5. Rights issues and bonus issues of shares Flashcards
What is a rights issue?
Give an example.
A rights issue is where new shares are offered to existing owners in proportion to their existing shareholding, usually at a discount to the current market price.
For example, a company with 20 million shares in issue decides to raise more cash by issuing 5 million new shares. It can offer the new shares to existing owners in a ‘1 for 4’ rights issue: each existing owner is offered a new share for every four currently held (20 million/5 million =4).
What is a bonus issue of shares?
Bonus issue (or capitalisation issue or scrip issue): is an issue of fully paid shares to existing owners, free of charge, in proportion to their existing shareholdings.
A bonus issue does not involve any cash inflow for the company. The company converts some of its reserves (share premium or retained earnings or both) into new fully paid share capital issued at its par value.
What is the journal entry for the par value of bonus shares issued?
How does a company use share premium?
The journal entry for the par value of bonus shares issued is:
Debit - Share premium or retained earnings or both
Credit - share capital
The balance of share premium (cannot by law) be paid to owners as dividends. There only a few transactions that can ever reduce share premium. One of these is a bonus issue of shares.
Note: In the exam you should assume that a company uses the share premium account as fully as it can before using retained earnings, unless told otherwise.
