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Sir, why is that the issue of a bonus share is done from a capital reserve such as a share premium account?
Because if it is taken from a revenue reserve then it would reduce the maximum dividends that could ever be paid.
Sir, Isn’t the aim of Bonus shares to capitalise shareholders’ possession ?
If so, I think that if we use Capital réserves, it will be the same thing.
Help please.
Issuing bonus shares does not affect the total equity – share capital increases and reserves decrease. So in that sense it makes no difference which reserve is used (and there is no law insisting which reserve should be used).
However, revenue reserves can be paid out as dividend whereas capital reserves cannot be paid out as dividend. Therefore the company would always prefer to use capital reserves – using revenue reserves would limit the future dividends that could be paid.
Share premium is a capital reserve which is why that is always the one that would used in preference (and is always the reserve that is used in the exam).
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