Bonus & Right Issue by CA Raj K Agrawal
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Want to know more about share issues in C02 financial accounting fundamentals?
CIMA marker and tutor Accounting for bonus issue Sibley explains.
In many jurisdictions, a limited company will create equity shares at incorporation.
The shares will be given a fixed nominal value, such as USD1 or USD0.
Shares would not be issued below this nominal value.
The share capital, shown in the statement of financial position of a company, is the number of shares the company has issued to its shareholders.
There must be at least one share issued up to a maximum decided by accounting for bonus issue company.
The accounting for bonus issue of finance raised will initially be in relation to nominal value, for example if 1,000 shares are created with a nominal value of USD1 each this will raise USD1,000 of capital from one or multiple shareholders.
Accounting for share issues There are four main types of issue that we will consider.
Shares issued at nominal value The initial issue of shares in a company will usually be at nominal value.
The cash received is recorded with a corresponding entry to the share capital account.
Dr Cash Cr Share capital 2.
Shares issued at market value If the business grows and becomes successful following the initial issue of shares the market value of the shares will increase.
This will mean that future shares issues would be made at an amount that is higher than their nominal value.
Again the cash proceeds are recorded but the amount received must now be split.
As before, the accounting for bonus issue value of the shares is recorded in the share capital account but the excess value above nominal value market value — nominal valuewill create a share premium account.
The share premium account is a reserve account which is recorded in the statement of financial position as a part of equity.
The share premium account is only created when the company issues shares at a premium.
It is a non-distributable reserve which means you cannot use it to pay dividends but it can be used to issue bonus shares see below.
The journal to record this issue is: Dr Cash Cr Share capital number of shares accounting for bonus issue x nominal value Cr Share premium the excess value over nominal value Example: Company Money for paypal account issues 10,000 USD1 equity shares at their market value of USD1.
The total amount of cash received is 10,000 x USD1.
The journal to record this is as follows: Dr Cash USD18,000 Cr Share capital USD10,000 Cr Share premium USD8,000 3.
Bonus issue A bonus or scrip issue is the issue of new shares to existing shareholders for no consideration.
This may seem like a bad idea but there are usually sound business decisions behind it.
This follows a simple supply and demand theory.
The amount of shares issued will be based on the number of shares in issue.
The debit entry for a bonus issue is normally to retained earnings or the share premium account.
It makes a bonus issue of three for two, utilising its share premium account.
Start by working out how many new shares will be issued.
The shares have a nominal value of USD1 so this will create USD450,000 450,000 x USD1 of share capital.
The journal to record the bonus issue from share premium is: Dr Share premium USD450,000 Cr Share capital USD450,000 The revised balance on the share premium account is therefore USD100,000 USD550,000 - USD450,000.
https://spin-jackpot-money.website/account/how-to-deposit-money-into-my-paypal-account.html capital in the statement of financial position will be USD750,000 300,000 x USD1 original shares +USD450,000 issue.
Rights issue The rights issue is again offered to existing shareholders but this time for monetary consideration.
The shares are offered at a price which is below current market value.
This encourages existing shareholders to buy accounting for bonus issue shares, generating finance for the entity.
Another incentive may be that if the option is taken up accounting for bonus issue all existing shareholders the balance of control is not affected.
For an investor with significant influence over the entity, who does not take up their options, this influence could be lost.
A rights issue is offered on the same basis as a bonus issue, for click here two for five, but the shareholders have the choice as to whether to buy the shares or not.
This means accounting for bonus issue raising finance is not guaranteed using this approach.
Although the shares are not issued at full right! accounting for guaranteed bonuses gaap are value, the price offered will be above nominal value so a share premium balance is created.
Example: Company C has in issue 500,000 USD1 equity shares with a current market value of USD2.
It offers a rights issue of 2 for 5 shares at an offer price of USD2.
The offer is fully taken up by all shareholders.
Again start by working out how many new shares will be issued.
The shares have a nominal value of USD1 so this will create USD200,000 200,000 x USD1 of share capital but will generate USD500,000 200,000 x USD2.
The journal to record the rights issue is: Dr Cash USD500,000 Cr Share capital USD200,000 Cr Share premium USD300,000 Share issues are an important topic as this knowledge will follow through to both F1 and F2 exams, so make sure you are fully comfortable with them.
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CA IPCC Accounts Group I - Accounting for Bonus Issue - By CA Atul Sukhani
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