Intermediate Notes For Lecture-1

“Education for Efficiency”
TANZANIA INSTITUTE OF ACCOUNTANCY

MBEYA CAMPUS
TEACHING NOTES ON
INTERMEDIATE FINANCIAL ACCOUNTING FOR
BAC II AND BPSAF II
Prepared by:
Mnyili M. D.
ACPA-PP, Msc. AF, BAF, Dip IPSASs
PREFACE
These teaching notes have been prepared to aid learning of second year students in
Bachelor of Accounting (BAC) and Bachelor of Public Sector Accounting and Finance
(BPSAF). The main issue behind the preparation of these notes was the fact that the
library service is very limited at our campus that challenges the learning capability of
students. It has been a challenge to students to access text books in the library, as well
as having a space to sit and study what has been imparted to them on lecturers. This
pamphlet, therefore, should be regarded as the learning aids to those intended
students. It should not be taken as a conclusive materials for the course intended, and
whenever a student has a reach on other materials they should also be studied in an
equally manner. I would like to express my thanks to my fellow lecturers, who in one
way or another they helped me during the whole process of preparing and compiling
these notes. Lastly, I would like to caution students that these notes should not be used
as a substitute of text books. They are just a skeleton to take them through key
learning outcomes as outlined in the course contents.
Mnyili M. D.
i
TABLE OF CONTENTS
PREFACE ................................................................................................................... i
TABLE OF CONTENTS ............................................................................................... ii
TOPIC 1: ACCOUNTING FOR ISSUE OF SHARES .........................................................5
MEANING OF COMPANY ............................................................................................5
IMPORTANT DOCUMENTS IN FORMING A COMPANY ..................................................5
TYPES OF COMPANIES ..............................................................................................6
ISSUE OF SHARES ....................................................................................................8
Issue of Shares Payable by Installments ................................................................... 10
Oversubscription of Shares ...................................................................................... 20
Calls in Arrears ....................................................................................................... 23
Calls in Advance ...................................................................................................... 23
Forfeited Shares...................................................................................................... 26
Reissue of Forfeited Shares ..................................................................................... 29
SEMINAR QUESTIONS ............................................................................................. 33
TOPIC 2: ISSUE AND REDEMPTION OF DEBENTURES ............................................... 37
MEANING OF DEBENTURES ..................................................................................... 37
DISTINCTION BETWEEN SHARES AND DEBENTURES................................................ 37
TYPES OF DEBENTURES .......................................................................................... 38
ISSUE OF DEBENTURES .......................................................................................... 38
Issue of Debentures for Consideration other than Cash ............................................. 38
ISSUE OF DEBENTURES AS A COLLATERAL SECURITY .............................................. 43
WRITING OFF DISCOUNT/LOSS ON DEBENTURES .................................................... 46
REDEMPTION OF DEBENTURES ............................................................................... 48
Redemption of Debentures in the Open Market ......................................................... 49
Redemption of Debentures out of Profit.................................................................... 53
Redemption through Sinking Fund ........................................................................... 55
REVIEW QUESTIONS............................................................................................... 61
TOPIC 3: REDEMPTION OF PREFERENCE SHARES .................................................... 63
ii
INTRODUCTION ..................................................................................................... 63
TYPES OF PREFERENCE SHARES.............................................................................. 63
CONDITIONS FOR REDEMPTION OF PREFERENCE SHARES ....................................... 64
CAPITAL REDEMPTION RESERVE (CRR) ACCOUNT ................................................... 65
REDEMPTION OF PREFERENCE SHARES ................................................................... 65
TOPIC 4: CONVERSION OF A PARTNERSHIP TO A LIMITED LIABILITY COMPANY ...... 89
INTRODUCTION ..................................................................................................... 89
THE PROCESS OF CONVERSION .............................................................................. 89
REVIEW QUESTIONS............................................................................................... 95
TOPIC 5: PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS (IAS 1) .. 99
INTRODUCTION ..................................................................................................... 99
FINANCIAL STATEMENTS ........................................................................................ 99
OBJECTIVES OF FINANCIAL STATEMENTS ............................................................. 100
COMPONENTS OF FINANCIAL STATEMENTS ........................................................... 100
OVERALL FEATURES ............................................................................................. 100
STRUCTURES AND CONTENTS............................................................................... 103
PUBLISHED FINANCIAL STATEMENTS .................................................................... 104
OTHER REPORTS – DIRECTORS/CHAIRMAN STATEMENT ....................................... 113
DISCLOSURE OF ACCOUNTING POLICIES .............................................................. 114
REVIEW QUESTIONS............................................................................................. 115
TOPIC 6: CASH FLOWS STATEMENT (IAS 7) .......................................................... 119
INTRODUCTION ................................................................................................... 119
OBJECTIVE AND SCOPE OF IAS 7 .......................................................................... 119
BENEFITS OF CASH FLOWS INFORMATION ............................................................ 119
CASH AND CASH EQUIVALENT .............................................................................. 120
CONTENTS OF CASH FLOW STATEMENT ................................................................ 120
PRESENTATION OF A STATEMENT OF CASH FLOWS ............................................... 122
REPORTING CASH FLOWS ON NET BASIS .............................................................. 129
FOREIGN CURRENCY CASH FLOWS ........................................................................ 129
iii
TOPIC 7: ACCOUNTING FOR INVESTMENTS ........................................................... 133
INTRODUCTION ................................................................................................... 133
PURCHASE AND SALE OF INVESTMENTS ................................................................ 133
PURCHASE OF SECURITIES CUM DIV/INT .............................................................. 134
SALE OF SECURITIES CUM DIV/INT ....................................................................... 134
PURCHASING OF SECURITIES EX – DIV OR EX – INT ............................................. 135
RIGHT ISSUE AND BONUS ISSUE OF SHARES ........................................................ 136
iv
TOPIC 1: ACCOUNTING FOR ISSUE OF SHARES
MEANING OF COMPANY
A company is a business organization. It is an association or collection of individual
real persons and/or other companies, who each provide some form of capital. This
group has a common purpose or focus and an aim of gaining profits. This collection,
group or association of persons can be made to exist in law and then a company is
itself considered a “legal person". The name company arose because, at least
originally, it represented or was owned by more than one real or legal person.
A company can be defined as an "artificial person", invisible, intangible, created by

or under Law, with a discrete legal entity, perpetual succession and a common seal.
It is not affected by the death, insanity or insolvency of an individual member. The
Companies Act, 2002 defined a company as a company formed and registered under
that Act or an existing company formed under other legislation prior to the act.
IMPORTANT DOCUMENTS IN FORMING A COMPANY

In establishing companies other than statutory companies, the most important
documents that are used are Memorandum of Association (MA) and Articles of
Association (AA). These documents plus other documents like a Declaration of
Compliance must be lodged with the Registrar of Companies together with the
required fees.
Memorandum of Association (MA)

The memorandum of association is a statement made by each subscriber confirming
their intention to form a company and become a member of that company. It is a
document forming the constitution of a company defining company’s objectives and
powers. The Memorandum of Association enables the shareholders, creditors and all
those who may have any dealings with the company to know the extent of the
powers of the company and the limits of its activities.
According to S. 4 of Companies Act, 2002 the Memorandum of Association of the
company should be printed in English language and state:
(a) The name of the company, with ''public limited company'' as the last words of
the name in the case of a public company, or with ''limited'' as the last word
of the name in the case of a company limited by shares or by guarantee (not
being a public company); and
(b) The objects of the company, i.e. the purpose of its formation.
Mnyili M. D. 5
(c) The liability of its members is limited, if the company is limited by shares or
guarantee.
(d) The proposed amount of share capital and its division into shares of fixed
amount.
Articles of Association (AA)

The Articles of Association define the rights of the members and the powers, duties,
and authority of the directors. It sets out the rules for the internal running of the
company, governing the rights and duties of the members of a company among
themselves. Articles deal with internal matters such as general meetings,
appointment of directors, issue and transfer of shares, dividends, accounts and
audit.
If the company does not prepare its own articles, S. 11(1) of Companies Act, 2002
allows such a company to adopt all or part of the regulations contained in Table A.
In case where a company adopts all or part of the regulations in Table A, a printed
copy of Table A shall be annexed to or incorporated in each copy of its articles of
association.
TYPES OF COMPANIES
There are various types of company that can be formed in different jurisdictions, but
the most common forms of company (generally formed by registration under
applicable company’s legislation) are:
Statutory Companies
These are companies that are formed by the special act passed by the parliament.
These companies are established in order to carry out special task that seems to be
important by the Government. Good examples of such companies are like Tanesco,
Tanapa, etc. These companies have features that distinguish them from other
companies like; they are not required to write Memorandum and Articles of
Association; they are not required to include the word limited in their name; they are
responsible and report to the Parliament.
Registered Companies
These are companies registered under the Companies Act, 2002 or any other
legislation prior to the Companies Act. They are established by following procedures
stipulated under the legislation and their operations are governed by the said
legislation. These companies are categorized into: Public and private companies, and
limited and unlimited companies.
Mnyili M. D. 6
i. Public Companies
These are companies that raise their capital by issuing shares to the public. Once a
company goes public, it has to answer to its shareholders. Certain corporate
structure changes and amendments must be brought up for shareholder vote.
Public companies have inherent advantages over private companies, including the
ability to sell future equity stakes and increased access to the debt markets. With
these advantages, however, come increased regulatory scrutiny and less control for
majority owners and company founders.
ii. Private Companies

Business firm in the private sector of an economy controlled and operated by
private individuals and not by civil servants or government-employees. According to
S. 27 of Companies Act, 2002, a private company is a company in which its articles
of association;
 Restricts the right to transfer its shares,
 Limits the number of its members to fifty, not including employees and former
employees who are now members of the company, and
 Prohibits any invitation to the public to subscribe for any shares or debentures
of the company.
iii. Unlimited Companies

These are companies on which the liability of their members for company debts is
unlimited and is proportional to their interests. The members can be called upon to
contribute their personal assets to meet debts owed by the company. Unlimited
companies must have a memorandum and articles of association which must be
submitted to the registrar of companies for the company to be registered and
established. Unlimited companies are very rare today.
iv. Limited Companies

A limited company is a company in which the liability of the members or
subscribers of the company is limited to what they have invested or guaranteed to
the company. Limited companies may be limited by shares or by guarantee. And
the former of these, a limited company limited by shares, may be further divided
into public companies and private companies.
 A Company Limited by Guarantee – under this kind of company, each

member agrees to contribute a specific amount towards the liabilities of the
company if it goes into liquidation. The liability of members is limited to the
stated amount.
Mnyili M. D. 7
These kinds of companies are commonly used where companies are formed
for non-commercial purposes, such as clubs or charities. The members
guarantee the payment of certain (usually nominal) amounts if the company
goes into insolvent liquidation but otherwise they have no economic rights in
relation to the company.
 A Company Limited by Shares. The most common form of company used

for business ventures. Specifically, a limited company is a “company in which
the liability of each shareholder is limited to the amount individually
invested" with corporations being "the most common example of a limited
company. This type of company is common in most countries. A company
limited by shares may be a publicly traded company or a privately held
company.
ISSUE OF SHARES
Issue of shares is governed by Part III of the Companies Act, 2002 and Articles and
Memorandum of Association of a respective company. Before going direct to the
accounting treatment on how companies raise capital, we need to discuss some
important terms involved;
A Share
A share is a fraction in the ownership of a company. The capital of a company is
normally divided into shares which are stated during the formation of the company.
A company may have different types/classes of shares, each having distinctive
ownership rules, privileges, and share values. Ownership of shares may be
documented by issuance of a Stock Certificate, which is a legal document that
specifies the amount of shares owned, par value, or the class of shares.
Nominal/Par Value of a share

This is the value shown on the face of a share, which is different from the market
value of the share. Nominal value of shares indicate the amount, in normal cases, a
share can fetch from the market. To determine the maximum share capital
(authorized share capital) to the company, then number of shares is multiplied by
the nominal/par value of a share.
Authorized Share Capital

Authorized share capital is a maximum share capital the company can issue as
stipulated in its Memorandum of Association. It is obtained by multiplying number of
shares with the face value per share (i.e. Number of shares x face value per share).
Mnyili M. D. 8
Issued Share Capital
This is the capital which has already being issued out to the public and has already
being demanded for payment by the company. It is not necessarily that the
company may issue all the authorized shares at once. Issued share capital is
determined by multiplying the issued share capital with the portion already called up
by the company.
Paid up Capital
It is the part of issued share capital which has already been paid for. It is the
amount that a company has already called from the applicants, and the applicants
have already paid for those calls. It consists of the called up capital plus calls in
advance, less calls in arrears.
Share Premium
This is an amount paid over and above nominal value of the share when the shares
are issued to the public. The law requires share premium to be maintained separate
from the nominal share value. Share premium can be used for;
- Issuing bonus shares
- Writing off preliminary expenses incurred during formation of company
- Writing off discount on issue of shares/debentures
- Writing off premium on redemption of redeemable preference shares if the
redemption is through other than the new issue of shares
- Writing off goodwill
Discount issue of shares

Discount issue of shares occur when shares are issued to the public at less than the
nominal value. According to Companies Act, 2002 section 60, companies are allowed
to issue shares at the price below the nominal/par value. Companies are allowed to
issue shares at discount provided that:
i. The issue of the shares at a discount must be authorised by resolution passed
in general meeting of the company, and must be authorized by the court,
ii. The resolution must specify the maximum rate of discount at which the
shares are to be issued,
iii. If the company has not commenced business, the period elapsed to which it
was entitled to commence business is less than one year,
iv. The shares to be issued at a discount must be issued within one month after
the date on which the issue is authorized by the court or within the period as
the court may allow.
Mnyili M. D. 9
A Call
A call is a demand from the company requiring shareholders to pay money relating
to a specific stage of their shares. In most cases, a share may have calls that range
to application call, allotment call, first call and so on.
Issue of Shares Payable by Installments

Shares issued payable by instalment refers to the situation whereby the issuing
company demands money from share applicants in parts. Applicants are not required
to pay the whole amount at once, but they will pay in parts when it is demanded by
the company.
In most cases, shares are issued by instalment when;

- The whole amount is not required immediately, and
- The public response is not certain
Accounting entries for shares issued by instalments

When shares are issued and payments to be made by instalments, the following
accounting entries are involved:
Shares issued at par

i. When cash is received on application stage, based on shares applied
Dr Bank A/c
Cr Application & Allotment A/c
With cash received on application (number of shares x application value)
ii. When allotment is made, that is accepting successful applicants

Dr Application & Allotment A/c
Cr Share Capital A/c
With the part of capital value on shares at application and allotment stage
iii. When allotment monies are received after share applicants have been notified to
pay allotment monies after being successful
Dr Bank A/c
Cr Application & Allotment A/c
With cash received on allotment
iv. When calls are made, share capital should be recognized immediately as in part
ii above, that is
Dr Nth Call A/c
With part of nominal value relating to the nth call
Mnyili M. D. 10
v. When monies relating to the nth call are received
Dr Bank A/c
Cr Nth Call A/c
With monies received at each nth stage
Example 1
1,000,000 ordinary shares of nominal value of Tzs. 100 each has been issued as
follows:
Tzs. 20/- payable on application
Tzs. 30/- payable on allotment
Tzs. 50/- payable on first and final call
Required
Show journal entries and ledgers to record the issue of shares, and the Statement of
Financial Position after the issue of shares.
Solution
Journal Entries
Date Particulars Dr (Tzs.) Cr (Tzs.)
(i) Bank a/c 20,000,000
To Application & Allotment A/c 20,000,000
Being money received on application stage.
(ii) Application & Allotment A/c 50,000,000
To Ordinary Share Capital A/c 50,000,000
Being recognition of share capital on
application and allotment stages.
(iii) Bank A/c 30,000,000
To Application & Allotment A/c 30,000,000
Being money received on allotment stage
(iv) First and Final Call A/c 50,000,000
To Ordinary Share Capital A/c 50,000,000
Being recognition of share capital on first
and final call.
(v) Bank A/c 50,000,000
To First and Final Call A/c 50,000,000
Being money received on first and final call.
Total 200,000,000 200,000,000
Mnyili M. D. 11
Ledgers
Bank A/c
Application & allotment 20,000,000 Balance c/d 100,000,000
Application & allotment 30,000,000
First and final call 50,000,000
100,000,000 100,000,000
Balance b/d 100,000,000
Application & Allotment A/c

Ordinary share capital 50,000,000 Bank – application 20,000,000
Bank – allotment 30,000,000
50,000,000 50,000,000
Ordinary Share Capital A/c

Balance c/d 100,000,000 Application & allotment 50,000,000
First and final call 50,000,000
100,000,000 100,000,000
Balance b/d 100,000,000
First and Final Call A/c

Ordinary share capital 50,000,000 Bank 50,000,000
Statement of Financial Position as at _______________

Tzs.
ASSETS
Current assets
Bank
100,000,000
Total assets 100,000,000
EQUITY
1,000,000 shares at Tzs. 100 each, fully paid 100,000,000
Total equity 100,000,000
Workings
Mnyili M. D. 12
1. Amount received on application stage
= 1,000,000 shares x Tzs. 20
= Tzs. 20,000,000
2. Recognition of share capital on application and allotment

= 1,000,000 shares x Tzs. (20 + 30)
= Tzs. 50,000,000
3. Amount received on allotment

= 1,000,000 shares x Tzs. 30
= Tzs. 30,000,000
4. Amount of capital recognized and paid on first and final call

= 1,000,000 shares x Tzs. 50
= Tzs. 50,000,000
Share issued at Premium

Shares issued at premium means shares are issued above their par value. When
shares are issued at premium, most of the journal entries will remain the same as
when shares are issued at par. The premium amount (component) is recorded by a
credit entry in the separate account known as “Share Premium Account”. The
premium received by the company is treated as one among the reserves and
included in the owners’ equity. Journal entries to record the share premium
assuming it is embodied in the allotment stage are;
Dr. Application & Allotment A/c - With the total of capital value and premium
Cr. Share Capital A/c - With the part of capital value on shares at
application and allotment stage
Cr. Share Premium A/c - With the part of share premium
Example 2
Maukwa Plc was incorporated in April 2007. On that date, the company invited the
public to subscribe to 500,000 ordinary shares of Tzs. 20 par value and 100,000
12% Preference shares of Tzs. 50 par value. The company’s authorised share capital
as indicated in the MA and AA consisted of 1,000,000 Ordinary shares and 200,000
12% Preference shares. Payments for the shares as directed by the company were
as follows:
Ordinary Preference
shares shares
(Tzs) (Tzs)
On Application 6 10
Mnyili M. D. 13
On Allotment (including premium) 10 25
On First Call 5 15
On Final Call 4 10
Total 25 60
Applications were received from the public with the same number of shares issued.
Applicants paid all monies as they were called by the company.
Required
Show how these transactions will be recorded in the ledger accounts.
Solution
Bank A/c
Applctn & allot - ord. 3,000,000 Balance c/d 18,500,000
Applctn & allot – pref. 1,000,000
Applctn & allot – ord. 5,000,000
Applctn & allot – pref. 2,500,000
First call – ord. 2,500,000
First call – pref. 1,500,000
Final call – ord. 2,000,000
Final call – pref. 1,000,000
18,500,000 18,500,000
Balance b/d 18,500,000

Ordinary share capital 5,500,000 Bank - application 3,000,000
Pref. share capital 2,500,000 Bank – application 1,000,000
Share premium – ord. 2,500,000 Bank – allotment 5,000,000
Share premium – pref. 1,000,000 Bank – allotment 2,500,000
11,500,000 11,500,000

First call 2,500,000
Final call 2,000,000
10,000,000 10,000,000
Mnyili M. D. 14
12% Preference Share Capital A/c
Balance c/d 5,000,000 Application & Allotment 2,500,000
5,000,000 5,000,000
Share Premium A/c

Balance c/d 3,500,000 Application & allot – ord. 2,500,000
Application & allot – pref. 1,000,000
3,500,000 3,500,000
First Call A/c

Ordinary share capital 2,500,000 Bank – ord. 2,500,000
Preference share capital 1,500,000 Bank – pref. 1,500,000
4,000,000 4,000,000
Final Call A/c

3,000,000 3,000,000
Mnyili M. D. 15
Maukwa Plc’s
Statement of Financial Position as at.... (after the issue of shares)
ASSETS
Current assets
Bank 18,500,000
18,500,000
CAPITAL AND RESERVES
Equity
Authorized share capital
1,000,000 Ordinary shares of 20/- each 20,000,000
200,000 12% Preference shares of 50/- each 10,000,000
30,000,000
Issued share capital
500,000 Ordinary shares of 20/- each fully paid 10,000,000
100,000 12% Preference shares of 50/- each fully paid 5,000,000
Share premium 3,500,000
18,500,000
Workings
Recognition of share capital and share premium on allotment stage
1. Ordinary shares
Share capital = 500,000 shares x Tzs. (10 – 5)
= Tzs. 2,500,000
Share premium = 500,000 shares x Tzs. 5
= Tzs. 2,500,000
2. Preference shares
Share capital = 100,000 shares x Tzs. (25 – 10)
= Tzs. 1,500,000
Share premium = 100,000 shares x Tzs. 10
= Tzs. 1,000,000
Share issued at Discount

When the issue price of share is less than the face value, shares are said to have
been issued at discount. In most cases, the discount part is embodied in the calls
especially the final call. In discount issue of shares, majority of journal entries will
remain the same as shares issued at par. Additional journal entry to cater for the
discount will be as follow:
Dr Bank A/c - with cash received on the particular call

Dr Share Discount A/c - with the discount amount
Cr Nth Call A/c - with the part of capital in the call
Mnyili M. D. 16
Example 3
Using the same facts as in Example 2:2, assume payments for the shares as directed
by the company were as follows:
Ordinary Preference
shares shares
(Shs) (Shs)
- On Application 5 8
- On Allotment 7 12
- On First Call 3 15
- On Final Call 2 7
Total 17 42
Applications were received from the public with the same number of shares issued.
Applicants paid all monies as they were called by the company.
Required
Show how these transactions will be recorded in the ledger accounts.
Mnyili M. D. 17
Solution
Bank A/c
Application & allot – ord. 2,500,000 Balance c/d 12,700,000
Application & allot – pref. 800,000
Application & allot – ord. 3,500,000
Application & allot – pref. 1,200,000
First call – ord. 1,500,000
First call – pref. 1,500,000
Final call – ord. 1,000,000
Final call – pref. 700,000
12,700,000 12,700,000

Preference share capital 2,000,000 Bank – pref. 800,000
Bank – ord. 3,500,000
Bank – pref. 1,200,000
8,000,000 8,000,000

10,000,000 10,000,000

5,000,000 5,000,000
Mnyili M. D. 18
First Call A/c
3,000,000 3,000,000
Final Call A/c

Preference share capital 1,500,000 Bank – pref. 700,000
Share discount 2,300,000
4,000,000 4,000,000
Share Discount A/c

Final call 2,300,000 Balance c/d 2,300,000
Maukwa Plc’s
ASSETS
Current assets
Bank 12,700,000
Share discount 2,300,000
15,000,000
Equity
Authorized share capital
1,000,000 Ordinary shares of 20/- each 20,000,000
200,000 12% Preference shares of 50/- each 10,000,000
30,000,000
100,000 12% Preference shares of 50/- each fully paid 5,000,000
15,000,000
Mnyili M. D. 19
Workings
Computation of share discount on final call
1. Ordinary share capital

Share capital = 500,000 shares x Tzs. (2 + 3)
= 2,500,000
Amount received = 500,000 shares x Tzs. 2
= Tzs. 1,000,000
Share discount = 500,000 shares x Tzs. 3
= Tzs. 1,500,000
2. Preference share capital

Share capital = 100,000 shares x Tzs. (7 + 8)
= Tzs. 1,500,000
Amount received = 100,000 shares x Tzs. 7
= Tzs. 700,000
Share discount = 100,000 shares x Tzs. 8
= Tzs. 800,000
Oversubscription of Shares
When a company invites applications for its shares it is obviously very rare that
applications for shares equals to exactly the number of shares issued. Where more
shares are applied for than are available for issue, then the issue is said to be
oversubscribed.
When shares are oversubscribed, the company needs to apply a rationing so that the
issue is restricted for the shares available for issue. The process of selecting who will
get how many shares depends on the policy of the company. Some companies
favours large shareholders due to less administrative costs while other companies
favour small shareholders as they posses less voting power in case of deciding
company matters. Therefore, the actual process of rationing the shares is then a
simple matter once a policy has been agreed. It consist of scaling down applications
of drawing lots or some other chance selection, but it will eventually bring the
number of shares applied down to the number of shares available.
Example 4
Wenyeji Company was issuing 10,000 7% Preference shares of 1,000 each, payable
10 per cent on application, 20 per cent on allotment, 40 per cent on the first call and
30 per cent on the second call.
Applications were received for 15,500 shares. A refund of the money was made in
respect of 500 shares, while the remaining 15,000 applied for, an allotment is to be
Mnyili M. D. 20
made on the basis of 2 shares for every 3 applied for. The excess application monies
are set off against the allotment monies asked for. The remaining requested
instalments are all paid in full.
Required
Show necessary ledger accounts to record the above transactions.
Solution
Given the following information
Number of shares issued = 10,000 7% Preference shares

Number of shares subscribed = 15,500 shares
Par value = Tzs. 1,000 each
Paid as follows
Application = 10% of Tzs. 1,000 = Tzs. 100
Allotment = 20% of Tzs. 1,000 = Tzs. 200
First call = 40% of Tzs. 1,000 = Tzs. 400
Final call = 30% of Tzs. 1,000 = Tzs. 300
Bank A/c
Application & allotment 1,550,000 Application & allotment 50,000
Application & allotment 1,500,000 Balance c/d 10,000,000
10,050,000 10,050,000
Application and Allotment A/c

Bank (refund) 50,000 Bank – application 1,550,000
Share capital 3,000,000 Bank – allotment 1,500,000
3,050,000 3,050,000

10,000,000 10,000,000
Mnyili M. D. 21
First Call A/c
Share capital 4,000,000 Bank 4,000,000
Final Call A/c

Wenyeji Company’s
ASSETS
Current assets
Bank 10,000,000
10,000,000
Equity
10,000 7% Preference shares of 1,000/- each fully paid 10,000,000
10,000,000
Workings
1. Pro-rata ratio
Shares issued Shares applied
Number of shares 10,000 15,500
Less: Refund 0 500
Net shares 10,000 15,000
Ratio 2 3
Therefore, any share applicant who applied for 3 shares were allotted/given 2
shares.
2. Computation of excess application money on application
Money received on application (15,500 shares x 100) 1,550,000
Less: Refund on refused shares (500 shares x 100) 50,000
Net amount retained on application stage 1,500,000
Less: Money required on application (10,000 shares x 100) 1,000,000
Excess money on application 500,000
Mnyili M. D. 22
Money required on allotment (10,000 shares x 200) 2,000,000
Less: Excess money on application 500,000
Money received on allotment 1,500,000
Calls in Arrears
When the demand for a particular stage’s money is made, some shareholders might
not be able to pay on due date. On that case, the amount unpaid on those shares is
recognised as Calls in Arrears. The unpaid amount ‘calls in arrears’ have to be
recorded in the account called Calls in Arrears Account. The calls in arrears will
arise at an allotment stage or on calls stage, therefore, the double entry to take care
the arrears will be;
Dr Calls in Arrears Account

Cr Share Appl. &Allotment /Nth Call A/c
With amount unpaid on calls upon payment
Calls in Advance
When a demand for payment is made, some shareholders may decide to pay at one
stage the whole or the next call(s) monies ahead of time that is, before the time
fixed for the call. The amount paid ahead of time should not be treated as share
capital but as a liability and should be accounted for in the Calls in Advance
account on the credit side. The advance payment can take place at the Allotment
and/or Calls stage. The accounting entry to take care the advance payment will be;
Dr Share Appl. &Allotment/Nth Call A/c
Cr Calls in Advance Account
With amount paid in advance ahead of a particular call
When the time for the calls comes for that monies to be paid, the advance payment
can be recognized as share capital or share premium as the case may be, and would
be transferred from Calls in Advance A/c to the respective stage where the money is
related (i.e. next stage from stage where it was paid). Generally, the calls in
advance will reverse at calls stage and the entry for that would be:
Dr Calls in Advance Account
Cr Nth Call Account
Example 5
Using the facts as on Example 2:4 above, assume the following;
Mnyili M. D. 23
- One applicant holding 200 shares failed to pay the first call money when they
fall due, and another applicant with 350 shares paid both the first call and final
call monies when they fall due.
- When the company called for the final call, applicants of 500 shares failed to
pay the amount due.
Required
Show necessary ledger accounts to record the above transactions in the books of
Wenyeji Company.
Solution
Bank A/c
Application and allotment 1,550,000 Application & allot (refund) 50,000
Application and allotment 1,500,000 Balance c/d 9,770,000
9,820,000 9,820,000

3,050,000 3,050,000
7% Preference Shares Capital A/c

10,000,000 10,000,000
First Call A/c

Call in advance 105,000 Call in arrears 80,000
4,105,000 4,105,000
Mnyili M. D. 24
Calls in Arrears A/c
First call 80,000 Balance c/d 230,000
Final call 150,000
230,000 230,000
Balance b/d 230,000
Calls in Advance A/c

Final call 105,000 First call 105,000
105,000 105,000
Final Call A/c

Share capital 3,000,000 Calls in advance 105,000
Bank 2,745,000
Calls in arrears 150,000
3,000,000 3,000,000
Wenyeji Company’s
ASSETS
Current assets
Bank 9,770,000
Calls in Arrears 230,000
10,000,000
Equity
10,000 7% Preference shares of 1,000/- each fully paid 10,000,000
10,000,000
Workings
1. Computation of excess application money on application
Money received on application (15,500 shares x 100) 1,550,000
Less: Refund on refused shares (500 shares x 100) 50,000
Net amount retained on application stage 1,500,000
Less: Money required on application (10,000 shares x 100) 1,000,000
Excess money on application 500,000
Mnyili M. D. 25
Money required on allotment (10,000 shares x 200) 2,000,000
Less: Excess money on application 500,000
Money received on allotment 1,500,000
3. Amount received on first call

Money required on first call (10,000 shares x 400) 4,000,000
Less: Unpaid amount (200 shares x 400) 80,000
3,920,000
Add: Amount paid in advance (350 shares x 300) 105,000
Amount received on first call 4,025,000
4. Amount received on final call

Money required on final call (10,000 shares x 400) 3,000,000
Less: Amount paid in advance on first call 105,000
Less: Unpaid amount (500 shares x 300) 150,000
Amount received on final call 2,745,000
Forfeited Shares
The company has the right to forfeit shares with calls in arrears especially when the
calls unpaid are long overdue. When shares are forfeited, any money paid by the
subscriber for the shares will be retained by the company. These shares will be
shown separately in the Balance Sheet under reserves as Forfeited Shares.
It is possible for the forfeited shares to be reissued to another subscriber at an

amount which is not less than the paid balance. The total amount paid for the
shares, both before and after forfeiture should not be less than the nominal value.
Journal entries to record the forfeiture of shares are as follows:
i. Cancellation of issued share capital for the forfeited shares.

Dr Share Capital A/c
Cr Forfeited Shares A/c
With the amount on shares which was credited to share capital before
cancellation
ii. Cancellation of Calls in Arrears which the shareholders would not be called to
make good for the shares cancelled.
Dr Forfeited Shares A/c
Cr Calls in Arrears A/c
With unpaid amount in calls in arrears on cancelled shares
Mnyili M. D. 26
iii. Cancellation of unpaid shares premium on cancelled shares
Dr Share Premium A/c
Cr Forfeited Shares A/c
With unpaid share premium if any
The balancing figure in the Forfeited Shares A/c is the amount which was paid for
the shares being cancelled before forfeited. This amount is retained by the company
and not be refunded to shareholders. At the balance sheet date, the balance in the
Forfeited Shares account should appear under reserves.
Example 6
Amour Plc has an authorized capital of Shs. 16,000,000 divided into 20,000 ordinary
shares of Shs. 800 each. The whole of the shares were issued at par, payments
being made as follows:
Shs.
Payable on application 80
Payable on allotment 240
First call 320
Second call 160
Applications were received for 32,600 shares. It was decided to refund application
monies on 2,600 shares and to allot the shares on the basis of 2 for every 3 applied
for. The excess application monies sent by the successful applicants is not to be
refunded but is to be held and so reduce the amount payable on allotment.
The calls were made and paid in full with the exception of one member holding 100
shares who paid neither the first nor the second call and another member who did
not pay the second call on 20 shares. After requisite action by the directors the
shares were forfeited.
Required
Show all necessary ledger accounts to record the transactions.
Solution
Bank A/c
Second call 3,180,800
16,156,800 16,156,800
Mnyili M. D. 27
6,608,000 6,608,000

Forfeited shares 96,000 Application and allotment 6,400,000
Balance c/d 15,904,000 First call 6,400,000
16,000,000 16,000,000
First Call A/c

6,400,000 6,400,000

First call 32,000 Forfeited shares 51,200
Second call 19,200
51,200 51,200
Second Call A/c

3,200,000 3,200,000
Forfeited Shares A/c

Calls in arrears 51,200 Share capital 96,000
Balance c/d 44,800
96,000 96,000
Balance b/d 44,800
Mnyili M. D. 28
Amour Plc’s
ASSETS
Current assets
Bank 15,948,800
15,948,800
Equity
120 Forfeited shares account 44,800
15,948,800
Workings
1. Shares forfeited
First and final calls Final call only Total shares
100 shares 20 shares 120 shares
2. Cancellation of share capital for the forfeited shares

120 shares x Tzs. 800 = Tzs. 96,000
Reissue of Forfeited Shares

When forfeited shares are reissued it involves reinstating the issued share capital to
the extent to which other shares are appearing credited to share capital account.
The shares to which reference is made are those which were issued in the first
instance together with those earlier cancelled.
The forfeited shares will be issued at the price such that the reissue price plus
amount paid per share before forfeiture is equal to or more than the nominal value
per share. If that is not the case, it will imply that those shares will be issued at a
discount, and the company will be compelled to conform to the conditions for issuing
shares at discount as shown in part 2 above. Also in reissue of forfeited shares, a
gain should be ascertained by comparing the amount paid before cancellation plus
amount paid on reissue with the nominal value of those shares. The gain should be
transferred to share premium account. An account known as “ Forfeited Shares
Reissue Account” is opened to take the reissue of the forfeited shares.
Journal entries to record reissue of forfeited shares are as follows:
i. Reinstating the issued share capital for shares being reissued.

Dr Forfeited Shares Reissue A/c
With the amount to which other shares have been credited to share capital
Mnyili M. D. 29
ii. When cash is received on the reissued shares based on the price of reissue
Dr Cash/Bank Account
Cr Forfeited Shares Reissue A/c
With the amount received on reissued shares
iii. Transfer of amount paid before the shares were forfeited from the Forfeited
Shares A/c to Forfeited Shares Reissue A/c
Dr Forfeited Shares Account
Cr Forfeited Shares Reissue A/c
With the amount paid before the shares were forfeited
Example 7
From the details in Example 2:6, assume that the forfeited shares were later
reissued to Severini Mboya at a price of Shs. 640 per share.
Required
Show all necessary ledger accounts to record the reissue of forfeited shares.
Solution
Bank A/c
Re – issue 76,800
16,233,600 16,233,600

6,608,000 6,608,000
Mnyili M. D. 30
Forfeited shares 96,000 Application and allotment 6,400,000
Balance c/d 16,000,000 First call 6,400,000
Re – issue 96,000
16,096,000 16,096,000
First Call A/c

6,400,000 6,400,000

First call 32,000 Forfeited shares 51,200
Second call 19,200
51,200 51,200
Second Call A/c

3,200,000 3,200,000
Forfeited Shares A/c

Calls in arrears 51,200 Share capital 96,000
Re – issue 44,800
96,000 96,000
Re – issue (Severin Mboya) A/c

Share capital 96,000 Bank 76,800
Share premium 25,600 Forfeited shares 44,800
121,600 121,600
Mnyili M. D. 31
Share Premium A/c
Balance c/d 25,600 Re – issue 25,600
25,600 25,600
Balance c/d 25,600
Amour Plc’s
ASSETS
Current assets
Bank 16,025,600
16,025,000
Equity
Authorized Share Capital
20,000 Ordinary shares of 800/- each 16,000,000
Issued Share Capital

Share premium 25,600
16,025,600
Workings
1. Amount received on reissue of forfeited shares
120 shares x Tzs. 640 = Tzs. 76,800
Mnyili M. D. 32
SEMINAR QUESTIONS
Question 1
Wazawa Ltd has a nominal capital of Tshs. 76,800,000 divided into 120,000 ordinary
shares of Tshs. 640 each. The whole of the capital was issued at par on the
following terms:
Per share
Payable on application Tshs. 80
Payable on allotment 160
First call 160
Second call 240
Applications were received for 160,000 shares and it was decided to allot the shares
on the basis of three for every four for which applications had been made. The
balance of application monies were applied to the allotment, no cash being
refunded. The balance of allotment monies were paid by the members.
The calls were made and paid in full by the members, with the exception of a
member who failed to pay the first and second calls on the 800 shares allotted to
him. A resolution was passed by directors to forfeit the shares. The forfeited shares
were later issued to P. Mambosasa at Tshs. 576 each.
Required
Record the above transactions in the ledgers of Wazawa Ltd, and the relevant
extracts from balance sheet after all the transactions had been completed.
Question 2
MT Limited has an authorized share capital of shs. 210,000,000 divided into
1,500,000 ordinary shares of shs. 140 each. The issued share capital at 31 st
December, 2009 was shs. 70,000,000 which had been issued at par. On 1st January,
2010, the directors, in accordance with the company’s Articles decided to increase
the share capital of the company through offering a further 500,000 shares of shs.
140 each at a price of shs. 224 per share payable as follows:
On application, including premium Shs. 119
On allotment 35
st
On first and final call on 1 June, 2010 70
On 30th January 2010, applications had been received for 750,000 shares and it was
decided to allot the shares to applicants for 625,000 shares, on the basis of four
shares for every five shares for which applications had been received. The balance
of the money received on application was to be applied to the amounts due on
Mnyili M. D. 33
allotment. The shares were allotted on 1st February 2010, the unsuccessful
applicants being repaid their cash on this date.
The balance of the allotment money was received in full by 28th February 2010, with
the exception of one member who failed to pay the call on the 5,000 shares allotted
to him. The directors decided to forfeit these shares on 15 th March 2010, giving the
required notice.
Required
Write up the ledger accounts necessary to record the above transactions in the
books of MT Limited.
Question 3
Applications were invited by the directors of Muasa Limited for 150,000 of its Shs.
100 ordinary shares at Shs. 115 per share payable as follows:
On application on 1 April 2008 (per share) 75
On allotment on 30 April 2008 (including premium of Shs.15 per 20
share)
On first and final call on 31 May 2008 20
Applications were received for 180,000 shares and it was decided to deal with as
follows:
i. To refuse allotment to applicants for 8,000 shares.
ii. To give full allotment to applicants for 22,000 shares.
iii. To allot the remainder of the available shares pro rata among the other
applicants.
iv. To utilise the surplus received on applications in part payment of amounts
due on allotment.
An applicant, to whom 400 shares had been allotted, failed to pay the amount due
on the first and final call and his shares were declared forfeited on 31 July 2008.
These shares were reissued on 3rd September 2008 as fully paid at Shs. 90 per
share.
Required
Show how the transactions would be recorded in the company’s books.
Question 4
During the year to 30th June 2007, Uwanji Limited made a new issue of shares. the
details of the offer were as follows:
Mnyili M. D. 34
(i) 100,000 ordinary shares of shs. 2,400 each were issued payable in instalments
as follows:
Per share
(Shs)
On application at 1st August 2006 1,560
On allotment (including the share premium of shs. 1,200
per share on) 1st December 2006 1,320
On first and final call on 1st June 2007 720
3,600
(ii) Applications for 200,000 shares were received, and it was decided to deal with
them as follows:
(a) To return cheques for 75,000 shares;
(b) To accept in full applications for 25,000 shares; and
(c) To allot the remaining shares on the basis of three shares for every four
shares applied for.
(iii) On the first and final call, one applicant who had been allotted 5,000 shares
failed to pay the due amount, and his shares were dully declared forfeited.
They were then reissued to Ambwene Mwakibinga on 1st September 2007 at
price of shs 1,920 per share fully paid.
Note: Uwanji Limited’s issued share capital on 1st July 2006 consisted of 500,000
ordinary shares of shs 2,400 each.
Required
Record the above transactions in the following ledger accounts:

(a) Ordinary share capital;
(b) Share premium;
(c) Application and Allotment;
(d) First and Final Call;
(e) Forfeited Shares; and
(f) Ambwene Mwakibinga’s account.
Question 5
DA Company Ltd made an issue of 50,000 ordinary shares of shs. 1,000 payable as
follows:
2006 Shs.
January 1st application 400
February 1st allotment (including premium) 600
March 1st First and Final Call 200
Mnyili M. D. 35
1,200
The response of applicants to the issue was as follows:
Category Number of Number of Shares

Applicants Applied for Allotted to
by each each
Applicant Applicant
A 40 1,000 500
B 20 10,000 1,000
C 1 40,000 10,000
It was a condition of the issue that amounts overpaid were to be retained by the
company used reduction of further sums due on shares allotted. Surplus contribution
if any refunded on 15th February, 2006.
Seleman Uduvi, who has subscribed Shs. 400,000 on application for 1,000 shares
failed to pay allotment money for the shares allotted. On 1st April 2006 the directors
forfeited the shares in arrears. These shares were reissued on 1st May to Edina
Chakwe for Shs. 550,000, on the same day the company received a cheque from her
in full settlement.
Required
(a) Show how the above transactions would appear in the ledger accounts of DA
Company Ltd, and
(b) Draw a Statement of Financial Position as at 30th June, 2006.
Mnyili M. D. 36
TOPIC 2: ISSUE AND REDEMPTION OF DEBENTURES
MEANING OF DEBENTURES
The word ‘debenture’ has been derived from a Latin word ‘debere’ which means to
borrow. Debenture is a written instrument acknowledging a debt under the common
seal of the company. It contains a contract for repayment of principal after a specified
period or at intervals or at the option of the company and for payment of interest at a
fixed rate payable usually either half-yearly or yearly on fixed dates.
Debenture may include debenture inventory, bonds and any other securities of a
company whether constituting a charge on the assets of the company or not. Bond is
also an instrument of acknowledgement of debt. Traditionally, the Government issued
bonds, but these days, bonds are also being issued by semi-government and non-
governmental organizations. The terms ‘debentures’ and ‘Bonds’ are now being used
inter-changeably.
DISTINCTION BETWEEN SHARES AND DEBENTURES

Differences between shares and debentures are given in the following table below:
Basis of difference Shares Debentures

1. Ownership A share represents
A debenture is an
ownership of the company. acknowledgement of a debt.
2. Return The return on shares is Return on debenture is known
known as dividend. as interest.
3. Repayment The amount of shares In most cases, the amount of
(especially ordinary shares)
debentures will be paid back
is not returned during the to holders at a specified
lifetime of the company. period of time.
4. Voting rights Shareholders enjoy voting Debenture holders normally
rights on company’s affairs.
do not enjoy any voting
rights.
5. Security Shares are not secured on Debentures are generally
any charge. secured and carry a fixed or
floating charge over the
assets of the company.
6. Convertibility Shares cannot be converted Debentures can be converted
37
into debentures. into shares if the terms of
issue so provide.
TYPES OF DEBENTURES
A company may issue different kinds of debentures which can be classified in a diagram
hereunder:
Secured debentures
Security
Naked debentures
Redeemable debentures
Tenure
Perpetual debentures
Debentures
Convertible debentures
Mode of
Redemption
Non-convertible debentures
Zero coupon rate debentures
Coupon Rate
Specific rate debentures
ISSUE OF DEBENTURES
The procedure for the issue of debentures is the same as that for the issue of shares.
The intending investors apply for debentures on the basis of the prospectus issued by
the company. The company may either ask for the entire amount to be paid on
application or by means of installments on application, on allotment and on various
calls. Debentures can be issued at par, at a premium or at a discount. They can also be
issued for consideration other than cash or as a collateral security.
Issue of Debentures for Consideration other than Cash

Sometimes a company purchase assets from vendors and instead of making payment in
cash issues debentures for consideration thereof. Such issue of debentures is called
38
debentures issued for consideration other than cash. In that case also, the debentures
may be issued at par, at a premium or at a discount then entries made in such a
situation are similar to those of the shares issued for consideration other than cash,
which are as follows:
1. On purchase of an asset
Dr Specific Asset A/c xx
To Vendor/Supplier A/c xx
With the cost of an asset acquired
2. On issue of debentures
(a) At par
Dr Vendor/Supplier A/c xx
To Debentures A/c xx
(b) At premium
Premium on Debentures A/c xx
(c) At discount
Dr Discount on Debentures A/c xx
Example 1
Alfa Polyester Ltd. acquired a truck of Tzs. 100,000,000 and cash of Tzs. 10,000,000
from Marine Solution Ltd. It was agreed that to compensate Marine solution, Alfa
Polyester should issue 5% Debenture of Tzs. 100 each.
Required
Record necessary journal entries and ledgers in the books of Alfa Polyester Ltd,
assuming the debentures were issued;
(i) At par
(ii) At premium of 25%
(iii) At a discount of 10%
39
Solution
(i) Debentures issued at par
Journal Entries
S/No Narrations Dr Cr
1. Motor Vehicles (PPE) A/c 100,000,000
Bank A/c 10,000,000
To Marine Solution Ltd 110,000,000
Being acquisition of assets from Marine
Solution Ltd.
2. Marine Solution Ltd A/c 110,000,000
To 5% Debentures A/c 110,000,000
Being 5% debentures issued at par in place of
assets acquired from Marine Solution Ltd.
TOTAL 220,000,000 220,000,000
Ledgers
Motor Vehicles (PPE) A/c

Marine Solution Ltd 100,000,000
Bank A/c
Marine Solution Ltd A/c

5% Debentures 110,000,000 Motor vehicles 100,000,000
Bank 10,000,000
5% Debentures A/c
40
(ii) Debentures issued at premium of 25%
Journal Entries
Bank A/c 10,000,000
Solution Ltd.
To 5% Debentures A/c 110,000,000
Premium on Debentures A/c 27,500,000
Being 5% debentures issued at premium of
25% in place of assets acquired from
Marine Solution Ltd.
TOTAL 247,500,000 247,500,000
Ledgers

Bank A/c

Premium on debentures 27,500,000 Bank 10,000,000
41
5% Debentures A/c
Premium on Debentures A/c

(iii) Debentures issued at discount of 10%
Journal Entries
Bank A/c 10,000,000
Solution Ltd.
Discount on Debentures A/c 12,222,222
5% Debentures A/c 122,222,222
Being 5% debentures issued at discount of
10% in place of assets acquired from
Marine Solution Ltd.
TOTAL 232,222,222 232,222,222
Ledgers

Bank A/c
42
Bank 10,000,000
5% Debentures A/c
Discount on debentures 12,222,222
Discount on Debentures A/c

5% Debentures 12,222,222
ISSUE OF DEBENTURES AS A COLLATERAL SECURITY

Collateral security means security given in addition to the principal security. It is a
subsidiary or secondary security. Whenever a company takes loan from bank or any
financial institution it may issue its debentures as secondary security which is in
addition to the principal security. Such an issue of debentures is known as ‘issue of
debentures as collateral security’. The lender will have a right over such debentures
only when company fails to pay the loan amount and the principal security is
exhausted. In case the need to exercise this right does not arise debentures will be
returned back to the company. No interest is paid on the debentures issued as collateral
security because company pays interest on loan.
In the accounting books of the company issue of debentures as collateral security can
be recorded in two ways:
i. No Records to be Made in the Books of Account

When debentures are issued as a collateral security, a company can only give a note of
debentures in the financial statements. This is due to the fact that, debentures at this
stage are not an immediate liability. In most cases, this note is given the heading
Secured Loans and Advances.
43
ii. Records to be Made in the Books of Account
Another way is when a journal entry is to be made on the issue of debentures as a
collateral security. The entry should be made on the account known as “Debentures
suspense A/c”, the account is debited as no cash is received for such issue. The journal
entry to be made will be as follows:
Dr Debenture Suspense A/c xx

With the amount of debentures in the issue
Example 2
Romanu Enterprises Ltd has entered into an agreement with Tan Finances Ltd. to
obtain a term loan of Tzs. 250 million for a period of 5 years. The interest agreed on
the loan was 14% p.a. The loan is secured by a mortgage of factory Land & Building
and Machinery. Since Land & Buildings and Machinery were old, Tan Finances Ltd.
asked for additional security. For this purpose, the borrower issued Tzs. 80 million 9%
Debenture as collateral security.
Required
Record these transactions in the books of Romanu Enterprises Ltd and show the
relevant items in the financial statements.
Solution
Journal entries
Date Particulars Dr Cr
i. Bank A/c 250,000,000
To Tan Finances Ltd. A/c 250,000,000
Being a term loan received from Tan
Finances Ltd.
ii. Debenture Suspense a/c 80,000,000
To 9% Debenture A/c 80,000,000
Being debenture issued as a second
mortgage for the loan received from Tan
Finances Ltd.
TOTAL 330,000,000 330,000,000
44
Ledgers
Bank A/c
Tan Finances Ltd. 250,000,000
Tan Finances Ltd A/c

Balance c/d 250,000,000 Bank 250,000,000
Balance b/d 250,000,000
Debenture Suspense A/c

Debentures 80,000,000 Balance c/d 80,000,000
9% Debenture A/c
Balance c/d 80,000,000 Debenture suspense 80,000,000
Relevant items in the financial statements

In the Statement of Profit and Loss;
Expenses
Finance cost – loan interest xxx
In the Statement of Financial Position

ASSETS
Non-current Assets
Debenture suspense 80,000,000
EQUITY AND LIABILITIES

Long term liabilities
9% Debenture 80,000,000
Term loan – Tan Finances Ltd 250,000,000
45
WRITING OFF DISCOUNT/LOSS ON DEBENTURES
Discount/loss on issue of debenture must be written off before such debentures are
redeemed. In the writing off the discounts, companies are permitted to utilize the
premium obtained while issuing securities or using the available profits. Discounts or
losses not written off is shown in the Balance Sheet on its assets side under the
heading “Misc. Expenses”. This shows that the amount not yet written off is carried
forward until fully written-off.
(i) The entry to write off the discount out of securities premium account is as
follows
Dr Premium on Securities A/c xx
To Discount on Issue of Debentures A/c xx
With the amount of discount written off
(ii) The entry to write off discount using the available profits will be as follows:
Dr Profit and Loss A/c xx
To Discount on Issue of Debentures A/c xx
With the amount of discount written off
Note
The minimum amount to be written off every year, assuming no amount from securities
premium is available, is proportionate to the amount of debenture redeemed. It implies
that unwritten off balance of discount/loss is proportionate to the amount of debenture
outstanding. However companies can write off any higher amount which is permissible
by the availability of profit. The loss on issue of debentures (debenture discount) to be
written off annually is determined using the following formula:
Total loss/discount
Portion of debenture written-off =
Number of years
Example 3
On January 1, 2000 Jamaldin Company Ltd. issued 100,000 7% debenture of Tzs. 1,000
each at a discount of 4% redeemable after 5 years. At the time of issue, the company
had a balance in the share premium account of Tzs. 6,500,000.
Required
Pass necessary journal entries and ledgers for issue of debenture and writing off loss on
issue debenture for the first three years.
46
Solution
Journal entries
Date Narrations Dr Cr
1 Jan Bank A/c 96,000,000
2000 Discount on Debentures A/c 4,000,000
To Debenture holders A/c 100,000,000
Being cash received on issue of debentures
at a discount of 4%.
1 Jan Debenture holders A/c 100,000,000
2000 To 7% Debentures A/c 100,000,000
Being recognition of debenture issued.
31 Dec Share Premium A/c 800,000
2000 To discount on Debentures A/c 800,000
Being writing off of discount on debenture
using premium on securities.
TOTAL 202,400,000 202,400,000
Ledgers
Bank A/c (extract)
1/1/00 Deb. Holders 96,000,000
Debenture Holders A/c

1/1/00 Debentures 100,000,000 1/1/00 Bank 96,000,000
Debenture disc. 4,000,000
100,000,000 100,000,000
47
7% Debentures A/c
31/12/00 Balance c/d 100,000,000 1/1/00 Deb. Holders 100,000,000
31/12/01 Balance c/d 100,000,000 1/1/01 Balance b/d 100,000,000
1/1/03 Balance b/d 100,000,000
Discount on Debentures A/c

1/1/00 Deb. Holders 4,000,000 31/12/00 Share premium 800,000
31/12/00 Balance c/d 3,200,000
4,000,000 4,000,000
1/1/01 Balance b/d 3,200,000 31/12/01 Share premium 800,000
31/12/01 Balance c/d 2,400,000
3,200,000 3,200,000
1/1/02 Balance b/d 2,400,000 31/12/02 Share premium 800,000
31/12/02 Balance c/d 1,600,000
2,400,000 2,400,000
1/1/03 Balance b/d 1,600,000
Share Premium A/c

31/12/00 Deb. Discount 800,000 1/1/00 Balance b/d 6,500,000
31/12/00 Balance c/d 5,700,000
6,500,000 6,500,000
31/12/01 Balance c/d 4,900,000
5,700,000 5,700,000
31/12/02 Balance c/d 4,100,000
4,900,000 4,900,000
1/1/03 Balance b/d 4,100,000
REDEMPTION OF DEBENTURES
Debentures being money borrowed by listed companies for a period of years, on the
expiration of the agreed time the money has to be repaid by buying back those
debentures from debenture holders. The situation whereby the company is buying back
48
its debentures previously issued to the public is referred to as redemption of
debentures. Debentures will be redeemed by the company at the end of the period as
shown the Debenture Trust Deed unless those debentures were issued as irredeemable.
In the redemption of debentures, several methods are used. The method which will be
used in the redemption of debentures will be stated in the debenture trust deed. Some
of the methods include:
(a) Buying them in the open market;

(b) Through using internal funds, and
(c) Through Sinking fund.
Redemption of Debentures in the Open Market

When a company purchases its own debentures in the open market for the purpose of
immediate cancellation, the purchase and cancellation of such debentures are termed
as redemption by purchase in the open market. The advantage of such an option is that
a company can redeem the debentures at its convenience whenever it has surplus
funds. Secondly, the company can purchase them when they are available in market at
a discount.
When Debentures are Redeemed at Discount

When the debentures are purchased from the market at a discount and cancelled, the
journal entries are recorded as follows:
(i) On purchase of own debentures for immediate cancellation.

Dr Debenture Account
To Debenture holders Account
To Discount on Redemption Account
When debentures are redeemed at discount which is profit to the company
(ii) On payment of amount due to debenture holders.

Dr Debenture holders Account
To Cash/Bank Account
With the amount paid to debenture holders
(iii) On transfer/closing off the profit/discount on redemption of debentures

Dr Discount on Redemption Account
To Capital Reserve Account
With the balance in the respective account
49
Example 4
XYZ Ltd. purchased its own debentures of Tzs. 100 each of the face value of Tzs.
20,000,000 from the open market for cancellation at Tzs. 92. Record all necessary
journal entries.
Solution
Journal entries
(i) Debentures A/c 20,000,000
To Debenture Holders A/c 18,400,000
Discount on Redemption A/c 1,600,000
Being cancelation of debenture for redemption
(ii) Debenture Holders A/c 18,400,000
To Cash/Bank A/c 18,400,000
Being payment made on redemption of
debentures.
(iii) Discount on Redemption A/c 1,600,000
To Capital Reserve A/c 1,600,000
Being transfer/closing off the profit/discount
on redemption of debentures
TOTAL 40,000,000 40,000,000
Ledgers
Debentures A/c
Debenture holders 18,400,000 Balance b/d 20,000,000
Discount on redemption 1,600,000
20,000,000 20,000,000

Cash/Bank 18,400,000 Debentures 18,400,000
Discount on Redemption A/c

Capital reserve 1,600,000 Debentures 1,600,000
50
Cash/Bank A/c
Debenture holders 18,400,000
Capital Reserve A/c

Balance c/d 1,600,000 Discount on redemption 1,600,000
When Debentures are Redeemed at Premium

In case, the debentures are purchased from the market at a price which is above the
nominal value of debenture, the excess will be debited to loss on redemption of
debentures. The journal entry in that case will be:
(i) On cancellation of debentures.

Dr Premium on Redemption Account
When debentures are redeemed at premium which is a loss to the company
(ii) On payment of amount due to the debenture holders.

With the amount paid to debenture holders
(iii) On transfer/closing off the premium on redemption.

Dr Profit & Loss Account
To Premium on Redemption Account
With the balance in the premium account
Example 5
X Ltd. purchased its own debentures of Tzs. 100 each of the face value of Tzs.
20,000,000 from the open market for cancellation at Tzs. 110. Record all necessary
ledger entries.
51
Solution
Journal entries
(i) Debentures A/c 20,000,000
Premium on Redemption A/c 2,000,000
To Debenture Holders A/c 22,000,000
Being cancelation of debenture for redemption
(ii) Debenture Holders A/c 22,000,000
Being payment made on redemption of
debentures.
(iii) Profit or Loss A/c 2,000,000
To Premium on Redemption A/c 2,000,000
Being transfer/closing off the loss/premium on
redemption of debentures
TOTAL 46,000,000 46,000,000
Ledgers
Debentures A/c
Debenture holders 22,000,000 Balance b/d 20,000,000
Premium on redemption 2,000,000
22,000,000 22,000,000

Cash/Bank 22,000,000 Debentures 22,000,000
Premium on Redemption A/c

Debentures 2,000,000 Profit/loss 2,000,000
Cash/Bank A/c
Debenture holders 22,000,000
52
Profit or Loss
Premium on redemption 2,000,000
Redemption of Debentures out of Profit

When debentures are to be redeemed out of profits, an adequate amount of profits is
required to be transferred to Debenture Redemption Reserve every year before the
redemption begins.
Any discount (or profit) on redemption will be transferred to reserve account, and any
premium (or loss) on redemption will deemed to come out of such reserve account, or
if no such reserve exist or insufficient, then it will deemed to come out of the share
premium account. The accounting treatment for the redemption of debentures in the
open market will be as follows:
i. When a company decides to redeem debentures
Dr Profit and Loss Account
To Debenture Redemption Reserve Account
With the amount set aside to finance the redemption.
ii. When debenture account is closed to create the liability

With the amount as shown in the debenture account.
iii. When the company settle the liability by paying through cash/bank
With the amount paid on the redemption
Note:
If debentures are redeemed at premium or discount, the premium on redemption, or
discount on redemption will be transferred to Debenture Redemption Reserve Account.
When there is premium on redemption, the premium account will be closed to the
Debenture Redemption Reserve, Profit and Loss, or to Share Premium.
Example 6
53
ABC Ltd issued 200,000 15% Debentures of Tzs. 100 each on April 1, 2011 at a 10%
discount, redeemable at 10% premium out of profits. You are required to show journal
entries for all the years, when the debentures are redeemed after four years.
Solution
Given the following
200,000 15% Debentures of Tzs. 100 each
Issued at discount of 10%
Redeemed at premium of 10%
Duration is 4 years
At issue
Amount received (200,000 x 100 x 90%) = 18,000,000
Debenture discount (200,000 x 100 x 10%) = 2,000,000
Amount to be set aside out of profit
= 20,000,000/4
= 5,000,000
Debenture A/c
31/12/11 Balance c/d 20,000,000 1/4/11 Bank 18,000,000
1/4/11 Discount on deb. 2,000,000
20,000,000 20,000,000
31/12/14 Debenture holders 20,000,000 1/1/14 Balance b/d 20,000,000
Debenture Redemption Reserve Fund A/c

31/12/11 Balance c/d 5,000,000 31/12/11 P/L 5,000,000
31/12/12 Balance c/d 10,000,000 1/1/12 Balance c/d 5,000,000
31/12/12 P/L 5,000,000
10,000,000 10,000,000
31/12/13 P/L 5,000,000
15,000,000 15,000,000
31/12/14 Balance c/d 22,000,000 1/1/14 Balance c/d 15,000,000
31/12/14 P/L 5,000,000
31/12/14 Premium on red. 2,000,000
22,000,000 22,000,000
54
31/12/14 Bank 22,000,000 31/12/14 Debentures 20,000,000
31/12/14 Premium on red. 2,000,000
22,000,000 22,000,000
Redemption through Sinking Fund

This is the common method of debenture redemption used by most company as it
assures the debenture holders the return of their money on due date. Under this
method, a fund will be created by an annual appropriation from profit and that amount
will be invested to selected type of investments which will be managed by a trustee.
The return from this investment will be reinvested until when there is a sufficient
amount for the redemption of debentures.
Three accounts needs to be opened to record transactions concerning the fund

creation, investment and redemption. These accounts are:
 Sinking Fund Account – for the build-up of the fund;

 Sinking Fund Investment Account – for the amount of funds which have been
invested, and
 Debenture Redemption Account – for the ascertainment of a gain or loss on
redemption.
Accounting Entries in Redemption through Sinking Fund

The accounting entries for the redemption of debentures under the sinking method are
as follows:
i. When making annual appropriation of profit.
Dr Profit & Loss A/c
Cr Sinking Fund A/c
With the amount to be set from profit and loss account
ii. When investing the funds which have been set aside.
Dr Sinking Fund investment A/c
Cr Sinking Fund A/c
With the amount to be set from profit and loss account
iii. When income is received on the investment made earlier
55
Dr Bank A/c
Cr Sinking Fund A/c
With the amount of income received if the income is reinvested credit Sinking
Investment Account
iv. When redeeming debentures when they mature

Dr Debentures A/c
Cr Debenture Redemption A/c
With the nominal value of debentures being cancelled.
v. When making payments to debenture holders

Dr Debenture Redemption A/c
Cr Bank A/c
With the amount to debenture holders being redeemed.
vi. To provide for the funds used on redemption, part of the investment established
will be sold.
Dr Bank A/c
Cr Sinking Fund Investment A/c
With the sale proceeds.
vii. Profit or loss on realization of investment will be determined and transferred to

Sinking Fund Account.
 When sold at profit
Dr Sinking Fund investment A/c
Cr Sinking Fund A/c
With profit on sale
 When sold at a loss

Dr Sinking Fund A/c
Cr Sinking Fund Investment A/c
With the amount of loss on sale
When all debentures have been redeemed and all sinking fund investment have been
sold, the balance in the sinking fund account will be transferred to general reserves
account and form part of equity of the issuing company.
Example 7
56
Wateule Company Limited borrowed TZS 15,000,000 by the means of debentures at
par, repayable in 6 years at a premium of 5%. The company decided to provide for
redemption by means of Sinking Fund at a 4% compound interest. The Sinking fund will
be made by appropriating Tzs 2,261,415 out of annual profit.
Required
Show journal entries and ledgers to record the above transactions.
Solution
Given the following

Amount borrowed by way of debentures 15,000,000
Duration 6 years
Redeemed at premium of 5%
Rate of compound interest 4%
Amount to be appropriated Tzs. 2,261,415
Debenture A/c
31/12/y0 Balance c/d 15,000,000 1/1/y0 Bank 15,000,000
31/12/y1 Balance c/d 15,000,000 1/1/y1 Balance b/d 15,000,000
1/1/y6 Debenture holders 15,000,000 1/1/y6 Balance b/d 15,000,000
57
Sinking Fund Account
31/12/y0 Balance c/d 2,261,415 1/1/y0 P/L 2,261,415
31/12/y1 P/L 2,261,415
31/12/y1 Bank – interest 90,457
4,613,287 4,613,287
31/12/y2 P/L 2,261,415
7,059,233 7,059,233
31/12/y3 P/L 2,261,415
9,603,017 9,603,017
31/12/y4 P/L 2,261,415
12,248,553 12,248,553
31/12/y5 P/L 2,261,415
14,999,910 14,999,910
1/1/y6 CRRF 14,999,910 1/1/y6 Balance b/d 14,999,910
58
Sinking Fund Investment Account
1/1/y1 Bank 2,261,415 31/12/y1 Balance c/d 2,261,415
1/1/y2 Balance b/d 2,261,415 31/12/y2 Balance c/d 4,613,287
1/1/y2 Bank 2,351,872
4,613,287 4,613,287
1/1/y3 Bank 2,445,946
7,059,233 7,059,233
1/1/y4 Bank 2,543,784
9,603,017 9,603,017
1/1/y5 Bank 2,645,536
12,248,553 12,248,553
1/1/y6 Balance b/d 12,248,553 1/1/y6 Bank – sales 14,999,910
1/1/y6 Bank 2,751,357
14,999,910 14,999,910
Workings
1. Interest received from Sinking Fund Investment

Year 1 2,261,415 x 4% = 90,456.6 ~90,457
Year 2 4,613,287 x 4% = 184,531.4 ~ 184,531
Year 3 7,059,233 x 4% = 282,369.3 ~ 282,369
Year 4 9,603,017 x 4% = 384,120.68 ~ 384,121
Year 5 12,248,553 x 4% = 489,942.1~ 489,942
2. Amount invested each year

Year Annual appropriation Interest Total
1 2,261,415 - 2,261,415
2 2,261,415 90,457 2,351,872
3 2,261,415 184,531 2,445,946
4 2,261,415 282,369 2,543,784
5 2,261,415 384,121 2,645,536
6 2,261,415 489,942 2,751,357
59
Debentures Redeemed at Premium/Discount
In case debentures have been redeemed at premium or discount, there will be a

balancing figure in the Debenture Redemption Account. The balance represents a loss
(if redeemed at premium) or gain (when redeemed at discount) on the redemption at
more or less than the nominal value. The loss/gain in the Debenture Redemption
Account will be transferred to Sinking Fund Account.
The accounting entries will be as follows:

(a) When debentures are redeemed at premium (i.e. above their nominal value)
Dr Sinking Fund A/c
Cr Debenture Redemption A/c
With the amount of premium on redemption.
(b) When debentures are redeemed at a discount (i.e. below their face value)
Dr Debenture Redemption A/c
Cr Sinking Fund A/c
With the amount of discount on redemption
60
REVIEW QUESTIONS
Question 1
Papito Plastics Limited redeemed 1,000, 15% debentures of Tzs. 100 each by
converting them into equity shares of Tzs. 10 each at a premium of Tzs. 2.50 per share.
The company also redeemed 500 debentures by utilizing Tzs. 50,000 out of profit.
Required
Show the necessary journal entries.
Question 2
The balance sheet of XYZ Ltd., disclosed the following information as on December, 31
2011;
Debenture Redemption Fund 11,636,000
Debenture Redemption Fund Investment (10% Govt. Securities) 11,636,000
The contribution to Debenture Redemption Fund was Tzs. 1,308,000 per annum for the
year 2012 and 2013. Debentures are due for payment on December 31, 2013.
Required
Prepare the above accounts in the books of company assuming that securities were
realized on December 31, 2013 for a sum of Tzs. 13,520,000 and interest on securities
on December 31, was immediately invested.
Question 3
The following balances appeared in the books of a company on January 01, 2014:
12% Debentures Sinking Fund 3,000,000
12% Debentures Sinking Fund Investment (Represented by 10%, 4,000,000
secured Bonds of 3,000,000
Annual contribution to the sinking fund was 600,000 made on December 31 each year.
On December 31, 2014, balance at Bank was 3,000,000 after receipt of interest on
Debentures Sinking Fund Investment. The company sold the investment at a loss of
18% and the debentures were paid off.
Required
Prepare all necessary accounts for the year 2014.
61
Question 4
Debentures of Tzs. 3,000,000 are issued on 1st January, 2005. Redemption is to take
place, on equal terms, 4 years later. The company decides to put aside an equal
amount to be invested at 15% which will provide Tzs. 3,000,000 on maturity. Table
shows that Tzs. 0.3503 invested annually will produce Tzs. 1.00 in 4 year’s time.
For the 4 years’ time, you are required to show:

(a) Debenture Redemption Reserve Account,
(b) Debenture Sinking Fund Investment Account,
(c) Debenture Account, and
(d) Profit and Loss Account extracts.
Question 5
Laporta International Company (LIC) issued debentures several years ago. According to
the terms of agreement, an amount had to be set out from profit and invested. The
balances of selected accounts as on 1st July 2002 were:
2% Debentures Tzs. 750,000
Sinking Fund, which is also represented by investments Tzs. 675,000
The following transactions occurred during the year ended 30th June, 2003:
(i) Investment income was received on 5th August 2002 Tzs. 15,000, the same was
invested immediately.
(ii) Paid quarter year’s debenture interest on 30th September, 2002.
(iii) Redeemed Tzs. 15,000 of debentures on 5th January, 2003 at Tzs. 80. Selling
investments, which cost Tzs. 75,000 for Tzs. 67,500 to finance this.
(iv)The company set aside Tzs. 22,500 from Profit and Loss Account this amount
was not invested.
(v) On 30th June 2003, the company paid final interest and redeemed all debentures
at 105. All investments were sold for Tzs. 750,000.
Required
Show the necessary ledger accounts to record the above transactions.
62
TOPIC 3: REDEMPTION OF PREFERENCE SHARES
INTRODUCTION
You have already learnt various aspects of accountancy and corporate accounting up to
this level. The fund provided by the owners in to a business is known as capital. You
know that capital of the business depends upon the form of business organization.
From ownership point of view, there are number of business organizations like, sole
proprietorship business, partnership business, cooperative societies, joint stock
companies etc. Total capital of the company is divided into a number of small units of
fixed amount and each such unit is called a share. The fixed value of a share register
with the registrar of Companies is called face/ nominal value. However, a company can
issue shares at a price different from its nominal value or face value. As the total capital
of the company is divided into shares, the capital of the company is known as share
capital. A company can issue two types shares equity shares and preference shares.
The issue of preference shares is one of the important sources of capital of a company.
Redemption is the process of repaying an obligation at predetermined amounts and
timings. The redeemable preference shares are issued on the terms that share holders
will at a future date be repaid amount which they invested in the company.
TYPES OF PREFERENCE SHARES

In previous sections we have discussed different sources of capital. Equity shares get
dividend at a rate fixed at the Annual General Meeting (AGM) depending on the profit
available for a particular year. The rate of dividend also varies from year to year. The
preference shareholders contribute capital to the company. Persons/investors holding
preference shares, called preference shareholders. They are assured of a preferential
dividend at a fixed rate during the life of the company. This type share holders carry
preferential right over other shareholders to be paid first in case of liquidation of the
company. Companies use this mode of financing as it is cheaper than raising debt. The
preference shares can be of various types. These are:
i) Redeemable Preference Shares: A company may issue this type of shares on

the condition that the company will repay the amount of share capital to the
holders of this category of shares after the fixed period or even earlier at the
discretion of the company.
63
ii) Irredeemable Preference Shares: The preference shares, which do not carry
the agreement of redemption, are known as irredeemable preference shares.
iii) Convertible Preference Shares: These types of shares enjoy the right to the
holder to get them converted into equity shares according to the terms and
conditions of the issue.
iv) Non-convertible Preference Shares: The holders of these shares do not enjoy
the right to get the shares converted into equity shares. Unless otherwise stated,
Preference shares are non-convertible.
v) Participating Preference Shares: The holder of this type of preference shares
enjoy the right to participate in the surplus profits, if any, after the equity
shareholders have been paid dividend at a rate fixed in the AGM. So the
shareholders get additional dividend with their normal dividend.
vi) Non-participating Preference Shares: These shares carry only a fixed rate of
dividend without any right to get additional dividend. Unless otherwise stated, the
preference shares are non-participating.
vii) Cumulative Preference Shares: The cumulative preference shares carry the
right to a fixed amount of dividend. The holders of these shares are entitled to
get dividend out of future profit if current year’s profit is insufficient for the same.
So, the dividend on these shares accumulates till the final payment.
viii) Non-cumulative Preference Share: In this case the dividend for the
shareholders does not accumulate. If there is no sufficient profit, this type of
preference shareholders will not get any dividend. In this case, the dividend will
be lapsed and there will be no arrear dividend.
CONDITIONS FOR REDEMPTION OF PREFERENCE SHARES

Before going to redeem the preference shares, a company should observe the following
conditions:
i) There must be a provision in the Articles of Association regarding the redemption
of preference shares.
ii) The redeemable preference shares must be fully paid up. If there is any partly
paid share, it should be converted in to fully paid shares before redemption.
iii) The redeemable preference shareholders should be paid out of undistributed
profit/ distributable profit or out of fresh issue of shares for the purpose of
redemption.
iv) If the shares are redeemed at a premium, it should be should be provided out of
securities premium or profit and loss account or general reserve account.
v) The proceeds from fresh issue of debentures cannot be utilized for redemption.
64
vi) The amount of capital reserve cannot be used for redemption of preference
shares.
vii) If the shares are redeemed out of undistributed profit, the nominal value of
share capital, so redeemed should be transferred to Capital Redemption Reserve
Account. This is also known as capitalization profit.
So, you may understand that a company must follow the above conditions for the
purpose of redemption of its redeemable preference shares. In the next section we
shall discuss about the Capital Redemption Reserve account.
CAPITAL REDEMPTION RESERVE (CRR) ACCOUNT

If you go through the conditions as discussed in the previous section, it will be clear
that, if the preference shares are redeemed out of accumulated profit, it will be
necessary to transfer an amount equal to the amount repaid on the redemption to
Capital Redemption Reserve Account. If the company issues any fresh shares for
redemption purpose, the transferred amount will be the difference between nominal
value of shares redeemed and the nominal value of shares issued (i.e. amount
transferred to CRR = Nominal value of shares redeemed – Nominal value of shares
issued). The capital redemption reserve account can be used for issuing fully paid
bonus shares.
The major importance of creation of capital redemption reserve account is to protect

the interest of creditors and also to maintain working capital. Redemption of preference
shares involves repayment of capital before paying creditors of the company. It may
affect the interest of creditors. In addition to that the working capital of the company
will be depleted as a result of outflow of cash due to redemption. The amount is
capitalized by creating the capital redemption reserve account. As a result this amount
will not be available for distribution of dividend. It helps protect the interest of creditors
and on the other hand it replenishes working capital.
REDEMPTION OF PREFERENCE SHARES

The redeemable preference shares can be redeemed by a) the proceeds of a fresh issue
of equity shares/ preference shares, b) the capitalization of undistributed profit i.e.
creating capital redemption reserve account, or c) a combination of both (a) and (b).
Redemption by the Proceeds of Fresh Issue of Shares

A company can issue new shares (being ordinary/equity shares or preference shares)
and utilize its proceeds for the redemption of existing preference shares. For this
purpose, the new shares can be issued at par, at premium or at discount. It must be
65
noted that, the company cannot utilize the amount received from the issue of
debentures to redeem preference shares, in other words, the company is required to
issue new shares when redeeming preference shares using this method.
Advantages of redeeming preference shares through proceeds of fresh issue of shares
i. No cash outflow in the case of company as proceeds of new issue of shares will
be utilized, and
ii. New shares may be issued at premium which results into additional cash inflow
to the company.
Disadvantages of using this method
i. Dilution of earnings per share (EPS) figure as the number of shares will be
increased especially when shares are issued with less denomination on its face
value, and
ii. Change in the shareholding pattern leading to dilution of control of existing

shareholders.
Note
It must be noted that, when shares are issued at discount with the intention of using
the proceeds to redeem preference shares. The proceeds from the new issue of shares
must be sufficient to cover the face value of shares to be redeemed.
The journal entries to be passed when shares are redeemed through using the
proceeds from the new issue of shares are as follow:
i) When new shares are issued at par:
Dr Bank Account
Cr Share Capital Account
ii) When new shares are issued at premium:

Dr Bank Account
Cr Share Premium Account
iii) When new shares are issued at a discount:

Dr Bank Account
Dr Discount on Issue of Shares Account
66
iv) Conversion of partly paid shares into fully paid shares:
a) Dr Share Call Account
b) Dr Bank Account
Cr Share Call Account
v) When preference shares are redeemed at par:

Dr Redeemable Preference Share Capital Account
Cr Preference Shareholders Account
vi) When preference shares are redeemed at a premium:

Dr Premium on Redemption of Preference Shares Account
vii) Adjustment of premium on redemption:

Dr Share Premium Account
Cr Premium on Redemption of Preference Shares Account
viii) Transferring the amount to Capital Redemption Reserve Account:

Dr General Reserve Account
Cr Capital Redemption Reserve Account
ix) Expenses on issue of shares, if any:

Dr Expenses on Issue of Shares Account
Cr Bank Account
x) When payment is made to preference shareholders:

Dr Preference Shareholders Account
Cr Bank Account
Example 1
XY Company Ltd. had part of its share capital in 2,000 preference shares of Tzs. 1,000
each fully paid up and these have become due for redemption. The preference share
capital was to be redeemed out of a fresh issue of equity shares at par made
particularly for this purpose and the general reserve of the company stood at Tzs.
250,000. The equity share capital of the company at the date of redemption had a
balance of Tzs. 8,000,000.
67
Required
Show the relevant entries for the above transactions.
Solution:
XY Ltd’s Journal Entries
1/4/2008 Preference Share Capital A/c 2,000,000
To Preference Shareholders A/c 2,000,000
Being amount payable on redemption of
2,000 preference shares of Tzs. 1,000 each.
1/4/2008 Bank A/c 2,000,000

To Equity Share Capital A/c 2,000,000
Being the amount received on issue of 2000
equity shares of Tzs. 1,000 each made for the
purpose of redemption of preference shares
1/4/2008 Preference Shareholders A/c 2,000,000

To Bank A/c 2,000,000
Being the payment of amount due to
preference shareholders
TOTAL 6,000,000 6,000,000
Ledgers
Preference Share Capital A/c
1/4/08 Pref. shareholders 2,000,000 1/4/08 Balance b/d 2,000,000
Preference Shareholders A/c

1/4/08 Bank 2,000,000 1/4/08 Pref. share capital 2,000,000
Bank A/c
1/4/08 Equity shares 2,000,000 1/4/08 Pref. shareholders 2,000,000
68
Equity Share Capital A/c
1/4/08 Bank 2,000,000
10,000,000 10,000,000
1/1/09 Balance b/d 10,000,000
Redemption by Capitalization of Undistributed Profits

A company can redeem its preference shares by capitalization of undistributed profits
instead of the issue of new shares. With this method, an amount equal to the face
value of the shares to be redeemed will be transferred to Capital Redemption Reserve
Account.
Advantages
i. No change in the shareholding pattern of the company, and

ii. Future earnings per share of the company are not diluted.
Disadvantages
i. The method involves cash outflow from the company, and

ii. The company may face liquidity problems after redemption of preference shares.
The journal entries when shares are redeemed out of undistributed profits will be as
follows;
i) When preference shares are redeemed at par:

ii) When preference shares are redeemed at a premium:

Dr Premium on Redemption of Preference Shares Account
iii) Adjustment of premium on redemption:

Cr Premium on Redemption of Preference Shares Account
69
iv) Transferring the amount to Capital Redemption Reserve Account:
Cr Capital Redemption Reserve Account
v) When payment is made to preference shareholders:

Dr Preference Shareholders Account
Cr Bank Account
Example 2
Given below is the extract from the Statement of Financial Position of Bata Company
Ltd. as at 31 December 2014.
i. Share capital:
- 20,000 equity shares of Tzs. 10,000 each fully paid Tzs. 200,000,000.
- 5,000, 10% redeemable preference shares of Tzs. 1,000 each fully paid
Tzs. 5,000,000.
ii. Reserves and Surplus:
- Capital reserve Tzs. 2,500,000.
- Share premium Tzs. 2,500,000.
- General reserve Tzs. 3,750,000.
- Profit and loss account Tzs. 22,500,000.
On 1 January 2015, the company decided to redeem the preference shares at par by
using the internal reserves.
Required
Pass the necessary entries in the books of the company to record the redemption of
shares.
Solution
Journal entries
Date Details Dr Cr
1/1/15 10% Preference Share Capital A/c 5,000,000
To Preference shareholders A/c 5,000,000
Being cancellation of preference share capital
for redemption.
1/1/15 Preference shareholders A/c 5,000,000
Being payment made to shareholders on the
redemption of preference shares.
70
1/1/15 General Reserve A/c 3,750,000
Profit or Loss A/c 1,250,000
To Capital Redemption Reserve A/c 5,000,000
Being the entry for the amount transferred to
capital redemption reserve on redemption.
TOTAL 15,000,000 15,000,000
Ledgers

Preference shareholders 5,000,000 Balance b/d 5,000,000

Bank 5,000,000 Preference share capital 5,000,000
Bank A/c (extract)

Preference shareholders 5,000,000
General Reserve A/c

Capital redemption reserve 3,750,000 Balance b/d 3,750,000
Profit or Loss A/c

Balance c/d 21,250,000
22,500,000 22,500,000
Capital Redemption Reserve A/c

Balance c/d 5,000,000 General reserve 3,750,000
Profit or loss 1,250,000
5,000,000 5,000,000
71
Redemption by Combination of both Methods
A company can decide to redeem the preference shares by using both methods, i.e.
partly from the proceeds of a new issue of shares and partly out of undistributed
profits. The accounting treatment will be the combination of the above two cases
mentioned earlier.
Example 3
Moroka Trading Company had 10,000, 10% redeemable preference shares of Tzs.
1,000 each fully paid. The company’s general reserve stood up at Tzs. 5,000,000. In the
previous general meeting it was decided to redeem these preference shares at par by
issuing a sufficient number of equity shares of Tzs. 100 each, fully paid – up, after
utilizing the existing the balance in the General Reserve Account. The equity share
capital of the company stood up at Tzs. 25,000,000, while the Bank account had a
balance of 15,000,000.
Required
Pass the necessary accounting entries to record the above transactions.
Solution
In the example, the combination of the two methods is used in the redemption of
preference shares. It is mentioned that, the amount available in free reserves (General
Reserve) is fully utilized for redemption of preference shares. The nominal value of
shares redeemed is Tzs. 10,000,000 the amount that will be redeemed by fresh issue of
shares will be as; Tzs. 10,000,000 – Tzs. 5,000,000 = Tzs. 5,000,000.
The amount to be transferred to the Capital Redemption Reserve (CRR) account, i.e.
nominal value of shares redeemed through the undistributed profits will be Tzs.
5,000,000.
Journal entries
Date Details Dr Cr
(i) Bank A/c 5,000,000
To Share Capital A/c 5,000,000
Being shares issued at par for redemption.
(ii) 10% Preference Share Capital A/c 10,000,000
Being cancellation of preference share capital
for redemption
(iii) Preference Shareholders A/c 10,000,000
72
To Bank A/c 10,000,000
Being payment made to preference
shareholders
(iv) General Reserve A/c 5,000,000
Being amount transferred to CRR on
redemption.
TOTAL 30,000,000 30,000,000
Ledgers
Bank A/c
Balance b/d 15,000,000 Preference shareholders 10,000,000
Share capital 5,000,000 Balance c/d 10,000,000
20,000,000 20,000,000
Share Capital A/c

Balance c/d 30,000,000 Balance b/d 25,000,000
Bank 5,000,000
30,000,000 30,000,000
10% Preference share Capital A/c

Preference shareholders 10,000,000 Balance b/d 10,000,000

Bank 10,000,000 Preference share capital 10,000,000
General Reserve A/c


Balance c/d 5,000,000 General reserve 5,000,000
73
Example 4
Kakamega Co. Ltd. Issued 50,000 Equity shares of Tzs. 1,000 each and 3,000, 10%
Preference shares of Tzs. 10,000 each, all shares being fully paid. On 31 March 2008,
Profit and Loss Account showed an undistributed profit of Tzs. 5,000,000 and General
Reserve Account stood at Tzs. 12,000,000. On 2 April 2008, the directors decided to
issue 1,500, 6% Preference shares of Tzs. 10,000 each for cash and to redeem the
existing preference shares at Tzs. 10,500 utilizing as much as would be required for the
purpose.
Required
Show the relevant entries to record the transactions.
Solution
Journal Entries in the Books of Kitkat Ltd
2/4/2008 10% Preference Share Capital A/c 30,000,000
Premium on Redemption A/c 1,500,000
Being amount payable on redemption of 3,000
preference shares, with premium of 5%.
2/4/2008 Bank A/c 15,000,000
To 6% Preference Share Capital A/c 15,000,000
Being the amount received on issue of 1,500,
6% Preference shares of Tzs. 10,000 each
made for the purpose of redemption of
preference shares
To Premium on Redemption A/c 1,500,000
Being the amount of premium on redemption
written off against general reserve
Profit & Loss A/c 450,000
Being amount transferred equal to the
difference between the nominal value of
74
shares redeemed and proceeds of new issue
2/4/2008 Preference Shareholders A/c 31,500,000
To Bank A/c 31,500,000
Being the amount due to preference
shareholders paid
TOTAL 93,000,000 93,000,000
Ledgers

Pref. Shareholders 30,000,000 Balance b/d 30,000,000

Pref. Shareholders 1,500,000 General reserve 1,500,000

Bank 31,500,000 Pref. Share capital 30,000,000
Prem. on redemption 1,500,000
31,500,000 31,500,000
Bank A/c (Extract)

Pref. Share capital 15,000,000 Pref. Shareholders 31,500,000

Balance c/d 15,000,000 Bank 15,000,000
General Reserve A/c

Premium on redemption 1,500,000 Balance b/d 12,000,000
75
Issue of Bonus Shares
After the redemption of preference shares, especially when the undistributed profits are
used, a company may decide to issue bonus shares. These are additional shares issued
for free to existing shareholders mostly basing on number of shares held. Bonus shares
are normally issued as fully paid shares, and issued for the reason of capitalizing part of
the company’s reserves.
Accounting entries to record the issue of bonus shares are as follows:
i) When the fully paid bonus shares are issued:

Dr Capital Redemption Reserve Account
To Bonus to Shareholders Account
ii) Capitalization of profit:

Dr Bonus to Shareholders Account
To Equity Share Capital Account
Example 5
The Umoja Nguvu Company’s Statement of Financial Statement shows the following
balances on 31st March, 2008;
- 30,000 equity shares of Tzs. 10 each fully paid;
- 18,000 10% Redeemable Preference shares of Tzs. 10 each fully paid;
- 4000, 15% Redeemable Preference shares of Tzs. 10 each, Tzs. 8 paid up.
- General Reserve Tzs. 12,000;
- Share Premium Tzs. 16,000;
- Profit or Loss Account Tzs. 80,000 and
- Capital Reserve Tzs. 20,000.
Preference shares are redeemed on 1st April, 2008 at a premium of Tzs. 2.00 per share.
To finance redemption, 4000 equity shares of Tzs. 10 each are issued at 10% premium.
A bonus issue of equity share was made at par, two shares being issued for every five
held on that date.
Required
Show the entries to record the above transactions.
76
Solution
Note: Partly paid up preference shares cannot be redeemed.
Journal Entries in the Books of Umoja Nguvu Company

1/4/2008 10% Preference Share Capital A/c 180,000
Premium on Redemption A/c 36,000
To Preference Shareholders A/c 216,000
Being amount payable on redemption of 18000
preference shares, with premium of 2%
1/4/2008 Bank A/c 44,000
To Equity Share Capital 40,000
Share Premium A/c 4,000
Being the amount received on issue of 4000,
Equity shares of Tzs. 10 each made with
premium of 10% for the purpose of redemption
of preference shares
1/4/2008 Share Premium A/c 20,000
Profit or Loss A/c 16,000
To Premium on Redemption A/c 36,000
Being the amount of premium on redemption
written off against general reserve
1/4/2008 General Reserve A/c 120,000
Profit or Loss A/c 16,000
To Capital Redemption Reserve A/c 136,000
Being amount transferred equal to the
difference between the nominal value of shares
redeemed and proceeds of new issue
1/4/2008 Preference Shareholders A/c 216,000
To Bank A/c 216,000
shareholders paid
1/4/2008 Capital Redemption Reserve A/c 136,000
To Bonus Shares A/c 136,000
Being the amount utilized for issue of bonus
shares in 5:2 ratio (30,000 x 2/5 x Tzs.10)
1/4/2008 Bonus Shares A/c 136,000
77
To Equity Share Capital A/c 136,000
Being the amount capitalized by issue of bonus
shares
TOTAL 920,000 920,000
Ledgers
Preference shareholders 180,000 Balance b/d 180,000

Preference shareholders 36,000 Share premium 19,000
Profit or loss 17,000
36,000 36,000

Bank 216,000 Preference share capital 180,000
Premium on redemption 36,000
216,000 216,000
Bank A/c (extract)

Equity shareholders 44,000 Preference shareholders 216,000
Equity Shareholders A/c

Share capital 40,000 Bank 44,000
Share premium 4,000
44,000 44,000

Balance c/d 476,000 Balance b/d 300,000
Equity shareholders 40,000
Bonus shares 136,000
476,000 476,000
Balance b/d 476,000
78
Share Premium A/c
Premium on redemption 20,000 Balance b/d 16,000
Equity shareholders 4,000
20,000 20,000
Profit or Loss A/c

Premium on redemption 16,000 Balance b/d 80,000
Capital redemption reserve 20,000
Balance c/d 44,000
80,000 80,000
Balance b/d 44,000
General Reserve A/c

Capital redemption reserve 120,000 Balance b/d 130,000
Balance c/d 10,000
130,000 130,000
Balance b/d 10,000

Bonus share 136,000 Profit or loss 16,000
General reserve 120,000
136,000 136,000
Bonus Share A/c

Equity share capital 136,000 Capital redemption reserve 136,000
Example 6
Black Diamond Inc. is a medium-sized company dealing with the collection of cash
crops from farmers in the southern highlands regions and exporting them to overseas’
markets. The following is the balance sheet of Black Diamond Inc. As at 31st March,
2008:
79
Capital & Liabilities Tzs. Assets Tzs.
Issued & Subscribed
Capital:
40,000 Equity shares @Tzs.10 400,000 Non-current assets 700,000
18,000 8% Preference shares
@ Tzs. 10 180,000 Current assets - Bank 400,000
Current liabilities – Creditors 40,000
1,100,000 1,100,000
The preference shares were redeemed on April 1, 2008 at a premium of Tzs. 5.00 per
share, the whereabouts of the holders of 1500 such shares not being known. At the
same time, a bonus issue of equity share was made at par, one share being issued for
every four equity shares held.
Required
Show the journal entries and ledgers to record the above transactions and the Balance
sheet as it would appear after the redemption.
Solution:
Journal Entries
1/4/2008 8% Preference Share Capital A/c 180,000
Premium on Redemption A/c 90,000
To Preference Shareholders A/c 270,000
Being amount payable on redemption of 18000
preference shares, with premium of Tzs. 5 each
1/4/2008 Profit & Loss A/c 90,000
To Premium on Redemption A/c 90,000
Being the amount written off against Profit And
Loss A/c
1/4/2008 Profit & Loss A/c 180,000
To Capital Redemption Reserve A/c 180,000
Being amount transferred equal to the nominal
value of shares redeemed and proceeds of new
issue
1/4/2008 Capital Redemption Reserve A/c 100,000
To Bonus Shares A/c 100,000
80
Being issue of 1 bonus share to every 4 equity
shares held (40,000 x ¼ x Tzs.10)
1/4/2008 Bonus Shares A/c 100,000
To Equity Share Capital A/c 100,000
Being the amount capitalized by issue of bonus
shares
1/4/2008 Preference Shareholders A/c 247,500
To Bank Account 247,500
shareholders paid except 1500 share holders
TOTAL 987,500 987,500
Ledgers
Preference shareholders 180,000 Balance b/d 180,000

Preference shareholders 90,000 Profit and Loss 90,000

Bank 247,500 Preference share capital 180,000
Balance c/d 22,500 Premium on redemption 90,000
270,000 270,000
Balance b/d 22,500

Bonus share 100,000 Profit and Loss 180,000
Balance c/d 80,000
180,000 180,000
Balance b/d 80,000
81
Profit and Loss A/c
Capital redemption 180,000 Balance b/d 480,000
Premium on redemption 90,000
Balance c/d 210,000
480,000 480,000
Balance b/d 210,000

Balance c/d 500,000 Balance b/d 400,000
Bonus share 100,000
500,000 500,000
Balance b/d 500,000
Bonus shares A/c

Share capital 100,000 Capital redemption 100,000
Bank A/c
Balance b/d 400,000 Preference shareholders 247,500
Balance c/d 152,500
400,000 400,000
Balance b/d 152,500
82
Black Diamond Inc.’s
Statement of Financial Position (after redemption of Preference Shares)
Tzs.
ASSETS
Non-current assets 700,000
Current assets
Bank 152,000
852,500
CAPITAL & LIABILITIES

Share capital and reserves
Equity shares of Tzs. 10 each fully paid 500,000
Capital redemption reserve 80,000
Profit or loss 210,000
790,000
Current liabilities
Creditors 40,000
Outstanding claims 22,500
852,500
Redemption of Partly Called-up Preference Shares

Preference shares can be redeemed only if they are fully paid up. If the problem states
that the company decided to redeem the preference shares which are partly called up,
it should be assumed that the final call on those shares are made and received before
the redemption. If a problem has both partly paid-up preference shares and fully paid-
up preference shares, then only the fully paid-up preference shares will be redeemed.
The accounting treatment will be the same as mentioned earlier, depending upon the
method of redemption chosen by the company.
Redemption of Fully Called-up but Partly Paid-up Preference Shares

If there are calls-in-arrears, then such arrears should be either received by the
company or such shares must be forfeited. If all calls-in-arrears are received, then they
become fully paid-up, and hence the company can proceed with redemption. If the
shares are forfeited, the usual entries for forfeiture are passed before the redemption.
The forfeited shares are not reissued, as the reissued shares must be redeemed in the
immediate future.
83
REVIEW QUESTIONS
Question 1
From the following scenario, determine the minimum amount of new shares of Tzs.
1,000 each to be made at a discount of 10% for redemption of preference shares at a
premium of 5%.
Fully paid redeemable preference shares 80,000,000
Revaluation reserve 10,000,000
Capital reserve 2,000,000
General reserve 27,000,000
Profit or loss account 8,000,000
Share premium 3,000,000
Question 2
The Statement of Financial Position of Petra Investment Company as at 31 st December,
2014 is given below:
Petra Investment Company’s
Statement of Financial Position as at 31st December, 2014
Tzs. 000’
ASSETS
Net assets (except bank) 48,000
Bank 31,200
79,200
CAPITAL & LIABILITIES

Ordinary share capital 36,000
Preference share capital 12,000
Share premium 4,800
Profit or loss account 26,400
79,200
Using the above details, answer scenario (a) to (e), you should note that each scenario
is independent of any other;
(a) Petra Investment Company redeems Tzs. 12,000,000 preference shares at par, a
new issue of Tzs. 12,000,000 ordinary shares at par being made for the purpose.
Show the accounting entries and a statement of financial position after the
redemption.
84
(b) The company redeems the preference shares at par, using the internal
undistributed reserves. Show the accounting entries along with the statement of
financial position after the redemption.
(c) Petra Investment Company redeems preference shares at par. To help finance
this, an issue of Tzs. 3,600,000 ordinary shares at par is made. Show accounting
entries and the statement of financial position of the company after the
redemption of shares.
(d) The company redeems the preference shares at a premium of 25%. There is no
new issue of shares for the purpose. It should be assumed that share premium is
from the issue of ordinary some years ago. Show the accounting treatment and
the statement of financial position of the company after the redemption of
shares.
(e) Petra Investment Company redeems preference shares at a premium of 40%.
New issue of Tzs. 16,800,000 at par for the purpose was made. The preference
shares had been issued earlier at a premium of 30%. Show the accounting
treatment and the statement of financial position of the company after the
redemption of shares.
Question 3
On 31st December 2015 the Statement of Financial Position of Wanyankole Limited
stood as follows:
Notes Tzs. 000’

ASSETS
Non-current Assets
Property, plant and equipments 1 1,034,800
Current assets
Investments 2 75,400
Inventories 291,824
Trade receivables 74,256
Cash and cash equivalents 3 57,720
1,534,000
EQUITY & LIABILITIES
Share capital and reserves
Share capital 4 754,000
Reserves and surplus 5 650,000
Current liabilities
Trade payables 130,000
85
1,534,000
Notes
1. Property, plant and equipment

Tzs. 000
Land and buildings 312,000
Plant and machinery 520,000
Furniture, fittings and fixtures 202,800
1,034,800
2. Current investments
Tzs. 000
Investments in Mutual Funds 75,400
3. Cash and cash equivalents

Tzs. 000
Balance with Bank 53,300
Cash on Hand 4,420
57,720
4. Share capital
Tzs. 000
Authorized share capital 1,040,000
Issued, subscribed and paid up:
100,000 Equity shares of Tzs. 5,200 each, fully paid 520,000
4,500 12% Redeemable preference shares of Tzs.
52,000 each 234,000
754,000
5. Reserves and surplus

Tzs. 000
Securities premium 10,400
Profit or loss account 201,240
649,740
On 1st January 2016 the company decided to redeem all of its preference shares at a
premium of 5%. To finance redemption the company issued 20,000 equity shares of
86
Tzs. 5,200 each at a premium of 10% and sold all of its investments for Tzs.
82,160,000.
After the redemption of the shares, the company issued one fully paid equity share of
Tzs. 5,200 as bonus share for every four shares held by its members.
Required
Pass the necessary accounting entries to record the above transaction and the
statement of the company after redemption of shares.
Question 4
The following information was extracted from the records of Chunya Mining Limited as
on 31 March 2012:
Share capital
20,000 12% Preference shares of Tzs. 50 each fully paid 1,000,000
100,000 equity shares of Tzs. 10 each, 7.50 called 750,000
Less: Calls in arrears 7,500 742,500
Securities premium 50,000
Calls in advance (final call on equity shares) 2,500
On 1st April 2012 the Board of Directors decided the following:
(i) The fully paid preference shares are to be redeemed at a premium of 5% in May,
2012, and for that purpose, 50,000 equity shares of Tzs. 10 each are to be
issued at par to be paid for in full on application in April 2012. The final call on
existing equity shares is to be made in July, 2012.
(ii) 1,000 equity shares owned by Kelvin Mtukwao, an existing shareholder, who
failed to pay the allotment money of Tzs. 2.50 per share, were forfeited in the
month of June, 2012. The above decisions were duly complied with according to
the time schedule laid down. The amount due on the issue of fresh equity shares
and on final call were duly received except from Bendera Chuma who has failed
to pay the first call money on his 1,000 shares, has failed to pay the final call
also. These shares of B. Chuma were declared forfeited on August 2012.
87
(iii) Among the shares forfeited, 1,500 shares were issued to Majembe Bombambili
on September 2012, credited as fully paid at Tzs. 9 per share, the whole of
Mtukwao’s shares being included.
Required
Pass accounting entries to record these transactions in the books of the company and
show the entries to be passed in the statement of Financial Position.
88
TOPIC 4: CONVERSION OF A PARTNERSHIP TO A LIMITED LIABILITY
COMPANY
INTRODUCTION
The main reason for a partnership firm becoming incorporated is to enable the partners
not to be personally liable for the debts of the business. A partnership has no separate
legal identity and each partner has joint and several liabilities for the debts of the firm.
However, a shareholder in a limited company is not responsible for the debts of the
company in the event of its insolvency. A share holder's liability is limited to any amount
still unpaid on the issue of the shares. If the shares were issued fully paid, (as they
normally are) then the shareholder has no liability.
Further, as a company the business should find it easier to attract new capital, as
investors become share holders and not partners. In the long run, companies can be
floated on a stock exchange. However, before incorporating the business as a company,
the partners will have to carefully consider the tax implications.
THE PROCESS OF CONVERSION

It is usual that a new limited liability company is formed especially for the purpose. The
company will buy/receive the net assets of the business from the partnership in
exchange for shares. Thus the partners become shareholders in the company and it is
the company that has legal title to the assets and is responsible for the business's
liabilities. Following the partnership's transfer of the business, its accounting records are
closed off.
The accounting for converting a partnership to a limited company can be broken down
into a number of steps.
Step 1: Closing of the partnership's accounts

All accounts in the books of the partnership need to be closed off. The first step in the
process is to rationalise the accounts i.e. to reduce to a minimum the number of open
accounts. If necessary, this means preparing a profit and loss account which will close
off all income and expense accounts and preparing a profit and loss appropriation
account which will close off the profit and loss account. In any event, the balances on
the partners' current accounts, loan accounts and drawing accounts can be closed to
the partners' capital accounts.
89
Step 2: Realisation of Assets/Liability
All the asset accounts (except cash) and liability accounts of the partnership firm are
transferred to a realisation account. The journal entry for transferring an asset account
to the Realisation Account is:
Dr Realisation Account
} With amount shown in the asset account
To Respective Asset Account
On the other hand, the journal entry for transferring a liability account to the
Realisation Account is:
Dr Respective Liability Account
} With amount shown in the liability account
To Realisation Account
Note
In most cases, assets and liabilities of the partnership firm will be transferred at their
book values, this is because the new formed company will take over the business of the
partnership firm. This ensures the going concern principle of accounting, but in certain
circumstances, the new company may include the assets and liabilities at different
values, but it is not necessary to the process of closing off the partnership books to
record the revaluation of any assets or liabilities. Further, unless the question
specifically requires otherwise, it is not necessary to record the goodwill of the
partnership either. Therefore, after completing step 1 and step 2 only the following
accounts remain open: Partner's Capital Accounts, Realisation Account and Cash/Bank
Account.
Step 3: Pre-Incorporation Transactions

Before the company takes over the business, there may be a number of final
transactions to be recorded. These transactions conducted before the incorporation of a
new company are known as pre-incorporation transactions. These transactions may be
recorded as follows:
(i) If an asset is sold by the partnership instead of being taken over by the
company, this is recorded:
Dr Cash/Bank Account
} With amount received when the asset is sold
(ii) If an asset is taken over by a partner, (a drawing), instead of being taken over
by the company, this is recorded:
Dr Partner’s Capital Account With amount agreed on the taking over of the
}
To Realisation Account asset
90
(iii) If a liability is paid by the firm instead of being taken over by the company, this
is recorded:
} With the amount shown in the liability account
(iv) If there are professional fees to be paid, in respect of the winding-up of the
partnership, this is recorded:
} With amount of fee paid
(v) If the company takes over the cash at bank, the balance on the account needs to
be transferred to the realisation account.
} With amount shown in cash/bank account
Step 4: Recording the Transfer of the Business

At this stage the business is taken over by the new established company from the
partnership firm. It may be necessary to determine the value at which the business is
transferred. This can be done by aggregating the fair values of the individual assets and
liabilities and adding a goodwill figure. The transfer of the business to the company can
now be recorded as:
Dr Debtor/Purchaser/New Company Account
With the amount of purchase consideration
The realisation account has now been posted with the `sale proceeds' of the business.
As the account also includes the net assets being sold at net book value, the balance on
the account now represents a profit (or loss) which is then allocated to the partners in
their profit sharing ratio thus closing off the realisation account. A profit is recorded as:
To Partners’ Capital Accounts
With amount of profit in the Realisation A/c
On reflection, it can be noted, that this profit comprises the unrecorded goodwill and
revaluation surpluses, and any other profits or losses incurred since the last profit and
loss account was recorded. The receipt of the company's shares can now be recorded:
Dr Partners’ Capital Accounts
To Debtor/Purchaser/New Company A/c
91
It should be noted that recording this transaction closes off both the last remaining
partnership accounts.
Step 5: The New Company's Records

The issue of shares by the company has also to be recorded in its own books. The
company purchases the business's net assets which it records at their fair value
together with the related goodwill.
Dr Respective Assets Account
Dr Goodwill Account (if any)
To Respective Liabilities Account
Share Capital Account
Example 1
On 1 January 2001, a new company known as AB Company Ltd was formed to acquire
the business of A and B Partnership made up by partners Amory and Beka. The
partnership deed provided that profits of the firm to be shared among partners in the
ratio 2:1. The balance sheet as at 31 December 2000 was as follows:
A and B Partnership’s
Balance Sheet as at 31 December, 2000
Tzs ‘000’ Tzs ‘000’
Liabilities and Capital Assets
Bills payable 7,200 Goodwill 8,000
Creditors 21,600 Land and Buildings 40,000
Loan (Amory’s wife) 3,200 Machinery 20,000
Capital Accounts Stock 24,000
Amory 64,000 Debtors 23,200
Beka 40,000 104,000 Bills receivable 6,400
Investment 4,800
Cash at Bank 9,600
136,000 136,000
It was agreed by the Company to take over the assets at book value with the exception
of land and buildings and stock which were taken over at Tzs. 45,000,000 and Tzs.
20,000,000 respectively. The investments are retained by the firm and sold by them for
Tzs. 4,000,000. They also discharge the loan of Mrs. A. The Co. takes over the
remaining liabilities. The value of goodwill is fixed at Tzs. 28,800,000.
It was further agreed that, the purchase consideration to be discharged as follows:

100,000 Equity Shares of Tzs. 1,000 each and the balance in cash.
92
Required
Close the books of A and B Partnership by showing all the relevant accounts. Workings
must be shown clearly.
Solution
Realization A/c Tzs. ‘000’

Goodwill 8,000 Bills payable 7,200
Land and buildings 40,000 Creditors 21,600
Machinery 20,000 Loan (Amory’s wife) 3,200
Stock 24,000 Investment 4,000
Debtors 23,200 AB Co. Ltd 114,600
Bills receivables 6,400
Investment 4,800
Loan (Amory’s wife) 3,200
Partners’ capitals
Amory (21,000,000 x 2/3) 14,000
Beka (21,000,000 x 1/3) 7,000
150,600 150,600
Partners’ Capital Accounts Tzs. ‘000’

Amory Beka Amory Beka
Shares in AB Ltd 50,000 50,000 Balance b/d 64,000 40,000
Bank 28,000 - Gain on realization 14,000 7,000
Bank - 3,000
78,000 50,000 78,000 50,000
AB Company Ltd A/c Tzs. ‘000’

Realization 114,600 Equity share 100,000
Bank 14,600
114,600 114,600
93
Bank A/c Tzs. ‘000’
Balance b/d 9,600 Amory’s wife loan 3,200
Investment 4,000 Amory’s capital 28,000
AB Company Ltd 14,600
Beka’s capital 3,000
31,200 31,200
Shares in AB Co. Ltd A/c Tzs. ‘000’

AB Company Ltd 100,000 Amory’s capital 50,000
Beka’s capital 50,000
100,000 100,000
Workings
1. Computation of Purchase consideration
ASSETS Tzs.
Goodwill 28,000,000
Land & Buildings 45,000,000
Machinery 20,000,000
Stock 20,000,000
Debtor 23,200,000
Bills receivable 6,400,000
Total assets 143,400,000
Less: Liabilities taken over
Bills payable (7,200,000)
Creditors (21,600,000)
Purchase Consideration 114,600,000
2. Settlement of the Purchase Consideration

According to the question, the Purchase consideration was settled by issue of
shares and through cash.
Total Purchase Consideration 114,600,000
Less: Value of shares issued (100,000 x 1,000) (100,000,000)
Settlement through cash 14,600,000
94
REVIEW QUESTIONS
Question 1
Mwaka and Mwala are in partnership. The following balances were extracted from their
books of account as at 30 June 2009.
Dr Cr
Accruals 2,340,000
Capital accounts at 1 July 2008
Mwaka 1,040,000
Mwala 260,000
Motor vehicles: at cost 14,300,000
Accumulated depreciation (30 June 2009) 6,500,000
Cash at Bank 5,460,000
Drawings
Mwaka (all on 31 December 2008) 3,900,000
Mwala (all on 31 March 2009) 2,600,000
Furniture: at cost 5,200,000
Accumulated depreciation (at 30 June 2009) 2,080,000
Net profit (for the year to 30 June 2009) 38,740,000
Prepayments 780,000
Salary to Mwala 5,200,000
Stock at cost (30 June 2009) 18,200,000
Trade creditors 30,680,000
Trade debtors 26,000,000
81,640,000 81,640,000
Additional information
(a) The partnership agreement includes the following arrangements between the
partners:
(i) Profits and losses are to be shared in the ratio 3 to 2;
(ii) Interest of 15% per annum is to be paid on the partners' capital account
balances as at the beginning of each year;
(iii) Interest at a rate of 10% per annum is to be charged on the partners'
drawings;
(iv) Mwala is entitled to be paid a salary of Tzs. 5,200,000 per annum.
(b) On 1 July 2009 a company called Precious Ltd was formed in order to make an
offer for the purchase of the partnership. The arrangements were as follows.
95
(i) Mwala was to purchase one of the cars at an agreed valuation of Tzs.
1,300,000;
(ii) Other assets and liabilities (apart from cash) were taken over by the
company at the following values;
Tzs.
Motor vehicles 4,680,000
Furniture 2,600,000
Stocks 19,240,000
Trade debtors 20,800,000
Prepayments -
Accruals 2,600,000
(iii) Goodwill is to be valued at one year's purchase of the weighted average net
profits of the preceding three years:
Year to 30 June: Weighting Amount
(Tzs)
2007 1 18,980,000
2008 2 33,800,000
2009 3 38,740,000
(iv) Additional costs incurred by the partnership in arranging the sale of the
business to Precious Ltd amounted to Tzs. 780,000;
(v) The company agreed to issue 150,000 ordinary shares of Tzs. 260 each at a
premium of 24%, the shares to be divided equally between the partners;
(vi) Any remaining balance on the partners' capital accounts was settled between
them in cash.
You are required to:
(a) Prepare the partners' profit and loss appropriation account for the year to 30
June 20099;
(b) Close off Mwaka and Mwala's accounts entering any transactions that took place
as a result of the partnership being wound up on 1 July 2009;
(c) Prepare Precious Ltd's balance sheet as at 1 July 2009.
Question 2
96
Chale and Suka have decided to sell their partnership business to a limited company to
be known as the Crank Manufacturing Co. Ltd. as and from the date of the Balance
Sheet on 31st December 2009. The purchase is not completed until 31st March 2010 but
the company agrees to pay the interest on the purchase price at 5 per cent per annum
for three months.
The business was sold to the company for cash. Plant and machinery are valued for the
purpose of sale at Tzs. 1,600,000 more than the figure appearing in the books and the
goodwill of the firm is assessed at Tzs. 7,900,000. In addition to the reserve for and
debts already provided Chale and Suka have to make a further allowance of Tzs.
1,500,000, while the liabilities to be taken over by the new company are found to be
Tzs. 500,000 more than the amount stated in the balance sheet. The balance sheet of
the partnership firm as at 31st December, 2009 was as follow:
Chale and Suka Partnership’s Balance Sheet as at 31 st December, 2009

Capital and liabilities Assets
Trade creditors 11,853,000 Plant and Machinery 5,000,000
Loans 3,297,000 Freehold property 7,500,000
Capitals Stock 9,000,000
Chale 25,000,000 Work in progress 10,000,000
Suka 12,500,000 Debtors
20,500,000
Less: Provision 18,150,000
2,350,000
Bank 3,000,000
52,650,000 52,650,000
Required
Show the ledger accounts in the firm's books of the sale of the business to the company
having regard to those adjustments, and allot to each partner his respective share. The
partners share profits in proportion to their capitals.
Question 3
Adam, Beka and Cosmas share profits and losses of a business on the 1/2, 1/3 and 1/6
respectively. The partners decided to convert their firm into a Joint Stock Company. For
this purpose, ABC Limited was formed with an authorised capital of Tzs. 10,00,000
divided into Tzs. 100 equity shares. The business of the firm was sold to this company
as at the date of Balance Sheet given below on the following terms:
97
(i) Motor Car, Furniture, Investments, Loose Tools, Debtors and Cash are not to be
taken over by the company.
(ii) Liabilities for Bills Payable and Bank Overdraft are to be taken over by the
company.
(iii) The purchase price is settled at Tzs. 195,500 payable as Tzs. 75,500 in cash and
the balance in company's fully paid shares of Tzs. 100 each.
(iv) The remaining assets/liabilities of the firm are directly disposed of by the firm as
per details given below.
- Investments are taken over by Adam for Tzs. 13,000;
- Debtors realize in all Tzs. 20,000;
- Motor Car, Furniture and Loose Tools fetch Tzs. 24,000, Tzs. 4,000 and
Tzs. 1,000 respectively.
- Adam agrees to pay his wife's loan and the creditors were paid Tzs.
74,000 in final settlement of their claims.
- Creditors for expenses were paid in full.
- The realisation expenses amount to Tzs. 500.
- The Equity shares received from the company are to be divided among
the partners in profit sharing ratio.
The partnership firm’s balance sheet as at 31 December 2008 was as follows:

Equity & Liabilities Tzs. ‘000’ Assets Tzs. ‘000’
Capital Goodwill 2,500
- Adam 17,500 Freehold land 5,000
- Beka 20,000 Buildings 27,500
- Cosmas 2,500 Machinery 12,500
Motorcar 7,000
Investments fluctuation fund 1,000 Furniture 3,000
Cosmas’ loan 8,250 Investments 4,500
Mrs Adam’s loan 3,750 Loose Tools 1,750
Trade creditors 19,000 Stock 4,500

Unpaid expenses 5,000 Bills receivable 5,000
Bills payable 8,000 Debtors 10,000
Provision for bad debts 500 Bank balance 250
Bank overdraft 15,000 Cosmas’ Current A/c 14,000
100,500 100,500
Required
Close the books of the partnership firm and open up the records of ABC Limited
98
TOPIC 5: PREPARATION AND PRESENTATION OF FINANCIAL STATEMENTS
(IAS 1)
INTRODUCTION
Companies usually prepare and send annual financial reports to its shareholders. It is
the means by which the directors are accountable for their stewardship of the assets
and their handling of the company’s affairs for the past year. Financial reports consist of
financial data/information which may have been audited and reviewed by auditors to
check whether the records show the true and fair view of financial matters within the
company.
The IAS 1 – Presentation of Financial Statements was developed to prescribe the basis
for presentation of General Purpose Financial Statements to ensure comparability
both with the entity’s financial statements of previous periods and with the financial
statements of other entities. General purpose financial statements are those statements
prepared to suit the needs of different users of financial statements, rather than the
special needs of particular group of users. The standard sets out the overall
requirements for the presentation of financial statements, guidelines for their structure
and minimum requirements for their content.
FINANCIAL STATEMENTS
According to IAS 1, financial statements are structured representation of the financial
position and financial performance of an entity. They are referred to as General purpose
financial statements. They are those statements with information in financial nature
intended to meet the needs of users who are not in a position to require an entity to
prepare reports tailored to their particular information needs.
Financial statements are prepared and presented at least annually and to suit the
common information needs of number of users. Apart from users with power or right to
obtain addition information to that in the financial statements, other users have to rely
on the financial statements as their major source of financial information and such
financial statements should, therefore, be prepared and presented with their needs in
view. Special purpose financial reports, for example, prospectuses and computations
prepared for taxation purposes are outside the scope of IAS 1.
99
OBJECTIVES OF FINANCIAL STATEMENTS
Financial statements provide information about the entity’s financial position,
financial performance and cash flows that is useful to a wide range of users in
making economic decisions. They also communicate the results of the management’s
stewardship of the resources entrusted to it.
To meet this objective, financial statements provide information about an entity’s

assets, liabilities, equity, income and expenses including gains and losses, contributions
and distributions to owners in their capacity as owners and cash flows. These items
shown in the financial statements are referred to as elements of financial statements.
COMPONENTS OF FINANCIAL STATEMENTS

A complete set of financial statements comprise the following components:
(a) A statement of financial position as at the end of the period;

(b) A statement of profit and loss and other comprehensive income for the period;
(c) A statement of changes in equity for the period;
(d) A statement of cash flows for the period;
(e) Notes, comprising a summary of significant accounting policies and other
explanatory information; and
(f) A statement of financial position as at the beginning of the earliest comparative
period when an entity applies an accounting policy retrospectively or makes a
retrospective restatement of items in its financial statements, or when it
reclassifies items in its financial statements.
Entities are allowed to use titles for the statements other than those used above
regarding that information contained are similar to those shown in the above
statements. The statement shown under item (f), applies when a company made a
change in its accounting policy that affects significantly items shown in the financial
statements. Other factors remains the same, the usual components are (a) up to (e).
OVERALL FEATURES
The overall features or attributes of the financial statements prepared under
International Financial Reporting Standards, especially IAS 1 are as follows:
i. Fair Presentation and Compliance with IFRSs

Financial statements should present fairly the financial position, financial performance
and cash flows of an entity. Fair presentation requires the faithful representation of the
effects of transactions, other events and conditions in accordance with the definitions
100
and recognition criteria for assets, liabilities, income and expenses set out in the
Framework for the Preparation and Presentation of Financial Statements. The
application of IFRSs, with additional disclosure when necessary, is presumed to result in
financial statements that achieve a fair presentation.
Entities whose financial statements comply with IFRSs are required to make an explicit
and unreserved statement of such compliance in the notes. The compliance should be
made by the entity if it complied with all the requirements of the IFRSs. In other words,
when an entity complies with only part of the requirements of IFRSs, it is required not
to include the statement of compliance in its financial statements.
ii. Going Concern

Financial statements prepared under IAS 1 should be prepared under the going concern
assumption. In preparing financial statements, management are required to make an
assessment of an entity’s ability to continue as a going concern. Financial statement
should be prepared under the going concern basis unless management either intends to
liquidate the entity or cease trading, or they have no other alternative but to do so.
When management is aware, in making its assessment, of material uncertainties related

to events or conditions that may cast significant doubt upon the entity’s ability to
continue as a going concern, those uncertainties should be disclosed. If financial
statements are not prepared in the going concern basis, management should disclose
the fact, together with the basis on which it prepared the financial statements and the
reason why the entity is not regarded as a going concern.
iii. Accrual Basis of Accounting

IAS 1 requires entities to prepare financial statements, except for cash flow information,
using the accrual basis of accounting. When the accrual basis of accounting is used, an
entity recognises the elements of financial statements when they satisfy the definitions
and recognition criteria for those elements in the Framework.
i. Assets are recognized when it is probable that the future economic benefits will
flow to the entity and the asset has a cost or value that can be measured
reliably;
ii. Liabilities are recognized when it is probable that an outflow of resources
embodying economic benefits will result from the settlement of a present
obligation and the amount at which the settlement will take place can be
measured reliably;
101
iii. Income is recognized in the income statement when an increase in future
economic benefits related to an increase in an asset or a decrease of a liability
has arisen that can be measured reliably, and
iv. Expenses are recognized in the income statement when decrease in future
economic benefits related to a decrease in an asset or an increase of a liability
has arisen that can be measured reliably.
iv. Materiality and Aggregation

Entities are required to present separately each material class of similar items, and
present separately items of a dissimilar nature or function unless they are immaterial.
Financial statements result from processing large numbers of transactions or other
events that are aggregated into classes according to their nature or function.
v. Offsetting
IAS 1 has prohibited entities to not offset assets and liabilities or income and expenses
unless required or permitted by an IFRS. They should report separately both assets and
liabilities, and income and expense.
Offsetting can be permitted when it reflects the substance of the transaction or other
event detracts from the ability of users both to understand the transactions, other
events and conditions that have occurred and to assess the entity’s future cash flows.
vi. Frequency of Reporting

Entities should present a complete set of financial statements, including comparative
information, annually. When an entity changes the end of its reporting period and
presents financial statements for a period longer or shorter than one year, an entity
should disclose, in addition to the period covered by the financial statements:
i. The reason for using a longer or shorter period, and
ii. The fact that amounts presented in the financial statements are not entirely
comparable.
vii. Consistency of Presentation

An entity is required to retain the classification and presentation of items in the financial
statements from one period to the next unless:
(a) It is apparent, following a significant change in the nature of the entity’s

operations or a review of its financial statements, that another presentation or
102
classification would be more appropriate having regard to the criteria for the
selection and application of accounting policies in IAS 8; or
(b) An IFRS requires a change in presentation.
STRUCTURES AND CONTENTS

IAS 1 requires particular disclosures in the presentation of elements of financial
statements in the statement of financial position or of comprehensive income, in the
separate income statement (if presented), or in the statement of changes in equity and
requires disclosure of other line items either in those statements or in the notes.
(i) Identification of Financial Statements

Entities should clearly identify the financial statements and distinguish them from other
information in the same published document. They should clearly identify each financial
statement and the notes.
Above that, entities should display the following information prominently, and repeat it
when necessary for the information presented to be understandable:
(a) The name of the reporting entity or other means of identification, and any
change in that information from the end of the preceding reporting period;
(b) Whether the financial statements are of an individual entity or a group of
entities;
(c) The date of the end of the reporting period or the period covered by the set of
financial statements or notes;
(d) The presentation currency, as defined in IAS 21; and
(e) The level of rounding used in presenting amounts in the financial statements.
(ii) Timeliness
The usefulness of financial statements is impaired if they are not made available to
users within a reasonable period after the reporting date. An entity should be in a
position to issue its financial statements within six months after the reporting date.
Factors such as complexity of an entity’s operations are not sufficient reasons for failing
to report on a timely basis.
103
PUBLISHED FINANCIAL STATEMENTS
To make financial statements more understandable, entities are required to present
information in thousands or millions of units of the presentation currency. This is
acceptable as long as the entity discloses the level of rounding and does not omit
material information.
(i) Statement of Financial Position

IAS 1 specifies which items are to be included on the face of the Statement of Financial
Position but it does not prescribe the order and presentation that is to be followed. It
would be acceptable to present assets less liabilities equaling equity, or total assets
equaling total equity and liabilities.
However, entities are required to present current and non-current assets, and current
and non-current liabilities, as separate classification on the face of its statement of
financial position except when other presentation is given by another standard, or
presentation based on liquidity provides information that is reliable and more relevant.
Information to be presented on the Face of the Statement

As a minimum, the statement of financial position is required to include line items that
present the following amounts:
(a) Property, plant and equipment;
(b) Investment property;
(c) Intangible assets;
(d) Financial assets [excluding amounts shown under (e), (h) and (i)];
(e) Investments accounted for using the equity method;
(f) Biological assets;
(g) Inventories;
(h) Trade and other receivables;
(i) Cash and cash equivalents;
(j) The total of assets classified as held for sale and assets included in disposal
groups classified as held for sale in accordance with IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations;
(k) Trade and other payables;
(l) Provisions;
(m) Financial liabilities (excluding amounts shown under (k) and (l));
(n) Liabilities and assets for current tax, as defined in IAS 12 Income Taxes;
(o) Deferred tax liabilities and deferred tax assets, as defined in IAS 12;
(p) Liabilities included in disposal groups classified as held for sale in accordance
with IFRS 5;
104
(q) Non-controlling interests, presented within equity; and
(r) Issued capital and reserves attributable to owners of the parent.
An entity is allowed to present additional line items, headings and subtotals in the
statement of financial position when such presentation is relevant to an understanding
of the entity’s financial position or if required by another standard.
When an entity presents current and non-current assets, and current and non-current
liabilities, as separate classifications in its statement of financial position, it should not
classify deferred tax assets/liabilities as current assets/liabilities.
Information to be presented either on the Statement or in the Notes

Entities are required to disclose, either in the statement of financial position or in the
notes, further sub-classifications of the line items presented, classified in a manner
appropriate to the entity’s operations. The details provided in sub-classification depend
on the requirements of IFRSs and on the size, nature, and functions of the amounts
involved.
The following information are required to be presented either in the statement of

financial position (or the statement of changes in equity), or in the notes:
(a) For each class of share capital:

i. The number of shares authorised;
ii. The number of shares issued and fully paid, and issued but not fully paid;
iii. Par value per share, or that the shares have no par value;
iv. A reconciliation of the number of shares outstanding at the beginning and at
the end of the period;
v. The rights, preferences and restrictions attaching to that class including
restrictions on the distribution of dividends and the repayment of capital;
vi. Shares in the entity held by the entity or by its subsidiaries or associates;
and
vii. Shares reserved for issue under options and contracts for the sale of shares,
including terms and amounts.
(b) A description of the nature and purpose of each reserve within equity.
(c) Entities without share capital, such as a partnership or trust, are required by IAS
1 to disclose information equivalent to those given above, showing changes
during the period in each category of equity interest, and the rights, preferences
and restrictions attaching to each category of equity interest.
105
The format for the presentation of the statement of financial position as per IAS 1 is
given below:
XYZ Limited’s
Statement of Financial Position as at 31 December, 20XX
Tzs.
000
Assets
Non-current assets
Goodwill x
Property, plant and equipment x
Other assets x
x
Current assets
Inventories x
Trade receivables x
Other current assets x
Cash and cash equivalents x
x
Total assets x
Equity and liabilities

Capital and reserves
Share capital x
Retained earnings x
Other reserves x
Total equity x
Non-current liabilities
Long-term borrowings x
Current liabilities
Trade and other payables x
Short-term borrowings x
Current tax payable x
Total current liabilities x
Total equity and liabilities x
106
(ii) Statement of Profit or Loss and Other Comprehensive Income
IAS 1 requires entities to present all items of income and expense recognized in the
period in:
(a) A single statement of comprehensive income, or
(b) Two statements: a statement displaying components of profit or loss (separate

income statement) and a second statement beginning with profit or loss and
displaying components of other comprehensive income (statement of
comprehensive income).
Information to be presented on the Face of Comprehensive Income

As a minimum, entities are required to include the following line items in the statement
of comprehensive income for the period:
 Revenue;
(aa) gains and losses arising from the derecognition of financial assets
measured at amortised cost;
 Finance costs;
 Share of the profit or loss of associates and joint ventures accounted for using
the equity method;
(ca) if a financial asset is reclassified so that it is measured at fair value, any
gain or loss arising from a difference between the previous carrying
amount and its fair value at the reclassification date (as defined in IFRS
9);
 Tax expense;
 A single amount comprising the total of:
(i) The post-tax profit or loss of discontinued operations and
(ii) The post-tax gain or loss recognised on the measurement to fair value
less costs to sell or on the disposal of the assets or disposal group(s)
constituting the discontinued operation;
 Profit or loss;
 Each component of other comprehensive income classified by nature [excluding
amounts in (h)];
 Share of the other comprehensive income of associates and joint ventures
accounted for using the equity method; and
 Total comprehensive income.
Entities are allowed to present additional line items, headings and subtotals in the
statement of comprehensive income and the separate income statement (if presented),
107
when such presentation is relevant to an understanding of the entity’s financial
performance.
Profit or Loss for the Period

Entities are required to recognise all items of income and expense for a period in profit
or loss unless an IFRS requires or permits otherwise. Some IFRSs specify circumstances
when an entity recognises particular items outside profit or loss in the current period.
Such circumstances are like the correction of errors and the effect of changes in
accounting policies (IAS 8). Other IFRSs require or permit components of other
comprehensive income that meet the Framework’s definition of income or expense to
be excluded from profit or loss (see paragraph 7).
Other Comprehensive Income for the Period

Comprehensive income is defined as “the change in equity or net assets of an entity
during a period from transactions and other events and circumstances from non-owner
sources (FASB). It includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners”. Comprehensive income is the
sum of net income and other items that are not recorded in the income statement
because they have not been realized. Examples of comprehensive income are;
 Foreign currency translation adjustments on foreign subsidiaries

 Changes in the fair value of available-for-sale financial assets
 Actuarial gains and losses arising on a defined benefit pension plan
 Revaluations of property, plant and equipment
 Changes in the fair value of a financial instrument in a cash flow hedge
Information to be presented in Statement Profit or Loss and Other

Comprehensive Income or Notes
(a) When items of income and expense are material, their nature and amount should
be disclosed separately such as;
i. Write down of inventories to net realizable value or of PPE to recoverable
amount.
ii. Restructuring of the activities of an entity and reversal of any provisions for
the cost of restructuring.
iii. Disposal of items of PPE
iv. Discontinued operations.
v. Litigation settlements.
vi. Other reversals of provisions.
108
(b) Entities should present an analysis of expenses recognized in profit or loss using
a classification based on either their nature or their function within the entity,
whichever provides information that is reliable and more relevant.
i. An example of classification by the nature of expense method is as follows:
Revenue X
Other income x
Changes in inventory and work in progress (x)
Raw materials and consumables used (x)
Employee benefits expense (x)
Depreciation and amortization expense (x)
Other expenses (x)
Total expenses (x)
Profit before tax x
ii. Classification basing on the function of expense method is provided below:
Revenue x
Cost of sales (x)
Gross profit x
Other income x
Distribution costs (x)
Administrative expenses (x)
Other expenses (x)
Profit before tax x
Income tax expense (x)
Profit for the year X
Other comprehensive income:

e.g. Gains on property revaluation x
Other comprehensive income for the year, net of tax (x)
Total comprehensive income for the year x
Entities classifying expenses by function are required to disclose additional

information on the nature of expense, including depreciation and amortisation
expense and employee benefits expense.
109
The choice of which method of classifying expenses on the presentation of
statement of comprehensive income is left on the management of entities
emphasis being made on reliability and relevance of information provided.
According to the standard, the choice will depend on historical and industry
factors and the nature of the entity. Both methods provide an indication of those
costs that might vary, directly or indirectly, with the level of sales or production
of the entity.
(c) Entities are required to disclose the amount of dividends recognized as

distributions to equity holders during the period, and the related amount per
share.
(iii) Statement of Changes in Equity

This is the statement prepared to show gains and losses recognized directly in equity.
The statement aids in full assessment of the performance of the entity apart from the
considerations of items of income and expense included in the determination of profit or
loss for the period. The statement of changes in equity reports the profit or loss for the
period and the other gains and losses recognized directly in equity. It may also report
transactions with equity holders, such as new share issues and the payment of
dividend.
Entities are required by IAS 1 to present a Statement of Changes in Equity which shows
the following information:
(a) Total comprehensive income for the period, showing separately the total
amounts attributable to owners of the parent and to non-controlling interests;
(b) Each component of equity, the effects of retrospective application or
retrospective restatement recognized in accordance with IAS 8;
(c) Each component of equity, a reconciliation between the carrying amount at the
beginning and the end of the period, separately disclosing changes resulting
from:
i. Profit or loss;
ii. Other comprehensive income; and
iii. Transactions with owners in their capacity as owners, showing separately
contributions by and distributions to owners and changes in ownership
interests in subsidiaries that do not result in a loss of control.
Information to be presented on the Statement of Changes in Equity or in the

notes
In the Statement of Changes in Equity, reporting entities are required to present the
following sort of information:
110
(iii) For each component of equity an entity is required to present an analysis of
other comprehensive income by item as per part 5.3 (c) (ii) above.
(iv)The amount of dividends recognised as distributions to owners during the period,

and the related amount of dividends per share.
(v) The components of equity which include each class of contributed equity, the
accumulated balance of each class of other comprehensive income, and retained
earnings.
Recommended format of the Statement of Changes in Equity

Entities can present the statement of changes in equity using the recommended format
below;
XYZ Company Ltd
Statement of Changes in Equity for the Year Ended 31 December 2013
Share Share Rev. RE Total
Capital Premium surplus
Opening balance 01/01/2012 x x x x x
Changes in Accounting policy x x
Restated Balance x x x x x
Changes in Equity for the year 2012
Dividends (x) (x)
Total comprehensive income for the year x x
Balance at 31/12/2012 x x x x x
Changes in equity for the year 2013
Issue of share capital x x x
Dividends (x) (x)
Total comprehensive income for the year x
Transfer to retained earnings x x
Tax on items taken directly to from equity x x x
Ending Balance 31/12/2013 x x x x x
From the above format, the main elements/components of the statement of changes in
equity are explained below:
Example 1
The shareholders’ equity section of the Statement of Financial Position of New Force
Limited as at 30 June, 2007 was as follows:
2007 2006
Share capital 200,000 160,000
General reserve 50,000 40,000
111
Revaluation reserve 74,000 60,000
Retained earnings 170,000 160,000
The following additional information is relevant:

 Newforce Limited issued 16,000 shares at 2.50 each on 31 May 2007 for cash.
 A transfer of 10,000 was made from retained earnings to the general reserve.
 Net profit for the year was 130,000.
 Dividend for the year comprised of interim dividend 50,000, and final dividend
provided 60,000.
 Land was revalued to current fair value, resulting in the recognition of a gross
revaluation increment of 20,000 and a deferred tax liability of 6,000.
Required
Prepare the statement of changes in equity of New Force Limited for the year ended 30
June 2007 in accordance with IAS 1.
Solution
NEW FORCE LIMITED’s

Statement of Changes in Equity for the Period Ended 30 June 2007
Share General Revaluation Retained Total
Capital Reserve Reserve Earnings
Opening balance 160,000 40,000 60,000 160,000 420,000
Change in accounting policy - - - - -
Restated balance 160,000 40,000 60,000 160,000 420,000
Change in Equity during the year
Issue of shares (16,000 x 2.5) 40,000 - - - 40,000
Transfer to General reserve - 10,000 - (10,000) -
Profit for the year - - - 130,000 130,000
Dividend
- Interim - - - (50,000) (50,000)
- Final - - - (60,000) (60,000)
Gain on revaluation - - 20,000 - 20,000
Deferred tax liability - - (6,000) - (6,000)
Closing balance 200,000 50,000 74,000 170,000 494,000
(vi) Notes to Published Accounts
This is the part of the financial statements that provides users with important details
that cannot be presented on the face of components of financial statements. The notes
112
give an overview of the company in terms of information that cannot be expressed in
monetary terms. In general terms, the notes should:
 Present information about the basis of preparation of the financial statements
and the specific accounting policies used;
 Disclose the information required by IFRSs that is not presented elsewhere in the
financial statements; and
 Provide information that is not presented elsewhere in the financial statements,
but is relevant to an understanding of any of them.
Notes should be presented in a systematic manner. Entities are required to cross-

reference each item in the face of financial statements to any related information in the
notes. In order to assist users to understand the financial statements and to compare
them with financial statements of other entities, notes should be presented in the
following order:
(a) Statement of compliance with IFRSs in accordance with paragraph 16;
(b) Summary of significant accounting policies applied as per paragraph 117;
(c) Supporting information for items presented in the statements of financial position
and of comprehensive income, in the separate income statement (if presented),
and in the statements of changes in equity and of cash flows, in the order in
which each statement and each line item is presented; and
(d) Other disclosures, including:
(i) Contingent liabilities (see IAS 37) and unrecognised contractual
commitments, and
(iv) Non-financial disclosures, like the entity’s financial risk
management objectives and policies (see IFRS 7).
OTHER REPORTS – DIRECTORS/CHAIRMAN STATEMENT

There are other reports that are not indicated in the IAS 1 but they are equally
important. Examples of these reports are like Directors’ Statement. In some countries
(example the UK), the content of this report is prescribed by law. Normally, this report
gives details of the company’s principal activities, a statement of company’s profit and
details of any changes in the share capital and the board of directors.
Chairman’s Statement
This serves as a formal communication by the chairman of the company to the
shareholders. There is no legal requirement that there should be a message of this
nature but in most cases, chairmen use the publication of annual financial reports as an
opportunity to inform the shareholders any ‘good news’ within the company, as well as
communicating any difficulties experienced by the company during the year and review.
113
Other details would include a review on corporate governance of the corporation,
details of the board members, the relation with shareholders and an outline of the
company’s policies in respect of the risk management, internal control and assurance.
DISCLOSURE OF ACCOUNTING POLICIES

Entities are required by IAS 1 to disclose in the summary of significant accounting
policies;
(a) The measurement basis (or bases) used in preparing financial statements;
(b) The other accounting policies used that are relevant to an understanding of the
financial statements
(c) The assumptions made about the future, and other major sources of estimation
of uncertainty at the end of the reporting period, that have a significant risk of
resulting in a material adjustment to the carrying amounts of assets and liabilities
within the next financial year.
(d) The judgments, apart from those in part ‘c’ above, that management has made
in the process of applying the entity’s accounting policies and that have the most
significant effect on the amounts recognized in the financial statements.
114
REVIEW QUESTIONS
Question 1
Lumbesa Ltd balances in the share capital accounts and reserves as at 1 January 2011
were as follows:
Tzs. 000’
Ordinary shares of Tzs 10 each 20,000
Share premium 10,000
Revaluation reserve 2,000
Profit and Loss 15,000
Total Owners’ Equity 47,000
The following information is relevant during the year:

(i) Profit after tax for the year ended 31st December 2011 was Tzs. 450,000
(ii) Dividends distributed by Lumbesa Ltd to its shareholders were Tzs. 100,000
(iii) Exchange difference gain from translation of foreign currency transactions was
Tzs 50,000
(iv) Correction of prior year overstatement of revenue was Tzs 200,000
(v) Issued 100,000 ordinary shares for Tzs 1,500,000
(vi) A property of the Company was found to be undervalued by Tzs. 330,000
(vii) Exchange difference loss from translation of foreign operation’s financial
statements (net investment) was Tzs. 125,000
Required
Prepare the Statement of Changes in Equity for the year ended 31 st December 2011 in
accordance with the requirements of IAS 1.
Question 2
Titan Construction Company is a medium sized company established to provide
construction services to local citizen at lowest prices. The company had the following
transactions for the year ended 30th June, 2011.
(i) There were 4,000,000 shares of common stock (Tzs. 0.01 value) issued and
outstanding at the beginning of 2011.
(ii) Additional paid-in capital at the beginning of 2011 was Tzs. 90,000,000.
(iii) On June 1, 2011, Titan issued 1,000,000 new shares of common stock for Tzs.
25 per share.
(iv) Retained earnings at the beginning of 2011 were Tzs. 80,000,000.
(v) Retained earnings at the end of 2011 were Tzs. 97,000,000.
115
(vi) On December 31, 2011, Titan declared and paid cash dividends of Tzs. 0.50 per
share.
(vii) Stocks purchased on January 1, 2011, for Tzs. 1,000,000 and held as available-
for-sale were worth Tzs. 1,180,000 on December 31, 2011. This is the only stock
that titan holds.
Required
Using this information, prepare a statement of changes in equity for 2011.
Question 3
The general ledger trial balance of Nyamongo Ltd includes the following accounts at 30
June 2014:
Tzs 000’
Sales revenue 950,000
Interest revenue 25,000
Gain on sale of fixed assets 10,000
Valuation gain on available for sale investments (no investments were
disposed off during the year) 20,000
Share of profit of associate 35,000
Cost of goods sold 600,000
Finance expenses 15,000
Selling and distribution costs 50,000
Administrative expenses 30,000
Exchange differences on translation of foreign operations (gain tax
free) 15,000
Income tax expense 75,000
Required
As an accountant of Nyamongo Ltd responsible for the preparation of the financial
statements of the company for the year ended 30 June 2014, prepare the income
statement showing the analysis of the expenses on the face of the income statement
(assume the company classifies expenses by function).
Question 4
The shareholders’ section of the Balance Sheet of Bambataa Ltd as at 30 June 2007
was as follows:
2007 2006
(Tzs 000) (Tzs 000)
Share capital 375,000 225,000
Available for sale investments revaluation reserve 75,000 50,000
116
Additional information
(i) Available for sale investments are regularly revalued to fair value. On the sale of
an investment, any related revaluation increment is transferred to the income
statement. Movements in the revaluation reserve during the year to 30 June 2007
comprised:
- Gross revaluation increments recognised Tzs. 55,000,000 (related deferred
income tax Tzs. 17,500,000).
- Gross transfers on sale of investments Tzs. 18,750,000 (related income tax
Tzs. 6,250,000).
(ii) Net profit for the year was Tzs. 175,000,000.
(iii) Dividend declared amounted to Tzs. 137,500,000 (dividend subject to dividend
reinvestment scheme Tzs. 37,500,000).
Required
Prepare the statement of changes in equity of Bambataa Ltd for the year ended 30 June
2007 as per IAS 1.
Question 5
The trial balance of Makambako Limited, a manufacturing company includes the
following account balances as at 30 June 2007.
Dr Cr
(Tzs 000) (Tzs 000)
Cash 146,250
Trade debtors 1,453750
Allowances for doubtful debts 62,500
Sundry debtors 337,500
Prepayments 117,500
Sundry loans (current) 25,000
Raw materials 616,250
Finished goods 868,750
Investment in unlisted company (at cost) 37,500
Land (at cost) 292,500
Buildings (at cost) 858,750
Accumulated depreciation – buildings 100,000
Plant and equipments (at cost) 7,911,250
Accumulated depreciation – plant and
equipment 3,795,000
117
Goodwill 3,031,250
Brand names 50,000
Patents 31,250
Deferred income tax 236,250
Sundry creditors 710,000
Bank overdrafts 143,750
Bank loans 2,310,000
Other loans 807,500
Current tax payable 92,500
Provision for employee benefits 277,500
Dividends payable 125,000
Provision for warranty 25,000
Share capital 4,323,750
Retained earnings 1,893,750
16,013,750 16,013,750
Additional information:
(a) Bank loans include loans repayable within 12 months Tzs. 775,000,000/-.
(b) Other loans outstanding are repayable within one year.
(c) Provision for employee benefits includes Tzs. 178,750,000/- payable within one
year.
(d) Provision for warranty is in respect of six-month warranty given over certain goods
sold.
Required
Prepare the Statement of Financial Position of Makambako Limited as at 30 June 2007
in accordance with the requirements of IAS 1.
118
TOPIC 6: CASH FLOWS STATEMENT (IAS 7)
INTRODUCTION
A Cash flows statement is a component in the financial statement that shows the
changes in the cash position during the year. The Cash flows statement list cash
receipts and payments. A cash flows statement provides useful predictive information
for decision making. The management and other users of financial statements are more
concerned with the ability of the business to meet maturity obligation and remain
solvent. Thus the statement of Cash Flows will include other significant finance and
investing activities.
The user of financial statements views cash flows statement as a parameter of financial
strength. Cash flows statement is a requirement as per International Accounting
Standard (IAS) 7.
OBJECTIVE AND SCOPE OF IAS 7

Information about the cash flows of an entity is useful in providing users of financial
statements with a basis to assess the ability of the entity to generate cash and cash
equivalents and the needs of the entity to utilize those cash flows. The economic
decisions that are taken by users require an evaluation of the ability of an entity to
generate cash and cash equivalents and the timing and certainty of their generation.
The objective of IAS 7 is to require the provision of information about the historical
changes in cash and cash equivalents of an entity by means of a statement of cash
flows which classifies cash flows during the period from operating, investing and
financing activities. An entity is required to prepare a statement of cash flows in
accordance with the requirements of IAS 7 and should present it as a part of its
financial statements for each period for which financial statements are presented.
BENEFITS OF CASH FLOWS INFORMATION

The following benefits are realized when Cash flow statements are used together with
the rest of financial statements;
i. Enable users to evaluate the changes in net assets and financial position of the
organization (including its liquidity and solvency) and its ability to affect the
amounts and timing of cash flows in order to adapt to changes circumstances and
opportunities.
119
ii. Useful in assessing the ability of the organization to generate cash and cash
equivalent and hence enables users to develop models to access and compare the
present value of the future cash flows of different organizations.
iii. Historical cash flow information is often used as indicator of the organization
financial adaptability, how able it is to react to future events, how adaptable it is to
future threat and opportunities.
iv. Useful in checking the accuracy of past assessment of future cash flows and in
examining the relationship between profitability and net cash flow and the impact
of inflation.
v. Also the cash flow statement brings up a link between the statement of financial
position and the statement of performance. Generally, the statement of financial
position shows the financial position at the year end and the statement of financial
gives the organization performance of the year. However, cash flow statement
provide the following additional information;
(a) How the increase of fixed assets has been financed;
(b) Where the proceeds of issue of shares has been utilized;
(c) What changes has taken place on working capital, and
(d) Why the bank balance has decrease when profit has been made and vice
versa.
CASH AND CASH EQUIVALENT

Cash equivalents are assets held for the purpose of meeting short-term cash
commitments rather than for investment or other purposes. For an investment to
qualify as a cash equivalent it must be readily convertible to a known amount of cash
and be subject to an insignificant risk of changes in value. Therefore, an investment
normally qualifies as a cash equivalent only when it has a short maturity of, say, three
months or less from the date of acquisition.
Cash flows exclude movements between items that constitute cash or cash equivalents
because these components are part of the cash management of an entity rather than
part of its operating, investing and financing activities. Cash management includes the
investment of excess cash in cash equivalents.
CONTENTS OF CASH FLOW STATEMENT

The statement of cash flows should report cash flows during the period classified into
operating, investing and financing activities. Entities are allowed to present their
statements of cash flows from operating, investing and financing activities in a manner
which is most appropriate to its business. Classification cash flows by activity provides
information that allows users to assess the impact of those activities on the financial
120
position of the entity and the amount of its cash and cash equivalents. This information
will also be used to evaluate the relationships among those activities.
It is possible for a single transaction to include cash flows that are classified differently.
For example, when the cash repayment of a loan includes both interest and capital, the
interest element may be classified as an operating activity and the capital element is
classified as a financing activity.
Operating Activities
The amount of cash flows arising from operating activities is a key indicator of the
extent to which the operations of the entity have generated sufficient cash flows to
repay loans, maintain the operating capability of the entity, pay dividends and make
new investments without recourse to external sources of financing. Cash flows from
operating activities are derived from the principal revenue-producing activities of the
entity. They generally result from the transactions and other events that enter into the
determination of profit or loss.
Examples of cash flows from operating activities are:

i. Cash receipts from the sale of goods and the rendering of services;
ii. Cash receipts from royalties, fees, commissions and other revenue;
iii. Cash payments to suppliers for goods and services;
iv. Cash payments to and on behalf of employees;
v. Cash receipts and cash payments of an insurance entity for premiums and
claims, annuities and other policy benefits;
vi. Cash payments or refunds of income taxes unless they can be specifically
identified with financing and investing activities; and
vii. Cash receipts and payments from contracts held for dealing or trading purposes.
Investing Activities
Expenditures that results in a recognized asset in the statement of financial position
should be classified as investing activities. The separate disclosure of cash flows arising
from investing activities is important because they represent the extent to which
expenditures have been made for resources intended to generate future income and
cash flows. Examples of cash flows arising from investing activities are:
i. Cash payments to acquire property, plant and equipment, intangibles and other
long-term assets. These payments include those relating to capitalized
development costs and self-constructed property, plant and equipment;
ii. Cash receipts from sales of property, plant and equipment, intangibles and other
long-term assets;
121
iii. Cash payments to acquire equity or debt instruments of other entities and
interests in joint ventures (other than payments for those instruments considered
to be cash equivalents or those held for dealing or trading purposes);
iv. Cash receipts from sales of equity or debt instruments of other entities and
interests in joint ventures (other than receipts for those instruments considered
to be cash equivalents and those held for dealing or trading purposes);
v. Cash advances and loans made to other parties (other than advances and loans
made by a financial institution);
vi. Cash receipts from the repayment of advances and loans made to other parties
(other than advances and loans of a financial institution);
vii. Cash payments for futures contracts, forward contracts, option contracts and
swap contracts except when the contracts are held for dealing or trading
purposes, or the payments are classified as financing activities; and
viii. Cash receipts from futures contracts, forward contracts, option contracts and
swap contracts except when the contracts are held for dealing or trading
purposes or the receipts are classified as financing activities.
Financing Activities
The separate disclosure of cash flows arising from financing activities is important
because it is useful in predicting claims on future cash flows by providers of capital to
the entity. Examples of cash flows arising from financing activities are:
i. Cash proceeds from issuing shares or other equity instruments;
ii. Cash payments to owners to acquire or redeem the entity’s shares;
iii. Cash proceeds from issuing debentures, loans, notes, bonds, mortgages and
other short-term or long-term borrowings;
iv. Cash repayments of amounts borrowed; and
v. Cash payments by a lessee for the reduction of the outstanding liability relating
to a finance lease.
PRESENTATION OF A STATEMENT OF CASH FLOWS

There are two formats that are used to present the statement of cash flows. Entities are
allowed to adapt any of the method in the presentation of information concerning the
cash flows. These methods differ in the reporting of cash flows from operating
activities.
The methods are:
122
(a) Direct Method, whereby major classes of gross cash receipts and gross cash
payments are disclosed. Under this method, presentation of Cash Flow
Statement is as follows;
ABC limited’s
Cash Flow Statement for the Period Ended 31 December, 20XX
Cash flows from operating activities
Cash received from customers x
Cash payments to suppliers (x)
Cash paid to and on behalf of employees (x)
Other cash payments (x)
Cash generated from operations x
Cash flows from investing activities

Purchase of Property, plant and Equipment (x)
Proceeds from sale of PPE x
Interest received x
Dividend received x
Net cash received/used in investing activities x
Cash flows from Financing activities

Proceeds from new issue of shares x
Long-term borrowings x
Payments of loans (x)
Interest paid (x)
Dividend paid (x)
Net cash received/used in financing activities x
Net cash received/used from activities x
Cash and cash equivalent at the beginning of the period x
Cash and cash equivalent at the end of the period x
(b) Indirect Method, whereby profit or loss is adjusted for the effects of
transactions of a non-cash nature, any deferrals or accruals of past or future
operating cash receipts or payments, and items of income or expense associated
with investing or financing cash flows.
The format for the presentation of Cash Flow Statement as per IAS 7 under the
indirect method is as follows:
ABC limited’s
123
Cash Flow Statement for the Period Ended 31 December, 20XX
Cash flows from operating activities
Net Profit before tax x
Adjustments for:
Depreciation x
Investment income (x)
Interest expense x
Operating profit before working capital changes x
Increase in trade and other receivables (x)
Decrease in inventories x
Decrease in trade payables (x)
Tax paid (x)
Net Cash from operating activities x
Note:
Other elements of the Cash Flow Statements will appear as shown in the presentation
using the direct method. The difference between the two method being presentation of
the cash flow from operating activities.
Example
The income statement of Papino Ltd for the year ended 31st December, 2010 appears
as follows:
31st Dec. 2009 31st Dec. 2010

Tzs Tzs
Sales 2,004,800 3,485,000
Cost of sales 1,432,000 2,788,000
Gross profit (i) 572,800 697,000
Expenses:
Salaries 157,200 172,400
Rent 24,000 24,000
Advertising 13,000 18,000
Bad debts 2,000 6,000
Other expenses 62,200 61,000
Depreciation 90,400 70,160
Loss on disposal of vehicle - 9,440
Total expenses (ii) 348,800 361,000
Net profit for the year (i) – (ii) 224,000 336,000
124
Taxation (112,000) (168,000)
Dividends (60,000) (120,000)
Profit b/f 74,000 126,000
126,000 174,000
The Statement of Financial Position of the company appears as follows:

31st Dec. 2009 31st Dec. 2010
Tzs. Tzs.
Current Assets
Stock in trade 113,000 232,400
Trade debtors (net) 136,400 191,600
Prepayments - 24,000
Cash 23,000 6,600
Total current assets (i) 272,400 454,600
Current Liabilities
Trade creditors 77,000 93,600
Accrued expenses 3,600 -
Tax payable 42,400 30,000
Dividend payable 25,000 33,000
Bank overdraft - 56,000
Total current liabilities 148,000 212,600
Net current assets (i) – (ii) 124,400 242,000
Fixed assets 361,600 338,000
486,000 580,000
Financed by:
Ordinary share capital 300,000 360,000
Share premium - 6,000
Profit and Loss Account 126,000 174,000
Long term loan 60,000 40,000
486,000 580,000
It has been ascertained that a vehicle acquired at a cost of Shs. 120,000 on 1 st April,
2008 and depreciated at 20% per annum on reducing balance basis has been disposed
off on 30th June, 2010 for Shs. 64,000.
Required
Prepare in a suitable form the Statement of Cash Flows for Papino Ltd for the year
ended 31st December, 2010 under;
125
(a) Direct Method
(b) Indirect Method
Solution
(a)
Papino Limited’s
Cash Flow Statement for the Year Ended 31 December, 2010 (Direct Method)
Tzs.
Cash flow from Operating Activities
Cash received from customers (w1) 3,423,800
Cash paid to suppliers (w2) (2,890,800)
Cash paid to and on behalf of employees (172,400)
Other payments (w3) (130,600)
Tax paid (w4) (180,400)
Net cash inflow from operating activities 49,600
Cash flow from investing activities

Sales proceeds from disposal of assets 64,000
Purchases of new fixed assets (w5) (120,000)
Net cash outflow from investing activities (56,000)
Cash flow from financing activities

Cash proceeds from issue of shares 66,000
Cash paid for long – term loan (20,000)
Dividend paid (112,000)
Net cash outflow from financing activities (66,000)
Net cash outflow during the year (72,400)
Cash and cash equivalent at the start 23,000
Cash and cash equivalent at the end (49,400)
Workings
Debtors A/c
Balance b/d 136,400 Bad debts 6,000
Sales 3,485,000 Bank (cash received) 3,423,800
Balance c/d 191,600
3,621,400 3,621,400
Balance b/d 191,600
126
Creditors A/c
Bank (cash paid) 2,890,800 Balance b/d 77,000
Balance c/d 93,600 Purchases* 2,907,400
2,984,400 2,984,400
Balance b/d 93,600
*
Purchases
Opening stock 113,000
Add: Purchases (missing figure) 2,907,400
Goods available for sale 3,020,400
Less: Closing Stock 232,400
Cost of goods sold (from income statement) 2,788,000
Other Expenses A/c

Bank 130,600 Balance b/d 3,600
P/L 103,000
Balance c/d 24,000
130,600 130,600
Balance b/d 24,000
Taxation A/c
Bank 180,400 Balance b/d 42,400
Balance c/d 30,000 P/L 168,000
210,400 210,400
Balance b/d 30,000
Dividend A/v
Bank 112,000 Balance c/d 25,000
Balance c/d 33,000 P/L 120,000
145,000 145,000
Balance b/d 33,000
Fixed Assets A/c

Balance b/d 361,600 Depreciation charge (P/L) 70,160
Bank (additions) 120,000 Disposal* 73,440
Balance c/d 338,000
481,600 481,600
Balance b/d 338,000
127
Computation of Carrying Amount of disposed vehicle
Cost at acquisition (1/4/2008) 120,000
Less: Depreciation of 2008 (120,000 x 20% x 9/12) 18,000
Carrying amount as at 1 Jan 2009 102,000
Less: Depreciation of 2009 (102,000 x 20%) 20,400
Carrying amount as at 1 Jan 2009 81,600
Less: depreciation of 2010 (81,600 x 20% x 6/12) 8,160
Carrying amount at disposal 73,440
(b)
Papino Limited’s
Cash Flow Statement for the Year Ended 31 Dec, 2010 (Indirect Method)
Tzs.
Cash flow from Operating Activities
Operating profit before tax 336,000
Depreciation 70,160
Loss on disposal of vehicle 9,440
Increase in stock (119,400)
Increase in trade debtors (55,200)
Increase in prepayments (24,000)
Increase in trade creditors 16,600
Increase in accrued expenses (3,600)
Tax paid (w4) (180,400)
Net cash inflow from operating activities 49,600
Cash flow from investing activities

Sales proceeds from disposal of assets 64,000
Purchases of new fixed assets (w5) (120,000)
Net cash outflow from investing activities (56,000)
Cash flow from financing activities

Cash proceeds from issue of shares 66,000
Cash paid for long – term loan (20,000)
Dividend paid (112,000)
Net cash outflow from financing activities (66,000)
Net cash outflow during the year (72,400)
Cash and cash equivalent at the start 23,000
Cash and cash equivalent at the end (49,400)
128
REPORTING CASH FLOWS ON NET BASIS
Reporting cash flows on the net basis refers to the reporting the net result on cash after
doing the set off (i.e. subtracting the cash outflows from the inflows to arrive at net
effect). Cash flows arising from the following operating, investing or financing activities
may be reported on a net basis:
 Cash receipts and payments on behalf of customers when the cash flows reflect the
activities of the customer rather than those of the entity. Examples of cash receipts
and payments under this category are:
(a) The acceptance and repayment of demand deposits of a bank;
(b) Funds held for customers by an investment entity; and
(c) Rents collected on behalf of, and paid over to, the owners of properties.
 Cash receipts and payments for items in which the turnover is quick, the amounts
are large, and the maturities are short. Examples of these cash flows are advances
made for, and the repayment of:
(a) Principal amounts relating to credit card customers;
(b) The purchase and sale of investments; and
(c) Other short-term borrowings, for example, those which have a maturity
period of three months or less.
 Cash flows arising from each of the following activities of a financial institution may
be reported on a net basis:
(a) Cash receipts and payments for the acceptance and repayment of deposits
with a fixed maturity date;
(b) The placement of deposits with and withdrawal of deposits from other
financial institutions; and
(c) Cash advances and loans made to customers and the repayment of those
advances and loans.
FOREIGN CURRENCY CASH FLOWS

Cash flows arising from transactions in a foreign currency should be recorded in an
entity’s functional currency by applying to the foreign currency amount the exchange
rate between the functional currency and the foreign currency at the date of the cash
flow. The cash flows of a foreign subsidiary should be translated at the exchange rates
between the functional currency and the foreign currency at the dates of the cash
flows.
129
REVIEW QUESTIONS
Question 1
Explain the benefits of presenting information contained in cash flow statements to
users of financial statements
Question 2
Compare and contrast the direct method and indirect method of preparing cash flow
statement and identify and comment on the reasons why the indirect method is most
preferable by preparers of financial statements.
Question 3
Discuss the proposition that a cash flow statement is more useful to users of financial
statements than an income statement.
Question 4
The following information relates to Mpanda South Ltd for the year ended 31 December
2010:
Tzs. 000’
Cash and cash equivalents
At 1 January 2010 8,952
At 31 December 2010 10,043
Operating profit 4,100
Depreciation charges 1,080
Increase in working capital 165
Proceeds of sale of tangible assets (book value Tzs. 96
116,000)
Issue of ordinary shares 400
Expenses relating the issue of new shares 10
Purchase of intangible non-current assets 150
Purchase of intangible non-current assets 2,540
Corporation tax paid 2,460
Dividends paid 1,570
Interest received 2,290
Required
Prepare a cash flow statement of the company for the year ended 31 December 2010
Question 5
130
Wazalendo Enterprises has been in business for many years. The management of the
company wonders why the company is experiencing cash flows problems despite huge
profits produced by the company year after year. The financial statement of the
company for the year ended 31st December, 2009 was as follows:
Wazalendo Enterprises
Statement of Financial Position as at 31 st December (Figures are Tzs ‘000’)
2008 2009
Non-current assets at cost 3,200 4,000
Less: Accumulated depreciation 1,200 1,600
2,000 2,400
Current assets
Stock 4,218 5,654
Debtors 1,560 1,842
Bank 840 695
6,618 8,191
Less: Current liabilities
Creditors 922 988
Taxation 306 410
Proposed dividend 500 750
1,728 2,148
Net current assets 6,890 8,443
Financed by:
Ordinary share capital 5,000 6,000
6,890 8,443
Wazalendo Enterprises
Income Statement for the year ended 31 st December, 2009
(Figures in Tzs ‘000’)
Profit on ordinary activities before taxation (after charging
depreciation of Tzs. 400) 1,713
Tax on ordinary activities 410
1,303
Undistributed profit from last year (retained profit b/d) 1,890
3,193
Proposed dividend 750
Retained profit 2,443
131
Required
Prepare a Statement of Cash Flows for the year ended 31st December, 2009.
132
TOPIC 7: ACCOUNTING FOR INVESTMENTS
INTRODUCTION
Under this topic we are going to discuss how to account for investments transactions
in the financial records of a business entity. An investment is an asset acquired by
the firm with the intention of earning income or for capital appreciation or both,
rather than to be used in the business or to be sold in the normal course of business
(IAS 40). In order for a company to acquire investment properties, firms need to
incur investment expenditures.
Firms can invest into real properties or into financial assets. Investments made into
real properties are covered under the IAS 40, and assets under this category are
known as investment properties. Financial assets on the other hand are intangible
representation of the monetary value of physical item. They obtain their monetary
value from contractual agreement of what it represents. While a real asset, such as
land, has physical value, a financial asset is a document that has no fundamental
value in itself until it is converted to cash. Common types of financial assets include
certificates, bonds, stocks, and bank deposits.
Under this topic, we will limit our discussion to the accounting treatments of
investments in financial assets since the investment in other kinds of assets is dealt
with in other occasion.
PURCHASE AND SALE OF INVESTMENTS

In transacting with investments in financial assets, there are some complications
arising such as;
 Price to be agreed by parties involved in the transaction;
 Apportionment of amount of interests or dividend
 Treatment of cost and income during the acquisition/disposal of investment
Resolving the complications arising while transacting investments, securities are

transacted under Excluding interest or dividend (Ex – int/div) or Including interest or
dividend (Cum – int/div).
Ex – Int or Ex – Div
Transacting investment excluding interest (Ex – Int) or excluding dividend (Ex – Div)
means the investment is purchased or sold without the immediate interest to be
received. Under this situation, the seller of the security is the one who is entitled to
receive the interest or dividend.
Mnyili M. D. 133
Cum – Int or Cum - Div
Cum – int or Cum – div stands for including interest or/and including dividend. When
an investment is traded cum – int/div it means that investment is sold or purchased
with the immediate interest/dividend to be received. The one who purchase the
investment, under this situation, will possess the right of receiving interest or
dividend.
PURCHASE OF SECURITIES CUM DIV/INT

As said earlier, when securities are purchased including dividend or interest (cum-
div/int) the immediate interest will be received by the buyer. The price actually
charged on purchasing securities on cum – div/int basis will comprise of the cost of
the security and dividend or interest that had occurred before the sale
transaction. When full dividend is subsequently received, the amount of interest
accrued before the purchase should be treated as cost recovery and not income.
Example 1
On 1st March, 2009 Mawenzi Corporation Limited purchased 100,000 Shs 1,000
Shares in Faru Portland Cement cum – div at 160. On 30th June, 2009 the annual
dividend of shillings 12,000,000 was declared. The financial year of Mawenzi
Corporation Limited ends on 30th June each year.
Required
Show the journal entries and the Investment account in the books Mawenzi
Corporation Limited.
Solution
Tzs. 1,000 Shares Investment A/c
Details N I C Details N I C
Tzs.000 Tzs.000 Tzs.000 Tzs.000
Bank (Purchases) 100,000 9,000 151,000 Bank (Dividend) - 12,000 -
P&L - 3,000 - Balance c/d 100,000 - 151,000
100,000 12,000 151,000 100,000 12,000 151,000
Balance b/d 100,000 - 151,000
Workings
SALE OF SECURITIES CUM DIV/INT

Sale of investment including dividend or interest (cum div/int) refers to the situation
whereby the holder of those securities decides to sale or transfers them to another
Mnyili M. D. 134
person including the immediate coming interest or dividend. In this situation, the
buyer of the securities will be the one receiving the income (dividend/interest). The
agreed price between the buyer and seller will include the income foregone by the
seller, and it should be accounted accordingly in books of both parties.
Example 2
On 1st January 2011 the financial manager of Forest Enterprises invested an extra
fund by purchasing shs 12,000,000 10% Loan Stock for shs 14,000,000. On 30 th July
2011 the loan stock was sold cum int for shs 17,000,000. Interest is paid annually
on 31st December each year.
You are required to show the necessary Journal entries and Investment account in
the books of Forest Enterprises.
10% Loan Stock Investment A/c

Tzs.000 Tzs.000 Tzs.000 Tzs.000 Tzs.000 Tzs.000
Bank – Purchases 12,000 - 14,000 Sales 12,000 700 16,300
P&L - 700 -
P&L - - 2,300
12,000 700 16,300 12,000 700 16,300
PURCHASING OF SECURITIES EX – DIV OR EX – INT

Purchasing securities ex – div or ex – int refers to buying a financial asset without
dividend or interest. When securities are bought ex – div or ex – int, the actual cost
of securities will include cost of the securities and interest or dividend
foregone by the buyer.
Example 3
On 30th November, 2009 Mawenzi Corporation Limited purchased Shs 1,200,000 9%

Debentures in Uyole Community Bank (UCB) ex – int for a price of shs 1,500,000.
Interest is paid annually on 31st December.
Required
Show the journal entries and the Investment account in the books Mawenzi
Corporation Limited.
Mnyili M. D. 135
Solution
MAWAZO CORPORATION
9% Debentures Investment A/c
Bank – purchase 1,200,000 - 1,491,000 To cost - 9,000 -
From income - - 9,000 Balance c/d 1,200,000 - 1,500,000
P&L - 9,000 -
1,200,000 9,000 1,500,000 1,200,000 9,000 1,500,000
Balance b/d 1,200,000 - 1,500,000
RIGHT ISSUE AND BONUS ISSUE OF SHARES

Rights issue of shares refers giving rights to existing shareholders to purchase
additional shares below the market price. The right issue of shares gives rise in
number of shares outstanding to the company without corresponding increase to the
fair value of the ordinary shares issued. Shareholders may decide to exercise the
right or sell the right to a third party. When the right is sold, there is no decrease in
number of shares held as only the right will be sold. Amount received from rights
sold will be treated as a reduction of cost of existing investments.
The bonus issue of shares, on the other hand, refers to the issuing of shares to the
existing shareholders for free. Companies often issue bonus shares in order to
convert their reserves into owners’ equity or capital.
Example 4
XYZ Company is holding 50,000 ordinary shares of shillings 1,000 each in Wananchi
Microfinance Bank (WMB) which originally cost the company shillings 130,000,000.
On 1st January 2010, The Bank declared a one new share for every five shares held
right issue at a price of shillings 1,400 per share.
XYZ Company decided to took up 60% of its entitlement and sold the remaining part
for shillings 300 per share on 30th April 2010.
Required
(a) Record the transactions in books of XYZ Company for the year ended 31 st
December 2010.
(b) Assume that WMB declared a bonus issue of 2 shares for every 5 held on 30th
April, 2011. Record this transaction in the books of XYZ Company.
Solution
Mnyili M. D. 136
4(a)
XYZ Company Ltd

Tzs.000 Tzs.000 Tzs.000 Tzs.000
Balance b/d 50,000 - 130,000 Bank – right sold - - 1,200
Bank – purchases 6,000 - 8,400 Balance c/d 56,000 - 137,200
56,000 - 138,400 56,000 - 138,400
Balance b/d 56,000 - 137,200
4(b)
XYZ Company Ltd

Tzs.000 Tzs.000 Tzs.000 Tzs.000
Balance b/d 50,000 - 130,000 Bank – right sold - - 1,200
Bank – purchases 6,000 - 8,400 Balance c/d 78,400 - 137,200
Bonus share 22,400 - -
78,400 - 138,400 78,400 - 138,400
Balance b/d 78,400 - 137,200
Mnyili M. D. 137
REVIEW QUESTIONS
Question 1
(a) What do you understand by the terms “cum div.” and “ex div.”?
(b) Distinguish between selling cum int. and selling ex int. How would you
apportion between capital and revenue in each case?
(c) If you purchase a 12% Government Stock with interest due half yearly on
April 1 and October 1, how would you apportion between capital and interest?
Assume the nominal value of stock was Shs. 12,000,000 purchased at 96 on
August 15.
Question 2
On 1st December 2010 Haika Enterprises purchased shs 12,000,000 10% Loan Stock
for shs 14,000,000 cum int. On 30th July 2012 the loan stock with nominal value of
shs 7,000,000 was sold cum int for shs 9,500,000. Interest is paid annually on 31 st
December each year. The financial year of Forest Enterprises runs from 1 July to 30
June.
Required
Show the Investment account in the books of Forest Enterprises as at 30 June 2013.
Question 3
On March 1st an investment trust company purchased Tshs. 24,000,000 Corporation

3% Stock (interest payable quarterly, January 1st etc.) at 87.5 cum div. On August
1st Tshs. 4,800,000 stock was sold at 87 cum div, and on September 1st Tshs.
4,800,000 stock was sold at 88.25 ex div.
Required
Show the ledger account of the investment for the year ending December 31 st
ignoring expenses of purchase and sale.
Question 4
J. Mwakanyamale purchased 1,000 ordinary shares of Shs. 2,200 each in Wezeshwa

Company Limited for Shs. 2,750,000 inclusive of brokerage charges and stump duty.
Some years later the company resolved to capitalize profits and to issue to the
holders of ordinary shares one new ordinary share for every share held by them.
Prior to the capitalization, the shares of Wezeshwa Company Limited stood in the
Mnyili M. D. 138
market at Shs. 3,850 per share. After the capitalization the company’s share were
dealt in on the market at Shs. 2,046 per share. J Mwakanyamale decided to sell the
bonus shares he received and the sale was affected at Shs. 1,980 per share net.
You are required to show the Investment Account in the books of J. Mwakanyamale.
Question 5
Included in the investments of Bamiza Ltd, on January 1st, was a holding of 10,000
ordinary shares of 1,000/- each, fully paid, in Bendera Ltd, having a book value of
11,250,000/-. Bamiza Ltd does not apportion of dividends received or receivable.
On February 1st Bamiza Ltd sold 2,000 shares in Bendera Ltd for 4,300,000/-.
At a meeting held on March 31st Bendera Ltd decided:
i. To make a bonus issue of two fully paid shares for every five shares held
on March 20th, and
ii. To give its members the right to apply for one share for every two shares
held on March 20th, at a price of 1,250/- per share of which 750/- was
payable on application on or before April 30th, and the balance of 500/- on
or before June 30th.
iii. The new shares issued under (i) and (ii) were not to rank for dividend for
the year ended March 31st.
Bamiza Ltd dully received the bonus shares and took up the entitlement under
the rights issue making the payments on the due dates.
Bendera Ltd declared and paid dividend as follows:
- July 20th, a final dividend of 10 percent for the year ended March 31st,
and
- November 30th, an interim dividend of 5 percent for the year ended March
31st following.
Required
Show the Investment Account in the books of Bamiza Ltd for the year ended
December 31st. Ignore expenses of sale and taxation.
Mnyili M. D. 139

Intermediate Notes For Lecture-1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Intermediate Notes For Lecture-1

Uploaded by

Copyright:

Available Formats

“Education for Efficiency”

TANZANIA INSTITUTE OF ACCOUNTANCY

A company can be defined as an "artificial person", invisible, intangible, created by

IMPORTANT DOCUMENTS IN FORMING A COMPANY

Memorandum of Association (MA)

Articles of Association (AA)

ii. Private Companies

iii. Unlimited Companies

iv. Limited Companies

 A Company Limited by Guarantee – under this kind of company, each

 A Company Limited by Shares. The most common form of company used

Nominal/Par Value of a share

Authorized Share Capital

Discount issue of shares

Issue of Shares Payable by Installments

In most cases, shares are issued by instalment when;

Accounting entries for shares issued by instalments

Shares issued at par

ii. When allotment is made, that is accepting successful applicants

Application & Allotment A/c

Ordinary Share Capital A/c

First and Final Call A/c

Statement of Financial Position as at _______________

2. Recognition of share capital on application and allotment

3. Amount received on allotment

4. Amount of capital recognized and paid on first and final call

Share issued at Premium

Show how these transactions will be recorded in the ledger accounts.

Application & Allotment A/c

Ordinary Share Capital A/c

Share Premium A/c

First Call A/c

Final Call A/c

Share issued at Discount

Dr Bank A/c - with cash received on the particular call

Show how these transactions will be recorded in the ledger accounts.

Application & Allotment A/c

Ordinary Share Capital A/c

12% Preference Share Capital A/c

Final Call A/c

Share Discount A/c

Computation of share discount on final call

1. Ordinary share capital

2. Preference share capital

Show necessary ledger accounts to record the above transactions.

Number of shares issued = 10,000 7% Preference shares

Application and Allotment A/c

7% Preference Share Capital A/c

Final Call A/c

Dr Calls in Arrears Account

Using the facts as on Example 2:4 above, assume the following;

Application and Allotment A/c

7% Preference Shares Capital A/c

First Call A/c

Calls in Advance A/c

Final Call A/c

3. Amount received on first call

4. Amount received on final call

It is possible for the forfeited shares to be reissued to another subscriber at an

Journal entries to record the forfeiture of shares are as follows:

i. Cancellation of issued share capital for the forfeited shares.

Show all necessary ledger accounts to record the transactions.

Ordinary Share Capital A/c