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ACCA Applied Knowledge · Financial Accounting · Statement of financial position

Zeta Co issues 200,000 ordinary shares of $1 nominal value at $1.75 each, fully paid in cash. What is the effect on the statement of financial position?

Share capital rises by $200,000, the nominal value of the shares, and share premium rises by $150,000, the excess of the $1.75 issue price over the $1 nominal value. Cash received totals $350,000, so the entry balances.

  1. AShare capital increases by $350,000 and share premium is unchanged
  2. BShare capital increases by $200,000 and share premium increases by $150,000Correct
  3. CShare capital increases by $200,000 and retained earnings increase by $150,000
  4. DShare capital increases by $200,000 and share premium increases by $350,000

Explanation

Nominal value 200,000 x $1 = $200,000 goes to share capital. The excess 200,000 x $0.75 = $150,000 goes to share premium. Total cash received is $350,000. Recording the whole $350,000 in share capital ignores the premium.

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