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Hi Tutors, I am having trouble trying to get my head around this answer.
Question:
‘An extract of Willow Co’s trial balance as at 30 june 20×1 is shown below:
Equity Shares $1: 72,000,000 CR
Share Premium: 13,000,000 CR
Retained Earnings at 1 July 20×0: 12,920,000 CR
Dividends Paid: 3,000,000 DRDuring the year ended 30 June 20×1, Willow Co made a ‘1 for 5’ bonus issue.
what are the accounting entries to record the bonus issue?
My answer was :
SHARE PREMIUM DR 2,600,000 (13,000,000 x 1/5)
EQUITY SHARES CR 2,600,000But the answer is actually 12,000,000 (1/6 x 72,000,000) as the trial balance is dated at year-end – I am having difficulty understanding how the 1/6 came up and how it was calculated – I will be grateful for your explanation 🙂
For every 5 shares there was a bonus issue of 1 share and therefore they end up with 6 shares.
The 72,000 shares are at the end of the year and are after the bonus issue. Therefore the bonus issue must have been 1/6 x 72,000 = 12,000 shares.
(Before the bonus issue there will have been 60,000 shares. The bonus issue was 1/5 x 60,000 = 12,000.)
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