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Brought to you by accountingrevision.com Bonus Shares Brought to you by accountingrevision.com

Brought to you by accountingrevision.com Bonus Shares A bonus share usually has all of the voting rights etc as any other ordinary share A company usually rewards its shareholders by paying out dividends – a share of profits earned There are occasions where paying a dividend is not desirable e.g. Need to maintain working capital, maintain cash reserves for a planned project etc In these situations, a company can still reward shareholders by issuing bonus shares. Brought to you by accountingrevision.com

Bonus Shares An issue of bonus shares must be shown in the profit and loss appropriation along with dividends, transfers to reserves etc. The journal entry to record the issue of bonus shares is: Dr Equity Reserve Cr Issued Capital The equity reserve that is debited could be - retained profit, current net profit, a general or any other allowable reserve The bonus issue can be thought of as a deferred dividend as the benefits to the shareholder are received once the share is sold Brought to you by accountingrevision.com

Brought to you by accountingrevision.com Bonus Shares ABC ltd started out on 1 Jan 2011 with authorised share capital of one million $1 shares. Of these, 200000 were issued. At the end of 2011 their after tax profit was $275 000. They decide to transfer $100 000 to the general reserve and make a bonus issue of 1 share for every 4 held. + 100 000 + 50 000 + 125 000 Brought to you by accountingrevision.com

Brought to you by accountingrevision.com Bonus Shares A bonus issue will dilute the value of each share – this is because each share now represents a smaller portion of the assets of the business This means that when bonus shares are issued, the share price of a listed company will often fall. A bonus issue can only occur if a company has sufficient authorised capital to make a bonus issue and it is allowable under the company’s constitution. This is to ensure the proportion of capital owned (and therefore voting rights) is not distorted. Brought to you by accountingrevision.com

Brought to you by accountingrevision.com Rights Issue A rights issue is an offer to existing shareholders to buy a certain number of newly created shares A rights issue is less expensive to administer than a share offer to the general public (public offer not available to a private company anyway). A shareholder may sell his/her right to purchase the new shares if they choose. Unlike in the case of a bonus issue, rights issue will increase the net assets of a company (cash is received). Brought to you by accountingrevision.com