Full Text Transcript
5
INTERNAL RECONSTRUCTION
Learning Objectives
After studying this chapter, you will be able to:
♦ Understand the meaning of term “reconstruction”.
♦ Sub-divide and consolidate shares.
♦ Convert shares into stock and stock into shares.
♦ Account the adjustments made at the time of internal reconstruction.
1. Meaning of Reconstruction
When a company has been making losses for a number of years, the financial position does
not present a true and fair view of the state of the affairs of the company. In such a company
the assets are overvalued, the assets side of the balance sheet consists of fictitious assets,
useless intangible assets and debit balance in the profit and loss account. Such a situation
does not depict a true picture of financial statements and shows a higher net worth than what
the real net worth ought to be. In short the company is over capitalized. Such a situation
brings the need for reconstruction.
Reconstruction is a process by which affairs of a company are reorganized by revaluation of
assets, reassessment of liabilities and by writing off the losses already suffered by reducing
the paid up value of shares and/or varying the rights attached to different classes of shares.
The object of reconstruction is usually to reorganize capital or to compound with creditors or to
effect economies. Such a process is called internal reconstruction which is carried out
without liquidating the company and forming a new one.
However, there may be external reconstruction. Wherever an undertaking is being carried on
by a company and is in substance transferred, not to an outsider, but to another company
consisting substantially of the same shareholders with a view to its being continued by the
transferee company, there is external reconstruction. Such external reconstruction is essen-
tially covered under the category ‘amalgamation in the nature of merger’ in AS-14.
© The Institute of Chartered Accountants of India
Accounting
1.1 Difference Between Internal and External Reconstruction
Basis Internal Reconstruction External Reconstruction
Liquidation The existing company is not The existing company is liquidated.
liquidated.
Formation No new company is formed but only A new company is formed to take
the rights of shareholders and over the liquidated company.
creditors are changed.
Reduction of There is certain reduction of capital There is no reduction of capital. In
capital and sometimes the outside liabilities fact there is a fresh share capital of
like debenture holders may have to the company.
reduce their claim.
Legal Internal reconstruction is done as External reconstruction is regulated
position per provisions of section 100 of the by section 494 of the Companies
Companies Act, 1956. Act, 1956.
2. Methods of Internal Reconstruction
For properly deploying the process of internal reconstruction following methods are generally
employed or used simultaneously:
a) Alteration of share capital as per section 94, 95 and 97 of the Companies Act.
b) Variation of Shareholders’ rights as per section 106 of the Companies Act, 1956.
c) Reduction of Share Capital as per Section 100 to 105 of the Companies Act, 1956.
d) Compromise/ Arrangement as per Section 391 to 393 and Section 394A of the companies
Act.
e) Surrender of Shares.
2.1 Alteration of Share Capital
Sub-division and Consolidation of Shares:
If authorised by its Articles, a company may, in a general meeting by passing an ordinary
resolution, decide to sub-divide or consolidate the shares into those of a smaller or higher
denomination than that fixed by the Memorandum of Association, so long as the proportion
between the paid up and unpaid amount, if any, on the shares continues to be the same as it
was in the case of the original shares.
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© The Institute of Chartered Accountants of India
Internal Reconstruction
A notice specifying alteration made must be given to the Registrar within 30 days of alteration.
For example, a company with a capital of Rs. 10,00,000 divided into 10,000 equity shares of
Rs. 100 each on which Rs. 75 is paid up decides to recognise its capital by splitting one equity
share of Rs. 100 each into 10 such shares of Rs. 10 each. The consequential entry to be
passed in such a case would be—
Dr. Cr.
Rs. Rs.
Equity Share Capital (Rs. 100) A/c Dr. 7,50,000
To Equity Share Capital (Rs. 10) A/c 7,50,000
(Being the sub-division of 10,000 shares of Rs. 100
each with Rs. 75 paid up thereon into 1,00,000
shares of Rs. 10 each with Rs. 7.50 paid up
thereon as per the resolution of shareholders
passed in the General Meeting held on...)
Similar entries will be passed on consolidation of shares of a smaller amount into those of a
larger amount.
Illustration 1
On 31-12-2XX9 B Ltd. had 20,000, Rs. 10 Equity Shares as authorised capital and the shares
were all issued on which Rs. 8 was paid up. In June, 2X10 the company in general meeting
decided to sub-divide each share into two shares of Rs. 5 with Rs. 4 paid up. In June, 2X11
the company in general meeting resolved to consolidate 20 shares of Rs. 5, Rs. 4 per share
paid up into one share of Rs. 100 each, Rs. 80 paid up.
Pass entries and show how share capital will appear in the Balance Sheet as on 31-12-2XX9,
31-12-2X10 and 31-12-2X11.
Solution
Journal entries
2X10 Rs. Rs.
June Equity Share Capital (Rs. 10) A/c Dr. 1,60,000
To Equity Share Capital (Rs. 5) A/c 1,60,000
(Being the sub-division of 20,000 Rs. 10
shares with Rs. 8 paid up into 40,000
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© The Institute of Chartered Accountants of India
Accounting
shares Rs. 5 each with Rs. 4 paid up by
resolution in general meeting dated....)
2X11
June Equity Share Capital (Rs. 5) A/c Dr. 1,60,000
To Equity Share Capital (Rs. 100) A/c 1,60,000
(Being consolidation of 40,000 shares of
Rs. 5 with Rs. 4 paid up into 2,000 Rs.
100 shares with Rs. 80 paid up as per
resolution in general meeting dated....)
Balance Sheet (includes)∗
Liabilities: Rs.
As on 31-12-2XX9
1. Share Capital
Authorised:
20,000 Equity Shares of Rs. 10 each 2,00,000
Issued and Subscribed:
20,000 Equity Shares of Rs. 10 each Rs. 8 per share called up 1,60,000
As on 31-12-2X10
1. Share Capital
Authorised:
40,000 Equity Shares of Rs. 5 each 2,00,000
Issued and Subscribed:
40,000 Equity Shares of Rs. 5 each Rs. 4 per share called up 1,60,000
As on 31-12-2X11 Rs.
Shareholders’ funds
Share Capital
Authorised:
2,000 Equity Shares of Rs. 100 each 2,00,000
Issued and Subscribed:
20,000 Equity Shares of Rs. 100 each Rs. 80 per share called up 1,60,000
∗Balance Sheet (extract) for the year 2X11 shall be prepared as per Revised Schedule VI wherein the share capital
details need to be shown in notes to accounts, however this information has been shown in the balance sheet only.
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© The Institute of Chartered Accountants of India
Internal Reconstruction
Note: Some accountants prefer not to make any entry as the amount remains same. Even when
an entry is passed it applies only to the called up portion, and not to uncalled or unissued
portion of share capital.
Conversion of Fully Paid Shares into Stock and Stock into Shares
Stock is the consolidation of the share capital into one unit divisible into aliquot parts. While it
is impossible of the share capital to be one share, any amount of stock may be transferred. In
practice, however, companies restrict the transfer of stock to multiples of, say, Rs. 100. A
company can convert its fully paid shares into stock [Section 94(c)]. Upon the company
converting its shares into stock, the book-keeping entries merely record the transfer from
share capital account to stock account.
A separate Stock Register is started in which details of members’ holdings are entered and
the annual return is modified accordingly.
Illustration 2
C Ltd. had Rs. 5,00,000 authorised capital on 31-12-2XX9 divided into shares of Rs. 100 each
out of which 4,000 shares were issued and fully paid up. In June 2X10 the Company decided
to convert the issued shares into stock. But in June, 2X11 the Company re-converted the
stock into shares of Rs. 10 each fully paid up.
Pass entries and show how Share Capital will appear in Balance Sheet as on 31-12-2XX9,
31-12-2X10 and 31-12-2X11.
Solution
Journal Entries
2X10 Rs. Rs.
June Equity Share Capital A/c Dr. 4,00,000
To Equity Stock A/c 4,00,000
(Being conversion of 4,000 fully paid
Equity Shares of Rs. 100 into Rs. 4,00,000
Equity Stock as per resolution in general
meeting dated...)
2X11
June Equity Stock A/c Dr. 4,00,000
To Equity Share Capital A/c 4,00,000
(Being re-conversion of Rs. 4,00,000
Equity Stock into 40,000 shares of Rs. 10
fully paid Equity Shares as per resolution
in General Meeting dated...)
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© The Institute of Chartered Accountants of India
Accounting
Balance Sheet ∗ (includes)
Liabilities :
As on 31-12-2XX9 Rs.
1. Share Capital
Authorised
5,000 Equity Shares of Rs. 100 each 5,00,000
Issued and Subscribed
4,000 Equity Shares of Rs. 100 each fully called up 4,00,000
As on 31-12-2X10 Rs.
1. Share Capital
Authorised
5,000 Equity Shares of Rs. 100 each 5,00,000
Issued and Subscribed
Equity Stock-4,000 Equity Shares of Rs. 100 converted into Stock 4,00,000
As on 31-12-2X11 Rs.
Shareholders’ funds
Share Capital
Authorised
50,000 Equity Shares of Rs. 10 each 5,00,000
Issued and Subscribed
40,000 Equity Shares of Rs. 10 each fully called up 4,00,000
2.2 Variation of Shareholders Rights
When a company has issued different classes of shares with different rights or privileges
attached to such shares e.g. rights as to dividend, voting rights etc. any of such right may be
changed in any manner.
For example, the company may change rate of (a) dividend on preference shares or (b)
convert cumulative preference shares into non-cumulative preference shares without changing
the amount of share capital by passing the following journal entries:
(a) Debit (Old)% Cum. Pref. Share Capital Account
Credit (New)% Cum. Pref. Share Capital Account
(b) Debit …% Cum. Pref. Share Capital Account
Credit …% Non-cum. Pref. Share Capital Account
∗ Balance Sheet (extract) for the year 2011 shall be prepared as per Revised Schedule VI wherein the share capital
details need to be shown in notes to accounts, however, this information has been shown in balance sheet only.
5.6
© The Institute of Chartered Accountants of India
Internal Reconstruction
2.3 Reduction of Share Capital
Section 100 of the Companies Act lays down the procedure in respect of reduction of share
capital. One way of doing this is reducing the paid-up capital. The share capital of a company
which has been suffering losses continuously for a long time, is not truly represented by its
assets. In such a case, any scheme for capital reduction should write-off that portion of capital
which is already lost.
This reduction is a sacrifice by the shareholders and the amount of reduction or sacrifice is
credited to a new account called Capital Reduction Account (or Reconstruction Account). The
accounting treatment is as follows:
a.) Reduction in paid up value only- Here the nominal value of the share remains the same
and only the paid value is reduced. For example, the shareholders may agree to reduce
the paid capital of Rs. 100 per share to paid value of Rs. 10 per share. The sacrifice is Rs.
90 and the entry will be
Share Capital Account Dr. (Rs. 90 X No. of Shares)
To Capital Reduction Account (Rs. 90 X No. of Shares)
b.) Reduction in both nominal and paid up values- In this case, both the paid up capital
and nominal value of the shares are reduced. Continuing the above example, the entry
will be:
Share Capital Account (Rs. 100 Share) Dr. (Rs. 100 X No. of Shares)
To Share Capital (Rs. 10 Share) (Rs. 10 X No. of Shares)
To Capital Reduction Account (Rs. 90 X No. of Shares)
Thus in such treatment we debit the original Share Capital Account so as to close it, credit
new Share Capital Account with the amount treated as paid up; and credit Capital Reduction
Account with the difference. A certified copy of Court’s order and Minutes approved by the
Court must be filed by the Registrar.
2.4 Compromise/Arrangements
A scheme of compromise and arrangement is an agreement between a company and its
members and outside liabilities when the company faces financial problems. Such an
arrangement therefore also involves sacrifices by shareholders, or creditors and debenture
holders or by all. Accounting treatment for some of the cases is as follows:
a) When equity shareholders give up there claim to reserves and accumulated profits:
Reserves Account Dr. (With the amount of
To Reconstruction Account reserves)
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© The Institute of Chartered Accountants of India
Accounting
b) Settlement of outside liabilities at lesser amount: Liabilities such as sundry creditors may
agree to accept less amount in lieu of final settlement. Treatment will be as follows:
Outside Liabilities Account Dr. (With the amount of sacrifice
Provision Account, if any Dr. made by creditors, debenture
To Reconstruction Account holders etc.)
2.5 Surrender of Shares
The shareholders are made to surrender there shares. These shares are then allotted to
debenture holders and creditors so that their liabilities are reduced. The unutilized surrendered
shares are then cancelled.
3. Entries in Case of Internal Reconstruction
On a scheme of reconstruction being adopted (through special resolution confirmed by the
Court), the entries to be passed are:
1. An appreciation in the value of an asset or reduction in the amount of a liability should
be debited to the account concerned and credited to Capital Reduction Account (or
Reconstruction Account).
2. Write off all fictitious assets (including Goodwill and Patents) and eliminate all over-
valuation of assets by crediting the accounts concerned and debiting the Capital
Reduction (or Reconstruction) Account. For this purpose, any reserve appearing in the
books of the company may be used. If any balance is left in the Capital Reduction (or
Reconstruction) Account it should be transferred to the Capital Reserve Account.
While preparing the balance sheet of a reconstructed company, the following points are to be
kept in mind:
(a) After the name of the company, the words “and Reduced” should be added only if the
Court so orders.
(b) In case of fixed assets, the amount written off under the scheme of reconstruction must
be shown for five years.
Illustration 3
The Balance Sheet of A & Co. Ltd. as on 31-12-2011 is as follows:
Assets Rs. Rs.
Fixed Assets:
Freehold property 4,25,000
Plant 50,000
Patent 37,500
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© The Institute of Chartered Accountants of India
Internal Reconstruction
Goodwill 1,30,000 6,42,500
Traded Investments (at cost) 55,000
Current Assets:
Debtors 4,85,000
Stock 4,25,000
Deferred Advertising 1,00,000 10,10,000
Profit and Loss Account 4,35,000
Total 21,42,500
Liabilities
Share Capital:
4,000 6% Cumulative Preference Shares of Rs. 100 each 4,00,000
75,000 Equity Shares of Rs. 10 each 7,50,000 11,50,000
6% Debentures (Secured on Freehold Property) 3,75,000
Accrued Interest 22,500 3,97,500
Current Liabilities:
Bank Overdraft 1,95,000
Creditors 3,00,000
Directors’ Loans 1,00,000 5,95,000
Total 21,42,500
The Court approved a Scheme of re-organisation to take effect on 1-1-2012, whereby:
(i) The Preference Share to be written down to Rs. 75 each and Equity Shares to Rs. 2 each.
(ii) Of the Preference Share dividends which are in arrears for four years, three fourths to
be waived and Equity Shares of Rs. 2 each to be allotted for the remaining quarter.
(iii) Accrued interest on debentures to be paid in cash.
(iv) Debenture-holders agreed to take over freehold property, book value Rs. 1,00,000 at a
valuation of Rs. 1,20,000 in part repayment of their holdings and to provide additional
cash of Rs. 1,30,000 secured by a floating charge on company’s assets at an interest
rate of 8% p.a.
(v) Patents, Goodwill and Deferred Advertising to be written off.
(vi) Stock to be written off by Rs. 65,000.
(vii) Amount of Rs. 68,500 to be provided for bad debts.
(viii) Remaining freehold property to be re-valued at Rs. 3,87,500.
(ix) Trade Investments be sold for Rs. 1,40,000.
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Accounting
(x) Directors to accept settlement of their loans as to 90% thereof by allotment of equity
shares of Rs. 2 each and as to 5% in cash, and balance 5% being waived.
(xi) There were capital commitments totalling Rs. 2,50,000. These contracts are to be
cancelled on payment of 5% of the contract price as a penalty.
(xii) Ignore taxation and cost of the scheme.
You are requested to show Journal entries reflecting the above transactions (including cash
transactions) and prepare the Balance Sheet of the company after completion of the Scheme.
Solution :
Journal of A & Co. Ltd.
Dr. Cr.
Rs. Rs.
2011
Dec. 31 Equity Share Capital A/c (Rs. 10) Dr. 7,50,000
To Capital Reduction A/c 6,00,000
To Equity Share Capital A/c (Rs. 2) 1,50,000
(Reduction of equity shares of Rs. 10 each to
shares of Rs. 2 each as per Reconstruction
Scheme dated...)
6% Cum. Preference Share CapitalA/c (Rs. 100) Dr. 4,00,000
To Capital Reduction A/c 1,00,000
To Pref. Share Capital A/c (Rs. 75) 3,00,000
(Reduction of preference shares of Rs. 100
each to shares of Rs. 75 each as per
reconstruction scheme)
2011
Dec. 31 Freehold Property A/c Dr. 82,500
To Capital Reduction A/c 82,500
(Appreciation in the value of property:
Book value Revalued Figure
Rs. 1,00,000 Rs. 1,20,000
Rs. 3,25,000 Rs. 3,87,500
Total Rs. 4,25,000 Rs. 5,07,500
Profit on revaluation: Rs. 82,500)
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© The Institute of Chartered Accountants of India
Internal Reconstruction
” 6% Debentures A/c Dr. 1,20,000
To Freehold Property A/c 1,20,000
(Claims of debenture-holders, in part, in respect
of principal discharged by transfer of freehold
property vide Scheme of Reconstruction)
Accrued Interest A/c Dr. 22,500
To Bank A/c 22,500
(Debenture interest paid)
” Bank A/c Dr. 1,30,000
To 8% Debentures A/c 1,30,000
(8% Debentures issued for cash)
” Bank A/c Dr. 1,40,000
To Trade Investment A/c 55,000
To Capital Reduction A/c 85,000
(Sale of Trade Investment for Rs. 1,40,000
cost being Rs. 55,000; profit credited to
Capital Reduction Account)
” Directors’ Loan A/c Dr. 1,00,000
To Equity Share Capital A/c 90,000
To Bank A/c 5,000
To Capital Reduction A/c 5,000
(Directors’ loan discharged by issue of equity
shares of Rs. 90,000, cash payments of Rs.
5,000 and surrender of Rs. 5,000, vide
Scheme of Reconstruction)
Dec. 31 Capital Reduction Account Dr. 24,000
To Equity Share Capital Account 24,000
(Arrears of preference dividends satisfied by
the issue of equity shares, 25% of the
amount due, Rs. 96,000)
” Capital Reduction A/c Dr. 8,48,500
To Patents 37,500
To Goodwill 1,30,000
To Deferred Advertising 1,00,000
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Accounting
To Stock 65,000
To Provision for Doubtful Debts 68,500
To Bank 12,500
To Profit & Loss Account 4,35,000
(Writing off patents, goodwill, deferred
advertising, profit and loss account and
reducing the value of stock, making the
required provision for doubtful debts and
payment for cancellation of capital
commitments)
Balance Sheet of A & Co. Ltd. (And Reduced) as on 1st January, 2012
Particulars Notes Rs.
Equity and Liabilities
1 Shareholders' funds
5,64,000
a Share capital 1
2 Non-current liabilities
3,85,000
a Long-term borrowings 2
3 Current liabilities
3,00,000
A Trade Payables
12,49,000
Total
Assets
1 Non-current assets
A Fixed assets
4,37,500
Tangible assets 3
-
Intangible assets 4
2 Current assets
3,60,000
A Inventories
4,16,500
B Trade receivables 5
35,000
C Cash and cash equivalents
12,49,000
Total
Notes to accounts
1 Share Capital
Equity share capital
1,32,000 Equity shares of Rs. 2 each 2,64,000
(Of the above 45,000 shares have been issued
for consideration other than cash)
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Internal Reconstruction
Preference share capital
3,00,000
4,000 6% Preference shares of Rs. 75 each
5,64,000
Total
2 Long-term borrowings
Secured
2,55,000
6% Debentures
1,30,000
8% Debentures
3,85,000
Total
3 Tangible assets
Fixed assets
Tangible assets
4,25,000
Freehold property
Add: Appreciation under scheme of 82,500
Reconstruction
(1,20,000) 3,87,500
Less: Disposed of
50,000
Plant
37,500
Patents
Less: written off under scheme of (37,500) -
Reconstruction
4,37,500
Net carrying value
4 Intangible assets
1,30,000
Goodwill
Less: written off under scheme of (1,30,000)
Reconstruction
- -
Net carrying value
5 Trade receivables
4,85,000
Trade receivables
(68,500) 4,16,500
Less: Provision for Doubtful Debt
Illustration 4
Given below is the summarized balance sheet of Rebuilt Ltd. as on 31.3.2012:
Liabilities Amount Assets Amount
Rs. Rs.
Authorised and issued capital: Building at cost less 4,00,000
depreciation
12,000, 7% Preference shares of Plant at cost less 2,68,000
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Accounting
Rs. 50 each(Note: Preference 6,00,000 depreciation
dividend is in arrear for five
years)
15,000 Equity shares of Rs. 50 Trademarks and 3,18,000
each 7,50,000 goodwill at cost
13,50,000 Stock 4,00,000
Loan 5,73,000 Debtors 3,28,000
Sundry creditors 2,07,000 Preliminary expenses 11,000
Other liabilities 35,000 Profit and loss A/c 4,40,000
21,65,000 21,65,000
The Company is now earning profits short of working capital and a scheme of
reconstruction has been approved by both the classes of shareholders. A summary of
the scheme is as follows:
(a) The equity shareholders have agreed that their Rs. 50 shares should be reduced to
Rs. 2.50 by cancellation of Rs. 47.50 per share. They have also agreed to
subscribe for three new equity shares of Rs. 2.50 each for each equity share held.
(b) The preference shareholders have agreed to cancel the arrears of dividends and to
accept for each Rs. 50 share, 4 new 5% preference shares of Rs. 10 each, plus 6
new equity shares of Rs. 2.50 each, all credited as fully paid.
(c) Lenders to the company for Rs. 1,50,000 have agreed to convert their loan into
share and for this purpose they will be allotted 12,000 new preference shares of
Rs. 10 each and 12,000 new equity shares of Rs. 2.50 each.
(d) The directors have agreed to subscribe in cash for 40,000, new equity shares of
Rs. 2.50 each in addition to any shares to be subscribed by them under (a) above.
(e) Of the cash received by the issue of new shares, Rs.2,00,000 is to be used to
reduce the loan due by the company.
(f) The equity share capital cancelled is to be applied:
i. to write off the preliminary expenses;
ii. to write off the debit balance in the profit and loss A/c; and
iii. to write off Rs. 35,000 from the value of plant.
Any balance remaining is to be used to write down the value of trademarks and goodwill.
Show by journal entries how the financial books are affected by the scheme and prepare
the balance sheet of the company after reconstruction. The nominal capital as reduced is
to be increased to Rs.6,50,000 for preference share capital and Rs.7,50,000 for equity
share capital.
5.14
© The Institute of Chartered Accountants of India
Internal Reconstruction
Solution
In the books of Rebuilt Ltd.
Journal Entries
Particulars Debit Credit
(Rs.) (Rs.)
1. Equity share capital A/c (Rs.50) Dr. 7,50,000
To Equity share capital A/c (Rs. 2.50) 37,500
To Reconstruction A/c 7,12,500
(Being equity capital reduced to nominal value of
Rs.2.50 each)
2. Bank A/c Dr. 1,12,500
To Equity share capital 1,12,500
(Being 3 right shares against each share was issued
and subscribed)
3. 7% Preference share capital A/c (Rs.50) Dr. 6,00,000
Reconstruction A/c Dr. 60,000
To 5% Preference share capital (Rs.10) 4,80,000
To equity share capital (Rs.50) 1,80,000
(Being 7% preference shares of Rs.50 each
converted to 5% preference shares of Rs.10 each
and also given to them 6 equity shares for every
share held)
4. Loan A/c Dr. 1,50,000
To 5% Preference share capital A/c 1,20,000
To Equity share capital A/c 30,000
(Being loan to the extent of Rs.1,50,000 converted
into share capital)
5. Bank A/c Dr. 1,00,000
To Equity share application money A/c 1,00,000
(Being shares subscribed by the directors)
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Accounting
6. Equity share application money A/c Dr. 1,00,000
To Equity share capital A/c 1,00,000
(Being application money transferred to capital A/c)
7. Loan A/c Dr. 2,00,000
To Bank A/c 2,00,000
(Being loan repaid)
8. Reconstruction A/c Dr. 6,52,500
To Preliminary expenses A/c 11,000
To Profit and loss A/c 4,40,000
To Plant A/c 35,000
To Trademarks and Goodwill A/c (Bal.fig.) 1,66,500
(Being losses and assets written off to the extent
required)
Balance sheet of Rebuilt Ltd. (and reduced)
as on 31.3.2012
Particulars Notes Rs.
Equity and Liabilities
1 Shareholders' funds
10,60,000
a Share capital 1
2 Non-current liabilities
2,23,000
a Long-term borrowings
3 Current liabilities
2,07,000
a Trade Payables
35,000
b Other current liabilities
15,25,000
Total
Assets
1 Non-current assets
a Fixed assets
6,33,000
Tangible assets 2
1,51,500
Intangible assets 3
2 Current assets
4,00,000
a Inventories
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Internal Reconstruction
3,28,000
b Trade receivables
12,500
c Cash and cash equivalents 4
15,25,000
Total
Notes to accounts
Rs.
1 Share Capital
Authorised capital:
65,000 Preference shares of Rs. 10 each 6,50,000
3,00,000 Equity shares of Rs. 2.50 each 7,50,000 14,00,000
Issued, subscribed and paid up:
1,80,000 equity shares of Rs. 2.5 each 4,60,000
60,000, 5% Preference shares of Rs. 10 each 6,00,000
10,60,000
Total
2 Tangible assets
4,00,000
Building at cost less depreciation
2,33,000 6,33,000
Plant at cost less depreciation
3. Intangible assets
1,51,500
Trademarks and goodwill
4 Cash and cash equivalents
12,500
Bank (1,12,500+1,00,000-2,00,000)
Illustration 5
Repair Ltd. is in the hands of a receiver for debenture holders who holds a charge on all
assets except uncalled capital. The following statement shows the position as regards
creditors as on 30th June, 2012:
Liabilities Rs. Assets Rs.
6,000 shares of Rs. 60 each, Property, machinery
Rs. 30 paid up and plant etc. (Cost
First debentures 3,00,000 Rs. 3,90,000)
Second debentures 6,00,000 Estimated at 1,50,000
Unsecured creditors 4,50,000 Cash in hand of
the receiver 2,70,000
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Accounting
Charged under debentures 4,20,000
Uncalled capital 1,80,000
6,00,000
Deficiency 7,50,000
13,50,000 13,50,000
A holds the first debentures for Rs. 3,00,000 and second debentures for Rs. 3,00,000.
He is also an unsecured creditor for Rs. 90,000. B holds second debentures for
Rs. 3,00,000 and is an unsecured creditor for Rs. 60,000.
The following scheme of reconstruction is proposed:
1. A is to cancel Rs.2,10,000 of the total debt owing to him, to bring Rs. 30,000 in cash
and to take first debentures (in cancellation of those already issued to him) for
Rs. 5,10,000 in satisfaction of all his claims.
2. B is to accept Rs. 90,000 in cash in satisfaction of all claims by him.
3. In full settlement of 75% of the claim, unsecured creditors (other than A and B)
agreed to accept four shares of Rs. 7.50 each, fully paid against their claim for each
share of Rs.60. The balance of 25% is to be postponed and to be payable at the
end of three years from the date of Court’s approval of the scheme. The nominal
share capital is to be increased accordingly.
4. Uncalled capital is to be called up in full and Rs. 52.50 per share cancelled, thus
making the shares of Rs. 7.50 each.
Assuming that the scheme is duly approved by all parties interested and by the Court,
Give necessary journal entries.
Solution
Journal Entries
Particulars Debit Credit
(Rs.) (Rs.)
First debentures A/c Dr. 3,00,000
Second debentures A/c Dr. 3,00,000
Unsecured creditors A/c Dr. 90,000
To A’s A/c 6,90,000
(Being A’s total liability ascertained)
A’s A/c Dr. 2,10,000
To Reconstruction A/c 2,10,000
(Being cancellation of debt upto Rs.2,10,000)
Bank A/c Dr. 30,000
To A’s A/c 30,000
(Being cash received in course of settlement)
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© The Institute of Chartered Accountants of India
Internal Reconstruction
A’s A/c Dr. 5,10,000
To First debentures A/c 5,10,000
(Being liability of A, discharged against first
debentures)
Second debentures A/c Dr. 3,00,000
Unsecured creditors A/c Dr. 60,000
To B’s A/c 3,60,000
(Being B’s liability ascertained)
B’s A/c Dr. 3,60,000
To Bank A/c 90,000
To Reconstruction A/c 2,70,000
(Being B’s liability discharged)
Unsecured creditors A/c Dr. 3,00,000
To Equity share capital A/c 1,12,500
To Loan (Unsecured) A/c 75,000
To Reconstruction A/c 1,12,500
(Being settlement of unsecured creditors)
Share call A/c Dr. 1,80,000
To Share capital A/c 1,80,000
(Being final call money due)
Bank A/c Dr. 1,80,000
To Share call A/c 1,80,000
(Being final call money received)
Share capital A/c (Face value Rs.60) Dr. 3,60,000
To Share capital (Face value Rs. 7.50) 45,000
To Reconstruction A/c 3,15,000
(Being share capital reduced to Rs.7.50 each)
Reconstruction A/c Dr. 8,70,000
To Profit and loss A/c 8,70,000
(Being reconstruction surplus used to write off
losses)
Working Notes:
1. Settlement of claim of remaining unsecured creditors Rs.
75% of Rs.3,00,000 2,25,000
Considering their claim for share of Rs.60 each
2,25,000/60 =3,750 shares
Less: Number of shares to be issued
3,750 x 4= 15,000 shares of Rs.7.5 each
Total value= 15,000 x 7.50 1,12,500
Transferred to Reconstruction A/c 1,12,500
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© The Institute of Chartered Accountants of India
Accounting
2. Ascertainment of profit and loss account’s debit balance at the time of
reconstruction.
Rs. Rs.
Asset
Fixed assets 3,90,000
Cash 2,70,000 6,60,000
Less: Capital & Liabilities:
Share capital 1,80,000
1st Debenture 3,00,000
2nd Debenture 6,00,000
Unsecured creditors 4,50,000 15,30,000
Profit and loss A/c (Debit balance) (8,70,000)
Summary
1. Reconstruction is a process by which affairs of a company are reorganized by
revaluation of assets, reassessment of liabilities and by writing off the losses
already suffered by reducing the paid up value of shares and/or varying the
rights attached to different classes of shares.
2. Reconstruction account is a new account opened to transfer the sacrifice made by
the shareholders for that part of capital which is not represented by lost assets.
3. Reconstruction account is utilized for writing-off fictitious and intangible assets,
writing down over-valued fixed assets, recording new liability etc.
4. If some credit balance remains in the reconstruction account, the same should
be transferred to the capital reserve account.
5. Methods of Internal reconstruction :
• Alteration of share capital :
(cid:57) Sub-divide or consolidate shares into smaller or higher Denomination
(cid:57) Conversion of share into stock or vice-versa
• Variation of shareholders’ rights :
(cid:57) Only the specific rights are changed. There is no change in the amount
of capital.
• Reduction of share capital
• Compromise, arrangements etc.
• Surrender of Shares.
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© The Institute of Chartered Accountants of India