FiZy Bhd experienced significant losses in recent years and proposed a capital rearrangement scheme to ensure the company's survival. The scheme involved reducing ordinary share values, exchanging preference shares for new preference and ordinary shares, issuing shares to settle debt with debenture holders and directors, selling investments, paying creditors, writing off losses and revaluing assets.

1. 1
BKAF3063: FINANCIAL ACCOUNTING AND REPORTING III (A141)
TUTORIAL 7 – COMPANY RECONSTRUCTION
SUBMISSION DATE: 23 Nov 2014
QUESTION 1
FiZy Bhd experienced an unprecedented operating loss for past few years. During the
previous Board of Directors meeting, the members unanimously agreed that the company
undergoes the capital rearrangement scheme. This is to ensure the company’s survival and
value creation to the shareholders. Subsequently, the board proposed the following capital
rearrangement scheme:
1. Each ordinary share is to be reduced to RM0.75 each. The ordinary shareholders are to
accept a reduction in the nominal value of their shares.
2. The existing 3,500,000 preference shares are to be exchanged for a new issue of
1,250,000 8% cumulative preference shares of RM1 each and 3,000,000 ordinary shares
of RM0.75 each.
3. The debenture holders are to accept 4,000,000 ordinary shares of RM0.75 each in lieu
of the interest payable. It is agreed that the value of the interest liability is equivalent to
the nominal value of the shares issued. The interest rate is to be increased to 9%. A
further RM2,000,000 of 9% debentures is to be issued and taken up by the existing
holders at RM80 per RM100.
4. A sum totaling RM200,000 of directors loan is to be cancelled. The balance is to be
settled by issuing 1,500,000 ordinary shares of RM0.75 each.
5. The investment in shares is to be sold at the current market price of RM2,740,000.
6. The bank overdraft is to be paid off. A sum amounting RM1,600,000 is to be paid to
trade creditors now and the balance at quarterly intervals.
7. The debit balance on the retained earnings and 10% of the trade receivables are to be
written off.
8. The remaining assets were professionally valued and should be included in the books
and accounts as follows:
(RM’000)
Land 7,000
Building 2,560
Equipment 2,000
Inventories 7,500
9. The company spent RM200,000 as the cost of capital rearrangement including fees paid
to the consultant.
10. Any balance in capital reduction account would be written off against reserves.

2. 2
The following is the Statement of Financial Position of the company prior to the scheme:
FiZy Bhd
Statement of Financial Position
As at 31 December 2013
RM'000
Assets
Non-Current Assets
Land 5,500
Building (net) 3,360
Equipment (net) 2,820
11,680
Current Assets
Trade receivables 3,540
Investment 2,340
Inventory 8,000
13,880
Total Assets 25,560
Liabilities And Equity
Current Liabilities
Trade creditors 2,800
Bank overdraft 2,000
Interest payable on debentures 4,200
9,000
Non-Current Liabilities
Loan from directors 1,500
8% Debentures 4,000
5,500
Total Liabilities 14,500
Equity
Share capital
Authorised, issued and fully paid:
10,000,000 Ordinary shares, RM1.00 each 10,000
3,500,000 5% Cumulative preference shares, RM1.00 each 3,500
Reserve 950
Retained earnings (3,390)
Total Equity 11,060
Total Liabilities and Equity 25,560

3. 3
The authorised shares capital for the company as stated in the company’s Memorandum and
Articles is 20,000,000 ordinary shares of RM1 each and 3,500,000 5% cumulative preference
shares of RM1 each.
REQUIRED:
(a) Prepare the journal entries to record the above restructuring scheme for FiZy Bhd
assuming that all necessary authorization has been granted.
(b) Prepare the Statement of Financial Position for the post implementation of the scheme.
(c) Discuss TWO (2) situations that allow a company to reduce its capital as stated in the
Section 64 of the Companies Act 1965.

4. 4
QUESTION 2
ASINI Bhd is principally involved in housing development in Northern region of Malaysia.
As the demand for properties shrink tremendously started in the last three years, ASINI Bhd
has recorded a net loss of RM3.5 million in the current financial year with an accumulated
loss of RM53.5 million. In response to this, the company immediately hired a financial
consultant to deal with the company’s current situation. Based on the initial meeting, the
consultant is very optimist that the company would not be liquidated as he already had
something about capital rearrangement in mind after reviewing the company’s current
financial statement.
Presented below are the company financial statements for the year ended 31 December 2013:
RM'000 RM'000
2013 2012
NON CURRENT ASSET
Plant, properties and equipments 167,850 185,500
CURRENT ASSET
Cash and bank balances 42,386 19,350
Account receivables 57,879 64,310
Inventory 2,835 3,150
103,100 86,810
CURRENT LIABILITIES
Trade creditors 85,000 83,000
Interest payable 5,950 5,810
90,950 88,810
NET CURRENT ASSETS 12,150 (2,000)
NET TOTAL ASSETS 180,000 183,500
FINANCED BY:
Share capital
Authorized, issued and full paid:
RM1.00 Ordinary shares 150,000 150,000
4% RM1.00 Convertible Preference Shares 8,000 8,000
7% RM1.00 Redeemable preference shares 500 500
158,500 158,500
Share premium 11,000 11,000
Reserves 8,500 8,500
Beginning retained earnings (53,500) (49,000)
Current year net profit/(loss) (3,500) (4,500)
Shareholders’ fund 121,000 124,500
Long term loan 29,000 29,000
8% Bond payable 30,000 30,000
TOTAL EQUITY & LONG TERM LIABILITIES 180,000 183,500

5. 5
The proposed capital rearrangement scheme drafted by the consultant was as follows:
1) Wrote off the company accumulated loss according to Section 64 of the Companies
Act, 1965.
2) The company major creditor of RM50 million agreed to convert 1/4 of the amount
into ordinary shares and forgive overdue interest of RM50,000.
3) Disposed a 2 year old operating equipment to raise additional cash. The equipment
carried a net book value of RM17 million and the company received RM18.7 million
from the sales proceed.
4) Convert half of the convertible preference shares into ordinary shares (at new par
value).
5) To redeem all the redeemable preference shares at par. The redemption will be
exercised by issuing the ordinary shares at par.
6) The company spent RM250,000 as the cost of capital rearrangement scheme including
fees paid to the consultant.
7) Issue additional 100 million units of ordinary share at par.
8) Any balance in capital reduction account would be written off against reserves.
REQUIRED
(a) Perform the journal entries to record the above capital rearrangement scheme for ASINI
Bhd assuming that all necessary authorization has been granted.
(b) Prepare the Statement of Financial Position for ASINI Bhd for the post implementation
of the scheme.