Chapter : Internal Reconstruction

Q.1. Following is the balance sheet of Good Luck company Ltd. as on 31 st March
2016:
Capital &
Liabilities
Authorised
Capital
10,000 6 %
Preference shares
of Rs. 100 each
10,000 Ordinary
shares of Rs. 100
each
Paid up Capital 7500 6 %
Preference shares
of Rs. 100 each
fully paid
5,000 Ordinary
shares of Rs. 100
each fully paid
Sundry creditors
Bank Overdraft

Rs.

Property & Assets

Rs.

10,00,000

Patent at cost

8,50,000

10,00,000

Leasehold
Property

1,30,800

7,50,000

Plant & Machinery

Sundry Debtors

42,200
76,500

5,00,000

Stock in Trade

55,000

30,000
20,000

Cash on Hand
Discount on issue
of shares
Preliminary
expenses
Profit & Loss
Account

500
18,000

13,00,000

12,000
1,15,000
13,00,000

The company suffered heavy losses and was not getting on well. A scheme of
reconstruction was adopted and sanctioned and it was agreed that:
a) That preference shares be reduced to an equal number of fully paid shares
of Rs. 50 each
b) The ordinary shares be reduced to an equal number of shares of Rs. 25
each fully paid
c) The amount is made available as above be used to write of balance of all
fictitious assets, Rs. 30,800 of leasehold premises, Rs. 15,000 of stock,
20% of Plant and Machinery and Debtors and the balance available if any
of Patents.
You are required to pass journal entries in the books of the company and prepare
capital reduction account.

Q.2. The following is the Balance sheet of Shri td. As on 31 st March, 2016:
Liabilities
13% cum.

Rs.
1,00,000

Assets
Fixed Assets

Rs.
15,00,000

Preference shares
of Rs. 100 each
Equity shares of
Rs. 10 each
8% Debentures
Current Liabilities
Provision for
Taxation

7,00,000

Current Assets

35,00,000

3,00,000
39,00,000
3,00,000

Profit & Loss A/c

3,00,000

53,00,000

53,00,000

The following scheme of reorganisation is sanctioned:

1)
2)
3)
4)

Fixed assets are to be written down by 1/3.

Current assets are to be revalued at Rs. 27,00,000
Company paid the tax of Rs. 4,00,000
One of the creditors of the company, to whom the company owes RS.
25,00,000 decides to forego 50% of his claim
5) The rate of interest on debentures is increased to 11%. The debentureholders surrender their existing debentures of Rs. 100 each and exchange
the same for fresh debentures of Rs. 75 each.
6) All existing equity shares are reduced to Rs. 5 each fully paid up.
7) All preference shares are reduced by Rs. 75 each fully paid up.
Pass Journal entries and Prepare Capital reduction Account.
Q.3. The summarized Balance sheet of M/s Koyal Ltd. Is given below:
M/s Koyal Ltd.
Balance sheet as on 31st March, 2015
Liabilities
50,000 Eq. shares
of Rs. 10 each
6,000 8 %
Preference shares
Capital of Rs. 100
each
Provision for Tax

Rs.
5,00,000

Assets
Plant & Equipment

Rs.
1,80,000

6,00,000

Investment
(Market value
8,00,000)

7,60,000

40,000
Stock
11,40,000
Note: Preference Dividend in arrears for 3 years

2,00,000
11,40,000

Adjustments:
a) Plant & Equipment having book value of Rs. 80,000 is obsolete, this is sold
as scrap for Rs. 16,000
b) Stock includes items valued at Rs. 48,000 which is sold at a loss of 50%.
c) Tax liability settled at Rs. 45,000
d) The expenses paid for framing and implementing scheme is Rs. 8000
e) The equity share shall be reduced to Rs. 3 each. However, the face value
will remain the same.
f) Arrears of preference dividend is to be reduced to one years dividend
which is paid in cash.
g) Investment realized at market value.

You are required to pass necessary journal entries and re-draft the Balance
Sheet.

Q.4. Suresh Ltd. has been suffering heavy losses in the past. It is now considered
that the worst is over and as sound re-organisation will enable its business
successfully in the future. The balance sheet of the company immediately before
the reconstruction is as follows
Balance Sheet as on 31st March, 2015
Liabilities
Share Capital
Authorised Capital
20,000 Eq. shares
of Rs. 100 each
5,000 10% Pref.
Shares of Rs. 100
each
Issued Capital
10,000 Eq. shares
of Rs. 100 each
2,000 10% Pref.
Shares of Rs. 100
each
(Dividend in
arrears for 5 years)
12% Debentures of
Rs. 100 each
Sundry Creditors
Liabilities for
Income Tax

Rs.

20,00,000
5,00,000

10,00,000
2,00,000

Assets
Goodwill
Fixed Assets
Stock in Trade
Sundry Debtors
Investment
Cash at bank
Preliminary Exps.
(not written off)
Discount on issue
of shares
Profit & Loss A/C

Rs.
3,00,000
15,85,000
95,000
50,000
20,000
12,000
5,000
3,000
12,90,000

16,60,000
4,80,000
20,000

33,60,000

33,60,000

The following scheme of reconstruction was agreed upon and duly confirmed by
court
a. The equity shares shall be reduced to the shares of Rs. 10 each, Rs. 5 per
share being paid up.
b. The preference shareholders shall forego 90% of their claims in shares and
the remaining shares shall be converted to 12% preference shares of Rs.
10 each, while their claim for arrears of dividend shall be reduced to one
years dividend and the same shall be discharged by the issue of fully paid
equity shares.

c. The debenture holder agreed to have 60% of their claims which shall be
discharged by the issue of 13.5% debentures of Rs. 100 each
d. The sundry creditors are required to forego 60% of their claims
e. The assets to be revalued: Fixed Assets Rs. 12,00,000 , Stock in Trade Rs.
70,000, Sundry Debtors Rs. 40,000, Investment Rs. 10,000
f. Inorder to provide sufficient working capital the equity shareholders are to
pay the balance amount due against each share
Show Journal entries in the books of the company and also the Balance
Sheet after implementation of the scheme

Q.5. The summarised Balance sheet of M/s Sai Ltd as on 31 st March, 2014
Liabilities
10% Pref. Shares of
Rs. 10 each
Eq. shares of Rs.
10 each
10% convertible
debentures of Rs.
100 each
Bank Overdraft
Sundry Creditors
Bills payable

Rs.
5,00,000
10,00,000

4,00,000
3,20,000
3,00,000
50,000

Assets
Goodwill
Land & Building
Furniture
Investment
Stock
Sundry Debtors
Bills receivable
Profit & Loss A/C

25,70,000

Rs.
2,00,000
10,00,000
1,25,000
4,00,000
1,80,000
2,20,000
25,000
4,20,000

25,70,000

The scheme of reconstruction as approved by court

a. Each existing equity shares shall be reduced to the shares of Rs. 4 each
fully paid.
b. Each existing preference shares to be reduced to Rs. 8 each, however face
value remain unchanged
c. Company made a fresh issue of equity shares to extent of Rs. 5,00,000
d. Goodwill and debit balance of Profit & Loss account to be written off
e. Land & building to be reduced by Rs. 6000
f. Value of Investment to be reduced to Rs. 3,80,000
Show Journal entries regarding reduction, prepare Capital Reduction Account
and resulting summarised Balance Sheet as on 31-3-2014.