Question

Owing to a slump in trading caused by technological change, Jason Company Limited found itself in a situation of having cash on hand far below its foreseeable requirements. Its current balance sheet on 1 April 2017 reveals the following:

	$ 000
Accounts receivable	10,200
Inventory	10,200
Goodwill	6,000
Factory equipment	12,800
Land and building	44,000
Total assets	83,200
Bank overdraft	2,000
Accounts payable	12,800
Debenture interest payable	3,200
8% debentures payable	40,000
Total liabilities	58,000

Ordinary shares (8,000,000 shares issued and fully paid)	40,000
Retained profits	(14,800)
Total equity	25,200
Total liabilities and equity	83,200

The actual value of the inventory was $8,200,000, while the collectible portion of the accounts receivable was estimated at $7,200,000. The factory equipment has been valued at $10,000,000, while the land and buildings were valued at $48,000,000. It was determined that goodwill actually had a zero value. The cost of reorganization was $1,000,000, which was well below the costs of liquidation.

The plan for reorganization that has been approved wrote down the value ($5 each) of the ordinary shares to $2 each. The debenture holders have agreed to forego 50% of the interest ($1,600,000) due to them in exchange for an increase in the rate of interest to 10%. The accounts payable creditors have agreed to accept 1,600,000 of the new

$2 ordinary shares in partial payment of their liabilities. The ordinary shareholders have agreed to purchase 2,000,000 of the new ordinary shares at $2 each.

The plan for reorganization eliminated the entire deficit in the retained profits.

Required

(a) Prepare a schedule of the required capital reduction.

(b) Prepare the accounting journal entries required for the reorganization.

(c) Prepare a statement of financial position (balance sheet) after the external reorganization.

Answer 1

A) SCHEDULE OF REQUIRED CAPITAL REDUCTION

INVENTORY (2000)

RECEIVABLES (3000)

FACTORY EQUIPMENTS (2800)

LAND & BUILDING 4000

GOODWILL (6000)

CASH (EXPENSES ON REORGANISATION) (1000)

DEBENTURE INTEREST 3200-1600 =1600

RETAINED PROFIT (14800)

SHARE CAPITAL REDUCTION 24000

b) Journal entries

DATE	PARTICULARS	DEBIT($000)	CREDIT ($000)
	CAPITAL REDUCTION A/c Dr.	13800
	TO INVENTORY A/c		2000
	TO ACCOUNTS RECEIVABLE A/c		3000
	TO FACTORY EQUIPMENTS A/c		2800
	TO GOODWILL A/c		6000
	(BEING VALUE DECREASES ON ACCOUNT OF EXTERNAL REORGANISATION)
	LAND & BUILDING A/c Dr.	4000
	TO CAPITAL REDUCTION A/c		4000
	(BEING VALUE INCREASES ON ACCOUNT OF EXTERNAL REORGANISATION)
	CAPITAL REDUCTION A/c Dr.	1000
	TO CASH A/c		1000
	(BEING EXPENSES PAID ON REORGANISATION)
	SHARE CAPITAL OF $5 EACH A/c Dr.	40000
	TO SHARE CAPITAL OF $2 EACH A/c		16000
	TO CAPITAL REDUCTION A/c		24000
	(BEING SHARE CAPITAL REDUCED)
	DEBENTURE INTEREST PAYABLE A/c Dr.	1600
	TO CAPITAL REDUCTION A/c		1600
	BEING DEBENTURE HOLDERS FORGO THEIR INTEREST TO THE EXTENT OF 50%)
	8% DEBENTURES PAYABLE A/c	40000
	TO 10% DEBENTURES PAYABLE A/c		40000
	ACCOUNTS PAYABLE A/c Dr.	3200
	TO SHARE CAPITAL A/c		3200
	CASH A/c Dr.	4000
	TO SHARE CAPITAL A/c		4000
	CAPITAL REDUCTION A/c Dr.	14800
	TO RETAINED PROFT A/c		14800

C) STATEMENT OF FINANCIAL POSITION (AFTER REORGANISATION)

PARTICULARS	AMOUNT($000)
ACCOUNTS RECEIVABLE	7200
INVENTORY	8200
CASH	3000
FACTORY EQUIPMENTS	10000
LAND AND BUILDING	48000
TOTAL ASSETS	76400
BANK OVERDRAFT	2000
ACCOUNTS PAYABLE	9600
DEBENTURE INTEREST PAYABLE	1600
10% DEBENTURES PAYABLE	40000
TOTAL LIABILITIES	53200
ORDINARY SHARES (11600000 SHARES OF $2 EACH)	23200
RETAINED EQUITY	0
TOTAL EQUITY	23200
TOTAL LIABILITIES AND EQUITY	76400