ABFA2064 FINANCIAL ACCOUNTING III 1 updated on 2024

Lecture 7: Introduction to company accounting RM'000

Assets
1. Introduction
Non- current assets
We have seen how financial statements are produced for sole traders.
These account are not subject to any specific regulation and so there is some Property, plant and equipment X
flexibility as to how they are presented. Intangible assets X
X
Companies use exactly the same bookkeeping process as sole traders;
however, the financial statements they produce are subject to regulation Current assets
and must follow a prescribe format.
Inventories X
Many of the differences are due to terminology used by company Trade receivables X
financial statements. Other current assets X
Cash and cash equivalents X
Proforma financial statements X
Statement of Profit or Loss for the year ended … Total assets X
RM'000
Revenue X
Equity and liabilities
Cost of sales (X)
Equity
Gross profit X
Share capital X
Other income ( if any) X
Reserves X
Distribution costs (X) X
Retained earnings
Administrative expenses (X)
X
Other expenses if any) (X)
Non-current liabilities
Finance costs (X)
Long term borrowings X
Profit before tax X
Current liabilities
Income tax expense (X)
Trade payables X
Profit for the year X
Tax payable X
Other payables X
X
Total equity and liabilities X
2. Share capital
Statement of financial position. as at …
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It is necessary to be able to distinguish between the following types of

share capital: Journal entry
(a) Authorise share capital: Maximum number shares the company may
issue. Dr Cr
(b) Issued share capital: Number of shares actually issued to the RM RM
shareholders. Bank 100,000
(c) Called up share capital: The amount of issued share capital the Share capital 100,000
company has asked shareholders to pay for to date. (Amount received from issuance of 100,000 ordinary shares at RM1
(d) Paid up capital: Amount of called up share capital which has been each)
paid for.

2.1 Type of shares Statement of financial position(extract) as at a January 20x6.

The two types of commonly encountered are ordinary shares and Current assets RM
preference shares. Cash and cash equivalents 100,000

Ordinary shares Preference shares Equity

3. Equity shareholders Fixed rate of returns Share capital 100,000
Ordinary shareholders effectively Receive dividend in priority to
own business ordinary shareholders 3.2 Bonus issue
Usually have voting rights Do not usually have voting rights
No rights to fixed dividend, receive On winding up, receive capital in The issuance of bonus shares or scrip shares are given free to its existing
what directors decide to pay priority shareholders.
Holder entitles to all profit left after Can be redeemable at a certain date,
payment of any preference dividend or irredeemable 3.2.1Purpose of bonus issue:
Share capital: Accounting treatment It is normally recommended when the company has large retained
earnings or other revenue reserves, but does not want to or is unable to
3.1 Issue of new shares distribute them in the form of cash dividends due to the company’s
dividend policy or due to statutory regulations.
Activity 1:
Rab Co started business on 1 January 20x6 issuing 100,000 ordinary Another purpose of bonus issue is to make share price more “affordable”
shares of RM1each per share. therefore improving liquidity of the share. If the share price is too high, it
would discourage buying interest especially from retail investors.
Show how this issue of shares would be accounted for and what the equity Although bonus issue does not bring monetary value directly, investors
section of the statement of financial position would look like immediately always treat bonus issue as a good news. This is because it is generally
after the issue. deemed that company will perform bonus issue only when management
Solution:
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thinks that there is not enough transaction volume to reflect value of a RM RM

stock on its share price. (1) Retained earnings 175,000
Bonus issue 175,000
The issue of bonus shares does not involve any outflow of funds. [(RM700,000x 1/4) x RM1]
However, there is a dilution in the net asset value of the shares and
(Being bonus issue by capitalised )
company share price also after the bonus issue

Activity 2: Bonus issue (2) Bonus issue 175,000

Ordinary share 175,000
The extract of statement of financial position for Ice-cream Bhd. as at 31 (Ordinary share increased by the bonus issue)
December 20x1 is as follows:
(c ) Statement of financial position (extract) as at 1 January 20x2
RM RM
Capital and reserves Capital and reserves
700,000 Ordinary share 700,000 875,000 Ordinary shares (700,000 + 175,000) 875,000
Reserves
Reserves
Retained earnings 810,700 -
1,510,700 Retained earnings (810,700 - 175,000) 635,700
1,510,700
On 1 January 202x, Ice-cream Bhd. declared a 1 for 4 bonus issues.
3.3 Right issue
Required:
A right issue is an issue of share for cash (unlike bonus issue) to existing
(a) Calculate how many units of ordinary share will be issued from the shareholders for less than their market value.
bonus issue exercise?
(b) Show the necessary journal entries for the bonus issue. 3.3.1 Purpose of right issue
(c) Prepare the statement of financial position (extract) of Ice-cream Bhd. A company may wish to raise additional capital from its’ existing to
immediately after the bonus issue. finance its expansion programme, to repay borrowings, etc.

Solution: Advantages:
(i) Most cost effective way for the company to raise fund than a
(a) 700,000 x ¼= 175,000 units of bonus issue fresh issue to the public.
(ii) A more time efficient way to issue share.
(b) Journal entries (iii) If all rights are taken up, shareholders will maintain their existing
(i) Description Debit Credit percentage shareholding.
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(iv) As shares offered at below market value, shareholders are more likely (d) Prepare the statement of financial position (extract) of ABC.
to buy them. immediately after the right issue.

Disadvantages: Solution:
(i) Lack of shareholder interest may reflect badly on the company
(ii) Unwelcome predators may try to acquire shares where not all rights are (a) Ordinary share will be issued from right issue exercise:
taken up. 100,000 x 2/5 = 40,000 units
(iii) Effect on future dividend policy as company will have to issue more
shares under the rights issue than it would have under a fresh issue to (b) Fund expected to obtained from right issue = 40,000 x
the public. RM1.50=RM60,000
(iv) Will cause the share price to fall as shares are issued at below market
value. (c) Journal entry

Dr Cr
Activity 3: Right Issue RM RM
Bank 60,000
ABC Co make a right issue on 2 for 5 basis. The right issue price is RM1.50 Right issue 60,000
which is lower than marker price RM1.85. All the shareholders take up their ( Amount received from right issue exercise)
rights. RM RM
Before the right issue, Rab Co has 100,000 ordinary share in issued. Right issue 60,000
The following statement of financial statement extract shows the position Ordinary share capital 60,000
before issue: (Ordinary share increased by the right issue)

ABC Co.
Statement of financial position(extract) as at a January 20x6. (d)
ABC
Equity RM Statement of financial position(extract) as at ….
100,000 ordinary share capital 185,000
Equity RM
Retained earnings 230,000
140,000 ordinary share capital (185+60) 245,000
Required: Retained earnings 230,000

(a) Calculate how many units of ordinary share will be issued from this
right I issue exercise?
(b) How much fund would be raised from this right issue exercise? 3.4 Preference shares
(c) Show the necessary journal entries for the right issue.
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There are 2 types of preference shares:

10,000 ordinary share of RM1 each
(i) Redeemable preference shares: 10,000 8% redeemable preference share RM2 each
This type of shares behave like debts/ borrowings because they 20,000 5% irredeemable preference share of RM1.5 each
contain an obligation to redeem the share upon maturity. Therefore,
they should be treated as non- current liability (if it maturity ABC made a profit of RM50,000 during the year. Retained earnings at the
more than 1 year). Dividend of this share should be treated as beginning of the year were RM25,000The company declared a dividend of 10
finance cost. cents per ordinary share at the end of the year.

(ii) Irredeemable preference shares: Required:

It contains no obligation so should be treated as equity. Ie in the same
way as ordinary shares. The dividends should be treated as an
appropriation of profit.
4. Reserve
The following reserves are commonly found in the company accounts:
(a) Share premium (not applicable in Malaysia)
(b) General reserve (normally transfer from retained earnings)
(c) revaluation reserves (only can be used to off-set revaluation loss)
(d) Retained earnings
5. Dividends
(a) Calculate the dividend amount payable for each type of shares.
(b) Prepare a journal entry for the dividend paid.
extract statements of financial position on the equity section?
(c) Show the movement in the retained earnings for ABC for the year ended
31 December 20x1
Solution:
(a) Dividend amount payable
Ordinary share dividend = 10,000 units x 10c= RM1,000
Redeemable preference shares dividend = RM40,000 x 8%= RM3,200
Irredeemable preference shares dividend = RM30,000 x 5%= RM1,500

Dividend is a distribution of retained earnings to owners/ shareholders. (b)

A company may pay dividend in two stages: Journal entry

(i) interim (mid-year)
(ii)Final (year end) Debit Credit
RM RM
(1) Retained earnings 1,000
Cash/ Dividend payable 1,000
(pay a dividend of 10 cents per ordinary share)
Activity 4: Dividend
(2) Finance cost 3,200
ABC company has the following types of share issued since incorporation. Cash/ interest payable 3,200
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(pay a 8% dividend to redeemable means the company will have to pay interest 10% on the RMRM500,000
shareholders) borrow each year. The capital amount of RM500,00 will be repaid in
20x6.
(3) Retained earnings 1,500
Cash/ Dividend payable 1,500 Activity 5: Debenture
(pay a 5% dividend to irredeemable
shareholders) DEF Co issue a RM50,000 10% debenture on 1 April 20x3. The
debenture’s maturity date is on 30 June 20x8. The debenture
interest is payable annually to the debenture holders.
(c) ABC Co Reconciliation of movement in retained earnings for the year
ended 31 December 20x1. DEF financial year end is on 31 December 20x3.

Required:
RM RM
(i) Calculate the debenture interest payable for the year ended 31
Retained earnings at 1 January 20x1 25,000
December 20x3.
Profit for the year 50,000
Dividend: (ii) Prepare a statement of profit or loss (extract) for the year ended 31
Ordinary shares (1,000) December 20x3. Only share the finance cost.
Irredeemable preference shares (1,500) (2,500)
Retained earnings at 31 December 20x1 72,500 (iii) Prepare a statement of financial position (extract) as at 31
December 20x3.
Why redeemable preference shares dividend is not shown in the movement in
the retained earnings?
Solution:
Redeemable preference shares dividend is accounted as finance cost, it will be
charges to statement of profit or loss. (i) Interest payable for the year ended 31 December 20x3.

6. Long term borrowings 500,000 x 10% x 9/12 = RM37,500

A company may choose to raise finance by issuing shares (equity).

Alternatively, it can raise fund by issuing debt.
One way of raising long term finance is for a company to issue loan notes
(also called loan stock or debentures).

These loan usually carry a fixed rate of interest and have a pre-determined (ii)
redemption date, for example, RM500,000 10% debenture 2-x6. This DEF
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Statement of Profit or Loss for the year ended 31 December 20x3 period. After the year, Inland Revenue Board will finalised the actual tax
RM'000 amount to be paid. Companies will then make the over or under tax
provision after the year end.
Profit from operations X
Finance costs (25,000)
Profit before tax X Activity 6: Income tax

DEF Lauren Bhd. has a year end of December.

Statement of financial position. as at 31 Dec 20x3
RM When preparing its financial year statements for the year ended 31
Non-current liabilities December 20x5, Lauren estimated that its income tax payable would be
Long-term borrowings 500,000 RM72,000 for the year 20x5 and start paying tax instalment of RM6,000
each month starting from 1 February 20x5.
Current liabilities
Interest payable 12,500 Required:

7. Income taxes Record the tax entries for the year ended 32 December 20x5 in the
ledger account.
Companies must pay income tax on their profits. This tax is payable after
the end of the financial year and so the financial statement will include an
accrual for the directors’ best estimate of the tax due on the profit for the Tax payable
period. 20x5 RM 20x5 RM
Feb- 31- 72,00
The tax is shown as an expenses in the statement of profit or loss and a Dec Bank (6000 x 11) 66,000 Dec Tax expenses 0
current liability in the statement of financial position and will be
Balance c/d 6,000
accounted as follows:
72,00
72,000 0
Dr Income tax expenses (SOPL)
Cr Current tax payable (SOFP)

Often, the actual amount of tax paid will be different from the amount that Tax expenses
was recorded in the financial statement. 20x5 RM 20x5 RM
This over or under provision is simply adjusted in the next financial 31-Dec Tax payable 72,000 31-Dec SOPL 72,000
statement.
In Malaysia tax legislation, all companies in Malaysia are required to pay
tax in advance (by instalment) based on the estimated profit for the
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8. Comparison of sole trader and company (Extracted from BPP FFA/FA

workbook)
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