INTERNAL RECONSTRUCTION (IRC) Seriated Learning: Bena Reconstruction, Internal Reconstruction, Causes and Objectives of Internal Company, Gi) Chi pul rject, Matter of Internal Reconstruction—4i) Alteration in Share Capital of pany, (ii) Change in Sharcholder’s Right, (iti) Reduction in Share Capital, (iv) Compromise and Agreement with creaditor and Debentureholders, (v) Capital Reductio i Asreement with eniitor dad Debontu apital Reduction Account, (vi) Difference between ‘As human beings are engulfed by number of di ing their life ‘larly Pe error eberyetmewni ct kg Alert ira nom Loss. Sometimes these diseases take such a bad shape that curing them is not, possible without surgery In context to this, Internal Reconstruction of a company is a surgery through which a company can get rid of its sufferings and can again begin its healthy life. In same sense, step of reconstruction is taken to reorganise the financial structure of a company. 3 Reconstruction is a very wide term for which an evident and universal definition is not possible. In wider sense word reconstruction includes alteration in legislation of a company, alteration in interests and rights of shareholders or alteration in interests and rights of debentureholders and creditors. Kinds of Reconstruction : Reconstruction is of two types : (Internal Reconstruetion. (i) External Reconstruction. Internal Reconstruction : Internal Reconstruction means reorganisation of financial structure of company. It is possible that company has suffered heavy losses during the past years, value of assets of company has decreased considerably or company is over-capitalised. Above this, owners and creditors of company want to save company from winding up. In such condition, only one remedy is available and that is remedy of Internal Reconstruction of Company. In process of reconstruction all the concerned parties have to sacrifice as per requirements, so that a company is able to get new life through coordinated efforts of all the parties concerned. ELL. Kohler has given it the name of Partial Re-organisation : According to him losses of company are written-off without forming a new company and conditions of profit are developed by eliminating conditions of losses. Characteristics or features of Internal Reconstruction 1. Through re-capitalisation, the capital structure of the existing campany can be reformed. 2. To write off past losses. 3. Tomake proper capital gearing of the company. Causes and Objectives or Desirabilaty of Internal Reconstruction : Following are the causes of Internal Reconstruction : . 1. ‘There is need to set-off excessive losses which have accumulated in the past years, 2. There is need to simiplify complex capital structure and to make it compatible to modern thoughts. 3, There is a fall in productivity and efficiency of company. 4, Alteration in Capital Gearing is required. 5. Alteration in face value of shares is required. oe 1. External Reconstruction is discussed in the chapter Amalgamation and External Reconstruction. Scanned with CamScanner2 | Jawahar Corporate Accounting SUBJECT MATTER OF INTERNAL RECONSTRUCTION Following points are studied under Internal Reconstruction : 1, Alteration in Sharo Capital of Company. 2. Change in Shareholder’s rights, 8. Reduction in Sharo Capital of Company. 4, Agreement and compromises with Creditors and Debentureholders of the Company. ALTERATION IN SHARE CAPITAL OF A COMPANY ; Meaning : Altoration in share capital of company means incrouso in share capital, consolidation or division of shares or conversion of share capital into stock or roconversion of stock into share capital or sub-division of shares. Provisions related to alteration in share capital of company are mentioned under Section 61, 62 and 64 of the Companies Act, 2013, (2) Increase in Share Capital : (Section 61); When whole Authorised Capital of company has been issued and is paid-up then too company finds it necessary to increase its share capital so that new shares can be issued. - Legal Provisions : Following are the legal provisions in relation to increase in Authorised Capital: (i) Notice of increase in share capital shall be given to Registrar within 30 days from the date when the resolution is passed-Rule 15, Companies (Share Capital and Debentures) Rules, 2014 i) Itis compulsory to take permission of SEBI. (ii) Accounting Procedure : Authorised Capital is increased and then shown in Balance Sheet : (iv) On issue of new shares : Assuming that full amount is payable on application. (@) Bank ale Dr. To Share Application and Allotment a/e (Being application Money received) (b) Share Application and Allotment a/e Dr. ‘To Share Capital a/e (Being shares issued) () Increase by an Order of Central Government : Where the Central Government has by an order made under Section 62 (6), directed that any debenture or loan or any part there of shall be converted into shares, in a company, the conditions, contained in the memorandum of such company Accounting Procedure : Following entries are recorded for conversion of loan or Debedtuses'iito Share Capital : Loan/Debentures a/c me To...Share Capital a/e (Being Loan/debentures Converted) @) Consolidation of Shares : When company d ce increases face value of shares, itis termed as consolidation of shat For Exacy 20 eee 10 each are consolidated into 2,000 shares of € 100 each, 7 ‘xample : 20,000 shares of Notice of increase in share capital shall be given to Registrar Role 16, —Section 61. and Debentures) Rules, 2014 Companies (Share Capital Accounting Entry : Old Share Capital a/c Dr. (Old fa i . ce value per share Nc ‘To New Share Capital a/c 0. of Sahres) (Being face value of Shares consolidated.) (New face value per share No, of Shares) Scanned with CamScannerSS >00€;(0C@—O Internal Reconstruction IRC | 3 In case of consolidation of shares, the paid up capital remains the same but the number of shares | is reduced. (8) Sub-Division of Shares : Division of shares of ‘higher face value into shares of lower face value ~y _ is known as sub-division of shares, For example, company converts 20,000 shares of 7 100 each into 2,00,000 shares of ¥ 10 each after sub-division. —Section 61 Notice of increase in share capital shall be given to Registrar Rule 15, Companies (Share Capital and Debentures) Rules, 2014 Accounting Entry : Old Share Capital w/e Dr. (old face value) ‘To New Share Capital ae (new face value) Being shares Sub-divided.) In case of sub-division of shares, the number of shares is increased. Specific Poi {) In case of partly paid up shares, the ratio between the paid up and unpaid amount on the shares continues‘to be the same after sub-division as before. For example,if 10,000 shares of 2 100 each, 7 80 paid up (80%) are sub-divided into 1,00,000 shares of € 10 each, the paid up amount must be 2 8 per share (80% of nominal Value), Gi) In case of consolidation and sub-division, there will be no change in the amount of total paid up capital of the company. Only the face value of the shares and the number of shares change. ii) In case of consolidation and sub-division of shares only the number of shares and face value changes. (iv) Conversion of Shares into Stock and Reconversion : Company can convert its fully paid-up shares into stock and stock into shares. —Section 61 Legal Provisions :" 1. Only fully paid-up shares of the company can be converted into stock. 2. It is compuléory to obtain permission of Stock Exchange if shares have been listed on ‘stock exchange. * 8. Notice to this effect shall be given to Registrar within 30 days: Accounting Procedure : a * First Method : Appropriate detailed amendments aré made in ledger and share capital account. can be replaced by stock account. *- Second Method : Journal Entries can be recorded which are as follows : ‘On conversion of shares into stock : .Share Capital a/e Dr. Toa nnsStock a/e (Being Shares Converted into Stock) ‘On conversion of stock into shares : Stock ale Dr. ‘To Share Capital a/e (Being Stock Converted into Shares) (6) Cancellation of Unissued Share Capital : Company can cancel such share capital which has not been issued and no person has agreed to take it. Accounting Procedure : No accounting entry is needed for such cancellation. Only reduced authorised capital is to be shown in the new balance sheet. Example : A company with an authorised capital of @ 60,00,000 and issued capital of € 50,00,000 can alter its capital to authorised capital of ® 50,00,000 and issued capital € 50,00,000. Scanned with CamScanner4_| Jawahar Corporate Accounting EXAMPLES AND QUESTIONS AT A GLANCE ‘[Link]. Particulare Examples | Questions Alteration in share capital of company 1,2,3,4 | 1,23 . | Reduction in Share Capital 5,6 4,56, 7 3. | Reduction in Sharo Capital and Capital Reduction Account and Balance Sheet 7,8 8,9,10 4. | Sottlement of Debts e a 5. | Scheme of Capital Reduction and Arroars of Dividend 10 12 6. Sacrifice of outstanding interest and Arrears of Dividend 11 13 7. | Payment of creditors partly in Cash and Partly in Debentures 12 4 8. | Miscellaneous x 15,16 9. Surrender of Shares 13 x 10. | Internal Reconstrution without r Reduction in Share Capital | ou 17 Example : 1 (Consolidation of Share Capital) A Company consolidates its share capital of 2,00,000 Equity shares of € 10 each fully paid into 20,000 Equity shares of € 100 each fully paid up. Give Journal entries. Solution : Journal nae a Lr. | Amount | Amount Dr. Cr. Date z z of | 10 Equity Share Capital a/c Dr. 20,00,000 consoli- | To 100 Equity Share Capital a/c 20,00,000 dation | (Being 2,00,000 Equity Shares of & 10 each consolidated | into 20,000 equity shares of 100 each) Note : Two entries, instead of above one entry, can also be made, Date z z of | 10 Equity Share Capital a/c Dr. 20,00,000 Consoli- | ToSundry Members a/e 20,00,000 dation | (Being ¥ 10 Equity Share Capital credited to Sundry Members Account for the purpose of consolidation) » [Sundry Members a/c Dr. 20,00,000) ‘To® 100 Equity Share Capital a/e 20,00,000 (Being consolidation of % 10 equity shares into ¥ 100 equity shares, Sundry Members Account closed by Crediting to ® 100 equity share capital) Example ‘A Company wants to sub divide its 1,000 equity’ :2 (Sub-Division of Shares) into equity shares of € 100 each. Pass journal entries for the sub division. shares of 1,000 each, on which ® 600 were paid up, Scanned with CamScannerInternal Reconstruction _ IRC | 5 Solution : Journal Entry Date Particulars EAU | are oue Dr. Cr. Date z z of Sub- | % 1,000 Equity Share Capital a/c 1,000 shares x % 600 Dr. 6,00,000 Division | To 100 Equity Sharo Capital w/e 6,00,000 Being 10 Equity Shares of ® 100 each on which ¥ 60 pe paid up are allotted to sundry members for their every 1,000 share held) As the existing shares are partly paid up, the company can sub divide these shares into partly paid up shares only. Ratio between the paid up and non paid up amount for the new shares should be the same as it was for the original shares. Thus, the company can issue 10 shares of € 100 each for each one share of % 1,000 each. The paid up value of lower denomination share @ 100 should be 8 60 per share Example: 8 (Consolidation and Sub Division) On 81st December, 2013, Kagaro Ltd. had Authorisd Capital of ® 4,00,000 into shares of 10 each. All shares were issued on which € 8 were paid up. On 1st May, 2014 the company in Annual General ‘Meeting decided to sub-divide each share into two shares of ® 5 each, & 4 paid up. On 1st June, 2015 the company in Annual General Meeting resolved to consolidate 40 shares of @ 5; % 4 paid up into one 100 shares, & 80 paid up. Pass Journal Entries and show how share capital will appear in Balance sheet as on 1st May, 2014 and Ist June, 2015. [[Link] : Jaunpur U. : 2014 (fig #) 1 Solution: Journal Entries ‘Amount | Amount Date Particulars LR | A rs 2014 z z Ast May | % 10 Equity Share Capital a/c (40,000 Shares x%8) Dr. 8,20,000 ‘To® 5 Equity Share Capital al/e 3,20,000 (Being sub division of 40,000 shares € 4,00,0007 10) of 10 into 80,000 shares of @ 5, @ 4 paid up) 2015 |%5 Equity Share Capital a/c Dr. 3,20,000 ‘To 100 Equity Share Capital a/e 8,20,000 (Boing consolidation of 80,000 equity shares of €5, % 4 paid up into 4,000) Equity Shares (& 4,00,0007 100) of € 100, & 80 paid up) Balance Sheet (1st May, 2014) Note | Amount Particulars ‘No. z L Equity and Liabilities: 1. Shareholder’s Funds: (a) Share Capital: ® “authorised : 80,000 Equity Shares of € 6 each 4,00,000 Issued and Subscribed fully paid up : 80,000 Equity Shares of ® 5 each, & 4 paid up Scanned with CamScanner8 | Jawahar Corporate Accounting Balance Sheet (1st June, 2015) Note | Amount Particulars ‘No. z L Equity and Liabilities: 5 1. Shareholder’s Fund: (a) Share Capital: Authorised : 4,000 Equity Shares of € 100 each 4,00,000 Issued and Subscribed fully paid up : 4,000 fs vot dae Equity Shares of € 100 each, 80 paid up 3,20,000 Example : 4 (Conversion of Share into Stock and Reconversion) Depression Ltd. had % 10,00,000 authorised capital on 31..2013 divided into shares of % 100 each out of which 6,000 shares issued and fully paid up. In Sept., 2013 the company decided to convert the issued shares in stock. But in Sept., 2014 the company reconverted the stock into shares of € 10 each fully paid up. Pass entries and show how share capital will appear as at 31..2014 and 31.3.2016 in the B/S. Solution : Journal Entries 2013 z z Sept. | Equity Share Capital a/c Dr. 6,00,000 To Equity Stock 6,00,000 (Being conversion of 6,000 fully paid shares of € 100 each into € 6,00,000 stock) 2014 | Equity Stock a/e Dr. 6,00,000 Sept. To Equity Share Capital a/c 6,00,000 (Being conversion of % 6,00,000 stock into 60,000 share of 10 each fully paid up) Balance Sheet (as on 31.3.2014) Partici Note | Amount lars No. z L Equity and Liabilities: 1. Shareholder’s Funds: (a) Share Capital: 10,00,000 Authorised : 10,000 Equity Shares of € 100 each Issued : Equity Stock 6,00,000 Balance Sheet (as on 81.3.2015) Particulars ‘Note | Amount L Equity and Liabilities: 1. Shareholder’s Funds: ,00,000 Equity Shares off 10 each Issued : 60,000 Equity Shares off 10 each fully paid Subscribed and fully paid : 60,000 Equity Shares of 10 each fully paid Scanned with CamScannerInternal Reconstruction irc | 7 __ CHANGE IN SHAREHOLDE! When company has issued different classes of shares wi (cights as to dividend, repayment of eapital). Any of such rig __Ggample, company may change rate of dividend on preference shares, ‘Accounting Procedure : The accounting entries are given below : (i) For reduction in the Rate of Dividend : ; {8% Cumulative Preference Share Capital a/e To 6% Cumulative Proference Share Capital a/c Being rate of dividend Changed) (i) For Change from cumulative to Non-Cumulative : 10% Cumulative Preference Share Capital a/e Dr, To 10% Non-Cumulative Preference Share Capital a/c (Being class of preference Shares Changed) Note : There is no change in the amount of share capital, REDUCTION IN SHARE CAPITAL Generally reduction in share capital of company is termed as Internal Rect ion i share Guaitay is carried out with an objective o sot-aff business losses and fictitious assets to denice assets at their real value, to eliminate or reduce the liability of shareholders in respect of uncalled ‘amount ete. The word Capital includes, Authorised Capital whether issued or unissued, fully paid or partly paid and stock is also included in shares. Procedure for reduction in share capital of company is described in Section 66 of the Companies Act., 2013, FORMS OF CAPITAL REDUCTION AND ACCOUNTING TREATMENT (Section 66) ‘Three methods of Capital Reduction have been described under Section 66 which are as follows 1. Extinguishment of Liabilities of Unpaid Amount : Generally liability of the sharcholders is limited to the face value of shares. Thus if full amount has not been called up on shares then shareholders are liable towards the company to the extent of uncalled amount. If company wishes it can extinguish such liability. Following entry would be recorded for doing so : share Capital (Partly Paid-up) a/c Dr. To......Share Capital (Fully Paid-up) a/e (Being partly paid up Shares made fully paid) As liability of shareholders is extinguished both, form and amount of Share capital are altered. 2. Paying-off Paid-up Capital : If company is having capital more than required amount then it ‘can refund this to its members, Following entry is recorded in relation to refund of share capital : (a) When share capital account is transferred to personal accounts of members : : Share Capital a/c “Dr. _ (with the amount refunded) ‘To Shareholders a/e (Being excess capital transferred) (b) When payment is made to shareholders: Shareholders a/c Dr. ‘To Bank a/e (Being excess capital paid) . 3. Cancellation of Lost Capital : Such paid-up share capital which has been lost due to excessive losses or it does not represent any existing assot can be cancelled by the company. In case of doing so following entry shall be recorded : (@)_ On reduction of share capital: - ° cnnwShare Capital a/e Dr. ‘To Capital Reduction a/c’ (Being Share Capital reduced) yunt us 01 sation or Reconstruction a/c in place of Capital Reduction account. In our * Seinfon if ‘along. with eRciders, ‘debentureholders or creditors also suffer losses than Reorganisation ‘Account should be used. 'S RIGHT h different rights attached to such shares hts may be changed in any manner. For Dr. Scanned with CamScanner8 | Jawahar Corporate Accounting (i) Alteration in the Structure of Share Capital Equity Share Capital a/c Dr. Pref, Share Capital ave Dr. To Equity Share Capital w/e ‘To P+ af, Share Capital we To Capital Reduction a/e (Being alteration in structure) (Old) (old) (New) (New) (With the amount of capital reduced) Note : Capital Reduction Account shall be credited with the amount by which reduction in capital has been made. COMPROMISE AND ARRANGEMENT Sections 230 to 239 of the Companies Act, 2013 deal with the compromise and arrangement. The compromise and arrangement are agreements between a company und shareholders, creditors and debenture holders. The accounting treatment is as follows : L Debentureholders a/c Dr. Creditors a/e Dr. Provision a/e Dr. Or Outside Liabilities a/c Dr. To Reconstruction a/e Or Capital Reduction a/e (Being Interest sacrificed.) When Debt and Interest is Sacrificed by Creditors and Debentureholders : (With the amount Sacrificed) (fany) 2. Settlement of claims and payment of outside liab’ ies : The creditors and/or debenture holders may have to be ‘paid in’eash or they may accept fixed assets of the company or new shares or new debentures or both in Settlement of their claims. Outside Liabilities a/c ett 2 t06 Dr. (Amount of Liabilities and ; Claims) To Bank a/c (Payment in cash) To Assets a/c (Agreed Value of Assets) To New Debentures a/c (Payment in new Debentures) ‘To New Share Capital a/c (Payment in new Shares) (Being Settlement of Claims) 3. Unpaid preference dividend is sacrificed by Preference Shareholders (Given in the Balance Sheet) : Unpaid Pref. Share Dividend a/e Dr. (With the amount of dividend unpaid) Or Proposed Preference Dividend a/e To Capital Reduction a/c (Being pref. dividend Sacrificed) 4 Arrears of Dividend (Does not appear inthe Balance Sheet) But paid now- Gi) Capital Reduction a/c Dr. (Dividend ‘To Preference Dividend ale . 'dend Payable) (Being arrears of dividend) Gi) Preference Dividend afe De oe bis "To Bank ale «| Payment of Dividend) To Share Capital a/e To Debentures a/e (Being arrears of dividend paid) Scanned with CamScannerInternal Reconstruction me i'9 5, When Value of assets increases on revalution : Particular Assets a/c ‘To Capital Reduction a/c (Being inerease on revaluation) 6. Profit on sale of investments or uny other Assets: Bank a/c ‘To Investments ale To Fixed Assets ‘To Capital Reduction a/e (Being assets sold) 7. On Transferring Revenue Profits, Capital Profits, Re d Fi i On Transferring Re fits, Reserves and Fund to Capital Dr. (with amount of increase) Dr. (Amount of Sale proceeds) (Amount of Profit) Workmen’s Compensation Fund a/e Dividend Equilisation Reserve a/c General Reserve a/e Security Premium a/e Capital Redemption Reserve a/c Debenture Redemption Fund a/e Share Forfeiture a/c Other Reserves, Profits & Surplus a/e ‘To Capital Reduction a/c (Being Profits etc. transfered to C.R.a/c) Writing off of Lost Capital or Utilisation of Capital Reduction 1, Writing off Fictitious and Intangible Assets : Capital Reduction a/c Dr. To Profit & Loss alc or (Negative Surplus) ‘To Goodwill a/e (written off) To Patent a/c (written off) To Trade Mark a/c To Discount on issue of Shares and Debentures a/e ‘To Preliminary Expenses a/c (Being fictitious/Intangible assets written off) Specific Point :] These eaccounts are to be written off even if the question is silent on this point. 2, Writing down Over Valued Fixed and Current Assets : Capital Reduction a/e Dr. _ (With the amount of reduction) To Fixed Assets a/c To Current Assets a/c (Being reduction in value of assets) 3. Unrecorded new Liabilities or/and Provision : FESPSeey Capital Reduction a/c Dr. (With the name and amount ‘To Particular Liability of liability and provision) or/and Provision a/c (Being provision Created) 4. _ Reconstruction Expense: Capital Reduction a/c " Dr. ‘To Cash/Bank a/e (Being reconstruction expenses paid) Scanned with CamScanner10 _| Jawahar Corporate Accounting 5. Payment of unrecorded Liabilities Reconstruction a/c or Capital Reduction a/e ‘To Bank a/e (Being unrecorded liabilities paid) 6. Balance of Capital Reduction Account : then it is transferred to Capital Reserve Account wi Capital Reduction a/c To Capital Reserve a/c (Being balance transferred to Capital reserve) Specific Point : | The amount to be written off can not ‘exceed the amount credited to Reconstruction Account. Dr. Ifany balance is left in Capital Reduction Account ‘th the help of the following journal entry = Dr. CAPITAL REDUCTION ACCOUNT In case of Internal Reconstruction with an objective to write-off past accumulated losses, to extinguish fictitious assets, to adjust Over/under Valuation of assets and to cancel paid-up capital, company opens a new account in the books which is known as Capital Reduction Account. On the credit side of this account amount sacrificed by all the parties is recorded and on debit side Trading Losses, Fictitious Assets, Reduction in value of assets etc, are recorded. Meaning of ‘To’ and ‘By’ in questions related to Capital Reduction : ‘To’ means that share capital has been reduced to that amount. For example—The shares of a company are of 100 each and these are to be reduced to % 60. It means that price of share of a company is only @ 60, and it is to be reduced by € 40. ‘By’ means that share capital has to be reduced by that amount. For example—The shares of a company are of € 100 each and these are to be reduced by € 40 each. It means that each share has to be reduced by € 40 and new the value of it shall be € 60. SPECIMEN OF CAPITAL REDUCTION ACCOUNT ze Dr. 3 Particulars z Particulars z To P & L ale (Loss written-off) By Share Capital a/c ‘To Goodwill (Written-of) (Amount of Reduction) To Preliminary Expenses By Debentures a/c (Written-of) (Amount of Reduction) To Discount on Shares/ By Creditors a/c Debentures (Written-off) (Amount of sacrifice) ‘To Assets (Decrease in value) By Assets a/c ‘To Bank a/c (Payment of (Increase in the value) unrecorded liability) ‘To Bank a/c (Payment of By Bank alc Reconstruction Exp.) (Sale of unrecorded Assets) ‘To Bank a/c (Arrears By Provision a/c (not required) of Pref, Dividend paid) ‘To New Provision a/c To Capital Reserve ale (Balancing figure if any) Revit ‘ged Balance Sheet : Once the scheme of reconstruction is completed a revised balance sheet 4d Balot of Share Capital after reduction and debentures and creditors after sacrifice are is prepared. 5 ate Afubility side of amended balance sheet and fixed and current assets are shown on the shown on the revised value on a! ‘The word.. required by ‘Tribunal order. sets side, losses and fictitious assets are eliminated. "(And Reduced) should be added after the name of the company for a certain period as Scanned with CamScannerInternal Reconstruction IRC | 11 Toon Reconstruction IRC | EXTERNAL AND INTERNAL RECONSTRUCTION External Reconstruction No. 1, | Old company is liquidated. 2. 3, Internal Reconstruction Old company is not liquidated. New company is not formed. Old company is not purchased. Anew company is formed. New company purchases all the assets and liabilities of old company. 4 In this losses are set off and extra i In this losses are written-« races: srorking capital ea his losses are written-off and process of alteration in share capital and reduction of share capital is carried out. Example: 5 (Reduction in Share Capital) (a) Bajaj Ltd, had an issued share capital of € 1,00,00,000 divided into 1, journal entries. (b) Kajaria Ltd. had 2,00,000 Authorised capital divided into 20,000 shares of? 10 each. All these shares were issued and were paid to the extent of 7 per share. The company decided in 2014 to pay off & 2per share and to reduce the € 10 share to 5 per share fully paid up by cancelling unpaid amount, fore wast on credit balance in Surplus P & L Account. Pass Journal entries and Prepare Balance Sheet on 31.12.20) Solution: (a) Journal Entries Date Particulars tr | Amount | Amount Dr. Cr. z z % 100 Equity Share Capital a/e Dr 80,00,000 ‘To 80 Euity Share Capital ale 80,00,000 (Being extinguishing of Liability on 1,00,000 equity shares @7 20 per share, not yet called by making partly paid shares as fully paid) ®) Journal Entries T ; Amount | Amount Date Particulars Lr. | Amou nou z z 2014 Share Capital a/c Dr. 40,000 ‘To Sundry Members/Shareholders a/c 40,000 GBeing transfer ® 2 per share on 20,000 shares for repayment) ‘Sundry Members/Shareholders ale Dr. 40,000 To Bank ale 40,000 (Being payment made to Shareholders) Surplus/P & Lale Dr. 40,000 ‘To Capital Reserve ale 40,000 (Being transfer upon repayment) 10 Share Capital ae (Partly paid) Dr 1,00,000 To %5 Share Capital a/c (Fully paid) 1,00,000 (Being cancellation of 7 5 per share on 20,000 shares to bring them 25 per share fully paid) Scanned with CamScanner12_| Jawahar Corporate Accounting Balance Sheet a Note Amount Particulars ‘No. z L Equity and Liabilitie 1. Sharcholder’s Funds: () Share Capital: 1 2,00,000 (b) Reserves and Surplus: 2 60,000 Notes to Accounts: 1, Share Capital z Authorised : 40,000 shares of 6 each 2,00,000 Issued Capital : 40,000 shares of @5 each 2,00,000 Subscribed & Fully Paid : 40,000 shares of € 5 each 2, Reserves and Surplus Capital Reserve P&LA Example : 6 (Reduction in Share Capital) On the reconstruction of a company the following terms were agreed upon : The shareholders to receive in lieu of their present holding (viz., 50,000 shares of € 50 each) the following: (a) Fully paid Equity shares to 2/6th of their holding. (b) 5% Preference shares, fully paid to the extent of U5 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 have been received in cash. ‘The Goodwill, which stood at & 3,00,000 was written down to ® 1,50,000. The Plant and Machinery, which etood at? 1,00,000, was written down to® 75,000. The freehold and Leasehold premises, which stood at 1,50,000, were written down to € 1,25,000. ‘Make the Journal Entries in the books of the company on the basis of above transactions. [[Link]. Garhwal : 2002, Kanpur : 2002 & 2008 & 2010, Raipur : 2003; Meerut : 2001, Rohitkhand : 2002, & 2003; Kurukshetra : 2003; Dr. B.R.A.U. : 2009; & Garhwal U.: 2012, Udaipur U.:2012 ] Solution : Journal Entries - z z ww Share Capital a/c Dr. 5,00,000 ‘To Equity Share Capital a/c 2,00,000 To 5% Pref. Share Capital a/e 40,000 ‘To 6% Second Debentures a/e 60,000 To Capital Reduction a/c 2,00,000 (Being new Equity shares, 5% Preference shares and 6% second debentures issued in lieu of old shares and Capital reduction a/c created by % 2,00,000) 2. [Capital Reduction a/c Dr. 2,00,000 ‘To Goodwill a/e 1,50,000 ‘To Plant and Machinery a/c "95-000 ‘To Freehold and Leasehold Premises a/c 25,000 (Being assets written down) . | Beingasesoorrovors ink a/e Dr. 3. | Bena o's First Debentures ale 50,900).| 50,000 (Boing amount received on the issue of 6% First debentures) Z eee [ Scanned with CamScannerInternal Reconstruction IRC _| 13 Notes to the Solution : (2) 50,000 SH x & 10 = % 5,00,000 x 2/6 = @ 2,00,000 (New Equity Share Cap.) (2) 2,00,000 « U5 = 40,000 (New Pref. 8. Cap.) (3) & 6,00,000 (Old 8, Cap) = 8 2,00,000 (New ln. Cag) a6,p0G (New Pret 8. Cap.) ~¥ 60,000 (6 Second Deb.) = 2,00,000 (Cap. Reduction a/c), (4) Goodwill :® 3,00,000 ~ 1,50,000 = 150,000 (5) Plant & Machinery : 1,00,000~% 75,000 = 25,000 (oy Io , FE150,000 = 128,000 0 aac: °,000 = 25,000. (6) Frechold and Leasehold Premises * The following two ent 8 can also pass instead of Entry No, 1; z z Share Capital a/e . Dr. 5,00,000 ‘To Shareholder's a/e ees 0 00, ¢ (Being reduction in share Capital) Fn0i00 Shareholder’s ale 5,00,000| To E.S Capital a/e 2,00,000 To 5% Pref. S, Capital a/c 40,000 To 6% Second Deb. a/c 60,000 ‘To Reconstruction a/c 2,00,000 (Being Shareholders Claim Settled) L Equity and Liabilities: 1. Shareholder’s Funds (a) Share Capital: Authorised : 10,000, 5% Pref. Shares of & 100 each 10,00,000 10,000 Equity Shares of @ 100 each 10,00,000 Subscribed and fully paid: \.-41500, 5% Pref. Shares of % 100 each fully paid 7,50,000 «5,000 Equity Shares of € 100 each fully paid 5,00,000 (b) Reserves and Surplus: Profit and Loss a/e (Negative) {-} 4,15,000) 2. Current Liabilities: > Creditors 30,000 Bank overdraft = 20,000 11,85,000 TL Assets: 1. Non-current Assets: (a) Fixed Asset Lease hold Premises 1,380,800 Plant 42,200 Patent at cost 8,50,000 2, Current Assets: ~ - . Cashin hand 500 Stock 55,000 Debtors 76,500 ‘Unamortized (Preliminary) Expenses Scanned with CamScanner14 | Jawahar Corporate Accounting "Tho company suffered from hugo lossos andl was not getting on well. The following scheme of reduction of share capital was adopted. Shard, THe Preference Shares bo reduce inn equal umber ares be reduced to an equal number of fully paid shares of 8 26 ‘write offpreliminnry expensen, Profit & Laas ae, completely afd also to write off & 40,800 of the Leasehold promises, & 16,000 of stock, 20% of plant and aundry debtors and the balance available of patents. Journalise the transactions and propare the Balance Sheet after the reduction has bee: en [Link]. : Jabalpur : 2007, Dr. BRA.U. : fully paid shares of € 50 each. 2. The Equity Benen, 3 ‘The amount available be used to Solution : In tho Books of Gangotri Tox Ltd. Journal Entries z z 5% Pref. Share Capital (€ 60) a/e Dr. 3,75,000 Equity Share Capital (© 75) Dr. 8,76,000 ‘To Capital Reduction a/c 7,50,000 (Being 7,500 Preference shares reduced from % 100 to % 50 each and 5,000 Equity shares reduced from & 100 to 25 each) Capital Reduction a/e Dr. 7,50,000 To Preliminary Expenses a/c 30,000 ToP&Lale 1,13,000 ‘To Leasehold Premises a/c 30,800 To Stock ae 15,000 To Plant a/e 8,440 ‘To Prov. for Doubtful Debt a/c 15,300 ‘To Patents ale 5,35,460 (Being Assets written off) - Gangotri Tex Ltd. (And Reduced) (Balance Sheet as at 31st March, 2015) Particulars Note Amount No. z L Equity and Liabilities: Shareholder’s Funds Equity Share Capital - ‘ Preference Share Capital , 25.00 Current Liabilities: 8,75,000 Trade Payables (Creditors) Short Term Borrowings (Bank Overdraft) 80,000 20,000 TL. Assets: Total ,000 Non-Current Assets: Fixed Assets: (Tangible (Premises and Plant) Gi) Intangible (Patents) 2 1,833,760 Current Assets: 3 3,14,540 Inventories (Stock) * ‘Trade Receivables (Debtors) 4 40,000 Cash and Cash Equivalents (Cash) 5 61,200 500 — 0000S | 60,000 Scanned with CamScanneroe Internal Reconstruction to Accounts: Share Capital: Authorised : 10,000 Pref. Shares of & 5Q each 10,000 Equity Shares of 8 25 cach Issued and Subscribed: ' 7,600 Pref. Shares of ¥ 100 cach Less : Reduction 7,600 SH x ¥ 50 5,000 Equity Shares of ® 100 each Less : Reduction 6,000 SH x 75 Tangible Assots Leasehold Premises z 7.60,000 IRC | 15 * 6,00,000 2,50,000 3,75,000 1,30,800 Less: Written off 30,800 ~ 1,00,000 Plant 42,200 0 Less : Written off (® 42,200 x 20/100) 8,440 33,760 1,33,760 Intangible Assets : a. Patents Less : Written off 2 7,50,000 —2 2,14,540 (% 1,15,000 + 30,000 +%30,800+% 15,000 + 78,440 +2 15,300) = 5,35,460) 3,14,540 Inventories (Stock) : Less: Written off 40,000 61,200 Exampl in in Cap., Cap. Reduction a/c & B/S) ‘Sheet of Govind Ltd. is as under : Particulars z= L Equity and Liabilities: 1. Shareholder’s Funds (a) Share Capital: Subscribed and fully paid: 5,000 8% [Link] of ® 10 each fully paid 50,000 500 Equity Shares of ® 100 each fully paid 50,000 (b) Reserves and Surplus: General Reserve 2,000 Securities Premium a/e 500 P & Lake (Negative) (22,500) 2 Current Liabilities: Creditors 1500 87,50( TL . Assets: [—_—— 1. Non-current. Assets: Fixed Assets at cost 47,500 Goodwill 12,500 2 Current Assets: Stock 12,500 Debtors 15,000 87,500 a Scanned with CamScanner(2015) 16 | Jawahar Corporate Accounting - 2 ‘The following resolutions for internal reconstruction were passed and the scheme was duly approver by the tribunal ; . ° 0) 8% Pref shares of € 10 each to be reduced to 6% Pref. shares of® 6 each fully paid up. Equity shares of % 100 each to be reduced to 250 cach, fully paid up. Creditors to give up their claim for 1,000. i‘ aia Gv) Goodwill and Profit and Loss a/e to be written off completely and Fixed Assets to be written down by€ 9,500. ; i Give j i i i Sheet after the implementation of Give journal entries, Capital Reduction a/e and show the Balance Sheet a entation of the recone cuction chars. {[Link]. : Vikram : 2001, Dr. BRA. ] Solution: In the Books of Govind Ltd. Journal Entries Amount Amount Date Particulars LE. Dr. Cr. z z 8% Pref. Share Capital (© 10) a/e Dr. 50,000 To 6% Pref. Share Capital (€6) ale 30,000 ‘To Capital Reduction a/c = 20,000 (Being 5,000 Preference shares reduced from € 10 to ®6 each) Equity Share Capital (100) ale 50,000 ‘To Equity Share Capital (@ 50) a/e 25,000 To Capital Reduction a/c 25,000 Being 500 Equity Shares reduced from ¥ 100 to 850 each) Creditors ale Dr. 1,000 To Capital Reduction a/c 3,000 Being Amount forgone by creditors) Securities Premium ale Dr. 500 General Reserve a/c Dr. 2,000 To Capital Reduction a/c 2,500 Being Securities Premium a/e and General Reserve ale transferred to Capital Reduction a/c) Capital Reduction a/e Dr. 44,500] To Goodwill a/e 12,500 ToP &Lale 221500 To Fixed Assets a/c 9,500 (Being Goodwill and P & L a/e written off completely and Fixed Assets by & 9,500) Capital Reduction ale Dr To Capital Reserve a/c 4,000 ane Being Balance of Capital Reduction a/e transferred to 2 Capital Reserve a/c) ~ Dr. Capital Reduction Account fe 7 z ; ToGondwill ae 32.600 | By Pref. Share Capital @ 10) afe 20,000 9. iu \ 'y Equity Share Capit To Fixed Assets ale | 9,500 | By ereditorg. Pita! & 100) ave eenon To Capital Reserve al (Bal. Fig. 4,000 | By Share Premium a/e "500 By General Reserve a/e 2,000 8,500 Scanned with CamScannerInternal Reconstruction IRC 17 ee a IRC E | 17 Govind Ltd. (And Reduced) Balance Sheet Particulars Note | Amount No. z 1. Equity and Liabilities: 1, Shareholder's Fund: (a) Share Capital 1 55,000 (b) Reserves and Surplus (See cap. red. a/e) 4,000 Current Liabilities: , ‘Trade Payables (Creditors) 6,500 Total [65,500 TL. Assets: | = eae Non-Current Assets: Fixed Assets 2 38,000 Current Assets: ’ Inventories (Stock) 12,500 ‘Trade Receivables (Debtors) 15,000 Total [65,500 Notes to Accounts: 1. Share Capital: z z Preference Share Capital: 5,000, 8% Pref. Share Capital of 10 each 50,000 Less : Reduction on reconstruction replaced by 6% Pref. Shares (5,000 x € 4) »' 720,000 30,000 Equity Share Capital: 500 Equity Shares of % 100 each 50,000 Less : Reduction (600 x ® 50) 25,000 25,000 55,000 2. Fixed Assets: ATO Less : Written off 9,500 38,000 Example : 9 (Settlement of Debts) Mis Dalal & Co. Promoted a joint stock company in 2008. The working of the company was not successful on account of abnormal depression in [Link] 31st March, 2015 the Company's Balance was as ‘under: Particulars L Equity and Liabilities: 1, Shareholder’s Funds (a) Share Capital: (0 Aatherioed 20,000 Shares of 100 each 20,00,000 Issued Subscribed & fully Paid up : 19,000 Shares of 100 each 19,00,000 (b) Reserves and Surplus P & L ale (Negative) (9,70,000) Current ities: calor 1,00,000 Dalal & Co, (Promoters) |__1,00,000 11,30,000 Scanned with CamScanner18 | Jawahar Corporate Accounting IL Assets: 1. Non Current Assets: 1,00,000 Building 2,60,000 Machinery, "20,000 Furniture ‘ Goodwill a 2. Current Assets: Se 3,70,000 Debtor 1,80,000 11,30,000 It was decided to reconstruct the company on the basis of the following scheme : (i) The 19,000 shares of & 100 each are to be reduced to an equal number of fully paid shares of @ 40 each. (ii) ‘The debts of ¥ 1,00,000 due te Dalal & Co. (Promoters) was also to be reduced, the remaining 1,000 unissued shares being issued to them as fully paid shares of € 40 each in full settlement of the amount due to them. (ii) The amount, thus rendered available by the reduction of capital and by the above arrangement with Dalal & Co. is to be utilised as under : Goodwill and P & L a/c both to be written off entirely and the balance to be written off the machinery. Give the necessary entries and prepare New Balance Sheet. Solution: Journal Entries z z Share Capital a/c (% 60) Dr. 11,40,000 To Capital Reduction a/c (% 60) 11,40,000 (Being capital reduced) Dalal & Co. ale Dr. 1,00,000 To Share Capital a/c (% 40) 40,000 To Capital Reduction a/c (% 60) 60,000 (Being payment of promoters by issue of 1,000 shares of %4( ch) poms Capital Reduction a/c 12,00,000, To Goodwill a/e 2,00,000 To Profit & Loss a/c 9,70,000. ‘To Machinery a/c 30,000 (Being written off the assets) Notes to the Solution : 711,40,000 + % 60,000 =% 12,00,000 -¥ 2,00,000 ~ 9,70,000 = % 30,000 used to write off machinery. Balance Sheet (After Reorganisation) Particulars Note | Amount No. z L Equity and Liabilities: Shareholder’s Funds: Gureeatzisnittes 1 8,00,000 Trade Payables (Creditors) oo Total 9,00,000 Scanned with CamScannerInternal Reconstruction IRC_| 19 TL Assets: Non-current Assets: Fixed Assets (Tangible) 2 3,50,000 Current Assets: Inventories (Stock) 3,70,000 Trade Receivables (Debtors) 1,80,000 ‘Total [-9,00,000 Notes to Accounts : z z 1, Share Capital: Authorised : 20,000 shares of € 40 each 8,00,000 Issued and Subscribed paid up : as 19,000 shares of & 100 each. Less : Reduction (® 19,000 x 60) 7,60,000 1,000 Shares issued to Dalal & Co. at 40 per share 40,000 8,00,000 2. ‘Tangible Assets, Buildi 1,00,000 iture 20,000 fachinery (8 2,60,000 - % 30,000) 2,830,000 _ 3,50,000 Example? 10 (Scheme of Capital Reduction and Arrears of Dividend) 1¢ Share Capital of Z Ltd. consisted of the following : 10,000 6% Preference shares of € 100 each; and (ii) 50,000 Equity shares of & 10 each. ‘The shares were fully paid and by the end of 2012, it had accumulated losses of Z 3,50,000 besides preliminary expenses totalling % 20,000. It was also ascertained that the fixed assets which stood in the books at 14,00,000 were over valued to the extent of & 4,00,000. Ascheme of capital reduction was adopted and approved by the Tribunal in order to remove the over- valuation and to write off the losses and preliminary expenses. Under the scheme the 6% preference shares were to be converted into 7.5% preference shares of ® 60 each and the Equity shares were to be converted into shares of 2 each. Also the dividend on the preference shares which were in arrear for three years were to be cancelled. (Pref. shares are non-cumulative) State the Journal Entries to be passed on the implementation of the scheme. Solution : Journal Entries 2 wlie © 1. | 6% Preference Share Capital a/e Dr. 10,00,000 To 7.5% Preference Share Capital a/c 6,00,000 To Capital Reduction a/c 4,00,000 (Being Preference shares converted and reduced by % 40 each) - 2. | Equity Share Capital a/e @ 10) 1 5,00,000 ‘To Capital Reduction a/c 4,00,000 ‘To Equity Share Cap. a/c (@ 2) 1,00,000 (Being Equity Shares reduced by % 8 each) 3. { Capital Reduction a/e Dr. 7,70,000| : To Profit & Loss a/c 3,50,000 To Preliminary Expenses a/e 20,000 To Fixed Assets a/c 4,00,000 (Being Capital reduction utilised in writing off losses & Preliminary expenses and writing down fixed assets) Scanned with CamScanner20_| Jawahar Corporate Accounting 4. [Capital Reduction a/e Dr. 89,000 ‘To Capital Reserve we B00 (Being Balanco of capital reduction transferred to Capital Reserve) Comment : Pir the balance of proference dividend no entry shull be recorded because preference hares are non-cummulative which has no liability in relation to dividend. (Waive of OFS Interest Arrears of Dividend) fa below is the Balance Sheet of Unwell Ltd. on dist March, 2016 : Particulars z Equity and Liabilities: 1, Shareholder's Funds (a) Share Capital: Issued and Subscribed : 3,000, 8% cumulative Pref. Shares of % 100 each fully paid 3,00,000 4,000 Equity Shares of & 100 each fully paid 4,00,000 (b) Reserves and Surplus: Securities Premium 1,00,000 P& Late (Negative) (171,800) 2. Non Current Liabilities : 6% Debentures 1,00,000 3. Current Liabilities: Creditors 40,000 Interest accrued 6,000 IL Assets: 1. Non-Current Assets: z Fixed Assets 2,20,000 Less: Dep. 40,000 1,80,000 Machinery 440,000" Less: Dep. 80,000 8,60,000 Goodwill aaa 34,000 Patents 44,000 2. Current Assets: Stock 30,000 Debtors 62,400 Unamortized/Preliminary Expenses 64,000 E [774,400 The following scheme of capital reduction was duly sanctioned by the court; (@ Equity shares to be reduced by ® 90 cach, Preference shares to be reduced to ® 90 each. ‘The debentureholders to waive their outstanding interest, (iv) One Equity share, € 6 paid will be issued for every ey s ; arrear for last two years. ery € 100 of preference dividend, which was in (W). Securities Premium and all intangible assets to be written off (vi) Two fixed assets to be reduced proportionally by the balance available. You are required to give Journal Entries and the Balance Sheet after Capital reduction. ([Link]. : Rohilkhand U.; 2014, Dr. [Link],U. Agra 2003] Scanned with CamScannerInternal Reconstruction IRC | 21 Solution : Journal Entries z z Equity Share Capital a/c Dr. 3,60,000 8% Cum. Prof, Share Capital a/c Dr. '30,000 ‘To Capital Reduction a/c 3,90,000 (Being Share Capital reduced) Interest Accrued on Debentures a/c Dr. 6,000 ‘Yo Capital Reduction a/c 6,000 (Being Debentureholders waived their interest) Capital Reduction a/c Dr. 2,400 ‘To Preference Dividend w/e 2,400 (Being Arrears of Preference dividend to be paid) Preference Dividend ale Dr. 2,400 To Equity Shares Capital a/e 2,400 (Being 480 Equity Shares & 5 paid, issued in satisfaction of preference dividend) Capital Reduction a/c Dr. 3,93,600 Securities Premium a/c Dr. 1,00,000 To Profit & Loss a/c 1,71,600 To Preliminary Expenses ale 64,000 ‘To Goodwill a/c 34,000 To Patents a/c 44,000 ‘To Property ale 60,000 ‘To Machinery a/c 1,20,000 (Being Balance of Capital reduction and Securities premium| utilised in writing off various assets and losses) Revised Balance Sheet (And Reduced) Particulars ee | Angee Equity and Liabilities: Shareholder’s Fund Share Capital 1 3,12,400 Non-Current Liabilities: ‘Long Term Borrowings (6% Debentures) 1,00,000 Current Liabilities ‘Trade Payables (Creditors) |___40.000 Total 4,52,400 Assets: Non-Current Assets: Fixed Assets: (a) Tangible Assets 2 3,60,000 Current Assets: Inventories (Stock) 30,000 ‘Trade Receivables (Debtors) 62,400 Total * 4,52,400 Scanned with CamScanner22 | Jawahar Corporate Accounting Notes to Account: : 1. Share Capital: Issued and Subscribed : (i) Preference Share Capital @ 100) 3,00,000 Less : Reduction (3,000 SH.x & 10) 0,000 —_-2,70,000 (ii) Equity Share Capital (& 100) 4,00,000 Less : Reduction (4,000 SH x 90) 3,60,000 40,000 (iii) 480 Equity Shares? 65 paid, issued in satisfaction of preference dividend (480 SH x 75) 2,400 ’ 3,12,400 2. Tangible Assets: z z Property 1,80,000 Less :Written off 5 60,000 _1,20,000 Machinery 3,60,000 Less : Written off zl 1,20,000 _2,40,000 Notes to the Solution : 2 1. Arrears of Pref. Dividend : % 3,00,000 x se = © 48,000; No. of Equity Shares to be issued = 48,000/100 = 480 Shares; Value of Equity shares issued = 480 x & 5 = 2,400, 2. Balance of Capital Reduction a/c : % 8,60,000 + 2 30,000 + ¥ 6,000 -& 2,400 = 7 3,93,600 + %1,00,000 (SP) = ¥ 4,93,600; & 4,93,600-% 1,71,600— % 64,000 —% 34,000 ~¥ 44,000 = 1,80,000; 1,80,006 used in writing off property and machinery in ¥ 1,80,000 : 8 3,60,000 or 1-2. ‘The property reduced by %60,000 and Méchinery reduced by 1,20,000, (Payment of Creditors partly in Cash and partly in Debenture) ‘alance Sheet of XYZ Co. Ltd. as on 31st March, 2015 was as follows : Particulars z L Equity and Liabilitio 1, Shareholder’s Funds (a) Share Capital: Issued and Subscribed: 32,000 6% preference shares of ® 10 each fully paid 3,20,000 96,000 Equity shares of ® 5 each fully paid 4,80,000 (b) Reserves and Surplus: z P & Lale (Negative) (144,000) Less : General Reserve 1,600 (142,400) 2. Non-Current Liabilities : 5% Debentures es 00 3. Current Liabilities aaee Creditors IL Assets: 1. Non-current Assets: Land and Building Plant and Machinery Be Goodwill . 224,000 Scanned with CamScanner- Internal Reconstruction IRC | 23 2. Current Assets: Stock | 000 Debtors 96.000 Bills Receivable 32,000 Casi 9,600 FE 169,600 Upon revaluation of the assets, it was found that goodwill was worthless and the other assets were over-valued to the following extent ; Land and Building by % 64,000 and Plant and Machinery by % 88,000, A provision for doubtful debts to the extent of & 8,000 was necessary, ‘The following scheme of reorganisation was approved by the court : (i) The creditors to accept 6% debentures to the extent of 60% of their claims, the balance to be paid in six months after the date. (ii) The preference shares to be reduced to® 5 each, Gii) The Equity shares to be reduced to® 1 each. (iv) ‘The assets to be brought to the revalued figures and the debit balance of the P & L a/c ta be wiped out. Draft journal entries to give effect to the above scheme and prepare the revised Balance Sheet of the ([Link]. : Sagar : 2005; Pt. R.S.8.U. Raipur. : 2004 : M.D.U. : 2609] company. Solution: Journal Entries z z 6% Preference Share Capital a/e Dr. 1,60,000 Equity Share Capital a/c Dr. 384,000) To Capital Reduction a/c 5,44,000 (Being Preference Shares and Equity Shares reduced by®5 and? 4 respectively) Capital Reduction a/e Dr. 5,44,000 ToP&Lale 1,44,000 To Land and Building a/e 164,000 To Plant and Machinery a/c 88,000 To Provision for Doubtful Debts a/c 8,000 To Goodwill a/c 2,24,000 To Capital Reserve a/c 16,000 (Being various assets P & L a/c and goodwill written off) Creditors a/c Dr. 1,60,000, To 6% Debentures a/c 1,60,000 (Being 6% Debentures given to the creditors to the extent of 50% of their clai General Reserve ale Dr. 1,600 To Capital Reserve a/e 1,600 (Being General Reserve transferred to Capital Reserve alc) Balance Sheet of XYZ Ltd. (And Reduced) (as on ist April, 2015) ‘Note | Amount Postilar ie (a L Equity and Liabilities: 1. -Shareholder’s Funds: (a) Share Capital 1 2,56,000 Scanned with CamScanner24 | Jawahar Corporate Accounting (b) Reserves and Surplus (Capital Reserve) 2, 17,600 2. Non-Current Liabilities: Long Term Borrowings (Debentures) 3,52,000 3. Current Liabilitios: ‘Trade Payables (Creditors) | __1,60,000 Total 7,85,600 TL Assets: 1, Non-Current Assets: Fixed Assets (Tangible) 4 5,92,000 2, Current Assets: Inventories (Stock) 64,000 ‘Trade Receivables (Debtors & B/R) 5 1,20,000 Cash and Cash Equivalents (Cash in hand) 9,600 Total = 7,85,600 Notes to Accounts: 1. Share Capital: Issued and Subscribed: z (@) 82,000, 6% Preference Shares of f 10 3,20,000 Less : Reduction 32,000 SH x %5. 1,60,000 1,60,000 (ii) - 96,000 Equity Shares of 5 each. - - “4,80,000 Less : Reduction 96,000 SH x % 4 3,84,000 2. Capital Reserve : 7 5,44,000 -® 5,28,000 ( 1,44,000 +. 64,000 +& 88,000 + % 8,000 + 2,24,000) =. 9 16,000 Add : General Reserve 1,600 17,600 3. Debentures: 5% Debentures 1,92,000 6% Debentures issued to creditors (€ 3,20,000 x 50/100) * _1,60,000 3,52,000 4. Tangible Assets Land and Building *-"3,84,000 ’ Less : Written off - 64,000 3,20,000 Plant and Machinery 3,60,000 Less : Written off 88,000 2,72,000 5,92,000 5. 96,000 8,000 88,000 Bills Receivables a 32.000 1,20,000 ‘6. In case goodwill a/c appears in the Balance She a/c (after writing off the assets and fictitiou goodwill a/c. eet and there remains a balance in capital reduction S assets, this balance must be utilised to write off the SURRENDER OF SHARES Surrender of shares moais voluntarily handing over or giving up the possession of the shares and rights attached there to by a shareholder to the company. A shareholder tare, such step when he finds ° inable to pay the amount dui himself incompetent or unable to pay t e on shares because of joes not want to pay money in future. He can surrender hares held by him at neon wish saans or he does Scanned with CamScannerInternal Reconstruction IRC_|_25 Surrender of shares is a part of the scheme of internal reconstructi ; " ion. The surrendered shares are Re ete the company in reducing or clearing the trading and non trading liabilities. [Example : r a creditors for supply of goods Non-Trading liabilities : Loan and Debentures)] ji company does not reissue its surrendered shares, these shares are cancelled and the amount sacrifices igh cancellation is used in writing off the past trading losses, fictitious and intangible assets and reducing the over valued fixed assets, t Example : 13 (Surrender of Shares and Calculation of Unknown Loss) Somany Ltd. had been suffering from heavy losses in the past. Itis hoped that the worst time is over and the company would start earning profit after reconstructi : iabiliti Cer aes reconstruction, Their assets and liabilities as on 31st Fixed Assets € 1,43,000, Stock ¥ 8,000, Debtors % 8,000, investment & 1,700, cash 10, i ; ), 000, 3,000, 700, #300, Authorised and Issued capital 800, Equity shares of 100 cach 80,000, 6% Debentures 140,000, Sundry ereditors 2 45,000, Income tax 1,000, Accrued interest on debentures % 7,000. ‘The following scheme of reorganization was approved by the court : 1. Bach equity share shall be sub-divided into twenty fully paid equity shares of @ 5 each. 2. After sub division, each shareholder shall surrender to the company 95% of his holding for the purpose of re-issue to debenturcholders and creditors so far as required and otherwise for cancellation. 3, Total claim of debentureholders to be reduced to ® 23,000. This will be satisfied by allotting them equity shares of & 5 each fully paid from the shares surrendered. 4. ‘The liability for income tax was satisfied in full. 5. The claims of creditors shall be reduced by 80% and the balance shalll be satisfied by allotting them equity shares of @ 5 each fully paid from the shares surrendered. The value of fixed assets is to be reduced to ¥ 23,000. |. Shares surrendered and not issued shail be cancelled. Pass journal entries and prepare balance sheet after reorganisation. Solution : 2 Journal Entries Date Particulars ur | At | a % 100 Equity Share Capital a/c Dr. 80,000] To% 5 Equity Share Capital /e ; 80,000 (Being Equity share of % 100 each fully paid converted into equity shares of 5 each fully paid) (No. of shares 80,000 x 20 100 Equity Share Capital a/c Dr. 76,000 ‘To Surrendered Shares a/¢ 76,000 (Being 95% of equity shareholder's holding surrendered) 95 (% 80,000 * 95) Surrendered Shares a/e Dr. 23,000 ‘To Equity Share Capital a/c 23,000 (Being Surrendered Shares issued to Debenture holders) Tncome tax ale Dr. 1,000 ‘To Bank a/c 1,000 lity of income tax paid) =T 16,000) Scanned with CamScanner26 | Jawahar Corporate Accounting Surrendered Shares ale Dr. ‘To Equity Share Capital ae (Being Surrendored Shares issued to sundry creditors to the extent of € 9,000 for their claim upto 20%) Surrendered Shares a/c Dr. 6% Debentures a/e Dr. Accrued Interest w/e Dr. Sundry Creditors a/e Dr. ‘To Capital Reduction n/e or Reconstruction a/c or Reorganisaction a/e (Being Total amount due to debenture holders, creditors and balance of share surrendered a/c transferred to capital reduction a/c) Capital Reduction a/c Dr. ‘To Profit Loss a/c ‘To Fixed Assets a/e ‘To Capital Reserve a/c (Bal. fig) (Being Debit balance of P & L a/c and fixed assets written off and balance of capital reduction a/c transferred to Capital Reserve a/c) Balance Sheet of Somany Ltd. (After Reorganisation) 9,000, 44,000 1,40,000 7,000 45,000 2,36,000 9,000 2,36,000 1,07,000 1,20,000 9,000 L Equity and Liabilities Particulars 1. Shareholder’s Funds: (a) Share Capital: (b) Reserves and Surplus: I. Assets: L 1 Notes to Accounts: Non-Current Assets: (a) Fixed Assets (b) Investments Current Assets: Stock Debtors Cash Share Capital: Issued and Subseriued : (@) 4,600 E. Shares of ® 6 issued or allotted Out of surrondered shares in favour of debentures i) 18,000 E. Shares of ® 6 issued or allotted to creditors regarding their 20% claim (@ 45,000 x 20/100 = (iii) 800 E, Share € 6 (6% of total capital & 80,000) (not surrendered by the sharchol ers) %9,000R 5 = ‘Note No. 36,000 45,000 23,000 1,700 8,000 3,000 |___ 9,200 1,800 Sh) 23,000 9,000 4,000 36,000 Scanned with CamScannerInternal Reconstruction IRC _| 27 2. Capital Reduction % 2,36,000~% 1,07,000 (P & L a/c) —¥ 1,20,000 (F. 3. Fixed Assets € 143,000 - & 1,20,000 (® 1,43,000 -% 23,000) = & 23,000 4, -Cash :% 10,300 -@ 1,000 (1, Tax) = 8 9,300 Notes to the Solution : Calculation of Loss or Negative Balanceof Profit and Loss Acccount : © 80,000 (S. Cap.) + % 1,40,000 (Deb.) + % 45,000 (crs.) + 8 7,000 Accrued Int. on Deb. + 1,000 (I. Tax) 2,738,000 —@ 143,000 (F. Assets) 8,000 (Stock) ~ 3,000 (Drs.) ~¥ 1,700 (Invest.) ~% 10,300 (Cash) 1,07,000 Loss or Debit balance of P & L a/e REORGANISATION SCHEME OR INTERNAL RECONSTRUCTION WITHOUT REDUCTION IN SHARE CAPITAL Reconstruction without reduction in shares capital It is not necessary that share capital be always reduced under the scheme of reorganisation or reconstruction of a company . The scheme of reorganisation or reconstruction is framed for increasing the share capital of the company or it is framed for bringing co-ordination between assets and liabilities or capital and liabilities and assets or Capital, liabilities and assets. Accounting entries depends on the terms and conditions of the scheme. Main characteristics of such scheme are as follows : Changes in the rights of shareholders, conversion of debentures into shares or new debentures, conversion of liabilities into shares and debentures, issue of bonus shares, ete. Example : 14 (Reconstruction scheme without reduction in share capital) On 31st March, 2013 the Balance Sheet of Garden Silk Ltd. was as under : %9,000 Capital Reserve. Particulars ‘Amount L_ Equity and Liabilities: z 1. Shareholder’s Funds (a) Share Capital : Issued and Subscribed Capital : 12,000 Equity Shares of € 10 each fully paid 1,20,000 10,000, 10% Cum. Preference Shares of € 10 each fully paid 1,00,000 (b) Reserves and Surplus: General Reserve 2,00,000 2, Non-Current Liabilities: 9% Debentures of ? 100 each 60,000 Long term loans 32,000 3. Current Liabilities: I. Assets: 1. Non-Current Assets: Fixed Assets 3,85,000 Investment 45,000 2. Current Assets: Stock 50,000 Debtors 36,000 Bank Balance 14,000 5,380,000 For implemention of the expansion programme, the company passed following reorganisation scheme : 1. The Authorised Share Capital of the company to be increased to & 6,00,000 divided into 50,000 equity shares of % 10 each and 10,000, 8% cumulative preference shares of € 10 each. Scanned with CamScanner28 | Jawahar Corporate Accounting 2. ‘The balance of General Reserve is to be capitalised for issue of equity bonus shares to the extent of % 1,165,000, 3. ‘The company decided to issue threo bonus shares of € 10 ench for every four equity shares held. 4. Such shareholders who agree to convert their 10% preference shares into 8% preference shares of equal number were to be allotted one bonus share of 10 each for every 4 preference shares converted, 5. The holders of 9% debentures havo an option to receive cash in full settlement at p: ing equity shares were offered to tho existing shareholders at a premium of 20%. ‘The reorganisation expenses incurred amounting to % 1,000. Assuming that all the preference shareholders and debenture holders exorcised their option of conversion and all the amounts on issue of equity shares were received at the time of application, Give Journal Entries and draft balance sheet after Teorganisation. Solution : In the books of Garden Silk Ltd. Journal Entries Date Particulars Bai) ef HamME, | Amount z z General Reserve a/e Dr. 1,15,000 ‘To Bonus to Shareholder’s a/e 1,15,000 (Being Amount transferred from General Reserve for issue of Bonus shares) 10% Preference Share Capital a/c Dr. 1,00,000 ‘To 8% Preference Share Capital a/c 1,00,000 (Being 10% Preference share capital converted into 8% preference shares capital) Bonus to Shareholder’s ale Dr. 1,165,000 ‘To Equity Share Capital a/c 1,165,000 (Being 9,000 and 2,500 equity shares of € 10 each issued as bonus shares to Equity Shareholders (9,000) and preference shareholders (2,500) respectively as per reorganisation scheme) ‘9% Debentures a/e Dr. 60,000 ‘To Debenture holder's a/c 60,000 (Being Amount transferred to debenture holder's a/c) Debenture holder's a/e Dr. 60,000 To Bank a/c 60,000 (Being Debenture holder's paid off) Bank a/c Dr. 3,18,000 To Equity Share Application and Allotment a/e 3,18,000 (Being Application money received on 26,500 shares @Z 12 per share) Equity Share Application and Allotment a/e Dr. 3,18,000| ‘To Equity Share Capital a/e 365,000 To Securities Premium a/e 53/000) (Being Allotment made) b isation Expenses a/c Dr. fon To Bank a/c Ri a (Being Reorganisation Expenses Paid) r ities Premium a/e : Seow Reorganisation Expenses ale i 4000) og (Boing Reorganisation Expenses written of i __ see. Scanned with CamScannerScanned with CamScanner Internal Reconstruction IRC_| 29 Balance Sheet (After reorganisation) Particulars Nate Amanat lo. Equity and Liabilities: 1. Shareholder’s Funds: (a) Share Capital: 1 6,00,000 (b) Reserves and Surplus: 2 1'37,000 2, Non Current Liabilities: Long-term Loans 32,000 3. Current Liabilities: Creditors 18,000 787,000, IL Assets: 1. Non-Current Assets: (a) Fixed Assets 3,85,000 (b) Investment 45,000 2. Current Assets: Stock 50,000 Debtors 36,000 Bank 3 0 7,87,000 Notes to Accounts: Share Capital: Issued and Subscribed: z 1. (a) Equity Share Capital: 12,000 old Equity Shares (12,000 x € 10) 1,20,000 19,000 Bonus Shares issued to old shareholders (12,000 * 3) = 9,000 x% 10 90,000 2,500 Bonus Shares issued to Pref. Shareholders (10,000 x5 =2,600%8 100) 25,000 Remaining shares issued for cash (60,000 - 23,500 (12,000 + 9,000 + 2,600) = 26,600 Sh. x 7 10 2,65,000 5,00,000 (b) Pref. Share Capital 1,00,000 10,000, 8% Pref. Shares of % 10 each fully paid , 6,00,000 Reserves and Surplu: z z 2 General Reserves: 2,00,000 Less : Bonus to Share holders © 90,000 + ® 25,000) 1,15,000 85,000 Securities Premium 53,000 Less : Reorganisation Exp. 1,00030 | Jawahar Corporaie Accounting 3. Bank: Balance Add : Issue of Shares z 60,000 Less: Debentures holders 5 Reorganisation Exp. 1,000 61,000 2,71,000 QUESTIONS Short Answer Questions Theoretical Questions NPgae 22 i. 12, 13, 14, [Link] r. B.R.A.U. : 2008) What is the meaning of reconstruction ? What is meant by Internal Reconstruction of a company ? ([Link], Meerut U. : 2010, Dr. B.R.A.U.: 2013] What is Capital Reduction Account ? {9 Cem. Dr. B.R.A.U. & Kanpur U, : 2008, Jaunpur U.: 2014) What do you mean by alteration in share capital of a company ? What do you understand by Reduction in Share Capital ? ([Link]. : Avadh.U. : 2014] What is the meaning of consolidation of shares ? Distinguish between External Reconstruction and Internal Reconstruction. ([Link]. : Dr. B.R.A.U : 2012, Kanpur and Vikram. : 2009, Rohilkhand : 2014) Why and how is Capital Reduction Account prepared ? State the various modes in which alteration of Capital is possible under Section 94 of the Indian Companies Act. State the circumstances in which Internal Reconstruction becomes necessary. ([Link]. : Bundelkhand U, : 2009] What is Capital Reduction Account ? When is it prepared? [[Link]. : Bundelkhand U. : 2012] Which liabilities can be reduced at the time of internal reconstruction in addition to reducing capital ? . ([Link]. : Dr. B.R.A.U. : 2009] Give the main objects of Reconstruction, ([Link], : Kanpur U. : 2010] What are the essential features of Internal Reconstruction ? ([Link], : Avadh U, : 2014) Practical Questions L ‘The paid-up capital of a company amounted to € 2,50,000 consisting of 25,000 equity shares of 210. The company decided to reduce capital. In lieu of their present holding, the sharcholders of the company are to receive : (i) Fully paid new equity shares equal to 2/5 of their holdings. !) 5% preference shares fully paid-up to the extent of 20% of the new equity shares. (iii) 3,000, 6% Second Debentures of @ 10 each. ee Somrna| Boriviet e me ([Link]. : Kanpur U. : 2010) vompany has a paid up share capital of 3,20,000 divided into 40,000 Equit; each, € 8 per share paid up. The company decides to reduce the paid up that capital oe ‘per share paid up. Give necessary Journal Entry. ([Link]. : Allahabad U. : 2011 (Modified)] Long Answer Questions Theoretical Questions L 2. 3. What is meant by Internal Re-construction of a Comy internal Re-construction becomes necessary. ([Link]. :iwaji 2007, Dr. B.R.A.U. : 1993 ; What is the meaning of Re-construction ? What accounting record is made ay ge es ee companies at the time of internal reconstruction? —_[[Link]. : Kur. U. 2006 i DU. 2008} What is meant by Reconstruction ofa Company ? Distinguish between catenct oo cisco and internal reconstruction of a company. Give Accounting Journal Enirice of trnal reconstruction. ([Link]. :Dr. BAU. :2012, 2001, 5; Rohilkhand s 300; sas sia apa pany ? State the circumstances in which Scanned with CamScanner