Matatizo Limited has been recording losses for the last few years. The Statement of Financial Position of the Company as at 31 March 2019 was as given below:

000's 000's

Equity Share Capital (Sh. 10 par value) 30,000 Goodwill 5,000

10% Preference Share Capital (Sh. 100 Plant and Machinery 30,000

Par Value fully Paid) 10,000 Equipment 15,000

Share Premium 4,000 Receivables 2,500

Loans from Directors 5,000 Inventory 1,500

Bank Overdraft 450 Cash in Hand 150

Creditors 2,200 Patents and Trademarks 500

12% Debentures 5,000 Accumulated losses 2,000

56,650 56,650

The Authorized Share Capital of Matatizo Limited is composed of 5,000,000 equity shares of Sh. 10 each and 200,000 10% Preference shares of Sh. 100 each. It was decided during a meeting of the shareholders and Directors of the Company to carry out a scheme of internal construction with effect from 1 April 2019 as follows:

2. Each equity share to be re-designated as a share of sh. 4.50. the equity shareholders are to accept a reduction in nominal value of their shares from sh. 10 to sh. 4.50. in addition the shareholders are to subscribe for a new issue of shares on the basis of one share for every three held at a price of Sh. 6 per share.
4. The existing preference shares are to be exchanged for a new issue of 55,000 15% preference shares of sh. 100 each and 500,000 equity shares of sh. 4.50 each.
6. The 12% preference shares are to be converted into 15% debentures. A further 1,000,000 of 15% debentures of sh. 100 each are to be issued at sh. 75 each.
8. The Directors agreed to forego 50% of their loan. The balance of the loan is to be settled by the issue of 400,000 equity shares of 4.50 each.
10. The Bank Overdraft is to be paid in full.
12. All intangible assets and Accumulated losses are to be eliminated.
14. Creditors agreed to be paid half of the amount due at a discount of 10%.
16. Assets are to be adjusted to their Fair values by the following amounts.

000,s

Plant and Machinery 6,100

Equipment 3,250

Receivables 1,160

Inventory 460

1. The share Premium account is to be utilized for purposes of capital reduction.

Required:

A Capital reduction account for Matatizo Limited after completion of the Internal reconstruction.

Answer rating: 100% (QA)

Capital Reduction Account for Matatizo Limited A Capital Reduction Account Debit Credit Equity Share Capital Reduction in nominal value 13500000 Share ... View the full answer