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Hello Sir,
Good day,
could you please help me to understand this question?
1. Which of the following items in the SOFP change immediately following a bonus issue?
A. Equity Share Capital and Cash
B. Equity Share Capital and Retained Earnings
C. Share Premium and Cash
D. Share Premium and Retained earnings.Answer: B
Explanation: Retained earnings would decrease and Equity share capital would increase.
My understanding was that it’s preferable to utilise the non-distributable reserves (Share Premium, Revaluation Surplus), but here they are referring to retained earnings.
Could you please help me with this?
Thank you!
Hello Sir,
I believe I understood the question incorrectly.
Retained earnings, Revaluation surplus and Share premium are all equity reserves and when issuing bonus shares it doesn’t matter what reserve we use, but Capital reserves are preferred ie; revaluation surplus and Share premium.In the question above, since Cash plays no part in Bonus issue and as such the capital doesn’t increase, we are only left with Option B.
Is this understanding correct?
Apologies, I don’t meant to answer my own question.
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