i : Topic oy . 12 Internal Reconstruction V/s External Reconstruction H INTERNAL 6s RECONSTRUCTION - OUTLINE internal Reconstruction ‘ 206 11. Need : Reconstruction Scheme 206 Methods 207 Legal Procedure — 207 41 Alteration of Share Capital 4,2 Variation of Shareholders’ Rights. 4.3 Reduction of Share Capital 4.4 Surrender of Shares 4.5 Compromise & Arrangement Accounting Procedure 210 5,1 Accounting Situations 5.2 Entries on Internal Reconstruction 5.3 Pro-forma Capital Reduction/Reconstruction Account 5.4 Balance Sheet After Reconstruction . Illustrations 3 het 215 6.1 Case Studies 62 Journal + Capital Reduction Account 63 Journal + Capital Reduction Account + Balance Sheet 8.4. Capital Reduction Account and / or Balance Sheet Rapid Revision Before Exam.| | | -V(TYBAF: Sey, yey ~ Financial Accounting as been making losses fora Io, of the financial position of y é Balance Sheet do not refs (1) Final Accounts, Not True & Fair: When an existing company h time, its Final Accounts no longer show the true and fair picture company. The figures of Assets, Liabilities and Capital shown in th the actual state of affairs of the company as explained below. (2) Assets : The Assets side of the Balance Sheet of a loss-maki Intangible or Fictitious Assets. There may be a heavy debit bal due to accumulated losses of past years. Preliminary Expenses, Expenditure etc. may not be written off in absence of profits. Tepresents a purely fictitious asset, because a sick company cannot The tangible or Real Assets are also shown at unreasonable high values. Due to Pee ee ea may not have provided adequate amount of depreciation resulting in inflating t . 00k values, of the Fixed Assets. The Current Assets like Inventory or Sundry Debtors may also heehee the Balance Sheet. Inventory may be valued at cost though the market price 1s Tower than the cost. No provision might be made for bad and doubtful debts. In short, the Asset side of the Balance Sheet of a sick company shows the assets at much higher values than the real values, (3) Liabilities : The Secured Loans of a sick company, such as Loans from Banks or Debentures may not be repaid though overdue. Interest on such Loans or on Debentures may be in arrears for a long time. Creditors may not have been paid in time. Company may have avoided recording some liabilities by showing the same as contingent liabilities. Preference dividends on Cumulative Preference Shares may be in arrears for several years. (4) Capital : When a sick company shows assets at inflated values and the Liabilities are not paid in time or not provided at all, naturally Capital (which is Assets - Liabilities) is also shown at much higher figure than justified by the actual facts. The Capital of a sick company no longer reflects the real value of the net assets of the company. (5) Reconstruction: Continuous losses damage the basic structure of a company. The pillars supporting the operations of the company - Assets and Capital - become weak due to the accumulated losses. If this is allowed to continue, the company may ultimately collapse. The company has to be ‘reconstructed’ and put on a firm foundation to ensure stability in future. Such reconstruction may be done in two ways - 'External Reconstruction’ or ‘Internal Reconstruction! Internal ‘Reconstruction’ is a comprehensive plan designed to renovate a company and give ita new lease of life. 1.2 EXHIBIT 1: INTERNAL RECONSTRUCTION V/S EXTERNAL RECONSTRUCTION Internal Reconstruction (IR) External Reconstruction (ER) Company is not liquidated. Company is liquidated. Rights of shareholders and creditors | Anew company is formed to take over are altered. . ; the business of the liquidated company. IR involves reduction of capital ER does not involve reduction in and/or liabilities. capital. IR is governed by S. 66 of the ER is governed by the Insolvency and Companies Act, 2013 w.e.f. Bankruptcy Code, 2016 w.e.f. : 15-12-2016. 15-11-2016, oa ing or sick company shows May lance in the Profit & Loss Aco Unamortized (Deferred) Reveny, Goodwill A/c in such a compan, t boast of having any ‘Goody, An Internal Reconstruction or Capital Reduction scheme covers the entire area of assets, liabilities and capital of a company. The scheme, in essence, involves writing down the assets to their {2 values by reducing the capital and in some’cases reducing the extemal lisbilities. The scheme expec all the participants to make some sacrifice, The shareholders may have to accept reduction in theI ern eeton * lue of th dup ve share capi The Debenturehoi ge: For examp ' Ve wosome extent Ir Der rence Sper, 10 aid up shares may be reduced to ® 5 paid up cit pave to bring in cash b ‘Ures OF other liabii 101 ders, Creditors etc. may have to give up their nay Y taking up more bilities are required to be actually paid, shareholders Ore shares or by Paying balance amount on partly paid up 207 amounts becoming availabl aa le thro, osses, preliminary expenses, Goo. Bere Such sacrifices are utilised to write off the accumulated je Inventory an Sundry Debtors are brow The Fixed Assets, Investments and the Current Assets lete, x oy of Assets, Li ‘Ought down to their real values. Once the Reconstruction is flect * anc fair’ fi thee ital in the Balance Sheet of the Company will ch scheme may involy ‘ompany. reduction of share capital share capital (b) variation of shareholders rights (c) rangement with creditors, » Liabilities a Fi ind th nancial position of the, Cap © (a) alteration of (4) compromise a 0. Alteration of Share Capital; ari : If the sch consolidation or sub-division of le 61 and 64 of Companies Act, one Capital, the company has to follow the provisions of Section a) Variation of Shareholders' Rights: ; ( ba company has to follon the tt Fike Scheme involves variation of the shareholders’ rights, involves alteration of share capital, i.e. increase, ions of Section 48 of ‘Companies Act, 2013. scheme involves reduction of paid-up capital, the company wn under Section 66 of Companies Act, 2013. The scheme Iders and in cases involving sacrifice on their part, also by the be carried out only after the scheme is approved by Tribunal. Ifthe scheme involves compromise/arrangement with the creditors has to follow the provisions of Sections 230-232 of Companies @) Reduction of Share Capital: If the has to follow the procedure laid do has to be approved by the sharehol creditors. Capital Reduction can ® Compromise/Arrangement: or shareholders, the company Act, 2013. 41 ALTERATION OF SHARE CAPITAL According to Section 61 of Companies Act, 2013 a limited company having a share capital, may, if so authorised by its articles, alter the share capital in any of the following ways : (Q) increase its share capital by issuing new shares; ()consolidate its share capital into shares of larger amount than its existing shares; (©) convert its fully paid up shares into stock; ((reconvert that stock into fully paid up shares of any denomination; () subdivide its shares into shares of smaller amount than is fixed by the memorandum; [however, insuch sub-division, there will be no change in the proportion between the amount paid and the amount, if any, unpaid on each reduced share as compared to the original share]; el stars wc il a ee cede soon - tmhount of its share capital by the amount o PRG eames Sa i tates that - or Seranies ACh, we any is divided into different classes of shares, the rights attached * Where a share capital of the compan) + the consent in writing of the holders of not less than gue shares of any class may > at ls or by means ofa seca resolution pasted st ie ins ee ee ie of the issued shares of that class,— 208 Financial Accounting - V(TYBAF, Sky | ined in the memorandum or arti (2) ifpprovision with respect to such variation is contained in the AKticles of company, or a) o (b) in the absence of any such provision in ihe pencraniie or articles, if such Variation i Prohibited by the terms of issue of the shares - : Provided that if variation by one class of shareholders affects he res oe any other oy shareholders, the consent of three-fourths of such other class of shareho also be of and the provisions of this section shall apply to such Te ces oracles dit coi wi an ten percent of the issued shares of Rake mah waite aoe ea af the special resolution forthe variation, they may apply tow, Tribunal to have the variation cancelled, and where any such application is made, the varg.® shall not have effect unless and until it is confirmed by the Tribunal. Provided that an application under this section shall be made within twenty-one days afte, date on which the consent was given or the resolution was passed, as the case may be, and ma made on behalf of the shareholders entitled to make the application by such one or more OF the number as they may appoint in writing for the purpose. : ‘ 3. The decision of the Tribunal on any application under sub-section (2) shall be binding on | shareholders. : 4. The company shall, within thirty days of the date of the order of the Tribunal, life of copy therege with the Registrar. 5. Where any default is made in complying with the provisions of this section, the company shall. punishable with fine which shall not be less than twenty-five thousand rupees but which extend to five lakh rupees and every officer of the company who is in default shall be punishabie with imprisonment for a term which may extend to six months or with fine which shall not be les, than twenty-five thousand rupees but which may extend to five lakh rupees, or with both. 4.3__ REDUCTION OF SHARE CAPITAL S. 66 of the Companies Act, 2016 states that - 1, Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in, particular, may (a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid- up; or (b) either with or without extinguishing or reducing liability on any of its shares, (i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or (ii) pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly. Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon. . The Tribunal shall give notice of every application made to it under sub-section (1) to the Central Government, Registrar and to the Securities and Exchange Board, in the case of listed companies, and the creditors of the company and shall take into consideration the representations, if any, made to it by that Government, Registrar, the Securities and Exchange Board and the creditors within a period of three months from the date of receipt of the notice. Provided that where no representation has been received from the Central Government, Regist the Securities and Exchange Board or the creditors within the said period, it shall be presum' that they have no objection to the reduction. 3. The Tribunal may, if it is satisfied that the debt or claim of every creditor of the company his been discharged or determined or has been secured on his consent is obtained, make an ode? confirming the reduction of share capital on such terms and conditions as it deems fit. 2 op ad nN> mal Reconstruction 09 jded that n icati K ie sae reduction of share capital shall be sanctioned by the Tribunal F rhe accounting standard nt, proposed by the company for such reduction is in conformity vi tate oe specified in section 133 or any other provision ofthis Act and @ oe y the companys auditor has been filed with the Tribunal. ERATION V. REDUCTION OF CAPITAL Alteration of share capital i capital is Smear the provisions of ea of the Companies Act, seqantion en of share capital is Reduction of share capital is quired to be done by ordinary _| required to be done by special rescuer. resolution. Confirmation Iteration of share capital is not | Reduction of share capital is to be required to be confirmed by the | confirmed by the Tribunal. Reduction of share capital governed by the provisions of Section 66 of the Companies Act, 2013. oo examples Alteration of share capital may be [Reduction of share capital may be done in the following manner : done in the following manner : (i) Increasing its nominal capital |(i) Extinguishing or reducing by issuing new shares. the liability of members in (ii) Consolidating and dividing all respect of the capital not paid or any of its share capital into up. shares of large denomination. | (ii) Writing off or cancelling any (iii) Converting fully paid up paid-up capital which is in shares into stock or vice versa.] excess of the needs of the (iv) Sub-dividing its shares into company. shares of smaller amount. (iii) Paying off any paid up share (v) Cancelling shares which have which is in excess of the needs not been taken up and of the company. diminishing the amount of share capital by the amount of the shares so cancelled. LE 44 SURRENDER OF SHARES of shares to the company by the shareholders. Articles Surender of shares means giving up possession ¢ ofassociation usually authorise the companies to accept surrender of shares. Surrender of fully paid stars amounts to a reduction of capital. The surrendered shares can, however, be reissued to new (asa part of ‘scheme of reconstruction). starholders/debentureholders/creditors REI) ai sda ARRANGEMENT 2013 contains provisions on * Compromises, Arrangements and “constructions.” A “scheme of compromise and arrangement” is an agreement between a company tdi creditors or members when the company is in financial difficulties. It may involve- (equity shareholders giving, up ther claim tothe reserves and accumulated profits, if any; debe vit tension oftime for payment; accepting & cash payment less than the ee nes giving UP their security in wee or in part, exchanging their ai ng to variation of their rights; res fe in the company; agreeing : creditors ee oa payment of their claims and the balance in shares or debentures in the ing 0 ference shareholders giving UP ced rate of dividend in the future z Setion 230 of Companies Act, oie rights to arears of dividends; agreeing to accept a or variation of their rights.210 Financial Accounting - V (TYBAp., sey, STS SITUATIONS () Alteration of Capital: Internal Reconstruction may involve Alteration of Capital, ie i Consolidation or Sub-division of share capital. Alteration involves only change in the face vad and number of shares, Alteration does not involve any Capital reduction. [see para 5.1), beloye Q) Variation of Rights: Variation of shareholders rights may involve change in the rate of prefers.” dividend payable in future or conversion of cumulative preference shares into Non-cumulat Preference shares (without any change in the amount of capital). [See para 5.202), below) (3) Capital Reduction: Capital Reduction involves the reduction in the Paid-up value of share capi The reduction is a sacrifice by the shareholders and the amount of reduction is credited ty ney Account called Capital Reduction Account, [see para 5.2(3), below]. (4) Compromise: Compromise involves sacrifices made by the shareholders or the creditors of debentureholders etc, as a Part of the scheme for reconstruction. These Sacrifices are also credj to the Capital Reduction A/c, (Some authorities use the Capital Reduction A/c only to TeCOtd thy sacrifices made by the shareholders and open another A/c called Reconstruction Alc to econ the sacrifices made by the outsiders like debentureholders, creditors, etc.). In case some liabilitieg are to be actually paid in cash, some assets may be sold. The profit on sale of assets is aly credited to the Capital Reduction A/c. Ifthe terms of the scheme so provide, Reserves, if any, are also transferred to the Capital Reduction A/c. [see para 5.2(4), below]. (S) Use of Capital Reduction Ale: The Capital Reduction/Reconstruction A/c at this stage will show credits gathered from above sacrifices. The credit balance so accumulated in the Capital Reduction/Reconstruction A/c is utilised in writing off the intangible assets or in writing down the values of the assets and for Providing the liabilities which were not recorded earlier. In case some credit balance still remains in the Capital Reduction/Reconstruction Alc, it is transferred to ‘Capital Reserve' A/c. [see para 5.2(5), below]. The actual Accounting entries are explained in detail below. ese oR naae RECONSTRUCTION Transaction/Entry ce ALTERATION OF SHARE CAPITAL Increase by Issue of Shares INo. of shares x Issue price] Bank A/c Dr. To Share Capital (Equity or Preference) Consolidation Lica Share Capital (® 1) A/c Dr. | [Old No. of shares x Old NV] To Share Capital 10) Ave [New No. of shares x New NV] fe: The existing shares of smaller amounts (say 1,000 shares of % 1 each) may be share change. Sub-division Share Capital ®@ 100) A/c Dr. | [Old No. of shares x Old NVI To Share Capital (@ 10) A/c [New No. of shares x New NVL Note: Sub-division is the’ reverse of consolidation. Here the existing shares of large! amounts (say 1,000 shares of € 100 each) are sub-divided into smaller amounts a 40,000 shares of % 10 each). The amount of share capital remains the same, only number of shares and the nominal value [NV] of shares change.| Reconstruction au Converting shares into stock Equity Share Capital (2 7 To Equity Stock hen ae note: ok can be purchased or sold 5107 capital remains the same. Ls] Converting stock into shares —T Equity Stock A/c a To Equity Share Capital A/c ‘note: con f sh 4 ne amount of share capital remains the same. (61 Cancelling un-issued Shares auth Dr. = Dr. L—_-In conversion of stock into sh TA 7 pe fares, the e capital stock ( jerted into, Say 1,000 equity shares of Z per : No entry is required to be i 5 a ital i passed for cancelling un-issued orised capital is to be shown at a lower amount as i gets reduced to th 7 [Total] In conversion of shares into stock, cing ania 000 shai ; i ; , the existing shares (say 1. , 1p) ate converted into a single stock (say equi capt 5 et off 1,00,000). Capital even in fractions (as in demat [No. of shares x NV] res of < 100 accounts). The amount of otal] Ne of shares x NV] ; gay € 1,00,000) 15 This is similar to sub-division. shares. Only the e extent of 2. 10% Cum. Pref. Share Capital '« To 8% Cum. Pref. Share Capital 22 | Change from Cumulative to Non-cumulative 10% Cum. Pref. Share Capital To 10% Non-Cum. Pref. Share Capital ofshare capital. (3) | CAPITAL REDUCTION 31 | Reduction in nominal value only Share Capital A/c (= 100) To Share Capital (€ 90) A/c Teduction in the paid-up value [X 90). $2 | Reduction in paid-up value only Share Capital A/c (% 100) p| To Capital Reduction A/c pee share by the sharehol Share Capital A/c (% 100) To Capital Reduction A/c To Share Capital A/c (& 10) Here, there is reduction in nomin Der a8 reduction in the paid-up value I! Share by the shareholders. oh cancellation. 2 VARIATION OF SHAREHOLDERS’ RIGHTS 1 Reduction in rate of dividend Or. (eee [New shares] riote: Here, the rights of preference shareholders have been changed in respect of rate ot dividend. There is no change in the amount of share capital. Dr. Or. Note: Suppose, shares of € 100 each (paid-up value %90 each) are reduced to shares of tominal value of @ 90 each. Here, there is reduction in nominal value [Shares with nominal value of € 100 reduced to Shares with nominal value of ¥ 90 each]. There is no Dr. Note: 4100 paid-up shares are reduced to 10 paid-up s ders. The Share Capital may be Equity or Preference. Reduction in both nominal and paid-up value Dr. al value [% 100 shares reduced to % 10 shar from & 100 to 710] res] a8 [ [New shares] | 3 Note: Here, the rights of preference shareholders have been changed in respect of right toaccumulate arrears of dividends. There is no change in rate of dividend or the amount [% 100 x No. of Shares] {Old shares] [Old shares] = [No. of Shares x NV & 100] [No. of Shares x NV @ 90] [R90 x No. of Shares] IR 90 x No. of Shares] hares resulting in a sacrifice of [% 90 x No. of Shares] [% 10 x No. of Shares] resulting in a sacrifice of 90Financial Accommning ~ VETYBAP: Sey, On Cancellation of surrendered Dr. To Capital Reduction IPROMISE/ARRANG! wt: Hay | COMPROMISEIARRANGENENT . To Capital Reduction/Reconst To further sacrifice by allowing the Reserves fone ae Sharehoen y ree ised for making available larger amounts for write-offs. ‘Appreciation / Profit on Sale of Assets (a) | Revaluation Fixed Assets A/c Dr. To Capital Reduction/Reconstruction Alc r : . Note: The market value of some Fixed Assets of the Company, like Land or buildings etc., may be higher than the written down value shown in the Balance Sheet. Such Fixed Assets may be revalued and the increase-in the value may be credited to the Capital Reduction/Reconstruction A/c. (Revaluation of Fixed Assets reflects the ‘true and correct’ values of the assets, which is in fact the aim of the whole exercise of Internal Reconstruction). (b) | Sale at Profit Dr. | Sale price realised Bank A/c Cost of assets sold To Fixed Assets A/c To Capital Reduction/Reconstruction A/c Profit on the sale transferred | Note: Some Fixed Assets may be actually sold at a profit to provide funds for paying off the external liabilities. The profit realised on such sale of Fixed Assets is also credited to the Capital Reduction/Reconstruction A/c. Increase in value of asset Sacrifice by Creditors etc. Prov. not required External Liability A/c Dr. Provision A/c Dr. To Capital Reduction/Reconstruction A/c Note: The external creditors like debentureholders, sundry creditors, banks, etc., may agree to accept less amount in full and final settlement of their dues. The sacrifice - profit on settlement of external liabilities - is credited to the Capital Reduction / Reconstruction A/c. Further, some provisions may no longer be payable and can be credited to the Capital Reduction/Reconstruction A/c. Payment External Liability A/c Or. To Bank A/c Liability pai , paid To Share Capital A/c Shares issued in settlement To Assets A/c Assets taken over in settlement Note: In some cases, certain Liabilities may have actually to be paid, The Debentureholders or Creditors may be paid in cash or may agree to take over an asset of the company of shares may be issued to them, in settlement of the amount due to them.| Reconstruction a 213 “Arrears of Prefer — 44. rence Di Walved Widend ) ; note: No entry is passed waved by the Preference Paid now (i) Capital Reductioy ; To Preference Srascenstuctin Ne Dr. | [record dividend payable] ji) Preference Sh ts Alc ; (Oo Bank Ae noers Ale br. | {dividend paid] ine above entries rei a Al te ruction Scheme ieee sacrifices made by the participants of the Internal accumulated on the Credit aa iders and external creditors). The amounts sacrifices ced subsequently, as shown ne i the Capital Reduction/Reconstruction Alc to be ILISATION - ut 2 OF CAPITAL REDUCTION/RECOI Writing off Intangible Assets Capital Reduction/Reconstructi ie ics & Loss A/c [Dr bal} Ac Or. fo Misc. Expenditure not wi To Goodwill uh) fiote: The primary aim of the Capital Reduction exercise is to write off the fi intangible ane viz. the Profit & Loss Account (Or. balance which represents the accumulates Penn the accounts falling under the head Misc. Expenditure not written off -such as Preliminary Expenses, and intangible assets like Goodwill. These amounts are to be written off even if not specifically stated. 62 | Writing Down Fixed and Current Assets Capital Reduction/Reconstruction A/c Dr. To (Fixed Assets) A/c Name of Assets To (Current Assets) A/c Note: Other Assets, i.e., Fixed Assets and Current Assets are to be brought down to their real values by debiting the Capital Reduction/Reconstruction A/c and crediting the relevant assets A/c, as shown above. Recording New Liability or Provision Capital Reduction/Reconstruction A/c Dr. To (Liability or Provision) A/c Name of Liability or Provision Note: As explained earlier, the company may have avoided recording a liability in the past or, a contingent liability may materialise and become payable. Such liabilities are now to be brought in the books by debiting the Capital Reduction/Reconstruction Ale and crediting the Liability Acc. If such liability is paid in cash the Liability A/c is debited and the Cash A/c is credited as shown above, in 4.3(b), above. Afresh provision may also be required to be created as a part of the scheme of Internal Reconstruction, for example, Provision for Doubtful Debts or Provision for Taxation etc. This is done by debiting the Capital Reduction/Reconstruction A/c and crediting the televant Provision A/c. Expenses of Reconstruction Capital Reduction/Reconstructi To Cash/Bank. | Balance Transferred (0 Capital Reduction/Reconstruction Ac To Capital Reserve Alc oe nd on Cumulative Preference Shares in Arrears are feholders. Such arrears is a contingent liability. vtili STRUCTION ACCOUNT . ion Alo Or. Capital Reserve A/c Dr.214 Note 1, at thi tion A/c stil sho “at this stage the Capital Reduction /Reconstruction A/c WS 50 = a (indicating that the sactices are more than the write-offs), the baa) yanstered to the Capital Reserve Account as above. 4 nea this, the whole exercise of Capital Reduction and Internal Reconstruction j pital Reductior is rf the new Balance Sheet of the company would now reflect the true Valu Sets, Liabilities, and Capital of the company. The Balance Sheet afta cat luction/Reconstruction would show the ‘true and fair’ view of the financial n..“*bi Y. : ong the company 5.3 WORKSHEET 2 Dr. ena?) UCTION ACCOUNT Capital Reduction/Reconstruction Account Utilisation To Profit & Loss Ale (Dr.) By Share Capital Jo Preliminary Expenses etc. (reduction in paid-up value) ty To Goodwill (fictitious assets w/o) | By Reserves (transfer) To Fixed Assets By Fixed Assets x To Current Assets (appreciation on revaluation) m (assets written down) By Bank/Fixed Assets To Liability/Provisions (profit on sale of assets) m (new liab/prov. booked) By External Liability To Expenses of Reconstruction (sacrifice by creditors etc.) ™ To Capital Reserve By Provision (prov. not required) (balance transferred) » => Note : itis advisable to prepare the ‘Capital Reduction A/c, by way of a Working Note in an examination answer, even if not specifically asked for. Exe! NCE SHEET AFTER RECONSTRUCTION The following point should be kept in mind while preparing the Balance Sheet of the company a reconstruction. (1) Name of Company (... and reduced): While granting approval to any scheme of Capa Reduction, the court may direct the company to add the words "and Reduced" to its name far such period as it thinks fit. Thus, when preparing the Balance Sheet of the Company after Capi reduction, the words -."and reduced" - should be added to its name. (2) Appreciation in value of Fixed Assets on Revaluation: The fixed assets may be revaluedas part of the scheme of reconstruction. The Balance Sheet after Reconstruction should show te revised (higher) figures in place of the original cost shown before. Further, the Balance She! after Reconstruction, should also show the amount of appreciation or increase due to revaluation in notes for 5 years. The above rules are prescribed by the Schedule III of the Companies Att 2013 and should be kept in mind while preparing the Balance Sheet of the Company st Reconstruction. (3) Amounts Written off: The primary aim of reconstruction is to write off intangible assets (Good etc.) and to bring down the values of other fixed assets to their realistic level. The Balance S! after reconstruction should show the revised (lower) figures in place of the original cost. F i the Balance Sheet after Reconstruction should show the amount written off under the schea"’ reconstruction in notes for S years. The above rules are prescribed by the Schedule II of! Companies Act, 2013 and should be kept in mind while preparing the Balance Sheet ©! Company after reconstruction.ie eee eer eer eee we! ol Reconstruction 25 SLLUSTRATIONS , tion 1: i Journal Entries for the following transactions : version Of 2 lakh fully paid Equi : {. Cos 7% fully Convertible D ebertnne shares of ® 10 each into Stock of & 1,00,000 and balance lidatic of 40 I ie " : ‘ p, 00 eo each. lakh fully paid Equity shares of € 2.50 each into 10 lakh fully paid Equlty a i division of 10 lakh fully paid 4 : id 11% 4. Seren shares of & 10 each, 1% Preference shares of € 50 each into 50 lakh fully paid version of 12% Preference shares of %5,00,000 int %3,00,000 and init 00, to 14% Preference shares < 3,00," A qnaining balance as 12% Non-cumulative Preference shares. (CAvInter, Nov. 2013, adapted) colton * Journal Entries Particulars Equity Share Capital A/c To Equity Stock A/c . To 12% Fully Convertible Debentures A/c Being conversion of 2 lakh Equity shares of % 10 each into stock of @ 1,00,000 and balance as 12% fully Convertible Debentures as per resolution dated .....] Equity Share Capital A/c (& 2.50) To Equity Share Capital A/c (& 10) [Being consolidation of 40 lakh shares of 2.50 each into 10 lakh shares of & 10 each as per resolution dated .....] 11% Preference Shares Capital A/c (% 50) Dr. | 5,00,00,000 To 11% Preference Share Capital A/c (% 10) [Being subdivision of 10 lakh Preference shares of = 50 each into 50 lakh shares of f 10 each as per resolution dated .....] 12% Preference Share Capital A/c Dr. 5,00,000 To 14% Preference Share Capital A/c To 12% Non-Cumulative Preference Share Capital A/c [Being conversion of 12% Preference shares of € 5,00,000 into 14% Preference shares of % 3,00,000 and 12% Non-cumulative Preference shares of & 2,00,000 as per resolution dated ..... ; 10,00,000 a : 1,00,000 19,00,000 Dr. | 1,00,00,000 1,00,00,000 5,00,00,000 3,00,000 2,00,000 ilustration 2 : (Cancellation of uncalled capital and writing off pald up capital) BL. has 40,000 shares of Z 10 each, % 8 per share paid up. The company has an accumulated los of 1,20,000 in the Profit & Loss A/c. The company now decides to reduce the share capital to fuly paid shares of @ 5 each and to write off the accumulated loss. Stow Jounal entries. Solution : Journal of B Ltd. : Particulars Cae '.| Equity Share Capital (& 10) Alc (40,000 x 8) To Equity Share Capital (& 5) A/c (40,000 x 5) 2,00,000 To Capital Reduction A/c (40,000 x 3) 1'20'000 [Reduction of 40,000 shares of € 10 each, @ 8 per share Paid up, to 40,000 shares of € 5 each fully paid up, as per _, | 8pecial resolution dated.... a5 confirmed by the Court] | * | Capital Reduction Alc Or. 1,20,000 To Profi Ic (acca ee en off as per scheme of capital reduction}-* 416 Financial Accounting - V (TYR4p Sey 6.2 a 5 ET See Mustration 3: renwal td. has incurred heavy losses since past few years. The company adopteg Asch, Tuction on the basis of following summarised Balance Sheet. ‘Summarised Balance Sheet of Unwell Lid. as on 31st March 2014 qabllties 3 : ‘Quity Share Capital : 4,80.000 Shares of & 10 each fully paid aoe Share Capital : 000, 10% Shares of & 1 i a Debentures ioe interest accrued and di Gent lue on debentures Bills Payable Outstanding Audit Fees Total Assets ; Land and Building Furniture Computer Debtors Stock Bills Receivable Cash at Bank Share Issue Expenses Profit and Loss Account (Dr. Balance) Total The following scheme of reconstruction ‘was approved by the court : 1. 10% Preference Shares to be reduced by % 20 per share. 2. Equity Shares to be reduced by 5 per share. 3. Debentureholders agreed to settle their claim fully by issue of New 11% Debentures of 14,00,009, They also agree to forgo 50% of their interest. The Payment of remaining 50% of interest tobe made immediately. . Computer was to be written down by % 40,000. . Land and Building and Furniture to be appreciated by 10%, .. Stock to be appreciated by 60,000. . Fictitious Assets and debit balance of Profit and Loss Account to be written off. . Cost of Reconstruction was % 50,000. }. 75% of the Creditors agreed to forgo their claims by 10%. 10. Reduce Debtors by % 70,000. You are required to pass journal entries to record the above transactions and prepare the Capit Reduction Account in the books of M/s Unwell Ltd. (T.Y.B.Com., Oct. 2014, adapt Solution : WMPNOAD In the Books of Unwell Ltd. Journal Entries eis — ity Share Capital Ale ( 10) ea ay Share Capital A/c (® 5) To Capital Reduction A/c : [Being 1,60,000 Equity shares of 2 10 each fully paid reduced by 5 per share]he 217 C yemal Reconstruction 10% Preference Share Capital 4,00,000; 2 | °"To 10% Preference Share Coun onan my 3,20,000 e ry Reduction A/c : 80,000 ing 4, " eT oa eae Gharer Preference Shares of 100 shares each reduced 10% Debentures A/c 120,00,000 aac) 11% Debentures A/c le 14,00,000 To Capital Reduction Ac 6,00,000 Being Nture: : eduction Account] s Settled and profit transferred to Capital aT on pee Land & Building A/c 1,22,000 4 | Eumiture Alc by. | “40,000 Stock AC Dr. | 60,000] To Coptal Reduction A/c 2,22,000 Being the assets appraci . C sptal Reserve Ne lated and the difference transferred to , | Creditors A/c 60,000 + | "To Capital Reduction Ac a 60,000 [Being 75% creditors’ foregoing 10% of their claim] ¢. | Capital Reduction A/c Dr. 50,000 To Cash / Bank A/c ; 50,000 [Being cost of reconstruction Paid] 7, | Interest Accrued and Due on Debenture: Dr. | 2,00,000 To Capital Reduction A/c res Ne : 1,00,000 To Cash / Bank A/c 1,00,000 [Being 50% of Interest accrued on debenture foregone and the balance settled immediately) 8. | Capital Reduction A/c Dr. |15,50,000 To Computer A/c 40,000 To Debtors A/c 70,000 To Share Issue Expenses A/c 40,000 To Profit and Loss A/c 14,00,000 [Being various assets and Profit and Loss balance written off through Capital Reduction A/c] 4. | Capital Reduction A/c Dr. | 2,62,000 To Capital Reserve A/c 2,62,000 [Being the balance amount in Capital Reduction A/c transferred to Capital Reserve A/c] Dr Capital Reduction Account Cr. Parioulars W]_%_| Particulars Uv|onae. ToWrite-offs (8) |15,50,000| By Equity Share Capital (1)] 8,00,000 ToCash (Cost) (6)| 50,000] By Preference Share Capital |(2)] 80,000 TOCRR (Bal. Fig.) (9)| 2,62,000| By 10% Debentures (3) } 6,00,000 By Assets (4)} 2,22,000 By Creditors (5)| 60,000 By Interest on Debentures (7)| 1,00,000 18,62,000 18,62,000 Mustration 4 : . Folowing is the summarised Balance Sheet of Risky Ltd. as on 31st March, 2015 : yo | } Preference Shares of yogach BH Dy ares of F 10 each 9160, 2/88,000 Sg tu OFX 100 each 400,000 | Debtors 1'92'000a : ing - 18 Financial Accounting V(TYBAF, Sey, Bank Overdratts & Advances Other Liabilities panes 240,000 Deposits snes Prelimit 320,000 aft and Loss Account 4.0992 (Or. Balance) Ny 2d Note : Preference Dividend is in arrears for 3 years. 4 Scheme of reconstruction is prepared and approved by all t he salient features of the scheme are : This is sok 1. ae Machinery having book value of & 1,60,000 is obsolete. This is Sold as sera, - The depreciation on plant and machinery is to be provided to the oe . Stock includes items valued at 2 96,000 which are sold at 2 loss of 50%. - The present realizable value of investments is € 1,12,000. . Arrears of Preference Dividend is not payable. . Reconstruction expenses were Z 16,000. The paid up value of equity shares is to be reduced to € 2 per share and preference shares, 5 per share. However, the face value of both equity and preference shares remain unchang, . 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 % 80,000 is to be cancelled. 10.A call of & 3 per share 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 aaa: (T¥.B.Com., Oct. 2015, adapteg In the Books of Risky Ltd. Journal Entries No. Particulars re: Cr. 1. | Equity Share Capital A/c Dr. | 6,40,000 he authorities. NOOPON 2 10% Preference Share Capital A/c Dr. | 2,40,000 To Capital Reduction A/c 8,80,000 [Being reduction of Equity and Preference capital} 2. | Creditors A/c Or. | 4,00,000 To Cash / Bank A/c (20%) 80,000 To Capital Reduction A/c (40%) 1,60,000 To 6% Debentures (40%) 1,60,000 [Being creditors dues settled as per scheme of reconstruction] 3. | Other Liabilities A/c Dr. 80,000 To Capital Reduction A/c 80,000 [Being dues to directors cancelled] 4, | Cash / Bank Alc Dr. 32,000 Capital Reduction A/c Dr. | 1,28,000 To Plant and Equipment A/c 4,60,000 [Being sale of plant having book value of % 1,60,000 for & 32,000) 5, | Capital Reduction A/c Dr. 80,000 To Plant and Equipment A/c 0,000 | {Being depreciation provide] 6. | Cash / Bank A/c Dr. 48,000 Capital Reduction A/c Dr. | 48,000 wa To Stock A/c . 96. [Being sale of stock having book value of 96,000 at a loss of 50%} ital Reduction A/c Dr. | 1,28,000 Te Investment A/c 4,28,00° [Being reduction in value by % 1,28,000)7 nal Reconstruction i ; 219 . Capital Reduction Ale uy Pan and Loss Ajo Dr. | 7,20,000 pang Soci a penses Nc $000 ard | ne per scheme of ‘econstuetog fcttious assets writen off as ' Capital Reduction Ae } | "To Cash / Bank Ae 16,000 [Being paid expenses on 16,000 ‘Cash / Bank A/c (80,000 16 | "To Equity Share Capita No oe eee [Being receipt of call mon ee ey On 80,000 shares @ 73 each] justrton 5: (Share Consolidation) ing is the su is re owing Mnarised Balance Sheet of Safemoving Lid. as on 3tst March, 2018 : poles ee norised & Issued Capital - - 6% Pret. Shares of Goodwill 2,40,000 oy each Land & Buildings 5,34,000 0,000 Equity Shares of 6,00,000] Plant 5,10,000 4 each Investment in Subsidiary Ltd. 1:50,000 tures (at cost) Bo erest Stock 4,50,000 K Overdratt Debtors 5,40,000 a tors Loan Profit & Loss Account 5,28,000 Peers Advertisement Expenses 1,20,000 000 '30,72,000 Note : (i) There is a contingent liability for damages % 60,000. (i) Preference shares are cumulative and dividends are in arrears for three years. Acapital reduction scheme setting the following terms was duly approved : fa) The preference shares to be reduced to%8 per share and Equity Share to 25 paisa each and to be consolidated as shares of 10 each and % 1 each fully paid respectively. The preference shareholders waive two third of the dividend in arrears and receive equity share for the balance. The authorised capital to be restored to 60,000 Preference shares of T 10 each and 12,00,000 equity shares of @ 1 each. (0) The share in Subsidiary Ltd. are sold to an outsider for & 3,00,000. _(¢) Allintangible and fictitious assets are to be eliminated and bad debts of & 42,000 and obsolete stock of ¥ 60,000 is to be written-off. (The debentureholders to take over one of the company’s properties (Book Value & 1 08,000) at aprice of € 120,000 in part satisfaction of the debentures and to provide further cash % 90,000 ona floating charge. The arrears of interest are paid. (@} Director's refund & 20,000 of the fees previously received by them. () The contingent liability materialised in the sum stated but the company recovered & 30,000 of these damages in action against one of its directors which was debited to his loan account of 48,000 and the balance of loan was paid in cash on his resignation. The Temaining directors agreed to take equity shares in satisfaction of their loans. Journal Entries and prepare Capital Reduction Account in the books of the Company. Solution = (TY.B.Com., Oct. 2003, adapted) Safemoving Ltd. Journal "| Reduction in Equity Capital : Equity Share Capital Alc (® 1) i To Equity Share Capital A/c (¥ 0.25) To Capital Reduction A/c ; tReduction of 12,00,000 Equity Share Capital of 1 ®2ch of equal no. of shares of € 0.25 each vide Scheme of , . construction dated ....-] 3,00,000 9,00,000—_~ 220 Financial Accounting . Viryp Ap 8p, . : My, Reduction in Preference Share Capltal : 800 iy reference Share Capital (& 10) Ac on s Preference Share Capital (® 8) A/c 429 ‘0 Capital Reduction A/c Tag Reduction of 60,000 Preference Shares of ® 10 each to 24, rs qual no. of shares of & 8 each] | equalno.ofsharesof@B each] Arrears of Preference Dividends : Dr. Capital Reduction Alc | 38.000 To Equity Share Capital A/c : [Discharge of 1/3 arrears of Preference Dividends € 1,08,000 By by issue of Equity Shares] Sale of Investments: Bank Alc Dr. | 3,00,009 To Investment in Subsidiary 1809, To Capital Reduction A/c : 150 ¢ [Investments sold, profit on sale tid. to Capital Reduction A/c] Oy Lmvestments sold, profit on sale tfd. to Capital Reduction A/c] | Settlement of Debentures : 6% Debentures A/c Dr. | 1,20,000] To Land and Building A/c 1,08 0, To Capital Reduction A/c a 12,049 {Debentures partly settled by way of Property; appreciation in Value, credited to Capital Reduction A/c; see Note] 6. | Bank A/c Dr. | 90,000} To 6% Debentures 90.0 [Further issue of Debentures against of floating charge] 7. | Debenture Interest Accrued Alc Dr. 12,000] To Bank Tom [Payment of accrued interest] 8. | Contingent Liabilities for Damages : Capital Reduction A/c Dr. 60,000 To Bank A/c 60,00 [Contingent Liability paid] rr 9. | Bank A/c Dr. 20,000! To Capital Reduction A/c 20,00 [Fees refunded by Directors] 10. | Director's Loans : Directors Loan A/c Dr. 48,000) To Capital Reduction A/c 30,000 To Bank A/c [Damages recovered % 18,000 from a Director adjusted in his Loan A/c and Credited to Capital Reduction Alc; balance loan paid in cash] 11. | Director's Loan A/c To Equity Share Capital A/c [Directors Loans balance settled by issue of Equity Shares; see Note} Utilisation of Capital Reduction A/c : Capital Reduction A/c Dr. | 9,90,000 To Profit & Loss A/c 0 To Advertisement A/c 1 To Goodwill A/c one To Debtors (Bad Debts) A/c eoot! To Stock : [Value of assets and P & L A/c adjusted against Capital Reduction A/c vide Scheme of Reconstruction dated.....] 13. | Balance of Capital Reduction A/c: ital Reduction A/c Dr. | 1,46,000 Oe onal Reserve A/c [tBaancetransfereg] — Dr. Dr. | 1,02,000 12.Reconstruction onsolidation on Equity Capital : fn cout Share Capital (@ 0.25) Ae ox. | 4,28,000 000 Jo Equity Share Capital (@ 1) Alc |“ ‘| consolidation of Equity Shares into 4,38,000 Equity Shares off 102ch nsolldation of Preference Capital : | Geterence Share Capital & 8) ee 7 To Preference Share Capital (10) Ave nsolidation of 60,000 Preference i (900 Pref. Shares of? 10 each] eae Notes = yor _ and Bulldings 4,80,000 : Profit i. Revalued rol ( , over by Debentureholders ' oe ee a nc cfd to Balance Sheet 198, wetor’s Loans teat , Total _ Defaulting Other 43,000 —_‘1,02,000 Loans 1a popovered (damages) ee 35.000 Fe nce Paid in Cash oS. 18,000 -yges Equity Shares -- _1,02,000 Ni NIE k Overdraft (330,000) p) Br ved eco gale of Investments 3,00,000 - Debentures ‘90,000 g oees Refunded 20,000 _4,10.000 80,000 Less Paid -pebenture Interest 12,000 -Contingent Liability 60,000 -Directors Loans a 18,000 (90,000) -Balance (Overdraft) c/d (10,000) Capital Reduction Account Cr. fon ce e Eqity Share Capital By Equity Share Capital '9,00,000 (Pref. Div.) By Pref. Share Capital 1,20,000 By Investment in subsidiary 1,50,000 By Debentures 12,000 By Bank (Refund of fees) 20,000 By Director's Loans 30,000 Tol Use atl Reserve (Bal. Fig.) 12,32,000 tion 6 : Leiger Balances of Feel Bad Ltd. Include : 9% 6,10,000, Furniture 2,00,000, Computer @ 3,00,000, Debtors % 3,00,000, Share issue "82s % 20,04 t Bank % 80,000, Bills Receivable ® 2,50,000, Stock % 40,000; 8% cont, Gah ‘shares of 100 each; Equity Share Capital - 80,000 shares of 10 “ 10% Debentures Z 4,00,000, ’B’ 12% Debentures 25,00,000, Outstanding Interest for one i Osbentures % 1,00,000, Creditors © 4,00,000, Bills, Payable % 50,000, Outstanding Audit 1000, Profit and Loss A/c. ?Financial Accounting -V (TYB4, OUTLINE No. Topic Pag, 8. Theory Questions 2% 84 Lee Questions [7 oF 8 Marks] a 8.2 Short Notes [5 Marks] 2 9. Objective Questions ay 9.1 Multiple Choice Questions Ey 9.2 Fill in the Blanks 5 9.3 Match the Following Columns 2 9.4 State Whether True oF False Es 9.5. Check Your Answers 6 10. Practical Problems 2 10.1 Basic 26 10.2 Capital Reduction A/c and Balance Sheet 2% 10.3 Miscellaneous 218 11. Master Key to Exercises 287 287 141.1. Capital Reduction Account 11.2 Balance Sheet THEORY QUESTIONS [15 MARK 8.1 DESCRIPTIVE QUESTIONS mis SI 1. Explain in brief internal Reconstruction. [Ans. : Para, 2. Explain in brief Reconstruction Scheme. [Ans. : Para 3. Explain in brief Alteration of Share Capital. [Ans. : Para, 4. Explain in brief Reduction of Share Capital. [Ans. : Para 5. Explain in brief surrender of shares. [Ans I 6. Explain in brief sub-division of shares. [Ans. : Pari 7. Explain when and why internal reconstruction becomes necessary. [Ans. : Pera 8.2 SHORT NOTES [5 MARKS] Write a Short Note on - . Internal Reconstruction . Need for Internal reconstruction . Internal Reconstruction V/s External Reconstruction Reconstruction Scheme Methods of Internal Reconstruction . Alteration of Share Capital . Variation of Shareholders’ Rights ;. Reduction of Share Capital . Compromise & Arrangement 10. Accounting Procedure on Internal Reconstruction 11. Capital Reduction Account 42. Balance Sheet After Internal Reconstruction OPPNMKaonsnal Reconstruction 263 we © OBJECTIVE QUESTIONS LTIP! 4 rm eters QUESTIONS rich Of the following statements is true ? et side of the Bal. , te the real values °° Sheet of a sick company shows the assets at much lower values ference divid ; 0) raver youn on Cumulative Preference Shares of a sick company may be in arrears «In internal reconstruction Company is liquidated @ external reconstruction involves reduction of capital : whieh of the following Statements is false 7 ‘The Assets side of the Balance Sh -making or si ny Intangible @) resus Aseoe Sheet of a loss-making or sick company shows many Intang} ) There may be a heavy debit balance in the Profi fa sick company due to © accumulated losses of past years tet (@) internal Reconstruction is governed by the Insolvency and Bankruptcy Code : (@)In external reconstruction, a new company is formed to take over the business of the sick company , Increase, consolidation or sub-division of share capital of the company involves - {a) Alteration of Share Capital (b) Variation of Shareholders’ Rights (o) Reduction of Share Capital (d) Compromise/Arrangement 4, Ascheme of reconstruction involving _ must be authorized by the Memorandum or Articles of Association, approved by the Board and a special resolution of the concerned members. (a) Reduction of Share Capital (b) Alteration of Share Capital () Variation of Shareholders’ Rights (d) Compromise/Arrangement 5, Ascheme of reconstruction involving must be authorised by the company’s articles; approved by a special resolution by the shareholders of the company; and confirmed by the tigh Court / Tribunal. (a) Reduction of Share Capital (b) Alteration of Share Capital (¢) Variation of Shareholders’ Rights (d) Compromise/Arrangement 6 Change in the rate of preference dividend payable in future without any change in the amount of capital is known as (@) Reduction of Share Capital (b) Alteration of Share Capital (¢) Variation of Shareholders’ Rights (d) Compromise/Arrangement 1. Conversion of cumulative preference shares into non-cumulative preference shares (without any change in the amount of capital), in a scheme of reconstruction, is known as (a) Reduction of Share Capital (b) Alteration of Share Capital (c) Variation of Shareholders’ Rights (d) Compromise/Arrangement 4 Surrender of fully paid shares amounts to (@) Reduction of Share Capital (b) Alteration of Share Capital (¢) Variation of Shareholders’ Rights (d) Compromise/Arrangement 8. Equity shareholders giving up their claim to the reserves and accumulated profits amounts to (a) Reduction of Share Capital (b) Alteration of Share Capital (¢) Variation of Shareholders’ Rights (d) Compromise/Arrangement NDebentureholders accepting a cash payment less than the face value of their debentures unts to (@) Reduction of Share Capital (b) Alteration of Share Capital () Variation of Shareholders’ Rights (d) Compromise/Arrangement Exinguishment of the liability in respect of unpaid portion of the face value of any share, in a 'gme of reconstruction, amounts to (@) Reduction of Share Capital (b) Alteration of Share Capital 2 ) Variation of Shareholders’ Rights ; ; (d) Compromise/Arrangement nt of any paid-up share capital which is in excess of the wants of the company, in a me of reconstruction, amounts to264 Financial Accounting - V (TYBAF , SEM, (2) Reduction of Share Capital (b) Alteration of ae (©) Variation of Sharcholders’ Rights __(@) Compromise/ATENOETET 13. Creditors accepting part payment of their claims, in a scheme, of Ft Captal ', amounts to (a) Reduction of Share Capital (b) Alteration of Snare ent (©) Variation of Shareholders’ Rights (¢) Compromise/Arrangs 14. Share Capital 1) Alc Dr. 1 To Share Capital (® 10) A/c on he above entry, in a scheme of reconstruction, records is (a) consolidation of share capital (b) sub-division of share capital (c) conversion of shares into stock (d) conversion of stock into shares 15. Share Capital (® 100) A/c Dr. To Share Capital (% 10) A/c The above entry, in a 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 16. Which of the following statements is true ? . (a) In conversion of shares into stock, there is a change in the amount of share capital (b) No entry is required to be passed for cancelling un-issued shares (C) In Sub-division of share capital, there is a change in the number of shares and the noming value [NV] of shares (d) Capital Stock can be purchased or sold only in marketable lots of 100 17.Which of the following statements is false ? (a) In consolidation of share capital, the amount of share capital remains the same; only th number of shares and the nominal value per share change (b) Sub-division of shares is the reverse of consolidation of shares (c) Capital Stock can be purchased or sold even in fractions (d) Conversion of stock into shares is similar to consolidation 18. Shares of % 100 each (paid-up value & 90 each) are reduced to shares of nominal value of 9 each in a scheme of reconstruction. (a) There will be credit of 10 per share to Capital Reduction A/c (b) There will be credit of % 90 per share to Capital Reduction A/c (c) There will be credit of % 100 per share to Capital Reduction A/c (d) There will be no credit to Capital Reduction A/c 19. Shares of % 100 each paid-up value are reduced to shares of nominal and paid up value of 7 10 each in a scheme of reconstruction. (a) There will be credit of 10 per share to Capital Reduction A/c (b) There will be credit of 7 90 per share to Capital Reduction A/c (c) There will be credit of 100 per share to Capital Reduction A/c (d) There will be no credit to Capital Reduction A/c 20.On cancellation of surrendered shares in a scheme of reconstruction (a) Share capital A/c will be debited (b) Share Surrendered A/c will be credited (c) Capital Reduction A/c will be credited (d) Capital Reduction A/c will be debited 21. Ifthe pref. shareholders give up their claim for Arrears of Preference Dividend shown as Contingent Liability in Notes to Accounts in a scheme of reconstruction (a) Capital Reduction A/c will be debited (b) Pref. Shareholders A/c will be credited (c) No entry is passed (d) Preference Dividend Payable A/c will be credited 22. 1n Internal Reconstruction (a) No company is liquidated (b) Only one company goes into liquidation (c) two or more companies are liquidated — (d) One or more companies go into liquidation 23.A limited company may alter the share capital so as to (a) Increase its reserve capital (b) Sub-divide its shares into shares of smaller amount (c) Give option to preference shareholders to get equity shares (d) None of the abovey Oe St | Reconstruction 265 I i . ytion of share capital of a com, a only called up share capital Ipany means reduction in ; 4 ly authorised capital (6) Subscribed andor paid-up share capital nce in Capital Reduction Ai (4) Only uncalled share capital 1 ner Reserve 7s generally transferred to Pa existing 1,000 shares of & 100 each are altered to 10,000 shares of © 3s aati consolidation ives @ conversion in Stock i pete! ania granting approval to any scheme of Capal Reduction, the cour may direct the company ‘oad ee words to its name for such period as it thinks fit. ® vided (b) Unlimited and Reduced © i (d) Limited and Reduced a onstruction refers to an arrangement, whereby (@) Apreviously unprofitable or a weak company is reconstructed by certain measures ) Two companies come together to form a new company ) Assets and liabilities of the company are not revalued (@ None of the above gp.The credit balance in capital reduction a/c is utilised for (a) Paying off dissentient shareholders (b) Writing off deferred expenses @ profit & Loss A/c a Capital Reserve isting 1,000 shares of & None of the above 7 Bay ‘consolidation of 1 each are atered to 100 shares of€ 10 each. This is known 2° : ion it (b) Sub-division wersation in Stock Oe ~ (@) Surrender 40 each. This is known (@) Issuing bonus shares (d) None of the above gi.For capital reduction under internal reconstruction, authorisation / approval is required from @) Shareholders (b) Articles of Association (@) Tribunal (d) All the above PI an =e) ion into shares of smaller denomination is known as —_—- 4, Splitting shares ofa higher denominati wiped out by making use of the credit balance in __— 4, Past losses and fictitious assets are alc under internal reconstruction. 4. Surendered shares (can/cannot) be re-issued. 4, Capital Reduction Acis to record all sacrifices by the lenders / shareholders. (credited / debited) +5, Increase in value of Land will be recorded on __— side of Capital Reduction A/c. Company can alter the share capital provided it is authorised by ___ (Memorandum of ‘Association / Articles of Association / Prospectus). 7. The company can implement the capital reduction scheme only after getting permission from —— (Central Government / Shareholders / Competent Tribunal). 4. Incase of internal reconstruction the existing company will be (liquidated / amalgamated/ continued). 4. Incase of subdivision of share capital the total number of shares (increases / decreases/ does not change). '0.Incase of consolidation of share capital the total number of shares ___ (increases. /decreases/ does not change). writing of all accumulated losses and others is 11.The balance in the capital reduction account after transferred to __—- (Goodwill account / General reserve accot t Share capital account). ' : When a company converts its equity shares into capital stock then the account to be credited is — (Equity share capital ‘account / Preference share capital account / Equity capital stock int), "Vincrease in the value of fixed assets at the time of reconstruction will be credited to (Capital reserve account / Share capital account / General reserve account / Capital red Fiicn count), uction unt / Capital reserve account /Financial Accounting - V (TYp4,, : SEN, inded by share holder jg Y vm account / General reserve Sh, My) debi / General reserve account / Accum DS 266 14. At the time of feorganisation the amount of shares Su! Sonar Capital reserve account / Capital reduction ‘urrendered share account). of capital reduction 15. For writting off the accumulated losses under the scheme of capi ia) (Share capital account / Capital reserve accoun account). : 16. Acontingent liability, not provided for materiali paid 600 irrespective of this liability. eee 0) account will be @® 1,000 /% 400 : f - 17. In case of consolidation of share capital the total number ae cae is 18. Alteration of shares of smaller amount into shares of larg' —.o Shay capital. f pai 19. When uncalled amount of share capital is to be reduced then the amount of paid “Pcabitaloty, company 20. A company can convert fully paid 21. To carry out the scheme of capital reduction approval is ee o 22. If the creditors are willing, their claims against the company tea : 23. Reserves of the company be utilised in meeting the accumulated losses at the time ° internal reconstruction. : i 24. When the company returns the excess share capital, it credits account. 25. After giving permission for capital reduction, the court may order the use of the Words ___ after the names of the company for a specified period. : 26. Cancellation of shares not taken up does not amount to - of capital. : 27. The various losses can be written with help of capital reduction account at the time os reconstruction, " ,000, the ing to the extent of & 1, Uran, Semaine to be charged from the Capital = into stock and also reconvert —__ back intg Share 28. The amount of surrendered shares is credited to account. [A] COLUMN A COLUMN B Final Accounts of a sick company (a) governed by Insolvency and Goodwill A/c in a loss-making Bankruptcy Code, 2016 company (b) Variation of Shareholders’ Rights 3. Internal Reconstruction (c) Do not show true and fair view of the 4. External Reconstruction financial position of the company 5. Increase, consolidation or (d) show true and fair view of the financial ‘sub-division of share capital Position of the company of the company (e) must be authorised by the company’s 6. S. 487 of Companies Act, 2013 articles; approved by a special resolution| deals with by the shareholders of the company; 7. Reduction of Share Capital and confirmed by the Tribunal () Fictitious asset (9) Company is liquidated (h) Company is not liquidated (i) Alteration of Share Capital under . 61 and 64 of the Companies Act, 2013 Fixed asset COLUMN A _Change in the rate of Preference dividend payable in future without any change in the amount of capital in fractions is known as a . (c) Consolidation Surrender of ful pald shares (d) Reduction of Paid-up Share Capital BB] COLUMN B Variation of Shareholders’ Rights (b) can be purchased or sold even& atl Reconstruction 267 ye Equity shareholders giving up thei - . 8 claim to the reserves. aa a 7 ae a ine ecumulated profit ean of? fe (f) Compromise / Arrangement 4 each converted into (9) Sub-divisi shares off 10 each ee g, Shares of ® 100 each converted into shares of @ 10 each 6 Cancelling un-issued Shares 1 Capital Stock a FAs eR company cannot subdivide shares of larger denomination into shares of smaller denomination. ; company IS fee bed OF extinguish the uncalled liability of its members. : No permission from the tribunal is required for a company to write off or cancel any paid UP 5 Capital which : lost or not represented by available assets. , cancellation of ae Capital is also a case of capital reduction. only sick oe les undertake capital reduction. mission of the tribunal is required for a it ich is in excess of the 4, Pe ments of the company, company to return capital which is in 1, No journal bd is required for the Cancellation of un-issued share capital. . ater granting the scheme of capital reduction the court may order the use of words “And Reduced after the name of the company til its winding up. «. Consent of the creditors is required if capital reduction involves diminution of liability regarding uncalled capital or return of Paid-up capital. p.consent of the creditors is not required if capital reduction involves the writing off of paid-up capital lost or not represented by available assets. 'y.Any surplus in the capital reduction account after writing off lost capital is transferred to General “Reserve. ce ‘zina scheme of reconstruction amount of shares surrendered by shareholders is transferred to Capital reduction account. ‘Amounts sacrificed by shareholders in a scheme of internal reconstruction are credited to Capital reserve account. 14,For a company to carry out capital reduction, permission is required from Central Government. 45.Security premium account can be transferred to Capital Reduction Account. External Reconstruction involves reduction in capital. {1.fauthorised by its articles, a company can increase its share capital by making fresh issue. {8.Acompany can consolidate its share capital by converting the shares of smaller denomination info shares of higher denomination. {9.ncase unissued share capital is to be decreased, then share capital account has to be cancelled. ‘A.In case of internal reconstruction, the existing company has to be liquidated. 21.The capital reduction scheme is adopted when the company has considerable amount in the form of accumulated losses. 2.Acompany is allowed to convert its fully paid shares into stock. %.Under a scheme of reorganisation by surrender of shares, the shares of a company are sub- divided into shares of smaller denominations and the share holders are made to surrender a Part of their holding. The various losses cannot be written off with the help of capital reduction account at the time of 4 'nlemal reconstruction. The balance in security premium account cannot be transferred to capital reduction account. peas of reorganisation of the share capital is to be charged from capital reduction account. -Acontingent ability, in respect of which no provision has been made, will be transferred to profit AMdloss account at the time of intemal reconstruction. a268 ESC 0 cell asus) 9.41 Financial Accounting - V (TYR, F; SE “y) 9.2 (1) Sub-division (2) Capital Reduction (3) Can (4) Credited (5) Credit (6) Articles of ion (7) Competent Court (8) Continued (9) Increases (10) Decreases (11) Capital reserve C00 (12) Equity capital stock account (13) Capital reduction account (14) Surrendered account (15) Accumulated loss account (16) & 400 (17) decreases (18) consolidation does not change (20) shares, stock (21) court (22) can not (23) can (24) ca reduced (26) reduction (27) internal (28) capital reduction A= (1) - (©), (2) - (f, (3) - (h), (4) - (a), (5) - (i), (6) - (b), (7) - (@) B : (1) - (a), (2) - (d), (3) - (fh, (4) - (©), (5) - (9), (6) - (@), (7) - (©) True : 3, 4,5, 6, 7, 9, 10, 15, 17, 18, 21, 22, 23, 26 False : 1, 2, 8, 11, 12, 13, 14, 16, 19, 20, 24, 25, 27 8. False; for specified period. 11. False; to Capital reserve account. 12. False; to Shares surrendered account. 13. False; to Capital reduction account. 14. False; from the competent court. 1 sh (25) 9.3 9.4 LL Te