The latest statement of financial position for Malorie Limited is summarized below: GH¢'000 GHc '000 GH 000 Non-current assets (NBV) 5.700 Current assets Inventory 3.500 Receivables 1.800 5.300 Current liabilities Unsecured payables 4.000 Unsecured Bank overdraft 1.600 5.600 (300) Total assets less current liabilities 5.400 Non-Current Liabilities 10% secured debentures (13.000 Net assets 2,400 Financed by: Stated capital Income Surplus 4.000 (1.600) 2.400 Malorie's stated capital consists of 4.000.000 ordinary shares issued at GHel.00 and fully paid. The non-current assets comprise freehold property with a book value of GH¢3.000.000 and plant and machinery with a book value of GHc2,700,000. The debentures are secured on the freehold property In recent years the company has suffered a series of trading losses which have brought it to the point of liquidation. The directors estimate that in a forced sale the assets will realize the following amounts. GHS Freehold premises Plant and machinery 2,000,000 1,000,000 • Inventory 1,700,000 Receivables 1,700,000 The costs of liquidation are estimated at GH¢770.000. However, trading conditions are now improving and the directors estimate that if new investment in plant and machinery costing GH¢2,500,000 were undertaken the company should be able to generate annual profits before interest of GH€1,750,000. In order to take advantage of this they have put forward the following proposed reconstruction scheme. Freehold premises should be written down by GH¢1.000.000, plant and machinery by GHc1,100,000, inventories by GH¢800,000 and receivables by GH¢100,000, The ordinary shares should be written down by GH¢3.000,000 and the debit balance on the income surplus account written off. The secured debenture holders would exchange their debentures for GH¢1,500,000 ordinary shares and GH¢1.300,000 14% unsecured loan stock repayable in five years' time. IV The bank overdraft should be written off and the bank should receive GH¢1.200,000 of 14% unsecured loan stock repayable in five years' time in compensation. The unsecured payables should be written down by 25%. vi. A rights issue of 1 for 1 at par is to be made on the share capital after the above adjustments have been made. міі. GH¢2,500,000 will be invested in new plant and machinery Required a. Write up the capital reduction account. b. Prepare the Statement of Financial Position of the company after the completion of the reconstruction
The latest
Freehold premises Plant and machinery 2,000,000 1,000,000 • Inventory 1,700,000 Receivables 1,700,000 The costs of liquidation are estimated at GH¢770.000. However, trading conditions are now improving and the directors estimate that if new investment in plant and machinery costing GH¢2,500,000 were undertaken the company should be able to generate annual profits before interest of GH€1,750,000. In order to take advantage of this they have put forward the following proposed reconstruction scheme. Freehold premises should be written down by GH¢1.000.000, plant and machinery by GHc1,100,000, inventories by GH¢800,000 and receivables by GH¢100,000, The ordinary shares should be written down by GH¢3.000,000 and the debit balance on the income surplus account written off. The secured debenture holders would exchange their debentures for GH¢1,500,000 ordinary shares and GH¢1.300,000 14% unsecured loan stock repayable in five years' time. IV The bank overdraft should be written off and the bank should receive GH¢1.200,000 of 14% unsecured loan stock repayable in five years' time in compensation. The unsecured payables should be written down by 25%. vi. A rights issue of 1 for 1 at par is to be made on the share capital after the above adjustments have been made. міі. GH¢2,500,000 will be invested in new plant and machinery Required
a. Write up the capital reduction account.
b. Prepare the Statement of Financial Position of the company after the completion of the reconstruction .
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