Question

b) CD had 5,000,000 R1 ordinary shares in issue. Subsequently, CD made a rights issue of 1 new ordinary share at R3.50 per share for every 5 ordinary shares currently held. At the same date CD’s ordinary shares were trading at R4.75.
Required:
(i) Explain the difference between a bonus issue and a rights issue of shares.
(ii) Prepare the journal entries required to record CD’s rights issue in its financial records, assuming that all rights were taken up.
(Total for sub-question (d) = 5 marks)

Answer 1

(i) Difference between bous issue and rights issue
Bonus Issue
When a company earns huge profit, it may distribute some of the retained earnings in the
form of bonus shares. These are given to existing shareholders with no consideration received.
Bonus issue may also be given for increasing the equity base of the company and also to
increase the dividend payout. It is given out of free reserves
The journal entry for bonus issue is:
General Reserve Account	Dr
Profit and Loss Account	Dr
Securities Premium Account	Dr
	To Share Capital Account
Rights Issue
When a company launches a fresh issue, it may give an exclusive right to the exisitng shareholders
to buy the shares at a lower price than the current market price. The exisitng shareholders may
or may not exercise the right. It is generally given in proportion to the current holding.
The journal entry for rights issue is:
Cash Account		Dr
	To Share Capital Account
If issued at premium, securities premium account is to be credited.
(ii) Journal entry
Number of existing shares = 5,000,000
Right issue proportion = 1 share for every 5 shares held = 1:5
Hence, number of right shares issued = 5,000,000*1/5 = 1,000,000 shares
Right issue price = R3.50 per share
Here par or face value of shares is R1.
Hence Premium amount = 3.50 - 1 = 2.50
Cash Account		Dr	3,500,000
	To Share Capital Account		1,000,000
	To Securities Premium Account		2,500,000