Page 130 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 6: External Reconstruction of Companies

l z When a company is suffering losses for the past several years and facing financial crisis, notes
the company can sell its business to another newly formed company. Actually, the new
company is formed to take over the assets and liabilities of the old company. This process
is called external reconstruction.
l z In other words, external reconstruction refers to the sale of the business of existing company
to another company formed for the purposed.

l z In external reconstruction, one company is liquidated and another new company is formed.
The liquidated company is called “Vendor Company” and the new company is called
“Purchasing Company”. Shareholders of Vendor Company become the shareholders of
purchasing company.
l z Amalgamation of companies involves liquidation of two or more companies, while external
reconstruction involves liquidation of only one company.

l z Absorption of companies does not involve formation of a new company, however, external
reconstruction involves formation of anew company.

6.4 keywords

Discharge of Purchase Consideration: It refers to the form in which, the purchase consideration
is discharged by the purchasing company.
External Reconstruction: External Reconstruction refers to the situation when an existing
company goes into liquidation for the express purpose of selling its assets and liabilities to a
newly formed company which is generally owned and named alike.
Internal Reconstruction: It refers to making internal arrangements for overcoming financial
difficulties.
Liquidation: To settle the affairs of (a business firm, for example) by determining the liabilities
and applying the assets to their discharge.
Purchase Consideration: Amount payable by the purchasing company to the vendor company as
the purchase price of the business.
Reconstruction: An arrangement by which a financially unsound and weak company is
strengthened by certain measures to avoid closure.
6.5 review Questions

1. Differentiate amalgamation, absorption and external reconstruction.
2. The Balance Sheet of XYZ Company Limited as on 31 March, 2011 was as follows:
st
Balance sheet of xyZ co. ltd.
as on 31 march, 2011
st
liabilities ` assets `
Share Capital: Goodwill 77,500
75,000 Equity Shares of ` 10 each 7,50,000 Buildings 4,25,000
Creditors 2,70,000 Machinery 2,00,000
Stock 1,35,000
Debtors 1,12,500
P&L A/c 70,000
10,20,000 10,20,000

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