Unit: 1 Capital Reduction/ Internal Reconstruction 25%

Golden Rules for solving question:

Assets reduced =CR A/c Dr.= If Assets decreases- Debit Capital Reduction A/c
Assets Increased=CRA/c Cr.= If Assets increases- Credit Capital Reduction A/c
Liabilities Reduced=CRA/c Cr.=If Liabilities reduces/decreases - Credit Capital Reduction A/c
Liabilities Increased=CR A/c Dr.= If Liabilities increases- Debit Capital Reduction A/c
Short Examples of Internal Re-organization:

1. A company has to pay one contingent liability of Rs.75,000. 50% of this liability is to
be paid by one director of company. A director has advanced a loan of Rs.62,500 to a
company. The company has deducted necessary amount from the director loan and the
remaining amount is paid by equity shares. The company has also paid contingent
liability. Write necessary entries with reference to capital reduction in the books of
company.
2. Directors have agreed to accept 65% of their claims in the form of equity share and
20% in cash and they have waived the remaining amount of Rs.26,250. Write necessary
entries with reference to capital reduction in the books of company.

3. The debenture holders of Sunil Co. Ltd. holding 12% debentures of Rs.5,00,000 have
agreed to accept the machinery of Rs.2,25,000 value at Rs.3,00,000 as part settlement
of their claim. Write necessary entries with reference to capital reduction in the books
of company.

4. Following balances of a company at the time of capital reduction were available:

10% debentures of Rs.500 each ------- Rs.7,50,000
Accrued interest on debentures ------- Rs.75,000
----------
8,25,000
According to the scheme of capital reduction, debenture holders will reduce their total claim
up to Rs.7,70,000 including interest and in consideration, the debenture holders are to get 8%
Preference shares each of Rs.100 from shares surrendered. Write necessary entries with
reference to capital reduction in the books of company.
5. Rs. 35,000 dividend on preference shares is not declared and paid. Preference
shareholders agreed to waive 3/5 dividend and for the 2/5 equity shares are to be
allotted. Journalise above transaction in case of capital reduction.
6. The directors returned the fees of Rs.20,000 received by them from the company.
Journalise above transaction in case of capital reduction.
7. A company was called upon to pay a contingent liability of Rs.10,000 when the scheme
of capital reduction was implemented. This amount was recovered from a director who
has advanced a loan of Rs. 40,000 to the company. The balance was paid to him in cash.
Journalise above transaction in case of capital reduction.
8. The company converted its 10,000 equity shares of Rs.10 each into shares of Rs.1 each
and thereafter, the shareholders are asked to surrender 90% of their shares to the
company. Journalise above transaction in case of capital reduction.
9. The debenture holders agree to cancel Rs.2,00,000 out of their dues. In consideration
of this, they are given surrender shares of Rs.1,00,000. Journalise above transaction in
case of capital reduction.
 10. There was a contingent liabilities of Rs.20,000 for Workmen compensation. For this
contingent liability no provision was made. It was settled at Rs. 14,000, however the
amount of Rs. 12,600 was recovered from insurance company. Journalise above
transaction in case of capital reduction.
11. A company has to pay one contingent liability of Rs.1,50,000. 50% of this liability is
to be paid by one director of company. A director has advanced a loan of Rs.1,25,000
to a company. The company has deducted necessary amount from the director loan and
the remaining amount is paid by equity shares. The company has also paid contingent
liability. Write necessary entries with reference to capital reduction in the books of
company. (July-2023)
12. Dividend on preference shares of Rs. 1,80,000 of Dhara Ltd. Is in arrears, which is
required to be cancelled. In exchange of it, Rs. 75,000 in cash and 3,600 fully paid
shares of Rs. 10 each at market price of Rs. 12.50 is to be paid. Pass journal entries in
reference of capital Reduction.
13. Dividend on 8% preference shares of Rs. 6,00,000 was in arrears for last two years.
Under the scheme of capital reduction, for outstanding dividend of Rs.100,an equity
share of Rs.25 is given in full settlement. Pass journal entries in reference of capital
Reduction.
Q.2 Answer the following:
1. A balance sheet of Divya Ltd. as on 31-03-2023 was as under:

Particulars Note Amount

No.
I. Equity and Liabilities
1. Share Holders’ Fund
a. Share Capital
Equity Shares of Rs.100 each fully paid 7,00,000
10% Pref. Shares of Rs.100 each fully paid 2,10,000
b. Reserve & Surplus
Profit & Loss A/c (1,20,000)
2. Non-Current Liabilities
a. Long term borrowings: 12% Debentures 2,24,000
b. Other Long term Liabilities: Director’s loan 42,000
3. Current Liabilities
a. Trade payable- Creditors 2,97,200
b. Other current liabilities: Accrued Interest on debentures 26,800
Total 13,80,000
II. Assets

1. Non-Current Assets
a. Fixed Assets- Tangible Assets
Land & Building 4,20,000
Plant & Machineries 2,03,000
Intangible Assets- Goodwill 1,20,000
b. Non-current Investments 49,000
c. Other Non-current Assets- Preliminary expenses 34,500
2. Current Assets
a. Inventories- Stock 2,03,000
 b. Trade Receivables- Debtors 1,50,500
c. Cash & Cash Equivalents: Bank balance 2,00,000
Total 16,50,000
Contingent liability: Claim of compensation against the company Rs.65,000.
Tribunal has approved a re-organization of scheme.
1. Every preference share by Rs.90 and every equity share to be reduced by Rs.30.
2. The debenture holders agreed to forgo their accrued interest and also agreed to accept a piece
of land having book value of Rs.1,12,000 at valuation of Rs.1,40,000 in part payment of their
holding.
3. The remaining land and building were valued at Rs.3,50,000.
4. Investments are to be sold at Rs.55,000. Reconstruction expenses amounted to Rs. 21,000.
5. It was decided that Company has to pay claim against itself. For this the amount of Rs.42,000
was adjusted against the credit balance of Director’s loan A/c in the company.

6. All intangible and fictitious assets are to be written off.

Pass necessary entries & prepare a balance sheet after introduction of scheme.
2. The Balance Sheet of Radhika Ltd. as on 31-3-2023 was as follows:
Particulars Note Amount
No.
I. Equity and Liabilities
1. Share Holders’ Fund
a. Share Capital
Equity Shares of Rs.100 each fully paid 3,20,000
8% Preference Shares of Rs. 100 each 1,60,000
b. Reserve & Surplus
Profit & Loss A/c (48,000)
2. Non-Current Liabilities
a. Long term borrowings: 10% Debentures 1,60,000
b. Other Long term Liabilities: Director’s loan 64,000
3. Current Liabilities
a. Short term borrowings- Bank overdraft 38,400
b. Trade payable- Creditors 80,000
c. Other current liabilities: Accrued Interest on debentures 16,000
Total 7,90,400
II. Assets

1. Non-Current Assets
a. Fixed Assets- Tangible Assets- Free hold property 1,60,000

Plant & Machineries 2,16,000

Intangible Assets- Goodwill 80,000
b. Non-current Investments 80,000
c. Other Non-current Assets- Preliminary expenses 32,000
3. Current Assets
 a. Inventories- Stock 1,44,000
b. Trade Receivables- Debtors 78,400
Total 7,90,400
The scheme of capital reduction sanctioned by the Tribunal is as under:
(1) Equity Shares are to be written down by Rs. 80 each.
(2) Preference Shares are to be written down to Rs. 60 each.
(3) The Debenture holders agreed to have their accrued interest paid in cash and to take
over Freehold Property, having a book value of Rs. 80,000 at a valuation of Rs. 1,12,000
in part payment of amount due to them.
4) The Directors accept settlement of their loan as to 80% of thereof by allotment of
Equity Shares, 10% in Cash and the balance being waived.
(5) The remaining amount is to be utilised in writing down Plant and Stock in the
proportion to their book values. You are required to show the Journal Entries and Balance
Sheet after Capital Reduction.

[South Guj. Uni., S.Y., April, 2015]

3. The following is the Balance Sheet of Modera Ltd, as on 31-12-2022:
Particulars Note Amount
No.
I. Equity and Liabilities
1. Share Holders’ Fund
a. Share Capital
4,000 Equity shares of Rs. 100 each fully paid 4,00,000

1,000, 'A' equity shares of Rs. 100 each, Rs. 50 paid up 50,000

b. Reserve & Surplus

Profit & Loss A/c (6,00,000)
Investment Allowance Reserve 1,50,000

2. Non-Current Liabilities
a. Other Long term Liabilities: Loan 6,40,000
3. Current Liabilities
a. Trade payable- Creditors 2,60,000
(including Rs. 10,000 holding some assets)
Total 9,00,000
II. Assets

1. Non-Current Assets
a. Fixed Assets- Tangible Assets- Land & Building 1,00,000
Machineries 4,00,000
Furniture 10,000
Motor vans 40,000
b. Non-current Investments (Market value Rs. 40,000) 50,000
2. Current Assets
a. Inventories- Stock 1,00,000
b. Trade Receivables- Debtors 1,90,000
c. Cash & Cash Equivalents: Bank balance 10,000
Total 9,00,000
A scheme of reconstruction was prepared and approved as under:
(1) Present value of Land and Building has been appreciated by 150%.
(2) Equity shares to be reduced to Rs. 10 per share paid, by cancelling Rs. 90 per share,
the face value remaining the same Rs. 100 and the equity shareholders paying a call of Rs.
50 per share to provide funds for the company's working capital
(3) Unsecured loans to be paid immediately to the extent of Rs. 1,00,000.
(4) Unsecured creditors to be paid immediately to the extent of 10% of their claims and
they accept a remission of 20% of their total claims.
(5) Investment Allowance Reserve, being no longer required, to be transferred to Profit
and Loss Account.
(6) Investments to be brought to their market value
(7) The amount available as a result of the scheme to be used to write off the debit
balance of Profit and Loss Account.
[South Guj. Uni., S.Y., April, 2016]
4. A balance sheet of Nivana Ltd. as on 31-03-2023 was as under:

Particulars Note Amount

No.
I. Equity and Liabilities
1. Share Holders’ Fund
d. Share Capital
Equity Shares of Rs.10 each fully paid 20,00,000
10% Red.Pref. Shares of Rs.100 each fully paid 8,00,000
II. Reserve & Surplus
Profit & Loss A/c (5,80,000)
2. Non-Current Liabilities
c. Long term borrowings: 12% Debentures 6,00,000
d. Other Long term Liabilities: Director’s loan 2,00,000
3. Current Liabilities
a. Short term borrowings: Bank Overdraft 3,00,000
b. Trade payable- Creditors 5,18,000
c. Other current liabilities: Accrued Interest on debentures 72,000
Total 39,10,000
II. Assets

1. Non-Current Assets
a. Fixed Assets- Tangible Assets- Land 8,00,000
Building 6,00,000
Machineries 2,80,000
Intangible Assets- Goodwill 6,00,000
b. Non-current Investments 4,50,000
c. Other Non-current Assets- Advertisement Suspense Account 50,000
4. Current Assets
a. Inventories- Stock 7,20,000
b. Trade Receivables- Debtors 4,00,000
c. Cash & Cash Equivalents: Bank balance 10,000
Total 39,10,000
Tribunal has approved following re-organization of scheme.
1. Every equity share is to be reduced by Rs.2.50.
2. Preference shareholders are given 15% 6000 preference shares of Rs.100 each and 80,000
equity shares of Rs.2.50 each.
3. The debenture holders are given 20,000 equity shares of Rs.2.50 each for their accrued
interest on debentures. Rate of interest of Debentures is increased to 15%. Debenture holders
are given Rs.2,00,000, 15% debentures of Rs.100 each at Rs.90.
4. Director’s loan of Rs.80,000 is to be cancelled and for balance amount of loan 20,000 equity
shares of Rs.2.50 are given as full settlement.
5. Investments are to be sold for Rs.6,00,000. Amount of Bank overdraft is paid.
6. Creditors of Rs.3,18,000 are paid immediately and balance is to be paid at quarterly intervals.
7. All intangible and fictitious assets are to be written off.
8. The assets are to be adjusted to fair value as under:

Assets Amount
Debtors 3,60,000
Stock 6,40,000
Machinery 2,00,000
Building 5,00,000
Land 6,40,000

Pass necessary entries & prepare a balance sheet after introduction of scheme.

[South Guj. Uni., S.Y., October, 2023]

5. Following balance appeared in the books of Tejanand Ltd. as on 31stMarch, 2018.

Particulars Notes Rs.

I. Equity & Liabilities :
(1) Shareholders’ Funds :
(a) Share Capital :
2,40,000 Equity Share of Rs. 10 each fully paid 24,00,000
7% Cumulative Pref. Shares of Rs. 100 each 12,00,000
(b) Reserve & Surplus : Profit & Loss A/c (10,20,000)
(2) Non-Current Liabilities :
(a) Long Term Borrowings : 12,00,000
8% Debentures of Rs. 100 each

Loan form Directors 2,40,000

 (3) Current Liabilities : 12,00,000
(4) Other Current Liabilities:
Debentures Interest Due 48,000
Total 62,88,000

II. Assets :
(1) Non-Current Assets :
(a) Fixed Assets
(i) Tangible Assets :
Land & buildings 14,40,000
Plant & Machinery 13,20,000
(ii) Intangible Assets :
Goodwill 3,00,000
(b) Non-Current Investments : 1,44,000
(2) Current Assets : 20,64,000
62,88,000
Total
Notes:

(1) Claims for damages against the company pending in the Court of law
amounted ₹ 1,20,000.
(2) Arrears of Pref. Share dividend for one year.
A scheme of capital reduction as approved by the court was as follows:
(1) Reduce the pref. share capital and equity share capital.
(2) Preference shareholders waived half of the arrears of dividend and for
remaining amount issues necessary number of new equity shares after capital
reduction (per share as new value).
(3) Debenture holders agreed to take over part of the Plant and Machinery having
book value ₹ 4,32,000 at ₹ 6,00,000 and ₹ 1,44,000 equity shares of new value
of each share were issued to them for the balance.
(4) Debenture holders waived their interest due on debentures.
(5) The claims for damage pending in the Court of law were settled by issue
14,400 equity shares of new value of each fully paid.
(6) Directors converted their loan into 96,000 equity shares in the same amount at
new per share value of share.
(7) All intangible and fictitious assets were written off.
(8) The assets were revalued as under: Plant and Machinery ₹ 4,08,000
Investment ₹ 1,20,000
 Note:
Following journal entry appear in the books of company for the balance of capital reduction
account and transfer to capital reserve :
Capital Reduction A/c Dr 5,94,000
To Capital Reserve A/c. 5,94,000
From the above information pass necessary journal entries in the books of company and prepare
Balance Sheet (as per Companies Act, 2013) after capital reduction.
6. The Balance Sheet of Prachi Ltd. as on 31-03-2023 is as under:

Particulars Notes Rs.

I. Equity & Liabilities :
(1) Shareholders’ Funds :
(a) Share Capital :
Equity Share of Rs. 10 each Rs. 5 Paid up 20,00,000
8% Pref. Shares of Rs. 100 each Rs. 75 Paid up 12,00,000
(b) Reserve & Surplus :
Profit & Loss A/c (8,56,000)
(2) Non-Current Liabilities :
(a) Long Term Borrowings :
9% Debentures 12,00,000
Loan form SBI 3,00,000
(3) Current Liabilities :
(a) Trade Payables : Creditors 1,38,000

(b) Other Current Liabilities:

Accrued Interest on Debentures 2,16,000

Outstanding Interest on Loan 30,000

42,28,000

II. Assets :
(1) Non-Current Assets :
(a) Fixed Assets 22,40,000
(b) Intangible Assets :
Goodwill 1,60,000
 (c) Non-Current Investments : 1,30,000
(Market Value Rs. 1,10,000)

(2) Current Assets :

(a) Inventories : Stock 13,60,000
(b) Trade Receivables : Debtors 2,40,000
Bills Receivable 98,000

42,28,000
Total
Note: Preference divided is in arrear for one year.

Following scheme of reconstruction is approved and agreed upon:

(1) Preference shareholders give up their claim, inclusive of dividends to

the extent of 30% and balance to be paid off. -70% paid
(2) Debenture holders agree to give up their claims to receive interest in
consideration of their rate of interest being enhanced to 10% henceforth.
(3) SBI Ltd. Agrees to give up 50% of their interest outstanding in
consideration of their claim being paid off at once.
(4) Sundry creditors would like to grant discount of 5% if they were to be
paid off immediately.
(5) Balance of Profit and Loss Account, Goodwill fully and 25% of the
total debtors to be written off.
(6) Fixed assets to be written down by Rs. 28,000.
(7) Investments to be reflected at their market value. Cost of
reconstruction is Rs. 6,700.
(8) To the extent required, equity shareholders suffer on Reduction of their
rights.
(9) The equity shareholders bring in necessary cash against their partly
paid shares to leave working capital as Rs. 40,000.
Pass journal entries in the books of Prachi Ltd. and prepare Balance Sheet after
reconstruction.
Q. 7 The Balance Sheet of Mohit Ltd. as on 31-03-2023 is as under:

Particulars Note Amount

No.
II. Equity and Liabilities
1. Share Holders’ Fund
c. Share Capital
11,000 Equity Shares of Rs.100 each fully paid 11,00,000
d. Reserve & Surplus
Profit & Loss A/c (2,00,000)
 Security Premium 20,000
2. Non-Current Liabilities
b. Long term borrowings: Debentures 3,00,000
c. Other Long term Liabilities: Director’s loan 12,000
3. Current Liabilities
b. Trade payable- Creditors 5,000
c. Other current liabilities: Outstanding Interest on debentures 30,000
Unpaid director fees 15,000
Total 12,82,000
II. Assets

1. Non-Current Assets
c. Fixed Assets- Tangible Assets- Land & Building 1,00,000
Machineries 4,00,000
Furniture 10,000
Intangible Assets- Goodwill 6,00,000
2. Current Assets
d. Inventories- Stock 82,000
e. Cash & Cash Equivalents: Bank balance 90,000
Total 12,82,000
Tribunal has approved following re-organization of scheme. Pass necessary entries & prepare
a balance sheet after introduction of scheme.
1. Reduced Equity share by Rs.80.
2. Utilise security premium.
3. Debenture holders took over half the machines at Rs. 2,50,000 as partial payment; increase
10% in the price of remaining machinery. They have also accepted the following:
The amount of working capital should remain Rs.1,30,000 after implementing the entire
scheme. For this purpose, the debenture holders should give necessary cash to the company
after deducting 80% and waiving 20% of outstanding interest on debentures.
4. The price of furniture is shown 25% above its real value.5. The company had promised a
contract of Rs.60,000. The contract was cancelled by paying 10% penalty of contract price.