(2) Ordinary Share Capital 1,50,000

(Re. 1) A/c
Dr
NAME: AMISHA PASAD ROLL NO:63 SYBMS-B PAGES:79-84
To Ordinary Share 30,000
Capital (Ra. 0.10) A/c 1,20,00
To Capital Reduction A/c 0
(Being ordinary share
reduced to Re. 0.10 each)
(3) 8% Cumulative 1,50,000
Preference Share Capital
A/c (0.75) Dr. 30,000
Ordinary Share Capital
(0.10) A/cBalance Sheet as on 31/12/2016
Dr. (Balance Sheet after Reconstruction)

To 8% Cumulative 1,50,000
Preference Shares Capital
(Re.1) A/c
To Ordinary Share 30,000
Capital (Re. 1) A/c
(Being ordinary share and
8% cumulative
Particulars
preference share Amt. (Rs)
consolidated into Re.1)
(4) (A) Equity andReduction
Capital Liabilities:A/c 16,000
Dr.
(1) Shareholders Funds: 16,000
To Ordinary Share 1,96,000
(a) Share Capital
Capital A/c(Note 1) -
(b) Reserves
(Beingand Surplus
issued one new
ordinary share of Re.1
(2) Noneach
Current Liabilities:
-
for Rs.4 of gross
preference dividend)
(5) (3) Current Liabilities:
Security Premium A/c 5,000
Dr.
(a) Trade Payable (Creditor) 85,000
To Overdraft
(b)Bank Capital Reduction A/c
(90,000-12,300-32,000-6,300+7,000) 52,400
5,000
(Being Balance of Share Total (1+2+3)
Premium Account 3,33,400
Transferred)
(B) Assets:
9% Debenture A/c 62,700
(6)
Dr.
(1) Non-Current Assets:
(a) Fixed
BankAssets:
A/c (Balance 12,300
Land Hold Property
Figure) Dr. (1,40,000-18,000) 1,22,000
Plant and Machinery (220,000-80,000) 1,40,000
To Freehold Property A/c 60,000
To Capital Reduction A/c
(b) Investment - 15,000
(Being debenture holders
claim settled)
(2) Current Assets
(7) Capital Reduction A/c 20,000
Dr.
(a) Inventories (Stock) 20,000
(b) Trade Receivable
To Plant (Debtors)
and Machinery 51,400
20,000
A/c
(Being plant and
machinery revalued) Total (1+2) 3,33,400
(8) Bank A/c Dr. 32,000
Capital Reduction A/c 8,000
Dr.

To Trade Investments 40,000

A/c
(Being investment sold at
loss)
(9) Creditors A/c Dr. 7,000

To Bank A/c 7,000

(Being contingent
liability settled)
 Note to Accounts:
Particular Amt. (Rs)
(1) Share Capital:

Authorised:
8% Cumulative Preference 2,00,000
Share Capital of Re 1 each Ordinary Shares of Re. 1 each 1,50,000

3,50,000

Issued Subscribed and Paid Up:

1,50,000, 8% cumulative Preference Share of Re. 1 each 1,50,000

46,000 Ordinary Share of Re. 1 each 46,000

Total 1,96,000

Illustration 20:

X. Ltd. whose Balance Sheet as at 31/12/2016 appears below,

formulated a scheme of reconstruction, details of which follow
and secured approval of all concerned.
LIABILITIES RS. ASSET RS.
Authorised Capital: Fixed Assets 5,60,000
50,000 Shares of Rs. 10 each 5,00,000 Patents and Copyrights 40,000
Investments at Cost
8% Preference Share Capital: (Market Value Rs. 32,500
4,000 Shares of Rs. 100 each, Rs. 3,00,000 27,500)
75 paid-up
Current Assets
Secured Loans: Profit and Loss A/c 4,24,500
9% Debentures 3,00,000 2,14,000
Interest Accrued and Due 54,000 3,54,000

Bank Overdraft 75,000

42,000
Sundry Creditors
(Including Interest of Rs. 7.500 due
to Bank) 12,71,000
12,71,000

Preference dividend is in arrear for one year.

(a) Preference shareholders to give up their claims, inclusive of

dividend to the extent of 30% and desire to be paid off.

(b) Debenture holders agree to give up their claims to interest in

consideration of their rate of interest being enhanced to 10%

(c) Bank agree to give up 50% of their interest outstanding in

consideration of their being paid off at once.

(d) Sundry Creditor would like to grant a discount of 5% if they

were to be paid off immediately.

(e) Balance of Profit and Loss Account, Patents and Copyrights

and 25% of the total Sundry Debtors of Rs. 60,000 to be written
off. Fixed Assets to be written down by Rs. 7,000. Investments
to reflect their market value.
(f) Equity shareholder to reduce their share to is. 7 per share
fully paid-up.

(g) Cost of reconstruction Rs. 1,675.

Pass journal entries in the books the company assuming that the scheme has
been put through fully with the Equity Shareholders bringing in necessary
cash to pay off the parties to leave a cash balance of Rs. 10,000.
Please draw the Balance Sheet after reconstruction.
In the books of M/s. X Ltd.
Journal Entries
Dat Particular L Debit Credit
e F Rs. Rs.
(1) 8% Preference Capital A/c 3,00,00
To Capital Reduction A/c 0 90,000
To Bank A/c 2,10,00
(Being 8% preference shareholders claim 0
settled)
(2) Capital Reduction A/c 16,800
To Bank 16,800
(Being 70% of preference dividend paid)
(Pref. Div. =3,00,000 * 8% = 24,000
=24,000 * 70% = 16,800
(3) 9% Debenture A/c 3,00,00
Interest Accrued and Due A/c 0
To 10% Debenture A/c 54,000 3,00,00
 To Capital Reduction A/c 0
(Being conversion of 9% debenture into 54,000
10% debentures on their agreeing to
sacrifice interest accrued and due)
(4) Equity Share Capital A/c (50, 000 * 10) 5,00,00
To Capital Reduction A/c 0 1,50,00
To Equity Share Capital A/c (50, 000 * 0
7) 3,50,00
(Being equity share capital reduced to Rs. 0
7 each)
(5) Bank A/c (Working Note) 3,50,00
To Equity Share Capital A/C 0 3,50,00
(50,000*7) 0
(Being equity share issued to met all
payments)
(6) Bank Overdraft A/c 75,000
Sundry Creditors (Int, on Overdraft) A/c 7,500
To Bank A/c 78,750
To Capital Reduction A/c 3,750
(Being payment of 50% bank overdraft
including interest on the other 50% being
sacrificed by the bank)
(7) Sundry Creditors A/c 34,500
To Bank A/c 32,775
To Capital Reduction A/c 1,725
(Being creditor paid)
(8) Capital Reduction A/c 2,82,67
To Profit and Loss A/c 5 2,14,00
To Patents and Copyrights A/c 0
To Investments A/c 40,000
To Sundry Debtors A/c 5,000
To Fixed Assets A/c 15,000
To Bank (Expenses) A/c 7,000
(Being assets written off) 1,675

Working note:
Dr. Bank A/C
Cr.
Particular Rs. Particular Rs.
To Balance b/d - By 8% Preference 2,10,000
Share Capital
To equity share 3,50,000 By Capital Reduction 16,800
capital (bal. figure) (Preference Dividend
By Bank Overdraft 78,750
By Sundry Creditor 32,775
By Capital Reduction 1,675
(Reconstruction Exp)
By Balance c/d (to be 10,000
maintained)
3,50,000 3,50,000
No. of Equity shares = 3,50,000
7
 = 50,000 Shares
50,000 Equity Shares Capital @ Rs. 7 per share = Rs. 3,50,000

Balance Sheet as on 31/12/2016

(Balance Sheet after Reconstruction)
Particulars Amt
(Rs.)
(A) Equity and Liabilities :
(1) Shareholders Funds:
(a) Share Capital:
1,00,000 Equity Share Capital of Rs. 7 each 7,00,000
(b) Reserves and Surplus: -
(2) Non Current Liabilities:
10% Debenture 3,00,000
(3) Current Liabilities: -
Total 10,00,000
(1+2+3)
(B) Assets:
(1) Non Current Assets:
(a) Fixed Assets 5,53,000
(b) Investment 27,500
(2) Current Assets:
(a) Trade Receivable (Debtors) 45,000
(b) Other Current Assets 3,64,500
(c) Cash at Bank 10,000
10,00,000
Total (1+2)

Illustration 21:
The balance of a limited liability company, as on 31/12/2016, stated
below:
Balance Sheet as on 31/12/2016
Liabilities Rs. Assets Rs.
Issued and Goodwill 42,300
Subscribed Capital:
45,000 Equity Shares 4,50,000 Patents 18,000
of Rs. 10 each, fully
paid
3,000, 6% Preference 3,00,000 Land and Buildings 2,70,000
Shares of Rs. 100 each
Sundry Creditors 60,000 Plant and Machinery 2,40,000
Bills Payable 50,000 Stock-in-Trade 88,800
Bank Overdraft 1,00,000 Sundry Debtors 1,50,900
Profit and Loss A/c 1,50,000
9,60,000 9,60,000
Dividends on Preference Shares are in arrear for three years
The company passes a special resolution to reduce its capital in
accordance with the following scheme and the same is duly sanctioned
by the court:
(a) The preference shares are converted from 6% to 8%, but revalued in a
manner in which the total return on them remains unaffected. The value of
Equity Shares is brought down to Rs. 8 per share.
(b) The arrears of dividend on preference shares are cancelled.
(c) The debit balance of the goodwill account is written off entirely.
(d) Land and building and plant and machinery are revalued at 150% and
80% of their respective book values.
(e) Book debts to the amount 7,200 are treated as bad, and hence to be
written off.
(f) Write off all intangible asset and profit and loss account (Debt balance).
(g) A secured loan of Rs. 2,40,000, bearing interest at 12% p.a. is to be
obtained by mortgaging tangible fixed assets for procuring cash for
repayment of bank overdraft and for providing additional funds for working
capital.
Journalize the above scheme and draw a Balance Sheet after the
implementation is over.

Solution:
Notes:
(1) There will be no entry for arrear preference dividend since they are
cancelled.
(2) Return on preference shares @ 6% on Rs. 3,00,000 is Rs. 18.000. Since
this minimum return must have to be maintained, value of preference share
capital, therefore, will be Rs. 2,25,000 (i.e., Rs. 18,000 x 100/8). So,
reduction of preference share capital will be Rs. 75,000 (i.e., Rs. 3,00,000 -
Rs. 2,25,000) and reduction per share will be Rs. 25.
Journal Entries
Da Particular L Debit Credi
te F Rs. t
Rs.
(1) Equity Share Capital (Rs. 10) A/c 4,50,0
To Equity Share Capital (Rs. 8) A/c 00 3,60,0
To Capital Reduction A/c 00
(Being reduction of Rs. 2 per share on 45,000 90,000
equity shares)
(2) 6% Preference Share Capital A/c 3,00,0
To 8% Preference Share Capital A/c 00 2,25,0
To Capital Reduction A/c 00
(Being reduction of Rs. 25 per share on 3,000 75,000
preference shares and increase the rate of
dividend from 6% to 8%)
(3) Land and Building A/c 1,35,0
To Capital Reduction A/c 00 1,35,0
(Being land and building appreciated) 00
(4,05,000 - 2,70,000)
(4) Capital Reduction A/c 2,65,5
To Goodwill A/c 00 42,300
To Plant and machinery A/c 48,000
To Sundry Debtors A/c 7,200
To Profit and Loss A/c 1,50,0
To Patents A/c 00
(Being fictitious assets, accumulated loss and 18,000
sundry assets written down)
(5) Bank a/c 2,40,0
To 12% Mortgage Loan A/c 00 2,40,0
(Being amount received as loan by mortgaging 00
fixed assets)
(6) Bank Overdraft A/c 1,00,0
To Bank A/c 00 1,00,0
(Being bank overdraft paid) 00
 (7) Capital Reduction A/c 34,500
To Capital Reserve A/c 34,500
(Being balance transferred)
Dr. Capital Reduction A/c
Cr.
Particulars Rs. Particulars Rs.
To Sundry Assets 2,65,500 By Equity Share 90,000
Capital
To Capital Reserve 34,500 By 6% Preference 75,000
(Balance Figure) Share Capital
By Land and Building 1,35,000
3,00,000 3,00,000
Balance Sheet as on 31/12/2016
(Balance Sheet and Reduced)
Particulars Amt Amt
(Rs. (Rs.)
)
(A) Equity and Liabilities:
(1) Shareholders Funds:
(a) Share Capital:
45,000 Equity Share Capital of Rs. 8 each fully 3,60,0
paid 00
3,000, 8% Preference Share of Rs. 75 each 2,25,0
fully paid 00
(b) Reserves and Surplus:
Capital Reserves 34,50
(c) Secured Loans: 0
12% Mortgage Loan (Secured on tangible fixed
assets) 2,40,0
(d) Unsecured Loans: 00
(2) Non Current Liabilities: 60,0 -
(3) Current Liabilities: 00 -
(a) Trade Payable: 50,0
(i) Sundry Creditors 00
(ii) Bills Payable
1,10,0
00
9,69,5
00
(B) Assets:
(1) Non Current Assets:
(a) Fixed Assets:
Land and Building 4,05,0
Plant and machinery 00
(b) Investment 1,92,0
(2) Current Assets: 00
Stock-in Trade
Sundry Debtors
Cash at Bank 88,80
0
1,43,7
00
1,40,0
00
 9,69,5
00
Illustration 22:
Following is the Balance sheet of ABC Ltd. Co as at 31st March,2016.
Balance Sheet
Liabilities Rs. Assets Rs.
Share capital: Plant and Machinery 9,00,000
2,00,000 Equity Shares 20,00,000 Furniture and fixtures 2,50,000
of Rs. 10 each fully
paid up
6,000, 8% Preference 6,00,000 Patents and copyrights 70,000
Shares of Rs. 100 each
9% Debentures 12,00,000 Inventory (at costs) 68,000
(Market value Rs.
55,000)
Inventory 14,00,000