Why shares are issued at a premium
/A company issues its shares at a premium when the price at which it sells the shares is higher than their par value. This is quite common, since the par value is typically set at a minimal value, such as $0.01 per share. The amount of the premium is the difference between the par value and the selling price. If shares do not have a par value, then there is no premium. In this case, the entire amount paid is recorded in the common stock account (if the payment is for common stock , rather than for some form of preferred stock ). For example, if ABC Company sells a share of common stock to an investor for $10, and the stock has a par value of $0.01, then it has issued the share at a premium of $9.99.
This premium is rarely recorded in an account having that name. Instead, it is more commonly recorded in an account called Paid-In Capital In Excess of Par Value. It may also be recorded in an account called Additional Paid-In Capital . The account appears in the shareholders' equity section of the balance sheet . It does not appear in the income statement . Other than the use of two accounts to record the separate elements of the price at which a share is sold, there is no particular relevance to the concept of a premium.
Terms Similar to Share Issuance at a Premium
Share issuance at a premium is also known as capital surplus .
