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ACCA Applied Knowledge · Financial Accounting · Capital structure and finance costs

Brindle Co has 1,000,000 equity shares of $1 each, a share premium account of $400,000 and retained earnings of $600,000. It makes a 1 for 4 bonus issue, using the share premium account first. Which statement about the position after the issue is correct?

Share capital becomes $1,250,000 and share premium falls to $150,000. A 1 for 4 bonus issue creates 250,000 new $1 shares, paid for by capitalising $250,000 of the share premium account. Retained earnings and total equity remain unchanged and no cash is received.

  1. AShare capital is $1,250,000 and share premium is $150,000Correct
  2. BShare capital is $1,250,000 and share premium is $400,000
  3. CShare capital is $1,250,000 and retained earnings are $350,000
  4. DShare capital is $1,000,000 and share premium is $150,000

Explanation

New shares = 1,000,000 / 4 = 250,000 at $1 = $250,000. This is debited to share premium (400,000 - 250,000 = 150,000) and credited to share capital (1,000,000 + 250,000 = 1,250,000). Retained earnings remain $600,000 because the premium was used first.

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