Andy Company Ltd. has recurring losses in operations, as well as declines in the value of...

  

 

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Andy Company Ltd. has recurring losses in operations, as well as declines in the value of its assets as compared to the book values. The current statement of financial position shows the following account balances: So00 Assets Goodwill 1,200 Property and building Equipment Inventory Accounts receivable 2,000 1,000 500 300 Total assets 5.000 Equity Ordinary shares (100,000 shares fully issued and paid-up) Retained earnings 1,000 (760) 240 Liabilities Bank overdraft 400 2,200 Accounts payable Interest payable 8% Debentures payable 160 2.000 4,760 5,000 Total liabilities and equity The actual value of the property and building has been agreed to be $3,500,000. The value of the goodwill is regarded as zero. The equipment has been valued at $850,000, and an allowance/a provision for bad debts of $50,000 is required. The cost of reorganization is $200,000, which is substantially below the liquidation cost. The creditors and shareholders of the company have agreed that a reorganization is necessary, and at least three-fourths of the interested parties have agreed that the ordinary shares will be written down to 20% of the value, and 5 shares of the written down value share will be consolidated into one new share. The debenture holders have agreed to forego the interest currently payable to them, in exchange for an increase in the interest rate on the debentures to 10%, plus 10,000 fully paid new ordinary shares. The accounts payable creditors have agreed to accept 50,000 fully paid new ordinary shares in partial payment of their claims. The ordinary shareholders have agreed to purchase 50,000 new ordinary shares, while the debenture holders have agreed to purchase 20,000 new ordinary shares. The entire deficit in the retained earnings will be eliminated. The court has approved this plan of reorganization. Required: (a) Prepare a schedule of the total amount of the capital reduction required. (6 marks) (b) Prepare the accounting entries required for the reorganization. (14 marks) Andy Company Ltd. has recurring losses in operations, as well as declines in the value of its assets as compared to the book values. The current statement of financial position shows the following account balances: So00 Assets Goodwill 1,200 Property and building Equipment Inventory Accounts receivable 2,000 1,000 500 300 Total assets 5.000 Equity Ordinary shares (100,000 shares fully issued and paid-up) Retained earnings 1,000 (760) 240 Liabilities Bank overdraft 400 2,200 Accounts payable Interest payable 8% Debentures payable 160 2.000 4,760 5,000 Total liabilities and equity The actual value of the property and building has been agreed to be $3,500,000. The value of the goodwill is regarded as zero. The equipment has been valued at $850,000, and an allowance/a provision for bad debts of $50,000 is required. The cost of reorganization is $200,000, which is substantially below the liquidation cost. The creditors and shareholders of the company have agreed that a reorganization is necessary, and at least three-fourths of the interested parties have agreed that the ordinary shares will be written down to 20% of the value, and 5 shares of the written down value share will be consolidated into one new share. The debenture holders have agreed to forego the interest currently payable to them, in exchange for an increase in the interest rate on the debentures to 10%, plus 10,000 fully paid new ordinary shares. The accounts payable creditors have agreed to accept 50,000 fully paid new ordinary shares in partial payment of their claims. The ordinary shareholders have agreed to purchase 50,000 new ordinary shares, while the debenture holders have agreed to purchase 20,000 new ordinary shares. The entire deficit in the retained earnings will be eliminated. The court has approved this plan of reorganization. Required: (a) Prepare a schedule of the total amount of the capital reduction required. (6 marks) (b) Prepare the accounting entries required for the reorganization. (14 marks)

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