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ACCA Applied Knowledge · Financial Accounting · Capital structure and finance costs

Tamsin Co issued 300,000 $1 shares at $1.60, with the full amount payable on application. Applications were received for all shares and cash was banked. Which statement about the share premium account is correct?

The share premium account has a credit balance of $180,000 and is part of equity. The premium is $0.60 per share on 300,000 shares, representing the amount received above nominal value, and it is a reserve rather than a liability or an asset.

  1. AIt has a credit balance of $180,000 and forms part of equityCorrect
  2. BIt has a credit balance of $480,000 and forms part of equity
  3. CIt has a debit balance of $180,000 and is a current asset
  4. DIt has a credit balance of $180,000 and is a non-current liability

Explanation

Premium is $0.60 x 300,000 = $180,000, credited to share premium. It is a reserve within equity, not a liability or asset. $480,000 is the total cash received, not the premium.

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