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A limited liability company issued 50,000 ordinary shares of 25c each at a premium of 50c per share. The cash received was correctly recorded but the full amount was credited to the ordinary share capital account.
Which one of the following journal entries is needed to correct this error?
A Debit: Share premium account 25,000
Credit: Share capital account 25,000
B Debit: Share capital account 25,000
Credit: Share premium account 25,000
C Debit: Share capital account 37,500
Credit: Share premium account 37,500
D Debit: Share capital account 25,000
Credit: Cash 25,000
I thought the correct answer would be to debit the share capital account for 12,500 and credit that 12,500 amount to the share premium account but according to the answer the amount to be debited and transferred to the premium account is 25,000 instead of 12,500.
I’m not sure why my calculations were wrong.
The shares were issued at 75c per share, and therefore they should have debited cash with 50,000 x $0.75 = $37,500, credited share capital with 50,000 x $0.25 = $12,500, and credited share premium with 50,000 x $0.50 = $25,000.
They have credited share capital with $37,500, and so to correct it they will debit share capital with $25,000 and credit share premium with $25,000.
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