Limited company accounts

Rights Issues and Bonus Issues

Comparison

Rights issue — calculation steps

1. Bank received = new shares × issue price
2. Share capital increase = new shares × nominal value
3. Share premium increase = new shares × (issue price − nominal value)

Example: 200 000 new £1 shares at £1.60:

• Bank: 200 000 × £1.60 = £320 000
• Share capital: 200 000 × £1.00 = £200 000
• Share premium: 200 000 × £0.60 = £120 000

Bonus issue — calculation steps

1. Calculate total shares after any prior rights issue
2. Apply ratio: shares ÷ denominator × numerator = bonus shares
3. Value at nominal: bonus shares × nominal value
4. Deduct from reserves in order: 1st share premium → 2nd revaluation reserve → 3rd retained earnings
5. Add same amount to ordinary share capital — total equity unchanged

Example: 1 000 000 existing £1 shares; 2-for-5 bonus issue:

• Bonus shares: 1 000 000 ÷ 5 × 2 = 400 000 × £1 = £400 000
• Deduct £400 000 from share premium first, then revaluation reserve if needed

Dilution and control (rights issues)

• Shareholder holds 120 000 of 300 000 shares (40%); company issues 75 000 new shares
• If shareholder accepts rights shares → 150 000 / 375 000 = 40% — no dilution
• If shareholder rejects offer → 120 000 / 375 000 = 32% — 8% dilution