Issue of Bonus Shares A company may issue bonus shares to shareholders as a form of compensation or to reward their loyalty. These bonus shares are typicall...
Issue of Bonus Shares
A company may issue bonus shares to shareholders as a form of compensation or to reward their loyalty. These bonus shares are typically issued at a discount to the original share price, and the company is required to account for the difference between the original and issue prices in the financial statements.
Accounting for Bonus Shares
To account for the issuance of bonus shares, the company must make the following adjustments to the share capital and liabilities sections of the financial statements:
Increase the number of shares outstanding by the number of bonus shares issued.
Increase the par value of each share by the issue price.
Reduce the retained earnings account by the issue price.
Increase the book value of the company by the issue price.
Examples
Suppose a company issues 10,000 bonus shares for 100, and the company has already earned a net income of $100,000. The company would record the following adjustments to the financial statements:
Increase the number of shares outstanding by 10,000.
Increase the par value of each share by $10.
Reduce the retained earnings account by $100,000.
Increase the book value of the company by $100,000