What is the typical accounting treatment for a share issue with premium and for issue costs?

What is the typical accounting treatment for a share issue with premium and for issue costs?

• A. Receive cash; credit share capital for nominal value and credit share premium for the premium; issue costs either reduce share premium or are expensed according to policy
• B. Record cash and credit revenue
• C. Debit cash and credit share capital for the entire amount
• D. Debit expense and credit cash

Answer: (A)

When shares are issued at a premium, the cash received increases equity in two parts: the nominal value goes into share capital and the excess over nominal value goes into share premium. The normal accounting entry on receipt of the funds is to debit cash (receive cash) and credit share capital for the nominal value and share premium for the premium. Issue costs are not treated as ordinary business expenses. They reduce equity, typically by reducing the share premium. If the share premium isn’t enough to absorb the costs, the remaining amount can be charged to profit and loss under the policy you’re following, but the primary approach is to reduce the share premium first. Example: issuing 1,000 shares with nominal value 1 each at 1.50 per share, gross cash 1,500, and issue costs 30. - Dr Cash 1,500 - Cr Share Capital 1,000 - Cr Share Premium 500 - Dr Share Premium 30 - Cr Cash 30 Net result: Cash 1,470; Share Capital 1,000; Share Premium 470. This aligns with recognizing the cash receipt and separating the equity components, while treating issue costs as a deduction from equity rather than a P&L expense.

When shares are issued at a premium, the cash received increases equity in two parts: the nominal value goes into share capital and the excess over nominal value goes into share premium. The normal accounting entry on receipt of the funds is to debit cash (receive cash) and credit share capital for the nominal value and share premium for the premium.

Issue costs are not treated as ordinary business expenses. They reduce equity, typically by reducing the share premium. If the share premium isn’t enough to absorb the costs, the remaining amount can be charged to profit and loss under the policy you’re following, but the primary approach is to reduce the share premium first.

Example: issuing 1,000 shares with nominal value 1 each at 1.50 per share, gross cash 1,500, and issue costs 30.

• Dr Cash 1,500

• Cr Share Capital 1,000

• Cr Share Premium 500

• Dr Share Premium 30

• Cr Cash 30

Net result: Cash 1,470; Share Capital 1,000; Share Premium 470.

This aligns with recognizing the cash receipt and separating the equity components, while treating issue costs as a deduction from equity rather than a P&L expense.