Wani Ltd., is an established company owned and run by three cousins. The company traded successfully up until early 2000s, but has suffered badly during the recession. Sales have fallen significantly and two of its main customers have gone into liquidation. The directors are confident that the company remains economically viable, provided that certain actions are taken, and that a high level of profitability will e restored once the recession ends. The directors have prepared the following estimate of the company's financial position, as at 21 October, 2001, at which date a meeting of creditors is to be held to consider the company's financial difficulties. ESTIMATED BALANCE SHEET AS AT 21 OCTOBER, 2001 Shs. "000" Shs. "000" 125,000 Fixed assets (Net Current Assets Stock and work in progress Debtors and prepayments 293,000 167.000 460,000 Current Liabilities Creditors and accruals Corporation tax and VAT Bank overdraft Loan from Dowiko Ltd. Net current assets 124,000 136,000 90,000 100,000 450.000 10.000 135.000 Financed by: Share capital (@shs. I ordinary shares) Retained profit 100,000 35.000 135.000 Discussions between the bank and Wani Ltd's directors indicated that debts amounting to shs. 50,000,000 are likely to prove bad and assuming that the company continues as a going concern, the saleable value of certain items of stock is shs. 30,000,000 below their book value. The bank's overdraft and the loan from Dowiko Ltd, (a supplier) are each unsecured. The preferential creditors comprises (a) Taxation owing and (b) Shs. 14,000,000 of the figure for creditors and accruals. The following three proposals are to be considered at the creditors' meeting: 1. 2. Immediate Liquidation of the Company In these circumstances the fixed assets would realize shs. 30,000,000 and the stock and work in progress shs. 203,000,000. Liquidation expenses are estimated at shs. 20,000,000. Reconstruction Scheme A This would involve the following: (1) The directors to subscribe for a further 200,000,000 ordinary shares of shs. 1 each at par. The preferential creditors to be paid immediately. (iii) All non-preferential creditors to agree to reduce their claims by 20%, postpone repayment for one year, and waive their right to interest during that period. 3. Reconstruction Scheme B. This would involve the following: - (i) Dowiko Ltd. to convert its loan into 100,000,000 shares of shs. I each, at par, and agree to subscribe for a further 160,000,000 shares of shs. 1 each at par. (ii) The preferential creditors to be paid immediately. 111 All non-preferential creditors to agree to reduce their claims by 30%, postpone repayment for six (iii) All non-preferential creditors to agree to reduce their claims by 30%, postpone repayment for six months, and waive their right to interest during that period. (iv) Dowiko Ltd to guarantee to advance Wani Ltd. a further shs. 150,000,000 at the end of six months, if this proves necessary to repay the non-preferential creditors (who have agreed to postpone repayment and reduce their claims by 30%). Wani Ltd's bank charges 16% per annual on overdrafts. Dowiko Ltd earns 12% per annum on monies deposited with the bank. REQUIRED: (a) Calculate, the amounts which the bank and Dowiko Ltd, will receive if Wani Ltd. is liquidated. (5 marks) (b) Prepare the revised balance sheet of Wani Ltd., if reconstruction scheme A is adopted. (5 marks) (c) Prepare the revised balance sheet of Wani Ltd., if reconstruction scheme B is adopted. (5 marks) (d) Comment on the relative merits of the three proposals from the viewpoint of (1) Dowiko Ltd and (ii) the bank. (5 marks) (Total: 20 marks) Notes: (1) Assume that the calculations are made on 21* October, 2001 and that any of the three proposals can be put into effect immediately. Under each of the reconstruction schemes, the present bank overdraft would be frozen (at the approximately adjusted level) and a new bank account opened for subsequent transactions. (ii) Wani Ltd., is an established company owned and run by three cousins. The company traded successfully up until early 2000s, but has suffered badly during the recession. Sales have fallen significantly and two of its main customers have gone into liquidation. The directors are confident that the company remains economically viable, provided that certain actions are taken, and that a high level of profitability will e restored once the recession ends. The directors have prepared the following estimate of the company's financial position, as at 21 October, 2001, at which date a meeting of creditors is to be held to consider the company's financial difficulties. ESTIMATED BALANCE SHEET AS AT 21 OCTOBER, 2001 Shs. "000" Shs. "000" 125,000 Fixed assets (Net Current Assets Stock and work in progress Debtors and prepayments 293,000 167.000 460,000 Current Liabilities Creditors and accruals Corporation tax and VAT Bank overdraft Loan from Dowiko Ltd. Net current assets 124,000 136,000 90,000 100,000 450.000 10.000 135.000 Financed by: Share capital (@shs. I ordinary shares) Retained profit 100,000 35.000 135.000 Discussions between the bank and Wani Ltd's directors indicated that debts amounting to shs. 50,000,000 are likely to prove bad and assuming that the company continues as a going concern, the saleable value of certain items of stock is shs. 30,000,000 below their book value. The bank's overdraft and the loan from Dowiko Ltd, (a supplier) are each unsecured. The preferential creditors comprises (a) Taxation owing and (b) Shs. 14,000,000 of the figure for creditors and accruals. The following three proposals are to be considered at the creditors' meeting: 1. 2. Immediate Liquidation of the Company In these circumstances the fixed assets would realize shs. 30,000,000 and the stock and work in progress shs. 203,000,000. Liquidation expenses are estimated at shs. 20,000,000. Reconstruction Scheme A This would involve the following: (1) The directors to subscribe for a further 200,000,000 ordinary shares of shs. 1 each at par. The preferential creditors to be paid immediately. (iii) All non-preferential creditors to agree to reduce their claims by 20%, postpone repayment for one year, and waive their right to interest during that period. 3. Reconstruction Scheme B. This would involve the following: - (i) Dowiko Ltd. to convert its loan into 100,000,000 shares of shs. I each, at par, and agree to subscribe for a further 160,000,000 shares of shs. 1 each at par. (ii) The preferential creditors to be paid immediately. 111 All non-preferential creditors to agree to reduce their claims by 30%, postpone repayment for six (iii) All non-preferential creditors to agree to reduce their claims by 30%, postpone repayment for six months, and waive their right to interest during that period. (iv) Dowiko Ltd to guarantee to advance Wani Ltd. a further shs. 150,000,000 at the end of six months, if this proves necessary to repay the non-preferential creditors (who have agreed to postpone repayment and reduce their claims by 30%). Wani Ltd's bank charges 16% per annual on overdrafts. Dowiko Ltd earns 12% per annum on monies deposited with the bank. REQUIRED: (a) Calculate, the amounts which the bank and Dowiko Ltd, will receive if Wani Ltd. is liquidated. (5 marks) (b) Prepare the revised balance sheet of Wani Ltd., if reconstruction scheme A is adopted. (5 marks) (c) Prepare the revised balance sheet of Wani Ltd., if reconstruction scheme B is adopted. (5 marks) (d) Comment on the relative merits of the three proposals from the viewpoint of (1) Dowiko Ltd and (ii) the bank. (5 marks) (Total: 20 marks) Notes: (1) Assume that the calculations are made on 21* October, 2001 and that any of the three proposals can be put into effect immediately. Under each of the reconstruction schemes, the present bank overdraft would be frozen (at the approximately adjusted level) and a new bank account opened for subsequent transactions. (ii)