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Difficulty: EasyReserves and Capital Structure

Under statutory company accounting rules, which of the following is a legally permitted application of the Share Premium account balance?

  1. Issuing fully paid bonus shares to existing shareholdersAnswer
  2. B
    Paying cash dividends directly to ordinary shareholders
  3. C
    Writing off routine operating losses incurred during normal trading
  4. D
    Funding annual cash bonus payments to company directors

Answer

Issuing fully paid bonus shares to existing shareholders
The Share Premium account is a non-distributable capital reserve. Under company law and statutory accounting rules, its balance can legally be applied to issue fully paid bonus shares to existing shareholders, write off preliminary formation expenses, or write off expenses/commissions on share issues.

Step-by-Step Solution

1
Identify the nature and classification of the Share Premium account
Share Premium is classified as a capital reserve because it represents funds paid by subscribers in excess of the nominal value of shares.
Capital reserves arise from capital transactions and are legally restricted from being treated as distributable profits.
2
Evaluate statutory regulations governing the utilization of capital reserves
Company regulations strictly permit capital reserves like Share Premium to be used for capital purposes—such as issuing fully paid bonus shares, writing off preliminary expenses, or writing off share issue commission.
Using capital reserves for cash dividends or operational losses violates statutory principles protecting company capital.

Key Concept

Statutory Utilization of Share Premium
Estimated Time:45s
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Topics

Reserves and Capital Structure

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