What is the Share Premium Reserve?

• A. A reserve created when shares are issued above nominal value
• B. A reserve for future dividends
• C. A reserve for tax losses
• D. A reserve for bad debts

Answer: (A)

Share premium reserve records the excess over the nominal value of shares when they are issued. When a company sells shares for more than their par value, the extra amount received is not added to share capital but is placed in the share premium reserve as part of equity. This reserve represents additional contributed capital from shareholders and is not a cash pool available for paying dividends. It can be used for specific purposes allowed by company law, such as paying up share capital or writing off the costs of issuing shares, and sometimes for issuing bonus shares. The other options describe reserves for dividends, tax losses, or bad debts, which are not what the share premium reserve represents.