Alteration of Share Capital and Internal Reconstruction | Accounting

Here is a compilation of top four accounting problems on alteration of share capital and internal reconstruction with its relevant solutions.

Illustration 1:  


The summarised Balance Sheet of Sunrise Ltd. as on 31st December, 2006 was as under:

On 31.12.2006 the following scheme of capital reduction was taken:

(a) The equity shares were reduced to 25 paise each.

(b) The preference shares were reduced to Rs 3.75 each and the rate of dividend on them to 5%.

(c) The ‘A’ and ‘B’ debenture holders waived payment of Rs 42,000 interest (which was included in ‘Creditors’ of Rs 2, 00,000).


(d) The directors were to be refunded Rs 50,000 fees, they had received in Cash.

(e) The ‘B’ debenture holders formed a new company to take over the Hooghly Works for Rs 5, 00,000 and the allotment of 50,000 fully paid of Rs 5 each in the new company.

(f) The investments were valued at Rs 25,000 Stock at Rs 50,000 and the Debtors at Rs 40,000. There was no actual liability to workmen in Hooghly. The assets were to be written down accordingly; any fictitious assets were to be eliminated; only necessary reserves were to be retained and the balance available was to be written off the book of the Howrah Works. Show the necessary entries.


Illustration 2:

D. Ltd. decided to reorganize its The Balance Sheet of the company as structure following a period of adverse trading conditions on 31st Dec. 2006 showed the following:



Preference dividends are in arrears for four years.

Subsequent to approval by court of a scheme for the reduction of capital, the following steps were taken:

(i) The preference shares were reduced to Rs 0.75 per share, and the ordinary shares to Re. 0.10 per share. After reduction the shares were consolidated into Re. 1 shares. The authorised capital was restored to 2, 00,000, 8% Cumulative Pref. Shares and 1, 50,000 ordinary shares, both of Re. 1 each.

(ii) One new ordinary share of Re. 1 was issued for every Rs. 4 of gross preferred dividend in arrears.

(iii) The balance on Security Premium Account was utilised.

(iv) The debenture holders took over the freehold property at an agreed figure of Rs 75,000 and paid the balance to the company after deducting the amount due to them,

(v) Plant and Machinery was written down to Rs. 1, 40,000.

(vi) Trade Investments were sold for Rs. 32,000.

(vii) Goodwill, Preliminary Expenses, Debts of Rs. 8,600 and obsolete stock of Rs. 10,000 were written off.

(viii) A contingent liability of which no provision had been made was settled at Rs. 7,000 and of the amount Rs. 6,300 was recovered from the insurance.

You are required (a) to show the Journal Entries, necessary to record the above transactions in the company’s books and (b) to prepare the Balance Sheet, after completion of the scheme.


Illustration 3: 

X. Ltd. whose balance Sheet as at 31.12.2006 appears below, formulated a scheme of reconstruction, details of which follow and secured approval of all concerned.

Preference dividend is in arrear for one year.

(a) Preference shareholders to give up their claims, inclusive of dividend to the extent of 30% and desire to be paid off.

(b) Debenture holders agree to give up their claims to interest in consideration of their rate of interest being enhanced to 10%.

(c) Bank agrees to give up 50% of their interest outstanding in consideration of their being paid off at once.

(d) Sundry Creditors would like to grant a discount of 5% if they were to be paid off immediately.

(e) Balance of Profit and Loss Account, Patents and Copyrights and 25% of the total Sundry Debtors of Rs. 60,000 to be written off. Fixed Assets to be written down by Rs. 7,000. Investments to reflect their market value.

(f) To the extent, not specifically stated, Equity shareholders suffer no reduction of their rights.

(g) Cost of reconstruction Rs. 1,675.

Pass journal entries in the books of the company assuming that the scheme has been put through fully with the Equity Shareholders bringing in necessary cash to pay off the parties to leave a working capital of Rs. 10,000.

Please draw the Balance Sheet after reconstruction.

Illustration 4:

The Balance of a limited liability company, as on 31st December, 2006 is stated below:

Dividends on Preference Shares are in arrear for three years.

The Company passes a special resolution to reduce its Capital in accordance with the following scheme and the same is duly sanctioned by the Court:

(a) The Preference Shares are converted from 6% to 8%, but revalued in a manner in which the total return on them remains unaffected. The value of Equity Shares is brought down to Rs. 8 per share.

(b) The arrears of dividend on Preference shares are cancelled.

(c) The debit balance of the goodwill account is written off entirely.

(d) Land and Building and Plant and Machinery are revalued at 85% and 80% of their respective book values.

(e) Book debts to the amount 7,200 are treated as bad, and hence to be written off.

(f) The company expects to earn profit @ Rs. 45,000 per annum from the current year which would be utilised entirely for reducing the debit balance of the Profit and Loss Account for three years. The remaining balance of the said account would be written off at the time of the capital reduction process.

(g) The balance of total capital reduction is to be utilised in writing down patents.

(h) A secured loan of Rs. 2, 40,000, bearing interest at 12% p a. is to be obtained by mortgaging tangible fixed assets for procuring cash for repayment of bank overdraft and for providing additional funds for Working Capital.

Journalise the above scheme and draw a Balance Sheet after the implementation is over. 



1. There will be no entry for arrear preference dividend since they are cancelled.

2. Return on preference shares @ 6% on Rs. 3, 00,000 is Rs. 18,000. Since this minimum return must have to be maintained, value of preference share capital, therefore, will be Rs. 2,25,000 (i.e. Rs. 18,000 x 100/8) So reduction of preference share capital will be Rs. 75,000 (i.e. Rs. 3,00,000 – Rs. 2,25,000) and reduction per share will be Rs. 25

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