Goggle Ltd has 1 million shares issued. The directors have elected to make a '1 for 5' bonus issue. The current market price of the shares is $10 each. What is the summary entry to record the bonus issue?
E) None of the given answers.

Question

Quizplus · Accepted Answer

A bonus issue is also known as a stock dividend because it involves the distribution of additional shares to existing shareholders. In a 1 for 5 bonus issue, shareholders would receive 1 additional share for every 5 shares they currently hold. Therefore, Goggle Ltd would be issuing 200,000 new shares (1 million shares / 5). The market price of the shares is irrelevant in determining the accounting entry for a bonus issue.

The correct accounting entry to record a bonus issue is:

Dr Share capital (nominal value of bonus shares) – 200,000 x nominal value per share
Dr Share premium (fair value of bonus shares) – 200,000 x (market price per share – nominal value per share)
Cr Share capital (nominal value of original shares) – 1 million x nominal value per share
Cr Share premium reserve – balance

As we don't have the nominal value per share, we can assume it to be $1. Therefore, the entry would be:
Dr Share capital - $200,000
Dr Share premium - $1,800,000 (200,000 x ($10 - $1))
Cr Share capital - $1,000,000
Cr Share premium reserve - $1,000,000 (balancing figure)

Option B is the only one that matches this entry.

Goggle Ltd Has 1 Million Shares Issued