Reference no: EM133229787
Issue 1:
The company since January 2021 has been losing money on housing contracts due to the increase in building materials, the labour shortage and the nature of the contracts with customers. Currently to complete 58 housing contracts the company would make a loss of $3,653,000 in total. The reason for this was that these contracts were fixed price contracts and did not envisage the impact of COVID on supplies and labour.
The financial statements prepared by Li show that this would result in the company for the year ended 30 June 2022 making a trading loss of $11,200,000.
Other factors attributing to the estimated loss are rental costs, operating expenses and the cost of funding the construction of a new head office building in Mitcham.
The company currently has retained earnings as at 1 July 2021 of $15,864,372 and after the estimated trading losses of $11,200,000 for 30 June 2022, this would leave Metrix with accumulated profits of $4,664,372. Metrix is also facing pressure from its contractors to pay them for their materials and services. The outstanding creditors are $18,328,789. Some are secured over the new head office, building supplies but many are unsecured.
The shareholders funds of Metrix consist of:
Authorised share capital (ordinary) $12,000,000
A class preference shareholders $8,000,000
Retained earnings $4,664,372
Total shareholders funds of the Metrix as at 30 June 2022: $24,664,372
The directors are mindful of the need to retain funds for working capital and estimate the company needs working capital of at least $6,500,000.
Issues they seek advice on:
- Is there a profit at law from which the directors of Metrix can pay a dividend if they wish to do so? The board of directors of Metrix has had a history in the past of paying dividends each year of approximately 15% of the retained earnings of the company at the end of the year.
- If they do decide to pay a dividend of 15% of retained earnings, would you recommend it or not?