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Fundamental
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0% found this document useful (0 votes)
107 views34 pagesInternal Reconstruction
Fundamental
Uploaded by
Yash SonkarCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
/ 34
of quite different
F nat
qeabjestives of reconstruction are not Jams Compared to amalgamation and mergers.
the same :
ital structure of a company is overeapitaltg co of business combination. Whenever
aust be written off or assets have been shong any has incurred heavy losses and
ponstructiON step is followed/adopted to roma the abere ates higher than required, then
defects as well as to reorganise the
Sconstruction’ is used for reorganisation or
e u ness unit. Really speaking, reconstruction is a
F smorhensivet a spd te Site and preci e definition can be given. In a broader sense,
a er dors right and inten eere’s the significant changes in company law, or changes
shareholders right and interests, or changes in the rights and interests of debonturcholdess
onpanys financial structure. Thus the term ‘r
Reconstruction may be of two types :
(a) Internal Reconstruction
() External Reconstruction
INTERNAL RECONSTRUCTION
_When the prescribed scheme of financial arrangement Keeps intact the entity of the
sisting company. i.e., neither a new company is formed nor the existing company goes into
Iqudation, ‘then it is called internal reconstruction. Thus in internal reconstruction, the
‘ettive of reorganisation is achieved without going into the process of liquidation. It means
‘tlemal Teconstruction and reorganisation are synonymous in use. The following are included
‘internal reconstruction :
(1) Alternation in share capital
@) Reduction in share capital
*Atration in Share Copitl ith alternation of share capital. It may
Sections anies Act, 2013 deal with alternation of sl al. It may
We the frm ‘of feos fosue af new shares, conversion of filly paid shares with stock,
3 tion BER ened capital consolidation of existing shares, sub-division of existing shares.
Pa Capital by making fresh issue : When a company needs additional
ital ang cane lt Share Capital By Me iy issued, then it may increase its authorised capital
ing ntl existing shares are being He nereased by the issue of such new shares. The
faye ew shares, The share capital AY Oo Tigsue of such shares must first be made to
Aging ction in this regard is that of6F Or. joldings unless the company has decided
Aberpigs tuity shareholders in proporti"h © dinary resolution approved by the Central
Gree BY special resolution OF 1 oqat 15 cays period to decide as to purchase
| nop ment. Each shareholder must be re 1. Ifa shareholder fails to exercise his/her option
ith @PUrChase new shares offered to HOT rag 4g isste such shares
‘hat period, the Board of Directors & SAHITYA BHAWAN PUBLICATIONS
38 sanity BHAWAN P a
eae a informed within 30 days of passin, ,
ae 7 be i
The Registrar of the company must ing entries in respect of j
for increasing the authorized capital. Book-keeping en! :
jginal issue. The expenses incury,
are the same as being done in the case i eae Nee cen Spe nr
issue of new shares are debited to an account kno © Acct
is dealt with as preliminary expenses. : ; a.
(b) Converaon of ‘Shaves ee Stock and vie bere aes UD Shares
converted into stock. Similarly stock can be Fae eee eater vonvertin ae dives
equal and sequential parts arid therefore the shareholder AST nveetina shar
have a definite portion of share capital and not any de! nite number of shares,
shares into stock must be conveyed to the company registrar within & month, ry,
Companies Act relating to shares do not apply to share capil - eave With sto,
is also recorded in the Members’ register of the company and then the amount of s,.,
the number of shares is recorded against the name of the shareholder. The folloy,
passed in the books when shares are converted into stock :
Ue of ly
Equity Share Capital A/c ... wDr.
To Equity Stock A/c
Or
Equity Stock A/e --Dr. | on Conversion of Stock Shares
To Equity Share Capital A/e
(©) Cancellation of Unissued Shares : A company has right to cancel all those
have not been issued on a particular date or whose issue has not been promised to
‘The prime objective of this cancellation is to get rid of unnecessary rights and dutie.
with these shares. Legally speaking, such cancellation of shares does not amount to
in capital in the eye of law; but the capital is depreciated by this process. Wh
resolution in respect of such cancellation of shares, the authorized capital be
amount of such shares. No entries are passed in the books of account in respect of
of shares,
() Consolidation of shares of smaller denomination into shares of higher den
A company has right to divide its share capital by consolidating shares of smaller de
into shares of higher denomination. This does not result into change of paid up cap
number of shares is reduced. If the shares are not fully paid i.e, all calls have n
then it must be taken into account that after consolidation, the ratio between pai:
and nominal value should remain the same as it was before consolidation, For
shares’ face value is 100 and only 80 per share is paid and now these shares are cot:
into 1,000 shares, then @ 800 shall be taken as paid-up, Entry is to be pa
Just for closing the old share capital account and opening the new share capital acco
on the basis of above example :
% 100 Share Capital A/c
will not change but the number of shares will increas
attract small investors. The entry will be the same ae
‘Note: In both (@) and (e) cases, necessary modifications are alan ma
Illustration 1
e. This step. is taken to m0
mentioned in (d) above.
ide in the Member's Register.
ed capit peat, ;
which 3,000 shares were issued and fully paid Up. In Sede 2018 ivided into shares of € ie wal
issued shares in stock, But in September 2014 the company mer vos the company decided (0%)
fally paid up. 'ny Teconverted the stock into share
Pass entries and show how share eapital will appear in alates Shastry 9; ¢g0reerd
as at 31.3.20148 RECONSTRUCTION OF COMPANIES
solution 1 Journal Entries
Particulars
Equity Share Capital A/c Dr.
‘To Equity Stock A/c >
Being conversion of 3,000 fully paid shares of. each int
f 100 each into ¢ 3,00,000
‘Equity Stock Ave
‘To Equity Share Capital A/c |
(Being conversion of & 3,00,000 stock into 30,000 shares of ¥ 10 each fully |
Dr.
paid up)
Balance Sheet (Equity and Liabilities side only)
‘As at 31.3.2014 =,
Share Capital :
Authorized : 5,000 Equity Shares off 100 each
Issued : Equity Stock
As at 31.3.2015
‘Share Capital :
Authorized : 5,000 Equity Shares of @ 100 5,00,000
Issued : 30,000 Equity Shares of 10 each fully paid '3,00,000_
Illustration 2
On 31st March, 2012, B Ltd. had authorized capital of ¢ 2,00,000 into shares of ¢ 10 each. All shares
were issued'on which % 8 were paid up. In September 2012 the company in general meeting decided to
subdivide each share into two shares of ¢ 5 each, ¢ 4 paid up. In September 2013 the company in general
meeting resolved to consolidate 20 shares of ¢ 5, ¢ 4 paid up into one ¢ 100 shares, % 80 paid up.
Pass entries and show how Share Capital will appear in Balance Sheets as on 31.3.2013 and 31.3.2014,
(Purvanchal, 2014)
Share Capital A/c
1 P90, 000 exquity shares of 10 into 40,000 equity shares
Solution 2
Journal Entries
= Dev] Gr
be Particulars LF | amount | Amount
a =F reaper ee
pee eo rr 60,
ept. | € 10 Equity Share Capital A/c | | 1,60,000
of € 5, 4 paid up)
2013 |¥5 Equity Share Capital A/e Dr 3,60,000
|
|
1,60,000
Sey To = 100 Equit are Capital A/c
PE oe Oe INE, PIS eal sharon of 5,24 pad int 2,000 enuity|
shares of € 100, ¢ 80 paid up)
Balance Sheet
(Equity and Liabilities side only)
‘As at 31.3.2013 =
Share Capital :
Authorized : 40,000 Equity Shares of 7 5 each
Issued : 40,000 Equity Shares of f 5 each, 7 4 paid up
As at 31.3.2014
Share Capital :
Authorized : 2,000 Equity Shares of % 100 each
Issued ,000 Equity Shares of € 100 each, ¢ 80 paid up a SAHITYA BHAWAN PUBLICATIONS
2. Reduction of Share Capital i
Section 66 of Companies Act, 2013 contains the
capital as follows : r
S 1 Protudare of Reduction of Share Capital ; (A) to (E) steps helow are included ;
(A) Power of Company to reduce ite share capital in different manners; Subject 4.
confirmation by the National Company Law Tribunal on an application by the’ compagy
company limited by shares or limited by guarantee and having a sbare capital may req.
share capital, by passing a special resolution, in any manner and in particular in the foll
manners ; + i; “i
(a) It may extinguish or reduce the liability on any of its shares in respect of th,
capital not paid-up; or ie 4 <
(b) Either with or without extinguishing or reducing liability on any of its shares +
may cancel any paid-up share capital which is lost or is unrepresented by available ag,
Gi) it may pay off any paid-up share capital which is in excess of the wants of the com,
Thereafter, it may alter its Memorandum of Association and reduce the amount. of its g
capital and of its shares accordingly. 4
However, no such reduction shall be made if the company is in arrears in the repayn
of any deposits accepted by it, either before or after the commencement of the Companies 4a.
2013, or the interest payable thereon.
‘B) Tribunal notice to invite representations (objections) : When a company m:
application to the Tribunal for reduction of its share capital, then the Tribunal shall give net
of every application to the Central Government, Registrar, and to the Securities and
Board (SEBD in the case of listed companies, and to the creditors of the company. Then, i
‘Tribunal shall take into consideration the representation, if any, made to it by that overs:
ment, Registrar, the Securities and Exchange Board, and the creditors within a period of three.
months from the date of receipt of the notice. However, where no representation has
received from them within the said period, the Tribunal shall presume that they hat
objection to the reduction of share capital by the company. a
(C) Confirmation order by Tribunal : If the Tribunal is satisfied that the debt or claim |
every creditor of the company has been discharged or determined or has been secured or
consent is obtained, then it may make an order confirming the reduction of share capital
such terms and conditions as it deems fit. However, no application for reduction of share ea
shall be sanctioned by the Tribunal unless the accounti:
provisions in regard to reductign
examination of the recommendations made by the
any other provision of the Companies Act, 2013 and a certificate to that effect by the Company
auditor has been filed with the Tribunal.
(@) Publishing of confirmation order of the Tribunal : The order of confirmation of
reduction of share capital by the Tribunal shall be published by the company in such
as the Tribunal may direct. If a company fails to comply with this direction, it shell
punishable with fine which shall not be less than ® 5 lakh but which may extend vo € 251
(E) Delivering a certified copy of Tribunals Confirmation Order to the Registrat (TH
company shall deliver a certified copy of the order of the Tribunal confirming the reduction
share capital and a minute approved by the Tribunal showing : (a) the amount of share capil!
(b) the number of shares into which it is divided, (c) the a : (q) the
within 30 days of the receipt of the copy of th
same and issue a certificate to that effect, RECONSTRUCTION OF COMPANIES 341
ee h, = -
~~ ay be noted that nothing mentioned above shall apply to buy-back of its own securities
ON member liable to any call or contribution : A member of the company, past or
, shall not be liable to any call or contribution in respect of any share held by him
eon the saount of sifference betwen the amount paid on the share, or reduced amount
* e been paid tl
a a ks Se onlece been paid thereon (as the case may be), and the amount of the
oo Liability of members to pay debt or claim of a creditor entitled to object but whose name
anot entered on the list of creditors : Where the name of any creditor entitled to object to
suction of share capital is not entered on the list of creditors by reason of his ignorance of
a proceedings for reduction or of their nature and effect with respect to his debtor claim, and
such reduction, the company is unable to pay the amount of his debt or claim (when it is
the process of ‘winding up’ by the Tribunal), then :
{a) every person who is a member of the company on the date of the registration of the
xier for reduction by the Registrar, shall be liable to contribute to the payment of that debt
asim, an amount not exceeding the amount which he would have been liable to contribute
zthe company has commenced winding up on the day immediately before the said date; and
(b)if the company is wound up and any such creditor makes an application to the Tribunal
sing with proof of his ignorance as aforesaid, then the Tribunal if it thinks fit, may settle a
ixt of persons so liable to contribute and make and enforce calls and orders to the contributories
xitled on the list, as if they were ordinary contributories in a winding up.
Nothing in (3) above shall affect the rights of the contributories among themselves.
4. Liability of the guilty officer of the company : If any officer of the company commits any
d{the following offences, he shall be liable under section 447 for being guilty of fraud and shall
fepunishable with imprisonment for a term which shall not be less than six months but which
nay extend to 10 years and shall also be liable to fine which shall not be less than the amount
avolved in the fraud but which may extend to three times the amount involved in the fraud,
towever, where the fraud in question involves public interest, the term of imprisonment shall
mt be less than three years :
(a) if the officer knowingly conceals the name of any creditor entitled to object to the
reduction;
()if the officer knowingly misrepresents the nature or amount of the debt or claim of any
editor; or
(if the officer abets (assists or encourages) or is privy (participates in the shared secret
tovledge) to any such concealment or misrepresentation as aforesaid. :
Entries in the Books
(@ When uncalled amount is cancelled/paid up capital is not affected; only partly paid up.
Sares become fully paid shares. In this case no entry in the books is required. By the way, the
mg entry may be passed :
Share Capital A/c (Partly paid) me wDr.
_. ‘To Share Capital A/c (Fully paid)
® Return of a portion of paid up capital to shareholder :
(a) Share Capital A/c Dr.
To Sundry Shareholders’ A/e
() Sundry Shareholders’ A/c “2 _Dr.
To Bank A/c : ;
experts are of the opinion that the payment of share capital should not be directly
olders but it should be through a specific account ‘Capital Reduction Account’.
ame a ITYA BHAWAN PUBLICATIONS
In that case, Capital Reduction Account shall be debited/credited in place of
shareholders.
(©) The general reserve or credit balance of Statement of P & L related to share
being reduced should be transferred to Capital Reduction Account or Capital Reserve .
(d) The Capital Redemption Account and Security Premium Account of the companys
also be reduced in the same way as share capital. ‘ Os
(ii) When capital reduction is in the form of writing off paid-up capital which ig jog,
(a) Share Capital A/c wee ter. ‘
To Capital Reduction A/e (By the amount of reduction).
or (b) If the writing off paid up capital results into total changes in the details of g
old share capital account be closed and new share capital account be opened and the dif,
between the two should be transferred to capital reduction account. As such :
Old Share Capital A/c a -Dr. (Old amount)
To New Share Capital A/c (New amount)
‘To Capital Reduction A/c (Amount of reduction)
(©) Capital Reduction Account is used to write off several tangible, intangible and fictitious
Capital Reduction A/c Dr.
‘To Statement Profit & Loss (Debit balance)
To Discount on Issue of Debentures A/e
To Preliminary Expenses A/c
To Goodwill Ale
‘To Patents Ale
‘To Other Assets A/e
(iv) Sometimes creditors or debenture holders also agree to sacrifice resulting
reduction in their claims. The amount of such reduction is credited to Capital Reducin
Account. Some Accountants are of the opinion that in the case of sacrifice by
creditors/debentureholders Reorganisation Account or Reconstruction Account should
named in place of Capital Reduction Account. :
(vy) On payment of any contingent liabilit
Capital Reduction A/e Stafige: teDre
To Contingent Liability A/c (Mention the name of liability)
Normal entry for payment shall be made.
(vi) When there is increase in the value of any asset after revaluation :
Assets A/e cctnt ene
To Capital Reduction A/e (Amount of increase) 2s
Notes : (i) Ifthere remains a balance in Capital Reduction Account after writing vari st balance wi
‘transferred to Capital Resorve Account, rains worious aeoete ofc, (hs
(Gi) Other items/events mentioned in the scheme may be recorded sa br pctucsches ene
book-keeping. led on the basis of principles of double
‘A company has a paid up Share Capital of ® 3,20,000 divided into 40, ity Shares of 104
28 per share paid up. The Statement of Profit & Loss shows a ,000 Equity ‘
a es credit balance of Z 1,40,000. al
The company decides to reduce the Paid-up Share Capital to & 6 per share paid up by paying’ ae
necessary amount out of accumulated profits. Give necessary Journal entries, ;
Solution 3 Journal Entries é
]
Dati Particulars Dr.
= = LE. | Amount
Equity Share Capital A/e aE
‘To Equity Shareholders’ A/e :
(Being transfer @ 2 per share on 40,000 shares for repayment) RECONSTRUCTION OF COMPANIES
eat ‘Ghareholders’ A’e 5
[att pank Ale
| pi ent to Eg Shareholders)
v fit&Loss
‘ent of Pro
sialegptal Reserve Ac
Cansfer upon payment of capital)
~
Dr. |
sion 4 \
poate ne a do 000F way Shares of ¥ 100, z 80 per share called up. In September
site et ed Cepitalon 813.2015 shares as fully paid by cancelling unpaid amount
laren rized Capit “ 0 31.3,2013 was & 40,00,000 divided into 40,000 shares of @ 100
a Necessary form ‘es were carried out, Pass entries and show how Share Capital will appear in
er ggni and 313.2014. -
rad €4,00,000 authorized capital divided into 40,000 shares of¢ 10 each. All these shore
eisvodendl were ‘paid to the extent of & 7 per share. The company decided on Sist March, 2014
f-share and to reduce the 10 share o 5 share fully paid up by eancelling unpaid amount
is ,00,000 balance in Statement of P&L (Cr).
fe 8T esan show how Share Capital will appear in BIS on 31.2014
tion 4
2 BOOKS OF X LTD.
a)
Journal Entries
al Particulars F.pe. Amouni[Ce Amount
E s k z
Share Capital A/c (Partly paid up) Dr. 82,00,000
‘To Share Capital Me (Fully paid up) 2,00,000
| cout eancllation of € 20 unpaid amount on 40,000 shares),
‘Balance Sheet (Equity and Liabilities side only)
‘As at 31.3.2013 z
Share Capital :
Juthorized + 40,000 Equity Shares of € 100 each 40,00,000
Issued: 40,000 Equity Shares of ¢ 100 each,
780 paid up 32,00,000
As at 31.3.2014
“50,000 Equity Shares of € 80 each
Issued: 40,000 Equity Shares of #80 each fully paid
BOOKS OF Y LTD.
Journal Entries.
Dr. Cr.
Particulars LBP | amoung | Amount
ee Dr | 80, 000 ©
Share Capital A/c | 80
‘To Shareholders’ A/c | | 80,000
Being eaanter @ 2 on 40,000 shares for repayment) _——--— bani
Shareholders’ A/c ir. 0,000 | ee
‘To Bank Ale 000
rf
Statement of Profit & Loss Dr} 80,000
cae Capital Reserve Alc | 80,000
transfer upon repayment to ‘
Sore Coit Ae ar Py pa) De} | 200008) 2,00,000
c : ,
nade Snare Capital Ne (ully Pat og hares toring thom 8) |
fully paid)
Balance Shoot (iguily and Liabilities File only) (as at 81.3.2014)
C 2
0,000
ae Capital
Ieee tt + 80,000 Shares of @ 5 each A
ued 80,000 Shares of @ 6 each fully pid 4,00,000 34 BLICATIONS
BHAWAN PU!
8
Mlustration 6 :
Below is the Balance Sheot of Satyadeep Co. Ltd. as at 31st March, 2014 ;
Particulars pie hk Rey oe
Share capital
Authorised capital :
10,000 Preference shares of ¢ 100 each
10,000 Equity shares of € 100 each
Issued capital :
7,500 Preference shares of ¥ 100 each fully paid. ’
5,000 Equity share of & 100 each full paid
Reserves and surplus
Statement Profit & loss (Dr. Balance)
Current liabilities :
‘Trade payables
Bank overdraft
TL, ASSETS
Non-current assets :
ied assets:
“Tangible ats
aschold premises
Plant and machinery
Intangible assets :
atents at cost
Current assets :
Inventories
‘Trade receivables
Cash and cash equivalents
Other current assets :
‘Unamortised expenses :
Preliminary expenses
Company proved unsuccessful and following scheme of reconatructi
shares be reduced to an equal number of lly paid shares of 50 each; (ii) 100 Equity shares be :
fo an equal number of fully paid shares of % 25 each; (iii) that the amount thus rendered available for
reduction of the assets is apportioned as follows: Preliminary expenses, Debit Balance of Profit &
be written off entirely; 30,800 off the leasehold premises, 15,000 off the inventories, 20% off the fl
& machinery, trade receivables and the balance available to be written off patents. Pass necessary J
entries and prepare B/S after reconstruction in the books of Satyadeep Co. Ltd,
is passed: (i)% 100 P
Solution 5 Journal Entries
2014 | LE. z
Mar. 31) Preference Share Capital A/c Del
Equity Share Capital A/e aut
‘To Capital Reduction A/c z
(Being the reduction of % 50 por share on 7,500 Pref
ference |
Seen ference Shares and ¥ 75"
per share on
Capital Reduet ae
To Statement of Profit & Loss (Dr. Balanee)
‘To Preliminary Expenses A/c
‘To Leasehold Premisos A/c
‘To Inventories A/c
To Plant & Machinery A/c
‘To Provision for Doubtful Debts A/e
To Patents A/c
ing the amount of eapital reduetion uscd)
B Utd. (and Reduceay
Sat Bist March. sora;
19,000 Preference shares of ¢ 50 eac
10/000 Equity shares of 36%,00,each
Subscribed capital
7,800 Preference shares of ¢ 50 each, fully pai
2688 Baus saa are Ber oO cag filly pasa 2:58:9980
- current tiabiliticn
‘Bank overdrat 20,000
Trade payables
x
Romgurrent assets:
“Gngible assets :
= chold premises 1,30,800
Zess : Written off under reconstruction scheme '30:800 | 1,00,000
lant & machine: 42:200,,
Tass t Wiliten off Under reconstruction scheme _*s490! 33.760
Intangible assets Seeraask
Less! Written off under reconstruction scheme 538,460" 3,14,540
Current assets : cane
Inventories : 000 | iB
Less? Written off under reconstruction scheme —28:898 | 40,000
‘Trade Receivables pia eee
Less * Provision — Beso ‘00.
Cash and cash equiivalents ote
200% 20 — 2 76,500 20 "
S2ORD Saco. Z 15.800,
00
{£750,000 ~ (415,000 + 12,000 + 18,000 + 30,800 15,000 + 8,440 + 18,900) = € 5,95.460.
2800 Pref. Shares = 75,000. . a
8000 iguity Shares ce 25 ¢ 1.86.00: € 6,00,000 equity capital — 1.26,000 = € 3.75.
100~F25 © 75, s
cz. SUMULATIVE PREFERENCE SHARE: :
When a\Company ig running continuously into losses, the dividends payable to cumulative
Hoerenee sharcholders qo on accumulating year-by-year and such arrenrs of dividends are
Ram" 84 contingent Hailinnes io the Balance Sheet. ‘The scheme designed for reduc
) tal may have the following situations in resp t of their claims of dividend arrears.
Preference Shareholders might waive fall amount of their claims of dividend arrears.
righ oltuation, io entry will be pasced im the books OF account, becaue the amount of
arrears is ingent liability and n
a eee of thelr total claims and for the reat
) Prefer may waive a part amoum yn also Since no account has been.
may accope aanerepolatens may owls." Ba unis sitandion also since no account hag beon
edn gReePt debentures, shares or ca sned for the amou Y Pr
dere, ROOks of accounts, no entry shall be pal Will issue debentures, shares
Myhich the company will a “a
‘ders. For ims for wh
: For that part of total claims ‘ SAINTYA BHAWAN PUBLICATIONS
sate
Pay cash; tho following entrios will be passed in the company’s books of accounts 4.)
dount of preference sharos dividends arrears not waived :
(a) Capital Reduction A/c as Dre
‘Yo Preference Share Dividend A/e
(Boing part of Preforonce sharo dividend to be paid to Preference
Shareholders provided out of Capital Reduction Account)
(b) Preference Sharo Dividend A/e o Dr.
To Debeturos A/c
‘To Share Capital A/e
To Cash Ave
(Being Preference shares dividend paid) S :
(iii) Proferonco shareholders may accept debentures, shares or cash for the full amount op
vwir claims of dividond arrears ie., they do not waive any amount. In such a situation, for
holo amount of dividend arrears, the two journal entries as shown in (ii) above shall be pas
‘th books of accounts.
Sometimes it so happens that the company has declared the dividend on preference
ut before its paymont, company has to implement the scheme of reduction in share cay
Ach a case, ‘Proferenco Shnre Dividend Account’ would have been opened in. the compas
doks of accounts and would have been shown in the Balance Sheet on liabilitiés side,
\tuation, if preference sharcholders waive any amount of their arrears of dividends, then;
redit balanco of Preferonce Share Dividend Account shall be reduced by that amount and
dlowing entries will be passed : e
Proference Share Dividend A/c es Dr.
‘To Capital Reduction A/c
(Being claim for preference share dividend renunciated by preference shareholders and profit.
on this account transferred to Capital Reduction Account)
Uustration 6
‘The following is the Balance Sheet of A Ltd. :
a Particulars
EQUITY & LIABILITINS
Shareholders’ funds :
Share capital :
‘Subscribed capital :
20,000 10% Preference shares of t 10 each
a 2,000 Equity shares of 100
eserves and surplu:
Statement oP ‘& L (Dr. balance)
Current liabilities :
‘Trade payables
Rise oat i
get:
mR her fixed ansots
Intangible assets!
foodwill :
Curent onsets: oo
orios ; ;
Hynde recetvablos
Tollowing resolutions were passed and the scheme was duh ibanal:
i Equity Shara of %:100 eich be reduced to fully paid up tae teehee Hees
(ii), 10% Preference Shares of € 10 euch be mduced to 10%, Preference ofz 6 each fully
(iii) Goodwill and debit balance of Profit, & Loss bo fully writton pee Ate Ks
iv) The balance of the amount be used to write off other fixed aseeta,
Give Journal entries and revised Balance Sheet of the eompany, Also prepare Capi
Account, RECONSTRUCTION OF COMPANIES 347
ees TRUOTION OF! COMP, - pgs
Solution 6
Journal Entrios
z z
% 100 Equity Share Capital A/e Dr. 2,00,000
To 60 Equity Share Capital A/c 1,00,000
‘To Capital Reduction A/c 1,00,000
(Being % 100 equity shares reduced to ® 60 per share fully ps
% 10, 10% Preference Share Capital Ale Dr. | 2,00,000 |
‘To ® 6, 10% Preference Share Capital A/c | 1,20,000
‘To Capital Reduction A/c ‘80,000
(Boing % 10 Preference Shares reduced to ® 6 per share fully paid)
Capital Reduction Ale Dr. 1,80,000
‘To Goodwill A/c 50,000
‘To Statement of Profit & Loss (Dr. Balance) 90,000
To Fixed Assets A/c | 40,000
(Being goodwill, losses and fixed assets written off) |
Capital Reduction Account
z ] z
‘To Goodwill Ale 50,000 | By % 100 Equity Share Capital A/c 1,00,000
‘To Statement of P & L (Dr. Balance) 90,000 | By % 10, 10% Preference Share
‘To Fixed Assets A/e 40,000] Capital A/e | 80,000_
1,80,000 [2:80.00
Balance Sheet of A Ltd. (and Reduced)
Particulars
1. EQUITY & LIABILITIES
Shareholders’ funds : |
Share capital :
Subscribed capital :
20,000, 10% Preference shares of * 6 each paid up
2,000 Equity shares of € 50 each fully paid
Current liabilities
‘Trade payables
I. ASSETS
‘Non-current assets (1,80,000 - 40,000)
Current assets :
Inventories
Trade receivables
Mustration 7 :
The following scheme of capital reduction was duly sanctioned by the tribunal :
(i) Equity Shares to be reduced by % 90 cach.
(ii) Preferene shares to be reduced to ? 90 each.
ii ‘holders to waive their outstanding interest. i .
i ons Ce ane 5 paid will be issued for every % 100 of proference dividend which was in
arrear for two years, ‘
(v) Securities preaiun and all intangible assets to be written off.
(Vi) Both types of fixed assets to be reduced proportionately by the balance available. ‘The Balance Sheot of Unwoll Ltd. as at 31at March, 2014 is
Particulars
EQUITY AND LIABILITIES
Shareholders’ funds :
Share capital
3,000, 8% Cumulative pref. sharos of € 100 each:
4,000’ Equity sharos of ¢ 100 each
Reserves and surplus:
Securities promium reserve A
Statement of Profit & loss (Dr. balance)
Non-current liabilities :
6% Debentures:
Current liabilities :
‘Trade payables
Interest on debentures accrued
» ASSETS
Non-current asset:
Tang
ngible assets :
Freehold assets 2,20,000
Less : Dep. "40,000
Machinery £40,000
Less : Dep. HAE S 80,000
Intangible assets :
Goodwill
Patents =
Current assets :
Inventories
‘Trade receivables
Other current assets :
‘Unamortised preliminary expenses
‘You are required to give Journal entries and prepare Balance Sheet after capital reductic
solution 7
Journal Entries
z
% 100 Equity Share Capital A/c Dr 4,00,000
‘To ¥ 10 Equity Share Capital A/e
‘To Capital Reduction Ale
| Being 4,000 Equity Shares of 100 reduced byz90)
100, 8% Cum, Pref. Share Capital Ale De 00 cod
‘To 90, 8% Cum, Pref. Share Capital A/e 00,0
‘To Capital Reduction A/c
| (Being 3,000 Pref. Shares ced by % 10)
6,000)
‘Interest on Debentures Accrued Ale Dr
‘To Debentureholders' A/c :
| (Boing accrued debenture interest transferred to debentureholders’ ale) __|
‘Debentureholders’ A/c ae
‘To Capital Reduction A/e .
(Being accrued interest waived by the debenturcholders)
Capital Reduction Ale eer =
"To Pref, Share Dividend A/e
(Being arrear of Pref. Share Div. for two years brought into account @ for
¥100 one equity of 5)
“Pref. Share Dividend A/c a
"To Equity Share Capital A/c Dr.
| coing anon of Prt Share dvdond pad throu uo of equity aaren
‘Securities Premium Reserve A/c cps
‘To Capital eduction Ae Ir.
| Being fo are-Premium transfered) vy
RECONSTRUCTION OF COMPANIES 349
Fetal Roguetion Ale Dr. 4,983,600 |
(7? Goodwill Ale 34,000
To Patents A/c 44,000
To Preliminary Expenses A/c 64:600
‘To Statement of Profit & Loss (Dr. Balance) 1,71,000
To Freehold Assets A/c ‘60,000
‘To Machinery A/e 1,20,000
_ jesus assets and intangibles assets written off)
lance in Capital Reduction Account for writing off fixed assols is ¥ 180,000, which h sed in the
i ae of 18 : 36 for writing off Frechold Assots and Machinery. Hono, which a ben ned in Ws
‘eltend = Boe
9. Arrear of Dividend = = 3,00,000 x 700 ‘x 2 = % 48,000
share Capital = % 48,000 x a = 2,400
Unwell Ltd. (and Reduced)
Balance Sheet (as at 31st March, 2014)
Particulars eamoue
ITY AND LIABILITIES
Tee reholdersfunds : z
Share capital :
3,000, 8% Cum. pref. share capital of ¢ 90 each 2,70,000
4,000 Equity shares of ¢ 10 eael 40,000
480 Equity shares of € 5 2,400
| Non-current liabilities
; 6% Debentures 1,00,000
Current liabilities :
; Trade payables
[IL ASSETS z
Non-current assets :
Fised assets
‘Tangible assets :
Freehold assets 1,20,000
‘Machinery 2;40,000
Current assets : 50.006
Inventories 20008
‘Trade receivables [eoeoeee
4,52,400
| Mustration 8
‘The Balance Sheet of R & Co. Ltd., as at 31st March, 2014 was as follows :
Balance Sheet
Particulars ‘Amount
z,
| kqurry AND LIABILITIES
Starehodere’funds :
hare capital :
4,000, 6% Preference shares of € 10 each fully paid 6,40,000
1,92,000 Equity shares of @ 5 each fully paid 9,60,000
ves and surplus :
Statement of P. & L. 2,88,000) |
‘Add : General reserve ~3:200 | (2,84,800)
Non-ew ae
Gs Se Debs 3,84,000
‘rent liabilities : on
le payables peeepoma: SOs. fer SAHITYA BHAWAN PUBLICATIONS
Il. ASSETS
Non-current assets :
Fixed assets :
Tangible assest :
‘Land & building
Plant & machinery
Intangible assets :
Goodwill
Current assets :
Inventories
Trade receivables :
Debtors
Bills Receivable
Cash & cash equivalents
overvalued to the following extent :
Land and Building by ¥ 1,28,000 and Plant & Machinery by @ 1,76,000. A provision for doubtfu
to the extent of 16,000 was necessary.
"The following scheme of reorganisation was sanctioned by the tribunal :
(a) The trade payables to accept 6% debentures to the extent of 60 per cent of their claims, the
to be paid in cash six months after the date.
(b) The preference shares to be reduced to ¥ 5 each paid up.
(©) The equity shares to be reduced to f 1 each paid up.
(@) The assets to be reduced to the revalued figures and the debit balance of Statement of
Loss to be wiped out. 3
‘Draft journal entries to give effect to the above scheme and prepare the revised Balance Sheet 0
company. e
Solution 8
Journal Entries
z
Creditors’ Ale Dr. 8,20,000
‘To 6% Debentures A/c
10, 6% Preference Share Capital A/e Dr. 6,40,000
‘To 5, 6% Preference Share Capital A/c
‘To Capital Reduction A/c
(Being € 10 preference shares reduced to® Seach)
= 5 Equity Share Capital A/c zi Dr | 960,000
‘To % 1 Equity Share Capital A/c :
"To Capital Reduction A/c 2 ‘
(Being ¢ 5 equity shares reduced to @ 1).
General Reserve A/e
To Capital Reduction A/c
(Being General Reserve transferred to Capital Reduction A/c)
Capital Reduction A/e Z Dr. 10,91,200
"To Goodwill A/e
‘To Statement of Profit & Loss (Dr, Balance)
‘To Land & Building Ale
- ‘To Plant & Machinery A/c
‘To Provision for D/D A/c '
‘To Capital Reserve A/c
(Being losses and assets written off as per acheme)
Re ,000 Equity shares of 1 pai
es and surplus : Paid up
1,92,000 |
16,000 | 1,76,000
ruction of a company, the following terms were agreed upon :
receive in lieu of their present holding (viz., 50,000 shares of % 10 each) the
d equity shares equal to 2/5th of their holding. :
shares, fully paid, to the extent of 1/5th of the above new Equity shares.
0, 6% second debentu1
pgcecond debentures. made and allotted, payment for the same have been
5 3 was
$0,000, 52 first deat ¢ 300,000 was written down to €1,50,000 The plant and
‘at & 1,00,000 was written down to t 75,000. The freehold and leasehold premises
50,000 were written down to €1,25,000, Make necessary journal entries in the books of
,f (Avadh, 2014; Patna, 2014)
z
2,00,000 Journal Entries
=:
Samet in a Talbieke
0 Equity Share Capital le
TOBE Prat Share Capital Ale |
‘To 6% Second Debentures Ae
‘To Capital Reduction Ale
cing cancellation of old share capital by issue of new Equity Shares, Pref,
Shat 3
ank Ale 50,000
20 5% First Debentures Ne
issue of 6% First Dobonturos) |
pital Reduction Ae Dr. 2,00,000
‘0 Goodwill A/e
To Plant & Machinery A/e
‘To Frechold & Leasehold Premises A/c
3eing values of various asseta written off)
tion 10
ywing is the Balance Sheet of R Ltd. as at 31st March, 2014 :
Particulars
(TY & LIABILITIES
2,000 Prof. shares of 100 bach
4,000 Equity shares of € 100 each
Reserves and surplus :
Statement of P & L (Dr. balance)
current liabilities :
5% Mortgage debentures
ent liabilities :
Bank overdraft
‘Trade payables
ETS
vaurrent aneete
Fixed assets
‘Tangible assots :
omises
‘Machinery
Intangible assets :
odwill
Inventories
‘Trade receivables
ie company got the following scheme approved by the tribunal - ae
).. The preference shares to be reduced to % 75 per share fully paid up, Equity shares to€S1%
i) The debenturcholders took over the inventories and trade receivables in full satisfaction
amount due to them. _ ite
i) The goodwill account is to be eliminated.
1) The premises is to be depreciated by 50%.
)). The value of the machinery is to be increased by ¥ 60,000, e
ass the entries in the Journal for the above and propare revised Balance Sheot.
jon 10
Journal Entries
0 Pref. Share Capital A/c i
ete Pref, Share Capital A/c Dr. 2,00,000
ital luction A/c
(Boing ¢ S60 Prof sharon reduced fo 75) ig Share Capital Ne ~
ie ee Equity Share are Capital Ae
pital Reduction
Bhai shares iced toy 3265 ] 1,50,000
a ie Debentures Ao ey
on Inventories A/c Dr. 1,00,000 |
Te rade Receivables A/c mY 050i
Fe Capital Reduction Ale | 40,000
ToC tpentureholders acco
oa ied Tnventores and Trade Receivables in ull eee
riscsneny ‘ital Reduction A/c Dr. 50,000 |
pring value of machine inreased) | 60,000
3,60,000
; 45,000
sment of Profit & Loss (Dr. 1,00,
ean assete ition of)® O* Balance) Le 45,000
R Ltd. (and Reduced)
Balance Sheet (Revised) 3
Particulars z
LIABILITIES
funds |
SH 99 Bret shares of@ 75 each fl paid | 150,000
4 00 Haity shares of 37.50 each 1'50,000
i | _ 50,000
~ Detalns Sheet of Durbhagya Ltd. as at 31st March, 2014 is as under :
hE Particulars
ital :
ference shares of 10 each
‘Shares of € 10 each
‘surplus :
it of P&L ‘under:
inventories proportionately.
Solution 11 Journal Entries
A scheme of reconstruction diily approved by the tribunal and implemented by the com,
(a) Each & 10 7% Debentures be exchanged for one % 5 10% Debentures; one new 10% :
Shares of 7 2.50 and one new Equity Share of € 2.50 each. 3
(b) The preference shares (7%) are to be reduced to © 3.75 of which % 1.75 will be repre
new equity shares and ¥ 2 by new 10% Preference Shares.
(c) Equity Shares are to be reduced to % 2.50 each. “i =
(a) Both Preference Shares and Equity Shares are to be consolidated into shares of ? 10
‘The Capital Reduction Account, after writing off losses is to be used in writing off fixed asset
Give Journal entries and prepare the revised Balance Sheet of the company.
| zt
7% Debentures A/c Dr. | 8,000
To Debentureholders’ A/c ~
(Being transfer for conversion)
Debentureholders A/e
‘To 10% Debentures A/c ( 5)
To 10% Pref. Share Capital A/c ( 2.50)
‘To Equity Share Capital A/c (€ 2.50)
(Being allotment ate.) |
‘l% Preference Share Capital Ale @ 1
To 10% Pref. Share Capital A/c (@ 2)
To Equity Share Capital A/c (@ 1.75)
‘To Capital Reduction A/e
(Being 1,600, 10% pref. shares of % 2 paid up and 1,600 equity shares of €
1.75 paid allotted in lieu of 7% pref shares) :
10 Equity Share Capital A/e Dr. 40,000
‘To % 2.50 Equity Share Capital A/c °
‘To Capital Reduction A/c
(Being 4,000 new equity shares of Z 2.50 each allotted to the holders of ¥ 10
equity shares)
General Reserve A/e Dr
To Capital Reduction A/e
Being balance transferred to Capital Reduction A/c)
10% Pref. Share Capital A/c (€ 2) Dr. 3,200
10% Pref. Share Capital A/c (& 2.50) Dr. 2,000
To 10% Pref. Share Capital A/c (% 10) |
(Being consolidation of Pref. shares of 2 and % 2.50 into % 10) 4
‘Equity Share Capital A/c ( 1.75) Dr. 2,800
Equity Share Capital A/c (& 2.50) Dr. 12,000.
‘To Equity Share Capital A/c (¢ 10)
Being consolidation of Equity shares of % 1.75 & % 2.50 into ¥ 10)
Capital Reduction A/c Dr. 58,140
To Statement of Profit & Loss (Dr. Balance) bee
‘To Fixed Assets A/c ‘
‘To Inventories A/c SOS
(Being losses and other assets written off as per the scheme) c
16,000,
18,140 wre capital +
520, 10% Pref. shares of 10 each
4,480! Equity shares of 10 each
j ws srrent liabilities :
5,200
14,800
4,000
5,584
9,716
18,700
158,140 - ¥ 22,260 = = 35,880
_ ind Assets : Inventories = 18,680 : 32,500 or 1,868 : 3,250 or 934 : 1,625,
2984 1,625
195 880%) B59 7 19,096; 35,880 x 35° = x 20,784
ion 1!
Ondist March, 2014 the Balance Sheet of X Ltd. was as follows :
‘and Inventories will be written off proportionately as bolow?
Particulars
ei =
EQUITY AND LIABILITIES
Shareholders’ funds i
Pen eee _
tuthorised, issued & subscribed :
: 12,000, 7% Cumulative preference shares of € 100 each 12,00,000
it ,20,000 Equity shares of 10 each 22,00,000
Reserves and surplus :
‘Securities premium reserve 3,20,000
, Statement of profit & loss 00,000)
F Curent abit
a 2 3,20,000
[33.40,000-
z
aS it 19,00,000
Building ¥ 5,00,000 depreciation 00,
e Machines ascot bes 1,60,000 depreciation 6,40,000
Relaaeate 240,000
will at cost gaHTTYA-BHAWAN PUBLICATIONS ___
Ast April, 2011,
roar fom proved Capital Reduction Scheme
Dividend on preference shares is an @
‘The following terms wero settled under duly oP rind Equity Shares to 7 5 each ly
® Breines fae G na fa each’ 20 of rss preference share divider,"
(c) The authorised share capital @ de aaa or Prol t & Loss and securitiog Prem
(d) Goodwill, preliminary expenses, de! *mium 4
to be written off. to € 14,80,000.
Siete Vheabove transactions and draw up the Balance Shoot, od
thereafter.
Solution 12 Journal Entries
in
ct
¥ 100, 7% Preference Share Capital A/e
To & 80, 7% Preference Share Capital A/c
‘To Capital Reduction A/c
(Being 12,000 pref. shares reduced to % 80 per share)
% 10 Equity Share Capital A/c Dr.
‘Tot 5 Equity Share Capital Ale
‘To Capital Reduction Ale
(Being & 10 Equity Shares reduced to @ 5)
Capital Reduction A/c Dr. 1,26,000
‘To Pref. Share Dividend Ale uy
Being arrear of Pref. Dividend provided @ one equity share of % 5 for % 10]
share dividend)
Pref. Share Dividend Ale Dr. 1,26,000
‘To ® 5 Equity Share Capital Ale 1s
Being issue of Equity Shares for Pref. Share Dividend)
Securities Premium Reserve A/e Dr. 3,20,000
To Capital Reduction Ae
(Being securities premium transferred)
Capital Reduction A/e Dr.
‘To Goodwill Ale
‘To Preliminary Expenses A/e
To Statement of Profit & Loss
To Building A/e
To Capital Reserve A/c
16,34,000
a 7
Arrear of Dividend = 12,00,000x 1 x= 2,50,000
Share Capital = ¢2,52,000 x-5-=2 1,26,000,
X Ltd. (and Reduced)
Balance Sheet (as at 81st March, 2014)
Particulars
TRS aa ee hgh Re eee
‘Shareholders’ funds :
Share capital :
Authorized :
15,000, 7% Cum, Preference sh,
4,40,000 Equity shares oft 5 ea 6 20 sich
ested, & subscribed ;
,000, 7% Cum,
2éd.oGo Ben Petrone hares
ares of 5 ach * 80 each COMPANIES 357
gand surplus : :
Fee reserve
jabuities
ovritgs payables
RECONSTRUCTION oF
gio:
i s ts >
pe Nee ised oS ble assets :
Buildings
Machinery less Dep.
Particulars
"AND LIABILITIES
‘Shareholders’ funds =
‘Share capital
it3% Cumulative preference shares of ¥ 100 each | 1,00,000
Equity shares of 10 each 700,000
‘and surplus :
Sstatemont of Profit & loss (Dr. balance) | (3,00,000)
3,00,000
|
| 39,00,000
|_3,00,000
15,00,000
35,00,000
- The ollowing scheme of reorganisation is sanctioned :
| OFzed assets are to be written down by 933%.
t) Current assets
5 1 & 27,00,000. +
lid Prefers aets are to be revalvied vt arogo their right to arrears of dividend which are in arrears
> (Ta Mabini
ili is settled at ® 4,00,000. ? :
One oes ne ocd ee Je cote an fo whom company owes £ 25,00,000 decides to forego
hi aie ee oa eso oa aquity shares of 6 each in part catisfaction of the baleinee of hie
sed to 11%, The debontureholders surrender their existing
Pesce 100 each ent oxchenge tne aamo for fresh debentures of € 75 each
baa mtg equity shares are reduced to f f each
aes ut Preference shares are reduced to 75 each, a oa ete ae
loumal entries and show the Balance Sheet of the company theaters, Solution 13 Journal Entrice
Date Particuta | Amount
z
| 7,00,000
Equity Share eo ‘Ne (? 10)
Equity Share Capital A/c (® 5)
To Capital Reduction Wo
(Being conversion of equity share capital oft abl into 6).
13% Cum. Pref, Share Capital Ae (® 100)
"To 1% Cuma Brak Shoe ‘Capital Ave te 75)
To Capital Reduction Ve
[@eing Sonversion of af 100 Bree, Paros inl R15).
8% Debentures Ale
‘To 11% Debentures A/c
‘To Capital Reduction A/c
|-CBeing conversion of £100 debentures into €.76)—__________]
Creditors A/e Pr.
To cee Share Capital Ale (@ 8)
a juction
tors foregoing 60% of his claim and allotted 1,00,000 shares of 6) | 3
Capi Reduction A/c Dr. 17,00,000
Statement of Profit & Loss (Dr. Balance) F
‘To Fixed Assots
‘To Currant Ascets Ale
‘To Provision for Tax A/c
(Being capital reduciton utilised),
Balance Sheet of Fatigue (and reduced)
Particulars
100,000
8,00,000
17,50,000
Bqus Tee ate 8 full id
oft
h pret ‘shares of ay ee
Short-term provisions :
Provision for tax
IL. ASSETS.
‘Non-current assets : <8
Fixed assets 10,00¢
Current assets 27,001
37,00)
fote: (1) Since arrears of dividend have not been shown in ies ctl
x capital reduction account. Recounts, foregoing of the same has not bea
(2) Out of & 25,00,000 creditars,€ 12,60,000 has boon foregone. Of the payables!
sted 03.000 form fo sare Pan 00 hea heey chic eae
(8) Debentureholders have sacrificed € 75,000 i., 3,000"
Illustration 14
The Balance Sheet of Depression Ltd. as at 90th September,
Particulars
2014 was as under:
L JUITY AND LIABILITIES
Bevanotders finde :
Share capital :
‘Authorized capital
50,000, 6% Cumulative preference.
100,000 Equity shares of€ 6 each
ee EGE
shares of 10 each,
ee a RECONSTRUCTION oF
cedeapital: RANTES ate
£80,000 Equity shares or ® 5 cache Syren of © 10 cach
pe ee see-ce
onesies, aakooh
a 1,50,000
17ST entonzets :
Fr. caoete
Te Patt tang
Dacian, fe gaa
ae 282.088
ae oe
es 25.000
er
See es ay x98099
Bee ante 55,398
‘oie The Preference dividend is in arrear for years, Application waa mada to the tribunal on Bist October,
\tsnd sanction (operative as from 30th Sept.) was obtained *
{| To reduce the preference shares to shares of @ 8 each fully paid.
2 To satisfy the arrears of dividends on Preference Shares by giving them 5 per cent deposit certificates
maturing at the ond of two years for 20,000,
3, To reduce the equity shares to shares of ¥ 2.50 cach T 1.25 paid-up and to increase the authorized equity
share capital to 1,20,000 shares of € 2.5 each.
4. To write off Goodwill and to reduce tho value of the Plant and Machinery by £ 25,000 and to write off the
‘Trade Receivables of the value of € 25,000 which were regarded a8 bad.
8, To appreciate land and building by € 20,000.
7. To consolidate all shares into shares of € 10 each.
Show the journal entries required to record the effect of the order of the tribunal and to draw up an amended
Sheet.
14 Journal Entries
me
Particulars oF | ami | a
5 =
0= Cumulative Praf, Share Capital Ne br 1.0,008
To Cay haction A/e | 1,00,000
ing 56,600 Cumulative Preference Shares of< 10 each reduced to8S.each)| |
Capital Reduction A/c ‘Dr. 80,000] s00
Memer eee Aided Me aan :
; are dividend 7 30,000 became due)
a Preference Share Dividend A/e Pe 30,000 s0L008
To Deposit Certificates A/c ae | a0
ing Issue of deposit certificates in satisfaction of pref. share divi De a/001b008
Equity Share Capital A/c 00 aden
no Capital Reduction A/c id onverted into & 2.50
Serer A 9 one 5.76 nid wn
Tae aS pelea a] | ai000
cwa2? Capital Reduction Ale : ae
ing increase in value of land ete.) NS.
HAWAN PUBLICATIO
a i
T Gapital Reduction A/e
| To Goodwill A/e
| To Plant and Machinery A/e
| ToTTrnde Receivables Ne
To Statement of Profit & Late scsarpeanee of Profit & Loss written
| (Being various assets written down an
LD a ee et
| Capital Reduction A/c
| To Capital Reserve Alc
3eing balance transferred) s De
£8, 6% Cumulative Preference Share Gapital A/e |
\ cannes mi f 7 er t
sS iE jon of st oe
/¥ 2, 50 Equity Share Capital Ale
"Tot 10 Equity Share Capital A/e
| (Being consolidation of shares in t 10)
Balance Sheet (and Reduced)
(as at 30th September, 2014)
Particulars
Share :
Authorized capital :
40,000, 6% Cumulative pref. shares of 10 each
30,000 Equity shares of 10 each
Issued capital :
40,000, 6% Cumulative pref. shares of % 10 each
10,000 Equity shares of € 10 each
Reserves and surplus :
Capital reserve
Non-current liabilities :
Deposit:
stm
ASSETS
‘Non-current assets :
Fized assets :
assets :
Land and building
Plant and machinery
Current assets :
Inventories
‘Trade receivables
Cash & Cash Equivalents
Internal Reconstruction without Reducti
Beeccnee Intarnal Racnatrielion doce pe eee Conn
cularly when internal reconstruction is designed for bri
abilities and capital, Such reconstruction involves
G) Changes in the rights of several types of shi
(ii) Compromises with creditors;
Gii) Conversion of liabilities into debentures
Gv) Conversion of debentures into equity shi
areholders;
and shares;
Tequire reduction of share f
inging coordination hetwee®
the following elements;
‘ares or preference shares;
capital RECO!
rey TRUCTION OF COMPANIES 361
go of bonus shares i.c., capitalisati ; >
; Ne rrease/decrease in authorized capital, eee
(vi) 19 ng entries on the basis of principi
pri
peor featubak of ach acho of Double Entry Book-keeping are passed
698 tion 15
jotta Sheet of Shobha Ltd. is given below :
Particulars
capital
‘Shart 500, 8% Preference shares of f 10 each
ooo Bquity shares of € 10 each
eserves and surplus :
General reserve
current liabilities :
| Nerpank loan
current liabilities:
‘Trade payables
ASSETS —
Non-current assets :
Fixed assets :
‘Tangible assets :
‘Land and building
Plant and imachinery
Furniture
Other non-current assets :
Investments
Current assets :
Inventories
‘Trade receivables
Cash & cash equivalents
For the expansion of the company the following scheme of reconstruction was duty passed :
@) ‘The capital of the company be increased to T 1,50,000 divided into 4,000, 6% cumulative
profercnos shares of € 10 each and 44,000 equity shares of € 2.60 each
(i) €140,000 cf the general reserve is to be capitalized by the issue of ¢ 2.50 bonus shares in the
.,. form of equity shares. ‘
i, Bea rene are oho agreo to convert their 8% preference ehares into 7 preference shares of
__ equal number were to be allotted one bonus share of? 2.50 each for every preference share converted.
@) Such shareholders who agree to convert each & 10 equity shares into four % 2.50 equity shares
were to receive a bonus of three ® 2.60 shares for every equity originally held.
©) The remaining equity shares of @ 2.50 are offered to the existing shareholders at a premium of 50%.
D Allthe she ine Oulty ened their option and the amounts die wate fully received. The expenses of
the revised Balance Sheet.
PBoluei cn Bemouinted to © 2,500. ‘Give Journal Entrios and prepar
mn 15
Na of Bouity Bonus Shares = 42'99°-= 16:00
Ht sew Shares issued to Proference Shirt = 0
nce Shareholders IN THE BOOKS OF SHOBHA LTD.
Journal Entries
se Particulars
| 8% Preference Share Capital Ne
| aoZ0 6% Cumulative Pref. Share Capital Ae
ing conversion as per scheme)
TIO Eg ire Capital A/c i
To? 2.50 Equity Share Capital A/e é
(Being convert of 4000 8 10, ‘uty hares into 16,000, 2.50 Equity
Shares) _
General Reserve Ale Pe.
| To Bonus to Shareholders’ Ale
Hiseamnadeatred |
| Bonus to Shareholders Ale Drs
| aed? F 2-50 Equity Share Capital A/e
| Being issue of 16,000 Equity Sharesse per scheme .e,, 4,000 to the holders|
|. of Preference shares and 12,000 to Equity shareholders)
Bank A/c
Dr. |
To % 2.50 Equity Share Capital A/e
‘To Securities Premium Reserve A/e
{Being issue of 12,000 Shares. at a premium of 50%) eS en
Reconstruction Expenses A/c Dr.
|, To Bank Ac
| Being expenses incurred)
Securities Premium Reserve Ale Dr
‘To Reconstruction Expenses Ale
| Being reconstruction expenses written off)
SAHITYA BHAWAN PUBLICATIONS __
Balance Sheet
Particulars
L EQUITY AND ‘LIABILITIES
Shareholders’ funds
Share capital
4,000, 6% Cumulative preference shares of 10 each
44,000 Equity shares of & 2.50 each
and surplus :
Securities premium reserve (15,000 — 2,500)
General reserve (47,000 — 40,000)
‘Non-current liabilities :
Bank loan
_ Current liabilities :
Trade payables
IL ASSETS
Non-current assets :
Fixed assets :
Tangible assets :
Land and building
Plant and machinery
Furniture
Other non-current assets ;
1 Tnvestments
Current assets :
Inventories
Trade receivables
Cash & cash equivalents (2,500 +. 45,000 - 2,500) SAHITYA BHAWAN PUBLICATIONS
‘THEORETICAL QUESTIONS
1. Long Answer Type Questions 4169 How i
1. Under what conditions internal reconstruction becomes desirable ? How is it effecteq ,
2. Whatare the essential features of internal reconstruction poe necessarily inva Carita
3. What is Capital Reduction Account ? When, why and how is it prepared ?
4. What entries are passed in the following cases ?
(a) Increasing Share Capital by creating new shares
(b) Conversion of Shares into Stock
(©) Consolidation of Shares
(@) Sub-division of Shares 4
5. What is meant by Internal Reconstruction of a company? State the cireunstances in ya,
reconstruction becomes necessary.
6. What is Internal Reconstruction? Explain in brief the process of internal reconstruction
7. What accounting entries are passed in the books of the companies at the time of internal er,
8. What is meant by reduction of capital? Give the Journal entries passed in the books of.
the reduction of capital. i
IL. Short Answer Type Questions
1, Whatdo you understand by reconstruction ofa company ? Give in brief the main object orn
2. Differentiate between Internal Reconstruction and External Reconstruction.
PRACTICAL QUESTIONS
1. (@) Girish Ltd. had on 31st March, 2014, 40,000 Equity Shares of @ 10; ¢ 8 per share called; py
September 2014, the Company decided to reduce % 10 shares to % 8 shares as fully peat
cancelling unpaid amount of ® 2 per share. Pass journal entries.
(b) Mahesh Ltd. had ¥ 4,00,000 authorized capital divided into 4,000 shares of ¢ 100
these shares were issued and were paid to the extent of ® 70 per share. The Com
in June 2014 to pay off € 20 per share and to reduce € 100 shares to % 50 shares fully
by cancelling unpaid amount. There was & 1,00,000 balance (credit) in Profit & Lo
necessory Journal entries and show Share Capital Account in the Balance Sheet.
2. On the reconstruction of a company the following conditions were agreed upon :
The shareholders to receive in lieu of their present holding (i.e. 25,000 shares of t 10 <3!
following :
(a) Fully paid Equity shares to 2/5 of their holding,
(b) 5% preference shares, fully paid to the extent of 1/5 of the above new equity shares
© % 30,000, 6% second debentures.
An issue of @ 25,000, 5% first debentures was made and allotted, payment for the same havi
received in cash. The Goodwill, which stood at % 1,50,000 was written down to ¢ 75,000. T'S
and Building, which stood at € 50,000 was written down to ® 37,500. The Plant and Machine"! "|
stood at 75,000, were written down to & 62,500. Give the journal entries in the books of he 02"
on the basis of above description.
Ans. Capital Reduction % 1,00,000,
3, ‘The share capital of Z Ltd. consisted of the following :
(10,000 6% Preference shares of & 100 each; and
Gid 5,000 Equity shares of 10 each, ae
‘The shares were fully paid. By the end of the year, i xtent of
besides preliminary expenses totalling ¢ 20,000. It et egcumelnte! oesasto toor'es :
stood in the books at % 14,00,000 were overvalued to the extent of & 4,00,000. A sche=™
reduction was adopted and approved by the tribunal in order to vemieve the over-all
write off the losses and preliminary expenses, Under the scheme, 6% Preference sb2!
370
al
State the journal entries to be passed on the implementati
Ans, Capital Reduction ® 9,80,000; Transfer to Capital Raeeos wee 00 i rdhorised capital
10,000 Equity shares of ¢ 1
10,000, 6% Pref. shares off 100 eh
Issued and subscribed capital :
6,000 Equity shares fully paid
6,000 Pref. shares fully paid
‘Reserves and surplus :
Statement of Profit and loss
rrent liabilities:
‘Trade payables :
Creditor
Bills payable
| Non-current assets
Fized assets
‘Tangible assets :
Freehold land and building
Machinery
Current assets :
Inventories
Trade receivables :
Debtors
_. Bills receivable
+ Cash & cash equivalents
Other current assets :
Unamortised preliminary expenses
10,00,000
10,00,000
6,00,000
6,00,000
(185,000)
80,000
20,000
100
2,30,000
5,00,000
2,15,000
1,40,000
10,000
5,000
15,000
| 11,15,000_
‘The followiig Scheme was finally accepted and sanctioned by the tribunal
(®) Pref.’ Shares were to be reduced by & 25 each, the rate of dividend being raised to 8%.
©) ‘The paid up value of equity shares was reduced to ® 60 each, the face value remaining the same.
© The amount made available by reduction were uti
285,000 from Inventories, and to create a provision of € 25,000 against Debtors.
‘Ait Journal entries recording the above transactions,
3p Capital Reduction F 3,90,000; Trans!
| int: Preliminary expenses and debit balance of
a mite question. 0
} * The Balance Sheet of Asafal Ltd. on 31st March, 2014 was as follows :
or Particulars
> EQUITY AND LIABILITIES
Shareholders’ funds
Share capital :
Authorised capital :
Asis. 20,000 Shares of 10 each
Paid up capital :
“19,600 Shares of € 10 each
Reserves and surplus
Statement of profit & loss
mqilities :
le
Amar (ihe promoter)
ilised to write off ¥ 40,000 from Machinery,
and draw up the Balance Sheet thereafter.
fer to Capital Reserve A/c % 90,000; Total of B/S % 10,00,000.
if Profit & Loss will be written off, though not asked
1,90,000
(97,000)
10,000
10,000 il, ABSETS
Non-Current aaseta :
ixed aneeta
‘Tangible nasots :
uilding
Machinory
inetmniture
Intangible assets:
Goodwill,
Current assete :
Inventoriox
‘Trade recolvablos
Blocmise of regular Tossos in tho businoss, tho following scheme of reorganining the gy,
prepared : mber of fully paid
(@ The 19,000 sharos oft 10 each are to be reduced to an equal number of fully paid y, ay
each. itten off, the remaining
i) ‘The debt of ¢ 10,000 due to Amar was also to be written off, ing 1,004)
shares bing issued to him ae flly paid up shares of 4 each in fll sttlemen ty,
due to him. : -
(Git 1¢ amount thus rendered available by the reduction of capital and by the above rr,
ath ‘Ammar, isto be utilised in writing off Goodwill and the debit balance of Prt
and in writing down the value of Machinery.
Give Journal entries to implement the above scheme and prepare the Balance Shu. ,
reconstructed company.
Ans. Total of B/S 90,000.
6. Following is the B/S of Subhash Ltd.
Particulars x
1 EQUITY AND LIABILITIES
Shareholders’ funds
Share capital:
4,000, 8% Pref. shares of 10 each
30,000 Equity shares of 10 each
Reserves and aurpl
Statement of P. & L. (Dr. balance)
Current liabilities :
‘Trade payables
TL ASSETS
Non-Current assete:
Fixed aseet
‘Tangible assets :
Building
Machinery
Furniture
Current asset
‘Trade receivables
Other current assets :
Unamortised expenses
balance of Profit & Loss to be written offentirely; x 60,000 off the buildings, % 30,000 off th
© 6,000 off the furniture and the balance avai i P
entries and prepare Balance Sheet aftor ee aa
Ans. BBE 20600% Cop Rauction 396,00; Prt Share Cantal 9g fot! ciysuare Corts"
,000; Equity Share Cai RECONST RUC
— ION OF Com!
JOMPANIES,
“pion ja tho Balanco Shoot of Ramonh Ld, 19 Mareh a78
jow at fareh, 2014 :
Coe Balance Shoot
“ewe Particularn
t Sa drs fen: =p
"Share capital: |
“Authorised Capital : |
20,000, 8% pref. sharon of ¥ 100 ouch
20,000, 10% equity shares of @ 100 wach
‘Subscribed Capital ; Total
16,000, 8% prof shares of 100 each fully paid
. 19 | 15,00,000
Bela equity shares of 7 100 cach fully paid 10,00,000
Statement of P & L |
© Current Liabilities : | (2,30,000)
© trade payables :
E Creditor
E Bills payable re
bp Total 3.
| asses noe
Non-current assets : \
Fixed assets : |
Tangible assets : \
Plant | 84,400
Leasehold premises 2,61,600
Intangible assets :
Patents right | 17,00,000
Current Assets : |
Inventories | 10,000
Trade receivable | 1,53,000
Cash and cash equivalents 1,000
Other current assets : |
‘Unamortised expenses :
Preliminary expenses meiai
ote
The company guffered from huge loses and was not getting on well. The following planning of
{fusion of share capital was adopted :
(Quite Preference shares be reduced to an equal
yee eauity shares be reduced to an equal number of f
‘The amount available be used to written off preliming
completely 4 10 of the leasehold premis
the netely and also to write off ¢ 61,600 o! ible of patents.
elant and debtors and the remain balance avait le Sheet aftor the reduction has been
Caniod necessary Journal enteries and prepare
A et Capital Reduction ¢ 15,00,000; B/S Total® 11,00,000-
. the Balance Sheet of Abhinay Ltd.
number of fully paid of % 50 each.
of fully paid shares of @ 25 each.
ry expenses, Statement of profit & loss,
(05,7 30,000 of the stock, 20% of
Shareholders’ funds :
Share capital :
1,500, 8% pref. shares of ¢ 100 oe
2,000 equity shares of ¢ 100 cae!
_. Reserves and surplus : _
General reserve SAHITYA BHAWAN PUBLICATIONS
oe
Tt was decided to reconstruct the company on the basis of the following scheme :
@
Gi)
D
Gv) One equity share, ¢ 5 paid will be issued for every % 100 of preference dividend, which wast,
arrear for last two years.
(v) General Reserve and all intangible assets to be written off.
‘Non-current liabilities
8% Debentures
Interest accrued
Current liabilities :
‘Trade payables
ASSETS:
Non-current assets :
Fixed assets :
‘Tangible assets:
Plant
Less : Dep.
‘Machinory
Less : Dep.
Intangible assets :
Goodwill
Patents
Current assets :
Inventories
‘Trade receivables
‘Cash & cash equivalents
Other current assets :
‘Unamortised preliminary exp.
Equity shares to be reduced by ¥ 90 each.
Preference shares to be reduced by ¥ 10 each.
‘The debentureholders to waive their outstanding interest.
‘Total
1,10,000
20,000
2,20,000
40,000
(wi) Two tangible assets to be reduced proportionally by the balance available.
Give journal entries and prepare the balance sheet after capital reduction.
‘Ans. Capital Reduction % 2,46,800; B/S Total ¥ 2,26,200.
The following is the Balance Sheet of Mohan Ltd. as at 31st March, 2013 :
| EQUITY AND LIABILITIES
‘Shareholders’ funds :
Share capital :
16,000, 6% Pref, shares of € 10 each fully paid
48,000 Equity shares of & 6 each fully paid
Reserves and surplus :
Statement of P&L
‘Add : General reserve
Non-current liabilities :
‘Long-term borrowings (6% Debentures)
Current liabilities :
Tangible assets :
Land & Building
Plant.& Muchiners Goodwill — =
{following scheme of reorganis; -xtent of & 4,000 was ne
Tete eeios to accep 6% debenture ee con
tobe paid in six months after the date,
(4) The preference shares to be reduced to 5 each,
(9 Theequity shares to be reduced to ® 1 each,
( Theassets to be brought to the revalued figure and th
Give journal entries and prepare the revise
‘n The following is the Balance Sheet of Aakash Ltd. :
is — Particulars
7 EQUITY AND LIABILITIES
Shareholders’ funds :
Share Capital :
20,000, 5% pref. shares of € 10 each, fully paid
2,000 equity shares of € 100 each, fully paid
Reserves and surplus :
General reserve
Statement of P&L
Current liabilities :
Trade payables
Total
IL ASSETS
Non-current assets :
Fixed assets :
Tangible assets :
Plant & Machinery
Intangible assets :
Goodwill
Current Assets
Inventories
‘Trade receivables
Cash and cash equivalents
assets : i
ourtavontorion | 1,12,000
‘Trade receivables : |
Debtors 32,000
Bills receivable
Cash and cash equivalents 48,000
Total ~