Deflation Ltd, which had experienced trading difficulties, decided to reorganise its finances.

On 31 December 2005 a final trial balance extracted from the books showed the following position:

Approval of the Court was obtained for the following scheme for reduction of capital:
1 The preference shares to be reduced to £0.75 per share.
2 The ordinary shares to be reduced to £0.125 per share.
3 One £0.125 ordinary share to be issued for each £1 of gross preference dividend arrears; the preference dividend had not been paid for three years.
4 The balance on share premium account to be utilised.
5 Plant and machinery to be written down to £75,000.
6 The retained profits, and all intangible assets, to be written off.
At the same time as the resolution to reduce capital was passed, another resolution was approved restoring the total authorised capital to £350,000, consisting of 150,000 6% cumulative preference shares of £0.75 each and the balance in ordinary shares of £0.125 each. As soon as the above resolutions had been passed, 500,000 ordinary shares were issued at par, for cash, payable in full upon application.

You are required:

(a) to show the journal entries necessary to record the above transactions in the company’s books;
and

(b) to prepare a balance sheet of the company, after completion of the scheme.

Transcribed Image Text:

Share capital, authorised and issued: 150,000 6% cumulative preference shares of 1 each 200,000 ordinary shares of 1 each 150,000 200,000 Share premium account 40,000 Retained profits 114,375 Preliminary expenses 7,250 Goodwill (at cost) Trade accounts payable Accounts receivable Bank overdraft 55,000 43,500 31,200 51,000 Leasehold property (at cost) 80,000 (provision for depreciation) 30,000 Plant and machinery (at cost) 210,000 (provision for depreciation) 62,500 Inventory 79,175 577,000 577,000