- This topic has 12 replies, 6 voices, and was last updated 9 years ago by
.
- Posts
Respected Sir!
When a company issues new bonus shares, the accounting entry for this to credit the share capital and debit any reserve though share premium reserve( a capital reserve) is debited in preference to other reserves.
We all know that revenue reserves are the reflection of the hard work of the company as they are made out of profits and the company can use them in any way they like (like giving dividends). Capital reserves are statutory reserves which cannot be used freely by the company. So why capital reserves are preferred in relation to revenue reserves when issuing bonus shares?
The effect is simply to move an amount “upwards ” in the balance sheet whilst not affecting the “buffer fund” the capital reserves have VERY FEW uses and in an ideal world should be used as much as possible where the law allows. In addition, by financing a bonus issue out of capital reserves, it leaves the retained earnings figure intact and thereby allows for dividends to be paid in future years – even though the company may make a loss. So long as there are distributable profits available, the company can pay a dividend
@mikelittle said:
The effect is simply to move an amount “upwards ” in the balance sheet whilst not affecting the “buffer fund” the capital reserves have VERY FEW uses and in an ideal world should be used as much as possible where the law allows. In addition, by financing a bonus issue out of capital reserves, it leaves the retained earnings figure intact and thereby allows for dividends to be paid in future years – even though the company may make a loss. So long as there are distributable profits available, the company can pay a dividendYour answer was not to the point. I am disappointed!
Your question was “So why capital reserves are preferred in relation to revenue reserves when issuing bonus shares?”
how does the following NOT address your question? “The effect is simply to move an amount “upwards ” in the balance sheet whilst not affecting the “buffer fund” the capital reserves have VERY FEW uses and in an ideal world should be used as much as possible where the law allows. In addition, by financing a bonus issue out of capital reserves, it leaves the retained earnings figure intact and thereby allows for dividends to be paid in future years – even though the company may make a loss. So long as there are distributable profits available, the company can pay a dividend”
If you are disappointed, I’m sorry. But if you ask the question again, I’ll give you the same answer!
Thank you for a clear and concise answer. I’m always surprised at how rude some of the Open Tuition members are – unless the poster doesn’t understand that all shares must have a par value, which was covered in F3 if I recollect correctly.
Dear pauliangenius,
Please don’t waste our tutor’s time by not understanding such simple things, being rude and even posting your comments.
We are so very appreciative of all the time this tutor puts into answering our questions FOR FREE just because he has a kind heart and wishes to help those of us who cannot afford the tuition one way or another.
It’s people like you who make nice, kind people not want to do nice things any more!!!!! Go away or behave!!!
Valentina
Pls spare her, you can infer from her writing that she’s a bit challenged with the language. I’m sure she does not mean dissappointed in the Tutor but disappointed in herself that she is still not grasping it! Her question is not straight to the point either!
Hi Dear Tutor! I have heard a lot about your online guidance services. I am an A level student and have opted Accounting. Previously, I was a science student but my friends motivated me to join business group.
My question is about Reconciliation of Control Accounts…..
This has proved to be the biggest dialamma I have ever faced in last 14 months of studying Accounting. I am unable to comprehend the topic at all. I don’t even know how to address my problem rightly, because I don’t have even a little understanding of it… Kindly help!!!
Hi Babar
John Moffat is your man! He’s the F3 tutor and has video recordings on the subject of Control Account Reconciliations. It would be a good idea for you to copy your post onto the Ask the Tutor page on F3. Meanwhile I’ll email John and tell him to expect a post from you
Now, something you can do for me! Can you let me have your best guess about how we at OpenTuition can reach more A level students? And can you please let me know the name of your A level examining board? If you personally don’t know it, then your tutor will so maybe you could ask your tutor.
That would be a great help, thank you.
Now I’ll go and email John to tell him to expect a post from you 🙂
- You must be logged in to reply to this topic.