Theory question 102
Company Accounts2. (a) What is a share premium? (b) List three purposes for which a share premium is utilized.
Show the model answer
Model answer
(a) Share premium is the amount by which the issue price of a share exceeds its nominal value; it is a capital reserve not available for cash dividends and is kept in a share premium account.
(b) Any three: issuing fully paid bonus shares; writing off preliminary expenses; writing off expenses, commission or discount on issue of shares or debentures; providing the premium payable on redemption of redeemable preference shares or debentures.
Explanation
Premium is a capital reserve, so it can only be used for capital purposes.