Issue of Bonus Shares
Explanation and Journal Entries
A company’s undistributed profit is transferred to the profit and loss appropriation account or retained earnings. If the directors decide that a portion of the profit will be divided among the shareholders, the following journal entry would be made:
|Profit and Loss Appropriation/Retained Earnings ——————Dr.|
|Dividends Payable —————————————————————-Cr.|
To retain cash in the business, the directors may decide to issue shares to shareholders. The shares issued are known as bonus shares. In this way, shareholders will receive additional shares without making any further payment.
The issue of bonus shares in payment of dividends is called capitalization of un-distributed profit. The following accounting entry is made for the issuance of bonus shares:
|Dividends Payable ———————————- Dr.|
|Share Capital ——————————————Cr.|
If shares are issued at a premium, the accounting entry would be:
|Dividends Payable ——————————- Dr.|
|Share Capital —————————————Cr.|
|Premium on Shares —————————— Cr.|
Delight Corporation Limited shows a retained earnings balance of $185,000. The directors decided to capitalize $75,000.
Required: Prepare separate journal entries under each of the following assumptions.
- If 7,500 shares are issued at $10 each
- If 6,000 shares are issued at $12.50 each
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.