A company has: Ordinary shares 1.00 each: 200,000; Share premium: 80,000; Revenue reserves: 160,000. Changes in order: (1) One-for-one bonus issue; (2) Rights issue of 100,000 shares at 1.40 each. Company wishes to maximise dividends. What are the resulting balances?

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SSC Financial and Cost Accounting P-1 QUESTION #6116

Question 1

A company has: Ordinary shares $1.00 each: $200,000; Share premium: $80,000; Revenue reserves: $160,000. Changes in order: (1) One-for-one bonus issue; (2) Rights issue of 100,000 shares at $1.40 each. Company wishes to maximise dividends. What are the resulting balances?

Ordinary share capital $500,000 | Share premium $40,000 | Revenue reserves $40,000✔️
Ordinary share capital $500,000 | Share premium $80,000 | Revenue reserves nil
Ordinary share capital $540,000 | Share premium nil | Revenue reserves $40,000
Ordinary share capital $540,000 | Share premium $40,000 | Revenue reserves $40,000

Correct Answer Explanation

Option A is correct.

Bonus issue (200,000 new shares @ $1): Use share premium $80,000 first, then revenue reserves $120,000.

After: Shares $400,000 | Share premium $0 | Revenue reserves $40,000

Rights issue (100,000 @ $1.40): $100,000 to share capital, $40,000 to share premium.

Final: Shares $500,000 | Share premium $40,000 | Revenue reserves $40,000

More Options