Discussion Problem-01

Following a series of trading losses, Sputnik Ltd resolved to reduce its capital to 50,000 fully paid Tk. 5
shares and to eliminate its share premium account. The balance sheet prior to implementation of the
scheme was:

Liabilities & Equity Tk. Assets Tk.

Equity: Non-current Assets:
Share capital 5,00,000 Goodwill 1,00,000
Share Premium 50,000 Land & Buildings 1,62,000
Retained Earning (50,000) Plant & Machinery 2,07,000
Liabilities: Current Assets:
Creditors 62,000 Stock 92,000
Bank Overdraft 73,000 Debtors 74,000
Total 635,000 Total 635,000

It was resolved to apply the sum available under the scheme:

(i) to write-off the Goodwill Account.

(ii) To write-off the debit balance of retained earning account.
(iii) To reduce the book values of the assets by the following amounts:
(a) Land and buildings-Tk. 42,000
(b) Plant & Machinery Tk. 67,000
(c) Sock- Tk. 33,600
(iv) to provide a bad debt reserve of 10% of the book value of debtors.

Show by journal entries, accounting adjustments required to give effect to the scheme and prepare the
revised balance sheet.

Solution:

First of scheme must be approved by the shareholders in EGM and a special resolution must be passed.
A petition must be filed to high court of BD to get confirmation of the court. The court confirmation and
minutes must be submitted to RJSC.

Journal Entries

1.

Capital Reduction A/C---Dr. 300,000

Goodwill Account-----Cr. Tk. 100,000

Retained Earnings------Cr. Tk. 50,000

Land & Building-------Cr. Tk. 42,000

Plant & Machinery---Cr. Tk. 67,000

Stock--------------------cr. Tk. 33,600

Allowance for bad debt---Cr. 7400

2.

Share capital-----Dr. Tk. 250,000

Share Premium ----Dr. Tk. 50,000

Capital Reduction A/C---- Cr. Tk. 300,000

Sputnik Ltd
Statement of financial Position (and reduced)
at 31st December 2021

Liabilities & Equity Tk. Assets Tk.

Equity: Non-current Assets:
Share capital 2,50,000 Land & Buildings 1,20,000
Liabilities: Plant & Machinery 1,40,000
Creditors 62,000 Current Assets:
Bank Overdraft 73,000 Stock (92,000-33600) 58,400
Debtors (Net) (74,000-7400) 66,600
Total 385,000 total 385,000