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External Reconstruction
Corporate Accounting (ICOMC43)
Annamalai University
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LESSON – 9
EXTERNAL RECONSTRUCTION
1. INTRODUCTION
The proverb <Old wine in a new bottle= is cent percent correct in the case of
external reconstruction of joint stock companies. Yes. When an existing corporate
body is liquidated and the same company is registered in a new name it is case of
external reconstruction. Because of over-capitalization, mal-administration,
accumulated losses, the existing company may decide to wind up and changes will
be made in capital structure, writing off fictitious assets, showing of assets at
market value etc. in the new company. For example; A Ltd decides to reconstruct by
liquidating A Ltd and form a new company as C Ltd. and register with the
companies Act, it is case of external reconstruction. But internal reconstruction is
entirely different from external reconstruction.
2. OBJECTIVES
On Completion of this chapter, you should be able to:
Objectives of External Reconstruction
Distinguish between Amalgamation, Absorption and External Reconstruction.
3. CONTENTS
3. Objectives of External Reconstruction
3. Distinguish between Amalgamation, Absorption and External Reconstruction
3. Accounting Procedure
3. Objectives of External Reconstruction
i. To wipe off the lost capital by offering to the shareholders of the existing
company shares in the new company to the extent of a portion of the face
value of their existing holdings.
ii. To get the benefit of settling the claims of creditors and debenture holders
at lesser amount
iii. To give a new life to a concern which has to be compulsorily liquidated
when its business become illegal by forming a new company by the
management of the existing company itself.
3. Distinguish between Amalgamation, Absorption and External Reconstruction.
Sl Amalgamation Absorption External Reconstruction 1. Two companies are wound up and they sell their business to a newly formed company
A company is wound up and an existing company acquires its business.
A company is wound up and that company sells its business to a newly formed company. 2. A new company is formed or floated.
No new company is formed.
A new company is formed by the existing company which is wound up. 3. A newly formed company acquires the business of two or more companies.
An existing company acquires the business of another existing company.
A newly formed company acquires the business of existing company.
3. Accounting Procedure
There is no much difference in the accounting procedure between
Amalgamation, Absorption and External Reconstruction of Companies. For Journal
Entries students are requested to refer the Unit 3 7 <Amalgamation=.
4. REVISION POINTS
External Reconstruction 3 Meaning 3 Difference.
5. INTEXT QUESTIONS
1. What is Reconstruction?
2. Write a short note on net payment method
6. SUMMARY
When an existing corporate body is liquidated and the same company is
registered in a new name it is case of external reconstruction. Because of over-
capitalization, mal-administration, accumulated losses, the existing company may
decide to wind up and changes will be made in capital structure, writing off
fictitious assets, showing of assets at market value etc. in the new company.
7. TERMINAL EXERCISES
1. Alteration of Share Capital is effected by a company it is authorized by the:
(a) Memorandum of Association (b) Articles of Association
(c) Shareholders (d) Board of Directors.
2. The Capital Reduction Scheme can be implemented only after getting
permission from:
(a).Central Government (b) Controller of Capital Issues
(c) Shareholders (d) The Competent Court
8. SUPPLEMENTARY MATERIAL
Reddy T. and Murthy. Corporate Accounting, Margham Publications, Chennai.
9. ILLUSTRATIONS
External Reconstruction – Lump – sum purchase price
Illus 1. Kala Ltd9s Balance Stheet showed the following position on 31st March
2010.
Liabilities Rs. Assets Rs. 10,000 equity shares of Rs each Capital reserve Bank loan Trade creditors
10,00,
2,00,
2,00,
3,00,
Fixed assets Current assets Cash at bank Profit & Loss A/c
8,00,
4,00,
2,00,
3,00,
17,00,000 17,00,
Mala Ltd. Was incorporated to take the fixed assets and 60% of the current
assets at an agreed value of Rs,00,000 to be paid as to Rs,40,000 in equity
shares of Rs each and the balance in 9% debentures. The debentures were
accepted by bank in settlement of loan. Remaining current assets realized
Rs,000. After meeting Rs,000 expenses of liquidation, all the remaining
cash was paid to the creditors in full settlement.
Give journal entries in the books of both the companies and prepare the initial
Balance Sheet of Mala Ltd. if the amalgamation is in the nature of purchase.
Solution
Books of Kala Ltd. (selling company)
Journal entries
Date Particulars L Dr. Cr. 31.3 Realisation A/c Dr. 12,00, To Fixed assets A/c 8,00, To Current assets A/c 4,00, [Being transfer of assets to relalisation except cash at bank] Bank Loan A/c Dr. 2,00, To Realisation A/c 2,00, [Being Transfer of Liability to be senled by Transferee Co.] Mala Ltd. A/C Dr. 7,40, To Realisation A/c 7,40, [Being purchase price receivable] SAhares in Mala Ltd. A/C Dr. 7,40, To Mala Ltd A/c 7,40, [Being purchase price received in the form of shares] Bank A/c Dr. 90, To Relisation A/c 90, [Being amount relised for 40% of the current assets and taken over by Mala Ltd] Relisation A/c Dr. 20, To Bank A/c 20, [Being payment of liquidation expenses] Trade creditors A/c Dr. 3,00, To Bank A/c 2,70, To Realisation A/c 30, [Being settlement of creditors by payment of all the cash available] Equity share capital A/c Dr. 10,00, Capital reserve A/c Dr. 2,00, To Equity sharcholders A/c 12,00, [Being transfer of capital and reserve] Equity shareholders A/c Dr. 3,00, To Profit & Loss A/c 3,00, [Being transfer of accumulated loss] Shareholders A/c Dr. 1,60, To Realisation A/c 1,60, [Being loss on realisation] Note: Since purchase consideration should not include Dehentures used t Bank Loan, it is preferable to transfer Bank loan to Mala Ltd in whose Books, the issue of Debentures to settle Bank Loan can be shown.
Working notes:
Realisation A/c
Particulars Rs. Particulars Rs. To Fixed assets To Current assets To Bank (expenses)
8,00,
4,00,
20,
By Mala Ltd By Bank(40% of current assets) By Bank loan By Creditors (discount) By Sharcholders (loss)
7,040,
90,
2,00,
30,
1,60,
12,20,000 12,20,
Bank A/c
Particulars Rs. Particulars Rs. To Balance b/d To Realisation A/c
2,00,
90,
By Realisation (expense) By Creditors (Bal. fig)
20,
2,70,
2,90,000 2,90,
Shareholders A/c
Particulars Rs. Particulars Rs. To P & L A/c ToRealisationA/c(Loss) To Shares in Mala Ltd
3,00,
1,60,
7,40,
By Share capital A/c By Capital reserve A/c
10,00,
2,00,
12,00,000 12,00,
Book of Mala Ltd. (purchasing company)
Journal entries
Date Particulars L Dr. Cr. 31.3 Business purchase A/c Dr. 7,40, To Liquidator of Kala Ltd 7,40, [Being purchase price payable] Fixed assets A/c Dr. 8,00, Current assets A/C Dr. 2,40,
÷
ø
ö
÷
ø
ö
100
60
000,00,4 x
To Business purchase A/c 7,40, Bank Loan Ltd A/c 1,60, To Capital reserve A/c (bal. fig) 1,40, [Being assets and Liability taken over and the capital profit thereon] Bank Loan A/c Dr. 1,60, To 9% Debenture A/c 1,60, [Being Debentures issued to settle Bank Loan] Liquidator of Kala Ltd A/c Dr. 9,00, To 9% Debentures A/c 1,60, To Share capital A/c 7,40, [Being payment of purchase price in the form of shares and debentures]
Balance Sheet of Maala Ltd. As on 31st March 2010
Liabilities Rs. Assets Rs. Share capital Fixed assets 8,00, 74,000 Share of Rs10 each Fully paid 7,40,000 Current assets
2,40,
(all the above shares were issued For consideration other than cash) Capital reserve 1,40, 9% Debentures 1,60, 10,40,000 10,40,
Illus 2. The following is the balance sheet of X Company Limited as on 3 1 st
December, 2012.
Liabilities Rs. Assets Rs. Share Capital: Land & Building 90, 12,000 shares of Rs. 10 each fully paid. 1,20,000 Machinery 50, Sundry Creditors 30,000 Stock 17, Bank Overdraft 28,000 Sundry Debtors 20, Profit & Loss a/c 1, 1,78,000 1,78,
The company went into voluntary liquidation and the assets were sold to Y
Company Limited for Rs,50,000 payable as to Rs,000 in cash (which
sufficed to discharge creditors and bank overdraft and to pay off the winding
up expenses of Rs,000) and as to Rs,000 by the allotment of 12,
shares of Rs each of the Y Company Limited Rs.7 per share paid up.
Draw up the important ledger accounts to close the books of 8X9 Company
Limited and the Journal entries for recording these transactions in the
books of 8Y9 Company Limited.
Solution
Calculation of Purchase Consideration: Rs.
Cash 60,
Shares (12,000 X 7) 90,
Purchase consideration 1,50,
Journal Entries in the books of X Ltd
S Particulars L Rs. Rs. 1 Realization a/c Dr 1,77, To Land & Building a/c 90, To Machinery a/c 50, To Stock a/c 17, To Sundry Debtors a/c 20, (Transfer of Assets to realization account) 2 Y Company Limited a/c Dr 1,50, To Realization a/c 1,50,
S Particulars L Rs. Rs. (Purchase Consideration due) 3 Shares in Y Ltd a/c Dr 90, Bank a/c Dr 60, To Y Limited a/c 1,50, (Purchase Consideration received) 4.. Sundry Creditors a/c Dr 30, Bank Overdraft a/c Dr 28, To Bank 58, ( Payment made to sundry creditors and Bank O) 5 Realization a/c Dr 2, To Bank a/c 2, (Liquidation expenses met by vendor company) 6 Equity Share holders a/c Dr 1, To Profit & Loss a/c 1, (Accumulated profit transferred to Equity shareholders account) 7 Equity Share Capital a/c Dr 1,20, To Equity Share holders a/c 1,20, 8 Equity Shareholders a/c Dr 90, To Shares in Y Company Ltd. 90, (Final settlement)
Realization a/c
Particulars Rs. Particulars Rs. To Land & Building a/c 90,000 By Y Company Limited (60,000+90,000)
1,50,
To Machinery a/c 50,000 Loss (Balancing Figure) 29, To Stock a/c 17, To Sundry Debtors a/c 20, To Bank (Expenses) 2, 1,79,000 1,79,
Equity Share holders9 a/c
Particulars Rs. Particulars Rs.
To Profit & Loss a/c To Realization Loss a/c To Shares in Y company Limited
1,
29,
90,
By Equity Share Capital 1,20,
1,20,000 1,20,
Bank a/c
Particulars Rs. Particulars Rs.
To B Limited 60,000 By Creditors By Bank Overdraft By Liquidation Expenses
30,
28,
2,
60,000 60,
Journal Entries in the Books of Y Co. Ltd (Purchasing Company)
Sl No Particulars L Dr. Cr. 1. Business Purchase a/c Dr To Liquidator of X Co. Ltd a/c (Purchase of Business)
1,50,
1,50,
2.
Land & Building a/c Dr Machinery a/c Dr Stock a/c Dr Sundry Debtors a/c Dr To Business purchase a/c To Capital Reserve (B/F) (Assets and Liabilities taken over)
90,
50,
17,
20,
1,50,
27,
- Liquidator of X Co. Ltd a/c Dr To Equity Share Capital a/c To Bank a/c (Purchase Consideration paid)
1,50,
90,
60,
Illus 3. The balance sheet of Alpha Limited as on 31 was as follows:
Liabilities Rs. Assets Rs. Share Capital: Land 65, 1,000 shares of Rs. 100 each fully paid. 1,00,000 Machinery 22, 8% Debentures 40,000 Furniture 3, Sundry Creditors 6,000 Stock 25, Debtors 15, Cash 4, Profit & Loss a/c 12, 1,46,000 1,46,
Beta Co. Ltd. was formed to takeover the business of Alpha Ltd, with a
nominal capital of Rs,00,000 divided into 500 9% preferential shares of
Rs each and 500 equity shares of Rs each, on the following basis:
(1) The debenture holders in Alpha Ltd. are to accept 350 preferential
shares
(2) The shareholders in Alpha Ltd. are to receive one equity share in Beta
Ltd. for every two shares held by them
(3) Cost of liquidation met by Beta Ltd. Rs.
(4) The balance of preference shares have been issued and taken up by the
public Give important ledger accounts to close the books of Alpha Ltd.
and Journal entries in the books of Beta Ltd.
Solution
Working Note:
Statement showing Purchase Consideration
Particulars Cash Pref. Shares Rs.
Equity Shares Rs.
Total Rs. Rs.
For Shareholders: Equity Shares 1,000 X Ω=500 X 100 = 50,000 50,000 50, For Debenture holders: Preference shares 350 X 100 = 35,000 35,000 35, For Expenses: Cash 600 600 Purchase Price (Including Expenses) 600 35,000 50,000 85,
Books of Alpha Limited (Selling Company)
LEDGER
Realization a/c
Particulars Rs. Particulars Rs. To Land 65,000 By Creditors 6, To Machinery 22,000 By Beta Co. Ltd. 85, To Furniture 3,000 By 8% Debentures 5, To Stock 25,000 By Loss (B/F) (Transferred to Equity Shareholders’) 38, To Debtors 15, To Cash 4, To Cash (expenses) 600 1,34,600 1,34,
Equity Share holders9 a/c
Particulars Rs. Particulars Rs. To Profit & Loss a/c To Realization Loss a/c To Shares in Beta company Limited
12,
38,
50,
By Equity Share Capital 1,00,
1,00,000 1,00,
Beta Limited a/c
Particulars Rs. Particulars Rs. To Realization a/c 85,600 By Cash By Preference shares in Beta Limited. By Equity shares in Beta Limited
600
35,
50,
85,600 85,
8% Debentures a/c
Particulars Rs. Particulars Rs. To Realization a/c To Preference shares in Beta Limited
5,
35,
By Balance b/d 40,
40,000 40,
Journal Entries in the Books of Beta Ltd (Purchasing Company)
JOURNAL
Sl. Particulars L Dr. Cr. 1 Business Purchase a/c Dr 85, To Liquidator of Alpha Ltd a/c 85, 2 (Purchase of Business) Land a/c Dr 65, Machinery a/c Dr 22, Furniture a/c Dr 3, Stock a/c Dr 25, Debtors a/c Dr 15, Cash a/c Dr 4, To Creditors a/c 6, To Business purchase a/c 85, To Capital Reserve (B/F) 42, 3 (Assets and Liabilities taken over) Liquidator of Alpha Ltd a/c Dr 85, To Equity Share Capital a/c 50, To 9% Pref. Share capital a/c 35, To Bank a/c 600 (Purchase Consideration paid) 4 Bank a/c Dr. 15, To 9% Pref. Share Capital a/c 15, (Issue of shares to public)
10. ASSIGNMENTS
External Reconstruction – Lump-Sum Purchase Price Method
1. Following was the balance sheet of flora Ltd. As on 31st March 2010
Liabilits Rs. Assets Rs. 24,000 equity share of Rs each 2,40,000 Machinery 1,80, General reserve) 4,000 Furniture 30, Bank Loan 72,000 Stock 80, Trade creditors 60,000 Trade debtors 44, Cash at bank 20, Profit & Loss A/c 22, 3,76,000 3,76,
Suman Ltd was formed to take over the fixed assets and stock of Flora Ltd.
for Rs,52,000 Payable Rs,80,000 in the form of equity shares of Rs.
each and Rs,000 in the form of 12% debentures of Rs each. The
bank loan was settled by transferri8ng the debentures.
Flora Ltd. realisaed the debtors at Rs,000. Expenses of liquidation
amounted to Rs,600. The remaining cash was paid to the creditors in full
satisfaction of their claim.
Give ledger accounts to close the books of Flora Ltd and the journal entires
along with the initial balance sheet in Suman Ltd.
[Ans: Loss on realization – Rs,000; Creditors receive –Rs,400;
Purchase price:Rs,80,000; Capital reserve in Suman Ltd. –Rs,000;
Balance Sheet total – Rs,90,000]
2. Lala Co decided to reconstruct and went into liquidation with the
following assets and liabilities
Liabilits Rs. Assets Rs. Pref. share capital of Rs each 2,00,000 Fixed assets 4,99, Equity share capital Rs each 8,00,000 Stock 73, General reserve 12,100 Debtors 1,31, Bank loan 18,600 Cash 400 Creditors 86,100 Profit & Loss A/c 4,12, 11,16,800 11,16,
A new company called Bala Co. Ltd was formed to acquire the fixed assets
and stock of Lala Co. Ltd at Rs,40,000 and Rs,000 respectively. The
purchase price is to be paid by issue of 10% preference shares and equity
shares of Rs, each for equal amounts.
Debtors realized Rs,22,750 and the creditors were paid Rs,340 in full
satisfaction Bank loan was paid in full. The expenses of liquidation came to
Rs,710. Close the books of Lala Co. Ltd and give the balance sheet of
Bala Co. Ltd.
[Ans: Purchase price – Rs,00,000; Loss on realization – Rs,86,900;
Payment to equity shareholodeers; Cash –Rs,500 and equity shares in
Bala Ltd. – Rs,00,000; Balance Sheet total of Bala Ltd. Rs,00,000]
External reconstruction – Net payment method
3. The books of S Ltd. Contained the following balance as on May 31/
Particulars Rs. Rs. Equity share capital (Rs. 10 each) 12,00, Creditors 14,00, Patents & Trade marks 12,00, Plant & Machinery 4,00, Stock 3,00, Debtors 5,00, Cash 12, Preliminary expenses 72, Profit & Loss A/c 1,15, 26,00,000 26,00,
The patents and trade marks are considerably over valued. The company is
also not in a position to raise any further capital. The following scheme of
reconstruction has, therefore been framed.
(i) The company will go into voluntary liquidation. A new company S.
Ltd. Will be formed with an authorized capital of Rs,00,000 to take
over the assets.
(ii) Liability will be discharged by the new company to the creditors by
payment of 25 paise in a rupee in cash and 50 paise in a rupee by
issue of 9% debentures.
(iii) 1,20,000 Shares of Rs each (Rs per share paid) will be issued to
the sharecholders of S Ltd; the balance Rs per shae to be paid on
allotment.
(iv) Expenses of liquidation amounting to Rs,500 will be paid by S.
Ltd. The Scheme was approved by all concerned. You are required to:
(i) Close the ledger of S. Ltd
(ii) Give entries to open the books of S. LOtd
(iii) Prepare the opening balance sheet of S Ltd.
[Ans: Ledger accounts in the books 8S9 Ltd: Realization a/c Loss
Rs,12,500; Equityshareholders a/c Rs,00,000.]
11. REFERENCE BOOKS
1. Gupta R. and Radhaswamy M., Corporate Accounting, Sultan Chand &
Sons, New Delhi.
2. Jain SP, Narang KL. Corporate Accountancy, Kalyani Publishers, New
Delhi.
12. LEARNING ACTIVITIES
Explain Accounting procedures of External Reconstruction
13. KEYWORDS
Liquidation Expenses: When a company goes into liquidation, some
expenses have to be incurred.
Trade Liabilities : It refers to those liabilities which are incurred on
account of goods of the business.
External Reconstruction
Course: Corporate Accounting (ICOMC43)
University: Annamalai University
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