A company issues 12,000 equity shares of ₹100 each at ₹92 per share (i.e., at a discount). As per the Companies Act, 50% of the discount is transferred to a Capital Reserve and the remaining 50% is written off as loss. Determine (i) the amount to be debited to Discount on Issue of Shares account, (ii) the amount transferred to Capital Reserve, (iii) the amount written off as loss, and (iv) the final amount credited to Share Capital account.
Answer
(i) Discount on Issue of Shares Dr ₹96,000; (ii) Capital Reserve Cr ₹48,000; (iii) Profit & Loss A/c Dr ₹48,000; (iv) Share Capital Cr ₹1,200,000.
Step-by-step solution
- Calculate nominal value of shares: 12,000 × ₹100 = ₹1,200,000.
- Calculate issue proceeds: 12,000 × ₹92 = ₹1,104,000.
- Find total discount: ₹1,200,000 – ₹1,104,000 = ₹96,000; debit Discount on Issue of Shares A/c with ₹96,000.
- Transfer 50% of the discount to Capital Reserve: 0.5 × ₹96,000 = ₹48,000; credit Capital Reserve A/c with ₹48,000.
- Write off the remaining 50% as loss: debit Profit & Loss A/c with ₹48,000.
- Credit Share Capital A/c with the nominal amount ₹1,200,000.
- Debit Bank A/c with cash received ₹1,104,000 (for completeness).
Common mistake: Transferring the whole discount to reserve instead of only 50% as permitted.
Concept tested: Issue of shares at discount and reserve transfer
Published · How this solution was prepared and checked
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