Accountancy · Ch 5 — Accounting for Share Capital
Issue of Shares for Consideration other than Cash
Issue of Shares for Consideration other than Cash
When a company buys assets (like land, a building, or machinery) from a vendor, it may not pay cash. Instead, the vendor agrees to accept fully paid shares of the company as payment. This is called an issue of shares for consideration other than cash. No cash is received by the company for these shares — the asset itself is the consideration.
The number of shares to be issued depends on two things: the amount payable to the vendor, and the issue price of the shares (whether at par, at a premium, or at a discount).
Number of shares to be issued = Amount Payable ÷ Issue Price per share
Example 1: Shares issued at par
Rahul Limited purchased a building from Handa Limited for ₹5,40,000. Payment is to be made by issuing shares of ₹100 each.
- Issue price = ₹100 (par)
- Number of shares = ₹5,40,000 ÷ ₹100 = 5,400 shares
Journal entries in the books of Rahul Limited:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Building A/c Dr. | 5,40,000 | |||
| To Handa Limited | 5,40,000 | |||
| (Building purchased) | ||||
| Handa Limited Dr. | 5,40,000 | |||
| To Share Capital A/c | 5,40,000 | |||
| (5,400 shares of ₹100 each issued at par) |
Why this entry?
First, the asset (Building) is recorded at its purchase price, and the vendor (Handa Limited) is credited as a liability. Then, when shares are issued, the vendor's account is debited (settling the liability), and Share Capital is credited. Since shares are at par, the full ₹5,40,000 goes to Share Capital.
Example 2: Shares issued at a premium
Same purchase — building for ₹5,40,000 — but shares are issued at a premium of 20%. Issue price = ₹100 + ₹20 = ₹120 per share.
- Number of shares = ₹5,40,000 ÷ ₹120 = 4,500 shares
- Share Capital = 4,500 × ₹100 = ₹4,50,000
- Securities Premium = 4,500 × ₹20 = ₹90,000
Journal entries:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Building A/c Dr. | 5,40,000 | |||
| To Handa Limited | 5,40,000 | |||
| (Building purchased) | ||||
| Handa Limited Dr. | 5,40,000 | |||
| To Share Capital A/c | 4,50,000 | |||
| To Securities Premium Reserve A/c | 90,000 | |||
| (4,500 shares of ₹100 each issued at ₹120 per share) |
Why this entry?
The vendor's claim is still ₹5,40,000. But the share capital is only the face value (₹100 per share). The excess over face value (₹20 per share) is credited to Securities Premium Reserve, a separate equity account. This is mandatory under the Companies Act.
Key points to remember
- No cash is received in these transactions. The asset itself is the payment.
- The vendor's account is debited when shares are issued, because the liability is being settled.
- Share Capital is always credited at face value (₹100 per share in these examples). …