ABFA2064 FINANCIAL ACCOUNTING III 1 SKH2020

Lecture 4 Revisions for Chapter 1 and 2

Extracted from: 10 February 2020 Q1 Required:

(A) (a) Calculate the capital as at 1 January 2019 and 31 December 2019.
(10 marks)
A sole trader, Ryan Ng, does not keep proper books of accounts. The following
information is extracted from Ryan Ng’s books for the year ended 31 (b) Prepare a statement to calculate the profit or loss for the year ended
December 2019: 31 December 2019. (2 marks)
1 January 2019 31 December 2019
RM RM (B)
Motor van 48,000 48,000
Furniture and fittings 34,000 38,800 The subscriptions received in cash by a club during the year 2019 were as
Trade receivables 19,000 18,800 follows:
Trade payables 17,600 17,000
Year RM
Inventories 33,000 37,500
2018 5,000
Prepaid expenses 800 1,000
2019 26,000
Cash in hand 2,500 4,800
2020 4,000
Additional information:
On 1 January 2019, there were RM2,000 of subscriptions received in advance.
1. An allowance for doubtful debts of RM600 is to be made for bad On 31 December 2019, the subscriptions in arrears amounted to RM3,500.
debts at the end of the year.
Required:
2. Depreciation of 10% per annum on cost is to be charged on all non-
current assets. (a) Prepare a subscriptions account to determine the subscriptions income for
the year ended 31 December 2019. (7 marks)
3. During the year, Ryan Ng had withdrawn RM800 from the business
each month for personal use. (b) Briefly explain the difference between a capital expenditure and a revenue
expenditure with an example each. (6 marks)
4. In August 2019, Ryan Ng brought in for use in the business a [Total: 25 marks]
cabinet, a table and an office chair amounting to RM4,800.
ABFA2064 FINANCIAL ACCOUNTING III 2 SKH2020

(B)
(A) (a)
(a) Subscriptions Account
Statement of Affairs as at … 2019 RM 2019 RM
31 December 2018 31 December 2019 Jan 1 Balance b/f Jan 1 Balance b/f
Debit Credit Debit Credit June 30 Inc. & Exp. June 30 Bank
RM RM RM RM `` Balance c/d 5,000 + 26,000 + 4,000
Motor van `` Balance c/d
Furniture and fittings
Trade receivables 2019 2019
Inventories July 1 Balance b/d July 1 Balance b/d
Prepaid expenses
Cash in hand
Trade payables (b)
Allowance for DD Capital expenditure
Accm Depreciation : MV
48,000 x 10%  Amount paid for items that would last for several accounting periods.
 For example the purchase of badminton nets; billiard tables
Accm Depreciation : FF
38,800 x 10% Revenue expenditure
Capital
 Amount paid for items which are used up or consumed within a short
period.
 For example the purchases of shuttle corks and tennis balls are revenue
(b) expenditure.
Statement of profit or loss for the year ended 31 December 2019
RM RM
Capital as at 31 December 2019
Add: Drawings RM800 x 12 months

Less: Capital as at 1 January 2019

Additional capital
Net profit
ABFA2064 FINANCIAL ACCOUNTING III 3 SKH2020

Extracted from: 12 September 2019 Q1

Question 1 (B)

(A)
Fun Cycling Club has recruited 250 members since it first started in
2011.
As at 1 January 2019, the club recorded a total of 35 members who have
not paid their December 2018 subscriptions and there are 50 members
who have paid both their January 2019 and February 2019 subscriptions
in advance.
Sean’s Books Corner has been operating since 1 January 2010.
Unfortunately, a fire has destroyed all the books on 31 August 2019.
You are given the following information:
 At the beginning of the year, all the books were valued at
RM385,000.
 Sales and purchases during the eight months to 31 August 2019 were
RM1,560,000 and RM996,000 respectively.

As at 30 June 2019, the accounts staff found that there were 28 members  Sean’s Books Corner has been maintaining a 20% mark up on all its
who have not paid their June 2019 subscriptions and 13 members who books sold.
have paid their July 2019 subscriptions.
Required:
Members are required to pay a monthly subscription of RM20 per
person. (a) Calculate the total inventories that were destroyed by the fire on 31
August 2019. (6 marks)
Required:
(b) State TWO (2) disadvantages of the single entry system of recording
(a) Calculate the amount of subscriptions received for the six months business transactions. (4 marks)
ended 30 June 2019. (10 marks) [Total: 25 marks]

(b) State the FIVE (5) sources of income for non-profit organisations.
(5 marks)
ABFA2064 FINANCIAL ACCOUNTING III 4 SKH2020

Question 1
Opening inventories
(A) (a)
Subscription Account Purchases
2019 RM 2019 RM
Jan 1 Balance b/f Jan 1 Balance b/f Closing inventories
Actual cost of goods sold
June 30 Income & Exp. June 30 Bank
Inventories loss = RM1,381,000 – RM1,300,000
= RM81,000
`` Balance c/d `` Balance c/d

2019 2019
(B) (b)
July 1 Balance b/d July 1 Balance b/d
Two disadvantages of single entry:
 Trial balance cannot be extracted to check the arithmetic
(A) (b)
accuracy of the ledger entry.
Five sources of income:
 Profit or loss cannot be determined easily by setting up final
 Membership annual subscriptions
accounts in the normal way since no information is readily
 Payments for life membership available on all its gains and revenue or its losses and expenses.
 Profit from some business activities, such as bar, canteen etc.  Its financial position is not easily determined since information
 Profit from social events such as dinner, contest etc. on its assets and liabilities may not be complete.
 Interest from investment in fixed deposits, shares etc.  Comparison on its trading operations with previous years may
 General donation received not be possible because of the unsystematic method of keeping
books.
[Total: 25 marks]
(B) (a)

Computed Cost of goods sold RM’000 %

Sales
Gross profit
Cost of goods sold
ABFA2064 FINANCIAL ACCOUNTING III 5 SKH2020

Lecture 5 and 6 Manufacturing account Format:

1. Introduction to manufacturing account Cost of raw materials used RM RM

Opening inventories of raw materials 2,500
Manufacturing businesses can be in the form of sole traders, partnerships
and limited companies or other mode of ownership. The objective of a Add: Purchases 50,000
manufacturing concern is to make saleable product in the factory and to sell Less: Returns outwards (if any) 1,000
the product. 49,000
Add: Carriage inwards 1,200
There should be distinguished between buying in saleable products from
outside suppliers and manufacturing the products by themselves in the Import duties 2,000
factory. The costs incurred in producing the finished product are Insurance on purchases 1,300 53,500
accumulated in an account call "manufacturing account". 56,000
Less: Closing inventories of raw materials 3,000
2. Division of costs
53,000
Direct materials

Direct labour Prime cost

4. Direct costs:
It has been possible to trace the costs of making an item to the item being
Direct expenses
Manufacturing manufactured.
Cost
Indirect materials Example: Wages of a machine operator treated as direct labour. Wages of
a foreman in repairing the machine in many departments treated as indirect
Indirect labour Overheads labour
Indirect expenses
5. Factory overheads: Indirect expenses
Other expenses not related to the factory must be debited in the profit and Those costs incurred in the factory where production is being done, but
loss account. cannot easily be traced to the item being manufactured.

3. Cost of raw materials used
The purchases of raw materials must be adjusted by the difference in
opening and closing inventories of raw materials to find the cost of raw
materials used in the period. The same format as Cost of goods sold.
Example: Wages for cleaners in factory; crane drivers; rent and rates for
factory; Depreciation of plant and machinery; maintenance cost of
machinery and crane, trucks, fork-lift; water and electricity etc.
ABFA2064 FINANCIAL ACCOUNTING III 6 SKH2020

6. Illustration:
7. Work in progress
The production costs of Kijang Manufacturer for the year ended 31
December 2019 are as follows: Products that take a long time to complete, that is long manufacturing cycle
RM will always have products at the end of period which is incomplete. These
Inventories of raw materials as at 1 January 2019 1,750 items are called work in progress.
Inventories of raw materials as at 31 December 2019 2,450
Purchase of raw materials 28,000
Manufacturing wages 73,500 8. Format of a manufacturing account
Royalties 525
Indirect wages 31,500 Manufacturing account for the year ended …
Rent of factory building 1,540 RM
Depreciation of plant and machinery 1,400 Cost of raw materials used X
General indirect expenses 1,085 Add: Direct labour X
Add: Direct expenses (e.g. royalties) X
Manufacturing account for the year ended 31 December 2019 Prime cost ?
RM RM Add: Overheads X
Cost of raw materials consumed 136,850
Inventories as at 1 January 2019 Add: Opening work in progress 1,350
Add: Purchase of raw materials 138,200
Less: Closing work in progress 1,980
Manufacturing cost of finished goods 136,220
Less: Inventories as at 31 December 2019

Direct labour: Manufacturing wages

Direct expenses: Royalties 9. Illustration: Manufacturing, trading account

Prime cost Given the extracts from Bayan Sdn. Bhd. for the year ended 30 April 2020.
RM
Inventories as at 1 May 2019:
Factory overheads
Raw materials 4,000
Indirect wages Work in progress 1,750
Rent of factory building Finished goods 17,500
Depreciation of plant and machinery Inventories as at 30 April 2020:
General indirect expenses Raw materials 5,250
136,850 Work in progress 2,100
Finished goods 22,000
ABFA2064 FINANCIAL ACCOUNTING III 7 SKH2020

Sales 125,000 Factory overheads

Purchases of raw materials 43,500 Indirect wages
Carriage inwards on raw materials 1,000
Maintenance of machinery
Direct expenses 700
Rent of factory
Direct wages 19,800
Indirect wages 12,750 Depreciation of plant and machinery
Maintenance of machinery 1,500 Travelling claims by factory's employee
Rent of factory 3,600 General factory expenses
Depreciation of plant and machinery 2,100 Insurance on factory plant and machinery
Travelling claims by factory's employee 900 Electricity
General factory expenses 1,650
Insurance on factory plant and machinery 750
Electricity 4,950 Add: Work in progress as at 1 May 2019

Solution:
Bayan Sdn Bhd Less: Work in progress as at 30 April 2020
Manufacturing account for the year ended 30 April 2020
RM RM
Production cost of completed goods 91,600
Cost of raw materials consumed
Inventories as at 1 May 2019
Add: Purchase of raw materials Bayan Sdn Bhd
Carriage inwards Trading account for the year ended 30 April 2020
RM RM
Less: Inventories as at 30 April 2020 Sales

Less: Cost of goods sold

Direct labour: Manufacturing wages
Inventories as at 1 May 2019
Direct expenses: Royalties Add: Production cost of completed goods

Prime cost 63,750 Less: Inventories as at 30 April 2020

Gross profit 37,900
ABFA2064 FINANCIAL ACCOUNTING III 8 SKH2020

Other assets 510,000

10. Apportionment of expenses Ordinary share 500,000
Retained earnings 20,000
Factory overhead expenses: to be charged to the manufacturing account.

Administrative expenses consist of managers' salaries, legal and accounting The shared overhead costs are to be apportioned as follows:
fees, depreciation of office equipment etc. These amount to be charged to
the statement of profit or loss. Manufacturing Administration Selling
Depreciation of equipment 80% 5% 15%
Distribution coats are items such as sales representative salaries and
commission, advertising, deprecation of delivery van etc. These amount to Rates and assessment 50% 30% 20%
be charged to the statement of profit or loss. Depreciation of building 50% 30% 20%
Water and electricity 40% 35% 25%
Apportionment is required if rent paid is for factory and office. The Telephone 40% 60%
measurement basis can be by floor area, or property valuation etc.
The values of inventories are as follows:
11. Illustration: Manufacturing, trading, profit and loss account 1 January 2019 31 December 2019
RM RM
Sedaya Sdn Bhd, a company incorporated in Malaysia, has its factory and
Raw materials 12,500 7,500
offices at the same site in Segamat, Johor. The results for the year ended
31 December 2019 were as follows: Work in progress 10,000 7,500
Finished goods 40,000 45,000
RM
Sales of finished goods 447,500 Required:
Purchases of raw materials 150,000
Prepare the manufacturing, trading, profit and loss account of Sedaya Sdn.
Manufacturing wages 175,000
Bhd. for the year ended 31 December 2019.
Depreciation of equipment 25,000
Rates and assessment 12,500
Depreciation of building 5,000
Water and electricity 7,500
Telephone 5,000
Other manufacturing overheads 5,750
Other administrative expenses 6,375
Other selling expenses 2,875
ABFA2064 FINANCIAL ACCOUNTING III 9 SKH2020

Solution:
Sedaya Sdn Bhd
Manufacturing Administration Selling Trading account for the year ended 31 December 2019
Depreciation of equipment 80% 5% 15% RM RM
25,000 Sales 447,500
Rates and assessment 50% 30% 20% Less: Cost of goods sold
12,500 Inventories as at 1 January 2019
Depreciation of building 50% 30% 20% Add: Production cost of completed goods
5,000
Water and electricity 40% 35% 25%
7,500 Less: Inventories as at 31 December 2019
Telephone 40% 60% Gross profit
5,000 Less:
Administrative expenses
Sedaya Sdn Bhd Depreciation of equipment
Manufacturing account for the year ended 31 December 2019 Rates and assessment
RM RM
Depreciation of building
Cost of raw materials consumed
Inventories as at 1 January 2019 Water and electricity
Add: Purchase of raw materials Telephone
Other administrative expenses
Less: Inventories as at 31 December 17,500
2019 Distribution costs
Direct labour: Manufacturing wages Depreciation of equipment
Prime cost 330,000 Rates and assessment
Factory overheads
Depreciation of building
Depreciation of equipment
Rates and assessment Water and electricity
Depreciation of building Telephone
Water and electricity Other selling expenses
Telephone 15,000
Other manufacturing overheads 32,500
Net profit 50,000
Add: Work in progress as at 1 Jan 2019

Less: Work in progress as at 31 Dec 2019 Add: Retained earnings b/f 20,000
Production cost of completed goods 370,000 Retained earnings c/f 70,000
ABFA2064 FINANCIAL ACCOUNTING III 10 SKH2020

In some business, manufactured goods are transferred from the factory to

Sedaya Sdn Bhd the warehouse at market price, or an approximation thereof, in the form of
Statement of financial position as at 31 December 2019 cost plus a given percentage for profit.
RM RM
Other assets This is intended to represent the price that the warehouse department would
Current assets have to pay if it bought the goods from an external supplier, or the price the
Closing inventories factory would receive if it sold the goods to an external customer.
Raw materials
Work in progress 13. Transfer price
Finished goods
The value of goods transferred out of the production department, at transfer
price value, is a cost to the department receiving the goods, example the
warehouse department, and it is "income" to the production department.
Financed by: The production department's profit is therefore its income received from the
Ordinary share capital 500,000 goods manufactured, less the cost of manufacturing the goods.
Retained profit c/f 70,000
570,000 Since the production department will earned a "profit" on the goods it
manufactured, but the business as a whole will only make a profit on what
it sells, there will be problems in periods when production volumes and
12. Profit centre and transfer pricing sales volume differ.

In certain business, management established profit centre of operations,
with each centre held accountable for making profit, and the manager of the
centre made responsible for its good and bad results of his centre.
When a production department is established as a profit centre, it makes a
"profit" on the output it manufactures and transfers out, either to finish
goods store or to another profit centre. However, production department do
not sell goods, they only manufacture the goods, and if a production
department is a profit centre, its "income" must come from the goods it
manufactures, not the goods sold.
This can be achieved by creating an "artificial" selling price for goods
manufactured and transferred out from the production department. This
artificial or internal selling price is called a transfer price.
As far as the business concerned, the manufacturing profit on goods
manufactured but not sold cannot be included in the profit and loss account.
The profit on goods manufactured but not yet sold is an unrealised profit,
and must be excluded from the profit and loss account. This is done by
creating an "Allowance for unrealised profit account"
14. Purpose of having transfer prices
The purpose of having internal transfer prices is said to make the managers
in the factory and warehouse more aware of the impact of market forces,
increase motivation and facilitate the evaluation of their performance.
ABFA2064 FINANCIAL ACCOUNTING III 11 SKH2020

15. Elimination of unrealised profit: Prudent concept

Solution:
If the valuation of closing inventories of finished goods includes an FIFA manufacturer
element of factory profit, this unrealised profit must be eliminated in the Manufacturing account for the year ended…
profit and loss account and statement of financial position by making an RM RM
appropriate allowance. Direct materials ?
Direct labour ?
The factory profit element included in closing inventories of finished goods
Prime cost ?
is eliminated from the profit and loss account of the business by:
Factory overheads ?
Profit and loss account Dr Production cost of completed goods 280,000
Closing inventories Cr Manufacturing profit 28,000
(Elimination of URP) Market price of finished goods 308,000

A reverse transaction is required for opening inventories when all opening FIFA manufacturer
inventories were sold in the next financial year: Trading, profit and loss account for the year ended…
RM RM
Opening inventories Dr
Sales
Profit and loss account Cr
(Factory profit element in opening inventories sold) Less: Cost of goods sold
Opening inventories
In the statement of financial position, inventories of finished goods is Add: Market price of completed goods
valued as follows:
Less: Closing inventories
RM Gross profit
Inventories of finished goods X
Add: Manufacturing profit
(gross value including profit)
Less: Allowance for unrealised profit (X) Less: Increase in allowance for URP
Cost of inventories of finished goods X 161,000

Illustration: 30,800
Unrealised profit for opening inventories = X 28,000 = RM2,800
308,000
Cost of production for FIFA manufacturer is calculated as RM280,000.
Opening and closing inventories are RM30,800 and RM53,900 respectively. 53,900
Unrealised profit for closing inventories = X 28,000 = RM4,900
Sales for the year amounted to RM420,000. 308,000

If the market price of the goods manufactured by FIFA manufacturer is 10% Increase in allowance for unrealised profit = RM2,100
above the production cost, the account would appear as follows:
ABFA2064 FINANCIAL ACCOUNTING III 12 SKH2020

Allowance for unrealised profit Office expenses:

RM RM Electricity 22,500
Profit and loss Balance General expenses 13,500
Balance b/d Manufacturing account Postage and telephone 4,350
Salaries 105,000
Balance b/d Other assets 676,250
Ordinary share capital 500,000
Statement of financial position (extract) Retained earnings 80,000
RM RM
Current assets The following additional information relates to the current financial year.
Inventories of finished goods
Less: Allowance for unrealised profit 1. At 30 September 2019, the following inventories were on hand
RM
Raw materials 15,000
16. Lecture illustration Work in progress 13,500
Finished goods 45,000
The following information has been extracted from the books of Saujana Sdn
Bhd for the year ended 30 September 2019. 2. There was an accrual for advertising of RM1,500 at 30 September 2019. It
RM was estimated that RM2,250 had been paid in advance for the office's
electricity.
Sales 766,600
Purchases of raw materials 303,000 3. The finished goods are transferred from the factory at the manufacturing
Inventories as at 1 October 2018: cost of production plus an addition of 20% for factory profit.
Raw materials 12,000
Work in progress 18,000 Required:
Finished goods 36,000 Prepare the manufacturing, trading, profit and loss account of Saujana Sdn Bhd
Direct wages 60,000 for the year ended 30 September 2019.
Advertising 3,000
Solution:
Unrealised profits 6,000 Allowance for unrealised profit
Factory overheads: RM RM
Insurance 1,500 Profit or loss Balance 6,000
Electricity 22,500 Balance b/d Manufacturing account
Indirect materials 7,500
Water 30,000
Balance b/d
Salaries 37,500
ABFA2064 FINANCIAL ACCOUNTING III 13 SKH2020

Saujana Sdn Bhd Gross profit

Manufacturing account for the year ended 30 September 2019 Add: Manufacturing profit
RM RM 310,600
Cost of raw materials consumed Less: Expenses
Inventories as at 1 October 2018 Electricity (22,500 - 2,250)
Add: Purchase of raw materials General expenses
Postage and telephone
Less: Inventories as at 30 September 2019 Salaries
Direct labour: Manufacturing wages Advertising (3,000 + 1,500)
Prime cost 360,000 Net profit 163,000
Factory overheads Add: Retained earnings b/f 80,000
Insurance Retained earnings c/f 243,000
Electricity
Indirect materials Saujana Sdn Bhd
Statement of financial position as at 30 September 2019
Water
RM RM
Salaries Other assets 676,250
Current assets
Add: Work in progress as at 1 October 2018 Closing inventories
Raw materials
Less: Work in progress as at 30 September 2019 Work in progress
Production cost of completed goods Finished goods 45,000 – 7,500
Manufacturing profit 20% x 463,500 Prepaid electricity 68,250
Transfer price 556,200
744,500
Saujana Sdn Bhd
Trading account for the year ended 30 September 2019 Financed by:
RM RM Ordinary share capital 500,000
Sales 766,600 Retained earnings 243,000
Less: Cost of goods sold
Inventories as at 1 October 2018 36,000 Current liabilities
Add: Transfer price of completed goods 556,200
Accrued advertising 1,500
592,200
Less: Inventories as at 30 September 2019 45,000 547,200
744,500
ABFA2064 FINANCIAL ACCOUNTING III 14 SKH2020

Revision 1 (a)
Allowance for unrealised profit
Modified 24 April 2020 Q2 2019 RM 2019 RM
Dec 31 SPL Jan 1 Balance b/f
For the year ended 31 December 2019, Comfy Shoes Manufacturing Company ʺ Balance b/f Dec 31 Factory profit
(CSMC) has incurred a total production cost of RM1,400,000.
2020
A 10% factory profit will be added to the total production cost and transferred
to the statement of profit or loss as finished goods. Total sales for the year Jan 1 Balance b/f
amounted to RM2,500,000.
(b)
CSMC also provided the inventories as at 31 December 2019 as follow: Comfy Shoes Manufacturing Company
RM Statement of profit or loss (extract) for the year ended 31 December 2019
Opening inventories of finished goods 60,500 RM RM
Closing inventories of finished goods Sales
Raw materials 55,000 Less: Cost of goods sold
Work in progress 48,000 Opening inventories
Finished goods 82,500 Transfer price 1,400,000 x 110%

Required: Less: Closing inventories

(a) Prepare an allowance for unrealised profit account for the year ended 31 Gross profit
December 2019. (3 marks) Factory profit

(b) Prepare an extract of statement of profit or loss for the year ended 31
December 2019, showing factory profit. (4 marks) (c)
Comfy Shoes Manufacturing Company
(c) Prepare an extract of statement of financial position as at 31 December Statement of financial position (extract) as at 31 December 2019
2019, showing only the inventories. (4 marks) RM RM
[Total: 11 marks] Current assets
Inventories:
Raw materials
Workings: Work in progress
Allowance for URP @ 1 January 2019 = 60,500 x 10/110 = RM5,500 Finished goods
Allowance for URP @ 31 December 2019 = 82,500 x 10/110 = RM7,500 Less: Allowance for nrealised profit
Factory profit = RM1,400,000 x 10% = RM140,000
ABFA2064 FINANCIAL ACCOUNTING III 15 SKH2020

Revision 2

Extracted 12 September 2019 Q2 (C) Sinaran Manufaturing Sdn. Bhd.

Manufacturing account for the year ended 31 May 2019
The following are extracted from Sinaran Manufacturing Sdn. Bhd.’s RM
accounting books for the year ended 31 May 2019: Inventories as at 1 June 2018
RM Purchases
Office salaries 25,419 Carriage inwards
Rent 6,240 Inventories as at 31 May 2019
Office utilities 4,720 Cost of raw materials consumed
Depreciation on machinery 11,220 Direct labour
Purchases of raw materials 101,615 Prime costs
Carriage on raw materials 1,060 Factory overheads
Direct labour 79,208 Rent 6,240 x ¾
Machinery 2,650 Maintenance fee for machinery
Sales 324,862 Depreciation on machinery
Maintenance fee for machinery 5,121

Additional information: Manufacturing costs

Add: Work in progress as at 1 June 2018
1. Rent is to be apportioned as follows: Less: Work in progress as at 31 May 2019
Factory : ¾ Office : ¼ Manufacturing costs of finished goods
(7 marks)
2. The inventories are stated as follows:
31 May 2019 31 May 2018
RM RM
Raw materials 27,800 27,890
Work-in-progress 22,450 30,300
Finished goods 25,940 24,240

Required:

Prepare the manufacturing account of Sinaran Manufacturing Sdn Bhd

for the year ended 31 May 2019. (7 marks)
ABFA2064 FINANCIAL ACCOUNTING III 16 SKH2020

Lecture 7: Accounts for Limited Companies (b) Limited by guarantee

Shares and Debenture
A company limited by guarantee has member rather than shareholders. Such a
Summary company will have no share capital.
(1) Introduction (5) Capital structure of a limited
(2) Classification of company liability company The member of the company “guarantee” to contribute a predetermined sum to
(3) Company Formation (6) Issuance of shares settle the liabilities of the company which become due in the event of the
(4) Differences between limited (7) Loan capital company being wound up.
liability companies with other
entities Unlimited Liability Company

1. Introduction There is no limit to the liability of its shareholders.

Companies are legal entities incorporated under the Companies Act 1965. The
Companies Act 1965 requires all businesses to be registered with the
Companies Commission of Malaysia (CCM). Revised the Companies Act
2016 take into effective currently.
The provision of the Company Act 1965 governs the rules of the formation,
conduct and regulations of companies. A company can be formed with a
minimum of two people. A company has a separate and distinct existence apart
from the natural person who created it and can enjoy limited liability.
The Company Act 1965 classified four board categories of companies:
(a) A company limited by shares,
(b) A company limited by guarantee,
(c) A company limited by both shares and guarantee, and
(d) An unlimited company.
Limited liability companies
(a) Limited by shares
Liability of its members is limited to the amount of share capital contribution.
Example:
A shareholder had subscribed for RM100,000 share capital and has only paid
RM70,000, his liability is limited only to the RM30,000 unpaid on his capital.
If the shares are fully paid up, there is in general no further liability.
In the event a company is to go into liquidation, the creditors have the right to
seize the personal assets of the shareholders to settle any outstanding debts.
2. Classification of company
Registered companies are formed under Company Act 1965. Such companies
can be grouped into:
(a) Public companies;
(b) Private companies;
(c) Exempt private companies;
(d) Foreign companies;
(e) Investment companies; and
(f) Government-linked companies.
Shareholders of a limited liability company enjoy limited liability. This means,
if a company goes into liquidation, the company will have to sell all its assets to
pay its debts owing to all payables. However, any shortage will not be
recovered from shareholders’ personal assets, unlike sole proprietorship or
partnership business.
Companies also have the opportunity to raise large amounts of capital through
issuance of shares and debentures. They also have the opportunity to trade their
shares on the stock exchange (Bursa Malaysia).
There is no need to wind up a company in the event of death or changes in
shareholders or directors.
ABFA2064 FINANCIAL ACCOUNTING III 17 SKH2020

3. Company Formation Company Constitution

A company is governed by Memorandum of Association and the Articles of the Under the CA 1965, every company was required to have a memorandum and
Association. articles of association. The memorandum and articles of association are now
collectively known as the constitution, and it is expressly stated in s31 and 38
Memorandum of Association CA 2016 that only a company limited by guarantee shall have a constitution;
other types of company may or may not have a constitution. It is optional for
Memorandum of Association set out the rules covering the external affair of the them.
business, it contains:

(a) The name of the company; If a company has no constitution, the company, each director and each member
(b) The location of the company’s registered office; of the company shall have the rights, powers, duties and obligations as set out
(c) The objective of the company (i.e. those activities in which the company in the Act. And ‘if the company has a constitution, the company, each director
may legally operate). and each member of the company shall also have the rights, powers, duties and
(d) A statement that the liability of the members is limited. obligations as set out in the Act, except to the extent that such rights, powers,
(e) The amount of the authorised share capital for each class of shares and the duties and obligations are permitted to be modified in accordance with this Act,
nominal value of each share. and are so modified by the constitution of the company’ (s31(2) CA 2016).
(f) Other rules and regulations
In other words, the rights, powers, duties and obligations of the company,
director and member are prescribed by the CA 2016 unless modified by the
Articles of the Association company’s constitution. The company’s constitution can modify any of those
rights, powers, duties and obligations only if the Act permits it.
Articles of Association set out the rules covering the internal affair of the
business, It contains:
For companies which were registered prior to the coming into operation of the
(a) The rights of different classes of shareholders; CA 2016, s619(3) provides that the memorandum and articles of association of
(b) The transfer of shares; a company existing before the operation of the Act shall have effect as if made
(c) The duties, power and the proceedings of directors; or adopted under the Act unless otherwise resolved by the company. Thus, a
(d) Notice and proceedings of meeting; and company’s existing memorandum and articles shall form the company’s
(e) The borrowing power of the company, etc. constitution until the company alters it by passing a special resolution.
ABFA2064 FINANCIAL ACCOUNTING III 18 SKH2020

4. Differences between limited liability companies with other entities

Sole Partnership Limited Liability
Proprietorship Company
Sole Partnership Limited Liability
Proprietorship Company (h) Funding Owner Capital is Capital is raised by
of contributes all contributed issuance of shares. If
(a) Number 1 2 to 20 Private – 2 to 50 Business the capital by all public listed companies,
of Public – 2 to unlimited (Capital) needed by the partners capital can be raised
Owners business. under agreed from public. First time
(b) Owners Sole proprietor Partners Shareholders/ upon amount. raising, it’s called initial
of Members public offerings (IPO).
Business
(c) Owners’ Unlimited Unlimited Limited to the capital Public listed companies
Liability amount of each shareholders shareholders may trade
their shares freely.
(d) Name of Sherly Home- Lee & Private – Sdn. Bhd
Business Made Cakes Brothers Public – Bhd. Private limited
companies
(e) Profits Owner takes all Partners The directors of the shareholders can only
/Losses the profits and share the company will propose transfer shares to
bears all the profits and whether to distribute profits existing shareholders.
losses. losses in form of dividends or
according to capital repayment. (i) Reporting No mandatory No Yes, required by
their profit Requirem requirements. mandatory Companies Act 1965.
sharing Extra profits undistributed ents requirements.
ratio. will be c/f to the next A set of audited annual
accounting year as retained report must be submitted
earnings (retained profits/ to CCM on annual basis
accumulated profits). before 30 June each
year.
(f) Manage Owner has to Selling & Shareholders are not
ment of manage managing involved in the operation of (j) Reporting No mandatory No Must comply to all
Business everything the business business. Roles are taken up Standards requirements. mandatory approved accounting
(e.g., selling & roles may be by appointing CEO. requirements. standards (International
managing the split among Financial Reporting
business) on the partners. Standards - IFRS).
his own.
ABFA2064 FINANCIAL ACCOUNTING III 19 SKH2020

(c) Issued Capital: This represents the part of nominal capital which has been
(k) Yearly No mandatory No An auditor must be issued to the public for cash or other consideration. The issued capital may
Statutory requirements. mandatory appointed to perform the be either partly or fully paid.
Audit requirements. annual audit.
(d) Unissued Capital: This represents the remaining amount of share capital a
If all partners This is to safe-guard the company may issue to public in the future.
agree, an shareholders’ Unissued Capital = (a) Authorised Capital – (c) Issued Capital
auditor may investments, since the
be appointed. shareholders are not (e) Called up Capital: This is the amount of money that the company has
Usually, a actively involved the called up on the issued capital. The subscribers are required to pay within a
sleeping company’s operation. specified time.
partner
prefers that, Re-appointment of (f) Uncalled Capital: This is the amount of money on the issued capital that
since he/she auditors are held every has not been called.
is not year at the Annual Uncalled Capital = (c) Issued Capital – (e) Called Up Capital
actively General Meeting (AGM)
involved in (g) Paid up Capital: This represents the amount of called up capital that has
the operation. been paid by the subscribers.

(h) Unpaid Capital: This is the amount of the called up capital that the
subscribers failed to pay. The unpaid amount is also known as “Call in
5. Capital Structure of a Limited Liability Company Arrears”. This amount will be shown under Statement of financial position,
under Current Asset.
The capital structure of a limited liability company comprises of: Unpaid Capital = (e) Called Up Capital – (g) Paid Up Capital

(1) Share capital - Equity (II) Types of equity instrument

(2) Loan capital - Liability
Summary
(I) Terms in Connection with Equity (A) Ordinary shares

(a) Authorised Capital: This is the maximum amount of share capital a (B) Preference shares
company is empowered to issue. This amount must be stated in the (a) Cumulative preference shares
company’s M&A. (b) Non-cumulative preference shares
(c) Participating preference shares
(b) Par/Nominal Value: This is the face value of each unit of share. For (d) Non-participating preference shares
example, ordinary shares of RM1 each means, the par or nominal value of a
unit of share is RM1. (e) Convertible preference shares
ABFA2064 FINANCIAL ACCOUNTING III 20 SKH2020

(A) Ordinary shares

 Shareholders have the right to vote.
 Shareholders entitled to share in the profits for dividends after the
dividends have been paid to other classes of shares.
 Shareholders are considered as risk takers because should the business fail
they can lose their capital. If the business prove to be successful, the
rewards can also be very high.
 The rate of dividends paid dependent upon the company’s level of profit
and dividend policy.
(c) Participating preference shares
In addition to the fixed dividend , shareholders are allowed to participate to
receive additional dividends to the extent expressed in the Articles of
Association, in any further profits, after all the other classes of shareholders
have received their dividends.
(d) Non-participating preference shares
Shareholders are not allowed to participate in the excess profits after all the
other classes of shareholders have been paid their dividends.

 The shareholders are effectively the owners of the company. (e) Convertible preference shares

(B) Preference share Shareholders are entitled to convert their preference shares to ordinary shares as
expressed in the Articles of Association.
 Shareholders do not have any voting rights.
 Shareholders carry preferential rights to the payment of dividends and 6. Issuance of shares
repayment of capital in the event of liquidation over the other classes of Share capital
shares.
IPO
 Received a fixed rate of dividend which is expressed as percentage of the
nominal value.
Instalment basis Payable in full
(a) Cumulative preference shares

The holders entitled to receive a fixed dividend per annum. Should insufficient
Subsequent to IPO
or the absence of profits prevent payment of any year, the arrears can be carried
forward and become payable in the future.
Rights issue Bonus issue
(b) Non-cumulative preference shares
A company can issue its shares at:[NOT applicable under Companies Act 2016]
The holders entitled to receive a fixed rate of dividend only when the company
(a) par/nominal value
has sufficient profits to declare a dividend. Should the company not have
(b) premium ( above their par value)
sufficient profits to declare dividends, the dividends for the year are forfeited
(c) discount (below their par value)
and cannot be carried forward.
ABFA2064 FINANCIAL ACCOUNTING III 21 SKH2020

(i) The amount collected above par value is recorded in “Share Premium
Account”.
(ii) The difference between par value and issue price is recorded in “Discount
on Shares Account”. However, to issue shares at discount, conditions stated
in Companies Act 1965 have to be met (example, authorised by a
resolution passed at general meeting and confirmed by court).
***Discount on Shares Account may be written off against Share Premium
Account or Retained earnings.
Question 1
Strawberry Bhd. was incorporated on 1 July 2018 with an authorised capital of
35,000,000 ordinary shares of RM1.00 each.
On 17 July 2018, the directors decided to make an issue of 10,000,000 ordinary
shares, payable in full upon application. Applications for 15,000,000 shares
were received. The money received on the oversubscribed shares was refunded.
Required:

Show the necessary journal entries, assuming the shares are issued at:
Recording Issuance of share
(a) RM1.00 each share.
Applicants for issue of shares are required to:
(b) RM1.70 each share.
(a) Pay the full amount of the share price upon application; or
Share application
(b) Pay by means of instalment (this is not a common practice in Malaysia).

Share allotment
Share Premium Account [NOT applicable under Companies Act 2016]

Share premium is a capital reserve. As specified in Companies Act 1965,

share premium account may be used for the following purposes only: Share capital Share premium

(1) Issue bonus shares to members of the company. Suggested answer

(2) Write off preliminary expenses of the company.

Debit Credit
No. Description RM RM
(3) Write off expenses, commission or brokerage paid, in connection with any
issue of shares of the company. (a)
(1) Bank (15m x RM1.00)
(4) Provide for premium payable on redemption of shares. Share application
(Amount received on application)
ABFA2064 FINANCIAL ACCOUNTING III 22 SKH2020

Bonus Issues [NOT applicable under Companies Act 2016]

(2) Share application
The issuance of bonus shares or scrip shares are given free of charge (FOC) to
Share allotment (10m x RM1.00) its existing shareholders and is normally recommended when the company has
Bank large accumulated profit/retained earnings or capital reserves, but does not want
(Allotment of 10m shares at RM1.00 each to or is unable to distribute them in the form of cash dividends due to the
and refund to unsuccessful applicants) company’s dividend policy or due to statutory regulations.

All forms of reserves included revenue reserves and capital reserves can be
utilised to issue bonus shares. The issue of bonus shares is also known as
(3) Share allotment capitalisation of reserve.
Ordinary share (10m x RM1.00)
(Issuance of 10m shares at RM1.00 each) (A) Revenue reserves (B) Capital reserve
(a) General reserve (a) Share premium
(b) Retained earnings (b) Asset revaluation reserve
(c) Capital redemption reserve
(b)
(1) Bank (15,000,000 x RM1.70) Bonus issue is made to the shareholders in proportion to their shareholdings.
Share application For example, if a company declare a “1 to 7” bonus share, a holder of 7 shares
(Amount received on application) will receive 1 share free.
1 to 7
New : Old / Existing
The issue of bonus shares does not involve any outflow of funds. However,
(2) Share application
there is a dilution in the net asset value of the shares after the bonus issue.
Share allotment (10m x RM1.70)
Bank Question 2 [NOT applicable under Companies Act 2016]
(Allotment of 10m shares at RM1.70 each
and refund to unsuccessful applicants) The extract of statement of financial position for Ice-cream Bhd. as at 31
December 2019 is as follows:
RM
(3) Share allotment 17,000,000 Capital and reserves
Ordinary share (10m x RM1.00) 10,000,000 Ordinary share capital of RM0.50 each 700,000
Share premium (10m x RM0.70) 7,000,000 Reserves
(Issuance of 10m shares at RM1.70 each) Share premium 35,000
Retained earnings 780,700
1,515,700
ABFA2064 FINANCIAL ACCOUNTING III 23 SKH2020

Bonus Issue 1:4 Right Issues

On 1 January 2020, Ice-cream Bhd. declares a 1 for 4 bonus issue. The bonus
issue is to be made out of the share premium account, and if the share premium
is insufficient, then the retained earnings is to be utilised.
Required:
(a) Show the necessary journal entries for the bonus issue.
(b) Prepare the statement of financial position (extract) of Ice-cream Bhd. as at
1 January 2020, after recording the bonus issue.
A company may wish to raise additional capital to finance its expansion
programme, to repay borrowings, etc.
Rights issue is an invitation to existing shareholders to purchase additional
shares in the company.
Usually, price of rights issue offered to existing shareholders are lower than the
market price.

Suggested answer [NOT applicable under Companies Act 2016] The shareholders are offered based on their existing shareholdings.
(a) Journal entries
Debit Credit The alternative available to the shareholders are:
Description RM RM
(1) Share premium 35,000 (a) To take up the shares that they are eligible to purchase;
Retained earnings 140,000
(b) To sell the “rights” to a third party; or
Bonus issue 175,000
[(RM700,000 / RM0.50 x 1/4) x RM0.50] (c) To renounce the “right” in favour of the company, in which case the
(350,000 shares issued as bonus shares) company may sell the shares in the open market.

(2) Bonus issue 175,000 Question 3

Ordinary share capital 175,000
(Ordinary share increased by the bonus issue) The extract of statement of financial position for Green Apple Bhd. as at 30
November 2019 is as follows:

(b) Statement of financial position (extract) as at 1 January 2020 RM

RM Capital and reserves
Capital and reserves Ordinary share capital of RM0.25 each 700,000
Ordinary share of RM0.50 each (700,000 + 175,000) 875,000
Reserves Reserves
Share premium (35,000 - 35,000) - Share premium 35,000
Retained earnings (780,700 - 140,000) 640,700 Retained earnings 780,700
1,515,700 1,515,700

Right Issue 2:5

ABFA2064 FINANCIAL ACCOUNTING III 24 SKH2020

On 1 December 2019, Green Apple Bhd. makes an offer of rights issue to all its 7. Loan Capital
existing shareholders at the rate of 2 rights issue for every 5 shares held at a
price of RM1.10 (market price RM1.35). In raising funds, a company may borrow from the public. The document issued
All shareholders took up the rights issue. stating the terms of borrowing is called “Debentures” or “Loan Stocks” or
“Bonds”.
Required:
(a) Show the necessary journal entries for the rights issue. (I) Differences between Ordinary shares and Debentures
(b) Prepare the statement of financial position (extract) of Green Apple Bhd. as Ordinary Shares Debentures
at 1 December 2019, after recording the rights issue. (1) Identity Shareholders. Payables.

Suggested answer (2) Classification SOFP – Capital and SOFP – Non-current liabilities
(a) Journal entries reserves
Debit Credit
Description RM RM (3) Returns Dividend. This Interest. This interest is at fixed
1 Bank [(RM700,000 / RM0.25 x 2/5) x RM1.10] 1,232,000 dividend varies rate.
from year to year.
Rights issue 1,232,000
(Amount received on rights issue) (4) Accounting Internal reporting Internal or External reporting
Treatment = Appropriation = Income Statement, under
2 Rights issue 1,232,000 for Returns Account finance cost.
OS [(RM700,000 / RM0.25 x 2/5) x RM0.25] 280,000 External reporting
SP [(RM700,000 / RM0.25 x 2/5) x RM0.85] 952,000 = Statement of
(Issue of 1,120,000 rights at RM1.10 each) Changes in Equity

(5) Enforcement No, shareholders Yes, interest are payable to

of returns cannot enforce the debenture holders regardless of
Green Apple Bhd.
payment of the performance of the company.
Statement of financial position (extract) as at 1 December 2019
dividend.
RM Legal action can be taken against
Capital and reserves the company for non-payment of
Ordinary share of RM0.25 each (700,000 + 280,000) 980,000 interest.

Reserves (6) Redemption Depends on the May be redeemable (repayable) or

Share premium (35,000 + 952,000) 987,000 of Capital M&A of the convertible convert into ordinary
Retained earnings 780,700 company. shares) at or by a specified date.
The terms are stated when the
2,747,700 debentures are issued.
ABFA2064 FINANCIAL ACCOUNTING III 25 SKH2020

(III) Issuance of Debentures

(7) Transfer of Yes. Yes. Debentures may be issued at par, at premium or at discount.
Ownership
Debentures issued are initially recognised at cost. Premium or discount is
amortised through the income statement using the effective interest rate or
(8) Security of Ordinary shares Debentures are secured against the straight-line, over the term of debentures.
Assets are not secured company’s assets (fixed or floating
against the charge). Premium on debentures will reduce the finance cost charged to the income
company’s assets. statement, while discount on debentures will increase the finance cost.
Fixed charge
a specified asset is charged to the Journal Entries
debenture. The company may use (1) On receipt of applicant money
the asset, but cannot dispose it off. Debit Bank account
Credit Debentures account
Floating charge
a group of assets are charged to the (2) If debentures are issued at a premium
debenture. This group of assets can Debit Bank account
vary from time to time. Credit Debentures account
Credit Premium on debentures account

(9) Repayment Ordinary The assets secured over debentures (3) If debentures are issued at a discount
of Capital shareholders are will be sold to pay the debenture Debit Bank account
due to paid last, after holders. Debit Discount on debentures account (SFP)
Liquidation preference Credit Debentures account
shareholders.
(4) Amortisation of discount on debentures
Debit Discount on debentures account (I/S – as expenses)
(II) Why Issue Debentures? Credit Discount on debentures account (SOFP)

(1) The new capital involved may be needed for a definite span of time only.
For example, the company intends to repay the loan in 10 years’ time.
(2) Interest is an allowable expense in company income tax payable
calculation, while dividend for shares is not allowable expense.
(3) The company may be reluctant to dilute control of existing ordinary
shareholders. Since debenture holders do not have voting rights, the control
of the existing shareholder will not be affected.
The Debenture Account shown in the statement of financial position is always
in nominal value, regardless whether it is issued at a premium or discount.
Question 4
On 1 January 2011, Raindeer Bhd. offered to the public 850,000 7%
Debentures. The maturity date of debenture is on 31 December 2020. The issue
was fully taken up and fully paid.
ABFA2064 FINANCIAL ACCOUNTING III 26 SKH2020

Lecture 8, 9 and 10 : Accounts for Limited Companies

Required: – External Reporting (Published Accounts)
Show the necessary journal entries for the issuance of debentures, assuming the
debentures are issued at: * IAS1 Presentation of Financial Statements
(a) RM100 for every RM100 debentures.
(b) RM130 for every RM100 debentures.
(1) Introduction
(c) RM98 for every RM100 debentures.
A limited liability company prepares financial statements for internal use
Suggested answer and external reporting.
Debit Credit
No. Description RM RM The internal users are owners and managers of the company.

(a) Bank (850,000 x RM100/RM100) 850,000 The external users include shareholders, customers, suppliers, providers
7% Debentures 850,000 of finance (i.e. bankers), government (including tax authority), public
(Issuance of 850,000 7% debentures at par) (who may be the prospective investors).

For external users:

(1) Companies Act, 1965 sets out the information to be disclosed in the
(b) Bank (850,000 x RM130/RM100) 1,105,000
7% Debentures financial statements; and
(850,000 x RM100/RM100) 850,000 (2) IAS1 Presentation of Financial Statements regulates the suggested
Premium on debentures format of financial statements.
(850,000 x RM30/RM100) 255,000
(Issuance of 850,000 7% debentures at RM130 (2) Companies Act 1965
for every RM100 of debentures)
Limited liability companies are required to comply with more
regulations and rules in the presentation of financial statements than
(c) Bank (850,000 x RM98/RM100) 833,000 sole-traders and partnerships.
Discount on debenture
(850,000 x RM2/RM100) 17,000 All limited liability companies are regulated by Companies Act 1965.
7% Debentures According to the act, all companies are required to:
(850,000 x RM100/RM100) 850,000
(Issuance of 850,000 7% debentures at RM98 (i) Prepare financial statements which are true and fair, from time to
for every RM100 of debentures) time.
(ii) All accounting and other transactions should be recorded within 60
days from date of occurrence.
ABFA2064 FINANCIAL ACCOUNTING III 27 SKH2020

(iii)Keep records of transactions and financial statements for audit. (5) FORMAT
(iv) The company should retain these records for 7 years.
(v) Maintain other important books and registers which may be made Tanjong Jara Bhd
available for inspection on request. Examples of registers: Statement of financial position as at …
1. Register of Members RM
2. Register of Directors and Directors’ Shareholdings ASSETS
3. Register of Charges Non-Current Assets
(vi) Hold annual general meeting (AGM). Notice of AGM should be sent Property, Plant & Equipment X
to all shareholders 14 days before the date of AGM.
Investment properties X
Goodwill X
(3) Annual Reports
Other intangible assets X
The annual report is a compilation of reports and financial statements Investment in associates X
required by law. It should be sent to shareholders 14 days before the X
AGM.
Current Assets
An annual report comprises of: Inventories X
(a) Chairman’s statement; Trade receivables X
(b) Corporate Governance Statement; Other receivables / Tax recoverable X
(c) The audit committee report; and
Prepaid expenses / Accrued income X
(d) Financial statements:
Short term deposit, cash & bank balances X
1. Statement of financial position (Balance Sheet)
2. Statement of profit or loss (Income Statement) - by function & X
by nature
3. Statement of Changes in Equity Total assets X
4. Statement of Cash Flow (Cash Flow Statement)
5. Notes, comprising a summary of significant accounting policies
& other explanatory notes EQUITY & LIABILITIES
Equity
(4) IFRS vs. PERS
Share capital X
Retained earnings X
International Financial Reporting Standards (IFRS) are for public
entities. Private entities may apply IFRSs or Private Entity Reporting Other components of equity X
Standards (PERS). X
ABFA2064 FINANCIAL ACCOUNTING III 28 SKH2020

Non-current liabilities By Function

Long-term loans X
Deferred borrowings X Tanjong Jara Bhd
Lease obligation X Statement of profit or loss for the year ended …
Deferred tax X RM
Long-term provisions X Revenue X
X Cost of sales (X)
Gross profit X
Current liabilities
Other income X
Trade payables X
Distribution costs (X)
Other payables X
Administrative expenses (X)
Accrued expenses / Revenue received in advance X
Other expenses (X)
Short term borrowings X
Finance costs (X)
Current portion of long-term borrowing X
Share of profit of associates -
Current tax payable X
Short-term provisions X Profit before tax X
X Income tax expense (X)
Profit for the year C
Total equity & liabilities X
Tanjong Jara Bhd
Statement of other comprehensive income for the year ended …
(B) Statement of profit or loss
RM
2 ways expenses are analysed: Profit for the year C
(a) By Nature
(b) By Function Other comprehensive income
Items that will not be reclassified to profit or loss:
Gain on property revaluation X
Investments in equity instruments (X)

Total Comprehensive Income for the year E

ABFA2064 FINANCIAL ACCOUNTING III 29 SKH2020

By Nature (C) Statement of changes in equity

Tanjong Jara Bhd Tanjong Jara Bhd

Statement of profit or loss for the year ended … Statement of changes in equity for the year ended 31 Dec 2019
RM SC SP RR GR RE Total
Revenue X RM RM RM RM RM RM
Other operating income X Balance at 1 Jan 2019 X X X X X X
Changes in inventories of FG & WIP (C/S - O/S) (X) Changes in equity
Raw materials & consumables used (O/S + Purchases - C/S) (X) Revaluation X
Issue of share capital X X X
Employee benefits expenses (X) Bonus issue X (X) -
Depreciation and amortisation expenses (X) Right issue X X
Impairment of PPE (X) Profit for the year X X
Other expenses (X) Transfer RE to GR X (X) -
Finance costs (X) Dividends (X) (X)
Share of profit of associates - Balance at 31 Dec 2019 X X X X X X
Profit before tax X
Income tax expense (X) SC = Share capital
Profit for the year C SP = Share premium
RR = Revaluation reserve
GR = General reserve
Note 1: Changes in inventories of FG & WIP RE = Retained earnings
RM
Closing inventories of FG & WIP X
Opening inventories of FG & WIP (X)
X

Note 2: Raw materials & Consumables used

RM
Opening inventory of raw materials X
Purchases X
Closing inventory of raw materials (X)
X
ABFA2064 FINANCIAL ACCOUNTING III 30 SKH2020

Question 1 2. Depreciation of RM3.7 million has been charged during the year and
is included under the appropriate cost headings on the trial balance.
Lovely Star Bhd. operates a chain of department stores across the
country. 3. The directors paid a dividend of RM600,000 during the year ended
31 December 2019.
The following summarised trial balance has been extracted from the
book of Lovely Star Bhd. as at 31 December 2019. 4. Taxation for the year has been estimated at RM2.1 million.
Dr Cr
RM'000 RM'000 Required:
Sales 27,300
Cost of sales 16,250 Prepare Lovely Star’s statement of profit or loss and statement of
Administrative expenses 250 changes in equity for the year ended 31 December 2019, and its
Distribution costs 2,500 statement of financial position as at that date. These should be in a
Trade receivables 800 format suitable for publication.
Interest paid 350
Property, plant and equipment - cost or valuation 37,000 Suggested solution
Property, plant and equipment – accum. depn. 4,200
Lovely Star Bhd.
Revaluation reserve 8,000
Statement of profit or loss for the year ended 31 December 2019
Inventories as at 31 December 2019 850
RM’000
Tax paid 2,000
Revenue
Bank 150
Trade payables 1,800 Cost of sales
Long-term loan 2,300 Gross profit
Share capital 16,000 Administrative expenses
Retained earnings 1,150 Distribution costs
Dividend paid 600 Finance costs
60,750 60,750 Profit before tax
Income tax expense
The following information is also available: Profit for the year 5,850

1. The company revalued its land during the year. This was the first
time that such a revaluation had been taken place. The land had cost
RM19 million and had not been depreciated.
ABFA2064 FINANCIAL ACCOUNTING III 31 SKH2020

Lovely Star Bhd.

Statement of changes in equity for the year ended 31 December 2019 Statement of financial position as at 31 December 2019
SC RR RE Total Non-current assets RM’000
RM’000 RM’000 RM’000 RM’000 Property, plant and equipment 32,800
Bal. as at 1 Jan 2019 16,000 1,150 15,150
Revaluation reserve Current assets
Profit for the year Inventory
Dividend paid Trade receivables
Bank
Bal. as at 31 Dec 2019

Non-current assets schedule 34,600

Land Building Total
Cost: RM’000 RM’000 RM’000 Equity and liabilities
Balance as at 1 January 2019 19,000 10,000 29,000 Share capital
Revaluation reserve Reserves
Acquisition
Balance as at 1 December 2019
Non-current liabilities
Accm Depn: Long-term loan
Balance as at 1 January 2019 - 500 500
Current year depreciation Current liabilities
Disposal Trade payables
Balance as at 1 December 2019 Tax payable

Book value:
Balance as at 1 January 2019 34,600
Balance as at 1 December 2019
ABFA2064 FINANCIAL ACCOUNTING III 32 SKH2020

Question 2 remaining trade receivables. Bad debts and doubtful debts to be

included as administrative expenses.
The trial balance of Flower Bhd. at 31 December 2019 is given below:
Dr Cr 3. Two transactions have been entered in the company’s cash record
RM’000 RM’000 and transferred to the suspense account shown in the trial balance.
Purchases and sales 18,000 31,150
Inventories as at 1 January 2019 4,500 They are:
Warehouse wages 850 (a) The receipt of RM1.5 million from the issue of 500,000 RM1.00
Salespersons' salaries and commission 1,850 ordinary shares at a premium of RM2.00.
Administrative salaries 3,070 (b) The sale of some surplus plant. The plant had cost RM1 million
General administrative expenses 580 and had a written down value of RM100,000. The sale proceeds
General distribution expenses 490 of RM150,000 have been credited to the suspense account but no
Director's remuneration 870 other entries have been made.
Interest paid 100
Dividend paid 40 4. Income tax paid by cheque during the year amounted to
Plant and machinery at cost 18,000 RM1,500,000 was omitted from the record. Tax expenses for the
Accum. depreciation - plant and machinery 3,900 year was estimated to be RM1,450,000.
Trade receivables and payables 6,900 3,800
Allow. for doubtful debts at 1 January 2019 200 5. Depreciation on plant and machinery should be charged at 10% per
Bank 1,420 annum on cost at the end of the year as cost of sales. Warehouse
Long-term borrowings 1,000 wages also to be included as part of cost of sales.
Share capital 10,000
Share premium 1,300 6. Accruals and prepayments still to be accounted for are:
Retained earnings as at 1 January 2019 3,670 Prepayments Accruals
Suspense account (Note 3) 1,650 RM’000 RM’000
56,670 56,670 General administrative expenses 70 140
General distribution costs 40 90
The following information is relevant: 110 230

1. Closing inventory amounted to RM5 million. 7. Directors’ remuneration is to be analysed between distribution costs
and administrative expenses as follows:
2. A review of the trade receivables total of RM6.9 million showed that RM’000
it was necessary to write off debts totalling RM400,000, and that the Distribution 300
allowance for doubtful debts should be adjusted to 2% of the Administrative 570
870
ABFA2064 FINANCIAL ACCOUNTING III 33 SKH2020

Required: Share capital

RM’000
Prepare the company’s statement of profit or loss and statement of Balance 10,000
changes in equity for the year ended 31 December 2019, and its Suspense
statement of financial position as at 31 December 2019 in a format
suitable for publication.
Share premium
Suggested solution RM’000
Balance 1,300
1. Dr Inventory: SFP 5,000 Suspense
Cr COGS: SPL 5,000

2. Dr Bad debts: SPL 400

Cr Allowance for doubtful debts 400 Plant and machinery
RM’000 RM’000
Trade receivables = 6,900 – 400 = 6,500 Balance 18,000 Disposal
Allowance for doubtful debts = 6,500 x 2% = 130 Balance c/d
Balance as at 1 January 2016 = 200 18,000
Decrease in doubtful debts = 70 Balance b/d
Dr Allowance for doubtful debts 70 Accumulated depreciation
Cr Decrease in doubtful debts 70 RM’000 RM’000
Disposal Balance 3,900
3. Dr Suspense 1,500 Balance c/d Depreciation
Cr Ordinary shares 500
Cr Share premium 1,000
Balance b/d
Suspense account
RM’000 RM’000 Disposal
Ordinary shares Balance 1,650 RM’000 RM’000
Share premium Plant and machinery Accum. depreciation
Disposal Gain on disposal Suspense
1,650
ABFA2064 FINANCIAL ACCOUNTING III 34 SKH2020

Flower Bhd.
Statement of profit or loss for the year ended 31 December 2019
4. Dr Depreciation 1,700 RM
Cr Accumulated depreciation 1,700 Revenue
Cost of sales
Gross profit
5.
Other income: Gain on disposal
Administrative expenses
Admin. expenses Distribution costs
Distribution costs
RM’000 RM’000
Finance costs
Directors’ rem. Directors’ rem.
Profit before tax
Bad debts Bank: Salaries
Tax expense
Doubtful debts Bank
Profit for the year 2,290
Bank: Salaries + Accruals
Bank Flower Bhd.
+ Accruals - Prepaid Statement of financial position as at 31 December 2019
2,690 RM’000
- Prepaid Non-current assets
4,620 Property, plant and equipment 17,000 – 4,700 12,300

Current assets
Cost of goods sold Inventory
RM RM Trade receivables 6,900 – 400 bad debts – 130 Allw DD
Inventories as at 1 January 2019 Tax recoverable
Purchases Prepaid administrative expenses
Warehouse wages Prepaid distribution costs
Depreciation: plant and machinery Bank 1,420 – 1,500 tax paid

Inventories as at 31 December 2019

20,050 23,830
ABFA2064 FINANCIAL ACCOUNTING III 35 SKH2020

Question 3
Equity and liabilities
Share capital The following trial balance relates to Blue Ocean Bhd., a manufacturing
Reserves and distribution company.

Trial balance as at 31 December 2019

DR CR
Non-current liabilities RM'000 RM'000
Long-term loan Revenue 21,660
Dividend (gross) 180
Current liabilities Inventories as at 1 January 2019
- Raw material 770
Trade payables
- Work in progress 330
Bank overdraft - Finished goods 1,530
Accrued administrative expenses Purchases of raw materials 8,530
Accrued distribution costs Wages and salaries 3,130
Depreciation of property, plant and equipment 3,670
Operating expenses 1,500
23,830 Preference dividend paid 150
Tax paid 1,080
Property, plant and equipment 25,700
Investments 4,920
Reserves
Trade receivables 4,770
RM’000 RM’000
Cash balances 800
Share premium
Bank 480
Retained earnings
Trade payables 1,760
Profit for the year
Ordinary shares of RM1.00 each 16,000
Dividend paid
Retained earnings 13,800
8,220
10% Redeemable preference shares of RM1.00 each 3,000
56,880 56,880

Additional information:

1. Closing inventories determined on weighted average basis were:

ABFA2064 FINANCIAL ACCOUNTING III 36 SKH2020

Note 1: Changes in inventories of FG & WIP

RM’000 FG WIP Total
Raw materials 680 RM’000 RM’000 RM’000
Work-in-progress 460 Inventories as at 1 January 2019
Finished goods 1,780 Inventories as at 31 December 2019
Increase 380
2. The 10% Redeemable preference shares will be due for redemption
at par on 1 January 2021. The dividend for second half of the Note 2: Raw materials & Consumables used RM’000
current financial year has yet to be accrued in the account. Inventories as at 1 January 2019
Purchases
3. The directors had proposed a final ordinary dividend of 5 sen per Inventories as at 31 December 2019
share as at 30 December 2019. 8,620

4. Tax expenses for the year is estimated at RM1,200,000. Blue Ocean Bhd.
Statement of profit or loss for the year ended 31 December 2019
Required: RM'000
Revenue 21,660
Prepare the following financial statements of Blue Ocean Bhd. for the Investment income
year ended 31 December 2019: Changes in FG and WIP [(460 + 1,780) - (330 + 1,530)]
RM used and consumed (770 + 8,530 - 680)
(a) Statement of profit or loss (by nature); Staff costs
Depreciation and amortisation expenses
(b) Statement of changes in equity; and Operating expenses
Finance costs: PS dividend (3,000 x 10% )
(c) Statement of financial position.
Profit before tax
Tax expenses
Profit for the year 3,800

Note 3: Reserve RM’000

Retained earnings as at 1 January 2019
Profit for the year

Dividend: Ordinary shares 16m x RM0.05

Retained earnings as at 31 December 2019
ABFA2064 FINANCIAL ACCOUNTING III 37 SKH2020

Question 4
Blue Ocean Bhd.
Statement of financial position as at 31 December 2019 The following are the capital structure of Winter Bhd. as at 1 January
RM’000 2019:
Non-current assets RM
Property, plant and equipment Authorised share capital of RM1.00 each 2,500,000
Investments Issued and paid up capital of RM1.00 each 1,000,000
Share premium 780,000
Current assets Revaluation reserve 500,000
Inventory: RM + WIP + FG General reserve 600,000
Trade receivables Retained earnings 980,000
Cash
During the financial year ended 31 December 2019:

1. The company revalued a piece of land from RM3,000,000 to

39,110 RM3,400,000 on 2 January 2019.

Equity and liabilities 2. On 10 January 2019, the directors offered a right issue of 1 ordinary
Share capital share for every 8 shares at RM1.20.
Reserves
3. On 1 February 2019, the directors declared a bonus issue of 1
Non-current liabilities ordinary share for every 5 shares held out of the share premium
10% Redeemable preference shares account.

Current liabilities 4. On 13 March 2019, an interim dividend of 5% was declared and paid
Trade payables to the existing shareholders, excluding the rights and bonus issue.
Bank overdraft
Tax payable 5. On 18 April 2019, the company made a further issuance of 300,000
Dividend payable: PS ordinary shares at RM1.35 per share.
Dividend payable: OS
6. Profit for the year ended 31 December 2019 amounted to
RM195,000.
39,110 7. On 30 December 2019, the board of directors approved a transfer of
RM98,000 from retained earnings to general reserve.
ABFA2064 FINANCIAL ACCOUNTING III 38 SKH2020

Question 5
8. Final dividend of 8% was declared and paid to all the shareholders at
the year end. Following is the trial balance of Netherland Bhd. as at 31 December
2019:
Required: DR CR
Prepare for Winter-Home Bhd. the statement of changes in equity for the RM RM
year ended 31 December 2019. Freehold land 2,780,000
Building 1,680,000
Plant and machinery (Note 10) 435,000
Fixtures and fittings at 316,900
Winter Bhd. Motor vehicles (Note 10) 227,300
Statement of changes in equity for the year ended 31 December 2019
SC SP RR GR RE Total Accumulated depreciation
RM’000 RM’000 RM’000 RM’000 RM’000 RM’000
Building 222,600
Plant and machinery 154,230
Bal. @ 1 Jan 2019 1,000 780 500 600 980 3,080 Fixtures and fittings 171,100
Motor vehicles 109,700
Changes in equity
Revaluation Communication expenses 126,500
Rent expenses 218,900
Right issue
Utilities 250,200
Bonus issue Inventories as at 31 December 2018 69,269
Receivables and payables 343,295 97,464
Interim dividend 5% Bank overdraft 40,580
Issue of share Purchases and sales 1,012,406 3,622,054
Returns 9,800 3,680
Profit for the year Interest income 2,789
Transfer RE to GR Bank loan interest paid 15,000
Discount allowed and discount received 64,360 31,890
Final dividend 8% Allowance for doubtful debts 3,010
Bal. @ 31 Dec 2019 Salaries 211,460
Overtime pay 18,800
ABFA2064 FINANCIAL ACCOUNTING III 39 SKH2020

6. Depreciation is to be charged at :

Directors' remuneration (non-executive) 159,080 Buildings : 2% per annum at cost

Tax paid 121,500 Plant and machinery : 10% per annum using straight-line method
Travelling allowance for employees 16,910 Fixtures and fittings : 15% per year on written down value
Stationeries 26,700 Motor vehicles : 10% per year using straight-line method
Refreshments 5,300
Entertainment expenses 38,180 Full year’s depreciation is to be provided for purchases made during
Carriage inwards 31,260 the year and no depreciation is to be provided for non-current assets
Carriage outwards 12,690 disposed during the year (See Note 10 and Note 12)
Other receivables and other payables 8,025 2,000
7. Tax expenses for the financial year ended amounted to RM129,264.
7% Bank loan 250,000
Ordinary shares capital of RM2.00 each 2,600,000
8. On 1 February 2019, the company made an issuance of 200,000
Share premium 260,000
ordinary shares at RM2.50 each.
Revaluation reserve 60,000
General reserve 200,000 Total 200,000 shares were allotted. No recording has yet been made
Retained earnings 367,738 to this transaction.
8,198,835 8,198,835
9. On 1 March 2019, the company made a bonus issue of 1 share for
Additional information: every 8 shares issued as at that date, utilising the share premium
account.
1. Cost of inventories as at 31 December 2019 were RM70,654. Some
of the inventories held by the company at cost of RM14,650 have net If the share premium account is insufficient, the general reserve
realisable value of RM12,205. account balance would be used.

2. Utilities unpaid as at 31 December 2019 was amounted to RM2,800. This transaction has not yet been recorded.

3. As at 31 December 2019, stationery in stock was valued at RM1,030.
4. The company will continue to provide 2% allowance for receivables.
5. Bank loan was obtained by the company in year 2016 and repayable
in full in year 2021.
10. During the financial year, some non-current assets were disposed. No
transaction has been recorded, including the receipts from disposal.
- A motor vehicle at cost of RM70,000 was disposed off at
RM56,000. The written down value of this motor vehicle at date
of disposal was RM51,100.
ABFA2064 FINANCIAL ACCOUNTING III 40 SKH2020

- Some machinery was disposed. The net book value of the

machinery disposed was RM156,000, with cost of RM202,600. (d) Statement of profit or loss for the year ended 31 December 2018 (by
Proceeds from disposal was RM120,000. function);

11. The following are the cost of non-current assets as at 1 January 2019: Common expenses are to be allocated as below:

RM Cost of Distribution Administrative

Freehold land 2,680,700 sales costs expenses
Buildings 1,500,000 Communication expenses 20% 20% 60%
Plant and machinery 335,000 Rent and utilities 50% 30% 20%
Fixtures and fittings 255,050
Motor vehicles 213,860 Discount allowed 100%
Staff related expenses 30% 30% 40%
All disposal of non-current assets made during the year is stated at Entertainment expenses 100%
Note 10. Stationeries 20% 10% 70%
Doubtful debt 100%
12. On 30 December 2019, the board of directors approved to: Depreciation on:
Building 50% 30% 20%
- Declared a final dividend of 6%. All shares issued as at that date
Plant and machinery 100%
are entitled for this dividend. The tax rate for the financial year is
25%. The declared dividend remained unpaid as at year end. Fixtures and fittings 50% 50%
Motor vehicles 20% 60% 20%
- Transfer a further RM100,000 to the general reserves account.
(e) Statement of changes in equity for the year ended 31 December
Required: 2019; and

Prepare for Netherland Bhd. the following financial statements for (f) Statement of financial position as at 31 December 2019;
publication purpose:
(g) Notes to the financial statements on:
(a) Schedule of allocation of expenses by nature;
(i) Property, plant and equipment;
(b) Schedule of allocation of expenses by function; (ii) Trade receivables;
(iii)Other receivables and prepayments; and
(c) Statement of profit or loss for the year ended 31 December 2019 (by (iv) Other payables and accrued expenses.
nature);