the reorganization of the company, without liquidating the existing company and forming a new one. Some completely change the idea of business and create a new one. You may also have a look at these following articles –, Copyright © 2021. Budget and Budgetary Control. INTERNAL RECONSTRUCTION Meaning: It refers to the reconstruct the business without its liquidation. You can access this course for life time - in your CA Raja Classes App as well as Website in Desktop / Laptop. The basic purpose is to reorganize the financial structure of the company. Shareholders c. memorandum of association d. Articles of association 13. External reconstructionrefersto closing/liquidating the company and starting again a new or a fresh. But if you want to start afresh and your stakeholders are with you, you can be better off by taking the path of external reconstruction since no permission is required from a court in the case of external reconstruction. That is technically, a new company will be floated or formed to take over the existing company. Internal reconstruction needs a lot of time and statutory requirements to occur because in internal reconstruction the company has to take the permission of every stakeholder and also of the court. Within the company, there are several reasons for such treatment but here are some common ones: Purpose of Capital reduction in order to pay off the unnecessary capital of the company which is of no use. Internal Restructuring of a Company: Causes, Modes and Procedure. Corporate Accounting 500 MCQs . The approach is similar when it comes down to internal and external reconstruction. It is done to ensure an inner re-arrangement of financial structure. Management Accounting MCQs. Internal reconstruction of a company means a recourse undertaken to make the necessary changes in the capital and debt structure of the company . They are the company’s shareholders, debenture holders, creditors etc. 3.3K views. The provision of reduction of share capital, which was earlier available under Sections 100-105 of the Companies Act, 1965, has now been dealt under section 66 of the Companies Act of 2013 (hereinafter referred to as 'the Act'). Internal Reconstruction is an arrangement made by companies whereby the claims of shareholders, debenture holders, creditors and other liabilities are altered/ reduced, so that the accumulated losses are written off, assets are valued at its fair value and the balance sheet shows the true and fair view of the financial position. It decides to convert its capital into 20,000 equity shares of Rs. Liquidated b. Internal reconstruction is basically concerned with the complete overhauling of financial position of a firm.The main purpose is to improve the profitability of the existing company. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. Share Capital - Alteration Of Share Capital, Advanced Corporate Accounting Capital reduction and reconstruction is a way to reduce the capital amount of the company. Therefore, in the process of internal reconstruction, only the rights of the shareholders and creditors are changed with a certain reduction of capital, and the rights/claims of the debenture-holders are kept outside the purview of the procedure of internal reconstruction. The purpose of internal reconstruction is to set off the past losses against future profits. Internal reconstruction refers to the internal re-organization of the financial structure of a company. It is a scheme of reorganization in which all interested parties in the capital structure volunteer to sacrifice. External reconstruction is one in which the company undergoing reconstruction is liquidated to take over the business of an existing company. Liquidation 12. Some prefer to stick to the old and reconstruct the internal processes. Board of directors b. It refers to the internal re-organization of the financial structure of a company. Amalgamation of companies involves liquidation of two or more companies, while external reconstruction involves liquidation of only one company,  2. The need for internal reconstruction. Section 106 relating to variation of shareholders’ rights. It is a scheme of reorganization in which all interested parties in the capital structure volunteer to sacrifice. Company can alter the share capital provided it is authorized by ----- a. It can set off past losses against future profits. It needs a lot of time and statutory requirements to occur because in internal reconstruction the company has to take the permission of every stakeholder and also of the court. It is of 3 types MCQ on Internal Reconstruction,State the Right Alternative,case of sub-division of share capital ... A company has issued capital of 10,000 equity shares of Rs. Internal reconstruction means a recourse undertaken to make necessary changes in the capital structure of a company without liquidating the existing company. Under this scheme company continues its legal existence. Ans:- if there is a creditor of company with a claim of Rs. 5,00,000 equity stock ) Variation of Shareholders rights: • When a company has issued different classes of shares with different rights or privileges attached to such shares e.g. When a company is suffering losses for the past several years and facing financial crisis, the company can sell its business to another newly formed company. It focuses on relieving the company from debts and losses by negotiating with the creditors and reducing the outstanding amount towards them, so as to reach a favorable position. Management Accounting. There is a difficulty to meet the financial crisis and there are continuous losses. Cash Flow Statement. The accounting required for both internal reconstruction and external reconstruction are complex. Internal reconstruction of a company is done through the reorganization of its share capital. Reconstruction may be external or internal which are described below: 1. Marginal and Absorption Costing. On the other hand, external reconstruction can be done immediately without any need for permission from the court. The Company having now turned the corner, the Directors expect it to earn good profit in future. ADVERTISEMENTS: Here is a compilation of top four accounting problems on alteration of share capital and internal reconstruction with its relevant solutions. Internal reconstruction is the reorganization of the financial affairs of the company internally without undergoing liquidation. External reconstruction. Internal reconstruction refers to making internal arrangements for overcoming financial difficulties. For lectures included in the course, click / tap Course Contents. Welcome to "A complete Study on Internal Reconstruction of a Company" This course focusing on the course topic designed exclusively for you to learn only what you want to learn at your affordable prices. External reconstruction: Introduction Reconstruction refers to certain arrangements made by financially unsound companies. A scheme of re-organisation is prepared in which all parties sacrifice. 3. It is also termed as re-organization which permits the existing company to be continued. However, both of these processes are much complex than they are perceived. 5 each. And both of these depend on the decision and the permission of the stakeholders involved in the whole process. The scheme of internal reconstruction is approved by ____. If it done without liquidating the company and forming a new company, the process is called internal reconstruction. Solution: It is suggested that the 7,000 shares paid up value to be reduced by Rs 60 so that the amount of reduction comes to Rs 4, 20,000. The scheme of internal reconstruction involves ___ company. Since a new company is established losses of the old company can’t be set off against the profits of the new company. As a result, it becomes important to sometimes reconstruct the existence of the businesses. By Sayantan Mukhopadhyay | Reviewed By Dheeraj Vaidya, CFA, FRM. Internal reconstruction needs a lot of time and statutory requirements to occur because in internal reconstruction the company has to take the permission of every stakeholder and also of the court. On the other hand, external reconstruction can be done immediately without any need for permission from the court. Internal reconstruction refers to making internal arrangements for … In the case, external reconstruction the losses of an old company can’t be set off against the profit of the new company. Internal reconstruction of a company is done through the reorganization of its share capital. There is an overvaluation of assets and undervaluation of liabilities. Internal Reconstruction: Internal reconstruction refers to the internal re-organization of the financial structure of a company. Internal and external reconstruction are both valid for the companies that want to reconsider their approach and future strategy. Sep 5, 2020 - Internal Reconstruction and Capital Reduction Multiple Choice Questions and Answers By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy, Coursera IPO Financial Model & Valuation Free Download, All in One Financial Analyst Bundle (250+ Courses, 40+ Projects), 250+ Courses | 40+ Projects | 1000+ Hours | Full Lifetime Access | Certificate of Completion. (a) shareholders (b) A/A (a) NCLT of Companies Act, 2013 d) SEBI 2. It does not require the binding of the existing company. Both of these reconstructions ensure the change in. Internal reconstruction is a method of corporate restructuring where an arrangement is made by the company of the organization where in changes in the assets and liabilities are made to improve the financial position without liquidating the company or transferring the ownership to external party, whereas external reconstruction is the one where an existing company is liquidated and taken over by another newly formed company and the transfer of assets and liabilities takes place, and the same is considered similar to amalgamation. Methods of Internal Reconstruction Convert fully paid up shares into stock or reconvert that stock into fully paid up shares. Standard Costing. 100, as per the Internal Reconstruction Scheme 50% of the claim needs to be waived off, The creditor may readily agree for it, otherwise, the company is on the verge of liquidation, so Rather then … Alteration of share capital and internal reconstruction -Past Year Questions. It is a scheme in which efforts are made to bail out the company from losses and put it in a profitable position. Funds Flow Statement Accounts of Holding Companies. It is a scheme of reorganization in which all interested parties in the capital structure volunteer to sacrifice. In the case of internal reconstruction, the losses of the company can be set off against the future profit of the company. It is also termed as re-organization which permits the existing company to be continued. a recourse undertaken to make necessary changes in the capital structure of a company without liquidating the existing company. 10 each fully paid into Rs. In case of internal reconstruction the existing company will be ----- a. Meaning of Internal Reconstruction : When the company reconstructs its financial structure internally without undergoing liquidation, it is internal reconstruction. Assets Rs. This has been a guide to Internal vs External Reconstruction. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute. There is no transfer of assets and liabilities, because there is not a formation of new company. New Company: In case of Internal reconstruction no new company is formed: In case of External Reconstruction a new company is formed: 4. You are asked to submit a scheme of reconstruction. Internal reconstruction is a method of reconstructing an earlier state in a language's history using only language-internal evidence of the language in question. Generally, share capital is reduced to write off the past accumulated losses of the company. Sections 100 to 105 of the Companies Act with respect to reduction of share capital. Under internal reconstruction, the accumulated trading losses and fictitious assets are written off against the sacrifice made by these interest holders in the form of a reduction of the paid-up value of their interest. It necessarily involves the reduction of share capital. ... A scheme of compromise and arrangement is an agreement between a company and its members and outside liabilities when the company faces financial problems. Equity shares of Rs.100 each 1,00,00,000 Fixed assets 1,25,00,000 Illustration 1: The summarised Balance Sheet of Sunrise Ltd. as on 31st December, 2006 was as under: On 31.12.2006 the following scheme of capital reduction was taken: (a) The equity shares were […] External reconstruction refers to closing/liquidating the company and starting again a new or a fresh. Very slow, tedious, and takes a long time. (Being conversion of 50,000 equity shares of Rs. Every 20 years Buddhist temples are reconstructed. When businesses get started, they’re not perfect. To resolve the problem of over-capitalization/ huge accumulated losses/ overvaluation of assets. When the capital structure of a company is complex and is required to make it simple. Ratio Analysis. Return to top, IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials, * Please provide your correct email id. By Pushkaraj G | Views 5720. … In case of external reconstruction, the undertaking being carried on by the company is transferred to a newly started company consisting substantially of the same shareholder. Internal reconstruction is done when there is a chance for the existing company to bounce back. Internal Reconstruction 5.6 Question 2 The following is the Balance sheet of Weak Ltd. as on 31.3.2012: Liabilities Rs. Internal Reconstruction. Application of Different Cash flow Methods, Basic Terminologies of Accounting for Hire Purchase System, Sample Merry Christmas Wishes Letter to Clients, Connect With Friends and Share Information, Methods for Accounting Treatment of Containers. IR is a restructuring method that doesn’t create a new company via liquidation. Company restructuring is a process in which a company changes the organizational structure and processes of the business. It Read more… Differences between amalgamation and external reconstruction  1. No matter what sort of reconstruction it is, it’s important to renovate, recreate, and reassume the business processes and visions as businesses grow. external or internal. Sections 94 to 97 of the Companies Act relating to alteration of share capital. (a) company law (b) AS (b) Income tax (b) Stock Exchange 3. The founders learn as they grow. External reconstruction is done to start the whole thing afresh. In the case of internal reconstruction, the losses of the company can be set off against the future profit of the company. External Reconstruction. "And reduced ” words are to be shown in the balance sheet as per ____ requirement. In internal reconstruction neither the existing company is liquidated, nor is a new company incorporated. Here we discuss the top differences between internal and external reconstruction along with infographics and comparative table. Generally, share capital is reduced to write off the past accumulated losses of the company. The idea of reconstruction is to create something new that would serve the world better. The nature of internal reconstruction. Methods of Internal Reconstruction (Reduction of Share Capital, Compromise/Arrangements & Surrender of Shares) By Team BAF on June 26, 2016 in Queries. Chapter Wise MCQs . 10 each fully paid. Login details for this Free course will be emailed to you, This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. It is a case of When change is required in the face value of shares of the company. They are the company’s shareholders, debenture holders, creditors, etc. The reconstruction arrangement made by a company, to come out of its financial difficulties, may be external or internal.

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