In: Accounting
QUESTION 1
The latest statement of financial position for Xtra Limited is
summarized below:
GH¢’000 GH¢’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 (3,000)
Net assets 2,400
Financed by:
Stated capital 4,000
Income Surplus (1,600)
2,400
Xtra’s stated capital consists of 4,000,000 ordinary shares issued
at GH¢1.00 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 GH¢2,700,000. 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 2,000,000
• Plant and machinery 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.
i. Freehold premises should be written down by GH¢1,000,000, plant
and machinery by
GH¢1,100,000, inventories by GH¢800,000 and receivables by
GH¢100,000.
ii. The ordinary shares should be written down by GH¢3,000,000 and
the debit balance on the
income surplus account written off.
iii. 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.
v. 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.
vii. 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.
kindly answer ASAP
VERY URGENT
Capital Reduction Account of Xtra Limited | ||||
GH¢' 000 | GH¢' 000 | |||
To Freehold Premises | 1,000 | By Stated Capital | 3,000 | |
To Plant & Machinery | 1,100 | By 10% Secured Debentures | 200 | |
To Inventories | 800 | By Bank Overdraft | 400 | |
To Receivables | 100 | BY Unsecured Payables | 1,000 | |
To Income Surplus | 1,600 | |||
4,600 | 4,600 | |||
Statement of financial position of Xtra Limited (and Reduced) as on ........ | ||||
Particulars | GH¢' 000 | GH¢' 000 | Notes | |
Non Current Assets (NBV) | ||||
Freehold Property (3,000-1,000) | 2,000 | |||
Plant & Machinery (2,700-1,100+2,500) | 4,100 | 6,100 | ||
Current Assets | ||||
Inventory (3,500-800) | 2,700 | |||
Receivables (1,800-100) | 1,700 | |||
Bank (2,500-2500) | - | 4,400 | Note-1 | |
Current Liabilities | ||||
Unsecured Payables (4,000-25%) | 3,000 | |||
Unsecured Bank Overdraft (1,600-1600) | - | 3,000 | ||
TOTAL ASSET LESS CURRENT LIABILITIES | 7,500 | |||
Non Current Liabilities | ||||
14% Unsecured Loan (1,200+1,300) | 2,500 | Note-2 | ||
10% Secured Debentures (3,000-3000) | - | 2,500 | ||
NET ASSETS | 5,000 | |||
Financed by | ||||
Stated Capital | 5,000 | Note-3 | ||
Income Surplus (1,600-1,600) | - | 5,000 | ||
Note- 1 | ||||
Bank | ||||
Proceeds received from issue of Right Shares | 2,500,000 | |||
Less: Invested in New Plant & Machinery | 2,500,000 | |||
- | ||||
Note-2 | ||||
14% Unsecured Loan | ||||
Issue of 14% unsecured Loan in exchange of Secured Debentures | 1,300,000 | |||
Issue of 14% unsecured Loan in exchange of Secured Debentures | 1,200,000 | |||
2,500,000 | ||||
Note-3 | ||||
Stated Capital | ||||
Fully paid up 4,000,000 Ordinary Shares @ 1 GH¢' | 4,000,000 | |||
Less: Reduction in share price by 0.75 GH¢' | 3,000,000 | |||
1,000,000 | ||||
Add: Issue of Shares in exchange of Debenture | 1,500,000 | |||
2,500,000 | ||||
Add: Issue of Right Shares | 2,500,000 | |||
5,000,000 |