Journal Entry for Issue of Bonus Shares
Bonus shares are the new share that company issues to the existing shareholders without charge. It is the bonus that the company provides to shareholders in the form of dividends.
Shareholders are the people who invested in the business by purchasing the company’s shares. Shareholders are entitled to attend the shareholder’s meeting and vote on issues such as electing directors, approving mergers, selling all or part of the company, and other decision-making. They make the majority of decisions regarding an organization’s future. It varies from company to company, equity holders generally have the power to elect board members who then choose senior management positions.
There are many different types of shareholders. Public shareholders are those who purchase shares on the open market, while private shareholders are those who invest in a specific company usually due to some special circumstance such as being friends with the founders or working within the company.
Shareholders are important because they provide non-refundable capital which is used to run and expand the entity. If the company takes a loan from bank or creditors, it must be payback based on the term. Shareholders have not required to pay back the capital invested.
The company must act in the best interest of its shareholders. If they don’t, their investors will sell their shares and the company stock price falls. This could result in bankruptcy or dire consequences for all parties involved. The company has the obligation to maximize shareholder wealth by increasing the profit, share price, and dividend.
Shareholders benefit from stock price appreciation and income from dividends paid. A company pays dividends on a regular basis. Some companies pay quarterly, while others paid twice per year. company pays out a cash dividend in an amount equal to a portion of its earnings. Sometimes, the company is making a profit, but they do not have enough cash to pay the shareholders. However, the company still wishes to pay the shareholders and keep them happy. As a result, management decides to issue the bonus share. They simply issue new shares from the retained earnings. The shareholders will receive new shares based on the number of shares they own.
Journal Entry for Issue of Bonus Shares
When the company’s board of directors decides to issue the share bonus, the company needs to record the deduction of retained earnings and increase dividends payable. The journal entry is debiting retained earnings and credit dividend payable.
| Account | Debit | Credit |
|---|---|---|
| Retained Earnings | $$$ | |
| Dividend Payable | $$$ |
The transaction will reduce the company accumulated profit on the equity section on the balance sheet. The dividend payable represents the company’s obligation to settle with shareholders.
On the due date, the company issues new shares to settle the dividend payable. Instead of paying cash, the company gives shares to the existing shareholders. The company has to record new common shares and reverse the dividend payable. The journal entry is debiting dividend payable and credit common stock, additional paid-in capital.
| Account | Debit | Credit |
|---|---|---|
| Dividend Payable | $$$ | |
| Common Stock | $$$ | |
| Additional paid-in capital | $$$ |
The dividend payable will be reversed as the company settles the liability. The common stock represents the total par value of all new share issues. The additional paid-in capital is the difference between dividend payable and total share par value. It shows the additional amount that shareholders agree to accept over the par value.
Example
Company ABC is a listed entity, at the year-end, company has declared a dividend of $ 5,000,000 to all shareholders. However, instead of paying cash, the board of directors decided to issue 100,000 shares which have a par value of $ 1 per share. Please prepare journal entry for the issuance of bonus shares.
At the end of the year, ABC has declared a dividend of $ 5,000,000 to the shareholders. They have to record dividends payable and reduce the retained earnings. It is a normal transaction for dividend declaration. The journal entry is debiting retained earnings of $ 5,000,000 and credit dividend payable of $ 5,000,000.
| Account | Debit | Credit |
|---|---|---|
| Retained Earnings | 5,000,000 | |
| Dividend Payable | 5,000,000 |
It means the company reduces accumulated earnings to pay the dividend to shareholders. As the dividend has not yet been paid, company has to record a liability on balance sheet.
However, instead of paying $ 5,000,000 in cash to shareholders, company issue 100,000 shares to them. It means each share is valued at $ 50 while the par value is $ 1 per share.
When company issues 100,000 shares as a bonus for shareholders. They have to reverse the dividend payable and record common stock based on the par value and additional paid-in capital based on the difference between share value and par value. The journal entry is debiting dividend payable $ 5,000,000 and credit common stock $ 100,000 (100,000 share with par value $ 1), and credit additional paid-in capital $ 4,900,000.
| Account | Debit | Credit |
|---|---|---|
| Dividend Payable | 5,000,000 | |
| Common Stock | 100,000 | |
| Additional paid-in capital | 4,900,000 |
