BACCT1201 • Financial Accounting
LECTURE 4
Company Accounts
Issah Hamdu
Faculty of Business Management and Globalization
Tel : 603 8317 8833 (Ext 8403)
Email: issah@limkokwing.edu.my
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
BACCT1201
Financial Accounting
2
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.
BACCT1201
Financial Accounting
3
Learning Objectives...
• Prepare published accounts (external use)
for limited liability companies.
• Explain when and how a limited company
may increase/decrease its share capital.
BACCT1201
Financial Accounting
4
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.
BACCT1201
Financial Accounting
5
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
BACCT1201
Financial Accounting
6
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".
BACCT1201
Financial Accounting
7
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.
BACCT1201
Financial Accounting
8
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.
BACCT1201
Financial Accounting
9
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.
BACCT1201
Financial Accounting
10
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.
BACCT1201
Financial Accounting
11
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.
BACCT1201
Financial Accounting
12
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.
BACCT1201
Financial Accounting
13
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).
BACCT1201
Financial Accounting
14
Some Benefits & Limitations of
Private & Public Companies
Category
Minimum no. of members
Public Company
7
Private Company
2
Maximum 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)
Offer of shares & Debentures
Allowed
Private Limited (Sdn
Bhd)
Not allowed
Liability
Limited
May not be limited
BACCT1201
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.
BACCT1201
Financial Accounting
16
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.
BACCT1201
Financial Accounting
17
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.
BACCT1201
Financial Accounting
19
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.
BACCT1201
Financial Accounting
20
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.
BACCT1201
Financial Accounting
21
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),
BACCT1201
Financial Accounting
22
Memorandum of Association
• the objectives of the company
• its authorized share capital, and the
subscribers (the original shareholders
of the company).
BACCT1201
Financial Accounting
23
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.
BACCT1201
Financial Accounting
24
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.
BACCT1201
Financial Accounting
25
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.
BACCT1201
Financial Accounting
26
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.
BACCT1201
Financial Accounting
27
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.
BACCT1201
Financial Accounting
28
Types of Shares
Ordinary shares: generally, all companies must
have ordinary shares. This share usually
comprises the bulk of the company’s capital. This
class 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
BACCT1201
Financial Accounting
29
Types of Shares……..
Preference shares offer their owners preferences
over ordinary shareholders. There are two major
differences between ordinary and preference
shares:
• Preference shareholders are often entitled to a
fixed dividend even when ordinary shareholders
are not.
• Preference shareholders cannot normally vote at
general meetings.
BACCT1201
Financial Accounting
30
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
BACCT1201
Financial Accounting
31
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.
BACCT1201
Financial Accounting
32
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
BACCT1201
Financial Accounting
33
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 predetermine 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.
BACCT1201
Financial Accounting
34
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
BACCT1201
Financial Accounting
35
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)
BACCT1201
Financial Accounting
36
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.
BACCT1201
Financial Accounting
37
Accounting entries for issue of
shares
No. Transaction
a)
b)
Debit
Receipt of application money
Bank
XXX
Application
On allotment of shares
Application
XXX
Share capital
BACCT1201
Financial Accounting
Credit
XXX
XXX
38
Accounting entries for issue of
shares
No. Transaction
a)
b)
Debit
Credit
Receipt of money on allotment
Allotment
XXX
share capital
share premium (if any)
XXX
XXX
On refund to unsuccessful
applicants:
Application
Bank
XXX
BACCT1201
Financial Accounting
XXX
39
Accounting entries for issue of
shares
No. Transaction
a)
b)
Debit
Surplus application money
used as allotment money.
Application
Allotment
Allotment money received
Bank
Allotment
BACCT1201
Financial Accounting
Credit
XXX
XXX
XXX
XXX
40
Accounting entries for issue of
shares
No. Transaction
a)
b)
Debit
On further call(s)
Call (1st call)
Share capital
XXX
Receipt of call money
Bank
Call
XXX
BACCT1201
Credit
XXX
Financial Accounting
XXX
41
Accounting entries for issue of
shares
No. Transaction
a)
b)
Debit
Credit
Receipt f call money in advance
Bank
XXX
Call in advance
XXX
Call in arrears (money not
received)
Call in arrears
Call
XXX
BACCT1201
Financial Accounting
XXX
42
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.
BACCT1201
Financial Accounting
43
Accounting entries: forfeiture &
reissue of forfeited shares
No. Transaction
a)
b)
Debit
Forfeiture of shares in arrears:
share capital
XX
forfeited shares
The uncollectible amount:
forfeited shares
XX
call in arrears
BACCT1201
Financial Accounting
Credit
XX
XX
44
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.
BACCT1201
Financial Accounting
45
Reissue of forfeited shares
No. Transaction
a)
b)
Debit
Forfeiture shares reissued at
nominal value
reissue account
shares capital
XX
The receipt of the amount due
on reissue:
bank
XX
reissue account
BACCT1201
Financial Accounting
Credit
XX
XX
46
Reissue of forfeited shares
No. Transaction
a)
b)
Debit
Credit
Amt in the forfeited share
account transferred to reissue a/c
forfeited shares
XX
reissue account
XX
Transfer of balance remaining (if
any) on the reissue account:
reissue
share premium
XX
BACCT1201
Financial Accounting
XX
47
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
BACCT1201
Financial Accounting
48
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
BACCT1201
Financial Accounting
49
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".
BACCT1201
Financial Accounting
50
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.
BACCT1201
Financial Accounting
51
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
BACCT1201
Financial Accounting
52
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
BACCT1201
Financial Accounting
53
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.
BACCT1201
Financial Accounting
54
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
BACCT1201
Financial Accounting
holders
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
BACCT1201
Financial Accounting
56
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
BACCT1201
Financial Accounting
57
Accounting entries for
redemption of shares
Transaction
Redeemable pref. shares are
redeemed
Redeemable pref. shares a/c
pref. shares redemption a/c
Debit
Credit
XXX
XXX
Premium payable on redemption
premium on redemption
pref. shares redemption a/c
XXX
Payment made to pref. share holders
Pref. share redemption a/c
Bank BACCT1201
Financial Accounting
XXX
XXX
XXX
58
Accounting entries for
redemption of shares
Transaction
Debit
Money received on fresh issue
Bank a/c
Application a/c
XXX
New shares issued specifically for
redemption
Application
Share capital
Share premium
XXX
BACCT1201
Financial Accounting
Credit
XXX
XXX
XXX
59
Accounting entries for
redemption of shares
Transaction
Debit
Credit
Transfer to capital redemption reserve
Profit & Loss a/c
XXX
Capital redemption reserve a/c
XXX
Writing off premium on redemption
Share premium
Profit & Loss
Premium on redemption
XXX
XXX
BACCT1201
Financial Accounting
XXX
60
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
BACCT1201
Financial Accounting
61
Regulatory requirements of
share buy-back (1)
• Regulatory requirements for stock buyback:
– 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 purchase
BACCT1201
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)
BACCT1201
Financial Accounting
63
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
BACCT1201
Financial Accounting
64
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.
BACCT1201
Financial Accounting
65
Share buy-back: accounting
recordings
Transaction
Debit
Credit
Shares purchased and held as treasury
stocks
treasury shares a/c
XXX
Bank a/c
XXX
Re-sale of treasury shares
Bank/Cash
Share premium
Treasury shares (at cost)
XXX
XXX
BACCT1201
XXX
Financial Accounting
66
Share buy-back
Transaction
Debit
Cancellation of shares
purchased:
Ordinary shares capital a/c
Purchase of own shares a/c
Payment for purchase of own
shares
Purchase of own shares
Bank/Cash
BACCT1201
Financial Accounting
Credit
XXX
XXX
XXX
XXX
67
Share buy-back
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
XXX
XXX
Capital redemption reserve a/c
Purchase of own shares a/c
BACCT1201
Financial Accounting
XXX
XXX
68
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
BACCT1201
Financial Accounting
69
Debenture buy-back:
accounting recordings
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
BACCT1201
Financial Accounting
XXX
XXX
70
Debenture buy-back:
accounting recordings
Transaction
Debit
Debentures redeemed:
Redeemable debentures a/c
Premium on redemption
Debenture redemption a/c
XXX
XXX
Payment made to debenture holders:
Debenture redemption
Bank/Cash
XXX
BACCT1201
Financial Accounting
Credit
XXX
XXX
71
Debenture buy-back:
accounting recordings
Transaction
Debit
Transfer of premium on redemption
profit & loss a/c
premium on redemption a/c
XXX
Transfer of DRR after debentures
have been redeemed:
Debenture redemption reserve a/c
General reserve/profit & loss
BACCT1201
Financial Accounting
Credit
XXX
XXX
XXX
XXX
72
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
BACCT1201
Financial Accounting
73
Accounting entries for
redemption of debentures
Transaction
Debit
Annual appropriation:
P & L appropriation a/c
Sinking fund a/c
XXX
Credit
XXX
Investment of annual appropriation above:
Sinking fund investment (SFI) a/c
XXX
Bank (general) a/c
XXX
Income from SFI received:
Bank (sinking fund bank) a/c
Sinking fund a/c
XXX
BACCT1201
Financial Accounting
XXX
74
Accounting entries for
redemption of debentures
Transaction
Debit
Investment of income from SFI:
Sinking fund investment a/c
Bank a/c
XXX
Sale of SFI:
Bank (sinking fund bank)
SFI a/c
XXX
Profit on sale of SFI:
Sinking fund a/c
SFI a/c
XXX
BACCT1201
Credit
XXX
XXX
XXX
Financial Accounting
75
Accounting entries for
redemption of debentures
Transaction
Debit
Loss on sale of SFI:
Sinking fund a/c
SFI a/c
XXX
XXX
Transfer after debentures have been
cancelled:
Sinking fund a/c
General reserve/P&L a/c
BACCT1201
Credit
Financial Accounting
XXX
XXX
76
Accounting entries for
redemption of debentures
Transaction
Debit
Debentures redeemed:
Debentures (at nominal value) a/c
Debenture redemption a/c
XXX
Premium payable on redemption:
Sinking fund a/c
debenture redemption a/c
XXX
Payment made to debenture holders:
Debenture redemption a/c
Bank
XXX
BACCT1201
Financial Accounting
Credit
XXX
XXX
XXX
77
Accounting entries for
redemption of debentures
Transaction
Debit
Transfer after the debentures have been
redeemed:
Sinking fund (with remaining amount
in the account)
General reserve/P & L a/c
XXX
BACCT1201
Financial Accounting
Credit
XXX
78
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)
BACCT1201
Financial Accounting
79
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.
BACCT1201
Financial Accounting
80
Accounting entries for buyback of debentures
Transaction
Debit
Payment to debenture holders:
Debenture redemption a/c
Sinking fund Bank a/c
XXX
Cancellation of debentures purchased:
Debentures (at nominal value)
Debenture redemption a/c
XXX
BACCT1201
Financial Accounting
Credit
XXX
XXX
81
Accounting entries for buyback of debentures
Transaction
Debit
Profit on purchase & cancellation of
debentures:
Debenture redemption a/c
Sinking fund a/c
When interest is received:
Sinking fund investment (cash) a/c
Debenture interest receivable a/c
BACCT1201
Financial Accounting
Credit
XXX
XXX
XXX
XXX
82
Accounting entries for buyback of debentures
Transaction
Debit
Purchase of debentures in the open
market:
Sinking fund investment a/c
(investment in own debentures)
Sinking fund bank a/c
XXX
Transfer of accrued interest included
in the purchase price (at cum.div):
Interest receivable a/c
Sinking fund investments a/c
BACCT1201
Financial Accounting
Credit
XXX
XXX
XXX
83
Accounting entries for
buy-back of debentures
Transaction
Debit
Interest receivable on debenture
investment:
Sinking fund investment (cash) a/c
Interest receivable
Sinking fund bank a/c
XXX
BACCT1201
Financial Accounting
Credit
XXX
XXX
84
The End
End of Lecture 4
BACCT1201
Financial Accounting
85