1. Right Issue– MEANING
The shares of a company are undoubtedly valuable where the issuing company has been either regularly paying handsome rate of dividend or expected to become a highly profitable one. Demands for the shares of such a company are considerably large and their market price appreciates above the issue price
Right shares are those shares which are issued to existing shareholders. Right shares must be in ratio of equity shares of existing shareholders
Shares are offered to existing shareholders in proportion to their current holdings at a price below market value.
A rights issue will raise some cash for the company and the issue costs involved in a rights issue are lower than a full issue to the public.
A rights issue will reduce the market value of the shares.

2. VALUATION OF RIGHTS.
The right shares are undoubtedly valuable where the issuing company has been either regularly paying handsome rate of dividend or expected to become a highly profitable one. Demands for the shares of such a company are considerably large and their market price appreciates above the issue price.
Valuation of right means the average gain made by the share holders if he subscribes to the right offer.

3. Calculation of Valuation of rights
It can be determined by two methods:
1st method: under this method, the valuation of right is calculated with the help of the following formula:
V = M-S/N+1
Where V = value of right.
M = market price per share.
N = no . of existing shares required for one right share.
S = issue price per right share.
2nd method: the value of right can be found by the following procedure:
Calculate the market value of shares which a shareholder is required to hold in order to avail of his right.
2. Add to the market value of shares the amount to be paid to the company for
subscribing offer of right.
3. Find out the average price by dividing total value by total no. Of shares.
4. Deduct the average price from the market price of share in order to
determine the value of right.

4. Illustration 1 Right Issue
A company is planning to raise funds by making rights issue of equity shares to finance its expansion. The existing equity share capital of the company is Rs. 50, 00,000. The market value of its share is Rs. 42. The company offers to its share the right to buy 2 shares at Rs. 11 each for every 5 share held. You are required to calculate:
Theoretical market price after right issue
The value of right
% increase in share capital
Solution:
1.Market value of 5 shares already held by a Rs. 42 = 210
Add the price to be paid by him for acquiring 2 more Rs. 11 per share = 22
Total Rs. 232
2. Theoretical market price of one share = 232/7 = Rs
Value of Right =Market price – theoretical market price = =
3. % increase in share capital Present capital = 50, 00,000 Right issue Rs.
50, 00,000 X 2/5 = 20, 00,000 % increase in share capital = 20, 00,000 / 50, 00,000 X 100 = 40%

5. Accounting of Right issue
Fred, a limited liability company, has 25,000 $1 shares in issue and makes a rights issue of 10,000 shares at $1.50 per share and the issue is fully taken up.
What is the double entry to record the above transaction in Fred’s financial statements?
Bank Account Dr 15, 000
Share Capital Account Cr. 10, 000
Security Premium Account Cr ,000

6. Underwriting of Right Shares
Sometime, company can contract with underwriter who promises that if existing shareholders will not buy, he will takeover all right shares. Underwriters and sub-underwriters may be financial institutions, stock-brokers, major shareholders of the company or other related or unrelated parties.

7. Bonus shares
Bonus shares are shares issued to existing shareholders free of charge. An alternative name often used is scrip issue. If the articles give the power, and the requisite legal formalities are observed, the following may be applied in the issuing of bonus shares:
The retained profits;
Any other revenue reserve;
Any capital reserve, e.g. share premium.

8. Bonus Issue
Meaning of Bonus:
Bonus means premium or gift which is paid normally in cash .
A bonus share issue is a distribution of free shares to existing shareholders. The number of bonus shares a shareholder will receive is based on how many shares they own.
Reasons for a bonus issue
A company has made an extraordinary profit because of good management or a successful strategy. The profit above what was expected is distributed to shareholders in the form of bonus shares.
A company may experience a fall in its share price once it is listed on the stock exchange. To compensate shareholders, a bonus issue of shares is distributed. This encourages shareholders to keep their shares and stay loyal to the company instead of selling their holdings and driving the price down further.

9. How Bonus Shares issued?
A company will issue bonus shares instead of paying a cash dividend. This means that company liquidity is not affected by a large dividend payout.
Bonus share issues are paid out of its reserves, such as retained earnings or the general reserve.

10. Illustration 2 Solution:
The directors of Bettawirk Ltd declared a bonus share issue on the basis of one share for
every twenty shares of $ 100 each. A shareholder who owns 2000 shares will receive how many bonus shares.
What are the entries required:
Solution:
For 2000 Shares/20= 100 Bonus shares are issued as Bonus.
Reserves Accounts Dr 10,000
To Bonus to Share Holders 10,000
(Bonus to share holders out of Reserves)
Bonus to Share Holders Dr 10,000
To Share Capital Account
(Bonus shares issued out of Bonus to 10,000
share holders)

11. Illustration 3
Miralou Ltd had an extraordinary first year of trading and profit exceeded the budget. The directors decided to distribute the profit with a bonus share issue on 1 July The total cost of the issue is $ and it will be paid out of retained earnings. As at
30 June 2010, retained earnings had a balance of $
Solutions:
Retained Earning Account Dr 100,000
Bonus to Shareholders ,000
(Bonus to share holders from retained
earnings)
Bonus to share holders Account Dr 100,000
Share Capital Account ,0000
(Bonus shares issued out of bonus to
shareholders

12. Source of bonus shares
The bonus shares can be issued out of profit or reserve which have been earned by the company profit or reserve should be free for the purpose of dividend and as specified in company act . The reserves can not be used for issue of bonus which are not earned by company . The following is the list of reserves which can be used for issuing bonus shares by passing the journal entries under its accounting treatment .
Profit and loss account
general reserve
revenue reserve
free reserves
dividend equalization fund
capital reserve
sinking fund
debenture redemption reserve only after redemption
development rebate reserve
allowance after expiry of 8 years
capital redemption reserve
share premium or security premium if received in cash

13. Alternatives for Bonus Issues
1st Case: When the partly paid up shares are converted into fully paid up shares through bonus issue.
For providing the amount of bonus out of reserve , then the following journal entry will pass
Capital reserve account debit xxxx
General reserve account debit xxxx
Revenue reserve account debit xxxx
Free reserve account debit xxxx
Dividend equalization fund account debit xxxx
Profit and loss account debit xxxx
Bonus to equity shareholders account credit xxxx
For amount due on final call of shares ( Existing shares unpaid amount )
Share final call account debit xxxx
Share capital account credit xxxx
For adjustment of final call amount out of profit
Bonus to shareholder account debit xxxx
Share final call account credit xxxx

14. Alternatives for Bonus Issues
2nd case When new fully paid up bonus shares are issued
a) for providing amount of bonus
Capital reserve account debit xxxx
share premium account debit xxxx
Capital redemption reserve account debit xxxx
Other general reserve account debit xxxx
Profit and loss account debit xxxx
Bonus to shareholder account credit xxxx
b) for issue of bonus
Bonus to equity shareholder account debit
Equity share capital account credit

15. Illustration 4

16. Solution

17. Illustration 5

19. Solution

20. Solution