Internal reconstruction

Internal reconstruction

1. Internal Reconstruction

2. What is Reconstruction? Reconstruction is a process of the company’s reorganization, concerning legal, operational, ownership and other structures, by revaluing assets and reassessing the liabilities . It refers to the transfer of company or several companies’ business to a new company.

3. Objectives of Reconstruction To resolve the problem of over-capitalization/huge accumulated losses/over valuation of assets. When the capital structure of a company is complex and is required to make it simple When change is required in the face value of shares of the company To generate surplus for writing off accumulated losses & writing down overstated assets . Raising the fresh capital by issuing new shares. Changing altogether the memorandum of association of the company. To generate cash for working capital needs, replacement of assets, to add balancing equipment’s, modernise plant & machinery etc.

4. Types of Reconstruction A company can be reconstructed in any of the two ways. These are: 1 . External Reconstruction 2 . Internal Reconstruction.

5. BASIS FOR COMPARISON INTERNAL RECONSTRUCTION EXTERNAL RECONSTRUCTION Meaning Internal reconstruction refers to the method of corporate restructuring wherein existing company is not liquidated to form a new one. External reconstruction is one in which the company undergoing reconstruction is liquidated to take over the business of existing company. New company No new company is formed. New company is formed. Use of specific terms in Balance Sheet Balance Sheet of the company contains "And Reduced". No specific terms are used in the Balance sheet. Capital reduction Capital is reduced and the external liability holders waive their claims. No reduction in the capital Approval of court Approval of court is must. No approval of court is required. Transfer of Assets and Liabilities No such transfer takes place. Assets and liabilities of existing company are transferred to the new company

6. Meaning of Internal Reconstruction Internal reconstruction refers to the internal reorganisation of the financial structure of a company . In reconstruction, usually the following activities are done Revaluation Of Assets & Liabilities; Writing Off Of the losses suffered by the company by reduction of the paid-up value Of shares; Varying of the rights attached to different classes Of shares and Compounding / arrangement with the creditors.

7. Reasons for Internal Reconstruction The need for reconstruction arises in the following cases : When a company has accumulated losses; When a Company finds itself overcapitalized , value placed on assets is too much as compared to their earning capacity; When the profits as a whole are insufficient to pay proper dividend;

8. Capital reduction account It is a temporary account opened at the time of internal reconstruction for transferring the part of capital which is lost or unrepresented by asset. The balance of capital reduction account after writing off losses will be transferred to capital reserve account.

9. FILL- Capital Reduction ,accumulated losses ,Reconstruction, Internal reconstruction , ……………………….is a process of the company’s reorganization, ownership, by revaluing assets and reassessing the liabilities In Reconstruction we ,writing off …………………..& writing down overstated assets. ……………A/c is a temporary account opened at the time of internal reconstruction for transferring the part of capital which is lost or unrepresented by asset. ………………………refers to the method of corporate restructuring wherein existing company is not liquidated to form a new one.

10. MCQ 1. ………………..refers to the method of corporate restructuring wherein existing company is not liquidated to form a new one Internal reconstruction External reconstruction 2. ……………….is one in which the company undergoing reconstruction is liquidated to take over the business of existing company . Internal reconstruction External reconstruction

11. 3. Balance Sheet of the company contains "And Reduced". Internal reconstruction External reconstruction 4. No new company is formed . Internal reconstruction External reconstruction

12. 5. Assets and liabilities of existing company are transferred to the new company. Internal reconstruction External reconstruction 6. Capital is reduced and the external liability holders waive their claims. Internal reconstruction External reconstruction

13. 7. refers to the internal reorganisation of the financial structure of a company. Internal reconstruction External reconstruction 8. When a Company finds itself overcapitalized , value placed on assets is too much as compared to their earning capacity is also reason for Internal Reconstruction Yes No

14. Methods of internal reconstruction

15. The various methods of internal reconstruction are: 1. Alteration of Share Capital : The alteration in the share capital can be done either by sub-division and consolidation of shares or by conversion of shares into stock or stock into shares . For example, a company with a capital Of Rs.10,00,000 divided into 10,000 equity shares Of 100 each on which 75 is paid up decides to recognise its capital by splitting one equity share Of 100 each into 10 such shares Of 10 each. The consequential entry to be passed in such a case would be—

16. 2. Variation of Shareholder’rights :   the  company can vary the rights of the shareholders with the consent in writing of the holders of three-fourths of the issued and outstanding shares of that class.   It can also do so with the sanction of a special resolution passed by a majority of the votes cast at a separate general meeting.

17. 3. Reduction of Share Capital : The Company can reduce share capital by share cancellations or buybacks .

18. 4. Compromise/Arrangement: Under this method, an agreement is made between the company and its members and outside liabilities in case of financial crisis whereby a sacrifice is made by the shareholders, creditors or debenture holders.

19.  5. Surrender of Shares: In this method, the shareholders are made to surrender their shares so that these can be allotted to debenture holders and creditors so as to reduce their liabilities.

20. MATCH Alteration of Share Capital Variation of Shareholder’ rights Reduction of Share Capital Compromise/Arrangement Surrender of Shares 3.by share cancellations or buybacks. 1.sub-division and consolidation of shares 5.shareholders are made to surrender their shares so that these can be allotted to debenture holders for reduce liability 4.a sacrifice is made by the shareholders, creditors or debenture holders 2.consent in writing of the holders of three-fourths of the issued and outstanding shares of that class.  

21. B E A D C

22. Methods of Alteration in Share Capital A company Limited by shares can alter its share capital, if articles of Association of company permits it and a resolution has been passed in the general meeting of the company.

23. Share capital can be altered in following ways ( 1) Increase in share capital by issue of new shares (2) Consolidation of shares (3) Sub-division of shares (4) Conversion of shares into stock or stock into shares (5) Cancellation of unissued shares

24. Match – Alteration of share capital (1) Increase in share capital by issue of new shares (2) Consolidation of shares (3) Sub-division of shares (4) Conversion of shares into stock or stock into shares (5) Cancellation of unissued shares 5.Authorised share capital 10,00,000 & issued S.C. 6,00,000. so cancelled 4,00,000 1. Issues share Rs.2,00,000 4.Convert 10,000 share @ 100 each into stocks 2.Convert 5 share @ 10/- each into One Share of 50/each 3.Convert One Share of 50/each into 5 share @ 10/- each

25. B D E C A

26. Accounting Entries 1 . For reduction of Equity Share Capital: (Old) Equity Share Capital Account Dr. To (new) Equity Share Capital Account To Capital Reduction Account 2 . For reduction of Preference Share Capital: (Old) Preference Share Capital Account Dr. To (new) Preference Share Capital Account To Capital Reduction Account 3 . For reduction of the amount due to debenture holders: Debenture holders Account Dr. To Capital Reduction Account

27. 4. For reduction of the amount due to Creditors : Creditors Account Dr. To Capital Reduction Account 5. For appreciation in the value of Assets: Assets Account Dr. To Capital Reduction Account 6. For the payment of Reconstruction expenses: Reconstruction Expenses Account Dr. To Bank Account Balance of Any Reserve (If Any) Transferred : Capital Reserve/ General Reserve/Any Particular Reserve A/c Dr. To Capital Reduction A/c

28. For utilization of capital reduction account in writing off accumulated losses and various fictitious assets: Capital Reduction Account Dr. To Profit and Loss account (loss) To Preliminary Expenses To Discount of issue of shares or debentures account To underwriting commission account To Advertising Suspense’s account To Reconstruction Expenses account To Good will account To Patents or Trade Marks account To Fixed assets account (over valued assets0 To Other assets account To Capital Reserves account (if some balance is still left

29. Balance of Capital Reduction A/c transferred : Capital Reduction A/c Dr. To Capital Reserve A/c For extinguishing or reducing the uncalled liability of the member: Equity Share Capital A/c To Equity share Capital A/c

30. Question -1 A company with a capital Of Rs.10,00,000 divided into 10,000 equity shares Of 100 each on which 75 is paid up decides to recognise its capital by splitting one equity share Of 100 each into 10 such shares Of 10 each. The consequential entry to be passed in such a case would be—

31. ANS Equity Share Capital ( Rs 100 ) A/c (7500X100) Dr 750000 To Equity Share Capital ( Rs 10 ) A/c(75000X10) 750000 Being the sub-division Of 10,000 shares Of Rs 100 each with 75 paid up thereon into 1,00,000 shares Of 10 each with 7.50 paid up thereon as per the resolution Of shareholders passed in the General Meeting held on...)

32. Question -2(SELF) RAM Ltd. with a capital Of Rs.1,00,000 divided into 10,000 equity shares Of 10 each on which 9 is paid up decides to recognise its capital by splitting one equity share Of 10 each into 2 such shares Of 5 each. The consequential entry to be passed in such a case would be—

33. Q-2 (ANS) Equity Share Capital ( Rs 10) A/c(10000share x 9) 90000 TO Equity Share Capital ( Rs 5) A/c(20000x4.5) 90000 Being the sub-division Of 10,000 shares Of Rs 10 each with 9 paid up thereon into 20,000 shares Of 5 each with 4.50 paid up thereon as per the resolution Of shareholders passed in the General Meeting held on...)

34. Question -3 (Consolidation of shares) On 31-12-20X1, B Ltd. had 40,000,Rs. 5 Equity Shares as authorised capital and the shares were all issued on which 4 was paid up . In June, 20X3 the company in general meeting resolved to consolidate 20 shares Of Rs.5 , Rs.4 per share paid up into one share Of Rs.100 each, Rs.80 paid up. Pass journal entries

35. ANS 3

36. Q.4 (Self) On2020, ABC Ltd. had 1,00,000, @ Rs 25 Equity Shares as authorised capital and the shares were all issued on which 25 was paid up. In 2021 the company in general meeting resolved to consolidate 4 shares Of 25, share paid up into one share Of 100 each, Pass journal entries

37. ANS -4 Self 2021 Equity Share Capital ( 25) A/c 250000 To Equity Share Capital ( 100) A/c 250000 •(Being consolidation Of 1,00,000 shares Of 25 into 25,000 ,100 shares with 100paid up)

38. Question-5 C Ltd. had Rs . 5000000 authorised capital on 31-12-20X1 divided into shares Of 100 each Out Of which 4,000 shares were issued and fully paid up . In June 20X2 the Company decided to convert the issued shares into stock. But in June, 20X3 the Company re-converted the stock into shares Of 10 each, fully paid up. Pass entries of 2002,2003

39. ANS -5 June X2 Equity Share Capital A/C (4000x100) 400000 To Equity Stock A/C 400000 (Being conversion Of 4,000 fully paid Equity Shares Of 100 into Rs.400000 Equity Stock as per resolution in general meeting dated...) June X 3 Equity Stock A/C 400000 To Equity Share Capital A/C 400000 (Being re-conversion Of 400000 Equity Stock into 40,000 shares Of 10 )

40. Question - 6 WX Ltd. had Rs . 200000 authorised capital on 31-12-2018 divided into shares Of 100 each Out Of which 2,000 shares were issued and fully paid up . In April 2019 the Company decided to convert the issued shares into stock. But in June, 2020 the Company re-converted the stock into shares Of 10 each, fully paid up. Pass entries.OF 2019,2020

41. Ans -6 Apr-19 Equity Share Capital A/C 200000 TO Equity Stock A/C 200000 (Being conversion Of 2,000 fully paid Equity Shares Of 100 into 2000 Equity Stock as per resolution in general meeting dated...) JUNE 20 Equity Stock A/C 200000 TO Equity Share Capital A/C 200000 (Being re-conversion Of 2000 Equity Stock into 2,000 shares Of 100 )

42. Question -7 Ravi Raghav Co. Ltd. passed the necessary resolution and received sanction of the court for the reduction of its share capital by 2,50,000 for the purposes enumerated hereunder: ( a) To write off the debit balance of profit and loss account 1,05,000. (b) Value of Machinary is 6,10,000 and To reduce the value of plant and machinery by 45,000 and of goodwill by 20,000. ( c) Value of investment is 140000 and to reduce the value of investment to market value by writing off 40,000 . The reduction was made by converting 25,000 preference shares of 20 each fully paid to the same number of preference shares of 15 each fully paid and by converting 25,000 equity shares of 20 each, 15 paid up into 25,000 equity shares of 10 each fully paid. Give journal entries necessary in relation to the reduction of share capital and show how you would deal with the balance of the reduction of share capital account, Prepare the Balance Sheet.

43. ANS

44. Capital Reduction A/c To Profit and Loss Account 1,05,000 By Preference Shares (20) Capital Account 125000 To Goodwill Account 20,000 By Equity Share Capital (20) Account 125000 To Plant & Machinery Account 45,000 To Investment Account 40,000 To Capital Reserve Account 40,000 250000 250000

45. Balance Sheet Particulars Note No. Amount (₹) I. Equity and Liabilities     1.Shareholders’ Funds     a. Share Capital 1 6,25,000 b. Reserves and Surplus 2 40,000 2.Non-Current Liabilities     3.Current Liabilities     Total   6,65,000       II. Assets     1.Non-Current Assets   665000 2.Current Assets     a. Cash and Cash Equivalents 3   Total   6,65,000

46. The  balance sheet  of Jack as on 31st Dec, 2012 is as follows:- Balance Sheet Equities   Assets   Authorized capital     Machinery  165,000  72,000 shares of 10 each  720,000  Patents  201,000  Paid up capital     Equipments  75,000 54,000 shares of 10 each  540,000  Preliminary expenses  15,000  Accounts Paybale   36,000  Stock/ Invenory  24,750  Accrued liabilities  12,000  A/ Receivables  14,040      Cash  180      Profit & Loss  93,000  The special resolution for capital reduction  has been passed and confirmed as per following details: 10 shared are to be reduced to 6 for the same number of shares, The amount of reduction should be utilized for: the  balance of the profit and loss account and preliminary expenses, machinery to be reduced to 110,000 . 9,000 write off against inventory, 4. Patents should be reduced to 167,000. Required : Pass the journal entries in the books of Jack.

47. Jack - Journal Entries Description Debit Credit 10 Share capital A/c (54000 x 10) Dr 540,000   To 6 Share capital (54000x6)   324,000     To Capital reduction (54000 x4)   216,000   ( Being share holders sacrifices there Rs.4 on a share)     Capital reduction  Dr 98000     To Machinery   (165000-110000)   55,000     To   Patents (201000-167000)   34,000     To Inventory   9,000  Capital reduction  Dr 108,000         To Profit and Loss account   93,000      To Preliminary expenses    15,000  Capital Reduction A/c Dr (216000-98000-108000) 10000 To Capital Reserve A/c 10000 ( Being Remaining Balance of Capital Reduction A/c Transferred into Capital Reserve A/c )

48. Capital reduction A/c Particular Dr To Assets A/C (Downwards) To Liability (Reassessment upward) To Cash A/c (Unrecorded liability) To Profit or loss A/c To Preliminary expense A/c To Underwriting commission A/c To Discount on issue of shares A/c To Goodwill A/c To Patents A/c To Capital reserve A/c (bal. fig) Particular Cr By E.s.c A/c By P.s.c . A/c By Asset A/c (Upward) By Liability A/c (Downward revaluation) By Cash A/c (Unrecorded Asset sale)

49. 5.Unsuccessful companies,6. 30 , 2.No Journal Entry, 1.The Court ,3.Accumulated Losses , 4.Reduces, 7.Paid up Reduction of capital is lawful only when it is sanctioned by……….. …………… is required for the cancellation of unissued share capital. Internal reconstruction is adopted to write off …………… On the reduction of capital, the security of creditors …………. Only ………… adopts internal reconstruction. Alteration of the capital must be noticed to the Registrar within ………. days of doing so as per Section 95 . Consent of creditors is required when ………….. share capital is reduced.

50. The Court No Journal Entry Accumulated Losses Reduces Unsuccessful companies Thirty Paid up

51. True/ False All types of companies undertake capital reduction .-F Reduction of capital can be possible in Internal reconstruction.-T There is no need for a company to take the permission of court to cancel any paid up capital which is lost or not represented by the available assets. T Share premium account cannot be transferred to capital reduction account. F To return the excess paid up capital, the permission of the court is required.T Cancellation of nominal capital is also called capital reduction . T If reduction of capital is not sanctioned by the court, it is unlawful.T

52. 1. False 2 . True 3 . True 4 . False 5 . True 6 . True 7 . True

53. T/F According to sec. 61 of the companies act, 2013, a limited company can increase, sub-divide or consolidate all or part of its existing share if authorised by its articles of association. Reduction of capital is unlawful except when sanctioned by the court. A company must pass a special resolution for reduction of capital. Alteration of share capital can be affected by passing an ordinary resolution. Cancellation of unissued capital is also a case of capital reduction. Redemption of preference shares is a case of capital reduction. Only unsuccessful companies undertake capital reduction. No journal entry is required for cancellation of unissued share capital. Consent of creditors is not required if capital reduction involves writing off of paid up capital lost or not represented by available assets. A company is free to reduce or extinguish the uncalled liability of its members.

54. T T T T T F T T T F

55. Consent of creditors is required if capital reduction involves diminution of liability regarding uncalled capital or return of paid up capital. Forfeiture and Surrender of shares is a case of capital reduction. Under Sec. 64 of the Companies Act, 2013 the company shall give notice of the alternation of capital to the registrar within 45 days. The word "And Reduced" is added to the name of the company for such period as the court deems fit.

56. 1 T 2 F 3 False ,30 days 4 True

57. 1) The various losses can be written with the help of capital reduction account at the time of-------- ------ reconstruction. a . External b . outsources c . Internal d . Surplus 2 ) The amount of surrendered shares is credited to --------------account a . capital reduction b . capital c . bank d . P&L

58. 4) Consolidation of shares does affect the amount of----------------. a . Share capital b . creditors c . Debtors d . Bank overdraft

59. 5 ) A company can convert fully paid ---------------into stock and also reconvert ----------------back into shares a . securities b . Debentures c . Deposits d . share,stock 6 ) Any debit balance in P&L a/c represents ------------and such losses will be written off as part of capital reorganization . a. Gains b . resources c . accumulated losses d . Incomes

60. 7 ) In the scheme of capital reduction, any new liability to be provided for, such as arrears of preference dividend, must be met out of-----------account. a . income reduction b . trading c . capital reduction d . debtors 8) For refunding surplus capital-----------------is credited. a . share a/c b . creditors a/c c . Liabilities a/c d . share holders a/c

61. 9) For any sacrifice made by debenture holders or creditors--------------is credited. a . capital reduction account b . Bank account c . capital reserve account d . Asset account 10) When the purchasing company allots shares at market price the calculation of purchase consideration is based on-----------------. a . Market price b . Paid up value c . Average of the above two d . None of the above

62. 11) In case of sub-division of share capital the total number of shares— a . Increases b . Decreases c . Does not change. 12) If the shares of smaller denomination-are converted into the shares of higher denomination without changing the total amount of share capital, then it is a case of— a . Consolidation of share capital b . Sub-division of share capital c . Decrease in unissued share capital.

63. 13) When a company converts its equity shares into the capital stock, then the account to be credited is— a.Equity share capital account b . Equity capital stock account c . No entry is required . 14) A Ltd. with a share capital of 10,000 equity shares of Rs . 10 each fully paid decides to repay Rs . 5 per share thus making each share of Rs . 5 fully paid. It is a case of— a . Reducing share capital by returning the excess capital b. Reducing the liability on account of uncalled capital c . Reducing the paid-up capital.

64. 15. For writing off the accumulated Josses under the scheme of capital reduction, we debit— a . Share capital account b . Accumulated losses account c . Capital reduction account.. 16. If there is any balance in the capital reduction account after writing off all the accumulated losses, then the same is transferred to — a.Share capital account b . Capital reserve account c . General reserve account . 17. A company has issued capital of 10,000 equity shares of Rs . 10 each fully paid. It decides to convert its capital into 20,000 equity shares of Rs . 5 each. It is a case of a . Consolidation of share capital b . Sub-division of share capital c . Decrease in unissued share capital.

65. 18. If the creditors are willing to reduce their claims against the company, (hen the amount of reduction in their claim will be transferred to a . Share capital account b . Creditors account c . Capital reduction account. 19. Any loss on revaluation of the assets at the time of internal reconstruction, will be charged from— a . Revaluation account b . Share capital account c . Capital reduction account. .

66. 20. In which of the following cases, procedure of reduction of capital is not called for: a . Redemption of preference shares b . Forfeitures of shares c . Surrender of shares or gift of shares d . All of the above 21. In a scheme of reorganisation amount of shares surrendered by shareholders is transferred to: Capital reduction account Shares surrendered account Capital reserve account Reserve capital account

67. 22. Amount sacrificed by shareholders are credited to: Capital reduction account Shares surrendered account Capital reserve account Reserve capital account 23. To carry out capital reduction, permission is required from: The Competent Court Company law Board Central government SEBI

68. 122) a 123) c N 125 ) a 126 ) d 127 ) c 128 ) c 129 ) d 130 ) a 131 ) a 132 ) a 133 ) a 134 ) b 135 ) a 136 ) c 137 ) b 138 ) b 139 ) c 140) c 141) d 142 ) b 143 ) a 144) a

69. - Reserves of the company -----------------be utilised in meeting the accumulated losses at the time of internal reconstruction. a . can b . cannot c . may be d . none of the above A To carry out the scheme of capital reduction ----------------approval is necessary. a . court b . central government c . Company Law Board d . registrars of company C