A company makes a 1 for 4 bonus issue of shares. The nominal value of the shares is $1. The company wishes to utilize its share premium account for this purpose. What is the correct double-entry to record this transaction?

Answer options:

Debit Cash, Credit Share Capital

Debit Share Capital, Credit Share Premium

Debit Share Premium, Credit Share Capital

Debit Retained Earnings, Credit Cash

How to approach this question

Remember that a bonus issue is a free issue of shares to existing shareholders, funded by reserves.

Full Answer

C.Debit Share Premium, Credit Share Capital✓ Correct

A bonus issue involves issuing new shares to existing shareholders for free. It is funded by transferring amounts from reserves (like Share Premium or Retained Earnings) to Share Capital. Therefore, debit Share Premium and credit Share Capital.

Common mistakes

Confusing a bonus issue with a rights issue, which does raise cash.

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Practice the full ACCA FA — Financial Accounting Practice Exam 2

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