Question

Case study 4: Belgium Mills Company SAOG (the Company) is engaged in the milling of wheat flour, bran and feed and distributing premium quality wheat products to the Oman market as well as export to African and other neighboring countries. The Company is also involved in production and sale of macaroni, pasta and related food products. Furthermore, it is involved in production and sale of propylene bags. The Company's commercial operation commenced on 1 January 1998. The total revenues reached OMR 53.6 Million, showing an increase of 3.1% over the year before because of higher sales volumes. The export revenues represented 53.8% of the total revenues. The net profit made by the company was about OMR 1.6 Million, showing a decrease of 5.1% compared to the previous year because of higher cost of raw materials and declining profit margins as a result of competition. The expansion of production capacity was expected to be completed by the Month of October 2020, which would increase the production capacity by 50%. Based on the Feasibility study and the review carried by Consultant Office, the Board of Directors decide to invest in Joint Venture with giant Ethiopian industrial and trading group by moving one Spaghetti Production Line to Euthopia. For the year 2020 the company had evaluated the following Opportunities and Threats: Threats Despite stiff competition from local Flour Mills and IFFCO – a Flour Mill Company in Sharjah, UAE, Belgium Mills Company is capable of competing by focusing on implementing high quality standards, providing technical assistance and offering competitive prices only by increase in prođuction capacity and implementing improved technology Opportunities: • Belgium Mills Company was established in 1995 and started commercial production in 1998 with a production capacity of 300 MT per day. The production capacity increased over the years to reach 1500 MT per day in 2012. Belgium Mills Company increased wheat storage capacity in June 2015 by adding 12 new silos which can store 120 thousand MT of wheat. Salalah Mills Company owns grain storage capacity of 161,500 Metric Tons, which is the biggest in Oman. • The sales quantity exported to Somalia was increased by 16% compared with 2018. The company wants to expand its capacity in order to cope with the increased demand and is in need for additional funds. The company decided to raise such funds through the issue of right shares. The details of such issue are as under: The issue period will be; Opening Date: 4ª May 2020 Closing Date: 14h May 2020 Rights Entitlement: Every shareholder as on the Record Date is entitled to about 16.5 Offer Shares for every 100 shares held as on the Record Date. • Eligibility for Subscription: Subscription for the Rights Issue is open to the Shareholders whose names appear in the Bank's shareholder register as on the Record Date. Persons who purchase the rights on the MSM within the trading period of the Rights Issue are also eligible to subscribe for the Offer Shares before the Rights Issue closes. The eligibility to subscribe for Offer Shares shall lapse in case the Shareholder neither exercises his/her right of subscription to the Rights Issue nor sells its 'rights' on the MSM đuring the prescribed period Issue Price Baiza 277 per Offer Share, consisting of issue price 275 plus Baiza 2 towards issue expenses, payable in full on submission of Application Form. Allotment and refunds would be within 3 days of the closure of the Rights Issue.

Estimated issue expenses: The issue expenses of the Rights Issue are estimated at RO 86,550. The issue expenses of the Rights Issue will be met from the amounts collected from Applicants at 2 Baiza per Offer Share and the remainder will be borne by the Bank. Any surplus of the collection towards Issue Expenses over the actual expenses incurred will be retained by the Bank and credited to company’s legal reserve or a special reserve to be established pursuant to Article 126 of the CCL The Financial Advisor & Issue Manager are Muscat Capital Markets SAOC; Legal Advisor to the Issue A & D Law Fim and Statutory Auditor Emst & Young LLC The authorized share capital of the Company consists of 778,000,000 shares of RO 0.100 each. The equity details just before the right issue are as follows: RO 45,850,011 Share capital Legal reserve Retained earnings General reserve Dividend Equalization reserve Investment fluctuation reserve 2,250,150 125,600 358,000 112,580 75,800 30% of the shareholders rejected the offer. Post right issue in pursuant with the provisions of Oman commercial law the company board also decided to come up with a bonus issue for its equity shareholders in June 2020. The bonus share of the company can be issued when the articles of the association is authorized to issue the bonus shares. It is essential to know that if the articles of association do not permit to issue bonus shares, the company should pass a special resolution at the general meeting of the company. As part of the procedure, the company has checked the articles of association which allowed issue of bonus shares and the company confimed enough authorized capital is available. It was accorded that a sum of RO 88,000 can be capitalized out of Dividend Equalization reserve and set free for distribution amongst the equity shareholders for bonus. Each shareholder will be eligible for 1 share for every 85 shares held. You are required: a. In your own words highlight upon the various situations presented in the case and how it will affect the company? (3 marks – Min 150 words) b. Pass necessary journal entries for the rights and bonus taking place in the given scenario. Ignore the entry for share issue expenses. c. Prepare necessary abstract to represent such transactions in Statement of Financial Position.

Answer 1

A. Various situations and its affect on the company

1. Increase in sales quantity in 2019 as compared to the perious year make the revenue of the company OMR 53.6 million which is increased by 3.1%, which clearly have a favourable affect on the revenue of the company.

2. Increase in Raw materail cost and decrease in profit margin, reduces the net profit of the compay to OMR 1.6 million which indicates the adverse affect onthe revenue of the company. However, increase in the cost of material is substantially uncontrollable cost due to the external environment factors.

3. Company is considering the investment in Euthopia for the one spaghetti production line which though have the stiff conpetition due to the local competitors but same can be overcome by increase in produsvtion capacuty, high wuality stamdards, & better technical support. This situation would increase the revenue of the company and make better expansion.

4. Production capacity and storage capacity has been increased substantially which shows that company has a high demand.

B. Journal entry

1. Bank A/c Debit (458500110*16.5/100*70%*0.277) RO 14669023

To Share capital A/c RO 5295676

To share premium A/c RO 9373347

(being right issue of shares takes place which was excercised by 70% shareholders)

2. Dividend equalisation reserve A/c Debit RO 88000

General reserve A/c Debit RO 358000

Retained earning A/c Debit   RO 125600

To bonus to shareholders A/c RO 571600

(being 1 bonus shares issued for every 85 shares held)

3. Bonus to shareholders A/c Debit RO 571600

To Share capital A/c RO 571600

( Being shares transferred)

4. Bank A/c Debit RO 19364

To Legal reserve A/c RO 19364

(Being excess amount trfd)

C. Abstract of Financial position

Share Capital

Authorised Share capital  778 million shares @ RO 0.100 each

Share capital RO 51717287

Legal Reserve RO 2269514

Share premium reserve RO 9373347

Investment flucatuation reserve RO 75800