T.Y.

BAF Capital Reduction & excel

Financial Accounting Internal Reconstruction commerce classes

CAPITAL REDUCTION AND

INTERNAL RECONSTRUCTION
Q.1: Rajaji Ltd. had adverse trading for past few years resulting in accumulated losses and overvalued assets.
Its summary Balance Sheet as on 31st March 2004 is as follows .
Liabilities ` Assets `
Share Capital (in shares of ` 10 each) 3,00,000 Goodwill 45,000
30,000 Equity Freehold Property 80,000
25,000- 8% Preference 2,50,000 Leasehold Property 1,27,000
Securities Premium 10,000 Plant 1,62,000
12% Debentures (Secured) 1,00,000 Investments 65,000
Accrued Interest 6,000 Stock 70,000
Creditors 1,21,000 Debtors 1,60,000
Overdrafts 1,40,000 Profit & Loss Account 2,18,000
9,27,000 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 Preference dividend for two years is to be paid by allotment of Equity
Shares credited ` 2.50 per share. The remaining amount to be cancelled.(3)The Debenture holders took
over freehold property which was mortgaged in their favour. This property realised ` 1,10,000. The bal-
ance amount after adjusting principal and interest was handed over to the company. (4) The investments
are sold for ` 80,000. (5) Obsolete stock worth ` 10,000 and irrecoverable Debt worth ` 11,000 are to be
written off along with Goodwill and Profit & Loss Account. (6)There was a claim against company not
provided to the extent of ` 20,000. This was settled for ` 8,500. (7) A call @ ` 2.50 per share on revised
Equity and Preference Shares was made. This was paid by all shareholders. (8) The authorised Capital
was suitably revised from ` 6,00,000 to ` 10,00,000 which was equally divided between equity and 8%
preference shares. (9) Remaining Bank Balance to be utilised to pay Bank Overdraft.
You are required to show Journal Entries and Balance Sheet after implementation of the scheme.

Q.2: Naki Pvt. Limited has prepared the summary Balance Sheet as on 31st March, 2004 reading as follow .
Liabilities ` Assets `
Share Capital : Fixed Assets :
(In Shares of ` 10 each ) Equity 5,00,000 Premises 4,00,000
10% Preference 3,00,000 Plant & Equipment 6,50,000
Secured Loan : Investment 1,50,000
15% Debentures 6,00,000 Current Assets :
Current Liabilities : Stocks 1,80,000
Creditors 2,50,000 Debtors 1,20,000
Overdrafts 1,50,000 Bills Receivable- Trade 50,000
Other Liabilities 2,00,000 Profit & Loss A/c 2,50,000
Publicity Campaign Expenses 2,00,000
20,00,000 20,00,000
It is observed that the new product launched by the company is not succeeded even after three years of
marketing. The management is of the opinion that assets and liabilities are not valued correctly and also
finds if difficult to raise finances.To overcome this situation a Scheme of Reconstruction is prepared by
Directors and approved by all authorities.The Salient features of Scheme are : (1) Plant and equipment
having book value of ` 1,00,000 is absolete. This is sold as scrap for ` 20,000. (2) The auditors have
pointed out that depreciation on plant is not provided to the extent of ` 50,000. (3) Stock includes items
valued at ` 60,000 which is sold at a loss of 50%. (4) The present realisable value of investments is
` 70,000. (5) Dividend on Preference shares is in arrears for 3 years. This amount is not payable. (6) All
losses and fictitious assets are to be written off. (7) The Expenses paid for forming and implementing
scheme is ` 10,000. (8) The paid up value of equity shares is reduced to ` 2 per share and preference
shares to ` 5 per share. However, face value remains unchanged.
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T.Y.BAF Capital Reduction & excel
Financial Accounting Internal Reconstruction commerce classes
(9) The creditors dues are settled as : 20% immediate payment. 40% amount is cancelled. 40% New
16% Debentures to be issued. (10) The other Current Liabilities include ` 50,000 payable to Directors
towards remuneration. This liability is to be cancelled. (11) A call of ` 3 per share on equity shares is
made. It is paid by all shareholders. (12) 15% Debenture-holders agree for issue of 10,000 equity
shares of ` 5 paid up for cash. (13) Bank Overdraft is paid -off to the extent possible.
You are required to show - Journal Entries and Balance Sheet.

Q.3: Following is the Balance Sheet of Sun Limited as on 31st March, 2004.
Liabilities ` Assets `
Share Capital : Madras Works 25,00,000
Authorised Issued, Subscribed Delhi Works 15,00,000
and Paid up : 5,00,000 Equity Workmen Compensation 55,000
Shares of ` 5 each fully paid 25,00,000 Fund / Investment :
4,00,000 6% Preference Shares of Stock 1,20,000
` 5 each fully paid 20,00,000 Sundry Debtors 45,000
6% “A”, Debentures, Secured Discount on Debentures:
on Madras Works 1,00,000 “A” 3,500
6% “B” Debentures, Secured on “B” 12,000 15,500
Delhi Works 5,00,000 Profit & Loss A/c 16,19,500
Workmen Compensation Fund :
Madras 35,000
Delhi 20,000 55,000
Bank Overdraft 5,00,000
Sundry Creditors 2,00,000
58,55,000 58,55,000
On 1st April, 2004; a scheme to reduce capital is implemented as under :(1) The equity shares were
reduced to ` 0.25 each.
(2) The Preference shares were reduced to ` 3.75 each and the rate of dividend to be 5%.
(3) The “A” and “B” Debenture holders waived interest payment of ` 47,000 which was included in sundry
creditors. (4) The directors were to refund ` 75,000 fees, they had received earlier.
(5) The “B” debenture holders formed a new company to take over the Delhi works for ` 7,50,000 and this
price was satisfied on the same date by surrender of “B” debentures and allotment of 50,000 fully paid
shares of ` 5 each in the new company. The investments were valued at ` 35,000, stock at ` 60,000 and
debtors at ` 40,000. There was no actual liability to workmen at Delhi. The assets were to be written down
accordingly; any fictitious assets were to be eliminated, only necessary reserves were to be retained and
the balance available was to be written off the book value of the Madras works.
Journalise the above transactions in the books of the company and prepare the Balance sheet
after the above scheme is carried out.

Q.4: The following is the Balance Sheet of Bad-day Ltd. as on 31st December 2003.
Liabilities ` Assets `
Issued subscribed Capital: Goodwill 75,000
30,000 Equity Shares of ` 10 land & Building 2,50,000
each fully paid. 3,00,000 Plant & Machinery 1,37,500
2000 12% Preference Shares of Furniture 16,250
` 100 each fully paid up 2,00,000 Stock 1,31,500
11% Debentures 1,25,000 Debtors 23,000
Sundry Creditors 22,750 Cash in hand 375
Bank Overdraft 68,375 Profit and Loss Account 82,500
7,16,125 7,16,125
The preference dividend was in arrears for 5 years. The Capital Reduction Scheme was submitted as
under : (1) Equity shares to be reduced to ` 5 each. (2) All arrears of Preference dividend to be can-
celled. (3) Each Preference share to be reduced to ` 75 and then exchanged for one new 12% Prefer-
ence share of ` 50 each and five equity shares of ` 5 each.(4) The debit balance of Profit and Loss
Account to be written off. Plant / Machinery to be written down by ` 47,500 and Goodwill is to be reduced
as much as possible.
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Financial Accounting Internal Reconstruction commerce classes
(5) The debentures are to be redeemed at 5% premium. Holders being given the option to subscribe at par
for new 12% Debentures. Approval of the court is obtained, 1,00,000, new Equity Shares are issued at par
(sufficient new equity shares are increased by increasing Authorised Share Capital) payable in full on
application. The whole issue is underwritten for 2% commission and the issue was fully taken up. Holders
of old debentures of ` 50,000 exercised their option and subscribed for the new Debentures. Expenses in
connection with the scheme amounted to ` 3,375 and were written off. Journalise the transactions to
record Reduction scheme and set out new Balance Sheet of the company.

Q.5: Following is the Balance Sheet of Hardluck Ltd. as on 30th June, 2004:
Liabilities ` Assets `
5,000 7% Cumulative Preference 5,00,000 Goodwill 75,000
Shares of ` 100 each Patents 50,000
1,00,000 Equity Shares of Land & Buildings 6,00,000
` 10 each 10,00,000 Plant and Machinery 5,50,000
7% Debentures of ` 100 each Investments ( at cost) 60,000
(Secured on Land/Building) 5,00,000 Stock 4,30,000
Interest Payable to Debtors: Considered Good 4,00,000
Debenture holders 17,500 Debtors: Considered Doubtful 30,000
Loan from Directors 1,00,000 Cash 2,500
Creditors 4,00,000 Preliminary Expenses 80,000
U.T.I. Bank Overdraft 2,50,000 Profit and Loss Account 4,90,000
27,67,500 27,67,500
Contingent Liabilities: (1) Claims for damages pending in the court totalling ` 50,000.
(2) Arrears of Preference Dividend ` 14,000.
The Board of Directors agreed to present the realistic picture of the State of Affairs of the Company’s
position and the following scheme of reconstruction was duly approved :
(a) The Preference Shares were to be reduced to an equal number of fully paid Preference Shares of
` 80 each Equity Shares to an equal number of fully paid Equity Shares of ` 2.50 each. (b) All intangible
assets including patents to be written off. (c) Stock to be revalued at ` 3,80,000 and Debtors considered
Doubtful to be written off. (d) Preference shareholders agreed to waive half of the arrears of dividends
and to receive Equity Shares in lieu of the balance. (e) Debenture holder agreed to take over part of the
security of the book value of ` 1,80,000 for ` 2,50,000 in satisfaction of part of their claim and to provide
further cash of ` 1,50,000 after deducting arrears of interest due to them on floating charge of the rest of
the assets. (f) The contingent liability for claims for damages pending in the Court of Law materialised to
the full extent. However, the company could recover ` 40,000 from those who were responsible for such
damages and settled the rest by issuing Equity Shares. (g) The Directors agreed to convert the loan into
Equity Shares.You are required to:(1) Pass Journal entries (2) The Balance Sheet after reconstruction.

Q.6: The summary Balance Sheet of Baroda Chemicals Ltd. as at 31st October, 2003 was as under:
Liabilities ` Assets `
Share Capital: Fixed Assets :
` 10
1,50,000 Equity Shares of` Gross Block 20,00,000
each fully paid 15,00,000 Less : Depreciation 15,00,000 5,00,000
5,000 11% Preference Shares of Current Assets :
` 100 each fully paid 5,00,000 Stock and Stores 6,00,000
Secured Loans: Receivables 14,50,000
11% Debentures 5,00,000 Other Current Assets 2,00,000
Interest due on Profit and Loss A/c 16,40,000
Debentures 1,10,000 6,10,000
Bank Overdraft 6,30,000
Unsecured Loans 5,00,000
Add: Interest Due 1,50,000 6,50,000
Current Liabilities 5,00,000
43,90,000 43,90,000

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Financial Accounting Internal Reconstruction commerce classes
A scheme of reconstruction has been agreed amongst the shareholders and the creditors as follows: (a)
Interest due on unsecured loans is waived. (b) 50% Interest due on debentures is waived. (c) 11%
Preference shareholders, rights are to be reduced to 50% and then converted in to 15% Debentures of
` 100 each. (d) Current Liabilities would be reduced by ` 50,000. (e) The Bank agreed to the arrange-
ment and to increase cash credit or overdraft limits by ` 1,00,000 upon the shareholder’s agreeing to
bring in a like amount by way of new equity. (f) Besides additional subscription as above, the equity
shareholders agree to convert the existing equity shares into new ten rupees shares of total value of
` 5,00,000. (g) The debit balance in Profit and Loss A/c. is to be written off totally, ` 2,60,000 should be
provided for doubtful debt and the value of Fixed Assets be increased by ` 4,00,000.
You are required to : (1) Pass Journal entries (2) The Balance Sheet after reconstruction.

Q.7: The summarised Balance sheet of Viprada Ltd. as at 31st March 2004 was as follows:
` `
Redeemable Preference Shares Fixed Assets 50,00,000
Capital of ` 100 each, fully paid 10,00,000 Cash on hand 5,00,000
Equity shares of ` 100 each Cash at ICICI Bank 20,00,000
fully paid 50,00,000 Other Current Assets 50,00,000
Reserves 25,00,000 Preliminary Expenses 5,00,000
Creditors 20,00,000
Loans 25,00,000
1,30,00,000 1,30,00,000
The company proposed to make a fresh issue of capital to the public in June,2004. However before doing
so the directors desire to carry out the following scheme of reconstruction:(1) The fictitious assets shall
be written off. (2) The fixed assets to be appreciated by 20%. (3) The goodwill of the company valued at
` 25,00,000 shall be brought into the books. (4) A provision of 5% shall be made against the other current
assets for likely short fall in its realisation by ear-marking the requisite amount from the existing reserves.
(5) The preference shares shall be redeemed at 10% premium. (6) The company to issue Bonus
Shares in the ratio of one share for every two existing equity shares out of Capital Reserve. (7) The equity
capital thereafter to be sub-divided into shares of ` 10 each. You are required to prepare:Balance
sheet and Pass journal entires.

Q.8: M/s. Bhansali Ltd. whose Balance Sheet as at 31st December, 2003 is as given below:
Particulars ` `
Sources of Funds :
1,00,000 Equity shares of ` 20 each ` 10 paid up 10,00,000
8% Preference share Capital :
8,000 shares of ` 100 each, ` 75 paid up 6,00,000
Secured Loans
9% Debentures 6,00,000
Outstanding interest 1,08,000 7,08,000
Loan from ICICI Ltd. 1,50,000
Outstanding interest 15,000 1,65,000
Total 24,73,000
Application of Funds:
Fixed Assets 11,20,000
Goodwill 80,000 12,00,000
Investments at cost (Market value 55,000) 65,000
Current assets and loans and advances :
Current assets :
Stock 6,80,000
Debtors 1,20,000
Bills Receivable 49,000
8,49,000
Less current liabilities:
Sundry creditors 69,000 7,80,000
Profit & Loss Account 4,28,000
Total 24,73,000
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T.Y.BAF Capital Reduction & excel
Financial Accounting Internal Reconstruction commerce classes
Preference dividend is in arrears for one year.
Following Scheme of reconstruction is approved and agreed upon.(1)Preference share holders to give
up their claims, including of dividends to the extent of 30% and balance to be paid off.(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) ICICI Ltd. agree to give up 50% of their interest outstanding in consider-
ation of their claim paid off at once. (4) Sundry creditors would like to grant a discount of 5% if they were
to be paid off immediately. (5) Balance of profit & loss account, goodwill and 25% of the total sundry
debtors to be written off.(6) Fixed assets to be written down by ` 14,000.(7) Investment to be reflected
at their market value. (8) Cost of reconstructions is ` 3,350.(9)To the extent required, Equity sharehold-
ers suffer on reduction of their rights. (10) The Equity shareholders bring in necessary cash against their
partly paid shares to leave cash balance at ` 20,000
Pass necessary Journal entries in the books of the company assuming that scheme has been put
through fully and prepare the Balance Sheet after reconstruction.

Q.9: Bottomout Ltd. was in serious financial crisis and the Directors considered it advisable to go in for a
compromise scheme with its creditors:
Balance Sheet of Bottomout Ltd. as on 31-4-2004
Liabilities ` Assets `
Preference Share Capital 5,00,000 Land 80,000
` 100 paid-up)
(` Building 2,60,000
Equity Share Capital 7,00,000 Plant & Machinery 3,75,000
` 10 paid-up)
(` Trade Mark 75,000
Creditors 2,80,000 Goodwill 1,50,000
Bank Loan 2,15,000 Stocks 1,60,000
12% Debentures 2,00,000 Debtors 2,73,000
Profit & Loss A/c 5,12,000
Preliminary Expenses 10,000
18,95,000 18,95,000
Scheme as proposed by the directors is as below:(1) Bank agreed to waive interest amount outstand-
ing of ` 15,000 included in the balance subject to immediate payment of 50% of their dues. (2) Land
was revalued upwards by 550%; other Tangible Fixed Assets are to be written down by 20% uniformly;
all intangible and fictitious assets to be written off. (3) Debenture holders agreed to reduce their claim
by 20% provided they are paid 20% immediately and balance being redeemed in 4 equal annual
instalments. (4) Preference Shareholders to reduce their shares to ` 60 paid-up. (5) Equity sharehold-
ers to reduce their shares to ` 2 per share fully paid-up and subscribe to such number of shares to
meet the cash requirement of the scheme and also leave a cash balance of ` 25,000. Pass Journal
entries & Prepare Balance sheet.

Q.10: The summarise assets and liabilities portion of Sunrise Ltd. as on 1-4-2004 was as under .
Liabilities ` Assets `
Authorised Capital : Goodwill 40,000
1,60,000 Equity Shares of ` 10 each 16,00,000 Land & Building 3,20,000
4,000 9% Pref. Shares of ` 100 each 4,00,000 Plant & Machinery 2,40,000
20,00,000 Investments 48,000
Issued and Paid up: Stock 1,08,000
80,000 Equity Shares of ` 10 Debtors 2,36,000
each, 7.50 paid-up 6,00,000 Cash in Hand 12,000
4,000 9% Preference Shares Profit & Loss A/c 2,85,600
of ` 100 each fully paid 4,00,000
Unsecured Loan 1,60,000
Sundry Creditors 96,000
Bank Overdraft 33,600
12,89,600 12,89,600
Note: (i) Dividend on Preference shares has not been declared for 2 years.
(ii) No provision has been made for sales tax liability of ` 19,200.
The following scheme of reconstruction has been approved by the court :
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Financial Accounting Internal Reconstruction commerce classes
(1) Uncalled capital is to be called -up in full and equity shares are to be reduced to ` 5 per share. (2)
Sales tax liability of ` 18,000 is to be paid immediately. (3) Land & Building are to be shown in Balance
Sheet at full market value of ` 4,40,000. Goodwill is to be written off. (4) Trade creditors have agreed to
forego 25% of their dues on the condition that 25% of net liability after remission is paid forthwith and the
balance is paid within one year. (5) Investments are to be taken over by bank in full settlement of Overdraft
balance. (6) Preference shareholders have agreed to sacrifice their right for 2 year’s dividend and accept
24 fully paid equity shares of ` 5 each for fully paid Preference shares.
Give necessary Journal Entries and draft the Balance sheet after such reconstruction.

Q.11: Following is the Balance Sheet of Satyaraj Ltd. as on 31st March, 2008 :
Balance Sheet
Liabilities ` Assets `
Share Capital : Goodwill 3,40,000
1,60,000 Equity Shares of ` 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 ` 100 Stock 3,30,340
each fully paid 4,00,000 Investment 45,450
8% Debentures (` ` 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 ` 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.
(1) Equity shares be reduced to ` 1.25 each and then to be consolidated into shares of ` 10 each.
(2) 6% preference shares be reduced to ` 40 each and then to be subdivided into shares of ` 10 each.
(3) Interest accrued but not due on 8% debentures for half year ended 31st March, 2008 has not been
provided in the above Balance Sheet. The debenture holders have agreed to receive 40% of this interest in
cash immediately and provision for the balance be made in the books of account. (4) ` 24,000 be paid to
preference shareholders in lieu of arrears of preference dividend. (5) The debenture holders have also
agreed to accept equal number of 9% debentures of ` 60 each in exchange of 8% debentures of ` 100
each. (6) Bank has agreed to take over 50% of stock in full satisfaction of its claim including interest. The
remaining stock be revalued at ` 1,20,000. (7) Investments be sold for ` 40,000.(8) Tangible fixed assets
be appreciated by 20%. Goodwill be written off in full and provision be made for doubtful debts of ` 20,000.
Give Journal Entries for the above scheme of reconstruction. Prepare Capital Reduction Ac-
count in the books of Satyaraj Ltd. and Balance Sheet of the Company after reconstruction.

Q.12: Following is the Balance Sheet of Fortunate Ltd. as on 31st March, 2008.
Liabilities ` Assets `
Share Capital : Goodwill 1,65,000
7,000 8% Cumulative Preference Land & Building 6,00,000
Shares of ` 100 each 7,00,000 Stock 2,20,000
80,000 Equity Shares of ` 10 each 8,00,000 Debtors :
9% Debentures of ` 100 each 3,50,000 Good 3,70,000
(Secured on Land & Building) Doubtful 60,000 4,30,000
Accrued Interest on Debentures 15,750 Bank 2,80,000
Director’s Loan 70,000 Preliminary Expenses 10,000
Sundry Creditors 3,10,000 Profit & Loss A/c 5,40,750
22,45,750 22,45,750
Contingent Liabilities : (1) Arrears of cumulative preference dividend for two years.
(2) Claims for damages pending in the Court of Law ` 1,00,000.The Board of Directors wish to show the
realistic picture of the state of affairs of the company’s position and the following scheme of reconstruc-
tion was duly approved. (a) 8% preference shares of ` 100 each were to be reduced to an equal number
of fully paid preference shares of ` 60 each and equity shares of ` 10 each were to be reduced to an equal
number of fully paid equity shares of ` 2.50 each. (b) Intangible and fictitious assets, accumulated losses
to be written off.
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(c) 8% preference shareholders agreed to waive one year’s dividend and to accept equity shares of ` 2.50
each fully paid for the balance of arrears of dividend.(d) Stock of be revalued at ` 2,00,000 and doubtful
debtors to be written off. (e) 9% Debentureholders agreed to take over part of the security of the book value
of ` 2,00,000 for ` 2,50,000 in part satisfaction of their claim and agreed to waive interest payable to
them.(f) Sundry creditors agreed to forego ` 10,000 subject to the condition that the company must pay
them half of the remaining amount immediately.
(g) The contingent liability for the claim for damages materialised to the extent of 50%, which the com-
pany paid immediately. (h) The directors agreed to convert their loan into equity shares of ` 2.50 each
fully paid. You are required to : 1. Pass Journal Entires and prepare Capital Reduction Account in the
books of Fortunate Ltd. 2. Prepare Balance Sheet of the company after reconstruction.

Q.13: Following balances appeared in the books of Nervous Ltd. as on 31st March, 2009 :
Debit Balances ` Credit Balances `
Goodwill 2,50,000 10,000 7% Cumulative Preference
Shares of ` 100 each fully paid. 10,00,000
Land and Building 12,00,000 2,00,000 Equity Shares of ` 10
each fully paid. 20,00,000
Plant and Machinery 11,00,000 8% Debenture of ` 100 each
(secured on Land and Building) 10,00,000
Investments 1,20,000 Debenture interest due 40,000
Current Assets 17,20,000 Loan from Directors 2,00,000
Profit and Loss Account 8,50,000 Current Liabilities 10,00,000
52,40,000 52,40,000
Note : (a) Claims for damages against the company pending in the court of law amounted to
` 1,00,000. (b) Arrears of preference dividend ` 70,000.
The Board of Directors agreed to present the realistic picture of the state of affairs of the company’s
position and the following scheme of reconstruction was sanctioned, approved and implemented :
(i) Preference Shares were reduced to equal number of fully paid Preference Shares of ` 80 each.
(ii) Equity Shares were reduced to equal number of fully paid Equity shares of ` 2.50 each.
(iii) Preference Shareholders waived half of the arrears of dividend and 14,000 equity shares of ` 2.50
each fully paid were issued to them in lieu of the balance.
(iv) 8% debenture holders took over part of the security having book value ` 3,60,000 at ` 5,00,000 in
part satisfaction of their loan and 1,20,000 Equity Shares of ` 2.50 each fully paid were issued to them
for the balance loan. (v) Debenture holders waived their interest due on Debentures.
(vi) The claims for damages pending in the court of law were settled by issue of 12,000 Equity shares
of ` 2.50 each fully paid. (vii) Directors converted their loan into equity shares of ` 2.50 each fully paid.
(viii) All intangible and fictitious assets were written off. (ix) The assets were revalued as under : - Plant
and Machinery ` 7,00,000, Investments ` 1,00,000.
You are required to prepare :- (i) Necessary Journal Entries to record the above scheme of recon-
struction in the books of Nervous Ltd. (ii) Capital Reduction Account in the books of Nervous Ltd., and
(iii) Balance Sheet of Nervous Ltd. after reconstruction.

Q.14: Following balances appeared in the books of Anmol Ltd. as on 31-3-2009

10,000 Equity shares of ` 100 each ` 80 per share paid up
5,000 - 10% Preference shares of ` 100 each fully paid up
4,000 - 13% Debentures of ` 100 each
4,000 - 12% Debentures of ` 100 each.
Outstanding interest on above Debentures for one year ` 52,000 and ` 48,000 respectively.Sundry Credi-
tors - ` 4,00,000; Bank Overdraft ` 1,00,000; Goodwill - ` 2,00,000; Land - ` 3,00,000; Building
` 7,00,000; Plant and Machinery ` 4,00,000; Computer ` 2,00,000; Stock ` 3,00,000; Debtors ` 1,00,000.
The company has
suffered heavy losses in the past. Hence the following scheme of reconstruction was agreed by the share-
holders and sanctioned by the court and implemented by the company.
(a) The existing equity shareholders paid ` 20 per share in cash to make theirs shares fully paid up and
then agreed to reduce them to ` 20 each fully paid. (b) 10% Preference shares were reduced by ` 40
each, however face value remained unchanged. (c) The claim of 13% Debenture holders along with
outstanding interest was settled by issue of 4,000 - 14%
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Financial Accounting Internal Reconstruction commerce classes
Debentures of ` 100 each. (d) The claim of 12% Debenturesholders along with outstanding interest
was settled by issue of 4,200 - 12.5% Debentures of ` 100 each.(e) The assets were revalued as
under :Land - ` 5,00,000; Building - ` 4,00,000; Plant and Machinery - ` 2,50,000; Computer -
` 1,20,000; Stock - ` 2,50,000 (f) Fictitious & Intangible assets were written off.
You are required to : i) Prepare Balance Sheet of Anmol Ltd. after reconstruction.
ii) Pass necessary journal entries to record the above scheme of reconstruction in the books of Anmol
Ltd. iii) Prepare Balance Sheet of Anmol Ltd. after reconstruction.

Q.15: The Balance Sheet of Dirty Ltd. as at 31st March, 2010 appeared as follows :
Liabilities ` Assets `
60,000 Equity Shares of ` 10 6,00,000 Goodwill 1,67,000
each fully paid Preliminary Expenses 25,000
2,000 9% Preference Shares of Land & Building 3,00,000
` 100 each, fully paid 2,00,000 Plant & Machinery 2,15,000
11% Debentures 4,00,000 Investments 75,000
Interest accrued on above debentures 44,000 Stock 2,10,000
Unsecured Loans 2,60,000 Sundry Debtors 3,10,000
Interest accrued on above Bank 45,000
Unsecured Loans 30,000 Profit & Loss A/c 3,53,000
Current Liabilities 1,66,000
Total 17,00,000 Total 17,00,000
A scheme of reconstruction has been agreed amongst the shareholders and the creditors, and approved
by the court with the following salient features. a) Equity Shares are to be reduced to ` 3 each fully paid.
b) 9% Preference Shareholders have agreed to accept 12% Debentures of Face Value of ` 1,20,000,
issued at par, in full satisfaction of their claims. c) Interest due on unsecured loans is paid at 40% dis-
count. d) Interest accrued on 11% Debentures is paid at 50% discount.
e) 40% of current liabilities are to be reduced to 75% and balance 60% to be reduced to 80%. f) 20% of
stock is obsolete which is sold at 40% of book value. g) Goodwill, Preliminary Expenses and Debit Bal-
ance in the Profit & Loss account is to be written off ` 33,000 should be provided for doubtful Debts and
the value of fixed assets should be appreciated by 10%. h) Cost of reconstruction paid ` 16,820.
Prepare the Capital Reduction Account and Redraft the Balance Sheet of the company assuming
that above scheme of reconstruction has been implemented by the company.

Q.16: Following is the Balance Sheet of Virat Ltd. as on 31-03-2011 :-

Liabilities ` Assets `
Equity Shares of ` 10 each 10,00,000 Goodwill 4,00,000
fully paid up
15% Preference Shares of 5,00,000 Land 3,00,000
` 10 each fully paid up
15% Debentures 4,00,000 Plant and Machinery 1,80,000
Interest Accrued on above Debentures 60,000 Furniture and Fittings 2,00,000
Unsecured Loans 1,00,000 Stock 90,000
Bank Overdraft 40,000 Sundry Receivables 53,000
Sundry Payables 75,000 Profit and Loss Account 9,77,000
Payable to Directors 25,000
22,00,000 22,00,000
A Scheme of reconstruction has been agreed amongst all the stakeholders of Virat Ltd. and approved by
the Court, which is as follows :-(1) Intangible and fictitious assets are to be fully written off. (2) Land is
revalued at 500% more than the book value. (3) There was an unrecorded asset of ` 10,000 which was
sold for ` 60,000. (4) Equity Shares are to be reduced by ` 4/- each fully paid up. (5) 15% Preference
Shares are reduced to ` 4/- each fully paid up. (6) Debenture holders waived 50% of the outstanding
interest on debentures. (7) 30% of the Sundry payables are reduced to the extent of 30% of book value.
(8) Directors waived 90% of the amount payable to them by the company. (9) Stock and Sundry receiv-
ables are reduced by 20% and 10% of their book values, respectively. (10) Plant and Machinery is re-
duced to 70% of its book value. (11) Furniture and Fittings to be reduced by 70%. (12) 40% of the unse-
cured loans are reduced by 60%.You are required to Prepare only Capital Reduction Account assum-
ing that the above scheme of reconstruction has been implemented by the company.
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Q.17. Following is the Balance Sheet of Ajay Ltd. as on 31st March, 2011.
Liabilities ` Assets `
Equity Shares of ` 10 each fully Goodwill 4,50,000
Paid up 8,00,000 Land 3,00,000
9% Preference Shares of ` 10 each Plant and Machinery 4,00,000
fully paid up 4,00,000 Furniture and Fittings 2,10,000
10% Debentures 5,00,000 Stock 60,000
Interest accrued on above Debtors 80,000
Debentures 50,000 Profit & Loss A/c 4,00,000
Unsecured Loans 75,000
Bank Overdraft 15,000
Sundry Creditors 60,000
19,00,000 19,00,000
A scheme of reconstruction has been agreed amongst all the stakeholders of Ajay Ltd. and approved by
the court, which is as follows :
i) Intangible and fictitious assets are to be fully written off.
ii) Equity shares are to be reduced to ` 4 each fully paid up.
iii) Debentures holders waived 50% of the outstanding interest on debentures.
iv) 80% of the unsecured loans are reduced by 40%.
v) Directors gave ` 30,000 to the company on non-refundable basis.
vi) Plant and Machinery is reduced to ` 1,20,000.
vii) Stock and Debtors are reduced by ` 15,000 and 20% of the book value, respectively.
viii) Furniture and fittings to be reduced by ` 63,000.
ix) Land is appreciated by 300%.
x) There was an unrecorded asset which was sold for ` 20,000.
xi) Preference shares are reduced to ` 6 each.
xii) 50% of the sundry creditors are reduced to the extent of 50% of their book value.
You are required to : Pass Journal entries Prepare Balance sheet of the firm.

Q.18. Following is the Balance Sheet of M/s. Sonam Limited as on 31st March, 2012 :
Balance Sheet as on 31-3-2012
Liabilities ` Assets `
10% Preference Shares of ` 10 each 5,00,000 Goodwill 2,00,000
Equity Shares of ` 10 each 10,00,000 Land and Building 10,00,000
10% Debentures 2,00,000 Investments 5,00,000
Sundry Creditors 2,00,000 Stock 4,00,000
Other Liabilities 7,00,000 Publicity Campaign Expenses 4,00,000
Preliminary Expenses 1,00,000
Total 26,00,000 Total 26,00,000
The scheme of reconstruction approved by the authority was as under :
1. Each Equity Share will be written down from ` 10 to ` 6 fully paid up.
2. Each 10% Preference share is to be written down from ` 10 to ` 8 fully paid up. These Preference Shares
are to be converted into 12% Preference Shares of ` 2 each and remaining into Equity Shares of ` 6 fully
paid up.
3. 10% Debentureholders agreed to waive 20% of their rights.
4. Assets were revalued as : Land and Building ` 12,00,000
Stock to be reduced by 20%.
5. Creditors dues are settled as follows :
a) 30% immediate payment.
b) 50% paid by issue of 10% Debentures.
c) 20% amount cancelled.
6. All Intangible and Fictitious Assets are to be written off.
7. 10,000 Equity Shares of ` 6 each were issued to public for cash.
You are required to prepare :
a) Capital Reduction Account.
b) Pass journal entries
c) Balance Sheet of Sonam Limited after reconstruction.

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1.INTERNAL RECONSTRUCTION
1.1. NEED
1) Final Accounts, Not True & Fair : When an existing company has been making losses for a long
time, its Final Accounts no longer show the true and fair picture of the financial position of the com
pany. The figures of Assets, Liabilities and Capital shown in the Balance Sheet to not reflect the
actual state of affairs o f the company as explained below.

2) Assets : The Assets side of the Balance Sheet of loss - making or sick company shows many
Intangible or Fictitious Assets. There may be a heavy debit balance in the Profit & Loss account due
to accumulated losses of past years. Preliminary Expenses, Unamortized (Deferred) Revenue
Expenditure etc. may not be written off in absence of profits. Goodwill A/c in such a company repre
sents a purely fictitious assets,because a sick company cannot boast of having any ‘ Goodwill’. The
tangible or Real Assets are also shown at unreasonable high values. Due to losses, the company
may not have provided adequate amount of depreciation resulting in inflating the book values of the
Fixed Assets. The Current Assets like Inventory or Sundry Debtors may also be overstated in the
Balance Sheet. Inventory may be valued at cost though the market price is lower than the cost. No
provision might be made for bad and doubtful debts. In short, the Assets side of the Balance Sheet of
sick company shows the assets at much higher values than the real values.

3) Liabilities : The Secured Loans of a sick company, such as Loans from Banks or Debentures. may
not be repaid though overdue. Interest on such Loans or on Debentures may be in arrears for a long
time. Creditors may not have been paid in time. Company may have avoided recording some
liabilities by showing the same as contingent liabilities. Preference dividends on Cumulative Prefer
ence Shares may be in arrears for several years.

4) Capital : When a sick company shows assets at inflated values and the Liabilities are not paid in
time or not provided at all, naturally Capital (which is Assets - Liabilities) is also shown at much
higher figure than justified by the actual facts. The capital of a sick company no longer reflects the real
value of the net assets of the company.

5) Reconstruction : Continuous losses damage the basic structure of a company. The pillars support
ing the operations of the company - Assets and Capital - become weak due to the accumulated
losses. If this is allowed to continue, the company may ultimately collapse. The company has to be
‘reconstructed’ and put on a firm foundation to ensure stability in future. Such reconstruction may be
done in two ways - ‘External Reconstruction’ (studied in Chapter 1) or ‘Internal Reconstruction’.
Internal ‘Reconstruction’ is a comprehensive plan designed to renovate a company and give it a new
lease of life.

2. RECONSTRUCTION SCHEME
An Internal Reconstruction or Capital Reduction scheme covers the entire area of assets, liabilities
and capital of a company. The scheme, in essence, involves writing down the assets to their true
values by reducing the capital and in some cases reducing the external liabilities. The scheme
expects all the participants to make some sacrifice. The shareholders may have to accept reduction
in the paid up value of the share capital. For example, ` 10 paid up shares may be reduced to ` 5
paid up share. The Debentureholders. Preference Shareholders, Creditors etc. may have to give up
their claims to some extent. If Debentures or other liabilities are required to be actually paid, share-
holders may have to bring in cash by taking up more shares or by paying balance amount on
partly paid up shares.
The amounts becoming available through such sacrifices are utilised to write off the accumulated
losses, preliminary expenses, Goodwill etc. The Fixed Assets, Investments and the Current Assets
like Inventory and Sundry Debtors are brought down to their real values. Once the Reconstruction is
complete. the values of Assets, Liabilities and the Capital in the Balance Sheet of the Company will
reflect the ‘true and fair’ financial position of the company.
Such scheme may involve (a) alteration of share capital (b) variation of shareholders rights (c)
reduction of share capital (d) compromise arrangement with creditors.
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3. METHODS
1) Alternation of Share Capital : If the scheme involves alteration of share capital, i.e. increase,
consolidation or sub -division of share capital, the company has to follow the provisions of Section
94,95, and 97 of the Companies Act, 1956.

2) Variation of Shareholders ‘Rights : If the scheme involves variation of the shareholders’ rights the
company has to follow the provisions of s. 106 of the Companies Act, 1956.

3) Reduction of Share Capital : If the scheme involves reduction of paid - up capital, the company
has to follow the procedure laid down under Section 100 to 105 of the Companies Act, 1956. The
scheme has to be approved by the shareholders and in cases involving sacrifice on their part, also
by the creditors. Capital Reduction can be carried out only after the scheme is approved by Court.

4) Compromise / Arrangement : If the scheme involves compromise / arrangement with the creditors
or shareholders, the company has to follow the provisions of sections 391 to 393 and 394A of the
Companies Act, 1956.

4. LEGAL PROCEDURE
4.1 ALTERATION OF SHARE CAPITAL
According to section 94 (1) of the Compaines Act, 1956 w.e.f 1 -4-2014] a limited company having a
share capital, may, if so authorised by its articles, alter the share capital in any of the following ways :
a) increase its share capital by issuing new shares;
b) consolidate its share capital into shares of larger amount than its existing shares ;
c) convert its fully paid up shares into stock;
d) reconvert that stock into fully paid up shares of any denomination;
e) Sub -divide its shares into shares of smaller amount than is fixed by the memorandum;
[however, in such sub - division, there will be no change in the proportion between the amount paid
and the amount, if any, unpaid on each reduced share as compared to the original share];

4.2. VARIATION OF SHAREHOLDERS’ RIGHTS

If a company has different classes of share with different rights attached to them, e.g., rights as to
dividend, voting, repayment of capital, etc., any of such rights may be varied or altered in any man-
ner, subject to the provisions of the Act. Such variation should be either authorised by the Memoran-
dum or Articles of Association of the company; or should not be prohibited by the terms of issue of
the shares of that class. The Board should approve the scheme for variation of the class rights by
passing appropriate resolutions. A meeting of the concerned class of members for the purpose of
passing a special resolutions for variation of class rights is a special class meeting. It is to be called,
held and conducted in accordance with the applicable provisions. A special resolution must be
passed at the meeting of the concerned class of members. Alternatively, instead of such meeting /
resolution, the holders of not less than - fourths of the issued shares of that class should give their
consent in writing to the proposed variation.

4.3. REDUCTION OF SHARE CAPITAL

1) Meaning : Section 100 of the Companies Act, 1956 lays down the requirements in regard to reduc-
tion of share capital of a company. Share capital, for the purpose of this section, means subscribed
and/or paid-up share capital and not authorised capital.

2) Conditions : Reduction of capital should be authorised by the company’s articles; approved by a

special resolution by the shareholders of the company; and confirmed by the High Court.

3) Modes of Reduction : Reduction may be done in the following ways -

a) Extinguishment or reduction of the liability in respect of unpaid portion of the face value of any
share;
b) Cancellation of any paid - up share capital which is lost or is unrepresented by any available
assets of the company.
c) Repayment of any paid - up share capital which is in excess of the wants of the company.
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4) Surrender of Shares : Surrender of shares means giving up possession of shares to the company
by the shareholders. Articels of association usually authorise the companies to accept surrender of
shares. Surrender of fully paid shares amounts to a reduction of capital. The surrendered shares
can , however, b reissued to new shareholders/ debentureholder/creditors (as a part of scheme of
reconstruction.

4.4. COMPROMISE & ARRANGEMENT

Sections 390 to 396 A of the Compaines Act, 1956 (still applicable as on 1-4-2014) contian provi-
sions on Compromises, Arrangement and Reconstructions.’ A “ scheme of compromise and
arrangment” is an agreement between a company and its creditors or members when the company
is in financial difficulties. It may involve-
a) equity shareholders giving up their claim to the reserves and accumulated profits, if any;
b) debenture- holders giving an extension of time for payment; accepting a cash payment less than
the face value of their debentures; giving up their security in whole or in part, exchanging their deben-
tures for shares in the company; agreeing to variation of their rights.
c) creditors accepting part payment of their claims and the balance in shares or debentures in the
company;
d) Preference Shareholders giving up their rights to arrears of dividends; agreeing to accept a re-
duced rate of dividend in the future or variation of their rights.

5. ACCOUNTING PROCEDURE
5.1. ACCOUNTING SITUATIONS
1) Alteration of Capital : Internal Reconstruction may involve Alteration of Capital, i.e.; increase con-
solidation or sub- divisions of share capital. Alteration involves only change in the face value and
number of shares. Alteration does not involve any Capital reduction. [see para 5.2 (1), below].

2) Variation of Rights : Variation of shareholders rights may involve change in the rate of preference
dividend payable in future or conversion of cumulative preference shares into non - cumulative
preference share (without any change in the amount of capital). [see para 5.2 (2), below].

3) Capital Reduction : Capital Reduction involves the reduction in the paid- up value of share capital.
The reduction is a sacrifice by the shareholders and the amount of reduction is credited to a new
Account called Capital Reduction Account [see para 5.2 (3),below]

4) Compromise : Compromise involves sacrifices made by the shareholders or the creditors or the
debentureholders etc. as a part of the scheme for reconstruction. These secrifices are also credited
to the Captial Reduction A/c. (Some authorities use the Capital Reduction A/c only to record the
sacrifices made by the outsiders like debentureholders, creditors, etc.). In case some liabilities are
to be actually paid in cash, some assets may be sold. The profit on sale of assets is also credited to
the Capital Reduction A/c.

5) Use of Capital Reduction A/c : The capital Reduction/ Reconstruction A/c at this stage will show
credits gathered from above sacrifices. The credit balance so accumulated in the Capital Reduction/
Resconstruction A/c is utilised in writing off the intangible assets or in writing down the values of the
assets and for provinding the liabilities which were not recored earlier.

Q.1 Choose the correct answer :-

1. Capital reduction is implemented per Section _____ of Companies Act.
a) 77 b) 75 c) 80 d) 100
2. The scheme of capital reduction is to be approved by _____.
a) High Court b) SEBI c) Central Government d) Shareholders
3. The scheme of internal reconstruction involves _____ company.
a) one b) two c) three d) many
4. Fictitious assets are to be transferred to ______.
a) internal reconstruction b) security premium
c) share capital d) capital reserve

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5. Balance in Capital Reduction should be transferred to _____.
a) security premium b) capital reserve c) share capital d) Profit & Loss Account
6. The cancellation of contingent liability is ______ for company
a) profit b) loss c) no profit - no loss d) nil
7. The payment for contingent liability should be debited to______.
a) capital reduction b) capital reserve
8. “And Reduced” words are to be shown as in Balance Sheet as per _____ requirement.
a) company law b) AS c) income tax d) stock exchange
9. XYZ Ltd. had on 31st December,2008; 80,000 equity shares at ` 10 each. It was decided to reduce
shares to ` 8 each. The reduction is ____.
a) ` 1,60,000 b) ` 80,000 c) ` 2,00,000 d) ` 1,50,000
10. Creditors of the company are ` 50,00,000 one creditor for ` 20,00,000 decided to forego 40% of his claim.
He is allotted 30,000 equity shares of ` 40 each in full satisfaction. The amount transferred to capital
reduction is _____.
a) ` 8,00,000 b) ` 10,00,000 c) ` 4,00,000 d) ` 5,00,000
11. The preference shareholders agree to forego arrears of preference dividend of ` 72,000. The amount
transferred to Capital Reduction Account is _____.
a) Nil b) ` 72,000 c) ` 36,000 d) ` 70,000
12. Creditors are ` 3,00,000. They are given the option to either accept 50% of their claim in cash in full
settlement or to convert their claim into equity shares of ` 10 each. Creditors of ` 2,00,000 opt for shares
in satisfaction of the claim. Capital reduction Account is credited by ____.
a) ` 1,00,000 b) ` 1,50,000 c) ` 50,000 d) ` 2,00,000
13. Investment costing of ` 24,000 given to Bank for bank overdraft of ` 16,800. The capital reduction is
debited by ____.
a) ` 4,000 b) ` 8,000 c) ` 7,200 d) ` 4,500
14. Y Ltd. has 8,000 equity shares of ` 100 each fully paid. Each share is sub-divided into 10 equity shares of
` 10each. The number of shares after sub-division will be _____.
a) 8,000 b) 80,000 c) 75,000 d) 60,000
15. Provision for taxation is ` 1,00,000. The tax liability of the company is settled at ` 80,000 & it is paid immediately.
Amount credited to capital reduction is _____.
a) ` 80,000 b) ` 1,00,000 c) ` 20,000 d) ` 60,000
16. 6% debentures of ` 100 each ` 1,00,000 to be converted into such number of 8% debentures of ` 50 each
as to generate the same amount of interest as before. The amount of 8% debentures will be _____.
a) ` 1,00,000 b) ` 25,000 c) ` 75,000 d) ` 1,20,000
17. In internal reconstruction, method of calculation of purchase consideration is by _____.
a) Net Asset Method b) Net Payment Method
c) no purchase consideration required d) none of the above
18. On internal reconstruction, assets are written off except_____.
a) land & building b) goodwill c) preliminary expenses d) Profit & Loss Account
19. Paymentof reconstruction expenses is debited to____.
a) Profit & Loss Account b) Capital Reduction Account
c) Cash Account d) Goodwill Account
20. The Court Confirmation Order may direct the management to add to its name _____.
a) limited b) unlimited c) and reduced d) none of the above
21. Credit balance on Capital Reduction Account is utilised for ____.
a) issue of bonus shares b) writing off fictitious assets
c) paying shareholders d) none of the above
22. The scheme of internal reconstruction requires sanction from______.
a) shareholders b) A/A c) Court d) all the above
23. Internal Reconstruction is governed by section _____.
a) 494 b) 801 c) 804 d) 809
24. Surrender of fully paid shares amounts to _____.
a) Alteration of share capital b) Reduction of share capital
c) Arrangement d) Variation of shareholder’s rights

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25. Debentureholders accepting less than the face value of their debentures amounts to_____.
a) Compromise b) Reduction of share capital
c) Alteration of share capital d) Variation of shareholder’s rights
26. Creditors accepting part payment of their claims amounts to______.
a) Reduction of Share Capital b) Variation of Shareholders Rights
c) Compromise d) Alteration of share capital
27. Share Capital A/c Dr. (` 100)
To Share Capital A/c (` 10)
The above entry in the scheme of reconstruction records:
a) Consolidation of share capital b) Sub-division of share capital
c) Conversion of shares into stock d) Conversion of stock into shares
28. In Internal Reconstruction______.
a) Only one company is liquidated b) One or more companies are liquidated.
c) Two or more companies are liquidated. d) No company is liquidated.
29. Reduction in Share capital of a company means reduction in ______.
a) Paid up capital b) Called up capital c) Authorized capital d) Uncalled c’tpital
30. Share Capital A/c Dr. (` 10)
To Share Capital A/c (` 100)
The above entry is the entry of _____.
a) Sub-division of share capital b) Consolidation of share capital
c) Internal reconstruction d) Amalgamation
31. A Ltd. company may alter its share capital to _____.
a) Increase reserve capital b) Sub-divide share capital c) Consolidate share capital d) band c
32. The existing 1,000 shares of ` 100 each altered to 10,000 shares of ` 10 each is_____.
a) Consolidation b) Sub-division c) Conversion d) Surrender
33. Balance on Capital Reduction is utilized to _____.
a) Write off preliminary expenses b) Issue bonus shares
c) Pay dissentient shareholders d) None of the above
34. Internal Reconstruction requires _____.
a) Ordinary resolution passed at General meeting b) Special resolution passed at General meeting
c) Special resolution passed at Board meeting d) Ordinary resolution passed at Board meeting
35. Capital Reduction requires _____.
a) Court order b) Order of the Registrar
c) Order of the SEBI d) Order of stock exchange
36. Amicable settlement of differences by mutual consent by parties is _____.
a) Arrangement b) Compromise c) Confirmation d) Merger
37. Re-arrangement of right or liabilities without any dispute is_____.
a) Amalgamation b) Arrangement c) Compromise d) Merger
38. Creditors foregoing their claims in whole or in part is _____.
a) Compromise b) Arrangement c) Consolidation d)Sub-division

Ans. [(1 - d), (2 - a), (3 - a), (4 - a), (5 - b), (6 - c), (7 - a), (8 - a), (9 - a), (10 - a), (11 - a), (12 - c), (13- c), (14 -
b), (15 - c), (16 - c), (17 - c), (18 - a), (19 - b), (20 - c), (21 - b), (22 - d), (23 - a), (24 - c), (25- a),(26 - c),
(27 - b), (28 - d), (29 - a), (30 - b), (31 - d), (32 -b), (33 - a), (34 - b), ‘(35 - a), (36 -b), (37-b), (38 - b)]

Q.2. Fill in the Blanks with Suitable words :

1. The reduction of capital is permitted under ____ of Companies Act.
2. The Capital reduction means reduction in ______ value of shares.
3. The Sub- division of shares does not result in _____ of capital.
4. The Shareholders can surrender shares for ____ or ____ .
5. The intemal reconstruction results in proper valuation of ____ and _____ of companies.
6. The scheme of internal reconstruction requires approval of ____
7. ____ resolution is to be passed by shareholders for approval of scheme of reconstruction.
8. The fictitious debit balances are to be transferred to ____ Account.
9. The difference in revaluation of assets is to be transferred to ____ Account.
10. A scheme of ____ or ____ mean the scheme having same effect.
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11. The full balance of capital is to be debited, if ____ value is reduced
12. Shareholders not approving scheme is called ____ shareholders.
13. The Balance Sheet prepared after implementation of the scheme is to be suffixed by words ____.
14. The expenses for forming and implementing scheme should be debited to ____ .
15. The scheme of internal reconstruction can be utilized to provide ____ for the company.
16. Capital Reduction Account is ____ by payment of reconstruction expenses.
17. The objective of reconstruction is to write off _____.
18. Court Confirmation Order has to be registered with the ____ of companies.
19. In ____, no new company is formed.
20. Appreciation in the value of land & building is recorded on ____ side of Capital Reduction Account.
21. Any credit balance on Capital Reduction Account after writing off losses is transferred to____ Account.
22. In re-organisation, shares surrendered are transferred to ____ ____ A/c.
23. Payment for contingent liability is debited to ____ ____ A/c.
24. Fittitous assets are written off to ____ ____ A/c.
25. The objective of capital reduction scheme is to w/off _____.
26. In capital Reduction all the adjustments are made in ____ ____ A/c.
27. Reconstruction expenses aredebited to ____ ____ A/c.
28. Appreciation in land and building is credited to ____ ____A/c.
29. Internal Reconstruction is governed by section ____of Companies Act.
30. Capital Reduction requires _____
31. Amicable settlement of differences by mutual consent by parties is _____
32. Creditors foregoing their claims in whole or in part is _____

Ans. [(1) 100, (2) paid-up value, (3) reduction, (4) re-issue-cancellation, (5) assets and liabilities, (6) court, (7)
Special, (8) Capital Reduction, (9) Capital Reduction, (10) capital reductionor internal reconstruction,
(11) face, (12) dissenting, (13) and reduced, (14) capital reduction, (15) funds, (16) debited, (17)
accumulated losses, (18) Registrar, (19) internal reconstruction, (20) credit, (21) Capital Reserve, (22)
shares surrendered, (23) capital Reduction, (24) capital Reduction, (25) Losses, (26) Capital Reductions
A/c, (27) Capital Reduction A/c, (28) Capital Reduction A/c. (29) 494. (30) court order, (31) compromise,
(32) Arrangement.]

Q.3. State whether the following statements are True or False.

1. Capital reduction and internal reconstruction is synonym.
2. Capital reduction is one variety of capital restructuring.
3. Consolidation of shares result in profit for a company.
4. Sub-division of shares result in gain for a company.
5. Fictitious balances are to be transferred to Capital Reduction Account.
6. Accounting for unrecorded assets & appreciation of assets results in credit to Reconstruction Account.
7. Provision for unrecorded liability indicates loss to a company.
8. Accounting for internal and external reconstruction is in identical manner.
9. The reduction in paid up value should not be coupled with reduction in face value of shares.
10. If shareholders surrender shares to the company, it is capital profit to the company.
11. Re-classification of surrendered shares should not be accounted.
12. Cancellation of contingent liability is treated as profit to the company.
13. Transfer of assets to creditors at book-value is benefit to the company.
14. The expenses for scheme should be debited to preliminary expenses.
15. Statutory reserve can be utilized to set off loss under the scheme.
16. The final accounts prepared after reconstruction -should be suffixed by words “and reduced”.
17. The requirements of Schedule VI is to be complied while preparing account after internal
reconstruction.
18. Authorised share capital is to be reduced to the extent of capital reduction.
19. Internal reconstruction scheme cannot be prepared to cover capital reconstruction.
20. The debit balance in capital reduction should be transferred to Goodwill Account.
21. Credit balance on Capital Reduction Account is utilised to write off accumulated losses.
22. After internal reconstruction, Balance Sheet of a company cannot reflect true and fair view.
23. Profit on sale of asset is credited to Capital Reduction Account.
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24. A company cannot subdivide shares.
25. Only sick companies undertake capital reduction.
26. No joumal entry is required for cancellation of unissued share capital.
27. Central Government permission is required for internal reconstruction.
28. Amount sacrified by shareholders in a scheme of reconstruction is transferred to Capital Reserve
Account.
29. Securities Premium Account can be transferred to Capital Reduction Account.
30. The object of reconstruction is to reorganise capital of the company.
31. Internal Reconstruction is governed by section 809 of the Company Law.
32. Creditors accepting part payment of their claims is a compromise.
33. Capital Reduction A/c balance is utilized for issue of bonus shares.
34. Internal Reconstruction requires ordinary Resolution of the Board of Directors.
35. Capital Reduction re-quires court order.
36. Creditors foregoing the claim is an arrangement.
37. Amicable settlement of differences by mutual consent by parties is a merger.
38. A company going for internal reconstruction must add the words, and reduced after its name.

Ans. [True: (1,2,6,7,11,16,17,20,21,23,25,26,29,30,32,35,36).

False: (3,4,5,8,9,10,12,13,14,15,18,19,22,24,27,28,31,33, 34, 37, 38)]

16