-

Advanced Accounting

Internal Reconstruction

Lecture No.- I

By- Nitin Goel

of previous lecture
1 Completion of Buy back
to be covered
1 Basic
concepts
 ↑

CA NITIN GOEL INTERNAL RECONSTRUCTION

U V Easy
CH
-

INTERNAL RECONSTRUCTION
-

4
“Don’t downgrade your dream just to fit your reality. Upgrade your conviction to
match your destiny.”

TOPIC1: INTRODUCTION

When a company has been making losses for several years, the financial position does not
- - - - -

present a true & 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 & debit-

-
balance in profit & loss account.

EReconstruction 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 and/or varying the rights attached to different
-

classes of shares. Such a process is called internal reconstruction which is carried out
without liquidating the company and forming a new one. /

(shareholders & outsides

-
-

- - -
-

- -

Page 4.1
 CA NITIN GOEL INTERNAL RECONSTRUCTION
orCapital
~

Reduction All
Recontraction Alc
TOPIC 1A: JOURNAL ENTRIES

1. For increase or reduction in value of assets

- - - -

a) Increase
-

120000
Asset All-Du
1L >
PAM
-

To
Capital Reduction Alc

b) Decrease Reduction All-Dr

-
Capital
To Asset A/L

2. For increase or reduction in-

- -
liabilities:
-
a) Increase Reduction -Du
-
Capital
To Alc
Liability
b) Decrease Al-Dr
-

Liability
T Reduction
Capital /

3. For payment of reconstruction expenses

-

a) At the time of
Expto
payment Capital Reduction All-Jr & [ Bank
To Bank A/2
Cap - Red
To Experns
4. Settlement of contingent liability
-

Example: Preference dividend in arrears, Capital commitments, etc. &

a) If waived I
forego
Entry
-
No

b) If paid Dr
Reduction OK
-

Capital
To Bank A/c
Ques [
specifics
To
Share
Capisc Als
5. If any losses or deferred revenue expenditure are appearing then such amount
- - -- -

should be written off even if question is silent.

-

Example of deferred revenue expenditure: Underwriting commission, Discount on

- - - -

issue of debentures, Preliminary expenses, Advertisement suspense, etc.

- -

a) At the time of write

off Capital Reduction Al-Ar
TO PLLA/2
Revenue En Ala
TO
Dy
. .

6. If any intangible assets appear in the balance sheet it may be written off by giving
- -
a note.
Rare Example: Patents, Trademarks, Goodwill, Copyrights etc.
=
- -

(whethe to write off

-

not
If Ques Asset or
is silent about
Intangible
I Goodwill :
Woff Fully J write your essumption Page 4.2
2) Other : Dont
& write of
f
 CA NITIN GOEL INTERNAL RECONSTRUCTION

a) At the time of write Reduction A/1-Dv

off Capital
To Asset
Intangible
7. Closing of Capital Reduction Account
-

a) Credit Balance
Capitol Reduction Alc Dr
-

(Fajda) To
Capital Rescue All

b) Debit Balance Dr
COUR A/D
Capital
-

(insacel Res A/c-Dr

Sec Pen
/ Revenue
.
.
.

↓s
B/ mein luch To Reduction Al
Existing Capital
resuves hunge pakica
↑
Notes:
1) In case of fixed assets, the amount written off under the scheme of reconstruction must be
shown for 5 years.
2) After the name of company, the words “and reduced” should be added only if the court so
orders.
TOPIC 2: METHODS OF INTERNAL RECONSTRUCTION

Methods of Internal Reconstruction:

Alteration of
-
Variation of Compromise/ Reduction of Surrenders
share capital
-
shareholder’s rights arrangement share capital of shares

TOPIC 2A: Alteration of Share Capital, Variation of Shareholder Rights,

Compromise/Arrangements & Reduction of Share Capital

ALTERATION OF SHARE CAPITAL

&
1. For Increase in Share Capital
-

Example:
X Ltd. issued 10,000 equity shares Bank Dr 100000
A/c
-

of ₹10 each at par. 100000

To
Equity
Share
cap All
.
- -

Reverse
2. For Consolidation of Shares
- I SDit 0000 X 10 10 000 =
0 X/00
Example:
X Ltd. having 10,000 equity shares
-

of ₹10 each decides to convert Equity share

cap
.
Al 10000

cap-Al (E100)
-
-

share capital into equity shares of To 100000

Equily
Share
- -

100 each.
-
NEW F V . .

3. For Sub-division of Shares

Example:
-
/speirup 1000x100 = 100000 =
-
1000 X10

X Ltd. having 1,000 equity shares of

cap Alc (E100)
Av 100000
Eg Sh -
. - .
-

₹100 each decides to convert share

-

(Elo)
-

capital into equity shares of 10 To 100000

Eg Shicap
-

.
- -

each.
-

Page 4.3
 CA NITIN GOEL INTERNAL RECONSTRUCTION
T Fretory
4. For Conversion of shares into stock
- -

Stock is a bundle of fully paid shares put together for convenience so that it may be divided
- - - -

into any amount & transferred into any fractions & subdivisions without regard to the
- - - -

original face value of the shares.

Example:
X Ltd. having 10,000 equity shares
-

of 10 each decides to convert the EquityShare cap Al-Dr

.
100000

100000
- -

Stock
share capital into equity stock
- -
To
Equity

5. For Conversion of stock into shares

- -

Example:
X Ltd. having equity stock of
-
-

₹1,00,000 decides to convert the

-
Equity Stock All-Dr 100000

equity stock into equity share

- -
To
Equity
Shar
CpA/ 10000

capital of ₹ 10 each.
-

&

6. For Cancelling the unissued shares

- -

In this case no accounting entry is passed. The authorized

- -
-
share capital gets reduced by
the amount of unissued shares now cancelled.
- -

VARIATION OF SHAREHOLDERS RIGHTS

Only the specific rights are changed. There is no change in the amount of capital. For example,
the company may change rate of (a) dividend on preference shares or (b) convert cumulative
preference shares into non-cumulative preference shares without changing the amount of
share capital.

Example:
X Ltd. has 1,000 10% preference
Preference cap Al-Ar
- -
10 % Share -
10000
shares of 100 each. At a meeting of
-

preference shareholders, it was

Prycren
100000
-

decided that the rate of dividend be

To 9 % Share
p. A/
reduced-
-

to 9%.
/

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. Reduc 80% To 20 %

- 450000 -
=> 360000 90000
>
-
Example:
In the balance sheet, sundry

[
3 6000
-

creditors are appearing at ₹ 1) creditors

All- Dr
-4,50,000. They agreed to reduce
-

36000
To Reduction Ale
their claims-
-
-

to 20% and half the Capital

T --

balance to be satisfied by issue of 45000

2) Creditors A/c-Ar
-
F - -

equity shares of ₹10 each. 45000

To Eg . Sh .

Lep-Flu
450

Bin
- :
90000
-
-
B)J

crystal
~
>
-
Cred 4 502
.
.

Page 4.4
 CA NITIN GOEL INTERNAL RECONSTRUCTION
↑
REDUCTION OF SHARE CAPITAL
a) Liability of the shareholders is extinguished or reduced in respect of unpaid amount on
= - - - -

the shares held by them.

-

Number of Shares = 10,000 - - -

Face Value = 10
↑10000 Shar Paid up Value = 8
- -

⑳ Reduce 10 per share into 8 per share fully paid up

- -

FV 10 PV
= 8 = - - -

So Cancel the unpaid amount of 2 per share >

-

↓ Old FV

↑
10000 shark Eq Snap All
.
-

#
(10) -
Du Sooro

FV = PV = 8 s To Eg (E
↳ 80 000
Sh
Cap Al
. -
.

New For .

b) Paying off excess paid-up share capital

- - -
T

Number of Shares = 10,000 -

Face & Paid up Value = 10

D
- &

10000 Sh Pay off 2 per share to make it 8 per share fully paid up
100000 - -

FV PU

(
= = 10

Eq cap A/L (10) Dr 100000

-
.
Sn .
.

10000 Sh .
2000
FV = PU = 8
To Eg .
Sh -

cap
.

(E8) 80000

Repay 2000 To Bank 20000

A/c
* c) Writing off the lost paid up capital
- -

I
Number of shares = 1,000 -

Face Value = 100 Reduce so

(a) Paid up Value ↳
= 100
- -
>
-
by
Core - -
Reduc to 20
Always &
a
fr
a
(a) out (b)

if > S
Write off -
Face Value ↳
80
20
80 &
E
100 &

>-
Paid up - 20 20 &

(b)
(a)
↑ 80000
100000 Eg Sh
Cap #/1-Bw
.

(E100)
. -

Dr
Eg Sh
Cap All
-

2000
. ·
.

To Red
20000 Capital
.

To Eg Su
cap (E20)
.
.
.

-
80000
To
Capital Reduction Alc

Note: If question does not specify reduction in Face value or paid up value, then assume
- - -
T

>
-

change in Face value and paid up value.

- -

Page 4.5
 ① Close - Sale to another to C
scheme
-

⑧
②
Company
-
-
=
Losses

Revive I Reconstruct
=> -

B/s

Assets
-quity & Lich-
Forgo

⑩
> X
40 20 PPE 30 -

20
Eq Sh-cp
.
-

Current Assets 30L

ing .
sh
up
.
320

5 Des 15 PALAK (2000) ⑩O

5 ↓e
5
Creditore #

No o
&
68 Go

&
Cp -

Red. 40

To P& L 40
 BXS - Footnote
Conting
-viability
ent :

Below BJJ

1000
Pry .
Divided in atreas

-
So y 20 %

Paid
Jorego
=
↑

20000
80000

[
20000
↓ Pr Dir
. To
E
Bank 20000
morg .

2000
Red
Capital 20000
To
Pry
. Dir
.
 & Authorized Cp
Disclosur
-
toL
-
of
100000 Shi 10 each
-
-

4L
40000 Sh .

Subsc
Issueda
Each
#
3L &
I
Shiny
10
Soon
Buyback
Doubt
of
 &

Homework

Compute your peedency if any

Revise the IR.
corupt of
2 Min Summary

Basic
concepts & Questions