CA NITIN GOEL INTERNAL RECONSTRUCTION

CH
INTERNAL RECONSTRUCTION
4
“Don’t downgrade your dream just to fit your reality. Upgrade your conviction to
match your destiny.”

TOPIC1: INTRODUCTION

When a company has been making losses for several years, the financial position does not
present a true & fair view of the state of the affairs of the company. In such a company the
assets are generally overvalued, as the balance sheet consists of fictitious assets,
unrepresented intangible assets & debit balance in profit & loss account.

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.

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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

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.

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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.
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.

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4. For Conversion of shares into stock

Stock is a bundle of fully paid shares put together for convenience so that it may be divided
into any amount & transferred into any fractions & subdivisions without regard to the
original face value of the shares.
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.

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.

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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

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.

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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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ASSIGNMENT QUESTIONS

TOPIC 1 & 2A
Question 1 (ICAI Study Material) Pg no._____
On 31-12-2021, 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, 2022 the company in general meeting decided to
sub-divide each share into two shares of ₹ 5 with ₹ 4 paid up. In June, 2023 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 31-12-2021, 31-12-2022 and 31-12-2023.

Question 2 Pg no._____
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, 2023
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 2022 company
decided to convert the issued shares into stock. But in February 2023 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) Pg no._____

The following scheme of reconstruction has been approved for Win Limited:
1. The shareholders to receive in lieu of their present holding at 1,00,000 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. Goodwill which stood at ₹ 1,40,000 was completely written off.
4. Plant and machinery which stood at ₹ 2,00,000 was written down to ₹ 1,50,000.
5. 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 Win Limited for the
above reconstruction.

Question 4 (ICAI Study Material) Pg no._____

Parth Ltd, had laid down the following terms upon the sanction of the reconstruction plan by
the court
1. Furniture & 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.

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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.

Question 5 (ICAI Study Material) Pg no._____

The Balance Sheet of A & Co. Ltd. as on 31-03-2023 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

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6. Intangible Assets
Goodwill 1,30,000
Patents 37,500
1,67,500
7 Non Current Investments
Investments at cost 55,000
The Court approved a Scheme of re-organisation to take effect on 1-4-2023, 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) 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 Pg no._____
The summarized Balance Sheet of AB Ltd. as on 31st March, 2023 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) PPE & 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

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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
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 the above-mentioned transactions.

Question 7 (ICAI Study Material) Pg no._____

Vaibhav Ltd. gives you the following ledger balances as on 31.3.2023:
₹
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.

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d) Property, Plant & Equipment are to be written down by 20%.

e) Current assets are to be revalued at ₹ 90,00,000.
f) Investments to be brought to their market value.
g) 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.
h) The taxation liability of the company is settled at ₹ 3,00,000.
i) It is decided to write off the debit balance of Profit and Loss account.
Pass Journal entries and prepare Balance sheet of the company after giving effect to above.

Question 8 Pg no._____
The following is the summarized Balance Sheet of Rocky Ltd. as at March 31, 2023:
₹ 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 equity shares be converted into 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 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

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Stock 120
Debtors 76
Pass Journal Entries for all the above-mentioned transactions.

Question 9 Pg no._____
Following is the Balance Sheet of M Ltd. as at 31st March, 2023:
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
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 loan given by Director to 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 (ICAI Study Material) Pg no._____

Following is the Balance Sheet of ABC Ltd. as at 31st March, 2023:
Note Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(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
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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.
Pass necessary journal entries in the books of the company. Prepare Capital Reduction
account and Balance Sheet of company after internal reconstruction.

Question 11 Pg no._____

From the given summarised balance sheet of Maitri Ltd. as on 31-3-2023 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

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Summarised Balance Sheet of Maitri Ltd. as on 31.3.2023

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 4,00,000 Goodwill at cost 36,100
Preference 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 64,000
market)
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 permission of 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 12 Pg no._____
The following was the Balance Sheet of Bhushan Developers Ltd., as on 31st March 2023:
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 Machinery 50,850
capital

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12,000 Shares of ₹10each 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 13 (ICAI Study Material) Pg no._____

Given below is the summarized balance sheet of Rebuilt Ltd. as on 31.3.2023:
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 ₹ 50 each 6,00,000
(Preference dividend is in arrears for 5 years) 13,50,000

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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 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.
(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 and prepare the
balance sheet of the company after reconstruction. 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 14 Pg no._____
The Balance Sheet of R Ltd., at 31st March, 2023 was as follows:
Liabilities ₹ Assets ₹
Share capital Authorised: 14,00,000 Intangibles 68,000
Issued: Freehold premises at cost 1,40,000
64,000, 8% Cum. Preference
shares of ₹ 10 each, fully paid 6,40,000
64,000 Equity shares of ₹ 10 each, 4,80,000 Plant & Equipment at cost less 2,40,000
₹ 7.5 paid depreciation
Loans from directors 60,000 Investments in shares in Q Ltd. 3,24,000
at cost
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

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Note: The arrears of preference dividends amount to ₹ 51,200. A scheme of reconstruction

was duly approved with effect from 1st April, 2023 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.
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) New face values of shares–preference & equity will be maintained at their reduced levels.
You are required to prepare:
a) Necessary ledger accounts to effect the above; and
b) Balance Sheet of the company after reconstruction.

Question 15 (ICAI Study Material) Pg no._____

Green Limited had decided to reconstruct the Balance Sheet since it has accumulated huge
losses. Following is summarized Balance Sheet of Company on 31.3.23 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

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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 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
Partly 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 utilized 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 16 Pg no._____
The draft Balance Sheet of Moon Limited as on 31st March, 2023 was as follows:
Liabilities ₹ Assets ₹
2,50,000 Equity shares of ₹ 10 25,00,000 Goodwill 5,00,000
each fully paid
9% 10,000 Preference shares of 10,00,000 Patent 2,50,000
₹100 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

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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 8,00,000
(Loss)
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.
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 transactions incl. amounts to be w/off of Goodwill, Patents, Loss
in P&L A/c. Prepare Bank A/c & working of Interest on Debentures allocation between A & B

Question 17 Pg no._____
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, 2023:
Liabilities ₹ Assets ₹
6,000 shares of ₹ 60 each, ₹ 30 Property, machinery and 1,50,000
paid up plant etc. (Cost ₹ 3,90,000)
Estimated at
First debentures 3,00,000 Cash in hand of the receiver 2,70,000

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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 18 (RTP May 2020) Pg no._____

The following is the Balance Sheet of Star Ltd. as on 31st March, 2023:
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% pref. 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
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

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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 19 Pg no._____
Following is the summarized Balance Sheet of Ravi Limited as on March 31, 2023:
Liabilities ₹ Assets ₹
Issued Equity share capital Patents 4,00,000
30,000 shares of ₹ 100 each fully 30,00,000 Plant and Machinery 30,00,000
paid
20,000 7% cumulative preference 20,00,000 Building 5,50,000
shares 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 company had suffered losses since last 3 years due to bad market conditions and hope
for a better position in the future.
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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 20 (ICAI Study Material) Pg no._____

The Balance Sheet of Revise Ltd. as on 31-03-2023 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

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Notes to Accounts
Amount
1. Share Capital
Equity Share Capital
10,000 equity shares of ₹ 100 each 10,00,000
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.
Pass journal entries giving effect to the above and the resultant Balance Sheet.

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PRACTICE QUESTIONS

TOPIC 1 & 2A
Question 1 (ICAI Study Material) Pg no._____
C Ltd. had ₹ 5,00,000 authorized capital on 31-12-2021 divided into shares of ₹ 100 each out of
which 4,000 shares were issued and fully paid up. In June 2022 the Company decided to
convert the issued shares into stock. But in June, 2023 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 31-12-2021, 31-12-2022 and 31-12-2023.

Question 2 (Inter July 2021) (5 Marks) Pg no._____

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.

Question 3 Pg no._____
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 4 (RTP Nov 2022) Pg no._____

M/s Planet Limited has decided to reconstruct Balance Sheet since it has accumulated huge
losses. Following is balance sheet of company as on 31st March, 2023 before reconstruction:
Note ₹ (In Lacs)
A. Equity and Liabilities
1. Shareholders’ Fund
Share Capital 1 2,100
Reserves & Surplus 2 (783)

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2. Non-Current Liabilities
Long Term Borrowings 3 1,050
3. Current Liabilities
Trade Payables 4 153
Other Liabilities 5 36
Total 2,556
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:

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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.
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
penalty of ₹ 72 Lakhs.
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 5 (ICAI Study Material) Pg no._____
The following is the Balance Sheet of Weak Ltd. as on 31st March, 2023:
Note Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital 1 1,50,00,000
(b) Reserves & Surplus 2 (6,00,000)
2. Non-current Liabilities
(a) Long Term Borrowings 3 40,00,000
3. Current Liabilities
(a) Trade Payables 50,00,000
(b) Short Term Provisions 4 1,00,000
Total 2,35,00,000
B. Assets
1. Non-current assets
(a) PPE & Intangible Assets
i. Property, Plant & Equipment 1,25,00,000
(b) Non Current Investment 5 10,00,000

2. Current Assets 1,00,00,000

Total 2,35,00,000
Notes to Accounts
Amount Amount
1. Share Capital
1,00,000 equity shares of ₹ 100 each 1,00,00,000
50,000 12% cumulative preference shares of ₹ 50,00,000
100 each 1,50,00,000
2. Reserves and Surplus
Profit and Loss Account (6,00,000)
3. Long Term borrowings

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40,000,10% Debentures of ₹ 100 each 40,00,000

4. Short Term Provisions
Provision for taxation 1,00,000
5. Non Current Investments
Investments (Market Value of ₹ 9,50,000) 10,00,000
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 12%. 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 to whom the company owes ₹ 20,00,000 decides to
forgo 40% of his claim. He is allotted 30,000 equity shares of ₹ 40 each in full & final
settlement of his claim.
e) Property, Plant & Equipment are to be written down by 30%.
f) Current assets are to be revalued at ₹ 45,00,000.
g) The taxation liability of the company is settled at ₹ 1,50,000.
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 prepare Balance sheet of the company after giving effect to above.
(Ans: Capital Reserve 50,000 Balance Sheet Total 1,40,50,000)
Question 6 Pg no._____
Vinod Limited decided to reconstruct its business as it has accumulated huge losses. The
following is the Balance Sheet of the company as on 31–03–2023 before reconstruction:
Liabilities ₹ Assets ₹
6,00,000 Equity Shares of ₹ 10 60,00,000 Goodwill 10,40,000
each fully paid up
3,20,000, 6% Preference Shares 32,00,000 Patents 3,00,000
of ₹ 10 each fully paid up
6% Debentures (Secured 30,00,000 Land & Building 34,00,000
against Land & 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) Debentureholders agree to take over part of Land& Building, Book value of which is 14 Lacs
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.

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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 7 (Inter Nov 2018) (10 Marks) / (RTP Nov 2021) Pg no._____
The summarized Balance Sheet of SK Ltd. as on 31st March, 2023 is given below.
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
Following Scheme of Internal Reconstruction is approved & put into effect on 31st March, 2023
(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 8 (ICAI Study Material) Pg no._____
The following is the summarized Balance Sheet of X Ltd. as on 31st March, 2023:
Note Amount
A. Equity and Liabilities
1. Shareholders’ Fund
(a) Share Capital 1 36,00,000
(b) Reserves & Surplus 2 (14,40,000)

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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
(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 inventories and trade receivables in full satisfaction of
their claims.
c) Land & Building to be appreciated by 30% and Plant & 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)
Pg no._____

Question 9
The Balance Sheet of M/s Clean Ltd. as on 31st March, 2023 was summarized as follows:

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Liabilities ₹ Assets ₹
Share capital Land & Building 75,00,000
Equity Shares of ₹ 50 each, fully 60,00,000 Plant & Machinery 22,00,000
paid 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 3,60,000
Balances
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:
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 10 (ICAI Study Material) / (RTP May 2021) Pg no._____
Recover Ltd decided to reorganize its capital structure owing to accumulated losses &
adverse market condition. The Balance Sheet of company as on 31st March 2023 is as follows:

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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 50,000
3 Current liabilities
A Trade Payables 80,000
B Short term Borrowings – Bank overdraft 90,000
C Other Current Liabilities- Interest payable 5,000
on Debentures
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
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
Profit and loss account (debit balance) (70,000)
(70,000)
3 Long-term borrowings
Secured
10% Debentures (secured on the freehold property) 50,000
50,000
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

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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, & equity shares to ₹ 1 per share.
ii. 1 new equity share of ₹ 1 was issued for arrears of preferred dividend for past 4 years.
iii. 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.
iv. Plant and Machinery was written down to ₹ 1,00,000.
v. Non-trade Investments were sold for ₹ 32,000.
vi. Goodwill and obsolete stock (included in the value of inventories) of ₹ 10,000 were
written off.
vii. 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 11 (Inter Nov 2019) (15 Marks) / (RTP May 2023) Pg no._____
Following is the summarized Balance Sheet of Fortunate Ltd. as on 31st March, 2023.
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
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.

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(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 12 (RTP May 2018 / RTP Nov 2019) Pg no._____
M/s Platinum Limited has decided to reconstruct Balance Sheet since it has accumulated
huge losses. The following is the Balance Sheet of the company as on 31st March, 2023
before reconstruction:
Liabilities ₹ Assets ₹
Share Capital Goodwill 22,00,000
50,000 shares of ₹ 50 each 25,00,000 Land & Building 42,70,000
fully paid up
1,00,000 shares of ₹ 50 each ₹ 40,00,000 Machinery 8,50,000
40 paid 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:
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:
(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.

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(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 13 (RTP Nov 2018 / RTP Nov 2020/ RTP May 2022) Pg no._____
The summarized balance sheet of Z Limited as on 31st March, 2023 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
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.

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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) 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 and Discount
on issue of debentures. And also prepare Bank Account and Reconstruction A/c.
(Ans: Capital Reserve 7,75,000)
Question 14 (RTP May 2018 (Similar) Pg no._____
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,2023
Liabilities ₹ Assets ₹
8,000 shares of ₹ 100 each, ₹ 60 Property (Cost ₹ 3,80,800) 1,08,000
paid 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.

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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)
Question 15 (Inter Nov 2022) (20 Marks) Pg no._____
The following is the Balance Sheet of Purple Limited as at 31st March, 2022:
Particulars Notes Amount in ₹
I. Equity and Liabilities
(1) Shareholders’ Funds
(a) Share Capital 1 15,00,000
(b) Reserves & Surplus 2 (3,00,000)
(2) Current Liabilities
(a) Trade Payables 2,20,000
(b) Short Term Borrowings – Bank Overdraft 2,00,000
Total 16,20,000
II. Assets
(1) Non-Current Assets
(a) Property, Plant and Equipment 3 10,20,000
(b) Intangible Assets 4 1,20,600
(2) Current Assets
(a) Inventories 1,70,000
(b) Trade Receivables 3,01,800
(c) Cash and cash equivalents 7,600
Total 16,20,000

Notes to Accounts
₹ ₹
(1) Share Capital
90,000 Equity Shares of ₹ 10 each fully paid 9,00,000
6% Preference Share Capital 6,00,000 15,00,000
(2) Reserves & Surplus
Profit & Loss account (3,00,000)
(3) Property, Plant and Equipment
Land and Building 5,40,000
Plant and Machinery 4,80,000 10,20,000
(4) Intangible Assets
Goodwill 84,600
Patents 36,000 1,20,600
Dividends on preference shares are in arrears for 3 years. On the above date, the company
adopted the following scheme of reconstruction:
a) The preference shares are converted from 6% to 8% but revalued in a manner in which
the total return on them remains unaffected.
b) The value of equity shares is brought down to ₹ 8 per share.
c) The arrears of dividend on preference shares are cancelled.
d) The debit balance of Goodwill account is written off entirely.
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e) Land and Building and Plant and Machinery are revalued at 85% and 80% of their
respective book values.
f) Book debts amounting to ₹ 14,400 are to be treated as bad and hence to be written off.
g) The company expects to earn a profit at the rate of ₹ 90,000 per annum from the
current year which would be utilized entirely for reducing the debit balance of Profit
and loss accounts for 3 years. The remaining balance of the said account would be
written off at the time of capital reduction process.
h) The balance of total capital reduction is to be utilized in writing down Patents.
i) A secured loan of ₹ 4,80,000 bearing interest at 12% per annum is to be obtained by
mortgaging tangible fixed assets for repayment of bank overdraft and for providing
additional funds for working capital.
You are required to give journal entries incorporating the above scheme of reconstruction,
capital reduction account and prepare the reconstructed Balance Sheet.
(Ans: Patents w/off 24,000 and Balance sheet total 16,00,000)

TOPIC 2B: SHARE SURRENDER

Question 16 Pg no._____
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, 2023.
Liabilities ₹ Assets ₹
Auth., Issued & Subscribed Capital: Goodwill 50,000
30,000 Equity Shares of ₹ 10 each 3,00,000 Plant 3,00,000
fully paid
2,000 8% Cumulative Pref. Shares of 2,00,000 Loose Tools 10,000
₹ 100 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 70,000 Bank 35,000
Directors’ remuneration ₹ 20,000)
Preliminary Expenses 5,000
P&L 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)
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 in
consideration of which 8% Preference Shares are to be converted into 9% Pref. 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:

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Goodwill by ₹ 50,000
Plant by ₹ 40,000
Tools by ₹ 8,000
Sundry Debtors by ₹ 15,000
Stock by ₹ 20,000
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 17 Pg no._____
The summarised Balance Sheet of Preet Limited as on 31st March 2023, 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 debentureholders shall be reduced by 50%. In consideration of the reduction,
the debenture-holder 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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