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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
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;
Page 3 of 50
Accounting Entries:
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)
Solution:
Page 5 of 50
account balance to writing off goodwill, plant
and machinery and leasehold premises)
Solution
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;
Page 7 of 50
Solution
The Balance Sheet of Aditya Company Limited as on 31st March, 2015 was as follows;
Page 8 of 50
Liabilities Amount (Rs) Assets Amount (Rs)
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
Bank Overdraft 50,000
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:
Page 9 of 50
5. Plant A/c…………………………………..Dr 50,000
To Capital Reduction A/c 50,000
(being the appreciation in the value of plant)
6. Capital Reduction A/c…………………….Dr 3,60,000
To Profit & Loss A/c 2,45,000
To Goodwill A/c 15,000
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)
The Balance Sheet of Excel Company Limited stood as follows on 31st March, 2015.
Page 10 of 50
Goodwill 2,00,000
Profit & Loss A/c 9,70,000
21,00,000 21,00,000
Solution:
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
Illustration:6
Given below is the balance sheet of Unsuccessful Company Limited as on 31st March, 2015.
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
Page 13 of 50
Reserves & Surpluses
Non Current Liabilities
Secured Loans
Unsecured Loans
Current Liabilities
Creditors (Rs18,000-Rs8,000) 10,000
Bank Overdraft 20,000
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
The state of Affairs of Earnest Company Limited on 31st March, 2015 was as follows;
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:
Page 15 of 50
(being the payment of reconstruction
expenses)
8 Capital Reduction A/c…………………….Dr 2,79,500
To Profit & Loss A/c 1,75,500
To Goodwill A/c 80,000
To Reconstruction Expenses A/c 7,250
To Capital Reserve A/c (Bal fig) 16,750
(being the utilization of capital reduction
account balance in writing off accumulated
losses, goodwill etc.,)
Reconstructed Balance Sheet as on 31st March, 2015
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
Sundry Creditors 30,000
Bank Overdraft 20,000
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:
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
To Capital Reduction A/c 19,500
(being the debenture interest transferred to
Capital Reduction Account)
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
Liabilities Amount (Rs) Assets Amount (Rs)
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
8% Debentures 3,00,000
Current Liabilities 39,00,000
Provision for Taxation 3,00,000
53,00,000 53,00,000
Solution
Page 19 of 50
To Equity Share Capital A/c 5,00,000
To Capital Reduction A/c 12,50,000
(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
To Capital Reduction A/c 75,000
(being the conversion of 8% Debentures of
Rs100 each into 11% Debentures of Rs75
each)
5 Capital Reduction A/c…………………….Dr 17,00,000
To Profit & Loss A/c 3,00,000
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)
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
Liabilities Amount (Rs) Assets Amount (Rs)
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:
Page 21 of 50
In the Books of Ideal Company Limited
Reconstructed Balance Sheet as on 31st March, 2015
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.
(Bangalore University, B.Com April, 1997)
Solution:
In the Books of Bharath Construction Limited
Journal Entries
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
On April 1st, 2015 the Balance Sheet of Western Limited was as follows;
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
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
To Reorganization A/c 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
To Reorganization A/c 10,000
(being the fund no more required, transferred)
8 Reorganization A/c………………………..Dr 23,77,000
To Profit & Loss A/c 16,22,000
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 Debtors A/c 10,000
To Kolkata Works A/c 5,00,000
To Mumbai Works A/c 1,57,000
(being the losses written off and assets
reduced)
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
The following is the Balance Sheet of M/s Nostalgia Limited as on 31st March, 2015.
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:
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
To Capital Reduction A/c 22,000
(being the settlement of debenture interest)
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;
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:
Page 31 of 50
Shareholders’ Funds:
Share Capital:
6% Cumulative Preference Shares of Rs75 each 1,12,500
19,000 Equity Shares of Rs12.50 each 2,37,500
Reserves & Surpluses
Non Current Liabilities
Secured Loans
Unsecured Loans
Current Liabilities
Trade Creditors 42,500
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
Stock in trade 79,175
Bank 1,58,125
Total 3,92,500
SURRENDER OF SHARES:
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.
(Bangalore University, B.Com April, 1992)
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.
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)
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
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
22. Following is the Balance Sheet of Zenith Limited as on 31st March, 2015.
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
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)
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
(Bangalore University, B.Com – 1991)
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
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.
(Bangalore University, B.Com 1997)
Page 39 of 50
28. The following is the Balance Sheet of Aravind Limited before reconstruction as on
31st March, 2015.
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;
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
Sundry Creditors 1,55,000
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;
Page 41 of 50
Loan Secured 20,000
Sundry Creditors 50,000
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.
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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;
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Rs100 each 2,50,000
Sundry Creditors 15,000
Bank Overdraft 10,000
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;
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.
(Bangalore University, B.Com April, 1998)
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;
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.
37. Balance Sheet of Unprofitable Company Limited as on 31st March 2015 is as follows;
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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.
39. Balance Sheet of Paywell Company Limited as on 31st March, 20915 is as follows;
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
(Bangalore University, B.Com – 2009)
40. Following is the Balance Sheet of Newlook Company Limited as on 31st March,2015
Page 48 of 50
Rs100 each 5,00,000 Stock 27,500
10,00,000 Discount on Issue of Shares 9,000
Issued & Paid up Capital: Preliminary Expenses 6,000
3,750 Preference Shares of Profit & Loss Account 57,500
Rs100 each 3,75,000 Cash
2,500 Equity Shares of
Rs100 each 2,50,000
Sundry Creditors 15,000
Bank Overdraft 10,000
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.
(Bangalore University, B.Com – 2007)
42. The following is the Balance Sheet of Hitech Limited as on 31st March, 2015
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.
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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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