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ACCA Applied Knowledge · Financial Accounting · Statement of financial position

Olwen Co's equity at 1 January 20X5 was share capital $500,000 (50c shares), share premium $120,000 and retained earnings $380,000. During 20X5 it made a bonus issue of 1 share for every 5 held, using share premium first and then retained earnings where needed. What is the retained earnings balance immediately after the bonus issue (ignoring profit for the year)?

Retained earnings remain at $380,000. The bonus issue needs $100,000 to be capitalised, which is fully covered by the $120,000 share premium balance. Since the share premium is used first and is sufficient, no amount needs to be taken from retained earnings.

  1. A$380,000
  2. B$300,000
  3. C$320,000Correct
  4. D$360,000

Explanation

Shares in issue = 1,000,000 at 50c. Bonus shares = 200,000 at 50c = $100,000 nominal. Share premium of $120,000 covers this fully, leaving retained earnings unchanged at $380,000. Hence retained earnings is $380,000, not reduced.

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