Share premium is utilized for this purpose :a)For raising goodwillb)For premium payable on redemption of preference sharec)For writing of capital losses.d)For paying dividend.Correct answer is option 'B'. Can you explain this answer?

Question

Answer

Security Premium can be used for the following purposes:

1. For issuing Bonus Shares to the members of the company. This means that the the unissued shares of the company will be issued to the shareholders without taking any money from them. Amount standing at the credit of Security Premium A/c will be used for this purpose. These shares are issued to each shareholder in proportion to his shareholdings in the company. Journal entry for this will be:

Security Premium A/c Dr.

To Share Capital A/c

2. Writing off Preliminary Expenses. Preliminary expenses are those expenses which are incurred during the formation of the company. Securities Premium A/c can be used to write off these expenses. Journal entry for this will be:

Security Premium A/c Dr.

To Preliminary Expenses.

3. Security Premium A/c can be used to write of the expenses of or the commission paid or discount allowed on any issue of shares or debentures of the company. The journal entry will be as mentioned at 2 above.

4. If a company has to pay premium while redeeming Preference Shares or Debentures, it can utilised the amount standing at the credit of Security Premium A/c for this purpose. Journal entry for this will be:

Preference Share Capital /Debenture A/c Dr.

To Securities Premium A/c Dr.

To Preference Shareholders/Debentureholders A/c

5. For buying back its own shares (buy back of shares). In certain circumstances a company can buy its own shares. In such circumstances Securities Premium A/c may be used to finance this purchase.

Answer

According to Sec 78 of the Companies Act, share premium account may be applied by the company for:-

1. Issuing to members of the company fully paid bonus shares; or

2. writing off the preliminary expenses of the company; or

3. writing off the expenses of, or the commission paid or discount allowed on issue of shares or debentures of the company; or

4. Providing for the premium payable on the redemption of any redeemable preference shares or debentures.

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