Sahas Institute :- 11-12 Comm / FY – SY – TY B.

com /CA & CS Page |1

11th12th(Eng.Med)
F.Y S.Y. T.Y. B.COM
C.A. & C.S ( All levels )
E-107, Vrundavan Township, Harni Road, Near Sangam, Vadodara. M : 99989 84152, 82384 48020
Sharnam Complex , Besides Crystal School , Opp; Bahurani Restaurant , W.rd M : 82384 48020

T.Y.B.Com [ Sem 5 ] -: Advance Accounting :- Unit 1

=================================================================

Chapter-2 : INETERNAL RECONTRUCTION

(ALTERNATION OF CAPITAL)
[Q. 1] Explain Meaning of Internal Reconstruction.
:- In case of internal reconstruction, the capital of a company is reorganized to infuse new life in the
company.
:- It may take place by reducing the capital of the existing company without going into liquidation.
:- In this case the affairs of the company are reorganized by proper valuation of assets, reassessment of
liabilities and by writing off accumulated past losses through reducing the paid up value of shares
and or varying the rights of outside liabilities and different classes of shares.
:- The internal reconstruction of the company includes both alternation and reduction of capital.
-------------------------------------------------------------------------------
[Q.2] What is the meaning of Alternation of Share Capital.
:- A company can alter its share capital, if it is empowered by its articles to do so.
:- The alteration of capital can be done under the provisions of sections 61, 64 of the companies
Act, 2013.
:- The term alternation proper includes the following.
1. Consolidation or subdivision of the existing shares into share's of larger
or smaller denominations.
2. Conversion of fully paid shares into stocks and vice versa.
-------------------------------------------------------------------------------
[Q.3] Discuss different Accounting Entries of Internal Reconstruction.
[1] Increase in Share Capital :-
:- Increase in capital can be of course, brought about offering mere shares for subscription.
:- This is similar to making fresh issue of share capital : entries for the purpose will be same
as in the case of original issue of shares.
(A) Increase of Authorised Capital in Memorandum Of Association
No Entry
(B) Increase Of paid Up Capital By Further Issue of Shares Bank A/C.... Dr.
To Equity Share Capital A/C.
Entries can be for issue of shares At Par, Premium Or Discount
[2] Consolidation of Shares :-
:- In case of consolidation of shares, shares of smaller denomination are converted into shares of larger
denomination.
:- In such case the paid up share capital remains the same but the number of shares reduced.
:- The following journal entry will be passed for such conversion.
Share Capital (Say Rs. 100) A/C………………………. Dr.
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 Sahas Institute :- 11-12 Comm / FY – SY – TY B.com /CA & CS Page |2

To Equity Share Capital (Rs.100) A/C:

(Being 1,00,000 Equity Shares of Rs.10 each Consolidated To 10,000 Equity Shares
of Rs. 100 Each.)
,

[3] Sub-Division of Shares :-

:- In this case, shares of larger denomination are converted into shares of smaller denominations.
:- The journal entry in respect of such conversion would be on the same pattern as in case of consolidation
of shares, expect the number of shares would increase.
:- The following journal entry will be passed for such conversion.
Share Capital (say Rs.100) A/C……………….. Dr.
To Share Capital (Rs.10) A/C.

[4] Conversion of shares into stock :-

:- A company can convert its fully paid equity shares in to 'stock 'is not divided into equal and serially
number parts and hence the members will hold so much amount of shares have been converted
into stock.
:- 'Stock' rather than so many shares.
:- Thus if A held 20 shares of Rs.100 each previously, after conversion into stock he will be said to hold
Rs.2,000 'stock'.
:- The conversion of shares into stock is recorded in the books of account by entry.
Share Capital A/C Dr.
To Capital Stock A/C.
M = 82384 48020 , 99989 84152
:- The stock can be converted into shares.
:- The journal entry in such case would be just opposite of above. Karelibaug Waghodia Road

[5] Cancellation Of Unissued Shares :-

:- In case company cancels it unissued shares it does not require aly entry to be passed.
:- The authorized share capital of the company of the company will need reduced by the amount of
unissued shares.
:- No Accounting Entry is to be Passed in The Books of The Company.
-------------------------------------------------------------------------------
[Q.4] Write a short note on Internal Reconstruction.
:- When a company has been suffering losses continuously for any reason, its real capital is gradually lost
and will not be represented by the available, tangible assets.
:- Internal reconstruction refers to the reduction of capital to cancel any paid-up capital which is so lost or
unrepresented by the available assets.
:- This is generally resorted to; to write off past accumulated losses and to make the balance sheet show
the true and fair view of the assets and capital.
:- The capital written off, is used to eliminate the losses accumulated and to bring down the assets to their
true values.
:- The capital reduction account is a temporary account opened for carrying out the internal reconstruction
and will be closed when the scheme is carried out.
:- If this account shows any balance after the scheme, it will be transferred to a capital reserve account.
:- The equity shareholders bear the losses and will be agreeing to a reduction of their capital for an internal
reconstruction since the alternative would be to force the company into liquidation and in such an
event their loss would be much heavier because the assets may be realised only at a loss on a
forced sale.
:- Further, after internal reconstruction, there is every possibility of a company making sufficient profits
and in such a case it is only the ordinary shareholders who are going to be benefited.
:- Hence, they generally prefer reduction of their capital to a liquidation.
:- If the losses accumulated are so heavy that the sacrifice made by the ordinary shareholders
alone would not be sufficient to wipe out the entire losses from the books,
then preference shareholders and debenture holders

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 Sahas Institute :- 11-12 Comm / FY – SY – TY B.com /CA & CS Page |3

and/or creditors would be involved in the scheme of reconstruction

and their claims against the company would be reduced.
-------------------------------------------------------------------------------
[Q.5] Discuss the difference between Internal Reconstruction & External Reconstruction.
(1) Internal reconstruction means that the scheme will be carried out by means of reduction of capital, i.e.
by getting the approval of the court while external reconstruction means that the scheme will be
carried out by liquidating the existing company and incorporating immediately another company to
take over the business of the outgoing company.
(2) In internal reconstruction, debenture holders, creditors and bank overdraft may continue whereas they
may not if there is an external reconstruction where these parties will have to be settled.
(3) In internal reconstruction, the company will be able to set off the past losses against future profits for
income tax purposes, considerably reducing the tax liability. In the case of external reconstruction,
losses cannot be carried forward for income tax purpose since the business technically comes to an
end with liquidation.
(4) Internal reconstruction is a slow and tedious process since the approval of all creditors, shareholders
and the confirmation by the court are required before the scheme is carried out. But external
reconstruction can be brought about by the decision of the ordinary shareholders and hence is the
only way for a speedy reconstruction.
---------------------------------------------------------------------
[Q.6] Discuss different Methods of Reducing Share capital.
Reduction of Share Capital :-
:- Under section 100 of the companies act, company limited by shares can carry out reduction of capital
if it is authorised by its articles and by special resolution and confirmation of court.
:- Reduction of share capital will not be effective until a copy of the resolution and sanction of court is filed
and registered with registrar of companies.
:- The term reduction of capital includes the following.
1. Refunding the surplus paid up capital.
2. Reducing liability of the members of uncalled capital.
3. Writing off lost capital.
[A] Refunding The Surplus Paid Up Capital :-
:- A company may decide to refund excess capital to the shareholders in case if it has accumulated surplus
liquid cash, which cannot be profitably used.
:- The following journal entries will be passed in such case :
(i) Share Capital (Say Rs.10) A.C Dr.
To Share Capital (Say Rs.8) A/C. M = 82384 48020 , 99989 84152
To Sundry Members (Say Rs.2) A/C.
Karelibaug Waghodia Road
(ii) Share Members A/C. (Say Rs.2) Dr.
To Bank A/C.
[B] Reducing Liability of Members for Uncalled Capital :-
:- Here, the liability of the, member in respect of the uncalled share capital is reduced.
:- However, the total paid up value of the capital remains unchanged.
:- The shareholders will not be required to pay money to the extent of uncalled capital cancelled.
:- Journal entry requiring the cancellation of uncalled liability is as under.
Share Capital A/C.(Old) Dr.
To Share Capital A/C. (New)
(In Both The Cases The Paid Up Amount Is Same)
[C] Writing Off Lost Capital :-
:- It means cancelling or writing off that part of paid up share capital
which is not represented by tangible assets.
:- This is generally resorted to write off the past- accumulated losses and to make the balance sheet show
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 Sahas Institute :- 11-12 Comm / FY – SY – TY B.com /CA & CS Page |4

the true and fair value of the assets and capital.

:- The capital written off is used to eliminate the losses accumulated and to bring down the assets to their
real value.
:- This can be effected in two ways
1) To reduce paid up value of the existing shares without reducing the nominal value of shares. The journal
entry in this case will be as follows
Share Capital A/C. Dr. (Reduction In Paid Up Capital)
To Capital Reduction A/C
2) To reduce both the nominal as well as the paid up value of shares. The journal entry in this case will be
as follows.
Share Capital A/C. (Say Rs.10) Dr….
To Share Capital (Say Rs.3) A/C
To Capital Reduction A/C. (Say Rs.7)
[D] Reduction of Claims Of Creditors, Debenture Holders, etc. :-
:- If the losses accumulated are so heavy that the sacrifice made by the ordinary shareholders alone would
not be sufficient enough to wipe out the entire losses from the books, then the preference
shareholders and debenture holders and/or creditors would be involved in the scheme of internal
reconstruction and their claim against the companies would be reduced.
:- The amount of sacrifice made by them is transferred to credit of capital reduction a/c.
Creditors A/c. Dr.
Accrued Interest On Debentures A/C….. Dr.
To Capital Reduction A/C.
[E] Payment Of Reconstruction Expenses And Unrecorded Liability :-
:- If expenses are paid or unrecorded liabilities are settled, the entry will be as follows :
Capital Reduction A/C. Dr.
To Bank A/C.

[F] Treatment of Arrears of Preference Dividend :-

(1) The dividends on preference shares already declared by the company appear as a liability in the balance
sheet of the company.
:- The claimants of unpaid dividend are just like the other creditors of the company.
:- If they agree to sacrifice under the scheme of internal reconstruction, the amount forgone will be
credited to capital reduction account.
(2) The arrears of preference dividends appearing by way of foot note below the company's balance sheet,
if sacrificed either in whole or in part by the preference shareholders under a reconstruction
scheme than no accounting entry is necessary since the company has not so far admitted any
liability in respect of them.
:- However if the company is required to pay in full or in part the arrears of preference dividends under the
reconstruction scheme this will be additional loss to the company.
:- The following journal entry will be passed in such a case.
(i) Capital Reduction A/C. Dr.
To Preference Dividend A/C.
(ii) Preference Dividend A/C. Dr.
To Bank A/C.
[G] Disposal of Capital reduction account :-
:- The capital reduction account denotes to its credit the sacrifice made by the different Parties i.e. Equity
shareholders, preference shareholders, debenture holders, creditors etc.
:- The amount forgone is utilized for writing off Profit and Losses a/c debit balance, goodwill, patents,
miscellaneous expenditure and the assets, which are found overvalued.
:- Similarly, any appreciation in the value of assets, capital profits etc. are also credited to this account.
:- The balance of the account is transferred to Capital Reserve.
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 Sahas Institute :- 11-12 Comm / FY – SY – TY B.com /CA & CS Page |5

:- The following journal entry is passed for disposal of capital reduction account.
Capital Reduction A/C……. Dr.
To Fictitious Assets A/c.
To Intangible / Tangible Assets A/c.
To Capital Reserve A/c. (Balance left out)
(1) The amount to written off cannot exceed the amount available in the capital reduction account. But if
any reserve appears in the books of the company, the same may be utilized in writing off the
accumulated losses and fictitious assets.
(2) While preparing the balance sheet of the company after reconstruction is duly carried out, the
following point should be taken into consideration.
(a) So far as fixed assets are concerned, the account written off under the scheme must be shown for 5
years.
(H) Now, the credit balance of capital reduction account would be utilized to write off fictitious and
intangible assets like profit and loss account (dr. Balance), goodwill, preliminary expenses etc.
:- And the balance would be utilized for writing down the value of assets to their proper values.
:- The entry for utilizing credit balance of capital reduction would be as under :
Capital Reduction A/C……. Dr.
To Fictitious Assets / Misc, Expd. A/c
To Other Assets to be written off A/c.
(I) If there is any Balance Left to The Credit of Capital Reduction Account.
:- The same is transferred to Capital Reserve Account after Completion of The Capital Reduction Scheme.
:- The following entry would be made:
Capital Reduction A/C.
To Capital Reserve A/C.
:- This entry can be Alternatively Combined with entry (G) above.
-------------------------------------------------------------------------------
EXAMPLES
[METHOD - 1] : REFUND OF SURPLUS CAPITAL
ILL.1) (Col.) A company has a share capital of Rs 2,00,000 divided into shares of R 10 each. The company
resolves to repay its member Rs 3 per share and make the shares as much as Rs 7 each fully paid
up. Pass the journal entry.
Solution :
Returning Surplus paid up capital = 2,00,000 = 20,000 Shares
10
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
(i) Equity share Capital (Rs 10) A/C. Dr. 2,00,000
To Equity Share Capital (Rs 7) A/C. 1,40,000
To Equity Shareholders (Rs 3) A/C. 60,000
(ii) Equity shareholders A/C. Dr. 60,000
To Bank A/C. 60,000
ILL.2) (Col.) MG Ltd. has 90,000 shares of Rs 10 each fully paid up. The company finds that it has excess
cash fund of Rs 2,70,000 and resolves to refund it. Pass journal entries.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
(i) Equity share Capital (Rs 10) A/C. Dr. 9,00,000
To Equity Share Capital (Rs 7) A/C. 6,30,000
To Equity Shareholders (Rs 3) A/C. 2,70,000
(ii) Equity shareholders A/C. Dr. 2,70,000

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 Sahas Institute :- 11-12 Comm / FY – SY – TY B.com /CA & CS Page |6

To Bank A/C. 2,70,000

ILL.3) Reliance Ltd. had on 31st March 2018. Rs 8,00,000 authorized capital divided into 80000 equity
shares of Rs 10/-each. All these shares were issued and fully paid. In June 2018, the company
decided to pay off Rs.2 per share to make the share of Rs.8 fully paid up, pass necessary journal
entries.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
(i) Equity share Capital (80000 Share X Rs.10) Dr. 8,00,000
To Equity Share Capital A/C. 6,40,000
(80000 share X Rs. 8)
To Equity Shareholders A/C. 1,60,000
(80000 share X Rs. 2)
(ii) Equity shareholders A/C. Dr. 1,60,000
To Bank A/C. 1,60,000
ILL.4) Infosys Ltd. has 2,00,000 shares of Rs 10 each fully paid up. The company finds that it has excess cash
fund of Rs.6,00,000 and resolves to refund it. Pass Journal entries.

Solution : JOURNAL ENTRIES

Date Particulars L.F. Debit Credit
(i) Equity share Capital Dr. 20,00,000
To Equity Share Capital A/C. 14,00,000
To Equity Shareholders A/C. 6,00,000
(ii) Equity shareholders A/C. Dr. 6,00,000
To Cash/ Bank A/C. 6,00,000
-------------------------------------------------------------------------------
[METHOD - 2] : CANCELLATION OF UNCALLED CAPITAL
ILL.5)(Col.) The paid up capital of Delta Ltd. is Rs.6,00,000 consisting of 10,000 Equity Shares of Rs.100
each Rs.60 called and paid up. The company passes special resolution to cancel the uncalled
capital. Pass necessary journal entry.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
(i) Equity share Capital (Rs.100 each, Rs.60 paid up) Dr. 6,00,000
To Equity Share Capital (Rs.60 each fully paid) 6,00,000
ILL.6)(Col.) A company has share capital of Rs.2,00,000 divided into equity shares of Rs.10 each called and
paid up Rs.7 each. The company decides to cancel the liability of members to the extent of Rs.1 per
share, thus making the shares of Rs.9 each, Rs.7 paid up.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
(i) Equity share Capital (Rs.10 each, Rs.7 paid up) Dr. 1,40,000
To Equity Share Capital (Rs.9 each,Rs.7paid up) 1,40,000
Writing off lost capital
ILL.7) Cancellation of unpaid amount of Rs.4,00,000 in respect of 1,00,000 equity shares of Rs.10 each, Rs.6
called and paid up.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
(i) Equity share Capital A/c. Dr. 6,00,000

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 Sahas Institute :- 11-12 Comm / FY – SY – TY B.com /CA & CS Page |7

(Rs.10 each, Rs.6 paid up)

To, Equity share capital A/c. (Rs.6 paid up) 6,00,000
--------------------------------------------------------------------------------
[METHOD - 3] : REDUCTION OF SHARE CAPITAL

ILL.8)(Col.) KC Ltd. has 1,00,000 Equity shares of Rs.10 each fully paid up. The company has huge
accumulated losses. Hence it is resolved to reorganize the company. For this purpose the shares are
reduce to Rs.2 per share. Pass journal entries (i) if the face value is changed (ii) if the face values has
unchanged.

Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
(i) Situation: Face value is changed
Equity share Capital A/c. (Rs.10) Dr. 10,00,000
To Equity Share Capital (Rs.2) A/C. 2,00,000
To Capital Reduction (Rs.8) A/C. 8,00,000
(ii) Situation: Face value is unchanged
Equity share capital A/C. Dr. 8,00,000
To Capital Reduction A/c. 8,00,000
Ex.9) XYZ Ltd., has 1,00,000 equity shares of Rs.10 each fully paid up. The company has huge accumulated
losses. Hence it is resolved to reorganize the company. For this purpose the shares are reduced to
Rs.3 per share. Pass journal entries.
(i) If the face value is changed (ii) If the face value has unchanged.
-----------------------------------------------------------------------------
[METHOD - 4] : REDUCTION OF CLAIM OF CREDITORS ETC.
ILL.10)(Col.) Pass journal entries in the following cases: (Under the scheme of internal reconstruction)
(i) Creditors of Rs.20,000 are finally settled by cash payment of Rs.16,000.
(ii) Creditors of Rs.1,00,000, 75% of their claim settled by cash payment of 20% and
sacrifice of 80%.
(iii) 1,000 14% Debentures of Rs.100 each are settled at 90% by issue at par of equity shares and
the balance is settled in cash.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
(i) Creditors A/c. Dr. 20,000
To Bank A/c. 16,000
To Capital Reduction A/c. 4,000
(ii) Creditors A/c. Dr. 75,000
To Bank A/c. 15,000
To Capital Reduction A/c. 60,000

(iii) Creditors A/c. Dr. 1,00,000

To Bank A/c. 90,000
To Capital Reduction A/c. 10,000

LOWEST FEES = HIGHEST VALUE EDUCATION

( From Anywhere @ Anytime )

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 Sahas Institute :- 11-12 Comm / FY – SY – TY B.com /CA & CS Page |8

Working :
Creditors 1,00,000

75% 75,0000 25% 25,000 (No Change)

20% Cash payment 80% Sacrifice In Balance Sheet as creditors

15,000 60,000
Ex.11) Pass the journal entries in the following cases.
(under the scheme of internal reconstruction)
(A) Creditors of Rs.10,000 are finally settled by cash payment of Rs.8,000.
(B) Creditors of Rs.50,000, 75% of their claim settled by cash payment of 30% and sacrifice of 70%.
(C) 200, 15% debentures of Rs.100 each are settled at 90% by issue at par
of equity shares of Rs.100 each and the balance is settled in cash.
---------------------------------------------------------------------------------
[METHOD - 5] : CONSOLIDATION OF SHARE CAPITAL

ILL.12) Consolidation of 1,80,000 11% pref. shares of Rs.50 each fully paid up into 11% pref. shares of
Rs.100 each. Pass journal entries.

Solution : JOURNAL ENTRIES

Date Particulars L.F. Debit Credit
1 11% Pref. share Capital A/c. Dr. 90,00,000
(1,80,000 Share X Rs.50)
To 11% Pref. share capital A/c. 90,00,000
(90,000 share X Rs.100)
ILL.13) Consolidation of 20,000 14% preference share of Rs.25 each fully paid up into 14% preference
shares of Rs.100 each. Pass journal entries.

Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
1 14% Pref. share Capital A/c. 5,00,000
(20000 share X Rs.25)
To 14% Pref. share capital A/c. 5,00,000
(5000 share X Rs.100)
-------------------------------------------------------------------------
[METHOD - 6] : SUB - DIVISION
ILL.14) 8% Rs.1,00,000 Preference share of Rs.100 each are converted into Rs.80,000 preference shares of
Rs.80 each.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
1 8% Pref. share capital (Rs.100) A/c. Dr. 1,00,000
To 8% Pref. share capital A/c. (Rs.80) 80,000
To Capital Reduction A/c. 20,000

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 Sahas Institute :- 11-12 Comm / FY – SY – TY B.com /CA & CS Page |9

ILL.15) X Ltd., having a share capital of Rs.6,00,000 divided into shares of Rs.100 each, resolves to convert
the share capital into equity shares of Rs.10 each. Show the journal entry.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
1 Equity share Capital (Rs.100 each) Dr. 6,00,000
To Equity Share Capital (Rs.10) 6,00,000
ILL.16) Sub-division of 1,00,000 fully paid equity shares of Rs.10 each into 2,00,000 equity shares of Rs.5
each fully paid up.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
1 Eq. share capital A/c. Dr. 10,00,000
(1,00,000 share X Rs.10)
To Eq. share capital A/c. 10,00,000
(2,00,000 share X Rs.5)
ILL.17) X Ltd. has a share capital of Rs.400000 divided into 4000 shares of Rs.100 each of which Rs.80 per
share is called up and paid-up. Pass the journal entry of X Ltd. Resolves to subdivide the shares into
40000 shares of Rs.10 each of which Rs.8 per share paid-up and called-up.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
1 Equity share capital A/c. Dr. 3,20,000
(Rs.100 each, Rs.80 paid up)
To Eq. share capital A/c. 3,20,000
(Rs.10each, Rs.8 paid up)
z

ILL.18) Sub-division of 40,000 fully paid equity shares of Rs.100 each into 4,00,000 equity shares of Rs.10
each fully paid.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
1 Equity share capital A/c. (Rs.100) Dr. 40,00,000
To Equity share Capital A/c. (Rs.10) 40,00,000
--------------------------------------------------------------------------------
[METHOD - 7] : CONVERSION OF EQUITY SHARE CAPITAL TO EQUITY
STOCK & RECONVERSION
ILL.19) Conversion of equity stock of Rs.12,00,000 into 1,20,000 equity shares of Rs.10 each.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
1 Equity share stock A/c. Dr. 12,00,000
(1,20,000 shares X 10)
To Equity share Capital A/c. 12,00,000
ILL.20) Conversion of 60,000 equity shares of Rs.10 each into equity of Rs.6,00,000.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
1 Equity share capital A/c. Dr. 6,00,000
To Equity share stock A/c. 6,00,000
(60,000 shares X 10)
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 S a h a s I n s t i t u t e : - 1 1 - 1 2 C o m m / F Y – S Y – T Y B . c o m / C A & C S P a g e | 10

ILL.21) Conversion of fully paid equity share capital of Rs.3,00,000 into equity stock.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
1 Equity share capital A/c. Dr. 3,00,000
To Equity share Capital A/c. 3,00,000
ILL.22) Conversion of equity stock of Rs.2,50,000 into 25,000 equity shares of Rs.10 each.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
1 Equity stock A/c.(Rs. 10) Dr. 2,50,000
To Equity share Capital A/c. 2,50,000
===============================================================
MISCELLANEOUS EXAMPLES :-
ILL.23) X Ltd., has a share capital of Rs.2,00,000 divided into 2,000 shares of Rs.100 each of which Rs.80 per
share called up and paid up. Show the entries under of the following condition.
(1) If X Ltd., resolves to sub-divide the shares into 20,000 of Rs.10 each of Rs.8 per share paid up
and called up.
(2) If X Ltd., resolves to convert its 2,000 shares of Rs.100 each fully paid up into Rs.2,00,000 worth
of stock.
Solution :
JOURNAL ENTRIES
Date Particulars L.F. Debit Credit
(i) Equity share Capital A/c. (100,80 paid) Dr. 1,60,000
(2,000 share X Rs.80)
To Equity Share Capital (Rs.2) A/C. 1,60,000
(Rs.10 each, Rs.8 paid up)
(ii) Equity shareholders A/C. Dr. 2,00,000
To Equity stock A/c. 2,00,000
Ex.24) Voltamp Ltd. had on 31st December 2017, 160000 equity shares of Rs.10 each, Rs.8 per share called
and paid-up. In July 2018 the company decided to reduce it to Rs.8 per share fully paid up by
cancelling unpaid amount of Rs.2 per share. Pass necessary journal entry.
Ex.25) The paid up capital of Wipro Ltd. is Rs. 10,00,000 consisting of 20,000 equity shares of Rs.100 each,
Rs.50 called & paid Up. The company resolves to cancel the uncalled capital, pass necessary journal
entry.
<

Ex.26) (1) A company has its share capital 10,000 equity shares of Rs.10 each fully paid. It was to
consolidate the same into shares of Rs.50 each.
(2) A company has in its share capital 10,000 equity shares of Rs.10 each, Rs.5 paid up. It was
decided to consolidate the same into shares of Rs.50 each.
(3) A company has 1,000 preference shares of Rs.100 each fully paid. It was decided to subdivide
the same into shares of Rs.50 each.
(4) A company has 1,000 preference shares of Rs.100 each, Rs.50 paid up. It was decided to
subdivide the same into shares of Rs.50 each.
Ex.27) (a) Draft necessary journal entries in each of the following cases: (give reasons, where necessary) :
(1) ABC Ltd., has 10,000 shares of Rs.100 each, Rs.80 paid up. It was decided not to call remaining
Rs.20 from the shareholders and make the shares of Rs.80 fully paid up.
(2) XYZ Ltd., has 10,000 shares of Rs.10 each fully paid. It was decided to pay back Rs.2 Per share to
the shareholders and make shares of Rs.8 each fully paid up.
(3) PQR Ltd., has an authorized capital of 10,00,000 divided into 10,000 equity shares
of Rs.100 each. The company has issued only 8,000 equity shares so far.
It was decided to cancel the remaining unissued shares.
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 S a h a s I n s t i t u t e : - 1 1 - 1 2 C o m m / F Y – S Y – T Y B . c o m / C A & C S P a g e | 11

(4) TNG Ltd., has in its share capital 50,000 equity shares of Rs.10 each Rs.5 paid up. It was decided
to consolidate the same into shares of Rs.50 each.
(5) ZEE Ltd., has 5,000 preference shares of Rs.100 each, Rs.50 paid up. It was decided to subdivide
the same into shares of Rs.50/-.
. (6) The authorized share capital of Tom Ltd., consists of 40,000 equity shares of Rs.100 each.
The company increased its authorized capital to Rs.50,00,000.
Ex.28) (a) KBC Co. Ltd., had on 31st march 2018, Rs. 4,00,000 authorized capital divided into 40,000 equity
shares of Rs.10 each. All these shares were issued and fully paid. In June 2018, the company
decided to pay off Rs.2 per share to make the share of Rs.8 fully paid up. Pass necessary
journal entries.
(b) Mahatma Ltd., has 1,00,000 shares of Rs.10 each fully paid up. The company finds that it has
excess cash fund of Rs.3,00,000 and resolves to refund it. Pass journal entries.
(c) ABC & Co. Ltd., had on 31st December2016, 80,000 equity shares of Rs.10 each, Rs.8 per share
called and paid-up. In July 2017 the company decided to reduce it to Rs.8 per share fully
paid up by cancelling unpaid amount of Rs.2 per share. Pass necessary journal entry.
(d) The paid up capital of Delta Ltd., is, Rs.5,00,000 consisting of 10000 equity shares of Rs.100 each
Rs.50 called and paid-up. The company passes special resolution to cancel the uncalled
capital. Pass necessary journal entry.
(e) A company has share capital of Rs.4,00,000 divided into equity shares of Rs.70 each.The
company decides to cancel the liability of members to the extent of Rs.10 per share, thus
making the shares of Rs,90 each, Rs.70 paid up.
=============================================================== ==
COMPREHENSIVE EXAMPLES :-
ILL.29) Following the information the balance sheet of ABC Ltd. as on 31-3-18.
Equity & Liabilities : Rs.
1,00,000 8% Pref. share of Rs.10 each 10,00,000
3,00,000 Equity share of Rs.5 each 15,00,000
7% Debentures 6,00,000
O/S interest on debentures 42,000
Bank Overdraft 2,00,000
Creditors 5,00,000 M = 82384 48020 , 99989 84152
Total Rs. 38,42,000 Waghodia Road
Karelibaug
Assets
Building 3,40,000
Machinery 9,60,000
Equipment 2,73,000
Investment 1,50,000
Stock 4,25,000
Debtors 5,34,000
Development exp.(Not written off) 1,80,000
Profit & Loss A/C. 9,80,000
Total Rs. 38,42,000
:- A scheme of internal reconstruction approved by following:
(1) Pref. shares were to be reduce to 80% of their paid up value ha fully paid and equity shares to reduce to
10% of their paid up value keeping value unchanged.
(2) Assets to be revalued as follows:
Machinery 5,90,000 Stock 3,00,000
Equipment 1,50,000 Debtors 4,87,000
(3) Building costing Rs.60,000 is now worth Rs.1,40,000 & is to be taken by debentures holders in part
repayment of the principal amount due to the remaining building, is valued as Rs.4,00,000.
(4) The balance due to debentures holders was paid off.
(5) Investments were sold for Rs.2,20,000.
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 S a h a s I n s t i t u t e : - 1 1 - 1 2 C o m m / F Y – S Y – T Y B . c o m / C A & C S P a g e | 12

(6) A creditors of Rs.1,80,000 agreed to accept new 10% debenture of Rs.1,55,000, in full satisfaction of
this claims others creditors of Rs. 1,00,000 agreed to accept 85 paisa. In a Rs. In full settlement.
(7) Development expenditure is to be written off.
(8) After above adjustment the equity shareholders will bringing sufficient cash to make the share fully
paid up.
(9) The cost of scheme Rs.3,500 passed necessary journal entries & write a balance sheet after
amalgamation of their scheme.
Solution :
Dr. Capital Reduction A/c. Cr.
Particulars Rs. Particulars Rs.
To Machinery A/c. 3,70,000 By 8% Pref. share capital A/c. 2,00,000
To Stock A/c. 1,25,000 By equity share capital A/c. 13,50,000
To equipment A/c. 1,23,000 By building A/c. (See W.N.) 2,00,000
To Debtors A/c. 47,000 By Investment A/c. 70,000
To Bank A/c. 3,500 By Creditors A/c. (See W.N.) 40,000
To Development exp. A/c. 1,80,000
To P & L A/c 9,80,000
To Capital reserve A/c. 31,500
Total Rs. 18,60,000 Total Rs. 18,60,000
Dr. Capital Reduction A/c. Cr.
Particulars Rs. Particulars Rs.
To Investment A/c. 2,20,000 By Balance b/d 2,00,000
To equity share capital 13,50,000 By Debenture holder A/c. 4,60,000
By O/S interest on deb. A/c. 42,000
By Creditors A/c. 85,000
By Capital reduction A/c. 3,500
By Balance c/d. 7,79,500
Total Rs. 15,70,000 Total Rs. 15,70,000
JOURNAL ENTRIES IN THE BOOKS OF ABC LTD.
Date Particulars L.F Debit Rs. Credit Rs.
1 8% Pref. share capital A/c. (Rs.10) Dr. 10,00,000
To Capital reduction A/c. (Rs.2) 2,00,000
To 8% Pref. share capital A/c. (Rs.8) 8,00,000
2 Equity share capital A/c. Dr. 13,50,000
To Capital reduction A/c. 13,50,000
3 Capital reduction A/c. Dr. 6,55,000
To Machinery A/c. 3,70,000
To Stock A/c. 1,25,000
To equipment A/c. 1,23,000
To debtors A/c. 47,000
4 Building A/c. Dr. 2,00,000
To Capital reduction A/c. 2,00,000
5 7% Debentures A/c. Dr. 6,00,000
To Debentures holders A/c. 6,00,000
6 Debentures holders A/c. Dr. 6,00,000
To Building A/c. 1,40,000
To Cash/Bank A/c. 4,60,000
7 O/s Interest on deb. A/c. Dr. 42,000
To Bank A/c. 42,000
8 Bank A/c. Dr. 2,20,000
To Investment A/c. 1,50,000
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 S a h a s I n s t i t u t e : - 1 1 - 1 2 C o m m / F Y – S Y – T Y B . c o m / C A & C S P a g e | 13

To Capital reduction A/c. 70,000

9 Creditors A/c. Dr. 2,80,000
To 10% Debentures A/c. 1,55,000
To Bank A/c. 85,000
To Capital Reduction A/c. 40,000
10 Capital Reduction A/c. Dr. 11,60,000
To Development A/c. 1,80,000
To P & L A/c. 9,80,000
11 Bank A/c. Dr. 13,50,000
To Equity share capital A/c. 13,50,000
12 Capital reduction A/c. Dr. 3,500
To Bank A/c. 3,500
Working
(1) Building (3,40,000 Rs.b.V)

Costing 60,000 2,80,000

| |
Taken deb. Hold 1,40,000 4,00,000 (remaining valued at amt.)
| |
(1,40,000-60,000) 80,000 1,20,000 (4,00,000- 2,80,000)

CR = 2,00,000 Rs.
(2) 7% debentures 6,00,000 Rs. M = 82384 48020 , 99989 84152

Karelibaug Waghodia Road

Building (1,40,000) 4,60,000 (Pay in cash)

(3) Creditors (Rs.5,00,000 Total)

Creditor 1,80,000 1,00,000

1,55,000 25,000 0.85 paisa remaining

15,000 60,000 85,000 15,000
10% deb. (CR) Cash (CR)
Revised Balance Sheet as on 31-3-18
Particulars Notes Amount Rs.
EQUITY AND LIABILITIES :
(1) Shareholder’s Funds :
(A) Share Capital 1 23,00,000
(B) Reserve And Surplus 2 31,500
(2) Non Current Liabilities :
(A) Long term borrowings 3 1,55,000
(B) 10% Debentures
(3) Current Liabilities :
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 S a h a s I n s t i t u t e : - 1 1 - 1 2 C o m m / F Y – S Y – T Y B . c o m / C A & C S P a g e | 14

(A) Trade Payable 4 ----

(B) Creditors 5 2,20,000
Total 27,06,500
ASSETS
(1) Non-Current Assets :
(A) Fixed Assets :
(I) Tangible Assets 6 11,40,000
(B) Non current investment 7 --
Investment
(2) Current Assets :
(A) Inventories (stock) 8 3,00,000
(B) Trade Receivables 9 4,87,000
(C) Cash And Cash Equivalents 10 7,79,500
Total 27,06,500
ILL.30) Following the balance sheet of XYZ Ltd.
Equity & Liabilities : Rs.
10,000 9% Cumulative Pref. share of Rs.10 each 1,00,000
30,000 Equity share of Rs.10 each 3,00,000
13.5% Debenture 1,00,000
Creditors 50,000
Total Rs. 5,50,000 M = 82384 48020 , 99989 84152
Assets Karelibaug
Fixed Assets 3,80,000
Waghodia Road
Goodwill 1,00,000
Cash in hand 9,000
Accumulated loss 61,000
Total Rs. 5,50,000
:- The company decided of scheme of internal reconstruction which was duly authorised.
:- The scheme as follows.
(1) Each existing equity shares is to be reduced by Rs.5 paid. Face value remain same.
(2) 2 equity share Rs.10 each, Rs.5 paid up per share to be issued to each pref. share.
(3) 10,000 equity share when taken up by the directors & paid up by them to the extent of Rs.5 each.
(4) Arrears of Pref. dividend for last 4 years to be cancelled.
(5) Debenture holder to receive 8,000 equity shares of Rs.10 each credited as fully paid up against their
total amount.
(6) Creditors included Rs.10,000 holding lien on sum off the fixed assets.
(7) Unsecured creditors to be paid immediately to be extent of 10% of their claims & the accepted written
off 20% off their claims.
(8) The authorized capital of company consisted of 1 lakh equity share of Rs.10 each & Rs.20,000. 9%
Cumulative pref. share of Rs.10 each.
:- The amount available as result of the scheme to be utilized to write off accumulated loosed.
:- Goodwill, fixed assets to the extend off 10,000.
Solution :
Dr. Capital Reduction A/C Cr.
Particulars Rs. Particulars Rs.
To Goodwill A/C. 1,00,000 By equity share capital A/C 1,50,000
To Fixed Assets A/C. 10,000 By 13.5.10 Debenture A/C 20,000
To P & L A/C. 61,000 By Creditors A/C 8,000
To Capital reserve A/C. 7000
Total Rs. 1,78,000 Total Rs. 1,78,000

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 S a h a s I n s t i t u t e : - 1 1 - 1 2 C o m m / F Y – S Y – T Y B . c o m / C A & C S P a g e | 15

Dr. Bank A/C Cr.

Particulars Rs Particulars Rs
To balance B/d 9,000 By Creditors A/C 4,000
To equity share capital A/C 50,000 By balance c/d 55,000
Total Rs. 59,000 Total Rs. 59,000
JOURNAL ENTRIES IN THE BOOKS OF ABC LTD.
Date Particulars L.F Debit Rs Credit Rs
1 Equity share capital A/C Dr. 1,50,000
To Capital reduction A/C 1,50,000
2 9% cumulative pref. share A/c. Dr. 1,00,000
To equity share capital A/c. 1,00,000
(Being 20,000 equity share of R.10 each,5 paid
up issued to 10,000 pref. shares ofRs.10 each
under reconstruction scheme.)
3 Bank A/c. Dr. 50,000
To Equity share capital A/c. 50,000
4 13.5 % Debentures A/c. Dr. 1,00,000
To equity share capital A/c. 80,000
To Capital reduction A/c. 20,000
(Being 8,000 equity share of Rs.10 each fullyPaid
up issued to debentures holders in fullsettlement
of their claim.)
5 Creditors A/c. Dr. 12,000
To Cash/bank A/c. 4,000
To Capital reduction A/c. 8,000
6 Capital reduction A/c. Dr. 1,71,000
To Fixed assets A/c. 1,00,000
To Goodwill A/c. 10,000
To Accumulated loss A/c. 61,000
7 Capital reduction A/c. Dr. 7,000
To Capital reserve A/c. 7,000
Creditors (Rs.50,000)

Secured New B/S 10,000 40,000 (Unsecured)

28,000 (Unsecured) 10% 4,000 cash

40,000 10% 4,000 Cash

40,000 20% 8,000
40,000 - 12,000 = 28,000 (Unsecured) new b/S

Smart Mobile Education – From Any Time – Any Where

E 107 Vrundavant Township , 11 – 12th Commerce Sharnam Complex ,

Besides Tasty Restaurant , F.Y – S.Y – T.Y – B.Com Besides Crystal School
Near Sangam Cross Roads , Near Parivar Cross Roads ,
C.A & C.S [ All Levels ]
Karelibaug Waghodia Road

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 S a h a s I n s t i t u t e : - 1 1 - 1 2 C o m m / F Y – S Y – T Y B . c o m / C A & C S P a g e | 16

NOTES TO BALANCE SHEET

(1) Equity share capital
60,000 equity share of 10 each 3,00,000
5 Paid
8,000 equity share of Rs. 10 each 80,000 3,80,000
(Off the above 8,000 equity share of Rs.10 each fully paid up
issued to 13.5 debentures 10,000
Of Rs.10 each Rs.2 paid up issued directors cash in equity shares
Of 20,000 issued at 9% cumulative pref. share & other reduce to
Rs.5 each under scheme of internal reconstruction.)
(2) Reserve & surplus
Capital Reserve 7,000
(3) Non current Liability
Long term borrowing 10,000
Creditors (Lien off fixed assets)
(4) Current Liability 28,000
Creditors
Total Rs. 4,25,000
(5) Fixed Assets
Fixed Assets 3,70,000
(6) Cash & Cash equipments 55,000
Total Rs. 4,25,000
REVISED BALANCE SHEET AS ON 31-3-18
Particulars Rs.
Shareholders Fund
Share capital 1 3,80,000
Reserve & Surplus 2 7,000
Non Current Liabilities
Long term borrowings 3 10,000
Current Liabilities
Creditors (Trade Payable) 4 28,000
Total Rs. 4,25,000
Assets
Fixed Assets
Tangible Assets 5 3,70,000
Current Assets
Cash & cash equivalent 6 55,000
Total Rs. 4,25,000

Ex.31) (Col.) The following is the Balance Sheet of Hopeful Ltd., As on 31-12-17.
Equity & Liabilities : Rs.
Authorized Capital :
10,000 6% PreferenceShares of Rs.100 each 10,00,000
50,000 Equity Shares of Rs.10 each 5,00,000
Subscribed Capital:
5,000 6% Preference Shares of Rs.100 Each fully paid 5,00,000
40,000 Equity Shares of Rs.10 Each Fully paid-up 4,00,000
Capital Reserve 25,000
5% Debentures of Rs.100 Each 2,00,000
Accrued Interest on Debentures 30,000
Sundry Creditors 1,55,000
Total Rs. 13,10,000

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 S a h a s I n s t i t u t e : - 1 1 - 1 2 C o m m / F Y – S Y – T Y B . c o m / C A & C S P a g e | 17

Assets
Goodwill 55,000
Patents & Trade Marks 45,000
Building 2,15,000
Plant & Machinery 2,55,000
Furniture & Fixtures 60,000
Stock in Trade 90,000
Sunny Debtors 75,000
Cash at Bank 12,500
Cash in Hand 2,500
Discount on Issue of Debentures 20,000
Profit & Loss A/c. 4,80,000
Total Rs. 13,10,000
:- Note: The Preference dividend is in arrears for past 3 years.
:- It was decided to reconstruct the company. The following scheme was prepared and duly approved by
the court.
(a) The preference shares shall be converted into 7% preference shares of Rs.50 each.
(b) The equity shares shall be reduced to Rs.3 each.
(C) The 5% debentures shall be converted into 6% debentures of Rs.75 each. The debentures holders also
agreed to waive 50% of the accrued interest.
(d) Arrears of preference dividend is to be cancelled.
(e) The sundry creditors agreed to waive 30% of their claim and to accept equity share for Rs.30,000 of
their renewed claims in part settlement.
(f) The assets are to be revalued as follows building Rs.2,50,000, stock in trade R.80,000; furniture &
fixtures Rs. 55,000 plant & machinery Rs.2,25,0000; sundry debtors Rs.70,000.
(g) Patents and trademarks and other fictitious assets (including goodwill) are to be written off as far as
possible. Draft the journal entries necessary to give effect to the aforesaid scheme and prepare the
balance sheet after the reconstruction.
Ex.32) A Ltd., decided to reorganize its capital structure because of a period of adverse trading conditions.
The balance sheet of the company as on 31-3-2018 showed the following.
Equity & Liabilities Rs.
20,000 8% PreferenceShares Of Rs.10 Each 2,00,000
15,000 Equity Shares of Rs.10 Each 1,50,000
Security Premium Account 5,000
Profit And Loss Account (-)69,200
9% Debentures 60,000
Interest outstanding on Debentures 2,700
Creditors 85,000
Bank Overdraft 96,000
Total Rs. 5,29,500
Assets Rs.
Goodwill 55,000
Freehold Property At Cost 60,000
Leasehold Property (Net) 1,22,000
Plant & Machinery (Net) 1,60,000
Trade Investment At Cost 40,000
Stock 30,000
Debtors 60,000
Preliminary Expenses 2,500
Total Rs. 5,29,500
:- Note : Preference dividends are in arrears for 4 years.
:- Subsequent to approval by the court of a scheme for the reduction of capital, the following steps were
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 S a h a s I n s t i t u t e : - 1 1 - 1 2 C o m m / F Y – S Y – T Y B . c o m / C A & C S P a g e | 18

taken:
(1) The preference shares were reduced to Rs.7.5 per share and the equity shares to Rs.2 per share. After
reduction the shares were consolidated into Rs.10 shares.
(2) The authorized capital was restored to Rs.2,00,000 8% cumulative preference shares and Rs.1,50,000
equity shares, both of Rs.10 each.
(3) 1 new equity shares of Rs.10 was issued for every Rs.40 of gross preference dividend in arrears.
(4) The debenture holders took over the freehold property at an agreed figure of Rs.75,000 & paid the
balance to the company after deducting the amount due to them.
(5) Plant and machinery was written down to Rs.1,40,000.
(6) Trade investment was sold for Rs. 32,000.
(7) Goodwill, preliminary expenses, debts of Rs.8,600, obsolete stock of Rs.10,000 and profit & Loss
account were written off.
(8) Contingent liability for which no provision had been made was settled at Rs.7,000 and of the amount
Rs.6,300 was recovered from the insurers.
(9) Available cash is deposited in bank overdraft account.
(10) The deficit if any in capital reduction account will be adjusted with securities premium account.You
are required to pass journal entries to record the above transaction in the company’s book, to
show capital reduction account and cash account and to prepare the balance sheet after
completion of the scheme. [CR = 1,90,000; B/S : 3,33,400]
Ex.33) The Following is the Balance Sheet Of M/S Ltd., As on March 31st 2018.
Equity & Liabilities Rs.
50,000 Equity Shares Of Rs.10 Each Rs.7.5 Paid Up 3,75,000
9% 20,000 Cumulative Pre. Shares.Of Rs. 10 Each, Fully Paid Up 2,00,000
Profit and Loss Account (-)1,50,000
11% Debentures 2,00,000
Bank Overdraft 50,000
Creditors For : Trade 72,000
Debentures Interest Due 44,000
Expenses 17,000
Bank Interest 2,000
Total Rs. 8,10,000
Assets Rs.
Goodwill 1,20,000
Plant And Machinery 2,80,000
Land And Buildings 2,00,000
Stock In Trade 95,000
Debtors 65,000
Cash And Bank 50,000
Total Rs. 8,10,000
:- The company is in arrears of preference dividends for three years.
:- Finding itself in a difficult situation; the company formulated a scheme of reconstruction and obtained
the approvals of the authorities and parties concerned.
:- The scheme in its essentials consisted the following:
(1) Cumulative preference shareholders would give up their rights to dividends in arrears.
(2) Interest due on debentures would be waived to the extent of 50% and for the balance equivalent value
of debentures would be issued at a discount of 12%.
(3) Bank would scale down its interest calculations from 16% to 10%.
(4) Trade creditors to be fully discharged by setting their claims at 90% in future.
(5) Goodwill to be written off fully. Plant and machinery to be depreciated by 20%. Stock in trade by 10%
and doubtful debts to the extent of 40% of the total outstanding to be written off.
(6) Land and buildings to reflect their market value of Rs.3 Lakhs.
(7) Cost of reconstruction amounting to Rs.15,450 to be written off.

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 S a h a s I n s t i t u t e : - 1 1 - 1 2 C o m m / F Y – S Y – T Y B . c o m / C A & C S P a g e | 19

(8) The Equity Share holders agree to suffer such reduction in their claims as is necessary put the scheme
into operations.
:- Show the journal entries to put the above scheme into operations and draw the balance sheet of the
company after construction.
[Total Losses to be written off Rs.3,79,950; Sacrifices available Rs.1,29,950; Reduction of Rs.5 Per
Equity Share; Balance Sheet Total Rs.6,48,500]
Ex.34) The following scheme of internal reconstruction was duly approved for Poornima Ltd.
(1) Equity shares were to be reduced to Re. one each.
(2) Preference shares were to be reduced by Rs.2 per share.
(3) Debentures holders were to forego their unpaid interest Rs.5,200 which I included in creditors.
(4) ‘B’ debentures holders agreed to take over the Bombay property at Rs.50,000 and paid the
balance amount due from them in cash.
(5) Workmen’s compensation fund (Bombay) disclosed the fact that actually there was a liability of
Rs.2,000 only. As a result the relevant fund account balance account balance was to be
brought down to the required amount. Investments were realized at 10% above the book
value.
(6) The plant and machinery were to be written down by Rs.90,000.
(7) Any balance remaining was o be applied as to 75% in writing down the Poona Property and 25%
transferred o capital reserve.
Following is the balance sheet of Poornima Ltd., as on 31-3-2018.
Equity & Liabilities: Rs.
Equity Shares of Rs.10 Each Fully Paid 7% 2,00,000
Preference Shares of Rs.10 Each Fully Paid 1,80,000
Workmen’s Compensation Fund :
Poona 20,000
Bombay 10,000
Secured Loans :
M = 82384 48020 , 99989 84152
A 6% Debentures (Poona Property) 30,000
B 6% Debentures (Bombay Property) 35,000 Karelibaug Waghodia Road
Creditors 25,000
Total Rs. 5,00,000
Assets
Poona Property 1,60,000
Bombay Property 1,20,000
Plant & Machinery 1,50,000
Investment 30,000
Miscellaneous Expenditure 40,000
Total Rs. 5,00,000
:- Pass the necessary journal entries in the books of the company and prepare balance sheet as 1-4-2018
after giving effect of the above reconstruction scheme.
[CR=Total Rs.2,32,200; CR Rs.8,050; B/S = Rs.2,43,850]
Ex.35)(Col.) RK Ltd., had adverse trading for past few years resulting in accumulated losses and overvalued
assets. Its balance sheet as on 31st march,2018 was as follows.
Equity & Liabilities Rs.
30,000 Equity Shares of Rs.10 Each 3,00,000
25,000 8% Preference SharesOf Rs.10 Each 2,50,000
Securities Premium 10,000
12% Debentures (Secured) 1,00,000
Outstanding Interest on Debentures 6,000
Creditors 1,21,000
Overdraft 1,40,000
Total Rs. 9,27,000
E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 S a h a s I n s t i t u t e : - 1 1 - 1 2 C o m m / F Y – S Y – T Y B . c o m / C A & C S P a g e | 20

Assets
Goodwill 45,000
Freehold Property 80,000
Leasehold Property 1,27,000
Plant 1,62,000
Investment 65,000
Stock 70,000
Debtors 1,60,000
Profit & Loss A/C 2,18,000
Total Rs. 9,27,000
:- Note: Preference dividend is unpaid for past five years.
:- The shareholders and the court approved the following scheme of reconstruction.
(1) The paid up value of preference shares and equity shares was to be reduced by 25% and 75%
respectively. The face value will remain unchanged.
(2) The debenture holders took over freehold property, which was mortgaged in their favor. This property
realized Rs.1,10,000. The balance amount after adjusting principal and interest was handed over to
the company.
(3) The investments are sold for Rs.80,000.
(4) Obsolute stock worth Rs. 10,000 and irrecoverable debt worth Rs.11,000 are to be written off along
with goodwill and profit and loss account.
(5) There was a claim against a company not provided to the extent of Rs.20,000. This was settled for
Rs.8,500.
(6) The preference dividend for two years was to be paid in cash. The remaining amount to be cancelled.
(7) A call of Rs.2.50 per share on revised equity and preference shares was made. This was paid by all
shareholders.
(8) The authorized capital was suitably revised from Rs.6,00,000 to Rs.10,00,000 which was equally divided
between equity and 8% preference shares.
(9) The remaining balance is utilized to pay bank overdraft.
:- You are required to show journal entries and balance sheet after implementation of the scheme.
[CR=Total Rs.3,32,500; B/S = Rs.5,31,000]
Ex.36) The following is the Balance Sheet of Sick Ltd., as on 31st Dec 2018.
Equity & Liabilities Rs.
Issued Share Capital:
10% Cumulative Pref. Shares of Rs.100 Each Fully Paid 60,000
Equity Shares Of Rs.10 Each Fully Paid Up 4,20,000
Profit & Loss A/C (-)1,80,000
8% Debenture 1,80,000
Sundry Creditors 15,00,000
Bills Payable 8,40,000
Provision for Taxation 1,80,000
Total Rs. 30,00,000
Assets
Goodwill 1,20,000
Land & Building 60,000
Plant & Machinery 7,20,000
Stock 12,00,000
Debtors 6,00,000
Cash At Bank 3,00,000
Total Rs. 30,00,000
:- The following scheme of reconstruction is sanctioned.
(i) Preference shareholders to forego their right to the arrears of preference dividend which are in arrears
for three year Rs.

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152
 S a h a s I n s t i t u t e : - 1 1 - 1 2 C o m m / F Y – S Y – T Y B . c o m / C A & C S P a g e | 21

(ii) All existing equity shares reduced to Rs.5 each.

(iii) All preference shares reduced to Rs.75 each.
(iv) Sundry creditors of the company decide to forego 50% of the claims, and they are allotted 60,000
equity shares of Rs.5 each in part satisfaction of the balance of claim.
(v) The rate of debentures is increased to 10%. The debentureholders surrender their existing debentures
of Rs.100 each, and exchange the same for fresh debentures of Rs.75 each.
(vi) Goodwill and Profit & Loss Account should be completely written off and other assets to be reduced as
follows:
(a) Plant and Machinery by Rs.1,80,000;
(b) Stock by Rs.4,20,000;
(c) Reserve for doubtful debts to be made at 10% on debtors.
(vii) Taxation liability has been assessed at Rs.2,40,000.
Pass journal entries and show balance sheet of the company after giving effect to the above.
[CR =Total Rs.10,20,000 ; B/S = Rs.22,20,000]
================================================================

Quality Teaching + Efficient Management = Best Result

Join the Best

To be the Best
Lowest Fees = Highest Value Education

E-107, Vrundavan township, Besides Tasty Restaurant ,Near sangam char rasta, – 82384 48020 , 99989 84152