- 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.
Question
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:
- The ordinary shares were to be reduced to GH¢5 per share.
- 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.
- 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
- The balance on retained earnings is to be eliminated in full.
- 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.
- The accrued debenture interest was to be paid in cash.
- 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.
- The amount set aside for business restructuring was to be eliminated as well.
- 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.
Find Related Questions by Tags, levels, etc.
- Tags: Capital Reduction, Corporate reorganization, Equity, Liabilities
- Level: Level 3
- Topic: Corporate reconstruction and reorganisation
- Series: MAY 2020
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