internal reconstruction-surrender of shares

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

27 June 2010 dear sir/ma'am
wanted to ask a query from surrender of shares(internal reconstruction)

situation1
creditors(=72000) claim shall be reduced to 50%, it is to settled by the issue of equity shares of rs10 each out of the shares surrendered(=500000)

situation2
Creditors(=300000) agree to reduce their claim by one-fifth in consideration of getting shares of rs35000 out of the shares surrendered(=270000)
Kindly give entries in both situation..

In the book the 1st entry is creditors a/c dr to cap reconstruction 72000
Whereas 2nd entry is creditors a/c dr to cap reconstruction60000

Here confusion is, in first entry we have credited capital reconstruction a/c with rs72000 i.e total amt but in 2nd situation its only the reduced amount?why so?

shakuntala chhangani

shakuntala chhangani (Expert)
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06 July 2010 Hi, note the following entries :
Situation 1 :
Claim of creditors reduced to 50% being the profit for the co., the entry will be -
Creditors A/c Dr. 36,000
To Capital Reduction A/c 36,000
further the creditors were settled. it means that the balance creditors were settled:
Share surrendered A/c Dr. 36,000
To Equity Share Capital A/c 36,000
Since the above shares were issued out of share surrendered, the cost of settlement to the co. is nil and hence the total amount of creditors settled is profit for the co. and Hence
Creditors A/c Dr. 36,000
To Capital Reduction A/c 36,000
In fact, here, the co. settled whole of crs. amount by issuing shares out of shares surrendered by shareholders. nothing went out of the pocket of the co. and the crs. got settled n therefore the total amount of crs. settled is a profit for the co. to be transferred to capital reduction A/c
Situation 2 :
In this case crs. reduced 1/5 of their claim in consideration of shares to be issued to them out of shares surrendered a/c. It means they are reducing their claim by Rs. 60,000 only and balance Rs.2,40,000 will appear in the books of the co. as liability and for the 1/5 amount settled the entry is :
Share surrendered A/c Dr. 60,000
To Equity Share Capital A/c 60,000

Creditors A/c Dr. 60,000
To Capital reduction A/c 60,000

keep in mind that in situation 2 the total amount of crs. has not been settled as in case of situation 1.

If u hv any further doubt, revert back to me.
Regards, CA Shakuntala Chhangani

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