Aspirations Ltd began its business operations as a wholesale supplier of office equipment on January 1, 2021. To finance its operations, the company issued 1,500,000 ordinary shares at a par value of GH¢1 each, receiving full payment in cash at the time of issuance.
The Correct Answer and Explanation is:
Correct Answer:
Aspirations Ltd should record the issuance of shares as follows:
Journal Entry on January 1, 2021:
Dr. Bank GH¢1,500,000
Cr. Ordinary Share Capital GH¢1,500,000
300-Word Explanation:
When a company issues ordinary (common) shares, it is essentially raising equity capital from investors. In this scenario, Aspirations Ltd issued 1,500,000 ordinary shares at a par value of GH¢1 each, and received full payment in cash. This indicates that the shares were issued at par value (no premium), and investors paid the exact value of the shares.
The par value is a nominal value assigned to each share and is typically the minimum price at which shares can be issued. It is primarily used for accounting purposes and does not necessarily reflect the market value of the shares. Since the shares were issued at par value (GH¢1), the total capital raised equals:
1,500,000 shares × GH¢1 = GH¢1,500,000
In accounting, this transaction increases the company’s cash (an asset) and increases shareholders’ equity (specifically, the ordinary share capital account). The journal entry debits the Bank account (asset) to show the inflow of cash and credits the Ordinary Share Capital account (equity) to reflect the increase in ownership interest in the company.
This entry is made on January 1, 2021, the date business operations and the issuance took place.
There is no share premium in this transaction, so no entry is made in a share premium account. If the shares had been issued for more than the par value, the excess would have been credited to a Share Premium or Additional Paid-in Capital account.
In conclusion, this transaction reflects a fundamental financing activity, where Aspirations Ltd obtains the necessary startup capital through equity financing by issuing ordinary shares to shareholders, laying the foundation for its future operations and growth.