Effect of Share Issue and Dividend on Equity

Accounting for Companies Limited by Shares

Skill: Analyse

Stimulus

Question

(a) Analyse the effect of the new share issue (Transaction 1) on the accounting equation (Assets = Liabilities + Equity).

(b) Analyse the effect of Transaction 3 on the accounting equation and owners' equity, and explain why the dividend is not treated as an expense.

(c) Analyse whether the director's proposal to credit RM200,000 to a Share Premium Account is appropriate, and describe its effect on the equity components.

(d) Compute the total owners' equity at 31 December 2025.

Thinking steps

1. Identify the type of each transaction: share issue (adds capital), net profit (adds retained profit), and cash dividend (reduces retained profit).
2. For each transaction, determine the TWO accounts affected and the direction of change (increase/decrease), then map them onto the accounting equation Assets = Liabilities + Equity.
3. Compute the money amounts: share issue 500,000 x RM1.40 = RM700,000; dividend 2,500,000 units x RM0.06 = RM150,000 (use the number of shares after the new issue).
4. Test the Share Premium proposal against the no-par-value principle under the Companies Act 2016 to assess the effect of the mistreatment on the equity components.
5. Combine all the effects on the opening balances to obtain the closing balance of each equity component and total them.

Model answer

(a) Transaction 1: Cash (asset) increases by RM700,000 (500,000 units x RM1.40) and Ordinary Share Capital (equity) increases by RM700,000. The equation stays balanced through the two-sided effect on the asset and equity sides; liabilities are unaffected: Assets +700,000 = Liabilities (0) + Equity +700,000.

(b) Transaction 3: Cash dividend = 2,500,000 units x RM0.06 = RM150,000. Cash (asset) decreases by RM150,000 and Retained Profit (equity) decreases by RM150,000: Assets -150,000 = Liabilities (0) + Equity -150,000. A dividend is a distribution of profit to shareholders, not an operating expense, so it is charged directly to Retained Profit and not to the Income Statement.

(c) Not appropriate. Under the Companies Act 2016, shares are issued with no par value, so the Share Premium concept no longer applies. The whole RM700,000 proceeds must be credited to Ordinary Share Capital. If RM200,000 is moved to a Share Premium Account, Ordinary Share Capital is understated by RM200,000; although total equity is unchanged, the presentation of the equity components is wrong and breaches current accounting treatment.

(d) Ordinary Share Capital = 2,000,000 + 700,000 = RM2,700,000. Retained Profit = 600,000 + 420,000 - 150,000 = RM870,000. Total Owners' Equity at 31 December 2025 = RM3,570,000.