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Accounting of Bonus Shares - Advanced Corporate Accounting | Advanced Corporate Accounting - B Com PDF Download
The above entries make it clear that issue of bonus shares results in addition to share capital, of the company, but shareholder’s fund remains unchanged, because reserves are decreased by a corresponding amount. After bonus issue, other things remaining the same, the price of the shares will come down the total value of shares held by a shareholder will remain unaltered.
The issue of bonus shares can be profitable to the shareholders if the company maintains the rate of dividend per share after the issue of bonus shares as before. After the issue of bonus shares, shareholders will start getting more dividend as they are in possession of increased number of shares.
The imbalance between the lower amount of paid up capital and higher amount of net worth which is on account of accumulated reserves can be corrected by capitalizing reserves by issuing bonus shares. By the issue bonus shares the paid-up share capital will increase and will become representative capital in relation to the earning capacity. It will curb speculation in the prices of shares and as a result prices of shares of the company will stabilize.
Illustration:
The following are extracts from the Balance Sheet of Arihant Silk Ltd. as on December 31, 2008
A resolution was passed to issue 800 bonus shares of Rs. 10 each by providing Rs. 4,000 out of the P & L account and the balance out of the reserve fund.
Set out journal entries to give effect to the resolution and show how they would affect the balance sheet. (A.C.S., June 79)
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FAQs on Accounting of Bonus Shares - Advanced Corporate Accounting - Advanced Corporate Accounting - B Com
| 1. What is the accounting treatment for bonus shares? |  |
Ans. Bonus shares are issued by a company to its existing shareholders without any consideration. The accounting treatment for bonus shares involves transferring the appropriate amount from retained earnings to the share capital account. This increases the number of shares outstanding but does not have any impact on the total equity of the company.
| 2. How are bonus shares recorded in the financial statements? | |
Ans. Bonus shares are recorded in the financial statements by adjusting the share capital and retained earnings accounts. The number of shares outstanding is increased in the share capital account, while the value of the shares issued is transferred from retained earnings to the share capital account. This ensures that the financial statements reflect the increase in the company's share capital without affecting its total equity.
| 3. Can bonus shares be issued by any company? | |
Ans. Yes, bonus shares can be issued by any company that has accumulated profits or reserves. The decision to issue bonus shares is usually made by the company's management and approved by the board of directors. It is important to note that bonus shares cannot be issued if the company does not have sufficient retained earnings or reserves.
| 4. Are bonus shares taxable for shareholders? | |
Ans. Bonus shares are not taxable for shareholders at the time of issuance. This is because bonus shares do not involve any cash outflow or increase in the shareholders' wealth. However, when the bonus shares are eventually sold by the shareholders, they may be subject to capital gains tax, depending on the applicable tax laws and regulations.
| 5. How do bonus shares affect the market price of a company's shares? | |
Ans. Bonus shares generally do not have a direct impact on the market price of a company's shares. This is because the issuance of bonus shares does not change the underlying fundamentals of the company or its financial position. However, the increased number of shares outstanding as a result of bonus shares may lead to dilution of earnings per share, which can indirectly affect the market price of the shares.
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