INTERNAL

RECONSTRUCTION

What is

Reconstruction...???

Types of Reconstruction

ExternalReconstructio

n

Internal Reconstruction

Basic Journal Entries-

20,000 Equity Shares of Rs. 10 each is reduced to Rs. 6 each.

Equity Share Capital A/c (10) …Dr 2,00,000

To Equity Share Capital A/c (6) 1,20,000 To Capital Reduction A/c (4) 80,000

20,000 Equity Shares of Rs. 10 each is reduced by Rs. 6 each.

Equity Share Capital A/c (10) …Dr 2,00,000

To Equity Share Capital A/c (4) 80,000 To Capital Reduction A/c (6) 1,20,000

20,000 Equity Shares of Rs. 10 each is reduced to a paid up value of Rs. 4, face-value remaining unchanged.

Equity Share Capital A/c …Dr 1,20,000 To Capital Reduction A/c 1,20,000 (20,000 x 6)

Debenture holders take over a property of Rs. 10,000 for Rs. 15,000 and provide Rs. 5,000 on floating charge on rest of the assets.

(i) Debentures A/c …Dr 15,000

To Property A/c 10,000 To Capital Reduction A/c 5,000(ii)Cash A/c …Dr

5,000

To Debentures A/c 5,000

Damages of Rs. 10,000 materialized to the full extent, but amount of Rs. 4,000 is recovered from the director who was responsible for that. The amount was adjusted against director’s loan of Rs. 15,000. The remaining director’s agreed to settle the loan with equity shares.

(i) Capital Reduction A/c …Dr 6,000 Director’s Loan A/c …Dr 4,000

To Cash A/c 10,000(ii) Director’s Loan …Dr 11,000

To Equity Share Capital A/c 11,000

Creditors agreed to reduce their claims to the extent of 20% on the condition that 40% of the remaining is paid off immediately and rest after 2 years with 10% interest. Creditors is of Rs. 1,00,000.

(i) Creditors A/c …Dr 20,000

To Capital Reduction A/c 20,000

(ii)Creditors A/c …Dr 32,000

To Cash A/c 32,000

Arrears of Preference Dividend:

o If it is not paid - No Entry

o If it is paid -

Capital Reduction A/c …Dr To Cash A/c

(Note: Preference Dividend paid is a loss to the extent paid off.)

All the fictitious assets are to be written off (even if not specified in the sum). Capital Reduction A/c …Dr

To Fictitious assets A/c

Outstanding interest on debentures is waived off.

Outstanding Interest A/c …Dr To Capital Reduction A/c Reconstruction expenses incurred.

Capital Reduction A/c …Dr To Cash A/c

If any reserves is to be utilized for reconstruction scheme.

Any Reserves A/c …Dr To Capital Reduction A/c

Sale of asset at profit or loss.

(i)In case of profit-

Cash A/c …Dr

To Asset A/c To Capital Reduction A/c (ii) In case of loss-

Cash A/c …Dr Capital Reduction A/c …Dr

To Asset A/c

LIABILITIES Rs. ASSETS Rs.

Share capital:Authorized, Issued & Fully paid up:80000 6% Cumulative Preference shares of Rs. 10 each150000 Equity shares of Rs. 10 each

Secured loan:6% Debenture (secured on freehold property) 750000 Accrued interest 45000Unsecured loans:Directors 200000Overdraft 390000Current liabilities:Creditors

800000

15000002300000

Fixed assets:Freehold propertyPlantPatentsGoodwillTrade investments (at cost)Current assets:DebtorsStockDeferred AdvertisementProfit & Loss A/c

850000100000 75000260000110000

970000850000200000870000

4285000 4285000

Q. The summarized balance sheet of enterprises Ltd. as on March 31, 1990 was as follows:

795000

590000

600000

Note:

The preference dividends are four years in arrears. There are capital commitments totaling Rs. 500000

The court approved a scheme of re-organization, submitted by the debenture holders and agreed by other interested parties to take effect on 1st April, 1987 whereby:

The preference shares to be written down to Rs. 7.50 each and equity shares to Rs. 2 each, each class of shares than to be converted into shares of Rs.10 each.

Of the preference dividend in arrears, three fourths to be waived and equity shares to be allotted at par for remaining one fourth.

The debentures holders to have their accrued interest paid in cash to take over freehold property (book value Rs. 200000) at a valuation of Rs. 240000 in part repayment of their holdings and provide additional cash of Rs. 260000 secured by floating charge on the company’s assets at an interest rate of 8%.

Patents, goodwill and deferred advertising to be written off, Rs. 130000 to be written off for stock, Rs. 137000 to be provided for bad debts and remaining freehold property to be revalued at Rs. 775000.

The trade investments to be sold for Rs. 280000.

The directors accept settlement of their loans as to 90% thereof by allotment of equity shares at par and as to 5% being waived.

The contracts for capital expenditure to be called off an payment of 5% of the contract price as a penalty.

The preference shares to be written down to Rs. 7.50 each and equity shares to Rs. 2 each, each class of shares than to be converted into shares of Rs.10 each.o Preference share capital A/c …Dr 8,00,000

To Preference share capital A/c 6,00,000 To Capital reduction A/c 2,00,000o Equity share capital A/c …Dr 15,00,000

To Equity share capital A/c 3,00,000 To Capital reduction A/c 12,00,000

SOLUTION:

o Equity share capital A/c …Dr 3,00,000 To Equity share capital A/c 3,00,000 Of the preference dividend in arrears, three fourths to be waived and equity shares to be allotted at par for remaining one fourth.

o Capital reduction A/c …Dr 48,000 To Equity share capital A/c 48,000

o Preference share capital A/c …Dr 6,00,000 To preference share capital A/c 6,00,000

The debentures holders to have their accrued interest paid in cash to take over freehold property (book value Rs. 200000) at a valuation of Rs. 240000 in part repayment of their holdings and provide additional cash of Rs. 260000 secured by floating charge on the company’s assets at an interest rate of 8%.

o Debenture A/c …Dr 2,40,000

To Freehold property A/c 2,00,000 To Capital reduction A/c 40,000o Cash A/c …Dr 2,60,000

To 8% Debentures A/c 2,60,000

o Interest A/c …Dr 45,000 To Cash A/c 45,000

Patents, goodwill and deferred advertising to be written off, Rs. 130000 to be written off for stock, Rs. 137000 to be provided for bad debts and remaining freehold property to be revalued at Rs. 775000.o Capital reduction A/c …Dr 16,72,000

To Goodwill A/c 2,60,000 To patents A/c 75,000 To Deferred Advertising A/c 2,00,000 To Stock A/c 1,30,000 To Debtors A/c 1,37,000 To Profit & loss A/c 8,70,000

o Freehold property A/c …Dr 1,25,000

To Capital reduction A/c 1,25,000

The trade investments to be sold for Rs. 280000.

o Bank A/c …Dr 2,80,000

To Investments A/c 1,10,000 To Capital reduction A/c 1,70,000

The directors accept settlement of their loans as to 90% thereof by allotment of equity shares at par and as to 5% being waived.

o Directors A/c …Dr 2,00,000

To Equity share capital A/c 1,80,000 To Cash A/c 10,000 To Capital reduction A/c 10,000

o Capital Reduction A/c …Dr 25,000

To Cash/Bank A/c 25,000

The contracts for capital expenditure to be called off on payment of 5% of the contract price as a penalty.

Particulars. Amount

(Rs.)

Particulars Amount

(Rs.)To Equity Share Capital A/c 48,000 By Preference Share Cap. A/c 2,00,000

To Goodwill A/c 2,60,000 By Equity Share Capital A/c 12,00,000

To Patents A/c 75,000 By 6% Debentures A/c 40,000

To Deferred Advertisement A/c 2,00,000 By Free-Hold Property A/c 1,25,000

To Stock A/c 1,30,000 By Bank A/c 1,70,000

To Debtors A/c 1,37,000 By Director’s A/c 10,000

To Profit & Loss A/c 8,70,000

To Bank A/c 25,000

17,45,000

17,45,000

Capital Reduction A/cDr. Cr.

Liabilities Amount(Rs.)

Assets Amount(Rs.)

Issued, Subscribed and Paid up Capital

Fixed Assets

60,000 6%Preference Shares of Rs. 10 each

6,00,000 Free-Hold Property 7,75,000

52,800 Equity Shares of Rs. 10 each

5,28,000 Plant 1,00,000

Secured Loan Current Assets, Loans and Advances

6% Debentures 5,10,000 Stock 7,20,000

8% Debentures 2,60,000 Debtors 8,33,000Cash/Bank 70,000

Current Liabilities, Loans and AdvancesCreditors 6,00,000

24,98,000 24,98,000

BALANCE SHEET AS ON 31st MARCH 1990