Acca financial Accounting (FA) Study Text ac ca (FA)

Capital structure and finance costs 

224

 

KAPLAN PUBLISHING

 

Test your understanding 2 

Upon incorporation in 20X4, JD Co, a limited liability company, issued 

1,000 50c shares at nominal value. Needing further funds, in 20X5 it 

made a rights issue of 1 for 5 at $0.75. This offer was fully taken up. 

What accounting entries are required in 20X4 and 20X5? Illustrate 

the relevant section of the statement of financial position at year 

end 20X5. 

5 Bonus 

issues 

A 

bonus issue

 is: 

the issue of new shares to existing shareholders in proportion to their existing 

shareholding. No cash is received from making a bonus issue of shares.  

The 

advantages 

are: 

•

Issued share capital is divided into a larger number of shares, thus making

the market value of each one less, and so more marketable.

•

Issued share capital is brought more into line with assets employed in the

company by reducing stated reserves and increasing share capital.

The 

disadvantages 

are: 

•

the admin costs of making the bonus issue.

As no cash is received from a bonus issue, the issue must be funded from 

reserves. Any reserve can be used, though a non-distributable reserve such as 

the share premium account would be used in preference to reserves which can 

be distributed: 

Dr Share premium 

$X Nominal value 

(or other reserve) 

Cr Share capital 

$X Nominal value 

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