Test: Accounting for Bonus Issue and Right Share - CA Foundation MCQ

• The right shares can be offered to persons other than existing shareholders or employees by passing a Special Resolution.


• A Special Resolution requires the approval of at least 75% of the shareholders present and voting at a general meeting.


• This resolution is needed to authorize the issuance of new shares to individuals who are not currently shareholders or employees of the company.

• Notice Dispatch: The notice relating to an offering for right issue can be dispatched through registered post, speed post, or electronic mode.


• Registered Post: This is a traditional method of sending important documents through the postal service. It provides proof of posting and delivery.


• Speed Post: This is a faster delivery option provided by the postal department for sending documents securely and quickly.


• Electronic Mode: This refers to sending notices through email or other electronic means, which is quick and cost-effective.


• Any of the above: The notice can be dispatched using any of the above methods, depending on the preference and convenience of the company issuing the right issue.

• 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.

Explanation:

• Paid-up share capital increases with the issue of bonus shares: When a company issues bonus shares, it does not receive any additional funds from the shareholders. Instead, it utilizes its retained earnings or capital reserves to issue bonus shares. As a result, the number of shares outstanding increases without any change in the total capital invested in the company. This leads to an increase in the paid-up share capital of the company.

• Balance of profits & loss account: This can be used for the issue of bonus shares as it represents the accumulated profits of the company.


• Capital Reserve: Capital reserves are created out of the profits which are not distributable as dividends. They can be utilized for issuing bonus shares.


• Dividend Equalization Fund: This fund is created to equalize dividends, and it can also be utilized for issuing bonus shares.


• Development Rebate Reserve: This reserve is created out of development rebates, and it can be used for issuing bonus shares.


• Profit Prior to Incorporation: Profits earned before the company was incorporated can also be utilized for issuing bonus shares.

Based on the options given, the correct answer is 1 and 3 only (Option C).

• Bonus issue is authorized by its articles: This condition is required to be complied with by the company before making the bonus issue. The company must have the authorization in its articles of association to issue bonus shares.


• Company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it: This condition ensures that the company is financially stable and able to meet its obligations towards fixed deposit holders and debt security holders.


• Company has not defaulted in payment of statutory dues of the employees like PF contribution, gratuity, and bonus: This condition ensures that the company is compliant with all statutory requirements related to employee benefits and contributions.

Therefore, all of the above conditions (A, B, and C) need to be complied with by the company before making the bonus issue.

• Debit the general reserve account: When bonus shares are issued, the company utilizes its general reserve to fund the issuance of these shares.


• Credit the equity share capital account: The equity share capital account is credited to reflect the increase in the number of shares issued due to the bonus shares.

• Equity Shares before bonus issue = ₹ 8,00,000 / ₹ 10 = 80,000 shares


• Bonus shares to be issued = 3/4 * 80,000 = 60,000 shares

• Securities Premium available = ₹ 2,80,000


• General Reserve available = ₹ 1,40,000


• Total Reserve available = ₹ 2,80,000 + ₹ 1,40,000 = ₹ 4,20,000

• Total cost of issuing bonus shares = 60,000 shares * ₹ 10 (face value) = ₹ 6,00,000


• Utilization of Reserves = ₹ 4,20,000


• Amount to be debited to Profit & Loss Account = ₹ 6,00,000 - ₹ 4,20,000 = ₹ 1,80,000

• Step 1: Calculate the total number of bonus shares: For every 5 shares held, 3 bonus shares are declared. Therefore, the total number of bonus shares will be calculated as:
  
  Total shares held = Equity shares Capital / Face value of each share = 8,00,000 / 10 = 80,000 shares
  
  Number of bonus shares = (80,000 / 5) * 3 = 48,000 shares



• Step 2: Calculate the total value of bonus shares: The total value of bonus shares will be the face value of each share multiplied by the number of bonus shares.
  
  Total value of bonus shares = Face value of each bonus share * Number of bonus shares = 10 * 48,000 = ₹4,80,000



• Step 3: Determine the amount to be debited to Securities Premium A/c: The amount to be debited to Securities Premium A/c will be the minimum of the following:
  
  - Total value of bonus shares = ₹4,80,000
  
  - Securities premium balance = ₹1,00,000
  
  Therefore, the amount to be debited to Securities Premium A/c will be ₹1,00,000

Explanation:

• Securities Premium: Companies can issue fully paid-up bonus shares to its members out of Securities Premium. Securities Premium is the amount received by a company over and above the face value of the shares issued. It can be used to issue bonus shares without affecting the capital structure of the company.


• Capital Redemption Reserve: Capital Redemption Reserve is created when a company buys back its shares. It is used to redeem preference shares or debentures. Bonus shares cannot be issued out of this reserve as it is specifically meant for the redemption of capital instruments.


• Revaluation Reserve: Revaluation Reserve is created when the assets of a company are revalued. This reserve cannot be used to issue bonus shares as it is created for the purpose of accounting for the increase in the value of assets. It cannot be distributed to shareholders as bonus shares.


• All of the above: The correct answer is "All of the above" as bonus shares cannot be issued out of any of these reserves except Securities Premium.

Therefore, a company cannot issue fully paid-up bonus shares to its members out of the Capital Redemption Reserve, Revaluation Reserve, or any other reserves except the Securities Premium.

• Company's Bonus Issue: When a company makes a bonus issue at 2:3, it means that for every 2 existing shares, 3 bonus shares will be allotted to the shareholders.


• Calculation: To calculate the number of bonus shares a shareholder will receive, divide the total number of existing shares by the denominator of the ratio (in this case, 3) and then multiply by the numerator of the ratio (in this case, 2).


• Example: If a shareholder holds 100 existing shares, they will receive (100/3) * 2 = 66.67 bonus shares, which will be rounded down to the nearest whole number, giving a total of 66 bonus shares.


• Benefit to Shareholders: Bonus issues are a way for companies to reward their shareholders without impacting the company's cash reserves. Shareholders benefit from receiving additional shares, which can increase their ownership stake in the company.

• 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.

• Market value: The current price of the share in the market.


• Average price of the share: The average price at which the share has been traded over a specific period.


• Calculation: The value of the right is obtained by subtracting the average price of the share from the market value.


• Significance: This calculation helps investors understand the potential value of the right attached to a share.

• Authority: Bonus issue must be authorized by the board of directors.


• Article of Association: The bonus issue must also comply with the article of association of the company.


• Shareholder Approval: Shareholders must approve the bonus issue by an ordinary resolution.


• All of the Above: Therefore, the bonus issue must be authorized by the board of directors, comply with the article of association, and approved by shareholders through an ordinary resolution.

It is essential for the company to follow all these steps to ensure the bonus issue is legally authorized and in compliance with the company's regulations and requirements. By obtaining approval from all these bodies, the company can proceed with the bonus issue confidently and transparently.

• What is a bonus issue: A bonus issue is when a company decides to issue additional shares to existing shareholders for free, in proportion to their current holdings.



• Types of shares for bonus issue: Bonus issue can be made on either partly paid-up shares or fully paid-up shares.



• Partly paid-up shares: These are shares on which only a part of the face value has been paid by the shareholders. The company can issue bonus shares on these shares to reward the shareholders and bring their ownership to par.



• Fully paid-up shares: These are shares on which the full face value has been paid by the shareholders. Bonus issue on fully paid-up shares is a way for the company to reward the shareholders without requiring any additional payment.



• Option C and D: Option C states that bonus issue can be made on either partly paid-up shares or fully paid-up shares, while option D states that bonus issue can be made on both partly paid-up shares and fully paid-up shares. Since both options C and D are correct, the answer is option B.

• A: The bonus shares shall not be issued in lieu of dividends. - This statement is true. Bonus shares are issued to existing shareholders as a reward and do not replace dividends.


• B: The company which has once announced the decision of its Board recommending a bonus issue can withdraw the same. - This statement is false. Once a company announces a bonus issue, it cannot withdraw the decision.


• C: In case of bonus issue there is no cash flow. - This statement is true. Bonus shares are issued without any cash outflow as they are issued to existing shareholders.


• D: Issue of bonus shares does not affect the market value of the company. - This statement is false. The issue of bonus shares can impact the market value of the company as it increases the number of shares outstanding.

Therefore, the false statement among the given options is B: The company which has once announced the decision of its Board recommending a bonus issue can withdraw the same.

• To issue bonus shares: The balance in securities premium can be utilized to issue bonus shares to existing shareholders as a reward for their loyalty and support to the company.


• To write off expenses of and commission on issuing the same shares: The balance in securities premium can be used to cover the expenses and commissions incurred during the process of issuing shares.

Therefore, the correct answer is option (d): (a) & (d)

• 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

• Calculate the total dividend payable:




• Number of equity shares = 20,000


• Dividend rate = 10%


• Dividend per share = ₹10 x 10% = ₹1


• Total dividend payable = ₹1 x 20,000 = ₹20,000




• Calculate the dividend tax:




• Dividend tax rate = 17%


• Dividend tax amount = 17% of ₹20,000 = ₹3,400




• Calculate the total bonus shares to be issued:




• Total number of equity shares after bonus issue = 20,000 + (20,000/4) = 25,000


• Number of bonus shares = 25,000 - 20,000 = 5,000




• Calculate the premium on debentures:




• Debentures to be repaid = ₹1,20,000


• Premium on debentures = 6% of ₹1,20,000 = ₹7,200




• Calculate the final balance of Profit & Loss Account:




• Initial balance of Profit & Loss Account = ₹1,40,000


• Total dividend paid = ₹20,000


• Dividend tax paid = ₹3,400


• Debentures premium paid = ₹7,200


• Final balance = ₹1,40,000 - ₹20,000 - ₹3,400 - ₹7,200 = ₹1,09,400