TYBAF: FINANCIAL ACCOUNTING

Internal Reconstruction
It implies the reorganization of the capital structure of a company to infuse new life in the
company.

Journal Entries:
A) Writing off Lost Capital:
This means writing off or cancelling that part of the paid-up capital which is not
represented by the tangible assets.
a) Share of Rs. 10 reduced to Rs. 3 each.
Share Capital A/c Dr.
To Capital Reduction A/c

b) Share of Rs. 10 converted into Rs. 3 as nominal value and paid-up value.
Share Capital A/c Dr.
To Share Capital A/c
To Capital Reduction A/c

B) Reduction in Claim of Creditors, Debenture Holders etc:

Sometimes the creditors and the debenture holder of the company are required to reduce
their claim against the company on account of heavy losses suffered by the company
which cannot be met in full by the company’s shareholders.

Debenture A/c Dr.

Creditors A/c Dr.
To Capital Reduction A/c

C) Appreciation in the value of Assets:

Relevant Assets A/c Dr.

To Capital Reduction A/c

D) Disposal of Capital Reduction Account:

The capital Reduction Account represents the sacrifice made by the different parties i.e.
shareholder, debenture holders, creditors etc. This sacrifice is used fir writing off
accumulated losses, intangible assets, over valuation of assets etc.

Capital Reduction A/c Dr.

To Profit & Loss A/c (Dr.)
To Goodwill A/c
To Preliminary Expenses A/c
To Relevant Assets A/c
To Capital Reserve A/c
( Bal.. Fig…)

Note- Each asset should be credited individually with the amount of over-valuation.)

1. The Balance Sheet of X ltd. Is as follows:

Liabilities Rs. Assets Rs.

Issued Share Capital Goodwill 10,000
10,000 Equity shares of Rs. 10 Other Fixed Assets 90,000
each fully paid 1,00,000 Stock-in-trade 25,000
10,000 7% Preference shares of Debtors 30,000
Rs. 10 each fully paid up 1,00,000 Profit & Loss Account 45,000

2,00,000 2,00,000

It was resolved that equity shares of Rs. 10 each be reduced to fully paid shares of Rs. 6
each and 7% Preference shares of Rs. 10 each be reduced to 71/2% fully paid Preference
shares of Rs. 7 each. Number of shares in each case remained the same. It was further

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resolved that amounts so available be used for writing off the debit balance of Profit and
Loss Account, Goodwill Account completely and other fixed assets as far as possible.

2. M/s Patil & Co. promoted a joint Stock Company ‘Patil Products Ltd., 2003’. The
working of the company was not successful, on 31.12.2005 the company’s Balance Sheet
stood as under:

Liabilities Rs. Assets Rs.

Authorised Capital: Goodwill 2,00,000
20,000 Shares of Rs. 100 each 20,00,000 Land & Building 1,00,000
Subscribed Capital: Machinery 2,60,000
19,000 Shares of Rs. 100 each Furniture 20,000
fully paid 19,00,000 Stock 3,70,000
Creditors 1,00,000 Debtors 1,80,000
Patil & Co. 1,00,000 Profit & Loss Account 9,70,000

21,00,000 21,00,000

The company is to be reconstructed on the basis of the following:

a) 19,000 shares of Rs. 100 each are to be reduced to an equal number of fully paid
shares of Rs. 40 each.
b) The debt of Rs. 1,00,000 due to Patil & CO. was to be also reduced, the remaining
1,000 unissued shares being issued to them as fully paid up shares of Rs. 40 each
in full settlement of the amount due to them.
c) The amount thus made available by the reduction of capital and by the above
arrangement with Patil & Co. is to be utilized in wiping off the Goodwill and the
Profit & Loss Account and in writing down the value of Machinery.

Give necessary journal entries and Company’s balance Sheet giving effect to the
scheme of reconstruction.

3. The summarized Balance Sheet of Sunrise Ltd. As on 31st December, 2006 was as
under:

Liabilities Rs. Assets Rs.

Share Capital: Howrah Works 20,00,000
Authorised, Issued and paid-up Hooghly Works 10,00,000
4,00,000 Equity Shares of Rs. 5 Workmen’s
each, fully paid 20,00,000 Compensation Fund
3,00,000, 6% Pref. Shares of Rs. Investment 35,000
5 each fully paid 15,00,000 Stock 1,15,000
‘A’ 6% Debentures Secured on Debtors 50,000
Howrah Works 1,00,000 Discount on Debentures
‘B’ 6% Debentures Secured on ‘A’ 2,500
Hooghly Works 2,50,000 ‘B’ 10,000 12,500
Workmen’s Compensation Fund Profit & Loss Account 16,22,500
Howrah 25,000
Hooghly 10,000 35,000
Bank Overdraft 7,50,000
Creditors 2,00,000

48,35,000 48,35,000

On 31.12.2006 the following scheme of capital reduction was taken:

a) The equity shares were reduced to 25 paise each.
b) The preference shares were reduced to Rs. 3.75 each and the rate of dividend on
them to 5%.
c) The ‘A’ and ‘B’ debenture holders waived payment of Rs. 42,000 interest (which
was included in creditor’s of Rs. 2,00,000).
d) The directors refunded Rs. 50,000 fees, they had received in cash. The directors
let gone Rs. 10,000 remuneration which was otherwise due.
e) The ‘B’ debenture holders formed a new company to take over the Hooghly
Works for Rs. 5,00,000 and this price was satisfied on the same date by the
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surrender of the ‘B’ debentures and the allotments of 50,000 fully paid shares of
Rs. 5 each in the new company.
f) The investments were valued at Rs. 25,000 and the Debtors at Rs. 40,000. There
was no actual liability to Workmen Hooghly. The assets were to be written down
accordingly; any fictitious be written off and the balance available was to be
written off the books of the Howrah Works.
Show the necessary entries and Balance Sheet.

4. Walkman Ltd. Whose balance Sheet as at 31 st December, 2003 appears below,

formulates a scheme of reconstruction, details of which follows and secured approvals of
all concerned:

Liabilities Rs. Assets Rs.

1,00,000 Equity Shares of Rs. Fixed Assets 11,20,000
10 each, Rs. 10 paid-up 10,00,000 Patents & Copyrights 80,000
8,000, 8% Pref. Shares of Rs. Investment at cost 65,000
100 each, Rs. 75 paid-up 6,00,000 (M.V. Rs. 55,000)
9% Debentures Current Assets 8,49,000
6,00,000 7,08,000 Profit & Loss Account 4,28,000
Interest accrued due 1,08,000 1,50,000
Bank Overdraft
Sundry Creditors
(including interest of Rs. 84,000
15,000 due to Bank)
25,42,000 25,42,000

Preference Dividend is in arrears for one year:

a) Preference shareholders to give-up their claim inclusive of dividend to the extent
of 30% and desire to the paid off.
b) Debenture holder agree to give-up their claim to interest on consideration of their
rate of interest being enhanced to 10%.
c) Bank agreed to give up 50% of its interest outstanding in consideration of its
being paid off at once.
d) Sundry creditors would like to grant discount of 5% if they were paid off
immediately.
e) Balance of profit and loss account, Patent and Copyright and 25% of total Sundry
Debtors of Rs. 1,20,000 to be written off.
f) Fixed Assets to be written down by Rs. 14,000.
g) Investments to reflect their market value.
h) To the extent not specifically stated equity shareholder suffer reduction of their
rights. However, the face value of shares will remain the same.
i) Cost of reconstruction Rs. 3,350.

Pass journal entries in books of the company assuming that the scheme has been put
throughout with equity shareholders bringing in necessary cash to pay-off the parties and
to leave a working capital of Rs. 20,000 and bring appropriate amount againset their
unpaid amount of Share Capital.
Also draw the Balance Sheet after reconstruction.

5. Balance Sheet of Un-happy Ltd. As at 31.3.2003:

Liabilities Rs. Assets Rs.

6% Preference Share Capital Fixed Assets 3,86,000
(Rs.10) 1,00,000 Goodwill 1,80,000
Equity Share Capital (Rs. 10) 5,00,000 Discount on Debentures 4,000
General reserve 40,000 Profit & Loss Account 2,50,000
5% Debentures ( Rs. 100) 40,000
Overdraft 60,000
Creditors 80,000

8,20,000 8,20,000

The scheme of reconstruction as passed and sanctioned by Court is as follow:

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a) Rs. 100 5% Debentures are to be exchanged for Rs. 50, 6% Debentures and for
remaining Rs. 50, 6% Preference Shares of Rs. 10.
b) 6% Preference Shares including those to be issued to Debenture holder are to be
reduced to Rs. 6 and dividend is to be raised to 8%.
c) Equity Shares are to be reduced to Rs. 2 and then they are to be consolidated into
shares of Rs. 10.
d) Rs. 1,00,000 Equity Shares are to be subscribed at par by a person. Overdraft is to
be paid the reout.
e) Loss, Goodwill and Debentures discount are to be written off first; any balance
with Reserve is to be utilized in writing down Fixed Assets.

Show Balance Sheet after the scheme is carried out and also prepare the following Ledger
Accounts:
a) 5% Debentures Account
b) 6% Preference Share Capital Account
c) Equity Share Capital Account
d) Capital Reduction Account

6. The Balance Sheet of a limited liability company as on 31 st December 2001 is as stated

below:

Liabilities Rs. Assets Rs.

Issued & Subscribed Capital: Goodwill 42,300
45,000 Equity Share of Rs. 10 Patents 18,000
each fully paid 4,50,000 Land & Building 2,70,000
3,000, 6% Pref. shares of Rs. Plant & Machinery 2,40,000
100 each 3,00,000 Stock-in-trade 88,800
Sundry Creditors 60,000 Sundry Debtors 1,50,900
Bills Payable 30,000 Profit & Loss Account 1,50,000
Bank Overdraft 1,00,000
Income Tax due 20,000

9,60,000 9,60,000

Dividend on Preference share are in arrears 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 85% and 80% of their
respective book values.
e) Book debts to the amount of Rs. 7,200 is treated as bad, and hence to be written
off.
f) The Company expects to earn profit @ Rs. 45,000 per annum from the current
year which would be utilized entirely for reducing the debit balance of the profit
and loss account for three years. The remaining balance of the said account would
be written off at the time of the capital reduction process.
g) The balance of total capital reduction is to be utilized in writing down patents.
h) 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.
i) Bills payable & Income Tax liabilities are to satisfied in full.

Journalise the above scheme and draw a Balance Sheet after the implementation if over.

7. The following is the Balance Sheet of B.A. Ltd. As on 31.3.2000:

Liabilities Rs. Assets Rs.

Authorised and Issued Capital Goodwill 1,20,000
30,000 6% Pref. Shares of Rs. Land & Building 2,67,000
10 each 3,00,000 Plant 2,55,000
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6,00,000 Equity Shares of Re. 1 Shares in Subsidiary Ltd. 75,000

each 6,00,000 (at cost)
8% Debentures (Secured on Stock 2,25,000
Land & Building) 1,20,000 Debtors 2,70,000
Accrued Interest 6,000 1,26,000 Profit & Loss Account 2,64,000
Bank Overdraft 1,65,000 Advertisement & Campaign
(Secured on Stock) Expenses 60,000
Director’s Loan 75,000
Sundry Creditors 2,70,000

15,36,000 15,36,000

Notes:
1. There is a contingent liability for damage of Rs. 30,000.
2. Preference Shares are cumulative and dividends are in arrear for past three years.

A capital reduction scheme stating the following terms was duly approved:
1. The preference shares to be reduced to Rs. 8 per share and the Equity shares to 25
paise each; and to be consolidated as shares of Rs. 10 each and Re. 1 each fully
paid respectively. The preference shareholder waive two thirds of dividends arrear
and receive Equity shares for the balance. The authorized capital to be restored to
30,000 Pref. shares of Rs. 10 each and 6,00,000 Eq. shares of Re. 1 each.
2. The shares in subsidiary Ltd. are sold to an outside interest for Rs. 1,50,000.
3. All intangible assets are to be eliminated and Bad-Debt of Rs. 12,000 and
obsolete stock of Rs. 30,000 to be written off.
4. The Debenture holder to take one of the Company’s properties ( Book Value Rs.
54,000) at a price of Rs. 60,000 in part satisfaction of the debentures and to
provide further cash of Rs. 45,000 on a floating charge. The arrears of interest are
paid.
5. The contingent liability materialized in the sum stated but the company recovered
Rs. 15,000 of these damages in action one of its directors. This was debited to his
loan A/c of Rs. 24,000, the balance of which was paid in cash on his resignation.
6. The remaining directors agreed to take Equity shares in satisfaction of their loans.

You are required to give necessary journal entries including cash transactions & revised
balance sheet.

8. Following is the Balance Sheet of Satyaraj Ltd. as on 31st March, 2008.

Liabilities Rs. Assets Rs.

Share Capital: Goodwill 3,40,000
1,60,000 Equity Shares of Rs. 5 Land & Buildings 2,60,000
each fully paid 8,00,000 Equipments 2,50,000
4,000 6% Cumulative Sundry Debtors 2,40,970
Preference Shares of Rs. 100 Stock 3,30,340
each fully paid 4,00,000 Investment 45,450
8% Debentures (Rs. 100 each) 4,00,000 Cash at Bank 20,240
Bank Overdraft 1,50,000 Profit & Loss A/c 6,03,360
Sundry Creditors 3,40,360
(Including Rs. 20,000 interest
on Bank Overdraft)

20,90,360 20,90,360

Preference dividend is in arrears for five years.

Following scheme of reconstruction was approved by the Court.
a) Equity shares be reduced to Rs. 1,25 each and then to be consolidated into shares
of Rs. 10 each.
b) 6% preference shares be reduced to Rs. 40 each and then to be subdivided into
shares of Rs. 10 each.
c) Interest accrued but not due on 8% debentures for half year ended 31 st March,
2008 has not been provided in the above Balance Sheet. The debenture holders

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have agreed to receive 40% of this interest in cash immediately and provision for
the balance in the books of account.
d) Rs. 24,000 be paid to preference shareholders in lieu of arrears of preference
dividend.
e) The debenture holders have also agreed to accept equal number of 9% debentures
of Rs. 60 each in exchange of 8% debentures of Rs. 100 each.
f) Bank has agreed to take over 50% of stock in full satisfaction of its claim
including interest. The remaining stock be revalued at Rs. 1,20,000.
g) Investments be sold for Rs. 40,000.
h) Tangible fixed assets be appreciated by 20%. Goodwill be written off in full and
provision be made for doubtful debts of Rs. 20,000.
i) Give Journal entries for the above scheme of reconstruction. Prepare Capital
Reduction Account and Balance Sheet after reconstruction in the books of
Satyaraj Ltd.

9. Following is the Balance Sheet of Umesh Ltd. as on 31st March, 2009.

Liabilities Rs. Assets Rs.

6,000, 10% Cumulative Goodwill 2,00,000
Preference Shares of Rs. 100 Land & Building 19,50,000
each, fully paid up 6,00,000 Plant & Machinery 70,000
15,000 Equity Shares of Rs. Stock 4,00,000
100 each, fully paid up 15,00,000 Trade Debtors 2,88,000
Loans 2,22,000 Bank Balance 1,26,000
Creditors 7,50,000 Profit & Loss A/c 38,000

30,72,000 30,72,000

Preference dividend was in arrears Rs. 1,20,000. The board of directors of the company
decided upon the following scheme of reconstruction, which was approved by all
concerned.
a) Paid up value of equity share shall be reduced to Rs. 50 per share, face value
being Rs. 100.
b) Preference shares are to be converted into 13% debentures of Rs. 100 each with
regard to their 80% of dues (including arrears of preference dividend) and for the
balance (including dividend arrears), equity shares of Rs. 100 each (Rs. 50 paid
up) shall be issued.
c) All equity shareholders agreed to pay the balance amount, making shares fully
paid up.
d) The plant & machinery was revalued at Rs. 90,000.
e) The value of stock was reduced by Rs. 1,00,000.
f) Land & Building shall be written down to Rs. 15,50,000.
g) Creditors agreed to forego their claims by 10%.
h) Loan was fully settled for Rs. 2,00,000.
i) Goodwill, debit balance of Profit & Loss Account shall be written off.
j) Cost of reconstruction Rs. 5,000 was paid. Above resolution was carried out.
You are required to :
i) Pass Journal Entries
ii) Prepare Capital Reduction Account
iii) Prepare Balance Sheet after reconstruction.

10. Following is the Balance Sheet of M/s Careless Ltd. as on 31st March, 2009.

Liabilities Rs. Assets Rs.

40,000-8% Cumulative Goodwill 1,10,000
Preference Shares of Rs. 10 Freehold Property 1,20,000
each 4,00,000 Leasehold Property 2,44,000
30,000 Equity Shares of Rs. 10 Plant & Machinery 3,20,000
each 3,00,000 Furniture 80,000
Securities Premium 10,000 Stock 60,000
9% Debentures 1,20,000 Debtors 1,20,000
Accrued Debenture Interest 5,400 Preliminary Expenses 5,000
Sundry Creditors 1,70,000 Profit & Loss Account 1,38,400
Bank Overdraft 1,92,000
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11,97,400 11,97,400

Preference dividend was in arrears for four years.

There was a contingent liability of Rs. 20,000 for workmen compensation.
Following scheme of reconstruction was approved and implemented:
a) The Preference shares were reduced to Rs. 7.50 per share fully paid and equity shares
to Rs. 2 per share fully paid.
b) After reconstruction, both classes of shares were consolidated into Rs. 10 shares.
c) One new equity share of Rs. 10 each was issued for every Rs. 40 of gross preference
dividend in arrears.
d) The balance of securities premium was utilized.
e) Plant & Machinery was written down to Rs. 2,80,000.
f) Furniture was sold for Rs. 64,000.
g) Goodwill, preliminary expenses, debit balance of Profit & Loss Account, debt of Rs.
17,200 and obsolete stock of Rs. 20,000 were to be written off.
h) Contingent liability for which no provision had been made was settled at Rs. 14,000.
However, the amount of Rs. 12,600 was recovered from insurance company.
i) Debenture holders agreed to forego principal amount by Rs. 30,000 and accrued
debenture interest in full.

Pass Journal Entries; prepare Capital, reduction Account and Balance Sheet after
reconstruction.

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8 Prof. Naresh Dhanawade