The latest statement of financial position for Xtra Limited is summarized below:
GH¢’000 GH¢’000 GH¢’000
Non-current assets (NBV) 5,700
Current assets
Inventory 3,500
Receivables 1,800
5,300
Current liabilities
Unsecured payables 4,000
Unsecured Bank overdraft 1,600
5,600 (300)
Total assets less current liabilities 5,400
Non-Current Liabilities
10% secured debentures (3,000)
Net assets 2,400
Financed by:
Stated capital 4,000
Income Surplus (1,600)
2,400
Xtra’s stated capital consists of 4,000,000 ordinary shares issued at GH¢1.00 and fully paid. The
non-current assets comprise freehold property with a book value of GH¢3,000,000 and plant and
machinery with a book value of GH¢2,700,000. The debentures are secured on the freehold
property.
In recent years the company has suffered a series of trading losses which have brought it to the
point of liquidation. The directors estimate that in a forced sale the assets will realize the following
amounts. GHS
• Freehold premises 2,000,000
• Plant and machinery 1,000,000
• Inventory 1,700,000
• Receivables 1,700,000
The costs of liquidation are estimated at GH¢770,000. However, trading conditions are now
improving and the directors estimate that if new investment in plant and machinery costing
GH¢2,500,000 were undertaken the company should be able to generate annual profits before
interest of GH¢1,750,000.
In order to take advantage of this they have put forward the following proposed reconstruction
scheme.
i. Freehold premises should be written down by GH¢1,000,000, plant and machinery by
GH¢1,100,000, inventories by GH¢800,000 and receivables by GH¢100,000.
ii. The ordinary shares should be written down by GH¢3,000,000 and the debit balance on the
income surplus account written off.
iii. The secured debenture holders would exchange their debentures for GH¢1,500,000
ordinary shares and GH¢1,300,000 14% unsecured loan stock repayable in five years’ time.
iv. The bank overdraft should be written off and the bank should receive GH¢1,200,000 of
14% unsecured loan stock repayable in five years time in compensation.
v. The unsecured payables should be written down by 25%.
vi. A rights issue of 1 for 1 at par is to be made on the share capital after the above adjustments
have been made.
vii. GH¢2,500,000 will be invested in new plant and machinery.
Required
a. Write up the capital reduction account.
b. Prepare the Statement of Financial Position of the company after the completion of the reconstruction.