Question

Assertion (A): Issue of bonus shares will not affect the debt-equity ratio.

Reason (R): Bonus shares are issued out of accumulated profits and thus neither affect debt nor equity.

In the context of the above two statements, which of the following is correct?

Options

• Both (A) and (R) are correct and (R) is the correct reason of (A).

• Both (A) and (R) are correct, but (R) is not the correct reason of (A).

• Only (R) is correct.

• Both (A) and (R) are incorrect.

Answer 1

Both (A) and (R) are correct and (R) is the correct reason of (A).

Explanation:

Bonus shares are issued from accumulated profits (reserves), so only the amount from reserves is transferred to share capital. The total shareholder funds and debt remain unchanged. Thus, the debt-equity ratio is not changed. As a result, both Assertion and Reason are correct, and Reason correctly explains Assertion.