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.
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SHAREHOLDERS” equity $’000 $’000
share capital
$1 ordinary shares(fully paid) 1000
RESERVES
Share premium 500
Retained Earnings 2000
2500
3500Company decided to make a”3 for 2″bonus issue
after the issue the Balance sheet is as follows
SHARE CAPITAL 2500
RETAINED EARNINGS 1000
SHAREHOLDERS’ EQUITY 3500I have a question is about that How did the retained earnings and share capital change?and what does this “3 for 2″bonus issue mean?
thank you for attention
A 3 for 2 bonus issue means that they issue three new shares (free of charge) for every 2 shares that shareholders currently own.
Whenever there is a bonus issue, the share capital increases by the nominal value of the shares issued.
As they were issued free of charge, the reserves must fall by the same amount.
Usually it is the share premium account only that reduces (because it is a capital reserve) but if there is not enough on the share premium account then other reserves have to fall (here, the only other reserve is retained earnings).You will find it helpful to watch the free lecture on Company Accounts, where rights issues and bonus issues are explained.
Hi John,
What are the advantages and disadvantages of bonus issue and right issue?
Have you watched the free lecture on this?
It is not a question of advantages and disadvantages, and they are completely different things.
Rights issues are a way of raising new finance for the company, by offering existing shareholders the right to buy more shares.
Bonus issues are not a way of raising finance – they are given free – and are issued to reduce the market value of shares on the stock exchange. However, you cannot be asked to discuss this in Paper F3 – not until Paper F9.
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