Internal Reconstruction
Uploaded by
chowlonsengmannoiInternal Reconstruction
Uploaded by
chowlonsengmannoiCHAPTER-3 INTERNAL
RECONSTRUCTION
In case of internal reconstruction, the company will not be
liquidated, but accumulated losses and fictitious assets will be written off
by reducing the capital of the company. Internal reconstruction and
capital reduction mean the same. The claims of shareholders
and sometimes even of creditors are suitably adjusted to write
off accumulated losses, fictitious assets. No new company is
formed and the old company with its reconstituted capital
structure continues to carry on business. If the claims of the creditors and
debenture holders are also reduced, then it is more appropriate to
call it as “Reorganisation'.
In the Internal Reconstruction, the following methods are
generally Employed. 1 . Alternation of share capital section 64 of
the companies Act, 2013. 2. Valuation of shareholders Right as
per section 48 of companies Act,
2013.
3. Reduction of share capital as per section 66 of the
ompromise / Arrangement as per
companies Act, 2013. 4. C
section 230 to 232 of companies
Act, 2013. 5. Surrender of Shares O
ther Points A Certified copy of
Court / National Company law tribunal (NCLT)'s
order approving the scheme and minutes must be filed with the Register of
companies (ROC).
amount of fixed assets written off under the scheme of Recons
struction should be shown for a period of 5 years, in accordance
with Schedule. iii. Disclosure requirements. In case of listed
como
requirements. In case o
f listed c ompanies and to creditors of
onsideration for t he representations must be mad
within 3 months from date of such notice. iv. The Tribunal may confirm
the resolution if it satisfied t h
claim of every Creditor has been discharge or
determine
Secured and on such terms and conditions as it may deem fit V.
The Company must deliver w
ithin 30days of receipt
Reduction of Share Capital
Section 66 of the companies Act 2013 contains provisions
procedures of capital Reduction. These provisions
are
con
the resolution if it satisfied t hat the debt or s been discharge or
determined or h as been
thin 30days of receipt of order to
Register.
ontains provisions
covering
C-2
Dr
i. The company must pass a special Resolution to Reduce Share
Capital. ii. The resolution must be confirmed by the Nation Company Law
Tribunal. iii. The Tribunal shall give notice of every application made to it
to the
Central Government, Register and
ccounting Treatment For reducing
SEBI. A
the Capital
1) Equity Share Capital A/c (old) Dr (with the paid up
Preference Share Capital A/c (old) Dr value of the
old shares) To Capital Reduction A /c
or Reconstruction A/c To E
quity Share Capital A/c (new) (with
the paid-up To Preference Share Capital A/c (new)
value of new shares) If any sacrifice has been
made by creditors, debenture holders etc. Creditors
A/C
Dr
Debenture holders' A/C To Capital
Reduction A/c
(or Reconstruction A/c o
r
Reorganisation A/C) 3) When Capital Reduction /
Reconstruction A/c is utilised for writing
off accumulated losses, fictitious assets
etc.
Capital Reduction / (or
Reorganisation) A/C
Dr To Profit & Loss
“
Preliminary Expenses A/c
A/ c “
Discount on Issue of Shares or
Debentures A/c
odwill A/C “ Patents or T
Go rade
Marks A/ C
Other Assets ( individually)
/c (if any balance is
“ Capital Reserve A
left) Illustration - 1
The following is the Balance Sheet of Hopeless Ltd. as at
31sMarch 2002. Liabilities
* Assets
Share Capital: 20,000 Equity
Shares of
Buildings
2,00,000
*10 each, fully paid up 2,00,000 Machinery
1,50,000
10% Cumulative Preference Patents
40,000
Shares of 100 each,
Stock
70,000
fully paid
1,00,0
00 Debtors
60,000
9% Debentures
1,00,0
00 Cash at
Bank
10,000
Trade Creditors
3,50,000 P
reliminary Expenses 20,000
Profit and Loss
Alc
00 7,50,000
2,00,0
7,50,000
C-3
The company proved unsuccessful, it passed the fol lowing r esolution
and obtained the necessary confirmation from the court. 1) The Preference
Shares to be reduced to an equal number of 12%
Cumulative Preference Shares of 30 each, 2)
he Equity Shares to
T
be reduced to an equal number of shares of
* 2 each. 3) To reduce the Debentures by 20% and issue
new 13% Debentures for
the balance. 4) To reduce the claims of
Creditors by * 10,000.
The amount thus made available be utilised to write off fictitious
assets, patents by *25,000 and to reduce the value of stock by *
10,000, to make a provision for Doubtful debts to the extent of
5,000.
Pass the journal entries to give effect to the above and
show the company's post-r econstructed Balance Sheet.
Solution:
Journal
Debit Credit
Dr.
70,000
40,000
10% Preference Share
Capital A/c
(of 100 each)
|| 1,00,000 To
12% Preference Share Capital Alc 30,000
" Reconstruction Alc ( Being the reconstruction
made by converting Preference shares to new
12% Preference s hares of * 3 0 each and balance
transferred to Reconstruction A/c) Equity Share
Capital A/c ( o
f 10 e
ach) D
r. |12,00.000
To Equity Share Capital
Alc
(of 2 each) " Reconstruction a/c
(Being reconstruction by
making equity shares of * 2 each
and balance transferred to
Reconstruction) 9% Debentures
Alc
||1,00,000 To 13%
Debentures Alc
" Reconstruction Alc ( Being
reconstruction done by issue of
new 13% Debentures and the
balance transferred to
Reconstruction A/c )
1,60,000
Dr.
80,000
20,000
10,000
Trade Creditors
ATC
Dr.11 TO
Reconstruction alc
10,000
(Being the sacrifice made by creditors transferred to
Reconstruction A/c) Reconstruction Alc
Dr 2.60.000 To Profit
& Loss Alc
2,00,000
Preliminary Expenses Alc
20,000 *
Patents
25,000
10,000 *
Provision for Doubtful Debts
5.000
(Being the amount of reconstruction, utilised to write
off Profit & Loss Alo preliminary Expenses and to write
down the value of other assers)
Balance Sheet of Hopeless Ltd as on 31*
quity and Liabilities Share Capital
March E
70,000
Non-Current Liabilities
Long Term
Borrowings
80,000
Current Liabilities
Trade
Payable
3,40,000 T
otal
4,90,000
Assets
1. Non-Current Assets
Fixed Assets
.
3,65,000 2
Current Assets Inventories
60,000 Trade
Receivables
55,000 Cash
and Cash Equivalents
10.000 T
otal
00 THEORY
4,90,0
QUESTIONS What do you mean by Internal
Reconstruction. (B.Com. Osm.) What is the need for
Capital Reduction? (B.Com. Kakatiya) What is the
meaning of Reduction of Share Capital of a Company.
(B.Com. Osm.)
Distinguish between Internal Reconstruction and
External Reconstruction.
om. Kakatiya) Write
(B.C
short notes on: ( i) Dissenting Shareholders. (ii)
Inter-company holdings (iii) Realisation Account. (iv)
Amalgamation Adjustment Reserve. (v) Treatment of
realisation expenses.
II
1)
2)
3)
5)
C-5
SHORT ANSWER QUESTIONS
1. M. Ltd., had the following Capital:
10,000 Equity Shares of 7 10 each, fully
paid 1,000 8% Preference S hares of 100
each fully paid.
The Company resolved to reconstruct itself and reduce t he
equity shares to * 4 each and p reference shares to * 60 each.
The amount thus made available was utilised in writing off
profit and loss account d ebit balance amounting to 80,000
and the balance for writing down goodwill. Give entries i n the
books of M. Ltd., t o record the above. 2. A C
ompany under
the scheme of reconstruction decide to write off
preliminary expenses 20,000, Profit and Loss Account (Dr.) *
60,000. Machinery * 80,000 using * 1,40,000 Sacrifice
made by Equity Shareholders and * 70,000 sacrifice made
by Debenture holders. Give n ecessary journal entries to give
effect to the above.
(B. C
om., Osm Nov 2012) P
ROBLEMS
1. Vikrant Co. Ltd has the following B alance Sheet as on
31-12-2005 - Liabilities
* Assets Share
Capital
Goodwill
2,00,000
4,000 preference Shares of Buildings
2,20,000 * 100
each
4 ,00,000
Machinery
1,80,000 6,000
equity shares of
Stock
1,60,000 1
00
each
6,00,0
00 Debtors
1,80,000
Creditors
2,00,0
00 Cash
&L Account
20,000 P
2,40,000 1
2,00,000
12,00,000 Considering the financial position, a capital reduction
scheme is decided as follows:
(1) Equity and Preference s hares are to be reduced to 50
each (ii) The amount is to be used to write off goodwill and P&
L
Account. (i) Buildings are to be reduced by 30,000 and machinery by
20,000. (iv) The Balance is to be used to create reserve for b
ad debts
pass entries
to implement the scheme and prepare Balance
Sheet.)
(B. C
om., Osm. Nov 2010) ( An
s: B
alance Sheet T otal
77, 0
0, 000) 2
. Neelagiri C ompany Ltd. had the following
Balance Sheet on 3 1" March
2010.
Liabilities
* Assets Equity
shares of
Land & Buildings 1,00,000 1
00 each
00 Plant & Machinery 2,00,000
5,00,0
06
0% Debentures
2,00,000 Goodwill
Proot Prior to
90,000 P
atents
30,000
incorporation
10,000 C
ash
5,000
Sundry Creditors 1, 50,000 Sundry debtors
1,00,0
00 Stock
95,000 P
rofit & Loss A/C 2,20,000
Preliminary expenses 20,000 8,60,000
8,60,000
The following scheme of reconstruction was adopted. (a)
Each share was to be reduced to a share of 20 (b) All
fictitious assets including goodwill and patents were to be
eliminated (c) Plant and machinery was to be
brought to 1,60,000
Give journal entries for the above and prepare B alance
Sheet after implementation of the Scheme.
(B. C
om., Osm. April 2011) (Ans: B
alance Sheet Total
4,6
0, 000) 3. Rajendra a Company Ltd. Passed necessary
resolution and received
sanction of the Court for reconstruction as shown. ( 1) 25,000
preference shares of 20 each fully paid to be reduced to
the same number of s hares of 15 each. (2) 25,000 equity
shares of 15 each fully paid be reduced to the same
number of shares of 3
5 each. (3) Writing off of 1,50,000 debit
balance in Profit and loss Account (4) To reduce Plant and
Machinery by * 80,000 and goodwill by
20.000 (5) To reduce investments
value by 60,000
write Journal Entries n
ecessary to record the above and
also show capital reduction account in the books of Rajendra
Company Ltd.
.C
(B om. Osm. April
. On the reconstruction of a company the following
2012) 4
terms were agreed
upon:
The shareholders to receive in lieu of their present holding.
(Viz. 50,000 shares of 10 e
ach) the following: a) Fully paid
equity shares equal to 2/ 51" of their holding. b) 5%
preference shares, f ully paid, to the extent of 175 th of the
above
new equity shares. c) 60,000
6% Second Debentures.
An issue of 50,000, 5%
First Debentures was made and
allotted payment for the same having been received in cash.
The goodwill, which stood at 3,00,000 was written down to
1,50,000.
C-7
The Plant and Machinery, which stood at 1,00,000 were
written down to 75,000
The freehold and leasehold premises, which stood at
$1,50,000, were written down to 1,25,000
Make journal entries in the books of the Company
necessitated by the above reconstruction. 5 . Venkata Girija
Company Limited passed necessary resolution and
received sanction of the Court for the reduction of its share
capital by *2,50,000 for the purpose enunciated here under: i)
to write off the debit balance of Profit and Loss A
ccount
1,50,000. ii) to reduce the value of Plant and
Machinery by * 40,000 and
Goodwill by 20,000. i ii) to reduce the value of investments
to market value by writing off
* 40,000. The reduction w
as made by converting 25,000
Preference Shares of * 20 each fully paid to the same number of
Preference shares of 15 each f ully paid and by converting
25,000 equity shares of 20 each, * 15 paid up into 25,000 equity
shares of * 10 each fully paid up.
Show Journal entries necessary in relation to the reduction o
f
share capital and show how would you deal with the balance of
Share Capital Account.
(B.C
om. ,
Osm. ) 6. The following is the B
alance Sheet or Poor Ltd as on 31st
March. 2011.
Liabilities
* Assets
Share Capital
Buildings
2,00,000
20,000 equity shares of
Machinery
1,30,000 1
0
each fully
Patents.
40,000
paid up
2,00,0
00 Stock
80,000
500, 12% preference
Debtors
55,000
Shares of 100 each
Profit and Loss
A/C
1,65,000
fully paid
50,000 P reliminary Expenses 30,000
10% Debentures 1,00,000 T
rade Creditors 3,00,000
Outstanding Expenses 50,000 7 ,00,000
7,00,000
with a view to reconstruct the company it is proposed to (a)
Reduce the value of equity shares by 8 each. (b) Reduce the
value of preference Share to 60 each. () Reduce the 10%
debentures by 10% a
nd reduce the rate of interest
to 8%.
Trade creditors sacrifice * 1,30,000 (e)
Appreciate the value of buildings by
20%.
(d)
C-8
(f) write off all fictitious and intangible assets and
reduce machinery
by * 60,000 stock by 10,000 and create provision and carried
out, you are required to give necessary journal entries
and Balance sheet after reconstruction. P.D.D. Rg
Sooo
.C
(B om., O
sm. Nov 2012) ( A ns: B alance Sheet
Total 4, 3
0, 000) 7
. The following is the balance sheet of
Nav Bharat Co. Limited.
Authorised
Capital:
Patents v
8,50,000
10,000 Pref. shares
Premises
1,30,800 o
f
100 each
10,00,000 Plant &
Machinery
42,200
10,000 Ordinary. shares
Debtors
76,500 o
f
100 each
10,00,0
00 Stock in trade
v
55,000 2
0,00,000 S
hare
discounts
18,000 Preliminary expenses v 12,000
Deficiency Account 1,15,000
Cash on hand
500
Subscribed capital: 7,500 p ref. shares
fully paid
7,50,0
00
5,000 ordinary shares
fully paid
5,00,0
00
Sundry Creditors
30,000
Bank Overdraft
20,000 13,00,000
13,00,000 The
following scheme of reconstruction was adopted: i) The
preference shares be reduced to an equal number of fully paid
shares of 50 each and the ordinary shares be reduced to
an equal
number of shares of * 25 each. ii) The
amount available be used as follows:
a) To write off * 30,800 on P remises and * 15,000 on stock.
b) To reduce plant and machinery by 8,440 and to value
debtors
at * 61,200. c) T
o eliminate fictitious assets and reduce
patents to 5,00,000. Redraft the Balance Sheet giving
effect to the scheme.
(B . Com. O
smania) ( Balance S heet total
7,35, 460) 8 . The summarised Balance Sheet of X Co., as
on 31s March 1999 was as
below:
5,000 Equity
shares
of * 100
each 6%
Debentures
Goodwill 5,00,000 Land & Buildings
2,00,000 Plant &
Machinery
90,000 1,00,000 2,40,000
C-9
10,000
Profit prior
to
Patents
30,000
incorporation
10,000 B
ank
5,000
Creditors
1,40,0
00 Debtors
90,000
Bank Overdraft
50,000 M
otor Car
Stock in Trade
95,000 P
rofit and Loss
reliminary Expenses
2,00,000 P
40,000 9,00,000
2,00,000 T
he
business has passed through a depression and the worse
seems to have been over. The following scheme of
reconstruction is adopted with t he consent of all: a) Each share
was to be reduced to one-f ifth of its value. b) Each shareholder
was to subscribe for half the number of shares already
held by him, at its new value and pay immediately in
cash for the new
shares taken by them, to help the company with working
capital. c) All fictitious items including goodwill and patents were to be
eliminated. d) A provision of 5% on debtors in respect of doubtful
debts was to be
created. e) Motor car was to be reduced to half of its
value. f) Plant and Machinery was to be written down by the
balance of the
amount available.
You are asked to give the Journal entries necessary to
record the above and show the resulting Balance Sheet.
.C
(B om., O
smania) (B alance S heet Total
75,4
0, 0
00) 9 . The Balance Sheet of A.P. Industries Ltd. as on
31st December 1996 was
as follows:
Liabilities
* Assets
Share Capital:
Goodwill
15,000
2,000 Preference Shares
Freehold Property 2,00,000 of
100 each
2,00,000 Plant &
Machinery
3,00,000
4,000 Equity Shares of
Stock
50,000 *
100 each
4,00,000
Debtors
40,000
6% Debentures
1,00,000 P & L
A/C
2,45,000
Bank Overdraft
50,000
Creditors
1,00,000 8,50,000
8,50,000 The
Company got the following scheme of capital reduction
approved by the Court. a) The Preference Shares to be
reduced to 75 per share fully paid up and
the Equity Shares to
*37.50
C-10
100
b) the Debenture holders took over the stock and book debts
in full
satisfaction of their claim. c
) The Goodwill account to
be eliminated d ) The Freehold Properties are to be
depreciated by 50% e) The value of Plant &
Machinery to be increased by 50,000.
Give journal entries for the above and prepare the revised
Balance Sheet.
. Com. N
(B agarjuna) (Ans. B
al ance Sheet T
otal
0. The following is the Balance Sheet of C Ltd. as
4,50, 000) 1
on 31-3-2009
Liabilities
* Assets
Share Capital
Goodwill
20.000
Authorised Capital
Leasehold Premises 1,07,000
Preference Shares of
Plant & Machinery 60,000 10
each
5,00,0
00
Patents
1,73.900
Equity Shares of
Stock
34.000
310 each
5,00,000 D
ebtors
56,000 C
ash
Preliminary Expenses 2.000
10,00,000 Profit & Loss A/c 1,23.000
hares of
Issued & Paid up Preference S
10
each
2,50,000
Equity Shares of
10 each
2.50,0
00
Current Liabilities Sundry
Creditors 40,000 Bank
Overdraft
36,000 5, 76,000
5,76,000 T
he
company proved unsuccessful and resolutions were passed to carry
out the following scheme of reconstruction by reduction of
capital. (i) The value of P
reference Shares be reduced to * 5
each. (ii) The value of E
quity Shares be reduced to 2.50
each. (iii) That the amount so available be utilised towards
wiping out losses and
reduction of assets as
follows.
Make journal entries in the books of the company and
Prepare the Balance Sheet giving effect to the above scheme.
.C
(B om. , O
sm. A
pril 2
010) (A
ns: Balance S
heet T
otal
72,63, 500)
C- 11
11. The following was the balance sheet of Universal Auto LTD, as at
31.3.2002
Liabilities
Assets
Authorised Share Capital
1,00,000 i
Goodwill
Fixed Assets
(10,000 shares of
3,80,000
9,000
100 each)
10,00,000
Cash
Profit and L
oss
61,000
Issued, subscribed and paid up capital
Account
1000, 9% preference shares of 100
,00,000
each 1
3,000 equity shares
of * 10 each
3,00,000 13% Debentures
1,00,000 Secured Creditors
10,000
Trade Creditors
40,000 5,50,000
5,50,000 T
he
Company decided on a scheme of reconstruction, which
was as f ollows: i) Two e
quity shares of * 100 each, * 50
paid-up per share to be i ssued
for each preference share. ii) Each existing equity share is
reduced to 50 paid up, the face value
remaining the same at * 100. iii) 1,000 equity shares were to
be taken up by the directors by paying to
the extent of 50 each. iv) Debenture holders to receive 800
fully paid equity shares of 100 each
in place of debentures. v) Unsecured Creditors to be paid
immediately to the extent of 10% of
their claim and they accepted a remission of 20% o f their
claim. vi) The amount available as a result of the scheme to be used to
write-off
the debit balance in the profit and loss Account, to write off the
Goodwill and to reduce the value of fixed assets by 10,000. You are
required to give journal entries to record the above and give the
Balance-Sheet after the reconstruction is effected.
. Com. O
(B sm. ) (A
ns. Balance S
heet Total
54, 25,0
00) 1 2. The following was the Balance Sheet of Tin Toys Ltd.
as on 31stMarch
2004.
Liabilities
* Assets
Authorised Capital
Goodwill
10,000
20,000 Equity Shares of
20,500 10
each
2,00,000
Machinery
50,850
Buildings
C-12
Issued, subscribed
and
Stock
10,2
75
paid-up:
Book Debts
15,
000 12,000 shares of 10
Cash at
Bank
1,5
00 each
1,20,000
Profit & Loss Ale
20,8
00 l ess calls in Arrear
Preliminary Expenses 1,500 (
3 per share on 3000 shares) 9,000 1,11,000 S
undry Creditors
15,425 P rovision for taxation
,30,425
4,000 1
1,30,425 T he directors find that the machinery is overvalued by
10,000. It is now proposed to write down this asset to its true
value and extinguish Goodwill Account, Profit & Loss and
Preliminary expenses account by adopting the following
scheme. (a) Forfeit the shares on w
hich the calls are
outstanding (b) Reduce the paid-up capital by 3 per share (c)
Reissue the forfeited shares at 5 per share (d) utilise the
provision for taxes, if necessary,
Draft the journal entries necessary for giving effect to the
above scheme and prepare the reconstructed Balance Sheet of the
Company.
.C
(B om. A ndhra) ( A
ns. B
alance S
heet total
1, 03,125)
You might also like
- Internal Reconstruction 01 - Class NotesNo ratings yetInternal Reconstruction 01 - Class Notes16 pages
- To Write Off Goodwill by 3. 4. To Reduce The Value of Investments by 00,000No ratings yetTo Write Off Goodwill by 3. 4. To Reduce The Value of Investments by 00,00024 pages
- Internal Reconstruction: IPCC Paper 1: Accounting Chapter VNo ratings yetInternal Reconstruction: IPCC Paper 1: Accounting Chapter V73 pages
- Capital Reduction & Reconstruction: Liability AssetsNo ratings yetCapital Reduction & Reconstruction: Liability Assets10 pages
- Internal Reconstruction 01 - Class NotesNo ratings yetInternal Reconstruction 01 - Class Notes20 pages
- Internal Reconstruction Part-I Students 0No ratings yetInternal Reconstruction Part-I Students 040 pages
- Capital Reduction & Internal Reconstruction GuideNo ratings yetCapital Reduction & Internal Reconstruction Guide18 pages
- What Is Reconstruction?: Need For Internal Reconstruction79% (14)What Is Reconstruction?: Need For Internal Reconstruction31 pages
- Internal Reconstruction P-1 Liabilities Rs Assets RsNo ratings yetInternal Reconstruction P-1 Liabilities Rs Assets Rs8 pages
- 1 Chapter 5 Internal Reconstruction PDFNo ratings yet1 Chapter 5 Internal Reconstruction PDF22 pages
- Internal Reconstruction Small Practice QuestionsNo ratings yetInternal Reconstruction Small Practice Questions2 pages
- Internal Reconstruction (Theory and MCQS)No ratings yetInternal Reconstruction (Theory and MCQS)24 pages
- Internal Reconstruction: Q.1 Particulars Equity and LiabilitiesNo ratings yetInternal Reconstruction: Q.1 Particulars Equity and Liabilities4 pages
- Government of Karnataka Mock Tendering Process For Construction WorkNo ratings yetGovernment of Karnataka Mock Tendering Process For Construction Work4 pages
- Allied Transit and Transit Authority 8-21-2023No ratings yetAllied Transit and Transit Authority 8-21-20239 pages
- Cal Minerals Carta de Intencion 30 Julio PDFNo ratings yetCal Minerals Carta de Intencion 30 Julio PDF3 pages
- YAP Joris - BSA 22 - Midterms Online Quiz 1No ratings yetYAP Joris - BSA 22 - Midterms Online Quiz 13 pages
- Abella vs. Court of Appeals, 257 SCRA 482No ratings yetAbella vs. Court of Appeals, 257 SCRA 4822 pages