Bonus Issues Capitalize Reserves Without Cash Outflow

Steps:

• Identify bonus issue as free shares to existing shareholders from reserves.
• Evaluate statement 1: Incorrect, as bonus issues do not raise new capital.
• Evaluate statement 2: Correct, as they transfer reserves to share capital.
• Evaluate statement 3: Correct, as EPS decreases due to more shares.

Why C is correct:

• Statements 2 and 3 align with bonus issue definition: capitalizing reserves (statement 2) and diluting EPS (statement 3) per accounting standards.

Why the others are wrong:

• A includes incorrect statement 1 on capital raising.
• B includes only incorrect statement 1.
• D excludes correct statement 2 on reserve capitalization.

Final answer: C