Question

Where are security premium reserve is used??

Answer 1

When the company allots shares for the first time these shares can be issued at their nominal price or above or below such nominal price. The accounting for shares issued at premium and shares issued at discount varies a little. So let us see these accounting treatments and also look at securities premium account in some detail.

When the company decides to issue shares at a price higher than the nominal value or face value we call it shares issued at a premium. It is quite a common practice especially when the company has a great track record and strong financial performances and standing in the market.

So say the face value of a share is Rs 100/- and the company issues it at Rs 110/-. The share is said to have been issued at a 10% premium. The premium will not make a part of the Share Capital account but will be reflected in a special account known as the Securities Premium Account.

Now, this amount of premium can be called up by the company at any given time, i.e. with any call. The general norm is to collect the premium with either allotment or application money, rarely with call money. The premium amount as we discussed is credited to the Securities Premium Account. This account is found under the heading of Reserves and Surplus on the liabilities side of the Balance Sheet.

Shares Issued at Premium: Securities Premium Account

Securities Premium Account

Now according to the Companies Act 2013, there are some laws about the utilization of the Securities Premium Account. It states the specific purposes for which this balance may be used. So the account can only be used for such specific purposes and no other purpose.

To issue fully paid-up bonus shares to its existing shareholders. However, you cannot exceed the limit of the unissued share capital of the company.

Securities premium Account can be used for writing off any preliminary expenses of the company.

To write off expenses of issue of shares and debentures, such as commission paid or discount given on the issue of shares.

The balance can also be used to provide for the premium that is payable on the redemption of debentures or of preference shares of the company.

And finally, it can be utilized by the company to buy back its own shares.

Accounting Treatment for Shares Issued At Premium

The accounting treatment for shares issued at a premium will differ slightly than those issued at par. Let us see some journal entries for the same.

When Premium is received with Application money

If the premium amount is called and received with the application money we do not credit it directly to the Securities Premium A/c. The application is received but it could be rejected as well, so we wait until the application is accepted and finalized. The entries will be as follows

Answer 2

Answer:

Security premium reserve is used For the issue of fully paid bonus share capital.

Explanation:

For the issuance of fully paid bonus share capital, security premium reserve is used.

The following uses of securities premium are permitted under Section $52$ of the Act When issuing fully paid bonus shares:

• For covering the first costs the company suffered
• For covering the costs, commissions, or discounts associated with securities that the corporation had previously issued.
• In order to guarantee the availability of the premium on the redemption of the company's preference shares or redeemable debentures.
• For the purpose of financing a plan or a buyback of securities that complies with Section $68$ of the Companies Act.
• The securities premium should be handled in the same way as the company's paid-up capital. Therefore, the Act's regulations governing capital reduction should also apply to securities premium. The business can be reducing capital through an exercise. In such circumstances, the securities premium should likewise be decreased in proportion to the capital reduction.
• The corporation has the right to make changes to the securities premium account's balance. In certain situations, approval by the company's articles of incorporation is required.
• Securities premium reduction is permitted for loss cancellation purposes. The losses, though, ought to have happened as a result of trading in securities.
• A capital amount is the securities premium. Therefore, it is not possible to declare a dividend using securities premium as a source. The Companies Act permits the issuance of bonus shares using the securities premium.
• The company's members should, however, approve the matter. The members should approve the matter by means of a resolution. Bonus shares shouldn't be given out to owners of partially paid securities either.