Rights & Bonus Issues (Cambridge International AS Accounting)

Rights issue of shares

Spec point — the advantages and disadvantages to the company and to the shareholders of a company making a bonus issue of shares and a rights issue of shares how to prepare ledger accounts to record: – a rights issue of shares at par or at a premium

Rights issue of shares

What is a rights issue of shares?

• A rights issue involves existing shareholders being offered the option to purchase new shares based on the number they currently hold

  • E.g. a new share might be offered for every three shares the shareholders currently hold

• The issue is said to be fully subscribed if all shares are sold

What are the advantages of a rights issue of shares?

• A rights issue raises additional cash and permanent capital

  • The shares do not need to be repaid

• Control is not diluted

  • The shares are offered to existing shareholders
  • This is assuming the issue is fully subscribed

• Cheaper costs to issue the shares

  • The costs are cheaper to issue shares to existing shareholders than new shareholders

• The existing shareholders are already invested in the company's success

What are the disadvantages of a rights issue of shares?

• Existing shareholders might be unwilling to invest further

  • Particularly if the original shares were issued recently

How do I make the journal entries for a rights issue of shares?

• STEP 1 Calculate the number of issued shares before the rights issue

  • share capital ÷ nominal value

• STEP 2 Calculate the number of new shares issued

  • Use the ratio given in the question

    • e.g. if two shares are issued for every nine held then divide the current number of shares by nine and multiply by two

• STEP 3 Calculate the total amount received

  • issue price × number of shares issued

• STEP 4 Calculate the increase in the share capital and share premium

  • increase in share capital = nominal value × number of shares issued

  • increase in share premium can be calculated in two different ways

    • share premium per share × number of shares issued
    • total amount received - increase in share capital

• STEP 5 Make the journal entries

  • Debit the bank account with the total amount received
  • Credit the share capital account
  • Credit the share premium account if the issue is at a premium

Exam Hint The exam question might not tell you how many shareholders there currently are. In this case, you need to divide the share capital by the nominal value of a share.

Worked Example Y Limited provided the following information on 31 December 2025.

	$
Share capital (ordinary shares of $0.75 each)	45 000
Share premium	10 000
Retained earnings	29 000

On 1 January 2026, Y Limited made a rights issue of one ordinary share for every four held at a price of $0.90 per share. The issue was fully subscribed.

Prepare the journal entries to record the issue of the shares. Narratives are not required.

Answer:

Calculate the number of shares issued before the bonus issue

• Divide the share capital by the nominal value of an ordinary share

$45 000 ÷ $0.75 = 60 000 shares

Calculate the number of new shares issued

• Divide by 4

60 000 ÷ 4 = 15 000 new shares

Calculate the total amount received from the issue

• issue price × number of shares issued

$0.90 × 15 000 = $13 500

Calculate the increase in the share capital

• nominal value × number of shares issued

$0.75 × 15 000 = $11 250

Calculate the increase in the share premium

• Find the difference between the amount received and the increase in the share capital

$13 500 - $11 250 = $2 250

Y Limited Journal

Details	Debit $	Credit $
Bank	13 500
Share capital		11 250
Share premium		2 250

Bonus issue of shares

Spec point — the advantages and disadvantages to the company and to the shareholders of a company making a bonus issue of shares and a rights issue of shares how to prepare ledger accounts to record: – a bonus issue of shares

Bonus issue of shares

What is a bonus issue of shares?

• A bonus issue involves existing shareholders being given new shares, for free, based on the number they currently hold

  • E.g. two new shares might be given for every five shares the shareholders currently hold

• The company uses their reserves to issue the shares

• The reserves should be maintained in their most flexible form

  • This means the capital reserves should be used first

    • Use the share premium account

  • Use the revenue reserves only if the balance of the share premium account is not big enough to cover the issue

    • Use the retained earnings or general reserve

Exam Hint For your exam, you should not use the revaluation reserve for bonus issues.

What are the advantages of a bonus issue of shares?

• A bonus issue keeps shareholders satisfied

  • Shareholders are rewarded with new shares
  • The company might choose to do this if they do not have the cash funds to pay dividends

• A bonus issue makes effective use of capital reserves

• Control is not diluted

  • The shares are given to existing shareholders

What are the disadvantages of a bonus issue of shares?

• A bonus issue does not generate any new cash

  • It does not help the cash flow
  • It might reduce future dividend payments

• It uses up some of the company's reserves

• Potential reduction in earnings per share

  • The more shares issued, the less earnings per share

How do I make the journal entries for a bonus issue of shares?

• STEP 1 Calculate the number of issued shares before the bonus issue

  • share capital ÷ nominal value

• STEP 2 Calculate the number of new shares issued

  • Use the ratio given in the question

    • e.g. if two shares are issued for every nine held then divide the current number of shares by nine and multiply by two

• STEP 3 Calculate the increase in the share capital

  • nominal value × number of shares issued

• STEP 4 Calculate the decrease in the share premium and retained earnings

  • Use the share premium to cover the full amount of the transaction if possible
  • Otherwise, use as much as possible and use the retained earnings for the remaining amount

• STEP 5 Make the journal entries

  • Debit the share premium account
  • Debit the retained earnings account
  • Credit the share capital account

Worked Example Z Limited sells televisions.

On 1 January 2026, a bonus issue of shares was made of two ordinary shares for every seven shares held. Reserves were maintained in their most flexible form.

The following balances were available before the bonus issue.

	$
Share capital (ordinary shares of $0.50 each)	140 000
Share premium	31 000
Revaluation reserve	15 000
Retained earnings	42 000

Prepare the journal entries to record the issue of the shares. Narratives are not required.

Answer:

Calculate the number of shares issued before the bonus issue

• Divide the share capital by the nominal value of an ordinary share

$140 000 ÷ $0.50 = 280 000 shares

Calculate the number of new shares issued

• Divide by 7 and multiply by 2

280 000 ÷ 7 × 2 = 80 000 new shares

Calculate the total increase to the share capital

$0.50 × 80 000 = $40 000

Calculate the remaining balance once the full balance of the share premium account has been used

$40 000 - $31 000 = $9 000

Z Limited Journal

Details	Debit $	Credit $
Share premium	31 000
Retained earnings	9 000
Share capital		40 000