ISSUE OF BONUS SHARES

Bonus may be paid in cash or in shares:

            Cash bonus is given when the company has sufficient cash to pay without affecting the working capital

Capital Bonus (Bonus Share)

            If cash is insufficient and if payment of cash bonus is likely to affect the working capital the company may issue bonus shares instead of cash bonus. Capital bonus is given by making partly paid shares fully paid without getting cash from the shareholders or it is given by issue of fully paid shares.

            Bonus shares are those shares which are issued by a company free of charge to the existing shareholders of a company out of its large reserves created out of past profits.

Circumstances of issuing Bonus Shares

1. When the company wishes to capitalize its reserves

2. When the company has not sufficient cash reserves

3. When value of fixed assets of a company exceeded its capital, the difference is capitalized by issuing bonus shares

4. To avoid problems like demand by the workers for higher wages

SEBI Guidelines for Issue of Bonus Shares

1. The bonus issue can be made only out of free reserves built out of the genuine profits or securities premium collected in cash.

2. Reserves created by revaluation of fixed assets are not available for issue of bonus shares

3. The bonus issue cannot be made unless the partly-paid shares, if any, existing, are made fully paid-up

4. The declaration of bonus issue, in lieu of dividend, cannot be made

5. Once the company announces bonus issue after the approval of Board of Directors, the proposal must be implemented within a period of six months from the date of such approval and it does not have option of changing the decision

6. If there is no provision in the Articles for the capitalization of reserves, the company must pass a Resolution at its General Body Meeting to make provisions in the Articles

7. If consequent to the issue of bonus shares, the subscribe and paid-up capital exceeds the authorized capital, a Resolution shall be passed by the company at its General Body Meeting for increasing the authorized capital

Funds or Sources for Bonus Issue

A .Revenue Reserves/Profits

            1. Credit balance in the profit and loss account

            2. General Reserves

            3. Credit balance in the Sinking Fund Account for the redemption of a liability    after the redemption of the liability

            4. Dividend equalization reserve

 B. Capital Reserves/profits

            1. Profit prior to incorporation

            2. Profit on sale of fixed assets or business

            3. Capital Redemption Reserve created for redemption of preference share

            4. Security Premium collected in cash only

Note: Capital Redemption Reserve Account and Security Premium Account can be utilized only for issuing fully paid bonus shares

Accounting Treatment

            Bonus share can be issued at par or at premium. Bonus share can be given:

a) By making partly paid shares as fully paid

b) By issuing fully paid shares

When fully paid bonus shares are issued

1. For the transfer of amount for the issue of bonus shares (on declaration of bonus)

            Profit and Loss A/c                             Dr

            General Reserve A/c                           Dr

            Capital Redemption Reserve A/c       Dr

            Security Premium A/c                         Dr

            Capital Reserve A/c                            Dr

            Any other Reserve A/c                        Dr

                        To Bonus to Shareholders A/c

2.  on issue of bonus shares

            Bonus to Shareholders A/c                 Dr

                        To Share Capital

                        To Security Premium A/c        (if bonus shares are issued at premium)

When Bonus is given to convert partly paid shares into fully paid

1. On the declaration of bonus

           

Profit and Loss A/c                             Dr

            General Reserve A/c                           Dr

            Capital Reserve A/c                            Dr

                                    To Bonus to Shareholders A/c

2. On making the final call due

            Share Final Call A/c                            Dr

                        To Share Capital

3. On utilization of bonus to make the share paid-up

            Bonus to Shareholders A/c                 Dr

                        To Share Final Call A/c

Journal Entry for Cash Bonus

       1)  P&L Appropriation A/c                      Dr

                        To Bonus Payable

       2)  Bonus Payable A/c                              Dr

                        To Bank

Based on Financial Accounting Books