Question B

The chairman of Hello Kitty Ltd needs to obtain the consent of the shareholders to a reduction of capital. The summarised statement of financial position of Hello Kitty Ltd at 30 September 2020 was as follows: $000 Goodwill 50 Tangible fixed assets 1 300 Net current assets 725 2 075 Ordinary shares of $1 Profit and Loss Account 2 500 (425) 2 075 Further information: The company has not paid a dividend for the past few years. The directors are aware of the following matters: 1 Goodwill is now valueless. 2 The freehold premises have developed a structural fault and must now be written down by $225 000. 3 Stock has been damaged by flooding and must be written down by $20 000. 4 A major debtor owing $30 000 is in financial difficulties and is unlikely to pay. The company has secured a number of new, long-term profitable contracts and the directors are confident that in future the company will make annual profits of at least $70 000 The directors propose a scheme of capital reconstruction which will enable them to write off the debit balance on the Profit and Loss Account and adjust the accounts for items numbered 1 to 4 above. The scheme will not result in a change in the number of shares that have been issued. The directors are confident that the capital reconstruction will enable them to commence paying annual dividends of $50 000 in the year ending 30 September 2020. The current rate of interest on money invested outside the business is 2.8%. REQUIRED (a) Using the information given above, state the facts which the chairman should include in his letter to the shareholders to obtain their consent to the scheme of capital reduction [12] The directors have obtained the necessary consent and the scheme of capital reduction has been implemented. REQUIRED (b) Prepare the Statement of Financial Position as it appears after the scheme of capital reduction has been implemented [7]