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CHAPTER 3
ISSUANCE OF SHARES AND LOAN CAPITAL

LEARNING OBJECTIVES:

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

1. Explain why companies may issue shares.
2. Explain and show entries in journal and statement of financial position for
the issue of shares.
3. Differentiate between bonus issue and rights issue and show entries in
journal and statement of financial position.
4. Explain share split and share consolidation.
5. Explain and show entries in journal and statement of financial position for
the issue of debentures under amortised cost method and fair value
method.

INTRODUCTION
To raise capital, companies have the opportunity to issue its shares and debentures to
the potential investors in the capital market. The shares and debentures issued may be
purchased by individual investors or institutional investors from company that make the
public issue or from other shareholders and debenture holders in the open market
through stock brokerage firms. Once the applicants succeed in buying the shares or
debentures of the company, they will become the shareholders or debenture holders of
the company respectively. In this chapter, we shall study the procedure of issuing shares
and debentures for raising capital, share splits program and the relevant accounting
treatment in the book of the issuer, i.e. company.

2.1 ISSUANCE OF SHARES

After a company has been incorporated, it usually issues shares to increase the amount
of its capital for further growth and expansion. The capital can be increased in various
ways. For public company limited by shares, it can invite the public to subscribe for
shares by issuing prospectus together with the application form. Prospectus is an
invitation for public offer of shares. Other ways will include issuing shares through a right
issue, issuing bonus shares, exercising share options and converting loans into shares.
A private company may also increase its share capital but limit to the number of 50
shareholders only.

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2.1.2 Methods Of Issuing Shares

Initial Public Offering Right issue Bonus issue

• Refers to the first time a • Subsequent method of • Shares given to the

company issues its issuing shares after existing shareholders
shares to the general IPO. for free of charge. It
public. does not involve any
• It is an invitation to new capital injection to
• The publics can only be existing shareholders to the company
invited to buy the shares subscribe for additional
by IPO shares, generally at • New shares are
below market price. issued but the
• The shares issued may shareholders do not
be fully subscribed, • Shareholders are make any payment
oversubscribed or offered in proportion to because the cost is
undersubscribed. their shareholdings in absorbed by the
order to maintain their company through a
relative voting and rights capitalisation of
company’s reserves,
• If the offer is not for example the
accepted by the existing retained profits.
shareholders, the
directors may dispose • It is made to the
those shares in such shareholders in
manner as the directors proportion to their
think most beneficial to shareholdings.
the company.

Retained profits are profits that from operation activities and accumulated from the year
of incorporation. They are also called as distributable profits as it can be distributed in
the form of cash dividends to shareholders.

2.1.3 Issue Price and Issue Cost

In selling its shares to the public, the company must determine the issue price of the
issued shares. Issue price is the price at which the shares will be issued or commonly
referred to as offering price. The shares can be sold either in a fixed price or by tender
offer. For a sale at a fixed price, the price is determined by the company as issuer
whereas in a sale by tender, investors are invited to submit their chosen offer price and
subsequently a final price will be established once all tenders are received.

Issue cost on the other hand is the expenses incurred in connection with issue of shares
by the company. These transaction costs include payment for registration and legal fees
and payment for accounting consultation and other professional advisers such as
brokerage fees and commission.

The proceeds from issue of shares will be recorded at net of any direct issue costs.

2.1.4 Subscription Of Shares

Whenever the companies issue their shares, the application received for the subscription
may be:

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a. Fully subscribed
Is where the amount received (AR) for subscription is equal to amount of shares
issued (AI). AR = AI

b. Oversubscribed
Is where the amount received (AR) for subscription is greater than amount of shares
issued (AI). AR > AI

c. Undersubscribed
Is where the amount received (AR) for subscription is fewer than amount of shares
issued (AI). AR < AI

When shares are oversubscribed, the company may reject the excess application and
refund the money received to the unsuccessful applicants in full.

Example 1
Kenangan Bhd was incorporated as a public company on 1 January 20x5. The
company decided to issue 10,000,000 of its ordinary shares at RM2.00 each.

Required:
a. Identify the issue price.
b. Describe how the application received on the shares issued may be fully
subscribed, oversubscribed and undersubscribed.

Solution:

a. The issue price is RM2.00

b. Fully subscribed – where the amount of applications received is equal to amount of shares
issued, i.e. 10,000,000 units.

Oversubscribed - where the amount of applications received is greater than 10,000,000

units, for example15,000,000 units. Thus, the shares were oversubscribed by 5,000,000
units.

Undersubscribed – where the amount of applications received fewer than 10,000,000

units, for example 7,000,000 units. Thus the shares were undersubscribed by 3,000,000
units.

Example 2

Using the Example 1, assume the applications received by the company were
15,000,000 shares.

Required:
a. Identify the number of shares oversubscribed
b. Describe how the company may allot the shares to the share applicants based
on, full rejection.

Solution:

a. 5,000,000 units.
b. the excess applications of 5,000,000 shares were to be rejected completely and the
unsuccessful applicants is to be refunded by RM10,000,000.

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2.1.5 Terms Of Issuance

The payment of shares issued by the applicants can be made in either one of the
following terms:

a. Payment in full/lump sum

Applicants are required to pay the full amount of the shares issued upon
application.

b. Payment by installment basis

Applicants were to pay the issue price in stages, i.e. on application, on allotment
and on call. The company may forfeit shares on which the calls are unpaid. Upon
forfeiture, the defaulter ceases to be a shareholder and loses the amount of money
that already paid in the earlier stages. However, this method is not a common
practice in Malaysia.

2.1.6 Accounting Treatment

a. Journal entries for issuance of shares at the first time (IPO)

Being amount of money received on application (amount received × issue price)

Dr Bank a/c x
Cr. Share application a/c x

Being amount of money refunded to unsuccessful applicants – if any (amount rejected

× issue price)

Dr Share application a/c x

Cr. Bank a/c x

Being the allotment of share capital

Dr Share application a/c x

Cr. Share Capital a/c x

Example 3

Darul Ehsan Bhd is a newly incorporated company. On 2 January 20x1, it offered for
subscription an initial offering of 50,000,000 ordinary shares at RM5 per share.
Applications were closed on 31 January 20x1 and applications for 70,000,000 shares
were received. All the money due was received and the money received on the
oversubscribed shares was refunded. Allotment of shares was completed by 15
February 20x1

You are required to record the above transactions in the following entries:

i. Journal entries
ii. Extract of Statement of Financial Position as at 31 December 20x1
(equity section ony)

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Solution:

Working:

Step 1: Determine the issue price for shares issued – RM5.00 per share

Step 2: Determine the amount of shares issued – 50,000,000 shares

Step 3: Determine the amount of shares received upon application – 70,000,000 shares

Step 4: Determine the amount of shares rejected (if any) – 20,000,000 shares

i. Journal entries
ii.
Issuance of OSC at IPO
Debit Credit
RM RM
i Dr Bank (70,000,000 x RM5) 350,000,000
Cr Ordinary Shares Application 350,000,000

ii Dr Ordinary Shares Application 100,000,000

Cr Bank (20,000,000 x RM5) 100,000,000

iii Dr Ordinary Shares Application 250,000,000

Cr Ordinary Shares Capital (50,000,000 ×
250,000,000
RM5)

ii. Extract of Statement of financial position

Darul Ehsan Bhd

Statement of financial position (extract) as at 31 Dec 20x1

Issued and paid up capital

50,000,000 Ordinary shares 250,000,000

!!! Let’s try the following question:

The following is the extract of statement of financial position of Darul Naim Bhd as at 31 December
20x2.

Equity RM
Issued and paid up capital
25,000,000 Ordinary shares 50,000,000
20,000,000 6% Preference shares 20,000,000

Reserves
Retained profits 75,000,000

ON 3 January 20x3, Darul Naim Bhd makes a public issue of 25,000,000 ordinary shares at an issue
price of RM2.50 each and payable full on application. The company also issues 5,000,000 units of
6% preference shares at RM1.50 per share. The preference shares contain a non-mandatory
dividend.

Application received for the ordinary shares and 6% preference shares were 35,000,000 and
4,000,000 respectively. The directors decided to reject the excess application and refund the money
to the unsuccessful applicants.
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You are required to record the above transactions in the following entries:

i. Journal entries
ii. Extract of Statement of Financial Position as at 31 December 20x3 (show the equity
section only)

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Answer:
i. Journal entries

Issuance of OSC
Debit Credit
RM RM
i Dr Bank (35,000,000 x RM02.50) 87,500,000

Cr Ordinary Shares Application 87,500,000

ii Dr Ordinary Shares Application 25,000,000

Cr Bank (10,000,000 x RM2.50) 25,000,000

iii Dr Ordinary Shares Application 62,500,000

Cr Ordinary Shares Capital (25,000,000 × RM2.50) 62,500,000

Issuance of 6% PSC

i Dr Bank (4,000,000 x RM1.50) 6,000,000

6% Preferences Shares Application 6,000,000

ii Dr 6% Preferences Shares Application 6,000,000

Cr 6% Preferences Shares Capital (4,000,000 x

6,000,000
RM1.50)

ii. Extract of Statement of financial position

Darul Naim Berhad

Statement of financial position (extract) as at 31 December 20x3

Equity RM
Issued and paid-up capital
50,000,000 (25,000,000 + 25,000,000) Ordinary shares 112,500,000
24,000,000 (20,000,000 + 4,000,000) 6% Preference shares 26,000,000

Reserve
Retained profits 75,000,000

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b. Journal entries for Right Issue

In a right issue of shares, the existing shareholders will be offered shares in proportion
to their shareholdings. It is very unlikely that the applications for the share to be
undersubscribed or oversubscribed. Upon the offer of right issue, the shareholders may
take up the shares they are eligible for, to sell the ‘rights’ to a third party or to renounce
the ‘rights’ in favour of the company. The journal entries are similar as per entries in IPO,
except that the share application account is replaced with term of Right issue
application account.

Being amount of money received on application (amount received × issue price)

Dr Bank a/c x
Cr. Right issue application a/c x

Being the allotment of share capital

Dr Right issue application a/c x

Cr. Ordinary Share Capital a/c x

Example 4

Darul Makmur Bhd with an issued capital of RM70,000,000 comprise of 70,000,000

units of ordinary shares, offer a right issue to its existing shareholders of one for
every five shares held at a price of RM1.00 each. All the shares offered under the
rights issue were taken and fully paid.

You are required to record the above transactions in the following entries:

i. Journal entries
ii. Extract of Statement of Financial Position (show the equity section only)

Solution:

Working ;

Step 1: Determine the amount of shares held by the company - 70,000,000 units

Step 2: Determine the amount of right issue offered (in units and RM)
Right issue = (1/5 x 70,000,000 shares) × RM1.00
= RM14,000,000 (@ 14,000,000 shares

i. Journal entries

Issuance of right issue

Debit Credit
RM RM
i Dr Bank (14,000,000 x RM1) 14,000,000
Cr Right issue Application 14,000,000

iii Dr Right issue Application 14,000,000

Cr Ordinary Shares Capital 14,000,000

ii. Extract of Statement of Financial Position

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Darul Makmur Bhd

Statement of financial position (extract)

Issued and paid up capital

84,000,000 Ordinary shares (70,000 + 14,000) 84,000,000

c. Journal entries for Bonus Issues

Apart of issuing shares for cash consideration, company may also issue bonus shares.
Bonus shares are shares distributed to the shareholders for free of charge. Similar to
right issue, the shares are distributed to its existing shareholders in proportion to their
shareholdings. In other words, the number of shares to be given is calculated based on
the number of shares in issue. For example if a company were to declare one-for-five
bonus issue, a shareholder of five shares will receive one share for free. This issuance
is being practiced when the company has large accumulated profits but due to certain
policy and regulation, the company is unable to distribute them in the form of cash
dividends.

All forms of reserves, such as retained profit and asset revaluation reserve can be
utilized for the issuance of bonus shares. The CA 2016 provides no specific accounting
guidance in setting the issue price of the bonus shares. It currently can be priced at any
amount that the directors think fit (as per price set for offer of shares for cash). However,
as a best practice in accounting, the bonus shares should be logically be recorded at
their fair value. The journal entries for bonus issue:

Being utilization of reserves for bonus issue

Dr Retained profit a/c / Asset revaluation reserve a/c x

Cr. Bonus issue a/c c x

Being ordinary share capital increased by the bonus issue

Dr Bonus issue a/c x

Cr. Ordinary Share Capital a/c x

Example 5

The following balances were extracted from the books of Darul Iman Bhd As at 1
January 20x5:
RM
50,000,000 ordinary shares, fully paid 100,000,000
10,000,000 5% preference shares, fully paid 10,000,000
Retained earnings 35,000,000
Bank 200,000,000

On 30 June 20x5, the directors declared a bonus share of one for every twenty
ordinary shares held as at that date. The value of each bonus share is RM4.00. The
retained earnings account is to be utilized for this purpose.

You are required to record the above transactions in the following entries:
i. Journal entries
ii. Extract of Statement of Financial Position (show the equity section only)

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Solution:

Working of right issue

Step 1: Determine the amount of shares held by the company – 50,000,000 units

Step 2: Determine the amount of bonus shares offered (in units and RM)
Bonus shares = (1/20 x 50,000,000 units) × RM4.00
= RM10,000,000 @ 2,500,000 units

i. Journal entries

Bonus issue
i Dr Retained earnings a/c 10,000,000
Cr Bonus Issue a/c 10,000,000

ii Dr Bonus issue a/c 10,000,000

Cr Ordinary Shares Capital a/c 10,000,000

ii. Extract of Statement of financial position

Darul iman Bhd

Statement of Financial Position (extract) as at 31 December 20x5

Issued and paid-up capital

52,500,000 (50,000,000 + 2,500,000) Ordinary shares 110,000,000
10,000,000 5% preference shares 10,000,000

Reserve
Retained earnings (35,000,000 – 10,000,000) 25,000,000

Let’s try the following question!

The following balances were extracted from the books of Darul Ridzuan Bhd :

Statement of financial position (extract) as at 31 December 20x5

Current asset RM
Bank 1,000,000

Issued and paid-up capital

5,000,000 Ordinary shares 5,000,000
900,000 6% Preference shares 1,800,000

Reserve
Retained profit 10,000,000

To raise fund, the company made an offer of right issue to its existing shareholders of 100
shares for every 1,000 shares held at an issue price of RM2.00 per share. The issue was fully
paid and subscribed for.

At the same time, due to liquidity problem, the company decided to give 10 bonus shares for
every 20 shares held by the existing shareholders at the date of the old statement of financial
position. The value of each bonus issue is RM2.00 and retained profit was to be used for this
purpose.

You are required to record the above transactions in the following entries:
i. Journal entries
ii. Extract of Statement of Financial Position

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Answer:
i. Journal entries

Right issue
Debit Credit
RM RM
i Dr Bank [(100/1,000 x 5,000,000) x RM2.00] 1,000,000
Cr Right issue Application 1,000,000

Dr Right issue Application 1,000,000

Cr Ordinary share capital 1,000,000

Bonus issue
i Dr Retained profit [(10/20 x 5,000,000) x RM2.00] 5,000,000
Cr Bonus issue 5,000,000

ii Dr Bonus issue 5,000,000

Cr Ordinary share capital 5,000,000

ii. Extract of Statement of financial position

Darul Ridzuan Berhad

Statement of Financial Position as at 31 December 20x5

Current asset RM
Bank (1,000,000 + 1,000,000) 2,000,000

Issued and paid-up capital

8,000,000 (5,000,000+500,000+2,500,000) Ordinary shares 11,000,000
900,000 6% Preference shares 1,800,000

Reserve
Retained profit (10,000,000 – 5,000,000) 5,000,000

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2.2 ISSUANCE OF DEBENTURES

As mentioned earlier, public limited companies may also raise their capital by borrowing
money from the public through the issuance of debentures. Debentures may be issued
as follow:

a. at par - is when the debentures are issued at its nominal value. e.g. at 100.
b. at premium - is when the debentures are issued above its nominal value. e.g. at
120, or at a premium of 20%.
c. at discount - is when the debentures are issued below its nominal value. e.g. at 92,
or at a discount of 8%.

These financial liabilities are then classified and measured for as either at amortised cost
or fair value through profit or loss.

LIABILITY

Debt Debt
Instrument Measurement

Redeemable
Debentures Preference Amortised Cost Fair Value
Shares

2.2.1 Transaction Costs

Similar to issuance of share, when debt instruments are issued, the company will incur
transaction costs such as payment for consultation and legal fees and other relevant
costs. Transaction costs also called as issue costs. The accounting treatment for
transaction costs is depending on how the financial liability is classified. The treatment
can be summarised follows:

a. Where liabilities are carried at amortised cost - transaction costs are

deducted from the liability in arriving at the initial amount of the liability.

b. Where liabilities are carried at fair value - transaction costs are written off as
expenses.

2.2.2 Amortised Cost

Debentures that are recognised at amortised cost will be initially measured at fair value
minus any transaction costs (issue cost) and subsequently will be shown at amortised
cost. The amortised cost method involves amortising the difference between the initial
amount recognised and the final amount paid over the loan term and increasing the
liability by the amount amortised.

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The interest expense will be charged at effective interest rate (market interest rate)
while the interest paid on debenture will be at nominal amount (coupon rate) stated on
issue. In simple terms, the interest expense charged will not be the same from year to
year. The liability will increase with the interest expense (finance cost) charged to the
statement of profit or loss and decrease by the cash repaid.

The journal entries for the liability being accounted for at amortised cost can be
presented as follows.

Step 1: Being amount of money received from issue of debentures (fair value – issue
cost)

Dr Bank a/c x
Cr. X% Debentures a/c x

Step 2: Being interest expense charged (effective interest rate x carrying amount)

Dr Finance cost a/c x

Cr. X% Debentures a/c x

Step 3: Being interest expense paid (nominal interest rate x nominal amount)

Dr X% Debentures a/c x
Cr. Bank a/c x

Step 4: Being finance cost charged to Statement of Profit or Loss

Dr Statement of Profit or Loss/ Retained earnings x

Cr. Finance cost a/c x

Alternatively, step 2 and step 3 can be merged as follow:

Dr Finance cost a/c x

Cr. Bank a/c x
Cr. X% Debentures a/c x

Example 6: Accounting for a financial liability at amortised cost

Go Green Bhd raises finance on its first accounting period, January 20x5 by issuing
6% debentures of nominal value RM10,000,000. The financial liabilities are issued at
a discount of 10%, and will be redeemed after three years at a determined value. It is
carried at amortised cost.

The effective rate of interest is 12% and the interest is paid at the end of accounting
period. The transaction costs were RM300,000.

Required:

Explain and illustrate how the liability is accounted for in the books of Go Green Bhd.
As at 31 December 20x5

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Solution:
Step 1: Identify the debentures carrying amount

Debenture is classified as a financial liability as Go Green Bhd is receiving money that is

obliged to repay. The liability will be carried at amortised cost where initially measured at the
fair value of consideration received less the issue costs. With both discount on issue and
transaction costs, the initial measurement of the liability is as follow:

RM
Nominal value 10,000,000
Less: Discount (10% x RM10,000,000) (1,000,000)
Less: issue cost (300,000)
8,700,000

Step 2: Calculate the interest expense and interest paid on the liability

In applying amortised cost, the interest to be charged (finance cost) to the statement of profit
or loss is calculated by applying the effective rate of interest to the carrying amount of the
liability each year. The finance cost will increase the liability. The computation of finance cost
is as follow:

Interest expense = 12% x RM8,700,000

= RM1,044,000

While the interest paid at the end of the reporting period is calculated by applying th coupon
rate to the nominal value of the liability The annual interest paid will reduce the liability. The
computation of interest expense is as follow:

Interest paid = 6% x RM10,000,000

= RM600,000

In the final year, the difference between the effective and the nominal interest is added to the
carrying amount of the debenture which extinguishes the remaining balance of the liability.

Opening Finance charge at Interest paid at Carrying

balance 12% p.a 6% p.a amount at year
end

20x5 8,700,000 1,044,000 (600,000) 9,144,000

The entries for the liability being accounted for at amortised cost is presented as follows.

i. Journal entries

Issue of debentures at amortised cost

i Dr Bank 8,700,000
Cr 6% Debentures 8,700,000

ii Dr Finance cost (12% x 8,700,000) 1,044,000

Cr Bank (6% x 10,000,000) 600,000
Cr 6% Debentures (1,044,000 – 600,000) 444,000

iii Dr Statement of profit or loss 1,044,000

Cr Finance cost 1,044,000

ii. Extract of Statement of financial position

Go Green Bhd

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Statement of Financial Position (extract) as at 31 December 20x5

RM
Non-current liability
6% Debentures (8,700,000 + 444,000) 9,144,000

Let’s try the following question!

On 1 January 20x1, Go Strong Bhd issued 5% RM300,000 debenture stock at nominal

value and incurred a transactions cost amounted to RM30,000. The loan will be
redeemed in three year time at a determined value. The company measures the
liability at amortised cost. The market interest rate is 6% and interest is paid as due.

In the book of Go Strong Bhd, you are required to record the above transactions
in the following entries for the year ended 20x1:

i. Journal entries
ii. Extract of Statement of Financial Position (liability section only)

Solution:

i. Journal entries

Issue of debentures at amortised cost

Debit (RM) Credit (RM)

i Dr Bank (300,000 – 30,000) 270,000

Cr 5% Debentures 270,000

ii Dr Finance cost (6% x 270,000) 16,200

Cr Bank (5% x 300,000) 15,000

Cr 5% Debentures 1,200

iii Dr Statement of profit or loss 16,200

Cr Finance cost 16,200

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ii. Extract of Statement of financial position

Go Strong Bhd
Statement of Financial Position (extract) as at 31 December 20x1

RM
Non-current liability
5% Debentures (270,000 + 1,200) 271,200

2.2.3 Fair Value measurement

Financial liabilities that are measured at fair value through profit or loss are initially
measured at fair value. Any transaction costs incurred in connection to the issuance are
immediately written off to the statement of profit or loss. Similar to amortised cost, the
financial liability is increased by a finance cost and reduced by cash paid. However, the
liability is then revalued at each reporting date with any gains and losses immediately
recognised in the statement of profit or loss.

The measurement of the new fair value at the end of the accounting period will be its
market value. If the value is unknown, the present value of the future cash flows, using
the current market interest rates will be used. This type of measurement is not to be
tested in this syllabus.

2.3 SHARE SPLITS

A share split is a practice of companies to increase the number of issued shares in their
company without changing the total value of the shares. No effect on cash flow and no
new funds are raised. The reason for company to embark on this programme is to keep
the share price within an optimal trading range.

After a share split, the share price will be reduced to reflect the increase in the number
of shares issued. Thus, create cheaper shares and increase the shares’ marketability.
Subsequently, when the shares’ marketability is improved, the shares may reach by
more investors and eventually increase the value of the company.

Example 7

Tinta Bhd has issued and paid up capital of RM10,000,000 ordinary shares with
5,000,000 units. The company has now declared a share split in the ratio of two
ordinary shares for every one existing ordinary share.

Required:

Prepare the Statement of Financial Position (extract) before and after the share split.

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Solution:

Extract of Statement of financial position (before the share split)

Issued and paid up capital RM

5,000,000 ordinary shares 10,000,000

Extract of Statement of financial position (after the share split)

Issued and paid up capital RM

10,000,000 ordinary shares 10,000,000

After the share split, the issued number of shares will be increased to 10,000,000
units of shares. The total value of the shares remains at RM10,000,000, but the
paid up value of each share reduce to RM1.00.

2.4 SHARE CONSOLIDATION

A share consolidation is a process by which a company changes its share capital
structure by reducing the number of shares it has in issue and increasing the paid up
value of each shares. As a shareholder, even though the number of shares own would
be reduced, their paid up value of each share would rise to compensate. Subsequently,
the market price of the shares should also rise to reflect the greater ownership which
each share represents in the company.

For example, a company with 100,000,000 ordinary shares with paid up capital of
RM10,000,000 may consolidate on a 1 for 10 basis. After the consolidation, the number
of shares will reduce to 10,000,000 shares and increase the value of each share from
RM0.10 to RM1.00 each. The total value of the share issued remains unchanged.

Noted that share consolidation is the opposite of share split, in which the number of
shares issue rises, but the paid up value of each share falls.

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Quick review

The following is a set of journal entries related to the issuance of shares and debentures:

a. Issuance of shares at the first time (IPO)

Step 1: Being amount of money received on application (amount received × issue

price)
Dr Bank a/c x
Cr. Share application a/c x

Step 2: Being amount of money refunded to unsuccessful applicants -if any (amount
rejected × issue price)
Dr Share application a/c x
Cr. Bank a/c x

Step 3: Being the allotment of share capital

Dr Share application a/c x
Cr. Share Capital a/c x

b. Issuance of right issue

Step 1: Being amount of money received on application (amount received × issue
price)
Dr Bank a/c x
Cr. Right issue application a/c x

Step 2: Being the allotment of share capital

Dr Right issue application a/c x
Cr. Ordinary Share Capital a/c x

c. Issuance of bonus shares

Step 1: Being utilization of reserves for bonus issue
Dr Retained profit a/c / Asset revaluation reserve a/c x
Cr. Bonus issue a/c c x

Step 2: Being ordinary share capital increased by the bonus issue

Dr Bonus issue a/c x
Cr. Ordinary Share Capital a/c x

d. Issuance of debentures by amortised cost

Step 1: Being money received from issue of debentures (fair value – issue cost)
Dr Bank a/c x
Cr. X% Debentures a/c x

Step 2: Being amount amortised

Dr Finance cost a/c x
Cr. Bank a/c x
Cr. X% Debentures a/c x

Step 3: Being finance cost charged to Statement of Profit or Loss

Dr Statement of Profit or Loss / Retained earnings x
Cr. Finance cost a/c x

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2.5 COMPREHENSIVE EXAMPLE

The summary of financial position of Karisma Bhd as at 31 December 20x4 was as

follows:

Issued and paid up capital RM

50,000,000 ordinary shares 25,000,000
5,000,000 6% preference shares 10,000,000

Reserves
Retained profit 6,000,000

Non-current liability
5% Debenture 1,000,000

Current asset
Inventories 500,000
Account receivables 1,500,000
Bank 40,000,000

The following transactions took place during the accounting period:

1. The company issued 10,000,000 ordinary shares at RM0.50 each and 1,000,000
6% preference shares at a RM2.00 each. The preference shares carry non-
mandatory dividends.

2. The applications received for ordinary shares were undersubscribed by

1,000,000 shares whereas the applications received for the preference shares
were oversubscribed by 500,000 shares. It is the policy of the company to reject
the excess application in full and refund the money to the unsuccessful
applicants.

3. A bonus issue was made to the existing shareholders who held the ordinary
shares as at 31 December 20x4 on the basis of one bonus shares for every ten
shares held. The value of bonus share is RM0.50 each. The retained profit
account is to be utilized for this purpose.

4. On 1 October 20x5, the company issued additional RM1,000,000 5% Debentures

at a discount of 3%. The debenture is to be recognized at amortised cost. The
effective interest rate is 7%. All interest is paid at the end of the year.

You are required to prepare:

i. Journal entries to record the above transactions

ii. Statement of financial position as at 31 December 20x5 (equity and liability
section only)

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Solution:

a) Journal entries

Issuance of OSC
Debit Credit
RM RM
i. Dr Bank (9,000,000 x RM0.50) 4,500,000
Cr Ordinary Shares Application 4,500,000

ii Dr Ordinary Shares Application 4,500,000

Cr Ordinary Shares Capital 4,500,000

Issuance of 6%PSC
i Dr Bank (1,500,000 x RM2) 3,000,000
Cr 6% Preferences Shares Application 3,000,000

ii Dr 6% Preferences Shares Application 1,000,000

Cr Bank (500,000 X RM2) 1,000,000

iii Dr 6% Preference Shares Application 2,000,000

Cr 6% Preferences Shares Capital
2,000,000
(1,000,000 x RM2)

Issuance of bonus shares

Retained profit [(1/10 x 50,000,000) x
i Dr 2,500,000
RM0.50]
Cr Bonus Issue 2,500,000

ii Dr Bonus Issue 2,500,000

Cr Ordinary Shares Capital 2,500,000

Issuance of debentures
i Dr Bank (RM1,000,000 x 0.97) 970,000
Cr 5% Debentures 970,000

ii Dr Finance cost [(7% x 970,000) x 3/12] 16,975

Cr Bank [(5% x RM1,000,000) x 3/12] 12,500
Cr 5% Debentures (16,975 – 12,500) 4,475

iii Dr Retained profit 16,975

Cr Finance cost 16,975

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b) Statement of financial position

Karisma Bhd
Statement of Financial Position as at 31 December 20x5

Issued and paid up capital RM

64,000,000 (50m + 9m + 5m) ordinary shares 32,000,000
6,000,000 (5m + 1m) 6% preference shares 12,000,000

Reserves
Retained profit (6,000,000 – 2,500,000– 16,975) 3,483,025

Non-current liability
5% Debenture (1,000,000 + 970,000 + 4,475) 1,974,475

!!!Let’s try the following question:

The following is the extract equity section of statement of financial position of Kejora
Bhd as at 31 December 20x5.

Issued and paid up Capital RM

15,000,000 Ordinary shares 30,000,000
10,000,000 8% Preference shares 10,000,000

Reserves
Retained earnings 50,000,000

On 1 January 20x6, Kejora Bhd makes a public issue of 40,000,000 ordinary shares
at an issue price of RM2.50 per share payable full on application. The subscription
was oversubscribed by 15,000,000 units and the company decided to reject and the
money was refunded to the unsuccessful applicants.

The company then issues 45,000,000 units of 8% preference shares at RM0.80 per
share. This Preference shares contains a non-mandatory dividend. Applications of
35,000,000 shares were received and fully paid

In order to raise more fund, on 1 January 20x6 the company issued RM950,000 9%
debentures at 96 with an issuance cost of RM6,800. The effective interest rate is 12%
and the interest rate was paid at the end of accounting period. All the debentures were
taken up and fully paid. This debenture is carried at amortised cost.

Required:

i. Prepare the relevant journal entries to record all the above transactions.
ii. Prepare the Statement of Financial Position (extract) as at 31 December 20x6.
(Equity and liabilities section only)

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Solution:

i. Journal entries

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ii. Statement of Financial Position

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