- 15 Marks
CR – May 2021 – L3 – Q4a – Corporate Reconstruction for Kanzo Ltd
Prepare a statement of financial position and related computations after reconstruction or liquidation for Kanzo Ltd.
Question
Kanzo Ltd (Kanzo) 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 | GH¢’million |
|---|---|
| Property, plant and equipment | 3,250 |
| Patent | 350 |
| Total Non-current assets | 3,600 |
| Current assets | GH¢’million |
|---|---|
| Inventories | 1,000 |
| Accounts receivables | 500 |
| Total Current assets | 1,500 |
| Total assets | GH¢’million |
|---|---|
| Total Assets | 5,100 |
| Equity & Liabilities | GH¢’million |
|---|---|
| Ordinary share capital (@GH¢1) | 2,000 |
| Retained earnings | (750) |
| Total Equity | 1,250 |
| Non-Current liabilities | GH¢’million |
|---|---|
| 20% Preference shares | 1,100 |
| 25% Debentures (unsecured) | 1,000 |
| Total Non-Current liabilities | 2,100 |
| Current liabilities | GH¢’million |
|---|---|
| Accounts payables | 1,000 |
| Bank overdraft (secured on property, plant & equipment) | 750 |
| Total Current liabilities | 1,750 |
| Total Equity & Liabilities | 5,100 |
Additional Information:
- In the event of a forced sale, the assets would probably raise the following amounts:
| Asset | GH¢’million |
|---|---|
| Property, Plant and Equipment | 1,500 |
| Inventories | 400 |
| Accounts receivable | 450 |
- The company is developing a new product, expected to generate profit before interest and tax of GH¢500 million per annum in anticipation of an immediate capital injection of GH¢2,000 million.
- The Ordinary share capital should be written down to 200 million shares of GH¢1.00 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 GH¢1 per share.
- It is proposed for GH¢650 million of the 25% Debentures to be converted into ordinary shares at GH¢1 per share and the remainder to be converted into GH¢350 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.
- Property, plant and equipment are to be revalued at GH¢2,250 million, inventories at GH¢800 million, and Accounts Receivables at GH¢450 million.
- The accumulated losses and intangible assets are to be written off.
- The corporate tax rate is 25%.
- Liquidation expenses will amount to GH¢10 million.
Required:
i) Prepare a Statement of Financial Position after reconstruction on the assumption that the capital injection took place. (6 marks)
ii) Compute the expected profit after tax and the earnings per share after the reconstruction. (2 marks)
iii) Prepare a statement of distribution if the company were to be liquidated now. (2 marks)
iv) Describe the steps the Directors of Kanzo Ltd should follow to appraise the proposed scheme of reconstruction with an emphasis on the interest of shareholders. (5 marks)
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