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Dear Mrs. Kim,
My understanding is that where bonus issue is made, share premium account should be decreased. Share premium account is kind of a reserve.
In Harlem Co (sep/dec 19) there is a statement saying “Harlem Co has issued shares during the year via a bonus issue. Share capital within equity share increase by the value of the shares and a “reserve” should decrease accordingly”
So does this word “reserve” in the above statement means the share premium account? Or should I be specifically using the word “reserve” for bonus issue questions.
Thank you.
Making a bonus issue is one of the few things that a share premium reserve can be used for (as part of the capital injected into the business, it cannot be repaid as dividends, for example). If a company has a share premium account and makes a bonus issue, it is reasonable to assume that the accounting entries will be:
Dr Share premium
Cr Equity share/Share capital (or similar)In Harlem, however, it says “… Harlem Co has not paid its shareholders a dividend this year, choosing instead to undertake a bonus issue of its $0.50 equity shares.”
I don’t think there is any mention of there being a share premium account.
A cash dividend would be:
Dr Retained earnings
Cr CashHarlem is giving the shareholders shares instead of a dividend:
Dr Retained earnings
Cr Equity“Reserves” is just a generic term for anything that is part of equity other than the nominal/par/face value of shares issued.
A bonus issue out of retained earnings is also called a “capitalisation” issue – it takes an amount that could otherwise be distributed as dividends and “fixes” it as permanent/non-distributable capital.
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