Module 6

CHAPTER 6
Internal Reconstruction
CONTENT
Introduction – Meaning of Internal Reconstruction – forms – Reorganization or
Alteration of Share Capital – Differences between Internal Reconstruction and External
Reconstruction – Accounting Entries – Surrender of Shares – Illustrations – Exercises
Introduction
Meaning of Internal Reconstruction
Forms of Internal Reconstruction
Reorganization or Alteration of Share Capital
Reduction of Share Capital and other Liabilities
Differences between Internal Reconstruction and External Reconstruction

Legal Provisions for Internal Reconstruction
Accounting Entries of Internal Reconstruction
Reconstructed Balance sheet
Comprehensive Illustration
Excise Questions
CHAPTER 6
Page 1 of 50
Internal Reconstruction
Introduction:
A Company might have suffered huge losses in the past or might have the problem of
overcapitalization or might have overvalued its fixed assets because of inadequate provision
for depreciation. Such a company faces the danger of going into liquidation either
voluntarily or because of a petition by any of its Creditors or Debenture holders. In these
circumstances companies have three options;
1. To liquidate the company (Liquidation)

2. To reconstruct externally (External Reconstruction)
3. To reconstruct internally (Internal Reconstruction)
Meaning of Internal Reconstruction:

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.
Forms of Internal Reconstruction:

Internal Reconstruction may take any of the following two forms;
1. Reorganization or Alteration of Share Capital
2. Reduction of Share Capital and other Liabilities
Reorganization or Alteration of Share Capital:

Reorganization or Alteration of share capital refers to the rearrangement of the capital of the
company and includes the following;
A. Increasing the share capital by making fresh issue of shares.
B. Decreasing the share capital by cancelling the unissued shares.
C. Conversion of shares into stock and vice versa.
D. Consolidation of shares of smaller amounts into shares of larger amounts.
E. Subdivision of shares of larger amounts into shares of smaller amounts
A Company can alter its share capital if it is authorised by its Articles of Association.
Reduction of Share Capital and Other Liabilities:

Reduction of Share Capital is an arrangement under which the capital of the shareholder and
sometimes even the claims of the debenture holders and the creditors are reduced. The
amount made available by capital reduction is utilised in writing off the accumulated losses
fictitious assets and the overvalued portion of the other assets.
A Company can reduce its paid up capital if (A) it is authorised by its articles, (B) a special
resolution is passed and (C) a sanction of the court is obtained.
Differences between Internal Reconstruction and External Reconstruction

1. No new company is formed in case of internal reconstruction. A new company is
formed in case of external reconstruction.
2. In case of internal reconstruction, no company is liquidated. In case of external
reconstruction, one company is liquidated.
Page 2 of 50
3. Internal reconstruction requires courts confirmation. But external reconstruction can
be effected without court’s confirmation.
4. Internal reconstruction is a slow and tedious process. But external reconstruction can
be carried out easily.
5. In the case of internal reconstruction, the company is able to set off its past losses
against the future profits. Whereas, in the case of external reconstruction, then past
losses of the old company cannot be set off against the future profits of the new
company.
Legal Provisions for Internal Reconstruction:

Section 100 to 105 of the Indian Companies Act, 1956 contains the legal provisions relating
to the internal reconstruction which involves in essence an alteration of the Share Capital and
adjustments in the values of assets and liabilities. An alteration of share capital may be done
in any of the ways;
1. Reduction in Share Capital

2. Consolidation
3. Sub – Division
4. Conversion, and
5. Cancellation or Surrender
However, the following conditions must be satisfied;
1. The scheme is authorised by Articles of Association and passed by a special
resolution of the general meeting and confirmation by the court.
2. The Scheme does not affect the creditors’ interest in any way. If then proposed
scheme affects the interest of the creditors, the court/government (company law
board) shall confirm the scheme only after consulting the creditors.
3. The government (CLB) shall pass the orders of confirmation of internal
reconstruction on such terms and conditions as it may think proper and just after
consulting the creditors. If some of the creditors are unwilling the company will have
to settle their claims. The court may sanction scheme if the company secures whole
of the debts or amount fixed by the court.
4. The court may order the use of word “and reduced” after the name the company and
may order the company to publish the reason of such reduction.
5. The order of the court has to be filed with the registrar.
6. Capital reduction may involve variation of rights of different classes of shares. In
such a case the consent of the holders of three fourth shares should be obtained.
7. Holders of at least one – tenth of the issued capital affected by variation may apply to
court, within 21 days after the consent is obtained or resolution is passed, for
cancellation of such variation. However, the decision of court shall be final.
Page 3 of 50
Accounting Entries:
1. When reduction of Equity Share Capital:

(Old) Equity Share Capital A/c…………………….Dr
To (New) Equity Share Capital A/c
To Capital Reduction A/c
2. When reduction of Preference Share Capital:

(Old) Preference Share Capital A/c……………….Dr
To (New) Preference Share Capital A/c
3. When reduction of the amount due to debenture holders:

Debenture Holders A/c………………………….Dr
Or
When the debenture holders agree to accept new debentures of lower amount
(Old) Debentures A/c……………………………Dr
To (new) Debentures A/c
4. When reduction of the amount due to creditors:

Creditors A/c…………………………………Dr
5. When the appreciation in the value of assets

Assets A/c……………………………………Dr
6. When the payment of reconstruction expenses:

Reconstruction Expenses A/c…………………Dr
To Bank A/c
7. When the utilization of Capital Reduction Account balance in writing off

accumulated losses and various fictitious assets;
Capital Reduction A/c………………………Dr
To Profit & Loss A/c(Loss)
To Preliminary Expenses A/c
To Discount on Issue of Shares/Debentures A/c
To Underwriting Commission A/c
To Advertising Expenses A/c
To Reconstruction Expenses A/c
To Goodwill A/c
Page 4 of 50
To Patents or Trade Marks A/c
To Fixed Assets A/c (overvalued assets)
To Other Assets A/c
To Capital Reserve A/c (Balancing Figure)
Illustration:1 (Problem on Journal Entries)
On the reconstruction of a company, the following terms were agreed upon;

The shareholders to receive in lieu of their present holding (viz., 50,000 shares of Rs10 each)
the following;
1. Fully paid Equity Shares equal to 2/3 of their holdings.
2. 5% preference shares fully paid, to the extent of 1/3rd of the above new Equity Shares.
3. Rs60,000, 6% Second Debentures .
An issue of Rs50,000, 5% First Debentures was made and allotted payment for the
same having been received in cash.
The goodwill, which stood at Rs3,00,000 was written down to Rs1,50,000.
The plant and machinery, which stood at Rs1,00,000 were written down to Rs75,000.
The freehold and leasehold premises, which stood at Rs1,50,000 were written down to
Rs1,25,000.
Make journal entries in the books of the company necessitated by the above
reconstructions.
(Bangalore University, B.Com, April- 1993)
Solution:
Journal Entries in the Books of the Company
S.N Particulars L.F.No Debit (Rs) Credit (Rs)

o
1. (Old) Equity Share Capital A/c…………..Dr 5,00,000
To (New) Equity Share Capital A/c 2,00,000
To 6% Preference Share Capital A/c 40,000
To 5% Second Debentures A/c 60,000
To Capital Reduction A/c 2,00,000
(Being the conversion of 50,000 Equity
Shares of Rs10 each Equity Shares, 6%
Preference Shares and 5% Second
Debentures)
2. Bank Account …………………………….Dr 50,000
To 5% First Debentures A/c 50,000
(Being the issue of fresh debentures for cash)
3. Capital Reduction A/c……………………Dr 2,00,000
To Goodwill A/c 1,50,000
To Plant and Machinery A/c 25,000
To Leasehold Premises A/c 25,000
(Being the utilisation of capital reduction
Page 5 of 50
account balance to writing off goodwill, plant
and machinery and leasehold premises)
Illustration:2 (Problem on Journal Entries)

The paid up capital of Bangalore Company Limited in Rs5,00,000 and it includes 2,000,
5%Cumulative Preference Shares of Rs100 each and 30,000 Equity Shares of Rs10 each.
Because of heavy losses, the company has decided to reduce the burden of its capital and has
secured the required permission.
1. Reduction in the value of patents by Rs70,000, Machinery by Rs17,000 and
Equipment by Rs2,000.
2. Cancellation of the balance of loss of Rs1,98,000 shown on the profit and loss
account.
3. Writing down the balance of Research Expenditure Account by using the balance
remaining in the Capital Reduction Account (The Research Expenditure is shown in
the Balance Sheet at Rs79,000)
The approved scheme of Capital Reduction is as follows;
A. In exchange for every five 5% Preference Shares, issue of 4% Preference Shares
of Rs100 each and 20 ordinary shares of Rs2 each.
B. Issue of one equity share of Rs2 each in payment of arrears of Preference Shares
dividend of Rs10 (the total arrears of preference dividend is Rs30,000. The
dividend has not yet been declared)
C. Issue of one new equity share of Rs2 in exchange for every five old ordinary
shares.
Draft the journal entries.
Solution
In the Books of Bangalore Company Limited

Journal Entries

o
1. 5% Preference Share Capital A/c…………Dr 2,00,000
To 4% Preference Share Capital 1,20,000
(3/5 X2,000X100)
To Equity Share Capital A/c 16,000
(20/5X2,000X2)
To Capital Reduction A/c 64,000
(being the conversion of 2,000, 5%
Preference Shares of Rs100 each to 1,200,
4% Preference Shares of Rs100 each and
8,000 Ordinary Shares of Rs2 each)
2. (Old) Ordinary Share Capital A/c………..Dr 6,000
To (New) Ordinary Share Capital A/c 6,000
(1/5x30,000x2)
To Capital Reduction Ac
Page 6 of 50
(Being the issue of one ordinary share of Rs2
each for every 5 ordinary shares of Rs10
each)
3. Arrears of Preference Dividend A/c……..Dr 6,000
To Ordinary Share Capital A/c 6,000
(Being the issue of one ordinary share of Rs2
each for every Rs10 arrears of Preference
Dividend out of Capital Reduction Account)
4. Capital Reduction A/c…………………….Dr 3,52,000
To Profit & Loss A/c 1,98,000
To Patents A/c 70,000
To machinery A/c 17,000
To Equipment A/c 2,000
To Research Expenditure A/c 59,000
To Arrears of Preference Dividend A/c 6,000
(Being the utilization of Capital Reduction
Account balance in writi8ng off various
items)
Illustration:3
The Balance Sheet of Ram Dev Limited as on 31st March, 2015 was as follows;
Liabilities Amount (Rs) Assets Amount (Rs)

Authorised Share Goodwill 70,000
Capital:6,000 Shares of Buildings 80,000
Rs100 each 6,00,000 Plant 1,50,000
Issued Capital: Stock 50,000
2,000 Shares of Rs100 each Debtors 43,000
fully paid up 2,00,000 Cash 2,500
200, 5% Debentures of Preliminary Expenses 4,500
Rs1,000 each 2,00,000 Profit & Loss A/c 1,00,000
Sundry Creditors 50,000
Bills Payables 5,000
Bank Overdraft 45,000
5,00,000 5,00,000
The following scheme of reconstruction was adopted;

1. The paid up value of each share to be reduced to Rs50.
2. 5% Debentures to be converted into 100, 71/2% debentures of Rs1,000 each
3. Assets were re valued as under: Buildings Rs72,000, Plant Rs1,41,000, Stock
Rs45,000, Debtors subject to Reserve for bad debts Rs2,500.
4. Creditors agree to forego ¼ of the amount due to them in return for shares for the
balance.
5. Goodwill and other fictitious assets to be written off entirely.
Give the necessary journal entries
(Bangalore University, B.Com, November, 1993, April, 2000)
Page 7 of 50
Solution
In the Books of Ram Dev Company Limited

Journal Entries

o
(being the reduction of 2,000 Equity Shares
of Rs100 each to Rs50 each)
2. 5% Debentures A/c………………………..Dr 2,00,000
To 7 ½ % Debentures A/c 1,00,000
(Being the conversion of 200, 5% Debentures
of Rs1,000 each to 100, 7 ½ Debentures of
Rs1000 each)
3. Creditors A/c……………………………..Dr 50,000
To (New) Equity Share Capital A/c 37,500
(Being the cancellation of ¼ of the amount
due to creditors in return for shares for the
balance)
To Preliminary Expenses A/c 4,500
To Goodwill A/c 70,000
To Buildings A/c 8,000
To Plant A/c 10,000
To Stock A/c 5,000
To Reserve for Bad Debts A/c 2,500
To Capital Reserve A/c (bal fig) 12,500
(being the utilization of capital reduction
account balance in writing off various losses
and fictitious assets and the balance is
transferred to capital reserve account)
Illustration: 4 (Problem on Journal entries with Reconstructed Balance Sheet)
The Balance Sheet of Aditya Company Limited as on 31st March, 2015 was as follows;
Page 8 of 50
Share Capital: Goodwill 15,000
2,000 Preference Shares of Freehold Premises 2,00,000
Rs100each 2,00,000 Plant 3,00,000
4,000 Equity Shares of Stock 50,000
Rs100 each 4,00,000 Debtors 40,000
5% Mortgage Debentures 1,00,000 Profit & Loss Account 2,45,000
Creditors 1,00,000
8,50,000 8,50,000
The following scheme was approved by the Court for the company.
1. Preference Shares to be reduced to Rs75 per share and the Equity Shares to Rs37.50
per share.
2. Debenture holders to take over stock and book debts in full satisfaction of the amount
due to them.
3. Goodwill to be eliminated.
4. Freehold premises to be depreciated by 50%.
5. Plant to be appreciated by Rs50,000.
Journalise and prepare the revised Balance Sheet.
Solution:
In the Books of Aditya Limited Company

Journal Entries

o
1. (Old) Preference Share Capital A/c………Dr 2,00,000
To (New) Preference Share Capital A/c 1,50,000
(Being the conversion of 2,000 Preference
Shares of Rs100 each to Rs75 each)
2. (Old) Equity Share Capital A/c…………...Dr 4,00,000
(Being the conversion of 4,000 Equity Shares
of Rs100 each to Rs37.50 each)
3. 5% Mortgage Debentures A/c……………Dr 1,00,000
To 5% Mortgage Debenture holders A/c 1,00,000
(Being the transfer of debentures)
4. 5% Mortgage Debenture holders A/c……..Dr 1,00,000
To Stock A/c 50,000
To Debtors A/c 40,000
(Being the settlement of Debenture holders
by transferring stock and debtors)
Page 9 of 50
5. Plant A/c…………………………………..Dr 50,000
(being the appreciation in the value of plant)
To Freehold Premises A/c 1,00,000
(Being the utilization of capital reduction
account balance in eliminating the
accumulated losses, goodwill and freehold
premises)
Balance Sheet of Aditya Company Limited (Revised) as on 31st March, 2015
Equity and Liabilities Note Amount (Rs)

Share Capital:
2,000 Preference Shares of Rs75 each 1,50,000
4,000 Equity Shares of Rs37.50 each 1,50,000
Reserves & Surpluses
Non Current Liabilities
Secured Loans
Unsecured Loans
Current Liabilities
Bank Overdraft 1,50,000
Creditors 1,00,000
Total 4,50,000
ASSETS
Non Current Assets
Fixed Assets
Freehold Premises (Rs2,00,000 – Rs1,00,000) 1,00,000
Plant (Rs3,00,000 – Rs50,000) 3,50,000
Current Assets
Total 4,50,000
Illustration:5 (Journal Entries, Capital Reduction Account and Balance Sheet)
The Balance Sheet of Excel Company Limited stood as follows on 31st March, 2015.
Balance Sheet of Excel Company Limited as on 31st March, 2015

19,000 Shares of Rs 100 each 19,00,000 Land & Buildings 1,00,000
Sundry Creditors 1,00,000 Machinery 2,60,000
Debentures 1,00,000 Furniture 20,000
Stock 3,70,000
Debtors 1,80,000
Page 10 of 50
Goodwill 2,00,000
Profit & Loss A/c 9,70,000
21,00,000 21,00,000
The company is to be reconstructed as follows;

1. Shares of Rs100 are to be reduced to an equal number of fully paid shares of Rs40
each.
2. To issue 1,000 new shares of Rs40 each as fully paid up to debenture holders in full
settlement.
3. The amount available is to be utilized in writing off the goodwill and profit and loss
account and the balance in writ9ng down the value of machinery.
4. Authorised capital of the company is 20,000 shares of Rs100 each.
Give necessary journal entries; prepare Capital Reductio0n Account and
Reconstructed Balance Sheet.
(Bangalore University, B.Com April, 1999)
Solution:
In the Books of Excel Company Limited

Journal Entries

o
(being the conversion of 19,000 shares of
Rs100 each intoRs40 each)
2 Debentures A/c……………………………Dr 1,00,000
To Debenture Holders A/c 1,00,000
(being the debentures transferred)
3 Debenture Holders A/c……………………Dr 1,00,000
To (New) Equity Shares A/c 40,000
(Being the final settlement made to debenture
holders)
4 Capital Reduction A/c……………………Dr 12,00,000
To Machinery A/c 30,000
account balance in writing off profit and loss
account, goodwill and machinery)
Dr Capital Reduction Account Cr
Particulars Amount (Rs) Particulars Amount (Rs)
Page 11 of 50
To Profit & Loss A/c 9,70,000 By Old Equity Share Capital
To Goodwill 2,00,000 A/c 11,40,000
To Machinery 30,000 By Debenture holders A/c 60,000
12,00,000 12,00,000
Reconstructed Balance Sheet as on 31st March, 2015

Shareholders’ Funds:
Share Capital:
Authorised Share Capital 20,000 Shares of Rs100 20,00,000
Issued Share Capital 20,000 Shares of Rs100 each
Rs40 paid up 8,00,000
Secured Loans
Unsecured Loans
Current Liabilities
Creditors 1,00,000
Total 9,00,000
ASSETS
Non Current Assets
Fixed Assets
Land & Buildings 1,00,000
Machinery 2,30,000
Furniture 20,000
Current Assets
Stock 3,70,000
Debtors 1,80,000
Total 9,00,000
Illustration:6
Given below is the balance sheet of Unsuccessful Company Limited as on 31st March, 2015.

5,000, 8% Preference Shares Goodwill 1,00,000
of Rs10 each 50,000 Buildings 4,000
5,000 Equity Shares of Rs10 Plant 5,000
each 50,000 Debtors 1,200
Creditors 18,000 Stock 22,000
Bank Overdraft 20,000 Preliminary expenses 3,000
Profit & Loss A/c 2,500
Cash 300
1,38,000 1,38,000
The following scheme of Reconstruction was adopted;
Page 12 of 50
1. Rs10 Preference Shares were to be reduced to an equal number of fully paid shares of
Rs8 each.
2. Rs10 Equity shares were to be reduced to an equal number of fully paid shares of Rs5
each.
3. Creditors are agreed to forego Rs8,000
4. The amount thus available was to be utilizxe4d to the nominal assets and the balance
if any, to be written off Goodwill.
Pass necessary journal entries and prepare reconstructed balance sheet.
(Bangalore University, BBM, Oct/Nov – 1998)
Solution
In the Books of Unsuccessful Limited

Journal Entries

o
1. (Old) Preference Share Capital A/c………Dr 50,0000
To (New) Preference Share Capital A/c 40,000
(being the reduction of 5,000 Preference
Shares of Rs10 each to Rs8 each)
2 (Old) Equity Share Capital A/c…………..Dr 50,000

To (New) Equity Share Capital A/c 25,000
3 Creditors A/c………………………………Dr 8,000
(Being the creditors agreed to forego
Rs8,000)
4 Capital Reduction A/c……………………Dr 43,000
To Profit & Loss A/c 2,500
account balance in writing off profit and loss
account, goodwill and Preliminary Expenses)

Share Capital:
5,000, 8% Preference Shares of Rs8 each 40,000
5,000 Equity Shares of Rs 5 each 25,000
Page 13 of 50
Secured Loans
Unsecured Loans
Current Liabilities
Creditors (Rs18,000-Rs8,000) 10,000
Total 95,000
ASSETS
Non Current Assets
Fixed Assets
Goodwill 62,500
Buildings 4,000
Plant 5,000
Current Assets
Debtors 1,200
Stock 22,000
Cash 300
Total 95,000
Illustration: 7 ( Problem on Journal Entries and Reconstructed Balance Sheet)
The state of Affairs of Earnest Company Limited on 31st March, 2015 was as follows;

20,000 Equity Shares of Goodwill 80,000
Rs10 each 2,00,000 Buildings 1,75,000
15,000, 7% Preference Machinery 3,25,000
Shares of Rs10 each 1,50,000 Patents 54,000
13,000, 5% Preference Furniture 15,000
Shares of Rs10 each, Rs5 Investments 75,000
paid up 65,000 Sundry Debtors 4,15,000
5% Debentures 1,50,000 Cash 2,000
8% Debentures 3,00,000 Bank 18,000
Sundry Creditors 4,50,000 Profit & Loss A/c 1,75,500
Debenture Interest Due 19,500
13,34,500 13,34,500
The following scheme of Capital Reduction was submitted and approved by the Court.
A. Equity Shares of Rs10 each fully paid were to be reduced to shares of Rs5 each.
B. 7% Preference Shares of Rs10 each fully paid were to be reduced to 6% Preference
Shares of Rs10 each, Rs6 per share paid up.
Page 14 of 50
C. 5% Preference Shares of Rs10 each, Rs5 paid up were to be reduced to 4 ½ %
Preference Shares of Rs10 each, Rs3 per share paid up.
The debenture holders agreed to forego the interest due to them. The company in the
meantime recovered as damages a sum of Rs74,000 from a third party and it was
decided to use this amount also to write off the capital losses. The reconstruction
expenses come to Rs7,250.
Give Journal Entries to record the above and draw the Reconstructed Balance Sheet.
(Bangalore University, April 1996, April 1999)
Solution:
In the Books of Earnest Company Limited

Journal Entries

o
1. (Old) Equity Share Capital A/c………Dr 2,00,000
2 7% Preference Share Capital A/c…………Dr 1,50,000
To 6% Preference Share Capital A/c 90,000
(Being the conversion of 15,000, 7%
Preference Shares of Rs10 each to 15,000,
6% Preference Shares of Rs10 each, Rs6 paid
up)
3 5% Preference Share Capital A/c…………Dr 65,000

To 4 ½ % Preference Share Capital A/c 39,000
(being the conversion of 13,000, 5%
Preference Shares of Rs10 each, Rs5 paid up
to 13,000, 4 ½ % Preference Shares of Rs10
each, Rs 3 paid up)
4 Debenture Interest Due A/c……………….Dr 19,500
(being the debenture interest transferred to
Capital Reduction Account)
5 Bank A/c…………………………………..Dr 74,000
To Damage Recovery A/c 74,000
(being the recovery of damages)
6 Damage Recovery A/c…………………….Dr 74,000
(being the damages recovered transferred to
7 Reconstruction Expenses A/c……………Dr 7,250
To Bank A/c 7,250
Page 15 of 50
(being the payment of reconstruction
expenses)
8 Capital Reduction A/c…………………….Dr 2,79,500
To Reconstruction Expenses A/c 7,250
To Capital Reserve A/c (Bal fig) 16,750
account balance in writing off accumulated
losses, goodwill etc.,)

Share Capital:
20,000 Equity Shares of Rs 10 each, Rs5 paid up 1,00,000
15,000, 6% Preference Shares of Rs10 each, Rs6
Paid up 90,000
13,000, 4 ½ % Preference Shares of Rs10 each, Rs3
Paid up 39,000
Capital Reserve 16,750
Secured Loans
5% Debentures 1,50,000
Unsecured Loans
Current Liabilities
Creditors 4,50,000
Total 11,45,750
ASSETS
Non Current Assets
Fixed Assets
Buildings 1,75,000
Machinery 3,25,000
Patents 54,000
Furniture 15,000
Investments 75,000
Current Assets
Debtors 4,15,000
Cash 2,000
Bank (Rs18,000+Rs74,000 – Rs7,250) 84,750
Total 11,45,750
Illustration: 8
The following is the Balance Sheet of Bright Limited as on 31st March, 2015

Share Capital: Leasehold Premises 1,30,800
Authorised Capital: Plant & Machinery 42,200
10,000 Preference Shares of Patents at cost 8,50,000
Page 16 of 50
Rs100 each 10,00,000 Sundry Debtors 76,500
10,000 Equity Shares of Stock in trade 55,000
Rs100 each 10,00,000 Cash in hand 500
20,00,000 Discount on Issue of Shares 18,000
Subscribed Capital: Preliminary Expenses 12,000
7,500 Preference Shares of Profit & Loss Account 1,15,000
Rs100 each fully paid up 7,50,000
5,000 Equity Shares of
Rs100 each fully paid 5,00,000
13,00,000 13,00,000
The company suffered heavy losses and was not getting on well. The following scheme of
reconstruction was adopted.
A. The preference shares are reduced to an equal number of fully paid shares of Rs50
each.
B. The Equity Shares be reduced to an equal number of shares of Rs25 each.
C. The amount so made available be used to write off Rs30,800 of the Leasehold
Premises; Rs15,000 of Stock; 20% of Plant and Machinery and Sundry Debtors and
balance available off patents.
Journalise the transactions and prepare the Balance Sheet after the reconstruction has
been carried out.
Solution:
In the Books of Bright Limited

Journal Entries

o
1. (Old) Preference Share Capital A/c……….Dr 7,50,000
To (New) Preference Share Capital A/c 3,75,000
(Being reduction of Preference Shares )
2 (Old) Equity Share Capital A/c…………..Dr 5,00,000
(Being reduction of Equity Share Capital)
To Discount on Issue of Shares A/c 18,000
To Leasehold Premises A/c 30,800
Page 17 of 50
To stock A/c 15,000
To Plant & Machinery A/c (20%) 8,440
To Sundry Debtors A/c 15,300
To Patents A/c (bal fig) 5,35,460
(Being utilization of capital reduction account
for writing off accumulated losses and assets
as per the provisions)
4 Debenture Interest Due A/c……………….Dr 19,500
(being the debenture interest transferred to

Authorised Share Capital:
20,000 Preference Shares of Rs50 each 10,00,000
20,000 Equity Shares of Rs50 each 10,00,000
20,00,000
Subscribed Share Capital:
7,500 Preference Shares of Rs50 each fully paid 3,75,000
5,000 Equity Shares of Rs50 each fully paid 1,25,000
Secured Loans
Unsecured Loans
Current Liabilities
Total 5,50,000
ASSETS
Non Current Assets
Fixed Assets
Leasehold Premises 1,00,000
Plant & Machinery 33,760
Patents 3,14,540
Investments
Current Assets
Sundry Debtors 61,200
Stock in trade 40,000
Cash in hand 500
Total 5,50,000
Illustration: 9
The following is the Balance Sheet of Mysore Sandal Limited as on 31st March, 2015.
Page 18 of 50
13% Cumulative Preference Fixed Assets 15,00,000
Shares of Rs100 each 1,00,000 Current Assets 35,00,000
Equity Shares of Rs10 each 7,00,000 Profit & Loss A/c 3,00,000
Current Liabilities 39,00,000
Provision for Taxation 3,00,000
53,00,000 53,00,000

1. Fixed assets are to be written down by 331 1/3 %
2. Current Assets are to be re valued at Rs 27,00,000
3. Preference shares decide to forego their right to arrears of dividend which are in
arrears for three years.
4. The taxation liability is settled at Rs4,00,000
5. One of the creditors of the company to whom the company owes Rs25,00,000 decides
to forego 50% of his claim. He is allotted 1,00,000 equity shares of Rs5 each in part
satisfaction of the balance of his claim.
6. The rate of interest on debentures is increased to 11%. The debenture holders surrend
their existing debentures of Rs100 each and exchange the same for fresh debentures
of Rs75 each.
7. All existing equity shares are reduced to Rs5
8. All preference shares are reduce to Rs75 each.
Pass necessary journal entries and show the balance sheet of the company after giving
effect to the above.
(Bangalore University, B.Com April, 2001 and April, 2003)
Solution
In the books of Mysore Sandal Limited

Journal Entries

o
1. Equity Share Capital A/c………………….Dr 7,00,000
To New Equity Share Capital A/c 3,50,000
(being reduction of equity shares of Rs10
each into shares of Rs5 each)
2 Old 13% Cumulative Preference Shares A/c ………Dr 1,00,000
To (New)13% Cumulative Preference Shares A/c 75,000
To capital Reduction A/c
25,000
(being the reduction of preference shares of
Rs100 each to Rs75 each)
3 Sundry Creditors A/c……………………...Dr 17,50,000
Page 19 of 50
To Equity Share Capital A/c 5,00,000
(being the claim forego by a creditor and the
allotment of shares in part satisfaction of the
balance of his claim)
4 8% Debentures A/c………………………..Dr 3,00,000
To 11% Debentures A/c 2,25,000
(being the conversion of 8% Debentures of
Rs100 each into 11% Debentures of Rs75
each)
To Fixed Assets A/c 5,00,000
To Current Assets A/c 8,00,000
To Provision for taxation A/c 1,00,000
(being the loss written off, assets reduced and
provision for taxes increased)
Revised Balance Sheet of Mysore Sandal Limited as on 31st March, 2015

Share Capital:
13% Preference Shares of Rs75 each 75,000
Equity Share Capital 8,50,000
Secured Loans
Unsecured Loans
Current Liabilities
Current Liabilities (Rs39,00,000 – Rs17,50,000) 21,50,000
Provision for taxation ( 4,00,000
Total 37,00,000
ASSETS
Non Current Assets
Fixed Assets
Fixed Assets 10,00,000
Current Assets
Current Assets 27,00,000
Total 37,00,000
Illustration:10
The following is the Balance Sheet of Ideal Company Limited as on 31st March, 2015.
Page 20 of 50
Share Capital: Goodwill 2,00,000
Shares of Rs10 each Machinery 10,00,000
10% Cumulative Preference 10,00,000 Stock 2,50,000
Shares of Rs100 each 2,00,000 Debtors 2,00,000
Sundry Creditors 10,00,000 Bank 50,000
Profit & Loss A/c 5,00,000
22,00,000 22,00,000
Preference Dividends are in arrears for the last 4 years. The following scheme is approved by
the court;
1. Equity shares to be reduced to Rs1 each
2. 50% of the preference dividend in arrears to be paid in cash immediately and the
balance of arrears is agreed to foregone.
3. Machinery to be depreciated by 5% and 10% RBDD on debtors to be provided.
4. All intangible assets to be written off
5. Balance of reconstruction account if any to be capitalised.
Journalise and prepare the revised balance sheet.
(Bangalore University, April, 1995)
Solution:
In the Books of Ideal Company Limited

Journal Entries

o
1. Old Equity Share Capital A/c……………..Dr 10,00,000
To New Equity Share Capital A/c 1,00,000
(being the conversion of old equity share
capital into new equity share capital and the
remaining balance transferred to capital
reduction account)
2 Arrears of Dividend A/c…………………..Dr 40,000
To Bank A/c 40,000
(being the payment of arrears of preference
dividend)
To Reserve for Bad & Doubtful Debts A/c 20,000
To Arrears of Dividend A/c 40,000
To Capital Reserve A/c (bal fig) 90,000
(being the losses written off, assets reduced)
Page 21 of 50
In the Books of Ideal Company Limited

Share Capital:
Equity Shares of Rs1 each 1,00,000
10% Cumulative Preference Shares of Rs100 each 2,00,000
Secured Loans
Unsecured Loans
Current Liabilities
Sundry Liabilities 10,00,000
Total 13,90,000
ASSETS
Non Current Assets
Fixed Assets
Machinery 9,50,000
Current Assets
Sundry Debtors 2,00,000
Less: Reserve for bad and doubtful debts 20,000 1,80,000
Bank (Rs50,000 – Rs40,000) 10,000
Stock 2,50,000
Total 13,90,000
Illustration:11(Problem on Journal Entries and Reconstructed Balance Sheet)
Balance Sheet of Bharath Construction Limited as on 31st March, 2015

Authorised Capital: Goodwill 10,000
20,000 Equity Shares of Land & Buildings 20,500
Rs100 each 2,00,000 Machinery 50,850
Issued, Subscribed and Paid Preliminary Expenses 1,500
up Capital: Stock 10,275
12,000 Equity Shares of Book Debts 15,000
Rs10 each 1,20,000 1 Cash at Bank 1,500
Less Calls in arrears 9,000 1,11,000 Profit & Loss A/c
(Rs3 per share on 3,000 shares) balance as per last Balance
Sundry Creditors 15,425 Sheet: 22,000
Provision for taxation 4,000 Less: Profit for the year 1,200 20,800
1,30,425 1,30,425
Page 22 of 50
The valuation of machinery reveals that it is overvalued by Rs10,000. It is proposed to write
down this asset to its true value, to eliminate the deficiency in the Profit & Loss Account and
to write off goodwill and preliminary expenses by adopting the following course;
1. Forfeit the shares on which call is outstanding.
2. Reduce the paid up capital by Rs3 per share; face value remaining the same.
3. Reissue the forfeited shares at Rs5 per share
4. Utilise the provision for taxes if necessary
All the above were duly put into action. Pass the necessary journal entries and draw
up the Balance Sheet of the Company after carrying out the terms of the scheme.
Solution:
In the Books of Bharath Construction Limited
Journal Entries

o
1. Equity Share capital A/c…………………..Dr 30,000
To Calls in Arrears A/c 9,000
To Share Forfeited A/c 21,000
(being the forfeiture of 3,000 shares on which
Rs3 per share is in arrears)
2 Old Equity Share Capital A/c……………..Dr 15,000
To New Equity Share Capital A/c 3,000
(being the conversion of equity shares to Rs7
per share)
3 Bank A/c…………………………………..Dr 15,000
Share Forfeited A/c………………………..Dr 6,000
To Equity Share Capital A/c 21,000
(being the reissue of 3,000 shares of Rs7 per
share at Rs5 per share)
4 Shares Forfeited A/c………………………Dr 15,000
(being transfer if balance share forfeiture
account)
5 Capital Reduction A/c……………………Dr 42,000
Provision for Taxation A/c (bal fig)……..Dr 300
To Profit & Loss A/c 20,800
(being the losses written off and machinery
value reduced)
Dr Capital Reduction Account Cr
Page 23 of 50
Particulars Amount (Rs) Particulars Amount (Rs)
To Profit & Loss A/c 20,800 By Equity Share Capital A/c 27,000
To Goodwill 10,000 By Share Forfeited Account 15,000
To preliminary Expenses 1,500 By Provision for Taxation A/c 300
To machinery A/c 10,000
42,300 42,300
In the Books of Bharath Constructions Limited


Share Capital:
Authorised Share Capital: 20,000 shares of Rs10 each 2,00,000
Issued, Subscribed and Paid Up Share Capital:
12,000 Equity Shares of Rs7 each 84,000
Secured Loans
Unsecured Loans
Current Liabilities
Provision for taxation 3,700
Total 1,03,125
ASSETS
Non Current Assets
Fixed Assets
Land & Buildings 20,500
Machinery 40,850
Current Assets
Stock 10,275
Book Debts 15,000
Cash at Bank 16,500
Total 1,03,125
Illustration: 12 (Problem on Journal Entries and Reconstructed Balance Sheet)
On April 1st, 2015 the Balance Sheet of Western Limited was as follows;

Share Capital: Mumbai Works 20,00,000
Authorised Share Capital: Kolkata Works 10,00,000
4,00,000 Equity Shares of Workmen’s Compensation
Rs5 each, fully paid 20,00,000 Fund Investments 35,000
3,00,000, 6% Preference Stock 1,15,000
Shares of Rs5 each 15,00,000 Debtors 50,000
“A”, 6% Debentures secured Discount on Debentures
Page 24 of 50
on Mumbai Works 1,00,000 “A” 2,500
“B” 6% Debentures Secured “B” 10,000 12,500
on Kolkata Works 2,50,000 Profit & Loss Account 16,22,500
Workmen Compensation
Fund:
Mumbai 25,000
Kolkata 10,000 35,000
Bank OD 7,50,000
Sundry Creditors 2,00,000
48,35,000 48,35,000
On 1st April, 2015, a scheme to reduce the capital implemented the following;
A. The ordinary shares were reduced to Rs0.25 each
B. The Preference Shares were reduced to Rs3.75 each, and the rate of dividend on them
to 5%.
C. The “A” and “B” category debenture holders waived payment of Rs42,000 interest
(which was included in Creditors Rs2,00,000)
D. The Directors were refund Rs50,000 fee they had received.
E. The “B” Debenture holders formed a new company to take over the Kolkata Works
for Rs5,00,000, and this price was satisfied on the same date, by the surrender of the
“B” debentures and the allotment of 50,000 fully paid shares of Rs5 each in the new
company.
F. The investments were valued at Rs25,000. Stock at Rs50,000 and the debtors at
Rs40,000. There was no actual liability to workmen at Kolkata. The assets were to
be written down accordingly; any fictitious assets were to be eliminated; only
necessary reserves were to be retained and the balance available was to be written off
to the book value of the Mumbai Work.
Journalise these transactions and prepare the Balance Sheet after this scheme is
carried out.
(ACS)
Solution:
In the Books of Western Company Limited
Journal Entries

o
1. Old Share Capital A/c(Rs5 each)…………Dr 20,00,000
To New Equity Share Capital A/c (Rs.25) 1,00,000
To Reorganization A/c 19,00,000
(being the conversion and reduction of equity
shares of Rs5 each to shares of Rs0.25 each)
2 6% Preference Share Capital A/c…………Dr 15,00,000
To 5% Preference Share Capital A/c 11,25,000
To Reorganization A/c 3,75,000
(being the conversion of 6% Preference
shares of Rs5 each into 5% Preference shares
of Rs3.75 per share and the balance reduced)
Page 25 of 50
3 Sundry Creditors A/c……………………Dr 42,000
To Reorganization A/c 42,000
(being the interest waived by the debenture
holders)
4 Bank A/c…………………………………..Dr 50,000
(being the refund of Director’s fee)
5 “B”6% Debentures A/c……………………Dr 5,00,000
To Kolkata Works A/c 5,00,000
(being the Kolkata Works taken over by the
“B” Debenture Holders)
6 “B” 6% Debentures A/c…………………...Dr 2,50,000
Shares in New Company A/c……………..Dr 2,50,000
To “B” Debenture Holders A/c 5,00,000
(Being the cancellation of “B” Debentures
and receipt of 50,000 fully paid shares of Rs5
each in the new company in full settlement of
the amount due from “B” Debenture holders)
7 Kolkata Workmen Compensation Fund A/c………Dr 10,000
(being the fund no more required, transferred)
8 Reorganization A/c………………………..Dr 23,77,000
To Discount on Debentures A/c 12,500
(ARs2,500+BRs10,000)
To Investment A/c 10,000
To Stock A/c 65,000
To Kolkata Works A/c 5,00,000
To Mumbai Works A/c 1,57,000
(being the losses written off and assets
reduced)
In the Books of Western Company Limited

Reconstructed Balance Sheet

Share Capital:
4,00,000 Ordinary Shares of Rs0.25 each 1,00,000
3,00,000, 5% Preference Shares of Rs3.75 each 11,25,000
Mumbai Workmen’s Compensation Fund 25,000
Secured Loans
“A”6% Debentures (Secured on Mumbai Works) 1,00,000
Unsecured Loans
Current Liabilities
Creditors 2,00,000
Less: Written off 42,000 1,58,000
Page 26 of 50
Bank OD 7,50,000
Total 22,58,000
ASSETS
Non Current Assets
Fixed Assets
Mumbai Works 20,00,000
Less: Written Off 1,57,000 18,43,000
Workmen’s Compensation Fund Investment 35,000
Less: Written off 10,000 25,000
Shares in the Company 2,50,000
Current Assets
Stock 1,15,000
Less: Written Off 65,000 50,000
Debtors 50,000
Less: Written Off 10,000 40,000
Bank Balance 50,000
Total 22,58,000
Illustration:13 (Problem on Journal Entries and Reconstructed Balance Sheet)
The following is the Balance Sheet of M/s Nostalgia Limited as on 31st March, 2015.

Equity Share Capital: Fixed Assets
50,000 Shares of Rs10 each, Goodwill 1,20,000
Rs7.50 per share paid up 3,75,000 Plant & Machinery 2,80,000
Preference Share Capital: Land & Buildings 2,00,000
9%, 20,000 Cumulative
Preference Shares of Rs10 2,00,000 Current Assets
each, fully paid up Sundry Debtors 95,000
11% Debentures 2,00,000 Sundry Debtors 65,000
Bank Overdraft 50,000 Cash in hand & Bank 50,000
Sundry Creditors
Trade 72,000 Miscellaneous Expenses
Debenture Interest Due 44,000 Profit & Loss A/c 1,50,000
Expenses 17,000
Bank Interest due 2,000
9,60,000 9,60,000
The Company was in arrears of Preference Dividend for three years. finding itself in a
difficult situation, the company formulated a scheme of reconstruction and obtained the
approval of the authorities and parties concerned. The scheme in its essential consisted the
following;
1. Cumulative preference shareholders would give up their right to dividends in arrears.
Page 27 of 50
2. Interest due on debentures would be waived to the extent of 50% and for the balance,
equivalent value in debentures would be issued at a discount of 12%
3. Bank would scale down its interest calculations from 16% to 10%.
4. Sundry Creditors to be fully discharged by setting up their claims at 90%
5. Goodwill to be written off fully. Plant and machinery to be depreciated by 20%,
stock in trade by 10% and doubtful debts to the extent of 40% of the total outstanding
to be written off.\
6. Land & Buildings to reflect their market value of Rs3,00,000
7. Cost of construction amount to Rs15,450 to be written off
8. The equity shareholders agree to suffer such reduction in their claims as is necessary
to put the scheme into operations.
Show the journal entries to put the above scheme into operation and draw the Balance
Sheet of the Company after reconstruction.
(Charted Accountancy)
Solution:
Amount Required for Reconstruction to be met by Equity Shareholders
Losses to be written off and assets to be reduced Amount(Rs) Amount (Rs)

Profit & Loss Account 1,50,000
Goodwill 1,20,000
Plant & Machinery 56,000
Stock 9,500
Debtors 26,000
Amount due for Debenture Interest 44,000
Less: Waived 50% 22,000
Balance Due 22,000
Debentures to be issued at 12%
(22,000X100/88)X Discount on Debentures 25,000 3,000
Cost of Reconstruction 15,450 3,79,950
Less: Funds available from other sources:
Increase in Land & Buildings 1,00,000
Debenture Interest waived 22,000
Bank Interest waived (2,000X6/16) 750
Sundry Creditors Reduced 7,200 1,29,50
Loss to be borne by the Equity Shareholders: 2,50,000

Shares of Rs10 each, Rs7.50 per share paid up, may be reduced byRs5 per share to carry out
the scheme of reconstruction
In the Books of Nostalgia Limited

Journal Entries

o
1. Equity Share Capital A/c………………….Dr 2,50,000
Page 28 of 50
(being the reduction of shares by Rs5 each)
2 Sundry Creditors (Debenture Interest) A/c..Dr 44,000
Discount on Issue of Debentures A/c……..Dr 3,000
To Debentures A/c 25,000
(being the settlement of debenture interest)
3 Land & Buildings A/c……………………..Dr 1,00,000

Sundry Creditors A/c (Bank Interest)…….Dr 750
Sundry Creditors A/c (for trade)…………Dr 7,200
(being the increase in the value of land and
buildings account and sundry creditors
waived)
4 Reconstruction Expenses A/c…………….Dr 15,450
To Bank A/c 15,450
((being the expenses paid)
To Plant & Machinery A/c 56,000
To Stock A/c 9,500
To Discount on Debentures A/c 3,000
To Reconstruction Expenses A/c 15,450
(being the losses written off and assets
reduced)
Reconstructed Balance Sheet of M/s Nostalgia Limited as on 31st March, 2015

Share Capital:
50,000 Equity Shares of Rs10 each, Rs2.50 paid up 1,25,000
20,000, 9% Cumulative Preference Shares of Rs10 each 2,00,000
Secured Loans
New Debentures 25,000
Unsecured Loans
Current Liabilities
Sundry Creditors
Trade 64,800
Expenses 17,000
Bank Interest 1,250
Total 6,83,050
Page 29 of 50
ASSETS
Non Current Assets
Fixed Assets
Plant & Machinery 2,24,000
Land & Buildings 3,00,000
Current Assets
Stock In trade 85,500
Sundry Debtors 39,000
Cash at Bank 34,550
Total 6,83,050
Illustration: 14 (Problem on Journal Entries and Reconstructed Balance Sheet when the
Trial Balance is given)
Paradise Limited which had experienced trading difficulties decided to reorganize its finance.
On 31st March, 2015, the Trial Balance extracted from the books of the company showed the
following position;
Name of the Ledger Account Debit (Rs) Credit (Rs)

Share Capital, Authorised and Issued
1,500, 6% Cumulative Preference Shares of Rs100 each 1,50,000
Goodwill at cost 50,000
Trade Creditors 42,500
Debtors 30,200
Leasehold Property, Provision for Depreciation 30,000
Leasehold Property at cost 80,000
Plant & Machinery at cost 2,10,000
Plant & Machinery, provision for depreciation 57,500
Preliminary expenses 7,250
5,67,000 5,67,000
The approval of the Court was obtained for the following scheme for reduction of capital;
A. The preference shares to be reduced to Rs75 per share.
B. The Equity shares to be reduced to Rs12.50 per share
C. One Rs12.50 equity share to be issued for each Rs100 of gross preference dividend
arrears; the preference share dividend had not been paid for the last three years.
D. The balance in capital reserve to be utilised.
E. Plant and machinery to be written down to Rs75,000
F. The profit and loss account balance and all intangible assets to be written off.
At the same time as a resolution to reduce capital was passed another resolution was
approved restoring the total authorised capital to Rs3,50,000 consisting of 1,500, 6%
Page 30 of 50
cumulative preference shares of Rs75 each and the balance in equity shares were
issued at par, for cash, payable in full upon application. The same were fully
subscribed and paid.
You are required to;
A. To show the journal entries to record the above transactions in the company’s
books.
B. To prepare the Balance Sheet of the Company, after completion of the scheme.
(Charted Accountancy)
Solution:
In the Books of Paradise Limited

Journal Entries

o
1. 6% Cumulative Preference Share Capital A/c (Rs100)…..Dr 1,50,000
To 6% Cumulative Preference Shares Capital A/c (Rs75)
To Capital Reduction Account 1,12,500
(being the conversion of 6% Cumulative 37,500
Preference Shares of Rs100 each into shares
of Rs75 each and the balance reduced)
2 Equity Share Capital A/c (Rs100)………...Dr 2,00,000
To Equity Share Capital A/c (Rs12.50) 25,000
(being the conversion of equity shares of
Rs100 each into shares of Rs12.50 per share
and the balance reduced)
3 Capital Reserve A/c……………………….Dr 36,000
(being the capital reserve transferred to
capital reduction account)
To Provision for Plant & Machinery A/c 77,500
(being the loss written off and plant and
machinery reduced)
To Equity Share Capital A/c 2,09,125
(being the issue of one equity share of
Rs12.50 per share for Rs100 cumulative
preference share dividend arrears)
In the Books of Paradise Limited

Page 31 of 50
Share Capital:
6% Cumulative Preference Shares of Rs75 each 1,12,500
19,000 Equity Shares of Rs12.50 each 2,37,500
Secured Loans
Unsecured Loans
Current Liabilities
Total 3,92,500
ASSETS
Non Current Assets
Fixed Assets
Leasehold Property at cost 80,000
Less: Leasehold Property 30,000 50,000
Plant & Machinery at cost 2,10,000
Less: Provision for Depreciation 1,35000 75,000
Current Assets
Debtors 30,200
Bank 1,58,125
Total 3,92,500
SURRENDER OF SHARES:
We have so far seen internal reconstruction of a company through the scheme of

capital reduction. Internal reconstruction, may also take place by surrender of shares. Under
this method, shares are sub divided into shares of smaller amount s and then the shareholders
are asked to surrender a part of them to the company in order to help capital reorganization.
Such surrendered shares are utilised in reducing or clearing debentures and other liabilities.
The amount of shares surrendered but not reissued, and the claims foregone by creditors, and
debenture holders are transferred to capital reorganization account and is used in just the
same way as Capital Reduction Account.
Illustration:15 (Problem on when shares are surrendered)

A company’s position on 31st March, 2015 was as follows;

1,000, 6% Debentures of Rs1000 each 10,00,000
Interest on above 1,20,000
The assets on that date amounted to Rs9,60,000 (valued according to their present net worth).
The following steps were taken with the approval of all concerned.
A. The shares were subdivided into shares of Rs5 each and 90% of the shares were
surrendered.
Page 32 of 50
B. The total claims of the debenture holders were reduced to Rs4,90,000 and in
considering this, they were also allotted shares (out of the surrendered shares)
amounting to Rs2,50,000.
C. The shares surrendered but not reissued were cancelled.
Draft the journal entries and give the balance sheet of the company after
reconstruction.
Solution:
Since the accumulated losses are not given in the problem, a Balance Sheet can be prepared
to ascertain the total of the accumulated losses.

20,000 Equity Shares of Sundry Assets: 9,60,000
Rs10 each 20,00,000 Accumulated Losses or
1,000, 6% Debentures of Deficiency (bal fig) 21,60,000
Rs1,000 each 10,00,000
Interest on Debentures 1,20,000
31,20,000 31,20,000
Journal Entries in the Books of the Company

o
1. Equity Share Capital A/c(Rs100)..……….Dr 20,00,000
To Equity Share Capital A/c(Rs5) 20,00,000
(being the sub division of shares of Rs100
each into shares of Rs5 each)
2 Equity Share Capital A/c (Rs5)…………...Dr 18,00,000
To Surrendered Share Capital A/c 18,00,000
(being the surrender of 90% of the new equity
share capital)
3 6% Debentures A/c………………………..Dr 5,10,000
Interest on Debentures A/c……………….Dr 1,20,000
(being the reduction in the claims of
debenture holders and the cancellation of
debenture interest outstanding)
4 Surrender Share Capital A/c………………Dr 2,50,000
To Equity Share Capital A/c (Rs5) 2,50,000
(being the issue of equity shares to the
debenture holders as a consideration of their
sacrifice)
5 Surrendered Share Capital A/c……………Dr 15,50,000
(being the surrendered but not reissued shares
Page 33 of 50
cancelled)
6 Reorganization A/c………………………..Dr 21,80,000
To Deficiency A/c 21,60,000
To Capital Reserve A/c 20,000
(being the losses written off and the balance
transferred to capital reserve account)
Reconstituted Balance Sheet of the Company as on 31st March, 2015

Share Capital:

Secured Loans 4,90,000
6% Debentures
Unsecured Loans
Current Liabilities
Total 9,60,000
ASSETS
Non Current Assets
Fixed Assets
Sundry Assets 9,60,000
Current Assets
Total 9,60,000
EXERCISES
SECTION – A
1. What do you mean by Internal Reconstruction?
2. State two forms of Internal Reconstruction?
3. Distinguish between Internal Reconstruction and External Reconstruction?
4. What is reduction of Share Capital?
5. How do you deal with the Balance in Capital Reduction Account?
6. When can a company reduce its share capital?
7. What is capital reduction account?
8. When must Reorganization Account be opened?
9. What is the entry for appreciation in the value of assets, at the time of internal
reconstruction?
10. State the order in which Capital Reduction Balance must be used?
11. State any two legal provisions relating to capital reduction under the Indian
Companies Act?
12. State the main objective of Capital Reduction?
Page 34 of 50
13. A Company Limited with a share capital of Rs1,00,000 equity shares of Rs10 each
fully paid carried out by proper resolution subdivision of shares into Rs2 each fully
paid. Show the journal entry affecting the above transaction?
14. What are the different forms of Internal Reconstruction?
SECTION – B
15. Distinguish between Internal Reconstruction and External Reconstruction?
16. Explain briefly the legal formalities to be performed for the reduction of share
capital?
17. Distinguish between reorganization and reduction of share capital?
18. Mention the way of alternation of share capital?
19. The share capital of X Limited consist of the following;
A. 10,0006% Preference Shares of Rs100 each
B. 50,000 Equity Shares of Rs10 each
The shares are fully paid up. The Company has accumulated losses to the extent
of Rs3,50,000. Preliminary expenses of Rs20,000 and fixed assets are overvalued
to the extent ofRs4,00,000.
The scheme of capital reduction permits to write off overvalue of fixed assets,
losses and expenses. Under this scheme, 6% Preference Shares are to be
converted into 7 ½ % Preference Shares of Rs60 each and Equity Shares are
converted into shares ofRs2 each.
(Bangalore University, B.Com 2014)
20. Given below is the Balance Sheet of Hindustan Gold Mines Limited as on 31 st March,
2015.
Balance Sheet as on 31st March, 2015

10,000, 8% Preference Goodwill 2,00,000
Shares of Rs10 each 1,00,000 Buildings 8,000
10,000 Equity Shares of Plant & Machinery 10,000
Rs10 each 1,00,000 Sundry Debtors 2,400
Sundry Creditors 36,000 Stock in hand 44,000
Bank OD 40,000 Preliminary Expenses 6,000
Profit & Loss Account 5,000
Cash in hand 600
2,76,000 2,76,000

A. Rs10 Preference Shares were to be reduced to an equal number of fully paid shares
ofRs8 each.
B. Rs10 Equity shares were to be reduced to an equal number if fully paid shares of Rs5
each.
C. Creditors agreed to forego Rs16,000
D. The amount available was to be utilised to the nominal assets and the balance if any to
be written off from Goodwill.
Page 35 of 50
Pass the Journal entries and prepare the Reconstructed Balance Sheet.
(Bangalore University, B.Com – 2012)
21. Given below is the Balance Sheet of Nayak Limited as on 31st March, 2015

5,000 8% Preference Shares Goodwill 1,00,000
of Rs10 each 50,000 Land & Buildings 4,000
5,000 Equity Shares of Rs10 Plant & Machinery 5,000
each 50,000 Trade Debtors 1,200
Sundry Creditors 18,000 Stock 22,000
Bank Overdraft 20,000 Preliminary Expenses 3,000
Profit & Loss A/c 2,500
Cash Account 300
1,38,000 1,38,000

A. Rs10 Preference Shares were to be reduced to an equal number of fully paid
shares of Rs8 each.
B. Rs10 Equity Shares were to be reduced to an equal number of fully paid shares of
Rs5 each
C. Creditors agreed to forego Rs8,000.
D. The amount available was to be utilised to the nominal assets and the balance if
any to be written off goodwill.
Pass the required journal entries.
22. Following is the Balance Sheet of Zenith Limited as on 31st March, 2015.

10,000 Shares of Rs10 each 1,00,000 Land & Buildings 20,500
fully paid Plant & Machinery 50,850
Bank Overdraft 15,425, Stock 0,275
Trade Creditors 15,000 Sundry Debtors 15,000
Cash 1,500
Preliminary Expenses 1,500
1,30,425 1,30,425
The Company adopted the following Scheme of Internal Reconstruction.

a. Reduce the present value of shares to Rs5 each fully paid.
b. Sundry Creditors agreed to forego 20% of their claims as the company decided to
pay them cash immediately.
Page 36 of 50
c. The Company made a fresh issue of 6,515 Equity Shares of Rs5 each fully paid
and pay off the Bank Overdraft completely.
d. The Directors of the Company found that the machinery is overvalued by
Rs10,000. They also proposed to write off intangible assets and profit and loss
account completely.
(Bangalore University – B.Com 2009)
23. A Public Limited Company passed the necessary resolution and received the sanction
of the Court for reduction of Capital by Rs5,00,000. They decided to;
A. Wrote off losses of Rs2,10,000; Plant & Machinery Rs90,000, Goodwill Rs
40,000 and Investments Rs8,000
B. The reduction was made by converting 50,000 Preference Shares of Rs20 each
fully paid to the same number of shares of Rs15 each fully paid and 50,000
Ordinary Shares of Rs10 each fully paid.
Prepare Capital Reduction Account
(Bangalore University – B.Com – 2006)
SECTION – C
24. Unlucky Company Limited presents you with the following Balance Sheet as on 31 st
March, 2015

Equity Shares of Rs100 each Land & Buildings 1,50,000
fully paid 4,00,000 Plant & Machinery 3,00,000
7% Preference Shares 3,00,000 Patents 30,000
Profit Prior to Incorporation 10,000 Stock 2,20,000
6% Debentures 3,00,000 Sundry Debtors 1,50,000
Sundry Creditors 2,00,000 Cash 5,000
12,10,000 12,10,000
The following scheme of reconstruction was duly approved;

A. 7% Preference Shares to be converted into 9% Preference Shares, the amount being
reduced by 30%.
B. Equity shares be reduced to fully paid shares of Rs50 each.
C. Land & Buildings be appreciated by 20%.
D. Debentures to be reduced by 20%
E. All intangible assets and fictitious amounts including patents be written off. Utilise
profit prior to incorporation, if necessary.
F. Equity Shareholders to subscribe equity shares of Rs1,00,000 the amount to be
utilised for acquiring new Plant and Machinery.
Page 37 of 50
Assuming the whole scheme to have been put through. Give Journal entries in the
books of Unlucky Company.
(Bangalore University, BBM – April, 1999)
25. Balance Sheet of X Limited as on 31st March, 2015 is as follows;

Issued & Paid Up Share Goodwill 10,000
Capital: Other Fixed Assets 90,000
10,000Equity Shares of Rs10 Stock 25,000
each, fully paid 1,00,000 Debtors 30,000
10,000, 7% Preference Profit & Loss Account 45,000
Shares of Rs10each fully
paid 1,00,000
2,00,000 2,00,000
It was resolved that Equity Share Capital of Rs10 each be reduced to fully paid shares of Rs6
each and 7% Preference shares of Rs10 each be reduced to 7 ½ % fully paid Preference
Shares of Rs7 each. Number of shares in each case remained the same.
It was further resolved that the amount so made available be used for writing off the debit
balance of the Profit and Loss Account and Goodwill and other Fixed Assets to be extent
possible.
There were arrears of Preference Dividends for the last three years and it was decided that
they be cancelled.
Draft the Journal Entries and Prepare the Revised Balance Sheet as on the date
26. Following is the Balance Sheet of Venus Company Limited;

Share Capital: Buildings 50,000
15,000 Preference Shares of Stock 1,00,000
Rs5 each fully paid 75,000 Debtors 1,15,000
30,000 Equity Shares of Rs5 Investments 35,000
each fully paid 1,50,000 Profit & Loss Account 75,000
Debentures 50,000
Loan Creditors 25,000
(Secured by Investments)
3,75,000 3,75,000
The Company was reconstructed on the following lines;

A. Loans Creditors are to be paid off by selling investments which realise Rs35,000.
B. Trade Creditors agree to accept Preference Shares of Rs5 each to the extent of two
third of their dues in full satisfaction.
C. The Preference Shares are to be reduced to shares or Rs3 each fully paid.
Page 38 of 50
D. The Equity Shares are to be reduced to shares of Rs3 each and share holders are to
pay Rs2 per share making the shares again Rs5 fully paid.
Prepare the Capital Reduction Account and the Reconstructed Balance Sheet of
Venus Company Limited as on the date.
(Bangalore University, B.Com – November, 1996)
27. The ABC Company Limited, the Balance Sheet of which as on 31st March, 2015 is
given below;
Balance Sheet of ABC Company Limited as on 31st March, 2015

50,000, 10% Preference Plant & Machinery 28,00,000
Share Capital 50,00,000 Patents 2,00,000
40,000 Equity Shares of Furniture 1,00,000
Rs10 each 4,00,000 Stock & Debtors 11,00,000
8% Debentures 10,00,000 Bank 2,000
Interest on Debentures 2,00,000 Advertising Suspense 32,000
Trade Creditors 2,00,000 Profit & Loss Account 10,66,000
Arrears of Preference goodwill 15,00,000
Dividend
68,00,000 68,00,000
The following scheme of Capital Reduction was agreed upon subject to confirmation by the
Court.
A. Equity Shareholders agreed to have their capital reduced to 5% of their present
holding.
B. The 10% Preference Shareholders agreed to have their capital reduced by 25% of
their present holding.
C. The Debenture Holders agreed to forego the interest due to them in exchange for
2,000 Preference Shares of Rs100 each fully paid.
D. The claims of Trade Creditors are reduced by 50%
E. Arrears of Preference Dividend are to be settled by the issue of 3,000, 3% Preference
Shares of Rs10 each fully paid in full settlement.
F. The company utilised a portion of Rs80,000 not included in the Balance Sheet given
below and expenses of Reconstruction Rs2,000. The balance was retained as
Working Capital.
G. It was agreed to write down the debit balance of Profit and Loss Account,
Advertisement Suspense Account and Patents in full and write off Goodwill to the
extent possible.
Pass Journal Entries to give the effect to the above and prepare the Reconstructed
Balance Sheet as on the date.
Page 39 of 50
28. The following is the Balance Sheet of Aravind Limited before reconstruction as on
31st March, 2015.

Share Capital: Land & Buildings 4,00,000
12,000, 7% Preference Plant & Machinery 2,68,000
Shares of Rs50 each 6,00,000 Goodwill and Trade Marks 3,18,000
15,000 Equity Shares of Stock 4,00,000
Rs50 each 7,50,000 Debtors 3,28,000
Loans 5,73,000 Preliminary Expenses 11,000
Sundry Creditors 2,07,000 Profit & Loss Account 4,40,000
Other Liabilities 35,000
21,65,000 21,65,000
The Company is not earning profits but is short of working capital and a scheme of
reconstruction has been approved by both classes of shareholders and sanctioned by
the Court.
The scheme is as follows;
A. The Equity Shareholders have agreed that their Rs50 share be reduced to Rs2.50
per share.
B. They have also agreed to subscribe in cash for three new equity shares of Rs2.50
each.
C. The Preference Shareholders agreed to cancel the arrears of dividend and to accept
4 new 5%Preference Shares of Rs10 each for every Preference share they held
plus buy 6 New Equity Shares of Rs2.50 each fully paid.
D. Loan Creditors have agreed to subscribe in cash for an additional 40,000 Equity
Shares of Rs2.50 each fully paid.
E. The Directors have agreed to subscribe in cash for an additional 40,000 Equity
Shares of Rs2.50 each fully paid.
F. Of the cash received by the issue of new shares Rs2,00,000 into be used to reduce
the loans due by the company.
The amount made available by the scheme of reconstruction is to be applied to
write off preliminary expenses, profit and loss account debit balance and to write
off plant and machinery account by Rs35,000. The balance is to be used to write
off the value of Trade Marks and Goodwill.
Show the Journal Entries to put through the scheme and prepare the Balance Sheet
after Reconstruction
Note: Preference Dividend is in arrears of five years.
(Answer: Balance Sheet total Rs15,53,500)
(Bangalore University, April/May 1982)
29. The following is the Balance Sheet of Wonderful Company Limited as on 31 st March,
2015;

Authorised Share Capital: Goodwill 55,000
10,000, 6% Preference Patents & Trade Marks 45,000
Page 40 of 50
Shares of Rs100 each 10,00,000 Land & Buildings 2,15,000
50,000 Equity Shares of Plant & Machinery 2,55,000
Rs10 each 5,00,000 Furniture & Fittings 60,000
Issued Share Capital: Stock 90,000
5,000, 6% Preference Shares Sundry Debtors 75,000
of Rs100 each fully paid 5,00,000 Cash at Bank 12,500
40,000 Equity Shares of Cash in Hand 2,500
Rs10 each fully paid 4,00,00 Profit & Loss Account 4,80,000
Capital Reserve 25,000 Discount on Issue of
5% Debentures of Rs100 Debentures 20,000
each 2,00,000
Accrued Interest on
Debentures 30,000
13,10,000 13,10,000
The following scheme was prepared and fully approved by the Court;
A. The Preference Shares shall be converted into 7% Preference Shares of Rs50 each.
B. The Equity Shares shall be reduced to Rs3 per share.
C. The 5% Debentures shall be converted into 6% Debentures of Rs75 each. The
Debenture holders also agreed to waive 50% of the amount of interest.
D. Arrears of Preference Dividend are to be cancelled.
E. The Sundry Creditors agreed to waive 30% of their claims and to accept Equity
Shares for Rs30,000 of their renewed claims.
F. The assets are to be re valued as follows;
Land & buildings Rs2,50,000
Furniture & Fittings Rs55,000
Plant & Machinery Rs2,25,000
Sundry Debtors Rs70,000
Stock Rs80,000
G. Patents and Trade Marks and other fictitious assets are to be written off as far as
possible.
Draft the Journal Entries necessary to give effect to the aforesaid scheme and
prepare the Balance Sheet after Reconstruction.
(ICWA Final)
(Answer:- Total of Balance Sheet of Rs6,95,000)
30. The financial position of ABC Company Limited is as follows;

Share Capital: Freehold Property 34,000
Authorised, Issued and Plant & Machinery 96,000
Called Up Capital: Tools and Dies 27,300
15,000 Equity Shares 1,50,000 Investments 15,000
10,000, 6% Preference Debtors 53,400
Shares 1,00,000 Stock 42,500
7% Secured Debentures 60,000 RA&D Expenditure 18,000
Accrued Interest thereon 4,200 Profit & Loss Account 98,000
Page 41 of 50
Loan Secured 20,000
3,84,200 3,84,200
The Scheme of Reconstruction detailed below is agreed and approved by the Court:
A. Assets to be re valued at – Plant and Machinery Rs 59,000, Tools and Dies Rs15,000
and Debtor5s Rs48,700.
B. R&D Expenses and Profit and Loss Account to be written off.
C. Land at book value of Rs6,000 and valued at Rs 14,000 is taken over by debenture
holders in part payment. The remaining property is valued at Rs40,000.
D. The investment valued at Rs22,000 to be taken over by loan creditors, Rs2,000 is
refunded to company.
E. The Creditors for Rs18,000 has agreed to accept new second Mortgage Debentures
carrying interest at 10% p.a., in settlement of Rs15,500. Another Creditors for
Rs10,000 agrees to accept cash at a discount of 15%.
F. The Equity Shares are to be written down to Rs1 per share and Preference Shares to
Rs8 per share.
G. The cost of scheme amounting Rs3,500 to be paid and written off.
H. The Equity Shareholders to subscribe and pay for two new shares of Rs1 each for
every one share held.
You are required to show the Journal Entries, Capital Reduction Account, Bank
Account and Resultant Balance Sheet
(ICWA – Final )(Answer:- Balance Sheet total Rs2,12,700)
31. Following is the Balance Sheet of Unsound Company Limited as on 31st March, 2015.

20,000 Equity Shares of Rs Land & Buildings 2,00,000
10 each fully paid 2,00,000 Plant & Machinery 1,30,000
10% Cumulative Preference Patents 40,000
Shares of Rs100 each fully 50,000 Investments 80,000
paid Debtors 55,000
8% Debentures 1,00,000 Preliminary Expenses 10,000
Sundry Creditors 3,30,000 Profit & Loss Account 1,85,000
Outstanding Expenses 20,000
7,00,000 7,00,000
With a view to reconstitute the company it is proposed to reduce;

1. Equity Shares by Rs9
2. 10% Preference Shares by Rs40 each
3. 8% Debentures by 10% and trade creditors claim by one third
4. Machinery to Rs70,000 and Investments by Rs10,000
5. Provide Rs15,000 for bad debts
6. Write off all intangible assets
Page 42 of 50
7. Raise the rate of Preference Dividend to 14% and Interest on Debentures to 12.5%
assuming that above proposals are approved and sanctioned. Pass Journal Entries
and show Balance Sheet of the company after reconstruction.
(Bangalore University – November, 2001)
(Answer: - Balance Sheet Rs 3,80,000)
32. X Limited was promoted as a Limited Company in 2015. The working of the
Company was not successful as on 31st March, 2015. Balance Sheet stood as under;

Share Capital: Land & Buildings 5,00,000
12,000 Shares of Rs100 each 12,00,000 Plant & Machinery 2,60,000
Debentures 5,00,000 Furniture & Fittings 20,000
Sundry Creditors 7,00,000 Stock 3,70,000
Debtors 1,80,000
Goodwill 2,00,000
Preliminary Expenses 2,00,000
Discount on Issue of Shares 1,70,000
24,00,000 24,00,000
It is resolved to reconstruct the company on the basis of the following;

A. 12,000 Shares of Rs100 each are to be reduced to an equal number of fully paid
shares of Rs50 each.
B. Debenture holders are to be discharged by the issue of Rs8,000 unissued shares of
fully paid up shares of Rs50 each in full settlement of their claims.
C. The claims of creditors be reduced by 50% as agreed by them.
D. The amount available to be used to write off profit and loss account, preliminary
expenses, discount on issue of shares, 50% of goodwill, Rs20,00 of stock,
Rs30,000 of Machinery and also provision for doubtful debts to be made to the
extent of Rs10,000.
E. Journalise the transactions and prepare the balance sheet after reconstruction has
been carried out.
(Bangalore University, B.Com, May, 2002)
33. Following is the Balance Sheet of Peninsular Company Limited as on 31 st March,
2015.

Authorised Share Capital: Patents 4,25,000
5,000 Preference Shares of Leasehold Premises 65,400
Rs100 each 5,00,000 Plant & Machinery 21,100
5,000 Equity Shares of Debtors 38,250
Rs100 each 5,00,000 Stock 27,500
Issued & Subscribed Capital: Preliminary Expenses 6,000
3,750 Preference Shares of Profit & Loss Account 57,500
Rs 100 each 3,75,000 Cash Balance 250
Page 43 of 50
Rs100 each 2,50,000
6,50,000 6,50,000
The Company proved unsuccessful and the following scheme of reconstruction was
approved;
A. Rs100 Preference Shares is reduced to an equal number of fully paid shares of
Rs50 each.
B. Rs100 Equity Shares be reduced to an equal number of fully paid shares of Rs25
each.
C. The amount thus rendered available for the reduction of the assets to be
apportioned as follows; Preliminary Expenses, Profit and Loss Account and
Discount on Issue of Shares to be written off entirely; Rs15,400 off leasehold
premises, Rs7,500 off the stock, 20% off Plant and Machinery and Debtors and
the Balance Sheet after reconstruction in the books of the Company.
(Bangalore University – B.Com – June, 2007)
34. The Balance Sheet of Avenue Limited as at 31st March, 2015 is as follows;

Share Capital Fixed Assets 14,30,000
8,000 Shares of Rs100 each 8,00,000 Stock 80,000
6% Debentures 14,00,000 Debtors 30,000
Interest accrued thereon 70,000 Investments 17,000
Trade Creditors 4,50,000 Cash 1,03,000
Income tax due 10,000 Profit & Loss Account 10,70,000
27,30,000 27,30,000
The following scheme of reorganization was approved and confirmed by the Court.
A. Each share shall be sub dividend into twenty fully paid shares of Rs5 each.
B. After sub division each shareholder shall surrender to the company 95% of his
holdings for the purpose of re issue to debenture holders and creditors so far as
required and otherwise for cancellation.
C. Of the surrendered shares 46,000 shares of Rs5 each shall be converted into 8%
Participating Preference Shares of Rs5 each fully paid.
D. Debenture holders claim to be reduced to Rs2,30,000. This will be satisfied by
the issue to them of 46,000 Participating Preference Shares of Rs5 each fully paid.
E. The liability of income tax is to be satisfied in full.
F. The claims of unsecured creditors shall be reduced by 80% and the balance shall
be satisfied by allotting them equity shares of Rs5 each fully paid from the shares
surrendered.
G. Shares surrendered and not issued shall be cancelled.
Journalise the various entries to be made and prepare the Balance Sheet after
Reconstruction assuming that the tax liability is not paid.
Page 44 of 50
(Balance Sheet Total – Rs16,60,000)
35. The Dull Star Company Limited decided to reconstruct the affairs by a special
resolution and with that the tax liability is not paid.
A. The Equity Shares to be reduced to an equal number of fully paid shares of Rs3
each.
B. The Preference Shares to be reduced to an equal number of fully paid shares of
Rs80 each.
C. The Preference Shareholders agreed to forego 50% of the arrears of dividend and
receive equity shares for the balance. The Directors have agreed to forego the
loan due to them.
D. The “A” Debenture holders agreed to receive 40% of the interest amount due to
them in Preference Shares and the balance in cash.
E. The “B” Debenture holders agreed to buy a part of the freehold property of the
book value of Rs2,00,000for Rs2,50,000 in part settlement of their claims and
receive cash for interest due to them.
F. The amount made available to the company by company by the acceptance of the
above scheme was to be utilised in writing down freehold property to the extent
possible after eliminating goodwill and fictitious assets from the books, writing
down plant and machinery Rs80,000, stock by Rs20,000, Patents by Rs1,00,000
and creating a provision of Rs30,000 on Sundry Debtors.
G. The Company decided to provide itself with Rs1,00,000 liquid cash for Working
Capital requirements by raising a loan from the State Finance Corporation on the
security of Plant and Machinery
On the date of reconstruction i.e., 31st March, 2015, the Balance Sheet of Dull Star
Limited as follows;

Share Capital: Goodwill 2,00,000
1,00,000 Equity Shares of Plant & Machinery 10,00,000
Rs10 each 10,00,000 Freehold Property 15,00,000
10,000, 6% Cumulative Furniture & Fittings 1,00,000
Preference Shares of Rs100 Patent Rights 2,00,000
each 10,00,000 Stock 1,00,000
5%, “A” Debentures 5,00,000 Debtors 2,50,000
6%, “B” Debentures 8,00,000 Cash 3,000
Interest Accrued: Advertising Suspense 50,000
“A” Debentures 25,000 Profit & Loss Account 80,000
“B” Debentures 48,000
Director’s Loan 10,000
Arrears of Preference
Dividend 1,20,000
34,83,000 34,83,000
Page 45 of 50
(Answer – Balance Sheet Total Rs24,80,000)
36. Following is the state of affairs of Usha Limited as on 31st March, 2015.

10,000 Shares of Rs10 each 1,00,000 Goodwill\ 10,000
Bank Overdraft 15,425 Buildings 20,500
Sundry Creditors 15,000 Machinery 50,850
\stock 10,275
Debtors 15,000
Cash 1,500
1,30,425 1,30,425
The Company adopted the following scheme of internal reconstruction;

A. Reduce the present value of shares to Rs5 each fully paid.
B. The company to issue 6,500 Equity Shares of Rs5 each fully paid and pay off
bank overdraft.
C. Sundry Creditors agreed to forego 20% of their claims as the company decided to
pay them cash immediately for the balance.
D. Reconstruction expenses amounted Rs1,000
E. The Directors found that the machinery is overvalued by Rs10,000. They also
decided to write off intangible assets and Profit and Loss account completely.
Prepare the Journal Entries and Prepare the Reconstructed Balance Sheet.
37. Balance Sheet of Unprofitable Company Limited as on 31st March 2015 is as follows;

4,000 Preference Shares of Land & Buildings 4,00,000
Rs100 each 4,00,000 Plant & Machinery 6,00,000
Rs100 each 8,00,000 Debtors 80,000
Bank Loan 1,00,000
17,00,000 17,00,000
The following scheme of internal reconstruction was approved by the Court.

A. Preference Shares are to be reduced to Rs50 each fully paid.
B. Equity shares are to be reduced to Rs25 each fully paid
C. Debenture holders to take over stock and debtors in full settlement of their
amount.
Page 46 of 50
D. Eliminate goodwill and profit and loss account completely.
E. Plant and Machinery value is reduced to 50% of its present value.
Journalise the entries of the above scheme of internal reconstruction and prepare
the revised balance sheet.
38. The following is the Balance Sheet of Greeshma Limited as on 31st March, 2015.

19,000 Shares of Rs100 each 19,00,000 Land & Buildings 1,00,000
Sundry Creditors 1,00,000 Plant & Machinery 2,60,000
8% Debentures 1,00,000 Furniture & Fittings 20,000
Stock 3,70,000
Debtors 1,80,000
Goodwill 2,00,000
21,00,000 21,00,000
The Company is to be reconstructed as follows;

A. Shares of Rs100 are to be reduced to an equal number of fully paid shares of Rs40
each.
B. To issue 1,000 new shares of Rs40 each as fully paid up to the debenture holders
in full settlement.
C. The amount available is to be utilised in writing off the goodwill and profit and
loss account and the balance in writing down the value of machinery.
D. Authorised capital of the company is 20,000 shares of Rs100 each.
Give the necessary journal entries. Prepare the Capital Reduction Account and
Reconstructed Balance Sheet
39. Balance Sheet of Paywell Company Limited as on 31st March, 20915 is as follows;

4,000 Preference Shares of Land & Buildings 4,00,000
Rs100 each 4,00,000 Plant & Machinery 6,00,000
Rs100 each 8,00,000 Debtors 80,000
Bank Loan 1,00,000
17,00,000 17,00,000
The following scheme of internal reconstruction was approved by the Court;

A. Preference Shares are to be reduce to Rs50 each fully paid
B. Equity Shares are to be reduced to Rs25 each, fully paid
Page 47 of 50
C. Debenture holders to take over stock and debtors in full settlement of their
amounts.
D. Eliminate Goodwill and Profit and Loss Account completely.
E. Plant value is reduced to 50% of its present value.
Journalise the entries of the above scheme of internal reconstruction and prepare
the balance sheet
40. Following is the Balance Sheet of Newlook Company Limited as on 31st March,2015

12,000, 7% Preference Land & Buildings 2,00,000
Shares of Rs50 each 6,00,000 Plant & Machinery 3,00,000
15,000 Equity Shares of Rs Goodwill 4,00,000
50 each fully paid 7,50,000 Stock 4,00,000
12% Loan Creditors 5,75,000 Debtors 3,00,000
Trade Creditors 2,00,000 Preliminary Expenses 15,000
Other Current Liabilities 40,000 Profit & Loss Account 5,50,000
21,65,000 21,65,000
The Company adopted a scheme of internal reconstruction as under;

a. The Equity Shares to be reduced to Rs2.50 each fully paid and the Equity
Shareholders to subscribe to new equity shares of Rs2.50 each at the rate of three
shares for one share held.
b. The preference dividend which is in arrears for three years to be cancelled against
the issue of two new equity shares for every Rs100 dividend in arrears.
c. The preference shares to be reduced to 10% preference shares of Rs10 each fully
paid and preference shareholders to subscribe to new equity shares of Rs2.50 each
at the rate of two share for one share held.
d. 12% loan creditors to forego Rs1,25,000 and accept 10% preference shares of
Rs10 each fully paid for the balance of the claim. They also agree to subscribe
12,000 new equity shares of Rs2.50 each.
e. The Directors of the company to subscribe 40,000 equity shares of Rs2.50 each/.
f. Trade creditors to sacrifice 10% of their claim and be paid immediately 50% of
the remaining claims
g. The intangible and fictitious assets to be written off completely and the balance be
utilised to write off plant and machinery and stock in proportion to their book
value.
(Bangalore University, B.Com -2008)
41. Following is the Balance Sheet of Pearl Company Limited as on 31st March, 2015.

Authorised Share Capital: Patents 4,25,000
5,000 Preference Shares of Leasehold Premises 65,400
Rs100 each 5,00,000 Plant & Machinery 21,100
5,000 Equity Shares of Debtors 38,250
Page 48 of 50
Rs100 each 5,00,000 Stock 27,500
Issued & Paid up Capital: Preliminary Expenses 6,000
3,750 Preference Shares of Profit & Loss Account 57,500
Rs100 each 3,75,000 Cash
Rs100 each 2,50,000
6,50,000 6,50,000
The Company proved unsuccessful and the following scheme of reconstruction was
approved;
A. Rs100 Preference Shares be reduced to an equal number of fully paid shares of
Rs50 each.
B. Rs100 Equity Shares be reduced to an equal number of fully paid shares of Rs25
each.
C. The amount thus rendered available for the reduction of the assets to be
apportioned as follows; Preliminary Expenses, Profit and Loss Account and
Discount on Issue of Share to be written off entirely; Rs15,400 off leasehold
premises, Rs7,500 off the Stock, 20% off Plant and Machinery and Debtors And
the balance available to be written off patents. Pass the journal entries and
prepare the Balance Sheet after reconstruction in the books of the company.
42. The following is the Balance Sheet of Hitech Limited as on 31st March, 2015

3,000 Equity Shares of Rs10 Goodwill 50,000
each 3,00,000 Plant 3,00,000
2,000, 8% Preference Shares Loose Tools 10,000
of Rs100 each 2,00,000 Debtors 2,85,000
Share Premium 90,000 Stock 1,50,000
Loan Unsecured – Directors 50,000 Cash 10,000
Sundry Creditors 3,00,000 Preliminary Expenses 5,000
Outstanding Expenses 70,000 Profit & Loss Account 2,00,000
(including directors
remuneration Rs20,000)
10,10,000 10,10,000
Dividends were in arrears of three years. The following form of reorganization was
approved by the Court;
A. Equity Shares are subdivided 1,50,000 shares of Rs2 each.
B. 90% of Equity Share holdings were surrendered.
C. Preference shareholders agree to forego their rights to arrears of dividend in
consideration 8% Preference Shares converted into 9% Preference Shares.
Page 49 of 50
D. Sundry Creditors to reduce their claim by 1/5th in consideration of their getting
shares of Rs35,000 out of these surrendered shares.
E. Directors forego amount due to them as loan and remuneration.
F. Surrendered shares not issued are cancelled;
G. Assets are reduced as under
Goodwill Rs50,000
Stock Rs20,000
Plant Rs40,000
Tools Rs8,000
Debtors Rs15,000
Balance if any let used to reduce plant further.
H. Reconstruction expenses amounted to Rs10,000
I. A shareholder holding 100 equity shares opposed the scheme and it was taken by
a Director by a payment of Rs1,000
J. Further 50,000 Equity Shares were issued to the public at Rs2 per share, which
was fully subscribed by the public.
You are required to;
1. Pass the Journal Entries
2. Give Revised Balance Sheet
(Bangalore University, B.com – 2006)
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Module 6

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Module 6

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CHAPTER 6

Reduction of Share Capital and other Liabilities

Differences between Internal Reconstruction and External Reconstruction

1. To liquidate the company (Liquidation)

Meaning of Internal Reconstruction:

Forms of Internal Reconstruction:

Reorganization or Alteration of Share Capital:

Reduction of Share Capital and Other Liabilities:

Differences between Internal Reconstruction and External Reconstruction

Legal Provisions for Internal Reconstruction:

1. Reduction in Share Capital

1. When reduction of Equity Share Capital:

2. When reduction of Preference Share Capital:

3. When reduction of the amount due to debenture holders:

4. When reduction of the amount due to creditors:

5. When the appreciation in the value of assets

6. When the payment of reconstruction expenses:

7. When the utilization of Capital Reduction Account balance in writing off

Illustration:1 (Problem on Journal Entries)

On the reconstruction of a company, the following terms were agreed upon;

Journal Entries in the Books of the Company

S.N Particulars L.F.No Debit (Rs) Credit (Rs)

Illustration:2 (Problem on Journal Entries)

In the Books of Bangalore Company Limited

S.N Particulars L.F.No Debit (Rs) Credit (Rs)

Liabilities Amount (Rs) Assets Amount (Rs)

The following scheme of reconstruction was adopted;

In the Books of Ram Dev Company Limited

S.N Particulars L.F.No Debit (Rs) Credit (Rs)

Illustration: 4 (Problem on Journal entries with Reconstructed Balance Sheet)

In the Books of Aditya Limited Company

S.N Particulars L.F.No Debit (Rs) Credit (Rs)

Balance Sheet of Aditya Company Limited (Revised) as on 31st March, 2015

Equity and Liabilities Note Amount (Rs)

Illustration:5 (Journal Entries, Capital Reduction Account and Balance Sheet)

Balance Sheet of Excel Company Limited as on 31st March, 2015

Liabilities Amount (Rs) Assets Amount (Rs)

The company is to be reconstructed as follows;

In the Books of Excel Company Limited

S.N Particulars L.F.No Debit (Rs) Credit (Rs)

Dr Capital Reduction Account Cr

Particulars Amount (Rs) Particulars Amount (Rs)

Reconstructed Balance Sheet as on 31st March, 2015

Equity and Liabilities Note Amount (Rs)

Liabilities Amount (Rs) Assets Amount (Rs)

The following scheme of Reconstruction was adopted;

In the Books of Unsuccessful Limited

S.N Particulars L.F.No Debit (Rs) Credit (Rs)

2 (Old) Equity Share Capital A/c…………..Dr 50,000

Reconstructed Balance Sheet as on 31st March, 2015

Equity and Liabilities Note Amount (Rs)

Illustration: 7 ( Problem on Journal Entries and Reconstructed Balance Sheet)

Liabilities Amount (Rs) Assets Amount (Rs)

In the Books of Earnest Company Limited

S.N Particulars L.F.No Debit (Rs) Credit (Rs)

3 5% Preference Share Capital A/c…………Dr 65,000

Equity and Liabilities Note Amount (Rs)

Liabilities Amount (Rs) Assets Amount (Rs)

In the Books of Bright Limited

S.N Particulars L.F.No Debit (Rs) Credit (Rs)

Equity and Liabilities Note Amount (Rs)

The following scheme of reconstruction was adopted;

In the books of Mysore Sandal Limited

S.N Particulars L.F.No Debit (Rs) Credit (Rs)