Capital Reduction and Internal Reconstruction
In case of internal
reconstruction, the company’s existing financial structure is reorganized
without dissolving the existing company and forming a new company. Taking a
wider meaning of the term ‘Internal Reconstruction’,
1.
Alteration of share capital under section 61
2.
Reduction of share capital under section 66
3.
Variation of shareholders Rights under section 48
4.
Scheme of Compromise/Arrangement under section 230
Legal
Requirements
The main legal requirements in connection with the
alteration of share capital are summarized as under:
(a)
A company may alter the capital clause of its
memorandum only if it is authorized by its articles of association to do so.
(b)
A company may alter the capital clause in the following
manner:
i.
By increasing its
share capital by issue of new shares [e.g. from 1 crore to 5 crores].
ii.
By consolidating the
existing shares into shares of larger amount than its existing shares.
[e.g.Conversion of shares of Rs.10 each into shares of Rs. 100 each]. iii. By
sub-dividing the existing shares into
shares of smaller amount than its existing shares [e.g.Converstion of shares of
Rs.100 each into shares of Rs.10 each].
iv.
By converting fully
paid shares into stock or vice versa.
v.
By cancelling its
unissued shares.
(c)
An ordinary resolution must be passed at a general
meeting.
(d)
A notice specifying alteration made must be given to
the Registrar within 30 days alteration.
ACCOUNTING ENTRIES i. For increase in Share capital
The accounting entries in each case of alteration
of share capital will be under:
Example :
X Ltd. issued 10,000 Equity Shares of Rs.10 each at par.
|
i |
Bank
A/c Dr To Equity Share
Application & Allotment A/c
(Being the application money received) |
Rs. 1,00,000 |
Rs. 1,00,000 |
|
ii |
Equity Share Application & Allotment A/c Dr To Equity Share
Capital
A/c (Being 10,000 equity shares of Rs.10 each allotted at par) |
Rs. 1,00,000 |
Rs. 1,00,000 |
ii. For Consolidation of Shares
Example : X Ltd. having 10,000 Equity Shares
of Rs.10 each decided to convert the share capital into Equity shares of Rs. 100 each.
|
i |
Equity Share Capital (Rs.10 ) A/c Dr
To Equity Share Capital (Rs.100) A/c |
Rs. 1,00,000 |
Rs. 1,00,000 |
|
|
(Being 10,000 equity shares of Rs.10 each converted into 1,000 shares of Rs.100 each) |
|
|
iii. For Sub-division of Shares
Example :
X Ltd. having 10,000 Equity Shares of Rs.100 each decided to convert the share
capital into Equity shares of Rs. 10
each.
|
i |
Equity Share Capital (Rs.100 ) A/c Dr
To Equity Share Capital (Rs.10) A/c |
Rs. 1,00,000 |
Rs. 1,00,000 |
|
|
(Being 10,000 equity shares of Rs.100 each converted into 1,000 shares of Rs.10 each) |
|
|
iv. For Conversion of Shares into stock
Example :
X Ltd. having 10,000 Equity Shares of Rs.10 each decided to convert the share
capital into Equity shares.
|
i |
Equity Share Capital (Rs.10 ) A/c Dr
To Equity Share Capital A/c |
Rs. 1,00,000 |
Rs. 1,00,000 |
|
|
(Being 10,000 equity
shares of Rs.10 each converted into Equity shares) |
|
|
v. For Conversion of stock into stock
Example :
X Ltd. having Equity stock of Rs.1,00,000 decides to convert the equity stock
into Equity shares capital of Rs. 10
each.
|
i |
Equity Stock
A/c Dr To Equity Share
Capital (Rs.10) A/c |
Rs. 1,00,000 |
Rs. 1,00,000 |
|
|
(Being equity Stock of Rs.1,00,000 converted into 10,000 shares of Rs.10 each) |
|
|
vi. For Cancelling Unissued Shares
No accounting
entry is required to be passed. The authorised share capital is reduced by
the amount of unissued shares now cancelled.
REDUCTION OF SHARE CAPITAL ( Section 66 )
Legal
Requirements
The main legal requirements in connection with the
alteration of share capital are summaried as under:
(a)
A company limited by shares or a company limited by
guarantee having a share capital may reduce its share capital only if, it is
authorised by its articles of association to do so.
(b)
A company may reduce its share capital in any of the
following ways:
i. By extinguishing/reducing the liability
on any of its shares in respect of uncalled amount on shares. ii. By
cancelling the paid up share capital which is lost or is not represented
by available assets; iii. By paying off any paid up share capital,
which is in excess of the requirements of the company. (c) A special resolution must be passed at a
general meeting.
(d)
A court’s order confirming the reduction must be
obtained.
(e)
A certified copy of Court’s order and Minutes approved
by the court must be filed with the Registrar.
ACCOUNTING
ENTRIES
The accounting entries in each case of reduction of
share capital will be under:
i. For reducing the liability in respect of Uncalled
amount.
Example : X Ltd. having 1,000 Equity
Shares of Rs.100 each. Rs.60 paid up, decided to cancel the liability of member
to the extent of Rs.20 per share and make shares as of Rs.80 each, Rs.60 paid up.
i Equity Share Capital ( Rs. 100 ) A/c Dr Rs. 60,000
To Equity Share Capital (Rs. 80 ) A/c Rs. 60,000
(Being shares of Rs.100 each converted into shares of
Rs.80 each)
Note The paid up share capital of the
company will remain unchanged
ii. For paying off the surplus paid up
capital
Example :
A Ltd. having 1,000 Equity Shares of
Rs.100 each fully paid decided to repay to its members Rs.20 per share and make
shares as of Rs.80 each fully paid up.
|
i |
Equity Share capital
( Rs. 100 )
A/c Dr To Equity Share
Capital ( Rs. 80 ) A/c To Sundry
Members
A/c |
Rs. 1,00,000 |
Rs. 80,000 Rs.20,0000 |
|
|
(Being shares of Rs. 100 each converted into shares of
Rs.80 each And make Rs. 20 per share due to members) |
|
|
|
ii |
Sundry Members
A/c Dr To Bank A/c (Being the payment made to members) |
Rs. 20,000 |
Rs. 20,000 |
VARIATION OF SHAREHOLDERS’
RIGHTS ( Section 48) Legal Requirements
The main legal requirements for variation of
shareholder’ rights are summaried as under:
(a)
If the right attached to the shares of any particulars
class of shareholders are to be varied, a separate meeting of that particular class of
shareholders must be held.
(b)
The consent of the holder of at least three-fourth of
the shares of the class concerned ( or a higher proportion if so required by
the articles/memorandum ) must be obtained.
(c)
The holders of a least 10% of the issued shares of the
class concerned whose rights are being varied, may apply to the court to have
the variation cancelled within 21 days after the consent is obtained or the
resolution is passed.
(d)
If such appeal is made, the variation will not have
effect unless it is confirmed by the Court whose decision is final.
(e)
Notice of the variation must be filed with the
Registrar within 15 days of the court’s order.
ACCOUNTING
ENTRIES
Example : X
Ltd. has 1,000 10% Cum.Pref. Shares of Rs.100 each. At a class meeting of
Cum.Pref. Shareholders, it was decided that the rate of dividend be reduced to
9%. In such a case following entry will be passed :
|
i |
10% Cum Pref. Share Capital A/c Dr To 9% Cum.Pref.
Share Capital A/c |
Rs. 1,00,000 |
Rs. 1,00,000 |
Example :
Y Ltd. has 1,000 10% Cum.Pref. Shares of Rs.100 each. At a meeting of Cum.Pref.
Shareholders, it was decided that the existing Cum. Pref. Shares be
converted into Non-Cum-Pref. Shares :
|
i |
10% Cum Pref. Share Capital
A/c Dr To 10% Non-Cum.Pref.
Share Capital A/c |
Rs. 1,00,000 |
Rs. 1,00,000 |
Model Accounting Entries Transaction
Accounting Entry
1.
When the face value of shares is changed Share Capital A/c Dr
To Share Capital A/c
To Capital Reduction A/c
2.
When there
is a reduction in share capital Share Capital A/c Dr (face value of shares is not
changed) To Capital Reduction A/c
3.
When any sacrifice is made by Debentureholders Debentures A/c Dr
To Capital
Reduction A/c
4.
When any sacrifice is made by Creditors Creditors A/c Dr
To Capital
Reduction A/c
5.
When the value of any asset is appreciated Assets
A/c Dr
To Capital
Reduction A/c
6.
When capital reduction is utilised for written off
Capital Reduction
A/c Dr Fictitious assets, losses
and excess value of other assets To Profit and Loss A/c
To
Goodwill
A/c
To
Preliminary Expenses A/c
To Discount
on Shares / Debentures A/c
To Other
Assets A/c
To Capital
Reserve A/c
|
7. When shares are consolidated |
Share
Capital A/c Dr To Share Capital A/c |
|
8. When shares are sub-divided |
Share Capital A/c Dr To Share Capital A/c |
|
9. When shares are converted into stock |
Share Capital A/c Dr To Share Stock A/c |
|
10. When shares are surrendered |
Share Capital A/c Dr To Share Surrendered A/c |
|
11. When
surrendered shares are converted into
Preference shares |
Share Surrendered A/c Dr To Preference Share Capital A/c |
|
12. When an unrecorded liability is paid for |
Capital Reduction A/c Dr To Bank A/c |
|
13. When recorded liability paid for |
Liability A/c Dr To Bank A/c |
|
Note: Any
profit or loss should be transferred to Capital Reduction Account |
|
|
14. When contingent liability is paid for |
Capital Reduction
A/c Dr To Bank A/c |
|
15. When recorded asset is disposed off |
Bank A/c Dr
To Asset A/c |
|
Note :
Any Profit of Loss should be transferred to Capital Reduction A/c |
|
|
16. When an unrecorded asset is sold off |
Bank
A/c Dr To Capital Reduction A/c |
|
17. When reconstruction expenses are paid |
Capital Reduction
A/c Dr To Bank A/c |
|
18. When finance is raised by issue of shares |
Bank
A/c Dr To Share Capital A/c |
|
Note
: a.
Capital Reduction Account should not leave any balance |
|
|
b. Capital Reduction Account may be called
Reconstruction Account |
|
|
19. When
arrears of preference dividend are cancelled |
No Entry |
|
20. When arrears of preference dividend are settled by issue of deposit certificates/cash/shares |
Capital Reduction A/c Dr To Deposit Certificates/cash/ Share Cap.A/c |
|
21. When new Debentures are exchanged for old Debentures |
Old Debentures A/c Dr To New
Debentures A/c |
|
22. When the rate of Preference Dividend is increased |
Preference Share Capital
A/c Dr To Preference Share Capital
A/c |
|
23. When assets are taken over by loan creditors |
Loan Creditors
A/c Dr To Asset A/c |
|
24. When provision for taxation capital reserve/ securities
premium is utilised |
Provision for Taxation A/c / Capital Reserve A/c / Share Premium Dr To Capital Reduction A/c |
|
25. When Surrendered shares are issued to creditors
|
a.
Shares Surrendered A/c Dr To Share Capital
A/c b. Creditors A/c Dr To Capital Reduction A/c |
|
26. When Surrendered shares are cancelled |
Share Surrendered
A/c Dr To Capital Reduction A/c |
|
27. When penalty is paid |
Capital Reduction
A/c Dr To Bank A/c |
|
28. When claim is recovered against contingent liability |
Bank A/c Dr To Capital Reduction A/c |
|
29. When Directors refund their fees |
Bank A/c Dr To Capital Reduction A/c |
|
30. When Debentureholders takeover some assets/shares are
issued to them |
Debentures A/c Dr To Assets A/c To Debentures A/c |
|
31. When Preference Share Capital is exchanged for Equity
Shares / Debentures |
Debentures A/c Dr To Equity Share Capital
A/c To Debentures A/c |
|
32. When Calls are made |
Share Call A/c Dr To Share Capital A/c |
|
33. When Calls are collected |
Bank
A/c Dr To Share Call A/c |
|
34. When shares are forfeited |
Share Capital A/c Dr To Forfeited Shares A/c To Calls in Arrears A/c |
|
35. When forfeited shares are reissued |
Bank A/c Dr To Forfeited shares A/c To Share Capital A/c |
Fill in the blanks and rewrite the sentence
1. Capital
reduction is implemented per Section _____ of Companies Act.
a)
77 b) 75 c) 80 d)
66
2. The
scheme of capital reduction is to be approved by _____.
a)
High Court
b) SEBI c) Central Government d)
Shareholders 3. The scheme of internal reconstruction involves _____ company.
a) one b) two c) three d) many
(October, 2014)
4. Fictitious assets are to be transferred to _____.
a) internal reconstruction b) security premium c) share capital d)
capital reserve 5. Balance in Capital Reduction should be transferred to _____.
a) security premium b) capital reserve c) share capital d) Profit & Loss Account
6. The
cancellation of contingent liability is _____ for company
a)
profit b) loss c)
no profit – no loss d) nil
7. The
payment for contingent liability should be debited to _____.
a)
capital
reduction b) capital reserve 8. “And Reduced” words are to be shown
as in Balance Sheet as per _____ requirement.
a) company
law b) AS c) income tax d) stock exchange
9.
XYZ Ltd. had on 31st December, 2008; 80,000 equity
shares at Rs.10 each. It was decided to reduce shares to Rs.8 each. The
reduction is _____.
a)
Rs.1,60,000
b) Rs.80,000 c) Rs.2,00,000 d) Rs.1,50,000
10. Creditors
of the company are Rs. 50,00,000 one creditor for Rs.20,00,000 decided to
forego 40% of his claim. He is allotted 30,000 equity shares of Rs. 40 each in
full satisfaction. The amount transferred to capital reduction is _____. a)
Rs. 8,00,000 b) Rs.10,00,000 c) Rs.4,00,000 d) Rs.5,00,000
11. The
preference shareholders agree to forego arrears of preference dividend of
Rs.72,000. The amount transferred to Capital Reduction Account is _____.
a)
Nil b) Rs.72,000 c) Rs.36,000 d) Rs.70,000
12. Creditors
are ` 3,00,000. They are given the option to either accept 50% of their claim
in cash in full settlement or to convert their claim in to equity shares of
Rs.10 each. Creditors of Rs . 2,00,000
opt for shares in satisfaction of the claim. Capital reduction Account is
credited by _____.
a)
Rs. 1,00,000 b) Rs.1,50,000 c) Rs. 50,000 d) Rs. 2,00,000
13. Investment
costing of Rs. 24,000 given to Bank for bank overdraft of Rs.16,800. The
capital reduction is debited by
_____. a) Rs.4,000 b) Rs.8,000 c)
Rs.7,200 d) Rs. 4,500
14. Y
Ltd. has 8,000 equity shares of ` 100 each fully paid. Each share is
sub-divided into 10 equity shares of Rs. 10 each. The number of shares after
sub-division will be_____.
a)
8,000 b)
80,000 c) 75,000 d) 60,000
15. Provision
for taxation is ` 1,00,000. The tax liability of the company is settled at
Rs.80,000 & it is paid immediately. Amount credited to capital reduction is
_____.
a)
Rs. 80,000 b) Rs.1,00,000 c) Rs.20,000 d) Rs. 60,000
16. 6%
Debentures of Rs.100 each Rs.1,00,000 to be converted into such number of 8%
Debentures of ` 50 each as to generate the same amount of interest as before.
The amount of 8% debentures will be _____.
a)
Rs.1,00,000 b) Rs.25,000 c) Rs.75,000 d) Rs. 1,20,000
17. In
internal reconstruction, method of calculation of purchase consideration is
by_____.
a)
Net Asset Method b) Net Payment Method c) no purchase consideration required d)
none of the above 18. On internal reconstruction, assets are written off except
_____.
a) land & building b) goodwill c) preliminary expenses d)
Profit & Loss Account 19. Payment of reconstruction expenses is debited to
_____.
a) Profit & Loss Account b) Capital Reduction Account c) Cash
Account d) Goodwill Account 20. The Court Confirmation Order may direct the
management to add to its name ____.
a) limited b) unlimited c) and reduced d) none of the above
21. Credit balance on Capital Reduction Account is
utilised for _____.
a) issue of bonus shares b) writing off fictitious assets c)
paying shareholders d) none of the above 22. The scheme of internal
reconstruction requires sanction from _____.
a) shareholders b) A/A c) Court d) all the above
23. Internal
Reconstruction is governed by section _____.
a) 494 b) 801 c) 804 d) 809
24. Surrender
of fully paid shares amounts to _____.
a) Alteration
of share capital b) Reduction of share capital c) Arrangement d) Variation of shareholder's rights 25.
Debentureholders accepting less than the face value of their debentures amounts
to _____.
a) Compromise b) Reduction of share capital c)
Alteration of share capital d) Variation of shareholder's rights 26.
Creditors accepting part payment of their claims amounts to _____.
a)
Reduction of Share Capital c) Compromise
b) Variation of Shareholders Rights d) Alteration of share capital
27. Share Capital A/c Dr. (Rs100)
To Share
Capital A/c (Rs.10)
The above entry in the scheme of reconstruction
records :
a) Consolidation of share capital b) Sub-division of share capital
c) Conversion of shares into
stock d) Conversion of stock
into shares 28. In Internal Reconstruction _____.
a) Only one company is liquidated b) One or more companies are
liquidated.
c) Two or more companies are
liquidated. d) No company is liquidated.
(March, 2012) 29. Reduction in Share capital of a company means
reduction in _____.
a) Paid up
capital b) Called up capital c) Authorized capital d) Uncalled capital
30. Share Capital A/c Dr. (Rs.10) To Share Capital A/c (Rs. 100)
The above entry is the entry of _____.
a)
Sub-division of share capital b)
Consolidation of share capital c) Internal reconstruction d) Amalgamation 31.
A Ltd. company may alter its share capital to _____.
a) Increase reserve capital b) Sub-divide
share capital c) Consolidate share capital d)
b and c
32. The existing 1,000 shares of Rs. 100 each altered
to 10,000 shares of Rs.10 each is _____.
a) Consolidation b) Sub-division
c) Conversion d) Surrender 33. Balance on Capital Reduction is utilized to
_____.
a) Write off preliminary expenses c) Pay
dissentient shareholders b) Issue bonus shares d) None of the above 34.
Internal Reconstruction requires _____.
a) Ordinary resolution passed at General meeting b) Special resolution passed at General
meeting
c) Special resolution passed at
Board meeting d) Ordinary resolution
passed at Board meeting 35. Capital Reduction requires _____.
a) Court order b) Order of the Registrar c) Order of the SEBI d) Order of stock
exchange 36. Amicable settlement of differences by mutual consent by parties is
_____.
a) Arrangement b)
Compromise c) Confirmation d) Merger
37. Re-arrangement of rights or liabilities without
any dispute is _____.
a) Amalgamation b) Arrangement c) Compromise d) Merger
38. Creditors foregoing their claims in whole or in part is _____.
a) Compromise b)
Arrangement c) Consolidation d) Sub-division
39. Consolidation and
sub-division of shares result in ___ (Reduction in share capital / Alteration in share capital)
(April, 2015)
State whether the following statements are True
or False after rewriting the sentence
1. Capital reduction and internal reconstruction is
synonym. True 2. Capital reduction
is one variety of capital restructuring. True
3.
Consolidation of shares result in profit for a company.
4.
Sub-division of shares result in gain for a company.
5.
Fictitious balances are to be transferred to Capital
Reduction Account.
6.
Accounting for unrecorded assets and appreciation of assets
results in credit to Reconstruction Account. True
7.
Provision for unrecorded liability indicates loss to a
company. True
8.
Accounting for internal and external reconstruction is
in identical manner.
9.
The reduction in paid up value should not be coupled
with reduction in face value of shares.
10. If
shareholders surrender shares to the company, it is capital profit to the
company.
11. Re-classification
of surrendered shares should not be accounted. True
12. Cancellation
of contingent liability is treated as profit to the company.
13. Transfer
of assets to creditors at book value is benefit to the company.
14. The
expenses for scheme should be debited to preliminary expenses.
15. Statutory
reserve can be utilized to set-off loss under the scheme
16. The final
accounts prepared after reconstruction should be suffixed by words “and
reduced”. True
17. The
requirements of Schedule VI is to be complied while preparing account after
internal reconstruction. True
18. Authorised
share capital is to be reduced to the extent of capital reduction.
19 Internal reconstruction scheme cannot be prepared to cover capital reconstruction.
20. The
debit balance in capital reduction should be transferred to Goodwill Account. True
21. Credit
balance on Capital Reduction Account is utilised to write off accumulated
losses.
22. After
internal reconstruction, Balance Sheet of a company cannot reflect true and fair view.
23. Profit on sale of asset is credited to Capital Reduction Account. True
24. A
company cannot subdivide shares.
25. Only
sick companies undertake capital reduction. True
26. No
journal entry is required for cancellation of unissued share capital. True (October, 2014) 27. Central
Government permission is required for internal reconstruction.
28. Amount
scarified by shareholders in a scheme of reconstruction is transferred to
Capital Reserve Account.
29. Securities
Premium Account can be transferred to Capital Reduction Account. True 30. The object of reconstruction
is to reorganise capital of the company. True
31.
Internal Reconstruction is governed by section 809 of the Company Law. 32.
Creditors accepting part payment of their claims is a compromise. True
33. Capital
Reduction A/c balance is utilized for issue of bonus shares.
34. Internal
Reconstruction requires ordinary Resolution of the Board of Directors.
35. Capital
Reduction requires court order. True
36. Creditors
foregoing the claim is an arrangement. True
37. Amicable
settlement of differences by mutual consent by parties is a merger.
38. A
company going for internal reconstruction must add the words, and reduced after
its name.
39. No
new company is formed at the time of internal reconstruction of companies. True (April, 2015)
40. There
is no difference between Internal and External Reconstruction of companies. ( October, 2015) THEORY QUESTIONS - SHORT NOTES
1. Need
for internal reconstruction.
2. Alteration
of Share capital.
3. Consolidation
of share capital.
4. Sub-division
of share capital.
5. Conversion
of shares into stock.
6. Capital
Reduction.
7. Surrender
of shares.
SHORT QUESTIONS
1.
What is Internal Reconstruction?
2.
Why is Internal Reconstruction needed?
3.
What is consolidation of Share Capital?
4.
What is sub-division of Share Capital?
5.
What is surrender of shares?
6.
To which A/c balance on Capital Reduction A/c is
transferred?
7.
Why, the words 'And Reduced' added to the name of the
company after reconstruction?
8.
What is alteration of share capital?
Problem No. 1. Following is the Balance Sheet of Virat Ltd. as on
31/03/2018
Liabilities Rs.
Assets Rs.
Equity
shares of Rs.10 each fully paid up 10,00,000
Goodwill 4,00,000
15%
Preference shares of Rs.10 each fully paid up 5,00,000
Land 3,00,000
15%
Debentures 4,00,000
Plant and Machinery 1,80,000
Interest
Accrued on above Dentures 60,000
Furniture and fittings 2,00,000
Unsecured
Loans 1,00,000
Stock 90,000
Bank
Overdraft 40,000
Sundry Receivables 53,000
Sundry
Payables 75,000
Profit and Loss A/c 9,77,000
Payable to
Directors 25,000
22,00,000 22,00,000
A scheme of reconstruction
has been agreed amongst all the stakeholders of Virat Ltd. and approved by the
court, which is as follows:
1.
Intangible and fictitious assets are to be fully
written off.
2.
Land is revalued at 500% more than the book value.
3.
There was an unrecorded asset of Rs.10,000 which was
sold for Rs.60,000.
4.
Equity Shares are to be reduced by Rs.4 each fully
paid up.
5.
15% Preference Shares are reduced to Rs.4 each fully
paid up.
6.
Debenture holders waived 50% of the outstanding
interest on debentures.
7.
30% of the sundry payables are reduced to the extent
of 30% of book value.
8.
Directors waived 90% of the amount payable to them by
the company.
9.
Stock and
Sundry receivables are reduced by 20% and 10% of their book values,
respectively.
10.
Plant and Machinery is reduced to 70% of its book
value.
11.
Furniture and Fitting to be reduced by 70%.
12.
40% of the unsecured loans are reduced by 60%.
You are
required to prepare only capital
reduction account assuming that the above scheme of reconstruction has been
implemented by the company. (March, 2012, April 2017)
mProblem No. 2. Following is the Balance Sheet of Ajay Ltd. as on
31/03/2018
|
Liabilities
|
Rs. |
Assets |
Rs. |
|
Equity shares of Rs.10 each fully paid up |
8,00,000 |
Goodwill |
4,50,000 |
|
9% Preference shares of Rs.10 each fully paid up |
4,00,000 |
Land |
3,00,000 |
|
10% Debentures |
5,00,000 |
Plant and Machinery |
4,00,000 |
|
Interest Accrued on above Dentures |
50,000 |
Furniture and fittings |
2,10,000 |
|
Unsecured Loans |
75,000 |
Stock |
60,000 |
|
Bank Overdraft |
15,000 |
Debtors |
80,000 |
|
Sundry Creditors |
60,000 |
Profit and Loss A/c |
4,00,000 |
|
|
19,00,000
|
|
19,00,000
|
A scheme of reconstruction
has been agreed amongst all the stakeholders of Ajay Ltd. and approved by the
court, which is as follows:
i. Intangible and fictitious assets are to be fully written off.
ii. Equity
Shares are to be reduced by Rs.4 each fully paid up. iii. Debenture
holders waived 50% of the outstanding interest on debentures. iv. 80% of the
unsecured loans are reduced by 40%.
v.
Directors gave Rs.30,000 to the company on
non-refundable basis.
vi.
Plant and Machinery is reduced to Rs.1,20,000.
vii. Stock and
Sundry receivables are reduced by Rs.15,000 and 20% of their book values,
respectively. viii. Furniture and Fitting to be reduced by Rs.63,000. ix. Land is
appreciated by 300%.
x.
There was an unrecorded asset which was sold for
Rs.20,000.
xi.
There was an unrecorded asset of Rs.10,000 which was
sold for Rs.60,000.
xii.
50% of the sundry creditors are reduced to the extent
of 50% of their book value.
You are
required to prepare only capital
reduction account assuming that the above scheme of reconstruction has been
|
implemented by the company. sProblem
3. The Balance Sheet of Dirty Ltd. as on 31st
March, 2022 appeared as follows |
|
(October,
2012) |
Liabilities Rs.
Assets Rs.
2000-9%
Preference Shares of Rs.100 each, fully paid
200000 Goodwill 167000
60000
Equity Shares of Rs.10 each, fully paid 600000
Land & Building 300000
11%
Debentures 400000
Plant and Machinery 215000
Interest
Accrued on above Debentures 44000
Investment 75000
Unsecured
Loans 260000
Stock 210000
Interest
Accrued on above Unsecured Loans 30000
Bank 45000
Current
Liabilities 166000
Preliminary Expenses 26000
Profit
and Loss A/c 353000
1700000
1700000
A scheme of reconstruction
has been agreed amongst the shareholders and the creditors and approved by the
court with the following salient features.
a)
Equity Shares are to be reduced to Rs.3 each fully
paid.
b)
9% Preference shareholders have agreed to accept 12%
Debentures of Face Value of Rs.1,20,000,issued at par, in full satisfaction of
their claims.
c)
Interest due on unsecured loans is paid at 40%
discount.
d)
Interest accrued on 11% Debentures is paid at 50%
discount.
e)
40% of current liabilities are to be reduced to 75%
and balance 60% to be reduced to 80%.
f)
20% of stock is obsolete which is sold at 40% of book
value.
g) Goodwill,
Preliminary Expenses and Debit Balance in the Profit and Loss Account is to be
written off, Rs.33,000 should be provided for doubtful debts and the value of
fixed assets should be appreciated by 10%. h) Cost of reconstruction paid
Rs.16,820.
Prepare the Capital
Reduction Account and Redraft the Balance Sheet of the company assuming that
above scheme of
reconstruction
has been implemented by the company. (March, 2011)
sProblem 4. Following is the summarised Balance sheet of Risky
Ltd. as on 31st March, 2022:
|
Liabilities
|
Rs |
Assets |
Rs. |
|
10% Preference shares of Rs.10 each |
4,80,000 |
Premises |
6,40,000 |
|
Equity Shares of Rs.10 each |
8,00,000 |
Plant and Machinery |
10,40,000 |
|
5% Debentures of Rs.100 each |
9,60,000 |
Investments |
2,40,000 |
|
Sundry Creditors |
4,00,000 |
Stock |
2,88,000 |
|
Bank Overdrafts |
2,40,000 |
Debtors |
1,92,000 |
|
Other Liabilities |
3,20,000 |
Deposits and Advances |
80,000 |
|
|
|
Preliminary Expenses |
3,20,000 |
|
|
|
Profit and loss Account (Dr. Balance) |
4,00,000 |
|
|
32,00,000
|
|
32,00,000 |
Note : Preference dividend
is in arrears for 3 years.
A scheme of reconstruction
is prepared and approved by the authorities.
The salient features of the
scheme are:
1.Plant and Machinery have
book value of Rs.1,60,000 is obsolete. This is sold as scarp for Rs.32,000.
2.The Depreciation on plant
and machinery is to be provided to the extent of Rs.80,000.
3.Stock includes items
valued at Rs.96000 which are sold at a loss of 50%.
4.The present realizable
value of investments is Rs.1,12,000.
5.Arrears of Preference
Dividend is not payable.
6.Reconstruction expenses
were Rs.16,000.
7.The paid up value of
equity shares is to be reduced to Rs.2 per share and preference shares to Rs.5
per share. However , the face value of both equity and preference shares remain
unchanged.
8. The creditors’ dues are
settled as (a) 20%immediate payment in
cash
(b)
40% amount is cancelled
(c)
40% paid by issue of 6% debentures.
9.
Other liabilities of Rs.80,000 is be cancelled.
10.
A call of Rs.3 per shares on equity shares is made and
received.
You are required to pass
Journal Entries in the books of Risky Ltd. to record the above
transactions. ( October, 2015)
mProblem No. 5. The following is the Balance Sheet of M/s Sonam Ltd.
as on 31st March, 2012
Liabilities Rs.
Assets Rs.
10%
Preference Shares of Rs.10 each 5,00,000
Goodwill 2,00,000
Equity
Shares of Rs.10 each 10,00,000
Land & Building 10,00,000
Creditors 2,00,000
Investments 5,00,000
10%
Debentures 2,00,000
Publicity Campaign Exps. 4,00,000
Other
Liability 7,00,000
Stocks 4,00,000
Preliminary
Expenses 1,00,000
26,00,000 26,00,000
The following scheme of
reconstruction was sanctioned:
1.
Each existing equity shares will be written down from
Rs.10 to Rs.4.
2.
Each existing 10% Preference shares is to be written
down from Rs.10 to Rs.8 of which Rs.4 will be represented by 12% Preference
shares of Rs.4 by equity shares.
3.
10% Debenture holders agree to waive 20% of right.
4.
Assets revalued as under:
Land and
Building Rs.12,00,000, Stock to be
reduced by 20%.
5.
Creditors due are settled as:
a)
20% immediate payment
b)
40% amount cancelled
c)
40% paid by issue of 16% Debentures
6.
All fictitious and Intangibles assets written off.
7.
10,000 Equity shares of Rs.6 each were issued to
public for cash.
You are
required to prepare
(a)
Capital Reduction Account
(b)
Balance Sheet of Sonam Limited after reconstruction.
mProblem 6. The following is the summary Balance Sheet of Sandeep
Limited as on 31st March, 2018:
|
Liabilities
|
Rs. |
Assets |
Rs. |
|
10% Preference Shares of Rs.100 each |
4,00,000 |
Goodwill |
25,000 |
|
Equity Shares of Rs.10 each |
10,00,000 |
Patents |
15,000 |
|
12% Debentures |
7,50,000 |
Furniture |
35,000 |
|
Bank Overdraft |
50,000 |
Plant & Machinery |
6,00,000 |
|
Sundry Creditors |
1,40,000 |
Stock in Trade |
80,000 |
|
Bills payable |
35,000 |
Sundry Debtors |
90,000 |
|
|
|
Bills Receivable (Trade) |
15,000 |
|
|
|
Profit and Loss Account |
8,20,000 |
|
|
|
Share issue Expenses |
45,000 |
|
|
23,75,000
|
|
23,75,000 |
The preference dividend is
in arrear for four years. The following scheme of capital reduction was
sanctioned by the court agreed by the shareholders.
i.The preference shares are
to be reduced to Rs.50 each and equity shares to Rs. 2 each, both being fully
paidThe IDBI has agreed to apply for Rs.500000 of Equity Shares paying cash in
full on application. ii. of the preference dividend in arrears three-fourth to
be waived and remained to be paid in cash. iii.The debenture holders to take
over plant and machinery at Rs.6,50,000 in part satisfaction of their claim.
The remaining claim should be converted into 14% Debenturers. iv.Creditors
agreed to reduce their claim by Rs.20,000. Bills Payable to be paid
immediately.
v.Goodwill , patents, profit
and loss Ac and share issue expenses are to be written off entirely. vi.The
following assets are to be revalued as under : Furniture Rs.25,000, Stock in
Trade Rs.66,000, Land and Building Rs.5,80,000, Sundry Debtors Rs.80,000. vii.A
secured loan of Rs.1,50,000 at 12% per annum is to be obtained by mortgaging
Land and Building for repayment of Bank overdraft, bills payable and
reconstruction expenses Rs.15,000.
Pass journal entires to
record above scheme and draft the balance sheet of Sandeep Limited after
reconstruction.
mProblem 7. Following is the Balance Sheet of Paramount Ltd. as
on 31.03.2005
|
Liabilities
|
Rs. |
Assets |
Rs. |
|
Share
Capital 6000-8% Preference Shares of Rs.100 each 50000 Equity Shares of Rs.10 each |
600000 500000 |
Fixed
Assets: Goodwill Patents Trademarks |
60000 40000 |
|
Reserve & Surplus : Capital Reserves |
50000 |
Building Plant and Machinery Furniture |
300000 300000 100000 |
|
Secured
Loans : 5% Debentures of Rs.100 each Debentures Interest Due |
30 50000 |
Current
Assets, Loans & Advance: Stock |
150000 |
|
Current Liabilities & Provisions: Sundry
Creditors |
180000 |
Sundry Debtors Cash |
75000 100000 |
|
|
|
Bank |
25000 |
|
|
|
Miscellaneous
Expenditure |
|
|
|
|
Discount on Debentures |
30000 |
|
|
|
Profit and loss Account |
500000 |
|
|
1680000 |
|
1680000 |
Note: Preference Dividend is in arrears for three years.
The following scheme of
reconstruction was prepared and duly approved by the court.
(1)
The Preference
Shares shall be converted into equal Number of 9% Preference Shares of Rs.50
each.
(2)
The equity shares shall be reduced to Rs.3 each.
However, the face value will remain the same.
(3)
5% Debentures shall be converted into equal number of
6% Debentures of Rs.75 each. The Debenture holders also agreed to waive 50% of
the accrued interest.
(4)
Arrears of Preference Dividend is to be reduced to one
year’s dividend which is paid in cash.
(5)
The Sundry Creditors agreed to waive 30% of their
claims and to accept Equity shares for Rs.30000 in part settlement of their
renewed claims.
(6)
The assets are to be revalued as under:
Building
Rs.350000, Plant & Machinery
Rs.250000, Furniture Rs.80000, Stock Rs.100000, Sundry Debtors Rs.70000.
(7)
Intangible assets and fictitious assets are to be
written off:
Pass Journal
Entries, Prepare Capital Reduction Account and Balance Sheet after
Reconstruction in the books of the Paramount Ltd.
( October, 2006, May 2019 )
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