CHANGES IN CAPITAL STRUCTURE IF THERE IS DIVIDEND PREFERENCE SHARES IN ARREARS

What is dividend arrears?  Click here...

After you understand what the arrears is... let us try with this question...

Atan Bhd was face difficulties in business and made a decision to restructure the company's financial.  On 31 December 2009 the trial balance was release as follow:

	RM	RM
	"000	"000
250,000 Preference Share 10%@RM1.00 per share		250,000
200,000 Ordinary Share @ RM1.00 per share		200,000
Share Premium Account		55,000
Accumulated Losses	137,900
Research and development Expenses	9,250
Goodwill	18,100
Creditors		38,000
Debtors	42,100
Bank Overdraft		45,000
Freehold Lands	148,900
Machinery	280,000
Accumulated depreciation of Machinery		58,000
Stock	9,750
	646,000	646,000

The courts approve to start a reduction capital plan as follow:

1.  Preference share to be reduced to RM0.85 per share.
2.  Ordinary share to be reduced at RM0.75 per share.
3.  The preference shareholders to receive one ordinary share of RM0.25 each for every RM1.00 preference dividend in arrears.
4.  The share premium account has to be right off.
5.  Machinery have to revalue for RM175,000.
6.  Accumulated losses and all intangible assets have to be right off.
7.  500,000 ordinary share was issued at par value to gain company cash and fully paid.

While the resolution of reducing capital approved, another resolution to state the capital RM450,000 include 250,000 preference share 10% value RM0.85 per share and the balance will be in ordinary share value RM0.25 per share was approved.

Required:
1.  Journal entry for the transaction above
2.  Capital reduction account (CRA: CRR 24,000)
3.  Statement of Financial Position on 31 December 2009 after the capital reduction plans had completed.(455,750)


**Key answer no. 3:

25,000 x 0.25

Dr  Capital Reduction Account       6,250
      Cr   Ordinary Share Capital (Accrual Dividend)            6,250