Qn 1. Internal Capital Reconstruction

Mizambwa Limited found itself in financial difficulty. The balance sheet of the company as at 31^st December 2005 was as follows:

Mizambwa Ltd. Balance sheet as at 31st December 2005

ASSETS

Non-Current: SHS

Goodwill 3,000,000

Land 4,000000

Building at cost 3,750,000

Machinery at cost 2,200,000

Investments 2,250,000

Current:

Stock 3,600,000

Debtors 2,000,000

Cash 50,000

Advertisement suspense account 250,000

Profit and loss account 2,900,000

24,000,000

EQUITY & LIABILITIES

Equity:

Equity shares of shs 10 each 10,000,000

10% preference shares of shs 10 each 4,000,000

Non-Current Liabilities

12% Debenture 3,000,000

Interest Payable on debentures 360,000

Loan from Directors 1,000,000

Current Liabilities

Provision for depreciation

Buildings 750,000

Machinery 800,000

Bank Overdraft 1,500,000

Sundry creditors 2,590,000

24,000,000

It was decided during a meeting of the shareholders and directors of the company to carry out a scheme of internal reconstruction as follows:

1. Each equity share is to be redesignated as a share of shs. 2.50. The equity shareholders are to accept a reduction in the nominal value of their share from shs 10 to shs. 2.50 and subscribe for a new issue on the basis of 1 to 2 at a price of shs. 4 per share.

1. The existing preference shares are to be exchange for a new issue of 30,000. 15% preference shares of shs 10 each and 40,000 equity shares of shs 2.50 each.

1. The debenture holders are to accept 10,000 equity shares of shs. 2.50 each in lieu of interest payable. The interest rate is to be increased to 14%. A further shs 1,000,000 of 14% debentures of shs 100 each is to be issued and taken up by the existing holders at shs 90.

1. Shs 40,000 of directors loan is to be cancelled. The balance amount is to be settled by issue of 10,000 equity shares of shs 2.50 each.

1. The investments are to be sold at current market price of shs. 3,000,000

1. The bank overdraft is to be repaid

1. A sum of shs 1,590,000 is to be paid to the creditors immediately and the balance is to be paid at quarterly intervals.

1. All intangibles are to be eliminated

1. The following assets are to be adjusted to fair values:

Debtors shs. 1,800,000

Stock 3,200,000

Machinery 1,000,000

Buildings 2,500,000

Land 3,200,000

It is estimated that under new arrangements net profit before interest and tax will be shs. 2,500,000 per annum. There will be no tax liability of the company for the next fire years.

You are required to:

1. Show the journal entries to effect the reconstruction scheme
2. Prepare the balance sheet of the company immediately after reconstruction