Answer to Question #307401 in Accounting for Lukas

Question

(I) Distinguish the difference between the following concepts in relation to company accounting 

(a) Bonus issue and Rights issues 

(b) Loan stock or Bonds

(c) Preference shares and Ordinary shares

(d) Redeemable and Irredeemable

(e) Reserves and Provisions

(f) Unlimited and limited liability

(g) Share capital and Share premium 

(II) Briefly explain the advantages and disadvantages of Bonus and rights issue 

Answer 1

a)Rights Issue is a right issued to its existing shareholders to subscribe to the shares at a discounted price within a specified time period. A bonus issue is an issue of shares by the Company to its existing shareholders free of cost

b) Loan stock is stock issued by a business as a collateral against a loan. Just like other loans, it earns interest and grants control of the shares to the lender until the loan is paid off. A bond is a written and signed promise to pay a certain sum of money on a certain date, or on fulfilment of a specified condition

c) Ordinary shares are the common type of shares issued to founders and employees, while preference shares are issued shares to investors wanting to secure their return.

d) Redeemable preference shares are those preference shares which are redeemed on the expiry of a fixed period of time whereas irredeemable preference shares are redeemed (refunded) only at the time of winding up of the company.

e) A reserve is an appropriation of profit for a specific purpose, while a provision is a charge for an estimated expense.

f) Limited liability means the business owners' liability for debts is restricted to the amount they put into the business while unlimited liability, the business owners are personally responsible for any loss the business makes.

g) Share capital is the equity generated through the issue of shares at face value while share premium is the value received for shares that exceed the face value.

Ii)

Advantages of bonus issue

Bonus shares increase the issued share capital of the company, making it look like an attractive option to investors.

Disadvantages of bonus issue

Issuing bonus shares is costlier than declaring the dividend. It uses the company's capital reserve

Advantages of rights issue

a) A company raises equity capital without the conditions usually tied to debt capital.

b) It provides existing shareholders with an opportunity to purchase additional new shares from the company.

Disadvantages of rights issue

a) The existing shareholding percentage may get diluted

b) After the right issue share price decreases.

c) The negative effect of the company’s public image