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

Zenda Co issues 200,000 ordinary shares of $1 nominal value at $1.75 each, fully paid in cash. What is the correct double entry?

Debit cash $350,000, credit share capital $200,000 and credit share premium $150,000. Share capital is recorded at nominal value only, and the amount received above nominal value, $0.75 per share, is share premium, which is a separate non-distributable reserve in equity.

  1. ADr Cash $350,000; Cr Share capital $200,000; Cr Share premium $150,000Correct
  2. BDr Cash $350,000; Cr Share capital $350,000
  3. CDr Cash $200,000; Cr Share capital $200,000; Cr Share premium $150,000
  4. DDr Cash $350,000; Cr Share capital $150,000; Cr Share premium $200,000

Explanation

Cash received is 200,000 x $1.75 = $350,000. Share capital is credited with nominal value of 200,000 x $1 = $200,000. The excess of $0.75 per share, $150,000, is credited to share premium. Crediting all $350,000 to share capital ignores the premium.

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