Chapter II

INTERNAL RECONSTRUCTION

P-1
The following are the assets and liabilities of E Ltd as on 31-03-2020:
Liabilities Rs Assets Rs
5,000 6% Preference shares of Rs 5,00,000 Goodwill 55,000
100 each
40,000 Equity shares of Rs 10 each 4,00,000 Patents 45,000
Plant 2,55,000
Capital reserve 25,000 Building 2,15,000
5 % Debenture 2,00,000 Furniture 60,000
Accrued interest on debenture 30,000 Stock 90,000
Creditors 1,55,000 Debtors 75,000
Bank balance 12,500
Cash balance 2,500
Profit & Loss A/c 4,80,000
Discount on debentures 20,000
13,10,000 13,10,00
0
Note: The preference dividend was in arrear for the last three years.
The following scheme of reconstruction was prepared and approved by the court
1. The preference shares to be converted into 7 % Preference shares of Rs 50 each fully
paid.
2. Equity shares to be reduced to Rs 3 each fully paid.
3. Debenture holders agreed to waive 50 % of the accrued interest.
4. Arrears of preference dividend to be cancelled
5. Creditors agreed to waive 30 % of their claims and converted part of their remaining dues
by accepting Equity shares of Rs 30,000.
6. The assets were revalued as under :
Building Rs 2, 50,000
Plant 2, 25,000
Furniture 55,000
Stock 80,000
Debtors 70,000
7. After writing off the fictitious assets, patents to be written off as far as possible.
8. Capital reserve to be continued in the Balance sheet.
Pass Journal entries and prepare Capital reduction A/c
P-2
Following are the assets and liabilities of B Ltd as on 31-03-2020:
Liabilities Rs Assets Rs
8,000 Equity share capital of Rs 100 each 8,00,000 Goodwill 1,50,000
3,000 5 % Preference shares of Rs 100 3,00,000 Plant & Machinery 2,50,000
each
Secured loan 50,000 Building 4,50,000
Creditors 1,25,000 Patents 45,000
Bank overdraft 1,05,000 Stock 1,35,000
Debtors 90,000
Cash at bank 30,000
Profit & Loss A/c 2,10,000
Preliminary 20,000
expenses
13,80,00 13,80,00
0 0
The company took the following scheme of reconstruction:
1. Equity shares to be reduced to shares of Rs 50 each fully paid.
2. Preference shares were converted into 7 % preference shares of Rs 70 each fully paid.
3. Creditors to give up 1/5th of their claim and balance were paid off immediately.
4. 5,000 Equity shares of Rs 50 each were issued for cash.
5. Expense of reconstruction were Rs 7,500
6. The company decided to write off Goodwill, Profit & Loss A/c, Patents and Preliminary
expenses.
7. Write down Plant & machinery by Rs 45,000, stock by Rs 20,000 and create provision
for doubtful debts @ 5 %.
Pass Journal entries and prepare Capital reduction a/c

P-3
The following are the assets and liabilities as on 31-12-2019:
Liabilities Rs Assets Rs
20,000 Equity shares of Rs 100 each 20,00,00 Delhi works 16,00,00
0 0
18,000 7 % Preference shares of Rs 100 18,00,00 Madras Works 12,00,00
each 0 0
“ A” 8% Debentures 3,00,000 Stock on hand 9,00,000
(secured on Delhi works)
“B” 8% Debentures 3,50,000 Debtors 5,00,000
(secured on Madras works )
Creditors 2,50,000 Cash at bank 1,00,000
Bills payable 2,00,000 Invention 2,00,000
expenses
Profit & Loss A/c 4,00,000
49,00,00 49,00,00
0 0
The scheme of reconstruction was duly approved:
1. Equity shares were to be reduced to Rs 10 each fully paid.
2. Preference shares were to reduced to shares of Rs 80 each fully paid dividend to be raised
to 10%.
3. Debenture holders to forego their interest Rs 52,000 which is included in creditors.
4. “B” Debenture holders agreed to take over the Madras Work at Rs 5, 00,000 and to
accept an allotment of 3,000 Equity shares of Rs 10 each at par. They settled their
account by paying necessary amount by crossed cheque to the company.
5. Stock on hand was to be written down by Rs 2, 00,000 and provision for doubtful debts
are created to the extent of Rs 25,000.
6. Any balance arising out of the above points to be applied as to 2/3rd to write off the value
of Delhi works and 1/3rd to Capital reserve.
Pass Journal entries and Balance sheet after the scheme is implemented.

P-4 The following is the assets and Liabilities of A Ltd as on 31/3/2020

Liabilities Rs. Assets Rs.
Equity share s of Rs. 10each 8,00,000 Goodwill 4,50,000
9% Preference shares of Rs. 10each 4,00,000 Land 3,00,000
10% debentures 5,00,000 Plant and Machinery 4,00,000
Interest accrued on debentures 50,000 Furniture 2,10,000
Unsecured Loan 75,000 Stock 60,000
Bank overdraft 15,000 Debtors 80,000
Creditors 60,000 Profit and Loss A/c 4,00,000
18,00,000 18,00,000
The following scheme of reconstruction was adopted
1. Intangibles and fictitious assets are to be written off
2. Equity shares to be reduced to Rs. 4 each fully paid.
3. Preference shares to be reduced to Rs. 6 each fully paid
4. Debentures holders waive 50% of accrued interest.
5. 80% of unsecured loan reduced by 40%.
6. Directors refunded Rs. 30,000
7. Plant and Machinery reduced to Rs. 1,20,000
8. Stock reduced by Rs. 15,000
9. 20% of the debtors were written off.
 10. Furniture reduced by Rs. 63,000
11. Land appreciated by 300%.
12. Unrecorded asset sold for Rs20,000.
13. Unrecorded Liability paid Rs. 30,000.
14. 50% of the creditors reduced to 50% of the book value.
Pass Journal entries and Prepare Capital Reduction Account.

P-5 The Summary Balance Sheet of HK Ltd. As at 31st March 2020 was as under:
Liabilities Rs Assets Rs.
1,00,000 Equity shares of Rs. 10each 10,00,000 Goodwill 2,00,000
fully paid Other Fixed Assets 9,00,000
10% 4,000 Debentures of Rs. 100 each 4,00,000 Profit and Loss a/c 5,00,000
Interest on Debentures 40,000
Sundry Creditors 1,60,000
16,00,000
16,00,000
For the purpose of reconstruction of the company, necessary resolutions are passed on the
following lines:
(1) The Equity shares are to be sub-divided into shares of Re. one each and each shareholder
shall surrender 60% of his holding.
(2) Out of the surrendered shares, 6,000 shares will be converted to 8% Preference shares of
Rs. 10 each.
(3) Debentures holders will reduce their claims by Rs. 1,40,000 and in consideration they are
to get the entire Preference Shares Capital converted from shares surrendered.
(4) Creditors claims are to be reduced to the extent of Rs. 1,00,000 and in consideration they
are to receive Equity Shares of Re. 1 each amounting to Rs. 40,000 from the shares
surrendered.
(5) Goodwill and Profit and Loss Account (Dr. ) are to be written off fully.
(6) The remaining shares surrendered shares shall be cancelled.
You are required to give journal entries for the above and Prepare Baalance Sheet of the
company after reconstruction.

P-6
The ledger balances of Feel bad Ltd include
Building Rs 6,10,000, Furniture Rs 2,00,000, Computer Rs 3,00,000, Debtor Rs 3,00,000,
Preliminary expenses Rs 20,000, Cash at bank Rs 80,000, Bills Receivable Rs 2,50,000, Stock
Rs 4,000, 8% , 2,000Preference shares of Rs 100 each, 80,000 Equity shares of Rs 10 each, A
10% Debentures of Rs 4,00,000, B 12% Debentures of Rs 5,00,000, Outstanding interest on
debentures Rs 1,00,000, Creditors Rs 4,00,000, Bills payable Rs 50,000, Outstanding audit fees
Rs 50,000, Profit & Loss A/c ?
The company incurred heavy loss and the following scheme of reconstruction is agreed upon:
 1. 8% preference shares were reduced by Rs 20 per share
2. Equity shares were reduced by Rs 5 per share
3. To settle A 10%Debentures the company issued new 11% Debentures of Rs 2,00,000 and
they agreed to forgo their interest.
4. To settle the claim of B 12% Debentures the company issue 13% Debentures of Rs
5,00,000 and outstanding interest was paid.
5. To write of fictitious asset and debit balance of Profit & Loss A/c
6. Directors refunded Rs 60,000 fees previously received by them.
7. Computer was written down by Rs 20,000
Show Journal entries
Prepare Balance sheet after reconstruction

P-7
The assets and liabilities as on 31st March, 2020:
Liabilities Rs Assets Rs
50,000 Equity shares of Rs 10 each 5,00,000 Fixed assets 5,60,000
fully paid
3,000 8% Preference shares of Rs 100 3,00,000 Patents 40,000
each fully paid
9% Debentures 3,00,000 Investment (Market value Rs 32,500
27,500)
Accrued Interest on debenture 54,000 Debtors 60,000
Bank overdraft 70,000 Stock 1,64,500
Interest on bank overdraft 7,000 Profit & Loss A/c 4,14,000
Creditors 40,000
12,71,000 12,71,000

Capital Reduction A/c

J.E.No. Particulars Rs J.E.No. Particulars Rs
6 To Bank A/c 18,500 1 By Equity share capital 3,50,000
(50,000 x 7)
7 To Profit & Loss 4,14,000 2 By 8% preference share capital 90,000
A/c (3,000 x 30)
7 To Patents 40,000 3 By Debenture Interest 54,000
8 To Investment 5,000 4 By Interest on bank overdraft 3,500
9 To Debtors 15,000 5 By Creditors 5,000
9 To Fixed asset 10,000
5,02,500 5,02,500

Bank A/c
J.E.No. Particulars Rs J.E.No. Particulars Rs
8 To Investment A/c 27,500 By Balance b/d 70,000
11 To Equity share 3,50,000 2 By 8% preference share 2,10,000
call A/c capital
4 By Interest on bank overdraft 3,500
5 By Creditors 35,000
6 By Capital reduction A/c 18,500
By Balance c/d 40,500
3,77,500 3,77,500
 Pass Journal entries from the above accounts prepared.
 Prepare revised Balance Sheet of the company after reconstruction.
P-8
The assets and liabilities of B Ltd as at 31-03-20 are as follows:
Liabilities Rs Assets Rs
1,00,000 Equity shares of Rs 20 each 10,00,00 Goodwill 80,000
Rs 10 paid up 0
8 % 8,000 Preference shares of Rs 100 6,00,000 Fixed assets 11,20,00
each Rs 75 paid up 0
9 % Debentures 6,00,000 Investment(market value 65,000
Outstanding interest 1,08,000 7,08,000 Rs55,000)
Loan from ICICI Ltd 1,50,000 Stock 4,29,000
Outstanding interest 15,000 1,65,000
Creditors 84,000 Debtors 1,20,000
Bills receivable 3,00,000
Profit & Loss A/c 4,28,000
25,42,00 25,42,00
0 0
Preference dividend is in arrear for 1 year.
1. Preference shareholders agreed to give up the claim inclusive of dividends to the extent
of 30 % and balance to be paid off.
2. Debenture holders agreed to give up their interest in consideration of their rate of interest
enhanced to 10 %.
3. ICICI Ltd agreed to give up 50 % of their interest outstanding in consideration of their
claim being paid off at once.
4. Creditors would like to grant a discount of 5 % if they are paid off immediately.
5. Balance of Profit & Loss A/c, Goodwill and 25 % of the debtors to be written off.
6. Fixed assets to be written down by Rs 14,000.
7. Investment reflected at their market value.
8. Cost of reconstruction is Rs 3,350.
 9. To the extent required, Equity shareholders suffer on reduction of their rights without
change in face value.
10. The equity shareholders bring in necessary cash against their partly paid shares to leave a
bank balance of Rs 20,000.
 Pass Journal entries
 Prepare Capital reduction A/c and Bank A/c

P-9
The assets and liabilities of Lokpal Ltd as at 31st March, 2020
Liabilities Rs Assets Rs
10% Preference Share capital of Rs 10 10,00,000 Fixed assets 38,60,000
each
Equity share capital of Rs 10 each 50,00,000 Goodwill 18,00,000
10% Debentures of Rs 100 each 4,00,000 Discount on debenture 40,000
Unsecured loan 4,00,000 Profit & Loss 25,00,000
Bank overdraft 6,00,000
Creditors 8,00,000
82,00,000 82,00,000
The scheme of reconstruction was as follows:
1. Rs 100 10% Debentures are to be exchanged for Rs 50 12% Debentures and for
remaining Rs 50 10% preference shares of Rs 10 each.
2. 10% preference shares of Rs 10 including those issued to debenture holders under clause
(1) are to be reduced to Rs 6 each and dividend raised to 12%.
3. Equity shares were to be reduced to Rs 2 and then consolidated into shares of Rs 10 each.
4. Equity shares were subscribed at par and money received is Rs 10,00,000.
5. Overdraft is paid off.
6. Loss, goodwill and debenture discount are to be written off first and any balance to be
utilized to write down fixed assets.
Prepare the following ledger accounts
 10% Debenture A/c
 10% Preference share capital A/c
 Equity share capital A/c
 Capital reduction a/c
 Bank A/c

P-10
The assets and liabilities of Asian Cup Ltd as on 31st March, 2020 is as follows:
Liabilities Rs Assets Rs
12,000 Equity shares of Rs 60 each Rs 30 3,60,000 Land & Building 2,40,000
paid up
10% Debentures 6,00,000 Furniture 1,60,000
15% Debentures 12,00,000 Debtors 2,20,000
Creditors 9,00,000 Stock 1,60,000
Bank 5,40,000
Profit & Loss A/c 17,40,000
30,60,000 30,60,000
Mr. A holds 10% Debenture of Rs 6,00,000 , 15% Debenture of Rs 6,00,000 and is also
unsecured creditors Rs 1,80,000.
Mr. B holds 15% Debenture Rs 6,00,000 and unsecured creditor Rs 1,20,000
The following scheme of reconstruction is proposed
1. Mr. A is to cancel Rs 4,20,000 of the total debt owing to him, advance a cheque of Rs
60,000 and to take new debenture of Rs 10,20,000 in satisfaction of all his claims.
2. Mr. B to accept Rs 1,80,000 in satisfaction of all his claims.
3. Unsecured creditors other than Mr. A and B are to accept the allotment of 40,000 Equity
shares of Rs 7.50 each in satisfaction of 75% of their claim and balance is to be
postponed and payable after four years.
4. Uncalled capital is to be called up in full and Rs 52.50 per share cancelled thus making
the share of Rs 7.50 each.
 Pass Journal entries for the above scheme
 Prepare Capital reduction A/c and Bank A/c
 Balance Sheet after reconstruction