COMPANY ACCOUNTS ISSUE OF BONUS SHARES

 ISSUE OF BONUS SHARES

Companies with substantial reserve may decide to capitalise a part or whole of such reserves by issuing fully paid up, instead of paying dividend to its share holders.

Sources of Bonus Issue

1.        For fully paid up Bonus Shares :

(a)       P/L Account,

(b)       General Reserve,

(c)        Capital Redemption Reserve,

(d)       Share Premium A/c,

(e)       Other free reserves.

2.        For partly paid up bonus shares :

(a)       P/L A/c,

(b)       General Reserve,

(c)        Other free Reserves.

Note :

1)        Revaluation Reserve is not available for issue of Bonus Shares.

2)       Share Premium and Capital Redemption Reserves are not available for issuing partly paid up Bonus shares.

				JOURNAL ENTRIES.
	For fully paid up Bonus Share issue
1)	Reserve A/c					Dr.
	To Bonus to Shareholders
	(Declaration of Bonus as per share holders Resolution
	No........		dated......	)
2)	Bonus to Shareholders A/c					Dr.
	To Equity Share Capital
	(Issue of .....			(no.) of Bonus shares as per Share
	Holder Resolution No......dated.....					)

For issuing partly paid up Bonus shares

a)	Share	.......	CallA/c		Dr.
	To Share Capital
		(Call money due on .......		shares @ Rs   )......

b)	Reserves A/c			Dr.
	To Bonus to Shareholder A/c
	(Declaration of Bonus as per Share holder resolutions
	no....dated..)
c)	Bonus to Shareholders A/c			Dr.
	To Share Call A/c

(Utilisation of Reserves for making partly paid up shares into fully paid up)>

Procedure for Issue of Bonus share:

Students are advised to refer to the SEBI Guidelines issued from time to time in this respect. Behind bonus issue

1.        Reflection of true earning rate to share holders funds.

2.        Avoidance of monetary outflow involved in distribution of dividend.

3.        Improvement of company reputation in the market.

Redemption of Preference shares:

One should refer to Section 80 of Companies Act in this respect which is reproduced below:

1.        Only fully paid up shares can be redeemed.

2.        Such redemption should be affected either out of the funds obtained from fresh issue of shares or out of the nonspecific reserves of the company.

3.        Premium (if any) on redemption shall be paid out of companies past profit or Share Premium A/c.

4.        Where such redemption is affected otherwise than out of the proceeds of the fresh issue an amount equal to the nominal value of the shares so redeemed will be transferred termed "Capital Redemption Reserve".

		JOURNAL ENTRIES.
1.	Preference Share Capital A/c			Dr.
	[Face value of shares to be redeemed]
	Premium on Redemption A/c			Dr.
	To Preference Shareholders A/c
	(Amount due on Redemption as well as premium
	thereon transferred to preference share holders A/c)
2	Bank A/c			Dr.
	To Share Capital
	(Fresh issue made on finance Redemption).

Note:

1.           This entry should be made only when fresh shares are issued.

2.           Premium or discount on such issue shall be adjusted in the manner mentioned earlier while discussing issue of shares.

3.	Bank A/c			Dr.
	To Assets A/c
	(Sale of Assets to finance redemption)
	Note: Any profit or loss on such sale should be adjusted in P/L A/c
4.	Reserve A/c			Dr.
	To Capital Redemption Reserve
	[Face value of shares redeemed – Face Value of new issue]
	(Provision of Sec. 80 of Companies Act)
5)	Preference Shareholders A/c			Dr.
	To Bank
	(payment made to preference share holders)

Note : In case some of shareholders could not be found amount due to them should be shown on liability in the Balance Sheet.

6) Reserve A/c Dr. To Premium of Redemption A/c

[Premium on redemption adjusted]

Illustration 5 :

The Bharat Steel Co. whose issued share capital on 31st March, 1994, consisted of 6,000 8% redeemable preference shares of Rs. 100 each fully paid and 20,000 equity shares of Rs. 100 each,Rs. 80 paid up, decided to redeem preference shares at a premium of Rs. 10 per share. The Co.’s Balance Sheet as at 31st March, 1994, showed a General Reserve of Rs. 9,00,000 and a Capital Reserve of Rs. 85,000. The redemption was effected partly out of profits and partly out of the proceeds of a new issue of 3,000 7.5% cumulative preference shares of Rs. 100 each at a premium of Rs. 25 per share. The premium payable on redemption met out of the premium received on the new issue. On 1st July, 1994 the company at its General Meeting resovled that all the capital reserves be applied in the following manner :

(a)       The declaration of bonus at the rate of Rs. 20 per share on equity shares for the purpose of making the said shares fully paid; and

(b)       The issue of bonus shares to the equity shareholders in the ratio of 1 share for every four shares held.

You are required to pass necessary journal entries.

Solution :

Books of Bharat Steel Co. Ltd.

JOURNAL

Date			Particulars			Dr. (Rs.)	Cr. (Rs.)
31.3.94  8% Preference Share Capital A/c					Dr.	6,00,000
	To Preference Shareholders A/c						6,00,000
	(Redemption of 6,000 shares due)
31.3.94  Premium on Redemption A/c					Dr.	60,000
	To preference Shareholders A/c						60,000
	(Premium due on redemption)
31.3.94	Bank A/c				Dr.	3,75,000
	To 7.5% Preference Share Capital A/c						3,00,000
	To Share Premium A/c						75,000
	(Issue of Preference shares at 25% premium)
31.3.94	General Reserve A/c				Dr.	3,00,000
	To Capital Redemption Reserve A/c						3,00,000
	(Provision of s. 80 of Companies Act met)
31.3.94	Preference Shareholders A/c				Dr.	6,60,000
	To Bank A/c						6,60,000
	(Payments to Preference Shareholders)
31.3.94	Share Premium A/c				Dr.	60,000
	To Premium on Redemption A/c						60,000
	(Transfer entry)
1.7.94   Equity Share Final Call A/c					Dr.	4,00,000
	To Equity Share Capital A/c						4,00,000
	(Call made on 20,000 shares @ Rs. 20 per share)
1.7.94	General Reserve A/c				Dr.	4,00,000
	To Bonus Dividend A/c						4,00,000
	(Bonus issued @ Rs. 20 per share)
1.7.94	Bonus Dividend A/c				Dr.	4,00,000
	To Equity Share Final Call A/c						4,00,000
	(Issue of Bonus Share by conversion of partly paid
	up shares into fully paid up.)

1.7.94   Capital Redemption Reserve A/c			Dr.	3,00,000
Share Premium A/c			Dr.	15,000
Capital Reserve A/c			Dr.	85,000
General Reserve A/c			Dr.	1,00,000
To Bonus Dividend A/c				5,00,000
(Declaration of bonus as per Shareholders Resolution
No......dated.....)
1.7.94   Bonus Dividend A/c			Dr.	5,00,000
To Equity Share Capital A/c				5,00,000
(Issue of 5,000 Equity shares as bonus)

Illustration 6 :

The following is the Balance Sheet of TOM Ltd. as at 31.03.1997 :–

TOM Ltd.

Balance Sheet as at 31st March, 1997

Liabilities	Rs.	Rs.	Assets	Rs.		Rs.
Share Capital –			Fixed Assets
Authorised 5000 10% Redeemable			Gross Block	1,50,000
Preference Share of			Less : Depreciations	50,000
Rs. 10 each	50,000					1,00,000
45,000 Equity Shares			Investments			50,000
of Rs. 10 each	4,50,000		Current Assets, Loans and
		5,00,000	Advances :
Issued, Subscribed and			Inventory	12,500
paid-up Capital			Debtors	12,500
5000 10% Redeemable			Cash and Bank Balances	25,000
Preference Shares of						50,000
Rs. 10 each	50,000
5000 Equity Shares of			Misc. Expenditure to the
Rs. 10 each	50,000	1,00,000	extent not written off			10,000
Reserves and surplus
General Reserve	60,000
Share Premium	35,000
Profit & Loss A/c	9,250	1,04,250
Current Liabilities and
Provisions
Sundry Creditors		5,750
		2,10,000				2,10,000

For the year ended 31.3.1998, the company made a net profit of Rs. 7,500 after providing Rs. 10,000 depreciation and writing off the miscellaneous expenditure of Rs. 10,000.

The following additional information is available with regard to company’s operation :–

(i)       The preference dividend for the year ended 31.3.1998 was paid before 31.3.1998.

(ii)       The company redeemed the preference shares at a premium of 10%.

(iii)         To meet the cash requirements of redemption, the company sold a portion of the investments, so as to leave a minimum balance of Rs. 15,000 after such redemption.

(iv)       Except cash and bank balances other current assets and current liabilities as on 31.3.1998 was the same as on 31.3.1997.

(v)        The company issued bonus shares in the ratio of one share for every equity share held as on 31.3.1998.

(vi)       Investments were sold at 90% of cost on 31.3.1998.

You are required to :

(a)        prepare necessary Journal Entries to record redemptions and issue of bonus shares;

(b)        prepare the Cash and Bank Account;

(c)        prepare the Balance Sheet as at 31.3.1998 incorporating the above transactions.

Solution :

JOURNAL ENTRIES in the Books of TOM LTD.

					Dr. (Rs.)		Cr.(Rs.)
	10% Redeemable Preference Capital A/c			Dr.	50,000
	Premium on Redemption of Preference Shares			Dr.	5,000
	To Preference Shareholders						55,000
	(Being amount payable to Pref. shareholder on
	redemption).
	General Reserve A/c			Dr.	50,000
	To Capital Redemption Reserve						50,000
	(Being transfer to the Latter A/c on redemption of
	shares)
	Bank A/c.			Dr.	22,500
	Profit & Loss A/c			Dr.	2,500
	To Investments						25,000
	(Being amount realised on sale of Investments and
	loss thereon adjusted)

Preference Shareholders A/c

Dr.

55,000

To Bank

55,000

(Being payment made to Preference Shareholders)

Share Premium A/c

Dr.

5,000

To Premium on Redemption of Preference Shares

5,000

(Being amount of Premium payable on redemption of

Preference shares)

Capital Redemption Reserve A/c

Dr.

50,000

To Bonus to Shareholders

50,000

(Amount adjusted for issuing bonus shares in ratio

of 1 : 1)

Bonus to Shareholders A/c.

Dr.

50,000

To Equity Share Capital

50,000

(Balance of former account transferred to Latter)

Dr.

Cash and Bank Account

Cr.

Particulars

Rs.

Rs.

Particulars

Rs.

To

Balance B/F.

25,000

By

Preference Dividend

5,000

To

Cash from operations

By

Preference Shareholders

55,000

Profit

7,500

Add : Deprn.

10,000

Balance C/f.

15,000

Add : Misc. Expenditure

10,000

27,500

To

Investments

22,500

75,000

75,000

Working Notes :

Sale of Investments :

Cost of Investments

25,000

Less : Cash received

22,500

Loss on sale of Investment

2,500

Total Investment

50,000

Less : Cost of Investment sold

25,000

Cost of Investment in hand

25,000

Market value 90% of 25000

22,500

                                               Balance Sheet of Tom Ltd. as at 31st March, 1998

(After Redemption)

Liabilities					Rs.		Assets			Rs.
Share Capital							Fixed Assets :
Authorised Capital :					5,00,000		Gross Block		1,50,000
Issued, Subscribed & Paid up :							Less : Depreciation :
10,000 Equity Shares of Rs. 10/-							As per last A/c		50,000
each fully paid (5000, Shares							For the year		10,000	90,000
have been allotted as Bonus							Investments : (Market
Shares for Capitalising							value Rs. 22,500)			25,000
Capital Redemption Reserve)					1,00,000
Reserve & Surplus :		10,000					Current Assets, Loans & Advances :
General Reserve							Inventory		12,500
Share Premium A/c		30,000					Debtors		12,500
Profit & Loss A/c		9,250			49,250		Cash & Bank Balance		15,000	40,000
Current Liabilities & Provisions :
Sundry Creditors					5,750
					1,55,000					1,55,000
Working Notes :
Profit & Loss A/c –
Balance as per last A/c								9,250
Add : Profit for the year								7,500
Less : Pref. dividend							5,000	16,750
Sale of Investment							2,500	7,500
								9,250