Reconstruction or Reorganisation of companies

 Reconstruction or Reorganisation of companies is concerned with the

restructuring of the existing statement of financial position of the company.
 This may come about because of the huge loss or fictitious assets not written
off or of overvalued assets shown on the statement of financial position of the
business.
 In order to avoid liquidation all the interested parties may have to join hands
and a reorganisation scheme drafted.
 The reorganisation scheme should be submitted to court for approval
 If reorganisation is approved stakeholder such as shareholders, creditors and
debenture holders have to sacrifice an agreed amount of their interest and such
amount would be used to write off or write down overvalued assets and
accumulated losses.
 The amounts sacrificed by stakeholders are credited to a reorganisation
Account

Reorganisation Account

 Open a Reorganisation account and transfer all funds sacrificed by the stakeholders on
the credit side of the account.
 The funds accumulated is used to write off fictitious assets and write down
overvalued assets
 After fully implementing the scheme if there is a credit balance in the reorganisation
account, the balance is transferred to capital reserves
 A new statement of financial position is then drafted to reflect the new position of the
business.

Reconstruction Schemes

The following guide should be followed when formulating reconstruction schemes:

 Clarity_ the reconstruction scheme should be clear and without ambiguity.

 Wide acceptance- the scheme should be widely accepte4d by the interested parties as
being fair.
 Justice- the scheme should be seen as just to the parties involved.

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Question 1
Below is a statement of financial position for Shathani Ltd as 30 June 2013
Shathani Ltd statement of financial position as at 30 June 2013
P P
Non-Current assets
Goodwill 84 000
Land and buildings 105 000
Plant and Machinery 154 000
Patents and Trade Marks 35 000
378 000
Current assets
Inventory 112 000
Trade receivables 84 000
Preliminary expenses 14 000
Cash and bank 5 600 215 600

Total assets 593 600

Share Capital and liabilities

2 800 6% preference shares of 280 000
P100each
4 200 ordinary shares of P100 420 000
Retained profit 21 000
721 000
Profit and loss account (540 400)
180 600

5% debenture 140 000

Current liabilities
Income Tax 63 000
Trade Payables 210 000 273 000
Total capitals and liabilities 593 600

Additional information:
The stakeholders agreed that a reconstruction should be carried out.
A revaluation of the assets revealed the following:
P
Land and building 140 000
Plant and machinery 112 000
Patents and trade marks 7 000
Inventory 91 000
Trade Receivables 77 000
The following reconstruction scheme was formulated and was approved by court:

a) The preference shares be converted into 7½% preference shares of P30 each fully paid

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 b) The ordinary shares be converted into shares of P5 each fully paid
c) The trade payables agreed to reduce their claim to P150 000
d) The revaluation of assets be adopted
e) The rate of interest on Debentures was raised to 8%.
f) All shares were consolidated (sub divided) into shares of P10 each.

Required: assuming that all the necessary action was taken, draft a statement of
financial position after the scheme was put in place.

Question 2

Below is the financial statement of Star Limited.

Star Limited Statement of financial position as at 31 March 2015

Pula (000) Pula (000)

PPE 2 800
Current Assets 910
Total assets 3 710

Capital and liabilities

Share capital (28 000 ordinary shares of P100 2 800
each)
Profit and loss (1 358)
1 442
Non- current liability
1 400 6% debenture s of P1 000 1 400

Current liabilities
Trade payables 700
Interest owing 168 868
Total capital and liabilities 3 710
Additional information:

1. The non-current assets were revalued at P 1 344 000 and the current assets at
P672 000.
2. The shares were subdivided into shares of P8 each fully paid.
3. The total claim of the debentures were reduced by P480 000.
4. The creditors agreed to reduce their claim to P420 000. One third of their claim was to
be satisfied by the issue of equity shares.
Required to:

a) Pass journal entries to capture the transactions above.

b) Prepare a reconstruction account.
c) Prepare the statement of financial position after reconstruction has been carried
out.
d) Briefly explain why reconstruction or reorganisation of businesses is done.

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Question 2

a) Dr Reconstruction account 1 456 000 (1 mark)

Credit PPE 1 456 000(1 mark)
(Being the revaluation of fixed assets)

b) Debit Reconstruction account 238 000(1 mark)

Credit current assets 238 000(1 mark)
( Being revaluation of current assets

c) Debit Debentures 480 000(1 mark)

Credit reconstruction account 480 000(1 mark)
( Being reduction of the value of debentures)

d) Debit Payables 420 000(1 mark)

Credit reconstruction account 280 000(1 mark)
Credit share capital 140 000(1 mark)
(Being reduction of claims by creditors)

e) Debit share capital 2 576 000(1 mark)

Credit reconstruction account 2 576 000(1 mark)
(Being subdivision of 28 000 shares of P100 into P8 shares)

( 11 marks)
Reconstruction account
PPE 1456 (1) Share capital 2 576 (1)
Profit and loss 1358 (1)
Current assets 238 (1) Trade payables 280 (1)
Debentures 480 (1)
Capital reserve 284 (1)
3 336 3 336
( 7 marks)

Statement of financial position as at 30 June 2016

Pula Pula Marks
Non-current assets
PPE 1 344 000 1
Current assets 672 000 1
Total assets 2 016 000
Capital and Liabilities
Share capital 364 000 1
Capital reserve 284 000 1
Debenture 920 000 1

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 Current liabilities
Trade payables 280 000 1
Interest owing 168 000 1
448 000
Total capitals and 2 016 000
liabilities
(7 marks)
d) Reconstruction or Reorganisation
Reconstruction or Reorganisation of companies is concerned with the restructuring of the
existing statement of financial position of the company.
 This may come about because of the huge loss or fictitious assets not written
off or of overvalued assets shown on the statement of financial position of the
business.
 In order to avoid liquidation all the interested parties may have to join hands
and a reorganisation scheme drafted.
 The reorganisation scheme should be submitted to court for approval
 If reorganisation is approved stakeholder such as shareholders, creditors and
debenture holders have to sacrifice an agreed amount of their interest and such
amount would be used to write off or write down overvalued assets and
accumulated losses. The amounts sacrificed by stakeholders are credited to a
reorganisation Account