Correcting share capital for premium on issue

Steps:

• Par value is $1 per share, issued at$1.20, creating $0.20 premium per share.
• Initial entry recorded full $1.20 proceeds as credit to ordinary share capital, overstating it.
• Ordinary share capital should record only par value ($1), with excess as share premium ($0.20).
• Adjusting entry debits ordinary share capital ($0.20) to reduce it and credits share premium ($0.20) to recognize the premium.

Why C is correct:

• This entry adjusts ordinary share capital to par value and records share premium separately, as required by accounting standards (e.g., IAS 39 or equivalent) for shares issued above par.

Why the others are wrong:

• A: Suspense capital is a temporary holding account, not used for share premium adjustments.
• B: Reverses the flow, incorrectly reducing premium and increasing capital further.
• D: Reverses debits and credits, which would understate capital and overstate premium.

Final answer: C