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  • 15 Marks

CR – Nov 2024 – L3 – Q4a – Corporate Reconstruction

Prepare the capital reduction account and the statement of financial position for Mensimah Ltd after reconstruction.

Mensimah LTD (Mensimah) has been experiencing poor trading conditions over the last three years. As a result, it has been difficult to generate revenues and profits in the current year leading to very high inventory levels. Also, Mensimah has defaulted in paying interest due to the loan note holders for two years. Even though the debentures are secured against the land & buildings, the loan note holders have demanded either a scheme of reconstruction or the liquidation of Mensimah.

As the above trading difficulties have significantly threatened the going concern status of Mensimah, the directors as well as representatives of the shareholders and loan holders in a meeting decided to design the following scheme of reconstruction:

  1. The assets were independently valued and should now be recognised at the following amounts:

    Asset Category Amount (GH¢)
    Land 64,000
    Building 64,000
    Plant & Equipment 24,000
    Inventory 40,000

    The value of Mensimah’s investment in Adams LTD has increased to GH¢48,000 and was to be sold as part of the reconstruction scheme. As for the trade receivables, it was determined that 10% of the stated value is non-recoverable and therefore would be written off.

  2. Each GH¢1 equity share is to be redesignated as an equity share of GH¢0.25. After this, the equity shareholders would be persuaded to accept a reduction in the nominal value of their shares from GH¢1 to GH¢0.25 per share and subscribe for a new issue based on one-for-one at a price of GH¢0.30 per share.

  3. The existing 5% loan notes are to be exchanged for a new issue of GH¢28,000 9.5% loan notes, repayable in 2028, plus 112,000 equity shares of GH¢0.25 each. In addition, they will subscribe for GH¢7,200 loan notes, repayable in 2028, at par value at the rate of 9.5%.

    The 8% loan notes holders who have not received any interest for the past two years, are to receive 16,000 equity shares of GH¢0.25 each in lieu of the interest payable. It is agreed that the value of the interest liability is equivalent to the fair value of the shares to be issued. Moreover, the 8% loan notes holders have agreed to defer repayment of their loan until 2028, on condition that they are paid a higher interest rate of 9.5%.

  4. The deficit on retained earnings is to be written off and the bank overdraft is to be repaid immediately.

Mensimah’s statement of financial position as at 31 December 2023 is as follows:

Assets GH¢’000
Non-current assets
Land & buildings 154,597
Plant & equipment 48,603
Investment in Adams LTD 21,600
Total Non-Current Assets 224,800
Current assets
Inventory 96,198
Receivables 56,554
Total Current Assets 152,752
Total Assets 377,552
Equity & Liabilities GH¢’000
Equity
Equity shares (GH¢1) 160,000
Retained earnings (31,857)
Total Equity 128,143
Non-current liabilities
8% loan notes 64,000
5% loan notes 56,000
Total Non-Current Liabilities 120,000
Current liabilities
Trade payables 89,798
Interest payable 10,240
Overdraft 29,371
Total Current Liabilities 129,409
Total Equity & Liabilities 377,552

Required:

i) Prepare the capital reduction account for Mensimah LTD. 
ii) Prepare the statement of Financial Position of Mensimah LTD immediately after the reconstruction.
iii) Determine the position of each stakeholder group if the reconstruction scheme is not implemented.

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  • 6 Marks

CR – May 2020 – Q4a – Capital Reduction Account

This question requires the preparation of a Capital Reduction Account for Sasasila Ltd following a reorganization.

Sasasila Ltd has been operating profitably for a number of years. However, in recent times, the company has been making losses. Below is the statement of financial position as at 30 June 2019:

Assets GH¢000
Non-Current Assets
Patents and copyrights 75,000
Land and buildings (net) 200,000
Plant and machinery (net) 150,000
Current Assets
Inventories 125,000
Trade receivables 125,000
Bank 37,500
Investments (cost) 100,000
Total Assets 812,500
Equity and liabilities:
Equity
Ordinary share capital (issued at GH¢10 each) 375,000
20% cumulative preference shares (issued at GH¢10 each) 175,000
Retained earnings (75,000)
Non-current Liabilities
15% Debentures 125,000
Current Liabilities
Interest on debentures 18,750
Trade payables 93,750
Provision for business restructuring 50,000
Provision for legal damages & claims 12,500
Provision for warranties 37,500
Total Equity and Liabilities 812,500

Additional relevant information: The following scheme of reconstruction was approved by all parties as well as the High Court with the exception of only one ordinary shareholder:

  1. The ordinary shares were to be reduced to GH¢5 per share.
  2. The preference shares were to be reduced to GH¢7.5 per share and arrears in dividends for three years were to be canceled from the company’s books.
  3. The fair values of the assets were agreed at the following values:
    • Patents and copyrights: Nil
    • Land and buildings: GH¢225,000
    • Plant and machinery: GH¢75,000
    • Investments: GH¢75,000
    • Inventories: GH¢105,000
    • Trade receivables: GH¢70,000
  4. The balance on retained earnings is to be eliminated in full.
  5. The liability for legal damages and claims was to be settled for GH¢10 million, and the provision for warranties reduced to GH¢27.5 million.
  6. The accrued debenture interest was to be paid in cash.
  7. Investments with a carrying amount of GH¢52.5 million were to be sold for cash at that value to strengthen the working capital position.
  8. The amount set aside for business restructuring was to be eliminated as well.
  9. The High Court directed a payment of GH¢0.2 million to a member who opposed the scheme for 50 ordinary shares held by him.

Prepare the Capital Reduction Account as at 30 June 2019.

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  • 15 Marks

CR – May 2021 – L3 – Q4a – Corporate Reconstruction for Kanzo Ltd

Prepare a statement of financial position and related computations after reconstruction or liquidation for Kanzo Ltd.

Kanzo Ltd (Kanzo) is a company located in the Savannah Region. The company was strategically located to produce cashew nuts and to take advantage of available tax incentives. However, the company has incurred trading losses for many years now. The Directors are considering the alternatives of liquidation and capital reduction. The company’s Statement of Financial Position as at 31 December 2020 is as follows:

Non-current assets GH¢’million
Property, plant and equipment 3,250
Patent 350
Total Non-current assets 3,600
Current assets GH¢’million
Inventories 1,000
Accounts receivables 500
Total Current assets 1,500
Total assets GH¢’million
Total Assets 5,100
Equity & Liabilities GH¢’million
Ordinary share capital (@GH¢1) 2,000
Retained earnings (750)
Total Equity 1,250
Non-Current liabilities GH¢’million
20% Preference shares 1,100
25% Debentures (unsecured) 1,000
Total Non-Current liabilities 2,100
Current liabilities GH¢’million
Accounts payables 1,000
Bank overdraft (secured on property, plant & equipment) 750
Total Current liabilities 1,750

| Total Equity & Liabilities | 5,100 |

Additional Information:

  • In the event of a forced sale, the assets would probably raise the following amounts:
Asset GH¢’million
Property, Plant and Equipment 1,500
Inventories 400
Accounts receivable 450
  • The company is developing a new product, expected to generate profit before interest and tax of GH¢500 million per annum in anticipation of an immediate capital injection of GH¢2,000 million.
  • The Ordinary share capital should be written down to 200 million shares of GH¢1.00 each. In addition, they have agreed to provide the immediate capital injection.
  • The 20% preference shares are to be converted into 500 million ordinary shares valued at GH¢1 per share.
  • It is proposed for GH¢650 million of the 25% Debentures to be converted into ordinary shares at GH¢1 per share and the remainder to be converted into GH¢350 million 20% Debentures.
  • Accounts payables to accept immediate payment of 50% and a moratorium of six (6) months in payment of the remaining balance. New supplies would be paid for on delivery.
  • Property, plant and equipment are to be revalued at GH¢2,250 million, inventories at GH¢800 million, and Accounts Receivables at GH¢450 million.
  • The accumulated losses and intangible assets are to be written off.
  • The corporate tax rate is 25%.
  • Liquidation expenses will amount to GH¢10 million.

Required:
i) Prepare a Statement of Financial Position after reconstruction on the assumption that the capital injection took place. (6 marks)
ii) Compute the expected profit after tax and the earnings per share after the reconstruction. (2 marks)
iii) Prepare a statement of distribution if the company were to be liquidated now. (2 marks)
iv) Describe the steps the Directors of Kanzo Ltd should follow to appraise the proposed scheme of reconstruction with an emphasis on the interest of shareholders. (5 marks)

 

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  • 6 Marks

BL – May 2017 – L1 – SB – Q2b – Company Law | Partnership Law

Outlines permissible cases of capital reduction under CAMA and purposes for reducing share capital.

Section 105(1) of the Companies and Allied Matters Act (CAMA) provides that “except as provided by this Act, a company having share capital shall not reduce its issued capital.”
Required:
i. State TWO cases of capital reduction permitted under the CAMA.
(2 Marks)

ii. State TWO purposes for which a company may reduce its share capital under the CAMA.
(2 Marks)

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  • 15 Marks

CR – Nov 2016 – L3 – Q3 – Corporate reconstruction and reorganization

Prepare the capital reduction, stated capital, and bank accounts along with a statement of financial position after reorganization.

MM Ltd, producers of telecommunication equipment, has been making losses in recent times. The directors have proposed a scheme of reorganization to take effect on 1 October 2013. The statement of financial position of the company at 30 September 2013 is as follows:

Statement of Financial Position as at 30 September 2013

Additional information:

  1. The ordinary shares are to be written down to GH¢0.25 per share and then converted into new ordinary shares of GH¢1.00, fully paid.
  2. The preference shareholders are to receive 40,000 ordinary shares of GH¢1.00 per share, fully paid in exchange for their preference shares.
  3. Dividends on the 7% preference shares are two years in arrears. In consideration of waiving their rights to arrears of preference dividends, the preference shareholders have agreed to accept 10,000 new ordinary shares of GH¢1.00 per share, fully paid, in final settlement.
  4. The creditors have agreed to take 100,000 new ordinary shares of GH¢1.00 per share, fully paid in part settlement of the amounts due to them.
  5. The balance on the retained earnings account is to be written off.
  6. Some assets of the company have been revalued and are to be incorporated into the accounts as follows:
    • Freehold premises: GH¢100,000
    • Plant and equipment: GH¢125,000
    • Vehicles: GH¢25,000
    • Inventory: GH¢36,000
  7. An allowance of GH¢3,500 is to be made for doubtful debts.
  8. The ordinary shareholders have agreed to inject an additional GH¢90,000 cash by acquiring 120,000 ordinary shares at GH¢0.75 per share, fully paid.
  9. Reorganization costs amounted to GH¢7,500.

Required:
a) Prepare the capital reduction account, stated capital account, and bank account. (9 marks)
b) Prepare the statement of financial position of MM Ltd as at 1 October 2016, after the reorganization. (6 marks)

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  • 15 Marks

CR – Nov 2024 – L3 – Q4a – Corporate Reconstruction

Prepare the capital reduction account and the statement of financial position for Mensimah Ltd after reconstruction.

Mensimah LTD (Mensimah) has been experiencing poor trading conditions over the last three years. As a result, it has been difficult to generate revenues and profits in the current year leading to very high inventory levels. Also, Mensimah has defaulted in paying interest due to the loan note holders for two years. Even though the debentures are secured against the land & buildings, the loan note holders have demanded either a scheme of reconstruction or the liquidation of Mensimah.

As the above trading difficulties have significantly threatened the going concern status of Mensimah, the directors as well as representatives of the shareholders and loan holders in a meeting decided to design the following scheme of reconstruction:

  1. The assets were independently valued and should now be recognised at the following amounts:

    Asset Category Amount (GH¢)
    Land 64,000
    Building 64,000
    Plant & Equipment 24,000
    Inventory 40,000

    The value of Mensimah’s investment in Adams LTD has increased to GH¢48,000 and was to be sold as part of the reconstruction scheme. As for the trade receivables, it was determined that 10% of the stated value is non-recoverable and therefore would be written off.

  2. Each GH¢1 equity share is to be redesignated as an equity share of GH¢0.25. After this, the equity shareholders would be persuaded to accept a reduction in the nominal value of their shares from GH¢1 to GH¢0.25 per share and subscribe for a new issue based on one-for-one at a price of GH¢0.30 per share.

  3. The existing 5% loan notes are to be exchanged for a new issue of GH¢28,000 9.5% loan notes, repayable in 2028, plus 112,000 equity shares of GH¢0.25 each. In addition, they will subscribe for GH¢7,200 loan notes, repayable in 2028, at par value at the rate of 9.5%.

    The 8% loan notes holders who have not received any interest for the past two years, are to receive 16,000 equity shares of GH¢0.25 each in lieu of the interest payable. It is agreed that the value of the interest liability is equivalent to the fair value of the shares to be issued. Moreover, the 8% loan notes holders have agreed to defer repayment of their loan until 2028, on condition that they are paid a higher interest rate of 9.5%.

  4. The deficit on retained earnings is to be written off and the bank overdraft is to be repaid immediately.

Mensimah’s statement of financial position as at 31 December 2023 is as follows:

Assets GH¢’000
Non-current assets
Land & buildings 154,597
Plant & equipment 48,603
Investment in Adams LTD 21,600
Total Non-Current Assets 224,800
Current assets
Inventory 96,198
Receivables 56,554
Total Current Assets 152,752
Total Assets 377,552
Equity & Liabilities GH¢’000
Equity
Equity shares (GH¢1) 160,000
Retained earnings (31,857)
Total Equity 128,143
Non-current liabilities
8% loan notes 64,000
5% loan notes 56,000
Total Non-Current Liabilities 120,000
Current liabilities
Trade payables 89,798
Interest payable 10,240
Overdraft 29,371
Total Current Liabilities 129,409
Total Equity & Liabilities 377,552

Required:

i) Prepare the capital reduction account for Mensimah LTD. 
ii) Prepare the statement of Financial Position of Mensimah LTD immediately after the reconstruction.
iii) Determine the position of each stakeholder group if the reconstruction scheme is not implemented.

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  • 6 Marks

CR – May 2020 – Q4a – Capital Reduction Account

This question requires the preparation of a Capital Reduction Account for Sasasila Ltd following a reorganization.

Sasasila Ltd has been operating profitably for a number of years. However, in recent times, the company has been making losses. Below is the statement of financial position as at 30 June 2019:

Assets GH¢000
Non-Current Assets
Patents and copyrights 75,000
Land and buildings (net) 200,000
Plant and machinery (net) 150,000
Current Assets
Inventories 125,000
Trade receivables 125,000
Bank 37,500
Investments (cost) 100,000
Total Assets 812,500
Equity and liabilities:
Equity
Ordinary share capital (issued at GH¢10 each) 375,000
20% cumulative preference shares (issued at GH¢10 each) 175,000
Retained earnings (75,000)
Non-current Liabilities
15% Debentures 125,000
Current Liabilities
Interest on debentures 18,750
Trade payables 93,750
Provision for business restructuring 50,000
Provision for legal damages & claims 12,500
Provision for warranties 37,500
Total Equity and Liabilities 812,500

Additional relevant information: The following scheme of reconstruction was approved by all parties as well as the High Court with the exception of only one ordinary shareholder:

  1. The ordinary shares were to be reduced to GH¢5 per share.
  2. The preference shares were to be reduced to GH¢7.5 per share and arrears in dividends for three years were to be canceled from the company’s books.
  3. The fair values of the assets were agreed at the following values:
    • Patents and copyrights: Nil
    • Land and buildings: GH¢225,000
    • Plant and machinery: GH¢75,000
    • Investments: GH¢75,000
    • Inventories: GH¢105,000
    • Trade receivables: GH¢70,000
  4. The balance on retained earnings is to be eliminated in full.
  5. The liability for legal damages and claims was to be settled for GH¢10 million, and the provision for warranties reduced to GH¢27.5 million.
  6. The accrued debenture interest was to be paid in cash.
  7. Investments with a carrying amount of GH¢52.5 million were to be sold for cash at that value to strengthen the working capital position.
  8. The amount set aside for business restructuring was to be eliminated as well.
  9. The High Court directed a payment of GH¢0.2 million to a member who opposed the scheme for 50 ordinary shares held by him.

Prepare the Capital Reduction Account as at 30 June 2019.

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  • 15 Marks

CR – May 2021 – L3 – Q4a – Corporate Reconstruction for Kanzo Ltd

Prepare a statement of financial position and related computations after reconstruction or liquidation for Kanzo Ltd.

Kanzo Ltd (Kanzo) is a company located in the Savannah Region. The company was strategically located to produce cashew nuts and to take advantage of available tax incentives. However, the company has incurred trading losses for many years now. The Directors are considering the alternatives of liquidation and capital reduction. The company’s Statement of Financial Position as at 31 December 2020 is as follows:

Non-current assets GH¢’million
Property, plant and equipment 3,250
Patent 350
Total Non-current assets 3,600
Current assets GH¢’million
Inventories 1,000
Accounts receivables 500
Total Current assets 1,500
Total assets GH¢’million
Total Assets 5,100
Equity & Liabilities GH¢’million
Ordinary share capital (@GH¢1) 2,000
Retained earnings (750)
Total Equity 1,250
Non-Current liabilities GH¢’million
20% Preference shares 1,100
25% Debentures (unsecured) 1,000
Total Non-Current liabilities 2,100
Current liabilities GH¢’million
Accounts payables 1,000
Bank overdraft (secured on property, plant & equipment) 750
Total Current liabilities 1,750

| Total Equity & Liabilities | 5,100 |

Additional Information:

  • In the event of a forced sale, the assets would probably raise the following amounts:
Asset GH¢’million
Property, Plant and Equipment 1,500
Inventories 400
Accounts receivable 450
  • The company is developing a new product, expected to generate profit before interest and tax of GH¢500 million per annum in anticipation of an immediate capital injection of GH¢2,000 million.
  • The Ordinary share capital should be written down to 200 million shares of GH¢1.00 each. In addition, they have agreed to provide the immediate capital injection.
  • The 20% preference shares are to be converted into 500 million ordinary shares valued at GH¢1 per share.
  • It is proposed for GH¢650 million of the 25% Debentures to be converted into ordinary shares at GH¢1 per share and the remainder to be converted into GH¢350 million 20% Debentures.
  • Accounts payables to accept immediate payment of 50% and a moratorium of six (6) months in payment of the remaining balance. New supplies would be paid for on delivery.
  • Property, plant and equipment are to be revalued at GH¢2,250 million, inventories at GH¢800 million, and Accounts Receivables at GH¢450 million.
  • The accumulated losses and intangible assets are to be written off.
  • The corporate tax rate is 25%.
  • Liquidation expenses will amount to GH¢10 million.

Required:
i) Prepare a Statement of Financial Position after reconstruction on the assumption that the capital injection took place. (6 marks)
ii) Compute the expected profit after tax and the earnings per share after the reconstruction. (2 marks)
iii) Prepare a statement of distribution if the company were to be liquidated now. (2 marks)
iv) Describe the steps the Directors of Kanzo Ltd should follow to appraise the proposed scheme of reconstruction with an emphasis on the interest of shareholders. (5 marks)

 

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  • 6 Marks

BL – May 2017 – L1 – SB – Q2b – Company Law | Partnership Law

Outlines permissible cases of capital reduction under CAMA and purposes for reducing share capital.

Section 105(1) of the Companies and Allied Matters Act (CAMA) provides that “except as provided by this Act, a company having share capital shall not reduce its issued capital.”
Required:
i. State TWO cases of capital reduction permitted under the CAMA.
(2 Marks)

ii. State TWO purposes for which a company may reduce its share capital under the CAMA.
(2 Marks)

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  • 15 Marks

CR – Nov 2016 – L3 – Q3 – Corporate reconstruction and reorganization

Prepare the capital reduction, stated capital, and bank accounts along with a statement of financial position after reorganization.

MM Ltd, producers of telecommunication equipment, has been making losses in recent times. The directors have proposed a scheme of reorganization to take effect on 1 October 2013. The statement of financial position of the company at 30 September 2013 is as follows:

Statement of Financial Position as at 30 September 2013

Additional information:

  1. The ordinary shares are to be written down to GH¢0.25 per share and then converted into new ordinary shares of GH¢1.00, fully paid.
  2. The preference shareholders are to receive 40,000 ordinary shares of GH¢1.00 per share, fully paid in exchange for their preference shares.
  3. Dividends on the 7% preference shares are two years in arrears. In consideration of waiving their rights to arrears of preference dividends, the preference shareholders have agreed to accept 10,000 new ordinary shares of GH¢1.00 per share, fully paid, in final settlement.
  4. The creditors have agreed to take 100,000 new ordinary shares of GH¢1.00 per share, fully paid in part settlement of the amounts due to them.
  5. The balance on the retained earnings account is to be written off.
  6. Some assets of the company have been revalued and are to be incorporated into the accounts as follows:
    • Freehold premises: GH¢100,000
    • Plant and equipment: GH¢125,000
    • Vehicles: GH¢25,000
    • Inventory: GH¢36,000
  7. An allowance of GH¢3,500 is to be made for doubtful debts.
  8. The ordinary shareholders have agreed to inject an additional GH¢90,000 cash by acquiring 120,000 ordinary shares at GH¢0.75 per share, fully paid.
  9. Reorganization costs amounted to GH¢7,500.

Required:
a) Prepare the capital reduction account, stated capital account, and bank account. (9 marks)
b) Prepare the statement of financial position of MM Ltd as at 1 October 2016, after the reorganization. (6 marks)

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