Question

Assertion :Premium received on issue of shares, is credited to share premium account but not to Profit and Loss account. Reason: Since share premium is not a trading profit, it is not distributed to shareholders.

• A. Both Assertion and Reason are correct and Reason is the correct explanation for Assertion
• B. Both Assertion and Reason are correct but Reason is not the correct explanation for Assertion
• C. Assertion is correct but Reason is incorrect
• D. Both Assertion and Reason are incorrect

Answer 1

The correct option is A Both Assertion and Reason are correct and Reason is the correct explanation for Assertion

The share is said to have been issued at a 10% premium. The premium will not make a part of the Share Capital account but will be reflected in a special account known as the Securities Premium Account.

The value of a share premium account likely changes over time as a company issues new shares at the market value as opposed to the par value. The funds in the share premium account cannot be distributed as dividends and may only be used for purposes outlined in the company's bylaws or other governing documents.