Advantages of Bonus Matter
a) Tax advantages
Shareholders can sell new shares, and create cash in form of capital gains such is tax exempt unlike cash dividends which attract 5 percent withholding tax such is final
b) Indication of high profits in future:
A Bonus matter, in an inefficient market conveys significant information to the future of the company.It is declared whenever management expects increase in earning about offset additional outstanding shares so hence E.P.S is not diluted.
c) Conservation of cash
Bonus matter conserves cash particularly if the firm is in liquidity problems.
d) Increase in future dividends
If a firm follows a fixed/constant D.P.S policy, so then net future dividend would rise because of increase in number of shares after bonus matter.
Journal entry in case of bonus matter
Dr. R. Earnings (par value)
Cr. Ordinary share capital (par value)
NB: A firm can make a script matter also whereas bonus shares are directly from capital reserve.