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