Internal Reconstruction Ch 5 - 1

INTERNAL RECONSTRUCTION
TOPIC 1 Introduction
Reconstruction is a process by which affairs of a company are reorganized by revaluation
of assets, reassessment of liabilities and by writing off the losses already suffered by reducing
the paid up value of shares and/or varying the rights attached to different classes of shares.
Such a process is called internal reconstruction which is carried out without liquidating the
company and forming a new one.

TOPIC 1A Journal Entries

1. For increase or reduction in value of assets

a) Increase

b) Decrease

2. For increase or reduction in liabilities:

a) Increase

b) Decrease

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 Internal Reconstruction Ch 5 - 2
3. For payment of reconstruction expenses
a) At the time of
payment

4. Settlement of contingent liability

Example: Preference dividend in arrears, Capital commitments, etc
a) If waived

b) If paid

5. If any losses or deferred revenue expenditure are appearing then such amount should
be written off even if question is silent.
Example of deferred revenue expenditure: Underwriting commission, Discount on issue of
debentures, Preliminary expenses, Advertisement suspense,etc.
a) At the time of write
off

6. If any intangible assets appear in the balance sheet it may be written off by giving a
note.
Example: Patents, Trademarks, Goodwill, Copyrights etc.
a) At the time of write
off

7. Closing of Capital Reduction Account

a) Credit Balance

b) Debit Balance

Notes:
1) In case of fixed assets, the amount written off under the scheme of reconstruction must be shown for 5
years.
2) After the name of company, the words “and reduced” should be added only if the court so orders.

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 Internal Reconstruction Ch 5 - 3

TOPIC 2 Methods of Internal Reconstruction

Methods of Internal Reconstruction:

Alteration of Variation of Compromise/ Reduction of Surrenders

share capital shareholder’s rights arrangement share capital of shares

TOPIC 2A Alteration of Share Capital, Variation of Shareholder Rights,

Compromise/Arrangements & Reduction of Share Capital
ALTERATION OF SHARE CAPITAL

1. For Increase in Share Capital

Example:
X Ltd. issued 10,000 equity
shares of ₹10 each at par.

2. For Consolidation of Shares

Example:
X Ltd. having 10,000 equity
shares of ₹10 each decides to
convert share capital into
equity shares of 100 each.

3. For Sub-division of Shares

Example:
X Ltd. having 1,000 equity
shares of ₹100 each decides
to convert share capital into
equity shares of 10 each.

4. For Conversion of shares into stock

Example:
X Ltd. having 10,000 equity
shares of 10 each decides to
convert the share capital into
equity stock

5. For Conversion of stock into shares

Example:
X Ltd. having equity stock of
₹1,00,000 decides to convert
the equity stock into equity
share capital of ₹ 10 each.

6. For Cancelling the unissued shares

In this case no accounting entry is passed. The authorized share capital gets reduced by the amount of
unissued shares now cancelled.

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 Internal Reconstruction Ch 5 - 4
VARIATION OF SHAREHOLDERS RIGHTS
Only the specific rights are changed. There is no change in the amount of capital. For example, the
company may change rate of (a) dividend on preference shares or (b) convert cumulative preference
shares into non-cumulative preference shares without changing the amount of share capital.

Example:
X Ltd. has 1,000 10%
preference shares of 100 each.
At a meeting of preference
shareholders, it was decided
that the rate of dividend be
reduced to 9%.

COMPROMISE/ARRANGEMENT
A scheme of compromise and arrangement is an agreement between a company and its members and
outside liabilities when the company faces financial problems. Such an arrangement therefore also
involves sacrifices by shareholders, or creditors and debenture holders or by all.

Example:
In the balance sheet, sundry
creditors are appearing at ₹
4,50,000. They agreed to
reduce their claims to 20%
and half the balance to be
satisfied by issue of equity
shares of ₹10 each.

REDUCTION OF SHARE CAPITAL

a) Liability of the shareholders is extinguished or reduced in respect of unpaid amount on the shares held
by them.
Number of Shares = 10,000
Face Value = 10
Paid up Value = 8
Reduce 10 per share into 8 per share fully paid up
So Cancel the unpaid amount of 2 per share

b) Paying off excess paid-up share capital

Number of Shares = 10,000
Face & Paid up Value = 10
Pay off 2 per share to make it 8 per share fully paid up

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 Internal Reconstruction Ch 5 - 5
c) Writing off the lost paid up capital
Number of shares = 1,000
Face Value = 100
Paid up Value = 100

(a) (b)
Write off 80 80
Face Value 20 100
Paid up 20 20

Note: If question does not specify reduction in Face value or paid up value, then assume change in Face
value and paid up value.

TOPIC 2B Share Surrender

At the time of internal reconstruction, some people may voluntarily surrender their shares to the
company. Alternatively, there can be concept of compulsorily surrender in the reconstruction scheme.

Entries:
At the time of surrender

If the surrendered shares are

cancelled

If the surrendered shares are

utilized for the payment of an
obligation

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 Internal Reconstruction Ch 5 - 6

ASSIGNMENT QUESTIONS
TOPIC 1 & 2A

Question 1 ICAI Study Material

On 31-12-2018, Z Ltd. had 20,000, ₹ 10 Equity Shares as authorised capital and the shares were all
issued on which ₹ 8 was paid up. In June, 2019 the company in general meeting decided to sub-divide
each share into two shares of ₹ 5 with ₹ 4 paid up. In June, 2020 the company in general meeting
resolved to consolidate 20 shares of ₹ 5, ₹ 4 per share paid up into one share of ₹ 100 each, ₹ 80 paid up.
Pass entries and show how share capital will appear in notes to Balance Sheet as on 31-12-2018, 31-12-
2019 and 31-12-2020.
Question 2
Pass Journal Entries in the following conditions:
1) X Ltd. had 1,24,000 equity shares of ₹ 50 each on which ₹ 45 is paid up. In October, 2020 company
decided to sub-divide each share into 5 shares of ₹ 10 with ₹ 9 paid up.
2) Y Ltd. had 2,10,000 equity shares of ₹ 10 each fully paid up. In December 2019 company decided to
convert the issued shares into stock. But in February 2020 the company re-converted the stock into
equity shares of ₹ 100 each fully paid up.
3) Z Ltd. had capital of ₹ 30,00,000 divided into 3,00,000 equity shares of ₹ 10 each on which ₹ 6 is paid
up. During the year, company decided to reorganize its capital by consolidating 5 shares into one
share of ₹ 50 each, ₹ 30 paid up.
Question 3 ICAI Study Material
The following scheme of reconstruction has been approved for Ravi Limited:
1. The shareholders to receive in lieu of their present holding at 1 Lakh shares of ₹ 10 each, following:
a. New fully paid ₹ 10 Equity shares equal to 3/5th of their holding.
b. 10% Preference shares fully paid to the extent of 1/5th of the above new equity shares.
c. ₹ 40,000, 8% Debentures.
2. An issue of ₹ 1 lakh 12% first debentures was made and allotted, payment for the same being received
in cash forthwith.
3. The Assets were reduced as follows:-
a) Goodwill which stood at ₹ 1,40,000 was completely written off.
b) Plant and machinery which stood at ₹ 2,00,000 was written down to ₹ 1,50,000.
c) Freehold property which stood at ₹ 1,50,000 was written down by ₹ 50,000.
You are required to draw up the necessary Journal entries in the Books of Ravi Limited for the above
reconstruction.
Question 4 ICAI Study Material
Parth Ltd, had laid down the following terms upon the sanction of the reconstruction plan by the court
1. Furniture and Fixtures which stood at the books at ₹ 1,50,000 to be written down to ₹ 95,000. The
freehold premises which was valued at ₹ 7,00,000 showed an appreciation of ₹ 55,000.
2. Plant and machinery showed fall in value of ₹ 89,000, to be recorded in the books. Investment at ₹
2,00,000 was brought down to the existing market value at ₹ 1,05,000.
3. Debenture holders accepted to receive following in lieu of their present 9% debentures of ₹ 2,50,000-
a. 1/5th of the total to be paid in cash to them.
b. To take over the land and buildings of value ₹ 72,000.
c. To forgo the remaining unpaid portion as a policy of reconstruction.
Write off the profit and loss A/c debit balance at ₹ 70,000 which had been accumulated over the years.
In case of any shortfall, the balance of the General reserve of ₹ 1,50,000 can be utilized to write off the
losses under reconstruction scheme.
Show the necessary journal entries as part of the reconstruction process considering that balance in
general reserve utilized to write off the losses as per reconstruction scheme.
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 Internal Reconstruction Ch 5 - 7
Question 5 ICAI Study Material
The Balance Sheet of A & Co. Ltd. as on 31-12-2020 is as follows:
Note Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital 1 11,50,000
(b) Reserves & Surplus 2 (5,35,000)
2. Non-current Liabilities
(a) Long Term Borrowings 3 3,75,000
3. Current Liabilities
(a) Short Term Borrowings- Bank Overdraft 1,95,000
(b) Trade Payables 3,00,000
(c) Other Current Liabilities 4 1,22,500
Total 16,07,500
B. Assets
1. Non-current assets
(a) Property, Plant & Equipment & Intangible Assets
i. Property, Plant & Equipment 5 4,75,000
ii. Intangible Assets 6 1,67,500
(b) Non Current Investments 7 55,000
2. Current Assets
(a) Inventories 4,25,000
(b) Trade Receivables 4,85,000
Total 16,07,500

Notes to Accounts
Amount
1. Share Capital
Equity Share Capital
75,000 equity shares of ₹ 10 each 7,50,000
Preference Share Capital
4,000 6% preference shares of ₹ 100 each 4,00,000
11,50,000
2. Reserves and Surplus
Debit Balance of Profit and Loss Account (5,35,000)
3. Long Term borrowings
6% Debentures (secured on Freehold property) 3,75,000
4. Other Current Liabilities
Loan from Directors 1,00,000
Interest payable on 6% debentures 22,500
1,22,500
5. Property, Plant & Equipment
Freehold property 4,25,000
Plant 50,000
4,75,000
6. Intangible Assets
Goodwill 1,30,000
Patents 37,500
1,67,500
7 Non Current Investments
Investments at cost 55,000

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 Internal Reconstruction Ch 5 - 8
The Court approved a Scheme of re-organisation to take effect on 1-1-2021, whereby:
a) The Preference shares to be written down to ₹ 75 each and Equity Shares to ₹ 2 each.
b) Of the Preference Share dividends which are in arrears for four years, three fourths to be waived and
Equity Shares of ₹ 2 each to be allotted for the remaining quarter.
c) Interest payable on debentures to be paid in cash.
d) Debenture-holders agreed to take over freehold property, book value ₹ 1,00,000 at a valuation of ₹
1,20,000 in part repayment of their holdings and to provide additional cash of ₹ 1,30,000 secured by a
floating charge on company’s assets at an interest rate of 8% p.a.
e) Patents and Goodwill to be written off.
f) Stock to be written off by ₹ 65,000 and amount of ₹ 68,500 to be provided for bad debts.
g) Remaining freehold property to be re-valued at ₹ 3,87,500
h) Trade Investments be sold for ₹ 1,40,000
i) Directors to accept settlement of their loans as to 90% thereof by allotment of equity shares of ₹ 2 each
and as to 5% in cash, and balance 5% being waived.
j) There were capital commitments totalling ₹ 2,50,000. These contracts are to be cancelled on payment
of 5% of the contract price as a penalty.
k) Ignore taxation and cost of the scheme.
You are requested to show Journal entries reflecting the above transactions (including cash transactions)
and prepare the Balance Sheet of the company after completion of the Scheme.

Question 6
The summarized Balance Sheet of AB Ltd. as on 31st March, 2020 was as follows:
Note Amount Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital 1 7,50,000
(b) Reserves & Surplus 2 (10,00,000) (2,50,000)
2. Non-current Liabilities
(a) Long Term Borrowings 3 5,00,000
3. Current Liabilities
(a) Short Term Borrowings 4 5,00,000
(b) Trade Payables 2,50,000 7,50,000
Total 10,00,000
B. Assets
1. Non-current assets
(a) Property, Plant & Equipment & Intangible Assets
i. Property, Plant & Equipment 5 5,50,000
ii. Intangible Assets 6 1,50,000 7,00,000
2. Current Assets
(a) Inventories 1,50,000
(b) Trade Receivables 1,25,000
(c) Deferred revenue expenditure 25,000 3,00,000
Total 10,00,000
Notes to Accounts
Amount Amount
1. Share Capital
Authorised, issued & fully paid
5,000 equity shares of ₹ 100 each 5,00,000
2,500 8% preference shares of ₹ 100 each 2,50,000 7,50,000
2. Reserves and Surplus
Profit and Loss Account 10,00,000
3. Long Term borrowings
8% Debentures 5,00,000
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 Internal Reconstruction Ch 5 - 9
4. Short Term Borrowings
Loan from Directors 3,00,000
Bank overdraft 2,00,000 5,00,000
5. Property, Plant & Equipment
Freehold property 4,00,000
Plant 1,50,000 5,50,000
6. Intangible Assets
Goodwill 1,00,000
Trademark 50,000 1,50,000
The following scheme of internal reconstruction was framed, approved by the Court, all the concerned
parties and implemented:
a) The preference shares to be written down to ₹ 25 each and the equity shares to ₹ 20 each. Each class
of shares then to be converted into shares of ₹ 100 each.
b) The debenture holders to take over freehold property (book value ₹ 2,00,000) at a valuation of ₹
2,50,000 in part repayment of their holdings. Remaining freehold property to be revalued at ₹
6,00,000.
c) Loan from directors to be waived off in full.
d) Stock of ₹ 50,000 to be written off, ₹ 12,500 to be provided for bad debts.
e) Profit & Loss account balance, Trademark, goodwill & deferred revenue expenditure to be written off.
Pass Journal Entries for all the above mentioned transactions. Also Prepare Capital Reduction account
and company’s Balance Sheet immediately after reconstruction.

Question 7 IPCC Nov 2014 (12 Marks) / RTP May 2015 / RTP Nov 2017/ ICAI Study Material
Vaibhav Ltd. gives you the following ledger balances as on 31.3.2020:
₹
Property, Plant & Equipment 2,50,00,000
Investments (Market value ₹ 19,00,000) 20,00,000
Current assets 2,00,00,000
P & L A/c (Dr. Balance) 12,00,000
Equity shares of ₹ 100 each 2,00,00,000
6% Cumulative Preference shares of ₹ 100 each 1,00,00,000
5% Debentures of ₹ 100 each 80,00,000
Trade Payables 1,00,00,000
Provision for taxation 2,00,000
The following scheme of reorganization is sanctioned:
a) All the existing equity shares are reduced to ₹ 40 each.
b) All preference shares are reduced to ₹ 60 each.
c) The rate of interest on debentures is increased to 6%. The debenture holders surrender their existing
debentures of ₹ 100 each and exchange the same for fresh debentures of ₹ 70 each for every debenture
held by them.
d) One of the creditors of the company (included under trade payables in the above balance sheet) to
whom the company owes ₹ 40,00,000 decides to forgo 40% of his claim. He is allotted 60,000 equity
shares of ₹ 40 each in full & final settlement of his claim.
e) Property, Plant & Equipment are to be written down by 20%.
f) Current assets are to be revalued at ₹ 90,00,000.
g) The taxation liability of the company is settled at ₹ 3,00,000.
h) Investments to be brought to their market value.
i) It is decided to write off the debit balance of Profit and Loss account.
Pass Journal entries and show the Balance sheet of the company after giving effect to the above.

Question 8 RTP Nov 2015

The following is the summarized Balance Sheet of Rocky Ltd. as at March 31, 2020:

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 Internal Reconstruction Ch 5 - 10
₹ In Lacs
Liabilities
Fully paid equity shares of ₹ 10 each 500
Capital Reserve 6
12% Debentures 400
Debenture Interest Outstanding 48
Trade Creditors 165
Directors’ Remuneration Outstanding 10
Other Outstanding Expenses 11
Provisions 33
1,173
Assets
Goodwill 15
Land and Building 184
Plant and Machinery 286
Furniture and Fixtures 41
Stock 142
Debtors 80
Cash at Bank 27
Discount on Issue of Debentures 8
Profits and Loss Account 390
1,173
The following scheme of internal reconstruction was framed, approved by the Court, all the concerned
parties and implemented:
a) All the equity shares be converted into the same number of fully-paid equity shares of ₹ 2.50 each.
b) Directors agree to forego their outstanding remuneration.
c) The debentureholders also agree to forego outstanding interest in return of their 12% debentures
being converted into 13% debentures.
d) The existing shareholders agree to subscribe for cash, fully paid equity shares of ₹ 2.50 each for ₹ 125
lacs.
e) Trade creditors are given the option of either to accept fully-paid equity shares of ₹ 2.50 each for the
amount due to them or to accept 80% of the amount due in cash. Creditors for ₹ 65 lacs accept equity
shares whereas those for ₹ 100 lacs accept ₹ 80 lacs in cash in full settlement.
f) The Assets are revalued as under:
₹ In Lacs
Land and building 230
Plant and Machinery 220
Stock 120
Debtors 76
Pass Journal Entries for all the above mentioned transactions.

Question 9 RTP May 2015

Following is the Balance Sheet of M Ltd. as at 31st March, 2020:
Liabilities ₹ Assets ₹
15,000, 10% Pref. shares of 100 each 15,00,000 Goodwill 3,50,000
35,000 Equity shares of ₹ 100 each 35,00,000 Land & Buildings 15,00,000
Securities Premium account 1,00,000 Plant & Machinery 10,00,000
7% Debentures of ₹ 100 each 5,00,000 Stock 6,00,000
Trade Payables 12,50,000 Trade Receivables 15,00,000
Loan from Director 1,50,000 Cash at bank 1,00,000
Profit & Loss A/c 19,50,000
70,00,000 70,00,000
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 Internal Reconstruction Ch 5 - 11
No dividend on Preference shares has been paid for the last 5 years. The following scheme of
reorganization was duly approved by the court:
a) Each Equity share to be reduced to ₹ 25.
b) Each existing Preference share to be reduced to ₹ 75 and then exchanged for 1 new 13% Preference
share of ₹ 50 each and 1 Equity share of ₹ 25 each.
c) Preference shareholders have forgone their right for dividend for four years. One year’s dividend at
the old rate is however, payable to them in fully paid equity Shares of ₹ 25.
d) The Debentureholders be given the option to either accept 90% of their claims in cash or to convert
their claims in full into new 13% Preference shares of ₹ 50 each issued at par. One half (in value) of
the debentureholders accepted Preference shares for their claims. The rest were paid cash.
e) Contingent liability of ₹ 1,50,000 is payable, which has been created by wrong action of one Director.
He has agreed to compensate this loss out of the loan given by the Director to the company.
f) Goodwill does not have any value in the present. Decrease the value of Plant and Machinery, Stock
and Trade Receivables by ₹ 4,00,000, ₹ 1,00,000 and ₹ 1,50,000 respectively. Increase the value of
Land and Buildings to ₹ 18,00,000.
g) 40,000 new Equity shares of ₹ 25 each are to be issued at par, payable in full on application. The issue
was underwritten for a commission of 4%. Shares were fully taken up.
h) The total expenses incurred by the company in connection with the scheme excluding underwriting
commission amounted to ₹ 15,000.
Pass necessary Journal Entries to record the above transactions.

Question 10
Given below is the Balance Sheet of M Ltd. as at 31st March, 2020:
Liabilities ₹ Assets ₹
Share Capital: 4,000 equity shares of 4,00,000 Land & Buildings 1,00,000
₹ 100 each fully paid up Machinery 4,00,000
1,000 equity shares of ₹ 100 each, ₹ 50,000 Motor Vans 40,000
50 per share paid Furniture 10,000
Development Rebate Reserve 1,50,000 Short term Investments 50,000
(Market Value ₹ 40,000)
Unsecured Loans 6,40,000 Stock 1,00,000
Creditors (including ₹ 10,000 Debtors 1,90,000
holding lien on land) 2,60,000 Bank Balance 10,000
Surplus A/c (negative balance) 6,00,000
15,00,000 15,00,000
Due to financial constraints, a scheme of reconstruction was prepared & approved as under:
a) To bring in the books the present market value of Land & Buildings which had appreciated by 150%
b) Equity shares to be reduced to ₹ 10 per share paid by cancelling ₹ 90 & ₹ 40 per share respectively, the
face value remaining the same at ₹ 100 & the equity shareholders paying a call of ₹ 50 per share to
provide the funds for the company’s working.
c) Unsecured loans to be paid immediately to the extent of ₹ 1,00,000
d) Unsecured creditors to be paid immediately to the extent of 10% of their claims and they accepted a
remission of 20% of their claims.
e) Development Rebate Reserve being no longer required to be transferred to Surplus A/c
f) Investments to be brought to their market value.
g) The amount available as a result of scheme to be used to write-off debit balance in Surplus Account.
Give journal entries to record the above.

Question 11 ICAI Study Material

Following is the Balance Sheet of ABC Ltd. Co. as at 31st March, 2020:
Note Amount
A. Equity and Liabilities
1. Shareholders’ Fund
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 Internal Reconstruction Ch 5 - 12
(a) Share Capital 1 26,00,000
(b) Reserves & Surplus 2 (4,05,000)
2. Non-current Liabilities
(a) Long Term Borrowings 3 12,00,000
3. Current Liabilities
(a) Trade Payables 5,92,000
(b) Short term Borrowings- Bank Overdraft 1,50,000
Total 41,37,000
B. Assets
1. Non-current assets
(a) Property, Plant & Equipment & Intangible Assets
i. Property, Plant & Equipment 4 11,50,000
ii. Intangible Assets 5 70,000
(b) Non Current Investments 6 68,000
2. Current Assets
(a) Inventories 14,00,000
(b) Trade Receivables 14,39,000
(c) Cash & Cash Equivalents 10,000
Total 41,37,000

Notes to Accounts
Amount
1. Share Capital
Equity Share Capital
2,00,000 equity shares of ₹ 10 each 20,00,000
Preference Share Capital
6,000 8% preference shares of ₹ 100 each 6,00,000
26,00,000
2. Reserves and Surplus
Debit Balance of Profit and Loss Account (4,05,000)
3. Long Term borrowings
9% Debentures 12,00,000
4. Property, Plant & Equipment
Plant & Machinery 9,00,000
Furniture & Fixtures 2,50,000
11,50,000
5. Intangible Assets
Patents & Copyrights 70,000
6 Non Current Investments
Investments (Market Value of 55,000) 68,000

The following scheme of reconstruction was finalized:

a) Preference shareholders would give up 30% of their capital in exchange for allotment of 11%
Debentures to them.
b) Debentureholders having charge on plant and machinery would accept plant and machinery in full
settlement of their dues.
c) Stock equal to ₹ 5,00,000 in book value will be taken over by trade payables in full settlement of their
dues.
d) Investment value to be reduced to market price.
e) The company would issue 11% Debentures for ₹ 3,00,000 to augment its working capital requirement
after settlement of bank overdraft.
Give necessary journal entries reflecting the above scheme of reconstruction in the books of the ABC
Ltd. Co. Prepare Capital Reduction account and Balance Sheet of company after internal reconstruction.
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 13
Question 12
The shareholders of Maitri Ltd. decided on a corporate restructuring exercise necessitated because of
economic recession. From the given summarised balance sheet as on 31-3-2020 and the information
supplied, you are required to prepare:
(i) Journal entries reflecting the scheme of reconstruction,
(ii) Capital reduction account,
(iii) Cash account in the books of Maitri Ltd
Summarised Balance Sheet of Maitri Ltd. as on 31.3.2020
Liabilities ₹ Assets ₹
Share Capital PPE & Intangible Assets
30,000 Equity shares of ₹ 10 each 3,00,000 Trademarks and Patents 1,10,000
40,000 8% Cumulative Preference 4,00,000 Goodwill at cost 36,100
shares ₹ 10 each
Reserves and Surplus Freehold Land 1,20,000
Securities Premium Account 10,000 Freehold Premises 2,44,000
Profit and Loss Account (1,38,400) Plant and Equipment 3,20,000
Secured Borrowings Investment (marked to market) 64,000
9% Debentures (₹ 100) 1,20,000 Current Assets
Accrued Interest 5,400 1,25,400 Inventories:
Current liabilities Raw materials & packing
materials 60,000
Trade payables 1,20,000 Finished goods 16,000 70,000
GST payable 50,000 Trade receivables 1,20,000
Temporary bank overdraft 2,23,100
10,90,100 10,90,100
Note: Preference dividends are in arrears for 4 years.
The scheme of reconstruction that received the permission of the Court was on the following lines:
a) The authorized capital of the Company to be re-fixed at ₹ 10 lakhs (preference capital of ₹ 3 lakhs and
equity capital of ₹ 7 lakhs). Both classes of shares are of ₹ 10 each.
b) The preference shares are to be reduced to ₹ 5 each and equity shares reduced by ₹ 3 per share. Post
reduction, both classes of shares to be re-consolidated into ₹ 10 shares.
c) Trade Investments are to be liquidated in open market.
d) One fresh equity shares of ₹ 10 to be issued for every ₹ 40 of preference dividends in arrears (ignore
taxation).
e) Expenses for the scheme were ₹ 10,000.
f) The debenture holders took over freehold land at ₹ 2,10,000 and settled the balance after adjusting
their dues.
g) Unprovided contingent liabilities were settled at ₹ 54,000 and a pending insurance claim receivable
settled at ₹ 12,500.
h) The intangible assets were all to be written off along with ₹ 10,000 worth obsolete packing material
and 10% of the receivables.
i) Remaining cash available as a result of the above transactions is to be utilized to pay off the bank
overdraft to that extent.
j) The Equity shareholders agree that they will bring in necessary cash to liquidate the balance
outstanding on the overdraft account by subscribing the fresh shares. The equity shares will be issued
at par for this purpose.

Question 13
The following was the Balance Sheet of Bhushan Developers Ltd., as on 31st March 2020:
Liabilities ₹ Assets ₹
Authorised capital: Goodwill 10,000
20,000 Equity Shares of ₹10 each 2,00,000 Land and buildings 20,500
Issued, subscribed and paid up capital Machinery 50,850
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 14
12,000 Shares of ₹10 each 1,20,000 Stock 10,275
Less: Calls in arrear 9,000 1,11,000
(₹ 3 per share on 3,000 shares)
Sundry creditors 15,425 Book debts 15,000
Provision for taxation 4,000 Cash at bank 1,500
Profit and Loss A/c:
Balance as per last B/S 22,000
Less: Profit for the year 1,200 20,800
Preliminary expenses 1,500
1,30,425 1,30,425
The directors have had a valuation made of the machinery and find it overvalued by ₹10,000. It is
proposed to write down this asset to its true value and to extinguish the deficiency in the Profit and loss
account and to write off goodwill and preliminary expenses, by the adoption of the following course:
1. Forfeit the shares on which the call is outstanding.
2. Reduce the capital by ₹3 per share.
3. Reissue the forfeited shares at ₹5 per share.
4. Utilise the provision for taxes, if necessary.
You are requested to draft the necessary journal entries.

Question 14
S.P. Construction Co. finds itself in financial difficulty. The following is the summarized balance sheet
on 31st December 2020:
Liabilities ₹ Assets ₹
Share capital Land 1,56,000
20,000 Equity Shares of ₹ 10 each fully paid 2,00,000 Building (net) 27,246
5% Cum. Pref. Shares of ₹10 each fully paid 70,000 Equipment 10,754
8% Debentures 80,000 Goodwill 60,000
Loan from Directors 16,000 Investments (Quoted) in Shares 27,000
Trade payables 96,247 Inventory 1,20,247
Bank Overdrafts 36,713 Trade Receivables 70,692
Interest Payable on Debentures 12,800 Profit & Loss Account 39,821
5,11,760 5,11,760
The authorised capital of the company is 20,000 Equity Shares of ₹ 10 each and 10,000 5% Cum.
Preference Shares of ₹ 10 each. During a meeting of shareholders and directors, it was decided to carry
out a scheme of internal reconstruction. The following scheme has been agreed:
a. The equity shareholders are to accept reduction of ₹ 7.50 per share. And each equity share is to be
redesignated as a share of ₹ 2.50 each.
b. The equity shareholders are to subscribe for new share on basis of 1 for 1 at a price of ₹ 3 per share.
c. The existing 7,000 Preference Shares are to be exchanged for a new issue of 3,500 8% Cumulative
Preference Shares of ₹ 10 each and 14,000 Equity Shares of ₹ 2.50 each.
d. The Debenture holders are to accept 2,000 Equity Shares of ₹ 2.50 each in lieu of interest payable.
The interest rate is to be increased to 9 ½%. Further ₹ 9,000 of this 9½% Debentures are to be issued
and taken up by the existing holders at ₹ 90 for ₹ 100.
e. ₹ 6,000 of directors’ loan is to be credited. The balance is to be settled by issue of 1,000 Equity Shares
of ₹ 2.50 each.
f. Goodwill and the profit and loss account balance are to be written off.
g. The investment in shares is to be sold at current market value of ₹ 60,000.
h. The bank overdraft is to be repaid.
i. ₹ 46,000 is to be paid to trade payables now and balance at quarterly intervals.
j. 10% of the Trade receivables are to be written off.
k. The remaining assets were professionally valued & should be included in books of account as follows
Land 90,000
Building 80,000
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 15
Equipment 10,000
Inventory 50,000
l. It is expected that due to changed condition and new management operating profit will be earned at
the rate of ₹ 50,000 p.a. after depreciation but before interest and tax. Due to losses brought forward it
is unlikely that any tax liability will arise until 2022.
You are required to show necessary journal entries to affect reconstruction scheme. (Focus on: Point e)

Question 15 ICAI Study Material

Given below is the summarized balance sheet of Rebuilt Ltd. as on 31.3.2020:
Note Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital 1 13,50,000
(b) Reserves & Surplus 2 (4,51,000)
2. Non-current Liabilities
(a) Long Term Borrowings 3 5,73,000
3. Current Liabilities
(a) Trade Payables 2,07,000
(b) Other Current Liabilities 35,000
Total 17,14,000
B. Assets
1. Non-current assets
(a) Property, Plant & Equipment & Intangible Assets
i. Property, Plant & Equipment 4 6,68,000
ii. Intangible Assets 5 3,18,000
2. Current Assets
(a) Inventories 4,00,000
(b) Trade Receivables 3,28,000
Total 17,14,000

Notes to Accounts
Amount
1. Share Capital
Equity Share Capital
15,000 equity shares of ₹ 50 each 7,50,000
Preference Share Capital
12,000 7% Cumulative preference shares of ₹ 100 each 6,00,000
(Preference dividend is in arrears for 5 years) 13,50,000
2. Reserves and Surplus
Debit Balance of Profit and Loss Account (4,51,000)
3. Long Term borrowings
Loan 5,73,000
4. Property, Plant & Equipment
Building at cost less depreciation 4,00,000
Plant at cost less depreciation 2,68,000
6,68,000
5. Intangible Assets
Trademarks & Goodwill 3,18,000
The Company is now earning profits short of working capital and a scheme of reconstruction has been
approved by both the classes of shareholders. A summary of the scheme is as follows:
(a) The equity shareholders have agreed that their ₹ 50 shares should be reduced to ₹ 2.50 by cancellation
of ₹ 47.50 per share. They have also agreed to subscribe for three new equity shares of ₹ 2.50 each for
each equity share held.
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 16
(b) The preference shareholders have agreed to cancel the arrears of dividends and to accept for each ₹ 50
share, 4 new 5% preference shares of ₹ 10 each, plus 6 new equity shares of ₹ 2.50 each, all credited
as fully paid.
(c) Lenders to the company for ₹ 1,50,000 have agreed to convert their loan into share and for this
purpose they will be allotted 12,000 new preference shares of ₹ 10 each and 12,000 new equity shares
of ₹ 2.50 each.
(d) The directors have agreed to subscribe in cash for 40,000, new equity shares of ₹ 2.50 each in addition
to any shares to be subscribed by them under (a) above.
(e) Of the cash received by the issue of new shares, ₹ 2,00,000 is to be used to reduce the loan due by the
company.
(f) The equity share capital cancelled is to be applied:
a. to write off the debit balance in the profit and loss A/c; and
b. to write off ₹ 35,000 from the value of plant.
Any balance remaining is to be used to write down the value of trademarks and goodwill.
Show by journal entries how the financial books are affected by the scheme. Nominal capital as reduced
is to be increased to ₹ 6,50,000 for preference share capital and ₹ 7,50,000 for equity share capital.

Question 16
The Balance Sheet of R Ltd., at 31st March, 2020 was as follows:
Liabilities ₹ Assets ₹
Share capital Authorised 14,00,000 Intangibles 68,000
Issued: 64,000, 8% Cum. Preference 6,40,000 Freehold premises at cost 1,40,000
shares of ₹ 10 each, fully paid
64,000 Equity shares of ₹ 4,80,000 Plant & Equipment at cost less 2,40,000
10 each, ₹ 7.5 paid depreciation
Loans from directors 60,000 Investments in shares in Q Ltd. at cost 3,24,000
Sundry creditors 4,40,000 Stocks 2,48,000
Bank overdraft 2,08,000 Debtors 3,20,000
Deferred revenue expenditure 48,000
Profit and loss account 4,40,000
18,28,000 18,28,000

Note: The arrears of preference dividends amount to ₹ 51,200. A scheme of reconstruction was duly
approved with effect from 1st April, 2020 under the conditions stated below:
a) The unpaid amount on the equity shares would be called up.
b) The preference shareholders would forego their arrear dividends. In addition, they would accept a
reduction of ₹ 2.5 per share. The dividend rate would be enhanced to 10%.
c) The equity shareholders would accept a reduction of ₹ 7.5 per share.
d) R Ltd. holds 21,600 shares in Q Ltd. This represents 15% of the share capital of that company. Q Ltd.
is not a quoted company. The average net profit (after tax) of the company is ₹ 2,50,000. The shares
would be valued based on 12% capitalization rate.
e) A bad debt provision at 2% would be created.
f) The other assets would be valued as under:
Intangibles 48,000
Plant 1,40,000
Freehold premises 3,80,000
Stocks 2,50,000
g) The profit and loss account debit balance and the balance standing to the debit of the deferred revenue
expenditure account would be eliminated.
h) The directors would have to take equity shares at the new face value of ₹ 2.5 per share in settlement of
their loan.
i) The equity shareholders, including the directors, who would receive equity shares in settlement of
their loans, would take up two new equity shares for every one held.
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 17
j) The preference shareholders would take up one new preference share for every four held.
k) The authorised share capital would be restated to ₹ 14,00,000.
l) The new face values of the shares–preference and equity will be maintained at their reduced levels.
You are required to prepare:
a) Necessary ledger accounts to effect the above; and
b) The Balance Sheet of the company after reconstruction.
(Focus on: Point d)

Question 17 ICAI Study Material

Green Limited had decided to reconstruct the Balance Sheet since it has accumulated huge losses. The
following is the summarized Balance Sheet of the Company on 31.3.2020 before reconstruction:

Note Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital 1 65,00,000
(b) Reserves & Surplus 2 (20,00,000)
2. Non-current Liabilities
(a) Long Term Borrowings 3 15,00,000
3. Current Liabilities
(a) Trade Payables 5,00,000
Total 65,00,000
B. Assets
1. Non-current assets
(a) Property, Plant & Equipment & Intangible Assets
i. Property, Plant & Equipment 4 45,00,000
ii. Intangible Assets 5 20,00,000
2. Current Assets Nil
Total 65,00,000

Notes to Accounts
Amount
1. Share Capital
Authorized Share Capital
1,50,000 equity shares of ₹ 50 each 75,00,000
Issued, Subscribed and Paid up Share Capital
50,000 equity shares of ₹ 50 each 25,00,000
1,00,000 equity shares of ₹ 50 each, 40 paid up 40,00,000
65,00,000
2. Reserves and Surplus
Debit Balance of Profit and Loss Account (20,00,000)
3. Long Term borrowings
12% First Debentures 5,00,000
12% Second Debentures 10,00,000
15,00,000
4. Property, Plant & Equipment
Building 10,00,000
Plant 10,00,000
Computers 25,00,000
45,00,000
5. Intangible Assets
Goodwill 20,00,000

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 18
The following is the interest of Mr. X and Mr. Y in Green Limited:
Mr. X Mr. Y
12% First Debentures 3,00,000 2,00,000
12% Second Debentures 7,00,000 3,00,000
Sundry Creditors 2,00,000 1,00,000
12,00,000 6,00,000
Fully paid up ₹ 50 shares 3,00,000 2,00,000
Parly paid up shares (₹ 40 paid up) 5,00,000 5,00,000

The following Scheme of Reconstruction is approved by all parties interested and also by the Court:
(a) Uncalled capital is to be called up in full and such shares and the other fully paid up shares be
converted into equity shares of ₹ 20 each.
(b) Mr. X is to cancel ₹ 7,00,000 of his total debt (other than share amount) and to pay ₹ 2 lakhs to the
company and to receive new 14% First Debentures for the balance amount.
(c) Mr. Y is to cancel ₹ 3,00,000 of his total debt (other than equity shares) and to accept new 14% First
Debentures for the balance.
(d) The amount thus rendered available by the scheme shall be utilised in writing off of Goodwill, Profit
and Loss A/c and the balance to write off the value of computers.
You are required to draw the Journal Entries to record the same and also show the Balance Sheet of the
reconstructed company.

Question 18 RTP May 2014

The draft Balance Sheet of Moon Limited as on 31st March, 2020 was as follows:
Liabilities ₹ Assets ₹
2,50,000 Equity shares of ₹ 10 each 25,00,000 Goodwill 5,00,000
fully paid
9% 10,000 Preference shares of ₹100 10,00,000 Patent 2,50,000
each fully paid
10% First debentures 3,00,000 Land and Building 15,00,000
10% Second debentures 5,00,000 Plant and Machinery 5,00,000
Debentures interest outstanding 80,000 Furniture and Fixtures 1,00,000
Trade payables 2,50,000 Computers 1,50,000
Directors’ loan 50,000 Trade Investment 2,50,000
Bank Overdraft 50,000 Trade receivables 2,50,000
Outstanding liabilities 20,000 Stock 5,00,000
Provision for tax 50,000 Profit and Loss Account (Loss) 8,00,000
48,00,000 48,00,000
Note: Preference dividend is in arrears for last three years.
A holds 10% first debentures for ₹ 2,00,000 and 10% second debentures for ₹3,00,000. He is also
creditors for ₹ 50,000. B holds 10% first debentures for ₹ 1,00,000 and 10% second debentures for ₹
2,00,000 and is also creditors for ₹ 25,000.

The following scheme of reconstruction has been agreed upon and duly approved by the court.
a) All the equity shares be converted into fully paid equity shares of ₹5 each.
b) The preference shares be reduced to ₹ 50 each and the preference shareholders agree to forego their
arrears of preference dividends in consideration of which 9% preference shares are to be converted into
10% preference shares.
c) Mr. ‘A’ is to cancel ₹ 3,00,000 of his total debt including interest on debentures and to pay ₹ 50,000 to
the company and to receive new 12% debentures for the Balance amount.
d) Mr. ‘B’ is to cancel ₹ 1,50,000 of his total debt including interest on debentures and to accept new 12%
debentures for the balance amount.
e) Trade creditors (other than A and B) agreed to forego 50% of their claim.

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 19
f) Directors to accept settlement of their loans as to 60% thereof by allotment of equity shares and
balance being waived.
g) There were capital commitments totalling ₹ 1,50,000. These contracts are to be cancelled on payment
of 5% of the contract price as a penalty.
h) The Directors refund ₹ 55,000 of the fees previously received by them.
i) Reconstruction expenses paid ₹5,000.
j) The taxation liability of the company is settled at ₹ 40,000 and the same is paid immediately.
k) The assets are revalued as under:
₹
Land and building 14,00,000
Plant and Machinery 2,00,000
Stock 3,50,000
Trade receivables 1,50,000
Computers 90,000
Furniture & Fixtures 50,000
Trade Investment 2,00,000
Pass Journal entries for all the above mentioned transactions including amounts to be written off of
Goodwill, Patents, Loss in Profit & Loss Account.
Prepare Bank Account and working of allocation of Interest on Debentures between A and B

Question 19 ICAI Study Material

Repair Ltd. is in the hands of a receiver for debenture holders who holds a charge on all assets except
uncalled capital. The following statement shows the position as regards creditors as on 30th June, 2020:
Liabilities ₹ Assets ₹
6,000 shares of ₹ 60 each, ₹ 30 paid up Property, machinery and plant etc. 1,50,000
(Cost ₹ 3,90,000) Estimated at
First debentures 3,00,000 Cash in hand of the receiver 2,70,000
Second debentures 6,00,000 Charged under debentures 4,20,000
Unsecured creditors 4,50,000 Uncalled capital 1,80,000
Deficiency 7,50,000
13,50,000 13,50,000
A holds the first debentures for ₹ 3,00,000 and second debentures for ₹ 3,00,000. He is also an unsecured
creditor for ₹ 90,000. B holds second debentures for ₹ 3,00,000 and is an unsecured creditor for ₹ 60,000.
The following scheme of reconstruction is proposed:
a. A is to cancel ₹ 2,10,000 of the total debt owing to him, to bring ₹ 30,000 in cash and to take first
debentures (in cancellation of those already issued to him) for ₹ 5,10,000 in satisfaction of all his
claims.
b. B is to accept ₹ 90,000 in cash in satisfaction of all claims by him.
c. In full settlement of 75% of the claim, unsecured creditors (other than A and B) agreed to accept four
shares of ₹ 7.50 each, fully paid against their claim for each share of ₹ 60. The balance of 25% is to be
postponed and to be payable at the end of three years from the date of Court’s approval of the scheme.
The nominal share capital is to be increased accordingly.
d. Uncalled capital is to be called up in full and ₹ 52.50 per share cancelled, thus making the shares of ₹
7.50 each.
Assuming that the scheme is duly approved by all parties interested & by the Court, give necessary
journal entries

Question 20
The following is the balance sheet of Ram Ltd. as at 31st March, 2020:
Liabilities ₹ Assets ₹
Share capital Property, Plant & Equipment:
Authorised: Pune Property 1,60,000

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 20
30,000 equity shares of ₹ 10 each 3,00,000 Bombay Property 1,20,000
30,000, 13% preference shares of ₹ 10 3,00,000 Plant & Machinery 1,50,000
each 6,00,000
Subcribed, Issued & Paid up Capital Investments:
20,000 equity shares of ₹ 10 each 2,00,000 10% Government Loan
18,000, 13% preference shares of ₹ 10 1,80,000 earmarked against Workmen
each Compensation Fund 30,000
Reserve & Surplus: Miscellaneous expenditure &
Workmen’s Compensation fund: losses:
Pune 20,000 Profit & Loss Account 40,000
Bombay 10,000 30,000
Secured Loans:
12% ‘A’ debentures secured on Pune
Property 30,000
12% ‘B’ debentures secured on
Bombay Property 35,000 65,000
Current Liabilities & Provisions:
Creditors 25,000
5,00,000 5,00,000
The following scheme of reconstruction was duly approved:
a) Equity shares were to reduced to ₹ 1 each.
b) Preference shares were to be reduced by ₹ 2 per share.
c) Debenture holders were to forego their unpaid interest ₹ 5,200 which is included in sundry creditors.
d) ‘B’ Debenture holders agreed to take over the Bombay Property at ₹ 50,000 & paid balance in cash.
e) Workmen’s compensation fund (Bombay) disclosed the fact that actually there was a liability of ₹
2,000 only. As a result the relevant fund amount balance was to be brought down to the required
amount. Investments were realized at 10% above the book value.
f) The plant & machinery were to be written down by ₹ 90,000.
g) Any balance remaining was to be applied as to 75% in writing down Pune Property & 25% transferred
to capital reserve.
Show the journal entries to put through the scheme.
(Focus on: Point e)

Question 21 IPCC Nov 2015 (16 Marks) / RTP May 2020

The following is the Balance Sheet of Star Ltd. as on 31st March, 2020:
Amount Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital
10,000 equity shares of ₹ 100 each fully paid 10,00,000
9,000, 7% preference shares of ₹ 100 each fully paid 9,00,000
(b) Reserves & Surplus
Profit & Loss Account (2,00,000)
2. Non-current Liabilities
(a) Long Term Borrowings
“A” 6% Debentures (Secured on Bombay Works) 3,00,000
“B” Debentures (Secured on Chennai Works) 3,50,000
3. Current Liabilities
(a) Workmen’s Compensation Fund:
Bombay Works 10,000
Chennai Works 5,000
(b) Trade Payables 1,25,000
Total 24,90,000
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 21
B. Assets
1. Non-current assets
Property, Plant & Equipment
Bombay Works 9,50,000
Chennai Works 7,75,000 17,25,000
2. Investment
Investments for Workman’s Compensation Fund 15,000
3. Current Assets
(a) Inventories 4,50,000
(b) Trade Receivables 2,50,000
(c) Cash at Bank 50,000 18,50,000
Total 24,90,000
A reconstruction scheme was prepared and duly approved. The salient features of the scheme were as
follows:
a) Paid up value of 7% Preference Share to be reduced to ₹ 80, but the rate of dividend being raised to
9%.
b) Paid up value of Equity Shares to be reduced to ₹ 10.
c) The directors to refund ₹ 50,000 of the fees previously received by them.
d) Debenture holders forego their interest of ₹ 26,000 which is included among the Sundry Creditors.
e) The preference shareholders agreed to waive their claims for preference share dividend, which is in
arrears for the last three years.
f) “B” 6% Debenture holders agreed to take over the Chennai Works at ₹ 4,25,000 and to accept an
allotment of 1,500 equity shares of ₹ 10 each at par, and upon their forming a company called Zia
Ltd. (to take over the Chennai Works) they allotted 9,000 equity shares of ₹ 10 each fully paid at par
to Star Ltd.
g) The Chennai Worksmen’s compensation fund disclosed that there were actual liabilities of ₹ 1,000
only. As a consequence, the investments of the fund were realized to the extent of the balance. Entire
investments were sold at a profit of 10% on book value and the proceeds were utilized for part
payment of the creditors.
h) Stock was to be written off by ₹ 1,90,000 and a provision for doubtful debts is to be made to the
extent of ₹ 20,000.
i) Chennai works completely written off.
j) Any balance of the Capital Reduction Account is to be applied as two-third to write off the value of
Bombay Works and one-third to Capital Reserve.
Pass necessary Journal Entries in the books of Star Ltd. after the scheme has been carried into effect.

TOPIC 2B Share Surrender

Question 22 RTP Nov 2014 / RTP Nov 2017 / IPCC Nov 2018 (16 Marks) (Similar)
Following is the summarized Balance Sheet of Ravi Limited as on March 31, 2020:
Liabilities ₹ Assets ₹
Issued Equity share capital Patents 4,00,000
30,000 shares of ₹ 100 each fully paid 30,00,000 Plant and Machinery 30,00,000
20,000 7% cumulative preference shares 20,00,000 Building 5,50,000
of ₹ 100 each fully paid
General Reserve 6,00,000 Trade Receivables 23,50,000
Loan from director 4,40,000 Inventory 16,30,000
Trade Payables 24,60,000 Cash 1,20,000
Outstanding Expenses 3,20,000 Bank Balance 2,30,000
Dividend Payable 3,00,000 Profit & Loss A/c 8,40,000
91,20,000 91,20,000
Note: The arrears of preference dividend amount to ₹ 2,80,000.
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 22
The company had suffered losses since last 3 years due to bad market conditions and hope for a better
position in the future.
The following scheme of reconstruction has been agreed upon and duly approved by all concerned:
1) Equity shares to be converted into 3,00,000 shares of ₹10 each.
2) Equity shareholders to surrender to the company 80 percent of their holdings.
3) Preference shareholders agree to forgo their right on arrears of dividends in consideration of which
7% preference shares are to be converted into 8% preference shares.
4) Trade payables agree to reduce their claim by one fourth in consideration of their getting shares of ₹
5,00,000 out of the surrendered equity shares.
5) Directors agree to forego the amounts due on account of loan.
6) Surrendered shares not otherwise utilized to be cancelled.
7) Assets to be reduced as under
Patent by 4,00,000
Plant & Machinery by 4,00,000
Inventory by 3,40,000
8) Trade receivables to the extent of ₹ 17,00,000 are considered good.
9) Revalued figures for building is accepted at ₹ 7,00,000.
10) Dividend payable is paid to the equity shareholders.
11) Any surplus after meeting the losses should be utilized in writing down the value of the plant further.
12) Expenses of reconstruction amounted to ₹ 60,000.
13) Further 40,000 equity shares were issued to the existing members for increasing the working capital.
The issue was fully subscribed and paid up.
You are required to pass the Journal Entries for giving effect to the above arrangement.

Question 23 ICAI Study Material

The Balance Sheet of Revise Ltd. as on 31-03-2020 is as follows:
Note Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital 1 10,00,000
(b) Reserves & Surplus 2 (6,00,000)
2. Non-current Liabilities
(a) Long Term Borrowings 3 2,00,000
3. Current Liabilities
(a) Trade Payables 72,000
(b) Other Current Liabilities 4 24,000
(c) Short Term Provisions 5 24,000
Total 7,20,000
B. Assets
1. Non-current assets
(a) Property, Plant & Equipment & Intangible Assets
i. Property, Plant & Equipment 6 1,00,000
2. Current Assets
(a) Inventories 3,20,000
(b) Trade Receivables 2,70,000
(c) Cash and Cash Equivalents 30,000
Total 7,20,000

Notes to Accounts
Amount
1. Share Capital
Equity Share Capital
10,000 equity shares of ₹ 100 each 10,00,000
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 23
2. Reserves and Surplus
Debit Balance of Profit and Loss Account (6,00,000)
3. Long Term borrowings
12% Debentures 2,00,000
4. Other Current Liabilities
Interest payable on debentures 24,000
5. Short Term Provisions
Provision for taxation 24,000
6. Property, Plant & Equipment
Machinery 1,00,000
It was decided to reconstruct the company for which necessary resolution was passed and sanctions were
obtained from appropriate authorities. Accordingly, it was decided that:
(a) Each share is sub-divided into ten fully paid up equity shares of ₹ 10 each.
(b) After sub-division, each shareholder shall surrender to the company 50% of his holding, for the
purpose of re-issue to debenture holders and trade payables as necessary.
(c) Out of shares surrendered, 10,000 shares of ₹ 10 each shall be converted into 12% preference shares of
₹ 10 each, fully paid up.
(d) The claims of the debenture-holders shall be reduced by 75 per cent. In consideration of the
reduction, the debenture holders shall receive preference shares of ₹ 1,00,000 which are converted out
of shares surrendered.
(e) Trade payables claim shall be reduced to 50 per cent, it is to be settled by the issue of equity shares of
₹ 10 each out of shares surrendered.
(f) Balance of profit and loss account to be written off.
(g) The shares surrendered and not re-issued shall be cancelled.
You are required to show the journal entries giving effect to the above and the resultant Balance Sheet.

Question 24
Following is the summarized Balance Sheet of Max Ltd. as at March 31, 2020.
Liabilities ₹ Assets ₹
Share capital: Goodwill 20,000
Equity shares of ₹ 100 each 15,00,000 Other fixed assets 15,00,000
9% Pref. shares of ₹ 100 each 5,00,000 Trade receivables 6,51,000
General reserve 1,80,000 Inventory 3,93,000
Profit and loss account - Cash at bank 26,000
12% Debentures of ₹ 100 each 6,00,000 Own Debenture (Nominal value ₹2 Lakh) 1,92,000
Trade payables 4,15,000 Discount on Issue of Debentures 2,000
Profit and loss account 4,11,000
31,95,000 31,95,000
On 1.4.2020, Max Ltd. adopted the following scheme of reconstruction:
a) Each equity share shall be sub-divided into 10 equity shares of ₹ 10 each fully paid up. 50% of the
equity share capital would be surrendered to the Company.
b) Preference dividends are in arrear for 3 years. Preference shareholders agreed to waive 90% of the
dividend claim and accept payment for the balance.
c) Own debentures of ₹ 80,000 were sold at ₹ 98 cum-interest and remaining own debentures were
cancelled.
d) Debentureholders of ₹ 2,80,000 agreed to accept one machinery of book value of ₹ 3,00,000 in full
settlement.
e) Trade payables, trade receivables and inventory were valued at ₹ 3,50,000, ₹ 5,90,000 and ₹ 3,60,000
respectively. The goodwill, discount on issue of debentures and Profit and Loss (Dr.) are to be written
off.
f) The Company paid ₹ 15,000 as penalty to avoid capital commitments of ₹ 3,00,000.
You are required to give Journal entries for reconstruction in the books of Max Ltd.

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 24

Practice Questions
TOPIC 1 & 2A

Question 1 ICAI Study Material

C Ltd. had ₹ 5,00,000 authorized capital on 31-12-2018 divided into shares of ₹ 100 each out of which
4,000 shares were issued and fully paid up. In June 2019 the Company decided to convert the issued
shares into stock. But in June, 2020 the Company re-converted the stock into shares of ₹ 10 each fully
paid up. Pass entries and show how Share Capital will appear in Notes to Balance Sheet as on 31-12-
2018, 31-12-2019 and 31-12-2020.

Question 2 IPCC May 2018 (4 Marks)

Pass Journal Entries in the following conditions:
4) Super Ltd. had 62,000 equity shares of ₹ 50 each on which ₹ 45 is paid up. In September, 2020
company decided to sub-divide each share into 5 shares of ₹ 10 with ₹ 9 paid up.
5) Top Ltd. had 1,05,000 equity shares of ₹ 10 each fully paid up. In November 2019 company decided
to convert the issued shares into stock. But in January 2020 the company re-converted the stock into
equity shares of ₹ 100 each fully paid up.
6) New Ltd. had capital of ₹ 15,00,000 divided into 1,50,000 equity shares of ₹ 10 each on which ₹ 6 is
paid up. During the year, company decided to reorganize its capital by consolidating 5 shares into one
share of ₹ 50 each, ₹ 30 paid up.

Question 3 IPCC May 2019 (4 Marks)

The Paid-up capital of S Limited amounted to ₹ 5,00,000 Equity Shares of ₹ 10 each. Due to continuous
loss incurred by the company, the following scheme of Reconstruction has been approved for S Limited
on 1st April, 2020.
i. In lieu of present holding the Equity Shareholders are to receive:
a. Fully Paid Equity Shares equal to 3/5th of their holding.
b. 8% Preference Shares fully paid to the extent of 20% of the above new Equity Shares.
c. 10% Second Debentures of ₹ 40,000.
ii. An issue of 8% Debentures First Debentures of ₹ 1,00,000 was made and fully subscribed for cash,
iii. The Assets were reduced as follows:-
a. Building from ₹ 2,00,000 to ₹ 1,50,000
b. Plant & Machinery from ₹ 1,50,000 to ₹ 1,30,000
c. Goodwill from ₹ 30,000 to Nil.
Show the Journal Entries in the books of S Limited to give effect of the scheme of Reconstruction.

Question 4 Inter July 2021 (5 Marks)

Sapra Limited has laid down the following terms upon the sanction of reconstruction scheme by court.
(i) The shareholders to receive in lieu of their present holding at 7,50,000 shares of ₹10 each, the
following:
a. New fully paid ₹ 10 Equity Shares equal to 3/5th of their holding.
b. Fully paid ₹ 10, 6% Preference Shares to the extent of 2/5th of the above new equity shares.
c. 7% Debentures of ₹ 250,000.
(ii) Goodwill which stood at ₹ 2,70,000 is to be completely written off.
(iii) Plant & Machinery to be reduced by ₹ 1,00,000, Furniture to be reduced by ₹ 88,000 and Building
to be appreciated by ₹ 1,50,000.
(iv) Investment of ₹ 6,00,000 to be brought down to its existing market price of ₹ 1,80,000.
(v) Write off Profit & Loss Account debit balance of ₹ 2,25,000.
In case of any shortfall, the balance of General Reserve of ₹ 42,000 can be utilized to write off the losses
under reconstruction scheme.
You are required to show the necessary Journal Entries in the books of Sapra Limited of the above
reconstruction scheme considering that balance in General Reserve is utilized to write off the losses.
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 25
Question 5
Pass journal entries for the following transactions:
a) Conversion of 2 lakh fully paid equity shares of ₹ 10 each into stock of ₹ 1,00,000 and balance has
12% fully convertible Debenture.
b) Consolidation of 40 lakh fully paid equity shares of ₹ 2.50 each into 10 lakh fully paid equity share of
₹ 10 each.
c) Sub-division of 10 lakh fully paid 11% preference shares of ₹ 50 each into 50 lakh fully paid 11%
preference shares of ₹ 10 each.
d) Conversion of 12% preference shares of ₹ 5,00,000 into 14% preference shares ₹ 3,00,000 and
remaining balance as 12% Non-cumulative preference shares.

Question 6
The Balance Sheet of Neptune Ltd. as on 31-03-2020 is given below:
Liabilities ₹ Assets ₹
80,000, Equity shares of ₹10 each fully 8,00,000 Freehold property 5,00,000
paid
5,000, 6% Cumulative preference 5,00,000 Plant and machinery 1,80,000
shares of ₹100 each fully paid
6% Debentures 3,75,000 Trade investment (at cost) 1,70,000
(secured by freehold property)
Arrear interest 22,500 3,97,500 Sundry debtors 4,50,000
Sundry creditors 17,500 Stock-in trade 2,00,000
Director’s loan 3,00,000 Deferred Revenue Expenditure 1,50,000
Profit & Loss Account 3,65,000
20,15,000 20,15,000
The Court approved a scheme of re–organisation to take effect on 1.4.2020 & terms are given below:
a) Preference shares are to be written down to ₹75 each and equity shares to ₹2 each.
b) Preference dividend in arrear for 4 years to be waived by 75% and for the balance equity shares of ₹2
each to be allotted.
c) Arrear of debenture interest to be paid in cash.
d) Debentureholders agreed to take one freehold property (Book value ₹ 3,00,000) at a valuation of ₹
3,00,000 in part payment of their holding. Balance debentures to remain as liability of the company.
e) Deferred advertisement expenditure to be written off.
f) Stock value to be written off fully in the books.
g) 50% of the Sundry Debtors to be written off as bad debt.
h) Remaining freehold property (after take over by debentureholders) to be valued at ₹3,50,000.
i) Investment sold out for ₹ 2,00,000.
j) 80% of the Director’s loan to be waived and for the balance, equity shares of ₹2 each to be issued.
k) Company’s contractual commitments amounting to ₹ 5,00,000 to be cancelled by paying penalty at
3% of contract value.
l) Cost of re–construction scheme is ₹ 20,000.
Show the Journal entries (with narration) to be passed for giving effect to the above transactions and
draw Balance Sheet of the company after effecting the scheme.
(Ans: Capital Reserve 1,80,000 Balance Sheet Total 8,97,500)

Question 7 RTP May 2016 / RTP Nov 2016

The summarised Balance Sheet of M/s. Hema Ltd. as on 31-03-2020 is given below:
Amount Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital
1,00,000 equity shares of ₹ 10 each fully paid 10,00,000
4,000, 8% preference shares of ₹ 100 each fully paid 4,00,000 14,00,000
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 26
(b) Reserves & Surplus
Profit & Loss Account (5,25,000)
2. Non-current Liabilities
(a) Long Term Borrowings 6% Debentures 4,00,000
(secured by freehold property)
3. Current Liabilities
(a) Trade Payables 1,01,000
(b) Loan From Director 3,00,000
(c) Interest accrued on debentures 24,000 4,25,000
Total 17,00,000
B. Assets
1. Non-current assets
(a) Property, Plant & Equipment (Tangible Assets)
i. Freehold Property 5,50,000
ii. Plant & Machinery 2,00,000
Trade Investments (at cost) 2,00,000 9,50,000
2. Current Assets
(a) Inventories 3,00,000
(b) Trade Receivables 4,50,000 7,50,000
Total 17,00,000
The Board of Directors of the company decided upon the following scheme of reconstruction with the
consent of respective shareholders:
a) Preference shares are to be written down to ₹ 80 each and equity shares to ₹ 2 each.
b) Preference dividend in arrear for 3 years to be waived by 2/3rd and for balance 1/3rd, equity shares
of ₹ 2 each to be allotted.
c) Debentureholders agreed to take one freehold property at its book value of ₹ 3,00,000 in part payment
of their holding. Balance debentures to remain as liability of the company.
d) Arrear debenture interest to be paid in cash.
e) Remaining freehold property to be valued at ₹ 4,00,000.
f) Investment sold out for ₹ 2,50,000.
g) 2,25,000 of Director’s loan to be waived and for the balance, equity shares of ₹ 2 each to be allotted.
h) 20% of Trade receivables, 40% of Inventories to be written off.
i) Company’s contractual commitments amounting to ₹ 3,00,000 have been settled by paying 10%
penalty of contract value.
Show the Journal Entries for giving effect to the internal re-construction and draw the Balance Sheet of
the company after effecting the scheme. Narrations may be ignored.
(Ans: Capital Reserve 5,08,000 Balance Sheet Total 13,36,000)

Question 8 IPCC Nov 2017 (16 Marks) / RTP May 2017 / RTP May 2019 (Similar)
M/s Planet Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses.
The following is the balance sheet of the company as on 31st March, 2020 before reconstruction:

Note ₹ (In Lacs)

A. Equity and Liabilities
1. Shareholders’ Fund
Share Capital 1 2,100
Reserves & Surplus 2 (783)
2. Non-Current Liabilities
Long Term Borrowings 3 1,050
3. Current Liabilities
Trade Payables 4 153
Other Liabilities 5 36
Total 2,556
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 27
B. Assets
1. Non-Current assets
Property, Plant & Equipment & Intangible Assets
Property, Plant & Equipment 6 1,125
2. Current Assets
Current Investments 7 300
Inventories 8 450
Trade Receivables 9 675
Cash & Cash Equivalents 10 6
Total 2,556

Notes to Accounts
Amount
1. Share Capital
Authorised,
300 lakh shares of ₹ 10 each 3,000
12 lakh, 8% Preference Shares of ₹ 100 each 1,200
4,200
Issued, Subscribed & paid up
150 lakh Equity Shares of ₹ 10 each, full paid up 1,500
6 lakh 8% Preference Shares of ₹ 100 each, fully paid up 600
Total 2,100
2. Reserves and Surplus
Debit Balance of Profit and Loss Account (783)
3. Long Term borrowings
6% Debentures (Secured by Freehold Property) 600
Directors’ Loan 450
1,050
4. Trade Payables
Sundry Creditors for Goods 153
5. Other Current Liabilities
Interest Accrued and Due on 6% Debentures 36
6. Property, Plant & Equipment
Freehold property 825
Plant & Machinery 300
1,125
7. Current Investment
Investment in Equity Instruments 300
8. Inventories
Finished Goods 450
9. Trade Receivables
Sundry Debtors for Goods 675
10. Cash and Cash Equivalents
Balance with Bank 6

The Board of Directors of the company decided upon the following scheme of reconstruction with the
consent of respective shareholders:
a) Preference Shares are to be written down to ₹ 75 each and Equity Shares to ₹ 2 each.
b) Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for balance 1/3 rd, Equity
Shares of ₹ 2 each to be allotted.
c) Debenture holders agreed to take one Freehold Property at its book value of ₹ 450 lakh in part
payment of their holding. Balance Debentures to remain as liability of the company.
d) Interest accrued and due on Debentures to be paid in cash.
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 28
e) Remaining Freehold Property to be valued at ₹ 550 lakh.
f) All investments sold out for ₹ 425 lakh.
g) 70% of Directors' loan to be waived and for the balance, Equity Shares of ₹ 2 each to be allowed.
h) 40% of Trade Receivables and 80% of Inventories to be written off.
i) Company's contractual commitments amounting to ₹ 900 lakh have been settled by paying 8% penalty
of contract value.
You are required to:
(a) Pass Journal Entries for all the transactions related to internal reconstruction;
(b) Prepare Capital Reduction Account, Bank Account; and
(c) Prepare Notes to Accounts on Share Capital and Property, Plant & Equipment to Balance Sheet,
immediately after the implementation of scheme of internal reconstruction.
(Ans: Capital Reserve 432 Lakhs)

Question 9 RTP Nov 2014 / RTP May 2017

Vinod Limited decided to reconstruct its business as it has accumulated huge losses. The following is the
Balance Sheet of the company as on 31–03–2020 before reconstruction:
Liabilities ₹ Assets ₹
6,00,000 Equity Shares of ₹ 10 each 60,00,000 Goodwill 10,40,000
fully paid up
3,20,000, 6% Preference Shares of ₹ 10 32,00,000 Patents 3,00,000
each fully paid up
6% Debentures (Secured against Land 30,00,000 Land & Building 34,00,000
& Building)
Bank Overdraft 11,60,000 Plant & Machinery 4,00,000
Trade Payables 24,00,000 Investments (at Cost) 4,40,000
Provision for Income Tax 4,00,000 Trade Receivables 34,80,000
Inventory 34,00,000
Profit & Loss A/c 37,00,000
1,61,60,000 1,61,60,000
Following scheme of Reconstruction approved by all interested parties and Court:
a) All Equity Shares are reduced to ₹ 3 each and Preference Shares to ₹ 7 each.
b) Debenture holders agree to take over a part of Land and Building, Book value of which is ₹ 14,00,000,
towards their 50% claim. Rate of interest of balance 50% debentures increased to 9%.
c) Goodwill and Patent will be written off.
d) 10% of trade receivables to be provided for bad debts.
e) Inventory to be written off by ₹ 5,20,000.
f) 50% of balance Land & Building sold for ₹ 12,00,000 and remaining Land & Building valued at ₹
12,00,000.
g) Investments to be sold for ₹ 4,00,000
h) There are pending contracts amounting to ₹ 20,00,000. These contracts are to be cancelled on
payment of penalty @ 5% of pending contract amount.
i) The Income Tax Liability of the company is settled at ₹ 6,12,000. Provision for Income Tax will be
raised accordingly.
j) 1/3 of trade payables decided to forgo their claim.
k) After making all the above adjustments, balance amount available through scheme, will be utilised to
write off the value of Plant & Machinery to that extent.
You are required to pass the Journal Entries and Draw up Balance Sheet of the company after
reconstruction.
(Ans: P&M w/off 2,00,000 Balance Sheet Total 77,52,000)

Question 10 Inter Nov 2018 (10 Marks) / RTP Nov 2021

The summarized Balance Sheet of SK Ltd. as on 31st March, 2020 is given below.

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 29
Amount
(‘000)
Liabilities
Equity Shares of ₹ 10 each 35,000
8%, Cumulative Preference Shares of ₹ 100 each 17,500
6% Debentures of ₹ 100 each 14,000
Sundry Creditors 17,500
Provision for taxation 350
Total 84,350
B. Assets
Assets
Property, Plant & Equipment 43,750
Investments (Market value ₹ 3325 thousand) 3,500
Current Assets (Including Bank Balance) 35,000
Profit and Loss Account 2,100
Total 84,350
The following Scheme of Internal Reconstruction is approved and put into effect on 31st March, 2020.
(i) Investments are to be brought to their market value.
(ii) The Taxation Liability is settled at ₹ 5,25,000 out of current Assets.
(iii) The balance of Profit and Loss Account to be written off.
(iv) All the existing equity shares are reduced to ₹ 4 each.
(v) All preference shares are reduced to ₹ 60 each.
(vi) The rate of interest on debentures is increased to 9%. The Debenture holders surrender their
existing debentures of ₹ 100 each and exchange them for fresh debentures of ₹ 80 each. Each old
debenture is exchanged for one new debenture.
(vii) Balance of Current Assets left after settlement of taxation liability are revalued at ₹ 1,57,50,000.
(viii) Property, Plant & Equipment are written down to 80%.
(ix) One of the creditors of the Company for ₹ 70,00,000 gives up 50% of his claim. He is allotted
8,75,000 equity shares of ₹ 4 each in full and final settlement of his claim.
Pass journal entries for the above transactions.
(Ans: Capital Reserve 4,375)

Question 11 ICAI Study Material

The following is the summarized Balance Sheet of X Ltd. as on 31st March, 2020:
Note Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital 1 36,00,000
(b) Reserves & Surplus 2 (14,40,000)
2. Non-current Liabilities
(a) Long Term Borrowings 3 6,00,000
3. Current Liabilities
(a) Short Term Borrowings- Bank Overdraft 6,00,000
(b) Trade Payables 3,00,000
Total 36,60,000
B. Assets
1. Non-current assets
(a) Property, Plant & Equipment & Intangible Assets
i. Property, Plant & Equipment 4 30,00,000
ii. Intangible Assets 5 90,000
2. Current Assets
(a) Inventories 2,60,000
(b) Trade Receivables 2,80,000
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 30
(c) Cash & Cash Equivalents 30,000
Total 36,60,000

Notes to Accounts
Amount
1. Share Capital
Equity Share Capital
24,000 equity shares of ₹ 100 each 24,00,000
Preference Share Capital
12,000 10% preference shares of ₹ 100 each 12,00,000
36,00,000
2. Reserves and Surplus
Debit Balance of Profit and Loss Account (14,40,000)
3. Long Term borrowings
10% Debentures 6,00,000
4. Property, Plant & Equipment
Land & Building 12,00,000
Plant & Machinery 18,00,000
30,00,000
5. Intangible Assets
Goodwill 90,000
On the above date, the company adopted the following scheme of reconstruction:
a) The equity shares are to be reduced to shares of ₹ 40 each fully paid and the preference shares to be
reduced to fully paid shares of ₹ 75 each.
b) The debenture holders took over stock and debtors in full satisfaction of their claims.
c) The Land and Building to be appreciated by 30% and Plant and machinery to be depreciated by 30%.
d) The debit balance of profit and loss account and intangible assets are to be eliminated.
e) Expenses of reconstruction amounted to ₹ 5,000.
Give journal entries incorporating the above scheme of reconstruction and prepare the reconstructed
Balance Sheet.
(Ans: Capital Reserve 85,000 Balance Sheet Total 28,45,000)

Question 12 IPCC Nov 2014 (16 Marks)

The Balance Sheet of X Ltd. as at 31st March, 2020 was as follows:
Balance Sheet as at 31.03.2020
Amount Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital
40000 equity shares of ₹ 100 each fully paid 40,00,000
20000, 10% preference shares of ₹ 100 each fully paid 20,00,000
(b) Reserves & Surplus
Securities Premium Account 1,50,000
Profit & Loss Account (23,00,000)
2. Non-current Liabilities
(a) Long Term Borrowings 7% Debentures of ₹ 100 each 4,00,000
3. Current Liabilities
(a) Trade Payables 10,00,000
(b) Loan From Director 2,00,000
Total 54,50,000
B. Assets
1. Non-current assets
Property, Plant & Equipment & Intangible Assets
The copyright of these notes is with C.A. Nitin Goel
No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 31
a) Property, Plant & Equipment
(a) Land & Building 20,00,000
(b) Plant & Machinery 12,00,000 32,00,000
b) Intangible Assets
Goodwill 4,00,000
2. Current Assets
(a) Inventories 5,00,000
(b) Trade Receivables 12,00,000
(c) Cash at Bank 1,50,000 18,50,000
Total 54,50,000
No Dividend on Preference Shares has been paid for last 5 Years.

The following scheme of reorganisation was duly approved by the Court:

a) Each equity share to be reduced to ₹ 25.
b) Each existing Preference Share to be reduced to ₹ 75 and then exchanged for one new 13% Preference
Share of ₹ 50 each and one Equity Share of ₹ 25 each.
c) Preference Shareholders have forgone their right for dividend for four years. One year's dividend at the
old rate is however, payable to them in fully paid equity shares of ₹ 25.
d) The Debenture Holders be given the option to either accept 90% of their claims in cash or to convert
their claims in full into new 13 % Preference Shares of ₹ 50 each issued at par. One-fourth (in value) of
the Debenture Holders accepted Preference Shares for their claims. The rest were paid in cash.
e) Contingent Liability of ₹ 2,00,000 is payable which has been created by wrong action of one Director.
He has agreed to compensate this loss out of the loan given by the Director to the Company.
f) Goodwill does not have any value in the present. Decrease the value of Plant & Machinery, Stock and
Debtors by ₹ 3,00,000; ₹ 1,00,000 and ₹ 2,00,000 respectively. Increase the value of Land & Building
to ₹ 25,00,000.
g) 50,000 new Equity Shares of ₹ 25 each are to be issued at par payable in full on application. The issue
was underwritten for a commission of 4%. Shares were fully taken up.
h) Total expenses incurred by the Company in connection with the Scheme excluding underwriting
Commission amounted to ₹ 20,000.
Pass necessary Journal Entries to record the above transactions.
(Ans: Capital Reserve 4,60,000)

Question 13 IPCC Nov 2015 (16 Marks)

The Balance Sheet of M/s Clean Ltd. as on 31st March, 2020 was summarized as follows:
Liabilities ₹ Assets ₹
Share capital Land & Building 75,00,000
Equity Shares of ₹ 50 each, fully paid 60,00,000 Plant & Machinery 22,00,000
up
9% Preference Shares of ₹ 10 each, 40,00,000 Trade Investment 16,50,000
fully paid up
7% Debentures (secured by plant & 23,00,000 Inventories 9,50,000
machinery)
8% Debentures 17,00,000 Trade Receivable 18,00,000
Trade Payables 6,00,000 Cash and Bank Balances 3,60,000
Provision for Tax 75,000 Profit & Loss Account 2,15,000
1,46,75,000 1,46,75,000

The Board of Directors of the company decided upon the following scheme of reconstruction
duly approved by all concerned parties:
a) The equity shareholders agreed to receive in lieu of their present holding of 1,20,000 shares of ₹ 50
each as under:

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing.
 Internal Reconstruction Ch 5 - 32
1. New fully paid equity shares of ₹ 10 each equal to 2/3rd of their holding.
2. 9% preference shares of ₹ 8 each to the extent of 25% of the above new equity share capital.
3. ₹ 2,80,000, 10% debentures of ₹ 80 each.
b) The preference shareholders agreed that their ₹ 10 shares should be reduced to ₹ 8 by cancellation of ₹
2 per share. They also agreed to subscribe for two new equity shares of ₹ 10 each for every five
preference shares held.
c) The taxation liability of the company is settled at ₹ 66,000 and the same is paid immediately.
d) One of the trade creditors of the company to whom the company owes ₹ 1,00,000 decides to forgo
30% of his claim. He is allotted equity shares of ₹ 10 each in full satisfaction of his balance claim.
e) Other trade creditors of ₹ 5,00,000 are given option of either to accept fully paid 9% preference shares
of ₹ 8 each for the amount due to them or to accept 80% of the amount due to them in cash in full
settlement of their claim. Trade creditors for ₹ 3,50,000 accepted preference shares option and rest of
them opted for cash towards full settlement of their claim.
f) Company's contractual commitments amounting to ₹ 6,50,000 have been settled by paying 4% penalty
of contract value.
g) Debenture holders having charge on plant and machinery accepted plant and machinery in full
settlement of their dues.
h) The rate of interest on 8% debentures is increased to 10%. The debenture holders surrender their
existing debenture of ₹ 50 each and agreed to accept 10% debentures of ₹ 80 each for every two
debentures held by them.
i) The land and building to be depreciated by 5%.
j) The debit balance of profit and loss account is to be eliminated.
k) 1/4th of trade receivables and 1/5th of inventory to be written off.
Pass Journal Entries and prepare Balance Sheet after completion of the reconstruction scheme in the
books of M/s Clean Ltd. as per Schedule III to the Companies Act, 2013.
(Ans: Capital Reserve 47,73,000 Balance Sheet Total 1,26,33,000)

Question 14 RTP May 2021

Recover Ltd decided to reorganize its capital structure owing to accumulated losses and adverse market
condition. The Balance Sheet of the company as on 31st March 2020 is as follows:
Particulars Notes Amount
Equity and Liabilities
1 Shareholders’ funds
A Share capital 1 3,50,000
B Reserves and surplus 2 (70,000)
2 Non-current liabilities
A Long-term borrowings 3 55,000
3 Current liabilities
A Trade Payables 80,000
B Short term Borrowings – Bank overdraft 90,000
5,05,000
Assets
1 Non-current assets
A Property, Plant Equipment & Intangible Assets
a) Property, Plant Equipment 4 3,35,000
b) Intangible Assets 5 50,000
B Non-current investments 6 40,000
2 Current assets
A Inventories 30,000
B Trade receivables 50,000
5,05,000

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 Internal Reconstruction Ch 5 - 33
Notes to Accounts:
1 Share Capital
Equity share capital:
20,000 Equity Shares of ₹ 10 each 2,00,000
Preference share capital:
15,000 8% Cumulative Preference Shares of ₹ 10 each
(preference dividend has been in arrears for 4 years) 1,50,000
3,50,000
2 Reserves and surplus
Securities premium 10,000
Profit and loss account (debit balance) (80,000)
(70,000)
3 Long-term borrowings
Secured
9% Debentures (secured on the freehold property 50,000
Accrued interest on 9% debentures 5,000
55,000
4 Property, Plant and Equipment
Freehold property 1,20,000
Leasehold property 85,000
Plant and machinery 1,30,000
3,35,000
5 Intangible assets
Goodwill 50,000
6 Non-current investments
Non-Trade investments at cost 40,000
Subsequent to approval by court of a scheme for the reduction of capital, the following steps were taken:
i. The preference shares were reduced to ₹ 2.5 per share, and the equity shares to ₹ 1 per share.
ii. One new equity share of ₹ 1 was issued for the arrears of preferred dividend for past 4 years.
iii. The balance on Securities Premium Account was utilized and was transferred to capital reduction
account.
iv. The debenture holders took over the freehold property at an agreed figure of ₹ 75,000 and paid the
balance to the company after deducting the amount due to them.
v. Plant and Machinery was written down to ₹ 1,00,000.
vi. Non-trade Investments were sold for ₹ 32,000.
vii. Goodwill and obsolete stock (included in the value of inventories) of ₹ 10,000 were written off.
viii. A contingent liability of which no provision had been made was settled at ₹ 7,000 and of this
amount, ₹ 6,300 was recovered from the insurance.
You are required
(a) to show the Journal Entries, necessary to record the above transactions in the company’s books and
(b) to prepare the Balance Sheet, after completion of the scheme.
(Ans: Capital Reserve 30,800 Balance Sheet Total 3,06,300)

Question 15 Inter Nov 2019 (15 Marks)

Following is the summarized Balance Sheet of Fortunate Ltd. as on 31st March, 2020.
Particulars Amount
Liabilities
Authorized and Issued Share Capital
(a) 15,000 8% Preference shares of ₹ 50 each 7,50,000
(b) 18,750 Equity shares of ₹ 50 each 9,37,500
Profit and Loss Account (5,63,750)
Loan 7,16,250
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 Internal Reconstruction Ch 5 - 34
Trade Payables 2,58,750
Other Liabilities 43,750
Total 21,42,500
Assets
Building at cost less depreciation 5,00,000
Plant at cost less depreciation 3,35,000
Trademarks and goodwill at cost 3,97,500
Inventory 5,00,000
Trade Receivables 4,10,000
Total 21,42,500
(Note: Preference shares dividend is in arrear for last five years).
The Company is running with the shortage of working capital and not earnings profits. A scheme of
reconstruction has been approved by both the classes of shareholders. The summarized scheme of
reconstruction is as follows:
(i) The equity shareholders have agreed that their ₹ 50 shares should be reduced to ₹ 5 by cancellation
of ₹ 45.00 per share. They have also agreed to subscribe for three new equity shares of ₹ 5.00 each
for each equity share held.
(ii) The preference shareholders have agreed to forego the arrears of dividends and to accept for each ₹
50 preference share, 4 new 6% preference shares of ₹ 10 each, plus 3 new equity shares of ₹ 5.00
each, all credited as fully paid.
(iii) Lenders to the company for ₹ 1,87,500 have agreed to convert their loan into shares and for this
purpose they will be allotted 15,000 new preference shares of ₹ 10 each and 7,500 new equity shares
of ₹ 5.00 each.
(iv) The directors have agreed to subscribe in cash for 25,000 new equity shares of ₹ 5.00 each in
addition to any shares to be subscribed by them under (i) above.
(v) Of the cash received by the issue of new shares, ₹ 2,50,000 is to be used to reduce the loan due by the
company.
(vi) The equity share capital cancelled is to be applied:
a. To write off the debit balance in the Profit and Loss A/c, and
b. To write off ₹ 43,750 from the value of plant.
Any balance remaining is to be used to write down the value of trademarks and goodwill. The nominal
capital, as reduced, is to be increased to ₹ 8,12,500 for preference share capital and ₹ 9,37,500 for equity
share capital.
You are required to pass journal entries to show the effect of above scheme and prepare the Balance
Sheet of the Company after reconstruction.
(Ans: Trademarks & Goodwill w/off 1,61,250; Balance Sheet Total 20,93,750)

Question 16 RTP Nov 2015 / RTP May 2016 / RTP May 2018 / RTP Nov 2019
M/s Platinum Limited has decided to reconstruct the Balance Sheet since it has accumulated huge
losses. The following is the Balance Sheet of the company as on 31st March, 2020 before reconstruction:
Liabilities ₹ Assets ₹
Share Capital Goodwill 22,00,000
50,000 shares of ₹ 50 each fully paid up 25,00,000 Land & Building 42,70,000
1,00,000 shares of ₹ 50 each ₹ 40 paid 40,00,000 Machinery 8,50,000
up
Capital Reserve 5,00,000 Computers 5,20,000
8% Debentures of ₹ 100 each 4,00,000 Stock 3,20,000
12% Debentures of ₹ 100 each 6,00,000 Trade Debtors 10,90,000
Trade Creditors 12,40,000 Cash at Bank 2,68,000
Outstanding Expenses 10,60,000 Profit & Loss Account 7,82,000
1,03,00,000 1,03,00,000
Following is the interest of Mr. Shiv and Mr. Ganesh in M/s Platinum Limited:

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 Internal Reconstruction Ch 5 - 35
Mr. Shiv Mr. Ganesh
8% Debentures 3,00,000 1,00,000
12% Debentures 4,00,000 2,00,000
Total 7,00,000 3,00,000
The following scheme of internal reconstruction was framed and implemented, as approved by the court
and concerned parties:
(1) Uncalled capital is to be called up in full and then all the shares to be converted into Equity Shares of
₹ 40 each.
(2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of 40 each for ₹
12,50,000.
(3) Trade Creditors are given option of either to accept fully paid equity shares of ₹ 40 each for the
amount due to them or to accept 70% of the amount due to them in cash in full settlement of their
claim. Trade Creditors for ₹ 7,50,000 accept equity shares and rest of them opted for cash towards full
and final settlement of their claim.
(4) Mr. Shiv agrees to cancel debentures amounting to ₹ 2,00,000 out of total debentures due to him and
agree to accept 15% Debentures for the balance amount due. He also agree to subscribe further 15%
Debentures in cash amounting to ₹ 1,00,000.
(5) Mr. Ganesh agrees to cancel debentures amounting to ₹ 50,000 out of total debentures due to him
and agree to accept 15% Debentures for the balance amount due.
(6) Land & Building to be revalued at ₹ 51,84,000, Machinery at ₹ 7,20,000, Computers at ₹ 4,00,000,
Stock at ₹ 3,50,000 and Trade Debtors at 10% less to as they are appearing in Balance Sheet as above.
(7) Outstanding Expenses are fully paid in cash.
(8) Goodwill and Profit & Loss A/c will be written off and balance, if any, of Capital Reduction A/c
will be adjusted against Capital Reserve.
You are required to pass necessary Journal Entries for all the above transactions and draft the company's
Balance Sheet immediately after the reconstruction.
(Ans: Existing Capital Reserve utilized; Balance Sheet Total 88,50,000)

Question 17 IPCC Nov 2017 (16 Marks) / RTP Nov 2018 / RTP Nov 2020
The summarized balance sheet of Z Limited as on 31st March, 2020 is as under
Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital
5,00,000 equity shares of ₹ 10 each fully paid 50,00,000
20000, 9% preference shares of ₹ 100 each fully paid 20,00,000
(b) Reserves & Surplus
Profit & Loss Account (14,60,000)
2. Non-current Liabilities
(a) Long Term Borrowings 10% Secured Debentures 16,00,000
3. Current Liabilities
Trade Payables 5,00,000
Loan From Director 1,00,000
Bank Overdraft 1,00,000
Provision for Tax 1,00,000
Interest due on Debentures 1,60,000
Total 81,00,000
B. Assets
1. Non-current assets
Property, Plant & Equipment & Intangible Assets
(a) Property, Plant & Equipment
Land & Building 30,00,000
Plant & Machinery 12,50,000
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 Internal Reconstruction Ch 5 - 36
Furniture & Fixtures 2,50,000
(b) Intangible Assets
Goodwill 10,00,000
Patents 5,00,000
2. Current Assets
(a) Trade Investments 5,00,000
(b) Trade Receivables 5,00,000
(c) Inventories 10,00,000
(d) Discount on Issue of debentures 1,00,000
Total 81,00,000
Note: Preference dividend is in arrears for last 2 years.
Mr. Y holds 60% of debentures and Mr. Z holds 40% of debentures. Moreover ₹ 1,00,000 and ₹ 60,000
were also payable to Mr. Y and Mr. Z respectively as trade payable.
The following scheme of reconstruction has been agreed upon and duly approved.
a) All the equity shares to be converted into fully paid equity shares of ₹ 5.00 each.
b) The Preference shares be reduced to ₹ 50 each and the preference shareholders agreed to forego their
arrears of preference dividends, in consideration of which 9% preference shares are to be converted
into 10% preference shares.
c) Mr. Y and Mr. Z agreed to cancel 50% each of their respective total debt including interest on
debentures. Mr. Y and Mr. Z also agreed to pay ₹ 1,00,000 and ₹ 60,000 respectively in cash and to
receive new 12% debentures for the balance amount.
d) Persons relating to trade payables, other than Mr. Y and Mr. Z also agreed to forgo their 50% claims.
e) Directors also waived 60% of their loans and accepted equity shares for the balance.
f) Capital commitments of ₹ 3.00 lacs were cancelled on payment of ₹ 15,000 as penalty.
g) Directors refunded ₹ 1,00,000 of the fees previously received by them.
h) Reconstruction expenses paid ₹ 15,000.
i) The taxation liability of the company was settled for ₹ 75,000 and was paid immediately.
j) The Assets were revalued as under:
Land and Building 32,00,000
Plant and Machinery 6,00,000
Inventory 7,50,000
Trade Receivables 4,00,000
Furniture and Fixtures 1,50,000
Trade Investments 4,50,000
You are required to pass journal entries for all the above mentioned transactions including amounts to be
written off of Goodwill, Patents. Loss in Profit and Loss account arid Discount on issue of debentures.
And also prepare Bank Account and Reconstruction A/c.
(Ans: Capital Reserve 7,75,000)

Question 18 RTP May 2014

The ledger balances of Casio Ltd. as on 31st March, 2020 are:
Profit & loss account (Dr.) balance 10,20,000, Property, Plant & Equipment ₹ 7,00,000, Investment ₹
10,000, Inventory ₹ 3,90,000 Trade receivables ₹ 4,60,000. Equity Share Capital (60% paid) ₹ 6,00,000,
10% First Debentures ₹ 2,00,000, 12% Second Debentures ₹ 5,00,000, Bank overdraft ₹ 50,000, Trade
payables (including Y for ₹ 8,50,000) ₹ 11,50,000, Outstanding interest for one year on both type of
debentures.
Due to heavy losses, the following scheme of re-construction is agreed:
a) To make the existing ₹ 100 equity shares fully paid up and then to reduce them to ₹ 20 each.
b) To settle the claims of first Debenture-holders by issuing 2,000, 13.5% Debentures of ₹ 100 each.
c) To discharge claims of the second debenture-holders by issuing 15% 4,000 debentures of ₹ 100 each.
d) To pay ₹ 3,00,000 to Mr. Y in full settlement of his account,
e) To allot 15,000 fresh equity shares of ₹ 20 each to discharge the remaining trade payables,
f) Market value of investments is ₹ 20,000, and
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 Internal Reconstruction Ch 5 - 37
g) To reduce the value of Property, Plant & Equipment.
Assuming all formalities are duly complied with, pass journal entries to give effect to the above scheme
and prepare the post-reconstruction Balance Sheet
(Ans: Property, Plant & Equipment reduced 5,10,000 Balance Sheet Total 11,00,000)

Question 19 IPCC Nov 2016 (16 Marks) / RTP May 2018 (Similar)
Proficient Infosoft Ltd. is in the hand of Receiver for Debenture Holders who holds a charge on all asset
except uncalled capital. The following statement shows position as regards creditors as on 30 June,2020
Liabilities ₹ Assets ₹
8,000 shares of ₹ 100 each, ₹ 60 paid Property (Cost ₹ 3,80,800) 1,08,000
up Estimated at
First debentures 3,60,000 Plant & Machinery (Cost ₹ 72,000
2,87,200) estimated at
Second debentures 7,80,000 Cash in hand of the receiver 3,24,000
Unsecured creditors 5,40,000 5,04,000
Uncalled capital 3,20,000
8,24,000
Deficiency 8,56,000
16,80,000 16,80,000
A holds the first debentures for ₹ 3,60,000 and second debentures for ₹ 3,60,000. He is also an unsecured
trade payable for ₹ 1,08,000. B holds second debentures for ₹ 3,60,000 and is an unsecured trade payable
for ₹ 72,000.
The following scheme of reconstruction is proposed.
a) A is to cancel ₹ 2,52,000 of the total debt owing to him; to bring ₹ 36,000 in cash and to take first
debentures (in cancellation of those already issued to him) for ₹ 6,12,000 in satisfaction of all his
claims.
b) B to accept ₹1,08,000 in cash in satisfaction of all claims by him.
c) In full settlement of 60% of the claim, unsecured trade payable (other than A and B) agreed to accept
three shares of ₹25 each, fully paid against their claim for each ₹100.
The balance of 40% is to be postponed and to be payable at the end of three years from the date of
Court’s approval of the scheme. The nominal share capital is to be increased accordingly.
d) Uncalled capital is to be called up in full & ₹75 per share cancelled, thus making the shares of ₹ 25
each.
Assuming that the scheme is duly approved by all parties interested and by the Court, give necessary
journal entries.
(Ans: Capital Reserve 62,000)

TOPIC 2B Share Surrender

Question 20
Following is the Balance Sheet of XYZ Ltd. as on 31st March, 2020:
Liabilities ₹ Assets ₹
8,000 – 7.5 % Preference shares @ ₹ 8,00,000 Plant and Machinery 8,50,000
100 each fully paid Furniture and Fittings 1,60,000
1,80,000 Equity shares @ ₹ 10 each 18,00,000 Patents and Copyright 60,000
fully paid Goodwill 35,000
11% Debentures 10,00,000 Investments (at cost) 65,000
Bank overdraft 1,65,000 Sundry debtors 12,00,000
Loan from director 15,000 Stock 13,00,000
Trade creditors 6,20,000 Cash in hand 12,000
Profit & Loss A/c 7,18,000
44,00,000 44,00,000
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 Internal Reconstruction Ch 5 - 38
Due to heavy losses and overvaluation of assets, the following scheme of reconstruction was finalised:
a. Preference shareholders will surrender their 20% shares and they have been allotted 9% (new)
preference shares for the remaining amount.
b. Debentureholders having charge on plant and machinery would accept plant and machinery in full
settlement.
c. Trade creditors accepted to take over the stock upto the value of ₹6,20,000.
d. Equity shareholders are to accept reduction of ₹4 per share.
e. Investment is to be valued at market price i.e., ₹60,000.
f. Sundry debtors and remaining stock is to be valued at 90% of their book value.
g. Directors have to forgo their loan in full.
h. Patents and Copyright and Goodwill have no more value.
Pass necessary journal entries in the books of XYZ Ltd. assuming that all the legal formalities have been
completed. Prepare capital reduction account and Balance Sheet of the company after reduction.
(Ans: Capital Reserve 39,000 Balance Sheet Total 19,24,000)

Question 21
The business of P Ltd. was being carried on continuously at losses. The following are the extracts from
the Balance Sheet of the Company as on 31st March, 2020.
Liabilities ₹ Assets ₹
Authorised, Issued and Subscribed Capital: Goodwill 50,000
30,000 Equity Shares of ₹ 10 each fully paid 3,00,000 Plant 3,00,000
2,000 8% Cumulative Pref. Shares of ₹ 100 2,00,000 Loose Tools 10,000
each fully paid
Securities Premium 90,000 Debtors 2,50,000
Unsecured Loan (From Director) 50,000 Stock 1,50,000
Sundry creditors 3,00,000 Cash 10,000
Outstanding Expenses (including Directors’ 70,000 Bank 35,000
remuneration ₹ 20,000)
Preliminary Expenses 5,000
Profit & Loss Account 2,00,000
10,10,000 10,10,000

Note:
1) Dividends on Cumulative Preference Shares are in arrears for 3 years.
2) Unsecured loans (from director) is assumed to be of less than 12 months hence, treated as short term
borrowings.(ignoring interest)

The following scheme of reconstruction has been agreed upon and duly approved by the Court.
a) Equity shares to be converted into 1,50,000 shares of ₹ 2 each.
b) Equity shareholders to surrender to the Company 90 per cent of their holding.
c) Preference shareholders agree to forego their right to arrears to dividends inconsideration of which 8
percent Preference Shares are. to be converted into 9 per cent Preference Shares.
d) Sundry creditors agree to reduce their claim by one fifth in consideration of their getting shares of ₹
35,000 out of the surrendered equity shares.
e) Directors agree to forego the amounts due on account of unsecured loan and Director’s
remuneration.
f) Surrendered shares not otherwise utilised to be cancelled.
g) Assets to be reduced as under:
Goodwill by ₹ 50,000
Plant by ₹ 40,000
Tools by ₹ 8,000
Sundry Debtors by ₹ 15,000
Stock by ₹ 20,000
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 Internal Reconstruction Ch 5 - 39
h) Any surplus after meeting the losses should be utilised in writing down the value of the plant further.
i) Expenses of reconstruction amounted to ₹ 10,000.
j) Further 50,000 Equity shares were issued to the existing members for increasing the working capital.
The issue was fully subscribed and paid-up.
A member holding 100 equity shares opposed the scheme and his shares were taken over by the Director
on payment of ₹ 1,000 as fixed by the Court.
You are required to pass the journal entries for giving effect to the above arrangement and also to draw
up the resultant Balance Sheet of the Company.
(Ans: Plant further w/off 17,000 Balance Sheet Total 7,45,000)

Question 22 RTP Nov 2016

The summarised Balance Sheet of Preet Limited as on 31st March 2020, was as follows:
Liabilities ₹ Assets ₹
Authorised and subscribed capital: Property, Plant & Equipment:
20,000 Equity shares of ₹ 100 each 20,00,000 Machineries 7,00,000
Unsecured loans: Current Assets:
15% Debentures 6,00,000 Inventory 5,06,000
Accrued interest 90,000 Trade Receivables 4,60,000
Current Liabilities: Bank 40,000
Trade Payables 1,04,000 Profit & loss A/c 11,60,000
Provision for income tax 72,000
28,66,000 28,66,000
It was decided to reconstruct the company for which necessary resolution was passed and sanctions were
obtained from the appropriate authorities. Accordingly, it was decided that:
a) Each share be sub-divided into 10 fully paid up equity share of ₹ 10 each.
b) After sub-division, each shareholder shall surrender to the company 50% of his holding for the
purpose of reissue to debentureholders and trade payables as necessary.
c) Out of shares surrendered 20,000 shares of ₹ 10 each shall be converted into 10% Preference shares of
₹ 10 each fully paid up.
d) The claims of the debentureholders shall be reduced by 50%. In consideration of the reduction, the
debentureholder shall receive Preference Shares of ₹ 2,00,000 which are converted out of shares
surrendered.
e) Trade Payables claim shall be reduced by 25%. Remaining Trade Payables are to be settled by the
issue of equity shares of ₹ 10 each of out of shares surrendered.
f) Balance of Profit and Loss account to be written off.
g) The shares surrendered and not re-issued shall be cancelled.
Pass Journal Entries giving effect to the above and the resultant Balance Sheet.
(Ans: Capital Reserve 11,000 Balance Sheet Total 17,06,000)

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