A bonus issue involves transferring amounts from reserves to share capital. What is the effect on the balance sheet?

A bonus issue involves transferring amounts from reserves to share capital. What is the effect on the balance sheet?

• A. Share capital increases; Reserves decrease
• B. Share capital decreases; Reserves increase
• C. Both increase
• D. No effect

Answer: (A)

A bonus issue moves value within equity by capitalizing reserves to issue more shares to existing shareholders. This means share capital increases by the amount transferred from reserves, while reserves decrease by the same amount. No cash is involved, so assets stay the same, and liabilities are unchanged. The overall owners’ equity stays the same in total because it’s just a reshuffling inside equity, not a change in the company’s wealth. So the balance sheet shows higher share capital and lower reserves.

A bonus issue moves value within equity by capitalizing reserves to issue more shares to existing shareholders. This means share capital increases by the amount transferred from reserves, while reserves decrease by the same amount. No cash is involved, so assets stay the same, and liabilities are unchanged. The overall owners’ equity stays the same in total because it’s just a reshuffling inside equity, not a change in the company’s wealth. So the balance sheet shows higher share capital and lower reserves.