| Reconstruction is an exercise of restating assets & liabilities by company / entity whose financial position as reflected by its balance sheet is not healthy but future is promising. Show This exercise is done to gain the confidence of different stake – holders (creditors, lenders, customers, share holders etc) whose support is required for revival of the operations. Objectives: 1. To generate surplus for writing off accumulated losses & writing down over – stated assets. 2. To generate cash for working capital needs, replacement of assets, to add balancing equipments, modernaise plant & machinery etc. Type of Reconstruction: Broadly it is of two types such as – 1. Internal Reconstruction – Recognisation with in the entity. 2. External Reconstruction – Transfer of business to another company (usually new company) persuing to a scheme of amalgamation – Accounting is same as amalgamation. Internal Reconstruction: The followings are the process / journal entries for making internal reconstruction – 1. Assets. a) Revaluation of assets. Assets A/c Dr. (Incremental Value) To Reconstruction A/c. b) Transfer of assets to creditors in discharge of liability. (i) Book value of assets transferred is less than liability settled. Liability A/c Dr. To Asset A/c (Book value) To Reconstruction A/c. (ii) Book value of assets transferred is greater than liability settled. Liability A/c Dr. Reconstruction A/c Dr. To Asset A/c. c) Sale of unproductive assets. (i) At profit. Bank A/c Dr. (Sale proceeds) To Asset A/c (Book value) To Reconstruction A/c. (Profit) (ii) At loss. Bank A/c Dr. (Sale proceeds) Reconstruction A/c Dr. (Loss) To Asset A/c. (Book value) 2. Outside Liabilities. a) Settlement at discount. Liabilities A/c Dr. To Bank A/c To Reconstruction A/c. (Discount amount) b) Conversion of liability from one class to another (e.g. unsecured to secured) usually for lower amount. Unsecured Loan A/c Dr. To Secured Loan A/c To Reconstruction A/c. c) Waiver of liability. Liability A/c Dr. To Reconstruction A/c. 3. Share Holders. a) Issue of fresh share. -General entry- b) Capital reduction. Old Share Capital A/c Dr. To New Share Capital A/c To Reconstruction A/c. 4. Utilisation of reconstruction surplus. Reconstruction A/c Dr. To P & L A/c To Asset A/c. 5. Transfer of Reconstruction surplus unutilized (if any) to capital reserve. Reconstruction A/c Dr. To Capital Reserve A/c. Note: (i) The name of the company after capital reduction should end with the phrase “And reduced” (Sec. 104, Companies Act). (ii) The narration to journal entry should specify the approval of High Court. Surrender of Share :- What is Surrender of Share : Surrender of share is an alternative to capital reduction. In this case the share holders volunteer to return some of the shares back to the company along with duly signed transfer deed. Journal Entries: 1. Surrender. Share Capital A/c Dr. To Share Surrender A/c. Note: The share surrender can be either equity or preference share. 2. Reissue of surrendered shares. a) For discharge of liability. (i) Issue of share out of Share Surrender in the name of creditor. Share Surrender A/c Dr. To Share Capital A/c. (ii) Cancellation of liability pursuant to issue of above share. Liability A/c Dr. To Reconstruction A/c. b) Reissue for cash. (i) Receipt of cash. Bank A/c Dr. To Reconstruction A/c. Note: Cash receipt represents profit since there is no increase in liability. (ii) Issue of share to applicants out of Surrender Share. Share Surrender A/c Dr. To Share Capital A/c. Note: The share surrender may be either reissued by same share of same class or a different class subject to approval of the High Court. 3. Cancellation of Share Surrender not reissued. Share Surrender A/c Dr. To Reconstruction A/c. About the AuthorPosted by Muhammad Atif Saeed on 23:37. Filed under Accounting . You can follow any responses to this entry through the RSS 2.0. Feel free to leave a response Which account is debited on surrender of shares?The share capital account of a company is debited with the amount called-upon the current date of forfeiture on shares.
What is the journal entry for issue of shares?Journal entry for the issuance of common shares with par value. Common shares with par value are journalized by debiting cash (asset) for the amount received for the shares and crediting common shares (equity) up to the par value, with the balance of the entry credited to additional paid-in capital (equity).
What is the journal entry for forfeiture of shares?When Forfeiture of shares Issued at Par. In this case, The company debits the Share Capital Account with the amount called-up up to the date of forfeiture on shares. It credits the Shares Allotment Amount or Shares Call Account with amount called-up on forfeited shares but due from the shareholders.
What is journal entry for reduction of share capital?Capital Reduction Account, is to be opened for transferring the part of capital which is lost, i.e., not represented by assets. In other words, this account reveals the sacrifices made by various parties, viz. equity shareholders, preference shareholders, debenture-holders, creditors, etc.
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