INTERNAL

RECONSTRUCTION
 The following is the Balance Sheet of X Ltd. as at 31 March, 2009:

Liabilities Rs. Assets Rs.

Share Capital Goodwill 25,000
20,000 equity shares of Land and Buildings 1,50,000
Rs. 100 each 20,00,000 Plant and Machinery 3,00,000
12% Debentures 5,00,000 Furniture 80,000
Outstanding Debenture Stock 2,70,000
Interest 1,20,000 Debtors 60,000
Creditors 3,00,000 Cash at Bank 35,000
Preliminary Expenses 20,000
Profit & Loss Account 19,80,000
29,20,000 29,20,000
 Internal reconstruction
 Reorganisation of the capital structure of a company
without the liquidation of the company.

 No new company is formed and the existing company

continues to carry on the business in a reorganised form.

 The claims of various parties viz. creditors, debenture

holders and shareholders are adjusted so as to
facilitate the writing off the fictitious assets,
accumulated losses etc.
 Internal reconstruction

 Alteration of Share Capital under Sections 61 and

64
 Reduction of Share Capital under Sections 66
 Variation of Shareholders’ Rights under Section 48
 Scheme of Compromise/Arrangement under
Sections 230 and 231
 Surrender of shares
 ALTERATION OF SHARE CAPITAL

 Authorized by the AOA

 Ordinary resolution

 Notice to Registrar of Companies

within 30 days from the date of
alteration
ALTERATION OF SHARE CAPITAL

Increasing
capital
(New issue)

Cancellation
of unissued Consolidation
of shares
shares

Alteration

Conversion Sub-
of stock division of
into shares shares

Conversion
of shares
into stock
 ALTERATION OF SHARE CAPITAL
Issue of new Share Capital

Bank A/c…………………………….………….Dr.
To Equity Share Application & Allotment A/c

Equity Share Application and Allotment A/c….Dr.

To Equity Share Capital A/c
 ALTERATION OF SHARE CAPITAL
Consolidation of Shares
 Conversion of existing shares of smaller amount into
shares of larger amount.
 Effect - amount of share capital remains at the old
figure
- the number of shares reduced

Equity Share Capital A/c(Old value)…………….Dr.

To Equity Share Capital A/c(New value)
 ALTERATION OF SHARE CAPITAL
Consolidation of Shares
 X Ltd. having 10,000 equity shares of ` 10 each
decides to convert the share capital into equity
shares of ` 100 each.

Equity Share Capital(` 10) A/c…………….Dr. 1,00,000

To Equity Share Capital(`100) A/c 1,00,000

(Being 10,000 equity shares of ` 10 each

converted into 1,000 shares of ` 100 each)
 ALTERATION OF SHARE CAPITAL
Consolidation of Shares
 X Ltd. having 10,000 equity shares of ` 10 each, ₹
7.5 paid up decides to convert the share capital
into equity shares of ` 100 each.

Equity Share Capital(` 10) A/c…………….Dr. 75,000 [10000*₹ 7.5]

To Equity Share Capital(`100) A/c 75,000 [1,000*₹ 75]

(Being 10,000 equity shares of ` 10 each, ₹ 7.5

converted into 1,000 shares of ` 100 each)
 ALTERATION OF SHARE CAPITAL
Sub-division of Shares
 Conversion of existing shares of larger amount into
shares of smaller amount.
 Effect - amount of share capital remains at the old
figure
- the number of shares increase

Equity Share Capital A/c (Old value) …………….Dr.

To Equity Share Capital A/c (New value)
 ALTERATION OF SHARE CAPITAL
Sub-division of Shares
 V Ltd. with a share capital of 60,000 equity shares of `
10 each fully paid resolves to sub-divide existing
shares into shares of ` 5 each fully paid.

Equity Share Capital A/c (` 10)………….Dr. 6,00,000

To Equity Share Capital A/c (` 5) 6,00,000
(Sub-division of 60,000 fully paid equity shares of `10
each into 1,20,000 shares of ` 5 each fully paid)
 ALTERATION OF SHARE CAPITAL
Consolidation of Shares into Stock

 Stock is the aggregate of fully paid-up shares

merged into one fund of equal value.

Equity Share Capital A/c …………….Dr.

To Equity Stock A/c
 ALTERATION OF SHARE CAPITAL
Consolidation of Shares into Stock
 X Ltd. having 10,000 equity shares of `10 each
decides to convert the share capital into equity
stock.

Equity Share Capital A/c(`10)…………….Dr. 1,00,000

To Equity Stock A/c 1,00,000
 ALTERATION OF SHARE CAPITAL
Conversion of stock into shares
 X Ltd. having equity stock of ` 1,00,000 decides to
convert the equity stock into equity share capital of
`10 each.

Equity Stock A/c……………………….Dr. 1,00,000

To Equity Share Capital A/c(`10) 1,00,000
 ALTERATION OF SHARE CAPITAL
Cancellation of unissued shares
 Cancellation of shares which have not been taken
up by anyone.
 No accounting entry required.
 The Authorized share capital gets reduced by the
amount of unissued shares now cancelled.
 A limited company with an authorised capital of `
50,00,000 and issued capital of ` 40,00,000 can
alter its capital to authorised capital of `
40,00,000 and issued capital of ` 40,00,000.
 Internal reconstruction
REDUCTION OF Share capital [sec 66]

 Special resolution required

 Courts order
 Filing with Registrar of Companies. Use of the
expression “ And Reduced” for a specified time
 Reasons of reduction to be published
 REDUCTION OF SHARE CAPITAL
Reduction of the uncalled capital
 It benefits the shareholders as they are not required to
pay the uncalled capital.
Share Capital A/c(Face value)…………………..Dr.
To Share Capital (Called up value)
 X Ltd. having 1,000 equity shares of `100 each
decides to cancel the liability of members to the extent
of ` 20 per share and make shares as of ` 80 each.
Share Capital A/c(` 100)…………………..Dr.
To Share Capital (` 80)
 Reduction through refund of excess
capital

[amount of old
Share Capital A/c…………………Dr. capital]
[amount of new
To Share Capital A/c capital]
[amount to be
To Shareholder’s A/c refunded]

Shareholder’s A/c………………………..Dr.
To Bank A/c
 Reduction through refund of excess
capital
A Ltd. having 1,000 equity shares of ` 100 each fully paid decides to repay to its
members ` 20 per share and make shares as of ` 80 each fully paid up.

Share
 A
Capital A/c(` 100)……………Dr. ` 1,00,000
To Share Capital A/c(` 80) ` 80,000

To Shareholder’s A/c ` 20,000

Shareholder’s A/c………………………..Dr. 20,000

To Bank A/c 20,000
 Reduction of paid capital
 Reduction in the paid up value only
It means the nominal value of the share remains the
same and only the paid value is reduced.

Share Capital A/c………………..………..Dr.

To Reconstruction A/c
Example : 1,000 equity shares of ` 100 each
Share Capital A/c(` 100)…..…..Dr. 80,000
To Reconstruction A/c 80,000
(Being the paid-up value of a share reduced from `100
to ` 20)
 Reduction of paid capital
 Reduction in both nominal and paid up value
This leads to a change in the category of share
capital
Share Capital A/c(Old value)…….…………..Dr.
To Share Capital A/c (New Value)
To Reconstruction A/c
 Reduction of paid capital
 Reduction in both nominal and paid up value

Example : 1,000 equity shares of ` 100 each

Share Capital A/c(`100)..………..Dr. 1,00,000

To Share Capital A/c (`20) 20,000
To Reconstruction A/c 80,000

(Beingthe nominal value of a share reduced from

`100 to ` 20)
Reduction of paid capital

The shareholders will not

ordinarily be willing for
the first alternative since it
puts additional burden on
them
 VARIATION OF SHAREHOLDERS’
RIGHT [Section 48]
 It means change in rights and privileges attached to shares e.g.
rights to dividend, repayment of capital etc.
 For reduction in the rate of dividend :
9% Cumulative Pref. Share Capital…………….Dr.
To 7% Cumulative Pref. Share Capital
 For change from cumulative to non-cumulative :
9% Cumulative Pref. Share Capital……………Dr.
To 9% Non-Cumulative Pref. Share Capital
 COMPROMISE AND ARRANGEMENT
[ Section 230]

 It is an agreement between a company and its

members and outside liabilities when the company
faces financial problems.

 Such an arrangement involves sacrifices by

shareholders, creditors or debenture holders.

 These sacrifices are also credited to Reconstruction

Account.
 Reduction of claim by debenture
holders or creditors

Debentures A/c…………………Dr.
With the amount
Creditors A/c…………………...Dr. waived or
foregone by them
To Reconstruction A/c
 Debenture holders accepting new
debentures of lower amount

[total paid up
(Old)Debentures A/c…………………Dr. value]
[paid up value of
To (New)Debentures A/c new debentures]
To Reconstruction A/c [difference]
 Appreciation in value of assets on
revaluation

Fixed Assets A/c………………Dr. With the amount

To Reconstruction A/c of appreciation
 Sale of fixed assets at a profit

Bank A/c……………….…………Dr. Sale Price

To Reconstruction A/c Profit on sale
Book value of assets
To Fixed Assets A/c sold
 Preference dividend
Dividend proposed(i.e. given in the Contingent Liability in the
Notes to Accounts in the Balance Sheet) sacrificed

No Entry
[As there is no actual liability appearing in the
Balance Sheet]
 Preference dividend
Arrears of Dividend (i.e. not given in the Balance Sheet) but
paid now

Reconstruction A/c……………….…Dr.
Dividend payable
To Preference Shareholders A/c

Preference Shareholders A/c…………….Dr. Payment of

To Bank A/c dividend
Writing off fictitious and intangible
assets
Reconstruction A/c…………………Dr.
To Profit and Loss A/c
To Preliminary Expenses A/c
To Discount on issue of shares

To Goodwill, Patents, Trade Marks etc.

These accounts are to be written off

even if the examination problem is
silent on this point.
Adjustment of over-valued assets
and unrecorded liability

Reconstruction A/c…………………Dr.
To Plant & Machinery A/c

To Other Fixed assets A/c

To Unrecorded liability
Payment of reconstruction expenses

Reconstruction A/c…………………Dr.
To Bank A/c
Credit Balance of Reconstruction A/c

Reconstruction A/c…………………Dr.
To Capital Reserve A/c