COMPANY ACCOUNTS 11.

UNIT – 4: ACCOUNTING FOR BONUS ISSUE AND

RIGHT ISSUE

LEARNING OUTCOMES

After studying this unit, you will be able to:

 Understand the provisions relating to issue of bonus shares
and right shares;
 Account for bonus shares and rights issue in the books of
issuing company;
 Understand the meaning of renunciation of right;
 Differentiate between cum-right and ex-right value of share;
 Calculate value of rights.

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UNIT OVERVIEW

BONUS Bonus issue means an issue of additional shares to existing

SHARES shareholders free of cost in proportion to their existing holding.
A company may issue fully paid-up bonus shares to its
shareholders out of—
(i) its free reserves;
(ii) securities premium account; or
(iii) capital redemption reserve account:
Bonus shares should not be issued out of revaluation reserves
(i.e., reserves created by the revaluation of assets).

RIGHT Rights issue is an issue of rights to a company's existing

ISSUE shareholders that entitles them to buy additional shares directly
from the company in proportion to their existing holdings,
within a fixed time period. In a rights offering, the subscription
price at which each share may be purchased is generally at a
discount to the current market price. Rights are often
transferable, allowing the holder to sell them in the open
market. The difference between the cum-right and ex-right value
of the share is the value of the right.

4.1 ISSUE OF BONUS SHARES

4.1.1Introduction
A bonus share may be defined as issue of shares at no cost to current shareholders
in a company, based upon the number of shares that the shareholder already owns.
In other words, no new funds are raised with a bonus issue. While the issue of
bonus shares increases the total number of shares issued and owned, it does not
increase the net worth of the company. Although the total number of issued shares
increases, the ratio of number of shares held by each shareholder remains
constant.
Bonus issue is also known as ‘capitalisation of profits’. Capitalisation of profits refers
to the process of converting profits or reserves into paid up capital. A company may
capitalise its profits or reserves which otherwise are available for distribution as
dividends among the members by issuing fully paid bonus shares to the
members.

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If the subscribed and paid-up capital exceeds the authorised share capital as a
result of bonus issue, a resolution shall be passed by the company at its general
body meeting for increasing the authorised capital. A return of bonus issue along
with a copy of resolution authorising the issue of bonus shares is also required to
be filed with the Registrar of Companies.

Bonus shares are

shares issued at no Based upon That the
cost to current the number of shareholder
shareholders in a shares already owns.
company

Example 1
Alpha Company announced bonus issue to its shareholders in the ratio of 2:3 ie.
2 shares for every 3 shares held. Shareholder X has 6,000 shares before
announcement of bonus issue. How much shares would he have after bonus issue?
Solution
Company announced bonus issue in ratio of 2:3

Shareholder X will be entitled to have 4,000 bonus shares (6,000

shares / 3 x 2) Total number of shares X has after bonus issue 10,000

(6,000 + 4,000)
4.1.2 Provisions of the Companies Act, 2013
Section 63 of the Companies Act, 2013 deals with the issue of bonus shares.
According to Sub-section (1) of Section 63, a company may issue fully paid-up
bonus shares to its members, in any manner whatsoever, out of—
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account:
Provided that no issue of bonus shares shall be made by capitalising reserves
created by the revaluation of assets.
Sub-section (2) of Section 63 provides that no company shall capitalise its profits
or reserves for the purpose of issuing fully paid-up bonus shares under sub-
section (1), unless—


As per Section 2(43) of the Companies Act, 2013, “free reserves” means such reserves which,
as per the latest audited balance sheet of a company, are available for distribution as dividend.
Provided that—
(i) any amount representing unrealised gains, notional gains or revaluation of assets, whether
shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognised in equity, including
surplus in profit and loss account on measurement of the asset or the liability at fair value, shall
not be treated as free reserves.

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(a) it is authorised by its articles;

(b) it has, on the recommendation of the Board, been authorised in the
general meeting of the company;
(c) it has not defaulted in payment of interest or principal in respect of fixed
deposits or debt securities issued by it;
(d) it has not defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus;
(e) the partly paid-up shares, if any outstanding on the date of allotment, are
made fully paid-up.
(f) it complies with such conditions as may be prescribed.
The company which has once announced the decision of its Board recommending a
bonus issue, shall not subsequently withdraw the same.
Sub-section (3) of the Section also provides that the bonus shares shall not be issued
in lieu of dividend.
As per Para 39 (i) of Table F under Schedule I to the Companies Act, 2013, a company
in general meeting may, upon the recommendation of the Board, resolve—
(i) (a) that it is desirable to capitalise any part of the amount for the time
being standing to the credit of any of the company’s reserve accounts,
or to the credit of the profit and loss account, or otherwise available
for distribution; and
(b) that such sum be accordingly set free for distribution in the specified
manner amongst the members who would have been entitled thereto,
if distributed by way of dividend and in the same proportions.
(ii) The sum aforesaid shall not be paid in cash but shall be applied, subject
to the provision contained in clause (iii), either in or towards— (a) paying up
any amounts for the time being unpaid on any shares held by such
members respectively; (b) paying up in full, unissued shares of the
company to be allotted and distributed, credited as fully paid-up, to and
amongst such members in the proportions aforesaid; partly in the way
specified in (a) and partly in that specified in (b) above;
A securities premium account and a capital redemption reserve account may only
be applied in the paying up of unissued shares to be issued to members of
the company as fully paid bonus shares. In other words, securities premium
account and capital redemption reserve cannot be applied towards payment
of unpaid amount on any shares held by existing shareholders.

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As per Section 63(2) of the Companies Act, 2013, bonus shares cannot be
issued unless party paid-up shares are made fully paid-up. Para 39(ii) of Table F
under Schedule I to the Companies Act, 2013 allows use of free reserves for
paying up amounts unpaid on shares held by existing shareholders.
On a combined reading of both the provisions, it can be said that free reserves
may be used for paying up amounts unpaid on shares held by existing
shareholders (though securities premium account and capital redemption
reserve cannot be used).

4.1.3 Journal Entries

(A) (1) Upon the sanction of an issue of bonus shares
Capital Redemption Reserve Account Dr.
Securities Premium Account1 Dr.
General Reserve Account Dr.
Profit & Loss Account Dr.
To Bonus to Shareholders Account.
(2) Upon issue of bonus shares
Bonus to Shareholders Account Dr.
To Share Capital Account.
(B) (1) Upon the sanction of bonus by converting partly paid
shares into fully paid shares
General Reserve Account Dr.
Profit & Loss Account Dr.
To Bonus to Shareholders Account
(2) On making the final call due
Share Final Call Account Dr.
To Share Capital Account.

1
As per SEBI Regulations, such securities premium should be realized in cash, whereas under the
Companies Act, 2013, there is no such requirement. In accordance with Section 52, securities
premium may arise on account of issue of shares other than by way of cash. Thus, for unlisted
companies, securities premium (not realized in cash) may be used for issue of bonus shares,
whereas the same cannot be used in case of listed companies.

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(3) On adjustment of final call

Bonus to Shareholders Account Dr.
To Share Final Call Account
ILLUSTRATION 1
Following items appear in the trial balance of Bharat Ltd. (a listed company) as on
31st March, 2022:

`
40,000 Equity shares of ` 10 each 4,00,000
Capital Redemption Reserve 55,000
Securities Premium (collected in cash) 30,000
General Reserve 1,05,000
Surplus i.e. credit balance of Profit and Loss Account 50,000

The company decided to issue to equity shareholders bonus shares at the rate
of 1 share for every 4 shares held and for this purpose, it decided that there
should be the minimum reduction in free reserves. Pass necessary journal entries.
SOLUTION
Journal Entries in the books of Bharat Ltd.
Dr. Cr.
` `
Capital Redemption Reserve A/c Dr. 55,000
Securities Premium A/c Dr. 30,000
General Reserve A/c (b.f.) Dr. 15,000
To Bonus to Shareholders A/c 1,00,000
(Bonus issue of one share for every four
shares held, by utilising various reserves as
per Board’s resolution dated…….)

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

To Equity Share Capital A/c 1,00,000
(Capitalisation of profit)

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Working Note-
Number of Bonus shares to be issued- (40,000 shares / 4) X 1 =
10,000 shares Value of Bonus shares- 10,000 shares of ` 10 each =
` 1,00,000 ILLUSTRATION 2
Pass Journal Entries in the following circumstances:
(i) A Limited company with subscribed capital of ` 5,00,000 consisting of
50,000 Equity shares of ` 10 each; called up capital ` 7.50 per share. A
bonus of ` 1,25,000 declared out of General Reserve to be applied in
making the existing shares fully paid up.
(ii) A Limited company having fully paid up capital of ` 50,00,000 consisting of
Equity shares of ` 10 each, had General Reserve of ` 9,00,000. It was
resolved to capitalize ` 5,00,000 out of General Reserve by issuing 50,000
fully paid bonus shares of ` 10 each, each shareholder to get one such
share for every ten shares held by him in the company.
SOLUTION
Journal Entries
` `
(i) General Reserve A/c Dr. 1,25,000
To Bonus to shareholders 1,25,000
A/c (For making provision of bonus
issue)
Share Final Call A/c 1,25,000
To Equity share capital A/c 1,25,000
(For final calls of ` 2.5 per share on 50,000
equity shares due as per Board’s Resolution
dated….)
Bonus to shareholders A/c Dr. 1,25,000
To Share Final Call A/c 1,25,000
(For bonus money applied for
call)
(ii) General Reserve A/c Dr. 5,00,000
To Bonus to shareholders 5,00,000
A/c (For making provision of bonus
issue)
Bonus to shareholders Dr. 5,00,000
A/c 5,00,000
To Equity share capital A/c
(For issue of 50,000 bonus shares at
` 10)
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ILLUSTRATION 3
Following notes pertain to the Balance Sheet of Solid Ltd. as at 31st March, 2022:

`
Authorised capital :
10,000 12% Preference shares of ` 10 each 1,00,000
1,00,000 Equity shares of ` 10 each 10,00,000
11,00,000
Issued and Subscribed capital:
8,000 12% Preference shares of ` 10 each fully paid 80,000
90,000 Equity shares of ` 10 each, ` 8 paid up 7,20,000
Reserves and Surplus :
General reserve 1,60,000
Revaluation reserve 35,000
Securities premium (collected in cash) 20,000
Profit and Loss Account 2,05,000
Secured Loan:
12% Debentures @ ` 100 each 5,00,000

On 1st April, 2022 the Company has made final call @ ` 2 each on 90,000
equity shares. The call money was received by 20th April, 2022. Thereafter the
company decided to capitalise its reserves by way of bonus at the rate of one share
for every four shares held. Show necessary entries in the books of the company
and prepare the extract of the Balance Sheet immediately after bonus issue
assuming that the company has passed necessary resolution at its general body
meeting for increasing the authorised capital.
SOLUTION
Journal Entries in books of Solid Ltd.
Dr. Cr.
2022 ` `
April 1 Equity Share Final Call A/c Dr. 1,80,00
To Equity Share Capital A/c 0 1,80,00
(Final call of ` 2 per share on 90,000 0
equity shares due as per Board’s
Resolution dated.............................................)

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April 20 Bank A/c Dr. 1,80,000

To Equity Share Final Call A/c 1,80,00
(Final Call money on 90,000 equity 0
shares received)
20,000
Securities Premium Dr.
1,60,000
A/c General Reserve Dr.
A/c Profit and Loss 45,000
Dr.
A/c (b.f.)
2,25,00
To Bonus to Shareholders A/c 0
(Bonus issue @ one share for every four
shares held by utilising various reserves
April 20 2,25,000
as per Board’s Resolution dated...)
Bonus to Shareholders A/c Dr.
To Equity Share Capital A/c 2,25,00
(Capitalization of profit) 0

Balance Sheet (Extract) as at 30th April, 2022 (after bonus

issue)
Particulars Notes Amount (`)
Equity and
1 Liabilities
a Shareholders' 1 12,05,000
b funds Share
2 1,95,000
capital Reserves
2
a and Surplus
3 5,00,000
Non-current liabilities Total
Long-term borrowings 19,00,000

Notes to Accounts
1 Share Capital
Authorised share capital
10,000 12% Preference shares of ` 10 1,00,00
each 1,12,500 Equity shares of ` 10 each 0
Issued, subscribed and fully paid share 11,25,00
capital 8,000 12% Preference shares of ` 0
10 each
1,12,500 Equity shares of ` 10 each, fully 80,000
paid (Out of above, 22,500 equity shares
@ ` 10 each were issued by way of bonus) (A)
Total 11,25,00
0
12,05,00
0

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2 Reserves and Surplus

Revaluation Reserve 35,000
Securities Premium 20,000
Less: Utilised for bonus (20,000) Nil
issue General reserve 1,60,000
Less: Utilised for bonus (1,60,000
) Nil
issue Profit & Loss
Account 2,05,000
Less: Utilised for bonus issue Total (45,000) 1,60,000
1,95,000
3 Long-term borrowings
Secured
12% Debentures @ ` 100 each 5,00,000
The authorised capital has been increased by sufficient number of shares.
(11,25,000 – 10,00,000)
Working Note-
Number of Bonus shares to be issued (90,000 shares / 4 ) X 1 = 22,500 shares
Note: It has to be ensured that the authorized capital after bonus issue should not
be less than the issued share capital (including bonus issue) in all the practical
problems. The authorized capital may either be increased by the amount of bonus
issue or the value of additional shares [value of bonus shares issued less unused
authorized capital (excess of authorized capital in comparison to the issued shares
before bonus issue)].
ILLUSTRATION 4
Following notes pertain to the Balance Sheet of Preet Ltd. as at 31st March, 2022

`
Share capital:
Authorised capital:
15,000 12% Preference shares of ` 10 each 1,50,000
1,50,000 Equity shares of ` 10 each 15,00,000
16,50,000
Issued and Subscribed capital:
12,000 12% Preference shares of ` 10 each fully paid 1,20,000
1,35,000 Equity shares of ` 10 each, ` 8 paid up 10,80,000

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Reserves and surplus:

General Reserve 1,80,000
Capital Redemption Reserve 60,000
Securities premium (collected in cash) 37,500
Profit and Loss Account 3,00,000

On 1st April, 2022, the Company has made final call @ ` 2 each on 1,35,000 equity
shares. The call money was received by 20th April, 2022. Thereafter, the company
decided to capitalise its reserves by way of bonus at the rate of one share for
every four shares held.
Show necessary journal entries in the books of the company and prepare the
extract of the balance sheet as on 30th April, 2022 after bonus issue.
SOLUTION
Journal Entries in the books of Preet Ltd.
` `
1-4-2022 Equity share final call A/c Dr. 2,70,000
To Equity share capital A/c 2,70,000
(For final calls of ` 2 per share on 1,35,000
equity shares due as per Board’s
Resolution dated….)

20-4-2022 Bank A/c Dr. 2,70,000

To Equity share final call A/c 2,70,000
(For final call money on 1,35,000 equity
shares received)

Securities Premium A/c Dr. 37,500

Capital Redemption Reserve Dr. 60,000
A/c General Reserve A/c Dr. 1,80,000
Profit and Loss A/c (b.f.) Dr. 60,000
To Bonus to shareholders A/c
3,37,500
(For making provision for bonus issue of
one share for every four shares held)

Bonus to shareholders A/c Dr. 3,37,500

To Equity share capital 3,37,500
A/c (For issue of bonus shares)

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Extract of Balance Sheet as at 30th April, 2022 (after bonus

issue)
Particulars Notes Amount (`)
Equity and
1 Liabilities
a Shareholders' 1 18,07,50
b funds Share 0
2
capital Reserves 2,40,00
0
and Surplus
20,47,500
Total
Notes to Accounts
`
1. Share Capital
Authorised Capital
15,000 12% Preference shares of `10 each 1,50,00
0
1,68,750 Equity shares of `10 each (refer working
note below) 16,87,50
0
Issued and subscribed capital
12,000 12% Preference shares of `10 each, fully
paid 1,68,750 Equity shares of `10 each, fully paid
1,20,00
(Out of above, 33,750 equity shares @ `10 each were 0
issued by way of bonus)
16,87,50
Total 0
Reserves and surplus 18,07,500
37,500
2. Securities Premium
(37,500
Less: Utilised for bonus
)
issue Capital Redemption NIL
Reserve Less: Utilised for
60,000
bonus issue General
(60,000 NIL
Reserve )
Less: Utilised for bonus issue 1,80,00
0
Profit and Loss Account NIL
(1,80,000
Less: Utilised for bonus )
issue 3,00,00
0
2,40,000
(60,000
)

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Working Notes:
1. Number of Bonus shares to be issued- `
(1,35,000 shares / 4) X 1 = 33,750 shares
2. The authorised capital should be increased as per details given below:
Existing issued Equity share capital 13,50,000
Add: Issue of bonus shares to equity shareholders 3,37,500
16,87,500

4.1.4 Effects of Bonus Issue

Bonus issue has following major effects:

Increase in share capital

Reduction in EPS and
other per share values
Favourable act
considered by market
Adjustment in market price.
Reduction in
accumulated
profits

4.2 RIGHT ISSUE

4.2.1 Introduction
Provisions of section 62(1)(a) of the Companies Act, 2013 govern any company,
public or private, which is desirous of raising its subscribed share capital by issue of
further shares. Whenever a company intends to issue new shares, the voting and
governance rights of the existing shareholders may be diluted, if they are not
allowed to preserve them. It may happen because new shareholders may subscribe
to the issued share capital. Companies Act, 2013 allows existing shareholders to
preserve their position by offering those newly issued shares at the first instance
to them. The existing shareholders are given a right to subscribe these shares, if
they like. However, if they do not desire to subscribe these shares, they are
even given the right to renounce it in favour of someone else (unless the articles of
the company prohibits such a right to renounce).

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Value Cum-right Ex-

of value of right
right share value
of
share
In nutshell, the existing shareholders have a right to subscribe to any fresh issue of
shares by the company in proportion to their existing holding for shares. They have
an implicit right to renounce this right in favour of anyone else, or even reject it
completely. In other words, the existing shareholders have right of first refusal, i.e.,
the existing shareholders enjoy a right to either subscribe for these shares or sell
their rights or reject the offer.
Example 2
Assume a company makes a right issue of 10,000 shares when its existing issued
and subscribed capital is 100,000 shares. This enables any shareholder having 10
shares to subscribe to 1 new share. Hence X, an existing shareholder holding 1,000
shares, may subscribe to 100 shares as a matter of right. The existing share
percentage of X was 1% (1,000 / 100,000). If X subscribes these shares, his
percentage holding in the company will be maintained at 1% (1,100 / 1,10,000).
However, if X does not mind his share 0.91% diluting (1,000 / 1,10,000), he may
renounce the right in favour of any one else, say Y. Hence, these 100 shares will be
issued to Y, at the insistence of X. X may charge Y for this privilege, which is
technically termed as the value of right.
A company desirous of issuing new shares has to offer, as per Section 62(1) (a) of
Companies Act 2013, the shares to existing equity shareholders through a letter of
offer subject to the following conditions, namely:
 The offer shall be made by notice specifying the number of shares offered
and limiting a time not being less than fifteen days and not exceeding thirty
days from the date of the offer within which the offer, if not accepted, shall
be deemed to have been declined;
 Unless the articles of the company otherwise provide, the offer aforesaid
shall be deemed to include a right exercisable by the person concerned to
renounce the shares offered to him or any of them in favour of any other
person; and the notice (referred to in above bullet point) shall contain a
statement of this right;
 After the expiry of the time specified in the notice aforesaid, or on receipt of
earlier intimation from the person to whom such notice is given that he
declines to accept the shares offered, the Board of Directors may dispose of
them in such manner which is not disadvantageous to the shareholders and
the company.
Exceptions to the rights of existing equity shareholders
Section 62 recognises four situations under which the further shares are to be
issued by a company, but they need not be offered to the existing shareholders.

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The shares can be offered, without being offered to the existing shareholders,
provided the company has passed a special resolution and shares are offered
accordingly.
Situation 1
To employees under a scheme of employees’ stock option subject to certain
specified conditions
Situation 2
To any persons, either for cash or for a consideration other than cash, if the
price of such shares is determined by the valuation report of a registered valuer
subject to certain specified conditions.
Situation 3
Sometimes companies borrow money through debentures / loans and give their
creditor an option to buy equity shares of a company. An option is a right, but not
an obligation, to buy equity shares on a future date (expiry date) at a price
agreed in advance (exercise price).
According to Section 62(3), nothing in this section shall apply to the increase of the
subscribed capital of a company caused by the exercise of an option as a term
attached to the debentures issued or loan raised by the company to convert such
debentures or loans into shares in the company.
Provided that the terms of issue of such debentures or loan containing such an
option have been approved before the issue of such debentures or the raising of
loan by a special resolution passed by the company in general meeting.
Situation 4
It is a special situation where the loan has been obtained from the government, and
government in public interest, directs the debentures / loan to be converted
into equity shares.
According to Section 62(4), notwithstanding anything contained in sub-section (3),
where any debentures have been issued, or loan has been obtained from any
Government by a company, and if that Government considers it necessary in the
public interest so to do, it may, by order, direct that such debentures or loans or
any part thereof shall be converted into shares in the company on such terms and
conditions as appear to the Government to be reasonable in the circumstances of
the case even if terms of the issue of such debentures or the raising of such loans
do not include a term for providing for an option for such conversion.

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Financial effects of a further issue

The financial position of a business is contained in the balance sheet. Further issue
of shares increase the amount of equity (net worth)2 as well as the liquid
resources (Bank). The amount of equity is the product of further number of shares
issued multiplied by issue price. The issue price may be higher than the face value
(issue at a premium). Companies Act does not allow issue of shares at a discount,
except issue of sweat equity shares under Section 53.
Book Value of a share
Book value of a share = Net worth (as per books)/ Number of shares
if there are 10,000 shares with net worth of 1,25,000. The book value of one share
is (` 125,000/ 10,000 shares) ` 12.50 per share. However, the market value may
differ from the book value of shares. The market value of a company's shares
represents the present value of future cash flows expected to be earned from the
share in the form of dividends and capital gains from expected future share price
appreciation.
The market price, which exists before the rights issue, is termed as Cum-right
Market Price of the share. If the company decides to issue further shares, it may
affect the market value of the share. 'Theoretically', the value of a company's
shares after a rights issue must equal the sum of market capitalisation
immediately prior to rights issue and the cash inflows generated from the rights
issue.
Normally, the further public issue to the existing shareholders are offered at a
discounted price from the market value, to evoke positive response as well as to
reward the existing shareholders.
Assume a company having a net worth of ₹ 250,000. 1,000 shares are issued
(making it a right issue of 1:10; or 1 new share for 10 existing shares held) at a
price of ` 14 per share. The existing worth of tangible assets held by the business
shall become 264,000 (Existing net worth ` 250,000
+ Fresh Issue ` 14,000). Equity shares shall correspondingly command a valuation
of ` 264,000.
The market price of the shares after further issue of shares (right issue) is termed
as Ex-right Market Price of the shares. Theoretical Ex-Rights Price is a deemed
value, which is attributed to a company's share immediately after a rights issue
transaction occurs. This price is going to prevail after the further issue of shares
is executed.

2
As per Section 2(57) of Companies Act 2013, “net worth” means the aggregate value
of the paid-up share capital and all reserves created out of the profits and securities
premium account, after deducting the aggregate value of the accumulated losses, deferred
expenditure and miscellaneous expenditure not written off, as per the audited balance
sheet, but does not include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation.

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[Cum-right (Existing
value of the Number of
Ex-right existing shares +
value of shares Number of
the shares + (Rights right
shares X shares)
Issue Price)]

Right of Renunciation
Right of renunciation refers to the right of the shareholder to surrender his right to
buy the securities and transfer such right to any other person. Shareholders that
have received right shares have three choices of what to do with the rights. They
can act on the rights and buy more shares as per the particulars of the rights issue;
they can sell them in the market; or they can pass on taking advantage of their
rights (i.e., reject the right offer).
The renunciation of the right is valuable and can be monetised by the existing
shareholders in well-functioning capital market. The monetised value available to
the existing shareholders due to right issue is known as ‘value of right’. If a
shareholder decides to renounce all or any of the right shares in favour of his
nominee, the value of right is restricted to the sale price of the renouncement of a
right in favour of the nominee. In case the right issue offer is availed by an
existing shareholder, the value of right is determined as given below:
Value of right = Cum-right value of share – Ex-right value of share
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)
In our previous example, Ex-right value of share = [` 250,000 + (` 14 X 1,000
shares)] / 10,000
+ 1,000 shares = ` 24
Value of right = ` 25 – ` 24 = ` 1 per share.
Example 3
Continuing the previous case, consider an individual shareholder Mr. Narain
holding 100 shares of Prosperous Company before rights issue.
Current worth of holding = No. of shares X Cum-right Market Price
= 100 X 25 = ` 2,500
(a) If Narain exercises his right, he will pay ` 14X10 shares = ` 140.
His total investment in the company including right is ` 2,640 (` 2,500+`
140).
On a per share basis, it is ` 2,640 /110 shares = ` 24, which is the Ex-right
Market value of the share.

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 ACCOUNTING
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(b If Narain does not exercise his right to further issue, his holding’s worth will
) decline to
` 24 X 100 shares = ` 2400. The law allows him to compensate for this
dilution of shareholding by renouncing this right in favour of, say, Mr.
Murthy.
Narain can charge Murthy, in well-functioning capital markets, this dilution of
` 100 by renouncing his right to acquire 10 shares. Hence Murthy will be
charged ` 10 per share (` 100 / 10 shares), in return for a confirmed
For every share to be offered to Murthy, Narain must have ten shares at the back.
Hence his holding of 10 shares fetches him right money of ` 10 or ` 1 per share
held. This is exactly equal to the difference between Cum-right and Ex-right value
of the share. It is termed as the Value of Right.

In a well-functioning capital market, this mechanism works in a fair manner to all

the participants.
 Murthy’s total investment will be ` 140 (payable to Company) + ` 100
(payable to Narain, by way of value of right), or ` 240. He will end up holding
ten shares at an average cost of ` 24, which is the Ex-right Market Price of
the share.
 Narain will have a final holding of ten shares worth ` 2400 + ` 100 by way of
value of right received from Murthy. It matches with his cum-right holding
valuation.
ILLUSTRATION 5
A company offers new shares of ` 100 each at 25% premium to existing
shareholders on one for four bases. The cum-right market price of a share is ` 150.
Calculate the value of a right. What should be the ex-right market price of a share?
SOLUTION
Ex-right value of the shares = (Cum-right value of the existing shares + Rights
shares Issue Price) / (Existing Number of shares + No. of right shares)
= (` 150 X 4 Shares + ` 125 X 1 Share) / (4 + 1) Shares
= ` 725 / 5 shares = ` 145 per share.
Value of right = Cum-right value of the share – Ex-right value of the share
= ` 150 – ` 145 = ` 5 per share.
Hence, any one desirous of having a confirmed allotment of one share from the
company at
` 125 will have to pay ` 20 (4 shares X ` 5) to an existing shareholder holding 4
shares and willing to renounce his right of buying one share in favour of that
person.

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4.2.2 Accounting for Right issue

The accounting treatment of rights share is the same as that of issue of ordinary
shares and the following journal entry will be made:
Bank A/c Dr.
To Equity shares capital A/c
In case rights shares are being offered at a premium, the premium amount is
credited to the securities premium account.
The accounting entry is usual and is
Bank A/c Dr.
To Equity Share Capital
A/c To Securities
Premium A/c
Example 4
A Company having 70,000 shares of `10 each as its issued share capital and
having market value of ` 21 issues rights shares in the ratio of 1:10 at an issue
price of ` 10. Pass journal entry for issue of right shares.
The entry at the time of subscription of right shares by the existing
shareholders will be: Bank A/c Dr. 70,000
To Equity Share Capital A/c

70,000 (Being issue of 7,000 right shares at price of ` 10)

Working Note- Number of rights shares to be issued- 70,000/10X1= 7000 shares.
Example 5
A company having 1,00,000 shares of ` 10 each as its issued share capital, and
having a market value of ` 46, issues rights shares in the ratio of 1:10 at an issue
price of ` 31. Pass journal entry for issue of right shares.
The entry at the time of subscription of right shares by the existing
shareholders will be: Bank A/c Dr. 3,10,000
To Equity Share Capital A/c 1,00,000
To Securities Premium A/c

2,10,000 (Being issue of 10,000 right shares @ ` 31 offered)

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4.2.3 Advantages and Disadvantages of Right Issue

Advantages of Right Issue
1. Right issue enables the existing shareholders to maintain their proportional
holding in the company and retain their financial and governance rights. It
works as a deterrent to the management, which may like to issue shares to
known persons with a view to have a better control over the company’s
affairs.
2. In well-functioning capital markets, the right issue necessarily leads to dilution
in the value of share. However, the existing shareholders are not affected
by it because getting new shares at a discounted value from their cum-right
value will compensate decrease in the value of shares. The cum-right value
is maintained otherwise also, if the existing shareholders renounce their
right in favour of a third party.
3. Right issue is a natural hedge against the issue expenses normally incurred by
the company in relation to public issue.
4. Right issue has an image enhancement effect, as public and shareholders view
it positively.
5. The chance of success of a right issue is better than that of a general public
issue and is logistically much easier to handle.
Disadvantages of Right Issue
1. The right issue invariably leads to dilution in the market value of the
share of the company.
2. The attractive price of the right issue should be objectively assessed
against its true worth to ensure that you get a bargained deal.
Effects of Right Issue

Maintenance of existing shareholders’

proportional holding in company and Dilution in the value of
retain their financial and governance share.
rights.
Effects of Right
Issue

Image Convenience in handling

enhancement issue

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SUMMARY
 Bonus issue means an issue of additional shares free of cost to existing
shareholders.
 Bonus Issue is also known as a "scrip issue" or "capitalization issue" or
“capitalization of profits”.
 Bonus issue has following major effects:
- Share capital gets increased according to the bonus issue ratio
- Effective Earnings per share, Book Value and other per share
values stand reduced.
- Markets take the action usually as a favourable act.
- Market price gets adjusted on issue of bonus shares.
- Accumulated profits get reduced.
 Bonus shares can be issued from following:
- Free Reserves
- Securities Premium collected in cash
- Capital Redemption Reserve.
 Bonus issue cannot be made out of Revaluation Reserve created by
revaluation of assets.
 A right issue is an offer of equity shares in a further issue of shares by a

company to its existing shareholders, to enable them in maintaining

their financial and governance interest in the company, if they so desire.
 The Right shares are normally offered at a price less than the cum-right
value of the share, causing dilution in its value post-right issue. The value
of share after right is termed as ex-right value (or average price) of the
share. The difference between the cum-right and ex-right value (average
price) of the share is called value of right.
 The accounting treatment of rights share is the same as that of issue
of ordinary shares.
 The right issue offers considerable advantages to existing shareholders
enabling them to maintain their rights in the company and is equally
advantageous to the company for its relatively simple logistics and cost
effectiveness as compared to a full blown pubic issue. However, the
dilution in the value of the share is a dampener and a major limitation.

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TEST YOUR KNOWLEDGE

True and false
1. Earning per share gets increased after bonus issue.
2. Issued share capital including issue of rights shares and bonus shares may
be more than the Authorised capital.
3. Rights issue of shares results in decrease of market value of per share in
comparison to market price before rights issue.
4. Right shares are normally offered at a price more than the cum-right value of
the share, causing dilution in its value post-right issue.

Multiple Choice Questions

1. Which of the following cannot be used for issue of bonus shares as per the
Companies Act?
(a) Securities premium account
(b) Revaluation reserve
(c) Capital redemption reserve
2. Which of the following statements is true with regard to declaring and issuing of
Bonus Shares?
(a) Assets are transferred from the company to the shareholders.
(b) A Bonus issue results in decrease in reserves and surplus.
(c) A Bonus issue is same as declaration of dividends.
3. Which of the following statement is true in case of bonus issue?
(a) Convertible debenture holders will get bonus shares in same
proportion as to the existing shareholders.
(b) Bonus shares may be issued to convertible debenture holders at
the time of conversion of such debentures into shares.
(c) Both (a) and (b).
4. Bonus issue is also known as
(a) Scrip issue.
(b) Capitalisation issue.
(c) Both (a) and (b).

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5. The bonus issue is not made unless

(a) Partly paid shares are made fully paid up.
(b) It is provided in its articles of association
(c) Both (a) and (b).
6. Bonus issue has the following effect
(a) Market price gets adjusted on issue of bonus shares.
(b) Effective Earnings per share, Book Value and other per share
values stand increased.
(c) Markets generally take the action as an unfavourable act.
7. ABC Co. Ltd resolved to issue bonus shares. Which of the following is not a
pre-requisite for issuance of bonus shares?
(a) Authorization in Articles of Association.
(b) Timely Payment of statutory dues of employees such as PF, Gratuity
etc.
(c) Sufficient balance in bank account of company.
8. In case of further issue of shares, the right to renounce the shares in
favour of a third party
(a) Must include a right exercisable by the person concerned to renounce
the shares;
(b) Should include a right exercisable by the person concerned to
renounce the shares;
(c) Is deemed to include a right exercisable by the person concerned to
renounce the shares (subject to the provisions under the articles of
the company).
9. A company’s share’s face value is ` 10, book value is ` 20, Right issue price
is ` 30 and Market price is ` 40, while recording the issue of right share, the
securities premium will be credited with
(a) ` 10
(b) ` 20
(c) ` 30
10. A. Right shares enable existing shareholders to maintain their
proportional holding in the company.
B. Right share issue does not cause dilution in the market value of the
share.

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Which of the option is correct?

(a) A-Correct; B Correct
(b) A – Incorrect; B Correct
(c) A - Correct; B – Incorrect
11. Ex-Rights price can be calculated by which of these formulas?
(a) (Cum rights value of the existing shares + Rights share issue
proceeds)/ (existing number of shares + No. of right shares).
(b) (Cum rights value of the existing shares + Rights share issue
proceeds) X (existing number of shares + No. of right shares).
(c) (Cum rights value of the existing shares - Rights share issue
proceeds)/ (existing number of shares – No. of right shares).

Theoretical Questions
1. What is meant by Bonus issue? Explain its related provisions as per the
Companies Act, 2013.
2. Explain the financial effects of a further issue of equity shares on the market
value of the share.
3. What are the advantages and disadvantages of a rights issue?
4. What is meant by renunciation of rights shares by existing shareholder?

Practical Questions
1. Following items appear in the Trial Balance of Saral Ltd. as on 31st March,
2022:
Particulars Amount
4,500 Equity Shares of ` 100 each 4,50,000
Securities Premium (collected in cash) 40,000
Capital Redemption Reserve 70,000
General Reserve 1,05,000
Profit and Loss Account (Cr. Balance) 65,000

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 Saral Ltd.

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2. The following notes pertain to Brite Ltd.'s Balance Sheet as at 31st March,
2022:
Notes ` in Lakhs
(1) Share Capital
Authorised :
20 crore shares of ` 10 20,000
each Issued and
Subscribed :
10,000
10 crore Equity Shares of ` 10 each
2,000
2 crore 11% Cumulative Preference Shares of ` 10 each
12,000
Total
Called and paid up:
10 crore Equity Shares of ` 10 each, ` 8 per share called 8,000
and paid up 2 crore 11% Cumulative Preference Shares of
` 10 each, 2,000
fully called and paid up 10,000
Total
(2) Reserves and Surplus : 1,485
Capital Redemption
2,000
Reserve
1,040
Securities Premium (collected in cash)
General Reserve 273
Surplus i.e. credit balance of Profit & Loss Account 4,798
Total
On 2nd April 2022, the company made the final call on equity shares @ `
2 per share. The entire money was received in the month of April, 2022.
On 1st June 2022, the company decided to issue to equity shareholders
bonus shares at the rate of 2 shares for every 5 shares held . Pass journal
entries for all the above mentioned transactions. Also prepare the notes on
Share Capital and Reserves and Surplus relevant to the Balance Sheet of
the company immediately after the issue of bonus shares.
3. Following notes pertain to the Balance Sheet of Manoj Ltd. as at 31st March,
2022

Authorised capital: `
30,000 12% Preference shares of ` 10 each 3,00,000
3,00,000 Equity shares of ` 10 each 30,00,000
33,00,000

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Issued and Subscribed capital:

24,000 12% Preference shares of ` 10 each fully paid 2,40,000
2,70,000 Equity shares of ` 10 each, ` 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, 2022, the Company has made final call @ ` 2 each on
2,70,000 equity shares. The call money was received by 20 th April, 2022.
Thereafter, the company decided to capitalise its reserves by way of bonus
at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company and prepare
the extract of the balance sheet as on 30th April, 2022 after bonus issue.
4. A company has decided to increase its existing share capital by making rights
issue to its existing shareholders. The company is offering one new share
for every two shares held by the shareholder. The market value of the share
is ` 240 and the company is offering one share of ` 120 each. Calculate the
value of a right. What should be the ex-right market price of a share?
5. A Ltd company having share capital of 25,000 equity shares of `10 each
decides to issue rights share at the ratio of 1 for every 4 shares held at par
value. Assuming all the share holders accepted the rights issue and all
money was duly received, pass journal entries in the books of the company.
6. Following notes pertain to the Balance Sheet of Mars Company
Limited as at 31st March 2022:

`
Authorised capital:
50,000 12% Preference shares of ` 10 each 5,00,000
5,00,000 Equity shares of ` 10 each 50,00,000
55,00,000
Issued and Subscribed capital:
50,000 12% Preference shares of ` 10 each fully paid 5,00,000

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4,00,000 Equity shares of ` 10 each, ` 8 paid up 32,00,000

Reserves and surplus:
General Reserve 1,60,000
Capital Redemption Reserve 2,40,000
Securities premium (collected in cash) 2,75,000
Revaluation Reserve 1,00,000
Profit and Loss Account 16,00,000

On 1st April, 2022, the Company has made final call @ ` 2 each on 4,00,000
equity shares. The call money was received by 25 th April, 2022. Thereafter,
on 1st May 2022 the company decided to capitalise its reserves by way of
bonus at the rate of one share for every four shares held, it decided that
there should be minimum reduction in free reserves.
On 1st June 2022, the Company issued Rights shares at the rate of two
shares for every five shares held on that date at issue price of ` 12 per
share. All the rights shares were accepted by the existing shareholders and
the money was duly received by 20th June 2022.
Show necessary journal entries in the books of the company for bonus issue
and rights issue.

ANSWERS/ HINTS
True and False
1. False. Earnings per share gets decreased after bonus issue.
2. False. Issued share capital including issue of rights shares and bonus
shares is always less than or equal to Authorised capital.
3. True. Rights issue of shares results in decrease of market value of
per share in comparison to market price before rights issue.
4. False. Right shares are normally offered at a price less than the cum-right
value of the share, causing dilution in its value post-right issue.

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Multiple Choice Questions

1. (b) 2. (b) 3. (c) 4. (c) 5. (c) 6. (a)
7. (c) 8. (c) 9. (b) 10. (c) 11. (a)

Theoretical Questions
1. Bonus Issue means an offer of free additional shares to existing shareholders.
A company may decide to distribute further shares as an alternative to
increase the dividend pay-out. For details, refer para 4.1.1 & 4.1.2.
2. The financial position of a business is contained in the balance sheet. Further
issue of shares increases the amount of share capital as well as the liquid
resources (Bank). The amount of share capital issued is the product of further
number of shares issued multiplied by issue price. The issue price may be
higher than the face value (issue at a premium).
3. Rights issue is an issue of rights to a company's existing shareholders
that entitles them to buy additional shares directly from the company in
proportion to their existing holdings, within a fixed time period. For
advantages and disadvantages of right issue, refer para 4.2.3.
4. In a situation where existing shareholder does not intend to subscribe to
the rights issue of a company, he may give up his right in favour of another
person for a consideration. Such giving up of rights is called renunciation
of rights.

Practical Questions
1. Journal Entries in the books of Saral Ltd.
2022 Dr. Cr.
Capital Redemption Reserve A/c Dr. 70,000
Securities Premium A/c Dr. 40,000
General Reserve A/c (b.f.) Dr. 40,000
To Bonus to Shareholders A/c 1,50,000
(Bonus issue of one shares for every three
shares held, by utilising various reserves
as per Board’s resolution dated…….)

Bonus to Shareholders A/c Dr. 1,50,000

To Equity Share Capital A/c 1,50,000
(Capitalisation of profit)

Working Note- Number of bonus shares to be issued- 4500 / 3 X1= 1500 shares

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2. Journal Entries in the books of Brite Ltd.

2022 Dr. Cr.
` in ` in
lakhs lakhs
April 2 Equity Share Final Call A/c Dr. 2,000
To Equity Share Capital A/c 2,000
(Final call of ` 2 per share on 10
crore equity shares made due)

Bank A/c Dr. 2,000

To Equity Share Final Call A/c 2,000
(Final call money on 10 crore
equity shares received)

June 1 Capital Redemption Reserve Dr. 1,485

A/c Securities Premium A/c Dr. 2,000
General Reserve A/c (b.f.) Dr. 515
To Bonus to Shareholders A/c
4,000
(Bonus issue of two shares for
every five shares held, by utilising
various reserves as per Board’s
resolution dated…….)
Bonus to Shareholders A/c Dr. 4,000
To Equity Share Capital A/c 4,000
(Capitalisation of profit)

Notes to Accounts
` in lakhs
1. Share Capital
Authorised share
capital: 20,000
20 crore shares of ` 10 each
Issued, subscribed and fully paid up share
14,000
capital: 14 crore Equity shares of ` 10 each,
fully paid up
(Out of the above, 4 crore equity shares @ ` 10
each were issued by way of bonus)
2,000
2 crore, 11% Cumulative Preference share capital
of ` 10 each, fully paid up 16,000

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2. Reserves and Surplus:

Capital Redemption 1,485
reserve (1,485) -
Less: Utilised for bonus issue
2,000
Securities Premium
(2,000) -
Less: Utilised for bonus issue
1,040
General Reserve
(515) 525
Less: Utilised for bonus issue
273
Surplus (Profit and Loss Account)
798
Total
3. Journal Entries in the books of Manoj Ltd.

` `
1-4-2022 Equity share final call A/c Dr. 5,40,000
To Equity share capital A/c 5,40,000
(For final calls of ` 2 per share on
2,70,000 equity shares due as per
Board’s Resolution dated….)

20-4-2022 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 Dr. 1,20,000
A/c 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 6,75,000
A/c (For issue of bonus
shares)

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Extract of Balance Sheet as at 30th April, 2022 (after bonus

issue)

`
Authorised Capital
30,000 12% Preference shares of `10 each 3,00,000
3,37,500 Equity shares of `10 each (refer W.N.) 33,75,000
Issued and subscribed capital
24,000 12% Preference shares of `10 each, fully paid 2,40,000
3,37,500 Equity shares of `10 each, fully paid 33,75,000
(Out of the above, 67,500 equity shares @ `10
each were
issued by way of bonus shares)
Reserves and surplus
Capital Redemption Reserve 1,20,000
Less: Utilised for bonus issue (1,20,000) NIL
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 and Loss Account 6,00,000
Less: Utilised for bonus issue (1,20,000) 4,80,000

Working Note:
1. Number of bonus shares to be issued- 2,70,000/4 X1= 67,500 shares
2. The authorised capital should be increased as per details given below:
`
Existing issued Equity share capital 27,00,000
Add: Issue of bonus shares to equity shareholders
6,75,00
0
33,75,00
0
4. Ex-right value of the shares = (Cum-right value of the existing
shares + Rights shares x Issue Price) /
(Existing Number of shares + No. of right
shares)
= (` 240 x 2 Shares + ` 120 x 1 Share) /
(2 + 1) Shares
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= ` 600 / 3 shares = ` 200 per share.

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Value of right = Cum-right value of the share – Ex-right value of the

share
= ` 240 – ` 200 = ` 40 per share.
Hence, any one desirous of having a confirmed allotment of one share from
the company at ` 120 will have to pay ` 80 (2 shares x ` 40) to an existing
shareholder holding 2 shares and willing to renounce his right of buying one
share in favour of that person.
5. Journal Entry in the books of A Ltd.
` `
Bank A/c Dr. 62,500
To Equity share capital A/c 62,500
(For rights share issued at par value in the ratio
of 1:4 equity shares due as per Board’s Resolution
dated….)
Working Note:
Number of Rights shares to be issued- 25,000/4x1= 6,250 shares
6. Journal Entries in the books of Mars Ltd.
2022 Dr. Cr.
` `
April 1 Equity Share Final Call A/c Dr. 8,00,000
To Equity Share Capital A/c 8,00,000
(Final call of ` 2 per share on
4,00,000 equity shares made due)

April 25 Bank A/c Dr. 8,00,000

To Equity Share Final Call A/c 8,00,000
(Final call money on equity
shares received)

May 1 Capital Redemption Reserve A/c Dr. 2,40,000

Securities Premium A/c Dr. 2,75,000
General Reserve A/c Dr. 1,60,000
Profit and Loss A/c (b.f.) Dr. 3,25,000

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To Bonus to Shareholders A/c 10,00,000

(Bonus issue of one shares for every
four shares held, by utilising various
reserves as per Board’s resolution
dated…….)
Bonus to Shareholders A/c Dr. 10,00,000
To Equity Share Capital A/c 10,00,000
(Capitalisation of profit)
June 20 Bank A/c Dr. 24,00,000
To Securities Premium 4,00,000
A/c To Equity Share 20,00,000
Capital A/c
(Being Rights issue of 2 shares for
every 5 shares held as per board
resolution dated
………..)

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