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Hi John. May I ask you something?
According to an ACCA practice test, the following statements are true:
-a bonus issue is known as a capitalisation issue
why? they are usually funded by share premium account. so money has been moved from one capital account to another. I do not see how this is a capitalisation when it was already a form of capital. is it because it uses capital?
-a bonus issue increases capital without diluting current shareholders’ holdings.
in what way do they increase capital when they are given free of charge, and just convert one form of capital (e.g. shareholders premium) to another (ordinary shares)?
Thank you.
If this is an actual ACCA question (as opposed to one in a Revision Kit) and if you have types out all of the information in the question, then it is rather poor of the ACCA.
Although bonus issues are usually funded from the share premium account, if there is no share premium then they will be funded from other (revenue) reserves).
A bonus issue is usually only called a capitalisation issue when it is funded from revenue reserves.
Similarly, they will increase capital if funded from revenue reserves.(It would seem that wherever you found the question, that the author of it is regarding capital as purely the share capital, but they should not be doing – assuming again that you have given all of the information from the question).
Hi John. Thank you for explaining.
It is an official ACCA question from one of their online practice tests. It lists four statements about bonus and rights issues, and asks to click true or false for each statement. I typed out the statements exactly as written. If you would like more information on it I would be happy to help.
I did try and research the answer myself before asking you, but could not find an answer.
Thanks again.
At 1 July 20X7 the capital and reserves of Arthur included the following:
$000
$1 Ordinary share capital 20,000
Share premium account 8,000
Retained earnings 32,000During the year ended 30 June 20X8 Arthur issued the following shares:
1 July 20X7 1 for 4 rights issue at $1.20
1 October 20X7 1 for 5 bonus issue using the share premium accountFor each statement below select whether it is true or false.
A bonus issue increases capital without diluting current shareholders’ holdings
A rights issue results in the capitalisation of reserves
A rights issue raises cash for the company
A bonus issue is also known as a capitalisation issue
Correct Answer
A bonus issue is also known as a capitalisation issue
-TrueA rights issue raises cash for the company
-TrueA rights issue results in the capitalisation of reserves
-FalseA bonus issue increases capital without diluting current shareholders’ holdings
-TrueBonus issue shares are issued to shareholders for free on the basis of their existing holding therefore their holding is not diluted
A rights issue does not result in a capitalisation of reserves. The double entry is as follows:
DR Cash
CR Share capital
CR Share premium accountShares in a rights issue are usually offered at a discount but they do need to be purchases by shareholders raising cash for the company.
A bonus issue is also known as a capitalisation issue as it results in the capitalisation of reserves. The double entry is as follows:
DR Share premium account
CR Share capital
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