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Module 3

Uploaded by

deepavg224
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CORPORATE ACCOUNTING II

MODULE III
INTERNAL RECONSTRUCTION AND CAPITAL REDUCTION
2 MARK QUESTIONS
1. What is Capital Reduction?

Internal reconstruction usually means capital reduction. Under the scheme,


the paid up share capital is reduced with the sanction of the court the amount
of debentures and creditors are reduced with their permission and the amount
is utilized to write off the accumulated losses and fictitious assets of the
company.

2. What do you mean by Internal Reconstruction?

Internal reconstruction refers to the internal reorganization of the financial


structure of a company. It is the internal reorganization either by alteration or
by reduction in share capital. Reconstruction by alteration of share capital is
effected by increasing the share capital, consolidating or subdividing the
shares, cancellation of unissued shares etc.

3. What is surrender of shares?

Surrendering of shares means giving up the right on the shares by


shareholders. It is usually done as a part of reconstruction scheme. The share
so surrendered may be either cancelled immediately or may be retained for
being issued to preference shareholders, debenture holders, creditors etc.

4. What is sub division of shares?

When shares of larger denominations are converted into those of smaller


denomination, it is called sub-division of shares. On sub-division of shares,
the share capital remains intact, the number of shares increases accordingly.

5. What is consolidation of shares?


Consolidation of shares is the conversion of shares of smaller denomination
into those of larger denomination. On consolidation the share capital does
not change. But the number of shares is decreased accordingly.

5 MARK QUESTIONS
1. Distinguish between Internal Reconstruction and external
reconstruction.
 In external reconstruction, an existing company is liquidated. But, in
the case of internal reconstruction no company is liquidated.
 In the case of external reconstruction a new company is formed. But in
internal reconstruction, no new company is formed.
2. What is alteration of share capital? What are the different methods
of it?

Alteration of share capital refers to the changes in the existing capital


structure of the firm. A company can alter its share capital only if it is
authorized by the article of association. The following are the different
methods of alteration of share capital.

(a) Increasing Authorised Share Capital

The company can raise its share capital by doing alteration in capital clause
in the Memorandum of Association.

(b) Consolidation of Share capital

Consolidation of shares is the conversion of shares of smaller denomination


into those of larger denomination. On consolidation the share capital does
not change. But the number of shares is decreased accordingly.

(c) Conversion of share capital


The company can do alteration in capital by converting the fully paid up
shares into the stock. The re-conversion of the stocks into fully paid up
shares can also be done.

(d) Sub-division of share capital

When shares of larger denominations are converted into those of smaller


denomination, it is called sub-division of shares. On sub-division of shares,
the share capital remains intact, the number of shares increases accordingly.

(e) Cancellation of share capital

There are some shares which are not taken by any person and diminish that
amount of share capital by the number of shares so cancelled.

3. Differentiate between internal reconstruction and amalgamation.


 In amalgamation, at least two companies are liquidated, whereas, in
internal reconstruction, no company is liquidated.
 In case of amalgamation a new company is formed to take over the
business of the amalgamating companies. But, in internal
reconstruction no new company is formed.
 Amalgamation is a case of combination, whereas, internal
reconstruction is only a reorganization.
4. Distinguish between internal reconstruction and absorption.
 In absorption, one company is liquidated; while, there is no liquidation
in internal reconstruction.
 Absorption is a case of combination, whereas internal reconstruction
is a case of alteration and reduction of capital.

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