Accounting Vol 2

4
Accounting for Bonus Issue

BASIC CONCEPTS
Bonus Issue means an offer of free additional shares to existing shareholders. A
company may decide to distribute further shares as an alternative to increase the
dividend payout.
Bonus Issue is also known as a "scrip issue" or "capitalization issue".
Bonus issue has following major effects :
Share capital gets increased according to the bonus issue ratio
Liquidity in the stock increases.
Effective Earnings per share, Book Value and other per share values stand reduced.
Markets take the action usually as a favourable act.
Market price gets adjusted on issue of bonus shares.
Accumulated profits get reduced.
Bonus shares can be issued from following :
General reserves
Capital Reserve realized in cash
Securities Premium realized in cash
The SEBI (Disclosure and Investor Protection) Guidelines, 2000 which came into
force w.e.f. 27th day of J anuary, 2000 require that the company while issuing
bonus shares shall ensure the following :
No company shall, pending conversion of FCDs/PCDs/ issue any by way
of bonus unless similar benefit is extended to the holders of such FCDs/
through reservation of shares in proportion to such convertible part of
FCDs or PCDs
The shares so reserved may be issued at the time of conversion(s) debentures
on the same terms on which the bonus issues were made.
The Institute of Chartered Accountants of India
Accounting For Bonus Issue 4.2
Question 1
The following is the summarised Balance Sheet of BumbumLimited as at 31
st
March, 2012:
`
Sources of funds
Authorized capital

50,000 Equity shares of ` 10 each 5,00,000
10,000 Preference shares of ` 100 each 10,00,000
15,00,000
Issued, subscribed and paid up
30,000 Equity shares of ` 10 each 3,00,000
5,000, 8%Redeemable Preference shares of ` 100 each 5,00,000
Reserves & Surplus
Securities Premium 6,00,000
General Reserve 6,50,000
Profit & Loss A/c 40,000
2,500, 9% Debentures of ` 100 each 2,50,000
Sundry Creditors 1,70,000
25,10,000
Application of funds
Fixed Assets (net) 7,80,000
Investments (market value ` 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Sundry Debtors 6,20,000
Cash & Bank balance 2,80,000
25,10,000
In Annual General Meeting held on 20
th
J une, 2012 the company passed the following
resolutions:
(i) To split equity share of ` 10 each into 5 equity shares of ` 2 each from1
st
J uly, 12.
(ii) To redeem8% preference shares at a premiumof 5%.
(iii) To redeem9% Debentures by making offer to debenture holders to convert their holdings
into equity shares at ` 10 per share or accept cash on redemption.
(iv) To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held
on record date.
4.3 Accounting
On 10
th
J uly, 2012 investments were sold for ` 5,55,000 and preference shares were
redeemed.
40% of Debentureholders exercised their option to accept cash and their claims were settled
on 1
st
August, 2012.
The company fixed 5
th
September, 2012 as record date and bonus issue was concluded by
12
th
September, 2012.
You are requested to journalize the above transactions including cash transactions and
prepare Balance Sheet as at 30
th
September, 2012. All working notes should formpart of your
answer.
Answer
BumbumLimited
Journal Entries
2012 Dr. (`) Cr. (`)
July 1 Equity Share Capital A/c (` 10 each) Dr. 3,00,000
To Equity share capital A/c (` 2 each) 3,00,000
(Being equity share of ` 10 each splitted into 5 equity
shares of ` 2 each)

July 10 Cash & Bank balance A/c Dr. 5,55,000
To Investment A/c 4,90,000
To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale credited to
Profit & Loss A/c)

July 10 8% Redeemable preference share capital A/c Dr. 5,00,000
Premium on redemption of preference share A/c Dr. 25,000
To Preference shareholders A/c 5,25,000
(Being amount payable to preference share holders on
redemption)

July 10 Preference shareholders A/c Dr. 5,25,000
To Cash & bank A/c 5,25,000
(Being amount paid to preference shareholders)
July 10 Securities premium A/c Dr. 5,00,000
To Capital redemption reserve A/c 5,00,000
(Being amount equal to nominal value of preference
shares transferred to Capital Redemption Reserve A/c
on its redemption as per the law)

Aug 1 9% Debentures A/c Dr. 2,50,000
Interest on debentures A/c Dr. 7,500
To Debentureholders A/c 2,57,500
(Being amount payable to debentureholders along with
interest payable)

Aug. 1 Debentureholders A/c Dr. 2,57,500
To Cash & bank A/c (1,00,000 + 7,500) 1,07,500
To Equity share capital A/c 30,000
To Securities premium A/c 1,20,000
(Being claims of debenture holders satisfied)
Sept. 5 Securities premium A/c Dr. 1,10,000
To Bonus to shareholders A/c 1,10,000
(Being securities premium capitalized to issue bonus
shares)

Sept. 12 Bonus to shareholders A/c Dr. 1,10,000
To Equity share capital A/c 1,10,000
(Being 55,000 fully paid equity shares of ` 2 each issued
as bonus in ratio of 1 share for every 3 shares held)

Sept. 30 Securities Premium A/c Dr. 25,000
To Premium on redemption of preference shares A/c 25,000
(Being premium on preference shares adjusted from
securities premium account)

Sept. 30 Profit & Loss A/c Dr. 7,500
To Interest on debentures A/c 7,500
(Being interest on debentures transferred to Profit and
Loss Account)

Note: For capitalisation of Bonus shares and transfer to capital redemption reserve
account any other free reserves given in the balance sheet may also be used.
Balance Sheet as at 30
th
September, 2012
Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 4,40,000
b Reserves and Surplus 2 13,32,500
4.5 Accounting
2 Current liabilities
a Trade Payables 1,70,000
Total 19,42,500
Assets
1 Non-current assets
a Fixed assets
Tangible assets 7,80,000
b Deferred tax asset 3,40,000
2 Current assets
Trade receivables 6,20,000
Cash and cash equivalents 2,02,500
Total 19,42,500
Notes to accounts
1 Share Capital ` `

Authorized share capital

2,50,000 Equity shares of ` 2 each 5,00,000

10,000 Preference shares of `100 each 10,00,000 15,00,000

Issued, subscribed and paid up

2 Reserves and Surplus

Securities Premium A/c

Balance as per balance sheet 6,00,000

Add: Premium on equity shares issued on
conversion of debentures (15,000 x 8)

1,20,000

7,20,000

Less: Capitalization for bonus issue (55,000 x 2) (1,10,000)

Adjustment for premium on preference
shares
(25,000)

Transfer to capital redemption reserve (5,00,000)

Balance 85,000

Capital Redemption Reserve 5,00,000


Profit & Loss A/c 40,000

Add: Profit on sale of investment 65,000

Less: Interest on debentures (7,500) 97,500
Total
13,32,500
3. Other current asset

Preliminary expenses 1,40,000

Deferred tax assets (assumed to be current asset) 3,40,000

Total
4,80,000
Working Notes:
`
1. Redemption of preference share:
5,000 Preference shares of ` 100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2. Redemption of Debentures
2,500 Debentures of ` 100 each 2,50,000
Less: Cash option exercised by 40% holders (1,00,000)
Conversion option exercised by remaining 60% 1,50,000
Equity shares issued on conversion =
1,50,000
10
= 15,000 shares
3. Issue of Bonus Shares
Existing equity shares after split (30,000 x 5) 1,50,000 shares
Equity shares issued on conversion 15,000 shares
Equity shares entitled for bonus 1,65,000 shares
Bonus shares (1 share for every 3 shares held) to be issued 55,000 shares
4. Cash and Bank Balance
Balance as per balance sheet 2,80,000
Add: Realization on sale of investment 5,55,000
8,35,000
Less: Paid to preference share holders (5,25,000)
Paid to Debentureholders (7,500 + 1,00,000) (1,07,500)
Balance 2,02,500
5. Interest of ` 7,500 paid to debenture holders have been debited to Profit & Loss Account.

4.7 Accounting
Question 2
Following is the extract fromthe Balance Sheet of M/s. Yahoo Ltd. as at 31
st
March, 2012:
(`)
Authorised capital:
50,000, 10% Preference shares of ` 10 each 5,00,000
Issued and subscribed capital:
40,000, 10% Preference shares of ` 10 each fully paid 4,00,000
1,80,000, Equity shares of ` 10 each, of which ` 7.50 paid up 13,50,000
Reserves and Surplus:
General reserve 2,40,000
Capital reserve 1,50,000
Securities premium 50,000
Profit and loss account 3,00,000
On 1
st
April, 2012, the company has made a final call @ ` 2.50 each on 1,80,000 equity
shares. The call money was received by 30
th
April, 2012. There after the company decided to
capitalize its reserves by issuing bonus shares at the rate of one share for every three shares
held. Securities premiumof ` 50,000 includes a premiumof ` 20,000 for shares issued to
vendor for purchase of a special machinery. Capital reserve includes ` 60,000 being profit on
exchange of plant and machinery.
Show necessary J ournal Entries in the books of the company and prepare the extract of the
Balance Sheet after bonus issue. Necessary assumption, if any, should formpart of your
answer.
Answer
In the books of M/s. Yahoo Ltd.
Journal Entries
Date Particulars ` `
1.4.2012 Equity share final call A/c Dr. 4,50,000
(Being the final call of ` 2.50 per share on 1,80,000
equity shares made)

30.4.2012 Bank A/c Dr. 4,50,000
To Equity share final call A/c 4,50,000
(Being final call money on 1,80,000 shares received)
30.4.2012 Securities premium A/c (50,000 20,000) Dr. 30,000
Capital reserve A/c (1,50,000 60,000) Dr. 90,000
General reserve A/c Dr. 2,40,000
Profit and loss A/c Dr. 2,40,000
To Bonus to shareholders A/c 6,00,000
(Being utilisation of reserves for bonus issue of one
share for every three shares held)

30.4.2012 Bonus to equity shareholders A/c Dr. 6,00,000
(Being bonus shares issued)
Extract of Balance Sheet (After bonus issue)
Particulars
Notes No.
`
Equity & Liabilities

1. Shareholders Funds

(a) Share Capital 1 28,00,000
(b) Reserves & Surplus 2 1,40,000
Notes to Accounts
`
1. Share Capital
Authorised share capital:
50,000, 10% Preference shares of ` 10 each 5,00,000
2,40,000, Equity shares of ` 10 each (refer W.N.) 24,00,000
Issued and subscribed capital:
40,000, 10% Preference shares of ` 10 each fully
paid
4,00,000
2,40,000, Equity shares of ` 10 each fully paid 24,00,000
(Out of the above, 60,000 equity shares of ` 10
each have been issued by way of bonus)

28,00,000
2. Reserves and Surplus:
General reserve 2,40,000
Less: Utilisation for issue of bonus shares (2,40,000) -
Capital reserve 1,50,000
Less: Utilisation for issue of bonus shares (90,000) 60,000

4.9 Accounting
Securities premium 50,000
Less: Utilisation for issue of bonus shares (30,000) 20,000
Profit and loss A/c 3,00,000
Less: Utilisation for issue of bonus shares (2,40,000) 60,000
1,40,000
Assumption:
1. As per SEBI Guidelines, Capital Reserve and Securities Premium collected in cash only
can be utilized for the purpose of issue of bonus shares. It is assumed that balance of
capital reserve and securities premium is collected in cash only.
2. It is also assumed that necessary resolutions have been passed and requisite legal
requirements related to the issue of bonus shares have been complied with before issue
of bonus shares.
Working Note:
On the basis of the above assumptions, the Authorised Capital should be increased as under:
Required for bonus issue ` 6,00,000
Less: Balance of authorised equity share capital (available) (` 2,00,000)
Authorised capital to be increased ` 4,00,000
Total authorised capital after bonus issue (` 20,00,000 + ` 4,00,000) = ` 24,00,000.
Question 3
The following is the summarized Balance Sheet of Trinity Ltd. as at 31.3.2011:
Trinity Ltd.
Balance Sheet as at 31st March, 2011
Liabilities ` Assets `
Share Capital Fixed Assets
Authorised Gross Block 3,00,000
10,000 10%Redeemable Preference Less : Depreciation 1,00,000
Shares of ` 10 each 1,00,000 2,00,000
90,000 Equity Shares of `10 each 9,00,000 Investments 1,00,000
10,00,000 Current Assets and Loans
Issued, Subscribed and Paid-up Capital and Advances
10,000 10%Redeemable Preference Inventory 25,000
Shares of ` 10 each 1,00,000 Debtors 25,000
10,000 Equity Shares of ` 10 each 1,00,000 Cash and Bank Balances 50,000
(A)
Reserves and Surplus
2,00,000 Misc. Expenditure to the extent
not written of
20,000
Securities Premium 70,000
Profit and Loss A/c 18,500
(B) 2,08,500
Current Liabilities and Provisions (C) 11,500
Total (A +B +C) 4,20,000 Total 4,20,000
For the year ended 31.3.2012, the company made a net profit of ` 15,000 after providing
` 20,000 depreciation and writing off the miscellaneous expenditure of ` 20,000.
The following additional information is available with regard to companys operation :
1. The preference dividend for the year ended 31.3.2012 was paid before 31.3.2012.
2. Except cash and bank balances other current assets and current liabilities as on 31.3.2012,
was the same as on 31.3.2011.
3. The company redeemed the preference shares at a premiumof 10%.
4. The company issued bonus shares in the ratio of one share for every equity share held as on
31.3.2012.
5. To meet the cash requirements of redemption, the company sold a portion of the investments,
so as to leave a minimumbalance of `30,000 after such redemption.
6. Investments were sold at 90%of cost on 31.3.2012.
You are required to
(a) Prepare necessary journal entries to record redemption and issue of bonus shares.
(b) Prepare the cash and bank account.
(c) Prepare the Balance Sheet as at 31
st
March, 2012 incorporating the above transactions.
Answer
Journal Entries in the Books of Trinity Ltd.
Dr. Cr.
` `
Securities Premium A/c Dr. 10,000
To Premium on Redemption of Preference shares 10,000
(Being amount of premium payable on redemption of preference
shares)

10% Redeemable Preference Capital Dr. 1,00,000
Premium on redemption of Preference Shares Dr. 10,000
To Preference Shareholders 1,10,000
4.11 Accounting
(Being the amount payable to preference shareholders on
redemption)

General Reserve A/c Dr. 1,00,000
To Capital Redemption Reserve 1,00,000
(Being transfer to the latter account on redemption of shares)
Bank A/c Dr. 45,000
Profit and Loss A/c Dr. 5,000
To Investments 50,000
(Being amount realised on sale of Investments and loss
thereon adjusted)
Preference shareholders A/c Dr. 1,10,000
To Bank 1,10,000
(Being payment made to preference shareholders)
Capital Redemption Reserve A/c Dr. 1,00,000
To Bonus to Shareholders 1,00,000
(Amount adjusted for issuing bonus share in the ratio of 1 : 1)
Bonus to Shareholders A/c Dr. 1,00,000
To Equity Share Capital 1,00,000
(Balance on former account transferred to latter)
(b) Cash and Bank A/c
` `
To Balance b/d 50,000 By Preference Dividend 10,000
To Cash from operations: By Preference shareholders 1,10,000
Profit 15,000 By Balance c/d 30,000
Add : Depreciation 20,000
Add : Miscellaneous
Expenditure
written off 20,000 55,000
To Investments 45,000
1,50,000 1,50,000

(c) Balance Sheet of Trinity Limited
as at 31st March, 2012 (after redemption)
Particulars Note No Amount
`
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 2,00,000
(b) Reserves and Surplus 2 98,500
(2) Current Liabilities
(a) Trade payables 11,500
Total 3,10,000
II. Assets
(1) Non-current assets
(a) Fixed assets 3
(i) Tangible assets 1,80,000
(b) Non-current investments (Market Value ` 45,000) 50,000
(2) Current assets
(a) Current investments -
(b) Inventories 25,000
(c) Trade receivables 25,000
(d) Cash and cash equivalents 30,000
Total 3,10,000
Notes to Accounts
`
1 Share Capital
(i) Authorised Capital 10,00,000

(ii) Issued, Subscribed and Paid-up Capital
- 20,000 Equity Shares of `10 each fully paid
(10,000 shares have been allotted as Bonus Shares
by capitalising capital Redemption Reserve) 2,00,000 2,00,000
2 Reserves and Surplus
Less: Transfer to CRR (1,00,000) 20,000
4.13 Accounting
Securities Premium 70,000
Less: Premium on redemption of preference shares (10,000) 60,000
Capital redemption reserve 1,00,000
Less: Utilised for Bonus shares (1,00,000) -
Profit and Loss A/c
Operating profit of the year(W.N.(i)) 10,000
Add: profit brought forward from last year 18,500
28,500
Less: Preference dividend (10,000) 18,500 98,500
3 Tangible assets
Gross Block 3,00,000
Less : Depreciation upto 31.3.2011 (1,00,000)
For the year (20,000) 1,80,000
Working Notes:
`
(i) Profit and Loss for the year ending 31st March, 2012
Profit for the year 15,000
Less : Loss on sale of investments 5,000
Balance as on 31.3.2012 10,000
(ii) Sale of Investments
Cost of Investments 50,000
Less : Cash Received 45,000
Loss on Sale of Investments 5,000
Total Investments: 1,00,000
Less : Cost of Investments sold 50,000
Cost of Investments on hand 50,000
Market value (90% of ` 50,000) 45,000
EXERCISES
1. The summarised Balance Sheet of A Ltd. as at 31.3.2012 is as follows:
Liabilities Rs. Assets Rs.
Authorised Share Capital Sundry Assets 17,00,000
1,50,000 Equity Shares of ` 10 each 15,00,000
Issued, Subscribed and Paid-up
80,000 Equity Shares of
` 7.50 each called-up and paid-up 6,00,000
Reserves and surplus
Capital Redemption Reserve 1,50,000
Plant Revaluation Reserve 20,000
Securities PremiumAccount 1,50,000
Development Rebate Reserve 2,30,000
Investment Allowance Reserve 2,50,000
17,00,000 17,00,000
The company wanted to issue bonus shares to its share holders at the rate of one share for every two shares held.
Necessary resolutions were passed; requisite legal requirements were complied with:
(a) You are required to give effect to the proposal by passing journal entries in the books of A Ltd.
(b) Showthe amended Balance Sheet.
(Hints: Total of Balance Sheet Rs.19,00,000)
2. The following is the Trial Balance of Subhash Limited as on 31.3.2012 :
(Figures in ` 000)
Debit Rs. Credit Rs.
Land at cost 110 Equity Capital (Shares of ` 10 each) 150
Plant &Machinery at cost 385 10%Debentures 100
Debtors 48 General Reserve 65
Stock (31.3.2012) 43 Profit &Loss A/c 36
Bank 10 Securities Premium 20
Adjusted Purchases 160 Sales 350
Factory Expenses 30 Creditors 26
Administration Expenses 15 Provision for Depreciation 86
Selling Expenses 15 Suspense Account 2
Debenture Interest 10
InterimDividend Paid 9
835 835
Additional Information :
(a) On 31.3.2012, the company issued bonus shares to the shareholders on 1 : 3 basis. No entry relating to this
has yet been made.
(b) The authorised share capital of the company is 25,000 shares of ` 10 each.
(c) The company on the advice of independent valuer wish to revalue the land at ` 1,80,000.
(d) Proposed final dividend 10%.
4.15 Accounting
(e) Suspense account of ` 2,000 represents cash received for the sale of some of the machinery on 1.4.2011.
The cost of the machinery was ` 5,000 and the accumulated depreciation thereon being ` 4,000.
(f) Depreciation is to be provided on plant and machinery at 10%on cost.
You are required to prepare Subhash Limiteds Statement of Profit &Loss for the year ended 31.3.2012 and a
balance sheet on that date in vertical formas per the provisions of Revised Schedule VI of the Companies Act,
1956.
Your answer to include detailed notes only for the following:
(1) Share Capital
(2) Reserves &Surplus
(3) Fixed Assets
Ignore previous years figures &taxation.
(Hints: Total of Balance Sheet ` 541; Net profit before dividend ` 83)

Accounting Vol 2

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Accounting for Bonus Issue

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