INTERNAL

RECONSTRUCTION
 What is
Reconstruction...???
 Types of
Reconstruction

External Internal
Reconstruction 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
Q. The summarized balance sheet of enterprises Ltd. as on
March 31, 1990 was as follows:
LIABILITIES Rs. ASSETS Rs.

Share capital: Fixed assets:

Authorized, Issued & Fully paid up: Freehold property 850000
80000 6% Cumulative Preference 800000 Plant 100000
shares of Rs. 10 each Patents 75000
150000 Equity shares of Rs. 10 1500000 Goodwill 260000
each 2300000 Trade investments (at cost) 110000
Current assets:
Secured loan: Debtors 970000
6% Debenture (secured on freehold Stock 850000
property) Deferred Advertisement 200000
750000 795000
Profit & Loss A/c 870000

Accrued interest
45000 590000
Unsecured loans:
Directors
600000
200000
Overdraft
390000
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.
SOLUTION:

 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 2,00,000

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

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

o Debenture A/c …Dr 2,40,000

To Freehold property A/c 2,00,000
To Capital reduction A/c 40,000

o Cash A/c …Dr 2,60,000

To 8% Debentures A/c 2,60,000
 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
 The contracts for capital expenditure to be called off
on payment of 5% of the contract price as a penalty.

o Capital Reduction A/c …Dr 25,000

To Cash/Bank A/c 25,000
 Dr.
Capital Reduction A/c Cr.
Particulars. Amount Particulars Amount
(Rs.) (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
 BALANCE SHEET AS ON 31st MARCH 1990
Liabilities Amount Assets Amount
(Rs.) (Rs.)

Issued, Subscribed and Paid Fixed Assets

up Capital
60,000 6%Preference Shares 6,00,000 Free-Hold Property 7,75,000
of Rs. 10 each
52,800 Equity Shares 5,28,000 Plant 1,00,000
of Rs. 10 each

Secured Loan Current Assets, Loans and

Advances
6% Debentures 5,10,000 Stock 7,20,000
8% Debentures 2,60,000 Debtors 8,33,000
Cash/Bank 70,000
Current Liabilities, Loans
and Advances
Creditors 6,00,000

24,98,000 24,98,000