For properly deploying the process of internal reconstruction following methods are generally employed or used simultaneously
- Alterations of share capital (Sub-division and Consolidation of shares & Conversion of shares into stock or Vice versa.)
- Valuations of Shareholders Right
- Reduction Of share Capital
- Compromise/ Arrangement
- Surrender of Shares
Alteration of Share Capital
Sub-division and Consolidation of Shares
As the term Suggest Sub division means Splitting the Shares of Rs. 100 each to 10 Shares of Rs. 10 each.
By this the number of shares Increases but the Amount of Capital remains the Same.
For example, a company with a capital of ` 10,00,000 divided into 10,000 equity shares of ` 100 each on which ` 75 is paid up decides to recognise its capital by splitting one equity share of ` 100 each into 10 such shares of ` 10 each. The consequential entry to be passed in such a case would be—
Equity Share Capital (` 100) A/c Dr. 7,50,000
To Equity Share Capital (` 10) A/c 7,50,000
(Being the sub-division of 10,000 shares of ` 100 each with ` 75 paid up thereon into 1,00,000 shares of ` 10 each with ` 7.50 paid up thereon as per the resolution of shareholders passed in the General Meeting held on…)
Similar entries will be passed on consolidation of shares of a smaller amount into those of a larger amount.
Illustration 1
On 31-12-2XX9, B Ltd. had 20,000, ` 10 Equity Shares as authorised capital and the shares were all issued on which ` 8 was paid up. In June, 2X10 the company in general meeting decided to sub-divide each share into two shares of ` 5 with ` 4 paid up. In June, 2X11 the company in general meeting resolved to consolidate 20 shares of ` 5, ` 4 per share paid up into one share of ` 100 each, ` 80 paid up.
Pass entries and show how share capital will appear in notes to Balance Sheet as on 31-12-2XX9, 31-12-2X10 and 31-12-2X11.
Solution
Journal Entries
Solution
Journal Entries `
Equity Share Capital (` 10) A/c Dr. 1,60,000
To Equity Share Capital (` 5) A/c 1,60,000
(Being the sub-division of 20,000 shares of `10 each with ` 8 paid up into 40,000 shares
`5 each with ` 4 paid up by resolution in general meeting dated….)
Equity Share Capital (` 5) A/c Dr. 1,60,000
To Equity Share Capital (` 100) A/c 1,60,000
(Being consolidation of 40,000 shares of ` 5 with `4 paid up into 2,000 ` 100 shares with` 80 paid up)
Notes to Balance Sheet
Liabilities:
(2009) `
- Share Capital
Authorised: 2,00,000
20,000 Equity Shares of ` 10 each
Issued and Subscribed: 1,60,000
20,000 Equity Shares of ` 10 each ` 8 per share called up
(2010)
- Share Capital
Authorised: 2,00,000
40,000 Equity Shares of ` 5 each
Issued and Subscribed: 1,60,000
40,000 Equity Shares of ` 5 each ` 4 per share called up
(2011) `
- Share Capital
Authorised: 2,00,000
2,000 Equity Shares of ` 100 each
Issued and Subscribed: 1,60,000
20,000 Equity Shares of ` 100 each ` 80 per share called up
Note: Some accountants prefer not to make any entry as the amount remains same. Even when an entry is passed it applies only to the called up portion, and not to uncalled or un-issued portion of share capital.
Conversion of Fully Paid Shares into Stock and Stock into Shares (Not been asked in BAF Exams)
Stock is the consolidation of the share capital into one unit divisible into aliquot parts. While it is impossible of the share capital to be one share, any amount of stock may be transferred. In practice, however, companies restrict the transfer of stock to multiples of, say, ` 100. A company can convert its fully paid shares into stock. Upon the company converting its shares into stock, the book-keeping entries merely record the transfer from share capital account to stock account. A separate Stock Register is started in which details of members’ holdings are entered and the annual return is modified accordingly.
- Variation of Shareholders Rights
When a company has issued different classes of shares with different rights or privileges attached to such shares e.g. rights as to dividend, voting rights etc. any of such right may be changed in any manner.
For example, the company may change rate of (a) dividend on preference shares or (b) convert cumulative preference shares into non-cumulative preference shares without changing the amount of share capital by passing the following journal entries:
- Debit (Old)% Cum. Pref. Share Capital Account Credit (New)% Cum. Pref. Share Capital Account
- Debit …% Cum. Pref. Share Capital Account Credit …% Non-cum. Pref. Share Capital Account
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