UKAF 1073

Business Accounting II
Methods of Evaluation
1. Assignment 20%
2. Mid-term test 20%

3. Final exam 60%

Total 100%
Prescribed Text
Every student must have continual assess to the following text:

Wood, F., & Sangster, A. Frank Wood’s Business Accounting,

Volume 2. Harlow: Pearson Education Ltd.
Morni HJS, Tuam KC, Lim WL, Lee KF, Kong CC, & Rahizah AR
(2013). Financial Accounting 1. Selangor: Oxford Fajar Sdn
Bhd.

• The sequence of the topics arrangement in this course DOES NOT

match with your text book.
• You may need to refer sub-sections of different chapters in your
text book for each topic.
• You are advised to refer and attempt exercises from other books
during the course of study.
 Message to students
• You have been registered with UTAR’s Web-
base Learning Environment (WBLE).

• All students are required to log on to

http://wble.utar.edu.my.
Message to students
 Please attend all lectures and tutorials.

 Complete all tutorial questions on time,

before the next tutorial class.

 Please ask questions during and after

class, whether lectures or tutorials.
Contact Information

Lecturer’s name: Mahendra

Faculty of Accountancy and Management
(Room no: KA 632)
Email address: mahendra@utar.edu.my
Consultation: will update soon
 WEEK 1

COMPANY:
Organization and Share
Capital Transactions
Company
Comprises two or more persons joined
together for the purpose of business
Recognised by law as a separate legal
entity
Formed under the provisions of
Companies Act, 1965 (registered with
CCM)
Classifications of
Companies
By purpose
◦ to earn a profit
◦ or nonprofit
By ownership
◦ Publicly-held companies
◦ Privately- held companies
Classification of Companies
Public Company
◦ Not a private company.
◦ Members: 2- no limit.
◦ Advantage: can issue shares/debentures to
public.
◦ “Berhad” is used to identify the co.
◦ May be listed in the stock exchange.
◦ All listed co are public co, but not all public
co are listed.
Classification of Companies
Private Company
- Cannot invite the public to subscribe to its
shares/debentures.
- Member: 2-50
- Restriction to transfer of shares
- Mainly family-owned/small business
- Use “Sdn Bhd” after its name
Characteristics of a
Company
Separate legal existence from its owners
Shareholders have limited liability
Limited by shares:
◦ Liabilities are limited to the amount specified, if
any, unpaid on the share capital. Shareholders are
not responsible for the liabilities of the company.
Ownership held in shares of capital stock
transferable units.
Ability to acquire capital through the issuance of
shares

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 Characteristics of a
Company
Company management
◦ is at the discretion of the board of directors
who are elected by the shareholders
Subject to numerous government regulations
Must pay an income tax on its earnings
Shareholders required to pay taxes on the
dividends they receive: the result is double
taxation
 Company
Organization Chart

Shareholders

Board of
Directors

President

Vice- Vice- Vice- Vice-

Company
President President President President
Secretary
Marketing Finance Production Personnel

Treasurer Controller
Advantages and Disadvantages
of a Company
Advantages Disadvantages
Separate legal existence Company management-
Limited liability of separation of ownership and
shareholders management
Transferable ownership Government regulations
rights
Ability to acquire capital Additional taxes
Continuous life
Company management –
professional managers
CLASSIFICATION OF
SHARES
 ORDINARY SHARES
 PREFERENCE SHARES
 Ordinary Shares
 All companies must have ordinary shares, which
comprise the bulk of the company’s equity.
 Ordinary shareholders are effectively the owners
of the company, and have certain rights and
rewards.
 They are also subject to certain risks e.g. risk of
business failure
Ownership Rights of Shareholders
Right to Vote—Stockholders have the right to vote on matters that come
before the stockholders, including the election of corporate directors.

Right to Receive Dividends—Stockholders have the right to share in profits

when the corporation declares dividends. The percentage of shares a
stockholder owns determines his or her share of the dividends distributed.

Right to Share in Distribution of Assets—Stockholders share in the

distribution of assets if the corporation is liquidated. The percentage of
shares a stockholder owns determines his or her share of the assets, which
are distributed after creditors and preferred stockholders are paid.

Preemptive Right—The preemptive right allows a stockholder to maintain

his or her percentage share of ownership when new shares are issued.
Each stockholder is offered the opportunity to buy a percentage of any
new shares issued equal to the percentage of shares he or she owns at the
time. However, most corporations have dropped this right due to
difficulties it causes corporations when they issue new shares.
 Preference Shares
 Contractual provisions give it priority over ordinary
shares (or preferential rights) in certain areas:
1) distribution of earnings
2) assets in the event of liquidation.
 usually do not have voting rights
 identified separately from other shares and paid up
capitals.
 May be classified as equity or a liability
•Treated as equity if the preference shares are
irredeemable or redemption is at discretion of company.
•Treated as a liability if mandatory redemption at a fixed
date or for a fixed amount.
Types of Preference Shares
Cumulative – entitled to a fixed dividend p.a. Any arrears of
dividend, due to insufficiency or absence of profits, are
carried forward and payable in future
Non- Cumulative – have a fixed dividend rate. Any arrears of
dividend are forfeited and not carried forward.
Participating – entitled to additional dividend, above the
fixed dividend, if further profits after all other classes of
shareholders have received their dividends
Redeemable – can be repurchased at a future fixed date at
the time of issue. Considered as a liability
Convertible – can be converted to ordinary shares at a
specified date and rate of conversion
  Preferential
Dividends
 Cumulative Dividends
Preferential Dividends

Preferred Ordinary
shareholders shareholders Preferred
shareholders
Cumulative dividend
◦ preferred shareholders must be paid both
current and prior year dividends before
ordinary shareholders receive any dividends
Dividends in arrears
◦ preferential dividends not declared in a
given period
◦ not considered a liability, but the amount of
the dividends in arrears should be disclosed
in the notes to the financial statements
 Computation of Total Dividends to
Preference Shares
If Port Marina has 5,000 shares of 7%, RM100 par value
cumulative preference shares outstanding, then the annual
dividend is RM35,000 (5,000 shares x RM7 per share). If
dividends were two years in arrears, preferred shareholders are
entitled to receive the following before any dividends are paid to
ordinary shareholders.

Dividends in arrears ($35,000 x 2) $ 70,000

Current-year dividends 35,000
Total preferential dividends $105,000
 If a company has only one kind of shares,
it usually is labeled as ordinary shares.

Type of Shares Definition

Authorized Shares available to sell
(issued and unissued)
Issued Shares actually sold
(includes treasury shares)
Outstanding Shares held by investors
(excludes treasury shares)
Authorized – Unissued = Issued
Issued – Treasury Shares = Outstanding
 Share Issue Considerations
Authorized Capital
 Total amount of shares a company is allowed
to sell as indicated by its MA.
◦ The authorization of share capital does not
result in a formal accounting entry.
◦ This event has no immediate effect on either
corporate assets or shareholders’ equity.
 Share Issue Considerations
Issuance of Shares
 A company can issue ordinary shares directly
to investors or indirectly through an investment
banking firm (brokerage house).
◦ Direct issue is typical in closely held companies.
◦ Indirect issue is customary for a publicly held
corporation.
◦ In an indirect issue, the investment banking
firm
◦ May agree to underwrite the entire share issue.

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 Share market price
information
Publicly held companies
◦ traded on organized exchanges
◦ dollar prices per share are established by the
interaction between buyers and sellers
The prices set by the marketplace generally
follow the trend of a company’s earnings and
dividends.
Example of listing on the Bursa Malaysia
Daily Summary is shown below:
 Issued Capital

That part of the nominal capital which

has been issued to the public.
 Partly or fully paid.
◦ Partly in instalments
 Company Capital

Shareholders’ equity, share-holders’ equity, or

company capital.
◦ Owner’s equity in a company
◦ Shareholders’ equity section of a corporation’s
SOFP.
Paid-up (contributed) capital –
Total amount of cash paid up to the company by
shareholders in exchange for share capital.
Retained earnings
Net income that is retained in a company.
Comparison of Owners’ Equity
Accounts

Note: Common stock = ordinary shares

 Ordinary Share Issues

The primary objectives in accounting for

the issuance of ordinary shares are:
 To identify the specific sources of paid-
up capital.
 To maintain the distinction between
paid-up capital and retained earnings.
 New public issue
(Initial Public Offerings - IPO)

Prospectus – circular to the public to invite them

to subscribe for shares.
Application form – application made via forms or
electronic share application system (via ATMs).
Application & Allotment of shares – only
successful applicants are allotted shares.
 Issue & recording of shares
•Shares are recorded at the issue price.

Shares paid in full

Dr Bank XXX
Cr Share Capital XXX
 Worked example
•The directors of Orange Bhd issued 60 000
Ordinary Shares RM1.50 per share. All the
shares were subscribed for and issued.

Required:
•Prepare the journal entries and the ledger
entries to record the issue of the shares.
 Journal

Date Particulars Dr Cr
RM RM
Bank 90 000
Ordinary Share Capital 90 000
 Ledger
Bank
RM RM
Ordinary Share
Capital 90 000

Ordinary Share Capital

Bank 90 000
 Worked exercise
The directors at Summer Bhd offered 100 000
10% preference shares of at RM1.20 per share.
All the shares were subscribed and paid for.
Required:
Prepare the journal entries and the ledger
entries to record the issue of the preference
shares.
Date Particulars Dr Cr
RM RM
Bank 120 000
10% Preference Share
Capital 120 000
 Bank
RM RM
10% Preference
120 000
Share

10% Preference Share Capital

Bank 120 000
 Shareholders’ Equity
Presentation and Analysis

Shareholders’ equity section of the Statement of

Financial Position
◦ paid-up capital and retained earnings are
reported
◦ specific sources of paid-up capital are identified

Paid-up capital
◦ Share capital
◦ Paid-up capital is sometimes called contributed
capital.
 Shareholders’ Equity
Presentation
EXAMPLE
Statement of Financial Position (partial)
Authorized capital RM RM
Ordinary shares 200,000
5% Preference shares 50,000
250,000
Issued and paid-up capital
Ordinary shares 100,000
5% Preference shares 20,000
120,000
Reserves
Revaluation reserve 10,000
General reserve 5,000
Retained earnings 14,256

Shareholders’ interests 29,256

149,256
 Book Value versus
Market Value
Book value per share
◦ based on recorded costs

Market value per share

◦ reflects subjective judgments of thousands of
shareholders and prospective investors about the
company’s potential for future earnings and
dividends
◦ may exceed book value per share, but that fact
does not necessarily mean that the share is
overpriced
 Shares paid by installment

 Application
 Allotment
 Call
 ACCOUNTING ISSUES OF
SHARES
i. On receipt of application money- debit bank,
credit application account
ii. On sending the allotment letter- debit
application a/c, credit share capital account
with application money), debit allotment
account, credit share capital account (with the
amt due on allotment)
iii. Sums returned to unsuccessful applicants-
debit application account, credit bank
iv. Excess application money retained on account of
allotment- debit application a/c, credit allotment
account
v. On receipt of the amount due on allotment- debit
bank, credit allotment account
 SAMPLE QUESTION
• Colourful Bhd ,whose authorized share capital is RM
50,000 divided into 200,000 ordinary shares of 0.25 cents
each, issue 100,000 shares to the public on the following
terms: RM 0.05 per share on application, RM 0.10 per share
due on allotment, first call of RM 0.05 on Sept 3, and
second and final call of RM 0.05 due on Oct 5.
•Applications were received for 120,000 shares on July 17
and allotment made on Aug 3, on which date excess
application money was returned to unsuccessful applicants.
•All installments were received five days after the due dates.
JOURNAL ENTRIES
Date Details Dr Cr
(RM) (RM)
July 17 Bank 6,000
Application 6,000
(Being RM 0.05 per share received on
applications for 120,000 ordinary shares)

Aug 3 Application 1,000

Bank 1,000
(Being return of RM 0.05 per share on
20,000 unsuccessful applicants)
JOURNAL ENTRIES
Date Details Dr Cr
(RM) (RM)
Aug 3 Application 5,000
Allotment 10,000
Ordinary shares capital 15,000
(Being allotment of shares on this day,
RM 0.10 due on allotment)

Aug 8 Bank 10,000

Allotment 10,000
(Being amount received on allotment)
JOURNAL ENTRIES
Date Details Dr Cr
(RM) (RM)
Sept 3 First Call 5,000
Ordinary shares capital 5,000
(Being first call of RM 0.05 per share on
100,000 shares)

Sept 8 Bank 5,000

First Call 5,000
(Being amount received on first call)
JOURNAL ENTRIES
Date Details Dr Cr
(RM) (RM)
Oct 5 Second & final Call 5,000
Ordinary shares capital 5,000
(Being second and final call of RM 0.05
per share on 100,000 shares)

Oct 10 Bank 5,000

Second & final Call 5,000
(Being amount received on second &
final call)
 SAMPLE QUESTION 2
o Burn Bhd has a nominal capital RM 120,000 divided into
120,000 ordinary shares of each RM 1. The whole capital
was issued on the following terms: Application is RM
0.125,Allotment RM 0.25,First Call RM 0.25 and Final call
RM 0.375.Applications were received for 160,000 shares
and it was decided to allot the shares on the basis of three
for every four which application had made.
oThe balance of application money were applied to
allotment, no cash being refunded.
oShow the relevant ledger accounts for the above
transactions.
 APPLICATION
Ordinary share 15,000 Bank 20,000
capital [160,000 x 0.125]
[120,000 x 0.125]
Allotment 5,000
[40,000 x .125]

---------- ----------
20,000 20,000
--------- ----------
 ALLOTMENT
Ordinary share 30,000 Application 5,000
capital [120,000x 0.25]

Bank 25,000

---------- ----------
30,000 30,000
---------- ----------
 1ST CALL
Ordinary share 30,000 Bank 30,000
capital
[120,000 x 0.25]
---------- ----------
30,000 30,000
---------- ----------
 FINAL CALL
Ordinary share 45,000 Bank 45,000
capital
[120,000 x 0.375]
---------- ----------
45,000 45,000
----------- ----------
 ORDINARY SHARE CAPITAL
Bal c/d 120,000 Application 15,000

Allotment 30,000

1st Call 30,000

Final call 45,000

------------ ----------
120,000 120,000
 BANK
Application 20,000 Bal c/d 120,000

Allotment 25,000

1st Call 30,000

Final call 45,000

---------- -----------
120,000 120,000
 Share forfeiture
 When a subscriber defaults in share payment, and
after due reminder, the shares are forfeited.

 The share capital account will be reduced by the

amount of the capital called up on the nominal value
of the forfeited shares.

 The amount paid up on forfeited shares will be

credited to the forfeited shares reserve a/c if the
shares are cancelled. This represents capital gain.