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a) The term ‘reserves’ is frequently found in company balance sheets. (i) Explain the meaning of...

a) The term ‘reserves’ is frequently found in company balance sheets. (i) Explain the meaning of ‘reserves’ in this context; (ii) Give two examples of reserves and explain how each of your examples comes into existence. b) A company’s issued share capital may be increased by a bonus (capitalization) issue or by a rights issue. Define ‘bonus issue’ and ‘rights issue’ and explain the fundamental difference between these two types of share issue

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Expert Solution

A)

(I) Reserves are called as retained earnings and they form part of portion of the company's profits. Many types of reserves are created for various purposes and for compliance requirements. Some of the purpose where reserves are used is to pay debts, dividends etc.

(II)

1. General reserve: General reserve is the amount which was kept aside from the profit earned by the company where the amount will be used for the payment of any future obligations.

2. Special reserve: Where the reserves are set aside for any specific purpose will be termed as special reserves and it can be created for some statutory obligations. Some of the examples are debenture redemption reserve, bad debt reserve etc.

B)

Bonus issue: When additional shares are issued to the current and existing shareholders, in lieu of dividends payable to them, it will be termed as bonus issue where it was issued at no cost to the shareholders.

Rights issue: In the rights issue the company will provide existing shareholder's to purchase the shares at discounted price for a limited period.

Difference: In the rights issue it is up to the shareholder to subscribe to the rights issue where shareholder may fully or partially renounce his right, whereas no such option to renounce in a bonus issue.

jeff jeffy answered 1 year ago
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