Capital Reduction Merged

CODE COURSE:
ACC4104 - CONSOLIDATED FINANCIAL REPORTING I

TOPIC 1:
INTERNAL RECONSTRUCTION OR CAPITAL REDUCTION
Course Learning Outcomes (CLO):

CLO1 Apply appropriate accounting treatments relating to an internal
and external reconstructions of a company.
CLO2 Construct statement of financial position after company
reconstruction scheme and changes in business structure.
CLO2 Prepare statements of financial position, profit & loss, and
statement of changes in equity according to MFRS for a group
of companies.
1 FAR 300 Financial Accounting 5
Diploma in Accountancy (UiTM)
#
CHAPTER 1 – CAPITAL REDUCTION/INTERNAL RECONSTRUCTION
CHAPTER 8
Introduction 2016
The Company Act 1965 requires a company’s paid up capital to be maintained except in special
circumstances (eg : share buy-back)
However, there could be circumstances when a company may have to reconstruct its capital structure.
When the company may have more than its optimum level of capital or its paid up capital
,
WHY?? was eroded by heavy losses.
Types of reconstructions :
o Internal reconstruction Capital reduction
o External reconstruction
Internal reconstruction Capital reduction
1. No new company is formed. The existing company continues as a going concern;

2. The ailing company will not give into liquidation under the capital reduction scheme and
3. Involves complying the requirements under the Companies Act.
External Reconstruction
1. A new company is formed by the existing shareholder of the old company to take over
the assets and liabilities;
2. The ailing company goes into liquidation and
3. There is no need to comply with particular clause in the Companies Act.
Kolej Poly-Tech MARA, Kuala Lumpur© FAR300/Notes/Nov 2014 – April 2015

Capital reduction (CR) or Internal Reconstruction (IR)

Capital Reduction or Internal Reconstruction is undertaken by companies that have surplus capital or
whose capital was eroded by trading losses.
CR/IR
Surplus Capital was eroded

capital by HEAVY losses
Company may apply to the courts to reduce its capital.

117 2016
Section 64 of the CA1965 permits a company to reduce its capital provided the following conditions are
satisfied :
a) The scheme must be confirmed by the court.
b) The Articles of Association (AOA) of the company must provide for a reduction of capital.
c) A special resolution must be passed by the company.
Confirmed by Conditions to reduce Provided in

court capital AOA
Special
resolution

117
Section 64 allows a company to reduce its capital in the following the three (3) situations/methods :
a) To reduce or write off the uncalled capital on its share.
b) To refund any surplus capital.
c) To cancel paid up capital NOT represented by assets. - Write off intangible assets with no
:
value, overvalued Assets
Reduce/write off Situations/ Refund

UNCALLED capital Methods SURPLUS capital
Cancel paid up capital

not represented by
ASSETS
Where a company has more than SUFFIENT capital and

Reduce/write off DOES NOT wish to make the calls at all.
UNCALLED capital
NO accounting transaction – no funds leave or enter the
company.
Where the company has EXCESS financial resources and it is NOT

UTILISING it.
Existence of EXCESS cash balances and low return on capital
Having excess capital may be detrimental to the
SO?? company
Company may not be able to meet the
shareholders’ expectation of higher return,
Refund
dividend or earnings per share
SURPLUS capital
The company’s share price may FALL
-
The OPTION is : REDUCE the par value of the shares and REFUND
the surplus capital to shareholders
The transaction/accounting entries :
Dr Ordinary share capital XXX

Cr Bank XXX

Where a company’s capital is eroded and company has

incurred heavy losses.
Cancel paid up capital Co has been unable to pay its shareholders dividend for
not represented by a no. of years.
ASSETS So, they have two (2) courses of action :
Wind up the company (liquidate)
Undergo reconstruction
To dispose of ALL the assets

Settle the liabilities and,
Reconstruction will be undertaken only.
Distribute the remaining assets to when the company has the evidence
the shareholders of making profit in the near future and
able to pay dividend to the
shareholders thru:
Eliminate the accumulated losses
Adjust the assets values

Factors to be considered in
devising the capital reduction
scheme
÷
@
.EE
5
Revalue all the assets to
The scheme devised L
current values. All
}
should be equitable to
intangible assets and all affected parties.
=
accumulated losses
have to be written off.
2 .
Consider the various The major losses

creditors including the
*¥÷I÷i¥oE¥¥f¥IEaIY¥
sustained by the
debenture holders. All
company should be
liabilities should be
settled. borne by the ordinary
shareholders.
The reduction or
written off value in
preference shares must
not be higher than
⇐÷E:¥
"
ordinary shares.

REMEMBER
ACCOUNTING ENTRIES – To record a scheme of capital reduction

Capital reduction
1. Amount written off share capital.

Accumulated losses. 400 Asset revalued upwards. 20
ordinary share capital. 600
Dr Share capital XXX Assets revalued downward. 100 Preference share capital
Cr Capital reduction XXX Intangible assets written off 100 Creditors
Reserve - SP 50
Des
Capital .
?
Loss on Reorg
Example 1 : 600
Issued and paid up capital

Ordinary shares of RM 1 each RM 100,000
The ordinary shares capital was reduced to RM 0.40 each.

Solution :
Dr Ordinary Share capital (100,000 units x 60 sen) RM 60,000

Cr Capital reduction RM 60,000
Notes :
RM 1 (old price) 40 sen (new price)
Reduce 60 sen by debiting Capital reduction
Example 2 :
The ordinary shares capital was reduced by RM 0.40 each.
Solution :
Dr Ordinary Share capital (100,000 units x 40 sen) RM 40,000

Notes :
RM 1 (old price) 60 sen (new price)

100,000 ordinary shares @ RM1 each. = 100,000
100,000 Ordinary shares @ RM 040 each.
-
= 40,000
Re-consolidate into RM 1.00 each
40,000 Ordinary shares @ RM 1.00 each. = 40,000
-
Example 3:
The ordinary shares capital was reduced to RM 0.40 each. Then to consolidate the reduced
ordinary shares into RM 1.
Solution :
Dr Ordinary Share capital (old) (100,000 units x RM 1) RM 100,000

Cr Capital reduction (100,000 units x 60 sen) RM 60,000
Cr Ordinary Share capital (new) (100,000 units x 40 sen) RM 40,000
Notes : -
100 x $10 40=40

.
RM 1 (old price) 40 sen RM 1 (new price)

$
.
1.00=40
.
40
Osc C RMD
'
osccrmo.io )
bld
'
1000
9%0×000,600 OSCCRNID 400
.
Osccamo 400
¥0
Co -40×1009
'
Cz
Example 4: Oscan , ) c- .
The ordinary shares capital was reduced to RM 0.70 each. The reduced shares to be converted into
fully paid RM 1 share.
Solution :
Dr Ordinary Share capital (old) (100,000 units x RM 1) RM 100,000

.
Cr Capital reduction (100,000 units x 30 sen) RM 30,000

Cr Ordinary Share capital (new) (100,000 units x 70 sen) RM 70,000
$70
.
100
Notes : =
70
'
RM 1 (old price) 70 sen RM 1 (new price) $

-
To X Rmi = 70
OSC Chew ) CRM 1.00

) Osc ( old )
604×100
'
'
) 40 bid
.
osccnw CR Go too
)
'
.
'
C C too
.
old 40
[ too 'x40k )
Tf
-
.
oscnebkmtw.to/d
'
40 40 .
xrmtw ) 4)
.
go
( Goo Xo
.

2. Reserves utilized for the scheme. Reserves :
.¥em
Share premium
Dr Reserves account * XXX
General reserve
Cr Capital reduction XXX Profit and Loss
ARR
CRR
Example 1 :
Reserves
Share premium RM 50,000
Half of the share premium was utilized for the scheme.

.
Solution :
Dr Share premium (½ x RM 50,000) RM 25,000

Example 2 :
Share premium was utilized for the scheme.
Solution :
Dr Share premium RM 50,000

3. To write off accumulated losses

Dr Capital reduction XXX
Cr Accumulated Loss XXX
Example 1 :
The accumulated losses, RM 200,000 are to be written off.
Solution :
Dr Capital reduction RM 200,000

Cr Accumulated Loss RM 200,000

-40
€3.00
!
Land
b/d 1,26
C. R ud 9 FAR 300 Financial Accounting 5

1/300 Diploma in Accountancy (UiTM)
-1,300
4. Amount written off assets on revaluation. Asset revalued downward

Dr Capital reduction XXX NBV > revaluation
Cr Relevant asset * XXX amount
5. Surplus on revaluation assets.

Dr Relevant asset * XXX
Cr Capital reduction XXX
NBV < revaluation
amount
Example 1 :
On revaluation, the value of land was increase by RM 40,000 (NBV : RM 1,260,000)
Solution :
Dr Land RM 40,000
Notes :
NBV (RM 1,260,000) < Revaluation (RM 1,260,000 + RM 40,000)
= RM 1,300,000
Amount increase by RM 40,000 SURPLUS on revaluation
Example 2 :
The value of building decreased by RM 25,000, when the NBV RM 120,000
Solution :

Cr Building RM 25,000
Notes :
NBV (RM 120,000) < Revaluation (RM 120,000 - RM 25,000)
= RM 95,000
Amount decreased by RM 25,000 DEFICIT/LOSS on revaluation

Example 3 :
Current assets
Account receivable RM 20,000
Bad debts of RM 3,000

Solution :

Cr Account receivable RM 3,000
Notes :
NBV (RM 20,000) < Revaluation (RM 20,000 - RM 3,000)
= RM 17,000 (after deduct bad debts)
Amount decreased by RM 3,000 DEFICIT/LOSS on revaluation
6. Shares issued in settlement of liability.

Dr Relevant liability * XXX
Cr Share capital XXX
Example 1 :
RM 20,000 of the creditors agreed to accept 2 ordinary shares at RM 0.50 for every RM 1 accrued
to them. 20% ×
2×0.50 =
Solution :
-
Dr Creditor (RM 20,000 x 2 units x RM 0.50) RM 20,000

RM 1
Cr Ordinary share capital RM 20,000

7. Other settlement of liability.

Dr Relevant liability * XXX
Cr Bank XXX
Example 1 :
RM 20,000 of the creditors agreed to accept cash for every RM 1 owed.
Solution :
Dr Creditor (RM 20,000) RM 20,000

RM 1
Cr Cash/Bank RM 20,000
8. Issue of new shares in lieu of preference dividend in arrears.

Cr Share capital XXX
Example 1 :
00
Arrears on preference dividends were RM 40,000
The preference shareholders agreed to receive one ordinary share of RM 0.20 each for every RM 1
preference dividend in arrears.
Solution :
Dr Capital reduction (RM 40,000 x 1 unit x 20 sen) 0

RM 8,000
RM 1
Cr Ordinary Share capital RM 8,000
Example 2 :
I
The preference shareholders have agreed to waive ¾ of the dividend in arrears and to receive
ordinary share for the balance
# Receive OSC = receive 1 unit
Solution :
Dr Capital reduction (RM 40,000 x 1 unit x ¼ ) RM 10,000


Example 3 :
-
20,000 units of ordinary shares to be issued at par, RM 1 for the full settlement of preference
dividend in arrears.
Solution :
Dr Capital reduction (RM 20,000 x RM 1) RM 20,000

Example 4 :
o units of ordinary shares to be issued at premium of RM 0.30 for the full settlement of
20,000
- -
preference dividend in arrears.

Solution :
Dr Capital reduction (RM 20,000 x RM 1.30) RM 26,000

Cr Share premium (RM 20,000 x 30 sen premium) RM 6,000
9. Settlement of contingent liability.

Cr Bank XXX
t
Example 1 : .
The contingent liability materialized and RM 10,000 is to be paid.

Solution :

Cr Bank RM 10,000

10. Expenses of capital reduction.

Cr Bank XXX
Example 1 :
Cost of reconstruction amounted to RM 1,200.
# Expenses
Solution :

Cr Bank RM 1,200
BALANCING OFF
Surplus on Deficit/Loss on
capital reduction capital reduction
Dr Capital reduction XXX Dr Loss on reorganization XXX

Cr Capital reserve XXX Cr Capital reduction XXX
# RESERVE in Balance Sheet # ASSET in Balance Sheet

COMPREHENSIVE EXAMPLE
The summarised Statement of Financial Position (SOFP) of Husnul Khotimah Bhd as at 31 January 2010 was
as follows:
RM
Non Current Assets
Land and building 2,455,000 /
Plant and machinery 401,800

Motor vehicles 111,110
}
Patent and Trademark Intangible assets
73,100
Goodwill 200,200
Trade Investments 323,900
Current Assets
Inventories 81,000
Account receivables 123,450
Bank (34- 28.9 - 12.7 34,000
3,803,560
Authorised Share Capital

2,000,000 9% Cumulative Preference Shares of RM1 each 2,000,000
7,000,000 Ordinary Shares of RM 0.50 each 3,500,000
11.666,667 0.30
5,500,000
Issued and Paid Up Capital

1,500,000 9% Cumulative Preference Shares of RM1 each 1,500,000
5,000,000 Ordinary Shares of RM0.50 each 2,500,000
Reserves -
Share Premium 230,000 01=161,000

.Profit and Loss (857,000)
Long Term Liabilities

12% Debentures 90,000
Current Liabilities
Loan from Directors 88,400
Account payables 252,160
3,803,560
Additional Information:
-
' -
i) Preference share dividend is two years in arrears 91 X 1,500 135

401 108
X 2 270
yrs
=
x
. = =
.
ii) There is a RM 31,400 contingent liability due to a claim from one of the employees

A capital reduction scheme duly approved by the court was set out as follows:
1. The ordinary shares were reduced to RM0.30 each and the preference shares were to be reduced by
#
-
) PSC C 450
.
2 0.30×1500
RM0.30 each. Dr OSC 5000 x 0.20 1000
450 CR C R
.
Cr. CR 1000
.
2. The preference shareholders have agreed to waive 60% of the dividend in arrears and to receive
.
ordinary shares at new par value for the balance. 401×270 1×0.30=32400 -
DR C .
R 32.4
CR Osc
32.4
.
3. All intangible assets and accumulated losses are to be eliminated. Bad debts of RM33,700 and -
¥5
DR C . R
obsolete inventories of RM31,500 will be written off. CR 102T 73.1

.
DR C .
R 857
CR
CR
Gfw .
roti , 2 Logs 857 .
CR
3,3
:}
tree .
.
.
CR Inventories
-
4. Seventy percent of share premium account to be utilized for the scheme.
338.5
200.2
.
DR SP C 701×230
.
) 161
'
161
CR C .
R
5. The investment was sold at a loss of RM85,000. The proceeds were used to settle the creditors in full.
Dr. CR. 85
Dr. Creditors. 252.160
Dr. Cash/Bank. 238.9 DR LOB
Cr. Bank. 238.9 435
Cr. Investment. 323.9 435
Cr. C R. 13.26 Discount
6. Assets were revalued as follows : . 252.160
cr
-
DR CR 30.66
RM
-
30.66
CR Mr
Land and building 2,890,000 435

Motor vehicles 80,450 (30.66)
Ptm
.
7. The plant and machinery costing RM80,000, which had been mortgaged against the director’s loan, .
-
Hd 80
.
. .
401.8 Loan
from Dir
was used as full settlement of the loan. The remaining of plant and machinery was revalued to
3.30.33
-
POM
DR Loan 88.4
Draft .FI£538.53
Dir
.
c. A 8.53 401.8 CV = .
4¥
old
RM330,330. Dirhoan
.
/
.
aspsm go
.
CV
-
-
-
R 8.4 = 321.8 CR c.
RV
-
401.8
( 80 )
41=0.33 e
.
.
8. The contingent liability materialized and the court ruled that RM28,900 is to be paid. .
DR c. R 28.9
321.8
'
=
Ch Bank 28.9
9. Cost of reconstruction amounted to RM12,700. DR C

.
A 127
.
CR Bank 12.7
10. Another special resolution was passed to restore the authorised capital at the new values.
-
Required:
a) Journal entries to record the capital reduction. Narrations are not required.
(15 marks)
. -
b) Statement of Financial Position (SOFP) of Husnul Khotimah Bhd after the implementation of the
capital reduction scheme.
F. pay (5 marks)
Investment
.
bid (Total : 20 marks)

bld 323.900 Cash 238.90 238,900 252.160 tasty
ay Investment
C. R 85,000
C 13.260
R
.
- -
25¥60
-
323.900
=
323,900 -
252,160
=
=
Kolej Poly-Tech MARA, Kuala Lumpur© .

FAR300/Notes/Nov 2014 – April 2015
SUGGESTED SOLUTION
a) Journal entries
1. The [ordinary shares were reduced to RM0.30 each]¹ and the [preference shares were to be reduced
by RM0.30 each]².
¹ Ordinary share capital

OSC (5,000,000 x 20 sen) 1,000,000 √
Capital reduction 1,000,000 √
# Notes :
50 sen (old) 30 sen (new)
reduce 20 sen
² Preference share capital

9% PSC (1,500,000 x 30 sen) 450,000 √
Capital reduction 450,000 √
# Notes :
RM 1 (old) 70 sen (new)
reduce 30 sen
2. The preference shareholders have agreed to waive 60% of the dividend in arrears and to receive
ordinary shares at new par value for the balance.
:
270
(1,500,000 x 9% x 73% x 2 years) x 1@

'
32,400
O sen x 40%
unit x 30 = RM 23,652=
# Additional information : Tewgtdosc

Preference share dividend is two years in arrears
32,400
Capital reduction 23,652 √ 32,400
OSC 23,652 √
3. All intangible assets and accumulated losses are to be eliminated. Bad debts of RM33,700 and
obsolete inventories of RM31,500 will be written off.
Capital reduction 1,195,500

Patent and Trademark (intangible assets ELIMINATE) 73,100 √
Goodwill (intangible assets ELIMINATE) 200,200 √
Profit and Loss (accumulated loss ELIMINATE) 857,000 √
Inventories (obsolete stock – WRITE OFF) 31,500 √
Account receivables (bad debts – REDUCE the AR value) 33,700 √
g.
,
g.

4. Seventy percent of share premium account to be utilized for the scheme.
Share premium (230,000 x 70%) 161,000 √

5. The [investment was sold at a loss of RM85,000]¹. The proceeds were used to [settle the creditors
in full]²
¹ Investment sold :
Bank 238,900 √
Trade Investments (record at cost) 323,900 √
² Settle the creditor

Creditors 252,160 √
Bank 238,900 √
Notes :
The proceeds were used to settle the creditors in full
* settle the creditor – using the money received from the sales of investment.
* amount paid RESTRICTED to RM 238,900 only.
6. Assets were revalued as follows : .

RM
Land and building 2,890,000
Motor vehicles 80,450 -
111,110 = 301 . -
Land and building :

NBV (RM 2,455,000) < Revaluation (RM 2,890,000)
Amount increase by RM 435,000 = SURPLUS on revaluation
Motor vehicles :
NBV (RM 111,110) > Revaluation (RM 80,450)
Amount decreased by RM 30,660 = DEFICIT/LOSS on revaluation
Land and building 435,000 √

Motor vehicles 30,660 √
Capital reduction 404,340

e) The [plant and machinery costing RM80,000, which had been mortgaged against the director’s loan, was
used as full settlement of the loan]¹. The [remaining of plant and machinery was revalued to
RM330,330]².
¹ Settle the director’s loan

Loan from Directors 88,400 √
Plant and machinery 80,000 √
Machinery costing RM 80,000

- Mortgaged to settle the
director’s loan
Remaining :
(RM 401,800 – RM80,000)
TOTAL COST = RM 401,800 = RM 321,800 (NBV)
Revalued to RM 330,330.
NBV < Revaluation
² Plant & machinery was revalued

Plant and machinery [(401,800 – 80,000) – 330,330)] 8,530 √
7. The contingent liability materialized and the court ruled that RM28,900 is to be paid.

Bank 28,900 √
8. Cost of reconstruction amounted to RM12,700.

Bank 12,700 √
(30 √ x ½ = 15 marks)

Capital reduction account
fir
I
32,400 23,652
-
OSC - Preference dividend in arrears OSC (5,000,000 x 20 sen) 1,000,000

✓
Various assets – written off 1,195,500 9% PSC (1,500,000 x 30 sen) 450,000
Trade investment 85,000 Share premium (230,000 x 70%) 161,000
Bank - Contingent liability 28,900 Creditors 13,260
Bank - Cost of reconstruction 12,700 Various assets – revaluation 404,340
Loan from Directors 8,400
* Capital Reserve 691,030 699,778 Plant and machinery 8,530
[(401,800 – 80,000) – 330,330)]
2,045,530 2,045,530
b)
Husnul Khotimah Bhd
Statement of Financial Position (SOFP) as at 31 January 2010
RM
Authorised Capital
9% Cumulative Preference Shares of RM 0.70 each 2,000,000
Ordinary Shares of RM 0.30 each 3,500,000
5,500,000
Issued and Paid Up Capital

9% Cumulative Preference Shares of RM 0.70 each 1,050,000 √
(1,500,000 - 450,000)
Ordinary Shares of RM 0.30 each .
1,523,652 √
(2,500,000 - 1,000,000 + 23,652) -
32,400
2,573,652
Long Term Liabilities
12% Debentures 90,000
Reserves .
Share Premium (230,000 - 161,000) 69,000 √
. * Capital Reserve 699,778 √
Bank overdraft (34,000 + 238,900 - 238,900 - 28,900 - 12,700) 7,600 √
Saff + a .
r . Loan Contingent cost

of
trials Reconstruction
3,440,030
Non Current Assets

Land and building (2455+445) 2,890,000 √
8.537
guntfevalr
Plant and machinery ( 401.8 330,330 √
' .
-
80 t
Settle
Motor vehicles ( 111.11 30.66 -
- loan
80,450 √
Current Assets
Inventories (81,000 - 31,500) 49,500 √
Account receivables (123,450 - 33,700) 89,750 √
3,440,030
\
(10 √ x ½ = 5 marks)

CHAPTER 2 – CHANGES IN BUSINESS STRUCTURES/EXTERNAL RECONSTRUCTION
CONVERSION of a CHANGES IN BUSINESS Business combination

business entity INTO a STRUCTURES
company
erase
Absorption
Amalgamation
Sole Partnership
proprietorship Takeover/merger
Company Company
Horizontal Vertical Conglomeration

Integration Integration
UNRELATED and DIVERSE

Combining of operations
business in the SAME Combining of business in
LINE the DIFFERENT LINE (within
the same “stream” of
activities) +
+ Perodua McDonald’s
+
Perodua Proton
Perodua Silverstone

REASONS for Business

To share resources
Enjoy economies of Combination To cut down
scale
INEFFICIENT use of
Larger production
resources and cost
units
To raise finance To reduce risk
Cutting out competition Control/coordinate of

the different functions
Becoming more
eg : production &
competitive
marketing
Business conversion
TYPES OF CHANGES SELLER ? BUYER ?
Sole
CONVERT
proprietorship
Ali Enterprise Ali Sdn Bhd

Company
Partnership
CONVERT
Perniagaan Bersatu Sdn Bhd

Company Ali dan Abu

Business combination
TYPES OF CHANGES SELLER ? BUYER ?
Amalgamation
+ COMBINE
2/more ¹ companies
combine their business
(assets and liabilities)² Teguh Bersatu Teguh Bersatu Sdn Bhd
together by selling their Sdn Bhd Sdn Bhd
businesses as going NEW
concerns to a newly OLD OLD
formed company ³
Old companies are

wound up ⁴
Absorption
ABSORB
When one dominant ¹
company acquires the
assets and liabilities² of Bersatu Teguh Sdn Bhd
another company³, Sdn Bhd
DOMINANT
The company being Company
acquired is wound up⁴ being
acquired
Liquidation expenses vs Formation expenses
Expenses incurred by the company for Expenses incurred by the company when
winding up they want to form a new company
It can be paid by seller or buyer Its ONLY can be paid by buyer

PURCHASE PRICE (PP) PURCHASE CONSIDERATION (PC)
Definition : The settlement of the PP

a) Cost of acquisition
b) An agreed price Comprise of :
a) Cash
Comprise of : b) Shares in purchasing/buyer company
a) Cash and cash equivalents payable c) Liabilities in purchasing/buyer
b) Fair value (FV) of other consideration company
(other than cash) given by the buyer d) Other assets
c) Any cost directly attributable to the e) Incidental expenses
acquisition
FACTORS that determine the PP :

a) Net asset taken over (NATO) by
buyer
b) Liabilities taken over
c) Goodwill
d) Liquidation expenses paid by BUYER
REMEMBER
Computation of PP :
(N) Add : Net asset taken over (NATO) by buyer
(L) Less : Liabilities taken over
(G) Add : Goodwill
(L) Less : Liquidation expenses paid by BUYER
PURCHASE PRICE = PURCHASE CONSIDERATION
: (
PP. = NATO + GW -LIQ. EXP (paid by buyer) = PC
Deb .
Cash .
goodwill
on
acquisition

REMEMBER
ACCOUNTING ENTRIES
CLOSING BOOKS OF SELLER/VENDORS OPENING BOOKS OF BUYER
a. To record the purchase price a. To record the agreed purchase price

DR Purchasing company XX DR Business purchase XX
CR Realisation XX CR Seller/Liquidator XX
b. Assets taken over b. To record the assets acquired at FV

DR Realisation XX DR Assets received XX
CR Relevant assets at CV XX CR Business purchase XX
c. Liabilities taken over c. To record the liabilities taken over

DR Relevant liabilities XX DR Business purchase XX
CR Realisation XX CR Liabilities taken over XX
d. Liquidation expenses (paid by SELLER) d. To record goodwill or premium paid

DR Realisation XX DR Goodwill XX
CR Bank XX CR Business purchase XX
e. Write off assets that have no value e. Payment of purchase consideration
-
DR Capital XX DR Seller/Liquidator XX
CR Assets of no value – at CV XX CR Share capital XX
CR Share premium XX
f. Profit on realisation CR Cash/Bank (if any) XX
DR Realisation XX
CR Capital XX
g. Purchase consideration received from buyer Realisation account

DR Cash, shares etc XX
CR Purchasing company XX
Buyer pp xx
AssettloxxTo
-
h. Assets and liabilities NOT taken over sank Xx Liab XX

¥gp
- .
Some assets may not be taken over by the

purchaser of the business. In that case the Lm sm_
Deficit XX
assets are sold separately and the profit and
loss on sale is transferred to the realization
-
srofitonrealtt Xx
account. The seller discharges liabilities not

taken over and any discount or premium
arising is transferred to the realization
account.
Sundry members
Buyer OSC Psc Deb
OSC PSC Deb
'
Realisation ×× Sim Buyer .
xx xx xx
Osc
psc
Deb
-
cash -
xx xx
= =
Business purchase
Seller -
pp .
xx
-
ssetstlo xx
tiab -170 XX
Balancing
XX Goodwill figured
COMPREHENSIVE EXAMPLE
CONVERSION (SOLE PROPRIETORSHIP – COMPANY)

Encik Shuib, sole proprietor of Perniagaan S.H.U.I.B, has decided to convert his business into a limited
company, Mukmin Sdn Bhd. On 1 August 2011, the Statement of Financial Position (SOFP) of the sole
proprietorship, Perniagaan S.H.U.I.B, was as follows :
Perniagaan S.H.U.I.B
Statement of Financial Position (SOFP) as at 1 August 2011
RM RM
Capital 100,000
Profit and Loss 40,000 x
Current liabilities :
Creditors 40,000 x
180,000
Non current assets :

Land 80,000 x
Plant and Machinery 43,000

Provision for depreciation (13,000) 30,000 x
Office equipment 30,000

Provision for depreciation (5,000) 25,000 x
Current assets :
Inventories 22,000 ×
Debtors 12,500 x
Bank 10,500 45,000
180,000
Note :
The purchase consideration was to be settled by the issue :
30,000 8% preference shares issued at 5% premium 30.000×1.65 = 31.500
-
70,000 ordinary shares of RM1 each at par 70,000×1.00 = 70,000
Sufficient cash can = ?

Additional information :
1. The new company, Mukmin Sdn Bhd was formed with an authorized capital of RM500,000 in 400,000
ordinary shares of RM1 each and 100,000 8% preference shares of RM1 each, to take over all of the
assets and liabilities (excluding the bank and plant & machinery) of Perniagaan S.H.U.I.B.
2. The assets taken over were revalued as follows :

RM
Land 90,000
Stock 17,000
3. Allowance for doubtful debts was estimated at 10% of debtors. ✓ 12,500×901=11,250
4. The plant and machinery were sold at 18,000. 30,000 -
18,000 =
12 .
ooo
5. Estimation of goodwill on acquisition was RM7,000.
6. Mukmin Sdn Bhd was to pay for the liquidation expenses of Perniagaan S.H.U.I.B to the sum of
RM 1,000.
7. Formation expenses of Mukmin Sdn Bhd amounted to RM 1,800.
8. After the conversion, Mukmin Sdn Bhd was to issue for 40,000 ordinary shares at premium of 5% per
share.
Required :
a) Calculate the purchase price of Perniagaan S.H.U.I.B and show how the purchase consideration is to be
discharged.
(5 marks)
b) Prepare the realisation account, the capital account and purchaser account in the books of Perniagaan
S.H.U.I.B. Books of seller
(10 marks)
c) Opening journal entries in the books of Mukmin Sdn Bhd. (Narrations are not required)
Books of buyer (4 marks)
d) Set out the Statement of Financial Position (SOFP) of Mukmin Sdn Bhd as at 1 August 2011
(6 marks)

SUGGESTED SOLUTION
a) Purchase Price and Purchase Consideration

RM
NATO :
Land Revalued amount 90,000 √
Office equipment 25,000 √
Inventories Revalued amount 17,000 √
.×Hs÷
Debtors ( 12500 -
1250401 11,250 √
143,250
(-) Creditors (40,000) √
(+) Goodwill 7,000 √
(-) Liquidation expenses PAID BY BUYER (1,000) √
PURCHASE PRICE 109,250
30,000 8% PSC issued at 5% premium (30.000×1.05) 31,500 √

70,000 ordinary shares of RM1 each at par 70,000 √
BANK (Sufficient cash) Balancing figure 7,750 √
PURCHASE CONSIDERATION : .
109,250 /
(10√ x ½ = 5 marks)
b) Books of SELLER
Realisation account
Land 80,000 √ Mukmin Sdn Bhd 109,250 √
Office equipment 25,000 √ Creditors 40,000 √
Inventories 22,000 √ CAPITAL : LOSS ON REALISATION 2,250 √
Debtors 12,500 √
Plant and Machinery (Loss) 12,000 √
151,500 151,500
Capital account
REALISATION : LOSS 2,250 Balance b/d 100,000 √
M¥13
-
8% PSC 31,500 √.
Profit and Loss 40,000 √
-
ordinary shares 70,000 √

BANK 36,250
140,000 140,000
0
+ m
'
old NBv→30 Bank 18
-30
'
Realisation 121
-
Kolej Poly-Tech MARA, Kuala Lumpur©

I
FAR300/Notes/Nov 2014 – April 2015
=
Bank account
Balance b/d 10,500 Capital 36,250 √
Plant and Machinery 18,000 √
Mukmin Sdn Bhd 7,750 √
36,250 36,250
Mukmin Sdn Bhd Buyer

Realisation 109,250 8% PSC 31,500 √
ordinary shares 70,000 √
BANK 7,750 √
109,250 109,250
Plant and Machinery account

Balance b/d 30,000 Bank 18,000
Realisation (Loss on sales of PM) 12,000
30,000 30,000
(20√ x ½ = 10 marks)
c) Journal entries : (Books of buyer)

RM RM
Business purchase 109,250 (½)√
Perniagaan S.H.U.I.B 109,250 (½)√
Record purchase price
Perniagaan S.H.U.I.B 109,250

8% PSC ( 30.000 Rm× i.
of 30,000 √
Share premium ( 30.000 × am 0.05
) 1,500 √
ordinary shares ( 70 .
ooo × Rm 1. oo ) 70,000 √
BANK 7,750 √
( Record purchase consideration )
Land 90,000 √
Inventories 17,000 √
Debtors Balancing figured 11,250 √ 143,250
Goodwill 7,000 √
Creditor 40,000 √
Bank (Liquidation expenses) 1,000
Business purchase 109,250

Business purchase
Assets t/o 143,250

Liabilities t/o 40,000
Perniagaan shuib 109,250
Bank -liquidation exp 1,000
Goodwill 7,000
Perniagaan shuib
Business purchase 109,250

Osc. 70,000
PSC 30,000
SP 1,500
Bank 7,750
109,250 109,250
Formation expenses 1,800 √

Bank 1,800 √
Bank ( 40.000×1.05 ) 42,000 √
40.000
{ )
ordinary shares × 1.00
40,000 √
Share premium 40,000 Xo 05
) 2,000 √
.
(16√ x ¼ = 4 marks)
d) Mukmin Sdn Bhd

Statement of Financial Position (SOFP) as at 1 August 2009
Authorised capital : RM
400,000 ordinary shares of RM1 400,000 (½)√
¥
100,000 7% preference shares of RM1 100,000 (½)√
500,000
'
issue
Issued capital : p ✓
new C
'
Ordinary shares of RM1 each (70,000 + 40,000) 110,000 √

30,000 8% preference shares of RM1 each 30,000 √
osc
Tl pc
Share premium (1,500 + 2,000) 3,500 √
143,500
.
Represented by :
Non current assets
Land 90,000 √
Goodwill 7,000 √
Formation expenses 1,800 √
>
Current assets :
Inventories 17,000 √
Debtors RM 12,500 .
Less : Prov D/Debts (1,250) 11,250 √
Bank (42,000 issued new share – 7,750 – 1,000 LE – 1,800 FE) 31,450 √
p .
c 59,700
Current liabilities :
Creditors (40,000) √ 19,700
143,500
(12√ x ½ = 6 marks)

PART 3 – PRE AND POST INCORPORATION
Question 1
a) Rezeki Furqan Bhd was incorporated on 1 September 2010 to take over the business of Muqaddam Bhd
as from 1 May 2010. The income statement of Rezeki Furqan Bhd for the year ended 30 April 2011 was
as follows :
RM
Gross profit 500,500
Rental income 55,100
Preliminary expenses 20,000
Office salaries 45,000
Director’s remuneration 48,800
Interest 14,000
Advertising expenses 30,780
Selling expenses 33,320
Depreciation 22,200
Additional information :
1) One-quarter of the total sales are for the first four months of the financial year. Gross profit margin is
constant throughout the year.
2) Rental income was derived from subletting part of the building from 1 July 2010.
3) Interest is on the bank loan that was taken out on 1 January 2011.
4) Selling expenses include RM 3,000 of bad debts, which is taken over from Muqaddam Bhd.
5) Of the depreciation expenses RM 18,200 is on non-current assets taken over from Muqaddam Bhd
and remaining balances on non-current assets bought on 1 January 2011.
Required :
Calculate the gross profit and expenses for the pre and post incorporation period.
(8 marks)
b) List (5) five circumstances when a holding company may exclude a subsidiary from the group financial
statements.
(5 marks)

Capital Reduction Merged

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Capital Reduction Merged

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CODE COURSE:

ACC4104 - CONSOLIDATED FINANCIAL REPORTING I

Course Learning Outcomes (CLO):

Internal reconstruction Capital reduction

1. No new company is formed. The existing company continues as a going concern;

Kolej Poly-Tech MARA, Kuala Lumpur© FAR300/Notes/Nov 2014 – April 2015

Capital reduction (CR) or Internal Reconstruction (IR)

Surplus Capital was eroded

Company may apply to the courts to reduce its capital.

Confirmed by Conditions to reduce Provided in

Kolej Poly-Tech MARA, Kuala Lumpur© FAR300/Notes/Nov 2014 – April 2015

Reduce/write off Situations/ Refund

Cancel paid up capital

Where a company has more than SUFFIENT capital and

Where the company has EXCESS financial resources and it is NOT

Dr Ordinary share capital XXX

Kolej Poly-Tech MARA, Kuala Lumpur© FAR300/Notes/Nov 2014 – April 2015

Where a company’s capital is eroded and company has

To dispose of ALL the assets

Kolej Poly-Tech MARA, Kuala Lumpur© FAR300/Notes/Nov 2014 – April 2015

current values. All

Consider the various The major losses

Kolej Poly-Tech MARA, Kuala Lumpur© FAR300/Notes/Nov 2014 – April 2015

ACCOUNTING ENTRIES – To record a scheme of capital reduction

1. Amount written off share capital.

Issued and paid up capital

The ordinary shares capital was reduced to RM 0.40 each.

Dr Ordinary Share capital (100,000 units x 60 sen) RM 60,000

Dr Ordinary Share capital (100,000 units x 40 sen) RM 40,000

Kolej Poly-Tech MARA, Kuala Lumpur© FAR300/Notes/Nov 2014 – April 2015

Dr Ordinary Share capital (old) (100,000 units x RM 1) RM 100,000

100 x $10 40=40

RM 1 (old price) 40 sen RM 1 (new price)

Dr Ordinary Share capital (old) (100,000 units x RM 1) RM 100,000

Cr Capital reduction (100,000 units x 30 sen) RM 30,000

RM 1 (old price) 70 sen RM 1 (new price) $

Reduce 30 sen by debiting Capital reduction

OSC Chew ) CRM 1.00

Kolej Poly-Tech MARA, Kuala Lumpur© FAR300/Notes/Nov 2014 – April 2015

2. Reserves utilized for the scheme. Reserves :

Half of the share premium was utilized for the scheme.

Dr Share premium (½ x RM 50,000) RM 25,000

Dr Share premium RM 50,000

3. To write off accumulated losses

Dr Capital reduction RM 200,000

Kolej Poly-Tech MARA, Kuala Lumpur© FAR300/Notes/Nov 2014 – April 2015

C. R ud 9 FAR 300 Financial Accounting 5

4. Amount written off assets on revaluation. Asset revalued downward

5. Surplus on revaluation assets.

Dr Capital reduction RM 25,000

Kolej Poly-Tech MARA, Kuala Lumpur© FAR300/Notes/Nov 2014 – April 2015

Bad debts of RM 3,000

Dr Capital reduction RM 3,000

6. Shares issued in settlement of liability.

Dr Creditor (RM 20,000 x 2 units x RM 0.50) RM 20,000

Kolej Poly-Tech MARA, Kuala Lumpur© FAR300/Notes/Nov 2014 – April 2015

7. Other settlement of liability.

Dr Creditor (RM 20,000) RM 20,000

8. Issue of new shares in lieu of preference dividend in arrears.

Dr Capital reduction (RM 40,000 x 1 unit x 20 sen) 0

Dr Capital reduction (RM 40,000 x 1 unit x ¼ ) RM 10,000

Kolej Poly-Tech MARA, Kuala Lumpur© FAR300/Notes/Nov 2014 – April 2015

Dr Capital reduction (RM 20,000 x RM 1) RM 20,000

preference dividend in arrears.