DPA30053

ACKNOWLEDGEMENT

Alhamdulillah, praise and thanks to Allah Subhanahu wa Ta’ala, for all the
graces and blessings that provide health and wisdom to me for realizing my
dream to produce this book. Shalawat and Salam to Rasulullah SAW,
hopefully His syafa’at will be abundant in the Hereafter.

May Allah bless me with the jari’ah for the effort as well as to those whom have
either directly or indirectly contributed to the contents of this note book. I would
like to thank my family whom have been understanding and my colleagues from
Commerce Department of Politeknik Merlimau especially Noor Hafizah Hassan
and Rusmaini Ramly for being a great team throughout the years we have been
teaching Financial Accounting 3 together. The guidance, comments and
motivational words are very much appreciated.

The author is aware that the preparation of this note book is still far from
perfection. Therefore, criticism and suggestions are expected as a material
improvement in the foreseeable future. Hopefully, this note book is useful for
all parties. Thank you.

Siti Najdah Bt Mohd Nor
Politeknik Merlimau,
December 2020

PREFACE

DPA30053 NOTE BOOK: 1st Series is a compact note book for students of
Diploma in Accountancy from Politeknik taking up FINANCIAL ACCOUNTING
3(DPA30053). It is part of my effort to enhance the student’s engagement and
easy reference in Financial Accounting 3. Therefore, this note book might come
in handy for quick reference for both lecturer and students during lecture or
revision.

Financial Accounting 3 (DPA30053) was first introduced during semester June
2020 with almost 80% of its syllabus were different from the previous Financial
Accounting 3. Therefore, several reference books and other medium of
references were being sought after by the author to ensure the contents could
be delivered to students clearly.

The book is written with an easy to understand in mind and cater the contents
as stipulated in the syllabus, hence given the thought of the simpler, the better.
There are some examples and questions at the end of each chapter.

Siti Najdah Mohd Nor
Lecturer
Politeknik Merlimau

Table of Contents
LIST OF TABLE........................................................................................................................... iii
LIST OF FIGURE......................................................................................................................... iii
MFRS 138: INTANGIBLE ASSETS ................................................................................................... 2
1.0 Introduction ........................................................................................................................ 2
1.1 Definition ............................................................................................................................ 3
1.2 Tangible vs Intangible Assets ......................................................................................... 6
1.3 Initial Recognition Criteria.............................................................................................. 7
1.3.2 Internally Generated Intangibles............................................................................... 9
1.4 Initial Measurement of Intangible Assets.................................................................... 12
1.4.1 Initial cost of Intangible Assets includes: ................................................................ 12
1.4.2 Useful life of Intangible Asset .................................................................................. 13
1.4.3 Capitalised vs Expenses............................................................................................ 15
1.4.4 Amortization .................................................................................................................. 16
1.5 Presentation of Intangible Assets in Financial Statements......................................... 18
..................................................................................................................................................... 22
2.1 terminology In understanding an equity .................................................................... 23
2.2 List of terms used in connection with share capital :.................................................. 26
2.3 Issuance of Shares......................................................................................................... 26
2.4 Methods of payment .................................................................................................... 28
2.4.1 The journal entries for each transaction is as below.............................................. 28
2.4.2 Extract of Statement of Financial Position .............................................................. 30
Question 1:.............................................................................................................................. 32
Question 2:.............................................................................................................................. 32
Question 3:.............................................................................................................................. 33
Question 4:.............................................................................................................................. 33
2.5 Forfeiture of shares and reissuance of forfeited shares ............................................. 34
2.6 The nature of Bonus Share, Pre-Emptive Right to New Shares (Right Issue) and
Conversion of Preference shares ........................................................................................... 38

i

QUESTION 1 ............................................................................................................................ 42
QUESTION 2: ........................................................................................................................... 43
QUESTION 3: .......................................................................................................................... 44
QUESTION 4: ........................................................................................................................... 45
QUESTION 5: ........................................................................................................................... 46
QUESTION 6: ........................................................................................................................... 47
QUESTION 7: ........................................................................................................................... 48
QUESTION 8: ........................................................................................................................... 49
QUESTION 9: ........................................................................................................................... 50
QUESTION 10: ......................................................................................................................... 51
QUESTION 11: ......................................................................................................................... 52
QUESTION 12: ......................................................................................................................... 53
QUESTION 13: ......................................................................................................................... 54

ii

LIST OF TABLE
Table 1 : Examples activities of Research and Development..............................................10
Table 2 : Illustrate the differences between them for your quick reference .....................25
Table 3 :Pro forma journal entries ......................................................................................34
Table 4 : Calculating transactions before writing the journal.............................................36
Table 5 : Journal...................................................................................................................37

LIST OF FIGURE
Figure 1 : Intangible Asset ......................................................................................................4
Figure 2 :Difference between tangible and intangible assets................................................6
Figure 3 : illustrate the recognition criteria for your quick reference ....................................7

iii

Topic 1

MFRS 138:
INTANGIBLE ASSETS

LEARNING OUTCOMES

At the end of this chapter, students should be able to:

 Understand the Meaning and Objective of Intangible assets
 Differentiate between Tangible and Intangible assets
 Understand the recognition criteria
 Compute the Initial cost of the Intangible assets
 Calculate the Measurement of Intangible assets including the ammortization
 Present in financial statements properly

1

MFRS 138: INTANGIBLE ASSETS

1.0 INTRODUCTION
In this topic, we will learn about intangible assets. You might have come across the term
“intangible asset” during the previous Financial Accounting course. The implementation of
intangible assets in Malaysia is stipulated in MFRS 138 Intangible Assets, which has been
issued by Malaysian Accounting Standard Board (MASB). The objective of the Standard is to
prescribe the accounting treatment for intangible assets that are not dealt with specifically
in another Standard. According to the Standard, an entity could recognize an expenditure as
intangible assets, only if specified criteria are met. The standard also specifies how to
measure the carrying amount of intangible assets and requires specified disclosures about
intangible assets.
Therefore to adapt with the standard and requirement from the syllabus, this topic will give
notes on the definition of Intangible assets, what are the differences with tangible assets, the
initial recognition criteria, how to measure the tangible assets and recording them in the
accounts and lastly how to present them in the financial statement.
For further reading and understanding on MFRS138 Intangible Assets, you may scan this QR
Code:

2

1.1 DEFINITION

INTANGIBLE ASSET is an identifiable non-monetary asset without physical substance.

Acronym as ICE:

* Identifiable (I)

* Control (C)

* Future Economic benefits (E)

Let’s explore the definition

 Identifiable

Intangibles that have been recognized at the date of acquisition. Separable or arises from
contractual or other legal rights. Ex; technology patent owned by an acquirer that has been
licensed to others for use with an exchange for specified percentage of revenue.

Extracted from Para 12 MFRS 138, an asset is identifiable if it either:

(a) is separable, ie is capable of being separated or divided from the entity and sold,
transferred, licensed, rented or exchanged, either individually or together with a related
contract, identifiable asset or liability, regardless of whether the entity intends to do so; or

(b) arises from contractual or other legal rights, regardless of whether those rights are
transferable or separable from the entity or from other rights and obligations.

 Entity control

An asset controlled by an entity as a results of past events. Ex: the knowledge is protected by
legal rights such as copyrights.

Extracted from Para 13 MFRS 138, an entity control an asset if the entity has the power to
obtain the future economic benefits flowing from the underlying resource and to restrict the
access of others to those benefits. The capacity of an entity to control the future economic
benefits from an intangible asset would normally stem from legal rights that are enforceable
in a court of law.

In the absence of legal rights, it is more difficult to demonstrate control. However, legal
enforceability of a right is not a necessary condition for control because an entity may be able
to control the future economic benefits in some other way.

 Future economic benefit

Revenue from the sale of products or services, cost savings, or other benefits resulting from
the use of the asset by the entity. Eg: the use of intellectual property in a production process
may reduce future production costs rather than increase future revenues.

3

Extracted from Para 17 MFRS 138, the future economic benefits flowing from an intangible
asset may include revenue from the sale of products or services, cost savings, or other
benefits resulting from the use of the asset by the entity. For example, the use of intellectual
property in a production process may reduce future production costs rather than increase
future revenues.

Figure 1: Intangible Asset

Let’s see how much you understand
1. Which of the following is a TRUE statement of an intangible asset?
a. It is not physical in nature
b. Goodwill is one type
c. It may hold value for a specific time period.
d. All answers are correct.

2. Which of the following assets is not an intangible asset?
a. Inventory
b. Goodwill
c. Brand name
d. Patent

3. Which of the following is the objective of MFRS 138?
a. To prescribe the accounting treatment for intangible assets that are dealt with specifically

in another Standard
b. To specify how to measure the fair value of intangible assets
c. To specify disclosure requirements about the intangible assets
d. All of the above

4

4. Which one of the asset below does not qualify as intangible asset?
a. Computer software
b. Laptop
c. Patent
d. Registered patent
5. The definition of an intangible asset comprises:
(i) identifiable
(ii) control over a resource
(iii) existence of future benefits
(iv) residual value
a. i, ii and iii
b. i and ii only
c. i and iii only
d. ii,iii and iv

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1.2 TANGIBLE VS INTANGIBLE ASSETS

We have learn from the Financial Accounting 1 (DPA30033) that there are 2 type of assets,
which are called as tangible and intangible assets. Tangible assets are physical assets or
property owned by a company, such as computer equipment. Tangible assets are the main
type of assets that companies use to produce their product and service.

On the other hand, intangible assets don't physically exist, yet are they have a monetary value
since they represent potential revenue. A type of an intangible asset could be a copyright to
a song.The record company that owns the copyright would get paid a royalty each time the
song is played. (Chris B.Murphy, Investopedia.com, 2020)

Tangible Intangible

Tangible assets are typically physical assets Intangible assets are non-physical assets
or property owned by a company, such as that have a monetary value since they

equipment, buildings, and inventory. represent potential revenue.

Entity use tangible assets such as plant and Entitiy need intangible assets such as
machineries to assist during the operation patented brand name as it wouldn't be
nearly as successful if it not for the money
of producing their product and service.
made through brand recognition

Tangible assets can be damaged by naturally Intangible assets are the non-physical
occurring incidence since they are physical assets that add to a company's future

assets. value or worth

Figure 2:Difference between tangible and intangible assets

From the diagram above, there are huge gap between tangible and intangible assets.
Therefore it is very important to understand the recognition for intangible assets, before we
could proceed with the measurement and later, how the intangible assets should be
disclosed in the financial statements.

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1.3 INITIAL RECOGNITION CRITERIA

1.3.1 Para 18 of MFRS138 has stated that, the recognition of an item as an intangible

asset requires an entity to prove that the item meets these conditions:

(i) The definition of an intangible asset (this has been explained in the earlier part of
note)
(ii) The recognition criteria
An intangible asset shall be recognized if, and only if:

(a) it is probable that the expected future economic benefits that are attributable to the asset
will flow to the entity; and
An entity shall assess the probability of expected future economic benefits using reasonable
and supportable assumptions that represent management’s best estimate of the set of
economic conditions that will exist over the useful life of the asset.
(b) the cost of the asset can be measured reliably.
An entity uses judgement to assess the degree of certainty attached to the flow of future
economic benefits that are attributable to the use of the asset on the basis of the evidence
available at the time of initial recognition, giving greater weight to external evidence.
(Para 21-23, MFRS 138)

Probable that the Recognition Cost or fair value of the
expected future economic criteria asset can be measured
benefits attributable to the
reliably
asset would flow to the

entity

Figure 3: Illustrate the recognition criteria for your quick reference

7

Let’s see how much you understand
Q1. An item is recognized as an intangible asset if it meets these 2 categories; the
definition and recognition criteria. Therefore you are required to choose which qualities the
intangibles assets should have. (Choose 3 qualities):
a) identifiable, uncontrollable and future economic benefits
b) identifiability, control and futuristic design
c) identity of business owner, control and future economic benefits
d) identifiability, control and future economic benefits
Q2. The recognition criteria are met when:
i- the cost is uncountable by the company but yet can be recognize
ii- the longer useful life of the item
iii- It is probable that the expected future economic benefits that are attributable to the
asset will flow to the entity;
iv- the cost of the asset can be measured reliably
Choose one or more statement above for CORRECT answer.

8

1.3.2 INTERNALLY GENERATED INTANGIBLES
Paragraphs 52-67 of MFRS138, provide the requirements and guidance that classify the
generation of internally generated assets into:

a) Research phase
b) Development phase

These two phases have to be distinguished clearly because to create an intangible asset, if an
entity cannot clearly identify research phase from the development phase of an internal
project, then the expenditures on that project were treated as incurred in the research phase
only.

Research and Development (R&D)
R&D refer to expenditures incurred prior to the start of commercial production. It is typical
for companies to undertake R&D activities to develop products and processes that are later
patented to monopoly the use, manufacture, or sale of the product or processes. (Financial
accounting and reporting 2, Oxford, 2nd edition)
How to distinguish the costs between Research and Development?
Research occurs when a company’s R&D team tests the viability of a potential product. The
process during research phase may include the work done in discovering new sciences that
can be used to create new products.
Development portion comes after the research and is the act of turning the discovered
science into a useful product that the company can market and sell (Investopedia.com)
MFRS 138 requires all costs incurred from research phase to be recognized as Expenses (para.
54), hence costs incurred from development phase shall be recognized as Intangible Assets
(para. 57) if the conditions of the process conform to the recognition criteria; able to obtain
future economic benefits and the cost could be measured reliably are met.

9

In Table 1 , the examples of research and development activities are listed and the
accounting treatment for each activities as discussed above is summarized for your easy

reference.

Table 1 : Examples activities of Research and Development

Phase Examples of activities Accounting treatment/
Presentation

Research  Activities aimed at obtaining new Expenses /
knowledge Profit & Loss item

 Searching for, evaluation and final
selection of, applications of research findings or
other knowledge

 Searching for alternatives for materials,
devices, products, processes, systems or services

 Formulating, design, evaluation and final
selection of possible alternatives for new or
improved materials, devices, products, processes,
systems or services

Development  Designing, constructing and testing of pre- Capitalized as Intangible
production or pre-use prototypes and models Assets (if the recognition
criteria are met)/
 Designing of tools, jigs, moulds and dies
involving new technology Balance Sheet

 Designing, constructing and operating of a
pilot plant that is not of a scale economically
feasible for commercial production

 Designing, construction and testing of a
chosen alternative for new or improved materials,
devices, products, processes, systems or services

Source: MFRS 138, MASB (Para. 56 & 59)

10

Let’s see how much you understand

Question:

The Research and Development (R&D) activities in Pisyo Berhad has commenced a project to
design an innovative way to save the usage of air conditioning system for homes and offices.
Among the activities include the following:

1. Jan 2020: Paid RM 185,000 on salaries of a company engineers and consultants who
conducted basic test to existing filters available in the market.

Research Development

2. Apr 2020: The basic model, which was developed in March was found to be ineffective
in resolving issues related to existing filters.

Research Development

3. June 2020: Spent RM155,000 on revising the filtration process and incorporation
SPRING360 in the filtering system design.

Research Development

4. August 2020: Developed a prototype of the filtration system tested it with a variety
of air conditioner models. Cost incurred were RM72,000. By end of August, the filtration
system had proven successful.

Research Development

You are required to identify each expenditures activity above whether it can be classified
as Research or Development?

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1.4 INITIAL MEASUREMENT OF INTANGIBLE ASSETS

1.4.1 INITIAL COST OF INTANGIBLE ASSETS INCLUDES:

a) Purchase price

b) Cost directly attributable during purchasing

MFRS 138 has outlined that intangible assets are initially measured at cost. If the assets were
acquired from other parties, then the cost to be recognized as intangible assets should
include the purchase price together with any directly attributable costs.

The cost of all other intangible assets developed internally should be charged to expense
in the period incurred. After the initial recognition, an entity shall choose either the cost
model or the revaluation model as its accounting policy.

Example 1

Zoom Malaysia Bhd has been granted a licence by the government of Malaysia to operate the
LRT from JB to Singapore for 15 years, beginning from 1 January 2020. In relation to the licence,
Zoom Malaysia Bhd had to incur legal and other administrative fees of RM210, 000. The fair value
of a similar licence on 1 January 2020 is RM1 million.

Solution:
On 1 January 2020, the company can choose to record the licence
granted by the government either at:
1. cost of RM210,000

1/1/2020 210,000
Dr Licence
Cr Cash 210,000

2. at its fair value of RM1,000,000 1,000,000
1/1/2020
Dr Licence Cash 210,000
Cr 790,000

Deferred revenue

Explanation:
I. Recording acquisition of license/intangible at cost
II. Capitalising the direct attributable costs

III. Since government awarded the license, the cost can be written off against asset or deferred
revenue

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1.4.2 USEFUL LIFE OF INTANGIBLE ASSET

Para. 88-96 MFRS 138 covers the useful life of intangible assets. The useful life of intangible
assets is the duration it contributes to your business's value. For example, a patent that lasts
20 years would have a useful life of 20 years. An entity shall assess whether the useful life of
an intangible asset is finite1 or indefinite2. The accounting for an intangible asset is based on
its useful life. Therefore it is important to differentiate between finite and indefinite because
the accounting treatment is different:
1) an intangible asset with a finite useful life is amortised (MFRS138 para. 97–106),
2) an intangible asset with an indefinite useful life is not amortised (MFRS138 para. 107–
110)

Accounting treatment
The accounting for an intangible asset is to record the asset as a long-term
asset and amortize the asset over its useful life, along with regular impairment reviews.
The accounting treatment is essentially the same as for other types of fixed assets. There
are many factors in determining the useful life of an intangible assets, which includes:
 the expected usage of the asset by the entity and whether the asset could be managed
efficiently by another management team
 typical product life cycles for the asset and public information on estimates of useful lives
of similar assets that are used in a similar way
 technical, technological, commercial or other types of obsolescence

 the stability of the industry in which the asset operates and changes in the market
demand for the products or services output from the asset
 expected actions by competitors or potential competitors
 the level of maintenance expenditure required to obtain the expected future economic
benefits from the asset and the entity’s ability and intention to reach such a level
 the period of control over the asset and legal or similar limits on the use of the asset,
such as the expiry dates of related leases
 whether the useful life of the asset is dependent on the useful life of other assets of the
entity.

1. finite, the length of, or number of production or similar units constituting, that useful life
2. indefinite, no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.

13

Let’s see how much you understand

Question 1: Ross Bhd acquired the trademark for a leading consumer product. The
trademark has a remaining legal life of 5 years, but is renewable every 10 years at little cost.
Ross Bhd intends to renew the trademark continuously and evidence supports its ability to
do so. An analysis of (a) product life cycle studies, (b) market, competitive and environmental
trends, and (c) brand extension opportunities provides evidence that the trademarked
product will generate net cash inflows for Ross Bhd for an indefinite period.
Required: Discuss the accounting treatment for the trademark. Provide explanations for your
answer.

Answer and Explanation
Ross Bhd. needs to capitalize the trademark as its asset, as the trademark is a resource of the
entity that will bring future benefit to the entity. It is an asset because the entity has control
through the contractual right and because it expects to generate future economic benefits.
The trademark is to be recognized as an intangible asset, as it has no physical features.
Further, the trademark satisfies the recognition criteria of intangible assets. The asset
(license) is an intangible asset as it is non-monetary (i.e. it is neither currency held nor an
asset receivable in a fixed or determinable amount of money), it does not have physical
substance (because it is a right) and is identifiable (because it arises from a contractual right).
The recognition is to be initially made at cost. Also, as the useful life is indefinite:
(i) It is not amortized
(ii) It is tested for impairment annually or whenever there is an indication of impairment,
(iii) The useful life is reassessed annually.

Source of question: financial accounting and reporting 2nd edition

14

1.4.3 CAPITALISED VS EXPENSES

In determining whether the cost of development expenditure should be capitalized as
Intangible asset or to be expensed off, then we must look for the recognition criteria as
discussed in ‘Development phase’ (MFRS 138 para. 57-58).

The amount of development expenditure shall be capitalized if:

 the technical feasibility of completing the intangible asset so that it will be available for
use or sale.
 its intention to complete the intangible asset and use or sell it.
 its ability to use or sell the intangible asset.
 how the intangible asset will generate probable future economic benefits. Among other
things, the entity can demonstrate the existence of a market for the output of the intangible
asset or the intangible asset itself or, if it is to be used internally, the usefulness of the
intangible asset.
 the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.
 its ability to measure reliably the expenditure attributable to the intangible asset during its
development.

Each development project must be reviewed at the end of each accounting period to ensure
that the recognition criteria are still met. If the criteria are no longer met, then the previously
capitalised costs must be written off to the statement of comprehensive income
immediately.

Let’s see how much you understand

Question:

During its first year of operation till December 2019, Nurtizen Bhd has invested huge amount
in R&D activities, the cost involved was RM96,000. Due to that, the company has successfully
produced 2 types of perfume, as a result of converting lavender extract to perfume which are
suitable for male and female. As a result of R&D, the expenditures for BeautyNur perfume
was RM240,000 and the company has expected the sales could be commenced on 1 June
2019. The sales forecast has expected to bring in steady revenues during a 5-year period,
before being replaced with a new product.

Required: State the treatment for expenditures and determine the amount of development
expenditure that should be capitalized by Nurtizen Bhd as at 31 December 2019

15

Solution and explanation

Cost Description Accounting treatment
RM96,000 Cost of the processes to All of these costs are expensed as incurred.
convert lavender extract These are costs incurred during the research
phase, as there is no commercial feasibility as yet
BeautyNur The R&D expenditures for (there are no products that can be commercially
perfume the perfume was sold.)
RM240,000. Commercial The costs from the project are capitalized from
production and sales the period when the project meets the
commenced on 1 June 2018. recognition criteria of intangible assets arising
The product is expected to from the development activity until the period
produce steady revenues before the start of commercial production of the
during a five-year period, asset.
before being replaced with a
new product. Evidence In this case, the costs that can be capitalized for
indicates that the company the financial year 2018 is RM240,000 being the
has adequate existing R&D costs that are incurred during the
resources to achieve this. development stage.

Further, the development cost is amortized to 5
years being the period when the company
expects to get benefits from the perfume that is
developed with the development cost of
RM240,000.

Source of question: financial accounting and reporting 2nd edition

1.4.4 AMORTIZATION

A tangible non-current asset, e.g. machinery, is capitalised and then depreciated over its
useful life. Similarly, the cost of the development expenditure should be amortised over the
useful life. Therefore, the cost of the development expenditure is matched against the
revenue it produces.

If an intangible asset will continue to provide economic value without deterioration over
time, then it should not be amortized. Instead, its value should be periodically reviewed and
adjusted with an impairment. Goodwill, for example, is an intangible asset that should
never be amortized.

Amortization must only begin when the asset is available for use (hence matching the
income and expenditure to the period in which it relates). It is an expense in the statement
of comprehensive income: -

Dr Amortization expense (SOCE)
Cr Accumulated amortization (SOFP)

16

If the intangible asset is considered to have an indefinite useful life, it should not be amortised
but should be subjected to an annual impairment review, i.e. check whether there has been
a fall in the value of the intangible asset.

The depreciable amount of an intangible asset with a finite useful life shall be allocated on a
systematic basis over its useful life. Amortization shall begin when the asset is available for
use, ie when it is in the location and condition necessary for it to be capable of operating in
the manner intended by management. Amortization shall cease at the earlier of the date that
the asset is classified as held for sale (or included in a disposal group that is classified as held
for sale) in accordance with MFRS 5 and the date that the asset is derecognised. The
amortization method used shall reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity.(MFRS138 Para. 97)

How to account for amortization? An intangible assets could be amortized over useful life,
typically straight- line basis.

Example:

A company developed an accounting software solution. The company does not intend to sell
it. Its intended use is for the company staff only. The software cost the company RM10,000
and the company estimates that the software will have a useful life of just three years given
the fast paced nature of software innovation. At the end of three years, the company reckons
that their internal software will have no remaining value. The company will use the straight-
line method to report the amortization of the software.

Accounting treatment:

This software is considered an intangible asset, and it must be amortized over its useful life.
Its residual value is therefore zero.

SOLUTION:

Year Amortization Recorded cost Accumulated Net Asset Value
amortization
expense RM
RM 10,000 – 3,333
RM RM
3,333 =6,667
Yr 1 10,000/3 yr = (3,333 + 3,333) 10,000 – 6,667

3,333 10,000 = 6,667 =3,333
(6,667 + 3,333) 10,000 – 10,000
Yr 2 3,333 10,000
= 10,000 =0
Yr 3 3,333 10,000

17

Journal: Dr (RM) Cr (RM)
3,333 3,333
Particulars 3,333 3,333
Yr 1 3,333 3,333
Amortization expense

Accumulated amortization
Yr 2
Amortization expense

Accumulated amortization
Yr 3
Amortization expense

Accumulated amortization

1.5 PRESENTATION OF INTANGIBLE ASSETS IN FINANCIAL STATEMENTS

An entity shall disclose the following for each class of intangible assets, distinguishing
between internally generated intangible assets and other intangible assets:

(a) whether the useful lives are indefinite or finite and, if finite, the useful lives or the
Amortization rates used;

(b) the amortization methods used for intangible assets with finite useful lives;

(c) the gross carrying amount and any accumulated Amortization (aggregated with
accumulated impairment losses) at the beginning and end of the period;

(d) the line item(s) of the statement of comprehensive income in which any Amortization of
intangible assets is included;

(e) a reconciliation of the carrying amount at the beginning and end of the period

Effect on Assets:

An intangible asset's annual amortization expense reduces its value on the balance sheet/
statement of financial position, which reduces the amount of total assets in
the assets section of the balance sheet. This occurs until the end of the intangible
asset's useful life.

18

Example:
Using the same question previously (page 19-20), the illustration of financial statement will look
like these:

Expenses: Statement of Comprehensive Income RM
Amortization For the year ended Yr1 3,333

Computer software Statement of Financial Position RM
Less: Amortization As at Yr1 10,000
(3,333)
6,667

Expenses: Statement of Comprehensive Income RM
Amortization For the year ended Yr2 3,333

Computer software Statement of Financial Position RM
Less: Amortization As at Yr2 10,000
(6,667)
3,333

Expenses: Statement of Comprehensive Income RM
Amortization For the year ended Yr3 3,333

Computer software Statement of Financial Position RM
Less: Amortization As at Yr3 10,000
(10,000)

0

19

COMPREHENSIVE EXERCISES:

1. My TV has a broadcasting licence which has been acquired 7 years ago at a cost of
RM2.5 million which is renewable every 5 years. The renewal of the licence can be done with
a little cost. No amortization is recognized for the licence. On 1/3/2018, the company has to
sell the licence to Mommies Berhad for RM2 million. Mommies Berhad intends to renew the
licence because it is expected to contribute to the entity’s nett cash flows.

You are required to discuss the related accounting treatment (show journal entries) for both
companies for the financial year ended 31.12.2018

2. The Intangible assets section of Glowy Berhad at 31 December 2019 is as below:

Intangible assets Acquisition Cost Amortization RM
date
Patents 60000 6000 54000
Franchises Jan 2017 48000 19200 28800
Trademarks Jan 2014 50000 10000 40000
Jan 2014

The following is information regarding transactions during the year ended 2018 :

1. 1/1/2018 The trademark has a remaining useful life of only 8 years
2. 2/1/2018 Legal fees paid to solicitors amounted to RM5,000 for defending

the patent against infringement by another company
3. 30/6/2018 The franchise was sold to a competitor for RM45,000
4. Jan – June R&D project namely “towards202” was completed by 30 June 2018

with a total cost of RM300,000. Glowy Bhd has demonstrate
successfully that the cost has meet the recognition criteria as an
intangible asset since it was first started in 2017.
Total cost spent in 2017 was RM180,000 while RM120,000 was
incurred evenly during the 6 month period in 2018.
The development costs are to be amortized over a 10-year useful
life
5. 1/8/2018 RM30,000 has been paid to acquire a patent for a product. The
patent has a remaining legal life of 10 years, but the company
expects to produce and sell the product for only 6 more years

You are required to show journal entries for the transactions including the amortization
expenses for the financial year ended 31.12.2018

20

END OF
CHAPTER

“Education is the most powerful weapon
which you can use to change the world."

(Nelson Mandela)

21

Topic 2

EQUITY SHARES : MFRS 7, MFRS 9,
MFRS 132 (MFRS 17- EFFECTIVE
1.1.2020) & MFRS 139

LEARNING OUTCOMES

At the end of this chapter, students should be able to:
 Understand the general background of the limited companies
 Explain the procedure of issuance of shares
 Understand the methods of payments in the issuance of shares
 Understand the nature of forfeiture of shares and reissuance of

forfeited shares
 Show the redemption of redeemable preference shares
 Differentiate between bonus shares and right issue

22

2.0 INTRODUCTION

A company’s capital may comprise of equity and loan. In this topic, we are focusing on the
equity as we know that most businesses were first started with the capital brought in in the
form of equity shares. The first time a company issues its shares to general public; it is called
Initial Public Offering (IPO). Public companies can only invite the public to subscribe for its
shares in an IPO

2.1 TERMINOLOGY IN UNDERSTANDING AN EQUITY

We have to acknowledge important terminology of equity to understand the equity of an entity.
There are:
a. Classification of companies
b. Companies formation
c. Capital structure
d. Classes of shares

 Classification of companies

There are 3 classes of companies governed by the Companies Act 2016:
1) Companies limited by shares
2) Companies limited by guarantee
3) Unlimited companies. It can be grouped into:

a) Public company
b) Private company
c) Exempt private company
d) Foreign company
e) Investment company

 Companies formation

The following information must be submitted when submitting an application for the
incorporation of a company:
(i) Name
(ii) Public/Private company
(iii) Nature of business
(iv) Address of the registered office
(v) Biodata of each member and director
(vi) Details of class and number of shares taken by the members (for company limited by

shares)
(vii) The amount guaranteed by the members and any other information required by the

Registrar

23

 Capital structure

 The Companies Act 2016 defines an equity share as ‘a share that is not a preference
share’. Capital of the companies comprises of shares invested by the owner who are known
as shareholders.

 Type of Shares:
I. Equity Shares – The holders bear the most risk in the company. They will receive their

share of profits only after the holders of other classes of shares have received the dividend
payment. The dividend payable is not fixed.
II. Preference Shares – The holders did not have any voting rights but enjoy a fixed
amount of dividends, unlike equity shares.

 Classes of shares

A company with different classes of shares is required to state that the company’s share
capital is divided into different classes of shares. They differ in their voting rights, priority to
receive dividend and the return of capital when liquidation.

Type of shares are:

a. Equity shares

All company must have ordinary shares which comprise the bulk of the company’s capital.
It carries the rights to vote and entitled to share in profit for dividend.
Risk takers because when the business failed they can loose their capital.
The rate if dividend paid to ordinary shareholders is not fixed because depend on company’s
level of profits and company’s dividend policy.

b. Preference shares

There are several type of Preference Shares:

1) Cumulative preference shares
The holders can receive a fixed dividend and if do not receive payment in any year, the arrears
can be carried forward and payable in the future.

2) Non Cumulative preference shares
Receive a fixed rate of dividend when company has sufficient profits to declare a dividend.
If the company has insufficient profit, dividend are forfeited and cannot be carried forward.

3) Participating preference shares
Right to receive an additional dividends beyond a specified amount in a distribution as
expressed in the company’s constitution after all the other classes of shareholders have
received their dividends.

24

4) Convertible preference shares
Right to convert preference shares into equity shares.

Table 2 : Illustrate the differences between them for your quick reference

PREFERENCE SHARES ORDINARY SHARES

Right of Dividend Preference dividend is paid Payment of ordinary dividend

Payout before the ordinary dividend amount does not have the priority.

amount (will receive after preference

holder)

Right of Has the priority of capital Has the second priority of capital
Repayment of repayment repayment
Capital Amount

Rate of Dividend The rate is fixed May vary from time to time
depending upon the term and
conditions made by member and
directors (according to company’s
profit)

Dividend Arrears May mount up for these Can’t be mount up in any case
shares

Convertibility The share may be The share can’t be convert to
converted to ordinary share preference share

Market Value Normally does not fluctuate Fluctuates according to market

Fluctuation conditions

Voting Rights Have voting rights only at Have all voting rights

their class meetings and

don’t have other voting

rights

Right of Premium Have right to gain premium Don’t have a right to receive

on on redemption premium on redemption

Redemption

Redeem Ability They are redeemable Not redeemable throughout the

throughout the entire life of entire life of a firm unless a firm

a firm makes a decision to buy back its

shares

25

2.2 LIST OF TERMS USED IN CONNECTION WITH SHARE CAPITAL :

Issued capital
 Part of the nominal capital which has been issued to the public for cash
 Either fully or partly paid
 It is an amount of share capital issued.

 Example; ABC Bhd has issued 3 billion shares at RM3 per share and they all fully
paid up. The issued capital will be RM9 billion.

Called up and Uncalled capital

 Called up is the amount of money that company has called up on the issued capital
in which the subscribers are required to pay within a specified time.
 Hence, called up is the amount that shareholder is required to pay up on the shares
that he has subscribed for.
 On contrary, the uncalled is the amount of money on the issued capital that has
not been called.
 The subscribers are not required to pay up the money yet.
 Example; if a company issued 10 million Ordinary Shares at RM1 each and asked
the shareholders to pay up to 80sen per share. The called-up capital is RM8 million.
Whereas the balance of RM2 million is referred to as uncalled capital.

Paid up and Unpaid capital

 The paid-up capital is the amount that has been paid up.
 Unpaid capital means the amount which has not been paid.

 Example; ABC Bhd has issued 2 million shares at RM1 per share and called up 70
sen per share, and no money was received on 100,000 shares. Therefore the called-up
capital will be RM1.4 million, uncalled capital is RM600,000 and the paid up capital is
RM1,330,000. The unpaid capital is RM70,000.

2.3 ISSUANCE OF SHARES

A company may issue equity shares in either of the following:
1) Pay the full amount of the share price upon application.
2) Pay by means of installments (not a common practice in Malaysia)

a) PAYMENT IN FULL
 Applicants are required to pay full amount of the share price upon application.
 Unsuccessful application for shares will be refunded.
 Successful applicants will be known as shareholders.

26

b) PAYMENT BY INSTALLMENT
 Not common practice in Malaysia and more complex than full payment.
 The share price is collected in the following stages:

1) Applications Applicants are required to pay a part of issue price when they apply


for the shares.

 Applicants not the shareholders.
 The minimum amount payable in each share should not be less than

5% of the nominal account.

2) Allotment

 No allotment should be made unless the sum payable on application

for the shares subscribed has been received by the company.

 On the allotment date, the shares are allotted to successful

applicants. Only when the shares are allotted to the applicants, then they are


considered as shareholders.

 Successful applicants who are allotted the shares will be required to

pay the balance of the issue price as and when the company requires further capital.

3) Call/Calls
 When further funds are required the directors may issue a “letter of call”

on shares that are not fully called up.
 The number of calls may vary:

i) Calls in advance
 Some shareholders may pay for their shares before the call

is made and the money received is credited to a calls in advance account which is treated

as a loan to the company.
 In Statement of Financial Position, calls in advance will be

disclosed as part of the paid up capital.
 Known as current liabilities.

ii) Calls in arrears
 Some shareholders may fail to pay the sum due on calls due

to one reason for another.
 In Statement of Financial Position, it will be deducted from

the issued capital.
 Known as current assets.

27

2.4 METHODS OF PAYMENT

Different methods of payment in the issuance of equity shares means the construction
of journal entries might differ slightly. In full payment upon application, the applicants
have to submit full payment before being able to buy the shares.

In contrast with the installment payment, the applicants need not have to pay the full
payment during the application to buy the shares. Once the applicant has succeeded
during application process, then only the status of an applicant, is known as the
shareholder. During the allotment and call for shares, these shareholders will then have
to pay the amount accordingly.

2.4.1 THE JOURNAL ENTRIES FOR EACH TRANSACTION IS AS BELOW.
a) Payment in FULL upon Application

Dr Cr
xx
Being receipt of application money: xx xx
Bank
Application

Being amount of share transferred after application:

Application xx

Share capital

Example 1:

Assume on July 1, AA Ltd issues 550,000 ordinary shares of out of its authorized capital of
1,000,000 ordinary shares, at a price RM1, and payable in full on application. Journal entry to
record proceed of cash from issuance of shares:

Item Debit (RM) Credit (RM)
Bank 550,000 550,000
Ordinary share capital

28

Example 2:

A Ltd offered for subscription an initial offering of 250,000 ordinary shares of RM1.00 each.
Applications for 260,000 shares were received. The directors rejected applications for 10,000
shares and allotted the shares among the remaining applicants.

Journal entries:

Item Debit (RM) Credit (RM)
Bank (260,000x1.00) 260,000 260,000
Share application

Share application 10,000
Bank (10,000 x1.00)
10,000

Share application 250,000
Ordinary shares capital
250,000

b) Payment by INSTALMENTS upon Application

On receipt of application money: xx
Bank
Application xx

Being refund to unsuccessful applicants: xx
Application
Bank xx

Being surplus application money used as allotment money

Application xx

Allotment xx

Being amount of share transferred on allotment shares

Allotment xx
Share capital
xx

Allotment money received xx
Bank
Allotment xx

On further calls

1st call xx
Share capital
xx

29

2.4.2 EXTRACT OF STATEMENT OF FINANCIAL POSITION

• In the Statement of Financial Position, the calls in advance and arrears will appear as
follows:

Extract of Statement of Financial Position of X Bhd
As at 31.12.20xx

Issued and called up capital RM
Less: Calls in arrears XXX
(XX)
Add: Calls in advance XXX
Paid up capital XX
XXX
 Example of payment in full

X Bhd was incorporated on 2.1.2020 and for subscription Calculation:
an initial offering of 20,000,000 ordinary shares at a price
of RM3 each. Applications for 25,000,000 shares were During application
received. 25,000,000 x RM3
On 31 January 2020, the application was closed and all the = RM75,000,000
money was received. Money received on the
oversubscribed shares was refunded. Allotment shares was Refund of money
completed by 14th February 2020. Because X Bhd initial offering
was 20,000,000 only
Show necessary journal entries and a statement of financial = 5,000,000 x RM3
position upon completion of the above transactions. = RM15,000,000

Solution Dr Cr
Journal entries

2.1.20 No accounting entries

31.1.20 Bank 75,000,000

Application 75,000,000

Application 60,000,000

Ordinary share capital 60,000,000

Application 15,000,000

Bank 15,000,000

Extract from the Statement of Financial Position of X Bhd

As at 14.2.2020

Issued share capital: RM60,000,000
20,000,000 ordinary shares of RM 3-each fully paid

Current asset – Bank RM60,000,000

30

 Example of payment by Installment

SAM Sdn Bhd invited applications for its first issue of 800,000 ordinary shares of
RM1.00 each payable on the following terms:

RM0.70 on application; RM0.25 on allotment; RM0.05 on call

Prepare journal entries to record the above transactions

Suggested Answer:

Item Debit Credit
(RM) (RM)
On receipt of application money
Bank (800,000 unit x 0.70) 560,000
Share Application
Being refund to unsuccessful applications 560,000
Share Application
Bank -
On allotment date -
Bank
Share Application 200,000
Close share application account
Share Application 200,000
Ordinary share
On 1st Call 760,000
1st call (800,000 x 0.05)
Ordinary shares capital 760,000
Receipt of call money
Bank 40,000
1st call
40,000

40,000

40,000

SAM Sdn Bhd

Statement of Financial Position (extract)

Current asset : 800,000
Bank 800,000

Issued share capital:
800,000 ordinary shares fully paid

31

Exercise for SUB-Topic 2

QUESTION 1:

Acer Ltd offered for sale to the public 65,000 ordinary shares at RM1.40 on the
following terms:

On application RM0.40
On allotment RM0.50
On 1st call RM0.30
On 2nd call RM0.20

Applications were received for 70,000 ordinary shares and the directors rejected applications for
5,000 shares. All monies due to allotment and calls on the ordinary shares were duly received.

You are required to:

Prepare journal entries & Statement of Financial Position to record the above transactions

QUESTION 2:

Following are the balances in ordinary shares account and Bank Account in AA Ltd
on 31.12.2018

Ordinary shares account RM25000
Bank Account RM25000

Resolutions are made to issue 50,000 ordinary shares at RM1.00 each as following:

On application 0.40

On allotment 0.40

On call 0.20

All monies were duly collected when due except for a shareholder, En. Jamil with 2,000 shares who
failed to pay the call money.
You are required to:
Prepare journal entries & Statement of Financial Position to record the above
transactions

32

QUESTION 3:

Nikki Ltd has an authorized capital of 300,000 divided into 300,000 shares of ordinary shares
at RM2.50. Overall the share is issued with a payment made as follows:

On application 1.00
On allotment 0.70
On first call 0.60
On second call 0.20

Applications were received for 500,000 shares and the directors have decided to refund the
application for 50,000 shares. The remaining applicants, the application allotted to the two
shares for every three shares applied for. Surplus fund applications submitted by the
successful applicants were not returned, but was offset by the allotment money due.

Calls have been paid in full unless a shareholder who fails to pay the two calls to 4,000 of its
shares. Another shareholder pays his first call, but do not pay a second call on 1,800 shares.

You are required to:

a. Prepare journal entry to record all transactions above.
b. Prepare extract of the Statement of Financial Position after all transactions
complete

Question 4:

SukaSuki Ltd with an authorized capital of 60,000 ordinary shares of RM2 each offered for sale
to the public 40,000 ordinary shares price of RM2.00 on the following terms:

On application RM0.40

On allotment RM0.40

On 1st call RM0.60

On 2nd call RM0.60

Applications were received for 50,000 ordinary shares and the directors resolved that the
shares be allotted on a pro rata basis of four shares for every five shares applied for. All
monies were duly collected when due except for a shareholder with 4,000 shares who paid
the 2nd and final call money at the same time as the 1st call, and another shareholder with
5,000 shares who failed to pay the 2nd call and final call money.

You are required to:

Prepare journal entries & Statement of Financial Position to record the above transactions

33

2.5 FORFEITURE OF SHARES AND REISSUANCE OF FORFEITED SHARES

A company may forfeit shares on which the calls are unpaid after all the formalities regarding
the forfeiture have been observed. In other words, forfeit shares are due to failure in
collecting money from call in arrears. The power to forfeit shares must be provided in Articles
of Association. The forfeit shares may be reissued or not to be reissued.

2.5.1 Reissued of forfeit shares

Forfeited shares may be reissued. These shares may be reissued as fully or partly paid up
shares provided that the total amount received from the defaulter (the original shareholder)
and the new purchaser is equal to at least the nominal value of the forfeited shares.

Table 3 :Pro forma journal entries

Item Debit Credit
(RM) (RM)
Being shares forfeited
Ordinary shares capital xx xx
Forfeited shares

To eliminate Call in arrears xx
Forfeited shares xx
Call in arrears

Reissued forfeited shares xx
Reissued shares xx

Ordinary shares capital

Amount received on the reissue xx
Bank xx

Reissued shares

Surplus collected (different amount of reissued & forfeited shares

Forfeited shares

Reissued shares xx

Ordinary Shares Capital xx

34

Example:

TMS Holding with an authorized capital of 200,000 9% preference shares @ RM1 each and
500,000 Ordinary shares of RM1.20 each has decided to increase its paid up capital. As at 1st
January 2019, the issued RM200,000 Ordinary shares of RM1.20.

On 1st April 2019, the Board of Directors has decided to offer and issue 300,000 Ordinary
shares after having fulfilled all requirements at RM1.20 per share payable as following terms:

On application 30 sen
On allotment 40 sen
On first call 20 sen
On 2nd and final call 30 sen

On 15th May, the application was closed and 400,000 applications have been received. The
directors have decided and agreed on the following:

i. To reject and return 50,000 units shares applied to unsuccessful
applicants
ii. All other applications were reduced proportionately
Balance money from application is used to reduce the allotment money
iii.

All monies were duly received, except from a shareholder name Michael whom hold 3,000
units failed to pay the 2nd call. Even though couple of reminder has been sent, the said
shareholder remained silent. Therefore when the call due on 15th August, the shares were
being forfeited and later reissued to Saloma at RM0.50 each. You are required to:

a. Show journals for all the transaction based on the above situation.
b. Prepare the extract of Statement of Financial Position as at 31st Dec 2019

35

These step-by-step workings are given for your easy reference

Answer:

1st step: Calculate each transaction before writing the journal

Table 4 : Calculating transactions before writing the journal

Transaction Workings Ref
A1
400,000 applications have been 400,000 x RM0.30 (price during application) A2
received. = 120,000
A3*
50,000 units shares were rejected and 50,000 x RM0.30(price during application) A4*
return = 15,000

350,000 units shares were divided into Balance of units:
2 parts: 400,000 – 50,000 = 350,000
i. transferred to OSC and 300,000 x RM0.30 = 90,000 (Issuing unit)
ii. remains in application 50,000 x RM0.30 = 15,000 (Surplus - Balance
money from application)
(if any)

300,000 units shares were allotted 300,000 x RM0.40 = 120,000 less

300,000 units shares were called to Surplus (15,000)
pay (first call)
300,000 units shares were called to Therefore only 105,000 will be paid by AL1
pay (second call), but Michael whom FC1
hold 3,000 units failed to pay the 2nd shareholder during allotment. SC1
call.
Therefore only 300,000 – 3,000 300,000 x RM0.20 SC2
= 297,000 units were paid = 60,000

300,000 x RM0.30 = 90,000 (2nd call amount)
But due to arrears from Michael,
3,000 x RM0.30 = 900 (unpaid)

=RM90,000 – RM900
= RM89,100 were received during 2nd call.

3,000 units of shares were being 3,000 x RM1.20 = RM3,600 F1
forfeited. Forfeited transactions RM900 (from trx during 2nd call, unpaid)
occurred divided to 2:
a. 3,000 from OSC acc
b. Arrears acc

3,000 units later were reissued to 3,000 x RM0.50 R1
Saloma at RM0.50 each =RM1,500 (amount received during the re-
issuance of shares)

Balances from forfeited sh acc and RM2,700 R2
reissue acc were being transferred to RM1,500
OSC as these acc will be closed off

Note: A3 & A4 indicates the workings ONLY. Therefore there will be no journal prepared for these

reference.

36

2nd step: Prepare journal based on workings
Table 5 : Journal

Transaction Dr Cr Ref.
RM RM
Application
120,000 120,000 A1
Bank 15,000 A2
15,000
Share Application (Sh. App) 105,000 105,000 AL1
210,000
Refund Total amt trans
Sh App (50k X0.30) 60,000
Bank 60,000 210,000 fr Sh App to OSC

Allotment 60,000 FC1
Bank 60,000
Sh. App
89,100 90,000 S
Sh App 900 90,000
OSC SC2
Ist call 90,000 SC1

Bank 3600 900 F1
1st call 2700 R1
1st call 1500 R2
Ordinary Share Capital (OSC) 2700 1500
1500
2nd call 4200
Bank
Call in arrears
2nd call

2nd call
OSC

Forfeited
OSC
Call in arrears

Forfeited shares

Reissue
Bank

Reissued Shares

Forfeited Shares
Reissued shares

Ordinary Share Capital

37

TMS Holding
Statement of Financial Position (Extract) As at 31 December 2019

Current Asset: RM
Bank 360,600

Authorised share capital: 200,000
200,000 9% Preference shares 500,000 600,000
800,000
units of Ordinary Shares
360,600
Issued Share Capital:
300,000 units of Ordinary Shares fully paid
(360,000 +4200-3600)

2.6 THE NATURE OF BONUS SHARE, PRE-EMPTIVE RIGHT TO NEW SHARES (RIGHT ISSUE)
AND CONVERSION OF PREFERENCE SHARES

a. Bonus Share

 Issued by the company to existing shareholders free of charge (FOC)
 Issued when company has huge profits (retained earnings) or huge capital
reserves (assets revaluation) and cannot make cash dividend payment
 No effect on corporate assets and shareholders’ equity
 Will diluting the net asset per share and listed price per share as the number
of shares has increased
 The net asset value of the share for the share will decrease after the bonus
issue

For examples:

1) Before bonus issue

The net value of one ordinary share is:

(RM800,000 Ordinary shares) + (RM400,000 Retained profits)= RM1.50
800,000 shares

38

2) After bonus issue

The net value of one ordinary share is:

(RM1,000,000 Ordinary shares)+(RM400,000 Retained profits)= RM1.40 800,000 +
200,000 shares

800,000 X ¼ = 200,000 units

Effect of bonus share given to share holders:

Units of shares increased from 800,000 to 1,000,000 unit of shares But,
The net asset value per shares decreased from RM1.50 to RM1.40

Capitalized reserves above into paid-up ordinary shares
e.g. 1 to 4 bonus share indicates the shareholder of 4 ordinary shares will receive 1
bonus share FOC

b. Right Issue

 Invitation to the existing shareholders to subscribe additional shares
 To raise capital without having to pay a high cost of issuance
 May dilute the listed price of the company share
 Increase shareholders’ equity and total assets (bank)
 Issued at a fixed rate e.g. 1 share offered for 4 shares
 Same recording as ordinary shares
 Price usually less than market price
 Full or installment payment
 The shareholders may take a number of actions:

a) Take up the shares they are eligible for

Example: Miss Dila has 2000 units share in Zen Bhd. If she is eligible the right

to ¼ of her shares, then the right she could exercise is:

¼ X2000 = 500 shares. Therefore Miss Dila could take all 500 units of shares

39

b) Sell the rights to a third party

Using the same example above, Miss Dila could sell all 500 units of shares

c) Renounce the ‘right ‘ in favour of the company, in which case the company
may sell the shares in the open market. This means, Miss Dila could take half and
sell half of her rights.

Example:
Hafizah Berhad, with an issued share capital 100,000 ordinary shares, made a rights
issue to its existing shareholders of one shares for every four shares held at a price
of RM2.50. All the shares offered under the right issue were taken up.

You are required to prepare the journal entries to record the issue of the shares.

100,000 / 4 = 25,000 shares 625,000

¼ X 100,000 = 25,000 625,000

Pay in full

Dr Bank (25,000 x RM2.50)
Cr Ordinary Share Capital

c. Conversion of Preference Shares:

 An entity may issue convertible preference shares with the option for the
holders of these shares to convert them into ordinary shares. The terms of the
conversion such as the conversion rate, whether at the option of the company or
shareholder etc. will be stipulated.

 Examples: 100,000
An extract from the statement of financial position of Emir Bhd 20,000
35,000
as at 1 January 2020:
40
Equity
100,000 ordinary shares, fully paid up
5% 20,000 convertible preference shares
Retained earnings

Four preference shares could be converted into three ordinary shares and on 1
January 2020, all the preference share were converted into ordinary shares

You are required to prepare the journal entries for the conversion and an extract
from the statement of financial position immediately after the conversion.

Dr Convertible preference shares 20,000
Cr Ordinary shares 20,000

An extract from the statement of financial position of Emir Bhd
as at 1 January 2020

Equity:

120,000 ordinary shares, fully paid up 120,000

Retained earnings 35,000

41

COMPREHENSIVE EXERCISES:

QUESTION 1

On the closing day for applications, applications for 400,000 ordinary shares were
received. 100,000 units were refunded.

Estika Berhad has an authorised share capital of 200,000 5% preference shares of RM2.00 each
and 500,000 ordinary shares @RM1.20 each.On 1st January 2020, Board of directors decided to
offer and issue 300,000 units of ordinary shares at the price of RM1.20 per share according
following terms :

On application RM0.50
On allotment RM0.30
On first call RM0.20
On final call RM0.20

All monies duly collected when due except for a shareholder name Elyas with 5,000
shares failed to pay the 2nd call money. The shares has been forfeited and reissue to
new shareholder name Emir at RM0.80.

You are required to:

a) The company does not receive applications equal to the number of shares
offered for subscription, in may be TWO (2) situations;

a.Under subscription,
b. Over subscription.

Describe the two situations stated with suitable example.

b) Show journal for all the transactions based on the above situation.

c) Construct the extract of Statement of Financial Position as at 31st Dec 2020
BEFORE the shares has been forfeited and reissue to a new shareholder.

d) Construct the extract of Statement of Financial Position as at 31st Dec 2020
AFTER the shares has been forfeited and reissue to a new shareholder.

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QUESTION 2:

Energy Sdn. Bhd. has an authorized share capital of 200,000 7% preference shares of RM1.00
each and 550,000 ordinary shares @RM1.40 each. On 30 June 2018, Board of directors decided
to offer and issue 300, 000 units of ordinary shares @ RM1.00 each at the price of RM1.40 per
share according following terms :

On application RM0.30

On allotment RM0.60
On first call RM0.20
On final call RM0.30

On the closing day for applications, applications for 400,000 ordinary shares were received. All
shares were allotted except for applications of 50,000 units were refunded. The balance of
application monies were transferred to the allotment account.

All monies duly collected when due except for a shareholder name Ammar with 10,000 share paid
the 2nd call at the same time as 1st call, and another share holder named Amyra who have 3,000
shares failed to pay the 2nd call money.

A resolution was passed and the shares belongs to Amyra were forfeited. On 1st December 2018,
the 3,000 forfeited shares were reissue as fully paid to Bahrain at RM0.90 each.

You are required to prepare:
i.Journal entries to record the above transactions.

ii.Statement of Financial Position (extract) as at 31 December 2018

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QUESTION 3:

Zamrud Bhd was incorporated with an authorised share capital of 10,000,000 ordinary
shares at RM 1.20 each and 5,000,000 6% preference shares of RM 1 each. On 31
January 2018, the company decided to make an initial offer for sale by making the
following issues:

a) 500,000 6% preference shares at a nominal value. All shares
were fully subscribed and fully paid.
b) 1,000,000 ordinary shares at RM 1.20 each, payable by
instalment on the following terms:

On application 40 sen
On allotment 40 sen
On 1st call and Final call 40 sen

Applications were received for 1,500,000 ordinary shares. The money received on
the oversubscribed shares was refunded.
You are required to:

a. Differentiate the following types of shares:

I. Ordinary shares
II. Preference shares

b. Prepare the journal entries to record the above transactions. (Narrations are not required)

c. Prepare the Statement of Financial Position (extract) immediately after the issuance of
the above shares as at 31 December 2018.

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QUESTION 4:

ABC Berhad has an authorized share capital of 10,000,000 units of ordinary shares of RM2.00 each.
The board of directors agreed for a resolution to issue 2,500,000 units of ordinary shares at the
price of RM2.30 per share. The payment for the issuance of shares were as follows:

On application RM0.60

On allotment RM0.70
On first call RM0.70
On final call RM0.30

On the closing day for applications, applications for 3,520,750 ordinary shares were
received. All shares were allotted except for applications of 20,750 units were refunded.
The surplus money on application will be transferred to the allotment account.

All monies due on applications, allotment and first call were received, together with
those from a shareholder who held 12,600 shares who also paid the final call together
with the first call monies.

The final call was duly paid with the exception of one shareholder who had held 55,000
shares.A resolution was passed and these shares were forfeited. The forfeited shares were
reissued as fully paid for 90 cent each
You are required to prepare:
a. Journal entries to record the above transactions.
b. Statement of Financial Position (extract) after the reissuance of shares.

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