BP22303 FINANCIAL ACCOUNTING II

LESSON PLAN

SEM 1, SESSION 2018/2019

This course reinforces the basic accounting knowledge and further exposes students to more elements of
financial statements. The course covers topics such as revenue recognition, EPS, capital reconstruction,
preparation of statement of cash flows and interim financial statements and to further their knowledge and skills
by incorporating ethical and sustainable practices to deal with financial reporting issues. The course also
discusses decision related to the selection of appropriate accounting policies and disclosure that is relevant and
reliable to users of financial statements.
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TOPIC ONE: (6 HOURS) At the end of this study session,

Week One & Two the student should be able to;

Capital Reconstruction 1.1 Explain the meaning of capital,

reduction, reorganization and
Duration: 6 hours reconstruction;
1.2 Determine the conditions that
Introduction: must be fulfilled before a
These three (3) terms - Capital Reorganization, Capital company can reduce its
Reduction and Capital Reconstruction are all ways out of capital;
1.3 Understand how to implement
a distress situation. They may be employed individually or
an already formulated scheme
in combination of two or all three to resolve a distress
of capital reduction;
situation facing a company. But most often, Capital 1.4 Understand how to formulate a
Reorganization and Reduction are jointly adopted in a scheme of capital reduction,
scheme to resolve a financial distress. A capital reduction reorganization or
scheme may be called for in the face of accumulation of reconstruction;
persistent trading losses, or in the case of a fall in the 1.5 Explain that capital
assets of the firm of an extensive nature, requiring drastic reconstruction can either be
revaluation of the company’s assets. The ways to external or internal;
account for each of these three (3) terms in the books is 1.6 Practically demonstrate by full
dealt with in this session presentation. illustration the procedure for
preparing the necessary
accounts in capital reduction,
Summary of Study: reorganization and
In the Study Session, the students learnt about: reconstruction schemes
implementation and
i. The distinction among these three (3) terms: capital formulation.
reduction, capital reorganization and capital
reconstruction;
ii. The conditions to be fulfilled before a company can
reduce its capital; Note
iii. The accounting procedure for capital reduction,
reorganization and reconstruction scheme formulation :
and implementation;
iv. Practical demonstration of the various steps taken
towards the preparation of the necessary accounts.

Teaching Strategies:
 Lecture
 Tutorial
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Self-Assessment Questions (SAQs) for Study Session 1

Now that you are through with this study session, to assess how well you have achieved
its learning objectives, you may answer the following questions. Write your answers in
your study notes and discuss them with your tutor at the tutorial class.

SAQ 1.1 (Testing Learning Outcome 1.1 and 1.2)

i. Distinguish among the following terms

a. Capital reduction
b. Capital reorganization; and
c. Capital reconstruction.

ii. State the conditions that must be met before a company can reduce its capital

SAQs 1.2 (Testing Learning Outcomes 1.4, 1.5 and 1.6)

i. The following statement of financial position is provided in respect of Bad-hit Sdn

Bhd which has been badly hit by recession.

RM’000 RM’000
Non Current Assets
Land and Building 10,000
Plant and Machinery 36,200
Development expenditure 1,500
Goodwill 1,200
48,900
Current Assets
Inventory 23,500
Trade Receivables 2,000
Prepayment 9,300
34,800
83,700
Equity
Ordinary capital 40,000
Accumulated losses (9,400)
30,600
Liabilities
12% Debenture 10,000
Trade Payable 18,400
Bank Overdraft 24,700 53,100

83,700
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The company’s activities have been rationalized and the loss making
department closed. The following scheme for the financial reorganization has
been drawn up to be implemented on 1 January 2019:

1. Intangible assets are to be treated in accordance with the prudent

concept: and the following assets are to be restated at the following
realistic values: Land and building = RM16,100,000, plant and machinery
=RM18,000,000, inventory =RM16,200,000

2. RM500,000 of the Trade Receivable were ascertained as uncollectable

3. The ordinary shares capital is to be reduced to a level necessary to

enable the remaining assets and liabilities to be restated at realistic
figures and clear past losses (if any).

4. The debentures holders are to accept in full satisfaction of the amount

due to them, 8,000,000 ordinary shares of RM1.00 each at RM1.20.

5. The directors to subscribe for a further 30,000,000 ordinary shares of RM1.00

each at a price of RM1.10 to provide the cash needed to complete the
reorganization.

6. The bank to covert RM20,000,000 of the overdraft into a loan carrying 15%
per annum; repayable in 8 equal ½-yearly installments commencing from
30 June 2019.

7. The trade creditors have agreed to collect 25% of the amount due to
them immediately; while the balance is to be repaid the following year
at 3% per annum.

You are required to prepare: as on 31 December 2019 the:

a. Reorganizing accounts

b. Ordinary shares capital accounts

c. Bank accounts

d. Statement of financial position (after the reorganization scheme

implementation)
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SAQs 1.3 (Testing Learning Outcomes 1.4, 1.5 and 1.6)

ii. The Board of director of GOING-GONE Sdn Bhd, has been meeting for the
past six (6) weeks to formulate a strategy out of the distress position the
GOINGGONE limited has found itself, but there seem to be no better
option than for a capital reconstruction or capital reorganization or
capital reduction scheme to be carried out.

The following is the statement of financial position of the company as at

30 September 2017:

Cost Depreciation NBV

Non current asset
Land and building 46,000 5,000 41,000
Plant & Machinery 85,000 6,000 79,000
Patents 28,000 - 28,000
159,000 11,000 148,000

Investment in Subsisdiary
Company shares @ cost 85,000
Advances 46,000
131,000
Current Cost
Inventory @ cost 87,000
Trade Receivables 42,000
Prepayments 10,000
139,000

418,000
EQUITY & LIABILITIES
100,000 ordinary shares of RM1.00 each, RM0.75 paid 75,000
250,000 8 ½ of cumulative redeemable preference share of RM1.00 250,000
each, fully paid
325,000
Profit & Loss account (167,000)
158,000
Current liabilities
Trade Payables 208,000
Bank Overdraft 52,000
260,000

418,000
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Notes:
1. There are contingent liabilities in respect of:
(a) A guarantee given to bankers to cover a loan of RM18,000 made to
the subsidiary; and
(b) Uncalled capital of RM0.15 per share on the holding of 100,000
shares of RM1 each in the subsidiary.
2. The dividend on the preference share is 3-years in arrears.

Additional Information:

The following capital reduction and reorganization scheme, which is to take

effect as on 5th October, 2017, has been dully approved and authorized:
1. The unpaid capital on the ordinary shares to be called up forthwith.
2. The ordinary shares there upon to be reduced to share of RM0.25 each
fully paid up by cancelling RM0.75 per share and then, each fully paid
share of RM0.25 to be subdivided into five (5) shares of 5k each, fully paid.
3. The holders (per (b) above) to surrender four (4) such 5k shares out of
every five (5) for re-issue as set out below.
4. The 8½ cumulative preference shares together with all arrears of dividend
thereon to be surrendered and cancelled; the holders to subscribe to a
new issue of convertible 7½ notes of RM30 each on terms that for every 50
preference share held shall:
(i) Receive one RM30 note, credited as RM10 paid and pay up the
balance.
(ii) Receive 80 fully paid ordinary shares of 5k each-being a redistribution
of those surrendered by the ordinary shareholders.
5. The unpaid capital of the shares in the subsidiary to be called up and paid
by the parent company whose guarantee to the bank should be
cancelled.
6. The book value of the freeholds to be written up to RM60,000 being the
amount of an independent valuation.
7. The adverse balance on profit or loss account and the patents to be
written off, and RM50,000 to be written off the shares in the subsidiary.
8. The following information is provided in respect of stock which should be
valued in accordance with the normal accounting practice.
Cost (RM) Net Realizable value (RM)
Raw Materials 35,000 36,500
W.I.P 10,000 11,000
Finished Goods 40,000 36,500

9. A total of 25% of the debtors was agreed to have proved uncollectible.

10. The balance of the sums made available by the scheme (if any) to be
used to write down the plant and machinery.

Required
a. Prepare the capital reduction account and related journal entries.
b. Prepare the summarised statement of financial position after reconstruction,
assuming that all the reconstruction events occurred after close of business on 31
December 2017.