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INTERNAL

RECONSTRUCTION

External Reconstruction
In external reconstruction, a
new company is formed to
take over the assets and
liabilities of an existing
company which goes into
liquidation.

Internal Reconstruction
Internal reconstruction means an
internal rearrangement that gives
a new look to the capital structure,
adjusts the rights of shareholders,
debenture holders and creditors
along with some adjustments in
the values of assets and writing off
fictitious assets .

Internal Reconstruction
Internal
reconstruction
means
reorganization
of
capital
structure
of
a
company without liquidating
the existing company and
forming a new company.

Internal Reconstruction
Internal Reconstruction becomes
necessary in the following cases:

1.Accumulated Losses
2.Shortage of working capital
3.Large proportion of fictitious
assets
4.Over valuation of assets etc.

Difference between Internal


Reconstruction & External
Reconstruction.
Internal

The Co, does not lose its identity.

The overvalued assets are revalued at


their net worth & the losses written off.

External

The Co loses its identity.

The newly formed Co takes over the


assets & liabilities of the liquidated Co
at agreed values.

Neither new Co is formed nor existing


Co is liquidated.

A new Co is formed in place of the old


Co.

Debenture holders, creditors & bank


over draft may continue.

These parties will have to be settled.

Methods or forms of Internal


Reconstruction

1.Alteration of share capital.


2.Reduction of share capital
3.Variation of shareholders
rights.
4.Scheme of compromise.

Alteration of Share Capital


A Co may alter the capital clause of
its Memorandum only if it is
authorized by its Articles to do so.
The company must also pass an
ordinary resolution at a general
meeting.
A
notice
specifying
alteration made must be given to
the registrar within 30 days of
alteration.

A Co. can alter the capital clause


of its Memorandum in any of the
following ways:
1. By increasing share capital.

2.By consolidation of shares.


3.Sub division of shares.
4. By Converting Shares into
Stock & Vice Versa.

1. By increasing share
capital
1. For increasing its share capital

i. Bank A/c Dr
To Share Application &
Allotment A/c
ii. Share Application &
Allotment A/c Dr
To Share Capital A/c

2.By consolidation of
shares
It is the alteration of share capital by
consolidating the shares of smaller
amounts into shares of large amounts.
For consolidation, there should be
provision for the same in the articles.

Journal Entry:

Equity Share Capital A/C


To Equity Share Cpl A/C

(Rs.10 each)

(Rs.100 each)

Dr

3.Sub division of shares


It is the process of subdividing the
shares of larger amounts into shares
of smaller amounts.
This is the reverse of consolidation
of shares.
Journal Entry:
Equity Share Capital A/C

(Rs.100 each)

To Equity Share Cpl A/C

Dr

(Rs.10 each)

4. By Converting Shares into Stock & Vice


Versa
For converting shares into stock:

Equity Share Cpl A/C Dr


To Equity Stock A/C
For converting stock into shares:

Equity Stock A/C


To Equity Share Cpl A/C Dr

Reduction of Share Capital


Capital reduction is the repayment or
writing down of a companys different
classes of capital due to large
accumulated losses or excess capital.
Legal formalities are there

Methods of Capital
Reduction
1. Reducing or extinguishing the
liability of members for uncalled
capital
2. Returning the excess capital
3. Reducing or cancelling the paid up
capital which is lost or not
represented by available assets

1.Reducing or extinguishing the


liability of members for uncalled
capital
Company may extinguish the uncalled
amount of partly paid shares. This
reduces the liability of the share holders.
Journal Entry:

Share Capital (old) A/c Dr


To Share Capital (New) A/c

2. Returning the excess capital


If a company finds that it has a surplus or
idle capital, it may return or pay off the
excess capital to the members.

Journal Entry:

Share Cpl A/C Dr


To Share holders A/C
Share holders A/C Dr
To Bank.

3. Reducing or cancelling the paid


up capital which is lost or not
represented by available assets
i. For reducing paid up capital by changing its face
value:

Share Capital (old) A/c Dr


To Share Capital (New) A/c
To Capital Reduction A/c (Difference)
ii. For reducing paid up capital without changing its face
value:

Share Capital A/c Dr (amount of reduced


capital)
To Capital Reduction A/c

If a portion of borrowed capital was also


lost then the following entry is necessary:

Debentures/ Creditors A/c Dr


To Capital Reduction A/c

Capital Reduction A/c


It is a new A/c opened for transferring that
part of capital which is lost or not
represented by the assets.
It is a temporary A/c opened for carrying out
internal reconstruction.
This A/c will be closed as soon as the scheme
is carried out.
The balance in Capital Reduction A/c can be
used to write off fictitious assets, past losses
and excess value of assets.

Capital Reduction A/c


The entry is as follows:

Capital Reduction A/c Dr


To Accumulated losses (like Preliminary
Expenses , discount on
issue of
shares, P&L A/c Dr.
balance etc)

To Over valued assets (like G/W, Plant, Patents etc)


To Any unrecorded liability ( if any)
To Capital Reserve A/c (Bal. Fig)

Variation of Shareholders Rights


Under this, the shareholders rights are
altered by changing the rate of
dividend or changing the classes of
shares.
For example, it can be done by
changing the cumulative preference
shares to non-cumulative preference
shares or from 10% preference shares
into 7% preference shares etc.

Scheme of compromise or
arrangement
Here a compromise or arrangement is made with
creditors or debenture holders while settling their
liabilities. This scheme involves the following:

1. For sacrifice by debenture holders:


Debentures A/c (old) Dr (with amount sacrificed)
To Capital Reduction A/c

2. For exchange of debentures for new


debentures or shares:
Debentures A/c (old) Dr
To Debentures/ Share Capital A/c (New)

3. For sacrifice by creditors:


Creditors A/c Dr (with amount
sacrificed)
To Capital Reduction A/c
4. For agreement to receive shares or
debentures in settlement of claims of
creditors:
Creditors A/c Dr
To Share Capital/ debentures A/c

Miscellaneous journals:
1. For appreciation of fixed assets:

Fixed assets A/c Dr (with amount of


appreciation)

To Capital Reduction A/c


2. For expense incurred on reconstruction:

Capital Reduction A/c Dr


To Bank A/c

Surrender of shares
Under
reconstruction,
the
shareholders may be required to
surrender a part of their share
holdings. Such surrendered shares
may be reissued to other parties
(creditors, debenture holders etc.)
in whole or in part satisfaction of
their claims.

Surrender of shares
The entries required are as follows:
1. On surrender of shares:
Share capital A/c Dr
To Surrendered shares A/c
2. On reissue of surrendered shares:
Surrendered shares A/c Dr
To Share capital A/c
3. On cancellation of unissued surrendered shares:
Surrendered shares A/c Dr
To Capital Reduction A/c

Treatment of Arrears of Preference Dividend


1. When Pref. shareholders agree to
sacrifice the arrears of dividend already
declared:
Proposed Dividend A/c Dr
To Capital Reduction A/c
(If dividends have not been declared, then
no entry is required )

Treatment of Arrears of Preference Dividend


1. If the Co. is required to pay arrears of
dividend under scheme of reconstruction
:

a)

Capital Reduction A/c

Dr.

To Pref. Shareholders
b)

Pref. Shareholders A/c Dr.

To Bank A/c

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