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ACCA Applied Skills · Corporate and Business Law (Global) · Capital maintenance and dividend law

Brightwell Co sold shares with a nominal value of 1 each for 1.60 each. Which of the following correctly describes the treatment of the 0.60 per share excess received?

The excess of 0.60 per share is credited to the share premium account. Share premium is treated as non-distributable capital under the capital maintenance principle, so it cannot be paid out as a dividend and is not income or loan capital.

  1. AIt is distributable profit and may be paid out as a dividend immediately
  2. BIt is credited to the share premium account, which is treated as non-distributable capitalCorrect
  3. CIt is treated as loan capital repayable on demand
  4. DIt is treated as revenue income in the statement of profit or loss

Explanation

Amounts received above nominal value are recorded in the share premium account. This is part of the capital that must be maintained and can be used only for limited purposes, such as paying up bonus shares or covering certain issue expenses. It is not a profit available for dividends, so treating it as distributable is the key error.

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