- 9 Marks
CR – Nov 2014 – L3 – SC – Q6b – Introduction to Corporate Reporting
Evaluate Luck & Co's financial position and recommend restructuring options to address going concern threats.
Question
Scenario:
Luck & Co. has been making losses over the last few years. Its statement of financial position at 31 December, 2013, showed the following:
Statement of Financial Position as at 31 December, 2013
| Assets | N |
|---|---|
| Property, plant, and equipment | 80,000 |
| Inventory | 20,000 |
| Receivables | 40,000 |
| Total Assets | 140,000 |
| Equity and Liabilities | N |
|---|---|
| Ordinary Capital | 100,000 |
| Retained Earnings | (140,000) |
| Secured Loan Stock | 100,000 |
| Payables | 80,000 |
| Total Equity & Liabilities | 140,000 |
On liquidation, the assets would realise the following:
| Assets | N |
|---|---|
| Property, plant, and equipment | 30,000 |
| Inventory | 12,000 |
| Receivables | 36,000 |
| Total Realisable Value | 78,000 |
If the company continues to trade for the next four years, profit after charging N20,000 per annum as depreciation on the property, plant and equipment would be as follows:
| Year | Profit (N) |
|---|---|
| 2014 | 4,000 |
| 2015 | 20,000 |
| 2016 | 26,000 |
| 2017 | 28,000 |
| Total | 78,000 |
Assume that there would be no surplus cash to settle the payables and loan stock holders until after four years when inventory and receivables could be realised at their book values.
Required:
Evaluate the financials and advise the management of Luck & Co on the options available to them and redraft the statement of financial position of Luck & Co after the exercise. (9 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Debt-to-Equity Swap, Financial restructuring, Going Concern, Liquidation, Profitability
- Level: Level 3
- Topic: Introduction to Corporate Reporting
- Series: NOV 2014