Page 109 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes 1987. Despite large price increases the project had to absorb, costs remained within the
projected range of US$50,000 to $55,000 per bed for equipment and $50,000 per bed for
construction.
Questions
1. Discuss the case situation.

2. Elaborate the solution in detail.
Source: http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTURBANDEVELOPMENT/EXTDISMGMT/0,,con
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5.2 summary

l z A company may be reconstructed in the event of acute financial problems.
l z A company may be reconstructed in two ways– (a) External reconstruction, where a
company is wound up and a new company is formed; (b) Internal reconstruction, where
some changes are made in the capital structure of the company without liquidating the
company.

l z There are two aspects of ‘External Reconstruction’, one, winding up of an existing company
and the other, rearrangement of the company’s financial position. Such arrangement shall
be approved by its shareholders and creditors and shall be sanctioned by the National
Company Law Tribunal (NCLT).
l z Internal reconstruction of a company becomes necessary in various situations like, to
change the face value of the shares of the company, to write off accumulated losses etc.

l z Internal reconstruction of a company can be carried out in two ways– (a) Alteration of
share capital; and (b) Reduction in share capital.

l z In internal reconstruction neither the existing company is liquidated, nor is a new company
incorporated.
l z It is a scheme in which efforts are made to bail out the company from losses and put it in
profitable position. Internal reconstruction of a company is done through the reorganization
of its share capital.
l z It is a scheme of reorganization in which all interested parties in the capital structure
volunteer to sacrifice. They are the company’s shareholders, debenture holders, creditors
etc.
l z Under internal reconstruction, the accumulated trading losses and fictitious assets are
written off against the sacrifice made by these interest holders in the form of reduction of
paid up value of their interest.

l z Accounting entries on alteration of share capital and reduction in share capital.
5.3 keywords

Consolidation: Consolidation is generally regarded as a period of indecision, which ends when
the price of the asset breaks beyond the restrictive barriers.
External Reconstruction: When the capital structure of a company is reorganized through the
liquidation of the existing company and formation of the new company, it is called external
reconstruction.
Internal Reconstruction: Internal reconstruction means the reorganization of the capital structure
of a company without forming a new company and without liquidating the existing company.

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