250 Financial Accounting ( T. Y.B. Com.

: S£h
- ,r, , ~
11 . Capital Reduction Account [Ans.: Para
12. Balance Sheet Aft 1 [Ans . p 5
er nternal Reconstruction . . ara SA-3) ..,}
9 ~ ' OBJECTIVE QUESTIONS
,
...
1~
9.1 MULTIPLE CHOICE QUESTIONS
1 · Whic h of the following statements is true ?
1L
(a) Asset side of th e Balance Sheet of a sick company shows the assets at much lower vaiu
than th e real valu es es
(b) Prefe rence d ividends on Cumu lati ve Prefere nce Shares of a sick company may be in arre
for s everal years _ _ ars
(c) In intern al reconstruction company is liquidated
(d ) Extern al reconst ruction involves reduction of capital
2 . Which of the following statements is false ?
(a ) T he Assets side of the Balance Sheet of a loss-making or sick company shows many Intangible
o r Fictitious Assets
(b ) Th ere may be a heavy debit balance in the Profit & Loss Account of a sick company due to
accumulated losses of past years
(c) Intern al Reconstruction is governed by the Insolvency and Bankruptcy Code
(d) In external recon:3truction, a new company is formed to take over the business of the sick
company
3. Increase , consolidation or sub-division of share capital of the company involves -
(a ) Alteration of Share Capital (b) Variation of Shareholders' Rights
(c) Reduction of Share Capital (d) Compromise/Arrangement
4. A scheme of reconstruction involving ___ must be authorized by the Memorandum or Articles
of Association, approved by the Board and a special resolution of the concerned members.
(a) Reduction of Share Capital (b) Alteration of Share Capital
(c ) Variation of Shareholders' Rights (d) Compromise/Arrangement
5 . A scheme of reconstruction involving ___ must be authorised by the company's articles;
approved by a special resolution by the shareholders of the company ; and confirmed by the
Hi gh Court I Tribunal.
(a ) Reduction of Share Capital (b) Alteration of Share Capital
(c) Variation of Shareholders' Rights (d) Compromise/Arrangement
6. Change in the rate of preference dividend payable in future without any change in the amount of
capita l is known as
(a) Red uction of Share Capital (b) Alteration of Share Capital
(c) Variation of Shareholders' Rights (d) Compromise/Arrangement
7 . C onvers ion of cumulative preference shares into non-cumulative preference shares (without
any change in the amount of capital) , in a scheme of reconstruction, is known as
(a ) Reduction of Share Capital (b) Alteration of Share Capital
(c ) variati on of Shareholders' Rights (d) Compromise/Arrangement
a. su rre nder of fully paid shares amounts to
(a ) Re duction of Share Capital (b) Alteration of Share Capital
(c) va riation of Shareholders' Rights _ (d) Compromise/Arrangement
_ Equity sh areholders giving ~p their claim to the reserve~ and accumulated profits amounts to
9
(a ) Red uction of Share Capital (b) Alteration of Share Capital
(c ) Variation of Shareholders' Rights (d) Compromise/Arrangement tures
O. Debe ntureholders accepting a cash payment less than the face value of their deben
1
amounts to
(a) Reduction of Share Capital (b) Alteration of Share Capital
( ) Variation of Shareholders' Rights (d) Compromise/Arrangement ·r, c:1 l
1
: x tinguishment of the liability in respect of unpaid portion of the face value of any share, !
11
. heme of reconstruction, amounts to .
sc A duction of Share Capital (b) Alteration of Share Capital
(a) e. t"on of Shareholders' Rights (d) Compromise/Arrangement
-(c ) Vana 1

• r
f / . ., • -
 I Reconstru ction
(11ter11a 251
Repaym ent of any pai? -UP share capital whi ch is in exces s of the wants of the company
12• heme of reconstru ction , amou nts to , in a

~~) Reduction of Share Capital · (b ) Alteration of Share Capital

(c) variation of ~ hareho lders' Rights (d ) Comprom ise/Arrang ement
.creditors accepting part payment of their claims, in a scheme of reconstru ction , amounts
13 to
(a) Reduction of Share Capital (b) Alteration of Share Capital
(c) Variation of Shareho lders' Rights (d) Comp ro mise/Arra ngement
_share Capital (~ 1) A/c Dr.
14
To Share Capital (~ 10) A/c
~s
The above entry, in a scheme of reconstruction , records
(a) co nsolidation of share capital (b) sub-division of share capital
rs
(c) co nversio n of shares into stock (d) conversion of stock into shares
15_share Capital (~ 100) A/c Dr.
To Share Capital (~ 10) A/c
The above entry, in a scheme of reconstruction , records
)le (a) consolidation of share capital (b) sub-division of share capital
(c) conversion of shares into stock (d) conve rsion of stock into shares
to 16.Which of the following statement s is true ?
. (a) In co nversion of shares into stock, there is a change in the amount of sha re ca pital
(b) No entry is requi red to be passed for cance lli ng un-i ssued shares
ick (c) In Sub-divisi on of share capital , there is a change in the number of shares and th e nomin
al
value [N V] of shares
(d) Capital Stock can be pu rchased or sold only in marketable lots of 100
17.Which of the follow ing statement s is false ?
(a) In con solidation of sha re capital , the amount of share capital remains the same ; only
th e
:l es number of shares and the nominal value per share change
(b) Sub-divis ion of shares is the reve rse of consolidation of sha res
(c) Capital Stock can be pu rchased or sold even in fractions
(d) Conve rsion of stock into shares is similar to consolidation
les; 18. Shares of ~ 100 each (paid-up value~ 90 each) are reduce d to shares of nominal value of
the ~ 90
each in a scheme of reconstruction .
(a) There will be credit of ~ 1 O pe r share to Capital Reduction A/c
(b) There will be credit of ~ 90 pe r share to Capital Reduction A/c
(c) There will be credit of ~ 100 pe r share to Capital Reduction A/c
,t of
(d) There will be no credit to Capital Reduction A/c
19. Shares of~ 100 each paid-Li p value are reduced to shares of nominal and paid up value of~
1o
each in a scheme of recon stru ction.
(a) There will be credit of~ 1 o per share to Capital Red uction A/c
, out
(b) There will be credit of~ 90 per share to Capital Red uction A/c
(c) There will be credit of t 1 oo per share to Capital Reduction A/c
(d) There will be no credit to Capital Reduction A/c
20.on cancellation of surrender
ed shares in a scheme of reconstruction
(a) Share capital A/c will be debited (b) Sha~e Surrend~red A/c ~ill be credited
(c) Capital Reduction A/c will be credited (d) Capital Reduction A/c will be debited
21. If _the
; to pref. sharehold ers give up their claim for Arrears of Pr~ference Dividend shown as Contingen t
Liabil ity in Notes to Accounts in a scheme of reconstruction
(a) Capital Reduction A/c will be debited (b) Pref. Shareholders A/c will be credited
tures (c) No entry is passed .
2 (d) Preference Dividend Payable A/c will be credited
2
· 1n Internal Reconstru ction
(a) No com . .
pany Is 1IquI·dated (b) Only one company goes into liquidation
. . . .
(c) two or . s are liquidated
in ::i <3 . more companie (d) One or more companie s go into liquidation
.
·A hrnited company may alter the share capital so as to
(a) Increase its reserve capital

J I lb) Sub-divide its shares into shares of smaller amount

 ·
252 Financia /A ccounting (T. Y.B.Com. : SE~K
lrl-~ 1
1
(c) Give option to preference shareholders to g et equity shares
(d) None of the above d ctio n in
24. Reduction of share capital of a company means re u ·bed an d/or
· paid-up shar_ e capital
(a) Only called up share capital (b) Subscn
Onl uncalled share capita 1
(c) Only authorised capital (d) y d to
25 Balance in Capital Reduction A/c is generally transferre
· (b) Capital Rese rve
(a) Genera l Reserve f the above
(c) p ro f1t & L A/ (d) None o
oss c
26 . The existing 1,000 shares of~ 1 each are altered to 1O0 shares <
of 1 o each. Th is is known as
. . 11
(a) Consolidatio n (b) Sub-div ision _
. . (d) Surrend e r
(c) Co ~v~rsat1 on 1n Stock
27 . The ex1st1ng 1,000 shares of~ 100 each are altered to 1O,OO 0 sha res of~ 1 o each. This is know
n
as
(a) Consoli dation (b) Sub-div ision
(c) Co nversio n in Stock (d) Surrender H
28. While granting app rov al to any scheme of Capital Reducti?n , ~he c~urt
may direct the company
to add th e fo llowin g words to its name for such period as it thinks fit.
2C
(a) And Reduce d (b) Unlimited and Reduce d 21
(c) Liquidated (d) Limited and Reduced
22
29. Reconstructi on refers to an arrangement , whe reby
23
(a) A previou sly unprofitable or a weak company is reconstructed by ce
rtain measur es
(b) Two companies come together to form a new company
24
(c) Assets and liabilities of the company are not revalued
25
(d) None of the above
30 . The credit balance in capital reduction ale is utilised for
26
(a) Paying off dissenti ent shareholders (b) Writing off deferred expens es 27 .
(c) Issuing bonu s shares (d ) None of the above
31. For capital reduction under internal reconstruction , authorisation
/ approval is require d from 28 .
(a) Shareholders (b ) Articles of Association
(c) Tribunal (d) Al l the above I
9.2 FILL IN THE BLANKS
[A]
1 . Splitting shares of a higher den omination into shares of smaller denomi
nation is known a s -·
2. Past losse_s and fictitious ass~ts are wiped out by making use of the
ale under intern al reconstruction. credit balance in - -
3. Surrendered shares _ _ (can/cannot) be re-issue d.
4. Capita l Reduction Ale is - - to record all sacrifices by the lend
(credited / debited) ; h Id
ers s areho ers.
5 . Increase in value of Land will be re~orded o n _ side of Capital
Reduction A/c.
6. Company can alter the share capital provided it is autho · d b
Associa tion/ Articles of Association/ Prospectus). d rn o!
· nse Y - -- (Memoran u
7. The company can implement the capital reduction scheme
. . . from
_ _ (Central Govern ment/ Shareholders Compete t T _obnly after getting
. I f I perm1ss1on
. t I t
8 n case o in erna recons n,1ct1on . h
t e existing company n- b n ·unal) · . . tedi
continued) . wi 11 e-(liq u1da ted / amalgarna
9. In case of subdivision of share capital the total number of h
does not change) . esi
s ares - - - (increases / decrea 5
1 O. In case of consolidation of share capital the total numb
does not change) . esl
er of shares ___ (increa ses/ decreas
11 . The balance in the capital reduction account after l
i5
transferre~ to _ _ (Goodwill accoun t; Genera~~~ing of all accumulated
losses and other~tl
Share capital account) . serve account / Capital reserve accoU
12 . When a company converts its equity shares into . . di5 ,
- - (Equ ity share capital account / Prefereni:~i~al stock ~hen the accoun
t to be cred1te cK ,
account) . are capital account ; Equity capital 510 I
 /~ft'f/1 0
1Reconstruction 253
se in the va lue of fixed asset t h • . . · d t
, 1ncrea s a t e time of recon stru ction will be cred 1te o .
'J (Capital reserv e ac co unt I Sh are ca pital acco unt / Gene ral reserve accou nt / Capital reducti on
ccount).
~t the time of_ reorganisation th e amount of sha res surrounded by share ho lde r is trans fe rred to
14
· - - - (C a pi ta l res e rv e a c coun t I Cap ital reduction acco un t / G eneral reserve account 1
surre ndered share account).
, f or writting_off th e accumu la~ed losses un der the sc heme of cap ital red uctio n w e d ebit - - -
5
. (Share capital account I C apital reserve account / Gene ral reserve account / Accumul ated loss
account).

16.Acontingent liabi!ity,_ not pro~id_ed _f? r materialised to the exten t of< 1,000 , the insu rance co mp ~ny
paid< 600 irrespective of this liab1 1ity. Hence th e am ou nt to be charged from the cap ita l reduction
account will be - - (< 1,000 / < 400 / ~ 600).
17 _1n case of conso lidation of share capital the tota l numbe r of share s of the company is -·
1s.Alteration of shares of smaller amount into shares of la rger amount is called ___ of sha re
capital.
19.When uncalle d amount of share capital is to be reduced then the amount of paid up cap ital of the
company _ _ .

2o.A company ca n convert fully paid _ _ into sto ck and also re convert _ _ back into s ha res .
21.To carry out the scheme of cap ita l reduction _ _ approval is necessary.
22.lf the creditors are willing , the ir claims against the company _ _ be red uced .
23.Reserves of the company - - be utilised in meeting th e accum ulated losses at th e time of
internal reconstruction.
24. When the company returns the excess share capital , it cred its _ _ account.
25.After giving permission for capital reduction , the court may orde r th e use of the words _ __
after the names of the company for a specified period .
26.Cancellation of shares not tak en up does not amount to _ _ of capita l.
27. Th e various losses can be written with help of cap ital redu cti on acco unt at the ti me _ __
recon stru ction .
28.The am ount of su rrendered sha res is cred ited to _ _ account.

9.3 MATCH THE FOLLOWING COLUMNS

[A] COLU MN A COLUMN B

1. Final Accounts of a sick company (a) governed by Insolvency and

2. Goodw ill Ale in a loss-making Ban kruptcy Code , 20 16
com pany (b) Variation of Shareh ol ders' Rights
3. Intern al Reconstructi on (c) Do not show tru e and fai r view of t he
4. Exte rn al Reconstruction fin ancial po sition of the company
5. Increase , consolidation or (d) show true and fair view of th e fina ncial
sub-division of sha re capital position of the co mpany
of the compa ny (e) must be authorised by the company's
6. S. 487 of Companies Act , 201 3 articles ; approved by a special reso lution
deals wi th by the share holders of th e compa ny;
7. Re duct ion of Share Capital and confi rm ed by the Tribun al
(f) Fictitious asset
(g) Co mpany is liqui dated
(h) Company is not liquidated
(i) Alteration of Sh are Cap ita l un der S. 61
and 64 of the Companies Act, 2013
(j) Fixed asset

)
 .
254
~
Financial Accounting (T. Y.B.Com.: SE/If ,
-~ I 1,,terni
[B] COLUMN A COLUMN B 25 -jhE
1. Change in the rate of preference Variation of Shareholders' Righ~ 26 -jhE
(a)
dividend payable in future without can be purchased or sold even 21. ACC
(b) an d

-
any change in the amount of capital in fractions
is known as (c) Consolidation
2. Surrender of fully paid shares Reduction of Paid-up Share Capital
(d)
3. Equity shareholders giving up their Reduction of only Authorized g,1
(e)
claim to the reserves and Share Capital 1.
accumulated profits (f) Compromise / Arrangement 2.
4. Shares of ~ 1 each converted into (g) Sub-division 3.
shares of~ 1 0 each 4.
5. Shares of ~ 100 each converted into 5.
shares of ~ 1 o each
6. Cancelling un-issued Shares g,2
7. Capital Stock

·9.4 STATE WH~THER TRUE OR FALSE

-
1 . A company cannot subdivide shares of larger denomination into shares of smaller denomination. 9.3 J
2 . A company is free to reduce or extinguish the uncalled liability of its members .
E
3. No permission from the tribunal is required for a company to write off or cancel any paid up
capital which is lost or not represented by available assets . 9.4 1
4. Cancellation of unissued capital is also a case of capital reduction . F
5 . Only sick companies undertake capital reduction . 8. Fals
6. Permission of the tribunal is required for a company to return capital which is in excess of the 11 . Fa/s
requirements of the company. 12 . Fa/s
7. No journal entry is required for the cancellation of un-issued sh are capital. 13. Fals
8. After granting the scheme of capital reduction the court may order the use of words "And Reduced' 14. Fals
afte r the name of the company till its winding up.
9. Consent of the creditors is required if capital reduction involves diminution of liability regarding 10.
un called capital or return of Paid-up capital.
1 0 . Consent of the creditors is not required if capital reduction involves the writing off of paid-up
capital lost or not represented by available assets .

--
11. Any surplus in the capital reduction account after writing off lost capital is transferred to General
0.1 : Th
Reserve. I

12. In a scheme of reconstruction amount of shares surrendered by shareholders is transferred to Liabi/iti

Capital reduction accou nt. 13% Cu
13. Am~unts sacri fice d by shareholders in a scheme of internal reconstruction are credited to Capital on 100
reserve account. Equity s
14 . For a com pany to carry out capital reduction , permission is required from Central Government. ' 8% Deb
15 . Secu rity premiu m account can be transferred to Capital Reduction Account. Credito r

--
16 . Exte rnal Reco nstruction involves reduction in capital. Provisio
17 _If authorised by its articles , a co mpany can increase its share capital by making fresh issue._
1 3_ A company can con solidate its share cap ital by converting the shares of smaller denomination The follc
into shares of higher denomination.
(1) Fixe,
19 1n case unissued share capital is to be decreased, then share capita l account has to be cancelled-
_
(2) Stoc
20 In case of internal reconstruction , the existing company has to be liquidated .
· . t1·n the (3) Pref1
21 _The capital reduction sche me 1s adopted when the co mpany has con side rabl e amoun for u
form of accumulated losses . (4) Th e
22 _ A company is allowed to convert its full y paid shares into stock. sub· (S) One
Un der a scheme of reorganisation by surrend er of shares, the shares of a company are 8 50%
23
· divided into shares of smaller denomination s and the share holders are made to su rrender , Of hi:
part of their holding. . . . . e ol 1 (6) The
_The various losses cannot be written off with the help of capital reduction account at the tirn exist
24
internal reconstruction.
 I·
~ 255
t

Reconstr uction
rer11a 1
'J /11 . • d r n account .
balance in security premium account cannot be transferr ed to capital re uc 10
\ 5 The . . t
2· . I d ction accoun .
cost of reorgani sation of the share capital is to be charged from capita re u ft1
z6. The ntingent liability, in respect of which no provision has been made, will be
transfer red to ~ro
21.::iloss account at the time of internal reconstr uction .

3U43M•X•J®~~i@=l$1i
g,1
(b) 6. (c) 11. (a) 16. (b) 21. (c) 26. (a) 31 . (d)
1.
(c) 7. (c) 12 . (a) 17 . (d) 22. (a) 27 . (b)
2.
(a) 8. (a) 13. (d) 18. (d) 23. (b) 28 . (a)
3.
(c) 9. (d) 14. (a) 19. (b) 24. (b) 29. (a)
4.
(a) 10. (d) 15. (b) 20 . (c) 25 . (b) 30 . (b)

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5.
(1) Sub-division (2) Capital Reductio n (3) Can (4) Credited (5) Credit (6) Articles
of Associa tion
(7) Compete nt Court (8) Continue d (9) Increase s (1 O) Decreas es (11) Capital
reserve account
(12) Equity capital stock account (13) Capital reduction account (14) Surrend
ered share
account (15) Accumu lated loss account (16) < 400 (17) decreas es (18) consolid
ation (19)
does not change (20) shares , stock (21 ) court (22) can not (23) can (24)
cash (25) and
reduced (26) reduction (27) internal (28) capital reduction
on. 9.3 A: (1) - (c) , (2) - (f) , (3) - (h) , (4) - (a), (5) - (i), (6) - (b ), (7) - (e)
B: (1) - (a) , (2) - (d) , (3) - (f) , (4) - (c) , (5) - (g), (6) - (e) , (7) - (b)
up 9.4 True: 3, 4, 5 , 6 , 7, 9, 10, 15, 17, 18, 21 , 22 , 23 , 26
False: 1, 2, 8, 11 , 12, 13, 14, 16, 19, 20 , 24 , 25 , 27
s. False; for specified period .
11. False; to Capital reserve account .
the
12. False; to Shares surrende red account.
13. False; to Capital reductio n account.
;ed" 14. False; from the compete nt court.

1
j ing 10. PRACTICAL PROBLEMS
j-up
10.1 BASIC
1eral
Q.1: The following is the Summa ry Balance Sheet of Sick Ltd . as o n 31 st Decemb
er 2018 :
id to Liabilities { Assets {
13% Cumulative Preferen
.pital ce Shares Fixed Assets
of~ 100 each 15,00 ,000
1,00 ,000 Stocks
Equity Shares of < 1 o each 35 ,00 ,00 0
,ent. 7, 00 ,000 Profit & Loss A/c
8%Debentures 3,00,00 0
3,00 ,000
Creditors
Pro · · 39 ,00,000
vision for Taxation 3 ,00,000
e.
ation 53 ,00,000

~lied.
1
t/
Th 0110
( wing scheme of reorgani sation is sanction ed :
( ) ixect Assets are to be w ritten down by 1/3 .
53,00,0 00

2
(3) :~ocks are to be revalued at~ 27 ,00,000. . .
1 th 8 eference Shareho lders decided to forego their nght to arrears of div idend which
( 1or three years. are •
4 in arrears
(si ~he taxation liability of the compan y is determin ed at 4 ,00,000.
sub· ~ of th_
e Creditors of the compan y to whom the compan y owes< 25,00,00 0 decides
5 to for
:Jer a of ho of h1_s claim . He is allotted 1,00,000 equity sh ares of< 5 each in part satisfac
( Is claim. tion f b ego
0
6l lhe t a Iance
of
ex· ra e of inte rest on debentu re s is increase d to 11 % . The debentu reholde

J
Ist rs s
ing debentu res of< 100 and exchang e t he same for fresh debe nt ures of < th
7 t;:~~~ r eir
.\