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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.
External
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:
(Rs.10 each)
(Rs.100 each)
Dr
(Rs.100 each)
Dr
(Rs.10 each)
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
Journal Entry:
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:
Miscellaneous journals:
1. For appreciation of fixed assets:
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
a)
Dr.
To Pref. Shareholders
b)
To Bank A/c