Question

Bonus shares are issued by companies because _____________.

• A. surplus cash is available
• B. there are heavy accumulated general reserves
• C. there is heavy competition from similar companies
• D. they have heavy gross-profit ratio

Answer 1

Answer: (B)

there are heavy accumulated general reserves

Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are company's accumulated earnings which are not given out in the form of dividends, but are converted into free shares.

In other words, when a company is prosperous and accumulates a large surplus, it converts this surplus into capital and divides the capital among the members in proportion to their rights.

The essential reason behind issuance of bonus shares is to capitalize profits and increase a company’s equity base and therefore, the shareholders to whom the shares are allotted have to pay nothing.