Page 110 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 5: Internal Reconstruction of Companies

Liquidation: To settle the affairs of (a business firm, for example) by determining the liabilities notes
and applying the assets to their discharge.
Memorandum of Association: A document that regulates a company’s external activities and must
be drawn up on the formation of a registered or incorporated company. As the company’s charter
it (together with the company’s articles of association) forms the company’s constitution.
Reconstruction: Reconstruction of a company implies the reorganization of the financial structure
of the company.

Reorganisation: The act of organising a business or an activity related to a business; the imposition
of a new organisation; organising differently (often involving extensive and drastic changes.

5.4 review Questions

1. What do you understand by reconstruction of a company?

2. What are the objectives of internal reconstruction of a company?
3. What are the differences between internal and external reconstruction?
4. What journal entry will be passed, if a company reduces its 25,000 equity shares of ` 100
each fully paid up to ` 10 each fully paid up?

5. Make the journal entry for the sub-division of 20,000 equity shares of ` 100 each fully paid
into 10 fully paid equity shares of ` 10 each.
6. What do you mean by internal reconstruction? Briefly, explain the essential conditions for
internal reconstruction.
7. What do you mean by Capital Reduction Account? Explain how and why, it is prepared.
8. Explain various legal provisions of the Companies Act, 1956 for the reduction of capital.
9. What is capital reduction scheme? Explain its objectives and legal formalities, if there is
any.
10. Explain the term internal reconstruction. What entries are made in the books of the company
in this connection?

11. What journal entries are made for following cases:
(a) Sub-division of shares
(b) Conversion of shares into stock.
(c) Consolidation of shares.

12. Make the journal entries for the following:
(a) A company, having 50,000 equity shares of ` 10, ` 7 per share called up decided to
reduce ` 10 shares to ` 7 shares as fully paid by cancelling unpaid amount to ` 3 per
share.
(b) A company resolved to convert 50,000 equity shares of ` 10 each fully paid into
` 5,00,000 stock on the basis of ` 100 of stock for every 10 fully paid shares of ` 10
each.
(c) A company, having 50,000 equity shares of ` 10 each fully paid, resolved to
sub-divide its existing shares into shares of ` 5 each fully paid.

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