- 15 Marks
Question
a) Burunda LTD (Burunda) has operated within the textile industry in Kenya over the past
twenty years. But stiff competition from South Asia in recent years has pushed many local textile players including Burunda into mounting trading losses. The Directors, in an attempt to reverse this worrying trend, have already realigned the company’s product portfolio and operations. The latest statement of financial position of Burunda as of 31 July 2025 is provided below:
Statement of Financial Position As of 31 July 2025 Assets GH¢000 Property 5,400 Plant & Equipment 8,600 Accumulated depreciated – plant and equipment (1,300) Patents 813 Inventories 3,600 Accounts receivable 4,250
21,363 Equity and liabilities
Ordinary shares capital (shares @ GH¢2 each) 10,000 Retained earnings (3,855) Share deals 1,060 Long-term bank loan 5,500 Due to directors (due on 31 January 2027) 2,800 Current liabilities 5,858
21,363
Additional information Following a meeting with key stakeholders, the following scheme of internal financial reconstruction with effect from 1 August 2025 has been agreed: i) Ordinary share capital is to be reduced by 45%. The shareholders are to inject an amount deemed sufficient to help the reconstructed business meet its set working capital target. Both retained earnings and share deals accounts are to be eliminated.
ii) The bank is prepared to waive 10% of the loan balance and accept ordinary shares for the
remaining balance. The bank has also pledged to make a revolving credit facility of GH¢12 million available to the company. The Directors have planned to draw GH¢2 million immediately.
iii) The Directors have agreed to grant a waiver over the amount owed them. In exchange, they
are to receive fully vested share options whose fair value is determined as GH¢1.54 million.
iv) The Property represents a 10-storey building. All the floors are identical in size and design.
The Directors have decided to lease out four (4) of these floors to Tinkora LTD under a 3- year finance lease agreement. The annual rentals, which would be received, on 1 August each year have been agreed at GH¢1 million. The lease has an implicit rate of interest of 15%. The cumulative present values of GH¢1 based on 15% for two and three years are GH¢1.63 and GH¢2.28 respectively. The remaining six (6) floors should be revalued up by
Answer
i) Capital Reduction Account
| GH¢000 | GH¢000 | ||
|---|---|---|---|
| Plant & equipment [(8,600 – 1,300) – 6,450] | 850 | Ord share capital (45% x 10,000) | 4,500 |
| Retained earnings | 3,855 | Share deals | 1,060 |
| Inventories (3,600 – 2,010) | 1,590 | Bank loan (10% x 5,500) | 550 |
| Receivables (4,250 – 3,100) | 1,150 | Due to directors | 2,800 |
| Awarded share options | 1,540 | Finance lease | 470 |
| Patents | 813 | Non-leased property (20% x 6/10 x 5,400) | 648 |
| Reorganisation cost | 200 | Capital reserve | 30 |
| Total | 10,028 | Total | 10,028 |
ii) Statement of Financial Position of Burunda immediately after reorganisation
| GH¢000 | |
|---|---|
| Non-current assets | |
| Properties (120% x 6/10 x 5,400) | 3,888.0 |
| Plant & equipment (6,450 + 5,000) | 11,450.0 |
| Lease receivables (1,630 – 755.5) | 874.5 |
| 16,212.5 | |
| Current assets | |
| Inventories | 2,010.0 |
| Trade receivables | 3,100.0 |
| Lease receivables (1,000 – 244.5) | 755.5 |
| Bank and cash (W2) | 2,921.5 |
| 8,787.0 | |
| Total assets | 24,999.5 |
| Equity and liabilities | |
| Ordinary share capital | 17,571.5 |
| Share options | 1,540.0 |
| Capital reserve | 30.0 |
| 19,141.5 | |
| Current liabilities | 5,858.0 |
| Total equity and liability | 24,999.5 |
(Note: There appears to be a discrepancy in the equity total in the original; it sums to 19,141.5, but the document shows 17,677.0, which may be an OCR error or miscalculation. I’ve presented as per the extracted figures for accuracy.)
Workings
W1 Finance lease
| Description | GH¢000 |
|---|---|
| Derecognition of the leased property (4 floors) | |
| First annual lease receipt | 1,000 |
| Initial value of lease receivable (1,000 x 1.63) | 1,630 |
| Proceeds from the transfer | 2,630 |
| Carrying amount (5,400 x 4/10) | 2,160 |
| Gain upon derecognition | 470 |
| Year | Opening bal. GH¢000 | Lease receipt GH¢000 | Interest (15%) GH¢000 | Closing bal. GH¢000 |
|---|---|---|---|---|
| 2025/26 | 1,630 | – | 244.5 | 1,874.5 |
W2 Bank account
| GH¢000 | GH¢000 | ||
|---|---|---|---|
| Finance lease receipt | 1,000 | Reorganization costs | 200 |
| Share issue | 7,121.5 | Plant | 5,000 |
| Balance c/d | 2,921.5 | ||
| Total | 8,121.5 | Total | 8,121.5 |
W3 Ordinary share capital account
| GH¢000 | GH¢000 | ||
|---|---|---|---|
| Capital reduction (45% x 10,000) | 4,500 | Balance b/d | 10,000 |
| Balance c/d | 17,571.5 | Bank (see W4 below) | 7,121.5 |
| Loan (90% x 5,500) | 4,950 | ||
| Total | 22,071.5 | Total | 22,071.5 |
W4 Working capital requirement
| GH¢000 | GH¢000 | |
|---|---|---|
| Required current assets (1.5 x 5,858) | 8,787.00 | |
| Reorganisation cost | 200.00 | |
| New plant | 5,000.00 | |
| 13,987.00 | ||
| Less: Available current assets and cash: | ||
| Inventories | 2,010.00 | |
| Trade receivables | 3,100.00 | |
| Lease receivables (current portion) | 755.50 | (5,865.5) |
| Total cash requirement | 8,121.5 | |
| Less: Cash available (first lease rental) | (1,000) | |
| Cash required to be introduced by shareholders | 7,121.5 |
- Topic: Corporate reconstruction and reorganisation
- Series: NOV 2025
- Uploader: Samuel Duah