Question

ABC Ltd. purchased a building worth Rs. 5,40,000 from XYZ Ltd. and the payment was made by the issue of shares of Rs. 100 each issued at 20% premium. Give necessary journal entries in the books of ABC Ltd.

Hint:

When shares are issued at premium, credit share capital with face value and securities premium with excess amount.

Answer 1

ABC Ltd. acquired a building worth Rs. 5,40,000 from XYZ Ltd. and settled the payment by issuing shares of Rs. 100 each at a premium of 20 percent. This means each share is issued at Rs. 120, consisting of Rs. 100 face value and Rs. 20 premium. The number of shares issued will be 5,40,000 divided by 120, giving 4,500 shares. The Building Account is debited with Rs. 5,40,000 to record the asset. XYZ Ltd. is credited with the same amount to recognise the liability. Then, Share Capital Account is credited with Rs. 4,50,000 (4,500 × 100), and Securities Premium Account is credited with Rs. 90,000 (4,500 × 20). These entries completely settle the amount payable to XYZ Ltd. and properly reflect capital raised with premium.