Question Tag: Capital Reduction

MM Ltd, producers of telecommunication equipment, has been making losses in recent times. The directors have proposed a scheme of reorganization to take effect on 1 October 2013. The statement of financial position of the company at 30 September 2013 is as follows:

Statement of Financial Position as at 30 September 2013

Additional information:

1. The ordinary shares are to be written down to GH¢0.25 per share and then converted into new ordinary shares of GH¢1.00, fully paid.
2. The preference shareholders are to receive 40,000 ordinary shares of GH¢1.00 per share, fully paid in exchange for their preference shares.
3. Dividends on the 7% preference shares are two years in arrears. In consideration of waiving their rights to arrears of preference dividends, the preference shareholders have agreed to accept 10,000 new ordinary shares of GH¢1.00 per share, fully paid, in final settlement.
4. The creditors have agreed to take 100,000 new ordinary shares of GH¢1.00 per share, fully paid in part settlement of the amounts due to them.
5. The balance on the retained earnings account is to be written off.
6. Some assets of the company have been revalued and are to be incorporated into the accounts as follows:
   • Freehold premises: GH¢100,000
   • Plant and equipment: GH¢125,000
   • Vehicles: GH¢25,000
   • Inventory: GH¢36,000
7. An allowance of GH¢3,500 is to be made for doubtful debts.
8. The ordinary shareholders have agreed to inject an additional GH¢90,000 cash by acquiring 120,000 ordinary shares at GH¢0.75 per share, fully paid.
9. Reorganization costs amounted to GH¢7,500.

Required:
a) Prepare the capital reduction account, stated capital account, and bank account. (9 marks)
b) Prepare the statement of financial position of MM Ltd as at 1 October 2016, after the reorganization. (6 marks)