INTERNAL RECONSTRUCTION )

Alteration of Share Capital : According to Section 94 of the Companies Act, a limited company can, if authorised by its articles of association, alter the capital clause of its memorandum of association in any of the following ways :

Increase its share capital by such amount as it thinks expedient by issue of new shares. Accounting entries are same as are done for the issue of new shares. Consolidate all or part of its existing shares of smaller amounts into shares of larger amounts. For example, X Ltd., having a share capital of Rs. 5,00,000 divided into 5,000 shares of Rs. 100 each , resolves to consolidate the shares into 50,000 shares of Rs.10 each ..

Sub-divide its shares of higher denomination into shares of smaller denomination subject to the condition that in case of partly paid up shares , the proportion between the paid up and the unpaid amount on the shares continues to be the same after sub-division as before . X Ltd. resolves to subdivide 5,000 shares of Rs. 100 each into 50,000 shares of Rs. 10 each

Reduction of capital is unlawful except when sanctioned by the court. CAPITAL REDUCTION OR INTERNAL RECONSTRUCTION : Reduction of capital is unlawful except when sanctioned by the court. Internal reconstruction means the reduction of capital to cancel any paid up share capital which is lost or unrepresented by available assets. The various provisions of capital given in the Companies Act,1956 are ; By reducing the uncalled liability of members of the company.

By paying off any paid up capital which is in excess of the needs of the company. Where any paid up share capital is being reduced without reducing the liability on the shares. Where any paid up share capital is being reduced reducing the liability on the shares. By any other method approved by the court.

Journal entry for sub-division is as under: Rs. Rs. Equity share capital (say Rs.100)Account Dr. 5,00,000 To equity share capital (say Rs.10 )Account 5,00,000 (being sub-division of 5,000 shares of Rs.100 each into 50,000 shares of Rs.10 each as per resolution number……dated…) cancel those shares which have not been taken up. It does not require journal entry because it does not affect paid up issued capital in any way.

ACCOUNTING ENTRIES ON INTERNAL RECONSTRUCTION When the face value of the shares is changed or the rate of dividend on preference shares is changed, journal entry passed is; (old) Share capital a/c Dr. (paid up value of old shares) To (new)Share capital a/c (paid up value of new shares) To capital reduction a/c (amount of capital reduced) If any sacrifice has been made by creditors and debenture holders ; Creditors Dr. (with amount of sacrifice) Debenture holders a/c Dr. To Capital reduction a/c

When any contingent liability arises and is to be paid immediately ; Capital reduction Dr. To Liability payable a/c Liability payable a/c Dr. To bank a/c If the value of any asset is appreciated ; Respective asset a/c Dr. To capital reduction a/c

Capital reduction a/c Dr. Profit and loss a/c Goodwill a/c When amount of capital reduction is still utilised for writing off fictitious assets, past losses and excess value of other assets ; Capital reduction a/c Dr. Profit and loss a/c Goodwill a/c Preliminary expenses a/c Discount on shares a/c Patents or Trade marks a/c Plant and machinery a/c Other assets a/c Capital reduction a/c (if some balance is still left)

The amount to be written off cannot exceed the amount credited to capital reduction account. But if any reserve appears on the liabilities side of the balance sheet, the same may be utilised in writing off the accumulated losses and assets. The amount written off in respect of fixed assets under the scheme of reconstruction must be shown for 5 years in the balance sheet along with respective fixed assets as deduction or addition as required in the Schedule IV. The words “And Reduced” should be added to the name of the company for such period as the court deems fit.

ILLUSTRATION : The following is the Balance Sheet of C Ltd. as on 31-3-2008 ; Liabilities Rs. Assets Rs. Share capital: Goodwill 20,000 Authorised capital: Leasehold premises 1,07,000 50,000 pref. Shares of 5,00,000 Plant and machinery 60,000 Rs. 10 each Patents 1,73,000 50,000 equity shares of 5,00,000 Stock 34,000 Rs. 10 each Debtors 56,000 Cash 100 10,00,000 Preliminary expenses 2,000 Profit and loss a/c 1,23,000 Issued and paid up : 25,000 pref. shares of 2,50,000 Rs. 10 each 25,000 equity shares of 2,50,000 Current liabilities: Sundry creditors 40,000 Bank overdraft 36,000 5,76,000

The Company proved unsuccessful and resolutions were passed to carry out the following scheme of reconstruction by reduction of capital : That the preference be reduced to an equal number of fully paid shares of Rs. 5 each. That the equity shares be reduced to an equal number of fully paid shares of Rs. 2.50 each. That the amount so available be utilised towards wiping out losses and reduction of assets as follows: Preliminary expenses ,Goodwill and profit and loss a/c to be written off entirely , Rs. 27,000 to be written off Leasehold premises, Rs. 14,000 to be written off stock , Rs. 6,000 to be provided for doubtful debts, 20% should be written off Plant and machinery and the balance be written off patents. Make journal entries in the books of the company and prepare the balance sheet giving effect to the above scheme.

JOURNAL Preference Share capital (Rs. 10)a/c Dr. 2,50,000 To Preference Share capital(Rs.5)a/c 1,25,000 To capital reduction a/c 1,25,000 (Being 25,000 pref. shares of Rs. 10 each reduced to pref. shares of Rs. 5 each) Equity share capital (Rs. 10 a/c Dr. 2,50,000 To Equity share capital(Rs.2.50 )a/c 62,500 To capital reduction a/c 1,87,500 (Being 25,000 equity shares of Rs.10 each reduced to equity shares of Rs. 2.50 each) Capital reduction a/c Dr. 3,12,500 To profit and loss a/c 1,23,000 To preliminary expenses 2,000 To Goodwill 20,000 To leasehold premises 27,000 To Plant and machinery a/c 12,000 To Stock a/c 14,000 To provisions for Doubtful Debts a/c 6,000 To Patents (balancing fig.) 1,08,500 (Being various assets & losses written off)

BALANCE SHEET OF C LTD. (and reduced) as on 1st april 2008 Liabilities Rs. Assets Rs. Share capital: Goodwill 20,000 Authorised capital 5,00,000 Less: Reduced under recons. 20,000 NIL 1,00,000 pref. shares Leasehold premises 1,07,000 of Rs. 5 each Less: Reduced under recons. 27,000 80,000 2,00,000 equity shares 5,00,000 Plant and machinery 60,000 Of Rs. 2.50 each Less: reduced under recons. 12,000 48,000 Patents 1,73,900 10,00,000 Less: reduced under recons. 1,08,500 65,400 Issued and paid up : Current Assets: 25,000 pref. shares of 1,25,000 Stock (34,000 – 14,000) 20,000 Rs. 5 each Debtors 56,000 25,000Equity shares of 62,500 Less: Prov. For d/debts 6,000 50,000 Rs. 2.50 each Current liabilities : Cash 100 Sundry creditors 40,000 Bank overdraft 36,000 2,63,500 2,63,500