MODULE4

INTERNAL RECONSTRUCTION

SACRED HEART COLLEGE THEVARA-B.COM TAX (AIDED)

The term 'reconstruction' refers to the reorganisation of the financial structure of company. It may
result in the reduction of claims of both the shareholders and creditors against the company.
There are two types of reconstruction, namely, external reconstruction and internal
reconstruction. In external reconstruction, the existing company has to be liquidated for the purpose
of forming another new company which takes over the business of the existing company, which is in
a bad financial position. But in internal reconstruction, there is neither liquidation nor formation of a
new company to takeover an existing company. The existing company keeps its legal entity status
and is reorganised its capital structure, It is usually done by both alteration and reduction of share
capital.
Internal Reconstruction
Internal reconstruction means the reorganisation of the existing financial structure of a company
without forming a new company. It includes alteration of share capital, reduction of share capital,
variation of shareholders' rights and scheme of compromise or arrangement. It is generally resorted
to write off past accumulated losses, fictitious assets and intangible assets by a scheme of capital
reduction.
Objectives of Internal Reconstruction
The following are the main objectives of internal reconstruction:
1. To write off past accumulated losses, fictitious assets and intangible assets.
2. To reduce the face value of shares to their real value on a scheme of capital reduction.
3.To present the true and fair value of the firm by writing of huge losses of past years and by writing
down the value of assets to its true values.
4.To create confidence among shareholders and investors by assuring them a fair return on their
investment.
5.To enhance the goodwill of the company and gain public confidence.
6.To ascertain the real value of net assets,
Methods of Internal Reconstruction
There are two methods of internal reconstruction:
1. Alteration of share capital
2. Reduction of share capital
1. Alteration of share capital

1
Alteration of share capital means changing the composition of share capital of a company
It does not require approval of the court. It has been stated under Sec 61 to 64 of the Companies Act,
2013.
Following are different ways in which share capital can be altered: Different methods of
alteration of share capital
1.Increase the share capital by issue of new shares.
2.Consolidate the shares of smaller denomination in to shares of larger denomination.
3.Sub-divide the shares of larger denomination in to shares of small denomination.
4.Convert the fully up shares in to stock or reconvert stock in to fully paid up shares.
5. Cancel the unissued shares.
The following are the main provisions in the Companies Act for alteration of share capital:
1. There should be a provision in the Articles of Association for increasing share
capital/consolidation /subdivision/conversion of shares in to stock or even cancellation of shares.
2.An ordinary resolution shall be passed in the General Meeting of the company
3.The company is required to give a notice to the Registrar of Companies within 30 days of its
passing.
4.Permission of SEBI is necessary if the shares are listed with a stock exchange
5Confirmation of the court is not required.
2. Reduction of share capital
Reduction of share capital is the cancellation of any paid up share capital which is lost or
unrepresented by available assets. It includes the writing off lost capital, refunding surplus paid up
capital and reducing liability of the members for uncalled capital. This is actually resorted to write
off the past accumulated losses and intangible assets of the company. Virtually, internal
reconstruction means capital reduction

Points to Remember
At the time of preparing Balance Sheet after reconstruction is duly carried out, the following matters
should be taken into consideration.
1. If the Tribunal orders, the words "and reduced" should be added after the name of the company
for certain period.
2. In respect of fixed assets, the amount written-off under a scheme of reconstruction must be shown
for five years.
Procedure for Reduction of share capital or capital reduction scheme

2
A company can reduce its share capital as per the provisions of Section 66 of Companies Act, 2013.
The following are the main provisions:
1)There should be a provision in the Articles of Association of the company for the reduction of
share capital.
2). The company must pass a Special Resolution for reduction of share capital
3).An application must be made by the company to the Tribunal/Court for an order confirming
reduction of capital.
4.)The order of confirmation for the reduction of share capital by the Tribunal shall be published by
the company in such a manner as the Tribunal may direct
5).The order of the Tribunal confirming the reduction of share capital must be produced before the
Registrar of Companies within 30 days of the receipt of the copy of order. The minutes of capital
reduction should also be filed with the Registrar for registration, Who in turn will issue a certificate
to that effect.
Deduction of share capital will not be effective until a copy of the resolution and sanction of the
court are filed and registered with the Registrar of Companies’ The Company Law 'Tribunal may
order the words "And Reduced" or "After reconstruction" to be added to the name of the company
for a prescribed period
6).A Company is permitted to reduce its share capital under section 66 of the Companies Act, 2013,
in any of the following ways;

a)By extinguishing or reducing the liability of the shareholders with respect to uncalled capital. For
example: X Ltd with a share capital of 1,00,000 Equity shares of 10 each, R 8 paid may reduce its
share capital by cancelling the uncalled capital of 2 per share and convert the shares in to fully paid
shares of R 8 each. In this case the Journal entry is:
Equity share Capital (Partly paid up) A/C.... Dr 8,00,000
(1,00,000 x 8)
To Equity share Capital (Fully paid up)8,00,000
(1,00,000 x 8)

(b) By Refunding any paid up share capital which is in excess of the needs of the company. For
example: Y Ltd with a paid up capital of 1,00,000 Equity shares of R 10 each, fully paid, decides to
reduce its paid up capital to shares of 8 each by refunding 2 per share out of its divisible profits. In
this case the Journal entries are;
(i) Share Capital A/C.... Dr 2,00,000
To Shareholders 2,00,000
(1,00,000 x 2)
(i) Shareholders A/c.... Dr 2,00,000
To Bank 2,00,000

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C )By reducing the paid up share capital. For example: Z Ltd with a paid up capital of 1,00,000
Equity shares of R 10 each, fully paid, decides to reduce the paid up capital by 2 per share. The
Journal entry is:
Equity share capital (Old denomination) A/C....Dr 10,00,000
(1,00,000 x 10)
To Equity share capital (New denomination) 8,00,000
(1,00,000x 8)
To Capital Reduction/Reconstruction 2,00,000
(1,00,000 x 2)

Distinction between Internal Reconstruction and External Reconstruction

Internal Reconstruction External Reconstruction

1.Meaning Internal reconstruction means When one company goes into liquidation
reorganisation of the capital structure and a new company is formed in that
or capital reduction place, it is called external reconstruction.
(2) Liquidation The company is not liquidated. The company is liquidated.

(3) Formation of No new company is formed. New company is formed to take over the
new company business
4.Legal formalities Legal formalities are concerned with Legal formalities are concerned with
alteration of share capital. liquidation and take over.

(5) Objective The objective is to write off the losses The objective is to increase the
out of the sacrifice of the claimants competitive strength.
and to place the company on strong

Distinction between Internal Reconstruction and Amalgamation

1) In internal reconstruction, there is no liquidation; where as in amalgamation at least two existing
companies are liquidated.
2) In internal reconstruction, there is no formation of a new company. But in case of amalgamation, a
new company is formed to take over the business of the amalgamating companies (Transferor or
vendor companies)
(3) Internal reconstruction means the reorganisation of the capital structure of a company; where as
amalgamation is a type of combination.

1. Reduction of Share Capital

1. For reducing the paid up value of Equity shares:
(Old) Equity share capital A/C.. .Dr
(With Old denomination)
To (New) Equity share capital
(With New denomination)
To Capital Reduction/Reconstruction

2.For reducing the paid up value of Preference shares:

Preference share capital A/ C............Dr
To (New) Preference share capital
To Capital Reduction/Reconstruction

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3.For any sacrifice has been made by Debenture holders:
(old) Debentures A/c...... .Dr
To (New) Debentures
To Capital Reduction/ Reconstruction
4.For any reduction allowed by creditors:
Creditors A/C... .Dr
To Capital Reduction/Reconstruction

5.For any appreciation in the value of asset:

Asset A/C... .....Dr
To Capital Reduction/ Reconstruction

6.For waiver of preference dividend in arrear if it is given on the liability side of Balance sheet:
Preference Dividend A/C... .. Dr
To Capital Reduction/ Reconstruction
( If the arrears of preference dividends are given in the inner column of the Balance sheet of the
company or by way of Foot note, then no accounting entry is necessary)

7.For Reconstruction expenses paid:

.Reconstruction expenses A/C....Dr
To Bank
8.For writing off past accumulated losses, Fictitious assets, excess depreciation etc.
Capital Reduction A/C.. ..Dr
(Reconstruction A/c)
To Goodwill
To Surplus A/c, Negative balance (Dr)
To Preliminary expenses
To Discount on issue of shares and debentures
To Patents
To Fixed Assets like Plant & Machinery
To Reconstruction expenses
To Other assets
To Capital Reserve (if any balance is left)

Qn-1).ABC Ltd passed resolution and got court permission for the reduction of. its share capital by
Rs 5,00,000 for the purposes given below:
1.To write off the surplus account debit balance of Rs 2,10,000
2. To write off goodwill by Rs 40,000
3.To reduce the value of plant and machinery by Rs 90,000
4.To reduce the value of investments by Rs 80,000
The reduction was made by converting 50,000 preference shares of Rs 20 each, fully paid into the
same number of preference shares of Rs 15 each, fully paid and by converting 50,000 equity shares
of Rs 20 each, Rs 15 paid up, into 50,000 equity shares of Rs 10 each, fully paid up.
Pass Journal Entries to record the scheme of capital reduction.

Solution:

JOURNAL

Date Particulars L/F Debit Credit

5
 (Old)Preference share capital A/C........................Dr. 10,00,000 .
(50,000x20) .
To (New) preference share capital 7,50,000
(50,000x15) .
To Capital Reduction (B.F) 2,50,000
(50,000 x 5 )
(For the conversion of 50,000 preference shares of
Rs 20 each fully paid in to the same number of
preference shares of Rs.15 each, fully paid on a
scheme of capital reduction)

(old) Equity share Capital A/c.................Dr. 7,50,000 .

(50,000x15) .
To (New) Equity are capital 5,00,000
(50,000x10) .
To Capital Reduction (B.F) 2,50,000
50,000 x 5
(For the conversion of 50,000 Equity shares of Rs
20 each,Rs 15 paid up into the same number of
Equity shares of Rs 10 each, fully paid on a scheme
of capital reduction)

Capital Reduction ...................................Dr. 5,00,000 .

2,50,000 + 2,50,000
To Surplus A/C 2,10,000
To Goodwill 40,000
To Plant & Machinery 90,000
To Investment 80,000
To Capital Reserve (B.F) 80,000
5,00,000 – 4,20,000
(For fictitious asset and accumulated losses written
off
and balance being transferred to capital reserve)

Qn-2)..Sad Ltd resolved the following:

1.To reduce 30,000 Equity shares of Rs 10 each to an equal number of shares of Rs 7 each.
2.To reduce 40,000, 8% preference shares of $10 each to an equal number of 10% preference
shares of Rs 4 each.
3.To reduce 8% Debentures of Rs 1,00,000 to 10% Debentures of Rs 70,000.
To utilize the amount available to write off Goodwill Rs 1,00,00, patents Rs 80,000, preliminary
expenses Rs 50,000, profit and loss account debit balance Rs 70,000 and to write down plant and
machinery to the extent possible.
Give Journal Entries.

Solutions

Journal

Date Particulars L Debit Credit

6
 /
F
(Old) Equity shares Capital A/C.........................Dr. 3,00,000 .
(30,000x10) .
To (New)Equity shares capital 2,10,000
(30,000x7) .
To Capital Reduction (30,000x3) 90,000
(Equity shares being reduced to Rs 7 on a scheme of
capital reduction)
(Old) 8% preference shares capital A/C..................Dr. 4,00,000 .
(40,000x10) .
To (New) 10% preference shares capital 1,60,000
(40,000x4)
To Capital Reduction (40,000x6) 2,40,000
(8% preference shares being reduced to Rs.6 by issuing
10% preference shares on a scheme of capital reduction)
8% Debenture A/C..................................................Dr. 1,00,000 .
To 10% Debenture 70,000
To Capital Reduction 30,000
(8% Debenture being reduced by Rs.30,000 on a scheme
of capital reduction by issuing 10% Debentures)
Capital Reduction A/c.............................................Dr. 3,60,000 .
(90,000 + 2,40,000 +30,000
To Goodwill 1,00,000
To Patents 80,000
To Preliminary Expenses 50,000
To Profit & Loss A/c 70,000
To Plant & Machinery (Bal. fig.) 60,000
3,60,000 -3,00,000
(Intangible and fictitious assets written off by utilizing
the available amount in capital reduction)

Qn-3)..Following is the balance sheet of Green Ltd as on the date of internal reconstruction scheme:
Balance Sheet
Particulars Note No. Amount
1.EQUITY AND LIABILITIES
1.Shareholders Fund:
1.Share capital
12% preference shares of 100 each 6,00,000
Equity shares of Rs 10 each 12,00,000
2.Reserves and Surplus
Surplus A/C (Negative balance ) (1,40,000)
Discount on shares (2,10,000)
Preliminary Expenses (1,90,000)
2.Share Application Money pending allotment
3.Non-current liabilities
Long term borrowings (13% Debentures) 2,00,000
4.current liabilities

7
 Trade payable(creditors) 8,50,000
Total 23,10,000
2.ASSETS
1.Non current Assets
1.Tangible assets(Plant& Machinery) 5,00,000
2.Intangible Assets(Goodwill) 4,00,000
2.Current Asset
1.Inventories(Stock) 8,00,000
2.Trade Receivables(Debtors) 7,50,000
3.Cash&Cash and equivalents
Cash in Hand 10,000
Bank overdraft (1,50,000)
Total 23,10,000

The company has got the following scheme of capital reduction approved by the court.
1. To reduce the paid up value of preference shares by Rs 40 per share.
2. To reduce equity shares by Rs 6 per share.
3. Liability on debentures to be reduced by 30%.
4. Creditors agreed to reduce their claim by Rs 1,50,000
5. To write off goodwill and fictitious assets provide Rs 40,000 for bad and doubtful debts and
utilize any balance of the scheme for writing down stock
Give entries and the new Balance Sheet
Solution

Journal

Date Particulars L/F Debit Credit

(Old) 12% preference share capital ..............Dr. 6,00,000 .
(6,000x100) 3,60,000
To (New) 12% preference share capital 2,40,000
(6,000x60)
To Capital Reduction (6,000x40)
(12% preference share of 100 each being converted
into shares of 60 each)

[Old) Equity share capital ......................Dr. 12,00,000 .

(1,20,000 x 10) .
To (New) Equity share capital (1,20,000x4) 4,80,000
To Capital Reduction [1.20.000x6] 7,20,000
(Equity shares of Rs 10 each reduced by Rs 6 on a
scheme of capital reduction)

(Old) 13%Debrenture .........................Dr. 2,00,000 .

To [New) 13% Debentures 12,00,000x70/100) 1,40,000
To Capital Reduction 2,00,000x30/100) 60,000
(13% Debentures of Rs.2,00,000 reduced by 30% on
a Scheme of capital reduction)

Creditors ..............................................Dr. 1,50,000 .

8
 To Capital Reduction 1,50,000
(Creditors being reduced by Rs 1,50,000 on a
scheme of capital reduction)
Capital Reduction A/c. 11,70,000 .
To Profit and loss A/c 1,40,000
To Discount on shares 2,10,000
To Preliminary Expense 1,90,000
To Goodwill 4,00,000
To Provision for Bad debts 40,000
To Stock (B.F) 1,90.000
[Intangible and fictitious assets being written off)

Balance sheet of Green Ltd (And Reduced) As on.........................

Particulars Note Amount (Rs)

No.
I. EQUITY AND LIABILITIES

(I) Shareholders Fund:

(I) Share Capital
12% preference shares of Rs 60 each 3,60,000
Equity share of Rs 4 each 4,80,000
(2) Non-Current Liabilities
13% Debentures 1,40,000
(3) Current Liabilities
Trade payable (creditors) (8,50,000-1,50,000) 7,00,000
Total 16,80,000
II. Assets
(1) Non-Current Asset
(i) Fixed: Tangible
Plant and Machinery 5,00,000
(ii) Intangible Assets

(2) Current Assets

(i) Inventories (8,00,000-1,90,000) 6,10,000
(ii) Trade Receivable (7,50,000-40,000) 7,10,000
(iii) Cash and Cash Equivalents .
Cash in hand 10,000
Bank overdraft (1,50,000)
Total 16,80,000

Qn-4)The following is the Balance Sheet of Short Life Ltd, as on 30th Sept, 2019

Balance Sheet as at 30th September 2019

Particulars Note No. Amount

1. EQUITY AND LIABILITIES:
1
(1) Shareholders' Funds
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Share capital
14%, 4,000 Preference shares of Rs 100 each 4,00,000
50,000 Equity shares of Rs 10 each fully paid 5,00,000
Reserves and Surplus
(1,30,000)
Surplus A/C (Negative balance )
(2) Share Application Money Pending Allotment
(3) Non-current Liabilities
Long-term borrowings (12% of Debentures) 1,00,000
(4) Current Liabilities
Trade payables (Creditors) 2,00,000
TOTAL 10,70,000
II. ASSETS:
(1) Non-current Assets
Fixed Assets:
(i) Tangible assets (Plant and machinery) 5,00,000
(ii) Intangible assets (Goodwill) 1,80,000
(2) Current Assets
Inventories (Stock) 3,00,000
Trade Receivables (Debtors) 70,000
Cash and Cash Equivalents (Cash) 20,000
TOTAL 10,70,000

The court has approved full scheme of reconstruction.

1. To issue 15% preference shares of Rs 60 each for every 14%pref. share of Rs. 100 each.
2. To reduce equity shares by Rs 4 each fully paid.
3. To redeem 12%debentures of Rs.100000 by the issue of 14% debenture of Rs.80000 in full
satisfaction.
4. To write off goodwill &accumulated losses, write down Plant &Machinery by 60000 &
balance if any left into capital reduction fund being provided for doubtful debt. Give journal
entries & prepare capital reduction A/C &Balance Sheet
Solution

Journal

Date Particulars L/F Debit Credit

14% Preference Share Capital............................Dr. 4,00.000 .
4,000 x 100
To 15% Pre. Share Capital 4,000 x 60 2,40,000
To Capital Reduction 4,000 x 40 1,60,000
(Old preference shares cancelled by issue of new
pref. shares as a part of capital reduction scheme)

Equity Share Capital (Old).................................Dr. 5,00,000 .

To Equity Share Capital (New) 3,00,000
50,000 x 6
To Capital reduction 2,00,000
50,000 x 4
(Equity shares reduced by 2 4 by the issue of
new shares as part of capital reduction scheme)

10
 12% Debentures...............................................Dr. 1,00,000 .
To 14% Debentures 80,000
To Capital Reduction 20,000
(Old debentures redeemed and new debentures
issued on capital reduction scheme)

Capital Reduction.............................................Dr. 3,80,000 .

1,60,000 + 2,00,000 +20,000
To Goodwill 1,80,000
To surplus a/c 1,30,000
To Plant and Machinery 60,000
To Provision for bad debts 10,000
3,80,000 – 3,70,000
(G.W. and Loss written-off plant and machinery
reduced and provision kept for bad debts)

Capital Reduction Account

Particulars Amount Particulars Amount

To Goodwill 1,80,000 By share capital 2,00,000
To profit and loss 1,30,000 14%pref. share 1,60,000
To plant and Machinery 60,000 14% Debentures 20,000
To Provision for bad debts 10,000
3,80,000 3,80,000

Short Life Ltd. Balance Sheet as on 1st October 2019

Particulars Note Amount

No
I.EQUITY AND LIABILITIES: 1
(1) Shareholders' Funds
Share capital

15%, 4,000 Preference shares of 60 each 2,40,000

50,000 Equity shares of 6 each fully paid 3,00,000

(2) Share Application Money Pending Allotment

(3) Non-current Liabilities

Long-term borrowings (14% Debentures) 80,000

(4) Current Liabilities 2,00,000

Trade payables (Creditors)
TOTAL 8,20,000

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II. ASSETS:
(1) Non-current Assets
Fixed Assets:

Tangible assets (Plant and Machinery) 4,40,000

5,00,000 – 60,000

(2) Current Assets

Inventories (Stock) 3,00,000

Trade Receivables (Debtors) 60,000

70,000 -10,000

Cash and Cash Equivalents (Cash) 20,000

TOTAL 8,20,000

Qn-5).The following is the Balance Sheet of In proper Ltd as on 31.12.2019

Particulars Note No Amount
1. EQUITY AND LIABILITIES
(1) Shareholders Fund:
(a) Share capital
3000 ,10% pref. shares Rs 100 each 3,00,000
6000, Equity shares of Rs.100 each 6,00,000
(b) Reserves and Surplus
(3,60,000)
Surplus A/C (Negative balance )
(2) Non-Current Liabilities
Long Term Borrowings (Bank Loan) 1,50,000
13% debentures 1,50,000
(3) Current Liabilities
Trade payables (creditors) 75,000
Total 9,15,000
1. ASSETS
(1) Non-Current Assets
(1) Fixed: Tangible
Land and Buildings 3,00,000
Machinery 4,50,000
(ii) Intangible (goodwill) 22,500
(iii) Non-Current Investments
(2) Current Assets:
Inventories (Stock) 65,000
Trade Receivables (Debtors) 70,000
Cash & Cash Equivalents 7,500
Total 9,15,000

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 The following scheme of reconstruction is approved by court
1. Reduce the paid up value of preference share to Rs 75 each .
2. Reduce the equity share to Rs.40 per share fully paid up.
3. The debenture holders took over stock and debtors in full satisfaction of their claims
4. Reconstruction expenses amounted to Rs 4500
5. The fictitious and intangible assets are to be eliminated
6. The land and building are to be appreciated by 30%.
7. Machinery to be depreciated by 331/3%

JOURNAL

Date Particulars l/f Debit Credit

(Old) Preference share capital A/c.................Dr. 3,00,000 .

(3.000 x 100) .
To (New) Preference share capital (3.000 2,25,000
x 75) 75,000
To Reconstruction A/c (3,000 x 25)
(3000 Preference shares of RS 100 each being
reduced to preference shares of 75 each on a
scheme of reconstruction)

(Old) Equity share Capital ..................Dr. 6,00,000 .

(6000x100) .
To (New) Equity share capital (6000x40) 2,40,000
To Reconstruction A/C (6000x60) 3,60,000
(6000 Equity shares of 3 100 each being
reduced to
equity shares of 40 each on a scheme of
reconstruction)

6% Debenture A/c.........................................Dr. 1,50,000 .

To 6% Debenture holders 1,50,000
(Amount transferred to debenture holders
account)

6% Debenture holders A/c...........................Dr. 1,50,000 .

To Stock 65,000
To Debtors 70,000
To Reconstruction (Bal.Fig) 15,000
(Amount due to debenture holders settled)

Land A Buildings A/c..................................Dr. 90,000 .

To Reconstruction 90,000
(Appreciation in the value of land & Buildings
brought in to account)

Reconstruction Expenses A/c....................Dr. 4,500 .

To Bank 4,500
(Reconstruction Expenses paid)

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 Reconstruction A/c...................................Dr 5,40,000 .
To Goodwill 22,500
To Surplus A/c (Negative Balance) 3,60,000
To Machinery (4,50,000 * 1/3) 1,50,000
To Reconstruction Expenses 4,500
To Capital Reserve 3,000
(Intangible and fictitious assets written off)

Proper LTD BALANCESHEET (And Reduced) as on 31.12.2019

Particulars Note Amount

No
1. EQUITY AND LIABILITIES
(1) Shareholders Fund:
(a) Share capital
5% preference share capital 2,25,000
Equity Share capital 2,40,000

(b) Reserves and Surplus 3,000

Capital Reserve

(2) Non-Current Liabilities 1,50,000

Long Term Borrowings (Bank Loan)

(3) Current Liabilities 75,000

Trade payables (creditors)

Total 6,93,000
1. ASSETS
(1) Non-Current Assets

(1) Fixed: Tangible

Land and Buildings (3,00,000 + 90,000) 3,90,000

Machinery (4,50,000-1,50,000) 3,00,000

(ii) Intangible

(iii) Non-Current Investments

(2) Current Assets:

Cash & Cash Equivalents 3,000

(7,500-4,500)

14
 Total 6,93,000

Qn-6).The following is the Balance Sheet of SL Ltd. as on 30th Sept 2019.

Balance Sheet as on 30/9/2019
PARTICULARS NOTE NO. AMOUNT
1) Equity and liabilities
2) Shareholders’ funds (equity shares of Rs.10 each) 20,00,000
Reserves and surplus (1,90,000)
Surplus A/C (Negative balance )
3) Share application money pending allotment
4) Non-current liabilities
5) Current liabilities
Trade payables (creditors) 15,00,000
TOTAL 33,10,000
i. Assets
1) Non-current assets
Fixed assets
i. Tangible assets (plant & mach.) 17,00,000
ii. Intangible assets (goodwill) 5,00,000
2) Current assets
Inventories (stock) 8,00,000
Trade receivables (debtors) 3,00,000
Cash and cash equivalents 10,000
TOTAL 33,10,000

The following scheme of reconstruction was approved by the court.

i. To reduce the paid up capital by Rs.5 per share.
ii. To write off goodwill and debit balance of P&L a/c.
iii. To write down the plant and machinery by Rs.3,10,000.
Give journal entries to implement the scheme, prepare capital reduction account and
the Balance Sheet after the implementation of reconstruction scheme.

Solution -Journal

Date Particulars L/F Debit Credit

Share Capital.............................................Dr. 10,00,000 .
To Capital Reduction Account 10,00,000
(Being the paid up value of shares reduced by Rs 5
share in order to write of fictitious and intangible
assets and reduce machinery as per reconstruction
scheme)

Capital Reduction Account........................Dr. 10,00,000 .

To Goodwill 5,00,000
To Profit and Loss A/C 1,90,000
To Plant and machinery 3,10,000

15
 (Goodwill and Profit and Loss Account written
off and plant and machinery reduced)

Capital Reduction Account

Particulars Amount Particulars Amount

To Goodwill 5,00,000 By share capital 10,00,000
To profit and loss 1,90,000
To plant and Machinery 3,10,000
10,00,000 10,00,000

Balance Sheet as at 31st December 2016

Particulars Note No Amount

I EQUITY AND LIABILITIES:

(1) Shareholders Funds

Share capital (shares of 5 each) 10,00,000

(2) Share Application Money

Pending Allotment

(3)Non-current Liabilities

(4)Current Liabilities

Trade payable(creditors) 15,00,000

TOTAL 25,00,000

II. ASSETS:

(1) Non-Current Asset

Fixed Assets

Tangible assets (Plant and Machinery) 13,90,000

(2) Current Assets

Inventories (stock) 8,00,000

Trade Receivables (Debtors) 3,00,000

Cash and Cash Equivalents 10,000

16
TOTAL 25,00,000

Qn-7)..(S.H. 2016)The following is the Balance Sheet of Weak Ltd. as on 31st March 2019

Liabilities Amount Assets Amount

(1,00,000 Equity 10,00,000 Land 1,00,000
Shares of Rs. 10
each)
Sundry Creditors 1,73,000 Plant and Machinery 2,30,000
Furniture and Fittings 68,000
Stock 1,50,000
Debtors 70,000
Cash at Bank 5,000
Surplus 5,50,000
Total 11,73,000 Total 11,73,000

The approval of the Court was obtained for the following scheme of reduction of capital:
(1) The Equity shares to be reduced to Rs. 4 per share.
(2) Plant and Machinery to be written down to Rs. 1,50,000
(3) Stock to be revalued at Rs. 1,40,000
(4) The provision on debtors for doubtful debts to be created Rs. 2,000
(5) Land to be revalued at Rs. 1,42,000
Pass journal entries to give effect to the above arrangement.

Equity share capital a/c Dr. (Rs. 10) 10,00,000

To Equity share capital (Rs. 4) 4,00,000
To Capital reduction 6,00,000
Land a/c Dr 42,000
To Capital reduction 42,000

Capital reduction a/c Dr 6,42,000

To P&M 80,000
To Stock 10,000
To Provision for Doubtful debts 2,000
To P&L a/c 5,50,000

Qn-8).( S.H. 2017 )Following was the Balance Sheet of Minerva Ltd., as on 31st march 2019.

LIABILITIES Amount ASSETS Amount

4000 equity shares of Rs. 100 Goodwill
4,00,000 50,000
each.

17
2000 7% preference shares of 2,00,000 Land and building 1,40,000
Rs.100 each.
6% debentures 2,00,000 Plant and machinery 1,50,000
Sundry creditors 2,00,000 Patents 40,000
Stock 1,60,000
Debtors 2,15,000
Cash in hand 5,000
Preliminary expenses 25,000
Discount on issue of
15,000
Debentures
Surplus 2,00,000
Total 10,00,000 Total 10,00,000

The following scheme of reconstruction was duly accepted and implemented.

a. Equity shares are to be reduced to equal number of fully paid shares of Rs.50 each.
b. 7% preference shares are to be reduced by 30% and the rate of dividend is to be increased to
9%.
c. The value to land and building is to be increased by 10%
d. The debentures are to be reduced by 20%
e. All nominal and fictitious assets are to be eliminated and the balance is to be used to write
off patents
f. Further equity shares are to be issued for Rs.50,000 for cash.
Give necessary journal entries and prepare the Balance Sheet after the reconstruction is
implemented.

. Equity Share Capital (4000 x 100) 4,00,000

To Equity Share Capital (4000 x 50) 2,00,000
To Capital Reduction a/c 2,00,000
7% Preference Shares 2,00,000
To 9% Pref Shares ( B.F ) 1,40,000
2,00,000 – 60,,000
To Capital Reduction 60,000
(200000 x 30/100 = 60,000
Land & Building A/c 14,000
To CR 14,000
1,40,000 X 10/100
Debentures a/c Dr. 40,000
To CR 40,000
2,00,000 X 20/100
C R a/c Dr (2,00,000+60,000+40,000+14,000) 3,14,000
3,14,000
To Preliminary expenses 25,000
To Discount on issue of debentures 15,000
To Surplus a/c 2,00,000
To Goodwill a/c 50,000
To Patents (3,14-2,90) 24,000
Cash a/c Dr 50,000

18
 To Eq. share capital 50,000

PARTICULARS NOTE.NO AMOUNT

I.EQUITY AND LIABILITIES
(1)Shareholders Fund:
(i)Share capital:
12% preference 1,40,000
Equity (2,00,000+ 50,000 fresh issue of shares ) 2,50,000
(ii)Reserve and surplus
(2)Non-current Liabilities
Long term borrowing (6% Debentures) 1,60,000
(3)Current Liabilities
Trade payables (creditors) 2,00,000
TOTAL 7,50,000
I. ASSETS
(1)Non-current Assets
(i)Fixed: Tangible
Land and Buildings (1,40,000 + 14,000) 1,54,000
Plant and Machinery 1,50,000
(ii)Intangible
Patents (40,000-24,000) 16,000
(iii)Non-Current Investments Nil
(2)Current Assets:
Inventory 1,60,000
Trade Receivables 2,15,000
Cash and Cash equivalents:
Cash at bank ( fresh issue 50,000 + 5,000 ) 55,000
TOTAL 7,50,000

**** Qn-9).The paid-up capital of Toy Ltd. amounted to 2,50,000 consisting of 25,000 equity
shares of 10 each.
Due to losses incurred by the company continuously, the directors of the company prepared a scheme
for reconstruction which was duly approved by the court. The terms of construction were as follows
1) In lieu of their present holdings, the shareholders are to receive:
(a) Fully paid equity shares equal to 2/5th of their holding
(b) 5% preference shares fully paid-up to the extent of 20% of the above new equity shares.
(c) 3,000 6% second debentures of R 10 each.

(ii) An issue of 2,500 5% first debentures of 10 each was made and fully subscribed in cash.
(iii )The assets were reduced as follows
(a) Goodwill from 1,50,000 to 75,000.
(b) Machinery from 50,000 to 37,500.
c)Leasehold premises from 75,000 to Rs 62,500.
Show the Journal Entries to give effect to the above scheme of reconstruction.

19
SOLUTION
In the Books of Toy Ltd. JOURNAL ENTRIES
DATE PARTICULARS L/F DEBIT CREDIT
Share Capital A/c ………………………………Dr 2,50,000
To Equity Share Capital a/c 1,00,000
2,50,000 x 2/5 =1,00,000
To 5% Preference Share capital A/c 20 ,000
1,00,000 x 20 /100 = 20,000
To 6% Secured Debentures A/c 3,000 x 10 30,000
To Capital Reduction a/c 1,00,000
2,50,000 – ( 1,00,000 + 20,000 +30,000 )
(Being conversion of 25000 equity shares and balance
being transferred to capital reduction a/c in accordance
with the scheme of internal reconstruction as per
special resolution ……dated as confirmed by court
order dated…)
Bank …………………………..Dr 25000
To 5% First Debenture A/c 25000
(being issue of rs.25000 5% lst Debenture for cash as
per scheme of internal reconstruction)
Capital Reduction Dr 1,00,000
To Goodwill A/c 75,000
To Plant and machinery a/c 12,500
To Leasehold Premises a/c 12,500
(Being sundry assets written down as per scheme of
internal reconstruction)

Qn-10).The ledger balances of X Co. as on 31st March, 2019 are

Fixed Assets 7,00,000, Investments 10,000, Stock and Debtors 8,50,000, Equity Share capital 60%
paid) 6,00,000, 10% First Debentures 2,00, 000, 12% Second Debentures5,00,000, Bank Overdraft
Rs 50,000, Trade Creditors (including Y for 8,50,000) 11,50,000 Outstanding interest for one year
on both types of debentures 80,000

Due to heavy losses, the following scheme of reconstruction is agreed as on 1-4-2019:

(i) To make the existing Rs 100 each shares fully paid up and then to reduce them to 20 each,
(ii) To settle the claims of first debenture-holders by issuing 2,000 13.5% debentures of 100 each,
(iii) To discharge the claims of the second debenture holders by issuing 15% 4,000 debentures of 100
each,
(iv) To pay 3,00,000 to Mr. Y in full settlement of his account.
(v) To allot 15,000 fresh equity shares of Rs 20 each to discharge the remaining trade creditors,
(vi )Market value of investments is Rs 20,000, and
(vii) To write off the fictitious assets and to reduce the fixed assets.

Assuming all formalities are duly complied with, pass Journal Entries to give effect to the
above scheme and prepare the post reconstruction Balance Sheet.

20
SOLUTION
Working Note: Calculation of balance of Surplus A/c
TRIAL BALANCE As on 31.3.2019
Particulars Credit Particulars Debit
Equity Share Capital (60%) 6,00,000 Fixed Assets 7,00,000
10% l st Debentures 2,00,000 Investments 10,000
12% II nd Debentures 5,00,000 Stock and Debtors 8,50,000
Bank Overdraft 50,000 Surplus A/c (loss) (Bal.fig) 10,20,000
Trade Creditors(including Y for
rs.8,50,000) 11,50,000
Outstanding Interest 80,000

25,80,000 25,80,000

JORNAL ENTRIES
DATE PARTICULARS L/F DEBIT CREDIT
Bank ……………………………………….Dr 4,00,000
To Equity Share Capital A/c 4,00,000
(Being 40% called and received)
6,00,000 x 100/60 =10,00,000 -6,00,000 = 4,00,000
Equity Share Capital (rs.100) ……………..Dr 10,00,000
To Equity share capital (rs.20) A/c 2,00,000
To Capital Reduction a/c 8,00,000
(being share of rs.100 reduced to rs.20)
10% Ist Debentures ………………….Dr 2,00,000
Debenture Interest Outstanding ……Dr 20,000
2,00,000 x 10/100 =20,000
To 13.5% Debentures A/c 2,00,000
To capital reduction A/c 20,000
(Being settlement of claim of Ist Debentures by issues
of 13.5% Debenture)
12% IInd Debenture ……………….Dr 5,00,000
Debenture Interest Outstanding …….Dr 60,000
80,000 –20,000 =60,000
5,00,000 x 12/100 =60,000
To 15% Debenture A/c 4000 x 100 4,00,000
To Capital Reduction A/c 1,60,000
(1,00,000 +60,000 )
(Being discharge of claim of IInd debenture by 15%
debentures)
Creditors (Y) ………………………….Dr 8,50,000
To bank A/c 3,00,000
To capital Reduction A/c 5,50,000
( Being claim of Y settled by paying rs.3,00,000)
Creditors ………………………Dr 3,00,000
To Equity Share Capital A/c 3,00,000

21
 (Remaining trade creditors claim settled by issue of
equity share capital)
Investments ……Dr (20,000 -10.000 ) 10,000
To Capital Reduction A/c 10,000
( Being appreciation in the value of investments)
Capital Reduction ……………Dr 15,40,000
8,00,000 +20,000 +1,60,000 +5,50,000 +10,000
To Surplus A/c ( negative balance ) 10,20,000
To Fixed Assets A/c 5,20,000
( Being balance of capital reduction utilised in writing
off fictitious and fixed assets)

BALANCE SHEET OF X CO. (AFTER RECONSTRUCTION)

As on 1.4.2019
PARTICULARS NOTE AMOUNT
NO.
I.EQUITY AND LIABILITIES
(1)Shareholders funds
(a)Share Capital
25,000 Equity shares of rs.20 each fully paid 5,00,000
(2,00,000 +3,00,000 )
(b)Reserves and Surplus -
(2)Non-current Liabilities
Long term borrowings (Secured loans):
13.5% Debentures 2,00,000
15% Debentures 4,00,000
(3)Current Liabilities -
Total Equity and Liability 11,00,000
II.ASSETS
(1)Non-current Assets
FixedAssets 7,00,000 1,80,000
Less: Reduced under Reconstruction scheme dated. 5,20,000

Investments assumed to be long term 20,000

(2)Current Assets
Stock and Debtors 8,50,000
Bank Balance 50,000
Total Assets 11,00,000

Working Note (1)

CAPITAL REDUCTION ACCOUNT
PARTICULARS DEBIT PARTICULARS CREDIT

To Surplus A/c 10,20,000 By Equity Share Capital 8,00,000

To Fixed Assets (Bal.Fig) 5,20,000 By 10% Debentures 20,000

22
 By 12% Debentures 1,60,000
By creditors (Y) A/c 5,50,000
By Investments A/c 10,000
15,40,000 15,40,000

***Qn-11). ( J & N )Following are the BALANCE SHEET OF SICK LTD. As on 31st march, 2019

PARTICULARS NOTE.NO AMOUNT

I. EQUITY AND LIABILITIES
(1) Shareholder’s funds
(a)Share Capital
equity shares of rs.10 each fully paid 7,00,000
1,000 13% pref. shares of rs.100 each fully paid 1,00,000

(b)Reserves and surplus: (3,00,000)

Surplus A/C (Negative balance )
Total Shareholders’ funds
(2) Non-Current Liabilities
Long-term Borrowing:
Secured Loans :11% Debentures 3,00,000
(3) Current Liabilities
Current liabilities 39,00,000
Liability for taxation 3,00,000

Total Equity and Liabilities (1)+(2)+(3) 50.00.000

II. ASSETS
(1) Non-Current Assets
Fixed Assets 15,00,000
(2) Current Assets 35,00,000
Total Assets (1)+(2) 50,00,000

Following scheme of reorganisation is sanctioned

1. All existing equity shares are reduced to 5 each
2. All Preference shares are reduced to 75 each. Preference Shareholders decide to forgo their right to
arrears of dividend which are in arrears for three years
3. The rate of interest on debentures is increased to 11%. The debenture holders Surrender their
existing debentures of 100 each and exchange the same for fresh debentures of Rs 75 each.
4.One of the creditors of the company, to whom the company owes 25,00,000
decides to forego 50% of his claim. He is allotted 1,00,000 equity shares of Rs 5 each in part
satisfaction of the balance of his claim.
5 The taxation liability of the company is settled at Rs.4,00,000.
6. Fixed assets are to be written down by 331/3%
7. Current assets are to be revalued at Rs 27,00,000.
Pass Journal Entries and prepare Balance Sheet of the company after giving effect to the above.
SOLUTION
JOURNAL OF SICK LTD.

23
DATE PARTICULARS L/F DEBIT CREDIT
31.3.2018 Equity Share Capital (10) ………….Dr 7,00,000
1. To Equity Share Capital (5) A/c 70,000 x 5 3,50,000
To Capital Reduction A/c 70,000 x 5 3,50,000
(Being conversion of equity share capital of rs.10
into rs.5 as per reconstruction scheme)
2. 13% Cumulative Pref. share capital 1,00,000
100)a/c………..Dr 1,000 x 100
To 13% Cumulative pref. share capital (75) A/c 75,000
1,000 x 75
To Capital Reduction A/c 1,000 x 25 25,000
(being conversion of 13% cumulative preference
share capital of rs.100 into rs.75 as per
reconstruction scheme)
3. 8% debenture Dr (3,000 x 100 ) 3,00,000
To 11% Debenture A/c 3,000 x 75 2,25,000
To Capital Reduction A/c 75,000
(being 11% debenture issued to 8% debenture
holders for 75% of their claims, the balance
transferred to capital reduction account as per
reconstruction scheme)
4. Sundry Creditors ……………….Dr 17,50,000
(25,00,000 x 50/100 = 12,50,000 +5,00,00)
To equity share capital A/c 1,00,000 x 5 5,00,000
To Capital Reduction A/c 12,50,000
25,00,000 x 50/100
(being a creditor of 25,00,000 agreed to surrender
his claim by 50% and allotted 1,00,000 shares of
Rs.5 in part settlement of his dues as per
reconstruction scheme)
5. Capital reduction a/c dr 1,00,000
To provision for taxation 1,00,000

6. Provision for taxation …………Dr 4,00,000

3,00,000 + 1,00,000 =4,00,000
To liability for taxation 4,00,000
(conversion of the provisions for taxation into
liability for taxation on settlement of the amount
due)

6. Capital Reduction ……………..Dr 16,00,000

(3,50,000 +25,000 +75,000 +12,50,000)-1,00,000
To Surplus 3,00,000
To Fixed assets 15,00,000 X 1/3 5,00,000
To Current Assets35,00,000 -27,00,000 8,00,000
(Being amount of capital reduction utilised in
writing off Surplus A/c (Dr) balance ,fixed assets,
current assets and for making provision for taxation
as per reconstruction scheme)

24
 BALANCE SHEET OF SICK LTD. (AFTER RECONSTRUCTION)
As on 31st march, 2019
PARTICULARS NOTE.NO AMOUNT
I.EQUITY AND LIABILITIES
(1)Shareholder’s funds
(a)Share Capital
1,70,000 equity shares of rs.5 each fully paid 8,50,000
1,000 13% pref. shares of rs.75 each fully paid 75,000
9,25,000
(b)Reserves and surplus: -
Total Shareholders’ funds 9,25,000
(2) Non-Current Liabilities
Long-term Borrowing:
Secured Loans :11% Debentures
(3) Current Liabilities
Current liabilities 21,50,000
Liability for taxation 4,00,000
25,50,000
Total Equity and Liabilities (1)+(2)+(3) 37,00,000
II.ASSETS
(1)Non-Current Assets
Fixed Assets 15,00,000
Less: Reduced under Reconstruction Scheme 5,00,000
10,00,000
(2)Current Assets 27,00,000
Total Assets (1)+(2) 37,00,000

Qn-12).Following is the Balance sheet of Rainbow Ltd. as on 31"t March 2019.

Balance sheet of Rainbow Ltd

Liabilities Assets
Authorised capital Goodwill 10,000
20,000 Equity shares of R10 each Land & Building 20,500
Paid up capital Machinery 50,850
12,000 Equity shares @ 10 Preliminary expenses 1500
1,20,000
Less: Calls-in-arrear (9,000)
3000 @R3 1,11,000
Sundry creditors 15,425 Stock 10,275
Provision for tax 4000 Book debts 15,000
Cash at bank 1500
Profit & Loss A/c 22,000
Less: Current year profit
(1,200) 20,800
1,30,425 1,30,425

25
It is found that machinery is over valued by Rs.10,000. It is proposed to write down this asset to its
true value and to write off Profit and Loss A/c balance, Goodwill & Preliminary expenses by the
adoption of the following scheme:

(1) Forfeit the shares on which call is outstanding.

(2) Reduce the paid up capital by 3 per share.
(3) Re-issue the forfeited shares at 5 per share.
(4) Utilise provision for tax, if necessary.
Give journal entries and show the new Balance sheet after Reconstruction.

Solution:
JOURNAL
Date Particulars LF Debit (Rs) Credit (Rs)
1. Equity share capital A/c …………………………………Dr 30,000
(3000 x 10)
To first call a/c dr
or
To Calls – in Arrear (3000 * 3) 9,000
To Forfeited shares (B.F) 3,000 x 7 21,000
(Being 3000 shares forfeited due to non-payment
of call money)
2. (Old) Equity share capital A/c ………………………. Dr 90,000
(9000 x 10) (12,000 - 3,000)
To (New) Equity share capital (9000 x7) 63,000
To Capital Reduction (9000 x 3) 27,000
(Out of 12,000 shares, 3000 shares were forfeited
and the remaining 9000 shares were reduced by
Rs.3 per share on a scheme of capital reduction)
3. Bank a/c 3,000 x 5 Dr 15,000
Forfeited shares a/c 3,000 x 2 (7 -5=2) Dr 6,000
To Equity share capital (3000 x 7) 21,000
(For the reissue of forfeited shares)
4. Forfeited shares A/c ………………………………………Dr 15,000
To Capital Reduction (21,000 – 6,000) 15,000
(Forfeited shares A/c balance transferred to
Capital Reduction A/c)
5. Provision for Tax A/c ……………………………………. Dr 300
To Capital Reduction 300
(10,000 + 10,000+1500+20,800) –
(27,000+15,000) (42,300-42,000)
(Provision for tax utilised)

26
6. Capital Reduction A/c ………………………………………Dr 42,300
To Goodwill 10,000
To Machinery 10,000
To Preliminary expenses 1,500
To surplus A/c debit balance 20,800
(Intangible assets, fictitious assets and excess
depreciation written off)
42,300 (10,000 +10,000 +1,500 +2,800 )- (27,000
+15,000)42,000 shoratge of 300 .

Balance sheet of Rainbow Ltd. (And Reduced)

As on 1/4/2019
PARTICULARS NOTE.NO AMOUNT
I.EQUITY AND LIABILITIES
(1)Shareholders Fund:
(i)Share capital:
12,000 equity shares of Rs.7 each 84,000
(ii)Reserve and surplus
(2)Non-current Liabilities
(3)Current Liabilities
Trade payables (creditors) 15,425
Provision for tax (4000-300) 3,700
TOTAL 1,03,125
I. ASSETS
(1)Non-current Assets
(i)Fixed: Tangible
Land and Buildings 20,500
Plant and Machinery(50,850 – 10,000) 40,850
(ii)Intangible nil

(iii)Non-Current Investments Nil

(2)Current Assets:
Inventory 10,275
Trade Receivables 15,000
Cash and Cash equivalents:
Cash 1,500 + 15,000 (3,000 x 5 ) 16,500
TOTAL 1,03,125

SURRENDER OF SHARES
Under this method, share capital is divided into shares of smaller denominations
Then the shareholders are persuaded to surrender a part of their capital in order to facilitate capital
reduction. Thus, surrender of shares means voluntary return of shares by a member to the company.

27
It can be accepted by the company provided it is authorised by the Articles of the company.
Surrender is valid under two circumstances:
1) When the call money has not been paid
2) When the share certificate gets torn or mutilated.
Surrender of shares means voluntary return of shares by a member to the company. Similarly, to
facilitate capital reorganisation, shareholders will surrender a part of their holdings. Such
surrendered shares are utilised to extinguish debentures or trade liabilities. The portion of shares
surrendered but not reissued and the amount of sacrifice is utilised for writing off losses and for
reducing the value of assets through a scheme of reorganisation or capital reduction.
Journal Entries
1. On surrender of shares:
Share Capital A/c
To Surrendered Shares A/c
2. On cancellation of Creditors and Debentures:
Debentures/Creditors A/c.Dr
To Capital Reduction
3.On issue of surrendered shares to creditors and debenture holders in satisfaction of
their claims:
Surrendered shares A/ C Dr
To Share Capital
4. On cancellation of unissued surrendered shares:
Surrendered shares A/C.. ....Dr
To Capital Reduction

Qn-13)..Smart Ltd has an Equity share capital of Rs 10,00,000 consisting of Rs 100000 shares of Rs
100 each.It is resolved and sanctions of the court has been obtained:
a. To subdivide equity shares into fully paid equity shares of Rs 10each .
b. 80% of the shares to be surrendered to the company.
c. 4,00,000 of the surrendered shares to be issued to 15% debentures of Rs 50,00,000 in full
settlement of the claim.
d. 2,00,000 of the surrendered shares to be issued as fully paid to the creditors of Rs 25,00,000.
e. The balance of the surrendered shares to be cancelled
f. To write off debit balance in P&L a/c Rs 32,00,000; goodwill Rs 38,00,000, preliminary
expense Rs 15,00,000 and the balance to be transferred to capital reserve .
Give journal entry to implement the scheme.

SOLUTION:
JOURNAL
DATE PARTICULARS L/F DEBIT CREDIT
1. (Old) Equity share capital (rs.100) 1,00,00,000
A/c………………….Dr 1,00,000
To (new) Equity share capital (rs.10)
(Equity shares of rs.100 each being sub divided
into equity shares of rs.10; share capital being the

28
 same)
2. Equity share capital ……….Dr 80,00,000
To surrendered shares 80,00,000
(being 80% of the shares surrendered)
3. Surrendered shares …………….Dr 40,00,000
To Equity shares capital 40,00,000
(4,00,000 shares @ rs.10 each being given into
debenture holders)
4. Surrendered shares ……….Dr 20,00,000
To equity share capital 20,00,000
(2,00,000 shares @ rs.10 each being given to
creditors)
5. Surrendered shares ……………Dr 20,00,000
To Capital Reduction 20,00,000
(balance being transferred to capital reduction)
(80,00,000-40,00,000-20,00,000)
6. Debenture ………….Dr 50,00,000
Creditors ………………..Dr 25,00,000
To Capital Reduction 75,00,000
(debenture and creditors being transferred)
7. Capital Reduction ………………Dr 95,00,000
(20,00,000+75,00,000)
To profit & loss A/c 32,00,000
To Goodwill 38,00,000
To preliminary expenses 15,00,000
To capital reserve (B.F) 10,00,000
(Intangible and fictitious assets written off)

Qn-14).A COMPANIES POSITION ON 31.12.2019 AS FOLLOWS

a.20000 equity shares of Rs 100 each - 20,00,000

b.10,000 6%debentures of Rs 100each - 10,00,000
c.Interest outstanding on debentures - 1,20,000
d. Sundry creditors - 5,00,000
e.Fixed assets - 20,00,000
f. Current assets - 6,50,000
Fixed assets were revalued at Rs 9,60,000 and current assets at Rs 4,80,000. The capital reduction
scheme approved by the court (tribunal) was as follows:
1) The shares were sub-divided into shares of Rs 5 each and 90% of the shares were surrendered.
2) Claims of debenture holders were reduced to Rs 4,90,000 for which Rs 2,50,000 equity shares were
allotted.
3) Creditors agreed to reduce their claims to Rs 3,00,000, one third of which was satisfied by the issue
of equity shares out of those surrendered.
Draft journal entries.

SOLUTION:
JOURNAL
DATE PARICULARS L/F DEBIT CREDIT
31.12.18 Equity share capital (rs.100) ….Dr 20,00,000

29
 To Equity share capital (rs.5) 20,00,000
(for the subdivision of 20,000 equity shares of rs.100
each in to shares of rs.5 each)
Equity share capital ……………Dr 18,00,000
To surrendered shares A/c 18,00,000
(for the surrender of 90% of equity shares by the
shareholders as per capital reduction scheme)
6% Debenture ……………………….Dr 5,10,000
(10,00,000-4,90,000)
Outstanding debenture interest ………Dr 1,20,000
To capital reduction 6,30,000
(for the reduction of debenture holders claim to
rs.4,90,000)
Surrendered shares …………………….Dr 2,50,000
To Equity share capital 2,50,000
(for the issue of equity share to debenture holders)
Creditors ………………………………………..Dr 3,00,000
To capital reduction 3,00,000
(for the reduction of creditors claim, ie, rs.2,00,000
reduction in creditors and rs.100,000 for which
surrendered shares are to be issued)
Surrendered shares ………………….Dr 1,00,000
To Equity share capital 1,00,000
(surrendered shares issued to creditors; 3,00,000x
1/3)
Surrendered shares ……………..Dr 14,50,000
To capital reduction 14,50,000
(being unissued surrendered shares cancelled and
transferred to capital reduction)
Capital reduction ………………….Dr 23,80,000
To surplus A/c (profit and loss A/c) 9,70,000
To fixed Assets (20,00,000-9,60,000) 10,40,000
To Current Assets (6,50,000-4,80,000) 1,70,000
To capital reserve (bal.fig) 2,00,000
(for accumulated loss written off, assets written down
and balance transferred to capital reserve)

WN (i) Calculation of Surplus A/c, Negative Balance

Balance sheet of rainbow ltd.
Liabilities Amount Assets Amount
20,000 equity shares of rs.100 each 20,00,000 Fixed assets 20,00,000

10,000 6% debenture of rs.100 each 10,00,000 Current assets 6,50,000

Outstanding interest on Debenture 1,20,000 Surplus A/c (negative 9,70,000

balance)bal.fig.
Creditors 5,00,000

36,20,000 36,20,000

30
Qn-15).Dindayal has an Equity Share Capital of 1,00,00,000 consisting 1,00.000 shares of 100 each.
lo is resolved and sanction of the court has been obtained.
(i) To sub-divide the equity shares into fully paid equity shares of 10 each. (ii) 80% of shares to be
surrendered to the company. (iii) 4.00,000 of the surrendered shares to be issued to 15% debentures
of 50.00.000 in full settlement of their claim. (iv) 2,00.000 of the surrendered shares to be issued as
fully paid to creditors of 25.00,000. (v) The balance of surrendered shares to be cancelled. (vi) To
write off debit balance in Profit and Loss Account Rs 32,00.000: Goodwill Rs 38.00.000;
Preliminary expenses Rs15.00.000 and balance to be transferred to Capital Reserve.
Give entries to implement the scheme
Solution
Journal
Dat Particulars L Debit Credit
e /
F
Equity share capital (old)…………Dr 1,00,000 .
To Equity share capital (new) 1,00,000
(Equity shares of Rs 100 each dividend into equity
shares of Rs10 each)
Equity share capital 80,00,000 .
To Surrendered shares 80,00,000
(Surrender of 80% of the equity shares of Rs 10 each)
15% Debentures……….Dr 50,00,000 .
To Capital Reduction 50,00,000
(The debentures to be redeemed as per reconstruction
scheme)
Surrendered shares………..Dr 40,00,000 .
To Equity share capital 40,00,000
(Surrendered shares being issued to debenture holders
in full settlement of their claims)
Creditors………..Dr 25,00,000 .
To Capital Reduction 25,00,000
(Creditors to be paid off under reconstruction Scheme
by issuing surrendered shares)
Surrendered shares………..Dr 20,00,000 .
To Equity share capital 20,00,000
(Surrendered shares being reissued to creditors in full
settlement)
Surrendered shares…………Dr 20,00,000 .
To Capital reduction 20,00,000
(Surrendered shares left after the issue of debenture
holders and creditors transferred to capital reduction
account)
Capital Reduction A/C…………Dr 95,00,000 .
To Goodwill 38,00,000
To Profit and Loss Account 32,00,000
To Preliminary expenses 15,00,000

31
 To Capital reserve 10,00,000
(Items written off against capital reduction account and
the balance transferred to capital reserve)

Qn-16). Ledger Balance of Z Ltd, as on 31st March, 2018 were:

1. Equity and Libation
(1) Shareholders' Funds
(a) Share Capital
30.000 Equity Shares of 100 each 30,00,000
10,000 11% Preference Shares of 100 each 10,00,000
(b) Reserves and Surplus :
Surplus A/c (Negative Balance) (15,50,000)
Shareholders Fund 24,50,000
(2) Non-current Liabilities

15% Debentures 10,00,000

(3) Current Liabilities
Interest due on Debentures 8,40,000
Sundry Creditors 3,00,000
Total 45,90,000
II. Assets
(1) Non-current Assets
Fixed Assets :
Tangible Assets 30,00,000
(1) Intangible Assets :
Goodwill 5,00,000
(2) Current Assets 10,90,000
Total 45,90,000
Following scheme of reconstruction has been passed and approved by the court as on April 1, 2018
(i) The equity shares are to be sub-divided into shares of 10 each, and each shareholder shall
surrender 70 per cent of his holdings.
(ii) Out of surrendered shares 50,000 shares shall be issued to preference shareholders in full
settlement of their claims.
(iii) Debenture holder's total claim shall be reduced to 7,00,000 and shall be satisfied by issue of
70,000 equity shares, out of surrendered shares.
(iv) Creditors claims are to be reduced by 50 per cent and in consideration the creditors shall receive
20,000 equity shares out of the surrendered shares.
(v) The remaining surrendered shares shall be cancelled.
(vi) Goodwill and Surplus Account are to be written off completely and Fixed Assets are to be
depreciated by 10,00,000.
You are required to give Journal Entries and Balance Sheet in the books of Z Ltd.

32
SOLUTION
In the Books of Z Ltd. JOURNAL ENTRIES
20 Equity Share Capital (Rs100) A/c ……………..Dr 30,00,000 .
18 To Equity Share Capital (Rs10) A/C 30,00,000
Ap (Being sub-division of equity shares of 100 each in to equity
ril1 shares of 10 per reconstruction scheme)
Equity Share Capital A/C……………Dr 21,00,000 .
To Shares Surrendered A/C 21,00,000
(Being surrender of 70% of their holdings of equity shares
holdings)
Shares Surrendered A/c 5,00,000 .
To Equity Share Capital Nc 5,00,000
(Being issue of equity shares out of surrendered shares to
preference shareholders, of their claims as per reconstruction
scheme)
Shares Surrendered A/c………………….Dr 7,00,000 .
To Equity Share Capital A/C 7,00,000
(Being issue of equity shares out of the surrendered shares to
debenture holders in full satisfaction of their claims as por
reconstruction scheme)
Shares Surrendered A/C………….Dr 2,00,000 .
To Equity Share Capital A/c 2,00,000
(Being issue of equity shares out of the surrendered shares to
the creditors as per reconstruction scheme)
Shares Surrendered A/C……………..….Dr 7,00,000 .
Preference Share Capital A/C…………Dr 10,00,000 .
15% Debentures A/C……………….…….Dr 10,00,000 .
Interest due on Debentures A/C……Dr 3,00,000 .
Sundry Creditors A/C…………………....Dr 4,20,000 .
To Capital Reduction A/c 34,20,000
(Being cancellation of unissued surrendered shares and
transfer of preference share capital and liabilities in respect of
debentures and creditors 4,20,000 to the Capital Reduction
A/c as these have been fully discharged by the issue of
surrendered shares)
Capital Reduction A/c…………..Dr 34,20,000 .
To Goodwill 5,00,000
To Surplus A/c 15,50,000
To Fixed Assets A/c 10,00.000
To Capital Reserve A/C 3,70,000
(Being writing off fictitious, Intangible and fixed assets from
Capital Reduction as per reconstruction scheme and balance
transferred to Capital Reserve)

BALANCE SHEET OF Z LTD. (AND REDUCED) as on 1st April, 2018

1. Equity and Labilities

(1) Shareholders' Funds

33
(a) Share Capital
2,30,000 Equity Shares of 10 each fully paid 23,00,000
(b) Reserves and Surplus
Capital Reserve 3,70,000
(2) Non-current Liabilities
(3) Current Labilities
Trade Receivables (Sundry Creditors) 4,20,000
Total Equity and Liabilities (1) + (2) + (3) 30,90,000

Assets
(1) Non-Current Assets :
Fixed Assets
30,00,000
Less : Reduced under Reconstruction Scheme Dated 20,00,000
10,00,000
(2) Current Assets 10,90,000
Total Assets (1) + (2) 30,90,000

Qn-17). The position of Fear Ltd. on 31st March 2016 as follows:

Balance sheet as at 31st March 2016

PARTICULARS NOTE AMOUNT

NO.
I. Equity and Liabilities
1) Shareholders Funds
Share capital (20,000 equity shares of Rs 100 each) 20,00,000
Reserves and Surplus(profit and loss account) (9,70,000)
2) Share Application Money Pending Allotment
3) Non Current Liabilities
Long term borrowings(1000,16%Debentures of Rs 1000 10,00,000
each)
4) Current Liabilities
Trade Payables(creditors) 5,00,000
Other current liabilities (outstanding interest on 1,20,000
debentures)
TOTAL 26,50,000
II. ASSETS:
1) Non current assets
Fixed Assets:
Tangible assets 20,00,000
2) Current Assets
Inventories(stock) 2,50,000
Trade Receivables(debtors) 3,50,000
Cash and cash equivalents(Cash) 50,000
TOTAL 26,50,000

34
 The fixed assets on the date were revalued at Rs 9,60,000,stock at 2,00,000 debtors at 2,30,000.

The following steps were taken with the approval of all concered:

i. The shares were subdivided into shares of Rs 5 each and 90% of the shares were surrendered.
ii. The total claim of the debenture holders were reduced to Rs 4,90,000 and in consideration of
this,they were also allotted shares(out of yhe surrendered shares) amounting to Rs 2,50,000.
iii. The creditors agreed to reduce their claims to Rs 3,00,000, 1/3 of which was satisfied by the
issue of equity shares out of those surrendered but not reissued were cancelled.

Draft journal entries and give the Balance sheet of the company after reconstruction.

Solution:

JOURNAL

DATE PARTICULARS L.F DEBIT CREDIT

Equity share capital(Rs 100 )A/c Dr 20,00,000
To equity share capital (Rs 5) 20,00,000
(the equity shares of Rs 100 each subdivided into
shares Rs 5 each)
Equity share capital A/c Dr 18,00,000
To surrendered shares A/c 18,00,000
(The surrendered of 90% of the equity shares of Rs 5
each)
16% Debentures A/c Dr 5,10,000
Outstanding Int. on debentures A/c Dr 1,20,000
To Capital reduction A/c 6,30,000
(The claim of debentures and outstanding int. on
debentures reduced to Rs 4,90,000)
Creditors A/c Dr 3,00,000
To Capital reduction A/c 3,00,000
(Creditors of Rs 5,00,000 reduced to Rs 2,00,000)
Surrendered Shares A/c Dr 3,50,000
To equity share capital (Rs 5 )A/c 3,50,000
(Rs 2,50,000 equity shares issued to debenture holder
and Rs 1,00,000 shares issued to creditors)
Surrendered Shares A/c Dr 14,50,000
To capital reduction A/c 14,50,000
(Reducing surrendered shares cancelled)
Capital Reduction A/c Dr 23,80,000
To profit and loss A/c 9,70,000
To fixed assets A/c 10,40,000
To stock A/c 50,000
To debtors A/c 1,20,000
To Capital reserve A/c 2,00,000
(The debit balance of profit and loss A/c apart of fixed
assets, current assets are written off and the balance
transferred to capital reserve)

35
 Balance Sheet as at 31st March 2016

Particulars Note Amount

No.
1. EQUITY AND LIABILITIES
1) Shareholders Funds
Share capital(1,10,000 shares of RS 5 each fully paid) 5,50,000
Reserves and surplus(capital reserve) 2,00,000
2) Share Application Money Pending Allotment
3) Non Current Liabilities
Long term borrowings(16% Debentures) 4,90,000
4) Current Liabilities
Trade Payables (creditors) 2,00,000
TOTAL 14,40,000
2. ASSETS:
1) Non Current Assets
Fixed Assets:
Tangible Assets 1 9,60,000
2) Current Assets
Inventories (stock) 2,00,000
Trade Receivables(Debtors) 2,30,000
Cash and cash equivalents(Cash) 50,000
TOTAL 14,40,000

Notes to Accounts

Particulars Amount
1. Tangible Assets
Sundary Assets 20,00,000
Less: written off as per reconstruction scheme 10,40,000 9,60,000
Total 9,60,000

SURRENDER OF SHARES
Qn-18). (S.H. 2018 Surrender)The Balance Sheet of M/s. Raman Ltd as on 31.12.2019
PARTICULARS NOTE
AMOUNT (RS.)
.NO
I. EQUITY AND LIABILITIES
(1)shareholders fund:
(i)Share Capital
Equity 8,00,000
(ii)Reserves and Surplus
(10,70,000)
Surplus A/C (Negative balance )
(2)Non-current Liabilities
14,00,000
8 % debentures

36
 (3)Current Liabilities
Accrued interest on debentures 70,000
Sundry Creditors 4,50,000
Short term provision(income tax liability) 10,000
TOTAL 16,60,000
II. ASSETS
(1)Non-current assets
(i)Fixed: Tangible;
Land & buildings 14,00,000
(ii)Non-current Investments NIL
(2)Current Assets:
Inventory 1,00,000
Trade Receivables
40,000
Cash & cash equivalents:
Cash in hand: 2000 1,05,000
Cash at bank: 1,03,000
Investments 15,000
Total 16,60,000

The fixed assets are heavily overvalued. A scheme of reorganization was prepared and passed. The
salient points of the scheme are the following :
1. Each share shall be sub divided into ten fully paid equity shares of Rs. 10 each.
2. After such sub division, each shareholder shall surrender to the company 90% of his holding
for the purpose of reissue to debenture holders and creditors so far as required and otherwise for
cancellation.
3. Of those surrendered 50,000 Equity shares of Rs. 10 each shall be converted into 8%
Preference Shares of Rs. 10 each fully paid for debenture holders.
4. The debenture holder’s total claim shall be reduced to Rs. 5, 00,000. This will be satisfied
by the issue of 50,000 preference shares of Rs. 10 each fully paid.
5. The claim of sundry creditors shall be reduced by 80% and the balance shall be satisfied by
allotting them Equity Shares of Rs. 10 each, fully paid from the shares surrendered.
6. Shares surrendered and not reissued shall be cancelled
Assuming that the scheme is duly approved by all parties interested and the court, draft
necessary journal entries and Balance Sheet of the company after the scheme has been carried into
effect.
SOLUTION:
JOURNAL
DAT PARTICULARS L/F DEBIT CREDIT
E

37
 (Old)Equity share capital (rs.100) a/c… 8,00,000
1 Dr 8,00,000
To (new)Equity share capital(rs.10)
(Equity shares of rs.100 each being
converted in to share of rs.10 each)
2 Equity share capital ………Dr 7,20,000
To surrendered share a/c 7,20,000
(90% of equity shares surrendered)
3 Surrendered share ………….Dr 5,00,000
To 8% preference shares capital 5,00,000
(preference shares issued to debenture
holders out of shares surrendered)

4 surrendered shares …….Dr 90,000

To equity share capital 90,000
(equity share issued to sundry creditors
equal to 20% of their claim)

5 Surrendered shares …Dr 1,30,000

To capital reduction 1,30,000
(720000-500000-90000)(capital being
transferred to capital reduction A/c)

6 Debenture ……………….Dr 14,00,000

Accrued Interest ………..Dr 70,000
Sundry creditors ………. Dr 4,50,000
To capital reduction 19,20,000
(debentures, accrued interest and
creditors being transferred)

7 Capital reduction ……….Dr 20,50,000

To surplus a/c, negative balance 10,70,000
To fixed assets ( Bal. fig ) 9,80,000
(surplus account negative balance
written off and the value of fixed assets
got reduced)

Notes: it is stated that “fixed assets are heavily over valued”. Therefore, the balance in capital
reduction has to be utilised for writing down the value of fixed assets.
Raman Ltd as BALANCESHEET (AND REDUCED) as on 31.12.2019
PARTICULARS NOTE.N AMOUNT
O (RS.)
I.EQUITY AND LIABILITIES

(1)shareholders fund:
(i)share capital
8% preference 5,00,000

38
 Equity (8,00,000-7,20,000+90,000) 1,70,000

(ii)reserves and surplus NIL

(2)Non-current Liabilities NIL

(3)Current Liabilities

Short term provision(income tax liability) 10,000

TOTAL 6,80,000
II.ASSETS
(1)Non-current assets
(i)Fixed: Tangible;

Land & buildings (14,00,000-9,80,000) 4,20,000

(ii)Non-current Investments NIL

(2)Current Assets:
Investments 15,000
Inventory 1,00,000

Trade Receivables 40,000

Cash & cash equivalents: 1,05,000

Cash in hand: 2000
Cash at bank: 1,03,000
Total 6,08,000

SURRENDER OF SHARES

Qn-19). (S.H. 2019)The following information relates to Disapponted Ltd as on 31 st December

2019
2000 Equity shares of Rs. 100 each Rs 2,00,000
1000, 6% Debentures of Rs. 100 each Rs. 1,00,000
Trade Creditors Rs. 50,000
Interest on Debentures outstanding Rs. 12,000
Fixed Assets Rs. 2,00,000 (now valued Rs. 96,000)
Current Assets Rs. 65,000 (now valued Rs. 48,000)

The following scheme was duly agreed and approved by the court
i. The shares were sub-divided into shares of Rs. 5 each and 90% or the shares were
surrendered.
ii. The total claim of debenture holders were reduced to Rs. 49,000 and in consideration of this,

39
 they were also allotted shares (out of the surrendered shares) amounting to Rs. 25,000.
iii. The creditors agreed to reduce their claims to Rs. 30,000
iv. the shares surrendered but not re-issued were cancelled
You are required to draft the necessary journal entries and give the balance sheet of the
company after reconstruction.

ANSWER Preparation of memorandum balance sheets and ascertaining P&L (Debit balance)
Rs. 97,000-
Working Note: Calculation of balance of Surplus A/c
Particulars Credit Particulars Debit
Equity Share Capital (60%) 2,00,000 Fixed Assets 2,00,000
6 % Debentures 1,00,000 Current Assets 65,000
Trade Creditors 50,000 Surplus A/c (loss) (Bal.fig) 97,000
Outstanding Interest on 12,000
Debentures

3,62,000 3,62,000

Journal entries
Date Particulars Dr amt Cr. Amt
Equity Share capital a/c (Rs. 100 each) Dr 2,00,000
Equity Share capital a/c (Rs. 5 each) a/c 2,00,000
Equity Share capital a/c (Rs. 5 each) Dr 1,80,000
Share surrender a/c (Rs. 5 each) a/c 1,80,000
6% Debentrures a/c Dr. 51,000
Outstanding Inte. On Deb a/c Dr 12,000
Capital Reduction a/c 63,000
Share Surrender a/c Dr. 25,000
Equity Share Capita a/c (Given to debentures) 25,000
Sundry Creditors a/c Dr 20,000
Capital Reduction a/c 20,000
Share Surrender a/c Dr 1,55,000
Capital Reduction a/c 1,55,000
Capital Reduction a/c Dr 2,38,000
Profit and Loss a/c 97,000
Fixed Assets 1,04,000
Current Assets 17,000
Capital Reserve 20,000

Liabilities X Ltd Assets X Ltd

Equity shares @ 5 each 45,000 Fixed Asset 96,000
Capital Reserve 20,000 Current assets 48,000
6% Debentures 49,000
Trade Creditors 30,000
1,44,000 1,44,000

40
Qn-20).Consolidation of shares

The following is the B Balance Sheet of Oscar Ltd. as on 31 Dec 2019

Particulars Note no. Amount
1) Equity and liabilities
2) Shareholders’ funds
Share capital 1
50,000 Pref. shares of Rs.10 each fully paid 5,00,000
80,000 Equity shares of Rs.5 each Rs.3.75 paid 3,00,000
Reserves & Surplus.
(2,05,000)
Surplus A/C (Negative balance )
3) Share application money pending allotment
4) Non- current liabilities
5) Current liabilities
Trade payables (creditors) 1,50,000
TOTAL 7,45,000
i. Assets
1) Non-current liabilities
Fixed assets
i. Tangible assets 2
Land and building 60,000
Plant and machinery 2,35,000
ii. Intangible assets(goodwill) 25,000
2) Current assets
Inventories (stock) 1,65,000
Trade receivables(debtors) 2,30,000
Cash and cash equivalents 30,000
TOTAL 7,45,000

The following schemes were adopted.

i. To reduce the pref. shares to shares of rs.8 each fully paid.
ii. To satisfy the arrears of dividend on pref. shares by giving 15% deposit certificates,
maturing at the end of 2 years for Rs.30000.
iii. To reduce the equity shares to shares of Rs.2.50 each, Rs.1.25 paid up and to increase the
authorised equity hare capital to 1,20,000 shares of Rs.2.5 each.
iv. To write off the goodwill and to reduce the value of the plant n machinery by Rs.35000 and
to write off the book debts to the value of RS.25000 which were regarded as bad.
v. To appreciate land and building by Rs.25000.
vi. To cancel the adverse balance in the P&L A/C.
vii. To consolidate all shares into Rs.10 each.
Give journal entries and Balance Sheet after the reconstruction process.

SOLUTION:
JOURNAL Oscar Ltd.
PARTICULARS L/ DEBIT CREDIT
F

41
 6% Cumulative preference share capital …..Dr 1,00,000
To capital reduction 1,00,000
(being the preference shares reduced from rs.10 each to
rs.8 each)
Equity share capital …………………..Dr 2,00,000
To capital reduction a/c 2,00,000
(being the equity shares reduced from rs.3.75 each to
rs.1.25 each)
Land and Building …………………Dr 25,000
To capital reduction 25,000
(being the appreciation in the value of land and
buildings credited to capital reduction)
Capital reduction ………Dr 30,000
To 15% Deposit certificates a/c 30,000
(being the issue of 15% deposit certificates of rs.30,000
to preference shareholders in satisfaction of arrears of
preference dividend out of capital reduction account)
Capital reduction ………………….Dr 2,95,000
To profit and loss a/c 2,05,000
To goodwill a/c 25,000
To plant and machinery a/c 35,000
To debtors a/c (bad) 25,000
To capital reserve a/c 5,000
(being the debit balance of profit and loss a/c, goodwill,
plant and machinery and bad debts written off and the
balance transferred to capital reserve)
Rs.8, 6% preference share capital ……..Dr 4,00,000
Rs.2.50, Equity share capital ………..Dr 1,00,000
To Rs.10, 6% preference share capital 4,00,000
To Rs.10, Equity share capital 1,00,000
(being the 6% preference share of Rs.8 each and equity
share of Rs.2.50 each consolidated into shares of rs.10
each)

OSCAR LTD.

Balance Sheet as at 31st December 2019

Particulars Note
Amount
no.
6) Equity and liabilities
7) Shareholders’ funds
Share capital 1
40,000, 6% Cumulative Preference Shares of Rs.10 each 4,00,000
20,000 Equity shares of rs.10 each, rs.5 per share paid up 1,00,000
Reserves & Surplus.
5,000
(Capital Reserves )
8) Share application money pending allotment
9) Non- current liabilities

42
 Long term borrowing (15% Deposit certificate) 30,000
Current liabilities
Trade payables (creditors) 1,50,000
TOTAL 6,85,000
ii. Assets
3) Non-current liabilities
Fixed assets
iii. Tangible assets 2
Land and Building 60,000
85,000
Add: Appreciation 25,000
Plant and Machinery 2,35,000
Less: Written off as per reconstruction scheme 35,000 2,00,000

iv. Intangible assets

4) Current assets
Inventories (stock) 1,65,000
Trade receivables(debtors) 2,05,000
Cash and cash equivalents 30,000
TOTAL 6,85,000

II. Alteration of share capital

Following are the different ways in which share capital can be altered.
1).Increase in share capital
The company can increase its share capital by issuing new shares if it is provided by
its Articles. If the Articles are silent on this issue the same can be amended to that effect by passing a
Special Resolution. The Journal entries in this case are:
(1) Bank A/C..Dr
To Equity share Application and Allotment
(2) Equity share Application and Allotment A/C.......
To Equity share capital

Eg.:-Vedvyas limited issued 1,00,000 Equity shares of 10 each at par. All the shares were applied for
and allotted. All the moneys were received in tine.
Pass Journal Entries.
Bank A/C.. Dr 10,00,000
To Share Application & Allotment 10,00,000
(For the application money received)
1,00,000x10
Share Application & Allotment A/C... dr 10,00,000
To Share capital 10,00,000
(For the allotment of shares)

2).Consolidation of shares
Consolidation refers to conversion of shares of smaller denomination in to shares of larger
denominations. On consolidation the number of share decreases and there is no change in the
amount of capital. This can be done by a company subject to the provisions of the Articles.
Equity share capital A/c (Old denomination)..
To Equity share capital (New denomination)

43
The distinction is stated by stating the face value of shares.

Eg.:- Vedvyas Ltd, having 1,00,000 Equity shares of Rs 10 each, decides to convert the shares into
equity shares of R 100 each.
Pass Journal Entry.
Equity share capital (Rs 10) A/c. Dr. 10,00,0000
To Equity Share capital Rs 100) 10,00,000
(Being 1,00,000 equity shares of Rs 10 each consolidated in to 10,000 equity shares of R 100 each)

3).Sub-division of shares

Sub-division refers to conversion of shares of larger denomination in to shares of smaller

denominations. On subdivision, the number of share increases and there is no change in the of share
capital. This can be done by a company subject to the provisions of its Articles
Equity share Capital A/c (Old denomination).Dr
To Equity share capital (New denomination)

Eg.:- Vedvyas Ltd, having 1,00,000 Equity shares of 10 each, decided to subdivide the shares in to
shares of R 1 each. Pass Journal Entry.
Equity share capital (Rs 10) A/c. .Dr 10,00,000
To Equity Share capital (Rs 1) 10,00,000
(Being subdivided 1,00,000 equity shares of R 10 each in to 10,00,000 shares of R1 each)

4).Conversion of shares in to stock

A company may convert its shares in to stock or stock in to shares of any denomination.
The distinction between shares and stock is interesting. Shares are generally in round denominations.
But stock may be infractions.
The Journal Entry is:
Bquity share capital A/c .Dr
To Equity stock

Eg.:- Vedvyas Ltd, having 1,00,000 Equity shares of 10 each, decided to convert equity shares in to
equity share stock. Pass Journal Entry
Equity share capital Dr. 10,00,000
To Equity Stock 10,00,000
(Being 1,00,000 equity shares of R 10 each converted in to equity stock)

5). Cancellation of unissued shares

A company may cancel its shares which have not been taken up or agreed to be taken up by
any person and reduce the amount of shares so cancelled. In this case, no entry is required to be
passed. T'he following are the provisions about cancellation of shares:
1.A company must be authorised by its Articles of Association to effect a change
2.A resolution, passed by an extra-ordinary general meeting, must sanction such a change.
3.A notice is to be sent to the Registrar of Companies within 30 days of alteration

Qn-21). Neha Ltd presents you with the following

Neha Ltd BALANCE SHEET) as on 31.3.2019

44
 PARTICULARS NOTE.NO AMOUNT
I. EQUITY AND LIABILITIES
(1)Shareholders Fund:
(i)Share capital:
12% preference shares of Rs.100 each 3,00,000
Equity of Rs 100 each 4,00,000
(ii)Reserve and surplus
(2,70,000)
Surplus A/C (Negative balance )
Preliminary Expenses (25,000 )
Profit prior to incorporation 10,000
(2)Non-current Liabilities
Long term borrowing (12 % Debentures) 3,00,000
(3)Current Liabilities
Trade payables (creditors) 2,00,000
Total
II. ASSETS
(1)Non-current Assets
(i)Fixed: Tangible
Land and Buildings 1,50,000
Plant and Machinery 3,00,000
(ii)Intangible
Goodwill 60,000
Patents 30,000
(iii)Non-Current Investments
(2)Current Assets: Nil
Inventory 2,20,000
Trade Receivables 1,50,000
Cash and Cash equivalents:
Cash at bank 5000
TOTAL

Following scheme of reconstruction was duly approved:

1)10% Preference shares be converted in to 12% Preference shares, the amount being reduced by
30%.
2. Equity shares be reduced to shares of 50 each.
3. Land and Buildings be appreciated by 20%.
4.12% Debentures be reduced by 20% by issuing 15% Debentures of the same amount.
5. All intangible assets and fictitious assets including patents be written off.
6. Utilise profit prior to incorporation, if necessary.
7.Equity shareholders to subscribe new equity shares of Rs 1,00,000, the amount be utilised for
acquiring new plant and machinery.
Give Journal Entries and show the Balance sheet after reconstruction.

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SOLUTION:

JOURNAL Neha Ltd

DATE PARTICULARS L/F DEBIT CREDIT
2018 10% Preference share capital (rs.100) ……Dr 3,00,000
March To 12% Preference share capital (rs.70) 2,10,000
31 To Reconstruction a/c 90,000
(10% preference share of rs.100 each being reduced by
30% on a scheme of reconstruction)
Equity share capital (rs.100) ……………….Dr 4,00,000
To Equity share capital (rs.50) 2,00,000
To reconstruction a/c 2,00,000
(Equity shares of rs.100 each being reduced to share of
rs.50 each on a scheme of capital reduction)
12% Debentures ………………….Dr 3,00,000
To 15% Debentures 2,40,000
To Reconstruction a/c 60,000
(Debentures being reduced by 20% on a scheme of
reconstruction )
Land and building …………Dr 30,000
To reconstruction a/c 30,000
(For appreciation in the value of land and building)
Profit prior to incorporation 5,000
a/c………………………………………Dr 5,000
To reconstruction a/c
(profit prior to incorporation utilised for reconstruction)
Reconstruction …………………………….Dr 3,85,000
To Goodwill 60,000
To Patents 30,000
To Preliminary expenses 25,000
To Surplus a/c, Negative Balance 2,70,000
(Intangible and fictitious assets written off)
Bank ……………………………………………….Dr 1,00,000
To Equity share capital 1,00,000
(For the issue of fresh equity shares)
Plant and Machinery …………………..Dr 1,00,000
To Bank 1,00,000
(For the purchase of new machinery)

Reconstruction A/c
PARTICULARS AMT PARTICULARS AMT
To Goodwill 60,000 By 10% Preference share capital 90,000
To Patents 30,000 By Equity share capital 2,00,000
To Preliminary expenses 25,000 By 12% Debentures 60,000
To Surplus A/c 2,70,000 By Land and Building 30,000
By Profit prior to incorporation 5,000
(bal.fig)
3,85,000 3,85,000

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 Neha Ltd BALANCE SHEET (AND REDUCED) as on 31.3.2019

PARTICULARS NOTE.N AMOU

O NT
I.EQUITY AND LIABILITIES
(1)Shareholders Fund:
(i)Share capital:
12% preference 2,10,000
Equity (2,00,000+1,00,000) 3,00,000
(ii)Reserve and surplus
Profit prior to incorporation 5,000
(2)Non-current Liabilities
Long term borrowing (15% Debentures) 2,40,000
(3)Current Liabilities
Trade payables (creditors) 2,00,000
Total 9,55,000
TOTAL 9,55,000
I. ASSETS
(1)Non-current Assets
(i)Fixed: Tangible
Land and Buildings 1,80,000
Plant and Machinery 4,00,000
(ii)Intangible Nil
(iii)Non-Current Investments Nil
(2)Current Assets:
Inventory 2,20,000
Trade Receivables 1,50,000
Cash and Cash equivalents:
Cash at bank 5000
TOTAL

Short Answer Questions

1)What do you mean by Internal Reconstruction? ( M.G. May 2019 )
2)What is Consolidation of shares? Give example.( M.G. 2015 )
3)What is sub-division of shares? Illustrate with an example.( M.G. 2016 )
4)What is Capital Reduction?
5)What do you mean by surrender of shares?
6)What do you mean by conversion of shares?
7)What is External Reconstruction? Give an example.
8) What is capital reduction scheme ? ( M.G. 2015 )

47
9)Explain when internal reconstruction takes place (.M.G. May 2019 )
Short Essay Questions
1)What is Internal Reconstruction? What are its objectives?
2)What is Alteration of Share Capital? Explain the provisions in the Companies Act for alteration of
share capital ? ( M.G. Mar 2017 )
3)What do you mean by Reduction of Share Capital? Explain briefly the procedure for Reduction of
Share Capital.
4)Distinguish between Internal Reconstruction and External Reconstruction.( M.G. 2015 )
5)What are the different ways of alteration of share capital?
6)What are the different methods of Internal Reconstruction.
7)Distinguish between consolidation and sub-division of shares.
8)Distinguish between Amalgamation and Internal Reconstruction.
9.What is alteration of capital ?What are the different methods of it ?( M.G. 2016 )

Multiple Choice

1. The company must pass

A a members resolution to reduce the share capital B an ordinary resolution to reduce the share
capital C a special resolution to reduce the share capital.

2. Capital reduction must be authorised by its

A articles of association B memorandum of association C none of the above.

3. Capital reduction scheme is worth considering

A if the company is small B if the company has recovery prospects

C if the company has no prospects.

4. The company must apply for an order confirming the reduction

A to the Supreme Court B to the High Court C to the Tribunal

5. The company has to deliver to the Registrar for registration :

A a certified copyt of the Tribunal’s order

B a minute approved by the Tribunal showing the details of the shares

C a certified copy of the Tribunal’s order and a minute approved by the Tribunal showing the details
of the shares

Multiple Choice
48
1. C; 2. A; 3. B; 4. B. 5. C

L Multiple Choice:
Choose the correct answer to each of the following:
1. Alteration of Share Capital is affected by a company if it is authorized by the:
(a) Memorandum of Association (b) Articles of Association (c) Shareholders
(d) Board of directors.
2. The Capital reduction Scheme can be implemented only after getting permission from:
(a) Central Govt. (b) Controller of Capital issues (c) Shareholders
(d) The competent court
3. In case of Sub-division of share capital, the total number of shares:
(a) Does not change (b) Decreases (c) Increases (d) Decreases Proportionately,
4. When a company converts its equity shares into the capital stock, then the account to be
credited is:
(a) Preference Share capital a/c (b) Equity share capital a/c (c) Equity capital stock a/c
(d) No entry is required
5. After writing off of all accumulated losses, the balance in capital reduction a/c, if any, should
be transferred to:
(a) Share capital a/c (b) Capital Reserve a/c (c) General Reserve a/c (d) Goodwill a/c
6. Any gain on revaluation of the assets at the time of internal Reconstruction will be credited
to:
(a) Capital Reserve a/c (b) Capital Reduction a/c (c) Share Capital a/c (d) General Reserve a/c
7. In the scheme of reorganization, number of shares surrendered by shareholders is
transferred to:
(a) Capital Reserve a/c (b) General Reserve a/c (c) Surrendered shares a/c
(d) Capital Reduction a/c
8. Any decrease in the value of assets, at the time of internal reconstruction, will be charged to:
(a) Goodwill a/c (b) Capital reduction a/c (c) Revaluation a/c (d) Share capital a/c
9. A company has issued capital of 40,000 equity shares of Rs. 10 each fully paid. It
decides to convert its capital into 80,000 equity shares of Rs. 5 each. It is a case of
(a) Decrease in unissued share capital (b) Sub-division of Share capital
(c) Consolidation of share capital (d) None of the above.
(Ans: 1. (b); 2. (d); 3. (c); 4. (e); 5. (b); 6. (b); 7. (c); 8 (b); 9. (b)

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1. Choose the correct answer from the choices given.
1.The balance in the Capital Reduction account is transferred to
a. General Reserve account b. Capital Reserve account c. Goodwill account
d. Capital account
2. The reduction of share capital requires the permission of the
a, Central Government b. Court c. SEBI d. Reserve Bank of India
3.The accumulated losses under the scheme of internal reconstruction are written off against
a. Share capital account b. Capital Reduction account c. Profit and Loss account
d. None of these
4. Reconstruction account is used in the case of
a. external reconstruction b. internal reconstruction c. amalgamation d. absorption
5. On consolidation of shares, the total number of shares of the company
a. decreases b. Increases c. docs not change d changes proportionately
6. On reduction of capital, the amount sacrificed by shareholders is credited to
a. capital reserve account b. capital reduction account c. profit and loss account d. none of these
7. Preference shareholder's sacrifice of undeclared preference dividend is credited to
a. preference share capital account b. capital reduction account d. none of these
c. profit and loss account
(Ans: 1.b 2. b 3. b 4.b 5. a 6.b 7. d)
Fill in the blanks.
1.........is resorted to write off past accumulated losses.
2.Capital Reduction account is also called -............
3.The process of conversion of shares of lower denomination in to shares of higher denomination is
known as.................
4.Cancellation of unissued share capital does not amount to - ….........of capital.
5.Confirmation of the ..............- is required for reduction of share capital.
6.No journal entry is required for the cancellation of .................share capital.
7.Reconstruction account is used in the scheme of.................
8.Claim foregone by debenture holders should be transferred to................
(Ans: 1. Internal reconstruction 2. Reorganization account 3. Consolidation of shares 4. Reduction 5.
Court 6. Unissued 7. Internal reconstruction 8. Capital reduction account)

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I. Multiple Choice Questions
1. Alteration of share capital is affected by a company if it is authorised by the:
(a) Register of Members (b) Articles of Association
(c) Minutes Book (d) Board of Directors
2. The Capital Reduction Scheme can be implemented only after getting permission from:
(a) SEBI Board (b) Controller of Capital Issues
(c) Shareholders (d) Competent Court
3. In case of sub-division of share capital, the total number of shares:
(a) Do not change (b) Decreases
(c) Increases (d) Increases disproportionately
4. When a company converts its equity shares into the capital stock, then the account to be credited
is:
(a) Preference Share Capital A/c (b) Equity Share Capital A/c
(c) Equity Capital Stock A/c (d) No entry is required
5. After writing off of all accumulated losses and fictitious assets, the balance in capital reduction
accounts should be transferred to:
(a) Share Capital A/c (b) Capital Reserve A/c
(c) General Reserve A/c (d) Goodwill A/c
6. Any gain on revaluation of the assets at the time of internal reconstruction will be credited to:
(a) Capital Reserve A/c (b) General Reserve A/c
(c) Surrendered Shares A/c (d) Capital Reduction A/c
7. In the scheme of reorganisation, amount of shares surrendered by shareholders is transferred to:
(a) Capital Reserve A/c (b) General Reserve
(c) Surrendered Shares A/c (d) Capital Reduction A/c
Alteration of Share Capital and Internal Reconstruction 9.47
8. Any decrease in the value of assets, at the time of internal reconstruction, will be charged to:
(a) Capital Reserve A/c (b) Capital Reduction A/c (c) Revaluation A/c (d) Shares Surrendered A/c
9. A company has issued capital of 60,000 equity shares of `10 each, fully paid. It decides to convert
its capital into 1,20,000 equity shares of `5 each. It is a case of:
(a) Decrease in Unissued Share Capital (b) Sub-division of Share Capital
(c) Consolidation of Share Capital (d) None of the Above

51
[Ans: 1. (b); 2. (d); 3. (c); 4. (c); 5. (b); 6. (b); 7. (c); 8. (b); 9. (b)]
II. True or False
1. Internal reconstruction refers to the reorganisation of capital structure of a company with the
liquidation of the company.
2. In case the unissued share capital is to be decreased, the share capital account need not be
cancelled.
3. A company is free to reduce or extinguish the uncalled liability of its members.
4. A company is not allowed to convert its fully-paid shares into stock.
5. Reconstruction Account is an alternative term for Capital Reduction Account.
6. The balance in securities premium account can be transferred to capital reduction account.
7. Cancellation of unissued capital is also a case of capital reduction.
8. If the balance in capital reduction account is not adequate enough to write off accumulated losses,
any reserve in the liabilities side can be used to the extent required.
9. Claim foregone by debenture holders should not be transferred to capital reduction account.
[Ans: True: 2, 5,6, 7, 8;False: 1, 3,4, 9]

III. Fill in the Blanks

1. Sub division of shares does not affect the amount of ________.
2. A company can convert fully paid ________ into stock and also reconvert ________ back into
shares.
3. Cancellation of shares not taken up does not amount to ________ of capital.
4. A company can carry out ________ only after a court approves a scheme.
5. Any debit balance in profit and loss account represents ________ and such losses will be written
off as part of a capital organisation.
6. Alteration of shares of smaller amount into shares of larger amount is called _______ of share
capital.
7. Consent of ________ is not required if capital reduction involves the writing off of paid-up capital
not represented by available assets.
8. In a scheme of capital reduction, any new liability to be provided for, such as arrears of preference
dividend, must be met out of _______ account.
9. Reserves of the company can be utilised in meeting the accumulated _______ at the time of
internal reconstruction.
10. After giving permission for capital reduction, the Court may order the use of the words _______
after the name of the company, for a specified period.

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[Ans: 1. Share capital; 2. Shares, stock; 3. Reduction;4. Capital reduction; 5. Accumulated losses; 6.
Consolidation; 7.Creditors; 8. Capital reduction; 9. Losses; 10. and reduced]

1.( M.G. 2018 )A company has equity share capital of Rs 5,00,000 consisting of 5,000 shares of Rs
100 each;

1) It is resolved to sub divide the share into shares of Rs 10 each

2) To ask the shareholders to surrender 50% of their shares

3) To issue 60% of the surrendered shares to 15% debenture holders of Rs 2,00,000 in full
settlement of their claims

4) To cancel the unissued surrendered shares.

Give journal entries in the books of the company.

53