Internal reconstruction

Sivaram ji,

Internal reconstruction refers to the internal re-organization of the financial structure of a company. It is also termed as re-organization which permits the existing company to be continued. Generally, share capital is reduced to write off the past accumulated losses of the company. The accounting procedure of internal reconstruction is distinct from that of amalgamation, absorption and external reconstruction.

1.    A)        Reducing the face value is like issuing the new class of equity shares to the existing shareholders and cancelling the old.

B)        Reducing the paid up value means face value remains the same, now the company can demand the balance outstanding amount. The decrased amount is transferred to a special account say “Reconstruction Account.”

e.g.=

            a.         Reducing the face value 

ABC Pvt. Ltd. reduces the FV to Rs.4/- each. Total shares issued in original (60,000 equity shares of Rs.10/- each.) as per the sceme of reconctruction.

In the above case,

The old equity shares which are of FV Rs.10/- is cancelled and new class of equity shares is issued to the existing shareholders.(Same no. of shares but @ lesser FV.)

b.       Reducung the paid up value

ABC Pvt. Ltd. reduces the paid up capitalto Rs.6/- each. Total shares issued in original (60,000 equity shares of Rs.10/- each.) as per the sceme of reconctruction.

In the above case,

The shares which were fully paid is now partly paid and the decrease in amount i.e. Rs.4/- is transferred to Reconstruction account. The ABC Pvt. Ltd. has a right to call Rs.4/- which is outstanding on the shares to make it fullypaid.

2.    Consolidation and subdivision of shares

e.g.

Consolidation

ABC Pvt. Ltd. consolidates the FV into Rs.100/-each shares fully paid. (Originally 60,000 shares of Rs.10/- each fully paid.)

Sub division

Subdivision is just the opposite of Consolidation.

ABC Pvt. Ltd. sub devides shres into 6,00,000 shares of Rs.1/- each fully paid. (Originally 60,000 shares of Rs.10/- each)

I’m attaching the forms for sub division and consolidation for your reference.

For  answer to 3 please rely on the others.

4.   Yes, according to me Preference shares can be converted into equity shares if approved in the sceme of reconstruction and by the share holders.

Members please correct me if I’m wrong.

plz help me. if in the question's balance sheet there is share premium account and the question is silent regarding write off. what to do ?

IT CAN BE USED FOR REDUCTION OF VALUE OF FICTITOUS ASSETS OR OTHER LOSSES OR FIXAED ASSETS IF MENTIONED

IF NOTHING MENTIONED NO CHANFE -IT WILL BE A PART OF REDUCED BALANCE SHEET

and what about the fictitious assets like patent, goodwill or misc expenditure not written off yet, nad the question is silent whether what to do?

BALANCE OF CAPITAL REDUCTION IS TO BE USED FULLY TO WRITE OFF G/W, PATENTS , ETC IF ANYTHING REMAINS THAT WILL  APPEAR IN NEW REDUCED BALANCE SHEET

SEQUENCE (IF QUESTION IS SILENT)

1.PROFIT AND LOSS

2. FIXED ASSETS (GIVEN IN QUESTION)

3.PRELIMINARY EXPS,

4.GOODWILL

5.PATENTS

please let me know the entry for

1. conversion of 10% debentures of rs.100 each to 12.5% debentures of rs.90 each

2. if the share is partly paid up, can reduction be made in partly paid up value of share in scheme of reconstruction, if yes please let me know the entry

@ geetanjali

cancelling 10% debentures :-

ESH(100) a/c...dr

To reconstruction a/c

re issue of 12.5% shares :-

reconstruction a/c ....dr

To 12.5% debentures a/c

im not an expert but i think thats the ans....in effect the sacrificed part will remain in the reconstruction acc to be used to w/o...

I didnt understand the explanation on consolidation and subdivision 

"Consolidation   ABC Pvt. Ltd. consolidates the FV into Rs.100/-each shares fully paid. (Originally 60,000 shares of Rs.10/- each fully paid.)  

Sub division   Subdivision is just the opposite of Consolidation.   ABC Pvt. Ltd. sub devides shres into 6,00,000 shares of Rs.1/- each fully paid. (Originally 60,000 shares of Rs.10/- each)"

Does this mean that the number of shares would reduce to 6000 nos in case of consolidation just as it became 6,00,000/- in case of subdivision. Then will  the holding of each shareholder automoatically change, iIs this practically possible and does it happen in reality.
 

what is the journal entry for:

equity share befor reconstruction is 20000 eq. share of rs 10 each.

1. now eq.share wiil be reduced to rs 5 per share, rs 3 paid up. the call was to be made immediatly for acquiring cash

@ work is worship

subdivision of shares means split od shares into smaller shares.

consolidation is reverse of subdivision i.e summing up share value is consolidation.

ans for your query,

yes number of shares does change. and no the shares will have to be reissued by the company holding the face value in each different case. but since we are in demat accounts era the need for re issue of shares is not needed.

and yes this can be used practically. in fact reliance did this very recently to stabilize its market.

if you remember reliance came out with an npo of reliance power around 4 or 5 yrs i guess (not sure)

it was over subscribed like ten twenty times and most of them wanted to make quick buck over the secondary market as soon as they could. on the first day of market, these ppl suddenly dumped the shares in the market and other ppl started getting tensed and they also started dumping the shares. this obviously made the market value of the share fall down drastically.reliance in 24hrs came up with this engenious idea of consolidation.they consolidated the shares and made it look like the share price has gone up and hence stabilizing the market...