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Question Three Social Distancing Company is in financial difficulties

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Question Three Social Distancing Company is in financial difficulties. A meeting of creditors is to be held to consider the company's affairs. The company has sent its bank the following Statement of Financial Position as at 28th February 2019 GH¢'000 GH¢'000 Stated Capital 60,000 Income surplus 21.000 81,000 Loan from Stayhome Ltd 30.000 111,000 Plant and equipment 36,000 Inventories and contract in progress 184,000 Accounts Receivable 135.000 319,000 Taxation due Creditors Bank Overdraft 15,000 169,000 60.000 244,000 75.000 111.000 The bank is aware that Social Distancing Ltd has been operating profitably, but the financial difficulties have been precipitated by the insolvency of a major customer. From discussions with the company's directors, the bank expects that the contracts-in-progress included in the Statement of Financial Position at GH¢50,000,000 will prove worthless, and that GH¢41,000,000 of the debts will prove to be bad. Unfortunately, the bank's overdraft was secured on the contracts, so that the bank is now in the position of an unsecured lender. The only preferential creditors are for taxation and GH€9,000,000 of the Creditors. The remaining liabilities are unsecured. The bank learns that the following proposals are to be considered at the creditors' meeting: i. Immediate liquidation of the company. In these circumstances, inventories would realize only GH¢80,000,000 and the sale value of the equipment would be negligible. The debts would be realized in full, apart from the bad debts previously mentioned. ii. A reconstruction in which business associates of the directors would subscribe GH¢40,000,000 in cash for new shares in the company; from this cash the preferential creditors would be satisfied. The conditions are that non-preferential creditors (including Stayhome Ltd and the bank) agree to a reduction in their claims to 90% of the amount Page 2 of 4 presently due, that payment is postponed for one year and the interest during the year is waived. A reconstruction in which Stayhome Ltd would convert its loan into 30,000,000 shares (issued at GHél each) and would subscribe a further GH440,000,000 cash for shares of GH¢1 each) in the company; from this cash the preferential creditors would be satisfied. The conditions are that the remaining non-preferential creditors agree to a reduction in their claims to 80% of the amount presently due; that payment is postponed for three months and that interest during the three months is waived. Stayhome Ltd offers a guarantee to lend Social Distancing Ltd a further GH¢50,000,000 to meet payments at the end of the three months if this proves necessary. The bank is confident that Stayhome Ltd has the funds available. The existing shareholders of Social Distancing Ltd are prepared to co-operate in the issue of shares under either of proposals (2) or (3). Under those proposal bad debts and valueless, contracts would be written off and preferential creditors would be paid immediately. The bank overdraft would be frozen (at the appropriately adiusted level and new bank account anned for subsequent iii. presently due, that payment is postponed for one year and the interest during the year is waived. A reconstruction in which Stayhome Ltd would convert its loan into 30,000,000 shares (issued at GH¢1 each) and would subscribe a further GH¢40,000,000 cash for shares (of GH¢1 each) in the company; from this cash the preferential creditors would be satisfied. The conditions are that the remaining non-preferential creditors agree to a reduction in their claims to 80% of the amount presently due; that payment is postponed for three months and that interest during the three months is waived. Stayhome Ltd offers a guarantee to lend Social Distancing Ltd a further GH¢50,000,000 to meet payments at the end of the three months if this proves necessary. The bank is confident that Stayhome Ltd has the funds available. The existing shareholders of Social Distancing Ltd are prepared to co-operate in the issue of shares under either of proposals (2) or (3). Under those proposal bad debts and valueless, contracts would be written off and preferential creditors would be paid immediately. The bank overdraft would be frozen (at the appropriately adjusted level) and a new bank account opened for subsequent transactions. Assume for convenience that an adopted proposal would be implemented immediately on 28th February 2019. Ignore liquidation or reconstruction expenses. Required; (a) Determine the amount the bank would receive under the first proposal if the information given improves accurate. (b) Show the journal Entries under the second proposal and prepare a Statement of Financial Position for Social Distancing Ltd at 28th February 2019, after making appropriate provisions on the assumption that the company will continue to trade. (c) Show the journal Entries under the second proposal and prepare a Statement of Financial Position for Social Distancing Ltd at 28th February 2019, after making appropriate provisions on the assumption that the company will continue to trade. (d) Consider the relative merits of the three proposals from the bank's viewpoint, and draw your conclusion