Reference no: EM132584085

AEJ Bhd. has suffered from accumulated lost for the past three years. The management of AEJ Bhd. was advised to undertake a capital reconstruction scheme in order to turn around the company.

The Statement of Financial Position of the company as at 30 April 2020 showed the following balances:

RM                                                   RM

Non Current Assets

Freehold land and building         500,000

Plant and machinery              150,000

Patent and trademark           160,000

Research and development cost 55,500

Quoted investment                  50,000

                                          915,500

Current Assets

Inventories                              90,000

Account receivables                   36,000

Cash and cash equivalent            64,000

                                                 190,000

Total Assets                          1,105,500

Equity and Reserves

Ordinary Shares at RM1 each            500,000

2% Preference shares at RM0.50 each  200,000

General reserves                          331,000

Retained earnings                    (195,500)

                                                 835,500

Non Current Liabilities

Bank loan                                  100,000

Current Liabilities

Account payables                        160,000

Short term borrowings                        10,000

                                                    170,000

Total Equities and Liabilities                 1,105,500

Notes:

i. Preference dividends were in arrears for two years.

ii. There is contingent liabilities of RM24,000.

FBA/PAS2313/APRIL20

CONFIDENTIAL/3

Having satisfied the legal requirements, a scheme of capital reduction was put into effect as follows:

1. The ordinary shares were to be replaced with a fresh issue of new ordinary shares at RM0.25 each and the preference shares were to be replaced with 3% preference shares of RM0.35 each.

2. The preference shareholders agreed to waive two third (2/3) of the preference dividend in arrears. They are willing to accept new ordinary shares for the balance.

3. The intangible assets and adverse profit and loss are to be written off.

4. RM16,300 of the general reserves is to be utilized for the scheme.

5. The assets are to revalued as follows:

Plant and machinery              RM120,000

Inventories                              RM40,000

Account receivables                   RM20,000

6. The investment is disposed at a profit of 60%. This proceed will be used to settle full amount of short term borrowings.

7. The creditors agreed to settle their accounts by accepting RM0.75 for every RM1 owed.

8. RM10,000 of the contingent liability is materialized, and AEJ Bhd. is responsible to settle this amount.

9. The company incurred RM4,000 for the reconstruction cost.

10. A special resolution was passed to restore the authorized share capital in ordinary shares of RM1 each and 3% preference shares of RM0.50 each with new par value.

Required:

Question a. Prepare journal entries to record the above transactions.

Question b. Prepare the Statement of Financial Position immediately after the completion of the reconstruction scheme. (Show all the workings)