ExpertMedium2 marksMultiple Choice
ACCA · Question 23 · Preparing basic financial statements
Section A
A company makes a 1 for 4 bonus issue of shares. Prior to the issue, the company had 200,000 $1 ordinary shares and a share premium account balance of $60,000. The company wishes to utilize the share premium account as much as possible.
What is the impact of this bonus issue on the total equity of the company?
Section A
A company makes a 1 for 4 bonus issue of shares. Prior to the issue, the company had 200,000 $1 ordinary shares and a share premium account balance of $60,000. The company wishes to utilize the share premium account as much as possible.
What is the impact of this bonus issue on the total equity of the company?
Answer options:
A.
Total equity increases by $50,000
B.
Total equity decreases by $50,000
C.
Total equity remains unchanged
D.
Total equity increases by $10,000
How to approach this question
Understand the nature of a bonus issue. It involves issuing free shares to existing shareholders by converting reserves into share capital. No cash changes hands.
Full Answer
C.Total equity remains unchanged✓ Correct
A bonus issue is a capitalization of reserves. The company issues 50,000 new shares (200,000 / 4). Share capital increases by $50,000. This is funded by reducing the share premium account by $50,000. Since both accounts are part of equity, the total equity remains exactly the same.
Common mistakes
Assuming a bonus issue increases equity because more shares are issued.
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