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    Internal reconstruction of a company

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    © All Rights Reserved
    Download as PDF or read online from Scribd
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    12 views61 pages

    Internal Reconstruction

    Uploaded by

    Flashcap693
    Internal reconstruction of a company

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    © All Rights Reserved
    Download as PDF or read online from Scribd
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    CAINTER _FOR 46™SESSION REGULAR BATCHES BOOK NO. 48 ADVANCED ACCOUNTING _GR.2_4GE (PART 5)_1 CHAPTERS CH. NO. CHAPTER NAME PAGE.NO. 3. | INTERNAL RECONSTRUCTION 3.4 -3.60 &@ MASTER MINDS" COMMERCE INSTITUTE PVT. LTD. CA + CMA + CS + MEC + CEC e HYDERABAD | VUAYAWADA | TIRUPATHL Cell: 98851 25025 / 26 Visit us @ www.mastermindsindia.com | Mail: mastermindsinfo@ymail.com Facebook Page: MASTERMINDS For CA Android App: Masterminds online classes ISSUE DATE: 27-10-2021 You tube Channel: MASTERMINDS FOR CA8CMA MRP: RS.400 MASTER 1S COMMERCE INSTITUTE PUT, LTD, WWW. MASTERMINDSINDIA.COM | 98851 25025 / 26 3. INTERNAL RECONSTRUCTION LEARNING OBJECTIVES 1) Meaning of Reconstruction 2) Reasons for Reconstruction. 3) Accounting Treatment for Internal Reconstruction. THEORY : : 5 zi F : ~ 1) [JOURNAL ENTRIES AND LEDGER | - : cams : 5 3 12) |JOURNAL ENTRIES AND BALANCE | a . 5 : : 5 [SHEET 3) [JOURNAL ENTRIES AND BALANCE ss 5 : 7 | SHEET ~ PARTY WISE : 0 7 [SETTLEMENT 4) _ [SHARES SURRENDERED 7 : Oe : : 7 NO. OF PROBLEM: VATERIAL CRD-07, | RELEVANT PROBLEM IN RELEVANT PROBLEM IN | MMMATERIAL EXAM | MMMATERIAL ILLUSTRATION 1 ACSP (100%) Mis RTP GRD 6 (100%) ILLUSTRATION 2 ACSP 2 (100%) 18-MTPH — 15M ‘CRO 4 (100%) ILLUSTRATION 3 ASSIGN 4 (100%) M18-MTP2 - 16M GRO 1 (100%) ILLUSTRATION 4 ‘ACSP T (100%) NIG-RTP [ASSIGN 4 (100%) ILLUSTRATION 5 CRD 5 (100%) Nig fom GRD 3 (98%) ILLUSTRATION 6 CRD 3 (100%) Mig-RTP CRD 4 (100%) ILLUSTRATION 7 [ASSIGN 5 (100%) 19-MTPt — 15M ‘CRD 4 (100%) ILLUSTRATION 8 GRD 7 (100%) Nig-RTP GRD 6 (98%) PRACTICE QUESTION 1 ACSP 5 (100%) N1Q-MTPI - 15M CRD 6 (100%) PRACTICE QUESTION 2 ACSP 6 (100%) Nig 15M ACSP 8 (100%) PRACTICE QUESTION 3 [ASSIGN 6 (100%) M20- RTP CRD 2 (100%) PRACTICE QUESTION 4 ASSIGN 3 (100%) M20-NITP 5m ACSP 3 (100%) PRACTICE QUESTION 5 AGSP 4 (100%) N20-RTP ASSIGN 1 (100%) N20-MTP - 8m ‘ASSIGN 7 (100%) M2t-RTP Merged in CRD 4 215M ‘ACSP 5(98%) CH.3 | INTERNAL RECONSTRUCTION | 46E BA OM | 98851 25025 / 26 Oy THEORY & PROBLEMS FOR CLASSROOM DISCUSSION (CRD) 2) [ASSIGNMENT PROBLEMS (AP) 3) ADDITIONAL CONCEPTS FOR SELF-PRACTICE (ACSP) 4) (MULTIPLE CHOICE QUESTIONS (SELF STUDY) 5) /SHORT ANSWER TYPE QUESTIONS (SELF STUDY) 6) WORKBOOK SOLUTIONS DIVISION 1: THEORY AND PPROBLEMS FOR CLASSROOM DISCUSSION (CRD) MEANING: (LINE BY LINE) Reconstruction is a process by which affairs of a company are reorganized by revaluation of assets, reassessment of liabilities and by writing off the losses already suffered, by reducing the paid up value of shares andior varying the rights attached to different classes of shares. The object of reconstruction is usually to reorganize capital or to compound with creditors so that company can be bailed out from present situation without winding up the existing company. In short - QO 0 Reconstruction means reorganization of a company’ ysiivantial structure. In reconstruction, usually the following activities are done: 4) Revaluation of Assets & Liabilities. 2) Writing off of the losses suffered by the Ginny ‘by reduction of the paid-up value of shares. 3) Varying of the rights attached to afferen lasses of shares and, 4) Compounding / arrangement with the creditors. Reasons: The need for reconstruction arises in the following cases 4) When a company has accumulated losses. 2) When a company finds itself overcapitalized, ie., value placed on assets is too much as compared to their earning capacity 3) When the profits as a whole are insufficient to pay proper dividend. (LINE BY LINE) EXTERNAL RECONSTRUCTION: Wherever an undertaking is being carried on by a company and is in Substance transferred, not to an outsider, but to another company consisting substantially of the same shareholders with a view to its being continued by the transferee company, there is external reconstruction TYPES OF RECONSTRUCTIOI NOTE: Accounting Treatment for external reconstruction is essentially covered under the category ‘amalgamation in the nature of merger in AS-14 INTERNAL RECONSTRUCTION: A settlement made with members, creditors and debenture holders may result into reconstruction of a company and such reconstruction will be called as “Intermal Reconstruction’, if there is no liquidation of an existing company CANTER | ADVANCED ACCOUNTS | 46 32 Cree U ua UA WWW. MASTERMINDSINDIA.COM | 98851 25025 / 26 Difference between Internal and External Reconstructio (QP-M19-5M) (LINE BY LINE) Liquidation _| The existing company is not liquidated. The existing company is liquidated. No new company is formed but only the rights|A new company is formed to take of shareholders and creditors are changed. over the liquidated company. Reduction of There is certain reduction of capital and|There is no reduction of capital. In capital sometimes the outside liabilities like debenture) fact, there is a fresh share capital of| Formation holders may have to reduce their claim. the company. Legal [Internal reconstruction is done as per provisions |External reconstruction is regulated position of section 66 of the Companies Act, 2013. by section 232 of the Companies Act, 2013. METHODS OF INTERNAL RECONSTRUCTION: Methods of Internal Reconstruction a — Alteration of Variation of Share] Reduction of ‘Compromise I Share Capital holders Rights Share Capital Arrangement aes (Sec. 61) (See. 48} G86) | ue. 2910240) 1) THE ACCOUNTING TREATMENT IN EACH C, E% \LTERATION OF SHARE CAPITAL WILL BE AS UNDE! ee ' ' SS a) For increase in Share Capital: & Ms Ro Ex: X Lid, issued 10,000 Equity ShayeS of R10 each at par i) Bank Alc EL. Dr. 1,00,000 Fo? To Equity Share Applicatién ang/Allotment Alc 1,00,000 (Being the application money received) Equity Share Application and Allotment A/c Dr. 100,000 To Equity Share Capital Alc 4,00,000 (Being 10,000 Equity Shares of Rs.10 each allotted at par) b) For Consolidation of Shares: Ex: X Ltd having 10,000 Equity Shares of Rs.10 each decided to convert the Share Capital into Equity Shares of Rs.100 each Equity Share Capital (Rs.10) Ale Dr. 1,00,000 To Equity Share capital (Rs.100) Ale 41,00,000 (Being 10,000 Equity Shares of Rs.10 each converted into 1,000 shares of Rs.100 each) c) For Sub-division of Shares: Ex: X Ltd having 1,000 Equity Shares of Rs.100 each decides to convert the Share Capital into Equity Shares of Rs.10 each. Equity Share Capital (Rs.100) Alc Dr. 1,00,000 To Equity Share Capital (Rs.10) Alc 4,00,000 (Being 1,000 Equity Shares of Rs.100 each converted into 10,000 Shares of Rs.10 each) CH.3 | INTERNAL RECONSTRUCTION | 46E 3.3 ELL Ueda Uda LA Ld WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 Conversion of fully paid shares into Stock and Stock into Shares: Stock is the Consolidation of the share capital into one unit divisible into aliquot parts. While itis impossible of the share capital to be one share, any amount of stock may be transferred. In practice, however, companies restrict the transfer of stock to multiples of say, Rs.100. A company can convert its fully paid shares into stock [Section 61 (c)]. Upon the company converting its shares into stock, the book-keeping entries merely record the transfer from share capital account to stock account. But a separate Stock Register is started in which details of members’ holdings are entered and the annual return is modified accordingly. d) For Conversion of Shares into Stock: Ex: X Ltd having Equity Shares of Rs.10 each decides to convert the Share Capital into Equity Stock. Equity Share Capital (Rs.10) Ale Dr. 1,00,000 To Equity Stock Alc 4,00,000 (Being 1,000 Equity Shares of Rs.10 each converted into equity stock) ) For Conversion of Stock into Shares: Ex: X Ltd having Equity Stock of Rs.1,00,000 decides to convert the Equity Stock into Equity Share Capital of Rs.10 each. Equity Stock Alc Dr. 1,00,000 To Equity Share Capital (Rs.10) Ao cS 4,00,000 (Being Equity Stock of Rs.1,00,000 comes 19,000 Equity Shares of Rs.10 each) voting rights relating to dividend, of otherwise in accordance with rules. It may be difference related to managing control, power'to appoint proxy and so on. a) Variation of Shareholders rights [section 48] Ex: X Ltd has 1,000, 10% Cum Pre, Shares of Rs.100 each. At a class meeting of Cum pref. Shareholders, it was decided that the rate of dividend to 9% In such a case following Journal Entry will be passed. 10% cum pref. Share Capital A/c Dr. 1,00,000 To 9% Cum pref. share Capital Alc 41,00,000 Ex: Y Ltd. has 1,000, 10% Cumulative Pref. Shares of Rs.100 each. At a meeting of Cum Pref. Shareholders, it was decided that the existing Cum-Pref.—Shares be converted into Non-Cum— Pref. Shares. 10% Cum pref. Shares Capital A/c Dr. 1,00,000 To 10% Non-cum pref. Share Capital A/c 1,00,000 3) THE ACCOUNTING TREATMENT IN EACH CASE OF REDUCTION OF SHARE CAPITAL WILL BE AS FOLLOWS: a) For Extinquishing or Reducing the liability in respect of Uncalled Amount: Ex: X Ltd having 1,000 Equity Shares of Rs.100 each Rs.60 paid up and decides to cancel the liability of member to the extent of Rs.20 per share and make shares as of Rs.80 each. Rs.60 paid up. CANTER | ADVANCED ACCOUNTS | 46 3.4 MASTER ST SU ‘WWW. MASTERMINDSINDIA.COM | 98851 25025 / 26 Equity Share Capital (Rs.100) Ale Dr. 60,000 To Equity Share Capital A/c (Rs.80) 60,000 (Being Shares of Rs. 100 each converted into shares of Rs.80 each) NOTE: The paic b) For paying off the surplus paid up Capital: Ex: A Ltd. having 1,000 Equity Shares of Rs.100 fully paid decides to repay to its members Rs.20 per share and make shares as of Rs.80 each fully paid up. up Share Capital of the company will remain unchanged. i) Equity Share Capital (Rs.100) Alc Dr. 1,00,000 To Equity Share Capital (Rs.80) Alc 80,000 To Sundry Members Alc 20,000 (Being shares of Rs.100 each converted into shares of Rs.80 each and make Rs.20 per share due to members) ‘Sundry Members A/c Dr. 20,000 To Bank A/c 20,000 (Being the payment made to members) c) For writing off the lost paid-up Capital: The reduction can be affected in any of the following two ways: NS Lost Paid up Capital | —Far— saternatve-1 ) <9” | atematve-2 a Reduction in Paid up Reduction in Face Capital Value Further company can called-up the balance Further can't called-up amount Alternative - 4: Reducing the paid-up value (not Nominal Value) of existing shares from Rs.100 to Rs. 20 Share Capital (Rs.100) A/c Dr Rs.80 To Capital Reduction A/c Rs.80 (Being the paid-up value of a share reduced from Rs. 100 to Rs.20) aims Reducing both Nominal Values and paid-up values of Shares from Rs.100 to 8, 20/- Share Capital (Rs.100) Ale Dr. Rs.100 To Share Capital (Rs.20) A/c Rs.20 To Capital Reduction Alc Rs.60 (Being the shares reduced to Rs.20 per share) NOTE: The Shareholders will not ordinarily be willing for the first alternative since it puts additional burden on them CH.3 | INTERNAL RECONSTRUCTION | 46E 35 Cree U ua UA WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 4) MEANING OF COMPROMISE/ARRANGEMENT: A scheme of compromise and arrangement is an agreement between a company and its members and outside liabilities when the company faces financial problems. Such an arrangement therefore also involves sacrifices by shareholders, or creditors and debenture holders or by all Accounting treatment for some of the cases is as follows: a) When equity shareholders give up their claim to reserves and accumulated profits: Reserves Account Dr. XXX. (With the amount of reserves) To Reconstruction Account XXX b) Settlement of outside liabilities at lesser amount- Liabilities such as sundry creditors may agree to accept lesser amount in lieu of final settlement. Treatment will be as follows: Outside Liabilities Account Dr. XXX (With the amount of sacrifice made by Creditors, debenture holders etc.) Provision Account, if any Dr. XXX To Reconstruction Account XXX Example Look at the following Balance Sheet _ 10% Debentures 14, ae = ‘Sundry Creditors 460. The debenture holders agree to eae up to Rs.5,00,000 in consideration of their getting 50,000 Equity Shares of ch. Sundry Creditors agree to reduce their claims to 20% and haf the balance to be sal alste by the issues of Equity Shares of Rs.10 each. The following Journal Entries shallbe passed, To record the aforesaid arrangement: i) 10% debenture holders' Alc 9,70,000 To Equity Shares Capital A/c (Rs.10) 5,00,000 To Reconstruction A/c 4,70,000 ii) Sundry Creditors A/c Dr.| 4,05,000) To Equity Shares Capital A/c (Rs.10) 45,000 To Reconstruction A/c 3,60,000 How to deal with arrears of Preference Dividends? ——_ +, In balance sheet (Already ut of balance sheet been exiting as a laity) {as a contingent liability) Waived Waived Pref. Dividend Alc Dr No entry To Bank Alc! TTo reconstruction Ale To Bank Alc! Share capital Ale Share capital Alc CANTER | ADVANCED ACCOUNTS | 46 3.6 MASTER 1S COMMERCE INSTITUTE PUT, LTD, WWW. MASTERMINDSINDI SOME IMPORTANT CONCEPTS, 1) TO RECORD AN APPRECIATION IN THE VALUE OF ASSET OR REDUCTION IN THE AMOUNT OF A LIABILITY OM | 98851 25025 / 26 Concerned Asset / Liability Alc Dr. To Capital reduction (or Reconstruction) Alc 2) WRITING OFF THE ACCUMULATED LOSSES, WORTHLESS INTANGIBLE A‘ AND OTHER OVERVALUED ASSETS TO THE EXTENT OF OVER VALUATION. The following Journal Entry will be passed in such regard: Capital Reduction A/c (Cr. Bal.) Dr. To Profit and loss Alc (Debit Bal.) To Preliminary Expenses Alc To Underwriting Commission Alc To Discount on issue of Shares / Debentures Alc To Goodwill Alc (To the extent of over valuation) To Patents A/c (To the extent of over valuation) To Copy Right A/c (To the extent of over valuation) To Other Overvalued Assets Ac (Individually) 2 NOTE: Even if the question is silent as to writing off the debit balance of Profit & Loss Account and items of Miscellaneous Expenditure (ike Preliminay ,Ssoerses Underwriting Comm., Discount on issue of Shares | Debentures) should be writen otto the extent of credit balance available in Reconstruction / Capital Reduction Account. <3" 3 3) CREDIT BALANCE OF CAPITAL REDUCTION! AIC (OR RECONSTRUCTION AIC): The credit balance if any left in the Capital RedUetion Nc (or Reconstruction Ale) should be transferred to the Capital Reserve Alc AY Capital Reduction A/c (or ReconStuctiA A ‘Alc) Dr. To Capital Reserve Alc NoTI a) It is recommended to use ‘Reconstruction Account’ particularly when the scheme of compromise / arrangement is carried out under the provisions of Sections 230 to 240. The use of Capital Reduction Account is purely justified when the capital reduction scheme is carried out without invoking the provisions of Sections 230 to 240, b) So far as Fixed Assets are concerned, the amount written off under a scheme of reconstruction must be shown in each Balance Sheet for five years. ¢) After the name of the Company, the words “and reduced” should be added only if the court so orders Dr. Reconstruction Alc cr. To Assets A/c (Downwards) XXX | By E.S.C Alc XXX To Liability (Reassessment upward) XXX | By P.S.C. Alc. XXX To Cash Alc (Unrecorded liability) XXX | By Asset Alc (Upward) XXX’ By Liability A/c (Downward To Profit or loss Alc XXX | revaluation) XXX CH.3 | INTERNAL RECONSTRUCTION | 46E 37 Cree U ua UA WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 To Preliminary expense Ac XXX [By Cash Alc (Unrecorded Asset sale) XXX To Underwriting commission Alc XXX! To Discount on issue of shares A/c XXX) To Goodwill Alc XXX! To Patents A/c XXX To Capital reserve Alc (bal. fig) XXX| XXX XXX EL 1: JOURNAL ENTRIES AND LEDGER CRD 1: The shareholders of Lili Ltd. decided on a corporate restructuring exercise necessitated because of economic recession. From the given summarised balance sheet as on 31-3-2017 and the information supplied, you are required to prepare 1) Journal entries reflecting the scheme of reconstruction, 2) Capital reduction account, 3) Cash account in the books of Lili Ltd. Summarised Balance Sheet of Lili Ltd. as on 31.3.2017 [Share Capital Fixed Assets 30,000 Equity shares of Rs.10each | 3,00,000/fragemarks and Patents 4,410,000 40,000 8% Cumulative Preference KR shares 10 each «gcSo| boa at cost 36,100 Reserves and Surplus Freehold Land 7,20,000 ‘Securities Premium Account { Freehold Premises 2,44,000 Profit and Loss Account > Plant and Equipment 3,20,000 ‘Secured Borrowings Investment (marked to market) 64,000 9% Debentures (100) _1,20,000 (Current Assets Accrued Interest 5,400 | 1,25,400/ Inventories: Current liabilities Raw materials and packing materials 60,000 Trade payables 1,20,000|Finished goods 16,000 76,000 Tax payable 50,000 | Trade receivables 4,20,000 ‘Temporary bank overdraft 223,100) 10,90,100 10,90,400 NOTE: Preference dividends are in arrears for 4 years. The scheme of reconstruction that received the permission of the Court was on the following lines: a) The authorized capital of the Company to be re-fixed at Rs.10 lakhs (preference capital of Rs.3 lakhs and equity capital offs.7 lakhs). Both classes of shares are of Rs.10 each, b) The preference shares are to be reduced to Rs. 5 each and equity shares reduced by Rs. 3 per share. Post reduction, both classes of shares to be re-consolidated into Rs.10 shares. ¢) Trade Investments are to be liquidated in open market. CANTER | ADVANCED ACCOUNTS | 46 38 Cree U ua UA WWW. MASTERMINDSINDIA.COM | 98851 25025 / 26 d) One fresh equity shares of Rs.10 to be issued for every Rs.40 of preference dividends in arrears (ignore taxation). e) Expenses for the scheme were Rs. 10,000. f) The debenture holders took over freehold land at Rs.2,10,000 and settled the balance after adjusting their dues. 9) Unprovided contingent liabilities were settled at Rs. 54,000 and a pending insurance claim receivable settled at Rs. 12,500 hh) The intangible assets were all to be written off along with Rs. 10,000 worth obsolete packing material and 10% of the receivables. i) Remaining cash available as a result of the above transactions is to be utilized to pay off the bank overdraft to that extent. j) The Equity shareholders agree that they will bring in necessary cash to liquidate the balance outstanding on the overdraft account by subscribing the fresh shares. The equity shares will be issued at par for this purpose What would be the effect on above question - a) "IF UNPROVIDED CONTINGENT LIABILITIES WERE CANCELLED. )_IF AUTHORIZED CAPITAL IS REDUCED to. Mte-uTP SP GRD 2: The following is the Balance Sheef6t Sf@r Ltd, as on 31st March, 2019 “TAmount ® | A) Equity & Liabilities 1) Shareholders’ Fund: a) Share Capital 9,000 7% Preference Shares of € 100 each fully paid 9,00,000 410,000 Equity Shares of” 100 each fully paid 10,00,000 b) Reserve & Surplus: Profit & Loss Account (2,00,000) 2) Non-current liabilities: “A” 6% Debentures (Secured on Bombay Works) 3,00,000 “B" 6% Debentures (Secured on Chennai Works) 3,50,000 3) Current Liabilities and Provisions: a) Workmen's Compensation Fund: Bombay Works 10,000 Chennai Works 5,000 b) Trade Payables 1,25,000 Total] 24,90,000 CH.3 | INTERNAL RECONSTRUCTION | 46E 3.9 Cree U ua UA WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 B) Asset Non-current Assets: 1) PPE: Bombay Works 950,000 Chennai Works 7,75,000 2) Investment: Investments for Workman's Compensation Fund 15,000 3) Current Assets: a) Inventories 4,50,000 b) Trade Receivables 2,50,000 ¢) Cash at Bank 50,000 24,90,000 ‘A reconstruction scheme was prepared and duly approved. The salient features of the scheme were as follows: j) Paid up value of 7% Preference Share to be reduced to & 80, but the rate of dividend being raised to 9%, ii) Paid up value of Equity Shares to be reduced to @ 10. ) The directors to refund ® 60,000 of the fees previously reggived by them. ) Debenture holders forego their interest of % 26,000 included among the trade payables. \) The preference shareholders agreed to waive theft sai for preference share dividend, which is in arrears for the last three years. SS. vi) “B” 6% Debenture holders agreed to take ‘Shennai Works at 4.25.00 and to accept an allotment of 1,500 equity shares of & 10, ar, and upon their forming a company called Zia Ltd. (to take over the Chennai Works)they~llotted 9,000 equity shares of % 10 each fully paid at ar to Star Ltd. wr ) The Chennai Workmen's compe SuPhana disclosed that there were actual liabilities of & 1,000 ‘As a consequence, the investments of the fund were realized to the extent of the balance. Entire investments were Sold ata proof 10% on book value and the proceeds were ullized fot part payment of the creditors. Inventory was to be written off by 2 1,90,000 and a provision for doubtful debts is to be made to the extent of & 20,000. ix) Chennai works completely written off. x) Any balance of the Capital Reduction Account is to be applied as two-third to write off the value of Bombay Works and one-third to Capital Reserve. Pass necessary Journal Entries in the books of Star Ltd. and prepare capital reduction a/c after the scheme has been carried into effect. [What would be the effect on above question - Ja) IF WORKMEN COMPENSATION FUND IS PAID IN CASH. b) IF EQUITY SHARES ARE REDUCED TO % 10 BY NOT CHANGING FACE VALUE AND SUCH. REDUCED AMOUNT IS TEMPORARILY PAID. [Amount to be transferred to Capital Reserve 21,33,800 CANTER | ADVANCED ACCOUNTS | 46 3.10 MASTER PRINTED SOLUTIOI 1S COMMERCE INSTITUTE PUT, LTD, WWW. MASTERMINDSINDI In the books of Star Ltd. Journal Entries OM | 98851 25025 / 26 7% Preference share capital (2 100) To 9% Preference share capital (@ 80) To Capital reduction Alc (Being preference shares reduced to 2 80 and also rate of dividend raised from 7% to 9%) Equity share capital Alc (2 100 each) Dr. To Equity share capital A/c (2 10 each) To Capital reduction Alc (Being reduction of nominal value of one share of 2 100 each to Z 10 each) Bank Alc Or. To Capital reduction Alc (Being directors refunded the fee amount) we iv) [Trade payables Alc (Interest on debentures) a Dr. To Capital reduction A/c QS LY (Being interest forgone by the debenturefildefsy v)_|No entry required g vi) a)|'B' 6% Debentures Alc OD & Dr. To Debentures holders Alo@” (Being amount due to Debentlires holders) b) | Debentures holders Alc Dr. To Chennai Works Alc To Equity share capital Alc (Being Chennai works taken over and equity shares issued to ‘B’ 6% Debenture holders) €) | Equity share of Zia itd. Ale Dr. To Debentures holders Ac (Being 9,000 equity shares of Zia Ltd, issued by Debentures holders) Chennai Works ~ Workmen Compensation Fund Or. To Capital reduction Nic (Being difference due to reduced amount of actual liability transferred to capital reduction account) b) Bank Alc. Or. To Investment for Workmen Compensation Fund To Capital reduction A/c (Being investment for Workmen Compensation Fund sold @ 10% profit) CH.3 | INTERNAL RECONSTRUCTION | 46E 3.1 Cree U ua UA WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 ©) | Trade Payables A/c Dr. To Bank Alc (Being part payment made to trade payables) Capital reduction Alc Dr. To Provision for Doubtful Debts A/c To Inventory Alc (Being assets revalued) ix) [Capital reduction Alc Dr. To Profit & Loss Alc ‘To PPE — Chennai Works (Being assets revalued and losses written off) x)_| Capital reduction Alc Dr. To PPE — Bombay Works To Capital reserve Alc (Being assets revalued and remaining amount transferred to capital feserve account) NCE SHEET vy GRD 3: Vaibhav Ltd. gives the following ledger balancés ag@ttst March 2021 fa fin ene _ [Amount (@) | Property, Plant and Equipment 2,50,00,000 Investments (Market-value Rs 19,00,000),% 20,00,000 (Current Assets GF o> 2,00,00,000 P&L Alc (Dr. balance) re 12,00,000 Share Capital: Equity Shares of Rs 100 each 2,00,00,000 (6%, Cumulative Preference Shares of @ 100 each 4,00,00,000 5% Debentures of % 100 each 80,00,000 (Creditors. 4,00,00,000 Provision for taxation 2,00,000 The following scheme of Internal Reconstruction is sanctioned: ’)Allthe existing equity shares are reduced to & 40 each. ii) All preference shares are reduced to @ 60 each iii) The rate of Interest on Debentures increased to 6%. The Debenture holders surrender their existing debentures of € 100 each and exchange the same for fresh debentures of & 70 each for every debenture held by them. iv) Property, Plant and Equipment is to be written down by 20%. ¥) Current assets are to be revalued at @ 90,00,000. vi) Investments are to be brought to their market value ine the it Qf the mpan) _whom the mpany 2A for 40% of his claim. The creditor is allotted with 60000 equity shares of % 40 each in full and final settlement of his claim. CANTER | ADVANCED ACCOUNTS | 46 3.12 ELL DEE WWW. MASTERMINDSINDIA.COM | 98851 25025 / 26 vill) The taxation liability is to be settled at € 3,00,000. ix) Itis decided to write off the debit balance of Profit & Loss Alc. Pass journal entries and show the Balance Sheet of the company after giving effect to the above. What would be the effect on above question? [2) IF PROVISION FOR TAX WAS SETTLED AT ® 1,80,000 b) IF HALF OF THE AMOUNT TO DEBENTURE HOLDERS WAS SETTLED AND FOR THE REMAINING HALF, THERE WERE SETTLED BY DECREASING THE INTEREST TO 4% (ISSUE NO. OF DEBENTURES AS IF THE INTEREST IN AMOUNT IS SAME FOR THE REMAINING HALF). €, similar to QP-N18 [Amount to be transferred to Capital Reserve © 26,00,000 Total of balance sheet 3,06,00,000 CRD 4: The Balance Sheet of Lion Limited as on 31-03-2018 is given below: eNom Equity and Liabilities Shareholders’ funds > Share capital o 1 1,400 Reserves and surplus 2 (622) Non-current ities Long-term borrowings 3 700 Current liabilities Trade Payables 4 102 Other liabilities Yy 5 24 Total, 1704 Assets Non-current assets Property, Plant and Equipment Tangible Asset é 750 Current assets ‘Current Investments. 7 200 Inventories 8 300 Trade receivables 9 450 ‘Cash and cash equivalents 10 4 Total, 1704 Notes to Accounts: 1) |Share Capital |Authorisec 200 lakh shares of 2 10 each 2,000 CH.3 | INTERNAL RECONSTRUCTION | 46E 3.13 Cree U ua UA WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 8 lakh, 8% Preference Shares of % 100 each 800 Issued, Subscribed and paid up: 2,800 100 lakh Equity Shares of Z 10 each, full paid up 1,000 4 lakh 8% Preference Shares of ® 100 each, fully paid up 400 Total 1400 2) [Reserves and Surplus Debit balance of Profit & Loss A/c (622) 3)_[Long Term Borrowings [6% Debentures (Secured by Freehold Property) 400 Directors’ Loan 300 700 4) [Trade Payables Trade payables for Goods 102 5) [Other Current Liabilities Interest Accrued and Due on 6% Debentures 24 6) [Tangible Assets Freehold Property 550 Plant & Machinery 200 750 7)_[Current investment Investment in Equity Instruments 200 8) _|Inventories Finished Goods 300 9) [Trade Receivables Trade receivables for Goods)” 450 10) [Cash and Cash Equivalents Balance with Bank 4 The Board of Directors of the company decided upon the following scheme of reconstruction with the cor a) b) e) qd) e) f g) h) i) d insent of respective shareholders: Preference Shares are to be written down to % 80 each and Equity Shares to % 2 each, Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for balance 1/3rd, Equity Shares of @ 2 each to be allotted Debenture holders agreed to take one Freehold Property at its book value of € 300 lakh in part payment of their holding, Balance Debentures to remain as liability of the compam Interest accrued and due on Debentures to be paid in cash. Remaining Freehold P: io be val 400 lakh, Allinvestments sold out for = 250 lakh. 70% of Directors’ loan to be waived and for the balance, Equity Shares of & 2 each to be allowed 40% of Trade receivables and 80% of Inventories to be written off. Company's contractual commitments amounting to % 600 lakh have been settled by paying 5% penalty of contract value. A contingent liability of which no provision had been made was settled at Z 70 lakhs. Of this amount & 63 lakhs was recovered from the insurance company. CANTER | ADVANCED ACCOUNTS | 46 3.14 ELL DEE WWW. MASTERMINDSINDIA.COM | 98851 25025 / 26 You are required to: ji) Pass Journal Entries for all the transactions related to internal reconstruction. ii) Prepare Reconstruction Account; and i) Prepare notes on Share Capital and Tangible Assets to Balance Sheet, immediately after the implementation of scheme of internal reconstruction. [What would be the effect on above question - Ja) IF INTEREST IS ACCRUED BUT NOT DUE TO THE DEBENTURE HOLDERS. b)_IF ONLY 50% OF INVESTMENTS ARE SOLD. M19-RTP, M18-MTP, similar to M21-RTP [Amount to be transferred to Capital Reserve ‘F279 lakhs PRINTED SOLUTION: Journal Entries in the books of 8% Preference share capital Alc (2100 each) <0’ To 8% Preference share capital A/c (2 80 eath) < To Capital Reduction Alc Ss (Being the preference shares of @ 100 on \felticed to @ 80 each as per the approved scheme ii) [Equity share capital A/c ( 10 eachy”. Dr. To Equity share capital Alc(@2 each) To Capital Reduction Alc i: (Being the equity shares of % 10 each reduced to 2 each) Capital Reduction Alc Dr. To Equity share capital A/c (@ 2 each) (Being 1/3 arrears of preference share dividend of 3 years to be satisfied by issue of 16 lakhs equity shares of 2 2 each) iv) [6% Debentures Alc Dr. To Freehold property Alc (Being claim of Debenture holders settled in part by transfer of freehold property) v)_|Accrued debenture interest A/c Dr. To Bank A/c (Being accrued debenture interest paid) vi) [Freehold property Alc Dr. To Capital Reduction A/c (Being appreciation in the value of freehold property) CH.3 | INTERNAL RECONSTRUCTION | 46E 3.15 Cree U ua UA WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 vii) [Bank Alc Dr. To Investments A/c To Capital Reduction Alc (Being investment sold at profit) Director's loan Alc Or. To Equity share capital A/c (% 2 each) To Capital Reduction Alc (Being director's loan waived by 70% and balance being discharged by issue of 45 lakhs equity shares of % 2 each) ix) |Capital Reduction Alc Or. To Trade receivables A/c To Inventories-in-trade A/c To Bank A/c (Being certain value of various assets and penalty on cancellation of contract are transferred to capital reduction a/c) x) [Contingent Liability Alo Dr. To Cash/Bank A/c (Being contingent liability is settled) OP Cash/Bank A/c S&S Or. Capital Reduction Alc ay Be Dr. To Contingent Liability A/c (Being amount recovered from ing mpany for payment of contingent liability at lance is transferred to capital reduction’ a/c)” Capital Reduction Alc Or. To P&L Alc To Capital reserve A/c (Being balance transferred to capital reserve account as per the scheme) Capital Reduction Account Dr. cr. ‘To Equity Share Capital By Preference Share Capital To Trade receivables By Equity Share Capital ‘To Finished Goods By Freehold Property To Bank Alc By Bank To Contingent Liability Alc By Director's Loan CAINTER | ADVANCED ACCOUNTS | 46E 3.16 Cree U ua UA WWW. MASTERMINDSINDI OM | 98851 25025 / 26 iii) Notes to Balance Sheet E _(@inlakhs) _ Authorised: 200 lakhs Equity shares of % 2 each 8 lakhs 8% Preference shares of @ 80 each Issued: 161 lakhs equity shares of 2 each 4 lakhs Preference Shares of % 80 each 2)_|Tangible Assets Freehold Property Less: Utilized to pay Debenture holders Add: Appreciation eS Plant and Machinery a oe RY {ET - PARTY WISE SETTLEMENT CRD 5: Repair Ltd. is in the hands of adie Sor debenture hoklers who hold a charge on all assets except uncalled capital, Repair bis. gives the following information as regards creditors on 31st March, 2001: SY, ae int (@) | Property, plant and equipment (Cost 3,90,000) - estimated at 1,50,000 (Cash in hand of the receiver 2,70,000 Charged under debentures 4,20,000 Uncalled capital 1,80,000 Deficiency 7,50,000 6,000 shares of % 60 each, 2 30 paid up 1,80,000 First debentures 3,00,000 ‘Second debentures 6,00,000 Unsecured trade payables 4,50,000, A holds the first debentures for 2 3,00,000 and second debentures for 2 3,00,000. He is also_an unsecured creditor for 2 90,000. B holds second debentures for 2 3,00,000 and is an unsecured trade payable for % 60,000. The following scheme of reconstruction is proposed: 1) Ais to cancel 2 2,10,000 of the total debt owing to him, to bring % 30,000 in cash and to take first debentures (in cancellation of those already issued to him) for & 5,10,000 in satisfaction of all his claims, 2) Bis to accept % 90,000 in cash in satisfaction of all claims by him. CH.3 | INTERNAL RECONSTRUCTION | 46E 3.17 ELL DEE WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 3) In full settlement of 75% of the claim, unsecured creditors (other than A and B) agreed to accept four shares of 2 7.50 each, fully paid against their claim for each share of @ 60. The balance of 25% is to be postponed and to be payable at the end of three years from the date of Court's approval of the scheme. The nominal share capital is to be increased accordingly. 4) Uncalled capital is to be called up in full and % 52.50 per share cancelled, thus making the shares of 27.50 each. ‘Assuming that the scheme is duly approved by all parties interested and by the Court, give necessary joumal entries and prepare Balance sheet immediately after reconstruction. (Schedule Ill is not required) [What would be the effect on above question? Ja) _IF BALANCE 25% IS ALSO WAIVED OF IN POINT (3) [Amount to be transferred to Capital Reserve ® 0 CRD 6: Mis Xylem Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses. The following is the summarized Balance Sheet of the company as on 31st March, 2017 before reconstruction: Ui ‘Share Capital oT & Building 42,70,000 [50,000 shares of @ 50 each fully paid up _| _25,00,000) Machinery 8,50,000 7,00,000 shares of € 50 each & 40 paid up | _40,00,000}Computers 5,20,000 Capital Reserve 28097000] Inventories 3,20,000 [8% Debentures of & 100 each -00,000| Trade receivables 10,90,000 12% Debentures of @ 100 each =|. 56,00,000) Cash at Bank 2,68,000 Trade creditors 2" ge” 12,40,000 | Profit & Loss Account 29,82,000 (Outstanding Expenses = 10,60,000 1,03,00,000 1,03,00,000 Following is the interest of Mr. A and Mr. B in M/s Xylem Limited: 8% Debentures 3,00,000 1,00,000| 12% Debentures 4,00,000 2,00,000 Total 7,00,000 3,00,000 The following scheme of internal reconstruction was framed and implemented, as approved by the court and concerned parties: 1) Uncalled capital is to be called up in full and then all the shares to be converted into Equity Shares of @ 40 each. 2) The existing shareholders agree to subscribe in cash, fully paid-up equity shares of 40 each for % 12,50,000. 3) Trade creditors are given option of either to accept fully paid equity shares of € 40 each for the ‘amount due to them or to accept 70% of the amount due to them in cash in full settlement of their claim. Trade creditors for %_7,50,000 accept equity shares and rest of them opted for cash towards full and final settlement of their claim. CANTER | ADVANCED ACCOUNTS | 46 3.18 ELL DEE WWW. MASTERMINDSINDIA.COM | 98851 25025 / 26 4) Mr. A agrees to cancel debentures amounting to € 2,00,000 out of total debentures due to him and agree to accept 15% Debentures for the balance amount due. He also agrees to subscribe further 15% Debentures in cash amounting to 2 1,00,000. 5) Mr. B agrees to cancel debentures amounting to @ 50,000 out of total debentures due to him and agree to accept 15% Debentures for the balance amount due. 6) Land & Building to be revalued at 2 51,84,000, Machinery at % 7,20,000, Computers at % 4,00,000, Inventories at & 3,50,000 and Trade receivables at 10% less to as they are appearing in Balance Sheet as above. 7) Outstanding Expenses are fully paid in cash. 8) Profit & Loss Alc will be written off and balance, if any, of Capital Reduction A/c will be adjusted against Capital Reserve. You are required to prepare necessary Journal Entries for all the above transactions and draft the company's Balance Sheet immediately after the reconstruction. [What would be the effect on above question? a) IF OUTSTANDING EXPENSES TO BE WAIVED OFF. b)_IF CAPITAL RESERVE IS NOT GIVEN IN THE QUESTIONS. M18-RTP, N19-MTP, similar to N19-RTP ‘Amount to be transferred to Capital Reserve 0G) Tota of balance sheet ® 850,000 y, wey What would be the effect on above qGestion’ Ja) IF DIRECTORS ACCEPT 10% M% EQUITY SHARES AND REMAINING WAIVED FOR THEIR LOAN. b) IF GOODWILL IN BALANGE SHEET IS SELF- GENERATED. [Amount to be transferred to Capital Reserve 7,75,000| ASSIGN 2: The following is the Balance Sheet of Planet Ltd. as on 31st March, 2019: ee ae _ Amount (®) | A) Equity & Liabilities 1) Shareholders’ Fund: a) Share Capital: 9,000 7% Preference Shares of ® 50 each fully paid 4,50,000 10,000 Equity Shares of @ 50 each fully paid 5,00,000 b) Reserve & Surplus: Profit & Loss Account (1,00,000) 2) Non-current lial ies: “A” 6% Debentures (Secured on Guntur Works) 4,50,000 “B" 6% Debentures (Secured on Vijayawada Works) 1,75,000 CH.3 | INTERNAL RECONSTRUCTION | 46E 3.27 MASTER MINDS COMMERCE INSTITUTE PVT. LTD. WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 3) Current Liabilities and Provisions: a) Workmen's Compensation Fund: ‘Guntur Works 5,000 Vijayawada Works 2,500 b) Trade Payables 62,500 Total| _12,45,000 B) Assets: Non-current Assets: 1) PPE: ‘Guntur Works 4,75,000 Vijayawada Works 3,87,500 2) Investmei Investments for Workman's Compensation Fund 7,500 3) Current Assets: a) Inventories 2,25,000 b) Trade Receivables 1,25,000 ¢) Cash at Bank 25,000 12,45,000 A reconstruction scheme was prepared and duly echoed Cine salient features ofthe scheme were as follows: OY 1) Paid up value of 7% Preference Share ty pbeiegited to ® 40, but the rate of dividend being raised to 9%. 6 Paid up value of Equity Shares to eGiseaes to%5. jill) The directors to refund % 50,000 Sind Bes previously received by them. iv) Debenture holders forego their interest of Z 13,000 which is included among the trade payables. v) The preference shareholders agreed to waive their claims for preference share dividend for one year, which is in arrears for the last two years and for the remaining one year, company issued equity shares of € 5 each at par. vi) "B" 6% Debenture holders agreed to take over the Vijayawada Works at @ 2,12,500 and to accept, an allotment of 1,500 equity shares of 2 5 each at par, and upon their forming a company called Priya Ltd. (to take over the Vijayawada Works) they allotted 9,000 equity shares of % 10 each fully paid at par to Planet Ltd The Vijayawada Worksmen’s compensation fund disclosed that there were actual liabilities of @ 500 only. As a consequence, the investments of the fund were realized to the extent of the balance. Entire investments were sold at a profit of 10% on book value and the proceeds were utilized for part payment of the creditors. Inventory was to be written off by 2 95,000 and a provision for doubtful debts is to be made to the extent of € 20,000. ix) Vijayawada works completely written off. Pass necessary Journal Entries in the books of Planet Ltd. after the scheme has been carried into effect, CANTER | ADVANCED ACCOUNTS | 46 3.28 Cree U ua UA WWW. MASTERMINDSINDIA.COM | 98851 25025 / 26 What would be the effect on above question? ]a) IF WORKMEN COMPENSATION FUND INVESTMENT IS SOLD AT A PRICE OF € 15,000. b) _IF CAPITAL RESERVE EXISTS IN THE BALANCE SHEET OF ® 5,000. Similar to M20-RTP [Amount to be transferred to Capital Reserve 22,793,200 ASSIGN 3: The following is the summarised Balance Sheet of Weak Ltd. as on 31.3.2015: Equity shares of Rs. 100 each _|1,00,00,000| Fixed assets 1,25,00,000 12% cumulative preference shares Investments 10,00,000 of Rs. 100 each 50,00,000 | (Market value Rs. 9,50,000) 10% debentures of Rs. 100 each 40,00,000/Current assets 1,00,00,000 ‘Trade payables 50,00,000|P & L A/c 6,00,000 Provision for taxation 1,00,000) 2,41,00,000 2,41,00,000 The following scheme of reorganization is sanctioned: S 4) All the existing equity shares are reduced to Rs. 4000 5? 2) All preference shares are reduced to Rs. 60 each ay 3) The rate of interest on debentures is inci sed‘t 12%. The debenture holders surrender their existing debentures of Rs. 100 each and exchange the same for fresh debentures of Rs. 70 each for every debenture held by them. 4) One of the creditors of the compan ve f the company owes Rs. 20,00,000 decides to forgo 40% of his claim. He is allotted 30,000 equity sHares of Rs. 40 each in full satisfaction of his claim. 5) Fixed assets are to be written down by 30%, 6) Current assets are to be revalued at Rs. 45,00,000. 7) The taxation liability of the company is settled at Rs. 1,50,000. 8) Investments to be brought to their market value. 9) Itis decided to write off the debit balance of Profit and Loss account. Pass Journal entries and show the Balance sheet of the company after giving effect to the above [What would be the effect on above question? a) IF, ALL THE EXISTING EQUITY SHARES ARE REDUCED BY & 40 EACH. b) IF ONE OF THE CREDITORS DECIDES TO FORGO ONLY 20% AND REMAINING SHALL BE CARRIED ON AS LONG TERM DEBT | Amount to be transferred to Capital Reserve & 50,000 Total of balance sheet & 1,40,50,000 CH.3 | INTERNAL RECONSTRUCTION | 46E 3.29 Cree U ua UA ASSIGN 4: The Balance Sheet of A & Co. Ltd. as at 31-12-2021 is as follows: OM | 98851 25025 / 26 Particulars Notes | Amount (®) | Equity and Liabilities 1)|__ [Shareholders funds a) | __ Share capital 1 11,50,000 b) | Reserves and Surplus 2 (6,35,000) 2) Non-current lial fies a) |" Long-term borrowings 3 3,75,000 3)| [Current ies a) | Trade Payables 3,00,000 b) | __ Short term borrowings - Bank Overdraft 7,95,000 c Other current liabilities 4 1,22,500 Total 16,07,500 Assets 1) | _[Non-current assets a) | Property, plant and equipment 5 4,75,000 b) | _ Intangible assets 6 1,67,500 ¢) | Non-current investments 2 7 55,000 2) |Current assets fe a) | _tnventories 4,25.000 b) | Trade receivables iS 4,85,000 Total 16,07,500 Notes of accounts 4) |Share Capital Equity share capital: 75,000 Equity Shares of @ 10 each 7,50,000 Preference share capital: 4,000 6% Cumulative Preference Shares of € 100 each 4,00,000 11,50,000 2) [Reserves and Surplus Debit balance of Profit and loss Account (6,35,000) (5,35,000) 3) |Long-term borrowings Secured 6% Debentures (secured on the freehold property) 3,75,000 3,75,000 4) |Other current liabilities Loan from directors 1,00,000 Interest payable on 6% debentures 22,500 1,22,500 5) [Property plant and Equipment Freehold property 4,25,000 Plant 50,000 4,75,000 CAINTER | ADVANCED ACCOUNTS | 46E 3.30 Cree U ua UA WWW. MASTERMINDSINDIA.COM | 98851 25025 / 26 6) [Intangible assets Goodwill 1,30,000 Patents 37,500 4,67,500 7) [Non-current investments Investments at cost 55,000 55,000 The Court approved a Scheme of re-organization to take effect on 1-1-2002, whereby: i) The Preference shares to be written down to % 75 each and Equity Shares to & 2 each. Of the Preference Share dividends which are in arrears for four years, three fourths to be waived and Equity Shares of 2 each to be allotted for the remaining quarter. ) Interest payable on debentures to be paid in cash. iv) Debenture-holders agreed to take over freehold property, book value 2 1,00,000 at a valuation of % 1,20,000 in part repayment of their holdings and to provide additional cash of & 1,30,000 secured by a floating charge on company's assets at an interest rate of 8% p.a ¥) Patents and Goodwill to be written of vi) Inventory to be writen off by & 65,000 . i) Amount of € 68,500 to be provided for bad debts. S viii) Remaining freehold property after giving to debentiré ‘holders, to be re-valued at & 3,87,500. ix) Investments be sold for & 1,40,000. Ss ay X) Directors to accept settlement of their loans’gs te"90% thereof by allotment of equity shares of & 2 each and as to 5% in cash, and balance-4% being waived. xi) There were capital commitments sa e 2,50,000. These contracts are to be cancelled on oan payment of 5% of the contract rice nalty. ignore taxation and cost of the scheme. You are requested to show Journal entries reflecting the above transactions (including cash transactions) and prepare the Balance Sheet of the company after completion of the Scheme. What would be the effect on above question? [a) IF HALF OF ARREARS OF DIVIDEND TO BE PAID IN CASH AND REMAINING WAIVED. b) IF ACCRUED INTEREST IS SETTLED BY WAY OF ISSUING EQUITY SHARES OF SAID. DENOMINATION. [Amount to be transferred to Capital Reserve & 0 Total of balance sheet & 137,500 ASSIGN 5: Following is the Draft Balance Sheet of ABC Ltd. Co.as at 31st March, 2015: ‘Share capital Plant and Machinery 9,00,000 2,00,000 Equity shares of Rs.10 each fully paid up 20,00,000 | Furniture and fixtures: 2,50,000 CH.3 | INTERNAL RECONSTRUCTION | 46E 3.31 Cree U ua UA WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 16,000 8% Preference Shares of Rs.100 each 6,00,000 | Patents and copy rights 70,000 Investments (at cost) Profit & Loss A/c (4,05,000) | (Market value Rs. 55,000) 68,000 '9 % Debentures 12,00,000| Inventory 14,00,000 Bank overdraft 1,50,000| Trade receivables 14,39,000 Trade Payable 5,92,000|Cash and bank balance 10,000 41,37,000) 41,37,000 The following scheme of reconstruction was finalized: i) Preference shareholders would give up 30% of their capital in exchange for allotment of 11% Debentures to them. Debenture holders having charge on plant and machinery would accept plant and machinery in full settlement of their dues. i) Inventory equal to Rs. 5,00,000 in book value will be taken over by trade payables in full settlement of their dues. iv) Investment value to be reduced to market price. v) The company would issue 11% Debentures for Rs.3,00,000 to augment its working capital requirement after settlement of bank overdraft. Give necessary journal entries reflecting the above sch: Ltd. Co. Prepare capital reduction account and reconstruction § e of reconstruction in the books of the ABC ne) Sheet of the company after internal [What would be the effect on above Ja) IF INVESTMENTS ARE S( b)_IF DEBENTURES ARE Nt ING CHARGE ON PLANT & MACHINERY wee” ow Amount tobe wansferredto Capital Reserve ® 1.54000 Total of balance sheet ® 28,74,000 ASSIGN 6: Green Limited had decided to reconstruct the Balance Sheet since it has accumulated huge losses. The following is the summarized Balance Sheet of the Company on 31.3.2015 before reconstruction: [Share Capital: Fixed Assets: Authorised: Goodwill 20,00,000 1,50,000 Equity Shares of @ 50 each 75,00,000 | Building 10,00,000 [Subscribed and Paid up Capital: Plant 10,00,000 ‘50,000 Equity Shares of & 50 each 25,00,000 Computers 25,00,000 1,00,000 Equity Shares of & 50 each, 40 per share paid up 40,00,000: Reserves and surplus (20,00,000) ‘Secured Loans: 12% First Debentures 5,00,000 CANTER | ADVANCED ACCOUNTS | 46 3.32 Cree U ua UA WWW. MASTERMINDSINDIA.COM | 98851 25025 / 26 12% Second Debentures 10,00,000 (Current Liabilities ‘Trade payables §,00,000 65,00,000 65,00,000 The following is the interest of Mr. X and Mr. Y in Green Limited: 12% First Debentures 3,00,000] 200,000) 12% Second Debentures 7,00,000| _3,00,000) Trade payables 2,00,000| _1,00,000) 12,00,000| _6,00,000' Fully paid up 2 50 shares 3,00,000| _2,00,000) Partly paid-up shares (® 40 paid up) 5,00,000| _5,00,000) The following Scheme of Reconstruction is approved by all parties interested and also by the Court: a) Uncalled capital is to be called up in full and such shares and the other fully paid-up shares be converted into equity shares of Rs. 20 each. b) Mr. Xis to cancel Rs. 7,00,000 of his total debt (other than share amount) and to pay Rs.2 lakhs to the company and to receive new 14% Fist Debentures forthe lance amount €) Mr. Yis to cancel Rs. 3,00,000 of his total debt (oth: oan equity shares) and to accept new 14% First Debentures for the balance. 26 oy” d) The amount thus rendered available by the scfemnéShall be utilised in writing off of Goodwill, Profit and Loss A/c Loss and the balance to, ro were oftthe value of computers. You are required to draw the Journal Enres'> a {$id the same and also show the Balance Sheet of the reconstructed company. PS [What would toe atti Rove question? a) IF GOODWILL IS SOLD TO ANOTHER COMPANY FOR & 10,000. [Amount to be transferred to Capital Reserve & 0 Total of balance sheet & 42,00,000 ASSIGN 7: The summarised Balance Sheet of Preeti Limited as on 31% March 2019, was as follows: ee ate Authorized and subscribed capital: Property, plant and equipme: /20,000 Equity shares of % 100 each fully paid 20,00,000| Machineries 7,00,000, Unsecured loans: Current Assets: 15% Debentures 6,00,000 Inventory 5,06,000, Interest payable thereon 90,000] Trade receivables 4,60,000 [Current Liabiliti Bank 40,000 Trade payables 1,04,000| Profit & loss Ale 11,60,000 CH.3 | INTERNAL RECONSTRUCTION | 46E 3.33 MASTER MINDS COMMERCE INSTITUTE PVT. LTD. WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 Provision for income tax 72,000 28,66,000| 28,66,000 It was decided to reconstruct the company for which necessary resolution was passed and sanctions were obtained from the appropriate authorities. Accordingly, it was decided that: i) Each share be sub-divided into 10 fully paid up equity shares of & 10 each ii) After sub-division, each shareholder shall surrender to the company 50% of his holding for the purpose of reissue to debenture holders and trade payables as necessary. iii) Out of shares surrendered 20,000 shares of & 10 each shall be converted into 10% Preference shares of 10 each fully paid up. iv) The claims of the debenture holders shall be reduced by 50%. In consideration of the reduction, the debenture holder shall receive Preference Shares of & 2,00,000 which are converted out of shares surrendered. ¥) Trade payables claim shall be reduced by 25%. Remaining trade payables are to be settled by the issue of equity shares of @ 10 each out of shares surrendered. vi) Balance of Profit and Loss account to be written off. The shares surrendered and not re-issued shall be cancelled. Pass Journal Entries giving effect to the above. concer What would be the effect on above question? GUESTONS a) IF FIVE SHARES ARE CONSOLIDATED INTO ONE SHARE. b)_IF PROVISION FOR TAXIS SETTLED Se =< mo SS JFINAL ANSWER _| Amount to be transferred to Capital Reserve &11,000 [ABC CATEGORISATION. B NOTES g DIVISION 2: THEORY FOR SELF-STUDY MEANING OF RECONSTRUCTION: When a company has been making losses for several years, the financial position does not present a true and fair view of the state of the affairs of the company. In such a company the assets are generally overvalued, as the balance sheet consists of fictitious assets, unrepresented intangible assets and debit balance in the profit and loss account (showing the carry forward of losses). Such a situation always leads the company to show a higher net worth and not depicting a true picture of financial statements. In short, the company is over capitalized. Such a situation brings the need for reconstruction/reorganization of the affairs. CATEGORY 1: THESE PROBLEMS BELONG TO ICAI SOURCES BUT VERY BASIC IN NATURE. BASED ON THE KNOWLEDGE OF PROBLEMS TAUGHT BY US, STUDENTS CAN COMFORTABLY SOLVE THESE PROBLEMS ON THEIR OWN. IF STUDENTS HAVE ENOUGH TIME, WE SUGGEST THEM TO SOLVE THESE PROBLEMS ALSO. ACSP 1: Refer Illustration 1, Page No. 6.5 in the Study Material ACSP 2: Refer Illustration 2, Page No. 6.7 in the Study Material AGSP 3: Refer MTP1-M20, MTP1-M21 CANTER | ADVANCED ACCOUNTS | 46 3.34 (MASTER MINDS COMMERCE INSTITUTE PVT. LTD. WWW. MASTERMINDSINDIA.COM | 98851 25025 / 26 CATEGORY 2: THESE PROBLEMS BELONG TO ICAI SOURCES. THESE PROBLEMS ARE VERY MUCH SIMILAR TO WHAT WE LEARNT IN CRD & ASSINGMENT PROBLEMS. BASED ON THE KNOWLEDGE OF ‘THOSE PROBLEMS, STUDENTS CAN COMFORTABLY SOLVE THESE PROBLEMS ON THEIR OWN. STUDENTS CAN COMFORTABLY TAKE THESE PROBLEMS AS CHOICE. ACSP 4: Refer Practical Q NO: 5, Page No. 6.48 in the Study Material CATEGORY 3: THESE PROBLEMS BELONG TO ICAI SOURCES. BUT THEY ARE BEYOND EXAMINATION STANDARDS. EVEN IF WE TEACH THESE PROBLEMS, YOU CAN'T SOLVE THEM WITHIN THE GIVEN TIME FRAME AS THESE PROBLEMS ARE VERY MUCH TIME TAKING. IF YOU GET ANY OF THESE PROBLEMS IN THE PUBLIC EXAM THEN IT IS WISE FOR YOU TO TAKE THEM AS CHOICE RATHER THAN ATTEMPTING TO SOLVE SUCH PROBLEMS. WE SUGGEST STUDENTS TO LEAVE THESE PROBLEMS AS CHOICE. OF COURSE, THESE PROBLEMS CAN ALSO BE SOLVED WITH THE KNOWLEDGE OF PROBLEMS TAUGHT TO THE STUDENTS: NIL THEORY: 1) Refer to Pg. 6.6 “Conversion of Fully Paid Shares into Stock and Stock into Shares” in ICAI sm 2) Refer to Pg. 6.8 “Reduction of Share Capital’ in ICAI SM 3) Refer to Pg. 6.11 “ENTRIES IN CASE OF INTERNALRECONSTRUCTION’ in ICAI SM CATEGORY 4: ALL THE FOLLOWING PROBLEMS. CAN BE SOLVED WITH THE KNOWLEDGE OF PROBLEMS DISCUSSED ABOVE. OUR FACULTY WILL TEACH THESE PROBLEMS ALSO, IF TIME PERMITS (FOR EXAMPLE, IN CASE OF LONG-TERM BATCH). WE MIGHT HAVE TAKEN SOME OF THESE PROBLEMS FROM ICAI SOURCES ALSO. EVEN JE FACULTY DOES NOT TEACH THESE PROBLEMS, DUE TO INSUFFICIENT TIME, STUDENTS GAN COMFORTABLY PREPARE THESE PROBLEMS ON THEIR OWN. FOR THEIR CONVENIENCE WE ARE EVEN PROVIDING SOLUTIONS OF THESE PROBLEMS IN THE ‘MAIN MATERIAL ITSELF ACSP 5: Parth Ltd, had laid down the following terms upon the sanction of the reconstruction plan by the court- 1) Fumiture and Fixtures which stood at the books at & 150,000 to be written down to ® 95,000. The freehold premises which was valued at 2 7,00,000 showed an appreciation of @ 55,000. 2) Plant and machinery showed fall in value of % 89,000, to be recorded in the books. Investment at % 2,00,000 was brought down to the existing market value at 2 1,05,000. 3) Debenture holders accepted to receive the following in lieu of their present 9% debentures of % 2,50,000- a) 1/5th of the total to be paid in cash to them. b) To take over the land and buildings of value @ 72,000. ¢) To forgo the remaining unpaid portion as a policy of reconstruction Write off the profit and loss A/c debit balance at 2 70,000 which had been accumulated over the years. In case of any shortfall, the balance of the General reserve of 1,50,000 can be utilized to write off the losses under reconstruction scheme. ‘Show the necessary journal entries as part of the reconstruction process considering that balance in general reserve utilized to write off the losses as per reconstruction scheme. CH.3 | INTERNAL RECONSTRUCTION | 46E 3.35 ELL DEE WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 [What would be the effect on above question? Ja) IF IN PLACE OF GENERAL RESERVE, SECURITIES PREMIUM IS GIVEN IN CASE OF SHORT FALL, ‘CAN SECURITIES PREMIUM BE UTILIZED? b)_IF LAND & BUILDING BOOK VALUE IS @ 60,000 AND TO BE REVALUED TO 72,000. Short fall of €1,26,000 should be utilized from general reserve AGSP 6: The following scheme of reconstruction has been approved for Win Limited: i) The shareholders to receive in lieu of their present holding at 1,00,000 shares of 10 each, the following: a) New fully paid @ 10 Equity shares equal to 3/5th of their holding. b) 10% Preference shares fully paid to the extent of 1/5th of the above new equity shares. ©) % 40,000, 8% Debentures, ii) An issue of 2 1 lakh 10% first debentures was made and allotted, payment for the same being received in cash forthwith. ili) Goodwill which stood at & 1,40,000 was completely wrttn off iv) Plant and machinery which stood at & 2,00,000 was.witteypdown to & 1,50,000 v) Freehold property which stood at % 1,50,000 was\written down by & 50,000. You are required to draw up the necessary soa eas in the Books of Win Limited for the above it reconstruction. Suitable narrations to Journal ié$ Should form part of your answer. What would be the. fect op og enon? a) IF EQUITY SHARE HOLDERS WERE GIVEN PREFERENCE SHARES TO THE EXTENT OF 1/51 OF THE HOLDINGS. b)_IF HALF OF THE GOODWMILL IS WORTHY. | Amount to be transferred to Capital Reserve & 0 ven below is the Balance sheet of Rebuilt Ltd, as at 31.3.2001 _ oo ____ Particulars _ _| Notes _| Amount (@) | Equity and Liabilities 1)|__ [Shareholders funds a) | Share capital 1 13,50,000 b)| Reserves and Surplus 2 (451,000) 2) Non-current liabilities a) | Long-term borrowings 3 5,73,000 3)|__ |Current liabilities a) | Trade Payables 2,07,000 CANTER | ADVANCED ACCOUNTS | 46 3.36 Cree U ua UA WWW. MASTERMINDSINDIA.COM | 98851 25025 / 26 b) | _ Other current liabilities 36,000 Total] 17,14,000 Assets 1)|__ [Non-current assets a) |__ Property, plant and equipment 4 6,68,000 b) | _ Intangible assets 5 3,18,000 2)| |Current assets a) | _ Inventories 4,00,000 b) | Trade receivables 3,28,000 Total 417,14,000 Notes to accounts Amount (®) | 4) [Share Capital Equity share capital: 15,000 Equity Shares of 50 each 7,50,000 Preference share capital: 12,000, 7% Cumulative Preference Shares of € 50 ea (Preference dividend is in arrears for five years) 6,00,000 Totall _13,50,000 2) [Reserves and Surplus Debit balance of Profit and loss Account (4,51,000) (4,51,000) 3) |Long-term borrowings Loan 5,73,000 5,73,000 4) |Property plant and Equipment Building at cost less depreciation 4,00,000 Plant at cost less depreciation 2,68,000 6,68,000 5) |Intangible assets Trademarks and Goodwill at cost 3,18,000 3,18,000 The Company is not earning profits, short of working capital and a scheme of reconstruction has been approved by both the classes of shareholders. A summary of the scheme is as follows: a) The equity shareholders have agreed that their = 50 shares should be reduced to € 2.50 by cancellation of & 47.50 per share. They have also agreed to subscribe for three new equity shares of 2 2.50 each for each equity share held. b) The preference shareholders have agreed to cancel the arrears of dividends and to accept for each @ 50 share, 4 new 5% preference shares of % 10 each, plus 6 new equity shares of % 2.50 each, all credited as fully paid €) Lenders to the company for ® 1,50,000 have agreed to convert their loan into share and for this Purpose they will be allotted 12,000 new preference shares of 2 10 each and 12,000 new equity shares of & 2.50 each, CH.3 | INTERNAL RECONSTRUCTION | 46E 3.37 ELL DEE WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 d) The directors have agreed to subscribe in cash for 40,000, new equity shares of € 2.50 each in addition to any shares to be subscribed by them under (a) above. e) Of the cash received by the issue of new shares, % 2,00,000 is to be used to reduce the loan due by the company. f) The equity share capital cancelled is to be applied: i) to write off the debit balance in the profit and loss A/c; and ii) to write off @ 35,000 from the value of plant Any balance remaining is to be used to write down the value of trademarks and goodwill ‘Show by journal entries how the financial books are affected by the scheme and prepare the balance sheet of the company after reconstruct ion. The nominal capital as reduced is to be increased to 2 6,50,000 for preference share capital and % 7,50,000 for equity share capital What would be the effect on above question? a) IF TRADEMARKS AND GOODWILL ARE WORTHFUL b)_IF MARKET VALUE OF BUILDING IS & 10,00,000 [Amount tobe transferred to Capital Reserve € 0 Total of balance sheet &15,25,000 Liabil Authorized and Issued Share Capital a) _ 15,000 8% Preference shares of % 50 each 7,50,000 b) _ 18,750 Equity shares of 2 50 each 9,37,500 Profit and Loss Account (5,63,750) Loan 7,16,250 Trade Payables 2,58,750 Other Liabilities 43,750 Total| — 21,42,500 Assets Building at cost less depreciation 5,00,000 Plant at cost less depreciation 3,36,000 Trademarks and goodwill at cost 3,97,500 Inventory 5,00,000 Trade Receivables 4,10,000 Total] — 21,42,500 (NOTE: Preference shares dividend is in arrear for last five years), The company is running with the shortage of working capital and not earnings profits. A scheme of reconstruction has been approved by both the classes of shareholders. The summarized scheme of reconstruction is as follows: CANTER | ADVANCED ACCOUNTS | 46 3.38 Cree U ua UA WWW. MASTERMINDSINDI OM | 98851 25025 / 26 i) The equity shareholders have agreed that their Rs 50 shares should be reduced to Rs 5 by cancellation of Rs 45 per share. They have also agreed to subscribe for three new equity shares of Rs 5 each for each equity share held. ji) The preference shareholders have agreed to forego the arrears of dividends and to accept for each Rs 50 preference share,4 new 6% preference shares of Rs 10 each, plus 3 new equity shares of Rs 5 each, all credited as fully paid. iii) Lenders to the company for 1,87,500 have agreed to convert their loan into shares and for this purpose they will be allotted 15,000 new preference shares of Rs 10 each and 7500 new equity shares of 5 each. iv) The directors have agreed to subscribe in cash for 25,000 new equity shares of 5 each in addition to any shares to be subscribed by them under (a) above. v) Of the cash received by the issue of new shares ,2,50,000 is to be used to reduce the loan due by the company. vi) The equity share capital cancelled is to be applied a) To write off the debit debit balance in the profit and loss alc, and b) To write off 43,750 from the value of plant. Any balance remaining is to be used to write down the value of trademarks and goodwill. The nominal capital as reduced is to be increased to Rs. 8,12,500 for preference share capital and Rs. 9,37,500 for equity share capital ey” © e You are required to pass journal entries to show the efi apbove scheme and prepare the balance sheet of the company after the reconstruction. What would be the effect on abov ]a) IF “WRITE OFF THE BALANCE OF P&L AIC” PHRASE IS NOT GIVEN. b)_IF PREFERENCE SHARES'ARE NON-CUMULATIVE. [Amount to be transferred to Capital Reserve 0 Total of balance sheet & 20,93,750 1) When the object of reconstruction is usually to re-organise capital or to compound with creditors or to effect economies then such type of reconstruction is called a) Internal reconstruction with liquidation b) Internal reconstruction without liquidation of the company ) External reconstruction 2) The accumulated losses under scheme of internal reconstruction are written off against a) Capital Reduction account b) Share Capital account c) Shareholders’ account 3) Aprocess of reconstruction, which is carried out without liquidating the company and forming a new one is called a) Internal reconstruction. ) External reconstruction. ¢) Amalgamation. CH.3 | INTERNAL RECONSTRUCTION | 46E 3.39 PIONEER FOR MEC / CECTO CA/ CMA FINAL [iJ CALL 4) Reconstruction is a process by which affairs of a company are reorganized by a) Revaluation of assets and Reassessment of liabilities, b) Writing off the losses already suffered by reducing the paid up value of shares and/or varying the rights attached to different classes of shares. c) Both (a) and (b). 5) For reduction of the share capital, the permission has to be sought from a) Court b) Controller ©) State government. 6) In case of internal reconstruction a) Only one company is liquidated b) Two or more companies are liquidated c) No company is liquidated. | DIVISION 5: SHORT ANSWER TYPE QUESTIONS (SELF STUDY) 1) What are the methods of internal reconstruction generally followed by companies? 2) What are the differences between Internal and External Reconstruction? PART 1:ANSWENS FOR CONCEPT QUESTIONS TO CRD PROBLEMS CRD a) No effect. b) No effect. c a) Workmen Compensation Fund A/c Dr. = 15000 To Cash/Bank Alc 2 15000 b) Equity Share Capital ic Dr. @ 8,10,000 To Cash/Bank Alc 8,10,000 (9,000 shares x € 90) CRD 3 a). Provision for tax Alc Dr. %2,00,000 To Cash/Bank Alc 2 1,80,000 To Capital Reduction Alc % 20,000 (bif) b) Total due to Debenture holders = € 80,09,000 50% 50% Settled in Cash Settled by way of issuing 4% debentures % 40,00,000 where in interest amount should be the same i-e., 40,00,000 x 5% = 2 2,00,000 4% debentures to be issued = <8 = % 50,00,000 debentures £200,000 CAINTER | ADANCED ACCOUNTS | 46E 3.40 EQ Tu WWW.MASTERMINDSINDIA.COM | 98851 25025 / 26 Journal entry 5% debentures Alc Dr % 80,00,000 Capital Reduction Alc Dr. 2 10,00,000 To CashiBank Alc % 40,00,000 To 4% debentures Alc 2 50,00,000 RD 4 a) No effect. b) Cash/Bank A/c Dr. 2125 To Investment Alc 100 To Capital Reduction A/c 225 RDS a) unsecured trade payables A/¢ Dr. 3,00,000 To Equity Share Capital A/c %1,12,500 To Capital Reduction A/c 21,87,500 RDG a) Outstanding expenses Alc Dr. 2 10,60,900 To Capital Reduction Alc % 10,60,000 b) Then 2 5,00,000 will be shortage to write off denaSorepet P&L Alc and hence the objective of internal reconstruction shall not be fulfilled out\and

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