Deflation Ltd, which had experienced trading difficulties, decided to reorganise its finances. On 31 December 2016 a final trial balance extracted from the books showed the following position:

Approval of the Court was obtained for the following scheme for reduction of capital:
1 The preference shares to be reduced to £0.75 per share.
2 The ordinary shares to be reduced to £0.125 per share.
3 One £0.125 ordinary share to be issued for each £1 of gross preference dividend arrears; the preference dividend had not been paid for three years.
4 The balance on the share premium account to be utilised.
5 Plant and machinery to be written down to £75,000.
6 The retained profits, and all intangible assets, to be written off.
At the same time as the resolution to reduce capital was passed, another resolution was approved restoring the total authorised capital to £350,000, consisting of 150,000 6% cumulative preference shares of £0.75 each and the balance in ordinary shares of £0.125 each. As soon as the above resolutions had been passed, 500,000 ordinary shares were issued at par, for cash, payable in full upon application.

You are required:
(a) To show the journal entries necessary to record the above transactions in the company’s books; and
(b) To prepare a statement of financial position of the company, after completion of the scheme.

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Share capital, authorised and issued: 150,000 6% cumulative preference shares of £1 each 200,000 ordinary shares of £1 each Share premium account Retained profits Preliminary expenses Goodwill (at cost) Trade accounts payable Accounts receivable Bank overdraft Leasehold property (at cost) Plant and machinery Inventory (provision for depreciation) (at cost) (provision for depreciation) لا 114,375 7,250 55,000 31,200 80,000 210,000 79,175 577,000 m 150,000 200,000 40,000 43,500 51,000 30,000 62,500 577,000