ExpertMedium2 marksMultiple Choice
ACCA · Question 05 · The use of double-entry and accounting systems
A company makes a 1 for 4 bonus issue of shares. The nominal value of the shares is $1. The company wishes to utilize its share premium account for this purpose. What is the correct double-entry to record this transaction?
A company makes a 1 for 4 bonus issue of shares. The nominal value of the shares is $1. The company wishes to utilize its share premium account for this purpose. What is the correct double-entry to record this transaction?
Answer options:
A.
Debit Cash, Credit Share Capital
B.
Debit Share Capital, Credit Share Premium
C.
Debit Share Premium, Credit Share Capital
D.
Debit Retained Earnings, Credit Cash
How to approach this question
Remember that a bonus issue is a free issue of shares to existing shareholders, funded by reserves.
Full Answer
C.Debit Share Premium, Credit Share Capital✓ Correct
A bonus issue involves issuing new shares to existing shareholders for free. It is funded by transferring amounts from reserves (like Share Premium or Retained Earnings) to Share Capital. Therefore, debit Share Premium and credit Share Capital.
Common mistakes
Confusing a bonus issue with a rights issue, which does raise cash.
Practice the full ACCA FA — Financial Accounting Practice Exam 2
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