Financial Reporting and Ethics - The Institute of Chartered ...

AMALGAMATION, ABSORPTION AND RECONSTRUCTION(ii)(iii)(iv)(v)(vi)(vii)(viii)(ix)The existing 5% cumulative preference shares are to be exchanged fornew issue of 175,000 8% cum preference shares of 1.00 each and700,000 ordinary shares of 25k each.Ordinary shareholders accepted a reduction in the nominal value ofthe shares of 1.00 for 25k, with subscription to a new issue on thebasis of 1 to 1 at a price of 30k per share.30,000 of Directors loan is to be cancelled. The balance is to be settledby issue of 50,000 ordinary shares of 25k each.Goodwill and loss in the profit and loss account are to be written off.Investments in shares are to be sold at market price of 300,000.Bank overdraft to be repaid, 100,000 is to be paid to trade creditorsand the balance payable instalmentally.20% of debtors is to be written off.Assets are revalued as follows:Land 1,450,000Building 400,000Equipment 50,000Stock and Work-in-Progress 250,000NRequired:(a) Show the necessary journal entries to effect the reconstruction scheme.(b) Prepare the balance sheet after the reconstruction, showing all workings.SUGGESTED SOLUTION 3.7(a)PEEPEE CONSTRUCTION COMPANY PLCJournal EntriesDebitCredit5% cum preference shares 350,0008% cum preference shares 175,000Ord. Shares (700,000 x 25k) 175,000Being exchange of 5% cum pref.Ordinary shares 500,000New ordinary shares 125,000Capital reconstruction 375,000Amount written off ordinary share capitalBank (500,000 x 30k) 150,000Ordinary shares 125,000Share premium 25,000Issue of 1 for 1 right at 30k each55