ICAI Notes- Unit 4: Accounting for Bonus Issue and Right Issue | Accounting for CA Foundation PDF Download

 Page 1


  
ACCOUNTING 
1.
118 
 11.118 
 
LEARNING OUTCOMES
UNIT – 4: ACCOUNTING FOR BONUS ISSUE AND 
RIGHT ISSUE 
 
 
After studying this unit, you will be able to: 
? Understand the provisions relating to issue of bonus shares and right 
shares; 
? Account for bonus shares and rights issue in the books of issuing 
company; 
? Understand the meaning of renunciation of right; 
? Differentiate between cum-right and ex-right value of share;  
? Calculate value of rights. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
Page 2


  
ACCOUNTING 
1.
118 
 11.118 
 
LEARNING OUTCOMES
UNIT – 4: ACCOUNTING FOR BONUS ISSUE AND 
RIGHT ISSUE 
 
 
After studying this unit, you will be able to: 
? Understand the provisions relating to issue of bonus shares and right 
shares; 
? Account for bonus shares and rights issue in the books of issuing 
company; 
? Understand the meaning of renunciation of right; 
? Differentiate between cum-right and ex-right value of share;  
? Calculate value of rights. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
 
 
    
 
11.119 
COMPANY ACCOUNTS 
 
 
 
BONUS 
SHARES 
Bonus issue means an issue of additional shares to existing shareholders 
free of cost in proportion to their existing holding.   
A company may issue fully paid-up bonus shares to its shareholders out of— 
(i)  its free reserves; 
(ii)  securities premium account; or 
(iii)  capital redemption reserve account:  
Bonus shares should not be issued out of revaluation reserves (i.e., reserves 
created by the revaluation of assets).  
RIGHT ISSUE  
Rights issue is an issue of rights to a company's existing shareholders 
that entitles them to buy additional shares directly from the company in 
proportion to their existing holdings, within a fixed time period. In a 
rights offering, the subscription price at which each share may be 
purchased is generally at a discount to the current market price. Rights 
are often transferable, allowing the holder to sell them in the open 
market. The difference between the cum-right and ex-right value of the 
share is the value of the right. 
4.1 ISSUE OF BONUS SHARES 
4.1.1 Introduction 
A bonus share may be defined as issue of shares at no cost to current shareholders in a 
company, based upon the number of shares that the shareholder already owns. In other words, 
no new funds are raised with a bonus issue. While the issue of bonus shares increases the 
total number of shares issued and owned, it does not increase the net worth of the company. 
Although the total number of issued shares increases, the ratio of number of shares held by 
each shareholder remains constant.  
Bonus issue is also known as ‘capitalisation of profits’. Capitalisation of profits refers to the 
process of converting profits or reserves into paid up capital. A company may capitalise its 
profits or reserves which otherwise are available for distribution as dividends among the 
members by issuing fully paid bonus shares to the members. 
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


  
ACCOUNTING 
1.
118 
 11.118 
 
LEARNING OUTCOMES
UNIT – 4: ACCOUNTING FOR BONUS ISSUE AND 
RIGHT ISSUE 
 
 
After studying this unit, you will be able to: 
? Understand the provisions relating to issue of bonus shares and right 
shares; 
? Account for bonus shares and rights issue in the books of issuing 
company; 
? Understand the meaning of renunciation of right; 
? Differentiate between cum-right and ex-right value of share;  
? Calculate value of rights. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
 
 
    
 
11.119 
COMPANY ACCOUNTS 
 
 
 
BONUS 
SHARES 
Bonus issue means an issue of additional shares to existing shareholders 
free of cost in proportion to their existing holding.   
A company may issue fully paid-up bonus shares to its shareholders out of— 
(i)  its free reserves; 
(ii)  securities premium account; or 
(iii)  capital redemption reserve account:  
Bonus shares should not be issued out of revaluation reserves (i.e., reserves 
created by the revaluation of assets).  
RIGHT ISSUE  
Rights issue is an issue of rights to a company's existing shareholders 
that entitles them to buy additional shares directly from the company in 
proportion to their existing holdings, within a fixed time period. In a 
rights offering, the subscription price at which each share may be 
purchased is generally at a discount to the current market price. Rights 
are often transferable, allowing the holder to sell them in the open 
market. The difference between the cum-right and ex-right value of the 
share is the value of the right. 
4.1 ISSUE OF BONUS SHARES 
4.1.1 Introduction 
A bonus share may be defined as issue of shares at no cost to current shareholders in a 
company, based upon the number of shares that the shareholder already owns. In other words, 
no new funds are raised with a bonus issue. While the issue of bonus shares increases the 
total number of shares issued and owned, it does not increase the net worth of the company. 
Although the total number of issued shares increases, the ratio of number of shares held by 
each shareholder remains constant.  
Bonus issue is also known as ‘capitalisation of profits’. Capitalisation of profits refers to the 
process of converting profits or reserves into paid up capital. A company may capitalise its 
profits or reserves which otherwise are available for distribution as dividends among the 
members by issuing fully paid bonus shares to the members. 
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.
120 
 11.120 
If the subscribed and paid-up capital exceeds the authorised share capital as a result of bonus 
issue, a resolution shall be passed by the company at its general body meeting for increasing 
the authorised capital. A return of bonus issue along with a copy of resolution authorising the 
issue of bonus shares is also required to be filed with the Registrar of Companies.  
 
Example 1 
Alpha Company announced bonus issue to its shareholders in the ratio of 2:3 ie. 2 shares for 
every 3 shares held. Shareholder X has 6,000 shares before announcement of bonus issue. How 
much shares would he have after bonus issue?  
Solution
Company announced bonus issue in ratio of 2:3 
Shareholder X will be entitled to have 4,000 bonus shares (6,000 shares / 3 x 2) 
Total number of shares X has after bonus issue 10,000 (6,000 + 4,000)
4.1.2  Provisions of the Companies Act, 2013 
Section 63 of the Companies Act, 2013 deals with the issue of bonus shares. According to 
Sub-section (1) of Section 63, a company may issue fully paid-up bonus shares to its members, 
in any manner whatsoever, out of— 
(i)  its free reserves *; 
(ii)  the securities premium account; or 
(iii)  the capital redemption reserve account:  
Provided that no issue of bonus shares shall be made by capitalising reserves created by the 
revaluation of assets.  
Sub-section (2) of Section 63 provides that no company shall capitalise its profits or reserves 
for the purpose of issuing fully paid-up bonus shares under sub-section (1), unless—  
 
*
As per Section 2(43) of the Companies Act, 2013, “free reserves” means such reserves which, as per the latest 
audited balance sheet of a company, are available for distribution as dividend. Provided that—  
(i)  any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a 
reserve or otherwise, or  
(ii)  any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit 
and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves.  
Bonus shares are shares 
issued at no cost to 
current shareholders in a 
company 
Based upon the 
number of shares 
That the shareholder 
already owns.
© The Institute of Chartered Accountants of India
Page 4


  
ACCOUNTING 
1.
118 
 11.118 
 
LEARNING OUTCOMES
UNIT – 4: ACCOUNTING FOR BONUS ISSUE AND 
RIGHT ISSUE 
 
 
After studying this unit, you will be able to: 
? Understand the provisions relating to issue of bonus shares and right 
shares; 
? Account for bonus shares and rights issue in the books of issuing 
company; 
? Understand the meaning of renunciation of right; 
? Differentiate between cum-right and ex-right value of share;  
? Calculate value of rights. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
 
 
    
 
11.119 
COMPANY ACCOUNTS 
 
 
 
BONUS 
SHARES 
Bonus issue means an issue of additional shares to existing shareholders 
free of cost in proportion to their existing holding.   
A company may issue fully paid-up bonus shares to its shareholders out of— 
(i)  its free reserves; 
(ii)  securities premium account; or 
(iii)  capital redemption reserve account:  
Bonus shares should not be issued out of revaluation reserves (i.e., reserves 
created by the revaluation of assets).  
RIGHT ISSUE  
Rights issue is an issue of rights to a company's existing shareholders 
that entitles them to buy additional shares directly from the company in 
proportion to their existing holdings, within a fixed time period. In a 
rights offering, the subscription price at which each share may be 
purchased is generally at a discount to the current market price. Rights 
are often transferable, allowing the holder to sell them in the open 
market. The difference between the cum-right and ex-right value of the 
share is the value of the right. 
4.1 ISSUE OF BONUS SHARES 
4.1.1 Introduction 
A bonus share may be defined as issue of shares at no cost to current shareholders in a 
company, based upon the number of shares that the shareholder already owns. In other words, 
no new funds are raised with a bonus issue. While the issue of bonus shares increases the 
total number of shares issued and owned, it does not increase the net worth of the company. 
Although the total number of issued shares increases, the ratio of number of shares held by 
each shareholder remains constant.  
Bonus issue is also known as ‘capitalisation of profits’. Capitalisation of profits refers to the 
process of converting profits or reserves into paid up capital. A company may capitalise its 
profits or reserves which otherwise are available for distribution as dividends among the 
members by issuing fully paid bonus shares to the members. 
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.
120 
 11.120 
If the subscribed and paid-up capital exceeds the authorised share capital as a result of bonus 
issue, a resolution shall be passed by the company at its general body meeting for increasing 
the authorised capital. A return of bonus issue along with a copy of resolution authorising the 
issue of bonus shares is also required to be filed with the Registrar of Companies.  
 
Example 1 
Alpha Company announced bonus issue to its shareholders in the ratio of 2:3 ie. 2 shares for 
every 3 shares held. Shareholder X has 6,000 shares before announcement of bonus issue. How 
much shares would he have after bonus issue?  
Solution
Company announced bonus issue in ratio of 2:3 
Shareholder X will be entitled to have 4,000 bonus shares (6,000 shares / 3 x 2) 
Total number of shares X has after bonus issue 10,000 (6,000 + 4,000)
4.1.2  Provisions of the Companies Act, 2013 
Section 63 of the Companies Act, 2013 deals with the issue of bonus shares. According to 
Sub-section (1) of Section 63, a company may issue fully paid-up bonus shares to its members, 
in any manner whatsoever, out of— 
(i)  its free reserves *; 
(ii)  the securities premium account; or 
(iii)  the capital redemption reserve account:  
Provided that no issue of bonus shares shall be made by capitalising reserves created by the 
revaluation of assets.  
Sub-section (2) of Section 63 provides that no company shall capitalise its profits or reserves 
for the purpose of issuing fully paid-up bonus shares under sub-section (1), unless—  
 
*
As per Section 2(43) of the Companies Act, 2013, “free reserves” means such reserves which, as per the latest 
audited balance sheet of a company, are available for distribution as dividend. Provided that—  
(i)  any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a 
reserve or otherwise, or  
(ii)  any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit 
and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves.  
Bonus shares are shares 
issued at no cost to 
current shareholders in a 
company 
Based upon the 
number of shares 
That the shareholder 
already owns.
© The Institute of Chartered Accountants of India
 
 
    
 
11.121 
COMPANY ACCOUNTS 
(a)  it is authorised by its articles;  
(b)  it has, on the recommendation of the Board, been authorised in the general meeting 
of the company;  
(c)  it has not defaulted in payment of interest or principal in respect of fixed deposits or 
debt securities issued by it;  
(d)  it has not defaulted in respect of the payment of statutory dues of the employees, such 
as, contribution to provident fund, gratuity and bonus;  
(e)  the partly paid-up shares, if any outstanding on the date of allotment, are made fully 
paid-up.  
(f)  it complies with such conditions as may be prescribed. 
The company which has once announced the decision of its Board recommending a bonus 
issue, shall not subsequently withdraw the same. 
Sub-section (3) of the Section also provides that the bonus shares shall not be issued in lieu 
of dividend. 
As per Para 39 (i) of Table F under Schedule I to the Companies Act, 2013, a company in 
general meeting may, upon the recommendation of the Board, resolve—  
(i) (a) that it is desirable to capitalise any part of the amount for the time being 
standing to the credit of any of the company’s reserve accounts, or to the credit 
of the profit and loss account, or otherwise available for distribution; and  
(b)  that such sum be accordingly set free for distribution in the specified manner 
amongst the members who would have been entitled thereto, if distributed by 
way of dividend and in the same proportions.  
(ii) The sum aforesaid shall not be paid in cash but shall be applied, subject to the 
provision contained in clause (iii), either in or towards— (a) paying up any amounts for 
the time being unpaid on any shares held by such members respectively; (b) paying 
up in full, unissued shares of the company to be allotted and distributed, credited 
as fully paid-up, to and amongst such members in the proportions aforesaid; partly in 
the way specified in (a) and partly in that specified in (b) above;  
 A securities premium account and a capital redemption reserve account may only be 
applied in the paying up of unissued shares to be issued to members of the company 
as fully paid bonus shares. In other words, securities premium account and capital 
redemption reserve cannot be applied towards payment of unpaid amount on any 
shares held by existing shareholders. 
 
© The Institute of Chartered Accountants of India
Page 5


  
ACCOUNTING 
1.
118 
 11.118 
 
LEARNING OUTCOMES
UNIT – 4: ACCOUNTING FOR BONUS ISSUE AND 
RIGHT ISSUE 
 
 
After studying this unit, you will be able to: 
? Understand the provisions relating to issue of bonus shares and right 
shares; 
? Account for bonus shares and rights issue in the books of issuing 
company; 
? Understand the meaning of renunciation of right; 
? Differentiate between cum-right and ex-right value of share;  
? Calculate value of rights. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
© The Institute of Chartered Accountants of India
 
 
    
 
11.119 
COMPANY ACCOUNTS 
 
 
 
BONUS 
SHARES 
Bonus issue means an issue of additional shares to existing shareholders 
free of cost in proportion to their existing holding.   
A company may issue fully paid-up bonus shares to its shareholders out of— 
(i)  its free reserves; 
(ii)  securities premium account; or 
(iii)  capital redemption reserve account:  
Bonus shares should not be issued out of revaluation reserves (i.e., reserves 
created by the revaluation of assets).  
RIGHT ISSUE  
Rights issue is an issue of rights to a company's existing shareholders 
that entitles them to buy additional shares directly from the company in 
proportion to their existing holdings, within a fixed time period. In a 
rights offering, the subscription price at which each share may be 
purchased is generally at a discount to the current market price. Rights 
are often transferable, allowing the holder to sell them in the open 
market. The difference between the cum-right and ex-right value of the 
share is the value of the right. 
4.1 ISSUE OF BONUS SHARES 
4.1.1 Introduction 
A bonus share may be defined as issue of shares at no cost to current shareholders in a 
company, based upon the number of shares that the shareholder already owns. In other words, 
no new funds are raised with a bonus issue. While the issue of bonus shares increases the 
total number of shares issued and owned, it does not increase the net worth of the company. 
Although the total number of issued shares increases, the ratio of number of shares held by 
each shareholder remains constant.  
Bonus issue is also known as ‘capitalisation of profits’. Capitalisation of profits refers to the 
process of converting profits or reserves into paid up capital. A company may capitalise its 
profits or reserves which otherwise are available for distribution as dividends among the 
members by issuing fully paid bonus shares to the members. 
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.
120 
 11.120 
If the subscribed and paid-up capital exceeds the authorised share capital as a result of bonus 
issue, a resolution shall be passed by the company at its general body meeting for increasing 
the authorised capital. A return of bonus issue along with a copy of resolution authorising the 
issue of bonus shares is also required to be filed with the Registrar of Companies.  
 
Example 1 
Alpha Company announced bonus issue to its shareholders in the ratio of 2:3 ie. 2 shares for 
every 3 shares held. Shareholder X has 6,000 shares before announcement of bonus issue. How 
much shares would he have after bonus issue?  
Solution
Company announced bonus issue in ratio of 2:3 
Shareholder X will be entitled to have 4,000 bonus shares (6,000 shares / 3 x 2) 
Total number of shares X has after bonus issue 10,000 (6,000 + 4,000)
4.1.2  Provisions of the Companies Act, 2013 
Section 63 of the Companies Act, 2013 deals with the issue of bonus shares. According to 
Sub-section (1) of Section 63, a company may issue fully paid-up bonus shares to its members, 
in any manner whatsoever, out of— 
(i)  its free reserves *; 
(ii)  the securities premium account; or 
(iii)  the capital redemption reserve account:  
Provided that no issue of bonus shares shall be made by capitalising reserves created by the 
revaluation of assets.  
Sub-section (2) of Section 63 provides that no company shall capitalise its profits or reserves 
for the purpose of issuing fully paid-up bonus shares under sub-section (1), unless—  
 
*
As per Section 2(43) of the Companies Act, 2013, “free reserves” means such reserves which, as per the latest 
audited balance sheet of a company, are available for distribution as dividend. Provided that—  
(i)  any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a 
reserve or otherwise, or  
(ii)  any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit 
and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves.  
Bonus shares are shares 
issued at no cost to 
current shareholders in a 
company 
Based upon the 
number of shares 
That the shareholder 
already owns.
© The Institute of Chartered Accountants of India
 
 
    
 
11.121 
COMPANY ACCOUNTS 
(a)  it is authorised by its articles;  
(b)  it has, on the recommendation of the Board, been authorised in the general meeting 
of the company;  
(c)  it has not defaulted in payment of interest or principal in respect of fixed deposits or 
debt securities issued by it;  
(d)  it has not defaulted in respect of the payment of statutory dues of the employees, such 
as, contribution to provident fund, gratuity and bonus;  
(e)  the partly paid-up shares, if any outstanding on the date of allotment, are made fully 
paid-up.  
(f)  it complies with such conditions as may be prescribed. 
The company which has once announced the decision of its Board recommending a bonus 
issue, shall not subsequently withdraw the same. 
Sub-section (3) of the Section also provides that the bonus shares shall not be issued in lieu 
of dividend. 
As per Para 39 (i) of Table F under Schedule I to the Companies Act, 2013, a company in 
general meeting may, upon the recommendation of the Board, resolve—  
(i) (a) that it is desirable to capitalise any part of the amount for the time being 
standing to the credit of any of the company’s reserve accounts, or to the credit 
of the profit and loss account, or otherwise available for distribution; and  
(b)  that such sum be accordingly set free for distribution in the specified manner 
amongst the members who would have been entitled thereto, if distributed by 
way of dividend and in the same proportions.  
(ii) The sum aforesaid shall not be paid in cash but shall be applied, subject to the 
provision contained in clause (iii), either in or towards— (a) paying up any amounts for 
the time being unpaid on any shares held by such members respectively; (b) paying 
up in full, unissued shares of the company to be allotted and distributed, credited 
as fully paid-up, to and amongst such members in the proportions aforesaid; partly in 
the way specified in (a) and partly in that specified in (b) above;  
 A securities premium account and a capital redemption reserve account may only be 
applied in the paying up of unissued shares to be issued to members of the company 
as fully paid bonus shares. In other words, securities premium account and capital 
redemption reserve cannot be applied towards payment of unpaid amount on any 
shares held by existing shareholders. 
 
© The Institute of Chartered Accountants of India
  
ACCOUNTING 
1.
122 
 11.122 
As per Section 63(2) of the Companies Act, 2013, bonus shares cannot be issued unless 
party paid-up shares are made fully paid-up. Para 39(ii) of Table F under Schedule I to the 
Companies Act, 2013 allows use of free reserves for paying up amounts unpaid on shares 
held by existing shareholders. 
On a combined reading of both the provisions, it can be said that free reserves may be 
used for paying up amounts unpaid on shares held by existing shareholders (though 
securities premium account and capital redemption reserve cannot be used). 
4.1.3 Journal Entries 
(A) (1) Upon the sanction of an issue of bonus shares 
  Capital Redemption Reserve Account   Dr. 
  Securities Premium Account
1
   Dr. 
  General Reserve Account   Dr. 
  Profit & Loss Account    Dr. 
       To  Bonus to Shareholders Account. 
 (2) Upon issue of bonus shares 
  Bonus to Shareholders Account   Dr. 
   To Share Capital Account. 
(B) (1) Upon the sanction of bonus by converting partly paid shares into 
  fully paid shares 
  General Reserve Account  Dr. 
  Profit & Loss Account  Dr. 
   To Bonus to Shareholders Account 
 (2) On making the final call due 
  Share Final Call Account  Dr. 
   To Share Capital Account. 
 
 
1
As per SEBI Regulations, such securities premium should be realized in cash, whereas under the Companies Act, 
2013, there is no such requirement. In accordance with Section 52, securities premium may arise on account of issue 
of shares other than by way of cash. Thus, for unlisted companies, securities premium (not realized in cash) may be 
used for issue of bonus shares, whereas the same cannot be used in case of listed companies. 
© The Institute of Chartered Accountants of India