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Qn 2. External Capital Reconstruction

The balance sheet of Kobelo Oil products Ltd. As at December 20x1 is as follows:-

ASSETS

Non-Current: SHS

Goodwill 3,300,000

FreeholdLand and building 2,590,000

Plant and Equipment 231,000

Current:

Stock 544,500

Debtors 762,300

Cash 25,000

Total Assets 4,482,800

EQUITY AND LIABILITIES

Equity:

Shs 100 ordinary shares, full paid 2,500,000

Shs 1,000 12% cumulative preference shares, fully paid 300,000

Share premium 250,000

Profit and loss account (1,767,200)

NON-CURRENT LIABILITIES

15% Debentures 750,000

CURRENT LIABILITIES

Creditors 1,400,000

Overdraft 1,050,000

4,482,800

Preference dividends are three years in areas

The company has employed a new management team, discarded all other products line except Ufuta cooking oil, which are sold under the name of Kinole The new management team has produced a corporate plan that includes a scheme of reconstruction.

1. Kobelo Oil Product Ltd is to go into voluntary liquidation and a new company, KINOLE Ltd is to be formed to acquire the old company. The consideration for the take is to be satisfied in the form of shares and debentures of the new company.

1. The land and buildings are to be sold and leased back. The lease will be classified as an operating lease and the sale proceeds for the land and buildings are expected to be shs. 3,000,000.

1. KINOLE Ltd is to take over the plant and equipment at shs 150,000 stocks and debtors are to be taken over by KINOLE Ltd at book values. The balance on the cash and bank accounts to be taken over after all amounts have been paid and received.

1. Preferential creditors amount to shs 250,000 are to be paid off by KOBELO Oil Products Ltd in full and in cash while the remaining creditors are to be paid 75 cents in the shilling in cash and the balance is to be taken over by KINOLE Ltd.

1. 15% Debenture holders are to be given shs 700,000 18% Debenture in KINOLE Ltd.

1. The ordinary shareholders are to receive one fully paid shs 500 ordinary shares in KINOLE Ltd for every25 ordinary shares held in KOBELO Oil Products Ltd. They also agree to purchase one shs 500 ordinary share at per in KINOLE Ltd for every 10 ordinary shares held in KOBELO Oil Product Ltd.

1. Goodwill in KOBELO Oil Products Ltd is considered to be worthless

1. The preference shareholders are to receive one fully paid shs 500 ordinary shares in KINOLE Ltd for every 2 preference shares held in KOBELO Oil Product Ltd, in additional, while agreeing to waive any entitlement to areas of preference dividend, the preference shareholders are to be receiving a shs 1,000 18% debenture for every 3 preference shares held.

Liquidation expenses for KOBELO Oil Products Ltd are expected to be shs. 15,000 and are to be reimbursed by KINOLE Ltd.

Required:

Close off the books of KOBELO Oil Products Ltd. and open the books of KINOLE Ltd.

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