TOPIC 8

CAPITAL RECONSTRUCTION

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Chapter Outline
 Compromises and arrangement, S176 Company Act 1965.  Debt restructuring  Internal reorganization (S61,62,64 CA) 1. alteration of authorized capital. 2. reduction of paid up capital. 3. issue of bonus shares. 4. redemption of preference shares.  External reorganization (S176 – 178 CA) 1. sales of assets & liabilities to another company. 2. a scheme of arrangement with creditors. 3. business combination.
4. The devising of a scheme to avoid liquidation
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Reorganization & Reconstruction
 When company incurring heavy losses and has been unable to pay dividends for few consecutive years. The company has two options: - Winding up (liquidate) - Reorganization (turn around) Reorganization - any alteration in the structure of the firm which enables to adapt to changes in its environment. Reconstruction – reorganizing various aspects, from management, finance, productions etc. Reorganization can only be undertaken if the company has evidence of making profits in the near future and able to pay dividends to its shareholders.
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  

Reorganization & Reconstruction FINANCIAL DISTRESS COMPANY RECONSTRUCTION Either way: LIQUIDATION COMPROMISE / ARRANGEMENT WITH: .Debenture holders .Creditors .Shareholders TAKEOVERS 4 .

5 . 176 of CA – power to compromise with creditors and members. or with its members or any class of them without going into liquidation.  “Arrangement” been defined in S.Compromises and Arrangements  S.  A company can enter into a compromise or arrangement with its creditors or any class of them. 176(11) to include a reorganisation of the share capital of a company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both these methods.

Debt Restructuring “A debt restructuring scheme ensures that a business survives if there is a reasonable prospect that it is viable. April 1999. K. 6 . Akauntan Nasional. p. as opposed to closure & liquidation” (quoted from Flynn. There are various benefits associated with the retention of viable businesses. 27). in Institute News.

creditors & shareholders of companies in financial distress can benefit mutually from the programme. b) help save jobs. A fails & can‟t pay co. co. B then can‟t pay C & so on).e. B. c) avert any possible contagion effects in the corporate sector (i. 7 .Debt Restructuring  Among the advantages: a) stakeholders like lenders.

creditors. financial stock take. identify various alternatives available to increase its financial situation. employees. e) negotiate with shareholders. f) implement the plan which should lead to a win-win outcome for both creditors & debtors. assess future cash flows. 8 . customers & suppliers.Debt Restructuring Basic steps in debt restructuring : a) b) c) d) assess process management.

extend the maturity date of the original debt at a lower rate of interest. creditors may: a) b) c) d) reduce the current interest rate . Example. 9 . Creditor‟s acceptance of assets or equity with a FV less than the amount of the debt. forgive some of the accrued interest or principal. 2. Modification of the debt term to alleviate the short-term cash needs of the debtor. modify some other term of the debt agreement .Debt Restructuring Most common form of debt restructuring: 1.

redemption of preference shares. sales of assets & liabilities to another company. The devising of a scheme to avoid liquidation . business combination. 10 4. a scheme of arrangement with creditors.  External reorganization (S176 – 178 CA) – changes in legal relationships with outsiders and accounting activity beyond the company itself: 1. 4. 2.64 CA) . 3. reduction of paid up capital.redefinition of rights of shareholders: 1. 2.Reorganization & Reconstruction Two types of reorganization:  Internal reorganization (S61.62. 3. issue of bonus shares. alteration of authorized capital.

Disposal of all part of undertakings. 2. 4. Expansion through business combination. The devising of a scheme to avoid liquidation 11 .External Reorganization  Involves with outsiders in few ways: 1. 3. The rearrangement of the capital structure.

Disposal of all part of undertakings : .  The sales of non current assets  Need approval from the shareholders in the general meeting  Includes the discontinuing operations (FRS 5)  After the disposal. 12 . the remaining balance of the sales proceeds might be distributed to shareholders.External Reorganization… 1.

13 .External Reorganization… 2. The rearrangement of the capital structure :  May involve changes in debt capital  Power to rearrange company’s debt capital by redeeming debentures & unsecured notes will depend on its articles & on the terms of the contracts.

000 KAF3063 FAR III A082 14 .50 ordinary share at par on 1 May 2005.External Reorganization… ☞ Example: On 1 April 2000. Ordinary share capital Bank 1.000 800.  Entries on 1 May 2005: Dr.000. Unsecured notes Cr. On the maturity date.000 1.000. PQR Berhad issued 7% unsecured notes worth RM1 million convertible into RM0. 80% by value of the note holders opted to convert.000 200.000. Sundry noteholders Cr. Sundry noteholders Dr.000 1.

 The possibilities of the combination are limitless (the terms reorganisation. acquisition. absorption. 15 . consolidation.External Reorganization… 3.  FRS 3 Business Combinations. merger & takeover are used interchangeably or sometimes used in a very specific situation in the business world).amalgamation. Expansion through business combination :  This type of reorganisation is motivated by a desire to expand within the industry or to diversify by acquiring businesses in other industries.

The devising of a scheme to avoid liquidation :  The scheme is devised in conjunction with creditors & shareholders to avoid the last resort in financial difficulties i. 16 .e. liquidation.External Reorganization… 4.

Reduction of paid up capital 1. 2. Alteration of authorized capital 1. Extinguish or reduce share capital not paid up 2. conversion of shares into unit of stock or vice versa. Cancellation of capital loss 3. Recognition of the amount of capital required for operations. 3. Return of excess capital to shareholders 3. Relieving shareholders’ of liability. Issue of bonus shares 1. 2. 3. 2. ‘tidying up’ the balance sheet. Redemption of preference shares. .Internal Reorganization 1. increase or reduce authorized capital. Recognition of increases in the value of assets 17 4. 4. change in the par value of shares.

No entry in the ledger or journal would be required as there has been no change in paid up capital. 2. conversion of fully paid shares into unit of stock or vice versa. 3. Difference between shares & stock: relate to divisibility & ease of recording. KAF3063 FAR III A082 18 . increase or reduction in the amount of authorized capital. Alteration of Authorized Capital  S62 CA – several ways: 1. It is not possible to sell part of a share while stock can be sold in any amount. change in the par value of shares.1.

000.50. To convert the fully paid ordinary shares into stock units of RM20.00 par. At the AGM held on 7 May 2005. To alter the par value of the remaining unissued shares from RM1.000 by cancelling 3.00 each fully paid.Alteration of Authorized Capital… ☞ Illustration 1: Selamat Berhad had been incorporated on 1 January 1993 with authorized capital of 10.000 ordinary shares of RM1.00 to RM0. the shareholders resolved: 1.000 unissued shares.00 each. 19 . and 3.000.000.000.000 ordinary shares of RM1. To decrease authorized capital to RM7. had an issued and paid up capital of 1. 2.

000.000 .000.000 RM Authorized 10m Issued 1m Unissued 9m Less 3m Bal unissued 6m Issued & paid up capital: 1.000.000.50 20 1.000 shares of RM1.Alteration of Authorized Capital… ☞ Solution to Illustration 1 Stmt of capital presented at the meeting: Authorized capital: 10.000.000 1.00 each Stmt of capital presented immediately after the meeting: Authorized capital: 50.50 each Issued & paid up capital: KAF3063 FAR III A082 50.000.00 each 10.000 RM6.000 ordinary stock units at RM20.000 ordinary shares of RM1.000.000 shares of RM0.00 each 12.000.000/0.000.000 6.000 ordinary stock units of RM20.00 each 1.

subject to confirmation by the Court & must be authorised by its articles by special resolution to reduce its share cap. alter its memorandum by reducing the amount of its share capital and of its shares accordingly. 21 . and may. Return of excess capital to shareholders • Pay off any paid up share capital which is an excess of the needs of the company. Reduction of Paid Up Capital  S64 CA . Cancel any paid up capital which is loss or is unrepresented by available assets. so far as is necessary. 3 conditions: 1. Extinguish or reduce share capital not paid up 2.2. 3.

Extinguish or reduce share capital not paid up:  BOD to decide & propose whether to retain the right to call up or to give up that right by canceling the uncalled capital.  If the uncalled capital is cancelled.Reduction of Paid Up Capital… 1.  The cancellation of uncalled capital reduces the par value of the shares involved. the resources available to discharge liabilities are reduced just as effectively as when capital is returned to shareholders by way of cash payment. 22 .

000 2.700.00 each Issued & paid up capital: 3.000 ordinary shares of RM1.40 per share in cash to shareholders.000 As the company has more assets than can be used profitable at present.00 each paid to RM0. the directors also proposed to cancel the RM0.90 5. they proposed that both of these changes ought to affect authorized capital. the directors proposed to reduce paid up capital and return the RM0.000.10 per share uncalled capital. In addition. Because they do not anticipate any growth in the company‟s activities.000 ordinary shares of RM1. KAF3063 FAR III A082 23 .Reduction of Paid Up Capital… ☞ Illustration 2: Sejahtera Berhad has the following related to its capital as at 30 June 2005: Authorized capital: 5.000.000.

200.40 per share on the 3.200.700. Capital reduction Cr.200.000 ======= 24 .000 1.000 OSC ======== 1.200.000 Shareholders’ Distribution 1.500.200. 1.000 (reduction in paid up capital by RM0.000 Cr. Cash/Bank (the return of part of paid up capital) Ordinary Share Capital Sh.200.000 Bal b/f 2.200. Ord.000 Bal c/f 1. Distr.000 ======== ======= Bank 1.000.Reduction of Paid Up Capital ☞ Solution to Illustration 2 Journal entries: Dr.000 issued shares as per court order) Dr. Sh. Capital reduction 1. Capital 1.

000 KAF3063 FAR III A082 25 .500.000.000 Issued & paid up capital: 3.50 1.00 each 3.500.50 each Par value Return in cash Cancel uncalled New par value RM1.000.000 1.50 each 2.000.40 RM0.000 ordinary shares of RM1.500.Reduction of Paid Up Capital… Stmt of capital after the distribution of surplus: Authorized capital: 2.000.10 RM0.000 ordinary shares of RM0.000 3.000 ordinary shares of RM0.00 RM0.

companies might have to write-off or writing down the accounts which contain the loss including adjusting their paid-up capital. 26 .  Badly managed companies might suffer losses of some of their paid-up cap due to a large scale embezzlement or a series of operating losses or a fire in uninsured building or by an economic.Reduction of Paid Up Capital… 2. Cancellation of capital loss:  known as Turnaround Situation.  Hence. political or technological changes.

27 .000.000 2.000 ☺ The purpose of reduction for this type of loss is to generate a credit balance against which the debit balances representing the loss of capital can be written off.000.000 3.000.Reduction of Paid Up Capital… ☺ Example of capital loss: Issued & paid up capital Less: Accumulated loss 5.

000 28 .000.000 ord.000 9.000.000) 7. shares of RM1.Reduction of Paid Up Capital… ☞ Illustration 3: The directors of Salam Akhir Berhad presented the following information to a meeting of shareholders: (a) Balance Sheet 30 June 2005 Property Plant & Equipment Other Assets Financed by: 5.000 2.000.000.000.000 4.000.000 9.000 Authorised.000 (3.00 each Less: Retained Earnings (loss) Shareholders’ fund Long Term Liabilities KAF3063 FAR III A082 10.000.000. Issued & Paid up Capital: 10.000.

The market value of the PPE has recently fallen to RM2.Reduction of Paid Up Capital… (b) Market surveys indicate that trading conditions have improved so much that future profits will be approximately RM1.000 per year. The proposals were approved. and iii) To write the PPE account down to market value.000 and the fall is expected to be permanent. 29 . (c) The directors proposed: i) To reduce paid up capital by RM0.000.55 per share ii) To write off the debit balance on Profit and Loss account.500.

000 (reduction of paid up capital by RM0.000 2.000.000 issued shares as per court order) Dr. Capital 5.500. Capital reduction 5. Retained earnings (loss) PPE (Losses written as per court order) 5.500.000.000 30 .500. Sh. Capital reduction Cr.Reduction of Paid Up Capital…  Solution to Illustration 3 Journal entries: Dr.000 3. Ord.55 per share on the 10.500.000 Cr.

000 ====== ===== PPE Bal b/f ‘000 ‘000 5. Reduction 3.500 ====== ====== Bal b/f Retained Earnings ‘000 ‘000 3.000 Bal c/f 4.500 ===== ===== Capital Reduction ‘000 Ret. Reduction 2.500 ===== KAF3063 FAR III A082 31 .Reduction of Paid Up Capital… Ordinary Share Capital ‘000 ‘000 Cap.500 Bal b/f 10.000 OSC PPE 2.500 Bal c/f 2.500 ===== ‘000 5.000 Cap. reduction 5. earnings 3.000 Cap.

500.500.45 each Long Term Liabilities 4.000 6. shares of RM0. Issued & Paid up Capital: 10.000.000 KAF3063 FAR III A082 32 .500.000 4.000 2.Reduction of Paid Up Capital… The balance sheet after the reduction: Property Plant & Equipment Other Assets 2.000 Financed by: Authorised.500.000 ord.000.000.000 6.

2. 4. discharge liabilities purchase income-producing assets such as shares & debentures enter into some additional business activity pay large dividends to shareholders (by distributing retained earnings) return to present shareholders some of the capital which had been contributed in the past 3.g. idle cash in the banks & ineffective investment). 33 .Reduction of Paid Up Capital… 3. 5.  The SURPLUS can be used to: 1. Return of excess capital to shareholders:  Some financial statements show that company is having more financial resources available than can be used profitably (e.

the directors may consider: .the costs of the various types of finance available.the requirements of the law relating to company [e. & its shareholders. For alternative (5). . need to satisfy S. . 34 . need to get approvals etc.the rates of return on other investments.  Could combine all the factors or combine several factors for an arrangement scheme. . 64 of CA.].the long-term effects (including the incidence of taxation) on the co.g.Reduction of Paid Up Capital…  In choosing among the alternatives.

Issued & Paid up Capital: 5.000 5.000 5.100.500.000 7.900.Reduction of Paid Up Capital… ☞ Illustration 4: Harapan Berhad Balance Sheet 30 March 2005 Cash at bank Other Assets Financed by: Authorised.000.000.00 each Retained Earnings Shareholders’ fund Long Term Liabilities KAF3063 FAR III A082 5.000 100.000 1.000 1.000 35 .000 7.000 ord. shares of RM1.500.000.000.

45 and return RM0. They have discovered that no profitable investment opportunity exists in the industry and that it would be unprofitable to reduce liabilities by more than RM900. the directors put the following reorganization into effect on 1 April 2005: i) Pay off RM900. shareholders and the Court for reduction of capital.02 per share. after having obtained the appropriate approvals from creditors. they agreed that it would be unwise for the existing management to attempt to move into other activities.55 per share to shareholders. 36 .000 of the liabilities. In addition. Therefore.000.Reduction of Paid Up Capital… The company is operating in a declining industry and the directors have considered how to use the surplus assets. and iii) Reduce the par value of all shares to RM0. ii) Pay a dividend of RM0.

000 issued shares as per court order) Dr. Ord.750.750.000 37 .000 2.000 (payment of dividend 5.000 2. Sh. Dividends payable Capital reduction Cr. Capital reduction 2.750. Bank KAF3063 FAR III A082 100.Reduction of Paid Up Capital…  Solution to Illustration 4 Journal entries: Dr. Liabilities Cr. Retained Earnings 100.55 per share on the 5.000.02) Dr.000 Cr. Bank 900.000 (reduction in paid up capital by RM0.000 x RM0.000 Cr. Capital 2.000 Dr.000 900.850. Dividend payable 100.000.

000 1.000 38 .250.000 3. shares of RM0. Issued & Paid up Capital: 5.250.000 Bal b/f Bal c/f 2.000. reduction 2.45 each Long Term Liabilities 2.000 ======= 5.Reduction of Paid Up Capital… Ordinary Share Capital Cap.000.000 ======== Extract of balance sheet after the reduction of capital: Harapan Berhad Balance Sheet 30 March 2005 Authorised.000.000 ord.250.750.

appropriately described. 39 . reduction of capital may involve more than one class of shareholders. a return of capital which affects more than one class of shares involves more accounting entries. As each class of capital issued by a company must be recorded in separate.Reduction of Paid Up Capital…   In certain cases. accounts.

000. 2.000 8% preference shares of RM1.40 per share.000 7. shares of RM1.20 per share.Reduction of Paid Up Capital… ☞ Illustration 5: Harapan Tinggi Berhad Statement of Capital 31 December 2004 Authorised Capital 7.000.000.00 each 2. 40 . having obtained all the approvals necessary. proceed to the following capital reduction: 1. reduce all preference shares to a par value of RM0.000.000 ord. reduce all ordinary shares to a par value of RM0.60 and return KAF3063 FAR III A082 RM0.80 and return RM0.000 5.00 each 5.000 Issued & Paid up Capital: 2.000.000.000 The directors.

000 Cr.000 (reduction of all preference shares to a par value 0f RM0.Reduction of Paid Up Capital…  Solution to Illustration 5 Journal entries: Dr. Capital reduction . shares 400. Ordinary Share Capital 2.000.000.60 per share by reducing paid up capital as per Court Order) 41 .Pref.000 (reduction of all ordinary shares to a par value of RM0.80 per share by reducing paid up capital as per Court Order) Dr.000 Cr. Capital reduction – Ord. shares 2. Preference Share Capital 400.

000 ===== Preference Share Capital ‘000 ‘000 Cap.000 OSC ====== ‘000 2.OS ‘000 2.PS ‘000 400 PSC ===== ‘ 000 400 ===== 42 . reduction 2.000 ====== ====== Bank Capital Reduction .000 Bal b/f 5.000 Bal c/f 1.600 ===== ===== Bank Capital Reduction .Reduction of Paid Up Capital… Ordinary Share Capital ‘000 ‘000 Cap. reduction 400 Bal b/f 2.000 Bal c/f 3.

600.000. shares of RM0.000 KAF3063 FAR III A082 43 .000 8% preference shares of RM0.000 ord.000 4.000 Issued & Paid up Capital: 2.000.60 each fully paid 1.000 3.000.000.Reduction of Paid Up Capital… Harapan Tinggi Berhad Statement of Capital 31 December 2004 Authorised Capital 7.80 each fully paid 5.600.

even the share price may fall. It is assumed that the company will maintain its traditional rate of cash dividends. or vary the rights of the shareholders. It is merely a means of reclassifying the elements of shareholders funds by capitalising some of them (by converting some part of distributable profits into paid up capital). The wealth of the shareholders may increase through increase in the market value of shareholders’ investment. 44   . Issue of Bonus Shares  The issue of bonus shares does not add to the wealth of a company.3.

3. 4. 2. Relieving shareholders’ of liability. Recognition of increases in the value of assets.  Some internal reasons for the issue of bonus shares: 1.Issue of Bonus Shares…  Bonus issue often used as a defence against take-over bid by way of: o persuade the shareholders to retain the shares for the dividends. 45 . ‘tidying up’ the balance sheet. Recognition of the amount of capital required for operations. o the increase in number of shares to be acquired by bidders.

unappropriated profits & profit and loss appropriation (dividends paid not equal to reported profit). 46   . Argument: the balance sheet does not accurately describe the situation and that all or most of the undistributed profit ought to be converted into paid up capital through the issue of bonus shares.Issue of Bonus Shares… (1) Recognition of the amount of capital required for operations:  Most companies “retain” some of each year‟s profit in way of retained earnings. These are regarded as permanent capital.

00 each Retained earnings Shareholders’ fund 2. 47 .000 Issued & Paid up Capital: 2.000.000 ordinary shares of RM1.000 5.Issue of Bonus Shares… ☞ Illustration 6: SerbaTinggi Berhad Statement of Capital 30 March 2005 Authorised Capital 10. the company requires share capital and reserves of RM7 million.000.000 7.000 The directors estimated that to maintain its present level of operations.500.500. The directors recommend a bonus issue of five shares for every two held.000.

Issue of Bonus Shares…  Solution to Illustration 6: If articles permit the direct capitalization: Journal entries: Dr. Ordinary Share Capital 5.000 Dr.000.000 5. Retained Earnings Cr.000 Cr.000 (bonus issue of five fully paid ordinary shares for every two shares held out of retained earnings) If articles does not permit the direct capitalization: Dr.000.000 5.000.000.000 Cr. Retained Earnings 5.000.000. Ordinary Share Capital KAF3063 FAR III A082 48 . Dividend Payable 5. Dividend Payable 5.

000.500.Issue of Bonus Shares… The statement of capital after the bonus issue: Authorised Capital Issued & Paid up Capital: 7.000 7.000 500.000 ordinary shares of RM1.00 each Retained earnings Shareholders’ fund 10.000 7.000 49 .000.000.

Issue of Bonus Shares…
(2) Relieving shareholders’ of liability:  It happens when company decides to capitalise undistributed profits by „paying up’ uncalled cap rather than by making a bonus issue of fully paid shares.  This has the effect of relieving shareholders of the liability to pay the uncalled capital.

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Issue of Bonus Shares…
☞ Illustration 7: Sederhana Berhad Statement of Capital 30 March 2005 Authorised Capital 20,000

Issued & Paid up Capital: 10,000 ordinary shares of RM1.00 each paid to RM0.50
Retained earnings Shareholders’ fund

5,000 12,000 17,000

The directors resolve to ‘pay up’ the uncalled capital out of retained earnings.
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Issue of Bonus Shares…
 Solution to Illustration 7:
Journal entries: Dr. Retained Earnings 5,000 Cr. Ordinary Share Capital 5,000 (capitalization of retained earnings by eliminating uncalled capital)

The statement of capital after the bonus issue: Authorised Capital Issued & Paid up Capital: 10,000 ordinary shares of RM1.00 each fully paid Retained earnings Shareholders’ fund
KAF3063 FAR III A082

20,000

10,000
7,000 17,000
52

327).  4 types of the list of accounts: 1. 60(2) – (3). of accounts appear under the category of share capital & reserves. Ac which relate to undistributed profits 3.Issue of Bonus Shares… (3) ‘tidying up’ the balance sheet :  Bonus issue could tidy up a Balance Sheet by reducing the no. issued & paid-up cap 2.S. 61(5).S.S. Ac which relate to authorised. Investment Fluctuation Reserve . Ac which have been established under specific statutory provisions (Share Premium Ac . 4. Ac which have been established under specific provisions in the company‟s Articles. 53 . Cap Redemption Reserve .

54 .Issue of Bonus Shares…  Hence the issuance of bonus shares will reduce those many accounts into less number of accounts.  The presented statements will be easier to digest & will look simpler.

Issue of Bonus Shares… (4) Recognition of increases in the value of assets :  Revaluation of assets: o Increase – upward revaluation (credit to revaluation reserve) o Decrease – downward revaluation (impairment. debit to profit and loss)  Revaluation gains (realised or unrealised) can be used to issue bonus shares or to „pay up‟ uncalled capital. 55 .

 S. Redemption of Preference Shares  Basically. or o the right to redeem this class of shares at company’s option.4. company can create a class of share which carries: o the right to a return of capital in future. company can issue redeemable preference shares & the redemption shall be effected only by the manner provided by the articles. 61 . except under the resolutions in S. 56 . a company is prohibited from returning back or distributing capital to its shareholders.  However. 64 discussed earlier.if authorised by its articles.

Redemption of Preference Shares  WARNINGS in S. AND . 61: o The redemption shall not be taken as reducing the amount of authorised share capital. 57 .out of profits which would otherwise be available for dividend. OR . premium on redemption must be provided for redemption out of profits or out of Share Premium Account.if they are fully paid-up. the value of assets & shareholders’ equity will decrease because the articles often require the redemption at premium (to compensate shareholders for the loss of income in the future).out of the proceeds of a fresh issue of shares made for the purposes of the redemption.  Even though paid-up cap is not reduced. Thus. o The shares could only be redeemed: .

000.000.000 2. shares of RM1. the directors resolve to exercise the company’s option to redeem all the preference shares.000 500.000 8. but a premium equal to 5% of the nominal value is payable if the shares are redeemed before 30 June 2007.000 6.000.000 2.Redemption of Preference Shares ☞ Illustration 8: Inferior Berhad Extract from Balance Sheet as at 30 June 2005 Authorized Share Capital Issued & Paid up Capital: 2.00 each fully paid* 6.200.00 each fully paid 10. On 1 August 2005.000 10. KAF3063 FAR III A082 58 .000 ordinary shares of RM1.000.000.000.000 Share premium Retained earnings Shareholders’ fund * These shares are redeemable at the option of the company.700.000 8 % redeemable pref.

000. Share premium Cr.100.000. Red.000 2.000 2. pref shareholders distribution Cr.000.000 100. Capital redemption reserve Dr. Red.000 2.000 2.000 59 .100. Retained earnings Cr.000 2. Red. Redeemable preference share capital Cr. pref shareholders distribution Dr.Redemption of Preference Shares  Solution to Illustration 8: I. pref shareholders distribution Dr. Redeem out of retained earnings: Journal entries: Dr.000 2. Bank KAF3063 FAR III A082 100.000.

S.000 ==== ==== KAF3063 FAR III A082 60 .000 Bal b/f 200 ===== ‘000 2.000 Bal b/f 2. Res.Redemption of Preference Shares Redeemable Preference Share Capital ‘000 ‘000 R.P.000 R.200 ===== Red. 100 Bal b/f Bal c/f 400 ====== ‘000 500 ===== C.100 Share prem. PSC 2.000 ====== ====== Share Premium ‘000 R. Shareholders Distribution ‘000 ‘ 000 Bank 2. 100 Red.S.Red. Bal c/f Retained Earnings ‘000 2. Pref.Distr.P. Earnings 2. 2.000 ===== ===== Capital Redemption Reserve ‘000 ‘000 Bal.Distr. c/f 2.

000 400 200 8.000 2.000 ordinary shares of RM1.000.00 each fully paid Capital redemption reserve Share premium Retained earnings Shareholders’ fund 10.Redemption of Preference Shares The statement of capital after the redemption: RM‘000 Authorised Capital Issued & Paid up Capital: 6.000 6.600 61 .

000.100.000 2.000 62 .000 2. Bank KAF3063 FAR III A082 100.000 2.000. Red. Redeem out of proceeds of a new share: Journal entries: Dr.000. Ordinary share capital Dr. pref shareholders distribution Cr.000  shareholders Solution to Illustration 6: Cr. Red. Redeemable preference share capital Cr.000.Redemption of Preference Shares  Solution to Illustration 8: II.000 2.000 2. pref distribution Dr. Bank Cr.000 2. pref shareholders distribution Dr. Share premium 100.100. Red.

Pref. Shareholders Distribution ‘000 ‘ 000 Bank 2.S.000 Bank 2.000 Bal b/f 2. 100 Red.000 ===== ===== Red.P. PSC 2.000 ====== ====== Share Premium ‘000 R.100 Share prem. 100 Bal b/f Bal c/f 400 ====== ‘000 500 ===== Bal c/f Ordinary Share Capital ‘000 ‘000 Bal b/f 6.P.000 8.S. 2.000 ===== ===== KAF3063 FAR III A082 63 .Redemption of Preference Shares Redeemable Preference Share Capital ‘000 ‘000 R.Distr.Distr.

000.000 ordinary shares of RM1.000 400 2.00 each fully paid Share premium Retained earnings Shareholders’ fund 10.Redemption of Preference Shares The statement of capital after the redemption: RM‘000 Authorised Capital Issued & Paid up Capital: 8.200 10.600 64 .000 8.

KAF3063 FAR III A082 65 . Company Account & Reporting. 5 th Edition.Referrence  Jane Lazar & Tan Lay Leng (2003).

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