Wonderful Ltd. is a company that carries on business in the entertainment industry.
For the past
few years, the company has been making losses owing to the low prices charged by competitors.
The company's statement of financial position as at 31 December 2013 was as follows:
Assets: Sh. ‘000’
Non-current assets 3,600
Current assets 4,775
Total assets 8,375
Equity and liabilities:
Equity: Ordinary shares of Sh.1 each fully paid 10,000
Retained earnings (9,425)
575
Non-current liabilities:
8% cumulative preference shares (2,500.000 shares of Sh.1 par) 3,300
11% loan notes redeemable 2020 3,500
Current liabilities 1,000
Total equity and liabilities 8,375
The company has changed its marketing strategy and is now hoping to attract more customers.
It is expected that the company will earn annual profits after tax of Sh.1.500, 000 for each of the
next five years. This figure is before an interest charge. Income tax is assumed to be at the rate
of 30%.
The directors are proposing to reconstruct the company and have drafted the following proposal
for discussion with shareholders:
1. To cancel the existing ordinary shares.
2. The 11 % loan notes are to be retired and the holders issued in exchange with:
• Sh.3, 000,000 14% redeemable notes 2025, and
• 2,000,000 ordinary shares ofSh.0.25 each fully paid up.
3. The carrying value of the preference share capital above includes four years of dividend
arrears. The preference shareholders arc to be issued with 2,000,000 ordinary shares of
Sh.0.25 each fully paid up in exchange for the cancellation of these dividend arrears.
4. The existing ordinary shareholders will be issued with 3,500,000 ordinary shares of Sh.0.25
each fully paid.
5. In the event of liquidation, it is estimated that the net realisable value of the assets would
be Sh.3, 100,000 for the non-current assets and Sh.3, 500,000 for the current assets.
Required:
a) Statement of financial position as at 1 January 2014 after the reconstruction had
been effected.
b) Computations to show the effect of the proposed reconstruction scheme on:
i. Loan note holders
ii. Ordinary shares
QUESTION
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 June 2009:
Statement of financial position as at 30 June 2009
Details Sh “000” Sh “000”
Non-current assets
Land and building 2,134,200
Plant and machinery 1,591,200
Furniture and fixtures 594,600
Investments 345,000
Goodwill 390,000
Patents 240,000
Preliminary expenses 100,800 5,395,800
Current assets
Inventories 975,000
Trade receivables 858,000
Cash at bank 271,200 2,104,200
7,500,000
Equity and liabilities
Capital and reserves
8% preference shares of sh.50 each 3,600,000
Ordinary shares of sh. 10 each 3,000,000
Retained earnings (2,520,000) 4,080,000
Non-current liabilities
4% debentures 2,400,000
Current liabilities
Trade payables 876,000
Accrued debenture interest 144,000 1,020,000
7,500,000
Additional information:
1. On 1 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
shs. 10 each and 40 million 6% preference shares of sh. 100 each.
2. Preference dividend in Swara Ltd was 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 share in Swara Ltd. In addition.., one fully paid 6% preference share of
sh. 100 each in Tumo Ltd would be issued for every four 8% preference shares in Swara
Ltd. The 8% preference 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 balance of the preference dividends.
5. One ordinary share of Sh. 10 each credited at 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 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 assets were transferred to Tumo Ltd at the following values:
Details Sh ‘000’
Land and buildings 2,880,000
Plant and machinery 1,770,000
Furniture and fixtures 510,000
Investments 197,400
Inventories –at book value less 10%.
Trade receivables- at book value.
Cash at bank-at book value.
9. Tumo Ltd paid Sh.30 million to Swara Ltd to cater for liquidation expenses.
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 acquisition of
Swara Ltd.
11. All the above transactions were completed on 1 July 2009.
Required:
a) The following accounts in the books of Swara Ltd:
i) Realization account
ii) Tumo Ltd account
iii) Preference shareholders sundry members accounts.
iv) Ordinary shareholders sundry members accounts.
b) Journal entries in the books of Tumo Ltd to record the purchase of Swara Ltd.
c) Statement of financial position of Tumo Ltd as at the close of business on July 2009.