The document discusses the concepts and accounting treatments related to the surrender of shares, which involves shareholders relinquishing share possession to a company, leading to a reduction in share capital. It outlines how surrendered shares can be re-issued, canceled, or used to settle liabilities, along with relevant journal entries for each scenario. Additionally, it explains the utilization of the reconstruction account for writing off assets and liabilities as part of the reconstruction process.

1. Internal
Reconstruction
Part-II
BY: BHOOMIKA GARG

2. Surrender of Shares
It means handing over or giving up the possession of the shares to the
company by the shareholders. In Companies Act, surrender of shares
amounts to reduction of share capital. However, the surrender shares can
be re- issued to:
To new shareholders
In reducing the trade Liabilities i.e. creditors
In reducing non- trading liabilities i.e. debenture holders
Note: When the surrendered shares are not re- issued, these are cancelled
and the balance is transferred to Reconstruction A/C.

3. Contd.
The Accounting treatment would be:
a) On Surrender of Shares
Share Capital A/C Dr.
To Shares Surrendered A/C
b) On Re- issue of Surrendered Shares
Shares Surrendered A/C Dr.
To Share Capital A/C
Note: Whether issued to new shareholders or to pay outside liabilities.
c) On Cancellation of Surrendered Shares
Shares Surrendered A/C Dr
To Reconstruction A/C

4. Example for Surrender of
Shares
Illustration
The Equity shareholders of XYZ Ltd. Agree to surrender their shares of Rs. 1,00,000.
Further, Rs. 80,000 debenture holders and Rs. 50,000 trade creditors agree to give up or
sacrifice or forego their claims by 50% each in exchange for equity shares to be issued
from the surrendered shares to settle their remaining claims. Journalize it.
Ans.
a) On Surrender of Shares
Equity Share Capital A/C Dr. 1,00,000
To Shares Surrendered A/C 1,00,000
b) For issue of equity shares out of surrendered shares
Shares Surrendered A/C Dr. 65,000 ( 40,000 + 25,000)
To Equity Share Capital A/C 65,000

5. Contd.
c) For Cancellation of claims by debenture holders and creditors
Debentures A/C Dr. 80,000
Trade Creditors A/C Dr. 50,000
To Reconstruction A/C 1,30,000
d) For Cancellation of the balance in shares surrendered A/C
Shares Surrendered A/C Dr. 35,000
To Reconstruction A/C 35,000
Note: Calculation of total sacrifice:
By shareholders 1,00,000
By Debenture holders 40,000
By Trade Creditors 25,000

6. Utilization of Reconstruction
A/C
At this stage the Reconstruction A/C will show some credit balance on account
of sacrifice made by shareholders, outside liabilities, profit on sale of fixed assets
etc. Reconstruction A/C is utilized in following manner:
a) Writing Off fictitious and intangible Assets: The Accounting treatment is:
Reconstruction A/C Dr.
To Preliminary Expenses A/C
To Discount on issue of shares A/C
To Patents A/C
To Goodwill A/C
To Surplus A/C ( Negative Balance)
Note: These have to be written off whether given in the problem or not.

7. Contd.
b) In writing down overvalued fixed and current assets: The accounting
treatment is:
Reconstruction A/C Dr. ( With the Amount of Reduction)
To Fixed assets A/C ( Individual Fixed Assets
To Current Assets A/C ( Individual Current Assets)
c) Recording New Liability: The accounting treatment is:
Reconstruction A/C Dr.
To Particular Liability A/C
Note: If some unrecorded Liability is directly paid in cash, the journal
entry would be:
Reconstruction A/C Dr.
To Bank A/C

8. Contd.
d) Expenses of Reconstruction: The Accounting treatment is:
Reconstruction A/C Dr.
To Bank A/C
e) Credit Balance in Reconstruction: If there is some credit balance in
Reconstruction A/c, it is transferred to Capital Reserve A/C. The journal
entry would be:
Reconstruction A/C Dr.
To Capital Reserve A/C

9. Problem I

10. Contd.

11. Solution
Date Particulars Dr.( amount) Cr.( Amount)
31.3.16 Equity Share Capital(Rs.100) A/C Dr.
To Equity Share Capital(Rs.5) A/C
To Reconstruction A/C
20,00,000
1,00,000
19,00,000
31.3.16 Equity Share Capital(Rs.5) A/C Dr.
Equity Share Capital(Rs.10) A/C
1,00,000
1,00,000
31.3.16 O/S Deb. Interest A/C Dr.
To Reconstruction A/C
1,20,000
1,20,000
31.3.16 12% Debentures A/C Dr.
To 14% Debentures A/C
5,00,000
5,00,000
31.3.16 Bank A /C Dr.
To Equity Share App. & All. A/C
5,00,000
5,00,000
31.3.16 Equity Share App. & All. A/C Dr.
To equity Share Capital A/C
5,00,000
5,00,000

12. Solution
Date Particulars Dr.( amount) Cr.( Amount)
31.3.16 Trade Payables A/C Dr.
To Equity Share Capital (Rs.10) A/C
To Bank A/C
To Reconstruction A/C
3,00,000
2,00,000
50,000
50,000
31.3.16 Land & building A/C Dr.
To Reconstruction A/C
50,000
50,000
31.3.16 Reconstruction A/C Dr.
To Plant & Machinery A/C
To prov. For doubtful debts A/C
To Goodwill A/C
To Share Issue Expenses A/C
To Surplus A/C
21,20,000
90,000
5,000
25,000
20,000
19,80,000

13. Balance Sheet
Particulars Note
No.
Amt. Amt.
I. EQUITY AND LIABILITIES
Shareholder’s Fund
Share Capital
Non- Current Liabilities
Long Term Borrowings
Current liabilities
Short Term Provisions
TOTAL
II. ASSETS
Fixed Assets
Current Assets
Inventories
Trade Receivables
Cash & Bank Balances
Total
1
2
3
4
5
8,00,000
5,00,000
5,000
___________
13,05,000
___________
4,90,000
2,70,000
60,000
4,85,000
__________
13,05,000
__________