jammy

Dear Members/Moderators

I am a self taught student and I need help to understand issue of new shares and share premium which ithought i did..

CAN ANYONE PLEASE EXPLAIN IN WHICH OF THESE TWO SITUATIONS SHARE PREMIUM ARISE and WHY?

1) year end 31/03/01

(P) acquired 75% of (S)

@ b/sheet date (P) share premiun £300,000 (S) Ord shr £200,000...
on 1/04/00 (P) issued one new ord shr valued @£5 and paid £1.40 cash, for every two shares it acquired in (S).


2) Year end 31/03/04

@B/sheet (P) share prem £8,000 and (S) Ord shares £30,000.
on 1/04/03 (P) acquired 24,000 shares in (S)....by way of an immediate shr xch of 2 shrs in (P) for every 3 shares in (S) plus a cash payment of £1 per (S) share payable om 1/04/06. Market price of (P) shares was £2 each.


Many thanks

genius1986

Dear Jammy,

It is impossible to determine whether share premium exists or otherwise in the scenario presented by you.

In order to evaluate whether share premium exists, there must be 2 key information:
1) Par value of the ordinary share issued, AND
2) Value of the ordinary share issued.

Any excess of the value of the share issued over its par value would be considered as Share Premium.

For example,
A acquired B by mean of ordinary share exchange of 1 A share with 2 B shares. Each A share is at $1 par and each B share's market value is $1.20.

In this scenario, you can assume that for each share of A is of equivalent value of 2 shares of B. Therefore, each share of A issued for the business combination would be

$1.20 x 2 = $2.40

Keeping in mind that each share of A is at par of $1, it means that the value of A share is issued at $1.40 ($2.40 - $1) above par (issued at a premium). Therefore, share premium would be $1.40.

The related double entry for each shares issued would then be

DR Investments in B $2.40
CR Share Capital $1.00
CR Share Premium $1.40