Document Sample
					                             INTERNAL RECONSTRUCTION
The position of Match Fixer Ltd on 31st March, 2009 was as follows:
Liabilities                                    Rs. Assets                                          Rs.
2,000, Equity shares of Rs.100 each                 Goodwill                                  1,75,500
  fully paid up                           2,00,000 Land & Building                            1,75,000
1,500, 7% Preference shares of                      Plant & Machinery                         3,25,000
  Rs.100 each fully paid                  1,50,000 Furniture & Fittings                         54,000
1,300, 5% Preference shares of                      Stock                                       15,000
  Rs.100 each Rs.50 paid                    65,000 Investments                                  75,000
5% Debentures                             3,00,000 Sundry Debtors                             4,15,000
4% Debentures of Rs.100 each              1,50,000 Cash in Hand & at Bank                       27,250
Interest due on Debentures                  19,500 Profit & Loss A/c                            72,750
Sundry Creditors                          4,50,000
                                         13,34,500                                           13,34,500
The following scheme of reconstruction was submitted and approved by the Court:
a) Equity shares of Rs.100 each were reduced to denomination of Rs.50 each fully paid.
b) 7% Preference shares of Rs.100 each fully paid reduced to 6% Preference shares of Rs.100 each,
     Rs.60 per share paid.
c) 5% Preference shares of Rs.100 each, Rs.50 paid per share were reduced to 4½% Preference
     shares of Rs.100 each, Rs.30 paid per share.
In view of the unsatisfactory state of affairs of the Company, the debenture holders agreed to forgo the
interest due on debentures. The Company meanwhile recovered as damages a sum of Rs.45,000 from
a third party and it was decided to utilize this sum to write off the capital losses. The reconstruction
expenses were Rs.2, 250. Pass Journal Entries and draw up the Balance Sheet thereafter.

The following was the Balance Sheet of Andhera Ltd. as on 31-12-2007:
Liabilities                                  Rs. Assets                                            Rs.
Share Capital:                                     Freehold Buildings                        23,75,000
15,000, 7% Cumulative Preference                   Plant & Machinery                          8,00,000
Shares of Rs.100 each                  15,00,000 Goodwill                                     3,00,000
2,75,000, Equity Sh. of Rs.10 each     27,50,000 Stock                                        3,50,000
Share Premium Account                   4,00,000 Debtors                                      2,25,000
Sundry Creditors                        4,00,000 Preliminary Expenses                         2,50,000
                                                   Profit and Loss A/c                        7,50,000
                                       50,50,000                                             50,50,000
Dividend on preference shares was in arrear as from 1st January, 2007.
The following scheme of reconstruction was approved and duly sanctioned:
1) Preference shares to be reduced to Rs.80 per share.
2) Equity shares to be reduced to Rs.5 per share.
3) Write off all intangible assets & premium account.
4) One equity share of Rs.5 each to be issued for Rs.10 of gross preference dividend in arrears.
5) Freehold buildings to be written down to Rs.18,50,000.
Give necessary Journal Entries & prepare revised Balance Sheet.

The following is the Balance sheet of Hopeful Ltd. as at 31.12.2000:
Liabilities                                    Rs. Assets                                           Rs.

Internal Reconstruction                                                                                - 45 -
Authorized Capital:                              Goodwill                                     55,000
10,000,6% Pref. Sh.of Rs.100 each      10,00,000 Patents & Trade Marks                        45,000
50,000, Equity Sh. of Rs.10 each        5,00,000 Building                                   2,15,000
Issued Capital:                                  Plant & Machinery                          2,55,000
 5,000, 6% Preference Shares of                  Furniture & Fixture                          60,000
  Rs.100 each fully paid                5,00,000 Stock-in-Trade                               90,000
40,000 Equity Shares of Rs.10                    Sundry Debtors                               75,000
  each fully paid up                    4,00,000 Cash at Bank                                 12,500
Capital Reserve                           25,000 Cash in Hand                                  2,500
5% Debentures of Rs.100 each            2,00,000 Profit & Loss A/c                          4,80,000
Accrued Int. on Debentures                30,000 Discount on Issue of Debentures              20,000
Sundry Creditors                        1,55,000
                                       13,10,000                                          13,10,000
Note: The preference dividend is in arrear for 3 years.
It was decided to reconstruct the Company.
The following scheme was prepared and duly approved by the Court:
1) The Preference shares shall be converted into 7% Preference shares of Rs.50 each.
2) The Equity shares shall be reduced to Rs.3 each.
3) The 5% Debentures shall be converted into 6% Debentures of Rs.75 each.
    The debenture holders also agreed to waive 50% of the accrued interest.
4) Arrears of Preference dividend to be cancelled.
5) The sundry creditors agreed to waive 30% of their claims and to accept equity shares for Rs.30,000
    of their renewed claims;
6) The assets are to be revalued as follows:
    Building                                  2,50,000
    Plant & Machinery                         2,25,000
    Furniture & Fixtures                       55,000
    Stock-in-Trade                             80,000
    Sundry Debtors                             70,000
7) Patents and Trade Marks and other fictitious assets are to be written off as far as possible.
Draft the Journal entries and prepare the Balance Sheet after the reconstruction.

The following is the summarised Balance Sheet of Jagjit Ltd. as on 31 st March, 1990.
Liabilities                                  Rs. Assets                                          Rs.
Authorized & Issued Capital:                       Goodwill                                 1,20,000
30,000, 6% Pref. Shares of Rs.10        3,00,000 Land & Building                            2,67,000
6,00,000 Equity Sh. of Rs.1 each        6,00,000 Plant                                      2,55,000
6% Debentures             1,20,000                 Shares in Subsidiary Ltd. (at cost)        75,000
(Secured on Land & Bldg.)                          Stock                                    2,25,000
Accrued Interest             6,000      1,26,000 Debtors                                    2,70,000
Bank Overdraft (Secured on stock)       1,65,000 Profit & Loss A/c                          2,64,000
Director’s Loans                                   Advertisement                              60,000
Creditors                               2,70,000
                                      15,36,000                                           15,36,000

Note: There is contingent liability for damages of Rs.30,000.
Preference shares are cumulative and dividends are in arrears for three years.
A capital reduction scheme setting the following terms was duly approved:
1) The Preference shares to be reduced to Rs.8 per share & the Equity shares to 25 paise paid each
    & to be consolidated as shares of Rs.10 each fully paid respectively. The preference shareholders

Internal Reconstruction                                                                             - 46 -
     waive two-third of the dividend in arrears & receive Equity shares for the balance. The authorised
     capital to be restored to 30,000 Pref. shares of Rs.10 each & 6,00,000 Equity shares of Rs.1 each.
2)   The Shares in Subsidiary Ltd. are sold to an outsider for Rs.1,50,000.
3)   All intangible assets are to be eliminated and bad debts of Rs.21,000 and obsolete stock of
     Rs.30,000 to be written off.
4)   The debenture holders to take over one of the company’s properties (book value Rs.54,000) at a
     price of Rs.60,000 in part satisfaction of the Debentures and to provide further cash Rs.45,000 on
     a floating charge. The arrears of interest are paid.
5)   Directors refund Rs.10,000 of the fees previously received by them.
6)   The contingent liability materialized in the sum stated but the company recovered Rs.15,000 of
     these damages in action against one of its directors. This was debited to his Loan A/c of Rs.24,000,
     the balance of which was paid in cash on his resignation.
7)   The remaining Directors agreed to take Equity shares in satisfaction of their loans.
Pass Journal entries, including cash transactions & draft revised Balance sheet.

Zero Ltd. submitted their Balance Sheet as on 31.3.2005 as follows:
Liabilities                                   Rs. Assets                                            Rs.
Subscribed Capital:                                 Fixed Assets                              10,00,000
3,000, 7% Cumulative Pref. shares                   (including Goodwill Rs.80,000)
  of Rs.100 each                         3,00,000 Investment                                     15,000
6,000, Equity Sh. of Rs.100 each         6,00,000 Stock-in-Trade                               1,50,000
Premium on Preference Shares               10,000 Debtors                                      1,85,000
General Reserve                            80,000 Cash at Bank                                   50,000
Current Liabilities                      4,10,000
Contingent Liability:
Dividend on Preference shares in
  arrears for 4 years
                                        14,00,000                                             14,00,000
The Directors submitted the following scheme of reconstruction which is approved by the Court:
1) Preference shares are to be exchanged for 3,000, 11% Debentures of Rs.100 each and 600 Equity
   shares of Rs.60 each fully paid.
2) Dividend in arrears is to be settled by issue of 6,000, 11% Non-cumulative Preference shares of
   Rs.10 each.
3) The Equity shares are to be shares of Rs.60 each. Equity holders have also agreed to subscribe for
   cash 1 share for 10 held.
4) Goodwill is to be written off. Fixed assets are to be reduced by Rs.80,000.
5) Stock in trade is to be increased by Rs.40,000. Sundry debtors are to be written down by Rs.12,000
   & investments are to be brought down to their market value of Rs.11,000.
Pass the journal entries to give effect to the above scheme as on 31.3.2005.
Prepare Balance sheet as on 30.9.2005 assuming the net profit during the period of 6 months to be
Rs.60,000, increase in cash by Rs.40,000, and stock increased by Rs.20,000, debtors increased by
Rs.50,000 and depreciation was charged for Rs.40,000.

The Summarised Assets and Liabilities of Chitra Ltd. as on 1.4.2008 were as follows:
Liabilities                                                                                          Rs.
Authorised Capital:
80,000, Equity Shares of Rs.10 each                                                            8,00,000
2,000, 9% Preference Shares of Rs.100 each                                                     2,00,000
Issued and Paid up Capital:
40,000, Equity Shares of Rs.10 each Rs.7.50 paid up                                            3,00,000
Internal Reconstruction                                                                                 - 47 -
2,000, 9% Preference Shares of Rs.100 each fully paid                                          2,00,000
Unsecured Loans                                                                                  80,000
Trade Creditors                                                                                  48,000
Bank Overdraft                                                                                   16,800
Assets                                                                                               Rs
Goodwill                                                                                         20,000
Land & Building                                                                                1,60,000
Plant & Machinery                                                                              1,20,000
Investments                                                                                      24,000
Stock                                                                                            54,000
Debtors                                                                                        1,18,000
Cash in Hand                                                                                      6,000
Profit & Loss Account                                                                          1,42,800
a) Dividend on Preference shares has not been declared for 2 years.
b) No provision has been made for sales tax liabilities of Rs.9,600.
Following scheme of Reconstruction has been approved by the Court.
1) Uncalled capital is to be called up in full and Equity shares are to be reduced to Rs.5 per share.
2) Sales tax liabilities of Rs.9,000 is to be paid immediately.
3) Land & building are to be shown in the Balance sheet at a full market value of Rs.2,20,000 &
    goodwill is to be written off.
4) Trade creditors have consented for 25% of remission of liability on a condition that 25% of the new
    liabilities after remission paid forthwith and the balance is paid within one year.
5) Investments are to be taken over by bank in full settlement of the overdraft balance.
6) Preference shareholders have agreed to give up their right for the two years dividend and accept
    12 fully paid equity shares of Rs.5, for each fully paid preference share.
Pass Journal Entries recording the above transactions and Give Balance Sheet after reconstruction.

The following was the Balance Sheet of Asatyam Ltd. as on 31st December 2001
Liabilities                                  Rs. Assets                                             Rs.
Equity Shares of Rs.100 each            5,00,000 Land & Building                               2,00,000
10% Pref. Shares of Rs.100 each         3,00,000 Plant & Machinery                             2,00,000
12% Convertible Debentures                90,000 Invention & Promotion                         1,00,000
Loan from Bankers (secured)             1,10,000 Discount & Issue Expenses on
Capital Reserve                           40,000     Shares & Debentures                         30,000
Creditors                               1,60,000 Profit and Loss A/c                           2,80,000
Forfeited Shares A/c                      10,000 Stock in Hand                                 3,00,000
                                                  Debtors                                      1,00,000
                                       12,10,000                                              12,10,000
It was believed that worst was now over and Company’s new invention was certain to bring sizeable
profit in future. But at present the additional working capital was badly required. The dividend on
Preference shares was in arrears for the last three years. The Company had very valuable property
which stood highly understated in the balance sheet and which it could not afford to sell, the said being
required for the business.
In view of these, shareholders and the creditors agreed upon the following scheme of reconstruction.
1) All fictitious assets including invention and promotion expenses were to be written off.
2) Rs.30,000 from Debtors, Rs.2,00,000 from Stock and Rs.1,50,000 from Plant and Machinery were
     to be written off.
3) The Convertible Debenture holders were given the option of subscribing Equity share of Rs.30
     each up to 50% of their face value and subscribing Preference share of Rs.50 each up to 25% of
Internal Reconstruction                                                                                 - 48 -
     their face value and the remaining 25% was to be paid to them in cash. All debenture holders
     exercised the option.
4)   All capital reserves were to be utilized.
5)   The creditors being unsecured agreed to reduce their claim by 25% on the condition that they will
     be paid off before 31st Dec.2004 They also agreed not to charge interest till the date of payment.
6)   Preference shares were reduced to Rs.50/share & Equity shares were reduced to Rs.30/share.
7)   Land & Buildings were revalued at such figure so as to put through the entire scheme.
8)   Bankers were to be paid off fully. For this purpose the Company was to issue 6,000 Equity shares
     of Rs.30 each for cash. Assuming that the scheme had been duly sanctioned by the court, prepare
     the Capital reduction Account and the new Balance Sheet of the Company.

Bottomout Ltd. was in serious financial crisis & the Directors considered it advisable to go in for a
compromise scheme with its creditors. Balance Sheet of Bottomout Ltd. as on 30-4-2004
Liabilities                                   Rs. Assets                                          Rs.
Preference Share Capital                5,00,000 Land                                         80,000
(Rs.100 paid up)                                    Building                                2,60,000
Equity Share Capital                    7,00,000 Plant & machinery                          3,75,000
(Rs.10 paid up)                                     Trade Mark                                75,000
12% Debentures                          2,00,000 Goodwill                                   1,50,000
Creditors                               2,80,000 Stocks                                     1,60,000
Bank Loan                               2,15,000 Debtors                                    2,73,000
                                                    Profit & Loss A/c                       5,12,000
                                                    Discount on Issue of Debentures           10,000
                                       18,95,000                                           18,95,000
Scheme as proposed by the Directors is as below:
1) Bank agreed to waive interest amount outstanding of Rs.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 & fictitious assets to be written off.
3) Debenture holders agreed to reduce their claim by 20% provided they are paid 20% immediately &
   balance being redeemed in 4 equal annual installments.
4) Preference Shareholders to reduce their shares to Rs.60 paid up.
5) Equity Shareholders to reduce their shares to Rs.2 per share fully paid up & subscribe to such
   number of shares to meet the cash requirement of the scheme & also leave a cash balance of
Show Capital Reduction A/c & Balance Sheet after carrying out the scheme of reconstruction.

Balance Sheet of Ganguly Ltd. as on 31st March, 2005
Liabilities                                  Rs. Assets                                            Rs.
Share Capital:                                    Fixed Assets:
Issued & paid up Capital:                         Land & Building                             7,50,000
70,000, Equity Shares of Rs.10                    Plant & Machinery                           5,71,000
  each fully paid                       7,00,000 Furniture & Fixtures                         1,15,000
10%, 50,000 Cum. Preference                       Preliminary Expenses                           5,000
  Shares Rs.10 each fully paid          5,00,000 Sundry Debtors                               3,00,000
Secured Loans:                                    Stock in Trade                              2,65,000
12% Debentures                          4,00,000 Goodwill                                     1,25,000
(secured on Land and building)                    Profit & Loss A/c.(Dr.)                     3,00,000
Accrued Interest on Debentures            24,000 Cash in Hand                                    7,000
Unsecured Loans:                                  Deferred Sales Expenses                       12,000

Internal Reconstruction                                                                               - 49 -
Directors Loan                           1,50,000 Investments                                  50,000
Bank Overdraft                           4,00,000
Current Liabilities:
Sundry Creditors                         3,00,000
Other Liabilities                          26,000
                                        25,00,000                                            25,00,000
The Company had to undergo a scheme of reconstruction submitted by the debenture holders which
was duly approved by the Court, whereby:
1) The Equity shares were to be written down to Rs.5 each and the Preference shares to Rs.8 each
   and each class of share to be then converted into shares of Rs.10 each fully paid.
2) The Cumulative Preference share dividend is in arrears for past two years, for which it was decided
   to waive ¾ of the claim and for the remaining, equity shares are to be allotted at par.
3) The debenture holders to have their accrued interest paid in cash and to take over a portion of the
   Land and Building at a valuation of Rs.2,10,000 whose book value is Rs.1,50,000.
4) With a view to provide additional cash and also to discharge 2/3rd of the Creditor’s liability, the
   Company is to have 10% Loan of Rs.6,50,000 secured by a floating charge on the Company’s
5) Preliminary expenses, Profit and Loss Account, and Deferred Sales Expenses should be
   completely written off.
6) A provision of 10% is to be created on sundry debtors for doubtful debts. The stock is to be reduced
   by Rs.40,000 and the value the of good will is to be adjusted according to the requirement of the
   reconstruction scheme.
7) The Director’s Loan to be settled as follows:
   a) 80% of the loan is to be discharged by allotment of fully paid equity shares at par.
   b) 10% is to be paid in cash and
   c) 10% is to be waived.
8) The investment is to be sold for Rs.70,000.
9) There are capital commitments amounting to Rs.3,00,000 and this contract is to be cancelled on
   payment of 6% of the contract price as penalty.
You are required to:
1) Pass Journal Entries to give effect to the above arrangement. (Narration not required).
2) Prepare Capital Reduction A/c.
3) Prepare the Balance Sheet after completion of the scheme.

The following was the summarised Balance Sheet of LALOO Ltd. as at 30 th June, 2008.
Liabilities                                 Rs. Assets                                             Rs.
Authorised & Issued Capital:                      Freehold Property                           6,00,000
18,000, 7% Preference Shares                      Plant and Machinery                         4,02,000
of Rs.50 each            9,00,000                 Patents                                     1,77,000
22,500 Equity Shares                              Goodwill                                    3,00,000
of Rs.50 each           11,25,000    20,25,000 Stock                                          6,00,000
Directors’ Loan                        8,59,500 Debtors                                       4,92,000
Sundry Creditors                       3,10,500 Preliminary Expenses                            16,500
Bills Payable                            52,500 Profit and Loss Account                       6,60,000
Contingent Liability:
Unpaid Dividend on Preference
Shares for 5 years Rs.3,15,000
                                        32,47,500                                            32,47,500
The following scheme for the reduction of capital was duly prepared and sanctioned:
1) Equity shares of Rs.50 each were to be reduced to equal no. of fully paid shares of Rs.2.50 each.
Internal Reconstruction                                                                                - 50 -
2) Each equity shareholder agreed to take against cash 3 equity shares of Rs.2.50 each for every
   equity share held by him.
3) The preference shareholder agreed to waive three- fourths of the dividend in arrears. The rest of
   the amount was to be paid in cash.
4) Preference shareholders were to be issued four 5 % preference shares of Rs.10 each & four equity
   shares of Rs.2.50 each for every 7 % preference share of Rs.50 each held.
5) 18,000, 5 % preference shares of Rs.10 each & 18,000 equity shares of Rs.2.50 each will be
   issued to directors in payment of their loan to the extent of Rs.2,25,000.
6) The directors agreed to take for cash 60,000 new equity shares of Rs.2.50 each.
7) The directors were to receive Rs.2,40,000 in cash in part payment of their loan.
8) The Balance of the capital reduction account will be used as follows:
   a) To write off preliminary expenses, profit and loss account and patents completely.
   b) To write off plant and machinery to the extent of Rs.27,000.
   c) The balance to be used in writing off goodwill.
Show Journal entries and set out the balance-sheet after the reduction of capital.
The Ledger Balances of Feel Bad Ltd. include:-
Building Rs.6,10,000, Furniture Rs.2,00,000, Computer Rs.3,00,000, Debtors Rs.3,00,000, Preliminary
Expenses Rs.20,000, Cash at Bank Rs.80,000, Bills Receivable Rs.2,50,000, Stock Rs.40,000, 8%
Preference Share Capital- 2,000 shares of Rs.100 each, Equity Share Capital- 80,000 shares of Rs.10
each, ‘A’ 10% Debentures of Rs.4,00,000, ‘B’ 12% Debentures of Rs.5,00,000, Outstanding Interest for
one year on Debentures Rs.1,00,000, Creditors Rs.4,00,000, Bills Payable Rs.50,000, O/s Audit Fees
Rs.50,000, Profit & Loss A/c ?
1) The Company has incurred heavy losses. The following scheme of Reconstruction is agreed upon-
2) 8% Pref. Shares are to be reduced by Rs.20/share. Equity shares are reduced by Rs.5/share.
3) To settle the claim of holders of ‘A’ 10% Debentures by issue of new 11% Debentures of
   Rs.2,00,000. ‘A’ Debenture holders agree to forgo their interest.
4) To settle the claim of holders of ‘B’ 12% Debentures by issue of new 13% Debentures of
   Rs.5,00,000. Outstanding debenture interest on ‘B’ 12% Debenture holders be paid.
5) To write off fictitious assets and debit balance of Profit & Loss A/c.
6) Directors refund Rs.60,000 fees previously received by them.
7) Computer was to be written down by Rs.20,000.
You are required to show:-
1. Journal Entries to record the above transaction in books of Feel Bad Ltd.
2. Balance sheet before reconstruction.
3. Balance sheet after reconstruction.
Assume that all the formalities are duly complied.

Tee bee Ltd. decided with the approval of the Court a scheme of reconstruction as at 31st March, 2006.
The summarised Balance Sheet of the Company as at that date is as under:
Liabilities                                    Rs. Assets                                          Rs.
12 % Preference Shares of Rs.10                      Land, Building, Plant & Machinery        9,45,000
  each fully paid                        4,20,000 Stock of W.I.P.                             3,20,000
Equity Sh. of Rs.10 each fully paid      8,20,000 Debtors                                     1,80,000
10% First Mortgage Debentures            3,15,000 Investments                                 3,98,000
Interest Accrued thereon less Tax            5,950 Goodwill                                   3,80,000
10 % Convertible Debentures of                       Discount on issue of Debentures            31,000
  Rs.100 each                            9,38,000 Profit and Loss A/c                         2,22,000
Interest Accrued thereon less Tax           15,050 Cash                                       3,00,000
Loans from Banks (secured)               1,00,000
Capital Reserve                             68,000
Creditors                                   94,000
Internal Reconstruction                                                                              - 51 -
                                         27,76,000                                             27,76,000
The material points in the scheme are:
1) Each convertible debenture is to be exchanged for Rs.35 of non-convertible 10 per cent Debenture,
   Rs.50 of 13 per cent Preference shares and Rs.15 of Equity shares.
2) Each existing 12 per cent preference share is to be written down from Rs.10 to Rs.8 of which Rs.5
   will be represented by 13 per cent Preference shares and Rs.3 by Equity shares.
3) Each existing Equity share will be written down from Rs.10 to Rs.3.
4) Both classes of shares will then be sub-divided into shares of Re.1 each
5) The State Finance Corporation has agreed to apply for Rs.3,75,000 of Equity shares paying cash in
   full on application.
6) The reduction of capital & reserves are to be applied in eliminating fictitious assets & the balance to
   be used in writing down the Land, Building, Plant & Machinery & Investment in the ratio of 3:1
You are required to give the journal entries and balance sheet as on 1st April 2006.

The balance sheet of K.T Co. Ltd .as on 31.12.2006 is as follows:
Liabilities                                   Rs. Assets                                             Rs.
Share Capital:                                      Freehold Property                           3,50,000
2,000,6% Cumulative Pref. Shares                    Plant                                         50,000
  of Rs.100 each, fully paid up          2,00,000 Trade Investments (at cost)                     60,000
75,000, Equity Shares of Rs.10                      Debtors                                     4,00,000
  each fully paid up                     7,50,000 Stock                                         2,00,000
6 % Debentures                 3,75,000             Deferred Advertising Expenses               1,50,000
(secured on freehold property)                      Profit & Loss A/c                           3,50,000
Accrued Interest                 22,500  3,97,500
Creditors                                  12,500
Directors’ Loans                         2,00,000
                                        15,60,000                                              15,60,000
The Court approved a scheme of reorganization to take effect on 1.1.2007 whereby:
1) Preference shares to be written down to Rs.75 each and equity shares to Rs.2 each.
2) Preference dividends-in-arrears for 4 years, 75% to be waived & equity shares of Rs.2 each to be
    allotted for the remaining quarter.
3) Accrued debenture interest to be paid in cash.
4) Debenture holders agreed to take over freehold property (Book Value-Rs.1,00,000) at a valuation
    of Rs.1,50,000 in part repayment of their holdings and to provide additional cash of Rs.1,30,000
    secured by a floating charge on the Company’s assets at an interest rate of 10% p.a.
5) Deferred advertising to be written-off.
6) Stock to be written off fully.
7) Rs.2,33,000 to be provided as bad debts.
8) Remaining freehold property to be revalued at Rs.4,00,000.
9) Investments sold out for Rs.1,50,000
10) In settlement of their loans, Directors are to accept equity shares of Rs.2 each for 90% of their
    loans, waiving 10% of the balance of their loan amount.
11) Capital commitments on contracts totaling Rs.3,00,000 are to be cancelled by payment of penalty
    @ 5% of contract value.
12) Taxation and cost of scheme are to be ignored.
Show journal entries and draw-up the balance sheet after effecting the scheme.

Following is the Balance Sheet of M/s Siddhant Ltd. as on 31-03-2004
Internal Reconstruction                                                                                  - 52 -
Liabilities                                   Rs. Assets                                          Rs.
Equity shares of Rs.10 each             10,00,000 Fixed Assets                              21,00,000
12% Cumulative Preference                         Stock                                     20,00,000
Shares of Rs.100 each                    7,00,000 Sundry Debtors                            15,00,000
10% Debentures                           3,00,000 Bank                                       1,10,000
Sundry Creditors                        36,00,000 Preliminary Expenses                         40,000
Provision for Tax                        5,00,000 Profit & Loss A/c                          3,50,000
                                        61,00,000                                           61,00,000
Note: Preference dividend for 3 years was in arrears.
Following scheme of reconstruction was approved:
1) Write off Fixed Assets by 20%, Sundry Debtors by 15%, and reduced the value of Stock to 55% of
    its book values.
2) Preference shareholders to forego arrears of preference dividend.
3) Directors to give temporary loan of Rs.5,00,000 to Company.
4) The Company settled tax liability to the extent of Rs.5,40,000 & to meet the expenses of
    reconstruction amounted to Rs.10,000.
5) Sundry Creditors to give a remission of 20% of their claims & a Company to allot 11% Preference
    shares of Rs.100 each fully paid up in settlement of the balance amount.
6) 10% Debentures to be converted into 13% Debentures of Rs.1,60,000 in full settlement of their
7) Equity shares to be reduced to Rs.2 each fully paid up & 12% Cumulative Preference shares to be
    reduced to 1,00,000 Cumulative Preference shares of Rs.2 each fully paid up.
8) Write off debit balance in Profit & Loss A/c & Preliminary Expenses.
Draft Journal Entries & Prepare Capital Reduction A/c & Balance sheet after reconstruction.

Following is the Balance Sheet of Paradise Ltd. as on 31-3-2005:
Liabilities                                    Rs. Assets                                          Rs.
Share Capital :                                      Fixed Assets:
10% Pref. Shares of Rs.10 each           2,40,000 Premises                                   3,20,000
Equity Shares of Rs.10 each              4,00,000 Plant & Equipments                         5,20,000
Secured Loans:                                       Investments                             1,20,000
15% Debentures of Rs.100 each            4,80,000 Current Assets / Loans & Advance:
Current Liabilities & Provisions:                    Stock.                                  1,44,000
Sundry Creditors                         2,00,000 Debtors                                      96,000
Bank Overdraft                           1,20,000 Deposits & Advances                          40,000
Other Liabilities                        1,60,000 Miscellaneous Expenditure:
                                                     Publicity Campaign Expenses             1,60,000
                                                     Profit & Loss A/c                       2,00,000
                                        16,00,000                                           16,00,000
It is observed that the new product launched by the company has not succeeded even after three years
of marketing. The management is of the opinion that the assets and liabilities are not valued correctly
and also finds it difficult to raise finance.
To overcome the situation a scheme of reconstruction is prepared by the Directors and approved by all
The salient features of the scheme are:
1) Plant & Equipments having book value of Rs.80,000 is obsolete. This is sold as scrap for
2) The auditors have pointed out that depreciation on plant is not provided to the extent of Rs.40,000.
3) Stock includes items valued at Rs.48,000 which is sold at a loss of 50%.
4) The present realisable value of investments is Rs.56,000.
5) Dividend on Preference shares is in arrears for three years. This amount is not payable.
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6) All losses and fictitious assets are to be written off.
7) The expenses paid for forming and implementing scheme is Rs.8,000.
8) The paid up value of Equity share is to be reduced to Rs.2 per share & Preference shares to Rs.5
    per share. However, the face value remains unchanged.
9) The creditors due are settled as:
    a) 20% immediate payment in cash.
    b) 40% amount is cancelled.
    c) 40% paid by issue of 16% Debentures.
10) Other current liabilities include Rs.40,000 payable to directors towards remuneration. This liability is
    to be cancelled.
11) A call of Rs.3 per share on Equity share is made and received.
12) Bank Overdraft is paid off to the extent possible.
You are required to show:
Journal Entries for above scheme of reconstruction and Balance Sheet after reconstruction.

The following is the Balance Sheet of Ramjane Ltd. as on 31-3-2006:
Liabilities                                   Rs. Assets                                               Rs.
Issued and Subscribed Capital                       Goodwill                                        25,000
10% Pref. Shares of Rs.100 each          4,00,000 Patents                                           15,000
Equity Shares of Rs.10 each             10,00,000 Furniture                                         35,000
12% Debentures                           7,50,000 Plant & Machinery                               6,00,000
Bank Overdraft                             50,000 Land & Building                                 6,50,000
Sundry Creditors                         1,40,000 Stock-In-Trade                                    80,000
Bills Payable                              35,000 Sundry Debtors                                    90,000
                                                    Bills Receivable                                15,000
                                                    Profit & Loss A/c                             8,20,000
                                                    Preliminary Expenses                            45,000
                                        23,75,000                                                23,75,000
The preference dividend is in arrear for four years. The following is the scheme of capital reduction:
a) The Pref. shares are to be reduced to Rs.50 each & Equity shares to Rs.2 each, both being fully
b) Of the preference dividend in arrears three-fourth to be waived and remaining to be paid in cash.
c) The Debenture holders to take over plant and machinery at Rs.6,50,000 in part satisfaction of their
   claim. The remaining claim should be converted into 14% debentures.
d) Creditors agreed to reduce their claim by Rs.20,000. Bills payable to be paid immediately.
e) Goodwill, Patents, Profit & Loss A/c and Preliminary Expenses are to be written off entirely.
f) The following assets are to be revalued as under: Furniture Rs.25,000, Stock-In-Trade Rs.68,000,
   Land & Building Rs.5,80,000, Sundry Debtors Rs.80,000.
g) A Secured Loan of Rs.1,50,000 at 12% per annum is to be obtained by mortgaging Land & Building
   for repayment of bank overdraft, bills payable & reconstruction expenses Rs.15,000.
Pass Journal Entries and draft the balance sheet of Ramjane Ltd. after reconstruction.

The following is the Balance Sheet of Bad-day Ltd. as on 31st December 2003.
Internal Reconstruction                                                                                    - 54 -
Liabilities                                   Rs. Assets                                           Rs.
Issued subscribed Capital                         Goodwill                                      75,000
30,000 Equity Shares of Rs.10                     Land / Building                             2,50,000
each fully paid.                         3,00,000 Plant / Machinery                           1,37,500
2,000, 12% Preference Shares of                   Furniture                                     16,250
Rs.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 & Loss Account                         82,500
                                         7,16,125                                             7,16,125
The preference dividend was in arrears for 5 years. The Capital Reduction Scheme was as under:
1) Equity shares to be reduced to Rs.5 each.
2) All arrears of preference dividend to be cancelled.
3) Each Preference share to be reduced to Rs.75 and then exchanged for one new 12% Preference
   share of Rs.50 each and five equity shares of Rs.5 each.
4) The debit balance of Profit and Loss Account to be written off, Plant / Machinery to be written down
   by Rs.47,500 and Goodwill is to be reduced as much as possible.

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
Rs.50,000 exercised their option and subscribed for the new debentures. Expenses in connection with
the scheme amounted to Rs.3,375 and were written off.
Journalise the transactions & set out new Balance Sheet of the Company.

The Balance Sheet of CARELESS Ltd. as at 31-01-01 appeared as follows:
Liabilities                                Rs. Assets                                              Rs.
Share Capital:                                  Fixed Assets:
30000 Equity shares of Rs.10 each               Fixed Assets at cost     4,00,000
  fully paid                         3,00,000 ( - ) Depreciation Prov. 3,00,000               1,00,000
1000 11% Preference Shares of
  Rs.100 each fully paid             1,00,000 Current Assets:
                                                Stock & Stores                                1,20,000
Secured Loans:                                  Receivable                                    2,90,000
11% Debentures           1,00,000               Other Current Assets                            40,000
Interest accrued &
  due on Debentures        22,000               Miscellaneous Expenditure:
Bank Overdraft           1,26,000    2,48,000 Profit & Loss Account                           3,28,000

Unsecured loans            1,00,000
Interest accrued & due       30,000      1,30,000

Current Liabilities & Provision:
Current Liabilities                      1,00,000
                                         8,78,000                                             8,78,000
A scheme of reconstruction has been agreed amongst the shareholders & the creditors with the
following salient features.
1) Interest due on unsecured loans is waived.
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2) 50% of the interest due on debentures is waived.
3) The 11% Preference shareholders’ rights are reduced to 50% & the remaining were converted into
   15% Debentures of Rs.100 each.
4) Current Liabilities would be reduced by Rs.10,000 on account of the provision no longer required.
5) The equity shareholders agree to convert the existing equity shares into new ten rupee shares of
   total value Rs.1,00,000.
6) The debit balance in the Profit & Loss Account is to be written off totally, Rs.52,000 should be
   provided for doubtful debts & the value of fixed assets should be increased by Rs.80,000.
Prepare the Capital Reduction Account & Redraft the Balance Sheet of the Company based on the
above scheme of reconstruction.

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