Bonus issue
A bonus issue is free extra shares given to existing shareholders by capitalising reserves into share capital; total equity is unchanged, only its components move between accounts.
See it move
A company with 240,000 shares of €0.50 nominal value declares a 1-for-3 bonus issue, capitalised from share premium. The 80,000 new shares carry €40,000 of nominal value, which moves out of share premium (€450,000 to €410,000) and into share capital (€120,000 to €160,000). Total equity stays at €1,470,000 throughout.
The formula
Variables
- Number of bonus shares issued (shares)
- Existing shares in issue (shares)
- Bonus ratio (ratio, e.g. 0.2 for 1-for-5)
Gives the number of free shares issued to existing holders under a stated bonus ratio, such as 1-for-5.
Check yourself
A company has 600,000 shares of €0.25 nominal value in issue (share capital of €150,000), a share premium account of €320,000, and retained earnings of €700,000. It declares a 1-for-4 bonus issue, capitalised from share premium. What is the share premium account balance immediately after the bonus issue?