Capitalizing the least flexible reserve for bonus shares

Steps:

• Bonus shares capitalize reserves by debiting a reserve account and crediting share capital.
• Available reserves include share premium (non-distributable), general reserve, and retained earnings (both distributable).
• Directors prioritize flexibility, meaning they preserve distributable reserves for dividends or other uses.
• Thus, debit share premium, the least flexible reserve, to maintain others intact.

Why D is correct:

• Share premium is debited per accounting standards (e.g., IAS 39/IFRS 9) as it is restricted to share-related purposes and not available for dividends, preserving flexible reserves.

Why the others are wrong:

• A. Bank: Bonus shares involve no cash outflow, so bank is unaffected.
• B. General reserve: Debiting it reduces flexible, distributable reserves, contradicting the flexibility goal.
• C. Retained earnings: Debiting it depletes distributable profits, limiting future dividends and flexibility.

Final answer: D