UNIT II

Internal Reconstruction

Q1) What is Reconstruction? State the purpose of it.

A1) Rebuilding is the process of restructuring a company in terms of law, operations, ownership and other structures by revaluing assets and revaluing liabilities. It refers to the transfer of the business of a company or multiple companies to a new company. Therefore, this means that the old company will be liquidated, and therefore shareholders agree to acquire shares of equal value in the new company. The financial statements do not reflect the true and fair position of the business, as if the company has suffered losses over the years, it will need to be rebuilt and the net worth will be higher than the actual net worth. Hmm.

In other words, "reconstruction" is the dissolution of an existing company and the transfer of its assets and liabilities to a new company established for the purpose of business succession or succession of the existing company. Shareholders of the existing company will become shareholders of the new company. The business content and shareholders of the new company are almost the same as those of the old company.

Purpose of Reconstruction

The main purposes of the reconstruction are:

Q2) What are the types of Reconstruction?

A2) Types of Reconstruction

The company can be rebuilt in one of two ways. These are:

External Restructuring: If a company suffers losses over the past few years and faces a financial crisis, it can sell its business to another newly established company. In fact, the new company was established to take over the assets and liabilities of the old company. This process is called external reconstruction. In other words, external reconstruction means selling the business of an existing company to another company established for that purpose. In the external reconstruction, one company will be liquidated and the other will be newly established. The liquidated company is called the "Vendor Company" and the new company is called the "Purchasing Company". The shareholders of the selling company are the shareholders of the purchasing company.

Internal Restructuring: Internal restructuring refers to the internal restructuring of a company's financial structure. It is also called a restructuring that allows an existing company to survive. In general, equity capital is reduced to amortize the company's past cumulative losses.

Q3) Write the significance of Internal Reconstruction.

A3) Internal reconstruction is done by the company in the following cases:

Conditions and regulations regarding Internal Reconstruction

1. Approval by Articles of Incorporation: The company must be approved by the Articles of Incorporation to appeal for capital reduction. The Articles of Incorporation contain all the details of the company's internal affairs and refer to provisions that include how to reduce capital.

2. Passing a special resolution: The company must pass a special resolution before appealing for a capital reduction. Special resolutions will only be passed if a majority of stakeholders agree to internal reconstruction. This special resolution must be signed by the arbitral tribunal and deposited with a registrar appointed under the Companies Act 2013.

3. Court Permission: The company must obtain the court or the court's legitimate permission before starting the capital reduction process. The court will only grant permission if the company is fair and is satisfied with the positive consent of all stakeholders.

4. Borrowing Payment: According to Article 66 of the Companies Act 2013, a company must repay all the amount deposited and its interest before reducing its capital.

5. Creditor Consent: The company that reduces the capital requires the written consent of the creditor. The court requires the company to secure the interests of the dissenting creditors. The company obtains the court's permission after the court determines that the reduction of capital does not harm the interests of the creditors.

6. Announcement: The company must announce according to the instructions of the tribe for a capital reduction. The company must also explain the justification.

Q4) Distinguish between Internal and External Reconstruction.

A4) The main difference between internal reconstruction and external reconstruction

Due to the difference between internal and external reconstructions, the subsequent points are relevant:

1. Internal restructuring is often defined as a restructuring of a corporation without liquidating an existing company and establishing a replacement one. On the opposite hand, external restructuring may be a sort of corporate restructuring that liquidates an existing company and creates a replacement company so as to continue the business of the prevailing company.
2. A new company won't substitute the interior reorganization. Conversely, a replacement company are going to be established for external reconstruction and therefore the business of the prevailing company is going to be appropriated.
3. Internal restructuring reduces the company's capital, and external liabilities like bond holders and creditors waive their debt at a reduction. On the opposite hand, external reconstruction doesn't reduce the company's capital.
4. Internal reconstruction requires court approval and court confirmation, as a discount in capital stock can affect shareholder rights. On the contrary, external reconstruction doesn't require such approval.
5. If the corporate goes through an indoor rebuilding process, the record created after the method will include the term "And Reduced". In contrast, within the case of external reconstruction, no particular term is employed on the record.
6. In internal reconstruction, no new company are going to be established, so there'll be no transfer of assets or liabilities.

Q5) What are the various methods of Internal Reconstruction?

A5) There are various methods of internal reconstruction, shown:

1. Alteration of Share Capital

If approved by the Articles of Incorporation, the limited liability company may change (change) the capital clause of the Articles of Incorporation. There are various ways to change stock capital:

      Increase in stock capital due to issuance of new shares

2. Reverse Stock Split

Consolidation refers to the conversion of shares with a smaller par value to shares with a larger par value.

Example: His 5000 shares of Rs. 10 pieces can be integrated into a stock of 500 rupees. 100 each.

3. Stock Split

Subdivision is the conversion of high par value stocks to low par value stocks.

Example: 5000 shares of Rs. Each 100 can be split into 50000 shares of Rs. 10 each.

4. Equity of Shares

The company can convert its shares into shares. Stocks can be fractions that are not possible in the case of stocks. Central government approval is required to convert shares into shares.

5. Transfer of Shares

Reconstruction plans may require shareholders to relinquish some of their ownership. Such a waiver may be issued prior to immediate cancellation or to satisfy some of the company's creditors.

6. Cancellation of Unissued Shares

If the company cancels unissued shares, it does not need to pass an accounting entry. The authorized share capital of the company will be the amount of unissued shares currently cancelled.

Q6) Write short note on Stock Split and Consolidation.

A6) If approved by the Articles of Incorporation, the company may, by passing a normal resolution, decide at the General Assembly to split or consolidate the shares into an amount less or higher than the amount stipulated in the Articles of Incorporation. The ratio of paid-in to unpaid shares will continue to be the same as for the original shares.

Notifications identifying changes must be submitted to the Registrar within 30 days of the changes.

For example, a company with capital of 10,000,000 split into 10,000 shares and paid 75 for every 100 shares decides to split 100 shares of 100 shares into 10 shares to recognize capital. Each. The resulting entry passed in such a case is —

Similar entries are passed when consolidating a smaller amount of stock into a larger amount of stock.

Q7) How are Fully Paid-In Shares converted to Shares?

A7) According to Article 61 of the Companies Act 2013, a company may convert fully paid-in shares into shares and convert the shares back into shares. If approved by the Articles of Incorporation, the company may, by passing a normal resolution, convert the fully paid shares into shares and reconvert the shares into shares at a general meeting of shareholders. Stock is the integration of equity capital into one of his units that can be split into aliquot parts. A stock is a fully paid bundle of stock that, for convenience, can be split into any amount and transferred to any fraction and subdivision, regardless of the original par value of the stock. He cannot have one share of equity capital, but he can transfer any amount of shares. However, in reality, the company limits the transfer of shares to multiples, such as 100 times his. Companies can convert fully paid shares into shares. When the company converts its shares into shares, the bookkeeping items only record the transfer from the stock capital account to the stock account. Another share registration will be initiated where the details of the member's holdings are entered and the annual returns change accordingly.

Example

C Ltd. Split the authorized capital of 5,000,000 into 100 shares each on March 12, 20X1, of which 4,000 were issued and paid in full. In June 220X2, the Company converted the issued shares into shares. Decided to do. However, in June 20X3, we reconverted the shares to his 10 shares and paid in full.

Pass an entry to show how equity capital appears in the balance sheet notes, such as 31-12-20X1, 31-12-20X2, 31-12-20X3.

Journal Entries

Q8) What does changes in Shareholder Rights mean?

A8) Under Article 48 of the Companies Act 2013, if a company issues different types of shares and grants such shares different rights or privileges, the rights relating to dividends, voting rights, etc. may be changed in any way. I will. This is done by the written consent of his three or more owners of her quarter of the issued shares of that type, or by a special resolution adopted at another meeting of the owners of the issued shares of that type. I will. (a) If the company's memorandum or articles of incorporation include provisions for such variations. Or (b) if there is no such provision in the Memorandum of Understanding or the Articles of Incorporation, or if such changes are not prohibited by the terms and conditions of issuance of shares of that class, provided that changes made by a shareholder of one class are the rights of another shareholder. When Impacting Regarding the type of shareholders, the consent of three-quarters of the other types of shareholders shall also be obtained and the provisions of this section shall apply to such changes.

For example, a company may (a) Change the dividend rate of preferred stock or (b) Convert cumulative preferred stock to non-cumulative preferred stock without changing the amount of equity capital by going through the following journal: can.

Q9) Explain the process of Reduction of Stock Capital.

A9) Article 66 of the Companies Act 2013 provides procedures for reducing stock capital. Subject to court confirmation of the company's application, the company may, by special resolution, reduce its share capital in the following ways:

In general, the reduction of equity capital occurs when a company suffers continuous losses over a long period of time and is not truly reflected in its assets. In such cases, the capital reduction scheme must amortize the portion of the capital that has already been lost.

This reduction is a shareholder sacrifice, and the amount of the reduction or sacrifice is credited to a new account called a capital reduction account (or restructuring account). The accounting process is as follows.

(a) Shareholders' liability to extinguish or diminish their liability for the accrued amount of shares held by the shareholders

The shareholders are not required to pay the accrued amount of their shares in the future. For example, a company decides to reduce 10 per share from 10 to 7.5 by cancelling the unpaid amount of 2.5 per share. The entry in this case looks like this:

Share Capital (Partly Paid-Up) Account Dr. ( 7.5 X No. of Shares)

To Share Capital (Fully Paid-up) Account                                                                ( 7.5 X No. of Shares)

(b) If the paid-in excess capital is refunded: If the company is unable to secure profitability, it may decide to refund the paid-in capital as excess to shareholders. For example, if a company with 10 fully paid shares each decides to refund 2 shares per share to make 8 fully paid shares, the entry would be:

Share Capital Account ( 10) Dr. ( 10 X No. Of Shares)

To Share Capital Account ( 8) ( 8 X No. of Shares)

To Sundry Shareholders Account  ( 2 X No. of Shares) Sundry Shareholders Account              Dr.                                  ( 2 X No. Of Shares)

To Bank Account ( 2 X No. of Shares)

(c) If lost or hidden paid-in capital is cancelled:

Share Capital Account Dr. ( 90 X No. of Shares)

To Capital Reduction Account                                          

(90 X No. Of Shares)

Q10) Draw the Proforma of Capital Reduction Account.

A10)                                               Capital Reduction A/c

Q11) Following is the Balance sheet of M/s. Careful Ltd. As on 31st March, 2010.

Note –

1. Preference dividend was in arrears for 3 years.
2. There was a contingent liability of Rs.30,000/- for workmen compensation.

Following scheme of reconstruction was approved & implemented.

1. The Preference shares were reduced to Rs.8/- per share fully paid & Equity Shares to Rs.3/- per share fully paid.
2. One new Equity share of Rs.10/- each was issued of every Rs.50/- gross preference dividend in arrears.
3. After reduction, both classes of shares were consolidated into Rs.10/- shares.
4. The balance of Securities Premium was utilized.
5. Plant & Machinery was written of down to Rs.2,50,000/-.
6. Furniture was sold to Rs.75,000/-
7. Preliminary expenses debit balance in Profit & Loss A/c, debt of Rs.25,000/- & obsolete stock Rs.18,000/- were to be written off.
8. Contingent liability for which no provision has been made was settled at Rs.15,000/-. However, the amount of Rs.11,000/- was recovered from insurance company.
9. Debenture holders agreed to Forgo principal amount by Rs.50,000/- & accrued debenture interest in full.

Pass journal entries. Prepare capital reduction account & Balance sheet after reconstruction.

A11)

Journal of Careful Ltd.

Date	Particulars	Debit (Rs.)	Credit (Rs.)
1.	8% Preference Share Cap. A/c.....Dr. (50,000X10)      To 8% Preference Share Capital       A/c (50,000X8)      To Capital Reduction A/c (50,000X2) (Being reduction in 8% Preference Capital.)	5,00,000	4,00,000   1,00,000
2.	8% Preference Share Capital A/c….Dr. (40,000X8) To 8% Preference Share Capital A/c (32,000X10) (Being consolidation of 8% Preference Shares.)	3,20,000	3,20,000
3.	Equity Share Capital A/c.........Dr. (40,000X10)     To Equity Share Capital A/c (40,000X3)     To Capital Reduction A/c (40,000X7) (Being reduction in Equity Share Capital)	4,00,000	1,20,000 2,80,000
4.	Equity Share Capital A/c.........Dr. (40,000X3)     To Equity Share Capital A/c (12,000X10) (Being consolidation of Equity Shares.)	1,20,000	1,20,000
5.	Capital Reduction A/c............Dr.      To Equity Share Capital A/c [(8%X5,00,000X 3)/50] (Being arrears of Preference dividend paid by issue of Equity shares.)	24,000	24,000
6.	Security Premium A/c............Dr.      To Capital Reduction A/c (Being Security Premium used.)	8,000	8,000
7.	Bank A/c.....................Dr. Capital Reduction A/c...........Dr.     To Furniture A/c (Being sale of Furniture at a loss of Rs.25,000/-)	75,000 25,000	1,00,000
8.	Capital Reduction A/c...........Dr.      To Bank A/c (Being payment of contingent liability.)	15,000	15,000
9.	Bank A/c.....................Dr.      To Capital Reduction A/c (Being recovery of claim from insurance company.)	11,000	11,000
10.	9% Debentures A/c.............Dr. Accrued Debenture interest A/c...Dr.      To Capital Reduction A/c (Being sacrifice made by debenture holders)	50,000 6,000	56,000
11.	Capital Reduction A/c...........Dr.      To Plant & Machinery A/c      (3,00,000 – 2,50,000)      To Preliminary Expenses A/c      To Profit & Loss A/c      To Sundry Debtors A/c      To Stock A/c       To Capital Reserve A/c (Being losses & Assets written off.)	3,91,000	50,000   9,000 2,07,000 25,000 18,000 82,000

Capital Reduction Account

Dr. Cr.

Balance Sheet of Careful Ltd (AND REDUCED)

Schedules forming a part of Balance Sheet

Q12) Following is the Balance Sheet of Shobha Ltd. As on 31st March, 2020.

Note: Preference dividend is in arrears for Five years.

Following scheme of reconstruction was approved by the court.

1)     Equity Shares be reduced to Rs.150/- each of then to be consolidated into shares of Rs.10/- each.

2)     6% Preference shares be reduced to Rs.50/- each & then to be subdivided into shares of Rs.10/- each.

3)     Interest accrued but not due on 8% debentures. For half year ended 31st March 2008 has not been provided in the above Balance Sheet. The debenture holders have agreed to received 30% of this interest in cash immediately & provision for the balance be made in the books of account.

4)     Rs.20,000/- be paid to Preference shareholders in lieu of arrears of Preference dividend.

5)     The debenture holders have also agreed to accept equal number of 9% debentures of Rs.60/- each in exchange of 8% debentures of Rs.100/- each.

6)     Bank has agreed to take over 50% stock in full satisfaction of its claim including interest. The remaining stock be revalued at Rs.80,000/-.

7)     Investment be sold for Rs.39,000/-.

8)     Tangible Fixed assets be appreciated by 15% & provision be made for doubtful debts of Rs.18,000/-.

Give journal entries for the above scheme of reconstruction. Prepare Capital Reduction Account in the books of Shobha Ltd. & Balance sheet of the company after reconstruction.

A12)

Journal of Shobha Ltd.

Capital Reduction Account

Dr. Cr.

Balance Sheet of Shobha Ltd (AND REDUCED)

Schedules forming a part of Balance Sheet

Q13) Following is the Balance sheet of Punjani Ltd. As on 31st March, 2020.

The following scheme of reconstruction was submitted & approved by the court.

1)     12% Preference Shares of the Rs.10/- each fully paid were reduced to 13% Preference Shares of Rs.10/- each, Rs.6/- per share paid up.

2)     10% Preference share of Rs.10/- each, Rs.5/- per share paid up were reduced to 13% Preference shares of Rs.10/- each, Rs.4/- per share paid up.

3)     Equity Shares of Rs.10/- each fully paid were reduced to the denomination of Rs.7/- each fully paid.

4)     11% Debenture holders agreed to accept 44,800 Equity Shares of Rs.5/- each in full settlement of their claims.

5)     Debentures holders agreed to Forgo the interest due on debentures.

6)     Sundry Creditors agreed to Forgo 20% of their claims.

7)     The company recovered as damages as sum of Rs.60,000/- which was not recorded in the books.

8)     Cost of reconstruction was paid Rs.3,000/-.

9)     Assets are to be revalued as under : Land & Buildings Rs.2,05,000/-, Plant & Machinery Rs.2,50,000/-, Furniture Rs.10,000/-, Investment Rs.1,05,000/-, Sundry Debtors Rs.2,77,000/-.

10) All intangible assets & accumulated losses are to be written off.

You are required to –

i)       Pass journal entries in the books of Punjani Ltd.

Ii)     Prepare Capital Reduction Account & Balance Sheet after reconstruction.

A13)

Journal of Punjani Ltd.

Capital Reduction Account

Dr. Cr.

Balance Sheet of Punjani Ltd (AND REDUCED)

Schedules forming a part of Balance Sheet

Q14)

Following is the Balance sheet of Roshni Ltd. As on 31st March, 2009.

Note : Preference dividend is in arrears for three years. The following scheme of reconstruction was prepared & duly approved by the court.

1)     The Preference Shares shall be converted into equal number of 11% Preference shares of Rs.50/- each.

2)     The Equity Share shall be reduced to Rs.2/- each. However,  the Face Value will remain the same.

3)     6% Debentures shall be converted into equal number of 7% debentures of Rs.85/- each. The debenture holders also agreed to waived 60% of the accrued interest.

4)     Arrears of Preference dividend is to be reduced to one years dividend which is paid in cash.

5)     The sundry creditors agreed to waived 40% of their claims & to accept Equity Shares for Rs.40,000/- in part settlement renewed claims.

6)     The assets are to be revalued as under :

Building  Rs.4,00,000/-

Plant & Machinery Rs.2,20,000/-

Furniture Rs.70,000/-

Stock Rs.1,00,000/-

Debtors Rs.70,000/-

7)     Intangible assets & fictitious assets are to be written off.

Pass journal entries.

Prepare Capital Reduction Account

A14)

Journal of Roshni Ltd

Capital Reduction Account

Dr. Cr.

Q15)

Following is the balance sheet of Bhushan Ltd. As on 31st March, 2020.

It is observed that the new product launched by the company has not succeeded even after three years of marketing. The management is of the opinion that the assets & liabilities are not valued correctly & also finds it difficult to raise finance.

To overcome the situation a scheme of reconstruction is prepared by the directors & approved by all authorities.

The salient features of the scheme are

1)      Plant & Equipment having book value of Rs.10,000/- is  obsolete. This is sold as scrap for Rs.36,000/-.

2)      The auditors have pointed out that depreciation on plant is not provided to the extent Rs.30,000/-

3)      Stock includes items valued Rs.50,000/- which is sold at a loss of 50%.

4)      The present realizable value of investments is Rs.55,000/-.

5)      Dividend on Preference Shares is in arrears for 3 years. This amount is not payable.

6)      All losses & Fictitious assets are to be written off.

7)      The expenses paid for forming & implementing scheme is Rs.10,000/-.

8)      The paid up value of Equity Share is to be reduced to Rs.2/- per share & preference share to Rs.5/- per share. However, the  face value remains unchanged.

9)      The Creditors due are settled as.

•                30% immediate payment in Cash.

•                40% amount is cancelled.

•                30% paid by issue of 15% debentures.

10) Other Current liabilities includes Rs.45,000/- payable to directors towards remuneration. This liability is to be cancelled.

11) A call of Rs.3/- per share on Equity Share is made & received.

12) Bank Overdraft is paid off to the extent possible.

You are required to show :

i)       Journal entries for above scheme of reconstruction.

Ii)      Show Bank A/c & Capital Reduction A/c

A15)

Journal In the books of Bhushan Ltd.

Bank Account

Dr. Cr.

Capital Reduction Account

Dr. Cr.

Q16) 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 31.3.2012 before reconstruction.

Balance Sheet of Green Limited as at 31.3.2012

The following is the interest of Mr. X and Mr. Y in Green Limited:

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. X is 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% First Debentures for the balance amount.

(c)     Mr. Y is to cancel Rs. 3,00,000 of his total debt (other than equity shares) and to accept new 14% First Debentures for the balance.

(d)    The amount thus rendered available by the scheme shall be utilised in writing off of Goodwill, Profit and Loss A/c Loss and the balance to write off the value of computers.

(e)    You are required to draw the Journal Entries to record the same and also show the Balance Sheet of the reconstructed company.

A16)

Green Limited Journal Entries

1. Bank Account Dr.     10,00,000

To Equity Share Capital Account                                        10,00,000

(Balance of Rs. 10 per share on 1,00,000 equity shares

Called up as per reconstruction scheme)                            

2.     Equity Share Capital Account (Rs. 50)  Dr. 75,00,000