Internal Reconstruction Part-II.pptxfile

Internal reconstruction

1. Internal Reconstruction Part-II By: Bhoomika Garg

2. Surrender of Shares It means handing over or giving up the possession of the shares to the company by the shareholders. In Companies Act, surrender of shares amounts to reduction of share capital. However, the surrender shares can be re- issued to: To new shareholders In reducing the trade Liabilities i.e. creditors In reducing non- trading liabilities i.e. debenture holders Note: When the surrendered shares are not re- issued, these are cancelled and the balance is transferred to Reconstruction A/C .

3. Contd. The Accounting treatment would be: a) On Surrender of Shares Share Capital A/C Dr. To Shares Surrendered A/C b) On Re- issue of Surrendered Shares Shares Surrendered A/C Dr. To Share Capital A/C Note: Whether issued to new shareholders or to pay outside liabilities. c) On Cancellation of Surrendered Shares Shares Surrendered A/C Dr To Reconstruction A/C

4. Example for Surrender of Shares Illustration The Equity shareholders of XYZ Ltd. Agree to surrender their shares of Rs. 1,00,000. Further, Rs. 80,000 debenture holders and Rs. 50,000 trade creditors agree to give up or sacrifice or forego their claims by 50% each in exchange for equity shares to be issued from the surrendered shares to settle their remaining claims. Journalize it. Ans. a) On Surrender of Shares Equity Share Capital A/C Dr. 1,00,000 To Shares Surrendered A/C 1,00,000 b) For issue of equity shares out of surrendered shares Shares Surrendered A/C Dr. 65,000 ( 40,000 + 25,000) To Equity Share Capital A/C 65,000

5. Contd. c) For Cancellation of claims by debenture holders and creditors Debentures A/C Dr. 80,000 Trade Creditors A/C Dr. 50,000 To Reconstruction A/C 1,30,000 d) For Cancellation of the balance in shares surrendered A/C Shares Surrendered A/C Dr. 35,000 To Reconstruction A/C 35,000 Note: Calculation of total sacrifice: By shareholders 1,00,000 By Debenture holders 40,000 By Trade Creditors 25,000

6. Utilization of Reconstruction A/C At this stage the Reconstruction A/C will show some credit balance on account of sacrifice made by shareholders, outside liabilities, profit on sale of fixed assets etc. Reconstruction A/C is utilized in following manner: a) Writing Off fictitious and intangible Assets: The Accounting treatment is: Reconstruction A/C Dr. To Preliminary Expenses A/C To Discount on issue of shares A/C To Patents A/C To Goodwill A/C To Surplus A/C ( Negative Balance) Note: These have to be written off whether given in the problem or not.

7. Contd. b) In writing down overvalued fixed and current assets: The accounting treatment is: Reconstruction A/C Dr. ( With the Amount of Reduction) To Fixed assets A/C ( Individual Fixed Assets To Current Assets A/C ( Individual Current Assets) c) Recording New Liability: The accounting treatment is: Reconstruction A/C Dr. To Particular Liability A/C Note: If some unrecorded Liability is directly paid in cash, the journal entry would be: Reconstruction A/C Dr. To Bank A/C

8. Contd. d) Expenses of Reconstruction: The Accounting treatment is: Reconstruction A/C Dr. To Bank A/C e) Credit Balance in Reconstruction : If there is some credit balance in Reconstruction A/c, it is transferred to Capital Reserve A/C. The journal entry would be: Reconstruction A/C Dr. To Capital Reserve A/C

9. Problem I

10. Contd.

11. Solution Date Particulars Dr.( amount) Cr.( Amount) 31.3.16 Equity Share Capital(Rs.100) A/C Dr. To Equity Share Capital(Rs.5) A/C To Reconstruction A/C 20,00,000 1,00,000 19,00,000 31.3.16 Equity Share Capital(Rs.5) A/C Dr. Equity Share Capital(Rs.10) A/C 1,00,000 1,00,000 31.3.16 O/S Deb. Interest A/C Dr. To Reconstruction A/C 1,20,000 1,20,000 31.3.16 12% Debentures A/C Dr. To 14% Debentures A/C 5,00,000 5,00,000 31.3.16 Bank A /C Dr. To Equity Share App. & All. A/C 5,00,000 5,00,000 31.3.16 Equity Share App. & All. A/C Dr. To equity Share Capital A/C 5,00,000 5,00,000

12. Solution Date Particulars Dr.( amount) Cr.( Amount) 31.3.16 Trade Payables A/C Dr. To Equity Share Capital (Rs.10) A/C To Bank A/C To Reconstruction A/C 3,00,000 2,00,000 50,000 50,000 31.3.16 Land & building A/C Dr. To Reconstruction A/C 50,000 50,000 31.3.16 Reconstruction A/C Dr. To Plant & Machinery A/C To prov. For doubtful debts A/C To Goodwill A/C To Share Issue Expenses A/C To Surplus A/C 21,20,000 90,000 5,000 25,000 20,000 19,80,000

13. Balance Sheet Particulars Note No. Amt. Amt. EQUITY AND LIABILITIES Shareholder’s Fund Share Capital Non- Current Liabilities Long Term Borrowings Current liabilities Short Term Provisions TOTAL ASSETS Fixed Assets Current Assets Inventories Trade Receivables Cash & Bank Balances Total 1 2 3 4 5 8,00,000 5,00,000 5,000 ___________ 13,05,000 ___________ 4,90,000 2,70,000 60,000 4,85,000 __________ 13,05,000 __________