'BioGenetics PLC' issues 10,000 shares with a nominal value of £1 each. Because the company is highly successful, investors pay £5 per share.

How must the £50,000 received be accounted for in the company's balance sheet?

Answer options:

£50,000 to the share capital account.

£10,000 to the share capital account and £40,000 to the profit and loss account.

£10,000 to the share capital account and £40,000 to the share premium account.

£50,000 to the share premium account.

How to approach this question

Separate the nominal value (£1 x 10,000) from the premium (£4 x 10,000) and assign them to their respective statutory accounts.

Full Answer

C.£10,000 to the share capital account and £40,000 to the share premium account.✓ Correct

When shares are issued at a price higher than their nominal (par) value, the nominal value (£10,000) must be credited to the share capital account. The excess amount (£40,000) must be credited to a separate, restricted account called the share premium account, as per the Companies Act 2006.

Common mistakes

Treating the share premium as standard profit that can be distributed as dividends. The share premium account is strictly regulated.

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