Model: Distribution of anticipated profits unrecorded liability ABC Ltd. decided to recognize itself following a period of adverse trading conditions. The summarized balance sheet at 31 March 20… was as follows:
|
Liabilities |
Assets |
(in lakhs)Rs. |
|
|
12% Cumulative Preference Shares of |
84.00 |
Goodwill |
6.00 |
|
Z 10 Each |
|
Patents & Franchises |
5.20 |
|
Equity Shares of Z 10 Each |
240.00 |
Land & Buildings |
160.40 |
|
Share Premium A/c |
10.00 |
Plant & Machinery |
12.40 |
|
14% Debentures |
96.00 |
Investments |
32.00 |
|
Interest Payable on Debentures |
Stocks |
124.00 |
|
|
Loan from Directors |
9.60 |
Debtors |
84.00 |
|
Sundry Creditors |
Deferred Charges |
2.00 |
|
|
Bank Overdraft |
20.00 |
Profit & Loss A/c |
94.00 |
|
|
520.00 |
|
520.00 |
Preference dividend is in arrears for 3 years. The authorized share capital is Rs.12 lakh 12% cumulative preference shares of Rs.10 each and 24 lakh equity shares of Rs.10 each. The following reconstruction scheme was formulated and duly approved:
- The existing equity shares were to be converted into fully paid up equity shares of Rs.2 each. The equity shareholders were to accept a consequent reduction in their value of holdings. They further agree to subscribe to a new issue of equity shares on the basis of 2 for 3 at a price of Rs.3.50 per share.
- The Preference Shareholders were to forego their right to arrear dividends. The existing 8,40,000 preference shares were to be exchanged for a new issue of 4,20,000 14% cumulative preference shares of Rs.10 each and Rs.42,00,000 in equity shares of Rs.2 each.
- The debenture holders were to accept 5,00,000 equity shares of Rs.2 each in settlement of their arrear interest and the interest rate on debentures was to be enhanced to 15%. The debenture holders were also to accept further 15% debentures of Rs.16,00,000 at Rs.90 per Rs.100.
- Half of the directors’ loan was to be cancelled. The balance was to be settled by the issue of 96,000 equity shares of Rs.2 each.
- Investments were to be sold at the current market value of Rs.20,00,000.
- The bank overdraft was to be repaid in full.
- An amount of Rs.20,00,000 was to be paid immediately to creditors. The balance amount would have to be paid in quarterly investments.
- All intangibles, deferred charges and the debit balance to P&L A/c were to be written off.
- Liability for damages unrecorded in books was to be settled for Rs.17,60,000. A sum of 3,00,000 was to be recovered in this connection from the insurance company.
- The existing share premium account was to be utilized in full.
- Tangible fixed assets were to be revalued as:
- Land & Buildings Rs. 1,76,00,000
- Plant & Machiner Rs. 10,00,000
- Stocks were to be written down by Rs.84,00,000.
- Debtors account was to be adjusted for an uncontrolled debt of Rs.9,00,000.
It is expected that with the new arrangements, the company will be able to earn a return of 50,00,000 p.a. before interest and taxes. The company will not attract any tax liability for the next 5 years.
You are required to:
- Show the journal entries necessary to record the above scheme
- Prepare the summarized balance sheet of the company immediately after reconstruction
- Show how the anticipated profit will be distributed after the reconstruction