UESTION 1

The Statements of Financial Position of Stephen, a specialist sports goods retailer, and two entities in which it holds substantial investments are shown below as at 31 March 2020:

Stephen Hannah GH000 GH000

Non-Current Assets

Property and Plants 12500 4700 Investments 18000 -

Esther GH000

4500 1300 5800

- 3100 2900

6000 11,800

2500 4300

6800 -

4000 600 400

5000 11800

Current Assets Inventories

Trade Receivables Cash

Total Assets

Equity and Liability

Ordinary Share Capital (GH1)

Reserves

Equity

Non-Current Liability

Loan Notes

Current Liability Trade Payables Tax

Over drafts

Total Equity plus Liability

30500 4700

7200 8000 6300 4300

800 -

14300 12300 44800 17000

10000 5000 14000 1000

24000 6000 10000 3000

8900 6700 1300 100

600

1200

10800 8000 44800 17000

The following notes to the Statements of Financial Position must be considered Note 1 Investment by Stephen in Hannah;

a. On 1 April 2017, Stephen purchased GH2 million loan notes in Hannah at par.

b. On 1 April 2018, Stephen purchased 4 million of the ordinary shares in Hannah for GH7.5 million in cash, when Hannahs reserves were GH1.5 million. At this date the shares of Hannah had a market price of GH1.50 each. At the date of acquisition of the shares, Hannahs property and plant included land recorded at a cost of GH920,000. At the date of acquisition, the fair value of the land was GH1,115,000. No other adjustments in respect of fair value were required to Hannahs assets and liabilities upon acquisition. Hannah has not recorded the fair value in its own accounting records.

c. On 1 October 2019, Stephen acquired 1 million shares in Esther, a sports goods manufacturer, when the reserves of Esther were GH3.9 million. The purchase consideration was GH4.4 million. Since the acquisition, Stephen has had the right to appoint two of the five directors of Esther and can exercise significant influence over Esther.

d. No fair value adjustments were required in respect of Esthers assets or liabilities upon acquisition.

e. Hannah supplies cricket bats to Stephen. On 31 March 2020 Stephens inventories included bats purchased at a total cost of GH1 million from Hannah. Hannahs mark-up on bats is 25%.

Required:

(a) Explain, with reasons, how the investments in Hannah and Esther will be treated in the consolidated financial statements of the Stephen group. (5 marks)

(b) Prepare the Consolidated Statement of Financial Position for the Stephen group at 31 March 2020. Full workings should be shown. (20 marks)

QUESTION 2

a) Ofosu Ltd (Ofosu) is a company located in the Savannah Region. The company was strategically located to produce cashew nuts and to take advantage of available tax incentives. However, the company has incurred trading losses for many years now. The Directors are considering the alternatives of liquidation and capital reduction. The company's Statement of Financial Position as at 31 December 2020 is as follows:

Non-current assets

Property, plant and equipment Patent

Current assets

Inventories

Accounts receivables

Total assets

Equity & Liabilities

Ordinary share capital (@GH1) Retained earnings

20% Preference shares

Non-Current liabilities

25% Debentures (unsecured)

Current liabilities

Accounts payables

Bank overdraft (secured on property, plant & equipment)

GHmillion

3,250 350 3,600

1,000 500 1,500 5,100

2,000 (750) 1,250 1,100

1,000

1,000 750 1,750 5,100

Total Equity & Liabilities

You are provided with the following additional information:

In the event of a forced sale, the assets would probably raise the following amounts.

GHmillion

Property, Plant and Equipment 1,500 Inventories 400 Accounts receivable 450

The company is developing a new product, which is expected to generate profit before interest and tax of GH500 million per annum in anticipation of an immediate capital injection of GH2,000 million.

The Ordinary share capital should be written down to 200 million shares of GH1.00 each. In addition, they have agreed to provide the immediate capital injection.

The 20% preference shares are to be converted into 500 million ordinary shares valued at GH1 per share.

It is proposed for GH650 million of the 25% Debentures to be converted into ordinary shares at GH1 per share and the remainder to be converted into GH350 million 20% Debentures.

Accounts payables to accept immediate payment of 50% and a moratorium of six (6) months in payment of the remaining balance. New supplies would be paid for on delivery.

A two-for-one rights issue will be made at a price of GH1 per share for cash after the above conversions.

Property, plant and equipment are to be revalued at GH2,250 million, inventories at GH800 million and Accounts Receivables at GH450 million.

The accumulated losses and intangible assets are to be written off.

The corporate tax rate is 25%.

Liquidation expenses will amount to GH10 million.

Required:

i) Prepare a Statement of Financial Position after reconstruction on the assumption that the capital injection took place. (15 marks)

ii) Describe the steps the Directors of Ofosu Ltd should follow to appraise the proposed scheme