Bonus Shares
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Bonus Shares
A bonus share usually has all of the voting rights etc as
any other ordinary share
A company usually rewards its shareholders by paying
out dividends – a share of profits earned
There are occasions where paying a dividend is not
desirable e.g. Need to maintain working capital, maintain
cash reserves for a planned project etc
In these situations, a company can still reward
shareholders by issuing bonus shares.
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Bonus Shares
An issue of bonus shares must be shown in the profit and
loss appropriation along with dividends, transfers to
reserves etc.
The journal entry to record the issue of bonus shares is:
Dr Equity Reserve
Cr Issued Capital
The equity reserve that is debited could be - retained
profit, current net profit, a general or any other allowable
reserve
The bonus issue can be thought of as a deferred dividend
as the benefits to the shareholder are received once the
share is sold
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Bonus Shares
ABC ltd started out on 1 Jan 2011 with authorised share
capital of one million $1 shares. Of these, 200000 were
issued.
At the end of 2011 their after tax profit was $275 000.
They decide to transfer $100 000 to the general reserve
and make a bonus issue of 1 share for every 4 held.
+ 100 000
+ 50 000
+ 125 000
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Bonus Shares
A bonus issue will dilute the value of each share – this is
because each share now represents a smaller portion of
the assets of the business
This means that when bonus shares are issued, the share
price of a listed company will often fall.
A bonus issue can only occur if a company has sufficient
authorised capital to make a bonus issue and it is
allowable under the company’s constitution.
This is to ensure the proportion of capital owned (and
therefore voting rights) is not distorted.
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Rights Issue
A rights issue is an offer to existing shareholders to buy a
certain number of newly created shares
A rights issue is less expensive to administer than a share
offer to the general public (public offer not available to a
private company anyway).
A shareholder may sell his/her right to purchase the new
shares if they choose.
Unlike in the case of a bonus issue, rights issue will
increase the net assets of a company (cash is received).
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