TOPIC - 4

ACCOUNTING FOR BONUS AND RIGHT ISSUE

(TOTAL NO. OF QUESTIONS – 8)

RTP QUESTIONS

Question 1 (May18, Nov18 & May19, Nov19)

Following is the extract of the Balance Sheet of Manoj Ltd. as at 31st March, 20X1
Rs
Authorized capital:
30,000 12% Preference shares of Rs 10 each 3,00,000
4,00,000 Equity shares of Rs 10 each 40,00,000
43,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of Rs 10 each fully paid 2,40,000
2,70,000 Equity shares of Rs 10 each, Rs 8 paid up 21,60,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000

On 1st April, 20X1, the Company has made final call @ Rs 2 each on 2,70,000 equity
shares. The call money was received by 20th April, 20X1. Thereafter, the company
decided to capitalize its reserves by way of bonus at the rate of one share for every four
shares held.

You are required to prepare necessary journal entries in the books of the company and
prepare the relevant extract of the balance sheet as on 30th April, 20X1 after bonus
issue.

4.1
SOLUTION
Journal Entries in the books of Manoj Ltd.
Rs Rs
1-4-20X1 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of Rs 2 per share on
2,70,000 equity shares due as per
Board’s Resolution dated….)

20-4-20X1 Bank A/c Dr. 5,40,000

To Equity share final call A/c 5,40,000
(For final call money on 2,70,000 equity
shares received)

Securities Premium A/c Dr. 75,000

Capital redemption reserve A/c Dr. 1,20,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 1,20,000
To Bonus to shareholders A/c 6,75,000
(For making provision for bonus issue
of one share for every four shares held)

Bonus to shareholders A/c Dr. 6,75,000

To Equity share capital A/c
(For issue of bonus shares) 6,75,000

Extract of Balance Sheet as at 30th April, 20X1 (after bonus issue)

Rs
Authorised Capital
30,000 12% Preference shares of Rs 10 each 3,00,000
4,00,000 Equity shares of Rs 10 each 40,00,000
Issued and subscribed capital
24,000 12% Preference shares of Rs 10 each, fully paid 2,40,000
3,37,500 Equity shares of Rs 10 each, fully paid 33,75,000
(Out of the above, 67,500 equity shares @ Rs 10 each were
issued by way of bonus shares)
Reserves and surplus
Profit and Loss Account 4,80,000

Question 2 (May18, May19, Nov19)

Omega company offers new shares of Rs 100 each at 25% premium to existing
shareholders on the basis one for five shares. The cum-right market price of a share is
Rs 200.

You are required to calculate the (i) Ex-right value of a share; (ii) Value of a right share?

4.2
SOLUTION
Ex-right value of the shares
= (Cum-right value of the existing shares + Rights shares x Issue Price) / (Existing No. of shares
+ No. of right shares) = (Rs 200 X 5 Shares + Rs 125 X 1 Share) / (5 + 1) Shares
= Rs 1,125 / 6 shares = Rs 187.50 per share.
Value of right = Cum-right value of the share – Ex-right value of the share
= Rs 200 – Rs 187.50 = Rs 12.50 per share.

Question 3 (Nov18 & May20)

Zeta Ltd. has decided to increase its existing share capital by making rights issue to
its existing shareholders. Zeta Ltd. is offering one new share for every two shares held
by the shareholder. The market value (cum-right) of the share is Rs 360 and the
company is offering one right share of Rs 180 each to its existing shareholders. You are
required to calculate the value of a right. What should be the ex-right value of a
share?

SOLUTION
Ex-right value of the shares = (Cum-right value of the existing shares + Rights shares x
Issue Price) / (Existing Number of shares + Number of Right shares)
= (Rs 360 x 2 Shares + Rs 180 x 1 Share) / (2 + 1) Shares
= Rs 900 / 3 shares = Rs 300 per share.
Value of right = Cum-right value of the share – Ex-right value of the share =
Rs 360 – Rs 300 = Rs 60 per share.
Hence, any one desirous of having a confirmed allotment of one share from the company at Rs
180 will have to pay Rs 120 (2 shares x Rs 60) to an existing shareholder holding 2 shares and
willing to renounce his right of buying one share in favour of that person.

Question 4 (May20)
The following is the summarised Balance Sheet of Bumbum Limited as at 31st March,
2019:
Rs
Sources of funds
Authorized capital
50,000 Equity shares of Rs 10 each 5,00,000
10,000 Preference shares of Rs 100 each (8% redeemable) 10,00,000
15,00,000
Issued, subscribed and paid up
30,000 Equity shares of Rs 10 each 3,00,000

4.3
 5,000, 8%Redeemable Preference shares of Rs 100 each 5,00,000
Reserves & Surplus
Securities Premium 6,00,000
General Reserve 6,50,000
Profit & Loss A/c 40,000
Trade payables 4,20,000
25,10,000
Application of funds
PPE (net) 7,80,000
Investments (market value Rs 5,80,000) 4,90,000
Deferred Tax Assets 3,40,000
Trade receivables 6,20,000
Cash & Bank balance 2,80,000
25,10,000
In Annual General Meeting held on 20th June, 2019 the company passed the following
resolutions:
(i) To split equity share of Rs 10 each into 5 equity shares of Rs 2 each from 1st
July, 2019.
(ii) To redeem 8% preference shares at a premium of 5%.
(iii) To issue fully paid bonus shares in the ratio of one equity share for every 3
shares held on record date.
On 10th July, 2019 investments were sold for Rs 5,55,000 and preference shares were
redeemed.
The bonus issue was concluded by 12th September, 2019
You are required to journalize the above transactions including cash transactions and
prepare Balance Sheet as at 30th September, 2019. All working notes should form part
of your answer.

SOLUTION
Bumbum Limited
Journal Entries
2019 Dr. (Rs) Cr. (Rs)
July 1 Equity Share Capital A/c (Rs 10 each) Dr. 3,00,000
To Equity share capital A/c (Rs 2 each) 3,00,000
(Being equity share of Rs 10 each splitted into 5
equity shares of Rs 2 each) {1,50,000 X 2}
July 10 Cash & Bank balance A/c Dr. 5,55,000
To Investment A/c 4,90,000
To Profit & Loss A/c 65,000
(Being investment sold out and profit on sale
credited to Profit & Loss A/c)
July 10 8% Red. pref. sh. capital A/c Dr. 5,00,000

4.4
 Premium on red. of pref. sh. A/c Dr. 25,000
To Preference shareholders A/c 5,25,000
(Being amount payable to preference share holders
on redemption)
July 10 Preference shareholders A/c Dr. 5,25,000
To Cash & bank A/c 5,25,000
(Being amount paid to preference shareholders)
July 10 General reserve A/c Dr. 5,00,000
To Capital redemption reserve A/c 5,00,000
(Being amount equal to nominal value of preference
shares transferred to Capital Redemption Reserve
A/c on its redemption as per the law)
Sept. 12 Capital Redemption Reserve A/c Dr. 1,00,000
To Bonus to shareholders A/c 1,00,000
(Being balance in capital redemption
reserve capitalized to issue bonus shares)
Sept. 12 Bonus to shareholders A/c Dr. 1,00,000
To Equity share capital A/c 1,00,000
(Being 50,000 fully paid equity shares of Rs 2 each
issued as bonus in ratio of 1 share for every 3
shares held)
Sept. 30 Securities Premium A/c Dr. 25,000
To Premium on redemption of preference 25,000
shares A/c
(Being premium on preference shares adjusted
from securities premium account)

Balance Sheet as at 30th September, 2019

Particulars Notes Rs
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 4,00,000
b Reserves and Surplus 2 12,30,000
2 Current liabilities
a Trade Payables 4,20,000
Total 20,50,000
Assets
1 Non-current assets
a PPE 7,80,000
b Deferred tax asset 3,40,000
2 Current assets
Trade receivables 6,20,000
Cash and cash equivalents 3,10,000
Total 20,50,000

4.5
 Notes to accounts
1 Share Capital Rs Rs
Authorized share capital
2,50,000 Equity shares of Rs 2 each 5,00,000
15,00,000
10,000 8% Preference shares of Rs100 each 10,00,000
Issued, subscribed and paid up
2,00,000 Equity shares of ` 2 each 4,00,000
2 Reserves and Surplus
Securities Premium A/c
Balance as per balance sheet 6,00,000
Less: Adjustment for premium on preference
Shares (25,000)
Balance 5,75,000
Capital Redemption Reserve (5,00,000-1,00,000) 4,00,000
General Reserve (6,50,000 – 5,00,000) 1,50,000
Profit & Loss A/c 40,000
1,05,000
Add: Profit on sale of investment 65,000
Total 12,30,000

Working Notes:
Rs
1. Redemption of preference shares
5,000 Preference shares of Rs 100 each 5,00,000
Premium on redemption @ 5% 25,000
Amount Payable 5,25,000
2. Issue of Bonus Shares
Existing equity shares after split (30,000 x 5) 1,50,000 shares
Bonus shares (1 share for every 3 shares held) to be 50,000 shares
issued
3. Cash and Bank Balance
Balance as per balance sheet 2,80,000
Add: Realization on sale of investment 5,55,000
8,35,000
Less: Paid to preference share holders (5,25,000)
Balance 3,10,000

4.6
 MTP QUESTIONS

Question 5 (MTP March19 & April19)

Following items appear in the Trial Balance of Hello Ltd. as on 31st March, 2017:
Particulars Amount
9,000 Equity Shares of Rs.100 each 9,00,000
Securities Premium 80,000
Capital Redemption Reserve 1,40,000
General Reserve 2,10,000
Profit and Loss Account (Cr. Balance) 90,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share
for every 3 shares held. Company decided that there should be the minimum reduction in
free reserves.
You are required to give the necessary Journal Entries in the books Hello Ltd.

SOLUTION
Journal Entries in the books of Hello Ltd.

Capital Redemption Reserve A/c Dr. 1,40,000

Securities Premium A/c Dr. 80,000
General Reserve A/c (balancing figure) Dr. 80,000
To Bonus to Shareholders 3,00,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated …….)

Bonus to Shareholders A/c Dr. 3,00,000

To Equity Share Capital 3,00,000
(Being capitalization of Profit)

Question 6 (Oct19)
Following items appear in the Trial Balance of Beta Ltd. as on 31st March, 2017:
Particulars Amount
3,000 Equity Shares of Rs. 100 each 3,00,000
Securities Premium (collected in cash) 40,000
Capital Redemption Reserve 30,000
General Reserve 1,00,000
The company decided to issue to equity shareholders bonus shares at the rate of 1
share for every 3 shares held. Company decided that there should be the minimum
reduction in free reserves. Pass necessary Journal Entries in the books of Beta Ltd.

4.7
SOLUTION
Capital Redemption Reserve A/c Dr. 30,000
Securities Premium A/c Dr. 40,000
General Reserve A/c Dr. 30,000
To Bonus to Shareholders 1,00,000
(Being issue of bonus shares by utilization of various Reserves, as per resolution dated
…….)

Bonus to Shareholders A/c Dr. 1,00,000

To Equity Share Capital 1,00,000
(Being capitalization of Profit)

PAST EXAM QUESTIONS

Question 7 (May18 – 5 Marks)

Following are the balances appear in the trial balance of Arya Ltd. as at 31st March.
2018.
Issued and Subscribed Capital:
Rs
10,000; 10% Preference Shares of Rs 10 each fully paid 1,00,000
1,00,000 Equity Shares of Rs 10 each Rs 8 paid up 8,00,000
Reserves and Surplus:
General Reserve 2,40,000
Securities Premium (collected in cash) 25,000
Profit and Loss Account 1,20,000

On 1st April, 2018 the company has made final call @ Rs 2 each on 1,00,000 Equity
Shares. The call money was received by 15th April, 2018. Thereafter the company
decided to issue bonus shares to equity shareholders at the rate of 1 share for every 5
shares held and for this purpose, it decided that there should be minimum reduction in
free reserves. Pass Journal entries.

SOLUTION
Arya Ltd.
Journal Entries
Dr. Cr.
2018 Rs Rs
April 1 Equity Share Final Call A/c Dr.2,00,000
To Equity Share Capital A/c 2,00,000
(Final call of Rs 2 per share on 1,00,000 equity shares
due as per Board’s Resolution dated .............. )
April 15 Bank A/c Dr. 2,00,000
To Equity Share Final Call A/c 2,00,000

4.8
 (Final Call money on 1,00,000 equity shares received)

Securities Premium A/c Dr. 25,000

General Reserve A/c* Dr. 1,75,000
To Bonus to Shareholders A/c 2,00,000
(Bonus issue @ one share for every 5 shares held by
utilizing various reserves as per Board’s Resolution
dated...)
April 15 Bonus to Shareholders A/c Dr. 2,00,000
To Equity Share Capital A/c 2,00,000
(Capitalization of profit)
Note: Profit and Loss Account balance may also be utilized along with General Reserve for the
purpose of issue of Bonus shares.

Question 8 (Nov19 – 5 Marks)

Following is the extract of Balance Sheet of Prem Ltd. as at 31st March, 2018:
Rs
Authorized capital:
3,00,000 equity shares of Rs 10 each 30,00,000
25,000,10% preference shares of Rs 10 each 2,50,000
32,50,000
Issued and subscribed capital:
2,70,000 equity shares of Rs 10 each fully paid up 27,00,000
24,000, 10% preference shares of Rs 10 each fully paid up 2,40,000
29,40,000
Reserves and surplus:
General reserve 3,60,000
Capital redemption reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and loss account 6,00,000
11,55,000
On 1st April, 2018, the company decided to capitalize its reserves by way of bonus at the
rate of two shares for every five shares held.
Show necessary journal entries in the books of the company and prepare the extract of
the balance sheet after bonus issue.

SOLUTION
Prem Ltd.
Journal Entries
Dr. Cr.
April 1 Capital Redemption Reserve A/c Dr. 1,20,000
Securities Premium A/c Dr. 75,000
General Reserve A/c Dr. 3,60,000
Profit and Loss A/c (b.f.) Dr. 5,25,000
To Bonus to Equity Shareholders A/c 10,80,000

4.9
 (Bonus issue @ two shares for every five
shares held by utilizing various reserves as
per Board’s Resolution dated...)
Bonus to Shareholders A/c Dr. 10,80,000
To Equity Share Capital A/c 10,80,000
(Issue of bonus shares)

st
Balance Sheet (Extract) as on 1 April, 2018 (after bonus issue)
Particulars Notes Amount (Rs)
Equity and Liabilities
1 Shareholders’ funds
a Share capital 1 40,20,000
b Reserves and Surplus 2 75,000

Notes to Accounts
1 Share Capital (Rs)
Authorized share capital:
3,78,000* Equity shares of Rs 10 each 37,80,000*
25,000 10% Preference shares of Rs 10 each 2,50,000
40,30,000
Total
Issued, subscribed and fully paid share capital: 3,78,000
Equity shares of Rs 10 each, fully paid (Out of above,
1,08,000 equity shares @ Rs 10 each
were issued by way of bonus) 37,80,000
24,000 10% Preference shares of Rs 10 each 2,40,000
Total 40,20,000
Reserves and Surplus
2
Capital Redemption Reserve 1,20,000 Nil
Less: Utilized 1,20,000
Securities Premium 75,000
Less: Utilised for bonus issue (75,000) Nil
General reserve 3,60,000
Less: Utilised for bonus issue (3,60,000) Nil
Profit & Loss Account 6,00,000
Less: Utilised for bonus issue (5,25,000) 75,000
Total 75,000
Note: *Authorized capital has been increased by the minimum required amount i.e. Rs
7,80,000 (37,80,000 – 30,00,000) in the above solution.

4.10
Student Notes:-

4.11
Student Notes:-

4.12