Companies - Capital Reconstruction 2013 -14

8/10/2019 Companies - Capital Reconstruction 2013 -14

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ALWADI INTERNATIONAL SCHOOL ACCOUNTING GRADE 12 NOTES

COMPANIES CAPITAL REDUCTION AND RECONSTRUCTION

The Companies Act 1!" permits companies to reduce their share capital provided theinterests of creditors are preserved. Losses on the income statement lead to a reduction ofcapital and, if the situation appears to be permanent, it will be necessary to recognise the factby undertaking a scheme of capital reduction. A Capital Reduction account is opened in thebooks for this purpose.

Samp#e ans$e% 1&

The following is the balance sheet of C'e%%( Lt)*at 3 !ecember "#$

+ +

%on Current Assets ,###Current Assets 3',###,-. Current Liabilities (")###*

"###

/2000

S'a%e Capita# an) Rese%es#,### +rdinary shares of ##,###Retained earnings (debit balance* (3-###*

/2000

%o provision has been made for !epreciation of the non current assets which at the date of thebalance sheet, were estimated to be worth +!000and it has been discovered that a maorcustomer, owing +3000has become bankrupt. /owever, the directors are of the opinion thatthe company will begin to make a profit of +"3000per annum from now on.

Re45i%e)&

,a. 0ournal entries to record the scheme of Capital reduction.

,6.A 1alance 2heet as it will appear after the scheme put into effect.

Ans$e%&

The shares are worth +0*/2 ,+/23000 7 1003000. on balance sheet values. After taking therealisable values of the assets into account, the value of the shares is +,23000 8 !3000. 71003000 9 + 0*"0* The accounting entries will reuire the use of a Capital Reduction Account$

:o5%na#

D%* C%*

+ +

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Capital reduction Account ,### %on current Assets -,### Trade receivables ),### Retained earnings 3-,### (Reduction in asset values*

+rdinary share capital ,###

Capital Reduction account ,###

C'e%%( Lt)*

=a#ance S'eet as at >1 Decem6e% 2011

+ +

%on current Assets )",###Current Assets 3",###,-.Current Liabilities ("),###*

-,###

Net Assets "0000

S'a%e Capita# an) Rese%es&

##,### +rdinary shares of +0*"0 "03000

Notes&

The share holders have not lost anything as a result of the reconstruction of the Capital of

the Company as their shares had already lost +0*"0of their value4 the reconstruction merelyrecognise this fact.

The debit balance has been eliminated from the retained earnings account. 5f the 6rofit of

+"3000 is achieved, it will be euivalent to a dividend of #7 payable to the shareholdersimmediately4 they will not have to wait ! (ea%s ,+>!0007"000.3for a dividend.

Samp#e ans$e% 2&

P#ant Lt)?ssummarised 1alance 2heet at 3 2eptember "# is as follows$

Non C5%%ent Assets& +000

8oodwill ##

6roperties '##6lant and 9uipment ":otor vehicles %et Current assets 3

1>"0

E45it(&

,'##,### ordinary shares of '##

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Retained earnings (debit balance* ("*

1>"0

@5%t'e% Ino%mation&

,i. 8ood will is now considered to be valueless.

,ii. The non current assets are considered to be overvalued and have been valued morerealistically as follows$

+000

6roperties )"# 6lant and euipment :otor vehicles 3#

,iii. 5nventory has been over valued by +12"3000. A maor customer owing +2"3000 hasbecome bankrupt.

The company has not paid any dividends for some years but the directors believe that thecompany can become profitable again and start paying dividends once more. They purpose tocarry out a scheme of capital reduction with the agreement of the shareholders.

Re45i%e)&

,a. 0ournal entries to record the scheme of Capital Reduction.

,6. Redraft the 1alance 2heet of 6lant Ltd. as it will appear immediately after the completionof the Capital Reduction.

Ans$e%&

The 1alance 2heet value of the shares in +0*!>B" ;(,'##,### < ",###* ,'##,###=After taking the overvaluation of the assets into account, the value of the shares is +0*"0*

+000

%ominal value of share capital ,'##Less& !ebit balance on retained earnings account ("*

Reductions in value of $ 8oodwill (##* 6roperties (-#* 6lant and euipment (##* :otor vehicles ("#* 5nventory ("&* Trade receivables ("&*

Rea# a#5e o O%)ina%( S'a%e capita# !00

,+!003000 13/003000 9 +0*"0.

,a. :o5%na#

+000 +000

COMPANIES RECONSTRUCTION Pa;e < >


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Capital Reduction account -## Retained earnings " 8oodwill ## 6roperties -# 6lant and euipment ## :otor vehicles "#

5nventory "& 1ad debit written off "&(Reduction in asset values and writing off 8oodwill*

+rdinary 2hare Capital account -## Capital Reduction account -##(Reduction of share capital*

The balance on the 2hare Capital account has now been reduced from +13/003000to !0030003but the shareholders still hold share certificates for 13/003000share of +1. The directors maycorrect this situation in various ways, but the two most likely are$

To give the shareholders certificates for +ne +rdinary share of +0*"0for every share of+1

they already hold.

To give the shareholders a certificate for +ne +rdinary share of +1for every two shares they

already hold.

,6.

Net Asset a#5e

>hen a company is closed down and its assets are sold, this is called #i45i)ation* 5f a companywas to go into liuidation, investors would like to know whether the company?s assets would beworth anything, and if so, how much of these net assets would attach to each share. The firstpiece of information can be read directly from the balance sheet, and reuires no furtheranalysis.

Capita# ,Net assets. 9 A## assets - A## #ia6i#ities

COMPANIES RECONSTRUCTION Pa;e <

P#ant Lt)

=a#ance S'eet imme)iate#( ate% t'e capita# %e)5ction

Non c5%%ent assets& +000

6roperties )"#6lant and euipment

:otor vehicles 3#%et current assets "##

!00

,'##,### +rdinary shares of #.@ !00

A#te%natie#(3 !003000 O%)ina%( s'a%es o +1


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This figure tells the investors what their investment is worth. To find the value per share, simplydivide by the number of shares.

Net asset a#5e pe% s'a%e 9 Net Assets N5m6e% o o%)ina%( an) p%ee%ence s'a%es

Samp#e ans$e% >&

Fnotso;oo) Limite)has been trading unprofitably for the past few years. The court hasrecently approved a scheme of Capital reconstruction. A balance sheet at 3 August "##'showed the following position$

Cost Depn* N=Non C5%%ent Assets +000 +000 +000Intan;i6#e& 8oodwill # #Tan;i6#e& Breehold land -# -# 6remises 3# "'# ehicles ""# '# '#

D"# "# nvestments "#C5%%ent Assets&5nventory )#Trade receivables &'Cash E cash euivalents(cash* )

##,-. C5%%ent Lia6i#ities&Trade payables -#Cash E cash euivalents (1ank* ##

(-#*%et Current Assets (-#*

Capital 9mployed ')#,-. Non C5%%ent #ia6i#ities&-7 !ebentures ("#"* (2ecured on the freehold land* (##*Net Assets "0S'a%e Capita# an) Rese%es&+rdinary shares of each #-7 6reference shares of each "##2hare 6remium account "

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Retained earnings (!ebit balance* ()#*S'a%e 'o#)e% 5n)s "0

Note& The 6reference shares are cumulative and the dividends on the shares are > (ea%sinarrears.The approved scheme for the reduction of capital was implemented as follows$

The 6reference shares were reduced to +0*"0per share.

The +rdinary shares were reduced to +0*2"per share.

T$onew +rdinary shares for every +1of gross 6reference dividend in arrears. Theshare premium account was utilised for the issue.

8oodwill was written off.

5nventory costing +/000had been included in the final accounts at its selling price of+10000.

A debt of +21000was written off as bad.

The !ebenture holder took over the Breehold land at an agreed valuation of +12"000* The1alance was paid to the company.

The investments were sold for +2>"000*

Re45i%e)&

,a. 6repare 0ournal entries from the above transactions.

,6. 6repare a Capital Reconstruction Account.

,c. The summarised balance sheet of Fnotsogood Limited immediately after the completion ofthe scheme of capital reconstruction.

,). Calculate the net asset value of each +rdinary share before and afterthe implementationof the scheme.

,e. 5dentify and eGplain one acto% that the court would consider before agreeing to thescheme of capital reconstruction.

NO 0/ PAns$e%&

,a. :o5%na#D%* C%*

+000 +000,i. 6reference share Capital ,200 0*"0. ##

Capital Reconstruction account ##,ii. +rdinary share Capital ,"00 0*B". 3D&

Capital Reconstruction account 3D&,iii. 2hare premium ")

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+rdinary share capital ,!000 2 9 /000 0*2". "),i. Capital Reconstruction account &)&

8oodwill # 5nventory )

Trade receivables " Retained earnings )#

,ii. -7 !ebentures ##

1ank "&Breehold Land -# Capital Reconstruction account )&

,iii. 1ank "3& 5nvestments "#

Capital Reconstruction account "&

,6. Capita# Reconst%5ction Acco5nt

200/ +000 200/ +000>1 A5; >1 A5;8oodwill # 6reference share capital ##Retained earnings )# +rdinary share capital 3D&5nventory ,10 /. ) Breehold Land ,12" !0. )&Trade receivables " 5nvestments ,2>" 210. "&

"" ""

,c. Fnotso;oo) Lt)* =a#ance S'eet as at >1 A5;5st 200/Non C5%%ent Assets& +000 +000Intan;i6#e& 8oodwill

Tan;i6#e& Breehold land 6remises "'# ehicles '#

3"#5nvestments C5%%ent Assets&5nventory ,0 - . 3'Trade receivables ,"/ 21. 3&Cash E cash euivalents,2>" 8 2" 100 8 . ')

"3&,-. C5%%ent #ia6i#ities&Trade payables -#

%et Current Assets &&Capital 9mployed )D&

,-. Non C5%%ent Lia6i#ities&-7 !ebentures ("#"* (2ecured on the freehold land* Net Assets B"S'a%e Capita# an) Rese%es&

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&H'### +rdinary shares of +0*2"each ,"00 >B" 8 2. )H"##### -7 6reference shares of +0*"0each ,200 100. ##2hare 6remium account ,2"0 2. ""'Retained earnings S'a%e 'o#)e% 5n)s B"

,). ,i. %et asset value of each +rdinary share before the scheme$

Net assets P%ee%ence s'a%esNo* o O%)ina%( s'a%es

3)#### I #.'- per share ####

,ii. %et asset value of each +rdinary share after the scheme$

3D## I #.'3 per share &H'###

Note&

=( iss5in; P%ee%ence s'a%es Net Assets a#5e inc%eases* To ca#c5#ate Net asset a#5e oeac' O%)ina%( s'a%e $e nee) to )e)5ct P%ee%ence s'a%es a#5e %om net assets*

,e. The share holders have not lost anything as a result of the reconstruction of the Capital of

the Company as their shares had already lost +0*B"of their value4 the reconstructionmerely recognise this fact.

The )e6it 6a#ance has been eliminated from the retained earnings. 5f the businessachieves 6rofits in future years, profits would be payable to the shareholders immediately4

they will not have to wait for several years to get dividends.

COMPANIES RECONSTRUCTION Pa;e < !

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Companies - Capital Reconstruction 2013 -14