5. Rights issues and bonus issues of shares

Question 1

What is a rights issue?

Answer 1

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.

This results in a cash injection into the company.

They are usually described as ‘a for b’ rights issue where you would get ‘a’ number of shares for every ‘b’ number of shares held

i.e ‘1 for 4’ would mean getting 1 share for every 4 held, so a company with 12 shares would have to issue 3 more

Question 2

How are rights issues accounted for? What are the necessary journal entries?

Answer 2

The bank would be debited with the full amount (no. of shares x market value).
Credit share capital with just the par value x no. of shares issued.
Credit share premium with the rest (no. of shares x (market -par value))

Debit - Cash
Credit - Share capital: equity shares
Credit - Share premium

Question 3

What is a bonus issue of shares?

Answer 3

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.

Question 4

How are bonus issues accounted for? What are the necessary journal entries?

Answer 4

Debit share premium or retianed earnings with the nominal value of the shares issued.
Credit share capital with the nominal value of the shares issued

In the exam you should always utilise the share premium account fully before using the retained earnings account unless told otherwise.