A limited company issues 100,000 ordinary shares of $0.50 nominal value at a price of $1.20 per share. What is the correct accounting entry to record this share issue?

Answer options:

Debit Cash $120,000; Credit Share Capital $120,000

Debit Cash $120,000; Credit Share Capital $50,000; Credit Share Premium $70,000

Debit Cash $50,000; Debit Share Premium $70,000; Credit Share Capital $120,000

Debit Cash $120,000; Credit Share Capital $70,000; Credit Retained Earnings $50,000

How to approach this question

Calculate total cash received. Allocate the nominal value to Share Capital and the excess to Share Premium.

Full Answer

B.Debit Cash $120,000; Credit Share Capital $50,000; Credit Share Premium $70,000✓ Correct

When shares are issued at a premium, the cash received is the total issue price (100,000 shares × $1.20 = $120,000). The Share Capital account is credited with the nominal value (100,000 shares × $0.50 = $50,000). The excess over the nominal value is credited to the Share Premium account (100,000 shares × $0.70 = $70,000).

Common mistakes

Crediting the full amount to Share Capital, or crediting the premium to Retained Earnings.

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