All questions of Unit 4: Accounting for Bonus Issue and Right Issue for CA Foundation Exam

Calculation of Balance of Profit & Loss A/c after Resolutions:
1. Dividend Distribution:
- Total Equity Shares = 20,000 shares
- Dividend declared = 10% of face value = 10% of 10 = 1 per share
- Total Dividend = 20,000 * 1 = 20,000
- Corporate dividend tax = 17% of 20,000 = 3,400
- Net Dividend paid = 20,000 - 3,400 = 16,600
2. Bonus Issue:
- Bonus shares to be issued = 1 for every 4 shares
- Total bonus shares = 20,000 / 4 = 5,000 shares
- Face value of bonus shares = 5,000 * 10 = 50,000
3. Right Issue:
- Existing shareholders have the right to purchase 1 share for every 4 shares held
- Total new shares issued = 20,000 / 4 = 5,000 shares
- Face value of new shares = 5,000 * 10 = 50,000
4. Debenture Repayment:
- Debentures to be repaid = 1,20,000
- Premium to be paid = 596 * 1,20,000 = 71,520
5. Final Calculation:
- Balance in Profit & Loss A/c = 1,40,000
- Total cash outflow = Dividend + Debenture premium = 16,600 + 71,520 = 88,120
- Total shares issued = Bonus shares + New shares = 50,000 + 50,000 = 1,00,000
- Total reduction in P&L A/c = Total cash outflow + Total shares issued = 88,120 + 1,00,000 = 1,88,120
- Balance in Profit & Loss A/c after resolutions = 1,40,000 - 1,88,120 = 48,100
Therefore, the balance of Profit & Loss A/c after giving effect to the resolutions will be 48,100.

• Market Value of the Share: ₹ 576


• Value of 1 new share: ₹ 100


• Premium on each new share: ₹ 188


• Total value of each new share: ₹ 100 + ₹ 188 = ₹ 288


• Value of 2 old shares: 2 x ₹ 576 = ₹ 1152


• Value of 1 new share: 1 x ₹ 288 = ₹ 288


• Total value of 3 shares after rights issue: ₹ 1152 + ₹ 288 = ₹ 1440


• Value of right: Total value of 3 shares - Total value of 2 old shares = ₹ 1440 - ₹ 1152 = ₹ 288


• Value of each right: Value of right / 3 = ₹ 288 / 3 = ₹ 96

Therefore, the value of each right is ₹ 96. So, the correct answer is option C.

Calculation of Bonus Shares Issued:
- Total Equity Shares before issuing bonus shares = 8,00,000 / 10 = 80,000 shares
- Bonus shares to be issued = 3/4 * 80,000 = 60,000 shares

Utilization of Reserves:
- Securities Premium = 2,80,000
- General Reserve = 1,40,000
- Total available for bonus issue = 2,80,000 + 1,40,000 = 4,20,000

Debit to Profit & Loss Account:
- Remaining amount needed for bonus issue = 60,000 * 10 (face value of shares) = 6,00,000
- Amount to be debited to Profit & Loss Account = 6,00,000 - 4,20,000 = 1,80,000
Therefore, the correct answer is option 'B' - 1,80,000.

Increased Paid-up Share Capital:
Bonus shares are issued to existing shareholders in proportion to their current shareholding. As a result, the company's paid-up share capital increases without any cash outflow. This means that the company's equity base expands, but there is no corresponding increase in its liabilities.

Impact on Total Market Value:
When a company issues bonus shares, the total number of outstanding shares increases. However, the value of the company remains the same as the total market capitalization is distributed over a larger number of shares. Therefore, the market price per share adjusts to reflect the bonus issue, but the overall market value does not change.

Effect on Fund Flow:
Issuing bonus shares does not impact the company's fund flow adversely. Since no cash is being distributed to shareholders, there is no outflow of funds from the company. In fact, bonus shares are often seen as a way to reward shareholders without affecting the company's cash reserves.
In conclusion, the statement that paid-up share capital increases with the issue of bonus shares is true. This is because bonus shares are issued out of the company's reserves and result in an increase in the company's equity base without requiring any cash outflow.

Calculation of the Value of the Right
The correct answer is option 'B', which states that the value of the right is determined by subtracting the average price of the share from the market value. Let's break down the calculation in detail:

Market Value:
- The market value refers to the current price at which a share is trading in the market. This is the price at which investors are willing to buy or sell the stock.

Average Price of the Share:
- The average price of the share is the mean price at which the stock has been trading over a specific period. It is calculated by summing up all the prices and dividing by the number of observations.

Calculation:
- To calculate the value of the right, you subtract the average price of the share from the market value. This gives you the difference between the current trading price and the average price.

Significance:
- This calculation helps investors understand the value of the rights they hold in relation to the current market price. It provides insight into whether the rights are trading at a premium or discount compared to the average price.
Therefore, the correct way to determine the value of the right is by subtracting the average price of the share from the market value.

Understanding Bonus Shares
Bonus shares are additional shares given to existing shareholders without any additional cost, based on the number of shares that a shareholder already owns. Companies can issue these shares from certain reserves.
Sources for Issuing Bonus Shares
A company can issue fully paid-up bonus shares from:

• Securities Premium: This refers to the amount received by a company over and above the face value of its shares. It can be used to issue bonus shares.
• Capital Redemption Reserve: This reserve is created specifically for the purpose of redeeming preference shares. Funds from this reserve can also be used to issue bonus shares.

Limitations of Revaluation Reserve
However, the Revaluation Reserve cannot be used to issue fully paid-up bonus shares, and here's why:

• Nature of Revaluation Reserve: This reserve arises from the increase in the value of a company's assets. It is not a realized profit but a book entry reflecting the appreciation of assets.
• Legal Provisions: According to the Companies Act, the use of Revaluation Reserve for issuing bonus shares is prohibited as it does not represent accumulated profits. This ensures that bonus shares are issued from real profits, maintaining shareholder equity.

Conclusion
In summary, while bonus shares can be issued from the Securities Premium and Capital Redemption Reserve, the Revaluation Reserve is not a permissible source due to its nature as a non-realized gain. This helps protect the financial integrity of the company and ensures that shareholders receive genuine value.

Reasons for applying a balance in securities premium:

Issuing bonus shares:
One reason for applying a balance in the securities premium is to issue bonus shares. This allows a company to reward its shareholders by issuing additional shares without requiring them to make any additional payment.

Writing off expenses and commissions:
Another reason for applying a balance in the securities premium is to write off expenses and commission on issuing the same shares. This helps the company offset the costs associated with issuing shares, ensuring that these expenses do not impact the company's financial performance.

Explanation of the correct answer:
In this case, option 'D' is the correct answer because it includes both of the above reasons for applying a balance in the securities premium. By issuing bonus shares and writing off expenses and commissions, a company can effectively utilize the securities premium balance for the benefit of its shareholders and financial stability.

• Capital Redemption Reserve: Bonus shares can be issued by utilizing the Capital Redemption Reserve, which is created by transferring a portion of profits to this reserve when redeeming preference shares.


• Securities Premium Account: Bonus shares can also be issued by utilizing the Securities Premium Account, which is created when shares are issued at a premium above their face value.


• Profit and Loss Account: In some cases, bonus shares can be issued by utilizing the profits accumulated in the Profit and Loss Account. However, this is less common compared to using the Capital Redemption Reserve or Securities Premium Account.

• Any of the above: In conclusion, bonus shares can be issued using any of the above methods, depending on the company's specific circumstances and financial position.

By following these guidelines, you can effectively issue bonus shares using the appropriate reserves or accounts.

• Notice Dispatch: The notice for the right issue must be dispatched to all existing shareholders before the opening of the issue.


• Mode of Dispatch: The notice can be sent through registered post, speed post, or electronic mode.


• Time Frame: The notice should be dispatched at least a few days before the opening of the issue to give shareholders enough time to consider the offer.

• Option A (3 days): This option is not feasible as sending the notice just 3 days before the opening of the issue may not provide enough time for shareholders to make informed decisions.


• Option B (5 days): This option is also not ideal as it may not give shareholders sufficient time to carefully evaluate the offer.


• Option C (7 days): This option is the most appropriate as sending the notice at least 7 days before the opening of the issue allows shareholders a reasonable amount of time to review the offer and make decisions.


• Option D (10 days): While sending the notice 10 days before the opening of the issue would provide shareholders with more time, it may not be necessary and could delay the process unnecessarily.

Therefore, based on the requirement of dispatching the notice before the opening of the issue and providing shareholders with ample time to consider the offer, the correct answer is Option C (7 days).