S ltd. purchased 8000 shares on 1-4-2001 in M ltd. When the shares were purchased, general reserve and profit and loss A/c of M lt. stood at Rs 30000 and Rs 16000 respectively. Dividends have been paid @ 10% every year after acquisition of shares, first dividend being paid out of pre-acquisition profits.
On 31-3-2004, bonus shares has been declared by M ltd. @ 1 fully paid share for 5 held, but no effect has been given to that in the above accounts. The bonus was declared out of profits earned prior to 1-4-2001 from general reserve.
Balance of M ltd. as on 31-3-2004
General reserve=36000
Profit and loss=20000
Treatment as per book: =
General Reserve
Closing balance=36000
Less: opening balance=30000
Bonus paid=20000
Capital profit=10000
Subsequent year profit=6000
Profit & loss account
Closing balance=20000
Less: opening balance=16000
Dividend paid=10000
Capital profit=6000
Subsequent year profit=14000
Query= Why the treatment is different for General reserve and profit & loss a/c. In case of general reserve, bonus paid is reduced from the opening balance and the rest is taken as capital profit and revenue reserve is simply taken as the difference between closing balance and opening balance. In case of profit & loss a/c, dividend paid is reduced from opening balance and rest is taken as capital profit but, revenue profit is taken by reducing the capital profit from the closing balance.
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