Internal Reconstruction

Advanced Accounting Lecture - I

By – CA Nitin Goel
RECAP
1
Completion of Buyback Chapter
TOPICS
1 Basic & Questions
concepts
 CA NITIN GOEL INTERNAL RECONSTRUCTION

Easy CH
INTERNAL RECONSTRUCTION
4
“Don’t downgrade your dream just to fit your reality. Upgrade your conviction to
match your destiny.”

TOPIC1: INTRODUCTION

When a company has been making losses for several years, the financial position does not
- - -
-
present a true & fair view of the state of the affairs of the company. In such a company the
- -
-

assets are generally overvalued, as the balance sheet consists of fictitious assets,
-

-
unrepresented intangible assets-& debit balance in profit & loss account. ↓
losses

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. Such a process is called internal reconstruction which is carried out
-

without liquidating the company and forming a new one.

-
-

[
Accounting
- -

Page 4.1
 CA NITIN GOEL INTERNAL RECONSTRUCTION

Als
TOPIC 1A: JOURNAL ENTRIES
Reconstruction or
Capital Reduction
1. For increase or reduction in value of assets As set : Dr
- - -

a) Increase Asset Av
Alc
-

To
Capital Reduction

b) Decrease Reduction
-

Capital Alc-gr
To Asset All

2. For increase or reduction in liabilities: Lic : (U -

- - -

a) Increase
Reduction Al-or
Capital
-

Al
To
libility
b) Decrease
-

viability Al-gr
To
Capital Reduction Als

3. For payment of reconstruction expenses

-
a) At the time of Expense
payment Capita Reduction All-gr [ Capita To Bonu

Redn
To Bank
All
4. Settlement of contingent liability Ionrecorded lid's

Forgo
Example: Preference dividend in arrears, Capital
-
commitments, etc.
a) If waived
No
entry
b) If paid Reduction
-

Capital All- Dr

AlJespenjid
To Bank
All
To share e
repith
5. If any losses or deferred revenue expenditure are appearing then such amount
- - -

should be written off even if question is silent.

-

Example of deferred revenue expenditure: Underwriting commission, Discount on

- - -

issue of debentures, Preliminary expenses, Advertisement suspense, etc.

- - -

a) At the time of write Reduction All-or

off Capital
To PMLA)y
To
Dyerred
Greeve Top Al
6. If any intangible assets appear in the balance sheet it may be written off by giving
-
- -

a note.
~ Example: Patents, Trademarks, Goodwill, Copyrights etc.
RARE -. Tology
- -

-
5
Goodwill
Je
Write
Ig Ques is sidet your Page 4.2
Once than alw :
Donotwlogg a
stumption
 CA NITIN GOEL INTERNAL RECONSTRUCTION

a) At the time of write Reduction Alc-or

off Capital
To ASSED Ala
Intay: ble
7. Closing of Capital Reduction Account
a) Credit Balance
Tyd To Capita Resure
.

Fayda) Capital Reduction Alc-or

Risure
To
Capital .

b) Debit Balance
(nuksao) Capital Resur =1
-
gr

↓ Sci .

Premium) Gerdin ·

A/c-zv
There will be
cesely
Reduction
To
Capital Als
in
13/s -

Notes:
1) In case of fixed assets, the amount written off under the scheme of reconstruction must be
- -
-
shown for 5 years. (Discosons -

2) After the name of company, the- - -

-

words “and reduced” should be added only if the court so -

-
orders.
-

TOPIC 2: METHODS OF INTERNAL RECONSTRUCTION

Methods of Internal Reconstruction:

Alteration of
-
Variation of Compromise/ Reduction of Surrenders
share capital
-
shareholder’s rights arrangement share capital of shares

TOPIC 2A: Alteration of Share Capital, Variation of Shareholder Rights,

Compromise/Arrangements & Reduction of Share Capital

ALTERATION OF SHARE CAPITAL :

chenerds
1. For Increase in Share Capital
-

Example:
X Ltd. issued 10,000 equity shares
-
Bann Alc
-
Dr 100000
of ₹10 each at par.
- To
Equin share
Capital All 1 00
, , 000

2. For Consolidation of Shares Reverse

/speit up 1000 * 10
00e
= 1 00 -
- , ,

Example:
-
X Ltd. having 10,000 equity shares
Equity Share cep Alc (E 10)
-
-

of ₹10 each decides to convert

-

100000
share capital into equity shares of To
Equity Share Cep All (Elo0)
.
-

100 each.
-
FV
#EW .

3. For Sub-division of Shares /speit up

- 1000x100 = 100000 = 0 x10
Example:
X Ltd. having 1,000 equity shares of
Equity up AK(Elo)
- Share -
-
DV 100000
₹100 each decides to convert share
-

capital into equity shares of 10 To

Equiy
share
up Ald 100
,
000
-
-

each.
-

Page 4.3
CA NITIN GOEL INTERNAL RECONSTRUCTION

4. For
-
Conversion of shares into stock +
Stock is a bundle of fully paid shares put together for convenience so that it may be divided
- - -

into any amount & transferred into any fractions & subdivisions without regard to the
- - -

original--
face value of the shares.
Example:
X Ltd. having 10,000 equity shares 100000

Equity Share
refited All-gr
-

of 10 each decides to convert the

-

EgriySNAo
To a
share capital into equity stock
-

5. For Conversion of stock into shares

-

Example:
X Ltd. having equity stock of
-
Equity stock Al-gr 100000
₹1,00,000 decides to convert the
To
Equity
Share
Capital Al- 100000
-

equity stock into equity share

-
capital of ₹ 10 each.
-

6. For Cancelling the unissued shares

-

In this case no
-
accounting entry is passed. The authorized share capital gets reduced by
- -

the amount of unissued shares now cancelled.

-

VARIATION OF SHAREHOLDERS RIGHTS

Only the specific rights are changed. There is no change in the amount of capital. 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. My
ingshare 10 %.
:

m
Example:
X Ltd. has 1,000 10% preference
Preg Share Cap My 3r
-
10 % · - 10000
shares of 100 each. At a meeting of
-

preference shareholders, it was

decided that the rate of dividend be
-
To 9
Pry-share epAk
% 100000
/

reduced to 9%.
-

COMPROMISE/ARRANGEMENT
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. -
-
-

Example:
In the balance sheet, sundry 360000
9 creditor Alc Du
- -

creditors are appearing at ₹

To Reduction Mc 3600
Capital
-

4,50,000. They agreed to reduce

(450000
- -

their claims to 20% and half the x 80 %/

- -

balance to be satisfied by issue of 45000

-
equity shares of ₹10 each.
-
b) Creditors
All-gr
To
Equityshare
45000
up
.
All

c 90000
X/
= 45000
Page 4.4
 CA NITIN GOEL INTERNAL RECONSTRUCTION

REDUCTION OF SHARE CAPITAL (a) , 16) :

A (C) : Que v

a) Liability of the shareholders is extinguished or reduced in respect of unpaid amount on -

- - -

the shares held by them.

-

Number of Shares = 10,000 -

OLD Face Value = 10 T

100se Sh FV 10 = iV 8 Paid up Value = 8

=
-

Reduce 10 per share into 8 per share fully paid up

NEW
-

So Cancel the unpaid amount of 2 per share

Fr = PV &
-
= -

10000 Sh .

Equity share
Capita Al (EIO) So Sora
-

800
To
Equity share up (ES)
.

b) Paying
-
off excess paid-up share capital
Number of Shares = 10,000
OLD -

-
Face & Paid up Value = 10
iV 10
-

100se Sh FV 10
= =
Pay off 2 per share to make it 8 per share fully paid up
-
-

NEW
Equity Share up (E1)
Dr 1000a
PV = &
-

FV
.

=
10000 Sh .

To Bank Love
A for
To
Equity shar
up (ES)
.

*
c) Writing off the lost paid up capital
Number of shares = 1,000 -

Face Value = 100 Cred : 100000

= Paid up Value = 100
If from
Ang ↓
our 20000
-

for
=
(a) (b)
r
Write off 80 80
Face Value 20 100
-

Paid up 20 r 20
-

[
Equity up (El00)
share -
Dr 100000
800
.

Equity Share
rep All-yr
-

up (E20) Goo
To
Equity
share 2000 To Reduction
Capital
.

To Reduction 80000
Capital All 1000 sh . FV = 100 PV : &0

1000 Sh .
FV = PV = 20

Note: If question does not specify reduction in Face value or paid up value, then assume
change in Face value and paid up value.

Page 4.5
 &
construction /Revivals Company Als

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Separate

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PPE 35

le
ESC * 5
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-
volved
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CONCR ASUA

De b
(10) 2212
.

a
Cred -
(5) -3

Fo
-

so too Go
- -

Scheme
=
 -ningest
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. >
-

Axe BX

BY : Foot not

As
Pry Divided is
.
Arrears

wal 100000

3000
For
waive
paid
gorg)
Pry As
.

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To
[Link]
 ran
Machiany -
Gonz

40000

Aus :
Goo
Maching

⑫it 100 000

Machiney
10) 6000
Dogg we are scheme
-
 Ath
c
*
Di[ -ooo St .
10 ech

5000 sh .

10 each 54

Issue
& Subsc

⑭
-

5
Ye00 Sh . 10 each .

-
#
A est
al
L
Existing 2000 share
of 10 each
,
8
paid up To
Old FV

2028 Equiny share

Lepith All (E10)
-
Dr
160000

160000
To
Equity Share
Spid All (ES) FV
New

Subdivided 40 000 Shar

2000 shary
,
>

of
8 5 each a
of 10 each , paid up ,
paid up

2023
Ju
Spith Al (ES)
16000
Equity Shar -Dr

16000
To
Equity share
Capita Ala (Eloos
Consolidate
40000 share 2000 Share
-
So
o
s each
,
y
paid up of 100 each ,

paid up
1000-2000
No .
=
sha o
Balanu sheet :

pitd
#on
share :
31/12/21
Authorised
Opitc
:

900
of
each
2000 share 10 -

Issued
,
subscribed
,
celle
a paid up
200 16000
share
of 10 each
, Spain up

cepitd
#on
share :
31/12/22
Authorised
Opitc
:

900
(000X2) 4000 share
of
5 each -

Issued
,
subscribed
,
celle
a paid up
16000
40000 share
of s each
,
4
Paid up
 cepitd
#on
share :
31/12/23
Authorised
Opitc
:

900
of
2000 share 100 each -

Issued
,
subscribed
,
celle
a paid up
160000
2000 share
of 100 each
,
so
paid up
Homework

Revise what is done in class

2 Mins Summary

Basic Questions
corupts &