Internal Company Reconstruction-Capital Reduction Where Capital Is Not Represented by Available Assets
|Situations In Capital Reduction Where Capital Is Not Represented by Available Assets:-|
|Balance Sheet Of XYZ Ltd
The above illustrates that XYZ Ltd has unwisely eroded its paid up share capital from $600,000 to $50,000.
|So what next should XYZ Ltd do? XYZ Ltd can either:
By embarking on an internal reconstruction, XYZ Ltd should have the following intention:
|The Need To Have A Properly Design Capital Reduction Scheme|
|In any Capital Reduction Scheme, it is imperative that the capital “lost” should be absorbed equitably by the various parties hence the careful need to design the proper scheme. Needless to say, the ordinary shareholders who are the risk taker need to bear the largest amount of reduction of capital. Next, it can be the preference shareholder, debenture-holders and creditors to share in the absorption of the losses.|
|The following are some of the factors to consider when determining the amount of capital that is lost and how this loss should be allocated:
3. Ensure that the ordinary shareholder should bear the major brunt of the losses as they are risk takers in the business
4. At the end, ensure that the scheme is equitable to all affected parties.
|See the next article on Accounting Entries Used For Capital Reduction|
- Internal Company Reconstruction-Accounting Entries For Capital Reduction Where Capital Is Not Represented by Available Assets
- Company Reconstruction-Type (Part 1)
- How Do We Classify The Share Capital In A Company?
- What is Capital Employed?
- Explain what are Forfeited Shares, what are the ways to deal with forfeited shares and the bookkeeping or accounting double entry system when dealing with forfeited shares