Advance Accounting b.com part 2 chapter 5 notes

Chapter # 5 Accounting for Company –

Reconstruction/Capital Reduction

Sameer Hussain

www.a4accounting.weebly.com

Accounting for Company – Reconstruction/Capital Reduction

Chapter # 5

Page 70

Sameer Hussain www.a4accounting.weebly.com

SYLLABUS ACCORDING TO UNIVERSITY OF KARACHI:

Accounting for companies. Reconstruction.

WHAT THE EXAMINER USUALLY ASK?

General Journal entries in the books of company. Revised Balance Sheet of company after capital reduction.


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www.a4accounting.weebly.com Sameer Hussain

REDUCTION OF CAPITAL A reduction in the issued share capital of a company is called capital reduction. The Companies Act states that, subject to confirmation by the court, a company may, if authorized by its article of association, pass a special resolution to reduce its issued share capital. It may:

a) Cancel any paid-up capital that is lost or no longer represented by available assets. b) Extinguish or reduce the liability on any of its shares in respect of share capital not

paid up. c) Pay off any paid-up share capital that is in excess of its warrants.

SOME POSSIBLE GENERAL ENTRIES 1- Reduction in the par value of paid – up ordinary shares:

Ordinary share capital Debit (with paid-up capital amount) Ordinary share capital Credit (with new par value) Capital reduction Credit (difference amount) ---------------------------------------------------------------------------------------------------------------

2- Write off retained earnings account (loss): Capital reduction Debit (accumulated loss amount) Retained earnings Credit (retained earning amount) ---------------------------------------------------------------------------------------------------------------

3- Write off preliminary expenses account: Capital reduction Debit (preliminary expense) Preliminary expenses Credit (preliminary expense) ---------------------------------------------------------------------------------------------------------------

4- Reduction in the values of current assets and fixed assets: Capital reduction Debit (total assets amount) Current assets Credit (current assets) Fixed assets Credit (fixed assets) ---------------------------------------------------------------------------------------------------------------

ILLUSTRATION # 1: The balance sheet of ABC Ltd. as on December 31, 2003 is as follows: Assets Rupees Equities Rupees Bank 30,000 Accounts payable 40,000 Accounts receivable 110,000 Allow for depreciation Plant 30,000 Merchandise inventory 25,000 Authorized Capital: Preliminary expense 12,000 Paid up capital 600,000 Goodwill 20,000 Share premium 30,000 Retained earnings 143,000 Plant assets 360,000

700,000 700,000 The following scheme of reconstruction was agreed upon & implemented on June 1, 2003:

(a) Ordinary share of Rs.10 each be reduced to an equal number of fully paid shares of Rs.5 each.

(b) Share premium was utilized.


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(c) The amount thus available is utilized to write off preliminary expenses, profit & loss and goodwill completely.

(d) Accounts receivable are estimated to realize Rs.100,000, inventory is valued at Rs.20,000 and plant assets are assigned a book value of Rs.190,000.

REQUIRED (1) Entries in the General Journal to give effect to the above scheme. (2) Revised balance sheet of ABC Ltd.

SOLUTION # 1: ABC Ltd.

General Journal Date Particulars P/R Debit Credit

1 Ordinary shares capital (60,000 x 10) 600,000 Ordinary shares capital (60,000 x 5) 300,000 Capital reduction 300,000 (To record the capital reduction) 2 Share premium 30,000 Capital reduction 30,000 (To record the write off share premium) 3 Capital reduction 175,000 Preliminary expense 12,000 Goodwill 20,000 Retained earnings 143,000 (To record the write off preliminary expenses,

profit & loss and goodwill)

4 Capital reduction 155,000 Allowance for bad debts 10,000 Merchandise inventory 5,000 Allowance for depreciation 140,000 (To record the reduction in the values of assets)

ABC Ltd. Balance Sheet

As on 1 June 2003 Equities Assets

Shareholder’s Equity: Fixed Assets: Issued & Paid-up Capital: Plant assets 360,000 60,000 ordinary shares Less: Allow for depreciation (170,000) @ Rs.5 each 300,000 Total fixed assets 190,000 Total shareholder’s equity 300,000 Current Assets: Liabilities: Inventory 20,000 Accounts payable 40,000 Accounts receivable 110,000 Total liabilities 40,000 Less: All for bad debts (10,000) Bank 30,000 Total current assets 150,000 Total equities 340,000 Total assets 340,000


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PRACTICE QUESTIONS Question # 1: The balance sheet of Zeeshan Ltd. as on Dec. 31, 2002 is as follows: Assets Rupees Equities Rupees Cash in hand 16,500 Accounts payable 82,500 Accounts receivable 275,000 Allow for depreciation Plant 165,000 Merchandise inventory 55,000 Authorized Capital: Investment 110,000 275,000 ordinary shares of Preliminary expense 27,500 Rs.10 each 2,750,000 Goodwill 38,500 Paid up capital 1,100,000 Profit & loss 165,000 Share premium 55,000 Plant assets 715,000

1,402,500 1,402,500 The following scheme of reconstruction was agreed upon & implemented on July 31, 2003:

(a) Ordinary share of Rs.10 each be reduced to an equal number of fully paid shares of Rs.5 each.

(b) Share premium was utilized. (c) Investment was sold for Rs.99,000. (d) The amount thus available is utilized to write off preliminary expenses, profit & loss

and goodwill completely. (e) Accounts receivable are estimated to realize Rs.220,000, inventory is valued at

Rs.44,000 and plant assets are assigned a book value of Rs.330,000. REQUIRED

(1) Entries in the General Journal to give effect to the above scheme. (2) Revised balance sheet of Zeeshan Ltd.

Question # 2: Following is the trial balance of Metropolitan Trading Company Limited as on December 31, 2006:

Assets (Rupees) Equities & Liabilities (Rupees) Land and building 480,000 Authorized Capital: Machinery & equipment 360,000 120,000 ord. shares of Rs.10 1,200,000 Furniture & fixture 24,000 Paid up Capital: Merchandise inventory 120,000 120,000 shares of Rs.10 1,200,000 Accounts receivable 132,000 Accounts payable 36,000 Retained earnings 120,000 Outstanding expense 30,000 Bank 30,000 1,266,000 1,266,000 The company has suffered losses for last few years. In a joint meeting of creditors and shareholders, it was decided to reconstruct the company and change the name of the company to Karachi Trading Company Limited. The scheme of reconstruction agreed upon and implemented with effect from January 1, 2007 are as follows: The new company will take over all assets and liabilities of the existing company. The authorized capital of the new company will consist of 180,000 ordinary shares of Rs.10 each. The new company purchases the business of the existing company for a sum of Rs.1,080,000 by issuing 96,000 shares of Rs.10 each and paying Rs.120,000 cash.


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The reconstruction expenses amounting to Rs.30,000 is to be meet by the existing the company. REQUIRED

(a) General Journal entries to record the reconstruction transactions. (b) Realization account and shareholders account in the books of Metropolitan Trading

Company Limited. Question # 3: The following are the balance sheet accounts of Rasheed Co. Ltd. as on 30th June 2007:

Debit (Rupees) Credit (Rupees) Cash 27,300 Accounts payable 52,000 Accounts receivable 94,900 Bank overdraft 67,600 Merchandise inventory 79,300 Share Capital: Plant & machinery 109,200 32,500 Ordinary shares of Rs.10 325,000 Preliminary expenses 2,600 Retained earnings (Deficit) 110,500 Patents 20,800 444,600 444,600 The company proved unsuccessful and resolutions were passed to carry out the following schemes of reconstruction by reduction of capital:

(1) That the ordinary shares be reduced to an equal number of fully paid shares of Rs.5 each.

(2) That the amount so available be utilized for wiping out losses and reduction of assets as follows:

Preliminary expenses and retained earnings account (Dr. Balance) to be written off entirely. The plant & machinery be reduced by Rs.10,400. The merchandise inventory is written down by Rs.7,800. Make provision for bad debts Rs.10,400. The patents to be completely written off. REQUIRED

(i) Make necessary journal entries in the books of the company to implement the above scheme of reconstruction.

(ii) Prepare the balance sheet (revised). Question # 4: The balance sheet of Al-Raza Ltd as on June 30, 2009 is as follows: Credit Balances: Authorized capital: 140,000 ordinary shares of Rs.20 Rs. 2,800,000 Paid up Capital: 63,000 ordinary shares of Rs.20 each Rs. 1,260,000 7% Bond payable Rs. 280,000 Accounts payable Rs. 105,000 Allowance for depreciation – Plant assets Rs. 210,000 Rs. 1,855,000 Debit Balances: Plant assets Rs. 840,000 Accounts receivable (Net) Rs. 336,000 Merchandise inventory Rs. 364,000 Cash Rs. 28,000


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Preliminary expenses Rs. 63,000 Profit / Loss Rs. 224,000 Rs. 1,855,000 The following scheme of reconstruction was agreed and implemented on the same date:

1. The amount of authorized capital to remain unchanged but the par value of each share is now to be Rs.10 as per Companies Ordinance 1984.

2. The shareholders were issued 70,000 shares at Rs.10 each against their holdings. 3. Bonds payable were settled by issuing 29,400 shares at par. 4. Preliminary expenses and profit or loss accounts were completely written off,

merchandise was valued at Rs.378,000, accounts receivable were estimated to realize to the extent of 90%. The balance of reduced capital’s amount was utilized to reduce the value of plant assets.

REQUIRED (a) Entries in the books of Al-Raza Ltd. to give effects of the above scheme. (b) Revised balance sheet as on June 30, 2009.

Question # 5: The following balances appeared on 31 December 1996 in the General Ledger of Aslam Ltd.

Balance Sheet Credit (Rupees) Debit (Rupees)

450,000 Ordinary shares Building 3,000,000 @ Rs.10 each 4,500,000 Plant & machinery 1,200,000 Long term bonds payable 525,000 Goodwill 300,000 Accounts payable 525,000 Merchandise inventory 450,000 Allowance for depreciation: Accounts receivable 375,000 Building 450,000 Preliminary expenses 225,000 Plant & machinery 225,000 Profit & loss 675,000

Total 6,225,000 Total 6,225,000 The following terms were settled under duly approved scheme of capital reduction:

(a) The ordinary shares to be reduced to Rs.5 each. (b) The long terms bonds payable were settled by issuing 120,000 shares of Rs.5 each. (c) To write off profit & loss (Dr.) balance, preliminary expenses and goodwill. (d) To value the building and plant & machinery be reduced to Rs.1,950,000 and

Rs.750,000 respectively. REQUIRED Give journal entries to record the above transactions and prepare balance sheet (revised).

Question # 6: The balance sheet of Al-Khair Ltd. as on 31 December 1995 is as follows:

Credit (Rupees) Debit (Rupees) Authorized capital par Rs.25 1,600,000 Plant assets 1,280,000 Paid-up capital par Rs.25 1,280,000 Goodwill 48,000 Bonds payable (Long term) 288,000 Preliminary expenses 16,000 Accounts payable 112,000 Accounts receivable 144,000 Allow for depreciation – Plant 96,000 Merchandise inventory 192,000 Cash in hand 8,000 Profit & loss 120,000


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Total 1,808,000 Total 1,808,000 The following schemes of reconstruction was agreed upon and implemented under Section 283 of Companies Ordinance 1984:

(a) The amount of authorized capital to remain unchanged at Rs.1,600,000 but the par value of each ordinary share is now to be Rs.10 in compliance with the Companies Ordinance 1984.

(b) The shareholders surrender their 51,200 ordinary shares of Rs.25 and in exchange they were issued 75,200 ordinary shares of Rs.10 par.

(c) 32,000 ordinary shares of Rs.10 par were issued to bondholders for redeeming their bonds.

(d) Goodwill, preliminary expenses, and balance to profit & loss were completely written off.

(e) Accounts receivable were expected to realize Rs.136,000. Merchandise was valued at Rs.160,000 and the plant assets were valued at Rs.880,000.

REQUIRED (1) Give General Journal entries to incorporate the above scheme. (2) Prepare revised balance sheet.

Question # 7: The balance sheet data of Al-Abid Ltd. as on 31 December 1988 is as follows:

Credit (Rupees) Debit (Rupees) Authorized capital par Rs.25 1,700,000 Plant assets 1,360,000 Paid-up capital par Rs.25 1,275,000 Goodwill 85,000 Long term bonds payable 340,000 Preliminary expenses 17,000 Sundry creditors 119,000 Stock – in – trade 204,000 Allow for depreciation – Plant 136,000 Cash in hand 8,500 Profit & loss 69,500 Sundry debtors 126,000

Total 1,870,000 Total 1,870,000 The following schemes of internal reconstruction is agreed and implemented:

(a) The amount of authorized capital to remain unchanged at Rs.1,700,000 but the par value of each ordinary share is now to be Rs.10.

(b) Holders of two shares receive three ordinary shares of Rs.10 each fully paid. (c) Bondholders are fully redeemed by the issue of 37,400 new ordinary shares of Rs.10

each to the bondholders. (d) Goodwill, preliminary expenses, and balance of profit & loss are completely written

off. (e) Sundry debtors are estimated to realize Rs.144,500, stock – in – trade is valued

Rs.170,000 and plant assets are assigned a book value of Rs.935,000. REQUIRED

(1) Entries in the General Journal to give effect to the above scheme. (2) Revised balance sheet of Al-Abid Ltd.

Question # 8: The following is the balance sheet of Salman Co. Ltd. as 31 December 1986:

Credit (Rupees) Debit (Rupees) Authorized Capital: Patents 216,000 72,000 Ordinary shares Building 180,000


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@ Rs.10 each 720,000 Machinery 108,000

Issued and Paid – Up Capital: Accounts receivable 14,400 57,600 Ordinary shares Merchandise inventory 28,800 @ Rs.10 each 576,000 Cash 7,200 All. for depreciation - Building 18,000 Profit & loss 72,000 All. for dep. – Machinery 9,000 Preliminary expenses 21,600 Accounts payable 45,000

Total 648,000 Total 648,000 The company implemented duly authorized the scheme for reduction of share capital. The scheme provides that shareholders will receive one new ordinary share each of Rs.8 paid – up for every two ordinary shares held. The scheme further provides that the capital reduction be utilized as follows:

(a) To write off entirely the debit balance of profit and loss and preliminary expenses. (b) To reduce the value of building and machinery to Rs.108,000 and Rs.72,000

respectively. (c) The balance available is utilized to write off further the patents. (d) The authorized share of capital was increases to Rs.720,000 comprising of 90,000

ordinary shares each of Rs.8 each. REQUIRED

(1) Give the necessary journal entries in the General Journal. (2) Draw up the balance sheet of the giving effect to the above scheme.

Question # 9: Sharif Company Ltd. Faisalabad obtained permission from court to do as under:

(1) To reduce 380,000 ordinary shares of Rs.10 each to 190,000 ordinary shares of Rs.10 each fully paid-up.

(2) To write off preliminary expenses Rs.323,000; goodwill Rs.285,000 and loss Rs.950,000.

(3) To write off plant assets of Rs.2,318,000 to the extent of remaining balance of capital reduction.

The company issued suitable number of ordinary shares to pay its long term liabilities. REQUIRED

(a) Prepare balance sheet before the scheme of reduction, assuming that the company had no assets and equities other than mentioned above.

(b) Prepare entries in General Journal of Sharif Company. (c) Prepare revised balance sheet.

Question # 10: The following is the balance sheet of Azam Company Ltd. as on 30 June 1992:

Credit (Rupees) Debit (Rupees) Authorized Capital: Copyright & patents 862,400 13,750 10% Preference shares Freehold premises 231,000 @ Rs.100 each 1,375,000 Machinery 55,000 132,000 Ordinary shares Accounts receivable 88,000 @ Rs.10 each 1,320,000 Merchandise inventory 44,000 2,695,000 Cash in hand 27,500

Issued and Paid – Up Capital: Discount on shares 17,600 8,800 10% Preference shares Preliminary expenses 11,000


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@ Rs.100 each 880,000 Profit & loss 258,500 66,000 Ordinary shares @ Rs.10 each 660,000 Accounts payable 44,000 Bank overdraft 11,000

Total 1,595,000 Total 1,595,000 The company suffered huge losses and was not getting on well. On 1 July 1992, the company scheme of internal reconstruction was agreed upon and implemented:

(a) The preference shares of Rs.100 each are reduced to an equal number of fully paid shares of Rs.50 each.

(b) The ordinary shares of Rs.10 each are reduced to an equal number of fully paid shares of Rs.3 each.

(c) The amount thus available be utilized to write off Rs.37,400 off freehold premises, Rs.13,200 off merchandise inventory, 20% off machinery and the balance available (after writing off discount on shares, preliminary expenses, and profit & loss completely) off copyrights and patents.

(d) The authorized capital increased to 27,500 10% preference shares of Rs.50 each and 440,000 ordinary shares of Rs.3 each.

REQUIRED (1) Entries in General Journal of Azam Company Ltd. to give effect to the above scheme. (2) Revised balance sheet of Azam Company Ltd. on 1 July 1992.

Question # 11: The following is the balance sheet of A.B Company Ltd. as on December 31, 1997:

Liabilities & Equities (Rupees) Assets (Rupees) Accounts payable 104,400 Cash 1,200 Interest on debentures payable 15,600 Accounts receivable 144,000 Bank loan 24,000 Inventory 256,800 5% Debentures payable 156,000 Patents 138,000 7 – ½% Preference shares Machinery 684,000 @ Rs.100 each 600,000 Building 480,000 9,600 ord. shares of Rs.100 each 960,000 Profit and loss 156,000

1,860,000 1,550,000 The company was authorized to issue 6,000 7 – ½% preference shares of Rs.100 each and 12,000 ordinary shares of Rs.100 each. During the past years the company sustained huge losses and, therefore, a scheme of reconstruction is prepared and approved by the shares holders. A summary of the scheme is as follows:

1) The preference shareholders forego the shares of dividend of Rs.90,000. 2) The 7 – ½% preference shares are to be converted into 5% preference shares. 3) Every ordinary shareholder should surrender 50% of his holdings to the company. 4) The debenture holders have agreed to forego the outstanding interest and to accept

1,200 ordinary shares of Rs.100 each in exchange for debentures and balance of Rs.36,000 to be paid in cash.

5) The surrendered ordinary shares are to be utilized as under: a) To write off deficit. b) To bring down the value of patents to Rs.90,000. c) Inventory is valued at Rs.180,000. d) To write off Rs.12,000 from accounts receivable.


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e) The balance of the surrendered shares is to be utilized in writing off the machinery.

6) The remaining 1,200 ordinary shares are issued against cash. The cash so received is utilized in paying bank loan and the balance of debentures.

REQUIRED 1) Entries in the General Journal of A.B. Company Ltd. to give effect to the above

scheme. 2) Revised balance sheet of A.B. Company Ltd. on January 1, 1998.

Education

Advance Accounting b.com part 2 chapter 5 notes