FINANCIAL ACCOUNTING 3

CONTENTS

FOREWORD i

PREFACE ii

ACKNOWLEDGEMENTS iii

ii

CHAPTER 1 ISSUE AND REDEMPTION OF SHARES AND DEBENTURES

1.0. Introduction 1
1.1. Company Formation 1
1.2. Issuance Of Shares 7
1.3. Term Of Payment 11
1.4. Forfeiture Of Shares 13
1.5. Redemption of Redeemable Preference Shares 16
1.6. Differences Of Bonus Shares And Right Issue 20
1.7. Issue Of Debentures 22
23
Questions

CHAPTER 2 INVESTMENT ACCOUNTS 29
30
2.0 Introduction
2.1 Fixed Investment 31
2.2 Ledger Relating To Accrued Interest Receivable and 39
41
Profit/Loss on the Sale of Investment
2.3 Income From Fixed Investment

Questions

CHAPTER 3 CONTRACT ACCOUNTS 46
46
3.0 Introduction 47
3.1 Contract Account 48
3.2 Definition Contract Term 49
3.3 Item of Contract Account 57
3.4 Format of Contract Account

Questions

CHAPTER 4 CONSIGNMENT ACCOUNTS AND BILL OF EXCHANGE

4.0 Introduction 63
4.1 Differentiate between Consignment Business and Normal
64
Business 65
4.2 Characteristics of Consignment 66
4.3 Accounting Procedures 72
4.4 Valuation of Stock on Consignment 76
4.5 Bill of Exchange 77

Questions

CHAPTER 5 BRANCH ACCOUNT 82
82
5.0 Introduction 83
5.1 Branch Account 94
5.2 Accounting System for Branch 89
5.3 Provision for Unrealized Profit 101
5.4 Combines Financial Statement
106
Questions

REFERANCES

REFERANCES

ISSUE AND

REDEMPTION OF SHARE

AND DEBENTURES

EXCHANGE

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 and debentures
 Understand the methods of payment in the issuance of shares
 Understand the nature of forfeiture of shares and reissuance of forfeited shares
 Show the redemption of redeemable of preference shares
 Differentiate between bonus shares and rights issue

1.0 INTRODUCTION

 A limited liability company is a legal entity
formed by registration under The Company
Act, 2016

 A limited liability company is owned by a pool of
shareholders who contribute funds (capital) to the
company. The capital structure of a company
depends on the types of share (debts of equity)
issued by the company.

1.1 COMPANY FORMATION

Memorandum and Articles of Association are legal documents of a company that
required to be lodged with Suruhanjaya Syarikat Malaysia (SSM) upon the registration
of a company is mandatory

i. The “Memorandum of Association of the company” also called the memorandum,
is the legal document that defines and reins the relationship between the company and
the outside. Defines the essential components of the structure of the company. Its
essential contents are:-

1

 The name of the company (which must end with the words “Sendirian Berhad” if
it is a private company, or just “Berhad” if it is a public company);

 The situation of the company’s registered office;
 The objects of the company, example:- the nature of business intended to be

carried out;
 That the liability of the members is limited
 The nominal amount of the authorized share capital with which it is proposed to

register the company and the division of such capital into shares of a fixed amount
(Company registration office in Malaysia, 2014)

ii. The “Articles of Association”, which constitutes the internal regulations of a
company usually contains clauses dealing with under-mentioned matters. Its essential
contents are:-

 The name of the company
 The name of each first director (minimum

two)
 The name of the first company secretary
 The minimum and maximum number of

directors
 Name, identity card number (if Malaysian),

passport (if foreigner), address and
occupation of each subscriber
 Name, designation and address of the witness to the signature of each subscriber

The “Articles of Association” also includes a provision governing the use of a
company seal on certain formal documents such as share certificates.

(Company registration office in Malaysia, 2014)

1.1.1 Types of limited liability companies

There are different types of limited liability companies can be summarized as
follow: (see table 1.1.1)

Table 1.1.1 Differentiate between public company and private company

Public Company Private Company
 The shareholders of a public  The shareholders are normally

company are the general public and family members and the company
shares of public company can be often restricts its shares to limited
traded in the open market. number of members.
 Ex: stock exchanges  The shares normally are not allowed
to be openly traded in the market.

2

1.1.2 Capital Structure

A company can have the following types of share capital. (see table 1.1.2)

Table 1.1.2 Definition of types of share capital using in the capital structure

Types of Share Capital Definition

Authorised/Nominal/  Defined, as registered capital of a company in

Registered Capital Malaysia. This is the maximum amount of the share

capital which a company is allowed to issue to its

subscribers.

 This amount must be stated in the Memorandum of

Association and the company is not required to issue

the total amount immediately.

 The amount issued to the public must not exceed

the total authorized capital. The authorized capital

may comprise more than one class of shares.

Par or nominal value  The value of each unit of share when it is issued.

 The par or nominal value of a share will remain the

same even if the market prices of the shares increase

or decrease.

 Example ; ordinary shares of RM 1 each means that

the par or nominal value RM 1.

Issued capital  The amount of share capital offered and allotted to
Unissued Capital the company’s subscribers.

 Issued capital cannot be more than the authorized
capital as this is stipulated in The Memorandum of the
company.

 This is the difference between the authorized capital
and the issued capital.

 Represents the amount of capital that the company
can still issue to the public in the future.

Called-up  When shares are issued by a company, it may not
Capital need the subscribes to pay the full value of the shares.

 Called-up capital is that portion of the share value
which the company has requested the subscribers
to pay.

Uncalled capital  Issued capital by company but yet to require
subscribers to pay.

3

Paid-up capital  The represents the amount of called-up capital that
Unpaid capital has been paid by the subscribers.

 It is referred as calls in arrears when a subscribers
fails to pay up the called-up capital required by the
company before an agreed date.

Example 1

Manjela Bhd is a listed company in Bursa Malaysia. The Memorandum and Articles of
Association stipulate that the company is allowed to issued up to 3,500,000 shares of
RM 1.00 each. Till date, Manjela Bhd issued 2,500,000 ordinary shares of RM1.00 each
upon the company’s formation. So far, the company has only called up RM 0.75 on all
of its shares. All calls have been paid by all its shareholders except David, who still
owes RM 3, 000 to the company for his shares.

You are required to compute the following:

(a) Authorized capital (e) Uncalled capital
(b) Nominal value of the share (f) Calls in arrears
(c) Issued capital (g) Paid up capital
(d) Called-up capital

Solution; = RM 3,500,000
= RM 1.00 each
(a) Authorized capital = RM 2,500,000
(b) Nominal value of the share = RM 1,875,000
(c) Issued capital = RM 625,000
(d) Called-up capital = RM 3,000
(e) Uncalled capital = RM 1,872,000
(f) Calls in arrears
(g) Paid up capital (RM 1,875,000 – RM 3,000)

4

1.1.3 Classes Of Shares

Figure 1.1.3 Classes of shares

Classes of Shares

Ordinary Shares Preference Shares

Cumulative
preference share

Non-Cumulative
preference share

i. Ordinary Shares
 Ordinary share is also know as equity shares.
 All companies must have ordinary shares and
generally the ordinary shares comprise the bulk of the company’s
equity.
 It carries the right to vote and the ordinary shareholders are entitled to share in
the profit for dividends only after the dividends, if any, have been paid to the
other classes of shares.
 Ordinary shareholders are considered to be risk takers because should the
business fail they can lose their capital.
 The rate of dividends paid to ordinary shareholders is not fixed. It is dependent
upon the company’s level of profits and dividend policy.
 The ordinary shareholders are effectively the owners of the company.

ii. Preference Shares
 Company share with dividends that are paid to shareholders before ordinary
share dividends are paid out.
 In the event of a company bankruptcy, preferred stock shareholders have a right to
be paid company assets first.
 Preference shares typically pay a fixed dividend.
 Preference share shareholders usually do not have voting rights. Category of
preference shares as follows:

(a) Cumulative preference shares 5
The holders of these shares are entitled to receive a fixed dividend per annum.
Should insufficient or the absence of profits prevent payment of dividends in any
year, the arrears can be carried forward and become payable in the future.

(b) Non-Cumulative preference shares
Holders of this class of shares receive a fixed rate of dividend only when the
company has sufficient profits to declare a dividend. However, should the
company not have sufficient profits to declare dividends; the dividends for that
year are forfeited and cannot be carried forward.

Table 1.1.3 Differences between Ordinary Shares and Preference Share

Terms Ordinary Shares Preference Shares
Voting rights Entitled to voting rights Not entitled to voting rights
Returns Dividend depends on profit Dividend at a fixed rate
Upon liquidation Last to receive capital Repaid before ordinary shares
repayment
Redeemability Not redeemable Redeemable
Classes of shares Only one class A few classes (e.g.
redeemable, participating and
cumulative etc.)

1.1.4 Debentures (Loan Stock)

A debenture is a long-term contract. The issuer of debentures agrees to make
payments of interest and principal on specific dates to the debenture holder.
Debentures are similar to term loans, but they generally advertised when issued
for sale, offered to the public and sold to many different investors.

 Debenture holders are not given voting right.
 Debenture is a loan to the company. It carries a fixed of interest per annum. The

company is required to pay the fixed rate of interest to the debenture holders
whether or not the company is making profit.
 Debenture holder holders are rewarded through dividend debenture interest
 Debenture holders, who are trade payables of the company, are given the priority
over the other types of shareholders to receive repayment in the event of
liquidation.
 Debentures are allowed to be repaid after a fixed period of time for the principal as
well as the agreed interest computed based on the nominal value.

6

1.2 ISSUANCE OF SHARE

The first sale of stock by a private company to the public. IPOs are often issued by smaller,
younger companies seeking the capital to expand,
but can also be done by large privately owned
companies looking to become publicly traded.

In an IPO, the issuer obtains the assistance of an
underwriting firm, which helps it determine what
type of security to issue (common or preferred), the
best offering price and the time to bring it to market.

A company can issue share at nominal value (par
value), at a premium or at a discount.

Also referred to as a "public offering."

Shares issued at Discount
:

Par Premium

1.2.1 Issuance of share at par
 A share is issued at par when the issued price equals to the nominal value (par
value) of the share. For example:
If a share with a nominal value of RM1.00 is issued at RM1.00. In this case, the
share is issued at par.

 When a company issues its shares payable in full on application, the accounting

entry is as follows:

Debit Bank

Credit Share Application

(On receipt of application money)

 In the case where shares are unsuccessful, the additional application money is

required to be returned to the applicants. The accounting treatment for such a

situation is as follows:

Debit Share Application

Credit Bank

(Being refund to unsuccessful applicants)

 After the allocation basis for the shares is firmed up, the company will allot shares 7
to the successful applicants accordingly. The allotment of shares to the successful
applicant indicates the acceptance of offer by the company. The accounting entry
for the allotment is as follows:

Debit Share Application

Credit Share capital

(On allotment of shares)

Example 2

Sunway Berhad decided to issue 100,000 ordinary shares of RM 1.00 at par. On 30
June 2013, the company received applications for 150,000 ordinary shares but the
directors rejected applications for 50,000 of them. The shares were then allotted to
the remaining successful applicants.

Show the journal entries for the above transactions.

Answer:

Debit Bank 150,000
150,000
Credit Share application
50,000
(On receipt of application money) 50,000

Debit Share application 100,000
100,000
Credit Bank

(Being refund to unsuccessful applications)

Debit Share application

Credit Share capital

(On allotment of shares)

1.2.2 Issuance of shares at a premium

 Share issued at a premium means that the shares are issued at a price above the
par value. For example:
If a share with a nominal value of RM 1.00 is issued at RM 1.40, the share is issued
at a premium of RM 0.40.

 The amount collected over and above the par value (that is, premium) is accounted
for in a separate account called the share premium account.

Example 3

Abastul Bhd. issued 10 million ordinary shares of par value RM2 each at RM2.25
per share for cash. All Shares were subscribed for and there was no
oversubscription.
Discuss the accounting treatment of the issuance of shares.

Answer:
Journal entries and an extract of the statement of financial position

8

Debit Bank RM RM
22,500,00
Credit Ordinary share capital
20,000,000
Share premium 2,500,000

(On receipt of application money)

Extract of the statement of financial position 20,000,000
2,500,000
EQUITY
Issued and paid up capital
10,000,000 ordinary shares of RM2 each
Reserve
Share premium

Question

Sempurna Bhd, decided to issue 100,000 ordinary shares of RM1.00 at RM1.15.
On 30 June 2013, the company received applications for 130,000 ordinary shares.
Subscriptions of 30,000 shares were rejected. The shares were then allotted to the
remaining successful applicant.

Show the journal entries for the above transactions.

9

1.2.3 Share premium account
 The share premium account is a capital reserve, and effectively forms a part of
the shareholders’ fund.
 The excess cash, or premium received by the company is place a shared premium
account and can be used:-
a. to pay up unissued shares for distribution as bonus shares,
b. to pay a premium on the redemption of preferred share,
c. writing down company expenses or expenses incurred in the issuance of the
shares.

1.2.4 Issuance of Share At a Discount
 A share is said to be issued at a discount if the offered price of the share is below
the nominal value of the share.

Example 4
Software modern berhad decided to issue 100,000 ordinary shares of RM1.00 at
RM0.95. On June 2013, the company received applications for 100,000 ordinary
shares and all the applicants were allotted the shares they applied for.

Show the journal entries for the above transactions.

Answer:

Journal entries

Debit Bank (100,000 x RM0.95) RM RM
95,000 95,000
Credit Share application
95,000 100,000
(On receipt of application money) 5,000

Debit Share application

Discount on shares
(RM1.00 – 0.95) x 100,000)

Credit Share capital

(Being shares issued at a discount)

10

1.3 TERM OF PAYMENT

A company may allow applicants for the issuance of shares to:

1.3.1 Payment in full Application
 Application are required to pay the full amount of the
Share
share price upon application price is
 Successful applications are then known as collected
through
shareholders
 Bank account is debited with the full amount Allotment

of the money received on the shares
 Share capital is credited with the Call/Calls

nominal value of share issued.

1.3.2 Payment by instalment
 The method is not commonly practiced in Malaysia
 Is more complex if the shared were payable in full on application.

(a) Application
 Required to pay a part of the issue price when they apply for the shares
 Applicants are not shareholders of the company
 Minimum amount payable on each share should not be less than 5% of
the nominal amount and share premium

(b) Allotment
 Allotment means distribution of shares among those who have
submitted written application.
 No allotment should be made unless the sum payable on application
for the shares, subscribed has been received by the company.

(c) Call(s)
 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.

(d) Calls in Advance
 Some shareholders may pay for their shares before the call is made.
 This is referred to as ‘call in advance’; and the money received is
credited to a call in advance account which is treated as a loan to the
company.
 It cannot be credited to the share capital account yet as the company has
not called for the payment of the money. The calls in advance do not
rank for dividends.

11

(e) Calls in Arrears
 Some shareholders may fail to pay the sum due on call(s) due to one
reason or another. This is termed as ‘calls in arrears’.
 In the balance sheet it is shown as a deduction from the issued capital
or as a debt.

In the statement of Financial Position the calls in arrears and in advance will

appear as follows:

EQUITY

Authorized share capital xxx

Issued and paid up capital xxx

Less: Calls in arrears (xx)

xxx

Add: Calls is advance xx

Paid-up capital xxx

Reserve xxx

(Jane Lazar,2011)

Pro forma Journal entries
Ordinary Shares

(a) On receipt of application money RM RM
Debit Bank xx xx
Credit Share application
xx
(b) On allotment of shares xx
Debit Share application xx
Credit Share capital xx

Being amount called up on allotment xx xx
Debit Share allotment (called up)
xx
Credit Share capital
Share premium (if any) xx

Being refund to unsuccessful applications 12

Debit Share application xx

Credit Bank

Surplus application money used as allotment money

Debit Share application xx

Credit Share allotment

(c) Allotment money received xx
Debit Bank
Credit Share allotment

(d) Being 1st call made xx
Debit 1st call (called up) xx

Credit Share capital

(e) Being amount received on 1st call xx
xx
Debit Bank
Credit 1st Call

(f) Being 2nd and final call made

Debit 2nd call/Final call xx
xx
Credit Share capital

(g) Being amount received on 2nd call

Debit Bank xx
xx
Credit 2nd Call / Final call

(h) If failed to pay the 1st call/Final call

Debit Bank xx
xx
Call in Arrears

Credit 1st Call / Final call xx

(i) If paid advanced for 1st call/Final call

Debit Bank xx
xx
Credit 1st Call / Final call xx

Call in Advance

(Jane Lazar,2011)

Journal entries
Preference Share for full application

(a) On receipt of application money RM RM
Debit Bank xx xx
Credit Share preference application xx

(b) On allotment of shares xx
Debit Share preference application
Credit Share capital

1.4 FORFEITURE OF SHARES

 A share in a company that the owner loses (forfeits) by failing to meet the purchase
requirements. Requirements may include paying any allotment or call money owed,
or avoiding selling or transferring shares during a restricted period.

13

 When a share is forfeited, the shareholder no longer owes any remaining balance,
surrenders any potential capital gain on the shares and the shares become the property
of the issuing company.

 The issuing company can re-issue forfeited shares at par, a premium or a discount
as determined by the board of directors.

Journal entries

The shares on which the call was not paid being forfeited

Debit Share capital

Credit Forfeited shares

(Number of shares forfeited not called up)

The uncollectible amount, i.e., calls in arrears on shares that are forfeited

Debit Forfeited shares

Credit Call in arrears

Example 5

Maiesha had paid RM 0.80 per share on 1,000 shares of RM1 each and subsequently
failed to pay the final call of RM 0.20 per share. The company forfeited the shares
after due notice was given.

Show the journal entries for the above transactions

Answer:

Journal entries

Debit Share capital RM RM
1,000 1,000
Credit Forfeited shares
200 200
(share which the call was not paid being forfeited)

Debit Forfeited shares

Credit Call in arrears

(Uncollectible amount ex. Calls in arrears )

1.4.1 Reissue of Forfeited 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.

14

Journal Entries

The forfeited shares reissued at the nominal value

Debit Reissue account

Credit Share capital

The receipt of the amount due on reissue

Debit Bank

Credit Reissue account

The amount in the forfeited share account transferred to the Reissue account

Debit Forfeited shares

Credit Reissue account

Transfer of balance remaining (if any) on the Reissue account

Debit Reissue account

Credit Share premium

Example 6
Continuing from the example 5, after requisite action by the Directors, the shares
were forfeited and reissued to Encik Kamal at a price of RM 0.40 per share.

Show the journal entries for the above transactions

Answer:
Journal entries

Debit Reissue account RM RM
1,000 1,000
Credit Share capital 400
400 800
(The forfeited shares reissued at the nominal value) 800
200
Debit Bank 200

Credit Reissue account

(The receipt of the amount due on reissue )

Debit Forfeited shares

Credit Reissue account

(Amount in the forfeited share account transferred

to the Reissue account)

Debit Reissue account

Credit Share Premium

(The receipt of the amount due on reissue )

15

1.5 REDEMPTION OF REDEEMABLE PREFERENCE SHARES

 A company can issue Preference shares which later if the company wishes, be
redeemed if it is by Articles of Association.

 Redeemable Preference shares are issued with the condition that the company
can buy back the shares from the shareholders at a specified date in future.

 Where the shares are redeemable a premium, the premium on redemption can be
provided for either out of share premium or out of profits.

 The total amount of the issued capital before and after the redemption of
Preference shares must be the same.

 It thus follows that upon redemption of Preference shares, “capital” up to the nominal
value of shares redeemed must be introduced to replace the amount of issued capital
redeemed in order to maintain capital.

 Otherwise, when the Preference shares are redeemed it will amount to reduction of
capital which is not permissible under normal circumstances.

 Redeemable Preference shares can be redeemed by the following means:

(a) by a fresh issue of shares

 The company has to make a fresh issue of shares (ordinary or preference)
equal to the nominal amount of Redeemable Preference shares redeemed
in order to restore the issued capital.

(b) out of profits

 Where the Redeemable are redeemed and no new shares are issued to
replace the nominal amount of shares redeemed, an amount equal to the
nominal amount of shares redeemed is transferred from the Profits and
Loss Account or any revenue reserve to a Capital Redemption Reserves.

 The capital redemption reserve is a capital reserve, a non-distributable
reserve and can be used to issue bonus shares.

 Though no new shares replace the shares redeemed the issued capital is
maintained by the creation of Capital Redemption Reserves.

(c) partly by a fresh issue of shares and partly out of profits

 The Redeemable Preference shares may be redeemed partly by the issue
of new shares and partly by transferring profits to the capital redemption
reserves.

 The nominal amount of new shares and the amount of profits transferred
to the capital redemption reserves should equal the nominal amount of
shares redeemed.

16

Pro forma Journal entries

RM RM
xx
(a) Being Preference shares redeemed xx
xx
Debit Redeemable Preference share capital xx xx
xx
Credit Preference share redemption account xx
xx
(b) Being premium payable on redemption
xx
Debit Premium on redemption xx

Credit Preference share redemption account

(c) Being payment made to the Preference shareholders

Debit Preference share redemption account xx

Credit Bank

(d) New shares issued specifically for redemption

Debit Share Application xx

Credit Share capital

Credit Share Premium (if any)

(e) Money received on fresh issue of shares

Debit Bank xx

Credit Share Application

(f) Transfer to capital redemption

Debit Profits and Loss Account xx

Credit Capital Redemption Reserves

(g) Writing off premium on redemption

Debit Share premium, and/or xx
xx
Debit Profits and Loss account

Credit Premium on redemption

17

Example 7

Statement of Financial Position RPS as at ………..

RM

Authorised share capital

100,000 Ordinary shares of RM1 each 100,000

50,000 6% Redeemable Preference shares of RM1 each 50,000

150,000

Issued and fully paid up capital 70,000
70,000 Ordinary shares of RM1 each 30,000
30,000 6% Redeemable Preference shares of RM1 each 100,000

Reserves 10,000
General reserves 40,000
Profits and Loss account 150,000

Current liabilities 15,000
Creditors 165,000

Fixed assets 100,000

Current assets 5,000
Stock 10,000
Debtors
Bank 50,000
165,000

The Redeemable Preference shares were redeemed at a premium of 5%. 10,000
Ordinary shares of RM1 each were issued at a premium of 10% in order to partly
finance the redemption of Preference shares.

You are required to prepared journal entries to record the transactions and a balance
sheet immediately after the redemption.

18

Answer

Journal entries

RM RM
31,500
Debit 6% Redeemable Preference share capital 30,000

Debit Premium on redemption 1,500

Credit Preference share redemption account

(Being Preference shares redeemed at premium of 5%)

Debit Preference share redemption account 31,500

Credit Bank 31,500

(Being Preference shareholders paid the amount due)

Debit Share Application 11,000

Credit Ordinary share capital 10,000

Credit Share Premium (if any) 1,000

(Being 10,000 Ordinary shares issued at premium of 10%)

Debit Bank 11,000
Credit Share Application
(Being money received on issue of shares) 11,000

Debit Profits and Loss Account 20,000

Credit Capital Redemption Reserves 20,000

(Being transfer of profit to capital redemption reserves)

Debit Share premium 1,000
Debit Profits and Loss account 500

Credit Premium on redemption 1,500

Statement of financial position of RPS RM

Authorised share capital 100,000
100,000 Ordinary shares of RM1 each 50,000 150,000
50,000 6% Redeemable Preference shares of RM1 each

Issued and fully paid up capital 80,000
80,000 Ordinary shares of RM1 each

Capital reserves 20,000
Capital redemption reserves

Reserves 10,000
General reserves 19,500
Profits and Loss account

Current liabilities 15,000
Creditors 144,500

Fixed assets 100,000
Current assets
Stock 5,000
Debtors 10,000
Bank 29,500
144,500
19

1.6 DIFFERENCES OF BONUS SHARES AND RIGHT ISSUE

a. Bonus Share
A bonus share is a free
share of stock given to
current shareholders in
a company, based upon
the number of shares that
the shareholder already
owns While the issue of
bonus shares increases
the total number of shares issued and owned, it does not change the value of the
company.

The company will have to transfer or converted some of its reserves to the
company’s share capital account. After the reserves are converted into share capital,

such reserves can no longer be distributable by way of dividend to the shareholders.

Journal Entries

Bonus shares issued

Debit Reserved (capital and revenue)

Credit Bonus shares

Increase in issued share capital

Debit Bonus shares

Credit Ordinary shares capital

Example 9

Sutera Maya Bhd

Statement of Financial Position (Extract)

RM

Equity

600,000 ordinary shares of RM1 each 600,000

Share premium 20,000

Retained profits 180,000
800,000

Sutera Maya Bhd. declared a bonus of one share for every four held. The share 20
premium was to be utilized for the bonus, and if the share premium was insufficient
then the retained profits was to be utilized for the bonus issue.

Required:
You are required to show the journal entries to record the bonus issue and an extract
of the statement of the financial position after the bonus issue.

Answer:

Journal entries

Debit Share premium RM RM
20,000 150,000
Retained profit 130,000 150,000

Credit Bonus shares

(Being 150,000 shares issued as bonus shares)

Debit Bonus shares 150,000

Credit Ordinary share capital

(Being ordinary share capital increased by the bonus issue)

Extract of the statement of the financial position

EQUITY RM

Equity 750,000
Ordinary shares of RM1 each 50,000
Retained profits
800,000

b. Rights Issue
Rights issue is an issue of new ordinary shares to the existing ordinary shareholders
in proportion to their shareholdings at a price which is lower than the market price
of those shares. Rights issue are normally offered at a special price by a company to
its existing shareholders in proportion to their holding of old shares.

Offered to existing shareholders at a price below existing market price. The
accounting entries for right issue are the same as those for public issue. Usually the
right issue shares are payable in full on application. Hence the accounting entries would
be as follows:
Journal Entries

With application money received for right issue shares

Debit Bank account

Credit Application & allotment

Increase in issued share capital

Debit Application & allotment account - with total application money received
Ordinary shares capital – with total nominal value of right issue share

Credit allotted
Share premium – with total share premium on the shares issued

21

Example 10

Sue Queets Bhd., with issued ordinary shares of 100 million of RM 1 each, made a
rights issue to its existing shareholders of one share for every four shares held at a
price of RM 2.50. The market price of the shares was RM 3.50.

Show the journal entries for the above transactions

Answer:
Journal entries

Debit Bank RM RM
Credit Ordinary share capital 87,500,000
Share premium 25,000,000
62,500,000

1.7 ISSUE OF DEBENTURES

 The accounting entries for the issuance of debentures are similar to those of shares.
 The accounts involved in the issuance of debentures include bank account, debenture

account and debenture interest account.
 The following show journal entries for issuance of debentures:

Debit Bank

Credit Debentures

(Being money received in respect of the debentures issued)

Debit Debentures interest expenses

Credit Bank

(Being debenture interest paid to the debenture holders)

22

QUESTIONS

Part A : Problem Solving Question

1.1

Looney Town Bhd. has an authorized capital of RM100,000 dividend into 100,000 ordinary
shares of RM1 each. The directors decided to make an issue of 50,000 shares of RM 1.20 each
to the public payable as follows:

On application 30 sen
On allotment 50 sen (including premium)
On call 40 sen

The issues was fully subscribed and all money due was received by the company.
Show the journal entries to record the transactions and a statement Financial Position after the
issue is completed in the books of Looney Town Bhd.

1.2

Suasaha Bhd with an authorized capital of 500,000 ordinary shares of RM 1 each offered for

issue to the public 300,000 ordinary shares of RM 1 on the following terms:

On application 20 sen

On allotment 20 sen

On 1st call 30 sen

On 2nd and final call 30 sen

Applications were received for 500,000 shares and the directors resolved that the shares be
allotted on a pro- rata basis of 3 shares for every 5 shares applied for. Any surplus application
monies were transferred to allotment account to reduce the money due on allotment.
You are required to show journal entries to record the above transaction.

1.3

A company is issuing 100,000 ordinary shares of RM1 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 are received for 155,000 shares. A refund of the money is made in respect of
5,000 shares while, for the remaining 150,000 applied for, an allotment is to be made on the
basis of 2 share for every 3 applied for. The excess application monies are set off against the
allotment monies asked for. The remaining requested installments are all paid in full.
You are required to show ledger entries to record the above transaction.

23

1.4

Busan Aman Berhad decided to issue 550,000 ordinary shares of RM1.00each, payable 20%
on application, 20% on application, 20% on allotment, 40% on the first call and 20% on the
second/final call. On 30 April 2014, the company received 850,000 ordinary shares
applications.

The directors have made a decision to refund the application monies of 25,000 shares and the
remaining shares were to be allotted based on the basis of 2 shares for every 3 shares applied.
It is the company policy to offset the excess application monies against the allotment monies
due from the successful applicants. The first call was made on 1 July 2014 and final call was
made on 1 October 2014. Both first and final calls were all paid full.

Show the journal entries for the above transaction.

Part B : Question

Question 1

Harris Corporation was registered with 200,000 10% preference shares of RM 1.00 each and
500,000 ordinary shares of RM 1.00 each, invited application for its first issue of 100,000 10%
preference share at par, payable in full on application and 200,000 ordinary shares of RM 1.00
each at RM 1.20 on following terms:

On application RM 0.20
RM 0.40 (including premium)
On allotment RM 0.30
On 1st call RM 0.30
On 2nd call

Application were received for 300,000 ordinary shares. The directors rejected application for
50,000 shares and allotted the shares on a pro-rata basis among the remaining applications.
Any surplus money on application was used to pay up on allotment.

All monies due to the allotment and calls on the ordinary shares were duly received. Preference
shares were fully subscribed for and there was no over or under subscription of preference
shares.

You are required to prepare:
(a) Journal entries to record the above transaction
(b) Statement Financial Position of the company after the completion of all transactions.

24

Question 2

ABC Berhad has an authorized share capital of 10,000,000 units of ordinary shares of RM 2.00
each. The board of directors agreed for a resolution to issue 2,500,000 units of ordinary shares
with par value of RM 2.00 each at the price of RM 2.30 per share. The payments for the
issuance of shares were as follows:

On application Per Share
On allotment RM 0.60
On first call RM 0.70 (including premium)
On final call RM 0.70
RM 0.30

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.

Question 3

Walaupun Sdn Bhd was incorporated with an authorized share capital of 10,000,000 ordinary
shares of RM1 each and 5,000,000 6% preference shares of RM1 each. On 31 January 2014,
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 RM1.20 each, payable by installment on the following

terms:

Per Share

On application RM 0.40

On allotment RM 0.40 (including premium)

On first call and Final call RM 0.40

25

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 transaction.

c) Prepare the Statement of Financial Position (extract) after the reissuance of shares.

Question 4

a) i) A limited company can issue preference shares to their shareholders. List TWO (2)
ii) characteristics of preference shares.
List THREE (3) situations that can be applied by a company for the share redemption
process in order to comply with the requirement of Company Art 1965 (section 61).

b) Amanah Holding was estimated with an authorized capital 200,000 9% preferences shares
@ RM1.00 each and 500,000 ordinary share @ RM1.00 each. On 1st April 2016, the Board
Directors decided to offer and issue 300,000 ordinary share @ RM1.00 each at the price of
RM 1.20 according following terms:

On application RM 0.30
RM 0.40
On allotment RM 0.20
On 1st call RM 0.30
On 2nd call

On the closing day for application, applicants for 400,000 shares were received and Board
of Directors decided to reject 50,000 unsuccessful shares and the money will be returned.
The balance of application monies were transferred to the allotment account. All monies
were duly collected when due except for a shareholder name Michelle who have 3,000
shares failed to pay the 2nd call money.

You are required to demonstrate the journal entries to record all the transactions.

26

Question 5

a) Name TWO (2) documents that need to be prepared in the formation of a limited
company.

b) Briefly state content of each document for the company formation.

c) Hasya Izni Collection Berhad has an authorised capital of 150,000 ordinary shares of RM
1 each and 80,000 7% preference shares of RM 2 each. The company offered 100,000
ordinary shares at a premium of RM 0.30 per share and 50,000 preference shares at par.
Preference shares are payable in full on application and ordinary shares payable as follows:

On application RM
On allotment (including share premium) 0.30
On first call 0.50
On final call 0.30
0.20

The director made the following suggestions:-
i. Acceptance of applications for 120,000 ordinary shares.
ii. Allotments were made.
iii. Excess application money were refunded.
iv. Allotment monies were fully received for ordinary shares.
v. First call was made
vi. First call monies were received from all members except one, who failed to pay
for his 5,000 shares while another holding 10,000 shares paid his final call
monies during the 1st call.

You are required to:

a. Write up the above transactions in the appropriate journal entries.

b. Show Extracted Statement of Financial Position as at 31 July 2015.

27

Question 6
(a) Briefly explain TWO (2) methods of payments for the issuance of share.
(b) You are required to show the journal entries for the transactions below.

Lady Lisa Gold Berhad was incorporated with an authorized share capital of 1,000,000
ordinary shares of RM 2.00 each and 1,000,000 6% preference shares of RM5.00 each.
Lady Lisa Gold Berhad decided to issue 1,000,000 ordinary shares at a premium RM
0.71 each.

The terms of the payment were as follows:

On application RM 0.70

On allotment 1.00 (including premium)

On 1st call 0.60

On 2nd call 0.40

Applications for 1,250,000 ordinary shares were received and the directors resolved to
refund applications for 250,000 shares and give full allotment to 1,000,000 shares.

All monies were duly collected when due, except one shareholder, who held 10,000
shares, paid the 2nd call money together with 1st call money.

(c) Prepare extracted Statement of Financial position for Lady Lisa Gold Berhad.

28

INVESTMENT
ACCOUNT

Learning Outcomes

At the end of this chapter, students should be able to:
 Understand the investment of account
 Describe the types of fixed investments
 Prepare the year-end entries relating to accrued interest receivable and

profit/loss
 Show the entries in the ledger purchase and sale of investment

2.0 INTRODUCTION

 Share is an investment to show that, the
ownership of a company

 When you buy stock, you are actually
buying part ownership of company; the
rate of ownership (or equity) is depending
on the number of shares purchased

 Investors buy shares of a company because
they want to earn a return from their
investment through:
i. Receive dividends paid from the
company’s profits
ii. Get capital gains, the profit derived from the increase in the share/stock price
when they buy at low prices and sell at high prices.

 There have a risk in buying shares, equity in an investment more risky than
investing in fixed income securities such as bonds.

 When performance is poor, shareholder may not receive any dividends.

29

2.1 INVESTMENT ACCOUNT ENTRY

 Investment account are normally ruled with three columns on their side, one for
nominal value of shares or units, one for income and the other for capital.

Table 2.1 Definition of investment account entry

Nominal Is the recording of the memorandum column nominal value
Income per transaction
Capital A double entry recording of investment income for each
transaction
A double entry recording of investment capital for each
transaction

Table 2.1.1 Investment account

Date Particular Nominal Income Capital Date Particular Nominal Income Capital

(N) (I) (C) (N) (I) (C)

(RM) (RM) (RM) (RM) (RM) (RM)

2.2 FIXED INVESTMENT

 Investment purchased or sold will be charged a brokerage.
 Brokerage charges and stamps duty is the capital cost of the investment.
 Payment of the purchases price of the investment includes brokerage charges

and stamp duty.
 Investment is sold, stamp duty and brokerage charges will be deducted from the

sales price.
 Investment can be bought and sold in the form of:

a. Cum-dividend / cum-interest
b. Ex-dividend / ex-interest

Table 2.2 Method of investment

Method Description

Cum-dividend /  Mean “with dividend”, the buyer of investments has the rights

Cum-interest to receive the entire income payable on the first payment date

after purchased.

 The interest/dividend for the period from last payment to
purchased reduces the cost of the investments.

30

Ex-dividend/  Mean “without dividend”, the buyer of investments does not
Ex-interest have the rights to receive any interest / dividend income
payable on the first payment date after purchased.

 The interest/dividend given up should be included in the cost
of the investments.

2.3 LEDGER RELATING TO ACCRUED INTEREST RECEIVABLE AND
PROFIT/LOSES ON THE SALE OF INVESTMENT

(a) Purchase At Cum. Div / Cum. Int

 The buyer of investments has the rights to receive the entire income payable
on the first payment date after acquisition

 Step to follow:
Step 1 : Timeline

Step 2 : Calculate Cost of investment RM

Purchase price xx
Add Brokerage fee / commission
xx
Less Accrued income given up by
seller * xx
Debit the capital

xx column with
amount paid

XX including stamp
fee/brokerage

*Compute the dividend/interest from date last received to date of purchase.
Debit in the
income column

Step 3 : Calculate dividend/interest receive for the half year

31

Example 2.1

Andik Ltd bought RM 100,000 of 12% shares on 1st September 2014 at 95 cum
div. Dividend is payable half-year on 30th June and 31 December.

Show the entries in the investing company’s ledger for its financial year ended
30th June 2015.

Dividend Purchase Dividend Dividend
Paid / Paid Paid /
Closing Closing

30 Jun 2014 1 Sept 2014 31 Dec 2014 30 Jun 2015

I = 2 mths Int Income = 10 mths

1/9/2014 Purchase price (RM 100,000 x 0.95) RM
Add Brokerage fee / commission 95,000

Less 1/9/2014 Accrued income given up by seller (I) 0
(RM 100,000 x 12% x 2/12) 95,000

(2,000)
93,000

Calculate dividend/interest receive for the half year

31/12/2014 RM 100,000 x 12% x 6/12 6,000
6,000
30/06/2015 RM 100,000 x 12% x 6/12
10,000
P&L : Interest Income

RM 100,000 x 12% x 10/12

Solution

Date Particulars N Andik Ltd N I C
(RM) Investment account – 12% shares (RM) (RM) (RM)
100,000 6,000
1/9/14 Bank - I C Date Particulars
30/6/15 Purchases (RM) (RM)
SOCI : Div 2,000 93,000 31/12/14 Bank-Div
inc
10,000 30/6/15 Bank-Div 6,000

Balance c/d 100,000 93,000

100,000 12,000 93,000 100,000 12,000 93,000

1/7/15 Balance c/d 100,000 93,000

32

(b) Purchase Ex. Div / Ex. Int

The buyer of investments does not have the rights to receive any interest/dividend
income payable on the first payment date after acquisition.
Step to follow:
Step 1 : Timeline

Step 2 : Calculate Cost of investment

RM

Purchase price xx Debit the cost
Add Brokerage fee / commission xx column with
xx amount paid
Add Dividend/Interest given up to xx including stamp
seller* fee/brokerage

XX

*Calculate dividend/interest from date of purchase to next interest date

Debit capital column and
credit in the income
column (CONTRA)

Step 3 : Calculate dividend/interest not receive for the half year

Example 2.2

Hanif Ltd bought RM 100,000 of 12% shares on 1st December 2014 at 90 ex div.
Interest is payable half-year on 30th June and 31 December.

Show the entries in the investing company’s ledger for its financial year ended
30th June 2015

Dividend Purchase Dividend Dividend
Paid / Paid Paid /
Closing Closing
1 Dec 2014 31 Dec 2014
30 Jun 2014 30 Jun 2015

I = 1 mth (Contra)

Int Income = 7 mths

33

1/12/2014 Purchase price (RM 100,000 x 0.90) RM
Add Brokerage fee / commission 90,000

Add 1/12/2014 Dividend/Interest given up to seller ( I ) 0
(RM 100,000 x 12% x 1/12) 90,000

1,000
91,000

Calculate dividend/interest not receive for the half year

30/06/2015 RM 100,000 x 12% x 6/12 6,000
7,000
P&L : Interest Income

RM 100,000 x 12% x 7/12

Solution

Hanif Ltd
Investment account – 12% shares

Date Particulars N I C (RM) Date Particulars N I C (RM)
(RM) (RM) (RM)
1/12/14 Bank - 100,000 (RM) 1,000
Purchases 6,000
Contra 90,000 Contra
91,000
1/12/14 7,000 91,000

1,000 Bank-Div

30/6/15

30/6/15 SOCI : 7,000
Dividend
income

Balance 100,000
c/d 100,000

100,000 7,000 91,000
1/7/15 Balance b/d 100,000 91,000

34

(c) Sales At Cum. Div / Cum. Int
The seller of investments gives up the rights to receive the income on the first
payment date after sale.
Step to follow:
Step 1 : Timeline

Step 2 : Calculate Net sale proceeds RM

Selling price xx
Less Brokerage fee / commission
xx
Less Accrued income given up by
seller * xx Credit the cost
column with
xx amount paid

excluding stamp

XX fee/brokerage

*Calculate dividend/interest from last payment to the date sale and, credit in the

income column. Credit in the income

column

Step 3 : Calculate dividend/interest receive for the half year

Step 4: Calculate Gain on Disposal of Investment
Selling Price (RM) - Purchase price (RM) = RM XXX

**If selling price and purchase price is the same amount

35

Example 2.3

Asyikin Ltd has balance RM 100,000 nominal value
of 12% share at cost of RM 90,000 on 1st July 2014.
The investment was sold for 96 cum dividend on 1st
October 2014. Interest is payable half-yearly on 30th
June and 31st December.

Show the entries in the investing company’s ledger
for its financial year ended 30th June 2015

Dividend Sales Dividend Dividend
Paid / 1 Okt 2014 Paid Paid /
Closing Closing
31 Dec 2014
30 Jun 2014 30 Jun 2015

I = 3 mths

Int Income = 3 mths RM
96.000
1/10/2014 Selling price (RM 100,000 x 0.96)
Less Brokerage fee / commission 0
96,000
Less 1/10/2014 Accrued income given up by seller (I)
(RM 100,000 x 12% x 3/12) (3,000)
93,000

Calculate dividend/interest receive for the half year

**Not ownership of the investment

30/06/2015 P&L: Interest Income

RM 100,000 x 12% x 3/12 3,000

Calculate Gain on Disposal of Investment

RM 93,000 – RM 90,000 = RM 3,000

36

Solution

Andik Ltd
Investment account – 12% shares

Date Particulars N I C (RM) Date Particulars N I C (RM)
(RM)
(RM) (RM) (RM) 3,000 93,000

1/7/14 Bal b/d 100,000 90,000 1/10/14 Bank-sales 100,000

30/6/15 SOCI : 3,000
30/6/15 Dividend
income 3,000
SOCI: Gain 3,000 93,000
on sales

100,000 100,000 3,000 93,000

(d) Sales At Ex. Div / Ex. Int
The seller will receive the income on the first payment date after sale.
Step to follow:
Step 1 : Timeline

Step 2 : Calculate Net sale proceeds RM Credit the cost
xx column with
Selling price xx amount paid
Less Brokerage fee / commission xx excluding stamp
xx fee/brokerage
Add Dividend/Interest given up by
buyer * XX

*Calculate dividend/interest from the date of sale to next payment date

Debit income column and
credit in the capital
column (CONTRA)

Step 3 : Calculate dividend/interest receive for the half year

Step 4: Calculate Gain on Disposal of Investment

Selling Price (RM) - Purchase price (RM) = RM XXXX
**If selling price and purchase price is the same amount

37

Example 2.4

Rohasniza Ltd has balance RM 100,000 nominal value of 12% share at cost of RM
90,000 on 1st July 2014. The investment was sold for 96 ex dividend on 1st August
2014. Interest is payable half-yearly on 30th June and 31st December.

Show the entries in the investing company’s ledger for its financial year ended 30th June
2015.

Dividend Sales Dividend Dividend
Paid / Paid Paid /
Closing Closing

30 Jun 2014 1 Aug 2014 31 Dec 2014 30 Jun 2015

I = 5 mths (Contra) RM
Int Income = 1 mth 96.000

1/8/2014 Selling price (RM 100,000 x 0.96) 0
Less Brokerage fee / commission 96,000

Add 1/8/2014 Dividend/Interest given up by buyer (I) 5,000
(RM 100,000 x 12% x 5/12) 101,000

Calculate dividend/interest not receive for the half year

31/12/2014 RM 100,000 x 12% x 6/12 6,000
1,000
30/06/2015 P&L : Interest Income

RM 100,000 x 12% x 1/12

Calculate Gain on Disposal of Investment

RM 101,000 - RM 90,000 = RM 11,000

Solution

Date Particulars N I Andik Ltd N I C
(RM) (RM) Investment account – 12% shares (RM) (RM) (RM)
1/7/14 Bal b/d 100,000 100,000 96,000
1/8/14 CONTRA 5,000 C (RM) Date Particulars 6,000 5,000
30/6/15 SOCI : Div/ inc 100,000 1,000
30/6/15 SOCI : Gain on 90,000 1/8/14 Bank-sales
sales 11,000 31/12/14 CONTRA
Bank-div

6,000 101,000 100,000 386,000 101,000

2.4 INCOME FROM FIXED INVESTMENT

A company may buy shares from other companies as an investment. Income received in
the form of dividends and the dividends received are changing and not stated on the
purchase

There are two types of shares involved:-

(a) Bonus issue

Bonus in the general sense mean getting extra in additional to normal. Bonus
shares are the shares issued free of cost by a company to its existing
shareholder. The reason for company to do so is when is has a very large amount
of reserves, which present a large percentage of the capital employed, declaring a
dividend may imply a high dividend rate.

(b) Rights issue

Right issues are normally offered to existing shareholders at a price below the
existing market price. Its objective is to afford them the opportunity to maintain
their percentage of ownership of the firm.

Example 2.5

On 20 February 2015, Evergreen Berhad purchased 10,000 ordinary shares of RM 0.60
each in Everrate Berhad for RM 12,000. On 1 May 2015, Evergreen Berhad sold 5,000
Ordinary shares of the investment in Everrate Berhad for RM 1.20. On 18th June 2015,
Evergreen Berhad received an interim dividend of RM 0.20 per shares in Everrate Hati
Berhad.

Solution

Date Particulars N I Evergreen Berhad N IC
20/2/15 (RM) (RM) Ordinary shares account (RM) (RM) (RM)
Bank - 6,000 3,000
purchase C Date Particulars 6,000
(RM)
12,000 1/05/15 Bank-sales

Bank-div 1,000

30/6/15 SOCI : 1,000
Div/inc 1,000 12,000

31/12/15 Balance c/d 3,000 6,000

6,000 6,000 1,000 12,000

39

Example 2.6

On 1st January 2015 Aziz Berhad purchased 30,000 ordinary shares of RM 0.50 each in
Azizah Berhad at RM 1.50 per share. On 19th April 2015, Azizah Berhad make a bonus
issue of two shares of every five shares held. Azizah Berhad announced a right issue of
one ordinary share for every six held on that day at RM 1.20. Aziz Berhad purchased for
half of the shares and the remaining rights were sold for RM .80 per share.

Solution

Investment a/c - Ordinary shares in Azizah Berhad

Date Particular N I C (RM) Date Particulars N I C (RM)
20/02/15 s (RM) (RM)
19/04/15 15,000 (RM) (RM)
31/06/15 Bank - 6,000 2,800
purchase 1,750 45,000
Bonus 46,400
issue 22,750 4,200 31/08/15 Sales right 49,200
Purchase issue
right
issue

49,200 31/09/15
31/12/15 Balance c/d 22,750

22,750

Workings on right issue 42,000 unit
Shares (30,000 unit + 12,000 unit) 7,000 unit
Right issue ( 1/6 x 42,000 unit)

Purchase 7,000 (half) 3,500 unit 3,500 x RM 0.50 = 1,750 (N)
3,500 x RM 1.20 = 4,200 (C)

Sell 3,500 x RM 0.80 = RM 2,800

40

QUESTIONS

Part A : Problem Solving Question

Purchase Cum Div. /Cum Int.

i. Fatimah Holdings purchased RM200, 000 10% Shares on 1 April 2013 at 192 cum div.
Dividend is paid every 30 June and 31 Dec. Record into the Investment Account if the
accounting period ends on 30 June every year.

ii. Fatimah Holdings purchased RM200, 000 10% Shares on 1 April 2013 at 192 cum div.
Dividend is paid every 28 Feb and 31 August. Record into the Investment Account if the
accounting period ends on 30 June every year.

iii. Fatimah Holdings purchased RM200, 000 10% Shares on 1 April 2013 at 192 cum div.
Dividend is paid every 30 June and 31 Dec. Record into the Investment Account if the
accounting period ends on 30 September every year.

Purchase Ex Div. / Ex Int.

i. Shaila Holdings purchased RM200,000 10% Shares on 1 December 2013 at 192 ex div.
Dividend is paid every 30 June and 31 Dec. Record into the Investment Account if the
accounting period ends on 30 June every year.

ii. Shaila Holdings purchased RM200,000 10% Shares on 31 January 2013 at 192 ex div.
Dividend is paid pada setiap 28 Feb and 31 Ogos. Record into the Investment Account if
the accounting period ends on 30 June every year.

iii. Shaila Holdings purchased RM200,000 10% Shares on 1 December 2013 at 192 ex div.
Dividend is paid pada setiap 30 June and 31 December. Record into the Investment
Account if the accounting period ends on 30 September every year.

Sale Cum Div. / Cum Int

i. Muhammad Holdings purchased RM200,000 10% Shares pada 1 April 2013 at 192 cum
div from Aina Holdings. Dividend is paid every 30 June and 31 Dec. Record into the
Investment Account if the accounting period ends on 30 June every year. Assume the
balance on 1 July 2012 is RM200,000 nominal and RM360,000 at cost.

ii. Muhammad Holdings purchased RM200,000 10% Shares pada 1 April 2013 at 192 cum
div from Aina Holdings. Dividend is paid every 30 June and 31 December. Record into
the Investment Account if the accounting period ends on 30 June every year. Assume the
balance on 1 July 2012 is RM200,000 nominal and RM390,000 at cost.

41

Sale Ex Div. / Ex Int.

i. Izzul Holdings purchased RM200,000 10% Shares on 1 December 2013 at 192 ex div
from Haziq Holdings. Dividend is paid every 30 June and 31 Dec. Record into the
Investment Account if the accounting period ends on 30 June every year. Assume the
balance on 1 July 2013 is RM200,000 nominal and RM360,000 at cost.

ii. Izzul Holdings purchased RM200,000 10% Shares on 1 August 2013 at 192 ex div from
Haziq Holdings. Dividend is paid every 28 Feb and 31 August. Record into the
Investment Account if the accounting period ends on 30 June every year. Assume the
balance on 1 July 2013 is RM200,000 nominal and RM360,000 at cost.

iii. Izzul Holdings purchased RM200,000 10% Shares on 1 December 2013 at 192 ex div
from Haziq Holdings. Dividend is paid every 30 June and 31 December. Record into the
Investment Account if the accounting period ends on 30 June every year. Assume the
balance on 1 July 2013 is RM200,000 nominal and RM390,000 at cost.

Part B : Question
Question 1
The following transactions of Fiona Berhad are recorded for the year ended 31 December 2014
:-
April 1 Purchased RM96,000 10% debentures at 80 cum div

20 Purchased 8,000 RM1.00 ordinary shares in Biodat Berhad at RM16,800
May 1 Received half year interest for 10% Debentures
June 18 Sold 4,000 shares in Biodat Berhad for RM1.25 per share
Oct 1 Sold RM24,000 10% Debentures at 85 ex div
Nov 1 Received half year interest for 10% Debentures
Dec 15 Received 10% dividend for shares in Biodat Berhad

You are required to prepare Investment Account for 10% Debentures and Ordinary Shares as
they would appear in the books of Fiona Berhad for the year ended 31 December 2014.

42

Question 2

The information below is related to Syarikat Belanda for the year ended 31 December 2015.

Jan 1 Purchased RM84,000 of 9% debentures at 90 cum div. Interest is receivable on
1 March and 1 September each year. Brokerage charge is RM420.
Feb 20 Purchased 10,000 RM0.50 ordinary shares in Europe Berhad for RM10,000.
Mar 1 Received half year interest for the 9% Debentures
Apr 10 Purchased 40,000 shares in Europe Berhad for RM1.20 per share
May 1 Sold RM24,000 9% Debentures at 95 ex div. Brokerage charge is RM120
Aug 1 Sold 20,000 ordinary shares of the investment in Europe Berhad for RM1.50 per
share.
Sep 1 Received half year interest for 9% Debentures
Oct 18 Received an interim dividend of RM0.20 per share on shares in Europe Berhad

You are required to prepare the following investment accounts for the year ended 31 December
2015:

a. 9% debentures
b. Ordinary shares in Europe Berhad

Question 3

Fruit Best Berhad is a season fruit (M) company whose financial year ends on 31 June. The

director of Fruit Best Berhad decided to invest in some surplus funds in a marketable securities.
The following transactions have been extracted from the company’s records for the year ended

31 June 2015.

2014 Transaction
1 August Bought RM 150,000, 8% Debenture, at 92 ex dividend. Brokerage
charges is RM 2,000. Dividend is payable on the 30 June and 31
15 June December.
Bought 20,000 of RM 0.50 ordinary shares in Safwan Bhd. at RM 0.80
1 October each. Brokerage charges is RM 200.
Bought RM 80,000, 8% Debenture, at 90 cum dividend. Brokerage
15 December charges is RM 1,060.
2015 Received dividend of 10% on shares in Safwan Bhd.

1 March Sold RM 115,000 8% Debenture at 98 cum div. Brokerage charges is RM
1,400.
1 February Bought 6,000 ordinary shares of RM 0.50 each in Safwan Bhd at RM
1.00 per share. Brokerage charges is RM 60.
15 June Received dividend of RM 0.20 on shares in Safwan Bhd.

43

It is the policy of Fruit Best Berhad to use the weighted average method when calculating the
cost of disposal of each investment.

You are required to prepare the following investment accounts for the year ended 31 June 2014:
a. 8% debentures
b. Ordinary shares in Safwan Berhad

Question 4

Sultanah Berhad which was established on Jan 1, 2015 was invested as follows:

a. RM100, 000, 10% of government stock on the capital cost of RM98, 000. Dividends

were paid on June 30 and December 31 every year.

b. RM 40,000 ordinary shares of RM1 in HHTI Development Bhd's capital costs RM

54, 000.

Here are the transactions for the year ended 31 December 2015:

1 February Receive 20% ordinary shares dividend.

1 Mar Purchase of RM20, 000, 10% of government stock at 97 cum-div.
Brokerage charges is RM200.

30 April Selling RM10, 000, 10% of government stock at 94 ex-div

30 Jun HHTI Development Bhd to issue bonus shares 1 for every 10 shares
held.

HHTI Development Bhd announced a rights issue of 1 every 8

1 September ordinary shares held at a subscription price of RM4.80 per share.

Sultanah Berhad subscribe to all shares.

1 October Sell 7,200 units shares at a price of RM39, 600.

You are required to:
a) Write up the investment in 10% government stock account for the year ended 31
December 2015. (round to the nearest ringgit)
b) Illustrate the investment in HHTI development Berhad account for the year ended 31
December 2015. (rounded to the nearest ringgit)
c) Compare between Cum-div (int) and Ex-div (int).

44

Question 5

a) (i) Define briefly:
i) Fixed income investment
ii) Bonus Share
iii) Right Issue

(ii) List THREE (3) examples of fixed income investment

b) Dagang bhd. is a plantation company with its financial year ending on 31 December. The
director decided to invest some surplus funds in marketable securities. The following
transactions have been extracted from the company’s records for the year ended 31

December 2015.

Investment type: 8% Government stock
April 1 Purchased RM 20,000 of 8% government stock at 78 cum
dividend. [Interest are payable on 30th June and 31st December.
May 1 Assuming that amount of interest is received on the appropriate
August 31 due date].
Sold RM 9,000, 8% government stock at 88 cum interest.
Purchased RM 18,000 of 8% government stock at 80 ex
interest.

Investment type: Ordinary shares – Times Berhad
April 25 Purchased 60,000 ordinary shares of RM 0.50 each in Times
Bhd. at RM 1.50 per share.
June 25 Times Bhd made a bonus issue of two shares for every five
shares held.
September 30 Received dividend of 10 per cent ordinary shares in Times Bhd

You are required to prepare:
(i) The investment account in 8% Government Stock and bring down the balances on 31
December 2015
(ii) The investment account in Ordinary Shares – Times Bhd and bring down the balances
on 31 December 2015

45

CONTRACT ACCOUNT

Learning Outcomes

At the end of this chapter, students should be able to:
 Understand the Contract Account
 Produce accounts for contracts
 Produce extract final account

3.0 INTRODUCTION

 A contract account is opened when a company starts a long-term contract.
 Contract accounts are synonym with the construction industry.
 Basically, a contract is an agreement

between parties who undertake jobs, such
as construction of a dam or a building or
a ship; laying down railway lines or roads
etc.
 A certain length of time is needed in
order to complete a contract.

3.1 CONTRACT ACCOUNT

 A Contractor has to maintain a separate account known as Contract Account for

each job and to know the profit earned or loss made on the contract.

 All expenditure occurred in the completing the job or the contract will be charged to

the contract account and become direct costs.

 All direct costs such as material cost, wages, cost of special plant and equipment,
cost of special services like architect’s fees, etc., are debited to the Contract

account.

 All indirect expenses such as office and administrative expenses, repairs and

storeroom expenses are charged to contract account on an equitable basis.

 On completion of the contract, the agreed price for the work done is credited to

contract account.

 The balance of the contract account represents profit or loss and is transferred to

Profit and loss account.

46

3.2 DEFINITION CONTRACT TERM
 Generally a contract is a big job requiring considerable length of time to complete
and the work may be undertaken outside the factory.
 There are a few terms that should be taken into consideration as in the following
charts.

Table 3.1 Definition of contract terms

Contractor
The person who agrees to perform the work

Contractee
The person who gives the contract or for whom the work is
done

Contract Price
The sum of money agreed upon to be paid by the Contractee

Architect
A qualified professional who design and supervise the
construction of buildings or other structures.

Direct expenses
Expenses incurred directly on the contract like raw
materials, direct labour, plant and equipment acquired
specially for the particular contract and other expenses
incurred wholly for the contract

Indirect expenses
Include establishment expenses, office salaries, telephone
charges etc which cannot directly attribute to any one
particular contract.

Retention Money
To safeguard his position, a customer will often hold back
payment of an agreed percentage of the work certified as
completed. This retention money covers any claims for late
completions and faulty workmanship.

Architect's certificate
a document certified by an architect or engineer that a
certain construction project has been completed in
accordance with the terms and specification contained in the
job contract.

47