Issuance of bonus shares

The undistributed profit of the company or corporation is transferred to Profit and Loss Appropriation account or retained earning. If the directors decided that out of the profit of the corporation a portion may be divided among the shareholders, the accounting entry would be:

Profit and Loss Appropriation/Retained earning ——————Dr.
          Dividend Payable —————————————————————-Cr.

In order to retain cash in the business, the directors may decide to issue shares to the shareholders in payment of dividend to them. The shares thus, issued, are known as bonus shares. In this way, shareholders will get the additional shares without making any further payment. The issue of bonus shares in payment of dividend is called as “Capitalization of Un-distributed Profit”. The accounting entry for the issuance of bonus shares would be:

Dividend Payable ———————————- Dr.
          Share Capital ——————————————Cr.

If shares are issued at premium, the accounting entry would be:

Dividend payable ——————————- Dr.
          Share Capital —————————————Cr.
          Premium on shares —————————— Cr.

Example:

Delight Corporation Limited shows a retained earnings balance of $1,85,000. The directors decided to capitalise $75,000.

Give journal entries under each of the following assumptions separately.

  • If 7,500 shares are issued at $10 each.
  • If 6,000 shares are issued at $12.50 each

Required: Journal entries in the books of Delight Corporation.

Solution:

Issunace of bonus shares

Prev page
Next page

Leave a comment