Learning Objectives
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Transcript of Learning Objectives
Company Accounts
LECTURE 4
Issah HamduFaculty of Business Management and Globalization
Tel : 603 8317 8833 (Ext 8403)Email: [email protected]
BACCT1201 • Financial Accounting
Learning Objectives
• At the end of the lecture students should be able to:– Identify, defined and differentiate
(including characteristics and importance) between different types of companies.
– Describe the statutory framework governing limited liability companies.
– Identify, defined and differentiate between different types of capital for companies
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Learning Objectives...
• Explain the differences between the memorandum of association and articles of association
• Explain and demonstrate the key steps in the issuance, purchase, redemption, conversion and forfeiture of shares and debentures including the accounting entries.
• Explain why and how annual reports (internal financial statements) for limited companies are prepared.
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Learning Objectives...
• Prepare published accounts (external use) for limited liability companies.
• Explain when and how a limited company may increase/decrease its share capital.
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Introduction• When business grows, it needs more capital to
finance its operations. This normally leads to investors outside the business are invited to invest in the ownership or equity of the business. This is how a company (corporation) is formed.
• A company is a "corporation" - an artificial person created by law. A company is a "legal" person. A company thus has legal rights and obligations in the same way that a natural person does.
• Companies are registered legal entities formed by several persons that can own property, draw contracts and employ people.
Type of companies in Malaysia
• The most common type of company in Malaysia is a company limited by shares. This may be further categorized into:
– Public Limited Company and
– Private Limited Company
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Types of Limited Companies in Malaysia
• Private limited companies cannot sell shares to the public, and are distinguished by the appellation "Sendirian Berhad", shortened to "Sdn Bhd" or "S/B".
• Public limited companies source their capital by selling shares to the public, and are distinguished by the appellation "Berhad", shortened to "Bhd".
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Other Types of Companies in Malaysia
• Exempt private company: a private limited company with not more than 20 members. Its shares cannot be held directly or indirectly by any other company. Such companies need not file their annual report with registrar of companies provided that the company files a certificate , signed by a director, the secretary and the auditor of the company stating that the company is able to meet its liabilities as and when they fall due.
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Other Types of Companies in Malaysia
• Foreign Company: A company incorporated outside Malaysia but which carries on business in Malaysia or establishes a place of business in Malaysia.
• Certain documentation and fees are required of this companies before they can commence business. This type company can hold movable properties in Malaysia.
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Other Types of Companies in Malaysia
• Investment Company: a public company engaged primarily in investments in marketable securities for the purpose of revenue and profit and not for the purpose of exercising control.
• Such companies are declared as investment companies by the ‘King’ or Y.P. Agong, and the status can be revoked if the purpose of its formation changes.
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Regulation of Registered Companies in Malaysia
• Companies in Malaysia are governed by the Companies Act 1965, which protects the rights and interests of shareholders and investors, and provides regulations for the incorporation of companies, the formulation of company constitutions, management and closures.
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Regulation of Registered Companies in Malaysia
• The provisions of The Companies Act 1965 allow the establishment of 3 types of companies:
• a company limited by shares, which can be private or public.
• a company limited by guarantee, where the members guarantee to meet the liability of up to a nominated amount if the company is wound up.
• an unlimited company, where there is no limit to the members' liability.
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Regulation of Registered Companies in Malaysia
• A company must have a minimum of two members, but a private limited company is limited to 50 members (public limited companies have no member limit).
• A minimum paid-up capital of only RM2 is needed to start a private limited company.
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Regulation of Registered Companies in Malaysia
• Public limited companies need a paid-up capital of not less than RM60 million (if it seeks to be listed on the Kuala Lumpur Stock Exchange Main Board) or not less than RM40mil (if it seeks to be listed on the KLSE Second Board).
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Some Benefits & Limitations of Private & Public Companies
Category Public Company Private Company
Minimum no. of members 7 2Maximum number of members
Unlimited 50
Invitation to public to subscribe
Allowed Not allowed
Transfer of shares to the public
Allowed Not allowed
Prefix after name Ltd (Berhard) Private Limited (Sdn Bhd)
Offer of shares & Debentures
Allowed Not allowed
Liability Limited May not be limitedBACCT1201 Financial Accounting 15
Capital Structure of a Company
• Authorized/Nominal/Registered share capital: Maximum number of shares that a company can issue to the public as specified in the firm's articles of incorporation. This amount of shares is registered by the company and thus stated in the memorandum of association.
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Capital Structure of a Company
• Par or nominal value: A minimum price of below which a company’s share cannot be issued as designated in the articles of incorporation. It is the face value attached to each unit of share.
• Issued share capital: The total value of the shares issued by the company and made available to the public for purchase i.e. number of issued shares multiplied by nominal value of shares.
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Capital Structure of a Company
• Unissued capital: the difference between authorized capital and issued capital.
• Called Up capital: the amount of capital that the company has called up on the issued capital which must be paid within a specified time by all subscribers.
• Uncalled Up capital: the portion of the issued capital not yet called up by the company. Thus the subscribers are not required to pay yet.BACCT1201 Financial Accounting 18
Capital Structure of a Company
• Paid Up capital: this is the amount of called up capital that has been paid by the subscribers.
• Unpaid capital: the amount of the called up capital that the subscribers failed to pay when the money was called. The unpaid amount is also referred to as call in arrears.
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Capital Structure of a Company
• Reserves: Profit and loss reserves are profits due to the owners that have not been paid out as dividend. This amount may not necessarily be held in cash but might have been invested in additional stock or fixed assets.
• Shareholder fund: This is the combination of share capital (issued) and reserves.
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Memorandum of Association
• The memorandum of association of a company is the document that governs the relationship between the company and the outside world. It is one of the documents required to incorporate a company in Malaysia, and the United Kingdom. It is also used in many of the common law jurisdictions of the Commonwealth.
• A company may alter particular parts of its memorandum at any time by a special resolution of its shareholders, provided that the amendment complies with company law.
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Memorandum of Association
A memorandum of association is required to state following:
• the name of the company, • the type of company (such as public
limited company or private company limited by shares),
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Memorandum of Association
• the objectives of the company
• its authorized share capital, and the subscribers (the original shareholders of the company).
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Articles of Association
• These are the regulations governing the relationships between the shareholders and directors of the company, and are a requirement for the establishment of a company in most common wealth countries (including Malaysia and United Kingdom) and many other countries.
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Articles of Association
• Together with the memorandum of association, they form the constitution of a company. The equivalent in the United States is Articles of incorporation.
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Articles of Association…
• Articles of association typically cover the following issues:
• issuing of shares (also called stock),• the different voting and dividend rights
attached to different classes of share, • restrictions on the transfer of shares, • the rules of board meetings and
shareholder meetings, and other similar issues.
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Articles of Association…
• In most common wealth countries such as the UK and Malaysia , a table containing standard articles of association is usually establish under the company’s Act, however, a company is free to incorporate under different articles of association, or to amend its articles of association at any time by a special resolution of its shareholders, provided that they meet the requirements and restrictions of the Companies Acts.
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Issue of Shares
• A company may have more than one type of shares. They differ in their voting rights, in priority to receive dividends and in the return of capital in the event liquidation of the company.
• Below are some details for the two main types of shares most companies usually issue.
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Types of SharesOrdinary shares: generally, all companies musthave ordinary shares. This share usuallycomprises the bulk of the company’s capital.
Thisclass of shares has the following features:
• carries the right to vote• dividends are paid to shareholders after dividend
payments to preference shareholders• where a business is performing well, dividend
payments can be high• carries the highest risk for all types of shares
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Types of Shares……..Preference shares offer their owners
preferencesover ordinary shareholders. There are two majordifferences between ordinary and preferenceshares:
• Preference shareholders are often entitled to a fixed dividend even when ordinary shareholders are not.
• Preference shareholders cannot normally vote at general meetings.
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Types of shares
• The preference dividend is fixed in the sense that preference shares are often issued with the rate of dividend fixed at the time of issue.
• For example, if 1000 units of 5% preference shares are issued at RM1 per share, where dividend is payable the amount of dividend will be computed as: 5% * RM1000 = RM50/yr
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Types of Preference shares
• Cumulative preference shares: Holders of this shares are entitled to receive a fixed dividend per annum. If dividends are not paid in a particular year, the amount of dividend accrued will be carried forward and become payable in the future.
• Non-cumulative preference shares: Holders of this shares are entitled to receive a fixed dividend only if the company has sufficient profits to declare a dividend. Where dividend is not paid for a particular year due to insufficient funds, the dividend for that year is forfeited and cannot be carried forward.
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Types of Preference shares
• Participating preference shares: This type of preferred stock allows the possibility of additional dividend above the stated amount under certain conditions.
• Non-participating preference shares: these shareholders are not allowed to participate in any excess profits after all other classes of shareholders have been paid dividends
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Types of Preference shares
• Redeemable preference shares: This type of shares can be repurchased from the shareholders (by the company) at a future date as pre-determine at the time of issue of the shares. This type of shares allows the issuing company to obtain capital of a semi-permanent nature at a fixed rate of dividend.
• Convertible preference shares: shares that can be converted to ordinary shares as expressed in the AOA. Date and conversion rate is also specified.
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Issue of Shares
• Why the need to issue shares• Regulatory requirements for issuance of
shares• Issuing House (e.g. Malaysian issuing
house)• Stages in the issuance of shares :
application; allotment and call for payment.
• Over and under subscription• Allotment on a pro-rata basis
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Issue of Shares
• Issue of shares at a premium.• Share premium account• Issue of shares at a discount • Terms of the issue:
– Payment of the full amount of share price upon application
– Payment by installments (generally not common in Malaysia)
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Issue of Shares
• On call(s): issuance of letter of call on shares that are not fully called up.
• Calls in advance: payment for shares before calls are made. This payment do not rank for dividend
• Calls in arrears: failure to pay the sum due on shares when call. Reduces issued capital.
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Accounting entries for issue of shares
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No. Transaction Debit Credit
a) Receipt of application money
Bank
Application
XXX
XXX
b) On allotment of shares
Application
Share capital
XXX
XXX
Accounting entries for issue of shares
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No. Transaction Debit Credit
a) Receipt of money on allotment Allotment share capital share premium (if any)
XXXXXXXXX
b) On refund to unsuccessful applicants: Application Bank
XXXXXX
Accounting entries for issue of shares
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No. Transaction Debit Credit
a) Surplus application money used as allotment money. Application Allotment
XXXXXX
b) Allotment money received Bank Allotment
XXXXXX
Accounting entries for issue of shares
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No. Transaction Debit Credit
a) On further call(s) Call (1st call) Share capital
XXXXXX
b) Receipt of call money Bank Call
XXXXXX
Accounting entries for issue of shares
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No.
Transaction Debit Credit
a) Receipt f call money in advance Bank Call in advance
XXXXXX
b) Call in arrears (money not received) Call in arrears Call
XXXXXX
Forfeiture of shares
• A company may forfeit shares on which the calls are unpaid usually after all the formalities regarding forfeiture has been observed. The share capital account will be reduced by the amount of capital called up on the nominal value of the forfeited shares. This shares may be reissued later.
• Note differences with capital reduction and where forfeited shares are cancelled.
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Accounting entries: forfeiture & reissue of forfeited shares
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No. Transaction Debit Credit
a) Forfeiture of shares in arrears:
share capital
forfeited shares
XX
XX
b) The uncollectible amount:
forfeited shares
call in arrears
XX
XX
Reissue of forfeited of shares
• This shares may be reissued either as fully paid or partly paid up shares provided the total amount received on this shares from:
– The original shareholder (defaulter) and – The subsequent purchaser
… Equals to at least the nominal value of the forfeited shares.
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Reissue of forfeited shares
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No. Transaction Debit Credit
a) Forfeiture shares reissued at nominal value reissue account shares capital
XXXX
b) The receipt of the amount due on reissue: bank reissue account
XXXX
Reissue of forfeited shares
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No. Transaction Debit Credit
a) Amt in the forfeited share account transferred to reissue a/c forfeited shares reissue account
XXXX
b) Transfer of balance remaining (if any) on the reissue account: reissue share premium
XXXX
Bonus shares & Right issue
• What is bonus shares
• Why bonus shares
• Accounting entry for bonus shares
• What is a right issue
• Why a right issue
• Possible scenario on a right offer
• Accounting entry for a right issue
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Share split
• What is a share split
• Why and how a share split is done
• Who benefits from a share split
• Accounting entry for a share split
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Share split
• What is a share split: A corporate action in which a company's existing shares are divided into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split.
A stock split is also referred to as a "scrip issue, "capitalization issue" or "free issue".
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Share split
• For example, in a 2-for-1 split, each stockholder receives an additional share for each share he or she holds.
One reason as to why stock splits are performed is that a company's share price has grown so high that to many investors, the shares are too expensive to buy in round lots.
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Share split
• For example, if a XYZ Bhd's shares were worth RM100 each, investors would need to purchase RM100,000 in order to own 1000 shares. If each share was worth RM10, investors would only need to pay RM1,000 to own 100 shares
• Demonstrate with an example
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Issue of Debentures
• What is a debenture?• Why and how debentures are issued• Issue of debentures at a discount (say
97) or at a premium (say 105)• Accounting entry for a debenture issue
is the same as shares• Debenture premium account
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Debentures (loan capital)
• A debenture is the traditional name given to a loan agreement where the borrower is a company. Typically, a debenture will set out the terms of the loan: the amount borrowed, repayment terms, interest, charges securing the loan, provisions for protecting and insuring the property etc., and terms for enforcement if the company defaults.
• Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.
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Debentures (loan capital)
• Debentures may be redeemable or convertible. Details of this will be clearly specified in the indenture.
• Some basic differences between debentures & shares:– Rate of dividend– Status of holders (owners Vs. creditors)– Priority in claim in the event of liquidation– Debenture interest (P&L) vs. dividend
(appropriation of profit)
– Trustees for (many) debenture holdersBACCT1201 Financial Accounting 55
Redemption of preference shares & debentures
• Statutory requirements for share redemption
• Financing redemption of shares (fresh issue; transfer of profits or both)
• Accounting entries for the above methods
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Redemption of preference shares & debentures
Statutory requirements for share redemption:- The reduction may not be done as a reduction
of authorized capital- The shares may only be redeemed either; out
of profits or proceeds of a fresh issue- Shares must be fully paid up before redemption- Where premium is payable on redemption, it
should be provided for out of profits or share premium account
- Creation of capital redemption account where redemption is out of profits
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Accounting entries for redemption of shares
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Transaction Debit Credit
Redeemable pref. shares are redeemed Redeemable pref. shares a/c pref. shares redemption a/c
XXXXXX
Premium payable on redemption premium on redemption pref. shares redemption a/c
XXXXXX
Payment made to pref. share holders Pref. share redemption a/c Bank
XXXXXX
Accounting entries for redemption of shares
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Transaction Debit Credit
Money received on fresh issue Bank a/c Application a/c
XXXXXX
New shares issued specifically for redemption Application Share capital Share premium
XXXXXXXXX
Accounting entries for redemption of shares
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Transaction Debit Credit
Transfer to capital redemption reserve Profit & Loss a/c Capital redemption reserve a/c
XXXXXX
Writing off premium on redemption Share premium Profit & Loss Premium on redemption
XXXXXXXXX
Purchase of Own Stock or Stock Buy Back
• What is stock buy-back: This is a practice where companies buy back their own shares in the open market. Such a scheme will lead to a reduction in the number of shares in the market, thus improving the scarcity value.
• The risk factor to a company in this case is that there will be a reduction in financial resources which otherwise could be used for future profitable investments
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Regulatory requirements of share buy-back (1)
• Regulatory requirements for stock buy-back:– The exercise must be authorized by the
AOA
• The purchase price should not be more than 15% above the weighted average price of the shares quoted in the KLSE for the past 5 market days – The company must be declared solvent by
the directors at the time of purchaseBACCT1201 Financial Accounting 62
Regulatory requirements of share buy-back (II)
• The cancellation of shares so purchased shall not be deemed as a reduction of capital
• It must not cause public share holding to fall below 25%
• It must not result in the issued and paid up capital to fall below the relevant prescribed minimum of RM50,000,000 (main board) and RM10,000,000 (second board)
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Share buy-back
• Financing of share buy-back: In Malaysia, a share buy back may be financed from any source. However, general practice (globally) is for company’s to use internally generated funds for a buy-back.
• Accounting treatment of share buy-back– Treasury stock method– Share retirement method
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Share buy-back
• Treasury stock method: this is where a company buy back its stock with the aim of reissuing the stock at a future date.
• The difference between reissue price and the carrying value of the treasury shares is shown (in the balance sheet) as a movement in the shareholder’s fund.
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Share buy-back: accounting recordings
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Transaction Debit Credit
Shares purchased and held as treasury stocks treasury shares a/c Bank a/c
XXXXXX
Re-sale of treasury sharesBank/Cash Share premium Treasury shares (at cost)
XXXXXXXXX
Share buy-back
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Transaction Debit Credit
Cancellation of shares purchased: Ordinary shares capital a/c Purchase of own shares a/c
XXXXXX
Payment for purchase of own sharesPurchase of own sharesBank/Cash
XXXXXX
Share buy-back
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Transaction Debit Credit
Transfer to capital redemption reserve and the premium paid on shares repurchased made out of share premium & retained profits:
Share premium a/c Retained profits Capital redemption reserve a/c Purchase of own shares a/c
XXXXXX
XXXXXX
Redemption of debentures
• What is debenture redemption: a practice where a company redeem (pay for) its debentures at some determinable future for a pre-determined price.
• Govern by same regulatory requirements as in the case of buy-back of shares
• May be redeem at a discount, premium or at par
• It represents repayment of loan and ths involves outflow of cash
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Debenture buy-back: accounting recordings
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Transaction Debit Credit
Appropriation of an amount equal to the nominal value of debentures redeemed to debenture redemption reserve a/c: Profit & Loss a/c Debenture redemption reserve a/c
XXXXXX
Debenture buy-back: accounting recordings
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Transaction Debit Credit
Debentures redeemed:Redeemable debentures a/cPremium on redemption Debenture redemption a/c
XXXXXX
XXX
Payment made to debenture holders:Debenture redemptionBank/Cash
XXXXXX
Debenture buy-back: accounting recordings
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Transaction Debit Credit
Transfer of premium on redemption profit & loss a/c premium on redemption a/c
XXXXXX
Transfer of DRR after debentures have been redeemed: Debenture redemption reserve a/c General reserve/profit & loss
XXXXXXXXX
Redemption of debentures
• Redemption through the creation of sinking fund. This can be grouped under 3 stages:
– Annual appropriation and investment of income received on the sinking fund investment (SFI)
– Sale of investment– Redemption on maturity
Below are the accounting entries for all the above
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Accounting entries for redemption of debentures
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Transaction Debit Credit
Annual appropriation: P & L appropriation a/c Sinking fund a/c
XXXXXX
Investment of annual appropriation above: Sinking fund investment (SFI) a/c Bank (general) a/c
XXXXXX
Income from SFI received: Bank (sinking fund bank) a/c Sinking fund a/c
XXXXXX
Accounting entries for redemption of debentures
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Transaction Debit Credit
Investment of income from SFI: Sinking fund investment a/c Bank a/c
XXXXXX
Sale of SFI: Bank (sinking fund bank) SFI a/c
XXXXXX
Profit on sale of SFI: Sinking fund a/c SFI a/c
XXXXXX
Accounting entries for redemption of debentures
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Transaction Debit Credit
Loss on sale of SFI: Sinking fund a/c SFI a/c
XXXXXX
Transfer after debentures have been cancelled: Sinking fund a/c General reserve/P&L a/c
XXXXXX
Accounting entries for redemption of debentures
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Transaction Debit Credit
Debentures redeemed: Debentures (at nominal value) a/c Debenture redemption a/c
XXXXXX
Premium payable on redemption: Sinking fund a/c debenture redemption a/c
XXXXXX
Payment made to debenture holders: Debenture redemption a/c Bank
XXXXXX
Accounting entries for redemption of debentures
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Transaction Debit Credit
Transfer after the debentures have been redeemed: Sinking fund (with remaining amount in the account) General reserve/P & L a/c
XXX
XXX
Debenture buy-back
• Treasury stock method: this is where a company buy-back its own debentures in the open market. This provision is usually inserted in the indenture and executed when the quoted price is below the redemption price.
• Redeemed and cancelled (savings on interest payments)
• Redeemed and held as investment (put into sinking fund investment)
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Debenture buy-back
• Purchase of debentures at cum.div: under this the accrued interest on the debentures is included in the purchase price. The purchase price is calculated from the last interest date of payment to the date of acquisition.
• Actual purchase price of the debentures will be reduced by the amount of interest accrued.
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Accounting entries for buy-back of debentures
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Transaction Debit Credit
Payment to debenture holders: Debenture redemption a/c Sinking fund Bank a/c
XXXXXX
Cancellation of debentures purchased: Debentures (at nominal value) Debenture redemption a/c
XXXXXX
Accounting entries for buy-back of debentures
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Transaction Debit Credit
Profit on purchase & cancellation of debentures: Debenture redemption a/c Sinking fund a/c
XXXXXX
When interest is received: Sinking fund investment (cash) a/c Debenture interest receivable a/c
XXXXXX
Accounting entries for buy-back of debentures
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Transaction Debit Credit
Purchase of debentures in the open market: Sinking fund investment a/c (investment in own debentures) Sinking fund bank a/c
XXX
XXX
Transfer of accrued interest included in the purchase price (at cum.div): Interest receivable a/c Sinking fund investments a/c
XXXXXX
Accounting entries for buy-back of debentures
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Transaction Debit Credit
Interest receivable on debenture investment: Sinking fund investment (cash) a/c Interest receivable Sinking fund bank a/c
XXXXXXXXX
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End of End of Lecture 4Lecture 4
The EndThe End