A Level Accounting (9706)•9706/12/M/J/21
Explanation
Bonus Issues Capitalize Reserves for Existing Shareholders
Steps:
- A bonus issue (scrip issue) transfers reserves to share capital, issuing free shares proportionally to existing shareholders.
- Statement 1 applies: Shares are distributed only to current shareholders based on holdings.
- Statement 2 does not apply: Bonus shares are issued at nominal (par) value, never at a premium, as no cash is received.
- Statement 3 does not apply: Shares are not sold; they are given free, so no pricing below market occurs.
Why B is correct:
- Bonus issues are defined under company law as non-cash distributions to existing shareholders only, capitalizing reserves without premium or discount pricing.
Why the others are wrong:
- A includes invalid premium issuance.
- C includes invalid premium and market pricing.
- D ignores core distribution to existing shareholders.
Final answer: B
Topic: Preparation of financial statements
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