Pembroke Limited was putting the finishing touches to its statement of financial position at the end of its first financial year, 30 September 2013. The only part of the statement of financial position left to complete was the ‘Total equity’ section. When the company was formed, it had ordinary share capital of £60,000, split into shares with a nominal value of 50p each. The shares were issued at a premium of 10p per share. The closing balance of retained earnings at 30 September 2013 was £82,000.

(a) Prepare the ‘Total equity’ section of Pembroke Limited’s statement of financial position as at 30 September 2013.

(b) After a successful first year’s trading, the directors of Pembroke Limited feel that they should be rewarded for their efforts. It has been suggested that they would benefit financially if the balance remaining on the company’s retained earnings was used to issue bonus shares. Write a concise report to the directors explaining the nature of a bonus issue and the circumstances when it might be appropriate.