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Dear Tutor
The following ACCA past exam made me think.
(iii) Haverford Co made a 1 for 5 bonus issue on 31 December 20X7, which has not yet been recorded in the above trial balance. Haverford Co intends to utilise the share premium as far as possible in recording the bonus issue.Working 3 – Bonus issue The 1 for 5 bonus issue will lead to an increase in share capital of $4m ($20m x 1/5). Of this, $3m will be debited to other components of equity to take it to zero. The remaining $1m will be deducted from retained earnings.
Adjustment:
Dr Share premium $3m
Dr Retained earnings $1m
Cr Share capital $4mHow did we calculate the the 3 million and the one million in Debits ?
Why did we debit 1 million I retained earnings?
What does this phrase mean exactly ‘’ Haverford Co intends to utilise the share premium as far as possible in recording the bonus issue.’’Thank you.
Hi,
You should find that the balance on the share premium account is $3m before the bonus issue, so we can only use this amount when recording the bonus issue (i.e. using it as far as possible). That then means there is a final $1m to process (4m – 3m) and this has to go to whatever reserves are available, which in this instance is the retained earnings one.
Thanks
Chris
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