Study Guide

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CHAPTER 2
INTRODUCTION TO COMPANIES
LEARNING OBJECTIVES:
At the end of this chapter, the students should be able to:

1. Define company and its features.
2. Explain the types and classifications of companies.
3. Explain briefly on the formation of companies.
4. Distinguish between sole proprietorship, partnership and companies.
5. Explain the different types of equity instruments and debts instruments.
6. Explain the differences between an equity instrument and a debt
instrument.
INTRODUCTION
In the previous chapter, you have learnt on two different types of business entities
namely, sole proprietorship and partnership. Unlike companies, sole proprietorship and
partnership are unincorporated bodies. Their registration is governed by the Registry of
Business (ROB) while the registration of companies is governed by the Registry of
Companies (ROC). Both departments are supervised under the Companies Commission
of Malaysia (CCM), which also called as the Registrar. At this level, you will learn on
another type of business entity called company, and the focus for this scope is on public
company limited by shares.
1.1 DEFINITION AND CHARACTERISTICS COMPANY
Company is a legal entity registered under the Companies Act 2016 (CA 2016) or under
any corresponding previous written law, i.e. Companies Act 1965.
A company incorporated under CA 2016 is a body corporate with legal personality

separate from its members and shall continue in existence until it is removed from the
register. Being a separate legal personality, companies will have a separate and distinct
existence from the natural persons who created it. Thus, a company shall be capable of
exercising all the functions of a body corporate and have the full capacity to carry on any
business activities such as to acquire, own, hold, develop or dispose of any property,
doing any act which it may do or to enter into transactions and to sue or be sued.
Furthermore, companies are liable for its debts, where the company’s owner (i.e.,
shareholders) are not personally liable for the company’s debt in the event if it unable to
meet its debt.
The owner of company is called as shareholders and the management is being

delegated to a board of directors who in turn appoint executive directors, i.e. the
management to manage the companies. Companies will also appoint its own external
auditors and company secretary to verify and report it financial records and manage the
annual general meeting and other directors or shareholders meeting respectively.
Comparing to sole proprietorship and partnership, company enjoys several advantages

over it counterparts. Some of the advantages are:
SURYANI ABDUL RAMAN_FP UiTM TAPAH
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• Having greater opportunity to raise large amounts of capital through the issuance
of shares and debentures.
• bear a limited liability, where shareholders are not liable for the company’s
debts beyond the amount of share capital they have invested in the company.
• having a continuity of existence, where in the event of death or changes in
ownership or directorship, companies need not to be winded up.
• Having opportunity to trade their shares on the Bursa Malaysia
In a nutshell, company is one type of corporation made up of several people joined

together for the purpose of conducting a business to gain profit.
1.2 TYPES OF COMPANIES

The companies that are incorporated under the Companies Act 2016 can be grouped
into the following:
COMPANIES
Exempt Government-
Public Private Foreign
Private Linked
Companies Companies Companies
Companies companies
1.2.1 Public Company

Public company means a company other than a private company. It has the word Berhad
(Bhd) at the end of its name. The public company shall have a minimum number of two
directors and one member. There is no limit on the maximum number of shareholders.
To raise the capital, public companies are allowed to offer its shares and debentures to
the public. In fact, they also can trade their shares in the stock exchange if being listed
in Bursa Malaysia. All listed companies are public companies, but not all public
companies are listed companies.
1.2.2 Private Company

A private company is one whose shares and debentures are prohibited to be offered to
the public for sale. The company shall have a minimum number of one director and one
member. The number of shareholders is restricted to a maximum number of 50. It has
the word Sendirian Berhad (Sdn Bhd) at the end of its name. The ownership is usually
retained among family members and operates under legal requirements less strict than
those for a public company.
1.2.3 Exempt Private Company

An exempt private company is a private limited company with not more than 20
members. The shares of an exempt private company should not be held and are not
held directly or indirectly by any corporation.

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This company need not file its annual accounts with the CCM for the information of the
public, except that it files a certificate, signed by a director, the secretary and the auditor
of the company, stating that the company is able to meet its liabilities when due.
1.2.4 Foreign Company

A Foreign company is defined under the CA 2016 as a company, corporation, society,
association or other body incorporated outside Malaysia. A foreign company may carry
on business in Malaysia by either incorporating a local company or registering the foreign
company in Malaysia with CCM. A foreign company shall, at all times, have a registered
office within Malaysia to which all communications and notices can be addressed and
be open and accessible for the public during its ordinary business hours.
Before commencing business in Malaysia, foreign company has to lodge the information
as per Section 562 (1) of the CA 2016 and pay an appropriate fee to the Registrar. As
laid down in Section 575 (1) of the CA 2016, the registered foreign company shall lodge
with the Registrar a copy of its financial statments within two monts of its annual general
meeting.
1.2.5 Government-Linked Company
Government-linked companies (GLCs) are defined as a company in which the
government owns at least 20% of the issued and paid-up capital. These companies
could be public or private companies.
The formation of GLCs was carried out progressively through the process of privatization
and corporatization. Many government departments were first privatized and later
transformed into separate wholly-owned government companies. Examples of GLCs are
Petronas, Maybank, Malaysian Airlines System, Telekom Malaysia, Tenaga Nasional ,
Sime Darby, CIMB Bank and Media Prima.
1.3 CLASSIFICATION COMPANIES

The companies incorporated under the Companies Act 2016 can be further classified
into the following types:
CLASSIFICATION OF
COMPANIES
Companies limited Companies limited Unlimited

by shares by guarantee companies
1.3.1 Companies limited by shares

This is one of the most popular forms of companies in Malaysia as it is available for all
business companies, i.e. public or private companies and it offers limited liability. A
company limited by shares means that the liability of its shareholders is limited to the
amount, if any, unpaid on shares held by the shareholders.

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For example, if a shareholder subscribed share capital for RM300,000 and had only
paid RM250,000 for it, the liability of the shareholder is limited to the RM50,000 of share
capital unpaid. On the other hand, if the shares are fully paid, in general there is no
further liability to the shareholder.
The use of word “limited” implies to creditors that the company has limited liability. In a
situation where company has financial difficulties, the personal assets of shareholders
are not at risk, and the companies’ debts do not become the debts of its shareholders.
1.3.2 Companies limited by guarantee

A company limited by guarantee is defined under the CA 2016 as a company formed on
the principle of having the liability of its member limited to such amount as the members
may undertake to contribute to the assets of the company in the event of it being wound
up.
A company limited by guarantee shall be a public company. However, it has members

not shareholders, has no share capital and cannot be formed as proprietary companies.
This company can only be formed for the purpose of providing recreation or amusement,
promoting commerce and industry, promoting art, science, religion, charity or pension
schemes or promoting any other object useful to the community.
Such a company shall apply its profits and other income for the purposes stated in the
objects of the company and prohibited for the payment of any dividend to its members.
In the case of winding up, it is required that all of the assets that would otherwise be
available to its members generally be transferred to another body with objects similar to
its own.
In Malaysia, a company limited by guarantee can be identified by the word such as
Foundation (Yayasan), Institute (Institut), Academy (Akademi), Corporation (Badan),
Alliance (Gabungan), Federal (Persekutuan), Chamber (Dewan), Council (Majlis), Fund
(Tabung), Memorial (Peringatan) and Centre (Pusat) which is used as part of its name.
1.3.3 Unlimited companies

A company in which there is no limit on the liability of its members, i.e. each member is
jointly liable for the debts of the company in the event of its liquidity. Thus, the creditors
have the right to seize/forfeit the personal assets of the shareholders to settle any
outstanding debts held by the company during it winding up. In this scope, the
responsibility is similar to a sole proprietorship and unlimited partnership.
Let’s try the following questions:
List THREE (3) characteristics of company:
1. _________________________________________________________________
_________________________________________________________________
2. _________________________________________________________________
_________________________________________________________________
3. _________________________________________________________________

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Company limited by shares:
Differentiate
the
followings:
Company limited by guarantee:
1.4 DIFFERENCES BETWEEN SOLE PROPRIETORSHIP,

PARTNERSHIP AND COMPANY
Running a business as a company can be said to be more credible compare to sole

proprietorship and partnership as company is required to fully comply with the provisions
of the Companies Act 2016. The Companies Act provides a such structured approach
which stipulating the requirements of establishing, managing and dissolving a company,
including the provisions of the financial reporting and the corporate governance affairs.
Below are some comparisons between these entities:
Sole Unlimited Public Company

Proprietorship Partnership limited by shares
A sole proprietorship A partnership is A company is owned

is owned by a single owned by several by many owners
owner. owners called called as
Ownership
partners shareholders.
Manage by the hands Managed by all the Delegated to a Board

of the single owner. partners unless of Directors (BOD)
otherwise agreed by who in turn appoint
partnership executive officers
Management
agreement. (managers) to
manage the
company’s affairs.
Contributed by the Contributed by the The capital is derived

single owner partners as specified by issuing financial
by the partnership instruments such as
Capital
agreement. shares and
contribution
debentures.

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The liability of the The liability of the The liability of the

owner is unlimited. partners in the shareholders is
The sole proprietor business is limited to the amount
himself is personally unlimited. The of the shares capital
liable for the debt of partners are contributed. The
the business. personally liable for creditors have no
Limitation of
the debt of the right to seize the
liability
business. (except for personal assets of
limited liability the shareholders if
partner) the company is
unable to settle the
debt.
There is no statutory There is no statutory The financial

requirement for the requirement for the statements of
Requirement
financial statements financial statements company are
of audited
to be audited. to be audited. required to be
financial
audited by external
statements
auditor, stated under
the CA 2016.
1.5 FORMATION OF COMPANIES

The incorporation of private or public company could be made by any individual
(individuals) who wish to form a company to the Registrar, i.e. Companies Commission
of Malaysia. The basic requirements to incorporate a private and public company are as
follows:
a. Private company (Sdn Bhd) - At least one director who ordinarily resides in
Malaysia by having a principal place of residence in Malaysia and minimum of
one promoter.
b. Public company (Bhd) - At least two directors who ordinarily reside in Malaysia
by having a principal place of residence in Malaysia and minimum of one
promoter.
1.5.1 Procedures of Incorporation

The process of incorporation involves the following:
i. Name search and application of name – a name search must be made by the
applicant to ensure that the proposed name is available and approved.
ii. Lodgement of application to incorporate a company – incorporation information

that needs to be completed is as follows:
a. the proposed company name

b. the status of a private or public company
c. the proposed type of business
d. the address of registered office
e. the business address
f. complete details of directors(s) and promoter(s)
g. declaration from directors(s) and promoter(s)
h. declaration of compliance from individuals responsible for incorporation, and
i. any additional documents (if any)

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iii. Payment of the incoporation fee – the fee charged to incorporate a company limited
by shares is RM1,000 while a company limited by guarantee is RM3,000.
iv. Verification of incoporation – a notice of approval and certificate of incorporation

(on demand) is issued to the applicant once the Registrar is satisfied that all
information provided is complete and complied with.
Once incorporated, the company shall appoint a company secretary within 30 days after
its incorporation and may file the constitution of the company (for company limited by
shares) after the incorporation of the company. The company is advised to obtain the
necessary license and permit from the relevant authorities before commencing it
business. Below is the exampe of application form for registration of company provided
by the CCM:

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1.5.2 Constitution of Company
A constitution is defined as a formal document that specifies the rules governing a

company. It include in explaining the relationship between the company, shareholders,
directors and other members of the company.
Section 31 of CA 2016 provides that a company may or may not have a constitution,
except for a company limited by guarantee. If a company has no constitution, then the
rights, powers, duties and obligations of the company, each director and each member
of the company are set out as per the provisions of the CA 2016. While for companies
having its own constitution, it represents a binding agreement between the company and
its shareholders and members, as long as the constitution does not conflict with the
provisions set out in the act. The contents of a constitution may include the following:
a. the objects of the company

b. the capacity, rights, powers or privileges of the company
c. matters contemplated by companies act 2016, and
d. any other matters as the company wishes to include in its constitution.
A company having a constitution may alter or amend its constitution by a special

resolution, unless the constitution itself prohibits the alteration or amendment.
Companies limited by guarantee must have a constitution and it shall be signed by the
person intending to incorporate the company and lodged it with the Registrar at the time
the company is incorporated. To view a sample of a company’s constitution, you may
visit the following url: http://www.ioigroup.com/Content/CI/PDF/Constitution.pdf
1.6 CAPITAL STRUCTURE OF COMPANIES

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The capital structure of company demonstrates how company finances its overall
operation by using different sources of fund, i.e. equity or debt. It provides an insight on
which sources that company depends heavily and the risk associated with it. Basically,
capital of companies comprises of equity and loan where both are termed financial
instruments. The former is categorized as part of company’s equity instruments which
include various types of shares. The latter part is termed as financial liabilities which may
include such as debentures and redeemable preference shares. Diagram below
demonstrate the composition of company’s capital structure:
Companies Capital
Structure
Equity Debt
Ordinary Preference Redeemable

Shares Shares Debentures Bonds Preference
Shares
Non-
Cumulative Participating Convertible
Cumulative
Preference Preference Preference
Preference
Shares Shares Shares
Shares
1.6.1 Types Of Equity Instrument

Share capital refers to the portion of a company's equity that has been obtained by
trading stock to potential shareholders for cash. It may come in a form of ordinary shares
and preference shares, where the preference shares can be cumulative, non-cumulative,
participating and convertible.
Before learning on the different types of shares, the following is a list of terms used in
connection with the share capital of a company:
It is the share capital which has been issued to the potential

shareholder.
Issued capital For instance, ABC Bhd issued 1,000,000 shares at RM5
each and they are all fully paid up. The issued capital for
ABC Bhd is RM5,000,000. (RM5 x 1,000,000 shares)
Called-up capital is the amount of issued capital for which

the shareholders are required to pay whereas the uncalled
capital is the amount of issued capital for which the
company has not requested payment.
Called-up capital and
For instance, ABC Bhd issued 1,000,000 shares at RM5 per
uncalled capital
share and called the shareholders to pay up to RM3 per
share. The called-up capital is RM3,000,000. (RM3 x
1,000,000 shares) and the balance of RM2 per share is
referred to as uncalled capital.

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Paid up capital is the amount of called up capital that has

been paid by the subscribers, while the unpaid capital is the
amount of called up capital that the subscribers failed to pay
when the money was called.
Paid-up capital and Assuming that when ABC Bhd issued 1,000,000 shares at
unpaid capital RM5 per share and called up the shareholders to pay RM3
per share, there are 100,000 shares that not paid during the
called up period. In this situation, the paid-up capital is
RM2,700,000 (RM3 x 900,000 shares) while the unpaid
capital is RM300,000 (RM3 x 100,000 shares).
The following are the different types of shares:
a. Ordinary shares (OSC)
Ordinary shares usually represent the bulk of the company’s equity but do not have any
predetermined dividend amounts. Holders of ordinary shares are typically entitled the
right to vote and effectively the owners of the company.
Ordinary shareholders have the right to company’s residual profits, i.e. they are entitled
to receive dividends if any are available after the dividends on preferred shares are paid.
They are also entitled to their share of the residual economic value of the company
should the business unwind. However, they are last in line after preference shareholders
and other creditors for receiving business proceeds. As such, ordinary shareholders are
considered as risk taker.
b. Preference shares (PSC)
Preference shares carry no voting rights but enjoy a privilege in dividend payment and
return of capital over ordinary shareholders. The dividend may be set at a specified rate
or amount and it may be cumulative or not. These shares can also be issued with or
without a redemption feature. A preference share that contains a non-mandatory
dividend payment is classified as equity, while those with mandatory dividends should
be recorded as liability. In the event the winding up of company, preference shareholders
have a greater claim on the company's assets and they are paid off before ordinary
shareholders. In general, there are four different types of preference shares as follows:
i. Cumulative preference shares
Enjoy the right to receive the dividend in arrears for the year in which company earned
no profit or insufficient profits, in the year in which company earn profit. In other words,
dividends on this share will go on accumulating until it is paid in full in areas, before any
dividend is paid on equity shareholders.
ii. Non-cumulative preference shares
Share dividend does not accumulate and therefore, no arrears of dividend will be paid in
the year of profit. If company does not have any profits in a year, no dividend will be paid
to non-cumulative preference shareholders.

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iii. Participating preference shares
Have the right to receive additional dividends beyond a specified amount in a distribution
as expressed in the company’s constitution.
iv. Convertible preference shares
These types of shares enjoy the right to the holders to get them converted into ordinary
shares according to the terms and conditions of the issue.
Let’s try the following question:

Due to the business expansion, Cahaya Surya Berhad had issued capital of 6,000,000
ordinary shares of RM3.00 each. The company called up on these newly issued
shares of RM2.00 each. All the shares are fully subscribed and paid for when the call
was made except for shareholders who hold 1,000,000 shares did not pay the call
money.
Required:
Determine the amount in value (RM) of the followings:
i. Called up = RM2 X 6,000,000

capital =RM12,000,000
ii. Uncalled = RM1 X 6,000,000

iii. Paid up = RM2 X 5,000,000

iv. Unpaid = RM2 X 1,000,000

1.6.2 Types Of Debt Instrument

Instead of using the equity to raise it capital, a company may issue debt instrument to
public which may be easier and cheaper to service. The debt instrument refers to funds
supplied by lenders that may come in the form of debentures, bonds and redeemable
preference shares. They are collectively called as financial liability as the company have
an obligation to repay it. These instruments may be listed and traded on the stock
exchange. Thus, only public companies can issue debt instrument to the public.
The issuance of these instrument will then give an obligation to the company (as the
issuer) to settle the liability as and when it fall due. The liabilities have to be repaid
together with the borrowing cost associated with it. The borrowing cost can be in the
form of interest and discounts. The company needs to assure that it is capable in paying
the interest and to redeem the liability amount based on the specified period. The
examples of debts instruments are as follows:

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i. Debenture
Is a type of debt instrument that company issued to anyone who lends money to a
company for a specified term and with fixed interest rate. Debentures include debenture
stocks, bonds, notes and any other evidence of indebtedness of company for borrowed
money for a fixed time. After that fixed time, the debentures will be redeemed at a
specified amount. The interest on debentures is classified as finance cost and shall be
disclosed in the Statement of profit or loss.
ii. Redeemable preference shares
The issuance of Redeemable preference shares in the constitution of a company.

Redeemable preference shares are classified as liability in the Statement of Financial
Position once company has an obligation to redeem the shares at a specified date and
at a determinable amount once it is issued. Besides than settling the liability, the
company is also obligated to pay dividends on the redeemable preference shares. The
dividend on this share is classified as an expense in finance cost and to be disclosed in
the Statement of profit or loss.
1.7 DIFFERENCES BETWEEN EQUITY AND DEBT
The following are some of the main differences between equity and debt:
Equity Debt
Equity means ownership and those who Debt represents an obligation to the
owns an equity share (ordinary) of a company to repay to its loan provider,
company owns a part of the company. called debenture holders. The loan
They are called shareholders and have providers are creditors of company and do
voting rights. Thus, can influence in the not have voting rights. However, on
decision making of the company. winding up of the company, debenture
holders have a priority claim over the
shareholders on the assets of the
company.
The return on investment for The debenture holders will receive return
shareholders is in the form of dividend, in form of a fixed rate of interest on the
where return is fixed for the preference nominal value of the debentures provided.
shareholders but not fixed to ordinary The payment is compulsory regardless of
shareholders. However, payment is not whether the company is making profit or
compulsory. not.
Equity financing allows a company to Debt financing increase the debt burden of
acquire fund without incurring debt, thus company due to contractual interest and
reduce the probability of bankruptcy. principal payment that must paid.
Dividends are an appropriation of profits Interest on debt and dividend for

and are shown in statement of changes redeemable preference shares are
in equity. expenses and be charged to the income
statement.

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CHARGES OVER DEBENTURES
Generally, debentures are secured to certain assets of the borrower (company) in order
to protect the debenture holders (lenders) in the event that the company is fail to pay the
interest or the loan capital. The purpose is to give the lender security over the assets
subject to that charge, which means that the lenders have priority over other creditors in
respect of those assets. Thus, it give the lenders a means of collecting debt if the
borrower defaults.
There are two types of charge that can be granted by a debenture, with lenders tending
to seek one or both of the following.
1. Fixed charge
A fixed charge is also known as a fixed debenture. It refers to a debt that issued against
specific assets, with a fixed rate of interest for repayment. To secure the loan, company
will sign over specific assets usually the property, to the debenture holder. With a fixed
charge, the borrower would not be able to sell the asset without the lender’s permission
but it can still be used in the normal course of business. In the event of default, the asset
is sold and the proceeds would usually go to the lender and any surplus proceeds will
be handed to the borrower.
2. Floating charge
In a floating debenture, a group of assets must be signed over to the debenture holder.
The debenture loan can be secured to all of a company’s assets, or specific classes of
asset, including motor vehicles, fixtures and fittings, stocks or even intellectual property.
The term ‘floating’ means these assets might change over time. The borrower is able to
move or sell or replace an asset from the group of assets charged with another asset
during the normal course of business. As an example, an entire group of inventory has
been used to backup a loan. The inventory is continually in flux but still has value. With
a floating charge debenture, the company would still be able to sell its stock as usual,
even though it was signed over to the creditor.

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CHAPTER 3
ISSUANCE OF SHARES AND LOAN CAPITAL

1. Explain why companies may issue shares.
2. Explain and show entries in journal and statement of financial position for
the issue of shares.
3. Differentiate between bonus issue and rights issue and show entries in
journal and statement of financial position.
4. Explain share split and share consolidation.
5. Explain and show entries in journal and statement of financial position for
the issue of debentures under amortised cost method and fair value
method.
INTRODUCTION
To raise capital, companies have the opportunity to issue its shares and debentures to
the potential investors in the capital market. The shares and debentures issued may be
purchased by individual investors or institutional investors from company that make the
public issue or from other shareholders and debenture holders in the open market
through stock brokerage firms. Once the applicants succeed in buying the shares or
debentures of the company, they will become the shareholders or debenture holders of
the company respectively. In this chapter, we shall study the procedure of issuing shares
and debentures for raising capital, share splits program and the relevant accounting
treatment in the book of the issuer, i.e. company.
2.1 ISSUANCE OF SHARES
After a company has been incorporated, it usually issues shares to increase the amount
of its capital for further growth and expansion. The capital can be increased in various
ways. For public company limited by shares, it can invite the public to subscribe for
shares by issuing prospectus together with the application form. Prospectus is an
invitation for public offer of shares. Other ways will include issuing shares through a right
issue, issuing bonus shares, exercising share options and converting loans into shares.
A private company may also increase its share capital but limit to the number of 50
shareholders only.
2.1.2 Methods Of Issuing Shares
Initial Public Offering Right issue Bonus issue

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• Refers to the first time a • Subsequent method of • Shares given to the

company issues its issuing shares after existing shareholders
shares to the general IPO. for free of charge. It
public. does not involve any
• It is an invitation to new capital injection to
• The publics can only be existing shareholders to the company
invited to buy the shares subscribe for additional
by IPO shares, generally at • New shares are
below market price. issued but the
• The shares issued may shareholders do not
be fully subscribed, • Shareholders are make any payment
oversubscribed or offered in proportion to because the cost is
undersubscribed. their shareholdings in absorbed by the
order to maintain their company through a
relative voting and rights capitalisation of
company’s reserves,
• If the offer is not for example the
accepted by the existing retained profits.
shareholders, the
directors may dispose • It is made to the
those shares in such shareholders in
manner as the directors proportion to their
think most beneficial to shareholdings.
the company.
Retained profits are profits that from operation activities and accumulated from the year
of incorporation. They are also called as distributable profits as it can be distributed in
the form of cash dividends to shareholders.
2.1.3 Issue Price and Issue Cost
In selling its shares to the public, the company must determine the issue price of the
issued shares. Issue price is the price at which the shares will be issued or commonly
referred to as offering price. The shares can be sold either in a fixed price or by tender
offer. For a sale at a fixed price, the price is determined by the company as issuer
whereas in a sale by tender, investors are invited to submit their chosen offer price and
subsequently a final price will be established once all tenders are received.
Issue cost on the other hand is the expenses incurred in connection with issue of shares
by the company. These transaction costs include payment for registration and legal fees
and payment for accounting consultation and other professional advisers such as
brokerage fees and commission.
The proceeds from issue of shares will be recorded at net of any direct issue costs.
2.1.4 Subscription Of Shares
Whenever the companies issue their shares, the application received for the subscription
may be:
a. Fully subscribed
Is where the amount received (AR) for subscription is equal to amount of shares
issued (AI). AR = AI
b. Oversubscribed
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Is where the amount received (AR) for subscription is greater than amount of shares
issued (AI). AR > AI
c. Undersubscribed
Is where the amount received (AR) for subscription is fewer than amount of shares
issued (AI). AR < AI
When shares are oversubscribed, the company may reject the excess application and
refund the money received to the unsuccessful applicants in full.
Example 1
Kenangan Bhd was incorporated as a public company on 1 January 20x5. The
company decided to issue 10,000,000 of its ordinary shares at RM2.00 each.
Required:
a. Identify the issue price.
b. Describe how the application received on the shares issued may be fully
subscribed, oversubscribed and undersubscribed.
Solution:
a. The issue price is RM2.00
b. Fully subscribed – where the amount of applications received is equal to amount of shares
issued, i.e. 10,000,000 units.
Oversubscribed - where the amount of applications received is greater than 10,000,000

units, for example15,000,000 units. Thus, the shares were oversubscribed by 5,000,000
units.
Undersubscribed – where the amount of applications received fewer than 10,000,000

units, for example 7,000,000 units. Thus the shares were undersubscribed by 3,000,000
units.
Example 2
Using the Example 1, assume the applications received by the company were
15,000,000 shares.
Required:
a. Identify the number of shares oversubscribed
b. Describe how the company may allot the shares to the share applicants based
on, full rejection.
Solution:
a. 5,000,000 units.
b. the excess applications of 5,000,000 shares were to be rejected completely and the
unsuccessful applicants is to be refunded by RM10,000,000.
2.1.5 Terms Of Issuance
The payment of shares issued by the applicants can be made in either one of the
following terms:
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a. Payment in full/lump sum

Applicants are required to pay the full amount of the shares issued upon
application.
b. Payment by installment basis

Applicants were to pay the issue price in stages, i.e. on application, on allotment
and on call. The company may forfeit shares on which the calls are unpaid. Upon
forfeiture, the defaulter ceases to be a shareholder and loses the amount of money
that already paid in the earlier stages. However, this method is not a common
practice in Malaysia.
2.1.6 Accounting Treatment
a. Journal entries for issuance of shares at the first time (IPO)
Being amount of money received on application (amount received × issue price)
Dr Bank a/c x
Cr. Share application a/c x
Being amount of money refunded to unsuccessful applicants – if any (amount rejected

× issue price)
Dr Share application a/c x

Cr. Bank a/c x
Being the allotment of share capital

Cr. Share Capital a/c x
Example 3
Darul Ehsan Bhd is a newly incorporated company. On 2 January 20x1, it offered for
subscription an initial offering of 50,000,000 ordinary shares at RM5 per share.
Applications were closed on 31 January 20x1 and applications for 70,000,000 shares
were received. All the money due was received and the money received on the
oversubscribed shares was refunded. Allotment of shares was completed by 15
February 20x1
You are required to record the above transactions in the following entries:
i. Journal entries
ii. Extract of Statement of Financial Position as at 31 December 20x1
(equity section ony)
Solution:
Working:
Step 1: Determine the issue price for shares issued – RM5.00 per share

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Step 2: Determine the amount of shares issued – 50,000,000 shares
Step 3: Determine the amount of shares received upon application – 70,000,000 shares
Step 4: Determine the amount of shares rejected (if any) – 20,000,000 shares
i. Journal entries
ii.
Issuance of OSC at IPO
Debit Credit
RM RM
i Dr Bank (70,000,000 x RM5) 350,000,000
Cr Ordinary Shares Application 350,000,000
ii Dr Ordinary Shares Application 100,000,000

Cr Bank (20,000,000 x RM5) 100,000,000
iii Dr Ordinary Shares Application 250,000,000

Cr Ordinary Shares Capital (50,000,000 ×
250,000,000
RM5)
ii. Extract of Statement of financial position
Darul Ehsan Bhd

Statement of financial position (extract) as at 31 Dec 20x1
Issued and paid up capital

50,000,000 Ordinary shares 250,000,000
!!! Let’s try the following question:
The following is the extract of statement of financial position of Darul Naim Bhd as at 31 December
20x2.
Equity RM
25,000,000 Ordinary shares 50,000,000
20,000,000 6% Preference shares 20,000,000
Reserves
Retained profits 75,000,000
ON 3 January 20x3, Darul Naim Bhd makes a public issue of 25,000,000 ordinary shares at an issue
price of RM2.50 each and payable full on application. The company also issues 5,000,000 units of
6% preference shares at RM1.50 per share. The preference shares contain a non-mandatory
dividend.
Application received for the ordinary shares and 6% preference shares were 35,000,000 and
4,000,000 respectively. The directors decided to reject the excess application and refund the money
to the unsuccessful applicants.
i. Journal entries

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ii. Extract of Statement of Financial Position as at 31 December 20x3 (show the equity
section only)
Answer:
i. Journal entries
Issuance of OSC
Debit Credit
RM RM
i Dr Bank (35,000,000 x RM02.50) 87,500,000
Cr Bank (10,000,000 x RM2.50) 25,000,000
iii Dr Ordinary Shares Application 62,500,000
Cr Ordinary Shares Capital (25,000,000 × RM2.50) 62,500,000
Issuance of 6% PSC
i Dr Bank (4,000,000 x RM1.50) 6,000,000
6% Preferences Shares Application 6,000,000
ii Dr 6% Preferences Shares Application 6,000,000
Cr 6% Preferences Shares Capital (4,000,000 x

6,000,000
RM1.50)
Darul Naim Berhad

Statement of financial position (extract) as at 31 December 20x3
Equity RM
Issued and paid-up capital
50,000,000 (25,000,000 + 25,000,000) Ordinary shares 112,500,000
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24,000,000 (20,000,000 + 4,000,000) 6% Preference shares 26,000,000
Reserve
b. Journal entries for Right Issue

In a right issue of shares, the existing shareholders will be offered shares in proportion
to their shareholdings. It is very unlikely that the applications for the share to be
undersubscribed or oversubscribed. Upon the offer of right issue, the shareholders may
take up the shares they are eligible for, to sell the ‘rights’ to a third party or to renounce
the ‘rights’ in favour of the company. The journal entries are similar as per entries in IPO,
except that the share application account is replaced with term of Right issue
application account.
Being amount of money received on application (amount received × issue price)
Dr Bank a/c x
Cr. Right issue application a/c x
Being the allotment of share capital
Dr Right issue application a/c x

Cr. Ordinary Share Capital a/c X
Example 4
Darul Makmur Bhd with an issued capital of RM70,000,000 comprise of 70,000,000

units of ordinary shares, offer a right issue to its existing shareholders of one for
every five shares held at a price of RM1.00 each. All the shares offered under the
rights issue were taken and fully paid.
i. Journal entries
ii. Extract of Statement of Financial Position (show the equity section only)
Solution:
Working ;
Step 1: Determine the amount of shares held by the company - 70,000,000 units
Step 2: Determine the amount of right issue offered (in units and RM)
Right issue = (1/5 x 70,000,000 shares) × RM1.00
= RM14,000,000 (@ 14,000,000 shares
i. Journal entries

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Issuance of right issue

Debit Credit
RM RM
i Dr Bank (14,000,000 x RM1) 14,000,000
Cr Right issue Application 14,000,000
iii Dr Right issue Application 14,000,000

Cr Ordinary Shares Capital 14,000,000
ii. Extract of Statement of Financial Position
Darul Makmur Bhd

Statement of financial position (extract)

84,000,000 Ordinary shares (70,000 + 14,000) 84,000,000
c. Journal entries for Bonus Issues

Apart of issuing shares for cash consideration, company may also issue bonus shares.
Bonus shares are shares distributed to the shareholders for free of charge. Similar to
right issue, the shares are distributed to its existing shareholders in proportion to their
shareholdings. In other words, the number of shares to be given is calculated based on
the number of shares in issue. For example if a company were to declare one-for-five
bonus issue, a shareholder of five shares will receive one share for free. This issuance
is being practiced when the company has large accumulated profits but due to certain
policy and regulation, the company is unable to distribute them in the form of cash
dividends.
All forms of reserves, such as retained profit and asset revaluation reserve can be
utilized for the issuance of bonus shares. The CA 2016 provides no specific accounting
guidance in setting the issue price of the bonus shares. It currently can be priced at any
amount that the directors think fit (as per price set for offer of shares for cash). However,
as a best practice in accounting, the bonus shares should be logically be recorded at
their fair value. The journal entries for bonus issue:
Being utilization of reserves for bonus issue
Dr Retained profit a/c / Asset revaluation reserve a/c x

Cr. Bonus issue a/c c x
Being ordinary share capital increased by the bonus issue
Dr Bonus issue a/c x

Cr. Ordinary Share Capital a/c x
Example 5
The following balances were extracted from the books of Darul Iman Bhd As at 1
January 20x5:
RM
50,000,000 ordinary shares, fully paid 100,000,000
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10,000,000 5% preference shares, fully paid 10,000,000

Retained earnings 35,000,000
Bank 200,000,000
On 30 June 20x5, the directors declared a bonus share of one for every twenty
ordinary shares held as at that date. The value of each bonus share is RM4.00. The
retained earnings account is to be utilized for this purpose.
i. Journal entries
ii. Extract of Statement of Financial Position (show the equity section only)
Solution:
Working of right issue

Step 1: Determine the amount of shares held by the company – 50,000,000 units
Step 2: Determine the amount of bonus shares offered (in units and RM)
Bonus shares = (1/20 x 50,000,000 units) × RM4.00
= RM10,000,000 @ 2,500,000 units
i. Journal entries
Bonus issue
i Dr Retained earnings a/c 10,000,000
Cr Bonus Issue a/c 10,000,000
ii Dr Bonus issue a/c 10,000,000

Cr Ordinary Shares Capital a/c 10,000,000
Darul iman Bhd

Statement of Financial Position (extract) as at 31 December 20x5

52,500,000 (50,000,000 + 2,500,000) Ordinary shares 110,000,000
10,000,000 5% preference shares 10,000,000
Reserve
Retained earnings (35,000,000 – 10,000,000) 25,000,000
Let’s try the following question!
The following balances were extracted from the books of Darul Ridzuan Bhd :
Statement of financial position (extract) as at 31 December 20x5
Current asset RM
Bank 1,000,000

5,000,000 Ordinary shares 5,000,000
900,000 6% Preference shares 1,800,000
Reserve
Retained profit 10,000,000

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To raise fund, the company made an offer of right issue to its existing shareholders of 100
shares for every 1,000 shares held at an issue price of RM2.00 per share. The issue was fully
paid and subscribed for.
At the same time, due to liquidity problem, the company decided to give 10 bonus shares for
every 20 shares held by the existing shareholders at the date of the old statement of financial
position. The value of each bonus issue is RM2.00 and retained profit was to be used for this
purpose.
i. Journal entries
Answer:
i. Journal entries
Right issue
Debit Credit
RM RM
i Dr Bank [(100/1,000 x 5,000,000) x RM2.00] 1,000,000
Cr Right issue Application 1,000,000
Dr Right issue Application 1,000,000

Cr Ordinary share capital 1,000,000
Bonus issue
i Dr Retained profit [(10/20 x 5,000,000) x RM2.00] 5,000,000
Cr Bonus issue 5,000,000
ii Dr Bonus issue 5,000,000

Darul Ridzuan Berhad

Statement of Financial Position as at 31 December 20x5
Current asset RM
Bank (1,000,000 + 1,000,000) 2,000,000

8,000,000 (5,000,000+500,000+2,500,000) Ordinary shares 11,000,000
900,000 6% Preference shares 1,800,000
Reserve
Retained profit (10,000,000 – 5,000,000) 5,000,000

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2.2 ISSUANCE OF DEBENTURES

As mentioned earlier, public limited companies may also raise their capital by borrowing
money from the public through the issuance of debentures. Debentures may be issued
as follow:
a. at par - is when the debentures are issued at its nominal value. e.g. at 100.
b. at premium - is when the debentures are issued above its nominal value. e.g. at
120, or at a premium of 20%.
c. at discount - is when the debentures are issued below its nominal value. e.g. at 92,
or at a discount of 8%.
These financial liabilities are then classified and measured for as either at amortised cost
or fair value through profit or loss.
LIABILITY
Debt Debt
Instrument Measurement
Redeemable
Debentures Preference Amortised Cost Fair Value
Shares
2.2.1 Transaction Costs

Similar to issuance of share, when debt instruments are issued, the company will incur
transaction costs such as payment for consultation and legal fees and other relevant
costs. Transaction costs also called as issue costs. The accounting treatment for
transaction costs is depending on how the financial liability is classified. The treatment
can be summarised follows:
a. Where liabilities are carried at amortised cost - transaction costs are

deducted from the liability in arriving at the initial amount of the liability.

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b. Where liabilities are carried at fair value - transaction costs are written off as
expenses.
2.2.2 Amortised Cost

Debentures that are recognised at amortised cost will be initially measured at fair value
minus any transaction costs (issue cost) and subsequently will be shown at amortised
cost. The amortised cost method involves amortising the difference between the initial
amount recognised and the final amount paid over the loan term and increasing the
liability by the amount amortised.
The interest expense will be charged at effective interest rate (market interest rate)
while the interest paid on debenture will be at nominal amount (coupon rate) stated on
issue. In simple terms, the interest expense charged will not be the same from year to
year. The liability will increase with the interest expense (finance cost) charged to the
statement of profit or loss and decrease by the cash repaid.
The journal entries for the liability being accounted for at amortised cost can be
presented as follows.
Step 1: Being amount of money received from issue of debentures (fair value – issue
cost)
Dr Bank a/c x
Cr. X% Debentures a/c x
Step 2: Being interest expense charged (effective interest rate x carrying amount)
Dr Finance cost a/c x

Step 3: Being interest expense paid (nominal interest rate x nominal amount)
Dr X% Debentures a/c x
Cr. Bank a/c x
Step 4: Being finance cost charged to Statement of Profit or Loss
Dr Statement of Profit or Loss/ Retained earnings x

Cr. Finance cost a/c x
Alternatively, step 2 and step 3 can be merged as follow:

Cr. Bank a/c x
Example 6: Accounting for a financial liability at amortised cost
Go Green Bhd raises finance on its first accounting period, January 20x5 by issuing
6% debentures of nominal value RM10,000,000. The financial liabilities are issued at
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a discount of 10%, and will be redeemed after three years at a determined value. It is
carried at amortised cost.
The effective rate of interest is 12% and the interest is paid at the end of accounting
period. The transaction costs were RM300,000.
Required:
Explain and illustrate how the liability is accounted for in the books of Go Green Bhd.
As at 31 December 20x5
Solution:
Step 1: Identify the debentures carrying amount
Debenture is classified as a financial liability as Go Green Bhd is receiving money that is

obliged to repay. The liability will be carried at amortised cost where initially measured at the
fair value of consideration received less the issue costs. With both discount on issue and
transaction costs, the initial measurement of the liability is as follow:
RM
Nominal value 10,000,000
Less: Discount (10% x RM10,000,000) (1,000,000)
Less: issue cost (300,000)
8,700,000
Step 2: Calculate the interest expense and interest paid on the liability
In applying amortised cost, the interest to be charged (finance cost) to the statement of profit
or loss is calculated by applying the effective rate of interest to the carrying amount of the
liability each year. The finance cost will increase the liability. The computation of finance cost
is as follow:
Interest expense = 12% x RM8,700,000

= RM1,044,000
While the interest paid at the end of the reporting period is calculated by applying th coupon
rate to the nominal value of the liability The annual interest paid will reduce the liability. The
computation of interest expense is as follow:
Interest paid = 6% x RM10,000,000

= RM600,000
In the final year, the difference between the effective and the nominal interest is added to the
carrying amount of the debenture which extinguishes the remaining balance of the liability.
Opening Finance charge at Interest paid at Carrying

balance 12% p.a 6% p.a amount at year
end
20x5 8,700,000 1,044,000 (600,000) 9,144,000
The entries for the liability being accounted for at amortised cost is presented as follows.
i. Journal entries
Issue of debentures at amortised cost

i Dr Bank 8,700,000
Cr 6% Debentures 8,700,000

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ii Dr Finance cost (12% x 8,700,000) 1,044,000

Cr Bank (6% x 10,000,000) 600,000
Cr 6% Debentures (1,044,000 – 600,000) 444,000
iii Dr Statement of profit or loss 1,044,000

Cr Finance cost 1,044,000
Go Green Bhd
RM
Non-current liability
6% Debentures (8,700,000 + 444,000) 9,144,000
Let’s try the following question!
On 1 January 20x1, Go Strong Bhd issued 5% RM300,000 debenture stock at nominal

value and incurred a transactions cost amounted to RM30,000. The loan will be
redeemed in three year time at a determined value. The company measures the
liability at amortised cost. The market interest rate is 6% and interest is paid as due.
In the book of Go Strong Bhd, you are required to record the above transactions
in the following entries for the year ended 20x1:
i. Journal entries
ii. Extract of Statement of Financial Position (liability section only)
Solution:
i. Journal entries
Issue of debentures at amortised cost

Debit (RM) Credit (RM)
i Dr Bank (300,000 – 30,000) 270,000
Cr 5% Debentures 270,000
ii Dr Finance cost (6% x 270,000) 16,200
Cr Bank (5% x 300,000) 15,000
iii Dr Statement of profit or loss 16,200
Cr Finance cost 16,200

74
Go Strong Bhd
RM
5% Debentures (270,000 + 1,200) 271,200
2.2.3 Fair Value measurement

Financial liabilities that are measured at fair value through profit or loss are initially
measured at fair value. Any transaction costs incurred in connection to the issuance are
immediately written off to the statement of profit or loss. Similar to amortised cost, the
financial liability is increased by a finance cost and reduced by cash paid. However, the
liability is then revalued at each reporting date with any gains and losses immediately
recognised in the statement of profit or loss.
The measurement of the new fair value at the end of the accounting period will be its
market value. If the value is unknown, the present value of the future cash flows, using
the current market interest rates will be used. This type of measurement is not to be
tested in this syllabus.
2.3 SHARE SPLITS

A share split is a practice of companies to increase the number of issued shares in their
company without changing the total value of the shares. No effect on cash flow and no
new funds are raised. The reason for company to embark on this programme is to keep
the share price within an optimal trading range.

75
After a share split, the share price will be reduced to reflect the increase in the number
of shares issued. Thus, create cheaper shares and increase the shares’ marketability.
Subsequently, when the shares’ marketability is improved, the shares may reach by
more investors and eventually increase the value of the company.
Example 7
Tinta Bhd has issued and paid up capital of RM10,000,000 ordinary shares with
5,000,000 units. The company has now declared a share split in the ratio of two
ordinary shares for every one existing ordinary share.
Required:
Prepare the Statement of Financial Position (extract) before and after the share split.
Solution:
Extract of Statement of financial position (before the share split)
Issued and paid up capital RM

5,000,000 ordinary shares 10,000,000
Extract of Statement of financial position (after the share split)

10,000,000 ordinary shares 10,000,000
After the share split, the issued number of shares will be increased to 10,000,000
units of shares. The total value of the shares remains at RM10,000,000, but the
paid up value of each share reduce to RM1.00.
2.4 SHARE CONSOLIDATION

A share consolidation is a process by which a company changes its share capital
structure by reducing the number of shares it has in issue and increasing the paid up
value of each shares. As a shareholder, even though the number of shares own would
be reduced, their paid up value of each share would rise to compensate. Subsequently,
the market price of the shares should also rise to reflect the greater ownership which
each share represents in the company.
For example, a company with 100,000,000 ordinary shares with paid up capital of
RM10,000,000 may consolidate on a 1 for 10 basis. After the consolidation, the number
of shares will reduce to 10,000,000 shares and increase the value of each share from
RM0.10 to RM1.00 each. The total value of the share issued remains unchanged.
Noted that share consolidation is the opposite of share split, in which the number of
shares issue rises, but the paid up value of each share falls.

76
Quick review
The following is a set of journal entries related to the issuance of shares and debentures:
a. Issuance of shares at the first time (IPO)
Step 1: Being amount of money received on application (amount received × issue

price)
Dr Bank a/c x
Cr. Share application a/c x
Step 2: Being amount of money refunded to unsuccessful applicants -if any (amount
rejected × issue price)
Cr. Bank a/c x
Step 3: Being the allotment of share capital

b. Issuance of right issue

Step 1: Being amount of money received on application (amount received × issue
price)
Dr Bank a/c x
Cr. Right issue application a/c x
Step 2: Being the allotment of share capital

Dr Right issue application a/c x
c. Issuance of bonus shares

Step 1: Being utilization of reserves for bonus issue
Dr Retained profit a/c / Asset revaluation reserve a/c x
Cr. Bonus issue a/c c x
Step 2: Being ordinary share capital increased by the bonus issue

Dr Bonus issue a/c x
77
d. Issuance of debentures by amortised cost

Step 1: Being money received from issue of debentures (fair value – issue cost)
Dr Bank a/c x
Step 2: Being amount amortised

Cr. Bank a/c x
Step 3: Being finance cost charged to Statement of Profit or Loss

Dr Statement of Profit or Loss / Retained earnings x
Cr. Finance cost a/c x
2.5 COMPREHENSIVE EXAMPLE
The summary of financial position of Karisma Bhd as at 31 December 20x4 was as

follows:

50,000,000 ordinary shares 25,000,000
5,000,000 6% preference shares 10,000,000
Reserves
5% Debenture 1,000,000
Current asset
Inventories 500,000
Account receivables 1,500,000
Bank 40,000,000
The following transactions took place during the accounting period:
1. The company issued 10,000,000 ordinary shares at RM0.50 each and 1,000,000
6% preference shares at a RM2.00 each. The preference shares carry non-
mandatory dividends.
2. The applications received for ordinary shares were undersubscribed by

1,000,000 shares whereas the applications received for the preference shares
were oversubscribed by 500,000 shares. It is the policy of the company to reject
the excess application in full and refund the money to the unsuccessful
applicants.
3. A bonus issue was made to the existing shareholders who held the ordinary
shares as at 31 December 20x4 on the basis of one bonus shares for every ten
shares held. The value of bonus share is RM0.50 each. The retained profit
account is to be utilized for this purpose.

78
4. On 1 October 20x5, the company issued additional RM1,000,000 5% Debentures

at a discount of 3%. The debenture is to be recognized at amortised cost. The
effective interest rate is 7%. All interest is paid at the end of the year.
You are required to prepare:
i. Journal entries to record the above transactions

ii. Statement of financial position as at 31 December 20x5 (equity and liability
section only)
Solution:
a) Journal entries
Issuance of OSC
Debit Credit
RM RM
i. Dr Bank (9,000,000 x RM0.50) 4,500,000

Issuance of 6%PSC
i Dr Bank (1,500,000 x RM2) 3,000,000
Cr 6% Preferences Shares Application 3,000,000
ii Dr 6% Preferences Shares Application 1,000,000

Cr Bank (500,000 X RM2) 1,000,000
iii Dr 6% Preference Shares Application 2,000,000

Cr 6% Preferences Shares Capital
2,000,000
(1,000,000 x RM2)
Issuance of bonus shares

Retained profit [(1/10 x 50,000,000) x
i Dr 2,500,000
RM0.50]
Cr Bonus Issue 2,500,000
ii Dr Bonus Issue 2,500,000

Issuance of debentures
i Dr Bank (RM1,000,000 x 0.97) 970,000

79
ii Dr Finance cost [(7% x 970,000) x 3/12] 16,975

Cr Bank [(5% x RM1,000,000) x 3/12] 12,500
Cr 5% Debentures (16,975 – 12,500) 4,475
iii Dr Retained profit 16,975

Cr Finance cost 16,975
b) Statement of financial position
Karisma Bhd

64,000,000 (50m + 9m + 5m) ordinary shares 32,000,000
6,000,000 (5m + 1m) 6% preference shares 12,000,000
Reserves
Retained profit (6,000,000 – 2,500,000– 16,975) 3,483,025
5% Debenture (1,000,000 + 970,000 + 4,475) 1,974,475
!!!Let’s try the following question:
The following is the extract equity section of statement of financial position of Kejora
Bhd as at 31 December 20x5.
Issued and paid up Capital RM

15,000,000 Ordinary shares 30,000,000
10,000,000 8% Preference shares 10,000,000
Reserves
On 1 January 20x6, Kejora Bhd makes a public issue of 40,000,000 ordinary shares
at an issue price of RM2.50 per share payable full on application. The subscription
was oversubscribed by 15,000,000 units and the company decided to reject and the
money was refunded to the unsuccessful applicants.

80
The company then issues 45,000,000 units of 8% preference shares at RM0.80 per
share. This Preference shares contains a non-mandatory dividend. Applications of
35,000,000 shares were received and fully paid
In order to raise more fund, on 1 January 20x6 the company issued RM950,000 9%
debentures at 96 with an issuance cost of RM6,800. The effective interest rate is 12%
and the interest rate was paid at the end of accounting period. All the debentures were
taken up and fully paid. This debenture is carried at amortised cost.
Required:
i. Prepare the relevant journal entries to record all the above transactions.
ii. Prepare the Statement of Financial Position (extract) as at 31 December 20x6.
(Equity and liabilities section only)
Solution:
i. Journal entries

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ii. Statement of Financial Position

82
CHAPTER 4
REDEMPTION OF SHARES,
REDEMPTION OF DEBENTURES AND SHARE BUY-BACK

1. Explain the legal requirements and implications of redemption of
redeemable preference shares.
2. Show entries in journal and statement of financial position for redemption
out of fresh issue of shares, profits and combination of fresh issue of shares
and profits.
3. Explain the accounting entries for redemption of debentures.
4. Explain the advantages and disadvantages of share buy-back.
5. Show entries in journal and statement of financial position for share buy-
back using treasury stock method and share retirement method.
INTRODUCTION
In previous chapter, you have learnt how company raise its capital by issuing equity and
loan instruments. Apart from issuing shares, company may also purchase its own
shares. A public company may embark on a share buyback programme provided it is
authorised by its constitution. On the other hand, company is obligated to redeem the
loan instrument such as the debentures and redeemable preference shares which has
been issued to finance its operation. Redemption is the process of repaying an
obligation at predetermined amounts and timings and thus, involve cash outflow.

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In this chapter, we shall study how the companies can redeem its loan instruments,
purchase its own shares in the open market and the accounting treatment for the above
schemes in the book of the company.
1.1 REDEMPTION OF SHARES
1.1.1 Redeemable preference shares

Redeemable preference shares (RPS) is one type of preference share that a company
can issue as part of raising the company’s capital. Only preference share can be issued
as redeemable shares, not the ordinary shares. In form, RPS is part of the share capital
of company. RPS is classified as a financial liability (in accordance with MFRS 132) once
their issuances provide a mandatory dividend payment.
1.1.2 Statutory Requirements for Redemption of RPS

Subject to Section 72 of Companies Act 2016, it specifies that if authorised by the
constitution, a company may issue preference shares which are liable to be redeemed
in accordance with its constitution. The company shall give notice to the Registrar
specifying the shares redeemed within fourteen days from the redemption.
The redemption will reduce the amount of outstanding preference shares and involves
cash outflow. However, the redemption of preference shares shall not be taken as
reducing the amount of share capital of company. Section 72(4) further lay down the
following rule on the redemption:
a. the shares can be redeemed only if the shares are fully paid up and
b. the redemption shall be out of one of the following:
i. redemption through a fresh issue of shares
ii. redemption out of profits
iii. redemption out of capital
1.1.3 Redemption through a fresh issue of shares

Under this method, a company will issue new shares to redeem the redeemable
preference shares as to ensure the issued capital will remain the same as before the
redemption took place. The company has to make fresh issue of shares either ordinary
or preference, equal to the amount of the shares redeemed.
1.1.4 Redemption out of profit

Section 72(5) stated that where any such shares are redeemed other than out of the
proceeds of fresh issue, there shall out of profits, be transferred into the share capital
accounts of the company (be an amount equal to the amount of the shares redeemed).
In other words, the company’s past profit is converted to become part of the company’s
paid up capital as effect to the redemption.
1.1.5 Redemption out of capital

This method requires company neither to make fresh issue of shares nor transfer profits
to share capital account for the shares redeemed. In fact, the company will use its own
capital as the company may have abundant and sufficient of capital and funds to redeem
the preference shares. However Section 72(6) provides that this method of redemption
is subject to following rule:
a. All the directors have made a solvency statement under section 113 in relation
to such redemption
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b. The company has lodged a copy of the solvency statement with the Registrar.
It means that this method is allowable only if the company satisfies the solvency test.
The company has to ensure that it will not become insolvent when it took the redemption.
1.1.6 Journal entries for redemption of RPS
Being redeem of preference shares

Dr Redeemable preference share capital a/c x
Cr. Redemption of preference share a/c x
Being payment made to the preference shareholders

Dr Redemption of preference share a/c x
Cr. Bank a/c x
Being issue of new shares for the capital maintenance

Dr Bank a/c x
Being transfer of profits for the capital maintenance

Dr Retained profit a/c x
Example 9 – Redemption by issuance of new shares
Seri Iskandar Berhad

RM
Cash at bank 60,200,000
60,200,000

50,000,000 ordinary shares 25,000,000
Reserves
2,000,000 5% Redeemable preference shares 2,200,000
60,200,000
In 20x0, Seri Iskandar Berhad had issued 2,000,000 5% Redeemable preference

shares at RM1 each which to be redeemed at RM1.10 after five years.
As at 31 December 20x5, the board of directors agreed to redeem all the redeemable
preference shares at the carrying amount and to issue 5,500,000 ordinary shares of
RM0.40 each for the purpose of redeeming the preference shares. The issue was fully
subscribed and paid for.
You are required to prepare the following entries immediately after the
redemption:
i. Journal entries
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ii. Statement of Financial Position as at 31 December 20x5
Solution:
i. Journal entries

i Dr 5% Redeemable Preferences Share Capital a/c 2,200,000
Cr Redemption of Preferences Shares a/c 2,200,000
ii Dr Redemption of Preferences Share a/c 2,200,000

Cr Bank a/c 2,200,000
iii Dr Bank a/c (5,500,000 x 0.40) 2,200,000

Cr Ordinary Share Application a/c 2,200,000
Dr Ordinary share application a/c 2,200,000

Cr Ordinary share capital a/c 2,200,000
ii.Extract of Statement of financial position

RM
Cash at bank (60,200,000-2,200,000+2,200,000) 60,200,000
60,200,000

55,500,000 ordinary shares (25,000,000+2,200,000) 27,200,000
Reserves
60,200,000
Example 10 – Redemption out of profit
The fact as given in Example 9 above, except that the redemption is to be made
through out of profits. No fresh issue of shares is made.
You are required to prepare the following entries immediately after the
redemption:
i. Journal entries
Solution:
i. Journal entries
RM RM

Cr Bank a/c 2,200,000
iii Dr Retained profit a/c 2,200,000


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RM
Cash at bank (60,200,000-2,200,000) 58,000,000
58,000,000
50,000,000 ordinary shares (25,000,000+2,200,000) 27,200,000
Reserves
Retained profit (33,000,000 - 2,200,000) 30,800,000
58,000,000
Example 11 – Redemption partly by issue of new shares and partly out of profits
The fact as given in Example 9 above, except that the redemption is to be made partly by
issuing 1,000,000 ordinary shares at an issue price of RM0.60 per share and the balance
is to be taken out of profits. The shares are fully subscribed and fully paid.
You are required to prepare the following entries immediately after the redemption:
i. Journal entries
Solution:
i. Journal entries


Cr Bank a/c 2,200,000
iii Dr Bank a/c (1,000,000 x 0.60) 600,000

Cr Ordinary Share Application a/c 600,000
Dr Ordinary share application a/c 600,000

Cr Ordinary share capital a/c 600,000
iv Dr Retained profit a/c (2,200,000 – 600,000) 1,600,000


RM
Cash at bank (60,200,000-2,200,000+600,000) 58,600,000
58,600,000
51,000,000 ordinary shares (25,000,000+600,00+1,600,000) 27,200,000

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Reserves
Retained profit (33,000,000 -1,600,000) 31,400,000
58,600,000
Kinta Perdana Berhad

RM
Cash at bank 102,000,000
30,000,000 ordinary shares 60,000,000

10,000,000 5% redeemable preference shares 12,000,000
102,000,000
In 20x0, Kinta Perdana Berhad had issued 10 million 5% redeemable preference shares which
were redeemable at a premium of 20% in 20x5.
At the end of 20x5, the company then resolved to redeem all of the redeemable preference shares.
It is resolved that this redemption will be finance partly by issuing 3,000,000 ordinary shares at
RM3.00 each. The shares issued was fully subscribed and paid for.
You are required to record the above transactions in the journal and the statement of
financial position immediately after the redemption.
Answer:
i. Journal entries
Debit Credit
RM RM

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Kinta Perdana Berhad

1.2 REDEMPTION OF DEBENTURES
Recall in previous chapter, debenture is a type of debt instrument that company issued
to anyone who lends money to a company for a specified term and interest rate.
Company obtained this loan through debentures for a fixed time. After that fixed time,
company will return the money of debentures to debenture holders. The refund of money
to debenture holders is called redemption of debentures. Redemption of debentures is
a repayment of loan capital and thus involves a cash outflow.
Besides than redeem at its issue value, debentures may be redeemed below or above
its issue value. The carrying amount of the debt instrument will move towards the
redemption value over the years. Any premiums or discounts are to be amortised over
the loan term.
The debentures may be redeemed a by lump sum payment on a fixed date. This is the
simplest option of redeeming the debentures. For this option, the debenture holders are
paid their promised sum on the fixed date. The lump sum paid is the total amount of
principal of all the debentures and any premium or discount, if any.
The redemption can also be paid by instalment, where this kind of redemption is similar
to the redemption of a term loan. It can be redeemed in monthly, quarterly, biannual, or
annual instalments. In this method, normally the company pays some part of the
principal, with any premium or discount every year to the debenture holders till the time
of maturity.
1.2.1 Redemption value

Debentures may be redeemed at:
a. Discount - debentures are repaid at an amount lower than the issue value. The
discount on redemption indicates gain to company. However, the standard requires
the discount to be amortized over the term loan.
b. Premium - debentures are repaid at an amount higher than the issue value. The
premium on redemption indicates an additional expense for the company. The
standards require it to be amortized over the term loan.
c. Par - debentures are repaid at a price equal to the issue value.
1.2.2 Journal entry for redemption of debentures

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Being amount paid to the debenture holders
Dr x% Debenture a/c x
Cr Bank a/c x
Example 12
MANJUNG Bhd issued RM50,000 3% debentures on 1 January 20x5 at par and the
prevailing market interest rate is 6%. At three years later, the company decided to
redeem all the debentures above the issue value.
You are required to discuss the accounting treatment.
Solution:
Years Debentures at the Finance Cost (6%) Interest paid Debentures

beginning (RM) (3%) carrying value
(RM) (RM) at the year end
(RM)
20x5 50,000 3,000 (1,500) 51,500
20x6 51,500 3,090 (1,500) 53,090
20x7 53,090 3,185 (1,500) 54,775
20x8 54,775 3,287 (1,500) 56,562
Journal entries:
Dr. 3% Debenture a/c RM56,562

Cr. Bank a/c RM56,562
1.3 SHARE BUY-BACK/PURCHASE OF OWN SHARES
As ruled by Companies Act 2016 under Section 127, public listed companies may
purchase its own ordinary shares in the open market, provided that it is authorized by its
constitution. The statutory requirement provide the following terms for company to
purchase its own shares:
i. The company is solvent at the date of the purchase and will not become insolvent
by incurring the debts involved in the obligation to pay for the shares so
purchased.
ii. The purchase is made through the stock exchange on which the shares of the
company are quoted and in accordance with the relevant rules of the stock
exchange, and
iii. The purchase is made in faith and in the interests of the company.
1.3.1 Reasons for share buyback

Reasons for companies to embark on share buy-back are as follow:
a. To reduce the number of the shares in the stock market so that the share value
will enhance.
b. To stabilize the demand and supply of the shares in the stock market and
consequently create a favorable impact on the company’s share price.

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c. To enhance the earnings per share and the dividend pay-out rate of the company
as a result of the reduced share capital base and consequently make the shares
more attractive to potential investors.
d. To increase the financial resources of the company when and if the shares
purchased and held as treasury shares are resold at a price higher than its
carrying value.
Section 127 (4) of the Companies Act 2016 allows company implementing the share
buy-back scheme to either to:
a. cancel the shares so purchased

b. to retain the shares so purchased in treasury as “treasury shares”, or
c. to retain part as treasury shares and cancel the remainder
Furthermore, section 127 (15) specifies that a cancellation of shares shall not be deemed
to be a reduction of share capital. Thus, the capital maintenance is required for the cost
of the shares repurchased.
1.3.2 Cancelling of shares repurchased

This method is used when the companies cancelled immediately shares after it is
repurchased and the shares are not to be held as treasury shares. This method is called
as share cancellation or share retirement method which may suitable for company that
has extra funds that it intends to give it back to its shareholders.
Section 127 (13) of Companies Act 2016 require that when own shares are repurchased
and cancelled, the cost of the shares purchased by the public listed company must be
made wholly out of company’s retained profits. Thus, the cost of share buyback should
be backed by an equivalent amount of the retained profits otherwise available for
distribution as dividends.
The journal entries for cancelling of shares repurchased can be shown as follow:
Being the cancellation of shares repurchased

Dr Ordinary share capital a/c x
Cr. Purchase of own shares a/c x
Being payment of shares purchased

Dr Purchase of own share shares a/c x
Cr. Bank a/c x
Being the capital maintenance

Cr. Ordinary share capital a/c x
Example 13
The following balances were extracted from the book of SIPUTEH Bhd:
Statement of financial position (extract) as at 30 June 20x5
Current asset RM
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Bank 26,000,000

15,000,000 ordinary shares 15,000,000
900,000 6% preference shares 1,800,000
Reserve
26,000,000
According to the current economic downturn, the directors of SIPUTEH Bhd. has
suggested to the company to embark on a share buy-back scheme. An ordinary
resolution has then been passed to buyback 2,000,000 ordinary shares at a price of
RM1.50 each and the shares are to be cancelled.
You are required to prepare the journal entries and the extract of statement of
financial position as at 30 June 20x5 to effect the above transactions.
Solution:
i. Journal entries
i Dr Ordinary Share Capital a/c (2,000,000 x 3,000,000
RM1.50)
Cr Purchase of own Shares a/c 3,000,000
ii Dr Purchase of own Shares a/c 3,000,000

Cr Bank a/c (2,000,000 x RM1.50) 3,000,000
iii Dr Retained profit a/c 3,000,000

ii. Statement of financial position (extract) as at 30 June 2015

Current asset RM
Bank (26,000,000 – 3,000,000) 23,000,000

13,000,000 ordinary shares (15,000,000 – 3,000,000 + 3,000,000) 15,000,000
Reserve
Retained profit (9,200,000-3,000,000) 6,200,000
23,000,000
1.3.3 Treasury shares method

This method is use when the shares repurchased by the companies are not cancelled
but to be held as treasury shares. While the shares are kept as treasury shares, the
owners of the shares have no rights to vote, to receive dividends or to participate in any
distribution. Where such shares are held as “treasury shares”, Subsection 7 of Section
127 of the Companies Act 2016 allows the directors of the company for the following:
a. to distribute the share as dividends to shareholders, where such dividends to be

known as “share dividends”
b. to resell the shares or any of the shares in accordance with the relevant rules of
the stock exchange.
c. to transfer the shares to employees for the purpose of employee’s share scheme.
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d. To sell, transfer or otherwise use the shares for such other purpose as the Minister
may by order prescribe.
e. to cancel the shares
As compared to cancellation method, this method is adopted if the company intends to

reissue the purchased shares in the future. The journal entry for shares repurchased
and held as treasury shares is as follow:
Being the shares repurchased and held as treasury shares

Dr Treasury shares a/c x
Cr. Bank a/c x
Treasury shares are not an asset. As such, in the statement of financial position, the
treasury shares are to be set off against equity (at its carrying value) and considered as
part of unissued shares as follow:
The extract in the statement of financial position as at…….
Equity RM
xxxx Ordinary shares xxxxx
xxxx Preference shares xxxxx
Reserves
Retained profit xxxx
xxxxx
Less: xxx units treasury shares at carrying value (xxx)
xxxxx
Example 14
Using the information in example 13, assume that the directors not cancelled the
shares repurchased but to keep the shares purchased as treasury shares.
Solution:
i. Journal entries
RM RM
i Dr Treasury shares 3,000,000
Cr Bank (2,000,000 x 1.50) 3,000,000
ii. Statement of financial position (extract) as at 30 June 20x5
Current asset RM
Bank (26,000,000 – 3,000,000) 23,000,000

15,000,000 ordinary shares 15,000,000
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Reserve
26,000,000
Less: 2,000,000 Treasury shares at carrying value 3,000,000
23,000,000
Over the time, the treasury shares may be reissued or resell in the open market when
the market condition is improved. The difference between the reissued price and the
carrying value of the treasury shares should be adjusted to or against equity. The journal
entry for resale of the treasury shares will be as follows:
Being resale of treasury shares (if reissued price is greater than the carrying value)
Dr Bank a/c x
Cr. Treasury shares a/c x
Being resale of treasury shares (if reissued price is lower than the carrying value)
Dr Bank a/c x
Dr Retained profits x
Example 15
Continue from the information in example 14 above, assume that the director
decided to resell the 2,000,000 treasury shares in the open market at RM3.00 per
share.
Solution:
i. Journal entries
RM RM
i Dr Bank (2,000,000 x RM3) 6,000,000
Cr Treasury shares 3,000,000
ii. Statement of financial position (extract) as at 30 June 20x5
Current asset RM
Bank (23,000,000+6,000,000) 29,000,000

15,000,000 ordinary shares (15,000,000+3,000,000) 18,000,000
Reserve
29,000,000
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!!Let’s try the following question:
BATU GAJAH Bhd. with an issued and paid up share capital of 50,000,000 ordinary shares at
RM2 each decided to purchase 3,000,000 of its ordinary shares from the open market at a
price of RM2.20 each.
An extract from the company’s statement of financial position showed the following balances:
RM
Bank 135,000,000
Situation 1
Assume that the company decided to keep the share purchased as treasury shares.
Situation 2
Assume now that the company decided to cancel the shares purchased.
You are required to prepare the journal entries and an extract of statement of financial position
immediately to effect the above transactions (treat each situation independently).
Answer:
Situation1:
i. Journal entries
Debit Credit
RM RM
ii. Statement of financial position (extract)

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Situation 2
i. Journal entries
Debit Credit
RM RM
ii. Statement of financial position (extract)
Quick review
The following is a set of journal entries related to the redemption and share buyback.
a. Redemption of preference shares
Being redeem of preference shares

Dr X% Redeemable preference share capital a/c x
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Cr. Redemption of preference share a/c x
Being payment made to the preference shareholders

Dr Redemption of preference share a/c x
Cr. Bank a/c x
Being issue of new shares for the capital maintenance

Dr Bank a/c x
Being transfer of profits for capital maintenance

b. Redemption of debentures
Being amount paid to the debenture holders

Dr X% Debenture a/c x
Cr Bank a/c x
c. Share buyback – cancellation method
Being the shares repurchased ( issued value of shares cancelled)

Dr Ordinary share capital a/c x
Cr. Purchase of own shares a/c x
Being payment of shares purchased (no. of shares purchased x purchase price)

Dr Purchase of own shares a/c x
Cr. Bank a/c x
Being the maintenance of capital

d. Share buyback – treasury shares method
Being the shares repurchased and held as treasury shares

Dr Treasury shares a/c x
Cr. Bank a/c x
e. Share buyback – resale of treasury shares
Being resale of treasury shares (if reissued price is greater than the carrying value)
Dr Bank a/c x

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Being resale of treasury shares (if reissued price is lower than the carrying value)
Dr Bank a/c x
Dr Retained profit x
Pangkor Berhad has in issued 5,000,000 ordinary shares at RM2.00 per share and
10,000,000 3% redeemable preference shares at RM1.00 each, which were redeemable
at RM1.50 per share on 31 March 20x5.
Given below is the statement of financial position of Pangkor Bhd. as at 1 April 20x4:
RM
Investment 26,190,000
Current asset
Inventories 200,000
Accounts receivable 650,000
Bank 10,240,000
37,280,000

5,000,000 ordinary shares 10,000,000
Reserves
5% Debenture 950,000
37,280,000
At the end of 31 March 20x5, the following transactions took place:
1. The carrying amount of the redeemable preference shares were to be redeemed. To

facilitate the redemption, 5,000,000 ordinary shares were issued to public at a RM2.00
each and the remaining is to be taken out of the profits. The shares issued were fully
paid and subscribed for.
2. At the end of the year, the company redeemed all of its debentures.

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3. 1,000,000 ordinary shares were repurchased at the open market at RM2.20 each and
the company decided to keep it as treasury shares.
4. All of the treasury shares were then sold in the open market for RM2.50.
You are required to prepare:

a) Journal entries to record the above transactions
b) Statement of financial position as at 31 March 20x5
Solution:
a) Journal entries
1) Redemption of RPS
RM RM
i Dr 3% Redeemable Preferences Share Capital 15,000,000
Cr Redemption of Preferences Shares 15,000,000
ii Dr Redemption of Preferences Share 15,000,000

Cr Bank 15,000,000
iii Dr Bank (5,000,000 x RM2) 10,000,000

Cr Ordinary Share Application 10,000,000
Dr Ordinary share application 10,000,000

iv Dr Retained profit (15,000,000 – 10,000,000) 5,000,000

2) Redemption of debentures
Dr 5% Debentures 950,000
Cr Bank 950,000
3) Share buy-back (treasury shares method)

Dr Treasury shares 2,200,000
Cr Bank (1,000,000 x 2.20) 2,200,000
4) Resale of treasury shares

Dr Bank a/c (1,000,000 x 2.50) 2,500,000
Cr Treasury shares 2,200,000
Cr Ordinary share capital 300,000
b) Pangkor Bhd.
Statement of Financial Position as at 31 March 20x5
RM

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Investment 26,190,000
Current asset
Inventories 200,000
Bank (10,240,000-15,000,000+10,000,000-950,000-2,200,000+2,500,000) 4,590,000
31,630,000
RM
Equity
5,000,000 ordinary shares (10,000,000+10,000,000+5,000,000+300,00) 25,300,000
Reserves
Retained profit (11,330,000-5,000,000) 6,330,000
31,630,000
An extract of the statement of financial position of Menora Bhd as at 31 December 20x5 is

given below:

200,000,000 ordinary shares 300,000,000
Reserves
Non-current liabilities
10% debentures 16,500,000
Assets
Investments 120,000,000
Bank 180,000,000
The following transactions took place during the year ended 31 December 20x6:
1. The board of directors agreed to redeem all of the 10% redeemable preference
shares at the carrying value partly by fresh issue of shares and partly out of profits.
2. For the purpose of redemption, 30,000,000 units of ordinary shares at RM3.00 per
share were issued and all the shares were fully subscribed and paid for.
3. 50,000,000 ordinary shares were repurchased at RM1.70 each in the open market
for immediate cancellation.
4. All of the 10% debentures are redeemed at its carrying value.

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5. The board of directors has also agreed to issue 1,000,000 units of bonus issue to
the existing shareholders using retained profits at RM2.50 each.
Required:
Prepare the relevant journal entries for the above transactions (without narrations).
Solution:
Journal entries
Redemption of RPS
RM RM
i Dr 10% Redeemable preference shares 100,000,000

Cr Redemption of Preference shares 100,000,000
ii Dr Redemption of Preference shares 100,000,000

Cr Bank 100,000,000
iii Dr Bank (30,000,000 x RM3) 90,000,000

Cr Ordinary share application 90,000,000
Dr Ordinary share application 90,000,000

iv Dr Retained profits (100,000,000 – 90,000,000) 10,000,000

Share buyback by cancellation method

RM RM
i Dr Ordinary share capital (50,000,000 x RM1.70) 85,000,000
Cr Purchase of own shares 85,000,000
ii Dr Purchase of own shares 85,000,000

Cr Bank (50,000,000 x RM1.70) 85,000,000
iii Dr Retained profits 85,000,000

Redemption of debentures

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RM RM
Dr 10% Debentures 16,500,000
Cr Bank 16,500,000
Bonus issue
RM RM
i Dr Retained profits (1,000,000 x RM2.50) 2,500,000
Cr Bonus issue 2,500,000
ii Dr Bonus issue 2,500,000

CHAPTER 5
PREPARATION AND PRESENTATION
OF FINANCIAL STATEMENTS

1. Understand the basis for the preparation and presentation of financial
statements.
2. Understand the concepts, principles and bases used in the preparation of
financial statements.
3. Prepare financial statements that suitable for publication in accordance to the
requirement of MFRS 101: Presentation of Financial Statements.
INTRODUCTION
The financial reporting of the companies in Malaysia is governed by the Companies Act
2016 and the Financial Reporting Act 1997. Every company incorporated under
Companies Act 2016, must comply with the Act’s provision. Companies Act 2016
requires the companies to prepare their financial statements in accordance with the
applicable approved accounting standards and adhere to the relevant financial reporting
guidelines. Section 244 (7) of the Act clarifies that if a conflict arises between the
provisions of the approved accounting standard and the Act, the provisions of the
accounting standard shall prevail.

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In Malaysia, the Public limited companies incorporated are required to prepare and
published a set of financial statement within six months after its accounting year end.
Financial statements are one of the components contained in the annual report of a listed
company. There is no statutory format for the preparation of the financial statements. A
company can present the financial statements in the format that best suits it. Thus, the
layout of financial statements of a company may vary from one to another. However, to
ensure consistency in the preparation of financial statements, the Malaysian Accounting
Standard Board (MASB), an independent authority body established under the Financial
Reporting Act 1997 that responsible in developing and issuing accounting and financial
reporting standards in Malaysia, has issued MFRS 101 Presentation of Financial
Statements. This Standard prescribes the basis for presentation of general purpose
financial statements to ensure comparability both with the entity’s financial statements
of previous periods and with the financial statements of other entities. It sets out overall
requirements for the presentation of financial statements, guidelines for their structure
and minimum requirements for their content.
All entities filing their financial statements to regulatory authorities such as Companies
Commission of Malaysia (CCM), Securities Commission (SC) and Bank Negara, should
apply the financial reporting standards issued by MASB in preparing and reporting the
financial statements.
1.1 OVERVIEW OF FINANCIAL STATEMENTS FOR COMPANY
1.1.1 Definition
According to MFRS 101, financial statements are defined as a structured representation
of the financial position and financial performance of an entity. It represent as an output
of companies financial affair to be presented to their relevant users.
1.1.2 Objectives
The objective of financial reporting is to provide useful information about the financial
position, financial performance and cash flows of an entity to a wide range of users
(existing and potential investors, lenders and other creditors) in making economic
decisions. The information supplied for users to meet the objectives included the entity’s
assets, equity, liabilities, income, expenses, gain, losses and cash flows.
Besides than that, it also demonstrates the results of the management’s stewardship of
the resources entrusted to it. Through financial statements, stakeholders may assess
what kinds of resources were available to the management and how such resources
have been used by the management.
1.1.3 Frequency of reporting

For the reporting period, the standard requires a complete set of financial statements to
be presented at least annually, i.e. the reporting period consists of twelve months.
1.1.4 Underlying assumption for financial statements’ presentation

To ensure the objective of comparability both with the entity’s financial statements of
previous periods and with the financial statements of other entities to be met, the
standards require the presentation of the financial statements to meet the following
underlying considerations:

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a. Going concern basis – financial statements shall be prepared on the basis that
the entity will continue its business on a going concern for the indefinite future,
unless the entity either intends to liquidate or to cease its operation, or has no
alternative but to do so.
b. Accrual basis – requires that items are recognized as assets, liabilities, equity,
income and expenses when they satisfy the criteria for those elements as specify
in the conceptual framework. For instance, expenses are recognized when they
are incurred, not when they are paid and revenues are recognized when they are
earned, not when they are paid.
c. Consistency of presentation – the classification and presentation of items in

the financial statements shall be consistent from one period to the next.
d. Materiality and aggregation – each class of material item and dissimilar items
is presented separately and those that are immaterial may be aggregated with
amounts of similar items.
e. Offsetting – assets and liabilities and income and expenses, shall not be offset
unless required or permitted by a standard.
1.1.5 Qualitative characteristics of useful financial information

Qualitative characteristics of financial statements are attributes that enhance the
meaningfulness of information provided in financial statements to their users. According
to IASB Framework for Preparation and Presentation of Financial Statements, the
qualitative characteristics possess by financial information is depicted as follows:
a. Relevance
Information must be relevant to the decision, where the information must possess
both predictive and confirmatory value. The information is relevant if it can
influences the economic decisions of users by helping them evaluate past, present
or future events or confirming, or correcting their past evaluations.
b. Faithfully representation
Faithful representation exists when there is agreement between a measure or
description and the phenomenon it purports to represent. It requires that information
be complete, neutral, and free from material error.
c. Comparability
The information is comparable if it helps users see similarities and differences
between events and conditions. For instance, users are able to compare the
financial statement of an entity through time in order to identify trends in its financial
position and performance.
d. Understandability
The information helps users to understand the information within the context of the
decision being made. Users are assumed to have a reasonable knowledge of
business, economic and accounting and able to apply themselves to study the
information properly.
e. Verifiability
Imply a consensus among different measurers. If information is verified, this
provides assurance to the users that it is both credible and reliable.
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f. Timeliness
Information is timely when it is available to users early enough to allow them to use
it in their decision process.
Qualitative
Characteristics
Fundamental Qualitative Enhancing Qualitative

Characteristics Characteristics
Faithfully
Relevance Comparability Understandability Verifiability Timeliness
Representation
1.2 COMPONENTS OF FINANCIAL STATEMENTS
The typical set of financial statements of company comprises the following:
a. Statement of Profit or Loss and other Comprehensive Income (SOPL)
Serve as the prime source of information about company’s performance (profit or

loss) during a reporting period. The profit and loss section provides information on
the operation of the company such as sale, company's income, expenses and profits
over a period of time. The presentation of companies’ expenses is to be classified
either by the nature of expenses or their function within the entity.
As recommended by MFRS 101, the expenses by nature method include expenses

of employee benefit, depreciation, impairment loss, transportation costs, advertising
costs, etc. The expenses by function on the other allocate the operating expenses to
the various functional activities of the entity that include cost of sales, administration,
distribution or marketing, research and development, etc.
On the other hand, other comprehensive income section comprises items of income
and expenses that are not recognized in the profit or loss section as required or
permitted by other MFRSs. The items may include changes in revaluation such as
surplus of property, plant and equipment or intangible assets, gains and losses arising
from translating financial statements of a foreign operation, gains and losses on
measuring available-for-sale of financial assets, etc.
b. Statement of Changes in Equity (SOCIE)
Explain the changes of the company's equity throughout the reporting period. It
portrays how an entity’s net worth or shareholders’ funds have changed during the
reporting period. It will disclose all components of equity such as ordinary share
capital, preference share capital, retained profits, and others showing in detail of it
opening balance, increases and decreases during the reporting date and the closing
balance. The preparation of this statement is to complement the Profit and Loss

105
Statement in providing information that enables an assessment of the full

performance of the company.
c. Statement of Financial Position (SOFP)
Statement of Financial Position provides information regarding company’s financial

structure and solvency where it specifically reports on company's assets, liabilities,
and ownership equity at a given point in time. Normally, company will present the
current and non-current assets and current and non-current liabilities as separate
classification on the statement of financial position. It is also called as balance sheet.
d. Notes to the financial statements
Is an integral part of the financial statement which to enhance the users

understandability on the Statement of Profit or Loss, Statement of Changes in Equity,
Statement of Financial Position and Statement of Cash Flow. The notes are cross-
referenced on items presented in the financial statements for explanation on the
financial policies, management discussion and analysis in further detail.
e. Statement of Cash Flow (SOCF) – is part of financial statements that shows the
generation and absorption of cash and cash equivalent for the accounting period
reported. It reports on a company's cash flow activities, particularly its operating,
investing and financing activities (however, this component is beyond of this topic).
1.3 FORMAT OF FINANCIAL STATEMENTS
1.3.1 COMPREHENSIVE FORMAT

ABC Bhd
Statement of profit or loss and other comprehensive income for the year ended ….
Notes RM’000
Revenue XX
Cost of sales (XX)
Gross profit XX
Other income XX
Distribution costs (XX)
Administrative expenses (XX)
Operating profit (XX)
Finance costs (XX)
Income from investment XX
Profit before tax XX
Tax expense (XX)
Profit after tax / Net profit for the year XXX
Other comprehensive income:
Items that will not be reclassified to profit or loss
Gains on revaluation of property XX
Actuarial loss on employee benefit XX
Income tax relating to items not reclassified (XX)
Items reclassified subsequently to profit or loss
Fair value change on available-for-sale financial assets XX
Income tax relating to items may be reclassified (XX)
TOTAL COMPREHENSIVE INCOME FOR THE YEAR XXXX

106
Earnings per share RM xxx
ABC Bhd
Statement of changes in equity for the year ended …….
Ordinary Preference Retained Asset General
Share Share profits revaluation reserve
capital capital reserve
RM’000 RM’000 RM’000 RM’000 RM’000
Balance as at ….. XX XX XX XX
Issue of new XX XX
shares
Bonus issue XX (XX)
Dividend (XX)
Profit for the year XX
Surplus on XX
revaluation
Transfer to general (XX) XX
reserve
Balance as at ….. XX XX XX XX
ABC Bhd
Statement of financial position as at ….
Notes RM’000
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment XX
Investment properties XX
Intangible assets XX
Investments in subsidiary XX
Available-for-sale financial assets XX
XXX
CURRENT ASSETS
Inventories XX
Trade receivables XX
Prepayments XX
Tax recoverable XX
Cash and bank balances XX
Other current assets XX
TOTAL ASSETS XXXX
EQUITY AND LIABILITIES

EQUITY
Share capital XX
Reserves XX
XXX
NON-CURRENT LIABILITIES
Long-term borrowings XX
Retirement benefit liabilities XX
Deferred income XX
Deferred tax liabilities XX
5% debentures XX
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CURRENT LIABILITIES
Payables XX
Bank overdraft XX
Short-term borrowings XX
TOTAL EQUITY AND LIABILITIES XXXX
Example of Notes to the financial statements
1. Basis of presentation
a. Statement of compliance
The financial statements of the company have been prepared in accordance with
applicable approved accounting standards for entities other than private entities
issued by the Malaysian Accounting Standards Board (MASB), accounting principles
generally accepted in Malaysia and the provisions of the Companies Act 2016.
b. Basis of measurement
The financial statements have been prepared on the historical cost basis except for
freehold land and investment properties as explained in its accounting policy.
c. Functional and presentation currency

The financial statements of the company are presented in Ringgit Malaysia (RM),
which is the company’s functional currency.
d. Use of estimates and judgments

In preparing the financial statements, management is required to make judgments,
estimates and assumptions that affect the application of accounting policies and the
reported carrying amounts of assets and liabilities and income and expenses. Actual
results may differ from these estimates.
The management reviews the estimates and the underlying assumptions on an

ongoing basis. Revisions to accounting estimates are recognized in the period in
which the estimate is revised and in future periods affected.
2. Significant accounting policies
a. Non-current assets and depreciation

All items of property, plant and equipment are initially measured and recorded at cost.
Subsequent costs that meet the recognition criteria are capitalized. Subsequent to
recognition, property, plant and equipment are stated at cost less accumulated
depreciation and accumulated impairment losses except for freehold land which is
revalued at regular interval. Freehold land is not depreciated. Depreciation of other
property, plant and equipment is provided for on a straight-line basis to write off the
cost of each asset to its residual value over the estimated useful life, at the following
periods:
Building 40 years
Plant and machinery 5 years
b. Investment properties
All investment properties are initially measured and recorded at cost. Subsequent to
recognition, investment properties are measured at fair value, with any changes
between the fair value and the carrying amount recognized in the statement of profit
or loss and other comprehensive income.
c. Inventories
Inventory valuation is arrived at by using First in First out valuation method and are
valued at the lower of cost and net realizable value.

108
d. Receivables
Receivables are initially recognized at cost and are subsequently stated at cost less
allowance for doubtful debt.
e. Revenue
Revenue from the sale of goods is recognized at fair value when the significant risks
and rewards of ownership have been transferred to the buyer. Revenue from services
rendered is recognized by reference to the stage of completion of the transaction at
the statement of financial position date. Dividend income is recognized when the right
to receive payment is established. Rental income is recognized on an accrual basis
in accordance with the term of the lease.
f. Tax expense
The income tax expense consists of current and deferred tax recognized in the
statement of profit and loss.
3. Profit before tax
Profit before tax is arrived after charging:

RM
Depreciation expense xx
Directors’ remuneration xx
Auditors’ fees xx
Interest on debentures/loan xx
Interest on overdraft xx
And after crediting:

Income from investment xx
Interest income xx
4. Income tax expense

RM
Tax charge for the current year xx
Increase in deferred tax liability xx
Tax charge xxx
5. Earnings per share:
Profit after tax – Preference shares dividend

EPS =
Total number of ordinary shares issued
EPS = RM xx
6. Property, plant and equipment:
Plant &
Land Building Total
Machinery
(RM) (RM) (RM)
(RM)
Cost
Balance b/d xx xx xx xx
Revaluation surplus/Acquisition xx - - xx
Balance c/d xx xx xx xx
Accumulated Depreciation
Balance b/d - (xx) (xx) (xx)
Current year depreciation - (xx) (xx) (xx)
Balance c/d (xx) (xx) (xx)
Carrying value as at….. xx xx xx xx

109
7. Dividend
RM
• Interim : - Ordinary xx
- Preference xx
• Final/declared - Ordinary xx
:
(payable) - Preference xx
8. Share capital
Ordinary shares X% Preference shares
Number RM Number RM
‘000 ‘000 ‘000 ‘000
1 January 20XX 1,000 2,000 600 600
Issue for cash on 1 May 20XX 1,500 3,000 nil nil
2,500 5,000 600 600
9. Capital commitment
The company has signed a contract with MK Berhad to supply equipment worth RMxxx.
10. Contingent liability

On………, there was a natural disaster occurred which causing extensive damages to
the assets of ABC Bhd. The estimated amount of loss was RM80,000. The financial
statements for the current financial year do not reflects this amount of loss.
1.3.2 FORMAT FOR CLASSROOM DISCUSSION

FAR160 BERHAD
Statement of Profit or Loss and other Comprehensive Income
for the year ended 20X1
Notes RM’000
Revenue/sales/turnover XX
Cost of sales (XX)
Gross profit XX
Other income (1) XX
Distribution costs (2) (XX)
Administrative expenses (3) (XX)
Operating profit XX
Finance costs (4) (XX)
Income from investment (5) XX
Profit before tax XXX
Tax expense (6) (XX)
Profit after tax / Net profit for the year XXX
Earnings per shares (EPS) (7) RM xxx
NO ITEMS DEFINITION EXAMPLES

1. Other income Income that arise from the Rent received, commission received, gain on
operating activities. disposal.
2. Distribution Costs incurred in procuring and Carriage outwards, depreciation on motor
costs sustaining the sales. vehicles, advertising expenses, salesmen’s
commission.

110
3. Administrative Costs incurred in running the Staff salaries, directors’ remuneration,

expenses business. bonus, auditor’s fee, depreciation on
building, depreciation on plant and
machinery, depreciation on fixtures and
fittings, bad debts.
4. Finance costs Costs of using borrowed capital. Interest on loan, interest on debentures,
bank charges, dividend payable to
Redeemable Preference Shareholders.
5. Income from Income from investing activities
investment either in short-term or long-term Interest income, dividend income.
investments.
6. Tax expense Consists of income tax payable Tax charged for the year by Inland Revenue
to the Inland Revenue Board. Board
7. Earnings per Amount earn for every shares Dividing the profit attributable to ordinary
share held. shareholders with the weighted average
number of ordinary shares outstanding
during the period.
FAR160 BERHAD
Statement of Changes in Equity for the year ended 20X1
Ordinary Pref. Asset General Retained
Share Share Rev. reserve profits
capital capital Reserve
RM’000 RM’000 RM’000 RM’000 RM’000
Balance b/d XX XX XX XX XX
Profit/(loss) for the year XX/(XX)
Issue of shares capital XX XX
Bonus issue XX (XX)
Interim dividend – OSC & PSC (XX)
Final dividend – OSC & PSC (XX)
Transfer to general reserve XX (XX)
Transfer from general reserve (XX) XX
Balance c/d XX XX XX XX XX
FAR160 BERHAD
Statement of Financial Position as at 20X1
Notes RM’000
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment XX
Investments XX
XXX
CURRENT ASSETS
Inventories XX
Accounts receivable XX
111
Tax recoverable XX
Prepayments XX
Cash in hand and at bank XX
TOTAL ASSETS XXX

EQUITY
Share capital XX
Reserves XX
XXX
Long-term borrowings XX
X% Debentures XX
CURRENT LIABILITIES
Accounts payable XX
Tax payable XX
Dividend payable XX
Bank overdraft XX
Short-term borrowings XX
Accruals XX
TOTAL EQUITY AND LIABILITIES XXX
1.4 PREPARATION & PRESENTATION OF FINANCIAL STATEMENT
The formats of financial statements provided in the previous section present the
information and its classification to be disclosed in each component of the companies’
financial statements. The following section discuss on some elements that are commonly
appeared in the financial statements of companies which have not been discussed in
the previous chapter in the books.
1.4.1 Taxation
Tax expense of company is charged on its income. Starting on year 2000, companies in
Malaysia are required to pay their tax in the year the income is earned. Therefore, the
companies will estimate the amount of tax to be paid for the current year and pay to the
Inland Revenue Board in the same year. Once the financial statements are finalised,
companies will compare the amount that was paid during the current year and the
amount they actually have to pay. Since the tax payment is made based on estimated
income of the current year, there will be a possibility of companies to have over or under
paid of the tax they have to pay.
If the tax already paid is greater than the tax payable, the amount of tax which has
overpaid is known as tax recoverable and represent as current asset in the statement of
financial position.
On the other hand, if the tax paid is less than the tax payable, the amount of tax which
has under paid is known as tax payable and represent as current liability in the statement
of financial position.
Example 16

112
The following information relates to Alinaz Berhad for the year ended 31 December
2015:
• The profit before tax was RM46,250,000
• The current year tax was estimated to be RM4,100,000
• Tax paid for the current year was RM3,670,000
Required:
Show the adjusting entries and the extract of the Statement of Profit or Loss and the
Statement of Financial Position to record the above transaction.
Solution:
Journal entries:
RM RM
Dr. Tax expense 4,100,000
Cr. Bank 3,670,000
Cr. Tax payable 430,000
Dr. SOPL 4,100,000

Cr. Taxation 4,100,000
Alinaz Berhad
Statement of Profit or Loss (extract) for the year ended 31 December 2015
RM
Profit before tax 46,250,000
Tax expense (4,100,000)
Profit after tax 42,150,000
Alinaz Berhad
Statement of Financial Position (extract) as at 31 December 2015
RM
Current liabilities
Tax payable 430,000
Example 17
The same information as in Example 16, except that the tax paid for the current year
was RM4,700,000.
Required:
Show the adjusting entries and the extract of the Statement of Profit or Loss and the
Statement of Financial Position to record the above transaction.
Solution:
Journal entries
RM RM
Dr. Taxation 4,100,000
Dr. Tax recoverable 600,000
Cr. Bank 4,700,000
Dr. SOPL 4,100,000

Cr. Taxation 4,100,000
Alinaz Berhad
Statement of Profit or Loss (extract) for the year ended 31 December 2015
113
RM
Profit before tax 46,250,000
Tax expense (4,100,000)
Profit after tax 42,150,000
Alinaz Berhad
Statement of Financial Position (extract) as at 31 December 2015
RM
Current asset
Tax recoverable 600,000
In example 17, the same amount of tax expense will be reported in the Statement of
Profit or Loss. However, the tax paid by Alinaz Berhad is now greater than the tax
payable by RM600,000. This amount is represented as tax recoverable in the Statement
of Financial Position under current asset.
1.4.2 DIVIDEND
Dividend is a payment made by a company to its shareholders. The dividend is paid in
return of their equity investment made in the company. When a company earns a profit,
it may retain a portion of its profits (called retained profits) and pay the remainder as a
cash dividend. Therefore, dividend is usually a distribution of profits, except for dividend
on redeemable preference shares. Dividend can be divided into two types:
Interim dividend
Dividend declared and paid to the shareholders during the financial year, usually in the
middle of the financial year. The amount paid is normally based on the first-half year of
company’s performance. The journal entry to record interim dividend paid is as follow:
Dr. Retained profits xxx

Cr. Bank xxx
Final dividend
Dividend declared at the end of the financial year or after the end of the financial year.
The amount is recommended by the directors of company and to be approved by the
shareholders at the company’s Annual General Meeting (AGM). If the final dividend is
declared at the end of the financial year, it is to be accounted as liability at the statement
of financial position date. The journal entry to record the final dividend is:
Dr. Retained profits xxx

Cr. Dividend payable xxx
In this case, the similarities between the interim and final dividend is both dividends are
deducted from the retained profits. The deduction of the dividend is presented in the
Statement of Changes in Equity while the dividend payable (final dividend declared at
the end of the financial year) is presented in the Statement of Financial Position, under
current liability.
Both interim and final dividends are available for preference shares and ordinary shares.
For preference shares, the amount of dividends declared in a financial year is limited to
114
dividend rate prescribed when the shares were issued. For instance, if the shares were
8% preference shares, the dividend paid will be 8% in total. If an interim dividend of 4%
was paid, then the final dividend will be another 4%.
Unlike preference shares, the amount of dividend declared for ordinary shares is not
limited. Suppose a company had paid an interim dividend of 4% and a final dividend of
8%, the final dividend for the year is treated as an addition to the 4% interim dividend
paid. Thus, total dividend paid on the ordinary shares is 12%.
Example 18
The following were extracted from the book of Arena Berhad as at 1 January 20x5:
RM
1,000,000 Ordinary Shares Capital 1,000,000
400,000 8% Preference Share Capital 800,000
Reserves
On 15 July 20x5, the company paid interim dividend to ordinary and 8% preference
shareholders of RM40,000 and RM32,000 respectively. There was no additional
transaction on share capital during the year. On 31 December 20x5, the company
declared a final dividend of 10% on the ordinary shares and the final preference
dividends. The profits for the year was RM2,245,000.
Required:
Show the adjusting entries and the extract of the Statement of Changes in Equity and
the Statement of Financial Position to record the above transaction.
Solution:
Workings for final dividend:

Ordinary shares = 8% x RM1,000,000
= RM100,000
Preference shares = (8% x RM800,000) – RM32,000

= RM32,000
Journal entries
To record interim dividend RM RM
Dr. Dividend 72,000
Cr. Bank (40,000 + 32,000) 72,000
To record final dividend

Dr. Dividend 132,000
Cr. Dividend payable (100,000 + 32,000) 132,000
Arena Bhd
Statement of Changes in Equity for the year ended 31 December 20x5
Ordinary Preference Retained

shares shares profits
RM’000 RM’000 RM’000
As at 1 January 20x5 1,000,000 800,000 15,580,000
Profit for the year 2,245,000
115
Dividend
- Interim (72,000)
- final (132,000)
As at 31 December 20x5 1,000,000 800,000 17,621,000
Arena Berhad
Statement of Financial Position as at 31 December 20x5 (extract)
RM
Equity
Share capital 1,800,000
Reserves 17,621,000
Current liabilities
Dividend payable 132,000
This example shows that both interim and final dividends are deducted from the retained
profits and presented in the Statement of Changes in Equity for the year ended 31
December 20x5. The final dividends of RM132,000 is recognized as liability (dividend
payable) at the statement of financial position date as the dividends declared at the year
ended.
Dividend on redeemable preference shares

As mentioned earlier, dividend paid or payable on redeemable preference shares are
not distribution of profit. As such, the dividend is disclosed under finance cost in the
Statement of Profit or loss as redeemable preference shares are liability.
Provision on payment of dividend

The accounting standard states that dividend become payable only when it is declared.
As for final dividend declared after the financial year ended, MFRS 110 Events after the
Reporting Period prohibits the dividend to be recognized as payable (liability) as at the
year end. Such dividend may be disclosed by way of notes to the financial statements
since the standard prescribes that the company does not have an obligation to pay the
dividend as at year end since the declaration is made subsequent to the year ended.
Companies Act 2016 states that dividend shall be distributed to the shareholders out of
profits of the company available if the company is solvent. Therefore, companies are not
allowed to distribute cash dividends to the shareholders using the non-distributable
reserves. The non-distributable reserves are those shareholders’ equity resulting from
company’s non-trading activities which cannot be distributed to shareholders in term of
cash dividend. They are also known as capital reserves. The non-distributable reserves
may arise due to:
• Accounting standards requirements - such as asset revaluation reserve and fair

value reserve.
• Legal requirements – such as share premium and capital redemption reserve.
• Accepted accounting practices – such as general reserve
The general rule of non-distributable reserves is that the company cannot distribute the
capital reserves in the form of cash dividends. Even if they are distributed, they can only
be distribute in the form of bonus shares.
However, capital reserves and revenue reserves are not accounting concepts. In fact,
with the new Companies Act 2016 and the MFRS in place, such classification of
distributable and non-distributable reserves is no longer necessary.
116
1.4.3 TRANSFER OF RESERVES

In addition to retained profit/ retained earning reserve, company may create another
reserve called general reserve as to secure the business or to prepare for when a need
arises. The general reserve is made out of retained profit.
Thus, when any amount is kept separate by a company out of its retained profit for future
purpose then that is called as general reserves. In other words the general reserves are
the retained earnings of a company which are kept aside to meet future obligations.
The journal entry of transfer to general reserve is:
Dr. Retained profits/earnings xxx

Cr. General reserve xxx
Conversely, if the company made a transfer from general reserve, the journal entry will
be:
Dr. General reserve xxx

Cr. Retained profits/earnings xxx
The following balances were extracted from the book of Laut Damai Berhad at 31
December 20x5:
Debit Credit
(RM’000) (RM’000)
Freehold land 42,000
Plant & Machinery 13,575
Fixtures & fittings 7,020
Motor vehicles 9,525
Investments 25,950
20,000,000 Ordinary shares 30,000
6,000,000 5% Preference shares 12,000
7% Debentures 23,000
Retained profit as at 1 January 20x5 17,029
General reserve 4,500
Accumulated depreciation as at 1 January
20x5:
Plant & machinery 3,390
Fixtures & fittings 1,020
Motor vehicles 2,040
Cost of sales 77,550
Sales 130,995
Rental paid and rental received 840 720
117
Cash at bank 23,400

Inventories 9,000
Accounts receivable and Accounts payable 7,680 4,260
Auditors’ fee 3,615
Directors’ remuneration 2,730
Debenture interest 1,425
Interim dividend:
Ordinary shares 1,689
5% Preference shares 300
Investment income 2,730
Tax paid 5,385
231,684 231,684
Additional information:
1. The following accruals have not been taken up in preparing the above trial
balance:
Auditors’ fees RM135,000
Directors’ remuneration RM270,000
2. Interest on debentures has not been fully accounted.
3. The depreciation of non-current assets are to be provided as follows:
Plant and Machinery RM1,357,000

Fixtures and fittings RM1,404,000
Motor vehicles RM1,497,000
4. On 31 December 20x5, the board of directors have decided to:

i. transfer RM5,000,000 to general reserve, and
ii. provide a final dividend of 3% on ordinary shares and the remaining of
preference shares dividend.
5. The tax expense to be charged for the year is RM6,235,000.
Required:
Prepare the following statements in compliance with related MFRS:
a. Statement of Profit or Loss and other Comprehensive Income for the year ended
31 December 20x5.
b. Statement of Changes in Equity for the year ended 31 December 20x5.
c. Statement of Financial Position as at 31 December 20x5.
d. The following notes to the financial statements:
i. Net profit before tax.
ii. Property, Plant and Equipment
iii. Earnings per share
Solution:

118
Working for the adjustment entries:
RM’000 RM’000
1) To record auditor’s fee accrued
Dr. Auditor’s fee 135
Cr. Accrued auditor’s fee 135
To record director’s remuneration accrued

Dr. Directors remuneration 270
Cr. Accrued director’s remuneration 270
2) To record on debenture interest accrued

Dr. Debenture interest 185
Cr. Accrued debenture interest (1,610 – 1,425) 185
3) To record depreciation of plant and machinery

Dr. Depreciation – plant and machinery 1,357
Cr. Accumulated depreciation – plant and machinery 1,357
To record depreciation of fixtures and fittings

Dr. Depreciation – fixtures and fittings 1,404
Cr. Accumulated depreciation – fixtures and fittings 1,404
To record depreciation of motor vehicles

Dr. Depreciation – motor vehicles 1,497
Cr. Accumulated depreciation – motor vehicles 1,497
4)To record the transfer of general reserve from retained profits

Dr. Retained profits 5,000
Cr. General reserve 5,000
To record of final dividend declared

Dr. Retained profits 1,200
Cr. Dividend payable (OSC) – (3% x 30,000) 900
Cr. Dividend payable (PSC) – (5% x 12,000) - 300 300
5)To record on tax expense recognized

Dr. Tax expense 6,235
Cr. Tax paid 5,385
Cr. Tax payable 850
Dr. SOPL 6,235

Cr. Tax expense 6,235

119
Laut Damai Berhad

for the year ended 31 December 20x5
RM’000
Revenue 130,995
Cost of sales (77,550)
Gross profit 53,445
Other income 720
Distribution costs (W1) (1,497)
Administrative expenses (W1) (10,351)
Operating profit 42,317
Finance costs (W1) (1,610)
Income from investment 2,730
Profit before taxation 43,437
Tax expense (6,235)
Profit after taxation 37,202
EPS RM1.83
Working 1 (W1)
Items Admin Distribution Finance
expenses cost cost
(RM’000) (RM’000) (RM’000)
Rental 840
Auditors fee (3,615+135) 3,750
Directors’ remuneration (2,730+270) 3,000
Debenture interest (7% x 23,000) / (1,425+185) 1,610
Depreciation – plant and machinery 1,357
Depreciation – fixtures and fittings 1,404
Depreciation – motor vehicles 1,497
10,351 1,497 1,610
Laut Damai Berhad

Ordinary Pref General Retained

Share Share reserve profits
capital capital
RM’000 RM’000 RM’000 RM’000
Balance b/d 30,000 12,000 4,500 17,029
Profit for the year 37,202
Transfer to general reserve 5,000 (5,000)
Dividend:
Interim – OSC (1,689)
Interim – PSC (300)
Final – OSC (3% x 30,000) (900)

Final – PSC (5% x 12,000) - 300 (300)
Balance as at 31 Dec 20x5 30,000 12,000 9,500 46,042

120
Laut Damai Berhad

RM’000 RM’000
ASSETS
NON-CURRENT ASSETS
Property, plant and equipment 61,412
Investments 25,950
87,362
CURRENT ASSETS
Inventories 9,000
Bank 23,400
TOTAL ASSETS 127,442
Financed by:
EQUITY
Share capital (30,000+12,000) 42,000
Reserves (9,500 + 46,042) 55,542
97,542
CURRENT LIABILITIES
Trade payable 4,260
Accrued Auditor’s fee 135
Accrued director’s remuneration 270
Accrued debenture interest 185
Dividend payable (900+300) 1,200
Tax payable (6,235 – 5,385) 850
TOTAL EQUITY AND LIABILITIES 127,442
Notes to financial statements:
1. Profit before tax
Profit before tax is arrived after charging:

RM
Depreciation expense - plant & machinery 1,357
Depreciation expense - fixtures & fittings 1,404
Depreciation expense - motor vehicles 1,497
Directors’ remuneration 3,000
Auditors’ fees 3,750
Debenture interest 1,610
And after crediting:

Rental received 720

121
2. Property, plant and equipment:
Plant Fixtures & Motor

Land Total
&machinery fittings vehicles
(RM’000) (RM’000)
(RM’000) (RM’000) (RM’000)
Cost:
Balance b/d 42,000 13,575 7,020 9,525 72,120
Balance c/d 42,000 13,575 7,020 9,525 74,120
Accumulated
depreciation:
Balance b/d - 3,390 1,020 2,040 6,450
Current year - 1,497
1,357 1,404 4,258
depreciation
Balance c/d - 4,747 2,424 3,537 10,708
Carrying value as at
31/12/20x5 42,000 8,828 4,596 5,988 61,412
3. Earnings per share
Profit after tax – Preference shares dividend

EPS =
Total number of ordinary shares issued
37,202,000 – 600,000
EPS =
20,000,000
EPS = RM 1.83

122
!!! Let’s try the following question:

The following balances were extracted from the books of Eco Dynamic Berhad as at
31 December 20x3.
Particulars Debit (RM) Credit (RM)

650,000 Ordinary share 650,000
150,000 7% Redeemable Preference Share 150,000
Administrative expenses 29,000
Director’s Remuneration 7,000
Office Rental 15,400
Sales 543,160
Purchases 157,000
Carriage Outwards 2,500
Interest on Debenture 12,000
Audit Fees 5,000
Interim dividend 4,200
Tax paid 40,000
6% Debenture 240,000
Retained Profit as at 1/1/20x3 325,000
Investment Income 9,200
Rental Income 3,084
Accounts Receivable and Payables 103,684 78,000
Bank Overdraft 24,000
Inventories as at 1/1/20x3 255,200
Investment 315,000
Freehold Land 82,000
Building at cost 750,000
Plant and machinery at cost 308,800
Motor Vehicle at cost 221,000
Accumulated Depreciation as at 1/1/20x3:
- Building 150,000
- Plant and machinery 92,640
- Motor Vehicle 44,200
Cash in Hand 1,500
Additional information:
1. Closing Inventories at the end of the period is RM 300,000.
2. The depreciation for Non-Current Asset for the year are as follows:
a) Building 75,000
b) Plant and machinery 15,440
c) Motor Vehicle 17,680 (being treated as distribution expense)
.
3. At the end of the year, the director declared a final dividend on Redeemable
Preference Share and a final dividend of 10% for the ordinary shares.
4. The interim dividend paid consists of 40% of ordinary share dividend.
5. It has been confirmed that the tax charge for the current year is RM 68,578.
123
6. Office were rented at RM1100 per month and accrued on debenture interest
need to be provided for.
Required:
Prepare the followings in a form suitable for publication purposes:
a. The Statement of Profit and Loss and Other Comprehensive Income for the year
ended 31 December 20x3.
b. The Statement of Financial Position as at 31 December 20x3.
c. The Statement of Changes in Equity for the year ended 31 December 20x3.
d. The notes to financial statement on property, plant and equipment.
Answer:
Eco Dynamic Berhad

for the year ended 31 December 20x3
RM
Revenue 543,160
Cost of sales (255,200+157,000-300,000) (112,200)
Gross profit 430,960
Other income 3,084
Distribution costs (W1) (20,180)
Administrative expenses (W1) (144,640)
Operating profit 269,224
Finance costs (W1) (24,900)
Profit before taxation 253,524
Tax expense (68,578)
Profit after taxation 184,946
Earnings per shares (
EPS)

124
Working 1 (W1)
Items Admin Distribution Finance
expenses cost cost
(RM) (RM) (RM)
As per trial balance 29,000
Directors’ remuneration (2,730+270) 7,000
Office Rental (1,100 x 12) 13,200
Carriage Outwards 2,500
Interest on Debenture (6% x 240,000) 14,400
Auditors fee 5,000
Depreciation – building 75,000
Depreciation – plant and machinery 15,440
Depreciation – motor vehicles 17,680
Dividend on RPS (7% x 150,000) 10,500
144,640 20,180 24,900
Eco Dynamic Berhad

Share capital Retained profits

RM RM
Balance as at 1 Jan 20x3 650,000 325,000
Profit for the year 184,946
Dividend:
Interim – OSC (4,200 x 40%) (1,680)
Final – OSC (10% x 650,000) (65,000)
Balance as at 31 Dec 20x3 650,000 443,266

125
Eco Dynamic Berhad

RM
ASSETS
NON-CURRENT ASSETS 966,840
Property, plant and equipment
Investments 315,000
1,281,840
CURRENT ASSETS
Inventories 300,000
Rental prepaid (15,400 - 13,200) 2,200
Cash in hand 1,500
TOTAL ASSETS 1,689,224
Financed by:
EQUITY
Share capital 650,000
Retained earnings 443,266
1,093,266
7% Redeemable preference shares 150,000
CURRENT LIABILITIES
Accounts payable 78,000
Bank overdraft 24,000
Accrued interest on debenture (14,400 - 12,000) 2,400
Dividend payable (65,000 + 7,980) 72,980
Tax payable (68,578 - 40,000) 28,578
TOTAL EQUITY AND LIABILITIES 1,689,224
Notes to financial statements - Property, plant and equipment:
Plant & Motor

Building Total
Land machinery vehicles
(RM) (RM)
(RM) (RM) (RM)
Balance b/d as at 1/1/20x3 82,000 750,000 308,800 221,000 1,279,800
Balance c/d as at 82,000 750,000 308,800 221,000 1,361,800
31/12/20x3
Current year depreciation - 75,000 15,440 17,680

Balance c/d as at - 225,000 108,080 61,880 394,960
31/12/20x3
Carrying value as at
31/12/20x3 82,000 525,000 200,720 159,120 966,840

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46

At the end of this chapter, the students should be able to:

1.1 DEFINITION AND CHARACTERISTICS COMPANY

A company incorporated under CA 2016 is a body corporate with legal personality

The owner of company is called as shareholders and the management is being

Comparing to sole proprietorship and partnership, company enjoys several advantages

In a nutshell, company is one type of corporation made up of several people joined

1.2 TYPES OF COMPANIES

1.2.1 Public Company

1.2.2 Private Company

1.2.3 Exempt Private Company

SURYANI ABDUL RAMAN_FP UiTM TAPAH

1.2.4 Foreign Company

1.3 CLASSIFICATION COMPANIES

Companies limited Companies limited Unlimited

1.3.1 Companies limited by shares

SURYANI ABDUL RAMAN_FP UiTM TAPAH

1.3.2 Companies limited by guarantee

A company limited by guarantee shall be a public company. However, it has members

1.3.3 Unlimited companies

SURYANI ABDUL RAMAN_FP UiTM TAPAH

Company limited by shares:

Company limited by guarantee:

1.4 DIFFERENCES BETWEEN SOLE PROPRIETORSHIP,

Running a business as a company can be said to be more credible compare to sole

Sole Unlimited Public Company

A sole proprietorship A partnership is A company is owned

Manage by the hands Managed by all the Delegated to a Board

Contributed by the Contributed by the The capital is derived

SURYANI ABDUL RAMAN_FP UiTM TAPAH

The liability of the The liability of the The liability of the

There is no statutory There is no statutory The financial

1.5 FORMATION OF COMPANIES

1.5.1 Procedures of Incorporation

ii. Lodgement of application to incorporate a company – incorporation information

a. the proposed company name

SURYANI ABDUL RAMAN_FP UiTM TAPAH

iv. Verification of incoporation – a notice of approval and certificate of incorporation

SURYANI ABDUL RAMAN_FP UiTM TAPAH

SURYANI ABDUL RAMAN_FP UiTM TAPAH

1.5.2 Constitution of Company

A constitution is defined as a formal document that specifies the rules governing a

a. the objects of the company

A company having a constitution may alter or amend its constitution by a special

1.6 CAPITAL STRUCTURE OF COMPANIES

Ordinary Preference Redeemable

1.6.1 Types Of Equity Instrument

It is the share capital which has been issued to the potential

Called-up capital is the amount of issued capital for which

SURYANI ABDUL RAMAN_FP UiTM TAPAH

Paid up capital is the amount of called up capital that has

The following are the different types of shares:

a. Ordinary shares (OSC)

b. Preference shares (PSC)

i. Cumulative preference shares

ii. Non-cumulative preference shares

SURYANI ABDUL RAMAN_FP UiTM TAPAH

iii. Participating preference shares

iv. Convertible preference shares

Let’s try the following question:

i. Called up = RM2 X 6,000,000

ii. Uncalled = RM1 X 6,000,000