Shares Issued at a Discount

Shares Issued at a Discount Discount Shares Par Value Issue Price UK Securities Law
Shares issued at a price below their par value. The discount is the difference between the par value and the issue price. It is illegal to issue shares at a discount in the UK.
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Definition

Shares Issued at a Discount refers to the issuance of shares by a company at a price lower than their par or nominal value. The par value represents the face value of the share, which is set by the issuing company, whereas the issue price is the actual price at which the shares are offered to investors. The difference between the par value and the issue price constitutes the discount. This practice is illegal in some jurisdictions, such as the United Kingdom.

Key Points:

  • Par Value: The nominal or face value of a share as stated in the charter of the company.
  • Issue Price: The price at which shares are offered to the public.
  • Discount: The difference between the par value and issue price.

Examples

Illustration 1:

A company issues shares with a par value of £10 each. If these shares are issued at £8, the discount per share is £2.

Illustration 2:

A tech startup issues shares with a par value of $5 each at an issue price of $3 each. The discount in this case is $2 per share.

Illustration 3:

A financial firm launches shares with a par value of €15 but sells them at €12 each. The discount per share here is €3.

Frequently Asked Questions

Q1: Why are shares sometimes issued at a discount? A1: Companies may issue shares at a discount to attract investors quickly, especially if they are in urgent need of capital.

Q2: Is issuing shares at a discount legal everywhere? A2: No, the legality varies by jurisdiction. For instance, it is illegal to issue shares at a discount in the United Kingdom.

Q3: What are the risks associated with issuing shares at a discount? A3: Issuing shares at a discount can significantly dilute the value of existing shares and may signal financial distress to potential investors.

Q4: Are there any exceptions to the rule against issuing shares at a discount? A4: Some jurisdictions allow issuing shares at a discount under specific circumstances, often requiring regulatory approval.

Q5: How is the discount from issued shares accounted for in financial statements? A5: The discount is usually recorded as a debit to the share capital account or a separate discount on issue of shares account, reducing the overall equity of the company.

  • Par Value: The nominal value stated on a share certificate or indicated in the company’s founding documents.
  • Share Premium: The amount received by a company over and above the par value of its shares.
  • Authorized Share Capital: The maximum amount of share capital that a company is authorized to issue to shareholders as per its corporate charter.
  • Paid-Up Capital: The amount of money a company has received from shareholders in exchange for shares of stock, which is paid in full.

Online References

Suggested Books for Further Studies

  1. “Accounting for Non-Accountants: The Fast and Easy Way to Learn the Basics” by Wayne Label
  2. “Financial Accounting: An Introduction” by Pauline Weetman
  3. “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield

Accounting Basics: “Shares Issued at a Discount” Fundamentals Quiz

### What does the term 'shares issued at a discount' mean? - [ ] Shares issued at their market value. - [x] Shares issued below their par value. - [ ] Shares issued with a bonus. - [ ] Shares issued for free. > **Explanation:** Shares issued at a discount refer to shares offered to investors at a price below their par or nominal value. ### Is it legal to issue shares at a discount in the UK? - [x] No, it is illegal. - [ ] Yes, under specific circumstances. - [ ] Yes, always. - [ ] It depends on the financial health of the company. > **Explanation:** In the UK, it is illegal to issue shares at a discount. ### What is par value? - [ ] The current market price of a share. - [ ] The highest price a share can achieve. - [x] The nominal or face value of a share. - [ ] The lowest price at which a share can be issued. > **Explanation:** The par value is the nominal or face value of a share as stated in the charter of the company. ### How is the discount calculated for shares issued at a discount? - [x] Subtract the issue price from the par value. - [ ] Subtract the par value from the issue price. - [ ] Add the par value and issue price. - [ ] Divide the issue price by the par value. > **Explanation:** The discount is calculated by subtracting the issue price from the par value. ### Why might companies issue shares at a discount? - [x] To attract investors quickly. - [ ] To comply with regulatory requirements. - [ ] To meet annual reporting standards. - [ ] To decrease shareholder equity. > **Explanation:** Companies may issue shares at a discount to attract investors quickly, especially if they are in urgent need of capital. ### What is the financial impact of issuing shares at a discount? - [x] It can significantly dilute the value of existing shares. - [ ] It increases the company's liabilities. - [ ] It does not affect the company's equity. - [ ] It increases the company's revenues. > **Explanation:** Issuing shares at a discount can significantly dilute the value of existing shares and may signal financial distress to potential investors. ### Which account is typically debited to record the discount on shares issued? - [ ] Cash Account - [x] Share Capital Account - [ ] Accounts Receivable - [ ] Retained Earnings > **Explanation:** The discount is usually recorded as a debit to the share capital account or a separate discount on issue of shares account, reducing the overall equity of the company. ### What is the difference between par value and share premium? - [ ] Par value is market value; share premium is above par value. - [ ] Par value and share premium are the same. - [ ] Share premium is below par value. - [x] Par value is the nominal value; share premium is the amount above par value. > **Explanation:** Par value is the nominal or face value of a share, whereas share premium is the amount received over and above the par value of the shares. ### Is the issuance of shares at a discount common practice? - [x] No, it is generally not common due to legal and financial constraints. - [ ] Yes, it is a normal part of business. - [ ] It is common only in certain industries. - [ ] It is common only for startups. > **Explanation:** It is generally not common due to legal and financial constraints, as issuing shares at a discount can dilute the value of existing shares and imply financial trouble. ### When recording shares issued at a discount, which financial statement is directly impacted? - [ ] Cash Flow Statement - [x] Balance Sheet - [ ] Income Statement - [ ] Statement of Retained Earnings > **Explanation:** The issuance of shares at a discount directly impacts the balance sheet, as it affects the shareholders' equity section.

Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!

Tuesday, August 6, 2024
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