INTERNAL RECONSTRUCTION

WHAT IS RECONSTRUCTION...???

TYPES OF RECONSTRUCTION

External Reconstruction

Internal Reconstruction

Basic Journal Entries20,000 Equity Shares of Rs. 10 each is reduced to Rs. 6 each.
Equity Share Capital A/c (10) «Dr 2,00,000 1,20,000 80,000

To Equity Share Capital A/c (6) To Capital Reduction A/c (4)

20,000 Equity Shares of Rs. 10 each is reduced by Rs. 6 each.
Equity Share Capital A/c (10) «Dr 2,00,000 80,000 1,20,000

To Equity Share Capital A/c (4) To Capital Reduction A/c (6)

20,000 Equity Shares of Rs. 10 each is reduced to a paid up value of Rs. 4, face-value remaining unchanged.
Equity Share Capital A/c «Dr 1,20,000 To Capital Reduction A/c (20,000 x 6) 1,20,000

Debenture holders take over a property of Rs. 10,000 for Rs. 15,000 and provide Rs. 5,000 on floating charge on rest of the assets.
(i) Debentures A/c «Dr To Property A/c To Capital Reduction A/c 15,000 10,000 5,000

(ii) Cash A/c «Dr To Debentures A/c

5,000 5,000

Damages of Rs. 10,000 materialized to the full extent, but amount of Rs. 4,000 is recovered from the director who was responsible for that. The amount was adjusted against director·s loan of Rs. 15,000. The remaining director·s agreed to settle the loan with equity shares.

(i) Capital Reduction A/c «Dr Director·s Loan A/c «Dr To Cash A/c (ii) Director·s Loan «Dr To Equity Share Capital A/c

6,000 4,000 10,000 11,000 11,000

Creditors agreed to reduce their claims to the extent of 20% on the condition that 40% of the remaining is paid off immediately and rest after 2 years with 10% interest. Creditors is of Rs. 1,00,000.
(i) Creditors A/c «Dr To Capital Reduction A/c 20,000 20,000

(ii) Creditors A/c «Dr To Cash A/c

32,000 32,000

Arrears of Preference Dividend:
o If it is not paid - No Entry o If it is paid Capital Reduction A/c «Dr To Cash A/c (Note: Preference Dividend paid is a loss to the extent paid off.)

All the fictitious assets are to be written off (even if not specified in the sum). Capital Reduction A/c «Dr To Fictitious assets A/c

Outstanding interest on debentures is waived off.
Outstanding Interest A/c «Dr To Capital Reduction A/c

Reconstruction expenses incurred.
Capital Reduction A/c «Dr To Cash A/c

If any reserves is to be utilized for reconstruction scheme.
Any Reserves A/c «Dr To Capital Reduction A/c

Sale of asset at profit or loss.
(i) In case of profitCash A/c «Dr

To Asset A/c To Capital Reduction A/c (ii) In case of lossCash A/c «Dr Capital Reduction A/c «Dr To Asset A/c

Q. The summarized balance sheet of enterprises Ltd. as on

March 31, 1990 was as follows:
LIABILITIES Rs. ASSETS Rs.

Share capital: Authorized, Issued & Fully paid up: 80000 6% Cumulative Preference shares of Rs. 10 each 150000 Equity shares of Rs. 10 each

800000 1500000 2300000

Secured loan: 6% Debenture (secured on freehold property) 750000 Accrued interest 45000 795000 Unsecured loans: Directors 200000 Overdraft 390000 590000 Current liabilities: Creditors 600000

Fixed assets: Freehold property Plant Patents Goodwill Trade investments (at cost) Current assets: Debtors Stock Deferred Advertisement Profit & Loss A/c

850000 100000 75000 260000 110000 970000 850000 200000 870000

4285000

4285000

Note: The preference dividends are four years in arrears. There are capital commitments totaling Rs. 500000 The court approved a scheme of re-organization, submitted by the debenture holders and agreed by other interested parties to take effect on 1st April, 1987 whereby: The preference shares to be written down to Rs. 7.50 each and equity shares to Rs. 2 each, each class of shares than to be converted into shares of Rs.10 each. Of the preference dividend in arrears, three fourths to be waived and equity shares to be allotted at par for remaining one fourth.

The debentures holders to have their accrued interest paid in cash to take over freehold property (book value Rs. 200000) at a valuation of Rs. 240000 in part repayment of their holdings and provide additional cash of Rs. 260000 secured by floating charge on the company·s assets at an interest rate of 8%. Patents, goodwill and deferred advertising to be written off, Rs. 130000 to be written off for stock, Rs. 137000 to be provided for bad debts and remaining freehold property to be revalued at Rs. 775000. The trade investments to be sold for Rs. 280000. The directors accept settlement of their loans as to 90% thereof by allotment of equity shares at par and as to 5% being waived. The contracts for capital expenditure to be called off an payment of 5% of the contract price as a penalty.

SOLUTION:

The preference shares to be written down to Rs. 7.50 each and equity shares to Rs. 2 each, each class of shares than to be converted into shares of Rs.10 each. o Preference share capital A/c «Dr To Preference share capital A/c To Capital reduction A/c o Equity share capital A/c «Dr To Equity share capital A/c To Capital reduction A/c 8,00,000 6,00,000 2,00,000 15,00,000 3,00,000 12,00,000

o Preference share capital A/c «Dr To preference share capital A/c o Equity share capital A/c «Dr To Equity share capital A/c

6,00,000 6,00,000 3,00,000 3,00,000

Of the preference dividend in arrears, three fourths to be waived and equity shares to be allotted at par for remaining one fourth. o Capital reduction A/c «Dr To Equity share capital A/c 48,000 48,000

The debentures holders to have their accrued interest paid in cash to take over freehold property (book value Rs. 200000) at a valuation of Rs. 240000 in part repayment of their holdings and provide additional cash of Rs. 260000 secured by floating charge on the company·s assets at an interest rate of 8%. o Interest A/c To Cash A/c o Debenture A/c «Dr To Freehold property A/c To Capital reduction A/c o Cash A/c «Dr To 8% Debentures A/c «Dr 45,000 45,000 2,40,000 2,00,000 40,000 2,60,000 2,60,000

Patents, goodwill and deferred advertising to be written off, Rs. 130000 to be written off for stock, Rs. 137000 to be provided for bad debts and remaining freehold property to be revalued at Rs. 775000. o Capital reduction A/c «Dr 16,72,000 2,60,000 75,000 2,00,000 1,30,000 1,37,000 8,70,000 1,25,000 1,25,000

To Goodwill A/c To patents A/c To Deferred Advertising A/c To Stock A/c To Debtors A/c To Profit & loss A/c o Freehold property A/c «Dr To Capital reduction A/c

The trade investments to be sold for Rs. 280000. o Bank A/c «Dr 2,80,000 1,10,000 1,70,000

To Investments A/c To Capital reduction A/c

The directors accept settlement of their loans as to 90% thereof by allotment of equity shares at par and as to 5% being waived. o Directors A/c «Dr 2,00,000 1,80,000 10,000 10,000

To Equity share capital A/c To Cash A/c To Capital reduction A/c

The contracts for capital expenditure to be called off on payment of 5% of the contract price as a penalty. o Capital Reduction A/c «Dr To Cash/Bank A/c 25,000 25,000

Dr.

CAPITAL REDUCTION A/C
Particulars. Amount (Rs.)
48,000

Cr.

Particulars
By Preference Share Cap. A/c

Amount (Rs.)
2,00,000 12,00,000 40,000 1,25,000 1,70,000 10,000

To Equity Share Capital A/c To Goodwill A/c To Patents A/c

2,60,000 By Equity Share Capital A/c 75,000 By 6% Debentures A/c

To Deferred Advertisement A/c 2,00,000 By Free-Hold Property A/c To Stock A/c To Debtors A/c To Profit & Loss A/c To Bank A/c 1,30,000 By Bank A/c 1,37,000 By Director¶s A/c 8,70,000 25,000
17,45,000

17,45,000

BALANCE SHEET AS ON 31ST MARCH 1990
LIABILITIES AMOUNT (RS.) ASSETS AMOUNT (RS.)

Issued, Subscribed and Paid up Capital 60,000 6%Preference Shares of Rs. 10 each 52,800 Equity Shares of Rs. 10 each Secured Loan 6% Debentures 8% Debentures Current Liabilities, Loans and Advances Creditors

Fixed Assets 6,00,000 5,28,000 Free-Hold Property Plant 7,75,000 1,00,000

5,10,000 2,60,000

Current Assets, Loans and Advances Stock Debtors Cash/Bank

7,20,000 8,33,000 70,000

6,00,000

24,98,000

24,98,000

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