Bonus Shares or Capitalization of Profits - PowerPoint Presentation

1. Bonus Shares or Capitalization of Profits A company gives cash bonus to its shareholders only when it has larger reserves and sufficient cash to pay bonus. On the other hand, capital bonus is paid when the company wants to share the accumulated reserves with shareholders but it is not in a position to pay cash bonus because it adversely affects the working capital of the company.

2. Capitalization of profits may be done in two ways:-By making partly paid up share fully paid up.By issuing fully paid bonus shares to existing shareholders free of cost

3. Circumstances for issue of bonus sharesAccumulated large reservesCompany not in a position to give cash bonusWhen value of fixed asset exceeds the amount of capitalTo tackle the problem of shareholders demanding the same rate in futureBig difference between market value and paid up value of shares

4. Provisions of companies act regarding issue of bonus sharesSection 205(3), 78(2) and 80(5) of companies act, 1956 and regulation 96 and 97 of table A make provisions of bonus share. Section 205(3) provides that a company may capitalize its profits or reserves for the purpose of issuing fully paid bonus shares or pay up any amount for the time being unpaid.Section 78(2) provides that the securities premium may be applied in paying up unissued shares of the company as fully paid bonus shares to its members.Section 80(5) provides that the CRR may be applied by the company in paying up unissued shares to be issued as fully paid bonus shares to its members.

5. SEBI guidelines for Issue of Bonus Shares made out of free reserves .Reserves created by revaluation of Fixed Assets are not capitalized.The declaration of bonus issue, in lieu of dividend, is not made.The bonus issue is not made unless the partly paid-up shares, if any existing, are made fully paid-up.A company must have approval within the six months.

6. the company shall pass a resolution for making provisions in the Articles of Association for capitalization. resolution shall be passed by the company for increasing the authorized capital the rate of dividend to be declared in the year immediately after the bonus issue should be indicated in the AGMNo bonus issue will be made which will dilute the value of rights of the holders of debentures, convertible fully or partly.

7. Free Reserves that can be used for Issue of Bonus shares :Surplus in Profit and Loss account.General ReserveDividend equalization reserve.Capital reserve arising from profit on sale of fixed assets received in cash.Balance in debenture redemption reserve after redemption of debentures.Capital Redemption Reserve A/c created at the time of redemption of redeemable preference shares out of the profits.Securities Premium collected in cash only.

8. Accounting Treatment:If bonus is utilized by making existing partly paid shares as fully paid:Profit & Loss A/c Dr.Or General Reserve A/c Dr.Or Capital Profit A/c Dr. To Bonus to Shareholders A/c(Being amount transferred for bonus payable to shareholders)2. Share Final Call Account Dr. To Share Capital A/c(Being final call due on shares)3. Bonus to shareholders A/c Dr. To Share Final Call A/c(Being bonus to shareholders utilized to make the final call paid-up)

9. B) If the payment of bonus is made by the issue of free fully paid bonus shares:Profit & Loss A/c Dr.Or General Reserve A/c Dr.Or CRR A/c Dr.Or Securities Premium A/c Dr.Or Capital Reserve A/c Dr.Or Any Other reserve A/c Dr. To Bonus to Shareholders A/c(Being amount transferred for issue of bonus shares)Bonus to Shareholders A/c Dr. To Share Capital A/c To Securities Premium A/c(Being issue of bonus shares at a premium)

10. Difference between bonus and right shares Issued to existing shareholders free of cost. Always fully paid up. Acc. to the provisions of AOA and SEBI guidelinesNo minimum subscription. Separate price for transfer.Existing shareholders will have to pay. can be fully as well as partly paid up.Regulated by sec 81 of companies act.Subject to minimum subscriptionNo separate price for transferBonus shares Right shares

11. Illustration :- The following figures have been extracted from the books of ABC Ltd. As at 31/3/2008: Rs.Authorized Capital:50,00,000 Equity Shares @Rs.10 5,00,00,000Issued and Subscribed Capital:45,00,000 Equity Shares @Rs 10 4,50,00,000(fully paid)Reserves and Surplus:General Reserve 50,00,000Profit and Loss A/c 1,10,00,000Capital Reserve 30,00,000Securities Premium 15,00,00014% partly convertibleDebentures @Rs.100 each 1,25,00,000 The company decided to capitalize its reserves by way of bonus issue at the rate of one share for every 4 shares held. Capital reserve includes Rs. 20,00,000 profit on sale of fixed assets. It may be assumed that securities premium has been realizes in cash .

12. 40% of 14% Debentures are convertible into equity shares of Rs. 10 each fully paid on 30th September, 2008. Show the necessary Journal entries in the books of company .Solution:- Date a)b)ParticularsCapital Reserve A/c Dr.Securities Premium A/c Dr.General Reserve A/c Dr.Profit & Loss A/c Dr. To Bonus to Shareholders A/c(Being bonus issue@1 share for every 4 shares held by utilizing various reserves as per Board’s resolution dated…)Bonus to Shareholders A/c Dr. To Equity Share capital A/c(Being issue of 11,25,000 bonus shares of Rs. 10 each fully paid up.)Debit amt.20,00,00015,00,00050,00,00027,50,0001,12,50,000Credit Amt.1,12,50,0001,12,50,000