1

Bonus & Right Issue

BONUS ISSUE

1. Authorised by Article of Association

2. Authorised in General Meeting
3. Not Defaulted in Payment (Interest or Principle of Debt, Statutory
Payment of employees like PF, Gratuity Etc.)
4. Partly Paid up Shares if any Made Fully Paid up

Bonus Shares (Shares at Free)

Accounting from Investors Point of View

Accounting from Company s
Covered in Investment Chapter – Recorded
Point of View Covered Here
at Nil Value

Form of Bonus (Not In lieu of Dividend

Conversion of Partly Paid up Shares into

Issue of Fully Paid up Bonus Shares
Fully Paid up Shares

Only Free Reserve and Profit can be

Utilisation of Reserve (Capitalization of Profit)
utilized

1. CRR A/c
2. Security Premium A/c (Collected in Cash) Revaluation Reserve
3. General Reserve A/c Cannot be utilized
4. Profit & Loss A/c
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Journal Entries

A) Issue of fully paid Bonus Shares

Particulars Debit Credit
Capital Redemption Reserve A/c Bonus to Shareholders A/c
1. Upon the sanction of an issue Securities Premium A/c
of bonus shares General Reserve Account A/c
Profit & Loss Account A/c
2. Upon issue of bonus shares Bonus to Shareholders A/c Share Capital A/c

B) Conversion of partly paid up shares into fully paid up shares

Particulars Debit Credit
General Reserve Account A/c Bonus to Shareholders A/c
Profit & Loss Account A/c
1. Upon the sanction of bonus by
converting partly paid shares
“Only free reserve and
into fully paid shares
profits can be utilized”

2. On making the final call due Share Final Call A/c Share Capital A/c

3. On adjustment of final call Bonus to Shareholders A/c Share Final Call A/c

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RIGHT ISSUE

Company 1st offer shares to existing

shareholders at a lower Price than Market
Price

Right Issue

Accounting from Company s Point of View

Existing Shareholders have 3 Options
same as for Issue of Shares

Accounting Covered in Investment Chapter

Subscribe Sell Rights Lapse

Smart Investor will sell

rights if not subscribe by
him

Value of Right = Cum Right Value - Ex Right Value

Market Price before Right Issue Market Price after Right Issue

[Cum Right Value of the Existing Shares] + [Right Issue x Issue Price]

Existing Shares + Right Shares

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MASTER SUMS
BONUS ISSUE

1. Pass Journal Entries in the following circumstances:

(i) A Limited company with subscribed capital of ₹ 5,00,000 consisting of 50,000 Equity shares
of ₹ 10 each; called up capital ₹ 7.50 per share. A bonus of
₹ 1,25,000 declared out of General Reserve to be applied in making the existing shares fully
paid up.

(ii) A Limited company having fully paid up capital of ₹ 50,00,000 consisting of Equity shares of
₹ 10 each, had General Reserve of ₹ 9,00,000. It was resolved to capitalize ₹ 5,00,000 out
of General Reserve by issuing 50,000 fully paid bonus shares of ₹ 10 each, each shareholder
to get one such share for every ten shares held by him in the company.

Solution:

Journal Entries

₹ ₹
(i) General Reserve A/c Dr. 1,25,000
To Bonus to shareholders A/c 1,25,000
(For making provision of bonus issue)
Share Final Call A/c 1,25,000
To Equity share capital A/c 1,25,000
(For final calls of ₹ 2.5 per share on 50,000 equity
shares due as per Board’s Resolution dated….)
Bonus to shareholders A/c Dr. 1,25,000
To Share Final Call A/c 1,25,000
(For bonus money applied for call)
(ii) General Reserve A/c Dr. 5,00,000
To Bonus to shareholders A/c 5,00,000
(For making provision of bonus issue)
Bonus to shareholders A/c Dr. 5,00,000
To Equity share capital A/c 5,00,000
(For issue of 50,000 bonus shares at ₹ 10)

2. Mobile Limited has authorized share capital of 1,00,000 equity shares @ ₹ 10 each. The company
has already issued 60% of its capital for cash. Now the company wishes to issue bonus shares in

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the ratio 1:5 to its existing shareholders. The following is the status of Reserve and Surplus of
the company:

General Reserve ₹ 1,60,000

Plant Revaluation Reserve ₹ 25,000
Securities Premium Account (Realised in cash) ₹ 60,000
Capital Redemption Reserve ₹ 80,000

Answer the following questions:

(a) What is the number of Bonus shares to be issued?

(b) Can company issue Bonus out of General Reserve only?

(c) Give Journal Entries and also give the extracts of the balance-sheet after such Bonus
issue.

(d) Is it possible for the company to issue partly paid-up bonus shares?

Solution:

(a) Number of Bonus shares to be issued:

Existing paid up Capital = 60,000 Shares

Number of Bonus Shares = (60,000 × 1) ÷ 5 = 12,000 Shares (i.e. for ₹ 1,20,000)

(b) Bonus out of General Reserve:

It is a usual practice to utilize specific reserve (available for specific purpose). Therefore, if
CRR and Securities Premium are available, then company should utilize these reserves in
priority over other free reserves. It is clear that company should not use General Reserve, in
the given example, as Capital Redemption Reserve and Securities Premium are sufficiently
available.

(c) Journal Entries in the Books of Mobile Ltd.

Particulars Dr. (₹) Cr. (₹)

Capital Redemption Reserve A/c Dr. 80,000
Securities Premium A/c Dr. 40,000
To Bonus to Shareholders A/c 1,20,000
(Being issue of 1 Share for every 5 Shares held, by
utilizing various reserves as per Board’s Resolution
dated …..)
Bonus to Shareholders A/c Dr. 1,20,000
To Equity Share Capital A/c 1,20,000

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(Capitalization of profits)

Extracts of the Balance-Sheet after Bonus issue

Particulars Note Amount (₹)

No.
EQUITY AND LIABILITIES
1. Shareholder’s funds
(a) Share Capital 1 7,20,000
(b) Reserves and Surplus 2 2,05,000

Notes to Accounts

1. Share capital
Authorised Capital
1,00,000 Equity Shares @ ₹ 10 each 10,00,000
Issued, Called up & Paid up Capital
72,000 Equity Shares @ ₹ 10 each 7,20,000
(Out of above, 12,000 shares have been
issued as bonus shares).
2. Reserve and Surplus
Plant Revaluation Reserve 25,000
Securities Premium A/c 20,000
General Reserve 1,60,000 2,05,000

(d) Fully Paid up bonus shares only

As per section 63 of the Companies Act, 2013, only fully paid up bonus shares can be issued.
Therefore, it is not possible for the company to issue partly paid-up bonus shares.

3. Following is the extract of the Balance Sheet of Solid Ltd. as at 31st March, 2021:
Particulars ₹
Authorised capital :
10,000 12% Preference shares of ₹ 10 each 1,00,000
1,00,000 Equity shares of ₹ 10 each 10,00,000
11,00,000
Issued and Subscribed capital:
8,000 12% Preference shares of ₹ 10 each fully paid 80,000

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90,000 Equity shares of ₹ 10 each, ₹ 8 paid up 7,20,000

Reserves and Surplus :
General reserve 1,60,000
Revaluation reserve 35,000
Securities premium (collected in cash) 20,000
Profit and Loss Account 2,05,000
Secured Loan:
12% Debentures @ ₹ 100 each 5,00,000

On 1st April, 2021 the Company has made final call @ ₹ 2 each on 90,000 equity shares. The call
money was received by 20th April, 2021. Thereafter the company decided to capitalise its
reserves by way of bonus at the rate of one share for every four shares held. Show necessary
entries in the books of the company and prepare the extract of the Balance Sheet immediately
after bonus issue assuming that the company has passed necessary resolution at its general body
meeting for increasing the authorised capital.

Solution:

Journal Entries in books of Solid Ltd.

Dr. Cr.
2021 ₹ ₹
April 1 Equity Share Final Call A/c Dr. 1,80,000
To Equity Share Capital A/c 1,80,000
(Final call of ₹ 2 per share on 90,000
equity shares due as per Board’s
Resolution dated..... )
April 20 Bank A/c Dr. 1,80,000
To Equity Share Final Call A/c 1,80,000
(Final Call money on 90,000 equity
shares received)
Securities Premium A/c Dr. 20,000
General Reserve A/c Dr. 1,60,000
Profit and Loss A/c Dr. 45,000
(b.f.) 2,25,000
To Bonus to Shareholders A/c
(Bonus issue @ one share for every
four shares held by utilising various
reserves as per Board’s Resolution
dated...)
April 20 Bonus to Shareholders A/c Dr. 2,25,000
To Equity Share Capital A/c 2,25,000
(Capitalisation of profit)

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Balance Sheet (Extract) as at 30th April, 2021 (after bonus issue)

Particulars Notes Amount (₹)

1 Equity and Liabilities

Shareholders' funds
a Share capital 1 12,05,000
b Reserves and Surplus 2 1,95,000
2 Non-current liabilities
a Long-term borrowings 3 5,00,000
Total 19,00,000

Notes to Accounts

1 Share Capital
Equity share capital Authorised share
capital
1,12,500 Equity shares of ₹ 10 each 11,25,000
Issued, subscribed and fully paid share capital 1,12,500
Equity shares of ₹ 10 each, fully paid (Out of above, 22,500
equity shares @ ₹ 10 each were issued by way of bonus)
11,25,000
(A)
Preference share capital
Authorised share capital
1,00,000
10,000 12% Preference shares of ₹ 10 each Issued,
subscribed and fully paid share capital 8,000 12% Preference
shares of ₹ 10 each (B) 80,000
Total (A + B) 12,05,000
2 Reserves and Surplus
Revaluation Reserve
Securities Premium 35,000
20,000
Less: Utilised for bonus issue (20,000) Nil
General reserve
1,60,000
Less: Utilised for bonus issue
(1,60,000) Nil
Profit & Loss Account
2,05,000 1,60,000
Less: Utilised for bonus issue
(45,000)
3
Total 1,95,000
Long-term borrowings
Secured
12% Debentures @ ₹ 100 each 5,00,000

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The authorised capital has been increased by sufficient number of shares. (11,25,000 – 10,00,000)

Working Note-

Number of Bonus shares to be issued (90,000 shares / 4 ) X 1 = 22,500 shares

Note: It has to be ensured that the authorized capital after bonus issue should not be less than
the issued share capital (including bonus issue) in all the practical problems. The authorized
capital may either be increased by the amount of bonus issue or the value of additional shares
[value of bonus shares issued less unused authorized capital (excess of authorized capital in
comparison to the issued shares before bonus issue)].

RIGHT ISSUE

4. (a) A company offers new right shares of ₹ 100 each at 20% premium to existing shareholders on one
for four shares. The cum-right market price of a share is ₹ 140. You are required to calculate (i) Ex-
right value of a share; (ii) Value of a right.

(b) A company having 1,00,000 shares of ₹ 10 each as its issued share capital, and having a market
value of ₹ 45 issues rights shares in the ratio of 1:5 at an issue price of ₹ 25. Pass journal entry for
issue of right shares.

Solution:

(a) (i) Ex-right value of the shares = (Cum-right value of the existing shares + Rights shares X Issue
Price) / (Existing Number of shares + No. of right shares)
= (₹ 140 X 4 Shares + ₹ 120 X 1 Share) / (1 + 4) Shares
= ₹ 680 / 5 shares = ₹ 136 per shares
(ii)Value of right = Cum-right value of the share – Ex-right value of the share

= ₹ 140 – ₹ 136 = ₹ 4 per share.

(b) The entry at the time of subscription of right shares by the existing shareholders will be:
Bank A/c Dr. 5,00,000
To Equity Share Capital A/c 2,00,000
To Securities Premium A/c 3,00,000
(Being issue of 20,000 right shares @ ₹ 25 offered)

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