ALTERATION AND REDUCTION OF SHARE CAPITAL

1. Alteration of Share Capital

Under The Company's Act, 1994 a company, limited by shares, if so authorized by its articles and the
correct legal formalities are observed, alter its share capital in any of the following ways:

1. Increase its share capital by the creation of new shares. If a company wants to raise capital beyond
the amount of its authorized capital, it must increase its authorized capital by the creation of new
shares. The accounting entries for the issue of these new shares are the same as for original issue.

2. Consolidate and divide all or any of its share capital into shares of larger amount than its existing
shares, e.g., 10,000 equity shares of Tk. 10 each may be consolidated into 1,000 equity shares of
Tk. 100 each. As a result of consolidation the amount of issued capital remains unchanged, but the
number of shares decreases. For such consolidation only the necessary details in the accounts may
be changed without passing any entry. Alternatively, a journal entry may be passed closing the
Share Capital A/c with new details [It may be noted that all the shares of the listed companies
must be of the face value of Tk. 10].

3. Convert all or any of its fully paid shares into stock, and reconvert that stock into shares of any
denomination, e.g., 10,000 equity shares of Tk. 10 each may be converted into 100,000 equity
stock. On such conversion or reconversion the necessary details in the accounts may be changed;
alternatively, a journal entry may be passed closing the Share Capital A/c and opening the Stock
A/c or vice versa.

4. Cancel shares which have not been taken or agreed to be taken by any person. This is 'diminution'
of capital, not to be confused with reduction of capital described later. Thus a company with an
authorized capital of Tk. 100,000 and an issued capital of Tk. 80,000 can alter its capital to be
authorized capital Tk. 80,000 and issued capital Tk. 80,000. No accounting entry is necessary for
such cancellation. Only the details of authorized capital in the next Statement of Financial Position
are to be changed.
Power of alteration should be exercised by the company in general meeting and need not be confirmed
by the court.

Problem # 1

A plantation company found that its Tk.100 shares rose to such a premium that the market became
restricted. A special resolution was therefore duly passed dividing the company’s 10,000 equity shares of Tk.
10 each into 100,000 shares of Tk. 10 each.
Show the entries which are necessary in order to give effect to the above resolution.

Problem # 2

On 30.06.2012 X Ltd. Passed a resolution consolidating 60,000 fully paid equity shares of Tk. 10 each
into 6,000 fully paid shares of Tk. 100 each. On 30.06.2013 the company passed another resolution converting
the shares into stock.

Show necessary entries.

2. Reduction of share Capital

A company limited by shares or by guarantee may, if so authorized by its Articles, reduce its share
capital in one or more of the following ways:
(a) By extinguishing or reducing the liability of members for uncalled capital,
(b) By writing off or cancelling any paid up capital which is lost or unrepresented by available assets,
(c) By paying off any paid up capital which is in excess of the wants of the company.

2.1 Procedure for the Reduction of Capital

(i) A special resolution to reduce the share capital must be passed by the company.
(ii) The company must then apply by petition to the Court for an order confirming the reduction.
(iii) The court's order confirming the reduction together with a certified copy thereof and a minute
approved by the court showing the details of reduction must be produced before the Registrar.
(iv) A certificate should be obtained from the Registrar of the registration of the Court's order. The
reduction takes effect from the date of registration.

Where a proposed reduction involves either the diminution of liability in respect of partly paid shares
or payment to any shareholder of any paid up capital or in another case the Court may, before giving sanction
to the reduction, direct the issue of notice to all creditors of the company. If any creditor objects to such
reduction the Court may direct that the claim of the objecting creditors must either be paid off or satisfactorily
secured before reduction of capital is allowed. The Court may also order that for a specified period after the
reduction the company shall add the words "and reduced" at the end of its name. The Court may also order the
publication of the reasons which led the company to reduce its capital.

2.2 Reduction not requiring Sanction of the Court

A reduction of capital under section 100 must be distinguished from the following:
(i) Cancellation of shares which have not been taken or agreed to be taken by any person,
(ii) Forfeiture of shares for non-payment of any call or calls,
(iii) Redemption o preference shares under section 80.

These can be given effect to without sanction of the Court.

2.3 Accounting Entries for Giving Effect to the Reduction of Capital

1. Where the liability on any share in respect of uncalled capital is being extinguished or reduced, e.g.,
a share of Tk. 10 on which Tk. 6 has been paid up, now being reduced to a fully paid share of Tk.
6 no entry is usually required, only the share scripts of Tk. 10 shares may be changed to those of
Tk. 6 shares, if, however, an entry is desired, it will be as follows:
Share Capital (Tk. 10) A/c Dr. Tk.6 (i.e., the paid up amount)
Share Capital (Tk. 6) A/c Cr. Tk.6
2. (a) where any paid up share capital is being reduced without reducing the liability on the shares,
e.g., a Tk. 10 share on which Tk. 6 has been paid up is being reduced to a Tk. 10 share Tk. 4 paid
up- the following is the entry:
Share Capital A/c Dr. Tk. 2 (i.e., Tk. 6 - Tk. 4)
Share Reduction A/c Cr. Tk. 2
(b) Where any paid up share capital is being reduced with reducing the liability on the shares, e.g., a
Tk. 10 share on which Tk. 6 has been paid up is being reduced to fully paid share of Tk. 4- the
entry will be:
Share Capital (Tk. 10) A/c Dr. Tk. 6
Share Capital (Tk. 4) A/c Cr. Tk. 4
Share Reduction A/c Cr. Tk. 2
 Some authors suggest the following simple entry in place of the above-
Share Capital A/c Dr. Tk. 2
Share Reduction A/c Cr. Tk. 2

Note: Since the face value of the share is going to be changed in this case, the former entry is more
meaningful.

3. (a) Where any paid up share capital is being refunded to the shareholders without reducing the
liability on shares, e.g., a Tk. 10 share on which Tk. 6 has been paid up is held by Mr. X Tk. 2 out
of the paid up amount is being refunded to him although the face value of the share remains
unaltered- the entries will be as below:
(i) Share Capital A/c Dr. Tk. 2
Mr. X (Shareholder) A/c Cr. Tk. 2
(ii) Mr. X (Shareholder) A/c Dr. Tk. 2
Bank A/c Cr. Tk. 2
In this case it is the usual practice to transfer an amount, equal to the amount paid off, from
Comprehensive Income Statement to General Reserve debiting the former and crediting the latter.
Sometimes Capital Reserve is preferred to General Reserve.
(b) Where any paid up share capital is being refunded to the shareholders with reducing the liability
on share, e.g., a Tk. 10 share held by B on which Tk. has been paid up is now being reduced to a
fully paid Tk. 4 share by refund of Tk. 2 of the paid up amount- the entries will be:
(i) Share Capital (Tk. 10) A/c Dr. Tk. 6
Share Capital (Tk. 4) A/c Cr. Tk. 4
Mr. B's (Shareholder) A/c Cr. Tk. 2
(ii) Mr. Bs (Shareholder) A/c Dr. Tk. 2
Bank A/c Cr. Tk. 2
Note: Transfer to General Reserve is also desirable in this case as in 3(a).

2.4 Implementation of Capital Reduction Scheme- Accounting Aspect

A capital reduction scheme may involve-

1. Refund of paid up capital not needed by the company. In this case entries suggested in 3(a) and 3(b)
shall be enough.
2. Reduction of the liability on shares only, where the company does not require any further amount
to be paid by the shareholders on the shares. In this case entry (or the alternative) suggested in (1)
above shall be enough.
3. Reduction of the paid up capital when it is not represented by available assets. In this case the
primary entries will be as suggested in 2(a) and 2(b) for the purpose of transferring the amount
available to the Capital Reduction A/c out of reduction of transferring the amount available to the
Capital Reduction A/c out of reduction of paid up capital. The scheme as approved by the Court may
also show surrender of amount by creditors of different categories including debenture-holders,
availability of capital profits arising out of evaluation of certain assets, windfall receipts, share
premium A/c, accumulated capital reserve etc. For transferring the amount available we are to credit
the Capital Reduction A/c debit being given to respective accounts as the case may be. In this
connection it must be remembered that a liability not shown in the Statement of Financial Position
although surrendered by the creditor does not constitute any contribution to the Capital Reduction
A/c. So in this case no entry will be necessary.

The capital reduction scheme may suggest as to how the amount coming to the credit of the Capital
Reduction A/c shall be utilized or it may remain silent.

When it suggests that certain assets are to be reduced, certain fictitious assets and accumulated losses
are to be written off and certain provisions are to be created, we are to debit the Capital Reduction A/c and
credit those respective accounts with the respective amounts. The amount to be utilized under the scheme shall
never exceed the amount coming to the credit of the Capital Reduction A/c rather it may be equal to or less
than the amount coming to the credit of the Capital Reduction A/c. The amount not utilized out of the Capital
Reduction A/c should be transferred to Capital Reserve.

When the scheme suggests different amounts coming to the credit of Capital Reduction A/c without
suggesting as to how it shall be utilized we should follow the following order first, write off the accumulated
losses and fictitious assets and then reduce or write off intangible assets like goodwill. If still there is a balance
left in the Capital Reduction A/c, this should not be used in writing down any real asset in the absence of
specific information in the problem; it should in that case be transferred to Capital Reserve.

Sometimes a scheme suggests the writing off or reduction of losses, fictitious assets and certain other
real assets along with the suggestion as to the amount surrendered by reference shareholders and creditors. In
this case the amount to be surrendered by the equity shareholders will be the balancing figure.

Problem # 3

A Ltd. has an issued capital of Tk. 500,000 in 50,000 shares of Tk. 10 each on which Tk. 7 per share
has been called up. The company now decides to reduce the share capital to shares of Tk. 7 each fully paid by
cancelling the unpaid amount of Tk. 3 per share.

Show journal entries.

Problem # 4

A company has a paid up share capital of Tk. 640,000 divided into 80,000 equity shares of Tk. 10
each, Tk. 8 per share paid up. The Comprehensive Income Statement shows a credit balance of Tk. 280,000.
The company decides to reduce the paid up share capital to Tk. 6 per share paid share paid up by
paying off the necessary amount out of the accumulated profits.

Give the appropriate journal entries.

Problem # 5

C Ltd. has 30,000 equity shares of Tk. 10 each. Tk. 8 per share called up. The company decides to pay
off Tk. 3 per share of the paid up capital and to reduce the Tk. 10 shares to Tk. 5 shares fully paid up canalling
the unpaid amount.

Show journal entries.

Problem # 6

B Ltd. has 40,000 shares of Tk. 10 each, Tk. 8 per share paid up. The company has an accumulated
loss of Tk. 120,000 in the Comprehensive Income Statement. The company now decides to reduce the shares
capital to fully paid shares of Tk. 5 each and to write off the accumulated loss.

Show journal entries.

Problem # 7

Below is given the Statement of Financial Position of D Ltd. as at 31.12.2013:

D Ltd.
Statement of Financial Position
As at 31.12.2013
Capital & Liabilities Taka Taka
Authorized Capital:
10,000 preference shares of Tk. 50 each 500,000
10,000 equity shares of Tk. 50 each 500,000 1,000,000
Subscribed capital:
8,000 equity shares of Tk. 50 each 400,000
8,000 preference shares of Tk. 50 each 400,000
Account Payable 40,000
Bank Overdraft 35,000
Total Capital & Liabilities 875,000
Assets
Leasehold Premises 450,000
Plant 80,000
Account Receivable 100,000
Preliminary Expenses 50,000
Accumulated loss 124,000
Cash 1,000
Total Assets 875,000

Due to heavy losses the company decided upon the following scheme of reconstruction:

(i) The preference shares were to be reduced to a value of Tk. 30 each. The equity shares also were to
be reduced to the value of Tk. 30 each.

(ii) The balance available was to be used to write off the accumulated loss, Tk. 20, from stock, the full
amount of the Preliminary Expenses, a provision of Tk.30,000 was to be made against the
Account Receivable. The Leasehold Premises were to be reduced by Tk. 66,000 and the Plant A/c
to be reduced to Tk. 50,000.

You are required to journalese the above transactions and prepare the reconstructed Statement of
Financial Position.