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Sir,
I will be grateful if you can explain the treatment of bonus issue in cash flow when financed from premium or capitalised in retained earning any or from both. From the question below, the bonus issue was totally ignored.
Extracts from the statements of financial position of Nedburg are as follows.
Statements of financial position as at 30 September:
20X2 20X1
$m $m
Ordinary shares of $1 each 750 500
Share premium 350 100On 1 October 20X1 a bonus issue of one new share for every 10 held was made, financed from the share premium account. This was followed by a further issue for cash.
What amount will appear under ‘cash flows from financing activities’ in the statement of cash flows of Nedburg for the year ended 30 September 20X2 in respect of share issues?
A $500 million
B $450 million
C $550 million
D $250 million (2 marks)Solution
B/f 600
Cash received (B) 500
C/d 1,100
Here the answer is (A). so the new shares issued, which is the right issue are 500. However in another question stated below. Please See as follow:BPP. Q251. Dickson question extract
Equity 20×8. 20×7
Share capital – $1 ordinary shares 500 400
Share premium 350 100
Revaluation surplus 160 60
Retained earnings 229 255Note:
During the year, Dickson made a 1 for 8 bonus issue, capitalising its retained earnings, followed by a rights issue.The new bonus issued was calculated as follows
Share capital & premium
B/d 500
Bonus issue 50
Right issue(B) 300
C/d. 850.Kindly explained why bonus issue was involved in question 2. And the reason for difference in treatment when issued from premium or capitalising retained earning.
Thank you for your time.
Nedberg:
Share Capital
B/d 500
Bonus issue 50
Right issue(B) 200
C/d. 750Share Premium
B/d 100
Bonus issue (50)
Right issue(B) 300
C/d 350So proceeds from the bonus issue $NIL and there NEVER are proceeds from a bonus issue
Proceeds from the rights issue $200 + $300 = $500
Dickson
This surely is incorrect! The brought forward figure is 400, not 500
Share capital & premium
B/d 500
Bonus issue 50
Right issue(B) 300
C/d. 850.Should it not be this:
Share capital & premium
B/d 400
Bonus issue 50 (1 for 8)
RIghts issue 50
C/d 500And the share premium moves :
Share capital & premium
B/d 100
Right issue(B) 250
C/d 350So the cash received for the rights issue was 50 + 250 = 300
the double entry is as follows:
Dr Retained earnings 50
Cr Share capital 50and that’s the capitalisation of 50 retained earnings to finance the issue of the 1for 8 bonus
Then there was a rights issue and the double entry must be:
Dr Cash 300
Cr Share Capital 50
Cr Share Premium 250Your confusion is unnecessary! Whether a bonus issue is financed from retained earnings or from share premium … it’s not surely a problem
The share capital will increase no matter whence the issue is financed …
… and the credit will be to the share capital account, the debit entry is in either retained earnings or in share premium, according to whatever is given in the question
There is no cash movement in a bonus issue
The rights issue is often, in an exam question, the balancing figure in the share capital account and the share premium account. The only problem there is whether the previous bonus was financed by the share premium in which case that premium account brought forward figure will be reduced by the value of the bonus
Is that any clearer?
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