Notes on Internal reconstruction PDF

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Brief Notes on Internal reconstruction as per companies act...

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Procedure for internal reconstruction 1. The article of association of the company must permit reduction/alter of share of capital. 2. A special resolution must be passed in the general meeting for alter and reduction of capital.

3. Confirmation of court for capital alters and reduction must be obtained. 4. A copy of resolution and court confirmation letter should be filed with the registrar of companies (ROC).

Alteration of capital    

issue of shares Subdivision of shares Consolidation of shares Cancellation of shares Conversion of fully paid up shares in to stock and vice versa

Accounting treatment 1. Issue of new shares- Entries are same as in 12th class. On applicationBank a/c dr To share application Share application A/c dr To share capital On allotment- (At par, At premium, At discount) Share allotment a/c dr To share capital Bank a/c dr To share allotment

At premium Share allotment a/c dr To share capital To share premium Bank a/c dr To share allotment At Discount Share allotment a/c dr Discount on issue of shares To share capital Bank a/c dr To share allotment On first and final call Share first &final call a/c dr To share capital Bank a/c dr To share first & final call

2. Subdivision of shares It means converting the larger denomination of shares in to smaller denominations. For example:

50000 share capital price of share is 10 each No. of shares = 50000/10= 5000 shares

Now, company reduced the price from 10 to 5 Now number of shares is = 50000/5 = 10000 shares

Note: Number of shares will increased due to reduction in price.

Accounting treatment: Equity share capital A/C dr (Rs 5000*10)

50000

To equity share capital (Rs. 10000*5)

50000

3. Consolidation of shares It means converting the smaller denomination of shares in to larger denominations. It’s a opposite of subdivision of shares. For example:

50000 share capital price of share is 10 each No. of shares = 50000/10= 5000 shares

Now, company increased the price from 10 to 20 Now number of shares is = 50000/20 = 2500 shares

Note: Number of shares will decreased due to increase in price. Paid up capital will remain same. Accounting treatment: Equity share capital A/C dr (Rs 5000*10)

50000

To equity share capital (Rs.2500* 20)

50000

4. Conversion of shares in t stock and vice versa A company can decide to convert its fully paid up shares in to stock or convert existing stock in to fully paid up shares.

For Example: Conversion of Rs. 10 equity share capital of Rs. 600000 with in to stock. Accounting treatment Equity share capital A/C dr To equity capital stock

600000 600000

(Entry will be reversed). 5. Cancellation of unissued shares It leads to reduction in unissued capital no reduction in paid up capital. Total shares =15000*5= 75000 Company issue =10000*5 = 50000, 5000 save for future Later on, 5000 will not be issued in future this is the decision of management. It does not require any journal entry

Fully paid up shares: face value= 20, amount received from investors= 20 Face value= 20, amount received from investors= 16 = 4rs outstanding balance Stock= combination/total of fully paid up shares Number of shares= 5000 , price of shares=10 Fully paid up shares= 4000*10= 40000 1000 is partly paid up shares= 1000*8=8000 Stock = 4000 shares, stock capital= 40000

REDUCTION OF SHARE CAPITAL 1. Change in paid up value only Share capital= 50000, price of share = Rs. 10 each (Face value) Paid up value = Rs 8 Total paid up capital= 5000*8= 40000 Remaining capital = 5000*2 = 10000 (This balance shareholders needs to pay in future when company called up) Accounting treatment Share capital a/c dr 50000 To new share capital To capital reduction

40000 10000

2. Change in paid up and face value both Share capital= 50000, price of share = Rs. 10 each (Face value) Later on company changed its face value = Rs. 8 Paid up value = Rs 8 Total paid up capital= 5000*8= 40000, Total capital = 5000*8 =40000 Note: No difference in total capital and paid up capital.

Accounting treatment Share capital a/c dr 40000 To New share capital a/c 40000

3. For Any sacrifice by creditors and debenture holders Creditors A/c dr Debenture holders A/c dr To capital reduction 4. Decrease in value of asset and increase in value of liabilities Debit capital reduction A/c To concerned assets and liabilities

5. Increase in value of asset and decrease in value of liabilities Concerned assets and liabilities To capital reduction A/c

Capital reduction amount will be used for write off – preliminary expenses, discount on issue of shares, p&l (Debit balance) and fictitious assets, if any balance is remaining in capital reduction account it will be transferred in to capital reserve. Entry:

Capital reduction a/c dr 200000 To P&L (Debit balance) To preliminary expenses To discount on issue of shares 160000 To capital reserve (Balance if any) 40000

Q.1

Preference share capital 7500 shares Rs. 100 each 5000 equity share capital of Rs.100 each Creditors Overdraft

750000

Leasehold premises

130800

500000

Plant

42200

30000 20000

Patents 850000 Stock 55000 Debtors 76500 Cash 500 Preliminary 12000 expenses Discount on 18000 issue shares P&L 115000

As the company is not doing well, the following scheme of the reconstruction was adopted. 1. Preference shares price reduced to Rs. 50 each. (Subdivision of shares) 2. Equity shares price reduced to Rs. 50 each. (Subdivision of shares) 3. The amount available to be used for write off fictitious assets fully, 30800 of the leasehold premises, 15000 of stock , 20% of plant and debtors and the balance available for the patents. Pass the necessary journal entries.

Solution: 1. Preference share capital A/c dr (7500*100) 750000 To preference share capital (7500*50) 375000 To capital reduction A/c 375000 2. Old Equity share capital A/c dr (5000*100) 500000 To new Equity share capital (5000*50)

250000

To capital reduction A/c

250000

3. Capital reduction A/c dr. 625000 To Preliminary expenses To discount on issue shares To P&L To Leasehold premises To stock To Plant (20%) To debtors (20%) To patents (Balance)

12000 18000 115000 30800 15000 8440 15300 (625000- 214540= 410460)

Q.2 share capital 4000 400000 shares Rs. 100 each 6% debentures 200000 Creditors 250000

Goodwill

60000

Land & building Plant Stock Debtors Preliminary expenses P&L

100000 400000 90000 60000 10000 130000

Company decided to write off the fictitious assets and intangible assets, plant to its proper figure of Rs. 100000, the shares were reduced to Rs. 20 each. Courts approval was obtained. Draft the necessary journal entries. 1. Old share capital(4000*100) 400000 To new share capital (4000*20) To capital reduction account 2. Capital reduction To Goodwill A/c

320000 60000

80000 320000

To preliminary expenses To profit& loss To plant To capital reserve

10000 130000 100000 20000

Q. 3 7% Preference share capital 3000 shares Rs. 100 each 6% debentures Creditors Equity share capital 4000 shares Rs. 100 each Profit prior to incorporation

300000

Goodwill

60000

300000 200000 400000

Land & building Plant Stock

150000 300000 220000

10000

Debtors

150000

Preliminary expenses P&L Patents Cash

25000 270000 30000 5000

The following scheme of reconstruction was duly approved. a. 7% shares be converted in to 9% preference shares, the amount being reduced by 30% . b. Equity shares to be reduced to fully paid up shares of Rs. 50 each. c. Land & building be appreciated by 20 % d. Debenture be reduced by 20% e. All intangible, fictitious assets including patents and accumulated losses be writes off, utilize profit prior incorporation if necessary. Give journal entries.

1. 7% old preference share capital (3000*100)

300000

To 9% new preference share capital (3000*70) To capital reduction account

2. Old Equity share capital A/C (4000*100) To new equity share capital (4000*50) To capital reduction 3. Land & building A/c To capital reduction

400000 200000 200000

30000 30000

4. 6% old debentures A/c 300000 To 6% new debentures To capital reduction 5. Capital reduction A/c dr Profit prior to incorporation To goodwill To patents To preliminary exp To P&L

210000 90000

240000 60000

380000 (90000+200000+30000+60000) 5000 60000 30000 25000 270000

Q. 4 Preference share 200000 2000 shares Rs. 100 each 5% debentures 100000 Creditors 100000 Equity share capital 400000 4000 shares Rs. 100 each Overdraft 50000

Goodwill

15000

Freehold 200000 premises Plant&Machinary 300000 Stock 50000

Debtors P&L

40000 245000

The company got the following reconstruction scheme: 1. Preference shares to be reduced to Rs. 75 each per share, fully paid up and the equity shares to Rs. 37.50. 2. The debenture holders took over the stock and book debts in full satisfaction of the amount due to them. 3. The goodwill A/c is to be eliminated. 4. The freehold properties to be depreciated by 50% 5. The value of the plant & machinary to be increased by Rs. 50000. Give the journal entries and prepare the balance sheet. 1. Old Preference share capital a/c (2000*100) 200000 To new preference share capital (2000*75) 150000 To capital reduction 50000 2. Old equity share capital A/c dr (4000*100) 400000 To new equity share capital (4000*37.50) To capital reduction 3. 5% mortgage debentures A/c dr To stock A/c To book debts To capital reduction

100000 50000 40000 10000

4. Capital reduction A/c dr 100000 To freehold properties

100000

5. Plant & Machinary A/c dr 50000 To capital reduction A/c

50000

6. capital reduction a/c dr To goodwill To P&L

260000 15000 245000

150000 250000

BALANCE SHEET Particulars 1. Share holder funds Equity share capital Preference share capital Reserves 2. Non current liabilities/Long term 3. Current liabilities/Short term Creditors Overdraft Total (1+2+3) Assets Non current assets Tangible Freehold premises Plant & Machinary

Notes

Amount

1 2

150000 150000 -

100000 50000 450000

3 4

100000 350000

Intangible Short term assets/Current Other current assets Total (1+2+3) Notes 1 2000 preference share capital of Rs. 75 each Notes 2 4000 preference share capital of Rs. 37.50 each Notes 3 Freehold premises (200000/2= 100000) Notes 4

450000

150000

150000

Plant & Machinary (300000+500000= 350000) Q.5 6% Preference share shares Rs. 100 each debentures Creditors Equity shares Rs. 100 each

200000

Goodwill

60000

100000 150000 400000

Fixed assets P&L Stock

200000 269000 150000

Debtors P&L Bank Discount on issue of debentures

60000 245000 1000 10000

850000

850000

The following scheme of reconstruction is adopted. 1. Preference shares price reduced to Rs. 60 each. 2. Equity shares price reduced to Rs. 80 each. 3. The amount thus made available to be used for write off fictitious assets fully including goodwill and Rs 50000 from fixed assets. Give journal entries for reconstruction and final Balance sheet.

Some special cases: 1. Debenture holders agree to forgo interest outstanding subject to the condition that the rate of interest be increase to 15%. (10% debentures 800000). Outstanding interest To capital reduction

10% Debentures A/c dr 800000 To 15% debentures

(Cancel old debentures) 800000 (Create new debentures)

Note: No need to open capital reduction account as just interest rate is only changed.

2. Creditors agree to forgo 25%of their claim. (Claim 100000) Creditors A/c To capital reduction...