ACCA Applied Knowledge · Financial Accounting · Capital structure and finance costs
Zeta Co has 2,000,000 $1 equity shares in issue with a share premium account of $500,000 and retained earnings of $900,000. It makes a 1 for 4 bonus issue, using the share premium account first and then retained earnings. What is the balance on retained earnings after the issue?
Retained earnings remain $900,000. The bonus issue capitalises $500,000 (500,000 new $1 shares), which is fully absorbed by the $500,000 share premium account, so no reserves are taken from retained earnings.
- A$900,000
- B$600,000Correct
- C$400,000
- D$500,000
Explanation
Bonus shares = 2,000,000 / 4 = 500,000 shares at $1 = $500,000. The share premium of $500,000 is used first and covers the whole amount, so retained earnings stay at $900,000. Correct figure is therefore $900,000, not a reduction.
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