A company issues 200,000 ordinary shares of £1 nominal value at £1.80 each for cash. What are the credit entries?
Answer and explanation
Correct answer: B. Share capital £200,000 and share premium £160,000
- Step 1: Cash received = 200,000 × £1.80 = £360,000.
- Step 2: Nominal value goes to share capital: 200,000 × £1 = £200,000.
- Step 3: The excess over nominal value, 200,000 × £0.80 = £160,000, is share premium.
Answer
Share capital £200,000 and share premium £160,000.
Why not the others: Share capital only records the nominal value, not the whole price. Premium is a separate reserve and is not part of retained earnings. This swaps the two amounts.
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