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CS Executive · Corporate Accounting and Financial Management · Accounting for Share Capital

Sunrise Textiles Ltd issues 10,000 equity shares of Rs 10 each, fully paid, to Kaveri Machines Ltd as consideration for a machine. The agreed value of the machine is Rs 1,40,000. What is the correct accounting treatment?

Machinery is debited Rs 1,40,000, equity share capital is credited Rs 1,00,000 and securities premium Rs 40,000. The Companies Act requires a premium on shares issued for cash or otherwise to be transferred to the securities premium account, so the Rs 40,000 excess cannot go to capital reserve or goodwill.

  1. ACredit Equity Share Capital Rs 1,00,000 and Securities Premium Rs 40,000; debit Machinery Rs 1,40,000Correct
  2. BCredit Equity Share Capital Rs 1,40,000; debit Machinery Rs 1,40,000
  3. CCredit Equity Share Capital Rs 1,00,000 and Capital Reserve Rs 40,000; debit Machinery Rs 1,40,000
  4. DCredit Equity Share Capital Rs 1,00,000; debit Machinery Rs 1,00,000 and Goodwill Rs 40,000

Explanation

Shares of Rs 10 face value are issued for a consideration worth Rs 14 each (Rs 1,40,000 / 10,000), so there is a premium of Rs 4 per share, Rs 40,000 in total. Section 52 requires a premium on shares issued for cash or otherwise to go to the securities premium account. Crediting capital reserve is wrong because a premium is not a capital profit on a pre-incorporation basis.

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