Funding Sources for Bonus Issues Steps:

• Identify that a bonus issue capitalizes reserves to issue free shares to existing shareholders.
• Recall eligible reserves include retained earnings and share premium account.
• Determine that cash or uncommitted profits cannot fund bonus issues as they require non-cash reserves.
• Match options: assume 1 is retained earnings, 2 is share premium, 3 is cash reserves.

Why A is correct:

• Bonus issues are funded by transferring from distributable reserves like retained earnings (1) and share premium (2), per company law (e.g., Companies Act provisions on capitalization).

Why the others are wrong:

• B includes 3 (cash), which is invalid as bonus issues use reserves, not liquid assets.
• C excludes 1 (retained earnings), a primary funding source.
• D uses only 3 (cash), which cannot capitalize shares without reserves.

Final answer: A