ISSUANCE OF SHARES

AND LOAN CAPITAL

PART 4

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 LEARNING OBJECTIVES

• Explain why companies may issue shares

• Explain and show entries in journal and SOFP for the issue
of shares
• Explain payment by instalment (theory only).
• Explain and show entries in journal and SOFP for issue of
debentures and convertible loan capital at par, premium
and discount

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 TERMS RELATED TO SHARE
CAPITAL
• Authorized capital
• Represent the total amount of capital with which the company is
registered.
• It is also the maximum amount of capital that a company can
issued
• This amount must be stated in the Memorandum of Association
• Also called nominal capital or registered capital

• Subscribed capital:
• The amount of capital (out of authorized capital) for which
company has received applications from the general public who
are interested in buying shares 3
 TERMS RELATED TO SHARE
• Issued capital:
CAPITAL
• The amount of capital (out of subscribed capital) which has been
issued by the company to the subscribers and thus are now
shareholders.
• Call-up capital
• In some jurisdictions, company is permitted to ask for only part
of the total issued capital
• i.e. company will require shareholders to pay only part of the
amount of the shares they hold and not to pay fully.
• Paid-up Capital
• The amount of capital (out of called-up capital) against which
the company has received the payments from the shareholders
so far.
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 BONUS SHARES

Aka bonus issue, scrip issue, share dividend

Shares issued by the company to the existing s/holders
free of charge (FOC).
Usually based on the proportion of the ordinary share
held by the shareholders
The shares issued are ordinary shares
Why the company issue bonus shares?
Large accumulated reserve
Replace cash dividend
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 BONUS SHARES

Profit will be distributed to s/holders in the form of

bonus shares as a replacement of cash dividends due
to the company’s dividend policy or statutory
regulations.
It can be issued from:
Capital reserves
Revenue reserves

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 BONUS SHARES
Example : Q2- Jun 2019

Mutiara Kasih was incorporated as a trading company in 2018. The extract of the
Statement of Financial Position as at 31 December 2017 is as follows:

Issued and paid-up capital RM

40,000,000 ordinary shares 140,000,000

10,000,000 8% preference shares 15,000,000

A bonus issue of 1 to 10 shares was made to the existing shareholders held at the
opening year balance

OS:10 BI:1
(40,000,000/10) x 1 = 4,000,000 shares (BI)
4,000,000 x RM3.5 = RM14,000,000

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 Journal Entries
Issuance of Bonus Issue
Transactions RM RM

Issuance of Bonus issue/share

Dr Retained Earnings/Profit 14,000,000

Cr Bonus Issue 14,000,000

Dr Bonus Issue 14,000,000

Cr Ordinary share capital (OSC) 14,000,000

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 CAPITAL RESERVES

• Capital reserves
- Non distributable reserves
- Arising through non trading activities
- Cannot be distributed by way of cash dividends
- Created due to statutory reasons:
- provision by case of law or accounting practices

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 REVENUE RESERVES

• Revenue reserves (e.g Retained Profit and General

Reserves)
- Distributable reserves

- Arising through trading activities

- Can be distributed for general use in the
business
- Created by transferring a certain amount of
profit and loss account to a particular reserves
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account.
 RIGHTS ISSUE

An invitation to existing s/holders to

purchase additional shares in the company.
One way to raise capital
Usually offered at a price below the market
price of the shares of the company.
The shares issued are ordinary shares

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 RIGHT ISSUE
Example : Q2- Mar 2014

Inqi Bhd has been operating a few years ago. The extract of the Statement of
Financial Position as at 30 September 2012 is as follows:

Issued and paid-up capital RM

7,000,000 ordinary shares 7,000,000
2,000,000 8% preference shares 1,000,000

The directors’ plan to get more capital injected into the business. On 31 December
2012, the company also made a right issue to the existing shareholder by offering
1 unit for every 4 units shares held on 30 September 2012 at RM1.20 per share.

OS:4 RI: 1
(7,000,000/4) x 1 = 1,750,000 shares
1,750,000 x RM1.20 = 2,100,000
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 Journal Entries
Issuance of Right Issue
Transactions RM RM

Issuance of Right Issue

Dr Bank (1,750,000 x 1.20) 2,100,000

Cr Right Issue Application 2,100,000

Dr Right Issue Application 2,100,000

Cr Ordinary share capital (OSC) 2,100,000

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 DIFFERENCES BETWEEN BONUS
SHARES/ISSUE AND RIGHTS ISSUE

• Bonus shares are issued because the company

unable to distribute its profits in the form of
cash dividends but rights issue is to raise capital
in the company

• Rightsissue involve cash inflow but not for

bonus shares (FOC).
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 SIMILARITIES BETWEEN BONUS
SHARES AND RIGHTS ISSUE

• Both are offered to the existing shareholders

• Both increase the share capital of the
company
• Both are Ordinary shares

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 TERMS OF THE ISSUE –
Payment by installments

Pay by installments (theory only)

Refer text book

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 SHARE SPLIT

Reason/ rationale: to keep share price within

optimal trading range, cheaper for small time
investor, improves marketability
Increase the number of shares in a company
without raising any funds
Nominal value of share reduced, number of
shares increased, total value of shares remains
unchanged

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 Example
Coco Bhd declared a share split in the ratio of
five ordinary share of RM0.20 each for every
one ordinary shares of RM1 each held.
Extract SFOP BEFORE share split RM
Issued share capital
200,000 ordinary shares of RM1 each 200,000

Extract SFOP before AFTER split RM

Issued share capital
1,000,000 ordinary shares of RM0.20 each 200,000
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 ISSUE OF DEBENTURES

• Company also increase capital by issuing

debentures
• The issue of liability give rise to an obligation on
issuer to settle the debt as and when due
• Involve transaction costs
• Can be issue at par, premium and discount
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 Journal Entries
Issuance of Debentures
Transactions RM RM
Issuance of % Debentures

Dr Bank XX (A)
(% Debenture at discount/premium) – (issuance cost)
Cr %Debentures XX

Finance costs incurred on the %Debentures

Dr Finance cost (A x %effective rate x months) XX

Cr Bank
(% Debenture x % int. on debenture x months) XX
Cr. % Debenture XX

Dr Retained Earnings XX
Cr Finance cost (A x %effective rate xmonths)
XX
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 ISSUANCE OF DEBENTURES
Example

QI Bhd has been operating a few years ago. The extract of the Statement of
Financial Position as at 31 December 2019 is as follows:

Issued and paid-up capital RM

7,000,000 ordinary shares 7,000,000
2,000,000 8% preference shares 1,000,000
Reserves
Retained Earnings 1,000,000
On 1 August 2020, the company also issued RM3,000,000 4% Debentures at 95.
The issuance cost is RM20,000. The effective interest rate was 10%. This
debenture was carried at amortised cost. The interest was paid at the end of
financial year.

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 ISSUANCE OF DEBENTURES
Example
Reserves
Retained Earnings 1,000,000
On 1 August 2020, the company also issued RM3,000,000 4% Debentures at 95.
The issuance cost is RM20,000. the effective interest rate was 10%. This
debenture was carried at amortised cost. The interest was paid at the end of
financial year.

4% Debenture RM3,000,000 at 95% = RM3,000,000 x 95% RM2,850,000

RM2,850,000 – RM20,000 (issuance cost) RM 2,830,000

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 Journal Entries
Issuance of Debentures
Transactions RM RM
Issuance of % Debentures
Dr Bank 2,830,000
(4% Debenture at 95 ) – (issuance cost)
Cr 4%Debentures 2,830,000

Finance costs incurred on the %Debentures

Dr Finance cost 117,907

(2,830,000 x 10% effective rate x 5/12 )
Cr Bank 50,000
(3,000,000 x 4% int. on debenture x 5/12)
Cr. 4% Debenture 67,907

Dr Retained Earnings 117,907

Cr Finance cost
117,907
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THANK YOU

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