DR - Srinivas Madishetti Professor, School of Business Mzumbe University
DR - Srinivas Madishetti Professor, School of Business Mzumbe University
DR - Srinivas Madishetti Professor, School of Business Mzumbe University
Dr.Srinivas Madishetti
Professor,
School of Business
Mzumbe University
Reduction of Share Capital
capital.
70. Director's certificate of solvency.
71. Application to court by creditors
membersTShs
230. Information as to compromise to be circulated.
231. Provisions for facilitating reconstruction and
amalgamation of companies.
232. Power to acquire shares of shareholders
formalities.
Another problem is that the accumulated losses of
Journal of Covina
Particulars Dr. Cr.
(TShs) (TShs)
1. Equity shares capital A/c(10,000 x10) Dr 1,00,000
To Equity Share Capital A/c (10,000x6) 60,000
To Capital Reduction A/c (10,000 x4) 40,000
(Being the equity shares reduced to TShs 6 per share &
remaining amount transferred to capital reduction account)
2. Equity share capital A/c (20,000 x 8) Dr 1,60,000
To Equity share capital ((20,000 x 6) 1,20,000
To capital Reduction A/c ((20,000 x 2) 40,000
(Being the equity shares reduced to TShs 6 per share &
the remaining amount transferred to capital reduction)
3. Debentures A/c Dr 1,20,000
To Debentures A/c 96,000
To Capital Reduction A/c 24,000
(Being the debenture holders sacrificed 20% of their
claim transferred to capital reduction)
Solution contd:
4. Interest on Bank loan A/c Dr 5,400
To Capital Reduction A/c 5,400
(being the bank interest waived & transferred
to capital reduction)
5. Creditors A/c Dr 18,000
To Capital reduction A/c 18,000
(Being the creditors reduced)
6. Capital Reduction A/c Dr 1,27,400
To profit & Loss A/c 1,10,400
To Discount on shares & Debenture A/c 2,000
To preliminary expenses 15,000
(being the losses written off)
7. Bank A/c Dr 40,000
To share capital A/c 40,000
(being the uncalled shares on 20,000
equity share, called at TShs 2 each)
Solution contd:
Capital Reduction A/c
Dr. Cr.
TShs TShs
To profit & Loss A/c 1,10,400 By Equity capital A/c 40,000
To Discount on shares
& Debenture 2,000 By Equity capital A/c 40,000
To preliminary expenses 15,000 By Debentures A/c 24,000
By Interest as Bank loan 5,400
By creditors A/c 18,000
-----------------------------------------------------------------------
1,27,400 1,27,400
Illustration -2;
Balance Sheet of xLtd as on 31-3-2001
Liabilities TShs Assets TShs
Equity Capital Goodwill 2,00,000
50,000 shares of TShs 10each 5,00,000 Plant & Machinery 1,00,000
Sundry creditors 50,000 Premises 1,75,000
Bank overdraft 30,000 Debtors 25,000
Bills payable 20,000 P & L A/c 1,00,000
6,00,.000 6,00,000
Illustration contd;
Eg : To write off losses and goodwill the following
scheme of reconstruction was agreed upon.
1 The shareholders are to receive in lieu of their
present holding the following:
Fully paid equity shares at 40% of their present
holding.
5% preference shares fully paid to the extent of 20%
Journal Entries
Date Particulars LF Debit TShs Credit TShs
Equity share capital A/c Dr 5,00,000
(TShs 10)
To Equity share Capital (new) 2,00,000
(40% of capital)
To 5% preference capital a/c 40,000
(4000 x 10)
To 6% 2nd Debentures a/c 60,000
To Reconstruction a/c 2,00,000
(being the existing equity shares converted into new equity, preference
and debentures, the remaining transferred to reconstruction a/c)
_______________________________________________________________
4,50,000 4,50,000
Illustration:
Eg: Balance sheet of Hope Ltd. as on 31-12-99
Liabilities TShs Assets Rs
Capital : Goodwill 55,000
5,000 6% Preference shares of
TShs 100 each fully paid 5,00,000Patents & trade makers 45,000
40,000 equity shares of
TShs 10 each fully paid 4,00,000 Buildings 2,15,000
Capital Reserve 25,000 Plant & Machinery 2,55,000
5% Debentures of
TShs 100 each 2,00,000 Furniture 60,000
Interest accrued on
debentures 30,000 Stock 90,000
Sundry creditors 1,55,000 Debtors 75,000
Bank 12,500
Cash 2,500
P & L A/c 4,80,000
Discount on Debentures20,000
13,10,000 13,10,000
Note : The preference dividend is in arrear for 3 years
Illustration contd:
1,46,000 1,46,000
Balance sheet of Bombay Ltd. as on 31-3----- (after reconstruction)
Liabilities TShs Assets TShs
Share capital Plant 1,93,000
Shares of TShs 2 each
(82500 shares) 1,65,000 Loose tools 7,000
Share premium 90,000 Stock 1,35,000
20,000 9% pref. shares2,00,000 Debtors 2,30,000
Creditors 2,25,000 Bank 1,45,000
Outstanding expenses 30,000 --
7,10,000 7,10,000
External Reconstruction
consideration
II. Closing the books of vendor company (Vendor
1. Intrinsic value
2. Exchange Ratio
How to identify the method of purchase consideration, applicable for the
given problem?
1. If the problem specifies the method to be adopted –
adopt the method specified
2. If the method is not specified in the problem, but
the amount of purchase consideration is given, it is
lump sum method and does not need any
calculation
3. When the payments made by purchasing company
to vendor company is given, with the statement
“Balance in……” then, “Net Asset Method” must be
adopted.
4. When the payment made by purchasing company
to Vendor Company is given liability wise or any
other item wise without the statement “Balance
in…..” then, “Net Payments Method” must be
adopted.
Discharge of purchase consideration
Various circumstances
1. Payment by transferor company and 3. Payments by Transferor company
also burden on transferor company: out of cash retained out of cash taken
Realization account Dr. over by the Transferee Company
To cash In this case, as cash has been retained
Note: no entry in the books of the out of the cash taken over by the
transferee company transferee company, the burden will be
2. Payment by transferee company and on the transferee company. As
also burden on transferee company: transferor company is not be bear
(payment in the form of these expenses, it transfers at the time
reimbursement) of transfer of assets, only that part of
A. In the books of Transferor Company cash to realization account which is
a. At the time of payment actually handed over to the transferee
Transferee Company account Dr. company. On payment of realization
To Cash account expenses the following entry is passes:
b. At the time of reimbursement Realization Account Dr.
Cash account Dr. To Cash Account
Illustration-2:
Following is the balance sheet of 'IT' Ltd. as on 31-3-2002
50,00,000 50,00,000
_____________________________________________________________________
Illustration contd:
'IT' Ltd. is absorbed by IT Refine Ltd. Which is newly formed in the
place of It ltd on the above date on the following terms.
1. Equity shares are to be repaid at 6% premium by issuing equity
shares in 'Q' Ltd.
2. Nine preference shares in 'Q' Ltd. are to be issued for five
preference shares held in 'IT' Ltd. face value of preference shares of
both the companies being same.
3. Stock is not taken over by 'Q' Ltd. and it realized TShs 2,00,000.
4. The fair value of assets taken over is as under.
Plants and Machinery TShs 8,00,000
Land and Buildings TShs 34,00,000
Investments TShs 2,00,000
Debtors TShsBook value less 10%.
Prepare Realization Account & Equity share holders Account in the
books of IT ltd. Write Journal entries in the books of Q Ltd.
Solution : Ledger Accounts in the 'Books of 'IT Ltd.‘
Dr Realization A/c Cr.
TShs
To Plant and Mach. A/c10,00,000 By DebentureA/c 4,00,000
TShs
TShs
To Debentures 400,000
_______________________________
_______________________________ 5,320.000
5,320,000