Mashal Institute of Higher Education Financial Reporting and Analysis



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Mashal Institute of Higher Education


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Financial Reporting and Analysis

Source person: Kamran Khan

M.Com, B.Com, D.Com………..

Lecturer at Mashal Institute of Higher Education

Mashal institute of Higher Education, Chara-e-zanbaq, opposite to Iran Embassy, Kabul

Chapter No. 02

Issue of Bonus and Right Shares and Financial Reporting




Chapter No. 02 Issue of bonus and right shares and Financial Reporting

Topic-1 Bonus shares

Bonus shares are those shares issued by a company free of charge to its existing shareholders on prorata basis. When a company has large amount of accumulated reserves, it can decide to distribute it among the shareholders by issuing to them bonus shares. Since bonus shares are created by the conversion of retained earnings or other reserves into equity share capital, it will not change the business position and the assets side will remain the same. Just the reserves will be converted into equity and the number of shares held by shareholders will increase.

Example: a company has the following capital structure.
100000 equity shares of $10 each--------------------------------$1000000

Share premium---------------------------------------------------------- 300000

Profit and loss----------------------------------------------------------- 500000

$1800000

The company decided to issue bonus shares on 1 for 2 basis (the shareholders will receive 1 new share for every 2 existing shares they own) by making use of share premium and profit and loss account.

Solution:

Required number of bonus shares: 100000 shares * 1 / 2 = 50000 shares

Required amont from the existing reserves: required number of bonus shares * face value

50000 * 10 = $500000

So, $300000 will be required from share premium and $200000 from profit and loss account.

After the bonus issue, the capital structure of the company will appear as follows.


150000 shares of $10 each---------------------------------$1500000

Profit and loss account--------------------------------------- 300000



$1800000

Topic-2 Sequence of reserves to be utilized when issuing bonus shares

  1. Share premium

  2. Capital redemption reserve

  3. Capital reserve

  4. Other reserve

Topic-3 Accounting and reporting issue of bonus shares

Illustration-1: The following balance sheet is of Abhistic Company as on 31 December, 2013.



Liabilities

$

Assets

$

40000 Equity shares of $10 each

Share premium

General reserve

Profit and loss account

Accounts payable


400000

140000


70000

120000


90000

Sundry assets

820000

Total

820000

Total

820000

The company decided to issue one bounus share for every four shares. Show the journal entries and balance sheet.

  1. Journal entries

Before passing journal entries, first we will find out the number of bonus shares.

40000 shares * 1/ 4 = 10000 shares

Required amount for 10000 shares = required bouns share * share face value

= 10000 * 10

= $100000
so, the total $100000 amount can be paid from share premium account.

Now the Journal entries:

Share premium----------Dr. 100000

Bounus to shareholders---Cr. 100000

(1 bouns share is payable for 4 held as per board resolution no….)

Bouns to shareholders---------Dr. 100000

Equity share capital----------Cr. 100000

(bonus payable converted into share capital)

Now, how the balance sheet will be:

Liabilities

$

Assets

$

50000 Equity shares of $10 each

Share premium (140000-100000)

General reserve

Profit and loss account

Accounts payable


500000

400000


70000

120000


90000

Sundry assets

820000

Total

820000

Total

820000

Right share issue

Right shares is an issue of shares in which the existing shareholders have a pre-emptive right to subscribe for the new shares. These shares are offered to the existing shareholders at a lesser price than the market price. And it can be issued at par, at discount and at premium.



Accounting treatments for issue of right shares

The accounting treatments for issue of right shares are the same as for the equity shares we discussed in chapter no. 01.



Illustration

Issue of right shares at par:

TCS Company having an issued capital of $200000 with a share price of $10 each and number of shares 20000. The company decided to have a right shares issu in the ratio of 1 for every 4 held, at the face value. Pass the necessary journal entries.



Accounting entries:

Before the journal entries, first we will find out the number of shares to issue.

20000 * 1 / 4 = 5000 shares.

Cash at bank ---Dr. 5000 * 10 50000

Equity share applications------Cr. 50000

(Applications money received for right shares issue)

Equity share applications---Dr. 50000

Equity share capital------Cr. 50000

(Ownership is given of 1 share for 4 held)

Issue of right shares at premium:

TCS Company having an issued capital of $200000 with a share price of $10 each and number of shares 20000. The company decided to have a right shares issue in the ratio of 1 for every 4 held, at a premium of $2. Pass the necessary journal entries.

Accounting entries:

Before the journal entries, first we will find out the number of shares to issue.

20000 * 1 / 4 = 5000 shares.

Cash at bank ---Dr. 5000 * 12 60000

Equity share applications------Cr. 60000

(Applications money received for right shares issue)

Equity share applications---Dr. 60000

Equity share capital------Cr. 50000

Share premium------------Cr. 5000 *2 10000

(Ownership is given of 1 share for 4 held)



Issue of right shares at a discount

TCS Company having an issued capital of $200000 with a share price of $10 each and number of shares 20000. The company decided to have a right shares issue in the ratio of 1 for every 4 held, at a discount of $2. Pass the necessary journal entries.

Accounting entries:

Before the journal entries, first we will find out the number of shares to issue.

20000 * 1 / 4 = 5000 shares.

Cash at bank ---Dr. 5000 * 8 40000

Equity share applications------Cr. 40000

(Applications money received for right shares issue)

Equity share applications---Dr. 40000

Discount on issue of shares---Dr. 5000*2 10000

Equity share capital------Cr. 50000

(Ownership is given of 1 share for 4 held)



Exercises For issue of bonus shares

  1. A company has a share capital of $700000 in equity shares of $10 each, while the quoted price is $20. The share premium account shows a balance of $700000. The company decided to issue 50000 bonus shares.

Requirement: Pass the necessary journal entries and show the capital portion of the balance sheet.

  1. The following are the extracts from the balance sheet of GTG Company.

5000 equity shares of $10 each = $50000

General reserve = $35000

Profit and loss = $10000

A resolution passed to issue 1000 shares of $10 each by providing $5000 out of the profit and loss account and the general reserve.

Requirement: show effect to the resolution and show how they affect the balance sheet.


  1. The following are the extract from the balance sheet of A Company.

Authorized capital: 100000 equity shares of $10 each $1000000

Issued and paid up capital: 80000 equity shares of $10 each 800000

Share premium 100000

General reserve 350000

Profit and loss account 250000

A resolution was passed declaring one bonus share for four held. Set out journal entries to give effect to the resolution stated above.



  1. The authorized capital of a company is $1200000 divided into 12000 equity shares of $100 each. Out of which 8000 shares have been subscribed. The company has the following indisposed off balances: a. $230000 Cr. In the profit and loss account, and b. $285000 in the general reserve. The company has decided in general meeting to issue 1000 fully paid up equity shares at par as bonus at the rate of one fully paid up share for eight shares held. The balance of the profit and loss account is first to be utilized and then the general reserve.

Give general journal entries to the above decision.

Exercises For issue of right shares

  1. FF Company has an issued capital $100000, divided into 10000 shares of $10 each. The company decided to issue a right shares issue at par by offering 1 new share for every 5 held. Pass the necessary journal entries.

  2. GG Inc. has an authorized capital of $1000000, and its issued capital is $10000, divided into 1000 shares of $10 each. The company decided to issue 1 right share for each 5 held at $15. Pass the necessary journal entries.

  3. HH Inc. has an authorized capital of $1000000, and its issued capital is $10000, divided into 1000 shares of $10 each. The company decided to issue 1 right share for each 5 held at $8. Pass the necessary journal entries.

  4. ABC Ltd has 500,000 $1 ordinary shares as at 31 December 2010. The company makes a rights issue to its existing shareholders by offering 1 new share for every five existing shares held. The new shares are issued at $1.50 each.



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