Capital reduction and reconstruction is a way to reduce the capital amount of the company. 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.
in order to extinguish the liability against the unpaid shares of the company,
in order to cancel paid up share capital which is unrepresented by the available assets.
How to Reduce Capital
An entity can proceed to capital reduction only when it is allowed by:
The consent of the creditors is also required, however, the court may dispense with such approval of the court in following cases:
if the entity is securing the creditor's amount,
if the entity is not willing to secure the creditor's amount, then the amount as fixed by the court.
The balance sheet of Jack as on 31st Dec, 2012 is as follows:
|72,000 shares of $10 each||720,000||Patents||201,000|
|Paid up capital||Equipments||75,000|
|54,000 shares of $10 each||540,000||Preliminary expenses||15,000|
|Accounts Paybale||36,000||Stock/ Invenory||24,750|
|Accrued liabilities||12,000||A/ Receivables||14,040|
|Profit & Loss||93,000|
The special resolution for capital reduction has been passed and confirmed as per following details:
$10 shared are to be reduced to $6 for the same number of shares,
The amount of reduction should be utilized for:
Pass the journal entries in the books of Jack.
|$10 Share capital||540,000|
|$6 Share capital||324,000|
|Profit and Loss account||93,000|