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:

You are provided with the following additional information:

• In the event of a forced sale, the assets would probably raise the following amounts.
  .                                                                                            GH¢’million
  Property, Plant and Equipment                                                  1,500
  Inventories                                                                                  400
  Accounts receivable                                                                    450
• The company is developing a new product, which is 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.
• A two-for-one rights issue will be made at a price of GH¢1 per share for cash after the above conversions.
• 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)

Mahadi Ltd has operated profitably in Ghana for several years but now facing financial difficulties after recording losses in its operations recently.
The company’s Statement of Financial Position as at 30 September, 2019 is given below:

Additional Information:
i) Mahadi Ltd operates a number of retail outlets for snack bar; most of these outlets are rented out. The company’s largest supplier is Banda Ltd which holds all of the debenture stocks and is also a trade creditor for GH¢240,000 included in sundry payables above. Included in the sundry payables are preferential payables of GH¢44,000; an amount due to the Ghana Revenue Authority.

ii) The bank overdraft from Northern Rock Bank is secured by a fixed charge over the freehold property of Mahadi Ltd, and the debenture stock is secured by a floating charge over the company’s assets.

iii) On October 1, 2019, Mahadi Ltd has scheduled a meeting of all the stakeholders of the company in order to consider the following alternative proposals:
Proposal Alternative 1
The management of Mahadi Ltd proposes for the immediate liquidation of the company, which would result in the following estimated amounts for realized assets:

Proposal Alternative 2
Banda Ltd has made an offer of support which would allow the reconstruction of Mahadi Ltd to continue to operate as a going concern. Under this reconstruction arrangement, the debentures held by Banda Ltd would be converted into 48,000 ordinary shares (issued at GH¢1.00 per share) and for every GH¢200.00 of GH¢240,000 trade debt owed to Banda Ltd, there would be issued 110 ordinary shares (issued at GH¢1.00 each) in the reconstructed company. The balance of the trade debt owed to Banda Ltd would be written off against the equipment of Mahadi Ltd.

Mahadi Ltd existing shareholders would receive one ordinary share in the reconstructed company (credited as to GH¢1.00 per share) in exchange for every five presently held. The balance on the retained earnings is not absorbed by the existing shareholders (in the share exchange above), and is to be written off against the capital surplus. The fair value costs of the freehold property and the inventories approximate their carrying value.

An additional 140,000 ordinary shares in Mahadi Ltd (issued at GH¢1.00) would be issued to Banda Ltd for cash consideration of GH¢140,000 in order to improve the liquidity position of the reconstructed entity. It has been estimated by the Management of Banda Ltd that after reconstruction, Mahadi Ltd would earn regular net profit of GH¢54,000 per annum.

Other relevant information:

• Ignore reconstruction and liquidation expenses.
• Assume that Banda Ltd can currently earn 15% per annum on new investments involving similar risks to those which would be incurred by investing in Mahadi Ltd.
• Assume that the adopted proposal would be implemented immediately.

Required:
a) Show the total amount Banda Ltd would receive in case of liquidation of Mahadi Ltd per proposal 1.                      (10 marks)

b) Prepare the statement of financial position of Mahadi Ltd after the reconstruction (on assumption that proposal 2 is adopted and implemented).                                                                                                                                                             (10 marks)

Bank of Ghana (BoG) earlier last year announced an increase in the minimum capital requirement for Micro Finance Institutions in the country from the current GH¢500,000 to GH¢2 million by June 2018. Capital Link, a Micro Finance Company has been affected by the increase in players in the Micro Finance Industry which has seen a reduction of its loan portfolio and an increase in loan default rate.

A statement of Financial Position recently prepared by Capital Link is as follows:

Additional information:
Depositors have the information that Capital Link is considering funding options to ensure the survival of the business. They are however not convinced that Management of Capital Link would be able to raise the required capital to meet the minimum requirement.

In a Stakeholders meeting, Management of Capital Link proposed two possible options for the company’s future.

Scheme 1- Close Down Mission
Unity Capital Ltd has made a firm offer of GH¢600,000 for the company’s leasehold property. Total loan portfolio is conservatively valued at GH¢592,500 in a forced sale. Investments in Treasury bills amounts to GH¢465,000. Liquidation expenses are estimated at GH¢30,000 and interest to depositors is GH¢330,000.

Scheme 2- Rescue Mission
Management of Capital Link propose to implement a scheme which includes a cheap loan of GH¢600,000 from a distress fund set up by an NGO, Business Rescuers. The following terms have been arranged:

GH¢375,000 would be reserved to pay for the loan from the NGO when the first installment falls due. The NGO has been asked to accept 20% debenture in exchange for the balance remaining due. The debenture would be repayable in four annual installments of GH¢150,000, commencing 28 February 2017, with the interest due for the preceeding year, paid on the same date.
Assume that:

• The current rate of interest on all borrowing is 14%
• The calculations are being made on 30th April, 2017 and either scheme could be put onto effect immediately.
• The present value of GH¢1 recoverable at the end of each year is:

Required:
a) By means of numerical analysis of the two schemes, evaluate how much the bank would recover from each scheme.                                                                                                                                                                                                       (12 marks)

b) Discuss TWO advantages of each scheme.                                                                                                                (3 marks)

Abusua Ltd. has been trading profitably for several years but for the past four years its operations have resulted in losses. The board of directors has decided to restructure the company.

You have been provided with the following additional information.

ii) No dividend was declared on the Preference shares for the year ended 30 September, 2016.
iii) The following assets have net realizable values as indicated below:

iv) The investment in Abusua Ltd. is 55% holding in Obi Ltd. An offer of GH¢ 1,350,000 has been made for it and it has been accepted by the directors.
v) Following further feasibility study carried out on the project which gave rise to the deferred development expenditure, the directors have decided to discontinue the project. The project is not patented.
vi) The directors have decided to sell the patent rights for a net realizable value of GH¢ 1,800,000.
vii) Inventories were written down by GH¢ 2,232,000.
viii) The 22% debentures are secured on the freehold land and buildings.
ix) The bank has a fixed and floating charge over the assets in respect of the loan.
x) It is considered that a proposed reconstruction of the company should result in net profit after tax of GH¢1,500,000 in the year ending 30 September, 2017 and GH¢1,800,000 or more in each of the years thereafter.
xi) The company will require a ratio of accounts receivable and cash to current liabilities of 0.80:1 in future to trade satisfactory.

Required:
As a Director of Finance of Abusua Ltd, recommend a scheme of reconstruction for consideration by the board of directors of the company and prepare a summarized statement of a financial position.                                                                      (15 marks)

MM Ltd, producers of telecommunication equipment has been making losses in recent times. The directors have proposed a scheme of reorganization, to take effect on 1 October 2013. The statement of financial position of the company at 30 September 2013 is as follows:

Additional information.
i) The ordinary shares are to be written down to GH¢0.25 per share and then to be converted into new ordinary shares of GH¢1.0 per fully paid.
ii) The preference shareholders are to receive 40,000 ordinary shares of GH¢1 per share, fully paid in exchange for their preference shares.
iii) Dividends of 7% preference shares are two years in arrears. In consideration of waiving their rights to arrears of preference dividend, the Preference shareholders have agreed to accept 10,000 new ordinary shares of GH¢1.00 per share, fully paid in final settlement.
iv) The creditors have agreed to take 100,000 new ordinary shares of GH¢1 per share fully paid in part settlement of the amounts due them.
v) The balance on the retain earnings account is to be written off.
vi) Some assets of the company have been revalued and are to be incorporated into the accounts as follows:
.                                                                  GH¢
* Freehold premises                           100,000
* Plant and equipment                       125,000
* Vehicles                                               25,000
* Inventories                                          36,000
vii) An allowance of GH¢3,500 is to be made for doubtful debts
viii) The ordinary shareholders have agreed to inject additional GH¢90,000 cash by acquiring 120,000 ordinary shares at 0.75 per share fully paid.
ix) Reorganization costs amounted to GH¢7, 500.

Required:
a) Prepare a capital reduction account, stated capital account and bank account.                                                              (9 marks)

b) Prepare a statement of financial position of MM Ltd as at 1 October 2016, after the reorganization.                           (6 marks)