Bact 310 Topic 3 Accounting For Capital Reorganisations and Reconstructions

Topic Two: Accounting for Capital Reorganizations and 2022
Reconstructions
Compiled by Mugo Robert
CAPITAL RECONSTRUCTION
Capital reconstruction is a situation where a company has to adjust its
financial components so that it can start operating in a desirable position. it
is normally done when the profitability of an organization is already turned
into a loss or profitability is under threat.
Capital reconstruction is divided into two aspects: Internal
reconstruction and external reconstruction
INTERNAL RECONSTRUCTION
This is when an organization alters its financial statements internally so that
it can appear attractive to investors.
This process may involve:
i) Writing off idle assets
ii) Writing off accumulated losses
iii) Writing off liabilities
iv) Capital reduction
v) Increasing the capital by the capitalization of reserves
In company accounts, the share capital of an organization is sacred
and can only be altered under the following circumstances:
i) When an extraordinary general meeting is called for where capital
reduction is the only agenda
ii) When a supermajority (75%) of the shareholders entitled to vote
approves such a decision
iii) A court order must sanction the above
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Journal entries
1. To write off idle assets
DR: Capital reduction a/c Xx
CR: Asset a/c xx
2. To write of liabilities
DR: Liabilities a/c Xx
CR: Capital reduction xx
3. Reduction of share capital
DR: Share capital a/c Xx
CR: Capital reduction a/c xx
4. Reconstruction expenses
DR: P&L a/c Xx
CR: Reconstruction payable xx
5. Dividend in arrears
DR: P&L Xx
CR: Dividend payable xx
6. Revaluation gains
DR: Asset a/c Xx
7. Loss written off
DR: Capital reduction a/c Xx
CR: P&L a/c xx
8. Gains or losses on reconstruction.
Gains
DR: Capital reduction a/c xx
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CR: Capital reserve a/c xx

Losses
DR: Goodwill a/c xx
9. Replacement of share capital
DR: Share capital replaced xx
CR: Share capital replacement xx
DR CAPITAL REDUCTION A/C CR

Details Sh. Details Sh.
Assets w/o Xx Liabilities w/o Xx
Losses w/o Xx Capital reduced Xx
Revaluation gains Xx
Capital reserve xx Goodwill Xx
xx xx
QUESTION ONE:
Furaha ltd which operates in the fruit processing industry is in financial
difficulty. The Statement of Financial Position of the company as at
31/03/2014 was given below
Details Amount Details Amount
'000' '000'
Equity shares of Sh. 10 par value 10,000 Goodwill 3,000
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10% Preference shares of Sh. 10 par 4,000 Land 4,000

value
12% debentures 3,000 Buildings 3,750
Interest payable on debentures 360 Machinery 2,200
Loan from directors 1,000 Investments 2,250
Provision for Depreciations: Buildings 750 Stock 3,600
Provision for Depreciations: Machinery 800 Debtors 2,000
Bank overdraft 1,500 Cash 50
Sundry creditors 2,590 Patents 250
Profit and 2,900
Loss
24,000 24,000
The authorized share capital of the company is 2.5 Million equity shares of
Sh. 10 each and 0.5 Million 10% preference shares of Sh. 10 each. It was
decided during the meeting of the shareholders and directors of the
company to carry out a scheme of internal reconstruction or liquidation with
effect from 01/04/2014 as follows:
1. Each equity share is to be redesignated as a share of Sh. 2.50. The
equity shareholders are to accept a reduction in the nominal value of
their shares from Sh. 10 to Sh. 2.50. besides, the shareholders are to
subscribe for a new issue based on one share for every two held for
Sh. 4 per share.
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2. The existing preference shares are to be exchanged for a new issue of

300,000 15% preference shares of Sh. 10 each and 400,000 equity
shares of Sh. 2.50 each.
3. The debentures holders are to accept 100,000 equity shares of Sh.
2.50 each in place of interest payable. The 12% debentures are to be
converted to 14% debentures. A further Sh. 1,000,000 of 14%
debentures of Sh. 10 each are to be issued and taken up by the
existing debentures holders at Sh. 8 each.
4. The investments are to be sold at their current market price of Sh.
3,000,000.
5. The bank overdraft is to be repaid in full.
6. A sum of Sh. 1,590,000 is to be paid to the creditors immediately and
the balance is in four equal instalments of each quarter.
7. All intangible assets are to be eliminated.
8. It would cost Sh. 5 Million if liquidation was adopted and Sh. 3.5
Million if reconstruction was adopted.
9. Assets to be adjusted to their fair values as follows:
Details Sh 000
Debtors 1,800
Stock 3,200
Machinery 1,000
Buildings 2,500
Land 3,200
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10. It is estimated that under the new arrangement, the net profit
before interest and tax will be Sh. 2,500,000 per year. There will be no
tax liability relating to the next five years.
Required:
a. Journal entries to effect the scheme of reconstruction
(12 Marks)
b. Statement of Financial Position after the reconstruction
(10 Marks)
Solution:
(a) Journal Entries
1. Reduction in share capital
DR: Share capital
CR: C.R.A 7,500
New shares 7,500
0.5 *1000= 500
DR: Bank 2,000
CR. Share capital 1,250
CR: Share premium 750
2. Workings
DR: 10% Pref. shares 4,000
CR: 15% Pref. shares 3,000
CR: Ord. shares 1,000
3. Workings
DR: Int. payable 360
CR: Ord. share capital 250
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CR: C.R.A 110
DR: 12% Debenture 3,000

CR: 14% Debenture 3,000
DR: Bank 900

DR: Disc. On debentures 100
CR: 14% Debentures 1,000
Disposal of investment
DR: Bank a/c 3000
CR: Investment a/c 2,275
CR: C.R.A a/c 750
DR: Creditors 1,590
CR: Bank 1,590
DR: C.R.A a/c 3,250
CR: Goodwill 3,000
CR: Patents 250
DR: P$L 3,500
CR: Reconstruction a/c 3,500
DR: C.R.A 2,300
CR: Debtors 200
CR: Stock 400
CR: Machinery 400
CR: Building 500
CR: Land 800
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Losses written off

DR: C.R.A a/c 6,400
CR: P$L a/c 6,400
DR C.R.A CR
Assets w/o 3,250 Capital reduction 7,500
Assets w/o 2,300 Interest payable 110
Losses w/o 6,400 Gain on investment 750
Goodwill 3,590
11,590 11,590
DR SHARE CAPITAL CR
Ord. share capital 7,500 Bal. c/d 10,000
Bank 1,250
Pref. shares 1,000
Bal. c/d 5,000 Deb. Int. payable 250
12,500 12,500
DR BANK A/C CR
S/capital 1,250 Bal. c/d 1,500
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14% deb. 900 Creditors 1,590

Investment 3,000
Share premium 750 Bal. c/d 2,810
5,900 5,900
(b)Jaribio Ltd.
Statement of financial position
As at 31st march 2014
Sh. Sh.
N.C.A
Land 3,200
Building 2,500
Machinery 1,000
Goodwill 3,590
Disc. On the issue of debenture 100
10,390
Cur. Assets
Debtors 1,800
Stock 3,200
Bank 2,810
Cash 50 7,860
Total Assets 18,250
Financed By:
Ord. share capital 5,000
15% pref. share capital 3,000
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Share premium 750

14% debentures 4,000
Creditors 1,000
Reconstruction payable 3,500
Loan from directors 1,000
18,250
QUESTION TWO
Nuru ltd reported favourable trading results until FOUR years ago when it
started reporting successive trading losses. Provided below is the company’s
Statement of Financial Position as at November 30, 2014
Details Sh Sh
‘000’ ‘000’
Assets
Non-current Assets
Goodwill 10,000
Land and buildings 48,000
Motor vehicles 47,000
Furniture and Equipment 35,000
140,000
Current assets;
Stock 18,000
Notes receivable 8,500
26,500
Totals 166,500
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Equity and liabilities

Capital and reserves
Ordinary share capital 50,000
10% preference share capital 40,000
Share premium 10,000
Profit and loss account balance (30,000)
70,000
Non-current liabilities
9% debentures 72,000
Current liabilities
Creditors 14,500
Bank overdraft 10,000
24,500
Total equity and liabilities 1166,500
Additional information;
a. Both the ordinary and the preference shares are sh 10 each and are
fully paid
b. On 30/11/2014, the preference dividends were three years in arrears
c. Debentures are secured on a floating charge over the assets of the
company. Debenture holders who are also suppliers of goods to the
company are owed sh 3 million. This amount is included in the
creditors' account.
d. The bank overdraft is secured on a fixed charge over the motor
vehicles
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e. The articles of association of the company give preference

shareholders priority over ordinary shareholders on repayment of
capital contributed. The articles also provide for the repayment of
contributed capital only after the settlement of preference dividends in
arrears outstanding
f. Due to successive trading losses that the company has reported in the
past three years, the directors have decided to either liquidate or
reconstruct the company.
The realizable values of the company’s assets as at 30/11/2014 were
as follows;
Sh “000”
Land and buildings 60,000
Motor vehicles 32,000
Furniture and equipment 15,000
Stock 12,500
Debtors 5,200
On liquidation of the company, dissolution costs of Sh. 8 Million would
be incurred
g. On the reconstruction of the company, the following measures were
effected
i. The authorized capital of the company would be increased from
sh 80 Million to Sh 150 Million composed of ordinary shares of
Sh. 10 each
ii. The 6% debentures of nominal value sh 50 million would be
settled by issue of ordinary shares at par Sh. 8 paid. The balance
of the 6% debentures would be exchanged for 8% debentures of
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the same nominal value. The trade debt due to debenture

holders would be settled immediately in cash
iii. The 10% preference shareholders would be issued with two Sh.
6 paid ordinary shares of sh 10 each for every 5 10% preference
shares held
iv. Preference dividends in arrears would be settled by the issue of
5 Sh. 7 paid ordinary shares for every Sh 100 of the arrears
v. Present ordinary shareholders would be issued with two sh. 6
paid ordinary shares of Sh. 10 for every 10 ordinary shares held
vi. It is estimated that in order to effect the scheme of
reconstruction, a cost of Sh. 5 Million would be incurred.
Required;
a. Prepare the journal entries of the company if the reconstruction was
undertaken. Also, show the necessary accounts (15 Marks)
b. Prepare the reconstructed statement of financial position
(10 Marks)
QUESTION THREE
a) Eveready East Africa ltd has been suffering from adverse trading
conditions largely due to the effect of obsolescence in its products.
This resulted in losses for the last five years. The company is unable o
secure an extension of its present overdraft and creditors are pressing
for payment.
The directors feel that a new product just developed by the company will
make it profitable in the future but they are worried that a winding-up order
may be made before this can be achieved.
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The following Statement of Financial Position is available as at

31/12/2014
Details Book Values Present
values
Sh Sh Sh
Goodwill 600,000 -
Patents 220,000 40,000
Freehold land and 2,400,000 3,000,000
buildings
Plant and vehicles 1,000,000 3,400,000 720,000
4,220,000
Stock and debtors 1,280,000 1,1160,000
Listed shares at cost 300,000 280,000
1,580,000
Creditors due within
one year
Trade 2,360,000
Bank Overdraft 620,000 (2,980,000) (1,400,000)
2,820,000
Share capital and
reserves
20% cumulative 1,000,000 1,000,000
preference shares fully
paid (dividends are
three years in arrears)
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Ordinary share capital 4,000,000 4,000,000

of Sh. 20 fully paid
Share premium 1,200,000 1,200,000
account
12% mortgage loan 1,200,000 1,200,000
secured on freehold
land
Profit and loss account (4,580,000) (4,580,000)
2,820,000
The following additional information is available:

1. The reconstruction costs are estimated to be Sh. 96,000
2. Preference shares rank in priority to ordinary shares in the event of a
winding-up
3. The bank has indicated that they would advance a loan of up to Sh. 1
Million provided that the overdraft is cleared and a second mortgage
on freehold land is given.
4. To ensure speedy production of the new product, it would be
necessary to expend Sh. 400,000 on new plant and Sh. 300,000 on
increasing stocks.
5. The creditors figure of Sh. 2,360,000 includes Sh. 380,000 that would
be preferential in liquidation
Required:
i. Show the journal entries if reconstruction was done (10 Marks)
ii. ledger accounts if reconstruction was done (8 Marks)
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iii. prepare the Statement of Financial Position after the reconstruction

was done (5 Marks)
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EXTERNAL RECONSTRUCTION
Reconstruction means the reorganization of a company’s financial structure.
In the reconstruction, of a company, usually, the assets and liabilities of the
company are revalued, and the losses suffered by the company are written
off by a deduction of the paid-up value of shares and/or varying of the rights
attached to different classes of shares and corresponding with the creditors.
It may be done without liquidating the company or forming a new company
in which case the undertaking is carried on by the company is transferred to
a newly started company consisting substantially of the same shareholders
with a view to the business of the transferor company being contained by
the transferee company. An attempt is made that the newly started
company has a sound financial structure and a good set of assets and
liabilities recorded in the books of the transferee company at their fair value.
It is similar to amalgamation in the nature of purchase; the books of the
transferor company are closed and in the books of the transferee company,
the purchase of the business is recorded.
Differences between Amalgamation and External Reconstruction:
i. In external reconstruction, only one company is involved whereas, in
amalgamation, there are at least two existing companies that
amalgamate.
ii. In external reconstruction, a new company is certainly formed whereas
in amalgamation, a new company may be formed or in the
alternatives, one of the existing companies may take over the other
amalgamating company.
iii. The objective of the external reconstruction is to reorganize the
financial structure of the company, on the other hand, the objective of
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amalgamation is to cut competition and reap the economies of large

scale.
The term reconstruction is used to refer to several situations. In general
terms, these are transactions in which:-
a) One company takes over another company
b) One company takes over the business of another company.
In most cases, it will involve a new company being formed to take over the
assets of the existing company undergoing the reconstruction process.
Effectively therefore the existing company is liquidated and its assets
transferred to the new company formed.
We prepare three accounts:- Realization a/c
- Reconstruction a/c
- Shareholders members a/c
DR REALIZATION A/C CR
Assets taken over (NBV) Xx Liabilities taken over Xx
Purchase consideration (New co.) Xx
Reconstruction a/c Xx Reconstruction a/c Xx
XX XX
DR RECONSTRUCTION A/C CR
Assets not taken over Xx Liabilities not taken over Xx
Losses w/o Xx Reserves w/o Xx
Revaluation gain Xx
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Realization loss Xx Sundry members a/c Xx

XX XX
DR SHAREHOLDERS MEMBERS A/C CR

New company. (purchase Xx Bal. b/d Xx
consideration)
Reconstruction a/c Xx Pref. div. in arrears Xx
XX XX
Journal entries
OLD COMPANY
Details SH. SH.
1. Assets not taken over
DR: Reconstruction a/c Xx
CR: Asset a/c Xx
2. Assets taken over
DR: Realization a/c Xx
CR: Asset a/c Xx
3. Liabilities taken over
DR: Liabilities a/c Xx
CR: Realization a/c Xx
4. Liabilities paid for by the purchasing co.
DR: Liability a/c
CR; New co. ( purchase consideration) Xx
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Xx
5. Liabilities not taken over
DR: Liability a/c Xx
CR: Reconstruction a/c Xx
6. Reserves w/o
DR: Reserves ac Xx
CR: Reconstruction a/c Xx
7. Reconstruction expenses
a) Paid for by the vendor
DR: P$L xx
CR: Bank xx
b) Paid for by the purchasing co.
DR: P&L xx
CR: New co. ( purchase consideration) xx
8. Losses w/o
DR: Reconstruction a/c Xx
CR: P&L a/c Xx
9. Exchange of shares
DR: Share capital Xx
CR: New co. ( purchase consideration) Xx
Determination of purchase consideration
Details Sh.
Ord. share capital Xx
Reconstruction expenses Xx
Payment of div.in arrears Xx
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Pref. share capital Xx

XX
NEW COMPANY
Details Sh. Sh.
1. Assets taken over
DR: Assets (NRV) Xx
CR: Business purchase a/c Xx
2. Liabilities taken over
DR: Business purchase a/c Xx
CR: Liabilities xx
3. Liabilities paid for by the purchasing company
DR: Old co. ( purchase consideration) Xx
CR; Bank xx
4. Reconstruction expenses paid for by the purchasing co.
CR; Bank xx
5. Shares issued to the vendor co.
CR; Share capital xx
DR BUSINESS PURCHASE A/C CR

Liabilities taken over Xx Assets taken over ( NRV) xx
Purchase consideration Xx
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Capital reserve Xx Goodwill xx

XX XX
QUESTION ONE
Prosperous ltd, which operates in the agricultural sector, has been reporting
losses for a number of years. The Statement of Financial Position of this
company as at 31/12/2013 was as follows:
Details Sh '000' Details Sh '000'
Equity shares of Sh. 100 each 1,200,000 Fixed assets 1,800,000
at NBV
12% cumulative preference shares 480,000 Stock in trade 720,000
of Sh. 100 each
1,200,000 Trade debtors 960,000
Bank overdraft (secured)
Creditors-Preferential 60,000 Profit and loss 900,000
balance
Creditors-Others 1,440,000
4,380,000 4,380,000
A scheme of reconstruction was approved by all parties. The scheme

provided the following:
(i) A new company known as Bright ltd was to be formed to take over the
assets and liabilities of Prosperous ltd as at 31/12/2013.
(ii) 2,400,000 equity shares for Sh. 100 each in Bright ltd, credited as Sh.
50 per share paid up were to be issued to the liquidator of Prosperous
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Ltd for the benefit of that company's equity shareholders who agreed
to pay up the balance of Sh. 50 per share immediately
(iii) 4,800,000 preference shares of Sh. 100 each in Bright Ltd
credited as Sh. 75 per share paid up were to be issued to the
liquidator of Prosperous ltd. The preference shareholders agreed to
pay up the remaining Sh. 25 per share.
(iv) Bright ltd was to pay up the liquidation expenses of Prosperous
ltd amounting to Sh. 12 Million
(v) Tangible assets were to be taken over by Bright ltd at the
following values
Details Sh '000'
Fixed Assets 1,680,000
Stock in trade 600,000
Trade Debtors 960,000
(vi) Bright ltd was to immediately discharge preferential creditors in
cash. The company was to fully satisfy other creditors as follows:
Details Sh. '000'
By payment in cash 720,000
By issue of 14% debentures (redeemable in 5 years) 720,000
(vii) The authorized capital of bright ltd was to be Sh. 3 Billion divided
into15 Million, 12% cumulative preference shares of Sh 100 each and
15 Million ordinary shares of Sh. 100 each.
(viii) The directors of Bright ltd agreed to subscribe for the 8.4 Million
shares of Sh. 100 each and the amount due was to be paid in full on
application.
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(ix) Bright ltd was to pay off the bank overdraft to the extent of Sh.
240 Million. The balance was to be secured on fixed assets.
(x) Preliminary expenses of Bright Ltd amounted to Sh. 24 Million
(xi) Assume that all the above requirements of the scheme of
reconstruction were fulfilled at the close of business on 01/ January
2014
Required:
a. Show in the books of prosperous ltd:
(i) Realization account (6 Marks)
(ii) Sundry members account (8 Marks)
b. Journal entries in the books of Bright ltd (8 Marks)
c. Statement of Financial position of Bright Ltd as a January 2014
(8 Marks)
PROSPEROUS AND BRIGHT LTD

Details Sh. Sh.
DR: Ord. share capital 1,200,000
CR: New co. ( purchase consideration) 120,000
CR: Reconstruction a/c 1,080,000
DR: Pref. share capital 480,000
CR: Reconstruction a/c 120,000
DR: P&L a/c 12,000
DR: Realization a/c 3,480,000
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CR: Fixed asset a/c 1,800,000

CR: Stock a/c 720,000
CR: Trade debtors 960,000
DR: Pref. creditors 60,000
DR: Other creditors 1,440,000

DR: Bank overdraft 1,200,000
CR: Realization a/c 960,000
Writing off acc. Losses
DR: Reconstruction a/c 912,000
CR: P&L a/c 912,000
Now we determine purchase consideration:

PURCHASE CONSIDERATION
Details Sh.
Pref. share capital 360,000
Liquidation expense 12,000
Pref. creditors 60,000
Other creditors 1,440,000
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TOTAL 2,232,000
DR …REALIZATION A/C CR
Assets taken over 3,480,000 Bank overdraft 960,000
Purchase consideration 2,232,000
Reconstruction 288,000
3,480,000 3,480,000
Realization loss 288,000 Ord. share capital 1,080,000
Losses w/o 912,000 Pref. share capital 120,000
1,200,000 1,200,000
DR SHAREHOLDERS SUNDRY MEMBERS A/C CR

Details Ord. Pref. Details Ord. Pref.
New co. 120,000 360,000 Bal. b/d 1,200,000 480,000
Reconstruction 1,080,000 120,000
1,200,000 480,000 1,200,000 480,000
N/B Prosperous ltd. No longer exists after the above transactions

BRIGHT LTD.
Details Sh. Sh.
DR: Bank 120,000
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DR: Old co.( purchase consideration) 120,000

CR: Ord. Share capital 240,000
DR: Bank 120,000
DR: Old co. ( purchase consideration) 360,000
CR: Pref. share capital 480,000
CR: Bank 12,000
DR: Fixed assets 1,680,000
DR: Stock 600,000
DR: Trade debtors 960,000
CR: Business purchase a/c 3,240,000
CR: Bank 60,000
DR: Old co. ( purchase consideration) 1,440,000

CR: Bank 720,000
CR: 14% Debentures 720,000
DR: Bank 840,000
CR: Ord. share capital 840,000
DR: Business purchase a/c 960,000
CR: Bank 240,000
CR: Bank overdraft 960,000
DR: Preliminary expenses 24,000
CR: Preliminary expense payable 24,000
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DR BUSINESS PURCHASE CR
Bank overdraft 960,000 Assets taken over 3,240,000
Purchase consideration 2,232,000
Capital reserve 48,000
3,240,000 3,240,000
DR BANK CR
Ord. share capital 120,000 Old company 12,000
Pref. share capital 120,000 Old company 60,000
Ord. share capital 840,000 Old company 720,000
Old company 240,000
Bal. c/d 48,000
1,080,000 1,080,000
DR ORD. SHARE CAPITAL A/C CR

Bank 120,000
Old company 120,000
Bal. c/d 1,080,000 Bank 840,000
1,080,000 1,080,000
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BRIGHT LTD.
STATEMENT OF FINANCIAL POSITION
AS AT 01ST JANUARY 2014
NCA SH.
Fixed assets 1,680,000
CURRENT ASSETS
Stock 600,000
Trade debtors 960,000
Preliminary expenses 24,000
Bank 48,000
TOTAL ASSETS 3,312,000
FINANCED BY:
Ord. share capital 1,080,000
Pref. share capital 480,000
14% debenture 720,000
Preliminary expense payable 24,000
Capital reserve 48,000
3,312,000
QUESTION TWO
Zima Ltd. a manufacturing company, started experiencing heavy annual
trading losses four years ago. Both the shareholders and creditors of the
company have accepted the reconstruction of the company by forming a
new company, to be named RTD Ltd. to take over Zima Ltd.
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The balance sheet of Zima Ltd. as at 30 June 2004 is provided below:

Zima Ltd.
Balance sheet as at 30 June 2004
Sh. million Sh. million
Assets:
Non-current assets:
Land and buildings 820
Motor Vehicles 680
Goodwill 350
Furniture and equipment 435
Patents 185
2,470
Current assets:
Stock 380
Debtors 280
660
Equity and Liabilities: 3,130
Capital and reserves:
Ordinary share capital (Sh. 10 each) 2,000
10% preference4 share capital (Sh. 10 each) 1,000
Share premium 400
Profit and loss account (850)
2,550
Non-current liability:
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8% debentures 400
Current liabilities:
Bank overdraft 30
Trade creditors 150 180
3,130
Additional information:
1. RTD Ltd. was formed with an authorized share capital of 300 million
ordinary shares of sh. 10 each.
2. The ordinary shareholders of Zima Ltd. received three ordinary shares in
RTD Ltd. for every five shares held in Zima Ltd. The shares from RTD
Ltd. were credited at Sh. 6 paid each. The shareholders were to pay cash
to RTD Ltd. to make the shares fully paid immediately on receipt of the
shares.
3. The 10% preference shareholders received four ordinary shared in RTD
Ltd. for every five preference shares in Zima Ltd. The ordinary shares
from RTD Ltd. were credited in Sh. 8 paid each and the shareholders
were to pay cash to RTD Ltd. to make these shares fully paid immediately
on receipt of the shares.
4. Dividends on the 10% preference shares were four years in arrears as at
30 June 2004 and RTD Ltd. accepted to settle the amount due by issuing
two fully paid ordinary shares and Sh. 100 6% debentures for every Sh.
800 of the dividend in arrears.
5. The debenture holders accepted 25 ordinary shares for every Sh.200 of
the debentures, the shares being credited at Sh.8 paid each. The
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debenture holders would introduce cash to make the shares fully paid on
receipt of the shares.
6. The assets were transferred to RTD Ltd. at the following values:
Sh.
Land and buildings million
Motor vehicles 620
Furniture and equipment 550
Patents 430
Stocks 140
Debtors 280
250
Goodwill was presumed to have no value and was, therefore, to be

written off.
7. RTD Ltd. paid Sh. 30,000,000 to Zima Ltd. to pay for dissolution costs.
This amount was treated as preliminary expenses and was to be written
off against profits in the following three years.
8. Immediately after acquiring Zima Ltd. RTD Ltd. purchased trading stock
worth Sh. 60 million in cash and settled Sh.50 million of the trade
creditors balance.
9. All the transactions were completed on 1 July 2004.
Required:
(a) The necessary accounts to close the books of Zima Ltd.(10 marks)
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(b) Journal entries in the books of RTD Ltd. to record the acquisition of
Zima Ltd (6 marks)
ZIMA LTD. & RTD LTD.

Details Sh. Sh.
Ord. shares in Zima=200
Blocks =200/5=40
New shares= 40*3=120
DR: Ord. share capital
CR: New co. (purchase 2,000
consideration) 720
CR: Reconstruction a/c
1,280
Pref. shares in Zima=100
Blocks 100/5=20
Ord. shares =20*4=80
DR: Pref. share capital 1,000
CR: New co.(purchase 640
consideration)
CR: Reconstruction a/c 360
Pref. div in arrears 100*4=400
DR: P&L 400
CR: Pref. div in arrears 400
No. of blocks=400/800=0.5
Page 33 of 45
Reconstructions
Ord. shares=2*0.5=1
6% deb= 1*0.5=0.5
DR: Pref. div in arrears 400
CR: New co.(purchase 10
consideration)
CR: New co.( purchase 50
consideration)
8% Deb =400
Blocks 400/200=2
0rd.shares= 25* 2=50
DR: 8% Debentures 400
CR: New co. (purchase 400
consideration)
DR: Realization a/c
CR: Assets a/c (NBV) 2,780
2,780
DR: Reconstruction a/c 350
CR: Goodwill a/c 350
DR: P&L 30
CR: New co. (purchase
consideration) 30
DR: Creditors 150
CR: Realization a/c 150
Page 34 of 45
Reconstructions
DR: Bank overdraft 30

DR: Reconstruction a/c 1,280
CR: P&L a/c 1,280
DR: Share premium 400
Now, we determine purchase consideration

PURCHASE CONSIDERATION
Details Sh.
Ord. share capital 720
Pref. share capital 640
Pref. Div. in arrears 60
8% debentures 400
Reconstruction expenses 30
1,850
DR REALIZATION A/C CR
Assets taken over 2,780 Purchase consideration 1,850
Creditors 150
Reconstruction 780
2,780 2,780
Page 35 of 45
Reconstructions
Realization loss 780 Ord. share capital 1,280
Goodwill 350 Pref. share capital 360
Losses w/o 1,280 Pref. div in arrears 340
Share premium 400
Bank overdraft 30
2,410 2,410
DR SHAREHOLDERS SUNDRY MEMBERS A/C CR

Details Ord. Pref. Details Ord. Pref.
New company 720 700 Bal. b/d 2,000 1,000
Reconstruction 1,280 700 Pref. div in 400
arrears
2,000 1,400 2,000 1,400
N/B Zima ltd no longer exists.
RTD LTD
Journal entries
Details DR CR
DR: Bank a/c 480
DR: Old company 720
CR: Ord. share capital 1,200
DR: Bank a/c 160
DR: Old company 640
Page 36 of 45
Reconstructions

DR: Old company 60
CR: Ord. share capita 10
CR: 6% Debentures 50
DR; Old company 400
DR: Bank 100
DR; Assets (NRV) 2,270
CR: Business purchase a/c 2,270
DR: Old company 30
CR: Bank 30
DR: Business purchase a/c 150

CR: Creditors 150
DR: Stock 60
CR: Bank 60
DR: Creditors 50
CR: Bank 50
DR BUSINESS PURCHASE A/C CR

Creditors 150 Assets taken over 2,270
Purchase consideration 1,850
Page 37 of 45
Reconstructions
Capital reserve 270

2,270 2,270
DR BANK A/C CR
Ord. share capital 480 Old company 30
Ord. share capital 160 Stock 60
Ord. share capital 100 Creditors 50
Bal. c/d 600
740 740
DR ORD. SHARECAPITAL A/C CR

Old company 10
Bank 480
Old company 720
Bank 160
Old company 640
Bank 100
Bal. c/d 2,500 Old company 400
2,500 2,500
Page 38 of 45
Reconstructions
RTD LTD
STATEMENT OF FINANCIAL POSITION
AS AT 1ST JULY 2004
Sh. ‘000000’ Sh.’000000’
N.C.A
Land and building 620
Motor vehicle 550
Furniture and 430
equipment
Patents 140 1,740
CURRENT ASSETS
Stock 340
Debtors 250
Bank 600 1,190
TOTAL ASSESTS 2,930
FINANCED BY:
Capital reserve 270
6% debentures 50
Creditors 100
Equities and liabilities 2,930
QUESTION THREE:
Diani Tours and Hotel suffered heavy losses in its operations in the years
ended 31/05/2013 and 31/05/2014. A scheme of reconstruction was put
Page 39 of 45
Reconstructions
before the members and creditors of the company in early May 2014 and it
was agreed that the company would be liquidated voluntarily and the
business transferred to a new company Shimoni Beach Hotels (SBH) Limited.
The information given below is provided to you by finance controller Diani
Tours and Hotel Ltd.
Statement of Financial Position as at 31/05/2014
Details Sh. Million Sh. Million
NCA
Property, plant, and equipment (NBV) 480
Freehold land and buildings 360
Motor Vehicles 60
900
Current Assets
Stock 160
Debtors 680
840
Current Liabilities
Bank overdraft (secured) 600
Creditors 750
1,350 (510)
390
Financed by:
Share capital
9% Cumulative preference shares of Sh. 10 200
Ordinary Shares 300
Page 40 of 45
Reconstructions
500
Revaluation Reserve 300
Profit and Loss Account (410)
390
Additional Information:
1. Under the scheme, the directors of DTH Ltd. were to introduce Sh. 500
Million cash into SBH Ltd. floating rate commercial paper. The rate of
interest on the Commercial Paper is 3% above the 91 day Treasury bill
rate in the week prior to June 1 and December 1 each year. SBH Ltd
received cash on 31/03/2014
2. The authorized share capital of SBH is Sh. 500 Million, made up of 20
Million 10% cumulative preference shares of Sh. 10 each and 30
Million ordinary shares of Sh. 10 each. The ordinary shareholders and
the preference shareholders were to receive 30 Million ordinary shares
and 20 Million preference shares of credited as Sh. 2 per share and Sh.
9 per share paid up respectively. Both groups of shareholders paid up
the balance outstanding to make the shares fully paid on 31/05/2014.
3. The preference dividends in DTH Ltd. were 2 years in arrears. Floating
Rate Commercial paper was to be issued to the preference
shareholders of nominal value equal to the arrears of dividends.
4. DTH Ltd. incurred liquidation expenses of Sh. 3 Million. SBH Ltd. paid
these expenses on behalf of DTH Ltd.
5. SBH Ltd incurred establishment costs of Sh. 4 Million which were paid
in cash on 31/05/2014. These were to be expensed against profit in
Page 41 of 45
Reconstructions
the first accounting period but would be carried as a prepayment

initially.
6. The proceeds from the financial instruments issued by SBH Ltd. were
to be used to repay off Sh. 150 Million of the more pressing creditors,
especially the VAT department. Creditors of Sh. 90 Million had agreed
to accept Sh. 45 Million nominal of the Commercial Paper provided a
similar amount was paid to them immediately this amount-this amount
is included in the Sh. 150 Million paid.
Required:
a) Journal entries to record the above entries (4 Marks)
b) The realization account, the ordinary shareholders’ sundry members
account and the preference shareholder’s sundry members account in
the books of DTH Limited. The purchase consideration for the net
assets taken over should appear as a single figure in the realization
account. (10 Marks)
c) Journal entries to record the above transactions in the books of SBH
Ltd and the opening balance sheet of SBH Ltd. (6 Marks)
(20 Marks)
QUESTION FOUR:
Swara Ltd. has been suffering from financial distress for several years. It has
been decided that the company be reconstructed. The following is the
statement of financial position of Swara Ltd as at 30/06/2009.
Statement of financial position as at 30/06/2009
Details Sh 000 Sh 000
Non-Current Equity and Liabilities
Page 42 of 45
Reconstructions
Assets
Land and building 2,134,200 Capital and Reserves
Plant and 1,591,200 8% preference shares of Sh. 3,600,000
Machinery 50 each
Furniture and 594,600 Ordinary shares of Sh. 10 3,000,000
fixtures each
Investments 345,000 Retained earnings (2,520,000)
Goodwill 390,000 Non-Current Liabilities
Patents 240,000 4% debentures 2,400,000
Preliminary 100,800 Current Liabilities
expenses
Current Assets Trade payables 876,000
Inventories 975,000 Accrued debenture interest 144,000
Trade 858,000
Receivables
Cash at Bank 271,200
7,500,000 7,500,000
Additional information:
1. On July 2009 a new company, Tumo Ltd was formed to take over
Swara Ltd. Tumo Ltd was formed with an authorized share capital
comprising 600 Million ordinary shares of Sh. 10 each and 40 Million
6% preference shares of Sh. 100 each.
2. Preference dividends in Swara Ltd were two years in arrears.
3. Three ordinary shares of Sh. 10 each credited at Sh. 5 each in Tumo
Ltd, would be issued for each 8% preference shares in Swara Ltd. The
Page 43 of 45
Reconstructions
ordinary shareholders would, however, pay the balance to make their

ordinary shares fully paid.
4. The 8% preference shareholders in Swara Ltd would forego half of the
preference dividends in arrears and would receive fully paid 6%
preference shares of Sh. 100 each in Tumo Ltd for the arrears of the
preference dividends.
5. One ordinary share of Sh. 10 each credited Sh. 5 each in Tumo Ltd
would be issued for every two ordinary shares in Swara Ltd. The
ordinary shareholders would, however, pay the balance to make their
shares fully paid.
6. The debenture holders would receive half of their dues (excluding
accrued interest) in 6% debentures of Tumo Ltd. and the balance in
fully paid ordinary shares of Tumo Ltd. interest accrued on the
debentures would be paid in cash by Tumo Ltd. after taking over
Swara Ltd.
7. Trade payables would be taken over by the new company and
immediately settled by issue of fully paid ordinary shares of Sh. 10
each of equal value.
8. The assests were transferred at the following values: Land and
Buildings Sh 2.88 Billion, Plant and Machinery Sh. 1.77 Billion,
Furniture and fittings Sh. 510 Million, and Investments Sh. 197.4
Million. Other assets such as inventories and Trade receivables were
taken over at book value less 10% and 5% respectively. Cash was
taken at book value.
9. Tumo Ltd. paid to Swara Ltd Sh. 30 Million to cater for liquidation
expenses.
Page 44 of 45
Reconstructions
10. Tumo Ltd. issued for cash and at par all the remaining ordinary
shares and preference shares not issued as part of the settlement of
the purchase consideration on the acquisition of Swara Ltd.
11. All the above transactions were completed on 01/07/2009
Required:
a. The journal entries to close the books of Swara Ltd (5 Marks)
b. Realisation, reconstruction and Sundry members accounts to close the
accounts of Swara Ltd (5 Marks)
c. The opening journals of Tumo Ltd (5 Marks)
d. The resultant statement of financial position of Tumo Ltd as at
01/07/2009 (10 Marks)
Page 45 of 45

Bact 310 Topic 3 Accounting For Capital Reorganisations and Reconstructions

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Bact 310 Topic 3 Accounting For Capital Reorganisations and Reconstructions

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Topic Two: Accounting for Capital Reorganizations and 2022

Compiled by Mugo Robert

Compiled by Mugo Robert

Compiled by Mugo Robert

CR: Capital reserve a/c xx

DR CAPITAL REDUCTION A/C CR

Compiled by Mugo Robert

10% Preference shares of Sh. 10 par 4,000 Land 4,000

Compiled by Mugo Robert

2. The existing preference shares are to be exchanged for a new issue of

Compiled by Mugo Robert

Compiled by Mugo Robert

CR: C.R.A 110

DR: 12% Debenture 3,000

DR: Bank 900

Compiled by Mugo Robert

Losses written off

Compiled by Mugo Robert

14% deb. 900 Creditors 1,590

Compiled by Mugo Robert

Share premium 750

Compiled by Mugo Robert

Equity and liabilities

Compiled by Mugo Robert

e. The articles of association of the company give preference

Compiled by Mugo Robert

the same nominal value. The trade debt due to debenture

Compiled by Mugo Robert

The following Statement of Financial Position is available as at

Compiled by Mugo Robert

Ordinary share capital 4,000,000 4,000,000

The following additional information is available:

Compiled by Mugo Robert

iii. prepare the Statement of Financial Position after the reconstruction

Compiled by Mugo Robert

Compiled by Mugo Robert

amalgamation is to cut competition and reap the economies of large

Compiled by Mugo Robert

Realization loss Xx Sundry members a/c Xx

DR SHAREHOLDERS MEMBERS A/C CR

Compiled by Mugo Robert

Compiled by Mugo Robert

Pref. share capital Xx

DR BUSINESS PURCHASE A/C CR

Compiled by Mugo Robert

Capital reserve Xx Goodwill xx

A scheme of reconstruction was approved by all parties. The scheme

Compiled by Mugo Robert

Compiled by Mugo Robert

PROSPEROUS AND BRIGHT LTD

Compiled by Mugo Robert

CR: Fixed asset a/c 1,800,000

DR: Other creditors 1,440,000

Now we determine purchase consideration:

Compiled by Mugo Robert

DR SHAREHOLDERS SUNDRY MEMBERS A/C CR

N/B Prosperous ltd. No longer exists after the above transactions

Compiled by Mugo Robert

DR: Old co.( purchase consideration) 120,000

DR: Old co. ( purchase consideration) 1,440,000

Compiled by Mugo Robert

DR ORD. SHARE CAPITAL A/C CR