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Capital Reconstruction Additional Illustrations

Question 1
The balance sheet of Ali as on 31st Dec, 2012 is as follows:
Balance Sheet

Equities Assets
Authorized capital Machinery 165,000
72,000 shares of RM10 each 720,000 Patents 201,000
Paid up capital Equipment 75,000
54,000 shares of RM10 each 540,000 Preliminary expenses 15,000
Accounts Payable 36,000 Inventory 24,750
Accrued Liabilities 12,000 Accounts Receivables 14,040
Cash 180
Profit & Loss 93,000

The special resolution for capital reduction has been passed and confirmed as per following
details:
1. RM10 shared are to be reduced to RM6 for the same number of shares.

2. The amount of reduction should be utilized for:

a. the balance of the profit and loss account and preliminary expenses.
b. machinery to be reduced to RM100,000.
c. RM9,000 write off against inventory.
d. Patents should be reduced to RM167,000.

Required:
Pass the journal entries in the books of Ali.
Solution

Description Debit Credit

1. To record capital reduction by RM 4 per share
RM10 Share capital 540,000
RM6 Share capital 324,000
Capital reduction 216,000
2. Write-off various assets account in reconstruction
Capital reduction 216,000
Profit and Loss account 93,000
Machinery 65,000
Preliminary expenses 15,000
Patents 34,000
Inventory 9,000

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Question 2
Teguh is a private limited company engaged in telecommunication business. The statement of
financial position for Teguh as at 31st December, 2012 is as follow:

Assets RM Liabilities RM
Cash 15,000 Accounts payable 75,000
Accounts receivable 250,000
Inventory 50,000 Authorized Capital
Authorized share capital
Investment 100,000 250,000 ordinary shares 2,500,000
@ RM 10 each
Preliminary expenses 25,000
Goodwill 35,000 Paid-up capital
10,000 shares @ 10 RM
Profit & loss 150,000 1,000,000
each
Plant & machinery (Net) 500,000 Share premium 50,000
Total 1,125,000 Total 1,125,000

The following scheme of reconstruction was agreed upon and implemented on July 31, 2013.
1. Ordinary shares of RM 10 each are to be reduced to an equal number of fully paid shares
of RM 5 each.
2. Share premium was utilized to accommodate the reconstruction.
3. Investment was sold at loss for RM 90,000.
4. The account thus available will be utilized to write off preliminary expenses, profit & loss,
and goodwill completely.
5. Accounts receivables are not estimated to be recovered fully. Estimated to realize RM
200,000.
6. Inventory is valued at RM 40,000 due to lower net realizable value.
7. Plant & machinery are assigned a lower book value of RM 300,000.
Required
a) Entries in general journal to give effect to the above scheme
b) Revised statement of financial position of Teguh after the exercise.

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Question 2 - Solution
Journal entries

1. To record capital reduction by RM 5 per share Debit Credit

RM10 ordinary share capital 1,000,000

RM 5 ordinary share capital 500,000

Capital reduction 500,000

2. To close premium account:

Share premium 50,000

Profit & loss account 50,000

3. In order to record the sale of investment at a loss:

Loss on sale of investment 10,000

Cash 90,000

Investment 100,000

4. Write-off various assets account in reconstruction:

Capital reduction 500,000

Preliminary expenses 25,000

Loss on sale of investment 10,000

Profit & loss 100,000

Goodwill 35,000

Accounts receivable 50,000

Inventory 10,000

Plant & machinery 200,000

Capital reserve 70,000

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Teguh Limited
Statement of Financial Position as at 31 July 2013

Assets RM Equities RM
Cash 105,000 Accounts payable 75,000
Accounts receivable 200,000
Inventory 40,000 Authorized capital
Authorized share capital
250,000 ordinary shares @ RM 1,250,000
5 each

Paid up capital
10,000 shares @ RM 5 each 500,000
Plant & machinery 300,000 Capital reserve 70,000
Total 645,000 Total 645,000

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