Dunstable Ltd has a statement of financial position with significant retained losses and no cash (it...
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Dunstable Ltd has a statement of financial position with significant retained losses and no cash (it holds a bank overdraft of £66,000). Its net assets stand at £84,000 and are represented by the following capital and reserves: Preference shares of £1 each fully paid Ordinary shares of £1 each fully paid Retained Earnings Net assets £'000 200 100 (216) 84 Dunstable has succeeded in creating a new product that its directors anticipate will yield profits of £50,000 each year for at least the next five years, although this will require additional funds. The following capital restructuring scheme has been approved and authorised by its creditors: 1. 40% of the ordinary shares are to be surrendered. 2. The preference shares are to be surrendered and cancelled and the holder of every 50 preference shares will pay Dunstable £30 cash, and will be issued: ▪ One 7% loan note of £40 each, and ▪ 10 fully paid ordinary shares of £1 (redistributing the shares surrendered). 3. The freehold property is to be revalued upwards by £60,000. 4. The negative balance on retained earnings will be written off, and equipment will be impaired by £4,000. (i) Discuss the challenges that Dunstable would face in raising finance to fund its new product given its current capital and reserves presentation. Explain how Dunstable may be able to persuade both ordinary and preference shareholders creditors to the restructuring scheme that is described above. and its (12 marks) (ii) Prepare the journals that would account for each of the adjustments (1) to (4) outlined above and present a T-account of the Capital Reduction and Reorganisation (CR&R) account that should clear to zero as a result of the adjustments. (12 marks) Dunstable Ltd has a statement of financial position with significant retained losses and no cash (it holds a bank overdraft of £66,000). Its net assets stand at £84,000 and are represented by the following capital and reserves: Preference shares of £1 each fully paid Ordinary shares of £1 each fully paid Retained Earnings Net assets £'000 200 100 (216) 84 Dunstable has succeeded in creating a new product that its directors anticipate will yield profits of £50,000 each year for at least the next five years, although this will require additional funds. The following capital restructuring scheme has been approved and authorised by its creditors: 1. 40% of the ordinary shares are to be surrendered. 2. The preference shares are to be surrendered and cancelled and the holder of every 50 preference shares will pay Dunstable £30 cash, and will be issued: ▪ One 7% loan note of £40 each, and ▪ 10 fully paid ordinary shares of £1 (redistributing the shares surrendered). 3. The freehold property is to be revalued upwards by £60,000. 4. The negative balance on retained earnings will be written off, and equipment will be impaired by £4,000. (i) Discuss the challenges that Dunstable would face in raising finance to fund its new product given its current capital and reserves presentation. Explain how Dunstable may be able to persuade both ordinary and preference shareholders creditors to the restructuring scheme that is described above. and its (12 marks) (ii) Prepare the journals that would account for each of the adjustments (1) to (4) outlined above and present a T-account of the Capital Reduction and Reorganisation (CR&R) account that should clear to zero as a result of the adjustments. (12 marks)
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Answer rating: 100% (QA)
i Challenges Dunstable faces in raising finance Challenges Negative retained earnings This raises red flags about profitability and potential future l... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-1119048541
11th Canadian edition Volume 2
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Nicola M. Young, Irene M. Wiecek, Bruce J. McConomy
Posted Date:
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