Question

The amount received over and above face value of shares is called:

• A. Discount on Issue of Shares
• B. Calls in Arrears
• C. Securities Premium
• D. Capital Reserve

Hint:

Amount received above nominal value of shares is called Securities Premium.

Answer 1

The Correct Option is C

Step 1: Understanding the Concept:
When a joint-stock company issues its corporate equity shares to investors in the capital market, it does so at a designated price. Every share possesses a fixed nominal value printed on the share certificate, known as the Face Value or Par Value (for example, \$10 or ₹10 per share). If a company enjoys an excellent market reputation or financial track record, investors are often willing to pay a higher price than this baseline face value to buy a stake in the business.
Step 2: Detailed Explanation:
Let's analyze the accounting definitions for each choice: - (A) Discount on Issue of Shares: This represents the deficit when shares are sold below their face value (e.g., selling a \$10 share for \$9). Modern corporate laws generally prohibit issuing shares at a discount. - (B) Calls in Arrears: This represents the total amount called up by the company's board of directors that a shareholder has defaulted on or failed to pay by the due date. - (C) Securities Premium: When shares are issued at a price higher than face value (e.g., selling a \$10 share for \$15), the surplus amount (\$5) is a capital profit. By accounting regulations, this extra premium collection must be credited to a dedicated reserve account called the Securities Premium Account. - (D) Capital Reserve: A general reserve created out of capital profits (like profit on sale of fixed assets or gain on forfeiture of shares), rather than regular operational revenue. Therefore, the amount collected above face value is called Securities Premium. This matches option (C).
Step 3: Final Answer:
The amount received over and above face value of shares is called Securities Premium.