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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.
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.
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- Tags: Capital Reduction, Corporate reorganization, Equity, Liabilities
- Level: Level 3
- Topic: Corporate reconstruction and reorganisation
- Series: MAY 2020
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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.
Question
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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- 4 Marks
AFM – Nov 2017 – L3 – Q5c – E: Corporate Reconstruction and Reorganisation
Discusses four problems associated with management buy-outs (MBOs).
Question
Management Buy-Outs can be the best way of maintaining links with a subsidiary, and can ensure the co-operation of management if a disposal is inevitable. However, there are a lot of problems in the management buy-out process.
Required:
Explain FOUR problems associated with Management Buy-Outs. (4 marks)
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- Tags: Corporate Restructuring, Financing MBOs, Management buy-outs, MBO challenges
- Level: Level 3
- Topic: Corporate reconstruction and reorganisation
- Series: NOV 2017
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- 20 Marks
AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization
Calculate the maximum possible loss of the company and allocate it between preference and ordinary shareholders.
Question
Additional Information:
- The realizable values of the assets are as follows:
- Furniture & Fittings: GH¢27.0m
- Motor Vehicle: GH¢67.5m
- Land & Building: GH¢26.25m
- Stocks: GH¢10.95m
- Debtors: GH¢7.5m
- The stated capital of the company is made up as follows:
- 2,000,000 ordinary shares of no par value: GH¢67.5m
- 500,000 15% cumulative preference shares of no par value: GH¢30.0m
- The cost of winding up is estimated at GH¢21.3m.
- The bank overdraft and 18% debentures are secured by a floating charge on the company’s assets.
- The preference dividends and interest on debentures are two years in arrears. However, no provision has been made for these in the financial statement.
- The ordinary shareholders have decided to inject GH¢60.0m in consideration for a new issue of equity shares if the capital reconstruction scheme is accepted.
- Although it is the company’s policy to amortize intangible assets over five years, the Board of Directors has decided to maintain the Goodwill indefinitely in the books due to the persistent losses, in contravention of the company’s policy. Goodwill has been outstanding since 2009. The current financial state of the company negates the value and existence of the goodwill.
- The preference shareholders have indicated their willingness to bear any deficit resulting from the reconstruction in proportion to their interest in the stated capital. In return, their stake would be converted into equity, and they would be permitted to make nominations to key management positions, including chairing the board for the first five years. If these proposals are accepted, the preference shareholders will contribute further equity of GH¢60.0m. They have also agreed to waive 50% of the arrears of dividend and convert the rest into equity.
- Any arrears of preference dividends are to form a first charge upon any surplus on winding up.
- The original ordinary shareholders have decided to waive any dividend due to them during the first two years in order to put the company on sound financial ground.
- The company is expected to improve its cash flow position and commence dividend payments if the additional capital of GH¢120.0m is introduced.
Required:
a) Calculate the amount available if Crave Cottage Industry Limited is liquidated and its distribution.
(7 marks)
b) Calculate the maximum possible loss of Crave Cottage Industry Limited and its allocation to Preference Share Capital and Ordinary Share Capital. (6 marks)
c) Calculate the Bank/Cash balance of Crave Cottage Industry Limited after the reorganization. (2 marks)
d) Calculate the new stated capital for the company after the reorganization. (2 marks)
e) Prepare a Statement of Financial Position of Crave Cottage Industry Limited showing the position immediately after the scheme has been put in place.
(3 marks)
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- Tags: Capital structure, Loss Allocation, Ordinary Shares, Preference shares, Shareholders
- Level: Level 3
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- 20 Marks
CR – Nov 2019 – L3 – Q4 – Corporate Reconstruction and Reorganisation
Evaluate the liquidation and reconstruction options for Mahadi Ltd and prepare the statement of financial position after reconstruction.
Question
Mahadi Ltd has operated profitably in Ghana for several years but is now facing financial difficulties after recording losses in its operations recently.
The company’s statement of financial position as at 30 September 2019 is given below:
| Mahadi Ltd Statement of Financial Position as at 30 September 2019 | GH¢ |
|---|---|
| Non-current Assets | |
| Freehold property | 68,000 |
| Equipment | 468,000 |
| Total Non-current Assets | 536,000 |
| Current Assets | |
| Inventories | 120,000 |
| Total Assets | 656,000 |
| Equity and Liabilities | GH¢ |
|---|---|
| Equity | |
| Stated capital (400,000 ordinary shares issued at 25 pesewas per share) | 100,000 |
| Capital surplus | 68,000 |
| Retained earnings | (40,000) |
| Total Equity | 128,000 |
| Non-current Liabilities | |
| 10% debenture stocks | 48,000 |
| Current Liabilities | |
| Sundry payables | 412,000 |
| Bank overdraft (from Northern Rock Bank) | 68,000 |
| Total Liabilities | 656,000 |
Additional Information:
- Mahadi Ltd operates several retail outlets for snack bars, most of which are rented out. The company’s largest supplier, Banda Ltd, holds all of the debenture stocks and is also a trade creditor for GH¢240,000 included in sundry payables. The sundry payables also include GH¢44,000 owed to the Ghana Revenue Authority (GRA).
- The bank overdraft is secured by a fixed charge over the freehold property, and the debenture stock is secured by a floating charge over the company’s assets.
- On October 1, 2019, Mahadi Ltd has scheduled a meeting of stakeholders to consider the following two proposals:
- Proposal Alternative 1 (Liquidation): The management proposes immediate liquidation, which would result in the following amounts for realised assets:
Realised Assets GH¢ Freehold property 56,000 Equipment 204,000 Inventories 40,000 - Proposal Alternative 2 (Reconstruction): Banda Ltd proposes to allow the company to continue operating as a going concern with the following actions:
- Convert the debenture stock into 48,000 ordinary shares (issued at GH¢1.00 per share).
- Convert trade debt owed to Banda Ltd into 110 ordinary shares (issued at GH¢1.00 each) for every GH¢200 owed, and the balance of the debt would be written off.
- Existing shareholders would receive one ordinary share for every five held.
- Banda Ltd would subscribe for an additional 140,000 ordinary shares at GH¢1.00 each for cash to improve liquidity.
- The fair value of the freehold property and inventories approximates their carrying value.
- The management of Banda Ltd expects that after reconstruction, Mahadi Ltd would earn a regular net profit of GH¢54,000 per annum.
- Proposal Alternative 1 (Liquidation): The management proposes immediate liquidation, which would result in the following amounts for realised assets:
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- Tags: Corporate Reconstruction, Financial Statements, Liquidation
- Level: Level 3
- Topic: Corporate reconstruction and reorganisation
- Series: NOV 2019
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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.
Question
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:
- 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.
- The preference shareholders are to receive 40,000 ordinary shares of GH¢1.00 per share, fully paid in exchange for their preference shares.
- 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.
- 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.
- The balance on the retained earnings account is to be written off.
- 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
- An allowance of GH¢3,500 is to be made for doubtful debts.
- 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.
- 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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- Tags: Capital Reduction, Financial Position, Reorganization, Stated Capital
- Level: Level 3
- Topic: Corporate reconstruction and reorganisation
- Series: NOV 2016
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- 15 Marks
CR – Mar 2023 – L3 – Q4a – Corporate reconstruction and reorganisation
Propose a scheme of capital reorganisation for Adonten, including a revised statement of financial position.
Question
For some years now, Adonten has been reporting operating losses, principally due to competition from better models. Adonten is now considering reorganising its operations and financial structure to allow it to obtain new funding required to develop and launch its new product. This product is tipped by technical experts to fare strongly on the market once launched.
The Statement of Financial Position as at 31 December 2021 is available:
Additional information:
- Preference dividends have been in arrears for three years.
- Retained earnings balance is to be eliminated.
- The following details relate to the assets:
- Tangible assets: 15% of the book value is to be transferred to the bondholders for an agreed value of GH¢720 million as full settlement of the debt, and the remaining book value of these assets marked up to 110%;
- Inventories include obsolete items worth GH¢540 million below their book value of GH¢680 million;
- A bond investment (having 10 months to maturity date) is to be revised to GH¢280 million from its carrying value of GH¢370 million;
- Receivables with carrying amount of GH¢1,200 million are to be factored out for 70% advance under terms that will allow for refund of any difference between actual collections and the upfront payment from the factor;
- One customer who owes GH¢828 million is in serious financial difficulty. Only 50% is expected to be received from this customer in one year’s time.
- The bank has demanded repayment of the bank overdraft, while the Venture Capital Fund (VCF) has accepted to receive 92% of their existing loan in new ordinary shares as full settlement. Upon successful completion of the reorganisation process, however, VCF is ready to immediately buy 15% GH¢900 million debentures in the reconstructed entity’s debts provided the directors will attach the right to convert the debt into shares at maturity. VCF will also require a 10% discount on the convertible debt at issue and a repayment period of three years. The effective rate of interest on this convertible debt, if the discount is granted, is estimated to be 18.7%, and the effective rate of interest on an equivalent non-convertible instrument will be 22.5%.
- Existing ordinary shareholders are prepared to inject GH¢4,200 million for 840 million new ordinary shares, while preference shareholders have pledged to finance a new production equipment whose estimated fair value is GH¢1,350 million in exchange for 250 million ordinary shares. Each of these shares currently has a value of GH¢5.
- Half of the trade payables (suppliers) are satisfied to receive ordinary shares in the reconstructed firm.
- The directors are projecting an annual profit before interest and tax in the reconstructed entity to be GH¢650 million.
- A firm order has been received from Amanten, a competitor, to buy all the business assets for GH¢7,200 million. 60% of these proceeds relate to properties. Closure costs are estimated at GH¢50 million.
Required: Suggest a scheme of capital reorganisation that would be acceptable to all stakeholders, including a revised statement of financial position.
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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.
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.
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- Tags: Capital Reduction, Corporate reorganization, Equity, Liabilities
- Level: Level 3
- Topic: Corporate reconstruction and reorganisation
- Series: MAY 2020
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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.
Question
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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- 4 Marks
AFM – Nov 2017 – L3 – Q5c – E: Corporate Reconstruction and Reorganisation
Discusses four problems associated with management buy-outs (MBOs).
Question
Management Buy-Outs can be the best way of maintaining links with a subsidiary, and can ensure the co-operation of management if a disposal is inevitable. However, there are a lot of problems in the management buy-out process.
Required:
Explain FOUR problems associated with Management Buy-Outs. (4 marks)
Find Related Questions by Tags, levels, etc.
- Tags: Corporate Restructuring, Financing MBOs, Management buy-outs, MBO challenges
- Level: Level 3
- Topic: Corporate reconstruction and reorganisation
- Series: NOV 2017
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- 20 Marks
AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization
Calculate the maximum possible loss of the company and allocate it between preference and ordinary shareholders.
Question
Additional Information:
- The realizable values of the assets are as follows:
- Furniture & Fittings: GH¢27.0m
- Motor Vehicle: GH¢67.5m
- Land & Building: GH¢26.25m
- Stocks: GH¢10.95m
- Debtors: GH¢7.5m
- The stated capital of the company is made up as follows:
- 2,000,000 ordinary shares of no par value: GH¢67.5m
- 500,000 15% cumulative preference shares of no par value: GH¢30.0m
- The cost of winding up is estimated at GH¢21.3m.
- The bank overdraft and 18% debentures are secured by a floating charge on the company’s assets.
- The preference dividends and interest on debentures are two years in arrears. However, no provision has been made for these in the financial statement.
- The ordinary shareholders have decided to inject GH¢60.0m in consideration for a new issue of equity shares if the capital reconstruction scheme is accepted.
- Although it is the company’s policy to amortize intangible assets over five years, the Board of Directors has decided to maintain the Goodwill indefinitely in the books due to the persistent losses, in contravention of the company’s policy. Goodwill has been outstanding since 2009. The current financial state of the company negates the value and existence of the goodwill.
- The preference shareholders have indicated their willingness to bear any deficit resulting from the reconstruction in proportion to their interest in the stated capital. In return, their stake would be converted into equity, and they would be permitted to make nominations to key management positions, including chairing the board for the first five years. If these proposals are accepted, the preference shareholders will contribute further equity of GH¢60.0m. They have also agreed to waive 50% of the arrears of dividend and convert the rest into equity.
- Any arrears of preference dividends are to form a first charge upon any surplus on winding up.
- The original ordinary shareholders have decided to waive any dividend due to them during the first two years in order to put the company on sound financial ground.
- The company is expected to improve its cash flow position and commence dividend payments if the additional capital of GH¢120.0m is introduced.
Required:
a) Calculate the amount available if Crave Cottage Industry Limited is liquidated and its distribution.
(7 marks)
b) Calculate the maximum possible loss of Crave Cottage Industry Limited and its allocation to Preference Share Capital and Ordinary Share Capital. (6 marks)
c) Calculate the Bank/Cash balance of Crave Cottage Industry Limited after the reorganization. (2 marks)
d) Calculate the new stated capital for the company after the reorganization. (2 marks)
e) Prepare a Statement of Financial Position of Crave Cottage Industry Limited showing the position immediately after the scheme has been put in place.
(3 marks)
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- Tags: Capital structure, Loss Allocation, Ordinary Shares, Preference shares, Shareholders
- Level: Level 3
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- 20 Marks
CR – Nov 2019 – L3 – Q4 – Corporate Reconstruction and Reorganisation
Evaluate the liquidation and reconstruction options for Mahadi Ltd and prepare the statement of financial position after reconstruction.
Question
Mahadi Ltd has operated profitably in Ghana for several years but is now facing financial difficulties after recording losses in its operations recently.
The company’s statement of financial position as at 30 September 2019 is given below:
| Mahadi Ltd Statement of Financial Position as at 30 September 2019 | GH¢ |
|---|---|
| Non-current Assets | |
| Freehold property | 68,000 |
| Equipment | 468,000 |
| Total Non-current Assets | 536,000 |
| Current Assets | |
| Inventories | 120,000 |
| Total Assets | 656,000 |
| Equity and Liabilities | GH¢ |
|---|---|
| Equity | |
| Stated capital (400,000 ordinary shares issued at 25 pesewas per share) | 100,000 |
| Capital surplus | 68,000 |
| Retained earnings | (40,000) |
| Total Equity | 128,000 |
| Non-current Liabilities | |
| 10% debenture stocks | 48,000 |
| Current Liabilities | |
| Sundry payables | 412,000 |
| Bank overdraft (from Northern Rock Bank) | 68,000 |
| Total Liabilities | 656,000 |
Additional Information:
- Mahadi Ltd operates several retail outlets for snack bars, most of which are rented out. The company’s largest supplier, Banda Ltd, holds all of the debenture stocks and is also a trade creditor for GH¢240,000 included in sundry payables. The sundry payables also include GH¢44,000 owed to the Ghana Revenue Authority (GRA).
- The bank overdraft is secured by a fixed charge over the freehold property, and the debenture stock is secured by a floating charge over the company’s assets.
- On October 1, 2019, Mahadi Ltd has scheduled a meeting of stakeholders to consider the following two proposals:
- Proposal Alternative 1 (Liquidation): The management proposes immediate liquidation, which would result in the following amounts for realised assets:
Realised Assets GH¢ Freehold property 56,000 Equipment 204,000 Inventories 40,000 - Proposal Alternative 2 (Reconstruction): Banda Ltd proposes to allow the company to continue operating as a going concern with the following actions:
- Convert the debenture stock into 48,000 ordinary shares (issued at GH¢1.00 per share).
- Convert trade debt owed to Banda Ltd into 110 ordinary shares (issued at GH¢1.00 each) for every GH¢200 owed, and the balance of the debt would be written off.
- Existing shareholders would receive one ordinary share for every five held.
- Banda Ltd would subscribe for an additional 140,000 ordinary shares at GH¢1.00 each for cash to improve liquidity.
- The fair value of the freehold property and inventories approximates their carrying value.
- The management of Banda Ltd expects that after reconstruction, Mahadi Ltd would earn a regular net profit of GH¢54,000 per annum.
- Proposal Alternative 1 (Liquidation): The management proposes immediate liquidation, which would result in the following amounts for realised assets:
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- Tags: Corporate Reconstruction, Financial Statements, Liquidation
- Level: Level 3
- Topic: Corporate reconstruction and reorganisation
- Series: NOV 2019
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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.
Question
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:
- 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.
- The preference shareholders are to receive 40,000 ordinary shares of GH¢1.00 per share, fully paid in exchange for their preference shares.
- 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.
- 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.
- The balance on the retained earnings account is to be written off.
- 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
- An allowance of GH¢3,500 is to be made for doubtful debts.
- 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.
- 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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- Tags: Capital Reduction, Financial Position, Reorganization, Stated Capital
- Level: Level 3
- Topic: Corporate reconstruction and reorganisation
- Series: NOV 2016
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- 15 Marks
CR – Mar 2023 – L3 – Q4a – Corporate reconstruction and reorganisation
Propose a scheme of capital reorganisation for Adonten, including a revised statement of financial position.
Question
For some years now, Adonten has been reporting operating losses, principally due to competition from better models. Adonten is now considering reorganising its operations and financial structure to allow it to obtain new funding required to develop and launch its new product. This product is tipped by technical experts to fare strongly on the market once launched.
The Statement of Financial Position as at 31 December 2021 is available:
Additional information:
- Preference dividends have been in arrears for three years.
- Retained earnings balance is to be eliminated.
- The following details relate to the assets:
- Tangible assets: 15% of the book value is to be transferred to the bondholders for an agreed value of GH¢720 million as full settlement of the debt, and the remaining book value of these assets marked up to 110%;
- Inventories include obsolete items worth GH¢540 million below their book value of GH¢680 million;
- A bond investment (having 10 months to maturity date) is to be revised to GH¢280 million from its carrying value of GH¢370 million;
- Receivables with carrying amount of GH¢1,200 million are to be factored out for 70% advance under terms that will allow for refund of any difference between actual collections and the upfront payment from the factor;
- One customer who owes GH¢828 million is in serious financial difficulty. Only 50% is expected to be received from this customer in one year’s time.
- The bank has demanded repayment of the bank overdraft, while the Venture Capital Fund (VCF) has accepted to receive 92% of their existing loan in new ordinary shares as full settlement. Upon successful completion of the reorganisation process, however, VCF is ready to immediately buy 15% GH¢900 million debentures in the reconstructed entity’s debts provided the directors will attach the right to convert the debt into shares at maturity. VCF will also require a 10% discount on the convertible debt at issue and a repayment period of three years. The effective rate of interest on this convertible debt, if the discount is granted, is estimated to be 18.7%, and the effective rate of interest on an equivalent non-convertible instrument will be 22.5%.
- Existing ordinary shareholders are prepared to inject GH¢4,200 million for 840 million new ordinary shares, while preference shareholders have pledged to finance a new production equipment whose estimated fair value is GH¢1,350 million in exchange for 250 million ordinary shares. Each of these shares currently has a value of GH¢5.
- Half of the trade payables (suppliers) are satisfied to receive ordinary shares in the reconstructed firm.
- The directors are projecting an annual profit before interest and tax in the reconstructed entity to be GH¢650 million.
- A firm order has been received from Amanten, a competitor, to buy all the business assets for GH¢7,200 million. 60% of these proceeds relate to properties. Closure costs are estimated at GH¢50 million.
Required: Suggest a scheme of capital reorganisation that would be acceptable to all stakeholders, including a revised statement of financial position.
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