Kumar Ltd. purchased assets of Rs.6,30,000 from Bhanu Oil Ltd. Kumar Ltd. issued equity share of Rs.100 each fully paid in consideration. What journal entries will be made, if the shares are issued, (a) at par, and (b) at premium of 20%. (Answer: Numbers of shares issued (a) 6,300 (b) 5,250)
Calculations: (a) Shares issued at par: Number of Shares = Purchase Price / Issue Price = Rs. 6,30,000 / Rs. 100 = 6,300 Shares.
(b) Shares issued at 20% premium: Issue Price = Rs. 100 + (20% of 100) = Rs. 120. Number of Shares = Rs. 6,30,000 / Rs. 120 = 5,250 Shares.
Journal Entries in the books of Kumar Ltd.
| Date | Particulars | L.F. | Debit Amount (Rs.) | Credit Amount (Rs.) |
|---|---|---|---|---|
| (a) | Assets A/c Dr. To Bhanu Oil Ltd.(Assets purchased from Bhanu Oil Ltd.) | 6,30,000 | 6,30,000 | |
| Bhanu Oil Ltd. Dr. To Share Capital A/c(6,300 shares issued at par) | 6,30,000 | 6,30,000 | ||
| (b) | Assets A/c Dr. To Bhanu Oil Ltd.(Assets purchased from Bhanu Oil Ltd.) | 6,30,000 | 6,30,000 | |
| Bhanu Oil Ltd. Dr. To Share Capital A/c To Securities Premium Reserve A/c(5,250 shares issued at 20% premium) | 6,30,000 | 5,25,000 1,05,000 |
Explanation
The question involves accounting for the purchase of assets by issuing equity shares. In the first case (a), shares are issued at par, meaning the issue price equals the face value (Rs. 100). The number of shares is calculated by dividing the total purchase consideration (Rs. 6,30,000) by the face value. In the second case (b), shares are issued at a 20% premium. The issue price becomes Rs. 120 (Rs. 100 + Rs. 20). The number of shares is calculated by dividing the purchase consideration by Rs. 120. The premium amount (Rs. 20 per share) is credited to the 'Securities Premium Reserve A/c'.
Solution Steps
Step 1: Calculate shares for case (a) at par. Number of Shares = 6,30,000 / 100 = 6,300 shares.
Step 2: Pass journal entry for case (a). Debit Assets A/c and Credit Bhanu Oil Ltd.; then Debit Bhanu Oil Ltd. and Credit Share Capital A/c.
Step 3: Calculate shares for case (b) at premium. Issue Price = 100 + 20 = Rs. 120. Number of Shares = 6,30,000 / 120 = 5,250 shares.
Step 4: Pass journal entry for case (b). Debit Assets A/c and Credit Bhanu Oil Ltd.; then Debit Bhanu Oil Ltd. and Credit Share Capital A/c (5,250 * 100) and Credit Securities Premium Reserve A/c (5,250 * 20).