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WaleedUQ
the share premium can only be debited with the amount lowest in this rule:
1) Share premium received on original issue ( the premium received on the shares that are being redeemed at the time of issuance )
2) Existing Share premium balance sheet value + share premium received on new issue
3) Total cash received on new issue
This is a RULE. now if any value is the lowest in the above 3 rules, that is the amount we can charge to the share premium but if any1 is 0, as 0 is the lowest value, which means we cannot charge anything to the share premium account and we will have to use Profit and loss account. coming to example 4 that is the problem, we are not told that if these shares or ordinary shares were issued on premium ( it is wrong also as Capital Redemption Reserve is to be created of $85,000 not $100,000 ), so we will consider the first rule "Share premium received on original issue" as it is 0, 0 being the lowest value, we cannot debit share premium account and will use Profit and Loss account. even-though, new shares are being issued, we can see the option 2 and 3 too, but there values are bigger than 0, so we will not consider them.
For people who dont know how to create Capital Redemption Reserve:
here, the treatment is quiet easy. if new share are being issued with premium then just subtract the nominal (par value) of shares being redeemed with the total cash received from issuance of new shares. the difference is the capital redemption reserve balance.
eg: preference shares of $200,000 are being redeemed, with a premium of $20,000 and new issuance is being made to finance the redemption of $100,000 with $25,000 premium. here the amount we will charge in the capital redemption reserve is :
Nominal value of preference shares being redeemed - total cash received on new issue = Capital Redemption Reserve
$200,0000 - ( $100,000 + $25,000 ) = $75,000 Capital Redemption Reserve will be created
if the new issuance of shares are not being made, we will create the Capital Redemption Reserve same as the Par value of Redeemed shares
eg. Consider the example above but now think that we are not issuing any shares just redeeming preference shares of $200,000 so the capital redemption reserve created will be $200,000
You're just making it complicated waji.
You are talking about redemption of shares and when to charge share premium?
See the image below and make your life easy