What is a bonus issue and how is it recorded?

What is a bonus issue and how is it recorded?

• A. It is issue of shares for cash; Dr Bank; Cr Share Capital
• B. It is issue of shares without cash to existing shareholders; Dr Reserves; Cr Share Capital
• C. It is reduction of share capital; Dr Share Capital; Cr Reserves
• D. It is issue of shares to new investors at a premium; Dr Bank; Cr Share Capital; Cr Share Premium

Answer: (B)

A bonus issue is when a company issues additional shares to existing shareholders at no cash cost, by capitalizing reserves to increase share capital. The recording reflects that no cash has moved in or out; instead, the company moves funds from reserves into share capital. The appropriate journal entry is a debit to reserves (the source of the capitalization) and a credit to share capital, increasing the number of shares outstanding while reducing reserves. This keeps the overall value of equity the same, just rebalances it from reserves to share capital. It’s different from a cash issue to new investors or a premium issue, which involve cash or premium accounts.

A bonus issue is when a company issues additional shares to existing shareholders at no cash cost, by capitalizing reserves to increase share capital. The recording reflects that no cash has moved in or out; instead, the company moves funds from reserves into share capital. The appropriate journal entry is a debit to reserves (the source of the capitalization) and a credit to share capital, increasing the number of shares outstanding while reducing reserves. This keeps the overall value of equity the same, just rebalances it from reserves to share capital. It’s different from a cash issue to new investors or a premium issue, which involve cash or premium accounts.