CAPITAL REORGANIZATION

1. 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
2016. The statement of financial position of the company at 30 September 2016 is as
follows:

Statement of Financial Position as at 30 September 2016

Non-current assets GH¢
Premises 80,000
Plant & Equipment 190,000
Vehicles 30,000
300,000
Current assets
Inventory 40,000
Trade receivables 30,000
Bank 10,000
80,000
Current liabilities
Trade payables (140,000)
(60,000)
Net assets 240,000

Financed by:
Stated capital
Issued and fully paid
100,000 7% Preference shares of GH¢1 Per share 100,000
400,000 ordinary shares of GH¢0.75 fully paid 300,000
400,000
Retained Earnings (160,000)
240,000
Additional information.
i) The ordinary shares are to be written down to GH¢0.25 per share and then to be converted
into new ordinary shares of GH¢1.0 per fully paid.
ii) The preference shareholders are to receive 40,000 ordinary shares of GH¢1 per share,
fully paid in exchange for their preference shares.
iii) Dividends of 7% preference shares are two years in arrears. In consideration of waiving
their rights to arrears of preference dividend, the Preference shareholders have agreed to
accept 10,000 new ordinary shares of GH¢1.00 per share, fully paid in final settlement.
iv) The creditors have agreed to take 100,000 new ordinary shares of GH¢1 per share fully
paid in part settlement of the amounts due them.
v) The balance on the retain earnings account is to be written off.
vi) Some assets of the company have been revalued and are to be incorporated into the
accounts as follows:
GH¢

ADOFO PRINCE-0247121028 1
 CAPITAL REORGANIZATION

• Freehold premises 100,000

• Plant and equipment 125,000
• Vehicles 25,000
• Inventories 36,000
vii) An allowance of GH¢3,500 is to be made for doubtful debts
viii) The ordinary shareholders have agreed to inject additional GH¢90,000 cash by acquiring
120,000 ordinary shares at 0.75 per share fully paid.
ix) Reorganization costs amounted to GH¢7, 500.

Required:
a) Prepare a capital reduction account, stated capital account and bank account
b) Prepare a statement of financial position of MM Ltd as at 1 October 2016, after the
reorganization. (November, 2016 Adjusted)

2. Sasasila Ltd has been operating profitably for a number of years now.
However, in recent times, the company has been making losses. Find below
the statement of financial position as at 30 June 2019.
Assets GH¢000

ADOFO PRINCE-0247121028 2
 CAPITAL REORGANIZATION

Non-Current Assets
Patents and copyrights 75,000
Land and buildings (net) 200,000
Plant and machinery (net) 150,000
425,000
Current Assets Inventories
Trade receivables 125,000
Bank 125,000
Investments (cost) 37,500
100,000
Total Assets 387,500
812,500
Equity and liabilities:
Equity:
Ordinary share capital (issued at GH¢10 each)
20% cumulative preference shares (issued at GH¢10 each) 375,000
Retained earnings 175,000
(75,000)
475,000
Non-current Liabilities
15% Debentures
125,000
Current Liabilities
Interest on debentures
Trade payables 18,750
Provision for business restructuring 93,750
Provision for legal damage & claims 50,000
Provision for warranties 12,500
37,500
Equity and liabilities 212,500
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:
i) The ordinary shares were to be reduced to GH¢5 per share.
ii) The preference shares were to be reduced to GH¢7.5 per share and arrears in
dividend thereof for three years were to be cancelled from the company’s books.

iii) The fair values of the assets were agreed at the following values:
GH¢000
Patents and copyrights Nil

ADOFO PRINCE-0247121028 3
 CAPITAL REORGANIZATION

Land and buildings 225,000

Plant and machinery 75,000
Investments 75,000
Inventories 105,000
Trade receivables 70,000
iv) The balance on the retained earnings is to be eliminated in full
v) The liability for legal damages and claims was to be settled for GH¢10 million and the
provision for warranty reduced to GH¢27.5 million.
vi) The accrued debenture interest was to be paid in cash.
vii)Investment with a carrying amount of GH¢52.5 million were to be sold for cash
at that value in desperation to strengthen the working capital position of the
business.
The amount set aside for business restructuring was to be eliminated also.
viii) 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. Mr. Salia a director of
the company, has offered to take over the shares.
ix) The following additional information is relevant:
Sasasila Limited continued trading from 1 July 2019 to 31 December 2019
which resulted in the following changes in assets and liabilities:
Increased by Decreased by
GH¢000 GH¢000
Bank and cash 10,000 -
Inventories 12,500 -
Trade and other receivables 20,000 -
Trade payables - 5,000

Plant and machinery is depreciated at 10% per annum and no depreciation is

provided on land and buildings. The half year debenture interest has not been
paid.

Required:
a) Prepare the Capital Reduction Account as at 30 June 2019.
b) Prepare the statement of financial position as at 31 December 2019. (May,
2020)

3. The summarized balance of Gerald Ltd at 31st March 2016 was as follows:
Statement of Financial Position as at 31st March 2016 GH¢
Goodwill 25,000
Patents and Trade mark 10,000
Land buildings 88,000
Plant and Machinery 86,000
Shares in subsidiary Ltd 30,000

ADOFO PRINCE-0247121028 4
 CAPITAL REORGANIZATION

Inventory 73,000
Receivables 98,500
Deferred expenditure-Advertising 25,000
Profit & loss account 85,000
520,500
Authorized and issued capital :
100,000 6% cumulative preference shares 100,000
200,000 ordinary shares 200,000
300,000
5% debentures (secured on land and buildings) 50,000
Add accrued interest 2,500 52,500
Bank overdraft 60,000
Creditors 85,000
Directors loans 23,000
520,500

Notes:
i. Dividends on the Preference Shares are three years in arrears.
ii. There is a contingent liability for damages of GH¢10,000.

A Capital Reduction Scheme, duly approved, settled the following terms.

a. The Preference Shares to be reduced to 80Gp each and the ordinary Shares to 25Gp
each and the resulting shares then to be converted into Preference and Ordinary Stock
respectively and consolidated into units of GH¢1. The authorized capital to be restored
to GH¢100,000 6 per cent. Cumulative Preference Stock and GH¢200,000 Ordinary
Stock. The Preference shareholders waive two –thirds of the dividend arrears and
receive ordinary stock for the balance.
b. All intangible assets to be eliminated and bad debts of GH¢7,500 and obsolete stock
of GH¢10,000, income surplus deficit to be written off.
c. The shares in subsidiary ltd are sold to an outside interest for GH¢ 60,000.
d. The debenture-holder agreed to take over one of the company’s properties (book value
GH¢ 18,000) at a price of GH¢ 25,000 in part satisfaction of the Debenture and
provide further cash of GH¢15,000 on a floating charge. The arrears of interest are
paid.
e. The contingent liability materialized but the company recovered GH¢5,000 of these
damages in an action against one of its directors. This was debited to his loan account
of GH¢8,000, the balance of which was repaid in cash on his resignation.
f. The remaining directors agreed to take ordinary stock in satisfaction of their loans.

You are required to:

a) Give the necessary Journal entries to record the above, including the cash transactions.
b) Set out the revised statement of financial position after giving effect to the entries in
(a). (Ignore taxation.)

ADOFO PRINCE-0247121028 5
 CAPITAL REORGANIZATION

4. The business of AFF Limited which hit the airwaves in 2012 has been making losses since
2014.
The statement of financial position as at 31st March 2016 was as follows:
ASSETS GH¢ GH¢

Non-Current Assets
Patents and copyrights 300,000
Land and buildings (NBV) 800,000
Plant and Machinery (NBV) 600,000
1,700,000
Current Assets
Inventories 500,000
Trade and other receivables 500,000
Bank 150,000
Investment (cost) 400,000
1,550,000
Total assets 3,250,000

Financed by:
Stated capital:
150,000 Ordinary shares GH¢10/share 1,500,000
20% 70,000 cumulative preference shares GH¢10/share 700,000
Income Surplus (300,000)
1,900,000
Non-Current Liabilities
15% Debentures 500,000

Current Liabilities
Interest on debentures 75,000
Trade payables 375,000
Provision for business restructuring 200,000
Provision for legal damages and claims 50,000
Provision for warranties 150,000
850,000
Equity and liabilities 3,250,000

The following scheme of reconstruction was approved by all parties as well as the High Court
with the exception of one ordinary shareholder.
i. The preference shares were to be reduced to GH¢7.5 per share and arrears in dividend
thereof for three years to be cancelled.
ii. The ordinary shares were to be reduced to GH¢5.00 per share.
iii. The fair values of the assets were to be taken at:
GH¢
Patents Nil

ADOFO PRINCE-0247121028 6
 CAPITAL REORGANIZATION

Land and buildings 900,000

Plant and machinery 300,000
Investments 300,000
Inventories 420,000
Trade and other receivables 280,000

iv. The balance on the Income surplus is to be eliminated.

v. The liability for legal damages and claims was to be settled for GH¢40,000 and the
provision for warranty reduced to GH¢110,000.
vi. The accrued debenture interest was to be paid in cash.
vii. Investment with a carrying amount of GH¢210,000 were to be sold for cash at that value
in desperation to strengthen the working capital position of the business. viii. The amount
set aside for business restructuring was to be eliminated.
ix. The High Court directed payment of GH¢1,000 to the member who opposed the scheme for
100 ordinary shares held by her. Mr. Ulrich Adu Danquah, a director of the company,
offered to take over the shares. The following individual information is relevant;
AFF Limited carried on trading from 1st April, 2016 to 30th September, 2016 which resulted
in the following changes in assets and liabilities:
Increased by Decreased by
GH¢ GH¢
Bank and cash 40,000 -
Inventories 50,000 -
Trade and other receivables 80,000
-
Trade payables -
20,000
Plant and machinery is depreciated at 10% per annum and no depreciation is provided on
land and buildings. The half year debenture interest has not been paid.
Required
(a) Prepare the Capital Reduction Account as at 31 March 2016.
(b) Prepare the statement of financial position as at 1st October 2016.

5. 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
3,600

ADOFO PRINCE-0247121028 7
 CAPITAL REORGANIZATION

Current assets
Inventories 1,000
Accounts receivables 500
1,500
Total assets 5,100

Equity & Liabilities

Ordinary share capital (@GH¢1) 2,000
Retained earnings (750)
1,250

20% Preference shares 1,100

Non-Current liabilities
25% Debentures (unsecured) 1,000

Current liabilities
Accounts payables 1,000
Bank overdraft (secured on property, plant & equipment) 750
1,750
Total Equity & Liabilities 5,100

You are provided with the following additional information:

• In the event of a forced sale, the assets would probably raise the following amounts.
GH¢’million
Property, Plant and Equipment 1,500
Inventories 400
Accounts receivable 450

• The company is developing a new product, which is 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.

ADOFO PRINCE-0247121028 8
 CAPITAL REORGANIZATION

• A two-for-one rights issue will be made at a price of GH¢1 per share for cash after
the above conversions.
• 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.
ii) Compute the expected profit after tax and the earnings per share after the
reconstruction.
iii) Prepare a statement of distribution if the company were to be liquidated now.
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. (May, 2021)

6. OMF Ltd has incurred losses for many years. However, the company is developing a new
product, which is expected to generate profits of GHS400, 000 per annum in anticipation
of an immediate capital injection of GHS2, 000,000. The company’s Statement of
Financial Position as at 31st December 2016 is as follows: GHS
Assets
Property, plant and equipment 3,250,000
Inventories 1,000,000
Accounts receivable 500,000
4,750,000
Liabilities and Equity
Ordinary share capital (GHS1 each) 2,000,000
10% Preference shares 750,000
15% Debentures (unsecured) 1,000,000
Accounts payable 1,000,000
Bank overdraft 750,000
Income surplus (750,000)
4,750,000
The bank overdraft is secured against the property, and equipment
In the event of a forced sale the assets would probably raise the following amount:
GHS
Property, plant and equipment 1,500,000
Inventories 400,000
Accounts receivable 350,000

The directors are therefore proposing a capital reorganization of the company on the following
basis:

ADOFO PRINCE-0247121028 9
 CAPITAL REORGANIZATION

i. The ordinary share capital should be written down to 200,000 shares of GHS1 each
ii. The 10% Preference shares are to be converted into 150,000 ordinary shares valued
at GHS1 per share.
iii. GHS650,000 of the 15% Debentures should be converted into ordinary shares at
GHS1 per share and the remainder to be converted into GHS350,000 10% Debentures
iv. Trade creditors to accept a moratorium of six months in payment of amounts
currently due them. New supplies will be paid for on delivery.
v. A two for one rights issue will be made at a price of GHS1 per share after the above
conversions.
vi. Property plant and equipment are to be revalued at GHS2, 250,000, inventories at
GHS600, 000 and accounts receivables at GHS450, 000.
vii. The accumulated losses are to be written off.
viii. The corporate tax rate is 25% ix. Liquidation expenses will amount to GHS10,000.
Required:
a. Prepare a statement of financial position after the reconstruction on the assumption
that the capital injection takes place
b. Compute the expected profit after tax and the earnings per share after the
reconstruction
c. Prepare a statement of distribution if the company were to be liquidated now.

7. Mahadi Ltd has operated profitably in Ghana for several years but 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:
GH¢
Non-current Assets
Freehold property 68,000
Equipment 468,000
536,000
Current Assets
Inventories 120,000
656,000
Equity and Liabilities
Stated Capital (400,000 ordinary shares issued at 25 pesewas per share) 100,000
Capital surplus 68,000
Retained earnings (40,000)
128,000
10% debenture stocks 48,000
Sundry payables 412,000
Bank overdraft (from Northern Rock Bank) 68,000
656,000
Additional Information:

ADOFO PRINCE-0247121028 10
 CAPITAL REORGANIZATION

i) Mahadi Ltd operates a number of retail outlets for snack bar; most of these outlets are
rented out. The company’s largest supplier is Banda Ltd which holds all of the
debenture stocks and is also a trade creditor for GH¢240,000 included in sundry
payables above. Included in the sundry payables are preferential payables of
GH¢44,000; an amount due to the Ghana Revenue Authority.

ii) The bank overdraft from Northern Rock Bank is secured by a fixed charge over the
freehold property of Mahadi Ltd, and the debenture stock is secured by a floating
charge over the company’s assets.

iii) On October 1, 2019, Mahadi Ltd has scheduled a meeting of all the stakeholders of
the company in order to consider the following alternative proposals:

Proposal Alternative 1
The management of Mahadi Ltd proposes for the immediate liquidation of the
company, which would result in the following estimated amounts for realized assets:
GH¢
Freehold property 56,000
Equipment 204,000
Inventories 40,000

Proposal Alternative 2
Banda Ltd has made an offer of support which would allow the reconstruction of
Mahadi Ltd to continue to operate as a going concern. Under this reconstruction
arrangement, the debentures held by Banda Ltd would be converted into 48,000
ordinary shares (issued at
GH¢1.00 per share) and for every GH¢200.00 of GH¢240,000 trade debt owed to
Banda Ltd, there would be issued 110 ordinary shares (issued at GH¢1.00 each) in the
reconstructed company. The balance of the trade debt owed to Banda Ltd would be
written off against the equipment of Mahadi Ltd.

Mahadi Ltd existing shareholders would receive one ordinary share in the
reconstructed company (credited as to GH¢1.00 per share) in exchange for every five
presently held. The balance on the retained earnings is not absorbed by the existing
shareholders (in the share exchange above), and is to be written off against the capital
surplus. The fair value costs of the freehold property and the inventories approximate
their carrying value.

An additional 140,000 ordinary shares in Mahadi Ltd (issued at GH¢1.00) would be

issued to Banda Ltd for cash consideration of GH¢140,000 in order to improve the
liquidity position of the reconstructed entity. It has been estimated by the Management
of Banda Ltd that after reconstruction, Mahadi Ltd would earn regular net profit of
GH¢54,000 per annum.

ADOFO PRINCE-0247121028 11
 CAPITAL REORGANIZATION

Other relevant information:

• Ignore reconstruction and liquidation expenses.
• Assume that Banda Ltd can currently earn 15% per annum on new investments
involving similar risks to those which would be incurred by investing in Mahadi Ltd.
• Assume that the adopted proposal would be implemented immediately.

Required:
a) Show the total amount Banda Ltd would receive in case of liquidation of Mahadi Ltd
per proposal 1.
b) Prepare the statement of financial position of Mahadi Ltd after the reconstruction (on
assumption that proposal 2 is adopted and implemented). (November, 2019)

8. Ega Ltd is a Private Limited Liability company that has been operating in the Agro
processing industry over the years. The company, which was very successful over the
years is now facing trading difficulties. The most recent statement of financial
position for the company is shown below:

Statement of Financial Position as at 31 March 2021

GH¢’million GH¢’million
Non-Current Assets
Land and buildings 100
Plant and machinery 362
Development expenditure 15
Goodwill 12
489
Current Assets
Inventory 235
Receivables 93 328
Total Assets 817

Equity
Ordinary share capital (@ GH¢1) 400
Retained earnings (94)
306
Non-current liabilities
12% debenture 80

Current liabilities
Trade creditors 184
Bank overdraft (secured on fixed asset) 247 431
Total Equity and Liabilities 817

ADOFO PRINCE-0247121028 12
 CAPITAL REORGANIZATION

The following additional information is provided:

The company’s activities have been rationalised and the loss-making departments closed.
The following scheme for financial reorganisation has been drawn up:
1) Intangible fixed assets should be written off and the remaining assets restated at their
market values:

GH¢’million
Land & Buildings 161
Plant & Machinery 200
Inventory 162
Receivables 88

2) The ordinary share capital should be written down as necessary, to enable assets and
liabilities to be restated at realistic figures and to clear the debit balance on retained
earnings account.
3) The 12% debenture should be converted into 80 million ordinary shares at no par value
to be issued at GH¢1 each in full satisfaction of the amount due.
4) The directors should subscribe for a further 200 million ordinary shares of GH¢1 each at
par to provide the cash needed to complete the reorganisation.
5) The bank is to convert GH¢200 million of overdraft into a loan carrying interest at 14%
per annum, repayable in four equal annual instalments commencing 31 December 2021.

Required:
i) Calculate the amount to be written off the existing share capital.
ii) Prepare a revised statement of Financial Position of Ega Ltd as at 1 April 2021 taking
into effect the proposed scheme for reorganisation.
iii) Provide an assessment of the proposal for the future prospect of the company. (April,
2022)

9. Bank of Ghana (BoG) earlier last year announced an increase in the minimum capital
requirement for Micro Finance Institutions in the country from the current GH¢500,000 to
GH¢2 million by June 2018. Capital Link, a Micro Finance Company has been affected
by the increase in players in the Micro Finance Industry which has seen a reduction of its
loan portfolio and an increase in loan default rate.

A statement of Financial Position recently prepared by Capital Link is as follows:

Statement of Financial Position as at 30th April, 2017
GH¢ GH¢
Non-current assets
Goodwill 450,000

ADOFO PRINCE-0247121028 13
 CAPITAL REORGANIZATION

Leasehold building (Carrying Amount) 750,000

1,200,000

Current assets
Loan Portfolio 825,000
Investment in Treasury bills 570,000
1,395,000
Current liabilities
Interest to depositors 885,000
Bank overdraft (secured on
Leasehold property) 975,000
1,860,000

Net current liabilities (465,000)

735,000
Financed by:
Share capital 600,000
General reserves 120,000
Retained Earnings 15,000
735,000
Additional information:
Depositors have the information that Capital Link is considering funding options to ensure the
survival of the business. They are however not convinced that Management of Capital Link
would be able to raise the required capital to meet the minimum requirement.

In a Stakeholders meeting, Management of Capital Link proposed two possible options for the
company’s future.

Scheme 1- Close Down Mission

Unity Capital Ltd has made a firm offer of GH¢600,000 for the company’s leasehold property.
Total loan portfolio is conservatively valued at GH¢592,500 in a forced sale. Investments in
Treasury bills amounts to GH¢465,000. Liquidation expenses are estimated at GH¢30,000 and
interest to depositors is GH¢330,000.

Scheme 2- Rescue Mission

Management of Capital Link propose to implement a scheme which includes a cheap loan of
GH¢600,000 from a distress fund set up by an NGO, Business Rescuers. The following terms
have been arranged:

GH¢375,000 would be reserved to pay for the loan from the NGO when the first installment
falls due. The NGO has been asked to accept 20% debenture in exchange for the balance
remaining due. The debenture would be repayable in four annual installments of GH¢150,000,
commencing 28 February 2017, with the interest due for the preceeding year, paid on the same
date.

ADOFO PRINCE-0247121028 14
 CAPITAL REORGANIZATION

Assume that:
• The current rate of interest on all borrowing is 14%
• The calculations are being made on 30th April, 2017 and either scheme could be put onto effect
immediately.

• The present value of GH¢1 recoverable at the end of each year is:
Year 1 Year 2 Year 3 Year 4
14% 0.88 0.77 0.67 0.59
20% 0.83 0.69 0.58 0.48

Required:
a) By means of numerical analysis of the two schemes, evaluate how much the bank would
recover from each scheme
b) Discuss TWO advantages of each scheme. (May, 2018)

10. Abusua Ltd. has been trading profitably for several years but for the past four years its
operations have resulted in losses. The board of directors has decided to restructure the
company.

The Statement of Financial Position as at 30 September, 2016

GH¢000 GH¢000
Non- current assets
Freehold land and buildings 3,788
Plant and equipment 7,020
Furniture and fixtures 3,080
Investment 2,300
Deferred development expenditure 7,050
Patent rights 4,200
27,438
Current assets
Inventories 3,510
Trade receivables 1,600
Cash 428
5,538
Current liabilities
Bank loan 5,360
Trade payables 4,650
Sundry creditors 1,060
11,070 (5,532)
Net current liabilities
22% Debentures (7,875)
14,031

ADOFO PRINCE-0247121028 15
 CAPITAL REORGANIZATION

Financed by:
Share capital 17,625
Capital surplus 2,250
Income surplus (5,844)
14,031
You have been provided with the following additional information.

i) Abusua Ltd’s share capital consists of GH¢000

Ordinary shares 13,500

20% Cumulative Preference shares 4,125

ii) No dividend was declared on the Preference shares for the year ended 30 September, 2016.

iii) The following assets have net realizable values as indicated below:

GH¢000
Freehold land and buildings 4,005
Plant and equipment 3,750
Furniture and fixtures 2,800

iv) The investment in Abusua Ltd. is 55% holding in Obi Ltd. An offer of GH¢ 1,350,000 has
been made for it and it has been accepted by the directors.

v) Following further feasibility study carried out on the project which gave rise to the deferred
development expenditure, the directors have decided to discontinue the project. The project
is not patented.

vi) The directors have decided to sell the patent rights for a net realizable value of GH¢
1,800,000.

vii) Inventories were written down by GH¢ 2,232,000.

viii) The 22% debentures are secured on the freehold land and buildings.

ix) The bank has a fixed and floating charge over the assets in respect of the loan.

x) It is considered that a proposed reconstruction of the company should result in net profit
after tax of GH¢1,500,000 in the year ending 30 September, 2017 and GH¢1,800,000 or
more in each of the years thereafter.

xi) The company will require a ratio of accounts receivable and cash to current liabilities of

ADOFO PRINCE-0247121028 16
 CAPITAL REORGANIZATION

0.80:1 in future to trade satisfactory.

Required:
As a Director of Finance of Abusua Ltd, recommend a scheme of reconstruction for consideration
by the board of directors of the company and prepare a summarized statement of a financial
position. (May, 2017)

11. Adomfa Ltd has been trading at a loss for a number of years. The board of directors of
the company is now considering the option to liquidate the company or reconstruct it. The
following statement of financial position is available as at 31st December, 2018
Cost Depreciation NBV
GH¢ GH¢ GH¢
Non-current Assets:
Goodwill 50,000 20,000 30,000
Development expenditure 30,000 30,000
Land and building 80,000 80,000
Fixtures and fittings 20,000 5,000 15,000
Plant 45,000 12,000 33,000
Investments 55,000 ______ 55,000
280,000 37,000 243,000

Current Assets:
Inventory 50,000
Account receivable 120,000
170,000

Less Current Liabilities:

Bank overdraft 20,000
Trade payables 60,000
Directors’ loans 15,000
Accrued interest on debenture 4,000
99,000 71,000
314,000
Financed by:
Stated capital
200,000 Ordinary shares 200,000
300,000 20% Preference shares 100,000
Income surplus 300,000
Capital surplus (45,000)
22% Debentures 8,000
51,000
314,000

ADOFO PRINCE-0247121028 17
 CAPITAL REORGANIZATION

Additional information
1). Preference dividend is 5 years in arrears.

2). The debentures are held by Adoma Bank Ltd and are secured on the land and building.
The bank has requested that the arrears of debenture interest be paid and have intimated that
they might lend the company a further GH¢50,000 on condition that the company increases
the collateral and the shareholders inject additional capital.

3). The bank has demanded the overdraft to be paid immediately.

4). The directors have agreed to waive their loan if they are guaranteed employment. The
ordinary shareholders have promised to introduce additional capital of GH¢100,000 and
guaranteed the directors their jobs.

5). Development expenditure and goodwill are to be eliminated

6). The cost of reconstruction scheme is GH¢5,000 while liquidation cost is estimated at
GH¢6,000.

7). Trade payables include tax liability of GH¢500, SSNIT payable of GH¢600.

8). The directors have decided to purchase additional plant costing GH¢30,000 to modernize
the production system.

9). The estimated break up values in respect of liquidation and replacement costs of assets are
given below:
Liquidated values Replacement costs
GH¢ GH¢
Land and building 120,000 110,000
Fixtures and fittings 10,000 12,000
Plant 30,000 25,000
Investment 55,000 60,000
Inventories 45,000 24,000
Account receivable 100,000 115,000

Required:

Suggest a scheme of reconstruction which will be accepted to all parties concerned. The
report should include a reconstructed statement of financial position of Adomfa Ltd after the
reconstruction scheme.

ADOFO PRINCE-0247121028 18
 CAPITAL REORGANIZATION

12. The following statement of financial position at 31 December 2021 relates to Dabidabi.
Dabidabi has been facing financial difficulties in recent years, and is considering a capital
restructuring.
GH¢ GH¢
Property, plant and equipment 701,600
Investment 80,400
782000
Current assets
Inventory 93,400
Trade receivables 76,800
170,200

Less Current liabilities

Trade payables (101,400)
Bank overdraft (73,600)
Short-term credit (20,000) (24,800)

Non-current liabilities
12% Medium-Term (160,000)
Net assets 597200

Financed by:
Stated capital 800,000
Capital surplus 52,800
Income surplus (255,600)
597200

Additional information
1. The stated capital is made up of: GH¢
Ordinary shares (1,000,000 shares @ GH¢0.20 each) 200,000

ADOFO PRINCE-0247121028 19
 CAPITAL REORGANIZATION

14% Cumulative Preference shares 600,000

800,000
2. The preference share dividends have not been paid for the past two years. The shareholders
have agreed to waive this if the company can re-organize its operations.
3. The providers of short and medium term credit facilities are demanding immediate payment
of interest which has been outstanding for the past four years. This has not been included in
the accounts. As an option, the providers are prepared to waive the interest plus 40% of the
medium term facility if the directors can provide a suitable re-organization plan.
4. Obsolete inventories amount to GH¢12,400.
5. The present value of the future cash flows from investment as at 31 December 2018 was
GH¢42,000. However, if it is sold on that date, the net sales proceeds would be GH¢32,800.
6. A major customer – Mumuni Ltd has gone into receivership. The liquidator has advised that
creditors should expect not more than GH¢0.15 in every cedi in respect of their account
balances. Meanwhile, Mumuni owes 60% of the trade receivables. Of the remaining 40%, only
55% are collectible.
7. The Property, Plant and Equipment were analysed as follows:

Book value Break-up value Re-valued

GH¢ GH¢ GH¢
Land & building 281,400 160,400 390,000
Plant & equipment 198,500 84,600 241,000
Computers 221,700 64,200 190,000

8. Liquidation expenses would amount to GH¢22,500.

9. The short-term credit and bank overdraft are to be settled immediately. The ordinary
shareholders are prepared to take up new shares for this.
Required
Advise the Directors of Dabidabi whether to re-organize or wind up, and prepare a statement of
financial position as at 1 January 2022 if the company were to reorganize its capital

ADOFO PRINCE-0247121028 20