- 9 Marks
Question
Scenario:
Luck & Co. has been making losses over the last few years. Its statement of financial position at 31 December, 2013, showed the following:
Statement of Financial Position as at 31 December, 2013
| Assets | N |
|---|---|
| Property, plant, and equipment | 80,000 |
| Inventory | 20,000 |
| Receivables | 40,000 |
| Total Assets | 140,000 |
| Equity and Liabilities | N |
|---|---|
| Ordinary Capital | 100,000 |
| Retained Earnings | (140,000) |
| Secured Loan Stock | 100,000 |
| Payables | 80,000 |
| Total Equity & Liabilities | 140,000 |
On liquidation, the assets would realise the following:
| Assets | N |
|---|---|
| Property, plant, and equipment | 30,000 |
| Inventory | 12,000 |
| Receivables | 36,000 |
| Total Realisable Value | 78,000 |
If the company continues to trade for the next four years, profit after charging N20,000 per annum as depreciation on the property, plant and equipment would be as follows:
| Year | Profit (N) |
|---|---|
| 2014 | 4,000 |
| 2015 | 20,000 |
| 2016 | 26,000 |
| 2017 | 28,000 |
| Total | 78,000 |
Assume that there would be no surplus cash to settle the payables and loan stock holders until after four years when inventory and receivables could be realised at their book values.
Required:
Evaluate the financials and advise the management of Luck & Co on the options available to them and redraft the statement of financial position of Luck & Co after the exercise. (9 Marks)
Answer
Evaluation of Financials and Management Advice:
Options for Luck & Co:
- Immediate Liquidation:
- Realisable value of assets: N78,000.
- Payable to loan stockholders: N78,000 (deficiency of N22,000 remains).
- Nothing for creditors or shareholders.
- Continuation of Trading for Four Years:
- Cash generation after four years: N78,000.
- Total available cash: N218,000 (including inventory and receivables).
- Full repayment of loan stock (N100,000) and creditors (N80,000), leaving N38,000 for shareholders.
- Debt-to-Equity Restructuring:
- Convert payables and loan stock into equity.
- Propose restructuring terms to creditors for future participation in company profits.
Redrafted Statement of Financial Position (Post-Restructuring):
| Assets | N |
|---|---|
| Property, plant, and equipment | 80,000 |
| Inventory | 20,000 |
| Receivables | 40,000 |
| Total Assets | 140,000 |
| Equity and Liabilities | N |
|---|---|
| Equity (Revised) | 140,000 |
- Tags: Debt-to-Equity Swap, Financial restructuring, Going Concern, Liquidation, Profitability
- Level: Level 3
- Topic: Introduction to Corporate Reporting
- Series: NOV 2014
- Uploader: Dotse