Advanced Corporate Accounting [INTERNAL RECONSTRUCTION ] 4rth Semester B Com

Internal Reconstruction

Introduction
A company may have suffered huge losses in the past or might have the problem of over
capitalization or might have over valued its fixed assets because of inadequate provision for
depreciation. Such a company faces a danger of going into liquidation. In these circumstances
companies can reconstruct it internally.

Meaning of Internal Reconstruction

Internal Reconstruction is an arrangement made by companies whereby the claims of
shareholders, debenture holders, creditors and other liabilities are altered, so that the
accumulated losses are written off, assets are valued at its fair value and the balance sheet
shows the true and fair view of the financial position.

Form of Internal Reconstruction

1. Re-organisation or alteration of share capital
2. Reduction of share capital and other liabilities

1. Re-organisation or alteration of share capital

a. Increasing the share capital by making fresh issue of shares
b. Decreasing the share capital by cancelling the unissued shares
c. Conversion of shares into stock & vice versa
d. Consolidation of shares of smaller amounts into shares of larger amounts
e. Sub-division of shares of larger amounts into share of smaller amounts.

2. Reduction of share capital and other liabilities

A company can reduce its paid up capital if
a. it is authorized by its articles
b. A special resolution is passed
c. A sanction of the court is obtained

1 Aaminah Firdos
Assistant Professor
Dept of Commerce
BMSCCM
 Advanced Corporate Accounting [INTERNAL RECONSTRUCTION ] 4rth Semester B Com

Illustrations:

1 On the reconstruction of a The shareholders to receive in lieu of their present holdings

(viz.50,000 shares of rs.10 each) the following:
a. Fully paid equity shares equal to 2/5th of their holding
b. 5% preference shares fully paid to the extent of 1/5th of the above new equity shares.
c. Rs.60, 000, 6% second debentures.
An issue of 50,000, 5% first debentures was made and allotted payment for the same have been
received in cash.
The goodwill which stood at 3, 00,000 was written down to 1, 50,000
The plant & machinery which stood at 1, 00,000 were written down to 75000.
The freehold & leasehold premises which stood at 1,50,000 were written down to 1,25,000.
Make journal entries in the books of the company

2 The paid up capital of a company is 5,00,000 and it includes 2000, 5% cumulative preference
shares of Rs.100 each and 30,000 equity shares of Rs.10 each.
Because of heavy losses the company has decided to reduce the burden of its capital has secured
the following permission:
i. Reduction in the value of patents by 70,000, machinery by 17000, equipment’s by 2000.
ii. Cancellation of the balance of loss of 1,98,000 shown on the profit/loss account.
iii. Writing down the balance of research expenditure account using the balance remaining
in the capital reduction account (the research expenditure is shown in the balance sheet at
79000)
The approved scheme of capital reduction is as follows:
a. In exchange for every five, 5% prefernce shares issue of three, 4% preference shares of
rs.100each and 20 ordinary shares of Rs.2 each.
b. Issue of one equity share of Rs.2 in payment of arrears of preference share dividend of
Rs.10. The total arrears of preference dividend Rs 30,000. The dividend is not yet declared
c. Issue of one new equity share of Rs.2 in exchange for every five ordinary shares.
Draft journal entries.

2 Aaminah Firdos
Assistant Professor
Dept of Commerce
BMSCCM
 Advanced Corporate Accounting [INTERNAL RECONSTRUCTION ] 4rth Semester B Com

3. Balance sheet of XYZ Ltd as at 31.03.2015 was as follows

Liabilities Rs Assets Rs
Share Capital Good will 15000
2000 Pref shares of Rs 100 each 2,00,000 Freehold premises 2,00,000
4000 Equity Shares of Rs. 100 4,00,000 Plant 3,00,000
5% mortgage debentures 1,00,000 Stock 50,000
Bank O/D 50,000 P/L 2,45,000
Creditors 1,00,000 Debtors 40,000

8,50,000 8,50,000
Company reconstructed as follows:
1. Preference shares should be reduced to Rs. 75 per share and the equity share to 37.50 per share
2. Debenture holders to take over stock and book debts in full satisfaction of amount due to them
3. Good will to be eliminated and Freehold premises to be depreciated by 50%
4. Plant to be appreciated by 50,000 Journalise and prepare revised balance sheet.

4. Balance sheet of ABC Ltd stood as follows on 31.03.2015

Liabilities Rs Assets Rs
19,000 shares of Rs. 100 each 19,00,000 Land & Building 1,00,000
Creditors 1,00,000 Machinery 2,60,000
Debentures 1,00,000 Furniture 20,000
Stock 3,70,000
Debtors 1,80,000
Goodwill 2,00,000
P/L A/c 9,70,000
21,00,000 21,00,000
The company is to reconstructed as follows
1. Shares of Rs. 100 are to be reduced to an equal number of fully paid shares of Rs. 40 each
2. To issue 1,000 new shares of Rs. 40 each as fully paid upto debenture holders in full settlement
3. The amount available is to be utilized in writing off the goodwill and profit & Loss A/c and the
balance in writing down the value of machinery
4. Authorised capital of the company is 20000 shares of Rs. 100 each
Give the necessary journal entries prepare capital reduction A/c and reconstructed balance sheet

3 Aaminah Firdos
Assistant Professor
Dept of Commerce
BMSCCM
 Advanced Corporate Accounting [INTERNAL RECONSTRUCTION ] 4rth Semester B Com

5. The Balance sheet of ABC Ltd as on 31.03.2016 was follows

Liabilities Rs Assets Rs
20,000 equity shares of Rs. 10 2,00,000 Goodwill 80,000
each Buildings 1,75,000
15000, 7% preference 1,50,000 Machinery 3,25,000
Shares of Rs. 10 each Patents 54,000
13000, 5% preference shares of 65,000 Furniture 15,000
Rs. 10 each, Rs. 5 paid Investment 75,000
5% debentures 1,50,000 Sundry Debtors 4,15,000
8% debentures 3,00,000 Cash 2,000
Sundry Creditor 4,50,000 Bank 18,000
Debenture interest due 19,500 P/L A/c 1,75,500
13,34,500 13,34,500

The following scheme of capital reduction was submitted and approved by the court
a. Equity shares of Rs 10 each were to be reduced to shares of Rs 5 each
b. 7% preference share of Rs 10 each fully paid were to be reduced to 6% preference shares of Rs. 10
each, Rs 6 per share paid
c. 5% preference shares of Rs 10 each, Rs 5 paid were to be reduced to 4.5% preference shares of Rs.
10 each, Rs. 3 per share paid up
d. The debenture holder agree to forgo the interest due to them .The company in the meantime
recovered as damages a sum of Rs. 74,000 from a third party and it was decided to use this amount also
to write off the capital losses.
e. The reconstruction expenses comes to Rs 7250.
Give journal entries and prepare capital reduction A/c and Revised balance sheet as at 31.3.16

6. Following is the balance sheet of Mysore Sandal Ltd as on 31.03.2015

Liabilities Rs Assets Rs
13% Cumulative preference shares of Fixed Assets 15,00,000
Rs. 100 each 1,00,000 Current Assets 35,00,000
Equity share of Rs. 10 each 7,00,000 P/L A/c 3,00,000
8% Debentures 3,00,000
Current Liabilities 39,00,000
Provision for tax 3,00,000
53,00,000 53,00,000

4 Aaminah Firdos
Assistant Professor
Dept of Commerce
BMSCCM
 Advanced Corporate Accounting [INTERNAL RECONSTRUCTION ] 4rth Semester B Com

The following scheme of reconstruction was adopted

 Fixed assets are to be written down 33.33%, current assets are to be re valued at 27,00,000
 Preference shareholders decide to forgo their right of arrears of dividend which are in arrears for 3
years.
 The taxation liabilities is settled at Rs. 4,00,000
 One of the creditor of the Company to whom the Company owes Rs. 25,00,000 decides to forgo
50% of his claims. He is allotted 1,00,000 equity shares of Rs. 5 each in part satisfaction of the
balance of his claims
 The rate of interest on debenture increased to 11% .The debenture holder surrender their existing
debentures of Rs 100 each & exchange the same for fresh debenture of Rs 75 each
 All existing Equity shares are reduced to Rs. 5 each
 All Preference shares reduced to Rs 75 each
Journalise and prepare new B/L

7 Balance sheet of Giri Ltd as at 31.3.15 as follows

Liabilities Rs Assets Rs
Authorized Capital Goodwill 70,000
6,000 shares of Rs 100 each 6,00,000 Buildings 80,000
Issued Capital Plant 1,50,000
2,000 shares of Rs 100 each 2,00,000 Stock 50,000
200,5% Debentures Rs 1,000 each 2,00,000 Debtors 43,000
Sundry Creditors 50,000 Cash 2,500
Bills Payable 5,000 Preliminary expenses 4,500
Bank Overdraft 45,000 P/L A/c 1,00,000
5,00,000 5,00,000
The following scheme of reconstruction was adopted.
1. The paid up value of each share to be reduced to Rs 50 each
2. 5% Debentures to be converted into 7.5% debentures of Rs 1,000 each
3. Assets were revalued as under – buildings Rs.72,000; plant Rs.1,40,000; stock Rs.45,000;
debtors subject to reserve for bad debts Rs.2,500
4. Creditors agree to forego 1/4th of the amount due to them in return for shares for the balance.
5. Goodwill and other fictitious assets to be written off entirely.
Give the necessary Journal Entries

5 Aaminah Firdos
Assistant Professor
Dept of Commerce
BMSCCM