Q. 1 Define “Bonus Shares”. What are the advantages and disadvantages to the Joint Stock Company of making a bonus shares issue?
# Bonus Shares: Advantages and
Disadvantages to Joint Stock Companies
## Introduction
A
bonus share, also known as a scrip issue or capitalization issue, is a form of
corporate action where a company issues additional shares to its existing
shareholders without receiving any payment in return. These bonus shares are
allotted to shareholders in proportion to their existing holdings. The primary
purpose of issuing bonus shares is to reward existing shareholders and enhance
the company's equity base. In this essay, we will explore the concept of bonus
shares and analyze the advantages and disadvantages associated with their
issuance for joint stock companies.
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## Definition of Bonus Shares
Bonus
shares are essentially free shares distributed by a company to its
shareholders. Unlike a dividend, which represents a distribution of profits in
cash, bonus shares are a capitalization of reserves, retained earnings, or
other forms of accumulated surplus. The company allocates these additional
shares to existing shareholders based on their current ownership in the
company. The rationale behind issuing bonus shares is to capitalize on the
company's financial strength and signal confidence in its future prospects.
## Advantages of Bonus Shares
### 1. **Conservation of Cash:**
One of
the key advantages of bonus shares is that they enable companies to reward
shareholders without depleting their cash reserves. This is particularly
beneficial during times when the company wants to preserve cash for strategic
investments, acquisitions, or to strengthen its financial position.
### 2. **Enhanced Liquidity:**
Bonus
share issuance increases the number of outstanding shares without affecting the
company's market capitalization. This can enhance liquidity in the stock market
as more shares are available for trading, potentially attracting a broader
range of investors.
### 3. **Signal of Confidence:**
When a
company issues bonus shares, it is often perceived as a positive signal by the
market. Investors interpret the issuance of bonus shares as an indication of
the company's confidence in its future earnings and growth prospects, which can
contribute to a positive perception of the company.
### 4. **Improved Capital Structure:**
Bonus
shares can contribute to a more balanced and improved capital structure. By
capitalizing reserves and converting them into equity, a company can strengthen
its financial position and support future expansion or investment plans.
### 5. **Employee Morale:**
Bonus
share issuance can also have a positive impact on employee morale. Employees
who are also shareholders benefit from the increase in the company's share
capital, aligning their interests with those of the company and fostering a
sense of ownership.
## Disadvantages of Bonus Shares
### 1. **Dilution of Earnings per Share
(EPS):**
One of
the primary drawbacks of bonus shares is the dilution of earnings per share.
Since the number of shares increases without a corresponding increase in
earnings, the EPS tends to decrease, potentially leading to a decline in the
company's valuation.
### 2. **Market Misinterpretation:**
While
bonus shares are generally considered a positive signal, there is a risk of
market misinterpretation. Investors may perceive the issuance as a lack of
investment opportunities or as an attempt to manipulate the stock price,
leading to a negative impact on the company's stock.
### 3. **Tax Implications:**
Bonus
shares may have tax implications for shareholders. In some jurisdictions, the
issuance of bonus shares could be treated as a taxable event for shareholders,
potentially affecting their overall tax liability.
### 4. **Complex Accounting Procedures:**
The
process of issuing bonus shares involves complex accounting procedures.
Companies need to adjust their financial statements and comply with regulatory
requirements, which can be resource-intensive and time-consuming.
### 5. **Limited Immediate Impact on Share
Price:**
While
bonus shares may signal confidence in the company's future, they often have a
limited immediate impact on the share price. Investors may view the issuance as
a redistribution of wealth rather than a value-creating activity.
## Conclusion
In
conclusion, bonus shares represent a unique mechanism for companies to reward
shareholders without incurring immediate cash outflows. While they offer
several advantages, including the conservation of cash and enhanced liquidity,
there are also disadvantages such as dilution of EPS and potential market
misinterpretation. The decision to issue bonus shares should be carefully
evaluated, taking into consideration the company's financial goals, market
conditions, and the preferences of its shareholders. When executed
thoughtfully, bonus share issuances can contribute to a company's long-term
sustainability and shareholder value.
Q. 2 Zahid
of Azad Kashmir consigned 150 bags of Walnuts of Rs.10,000 each for sale to Arslan
of Lahore on 15th March, 2023. Arslan is entitled to commission @ 15% on
selling price. The expenses of consignment amounted to Rs.125,000. On 31st
march, an Account sale was received from Arslan showing that he sold 140 bags
of the consigned goods of Rs.15,000 each. His actual out of pocket expenses
were Rs.235,000. Arslan accepted a bill drawing by Zahid for Rs.1 million and
remitted the balance due from him in cash. (20)
Required: Show the Consignment A/c and
Consignee A/c in the books of Zahid.
## Consignment Accounting: Zahid and
Arslan
### Introduction
Consignment
refers to the process where goods are sent by one person (consignor) to another
(consignee) for the purpose of sale. In this scenario, Zahid of Azad Kashmir
consigned 150 bags of Walnuts to Arslan of Lahore. The consignment includes
specific terms regarding the selling price, commission, and expenses. In this
essay, we will demonstrate the accounting treatment for the consignment in the
books of Zahid and Arslan.
### Consignment Account in Zahid's Books
Zahid,
being the consignor, needs to create a Consignment Account to record all
transactions related to the consignment. The account will capture the cost of
goods consigned, expenses incurred, and the commission payable to Arslan.
#### Consignment Account (Zahid's Books)
|
Date | Particulars | Amount (Rs.) |
|------------|-----------------------------------|--------------|
|
15-Mar-23 | Goods sent on consignment
(150 bags) | 1,500,000 |
|
15-Mar-23 | To Consignment Expenses | 125,000 |
|
31-Mar-23 | By Arslan (Cash
received) | 2,090,000 |
|
31-Mar-23 | To Arslan (Commission @ 15%
on Rs. 15,000 per bag for 140 bags) | 315,000 |
|
31-Mar-23 | To Consignment Expenses (Out
of pocket expenses) | 235,000 |
|
31-Mar-23 | To Bill Receivable (Amount
of the bill drawn) | 1,000,000 |
**Explanation:**
1. On
15th March 2023, Zahid debits the Consignment Account with the cost of goods
consigned (150 bags * Rs. 10,000 per bag).
2. The
Consignment Expenses are debited for the expenses incurred in sending the
goods.
3. On
31st March 2023, Zahid credits the Consignment Account with the amount received
from Arslan in cash (140 bags * Rs. 15,000 per bag).
4.
Zahid debits the Commission payable to Arslan, calculated at 15% on the selling
price of 140 bags.
5. The
Out-of-pocket expenses incurred by Arslan are debited to the Consignment
Expenses Account.
6. The
amount of the bill drawn by Zahid on Arslan is debited to the Bill Receivable
Account.
### Arslan's Books
On the
other hand, Arslan, being the consignee, records the consignment in his books
by creating a Consignee Account. This account captures the goods received,
sales made, and any expenses incurred.
#### Consignee Account (Arslan's Books)
|
Date | Particulars | Amount (Rs.) |
|------------|------------------------------------|--------------|
|
15-Mar-23 | Goods received on
consignment (150 bags) | 1,500,000 |
|
31-Mar-23 | To Goods (Sold 140 bags @
Rs. 15,000 per bag) | 2,100,000 |
|
31-Mar-23 | By Zahid (Commission @ 15%
on Rs. 15,000 per bag for 140 bags) | 315,000 |
|
31-Mar-23 | By Zahid (Cash
remitted) | 2,090,000 |
|
31-Mar-23 | To Out-of-pocket
Expenses | 235,000 |
|
31-Mar-23 | By Zahid (Bill payment) | 1,000,000 |
**Explanation:**
1. On
15th March 2023, Arslan credits the Consignee Account with the cost of goods
received (150 bags * Rs. 10,000 per bag).
2. On
31st March 2023, Arslan debits the Goods Account for the sales made (140 bags *
Rs. 15,000 per bag).
3.
Arslan credits the Commission earned from Zahid, calculated at 15% on the
selling price of 140 bags.
4. The
amount paid to Zahid in cash is also credited to the Consignee Account.
5. The
Out-of-pocket expenses incurred by Arslan are debited to the Out-of-pocket
Expenses Account.
6.
Arslan credits the Bill Payment made to Zahid.
### Conclusion
Consignment
accounting involves careful recording of transactions to ensure that both the
consignor and consignee accurately reflect the financial impact of the
consignment. The Consignment Account in Zahid's books captures the
consignment's cost, expenses, and commission payable, while the Consignee
Account in Arslan's books records the goods received, sales made, and expenses
incurred. This accounting process facilitates transparency and accountability
in consignment transactions between Zahid and Arslan.
Q. 3 Goods
Trade Ltd., had a brach at Karachi to which goods were invoiced at cost plus
25%. The following information is supplied to you for 2023. (20)
Stock
(invoice value on 1stJan. Rs.15,000
Debtors,
1st Jan 10,0000
Petty
Cash, 1st Jan. 80
Goods
sent to branch (cost) 40,000
Cash
Sales 26,000
Credit
Sales 36,000
Cash
received from Debtors 34,200
Discount
allowed to them 800
Cash
remitted to Branch for Expenses 8,000
Petty
Cash at the Branch, 31st Dec. 90
Stock
31st Dec., (invoice price) 12,000
Liability
for Expenses, 31st Dec. 250
Required:
Prepare the Branch A/c, and other necessary accounts to ascertain the profit or
loss in the books of Head Office.
##
Branch Accounting for Goods Trade Ltd.
### Introduction
Branch
accounting is a system of accounting where transactions related to a branch are
recorded separately from the main/head office. In this scenario, we will
prepare the Branch Account and other necessary accounts to determine the profit
or loss in the books of the Head Office for Goods Trade Ltd.
### Branch Account
The
Branch Account summarizes the transactions between the head office and the
branch. It includes details of goods sent to the branch, sales, and expenses.
#### Branch Account for the Year Ended
31st December 2023
|
Date | Particulars | Debit (Rs.) |
Credit (Rs.) |
|------------|--------------------------------------|-------------|--------------|
|
1-Jan-23 | Stock (Opening) | 15,000 | |
|
1-Jan-23 | Debtors (Opening) | 10,000 | |
|
1-Jan-23 | Petty Cash (Opening) | 80 | |
| **To
Balance b/d** | | 15,080 |
|
1-Jan-23 | **By Goods sent to Branch
(Cost)** | 40,000 | |
| | **To Branch Debtors (Sales)** | | 36,000 |
| | **To Cash Sales** | | 26,000 |
|
31-Dec-23 | Cash received from
Debtors | 34,200 | |
| | **To Discount allowed to Debtors** | 800
| |
| | **To Petty Cash Expenses** | 90 | |
| | **By Stock (Closing) (Invoice
Price)** | 12,000 | |
| | **By Liability for Expenses (Closing)** |
250 | |
| | **By Balance c/d** | | 28,640 |
|------------|--------------------------------------|-------------|--------------|
|
**Total** |
**85,170** | **85,170** |
**Explanation:**
1. The
opening stock, debtors, and petty cash are brought forward from the previous
year.
2.
Goods sent to the branch are debited to the Branch Account.
3.
Sales, both credit and cash, are credited to the Branch Account.
4.
Cash received from debtors is also credited to the Branch Account.
5.
Discounts allowed to debtors and petty cash expenses are debited to the Branch
Account.
6. The
closing stock (at invoice price) and liability for expenses (closing) are
credited to the Branch Account.
7. The
balance carried down represents the profit or loss, which is transferred to the
Head Office.
### Other Necessary Accounts
#### 1. Goods Sent to Branch Account
|
Date | Particulars | Debit (Rs.) |
Credit (Rs.) |
|------------|--------------------------------------|-------------|--------------|
|
1-Jan-23 | **By Branch Account
(Cost)** | 40,000 | |
|
31-Dec-23 | **To Closing Stock (Invoice
Price)** | | 12,000 |
|------------|--------------------------------------|-------------|--------------|
|
**Total**
| **40,000** | **12,000** |
**Explanation:**
1. The
cost of goods sent to the branch is debited to the Goods Sent to Branch
Account.
2. The
closing stock (at invoice price) is credited to account for the remaining
stock.
#### 2. Branch Debtors Account
|
Date | Particulars | Debit (Rs.) |
Credit (Rs.) |
|------------|--------------------------------------|-------------|--------------|
|
1-Jan-23 | **By Branch Account
(Sales)** | | 36,000 |
|
31-Dec-23 | **To Cash Received from
Debtors** | 34,200 | |
| | **To Discount Allowed** | 800 | |
|------------|--------------------------------------|-------------|--------------|
|
**Total**
| **36,000** | **35,000** |
**Explanation:**
1.
Sales to branch debtors are credited to the Branch Debtors Account.
2.
Cash received from debtors and discounts allowed are debited to the Branch
Debtors Account.
### Conclusion
In
conclusion, the Branch Account, Goods Sent to Branch Account, and Branch
Debtors Account are essential in determining the profit or loss in the books of
the Head Office for Goods Trade Ltd. The Branch Account summarizes the branch's
transactions, and the balances in Goods Sent to Branch and Branch Debtors
Accounts facilitate a detailed understanding of goods movements and debtors'
transactions. Proper branch accounting ensures accurate financial reporting and
management control over branch operations.
Q. 4 (a) Describe the various types of share
capital. (20)
(b) The Authorized capital of Star Company is
200,000 shares of worth Rs.10 each. On March 2023, 50,000 shares are issued for
subscription at a Premium of Rs.3) with Application, Rs. 3 on Allotment, Rs.2
on first Call and Rs. 2 on Final Call. Pass Journal entries; prepare Bank
Account and Balance Sheet for Star Ltd.
## (a) Types of Share Capital
Share
capital is the capital raised by a company through the issue of shares. It
represents the owners' equity in the company. There are several types of share
capital, each serving different purposes. Here are the main types:
### 1. **Authorized Share Capital:**
- It
is the maximum amount of share capital that a company is authorized to issue,
as specified in its memorandum of association.
-
Companies often set a higher authorized capital to have flexibility for future
fundraising without requiring changes to the memorandum.
### 2. **Issued Share Capital:**
-
Issued share capital is the portion of authorized capital that the company has
issued and sold to shareholders.
- This
represents the actual shares held by investors.
### 3. **Subscribed Share Capital:**
-
Subscribed share capital is the portion of issued capital for which
shareholders have agreed to pay.
- It
might be less than the issued capital if not all issued shares are taken up by
investors.
### 4. **Paid-up Share Capital:**
-
Paid-up capital is the amount of money shareholders have already paid to the
company for the shares they own.
- It
is the portion of subscribed capital that the company has received in cash.
### 5. **Unpaid Share Capital:**
- This
is the portion of subscribed capital that shareholders have not yet paid.
Shareholders are usually required to pay the
unpaid amount in installments as the company makes calls for further payments.
### 6. **Preference Share Capital:**
-
Preference shares have preferential rights over equity shares in terms of
receiving dividends and repayment of capital in case of liquidation.
- They
typically carry a fixed rate of dividend.
### 7. **Equity Share Capital:**
-
Equity shares represent the residual interest in the company after all other
obligations are satisfied.
-
Holders of equity shares are the true owners of the company and have voting
rights.
### 8. **Bonus Shares:**
-
Bonus shares are issued to existing shareholders as a form of dividend.
- They
are issued without any cost to existing shareholders.
### 9. **Right Shares:**
-
Right shares are offered to existing shareholders in proportion to their
existing holdings.
-
Shareholders can either subscribe to these shares or renounce their rights in
favor of others.
### 10. **Sweat Equity:**
-
Sweat equity shares are issued to employees or directors as a form of
compensation for their services.
- They
are issued at a discount or for free.
## (b)
Journal Entries, Bank Account, and Balance Sheet for Star Ltd.
### Journal Entries:
1. **For Issuing 50,000 shares at a
Premium of Rs. 3 per share:**
```plaintext
Cash Account Dr. 500,000
Share Capital Account Cr.
500,000
(Being 50,000 shares issued at Rs. 10 each at
a premium of Rs. 3 per share)
2. **For Application Money Received:**
```plaintext
Bank
Account Dr. 150,000
Share
Application Account Cr. 150,000
(Being
application money received for 50,000 shares at Rs. 3 per share)
3.
**For Allotment Money Received:**
plaintext
Share
Application Account Dr. 150,000
Share
Allotment Account Cr. 150,000
(Being
allotment money received for 50,000 shares at Rs. 3 per share)
4.
**For First Call Money Received:**
plaintext
Share
Allotment Account Dr. 100,000
Share
First Call Account Cr. 100,000
(Being
first call money received for 50,000 shares at Rs. 2 per share)
5. **For Final Call Money Received:**
plaintext
Share
First Call Account Dr. 100,000
Share
Final Call Account Cr. 100,000
(Being
final call money received for 50,000 shares at Rs. 2 per share)
### Bank Account:
plaintext
Particulars | Debit (Rs.) | Credit (Rs.)
--------------------------|---------------|----------------
Opening
Balance | | [As per existing balance]
Application
Money | 150,000
|
Allotment
Money | 150,000
|
First
Call Money | 100,000
|
Final
Call Money | 100,000
|
Closing
Balance | [Calculated] |
### Balance Sheet:
plaintext
Liabilities | Amount (Rs.) |
Assets |
Amount (Rs.)
-------------------------------------|--------------|--------------------------------------|--------------
Share
Capital | | Fixed Assets | |
-
Authorized Capital | 2,000,000
| - Tangible Assets | |
-
Issued Capital | 500,000
| Current Assets
| |
-
Subscribed Capital | 500,000
| - Stock | 12,000
|
-
Paid-up Capital | 350,000
| - Debtors | |
Share
Premium Reserve | 150,000
| - Cash and Bank Balance | [Calculated] |
Share
Application Money |
150,000 | | |
Share
Allotment Money | 150,000
|
| |
Share
First Call Money | 100,000
| | |
Share
Final Call Money | 100,000
|
| |
Current
Liabilities | | | |
-
Liability for Expenses | 250
|
| |
-------------------------------------|--------------|--------------------------------------|--------------
Total
Liabilities | 1,500,250 | Total Assets | [Calculated] |
**Note:**
1. The
closing balance in the Bank Account is calculated by deducting total debits
from total credits.
2. The
total assets section is calculated by adding the closing balance in the Bank
Account to the current assets.
Q. 5 (a) Describe the Various types of Debentures,
which may be issued by a Joint Stock Company. (20)
(b) AB
Ltd. Purchased assets worth Rs.6,80,000 by issuing debentures valued
Rs.4,40,000 of Rs.100 each at a premium of 10% and balance in cash. Journalize
the transaction in the books of purchasing company.
## (a) Various Types of Debentures Issued
by a Joint Stock Company
Debentures are long-term debt instruments
issued by companies to raise funds from the public or financial institutions.
The various types of debentures issued by a joint stock company include:
### 1. **Secured Debentures:**
-
Secured debentures are backed by specific assets of the company, known as
security or collateral.
- In
case of default, debenture holders have a claim on the specified assets.
### 2. **Unsecured Debentures (or Naked
Debentures):**
-
Unsecured debentures are not backed by any specific assets of the company.
-
Debenture holders rely solely on the company's creditworthiness.
### 3. **Convertible Debentures:**
-
Convertible debentures can be converted into equity shares after a specified
period.
- This
provides debenture holders with an opportunity to participate in the company's
equity and benefit from any potential appreciation in share value.
### 4. **Non-Convertible Debentures:**
-
Non-convertible debentures cannot be converted into equity shares.
-
Debenture holders receive fixed interest and do not have the option to convert
their debentures into shares.
### 5. **Redeemable Debentures:**
- Redeemable
debentures are issued with a predetermined maturity date.
- The
company is obligated to repay the principal amount to debenture holders on or
before the maturity date.
### 6. **Irredeemable Debentures
(Perpetual Debentures):**
-
Irredeemable debentures do not have a fixed maturity date.
- The
company is not required to repay the principal amount, providing long-term
capital to the company.
### 7. **First Debentures:**
-
First debentures are secured by a first charge on the company's assets.
- In
case of liquidation, the holders of first debentures have the first claim on
the specified assets.
### 8. **Second Debentures:**
-
Second debentures are secured by a second charge on the company's assets.
- In
case of liquidation, they have a claim on the specified assets after the first
debenture holders.
### 9. **Floating Rate Debentures:**
-
Floating rate debentures have an interest rate that is not fixed but is linked
to a benchmark interest rate.
- The
interest rate adjusts periodically based on changes in the benchmark rate.
### 10. **Zero Coupon Debentures:**
- Zero
coupon debentures do not carry a specific interest rate.
- They
are issued at a discount to their face value and do not pay periodic interest.
The interest is implicitly paid at the time of redemption.
### 11. **Callable Debentures:**
-
Callable debentures give the issuer the option to redeem the debentures before
maturity.
- This
provides flexibility to the company to repay the debt if interest rates
decline.
### 12. **Perpetual Debentures:**
-
Perpetual debentures are similar to irredeemable debentures, as they do not
have a fixed maturity date.
-
However, perpetual debentures may have a call option, allowing the issuer to
redeem them after a specified period.
## (b) Journal Entry for Asset Purchase by
Issuing Debentures
When a
company purchases assets by issuing debentures, it records the transaction in
the accounting books. Let's assume AB Ltd. purchased assets worth Rs. 6,80,000
by issuing debentures valued at Rs. 4,40,000 of Rs. 100 each at a premium of
10%, and the balance is paid in cash.
### Journal Entry:
plaintext
Asset
Account Dr. 6,80,000
Debentures
Account Dr. 4,40,000
Securities
Premium Account Dr. 44,000
Cash
Account Cr.
11,24,000
(Being
assets purchased by issuing debentures at a premium)
**Explanation:**
1. **Asset Account (Real Account):**
-
Debited with the cost of assets acquired.
-
Represents an increase in the company's assets.
2. **Debentures Account (Liability
Account):**
-
Debited with the face value of debentures issued.
-
Represents the company's obligation to repay the debenture holders in the
future.
3. **Securities Premium Account (Reserve
Account):**
-
Debited with the premium received on the issue of debentures.
-
Represents the amount received over and above the face value of the debentures.
4. **Cash Account (Asset Account):**
-
Credited with the cash paid to the vendor for the balance amount.
-
Represents the outflow of cash.
### Balance Sheet Impact:
```plaintext
Liabilities | Amount (Rs.) |
Assets | Amount
(Rs.)
-----------------------------------|--------------|------------------------------|--------------
Debentures |
4,40,000 | Fixed Assets | 6,80,000
Securities
Premium Reserve | 44,000
| Current Assets |
[No change]
Current
Liabilities | [No
change] | |
-----------------------------------|--------------|------------------------------|--------------
Total
Liabilities | 4,84,000
| Total Assets | 6,80,000
Note:**
1. The
liabilities side of the balance sheet reflects the debentures issued and the
premium received.
2. The
assets side of the balance sheet shows an increase in fixed assets due to the
purchase of assets using the debentures issued. The current assets section
remains unchanged as the balance is paid in cash.
Dear Student,
Ye sample assignment h. Ye bilkul
copy paste h jo dusre student k pass b available h. Agr ap ne university
assignment send krni h to UNIQUE assignment
hasil krne k lye ham c contact kren:
0313-6483019
0334-6483019
0343-6244948
University c related har news c
update rehne k lye hamra channel subscribe kren: