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CMA Intermediate · Corporate Accounting and Auditing · Issue, Forfeiture, Rights, Bonus, Sweat Equity, ESOP and Buy-back of Shares

Which statement about bonus shares is correct as a matter of accounting treatment?

A bonus issue capitalises existing reserves into share capital. Reserves decrease and share capital increases by the same amount, so total shareholders' funds stay unchanged and the company receives no cash.

  1. ABonus shares increase the total net worth of the company
  2. BBonus shares convert reserves into share capital without changing total shareholders' fundsCorrect
  3. CBonus shares bring cash inflow equal to nominal value
  4. DBonus shares are paid out of the securities premium only after cash is received

Explanation

A bonus issue capitalises reserves. Reserves fall and share capital rises by the same amount, so total shareholders' funds are unchanged and no cash is received.

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