Internal Reconstruction – Advanced Accounts CA Inter Study Material

Internal Reconstruction – CA Inter Advanced Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Internal Reconstruction – CA Inter Advanced Accounting Study Material

Basic Questions

Question 1.
Pass journal entries for the following transactions:

  1. Conversion of 2 lakh fully paid equity shares of ₹ 10 each into stock of ₹ 1,00,000 and balance has 12% fully convertible Debenture.
  2. Consolidation of 40 lakh fully paid equity shares of ₹ 2.50 each into 10 lakh fully paid equity share of ₹ 10 each.
  3. Sub-division of 10 lakh fully paid 11% preference shares of ₹ 50 each into 50 lakh fully paid 11% preference shares of ₹ 10 each.
  4. Conversion of 12% preference shares of ₹ 5,00,000 into 14% preference shares ₹ 3,00,000 and remaining balance as 12% Non-cumulative preference shares. (Nov. 2013) (4 Marks)

Answer:
Journal Entries
Internal Reconstruction – Advanced Accounts CA Inter Study Material 1

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 2.
Pass Journal Entries in the following conditions:
(1) Super Ltd. had 62,000 equity shares of ₹ 50 each on which ₹ 45 is paid up. In September, 2017 company decided to sub-divide each share into 5 shares of ₹ 10 with ₹ 9 paid up.

(2) Top Ltd. had 1,05,000 equity shares of ₹ 10 each fully paid up. In November, 2017 company decided to convert the issued shares into stock. But in January 2018 the company re-converted the stock into equity shares of ₹ 100 each fully paid up.

(3) New Ltd. had capital of ₹15,00,000 divided into 1,50,000 equity shares of ₹ 10 each on which ₹ 6 is paid up. During the year, company decided to reorganize its capital by consolidating 5 shares into one share of ₹ 50 each, ₹ 30 paid up. (May 2018) (6 Marks)
Answer:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 2

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 3.
Following is the summarized Balance Sheet of M Ltd. as at March 31, 2013.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 3
On 1.4.2013, M Ltd. adopted the following scheme of reconstruction:

  1. Each equity share shall be sub-divided into 10 equity shares of ₹ 10 each fully paid up. 50% of the equity share capital would be surrendered to the Company.
  2. Preference dividends are in arrear for 3 years. Preference shareholders agreed to waive 90% of the dividend claim and accept payment for the balance.
  3. Own debentures of ₹ 80,000 were sold at ₹ 98 cum-interest and remaining own debentures were cancelled.
  4. Debenture holders of ₹ 2,80,000 agreed to accept one machinery of book value of ₹ 3,00,000 in full settlement.
  5. Trade payables, trade receivables and inventory were valued at ₹ 3,50,000, ₹ 5,90,000 and ₹ 3,60,000 respectively. The goodwill, discount on issue of debentures and Profit and Loss (Dr.) are to be written off.
  6. The Company paid ₹ 15,000 as penalty to avoid capital commitments of ₹ 3,00,000. You are required to give Journal entries for reconstruction in the books of M Ltd.

Answer:
Journal Entries
In the Books of M Ltd.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 4
Internal Reconstruction – Advanced Accounts CA Inter Study Material 5

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 4.
The ledger balance of C Ltd. as on 31st March, 2014 are:

Profit & loss account (Dr.) balance 10,20,000, Fixed Assets ₹ 7,00,000, Investment ₹ 10,000, Inventory ₹ 3,90,000 Trade receivables ₹ 4,60,000. Equity Share Capital (60% paid) ₹ 6,00,000,10% First Debentures ₹ 2,00,000,12% Second Debentures ₹ 5,00,000, Bank overdraft ₹ 50,000, Trade payables (including Y for ₹ 8,50,000) ₹ 11,50,000, Outstanding interest for one year on both type of debentures.

Due to heavy losses, the following scheme of re-construction is agreed:
(a) To make the existing ₹ 100 equity shares fully paid up and then to reduce them to ₹ 20 each.
(b) To settle the claims of first Debenture holders by issuing 2,000, 13.5% Debentures of ₹ 100 each.
(c) To discharge the claims of the second debenture holders by issuing 15% 4,000 debentures of ₹ 100 each.
(d) To pay ₹ 3,00,000 to Mr. Y in full settlement of his account.
(e) To allot 15,000 fresh equity shares of ₹ 20 each to discharge the remaining trade payables.
(f) Market value of investments is ₹ 20,000, and
(g) To reduce the value of fixed assets.
Assuming all formalities are duly complied with, pass journal entries to give effect to the above scheme and prepare the post-reconstruction Balance Sheet.
Answer:
Journal Entries in the books of C Ltd.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 6
Internal Reconstruction – Advanced Accounts CA Inter Study Material 7

Balance Sheet of C Ltd. as at 31 March, 2014 (And Reduced)
Internal Reconstruction – Advanced Accounts CA Inter Study Material 8

Notes to Accounts
Internal Reconstruction – Advanced Accounts CA Inter Study Material 9

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 5.
The Balance Sheet of Vaibhav Ltd. as on 31 st March 2014 is as follows:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 10

The following scheme of Internal Reconstruction is sanctioned:

  1. All the existing equity shares are reduced to ₹ 40 each.
  2. All preference shares are reduced for ₹ 60 each.
  3. The rate of Interest on Debentures increased to 6%. The Debenture holders surrender their existing debentures of ₹ 100 each and exchange the same for fresh debentures of ₹ 70 each for every debenture held by them.
  4. Fixed assets are to be written down by 20%.
  5. Current assets are to be revalued at ₹ 90,00,000.
  6. Investments are to be brought to their market value.
  7. One of the creditors of the company to whom the company owes ₹ 40,00,000 decides to forgo 40% of his claim. The creditor is allotted with 60000 equity shares of 140 each in full and final settlement of his claim.
  8. The taxation liability is to be settled at ₹ 3,00,000.
  9. It is decided to write off the debit balance of Profit & Loss A/c.

Pass journal entries and show the Balance Sheet of the company after giving effect to the above. (Nov. 2014) (16 Marks)
Answer:
Journal Entries in the books of Vaibhav Ltd.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 11
Internal Reconstruction – Advanced Accounts CA Inter Study Material 12

Balance Sheet of Vaibhav Ltd. (After Reconstruction) as on 31.3.2014
Internal Reconstruction – Advanced Accounts CA Inter Study Material 13

Notes to accounts
Internal Reconstruction – Advanced Accounts CA Inter Study Material 14

Working Note:
Capital Reduction Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 15

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 6.
The Balance Sheet of A & Co. Ltd. as on 31-12-20X1 is as follows:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 16

The Court approved a Scheme of re-organisation to take effect on 1-1-20X1, whereby:

  1. The Preference shares to be written down to ₹ 75 each and Equity Shares to ₹ 2 each.
  2. Of the Preference Share dividends which are in arrears for four years, three fourths to be waived and Equity Shares of ₹ 2 each to be allotted for the remaining quarter.
  3. Accrued interest on debentures to be paid in cash.
  4. Debenture-holders agreed to takeover freehold property, book value ₹ 1,00,000 at a valuation of ₹ 1,20,000 in part repayment of their holdings and to provide additional cash of ₹ 1,30,000 secured by a floating charge on company’s assets at an interest rate of 8% p.a.
  5. Patents and Goodwill to be written off.
  6. Inventory to be written off by ₹ 65,000.
  7. Amount of ₹ 68,500 to be provided for bad debts.
  8. Remaining freehold property to be re-valued at ₹ 3,87,500.
  9. Trade Investments be sold for ₹ 1,40,000.
  10. Directors to accept settlement of their loans as to 90% thereof by allotment of equity shares of ₹ 2 each and as to 5% in cash, and balance 5% being waived.
  11. There were capital commitments totalling ₹ 2,50,000. These contracts are to be cancelled on payment of 5% of the contract price as a penalty.
  12. Ignore taxation and cost of the scheme.

You are requested to show Journal entries reflecting the above transactions {including cash transactions) and prepare the Balance Sheet of the company after completion of the Scheme.
Answer:
Journal of A & Co. Ltd.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 17
Internal Reconstruction – Advanced Accounts CA Inter Study Material 18
Internal Reconstruction – Advanced Accounts CA Inter Study Material 19

Balance Sheet of A & Co. Ltd. (And Reduced) as on 1st January, 20X2
Internal Reconstruction – Advanced Accounts CA Inter Study Material 20

Notes to accounts
Internal Reconstruction – Advanced Accounts CA Inter Study Material 21

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 7.
V Limited decided to reconstruct its business as it has accumulated huge losses. The following is the summarized Balance Sheet of the company as on 31.03.2014 before reconstruction:
Summarized Balance Sheet as on 31.03.2014
Internal Reconstruction – Advanced Accounts CA Inter Study Material 22
Following scheme of reconstruction is approved by all interested parties and the Court:

  1. All equity shares are reduced to ₹ 3 each and preference shares to ₹ 7 each.
  2. Debenture holders agreed to takeover a part of land and building, book value of which is ₹ 14,00,000, towards their 50% claim. Rate of interest of balance 50% debentures will be increased to 9%.
  3. Goodwill and Patent will be written off.
  4. 10% of Trade receivables to be provided for bad debts.
  5. Inventory to be written off by ₹ 5,20,000.
  6. 50% of balance of Land & Building sold for ₹ 12,00,000 and remaining Land & Building valued at ₹ 12,00,000.
  7. Investments to be sold for ₹ 4,00,000.
  8. There are pending contracts amounting to ₹ 20,00,000. These contracts are to be cancelled on payment of penalty @ 5% of pending contract amount.
  9. The income tax liability of the company is settled at ₹ 6,12,000. Provision for income tax will be raised accordingly.
  10. 1/3 of trade payables decided to forgo their claim.
  11. After making all the above adjustments, balance amount available through scheme, will be utilized to write off the value of plant & machinery to that extent.

You are required to pass the necessary Journal Entries.
Answer:
Journal Entries (in the books of V Limited)
Internal Reconstruction – Advanced Accounts CA Inter Study Material 23
Internal Reconstruction – Advanced Accounts CA Inter Study Material 24
Internal Reconstruction – Advanced Accounts CA Inter Study Material 25

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 8.
K Limited decided to reconstruct its business as it has accumulated huge losses. The following is the Balance Sheet of the company as on 31.03.2016 before reconstruction:
Balance Sheet as on 31.03.2018
Internal Reconstruction – Advanced Accounts CA Inter Study Material 26

Following scheme of reconstruction is approved by all interested parties and the Court:

  1. All equity shares are reduced to ₹ 3 each and preference shares to ₹ 7 each.
  2. Debenture holders agreed to takeover a part of land and building, book value of which is ₹ 14,00,000, towards their 50% claim. Rate of interest of balance 50% debentures will be increased to 9%.
  3. Patent will be written off.
  4. 10% of Trade receivables to be provided for bad debts.
  5. Inventory to be written off by ₹ 5,20,000.
  6. 50% of balance Land & Building sold for ₹ 12,00,000 and remaining Land & Building valued at ₹ 12,00,000.
  7. Investments to be sold for ₹ 4,00,000.
  8. The income tax liability of the company is settled at ₹ 4,50,000. Provision for income tax will be raised accordingly.
  9. 1/3 of trade payables decided to forgo their claim.
  10. After making all the above adjustments, balance amount available through scheme, will be utilized to write off the value of plant & machinery to that extent.

You are required to pass the necessary Journal Entries.
Answer:
Journal Entries (In the books of K Limited)
Internal Reconstruction – Advanced Accounts CA Inter Study Material 27
Internal Reconstruction – Advanced Accounts CA Inter Study Material 28

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 9.
Proficient Infosoft Ltd. is in the hand of a Receiver for Debenture Holders who holds a charge on all asset except uncalled capital. The following statement shows the position as regards creditors as on 30th June, 2016:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 29
A holds the first debentures for ₹ 3,60,000 and second debentures for ₹ 3,60,000. He is also an unsecured trade payable for ₹ 1,08,000. B holds second debentures for ₹ 3,60,000 and is an unsecured trade payable for ₹ 72,000.

The following scheme of reconstruction is proposed.

  1. A is to cancel ₹ 2,52,000 of the total debt owing to him; to bring ₹ 36,000 in cash and to take first debentures (in cancellation of those already issued to him) for ₹ 6,12,000 In satisfaction of all his claims.
  2. B to accept ₹ 1,08,000 in cash in satisfaction of all claims by him.
  3. In full settlement of 60% of the claim, unsecured trade payable (other than A and B) agreed to accept three shares of ₹ 25 each, fully paid against their claim for each ₹ 100. The balance of 40% is to be postponed and to be payable at the end of three years from the date of Court’s approval of the scheme. The nominal share capital is to be increased accordingly.
  4. Uncalled capital is to be called up in full and ₹ 75 per share cancelled, thus making the shares of ₹ 25 each.

Assuming that the scheme is duly approved by all parties interested and by the Court, give necessary journal entries. (Nov. 2016) (16 Marks)
Answer:
Journal Entries :
Internal Reconstruction – Advanced Accounts CA Inter Study Material 30
Internal Reconstruction – Advanced Accounts CA Inter Study Material 31

Working Notes:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 32

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 10.
The summarized Balance Sheet of V Ltd. as on 31st March 2014 is as follows:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 33

The following scheme of Internal Reconstruction is sanctioned:

  1. All the existing equity shares are reduced to ₹ 40 each.
  2. All preference shares are reduced to ₹ 60 each.
  3. The rate of Interest on Debentures increased to 6%. The Debenture holders surrender their existing debentures of ₹ 100 each and exchange the same for fresh debentures of ₹ 70 each for every debenture held by them.
  4. Fixed assets are to be written down by 20%.
  5. Current assets are to be revalued at ₹ 90,00,000.
  6. Investments are to be brought to their market value.
  7. One of the creditors of the company (included under trade payables in the above balance sheet) to whom the company owes ₹ 40,00,000 decides to forgo 40% of his claim. The creditor is allotted with 60000 equity shares of t 40 each in full and final settlement of his claim.
  8. The taxation liability is to be settled at ₹ 3,00,000.
  9. It is decided to write off the debit balance of Profit & Loss A/c.

Pass necessary journal entries and show the Balance Sheet of the company after giving effect to the above.
Answer:
Journal Entries (In the hooks of V Ltd.)
Internal Reconstruction – Advanced Accounts CA Inter Study Material 34
Internal Reconstruction – Advanced Accounts CA Inter Study Material 35
Internal Reconstruction – Advanced Accounts CA Inter Study Material 36

Balance Sheet of VLtd. (After Reconstruction) as on 31.3.2014
Internal Reconstruction – Advanced Accounts CA Inter Study Material 37

Notes to accounts
Internal Reconstruction – Advanced Accounts CA Inter Study Material 38
Internal Reconstruction – Advanced Accounts CA Inter Study Material 81

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 11.
Following is the Balance Sheet of XYZ Ltd. as on 31st March, 2010:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 82

Due to heavy losses and overvatuation of assets, the following scheme of reconstruction was finalised:

  1. Preference shareholders will surrender their 20% shares and they have been allotted 9% (new) preference shares for the remaining amount.
  2. Debenture holders having charge on plant and machinery would accept plant and machinery in full settlement.
  3. Trade creditors accepted to takeover the stock upto the value of ₹ 6,20,000.
  4. Equity shareholders are to accept reduction of ₹ 4 per share.
  5. Investment is to be valued at market price i.e., ₹ 60,000.
  6. Sundry debtors and remaining stock is to be valued at 90% of their book value.
  7. Directors have to forgo their loan in full.
  8. Patents and Copyright and Goodwill have no more value.

Pass necessary journal entries in the books of XYZ Ltd. assuming that all the legal formalities have been completed. Prepare capital reduction account and Balance Sheet of the company after reduction. (May 2010) (16 Marks)
Answer:
In the books of XYZ Ltd.
Journal Entries
Internal Reconstruction – Advanced Accounts CA Inter Study Material 39
Internal Reconstruction – Advanced Accounts CA Inter Study Material 40

Capital Reduction Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 41

Balance Sheet (and reduced) of M/s XYZ Ltd.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 42

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 12.
The Balance Sheet of X Limited as on 31st March 2011, was as follows:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 43
It was decided to reconstruct the company for which necessary resolution was passed and sanctions were obtained from the appropriate authorities. Accordingly, it was decided that:

  1. Each share be sub-divided into 10 fully paid up equity share of ₹ 10 each.
  2. After sub-division, each shareholder shall surrender to the company 50% of his holding for the purpose of reissue to debenture holders and creditors as necessary.
  3. Out of shares surrendered 10,000 shares of ₹ 10 each shall be converted into 10% Preference shares of ₹ 10 each fully paid up.
  4. The claims of the debenture holders shall be reduced by 50%. In consideration of the reduction, the debenture holder shall receive Preference Shares of ₹ 1,00,000 which are converted out of shares surrendered,
  5. Creditors claim shall be reduced by 25%. Remaining creditors are to be settled by the issue of equity shares of ₹ 10 each of out of shares surrendered.
  6. Balance of Profit and Loss account to be written off.
  7. The shares surrendered and not re-issued shall be cancelled.

Pass Journal Entries giving effect to the above and the resultant Balance Sheet. (May 2011) (16 Marks)
Answer:
In the books of X Limited Journal Entries
Internal Reconstruction – Advanced Accounts CA Inter Study Material 44

X Limited (and reduced) Balance Sheet as on ………
Internal Reconstruction – Advanced Accounts CA Inter Study Material 45

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 13.
The Balance Sheet of L Limited as on 31-03-2016 is given below:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 46

Notes to Accounts:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 47
The Board of Directors of the company decided upon the following scheme of reconstruction with the consent of respective shareholders:

  1. Preference Shares are to be written down to 180 each and Equity Shares to ₹ 2 each.
  2. Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for balance 1/3rd, Equity Shares of ₹ 2 each to be allotted.
  3. Debenture holders agreed to take one Freehold Property at its book value of ₹ 300 lakh in part payment of their holding. Balance Debentures to remain as liability of the company.
  4. Interest accrued and due on Debentures to be paid in cash.
  5. Remaining Freehold Property to be valued at ₹ 400 lakh.
  6. All investments sold out for ₹ 250 lakh.
  7. 70% of Directors’ loan to be waived and for the balance, Equity Shares of ₹ 2 each to be allowed.
  8. 40% of Trade receivables and 80% of Inventories to be written off.
  9. Company’s contractual commitments amounting to ₹ 600 lakh have been settled by paying 5% penalty of contract value.

You are required to:
(a) Pass Journal Entries for all the transactions related to internal reconstruction;
(b) Prepare Capital Reduction Account; and
(c) Prepare notes on Share Capital and Tangible Assets to Balance Sheet, immediately after the implementation of scheme of internal reconstruction.
Answer:
(a) Journal Entries in the books of L Ltd.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 48
Internal Reconstruction – Advanced Accounts CA Inter Study Material 49

Capital Reduction Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 50

Notes to Balance Sheet
Internal Reconstruction – Advanced Accounts CA Inter Study Material 51

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 14.
The shareholders of L Ltd. decided on a corporate restructuring exercise necessitated because of economic recession. From the given summarised balance sheet as on 31-3-2017 and the information supplied, you are required to prepare

  1. Journal entries reflecting the scheme of reconstruction,
  2. Capital reduction account,
  3. Cash account in the books of L Ltd.

Summarised Balance Sheet of L Ltd. as on 31.3.2017
Internal Reconstruction – Advanced Accounts CA Inter Study Material 52
Note: Preference dividends are in arrears for 4 years.

The scheme of reconstruction that received the permission of the Court was on the following lines:

  1. The authorized capital of the Company to be re-fixed at ₹ 10 lakhs (preference capital of ₹ 3 lakhs and equity capital of ₹ 7 lakhs). Both classes of shares are of ₹ 10 each.
  2. The preference shares are to be reduced to ₹ 5 each and equity shares reduced by ₹ 3 per share. Post reduction, both classes of shares to be re-consolidated into ₹ 10 shares.
  3. Trade Investments are to be liquidated in open market.
  4. One fresh equity shares of ₹ 10 to be issued for every ₹ 40 of preference dividends in arrears (ignore taxation).
  5. Expenses for the scheme were ₹ 10,000.
  6. The debenture holders took over freehold land at ₹ 2,10,000 and settled the balance after adjusting their dues.
  7. Unprovided contingent liabilities were settled at ₹ 54,000 and a pending insurance claim receivable settled at ₹ 12,500.
  8. The intangible assets were all to be written off along with ₹ 10,000 worth obsolete packing material and 10% of the receivables.
  9. Remaining cash available as a result of the above transactions is to be utilized to payoff the bank overdraft to that extent.
  10. The Equity shareholders agree that they will bring in necessary cash to liquidate the balance outstanding on the overdraft account by subscribing the fresh shares. The equity shares will be issued at par for this purpose.

Answer:
(i) In the books of L Ltd.
Journal Entries
Internal Reconstruction – Advanced Accounts CA Inter Study Material 53
Internal Reconstruction – Advanced Accounts CA Inter Study Material 54
Internal Reconstruction – Advanced Accounts CA Inter Study Material 55
Internal Reconstruction – Advanced Accounts CA Inter Study Material 56

(ii) Capital Reduction Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 57

(iii) Cash Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 58
Note: Shares issued to existing equity shareholders for bringing cash for payment of balance of bank overdraft = ₹ 2,23,100 – ₹ 97,100 = ₹ 1,26,000

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 15.
The summarized Balance Sheet of SK Ltd. as on 31st March, 2018 is given below.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 59

The following Scheme of Internal Reconstruction is approved and put into effect on 31st March, 2018.

  1. Investments are to be brought to their market value.
  2. The Taxation Liability is settled at ₹ 5,25,000 out of current Assets.
  3. The balance of Profit and Loss Account to be written off.
  4. All the existing equity shares are reduced to ₹ 4 each.
  5. All preference shares are reduced to ₹ 60 each.
  6. The rate of interest on debentures is increased to 9%. The Debenture holders surrender their existing debentures of 1100 each and exchange them for fresh debentures of ₹ 80 each. Each old debenture is exchanged for one new debenture.
  7. Balance of Current Assets left after settlement of taxation liability are revalued at ₹ 1,57,50,000.
  8. Fixed Assets are written down to 80%.
  9. One of the creditors of the Company for ₹ 70,00,000 gives up 50% of his claim. He is allotted 8,75,000 equity shares of ₹ 4 each in full and final settlement of his claim.

Pass journal entries for the above transactions. (November 2018 – New Course) (10 Marks)
Answer:
Journal Entries in the books of SK Ltd.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 60
Internal Reconstruction – Advanced Accounts CA Inter Study Material 61

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Working Note:
Capital Reduction Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 62

Comprehensive Questions

Question 16.
The Balance Sheet of M/s. Ice Ltd. as on 31-03-2011 is given below:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 63

The Board of Directors of the company decided upon the following scheme of reconstruction with the consent of respective stakeholders:

  1. Preference shares are to be written down to ₹ 80 each and equity shares to ₹ 2 each.
  2. Preference dividend in arrear for 3 years to be waived by 2/3rd and for balance 1 /3rd, equity shares of ₹ 2 each to be allotted.
  3. Debenture holders agreed to take one freehold property at its book value of ₹ 3,00,000 in part payment of their holding. Balance debentures to remain as liability of the company.
  4. Arrear debenture interest to be paid in cash.
  5. Remaining freehold property to be valued at ₹ 4,00,000.
  6. Investment sold out for ₹ 2,50,000.
  7. 75% of Director’s loan to be waived and for the balance, equity shares of ₹ 2 each to be allotted.
  8. 40% of sundry debtors, 80% of stock and 100% of deferred advertisement expenses to be written off.
  9. Company’s contractual commitments amounting to ₹ 6,00,000 have been settled by paying 5% penalty of contract value.

Show the Journal Entries for giving effect to the internal re construction and draw the Balance Sheet of the company after effecting the scheme. (Nov. 2011) (18 Marks)
Answer:
Journal Entries (In the books of Ice Ltd.)
Internal Reconstruction – Advanced Accounts CA Inter Study Material 64
Internal Reconstruction – Advanced Accounts CA Inter Study Material 65

Balance Sheet of Ice Ltd. (As reduced)
Internal Reconstruction – Advanced Accounts CA Inter Study Material 66

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 17.
M/s. Platinum Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses. The following is the Balance Sheet of the company as on 31st March, 2012 before reconstruction:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 67

Following is the interest of Mr. Shiv and Mr. Ganesh in M/s Platinum Limited:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 68

The following scheme of internal reconstruction was framed and implemented, as approved by the court and concerned parties:
(1) Uncalled capital is to be called up in full and then all the shares to be converted into Equity Shares of ₹ 40 each.

(2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of ₹ 40 each for ₹ 12,50,000.

(3) Trade Creditors are given option of either to accept fully paid equity shares of ₹ 40 each for the amount due to them or to accept 70% of the amount due to them in cash in full settlement of their claim. Trade Creditors for ₹ 7,50,000 accept equity shares and rest of them opted for cash towards full and final settlement of their claim.

(4) Mr. Shiv agrees to cancel debenture amounting to ₹ 2,00,000 out of total debentures due to him and agree to accept 15% Debentures for the balance amount due. He also agree to subscribe further 15% Debentures in cash amounting to ₹ 100,000.

(5) Mr. Ganesh agrees to cancel debenture amounting to ₹ 50,000 out of total debentures due to him and agree to accept 15% Debentures for the balance amount due.

(6) Land & Building to be revalued at ₹ 51,84,000, Machinery at ₹ 7,20,000, Computers at ₹ 4,00,000, Stock at ₹ 3,50,000 and Trade Debtors at 10% less to as they are appearing in Balance Sheet as above.

(7) Outstanding Expenses are fully paid in cash.

(8) Goodwill and Profit & Loss A/c will be written off and balance, if any, of Capital Reduction A/c will be adjusted against Capital Reserve.

You are required to pass necessary Journal Entries for all the above transactions and draft the company’s Balance Sheet immediately after the reconstruction. (May 2012) (16 Marks)
Answer:
Journal Entries
Internal Reconstruction – Advanced Accounts CA Inter Study Material 69
Internal Reconstruction – Advanced Accounts CA Inter Study Material 70

Balance Sheet (as reduced) as on 31.3.2012
Internal Reconstruction – Advanced Accounts CA Inter Study Material 71

Working Notes:
1. Cash at Bank Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 72

2. Capital Reduction Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 73

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 18.
The Balance Sheet of M/s. Cube Limited as on 31-03-2013 is given below:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 74

Notes to Accounts:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 75
The Board of Directors of the company decided upon the following scheme of reconstruction with the consent of respective shareholders:

  1. Preference Shares are to be written down to ₹ 80 each and Equity Shares to ₹ 2 each.
  2. Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for balance 1/3 rd, Equity Shares of ₹ 2 each to be allotted.
  3. Debenture holders agreed to take one Freehold Property at its book value of ₹ 150 lakh in part payment of their holding. Balance Debentures to remain as liability of the company.
  4. Interest accrued and due on Debentures to be paid in cash.
  5. Remaining Freehold Property to be valued at ₹ 200 lakh.
  6. All investments sold out for ₹ 125 lakh.
  7. 70% of Directors’ loan to be waived and for the balance, Equity Shares of ₹ 2 each to be allowed.
  8. 40% of Sundry Debtors and 80% of Inventories to be written off.
  9. Company’s contractual commitments amounting to ₹ 300 lakh have been settled by paying 5% penalty of contract value.

You are required to:
(a) Pass Journal Entries for all the transactions related to internal reconstruction;
(b) Prepare Reconstruction Account; and
(c) Prepare notes on Share Capital and Tangible Assets to Balance Sheet, immediately after the implementation of scheme of internal reconstruction. (May 2013) (16 Marks)
Answer:
(a) Journal Entries in the books of M/s. Cube Ltd.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 76
Internal Reconstruction – Advanced Accounts CA Inter Study Material 77
Internal Reconstruction – Advanced Accounts CA Inter Study Material 78

(b) Reconstruction Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 79

(c) Notes to Balance Sheet
Internal Reconstruction – Advanced Accounts CA Inter Study Material 80

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 19.
M/s. Planet Limited has decided to reconstruct the Balance Sheet since it has accumulated huge tosses. The following is the balance sheet of the company as on 31st March, 2017 before reconstruction:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 83

Notes to Accounts:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 84
The Board of Directors of the company decided upon the following scheme of reconstruction with the consent of respective shareholders:

  1. Preference Shares are to be written down to ₹ 75 each and Equity Shares to ₹ 2 each.
  2. Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for balance 1/3rd, Equity Shares of ₹ 2 each to be allotted.
  3. Debenture holders agreed to take one Freehold Property at its book value of ₹ 450 lakh in part payment of their holding. Balance Debentures to remain as liability of the company.
  4. Interest accrued and due on Debentures to be paid in cash.
  5. Remaining Freehold Property to be valued at ₹ 550 lakh.
  6. All investments sold out for ₹ 425 lakh.
  7. 70% of Directors’ loan to be waived and for the balance, Equity Shares of ₹ 2 each to be allotted.
  8. 40% of Trade receivables and 80% of Inventories to be written off.
  9. Company’s contractual commitments amounting to ₹ 900 lakh have been settled by paying 8% penalty of contract value.

You are required to:
(a) Pass Journal Entries for all the transactions related to internal reconstruction;
(b) Prepare Capital Reduction Account, Bank Account; and
(c) Prepare Notes to Accounts on Share Capital and Tangible Assets, immediately after the implementation of internal reconstruction. (Nov 2017) (16 Marks)
Answer:
(a) Journal Entries related to internal reconstruction (in the books of Planet Ltd.)
Internal Reconstruction – Advanced Accounts CA Inter Study Material 85
Internal Reconstruction – Advanced Accounts CA Inter Study Material 86

(b) Capital Reduction Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 87

(c) Note to Accounts on Share Capital and Tangible Assets after implementation of internal reconstruction
Internal Reconstruction – Advanced Accounts CA Inter Study Material 88

Working Note:
Calculation of number of equity shares issued:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 89

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 20.
The Abridged Balance Sheet (Draft) of C Ltd. as on 31st March, 2012 is as under:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 90
The following scheme is passed and sanctioned by the court:
(i) A new company M Ltd. is formed with ₹ 3,00,000, divided into 30,000 Equity shares of ₹ 10 each.

(ii) The new company will acquire the assets and liabilities of C Ltd. on the following terms:
(a) Old company’s debentures are paid by similar debentures in new company and for outstanding accrued interest, shares of equal amount are issued at par.
(b) The trade payables are paid for every ₹ 100, ₹ 16 in cash and 10 shares issued at par.
(c) Preference shareholders are to get equal number of equity shares at par. For arrears of dividend amounting to ₹ 12,000, 5 shares are issued at par for each ₹ 100 in full satisfaction.
(d) Equity shareholders are issued one share at par for every three shares held.
(e) Expenses of ₹ 8,000 are to be borne by the new company.

(iii) Current Assets are to be taken at book value (except stock, which is to be reduced by ₹ 3,000). Goodwill is to be eliminated, balance of purchase consideration being attributed to fixed assets.

(iv) Remaining shares of the new company are issued to public at par and are fully paid.

You are required to show:
(a) In the old company’s books:
(i) Realisation Account
(ii) Equity Shareholder’s Account
(b) In the new company’s books:
(i) Bank Account
(ii) Summarised Balance Sheet as per the requirements of Schedule III.
Answer:
(a) (i) In the books of C Ltd i.e. Old company’s books
Realisation Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 91

(b) (i) In the books of M Ltd (New company)
Bank Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 92

(ii) Balance Sheet as on 31st March, 2012
Internal Reconstruction – Advanced Accounts CA Inter Study Material 93

Notes to Accounts
Internal Reconstruction – Advanced Accounts CA Inter Study Material 94

2. Calculation of fair value at which fixed assets have been acquired by M Ltd.

Since, the question states that ‘balance of purchase consideration is being attributed to fixed assets’, it is implied that the amount of purchase consideration is equal to the fair value at which the net assets have been acquired.

Therefore, the difference of fair value of net assets (excluding fixed assets) and the purchase consideration is the fair value at which the fixed assets have been acquired.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 95

4. Calculation of number of Equity shares issued to public
Internal Reconstruction – Advanced Accounts CA Inter Study Material 96

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 21.
P Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses. The following is the draft Balance Sheet of the company as on 31st March, 2014 before reconstruction:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 97
The following scheme of internal reconstruction was framed and implemented, as approved by the court and concerned parties:
(1) Uncalled capital is to be called up in full and then all the shares to be converted into Equity Shares of ₹ 40 each.

(2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of 40 each for ₹ 12,50,000.

(3) Trade payables are given option of either to accept fully paid equity shares of ₹ 40 each for the amount due to them or to accept 70% of the amount due to them in cash in full settlement of their claim. Trade payables for ₹ 7,50,000 accept equity shares and rest of them opted for cash towards full and final settlement of their claim.

(4) Mr. S agrees to cancel debentures amounting to ₹ 2,00,000 out of total debentures due to him and agree to accept 15% Debentures for the balance amount due. He also agree to subscribe further 15% Debentures in cash amounting to ₹ 1,00,000.

(5) Mr. G agrees to cancel debentures amounting to ₹ 50,000 out of total debentures due to him and agree to accept 15% Debentures for the balance amount due.

(6) Land & Building to be revalued at ₹ 51,84,000, Machinery at ₹ 7,20,000, Computers at ₹ 4,00,000, Inventories at ₹ 3,50,000 and Trade receivables at 10% less to as they are appearing in Balance Sheet as above.

(7) Outstanding Expenses are fully paid in cash.

(8) Goodwill and Profit & Loss A/c will be written off and balance, if any, of Capital Reduction A/c will be adjusted against Capital Reserve.

You are required to pass necessary Journal Entries for all the above transactions and draft the company’s Balance Sheet immediately after the reconstruction.
Answer:
Journal Entries in the books of P Ltd.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 98
Internal Reconstruction – Advanced Accounts CA Inter Study Material 99

Balance Sheet (as reduced) as on 31.3.2014
Internal Reconstruction – Advanced Accounts CA Inter Study Material 100
Internal Reconstruction – Advanced Accounts CA Inter Study Material 101

Notes to accounts
Internal Reconstruction – Advanced Accounts CA Inter Study Material 102

Capital Reduction Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 103

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 22.
Following is the summarized Balance Sheet of R Limited as on 31st March, 2017.
Balance Sheet as on 31st March 2017
Internal Reconstruction – Advanced Accounts CA Inter Study Material 104
Note: The arrears of preference dividend amount to ₹ 2,80,000.

The company had suffered losses since last 3 years due to bad market conditions and hope for a better position in the future.

The following scheme of reconstruction has been agreed upon and duly approved by all concerned:

  1. Equity shares to be converted into 3,00,000 shares of ₹ 10 each.
  2. Equity shareholders to surrender to the company 80 per cent of their holdings.
  3. Preference shareholders agree to forgo their right on arrears of dividends in consideration of which 7% preference shares are to be converted into 8% preference shares.
  4. Trade payables agree to reduce their claim by one fourth in consideration of their getting shares of ₹ 5,00,000 out of the surrendered equity shares.
  5. Directors agree to forgo the amounts due on account of loan.
  6. Surrendered shares not otherwise utilized to be cancelled.
  7. Assets to be reduced as under:
    Internal Reconstruction – Advanced Accounts CA Inter Study Material 105
  8. Trade receivables to the extent of ₹ 17,00,000 are considered good.
  9. Revalued figures for building is accepted at ₹ 7,00,000.
  10. Declared dividend is paid to the equity shareholders.
  11. Any surplus after meeting the losses should be utilized in writing down the value of the plant further.
  12. Expenses of reconstruction amounted to ₹ 60,000.
  13. Further 40,000 equity shares were issued to the existing members for increasing the working capital. The issue was fully subscribed and paid up.

You are required to pass the Journal Entries for giving effect to the above arrangement and also to draw up the resultant Balance Sheet of the Company.
Answer:
Journal Entries
Internal Reconstruction – Advanced Accounts CA Inter Study Material 106
Internal Reconstruction – Advanced Accounts CA Inter Study Material 107
Note: There will be no journal entry on cancellation of preference dividend on cancellation.

Balance Sheet of R Ltd. (and Reduced) as at 31st March, 2017
Internal Reconstruction – Advanced Accounts CA Inter Study Material 108

Notes:
(1) Share capital
Internal Reconstruction – Advanced Accounts CA Inter Study Material 109

(4) Cash and cash equivalents
Internal Reconstruction – Advanced Accounts CA Inter Study Material 110

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 23.
X Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses. The following is the summarized Balance Sheet of the company as on 31st March, 2017 before reconstruction:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 111
The following scheme of internal reconstruction was framed and implemented, as approved by the court and concerned parties:
(1) Uncalled capital is to be called up in full and then all the shares to be converted into Equity Shares of ₹ 40 each.

(2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of ₹ 40 each for ₹ 12,50,000.

(3) Trade creditors are given option of either to accept fully paid equity shares of ₹ 40 each for the amount due to them or to accept 70% of the amount due to them in cash in full settlement of their claim. Trade creditors for ₹ 7,50,000 accept equity shares and rest of them opted for cash towards full and final settlement of their claim.

(4) Mr. A agrees to cancel debentures amounting to ₹ 2,00.000 out of total debentures due to him and agree to accept 15% Debentures for the balance amount due. He also agree to subscribe further 15% Debentures in cash amounting to ₹ 1,00,000.

(5) Mr. B agrees to cancel debentures amounting to ₹ 50,000 out of total debentures due to him and agree to accept 15% Debentures for the balance amount due.

(6) Land & Building to be revalued at ₹ 51,84,000, Machinery at ₹ 7,20,000, Computers at ₹ 4,00,000, Inventories at ₹ 3,50,000 and Trade receivables at 10% less to as they are appearing in Balance Sheet as above.

(7) Outstanding Expenses are fully paid in cash.

(8) Profit & Loss A/c will be written off and balance, if any, of Capital Reduction A/c will be adjusted against Capital Reserve.

You are required to pass necessary Journal Entries for all the above transactions and draft the company’s Balance Sheet immediately after the reconstruction.
Answer:
Journal Entries [In the Books of X Ltd.]
Internal Reconstruction – Advanced Accounts CA Inter Study Material 112
Internal Reconstruction – Advanced Accounts CA Inter Study Material 113

Balance Sheet of X Ltd. (as reduced) as on 31.3.2017
Internal Reconstruction – Advanced Accounts CA Inter Study Material 114

Notes to accounts
Internal Reconstruction – Advanced Accounts CA Inter Study Material 115

2. Capital Reduction Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 116

Question 24.
The summarized Balance Sheet of Bad Luck Ltd. as on 31st March, 2013 was as follows:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 117

Notes to Accounts
Internal Reconstruction – Advanced Accounts CA Inter Study Material 118
The following scheme of internal reconstruction was framed, approved by the Court, all the concerned parties and implemented:

  1. The preference shares to be written down to ₹ 25 each and the equity shares to ₹ 20 each. Each class of shares then to be converted into shares of ₹ 100 each.
  2. The debenture holders to take over freehold property (book value ₹ 2,00,000) at a valuation of ₹ 2,50,000 in part repayment of their holdings. Remaining freehold property to be revalued at ₹ 6,00,000.
  3. Loan from directors to be waived off in full.
  4. Stock of t 50,000 to be written off, ₹ 12,500 to be provided forbad debts.
  5. Profit and Loss account balance, Trademark, goodwill and deferred revenue expenditure to be written off.

Pass Journal Entries for all the above mentioned transactions. Also Prepare Capital Reduction account and company’s Balance Sheet immediately after reconstruction. (May 2013) (16 Marks)
Answer:
Journal entries in the books of Bad Luck Ltd.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 119
Internal Reconstruction – Advanced Accounts CA Inter Study Material 120

(b) Capital Reduction Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 121

Balance Sheet of Bad Luck Ltd. (And Reduced) As on 31st March, 2013
Internal Reconstruction – Advanced Accounts CA Inter Study Material 122

Notes to Accounts
Internal Reconstruction – Advanced Accounts CA Inter Study Material 123

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 25.
The Balance Sheet of X Ltd. as at 31st March, 2014 was as follows:

X Limited
Balance Sheet as at 31.03.2014
Internal Reconstruction – Advanced Accounts CA Inter Study Material 124
No Dividend on Preference Shares has been paid for last 5 Years.

The following scheme of reorganisation was duly approved by the Court:
(i) Each equity share to be reduced to ₹ 25.

(ii) Each existing Preference Share to be reduced to ₹ 75 and then exchanged for one new 13% Preference Share of ₹ 50 each and one Equity Share of ₹ 25 each.

(iii) Preference Shareholders have forgone their right for dividend for four years. One year’s dividend at the old rate is however, payable to them in fully paid equity shares of ₹ 25.

(iv) The Debenture Holders be given the option to either accept 90% of their claims in cash or to convert their claims in full into new 13% Preference Shares of ₹ 50 each issued at par. One-fourth (in value) of the Debenture Holders accepted Preference Shares for their claims. The rest were paid in cash.

(v) Contingent Liability of ₹ 2,00,000 is payable which has been created by wrong action of one Director. He has agreed to compensate this loss out of the loan given by the Director to the Company.

(vi) Goodwill does not have any value in the present. Decrease the value of Plant & Machinery, Stock and Debtors by ₹ 3,00,000; ₹ 1,00,000 and ₹ 2,00,000 respectively. Increase the value of Land & Building to ₹ 25,00,000.

(vii) 50,000 new Equity Shares of ₹ 25 each are to be issued at par payable in full on application. The issue was underwritten for a commission of 4%. Shares were fully taken up.

(viii) Total expenses incurred by the Company in connection with the Scheme excluding underwriting Commission amounted to ₹ 20,000.
Pass necessary Journal Entries to record the above transactions. (Nov 2014) (16 Marks)
Answer:
In the books of X Ltd.
Journal Entries
Internal Reconstruction – Advanced Accounts CA Inter Study Material 125
Internal Reconstruction – Advanced Accounts CA Inter Study Material 126
Internal Reconstruction – Advanced Accounts CA Inter Study Material 127
Internal Reconstruction – Advanced Accounts CA Inter Study Material 128

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Question 26.
The summarized balance sheet of Z Limited as on 31st March, 2017 is as under:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 129
Note: Preference dividend is in arrears for last 2 years.

Mr. Y holds 60% of debentures and Mr. Z holds 40% of debentures. Moreover ₹ 1,00,000 and ₹ 60,000 were also payable to Mr. Y and Mr. Z respectively as trade payable.
The following scheme of reconstruction has been agreed upon and duly approved.
(i) All the equity shares to be converted into fully paid equity shares of ₹ 5.00 each.

(ii) The Preference shares be reduced to ₹ 50 each and the preference shareholders agreed to forego their arrears of preference dividends, in consideration of which 9% preference shares are to be converted into 10% preference shares.

(iii) Mr. Y and Mr. Z agreed to cancel 50% each of their respective total debt including interest on debentures. Mr. Y and Mr. Z also agreed to pay ₹ 1,00,000 and ₹ 60,000 respectively in cash and to receive new 12% debentures for the balance amount.

(iv) Persons relating to trade payables, other than Mr. Y and Mr. Z also agreed to forgo their 50% claims.

(v) Directors also waived 60% of their loans and accepted equity shares for the balance.

(vi) Capital commitments of ₹ 3.00 lacs were cancelled on payment of ₹ 15,000 as penalty.

(vii) Directors refunded ₹ 1,00,000 of the fees previously received by them.

(viii) Reconstruction expenses paid ₹ 75,000.

(ix) The taxation liability of the company was settled for ₹ 75,000 and was paid immediately.

(x) The Assets were revalued as under:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 130
You are required to pass journal entries for all the above mentioned transactions including amounts to be written off of Goodwill, Patents, Loss in Profit and Loss account and Discount on issue of debentures. And also prepare Bank Account and Reconstruction A/c. (Nov 2017) (16 Marks)
Answer:
Journal Entries in the Books of Z Ltd.
Internal Reconstruction – Advanced Accounts CA Inter Study Material 131
Internal Reconstruction – Advanced Accounts CA Inter Study Material 132

Bank Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 133

Reconstruction Account
Internal Reconstruction – Advanced Accounts CA Inter Study Material 134

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Amalgamation + Internal Reconstruction

Question 27.
Following are the summarized Balance Sheet of Companies K Ltd. and W Ltd., as at 31-12-2011:
Internal Reconstruction – Advanced Accounts CA Inter Study Material 135
On 01-04-2012, K Ltd. adopted the following scheme of reconstruction:

  1. Each equity share shall be sub-divided into 10 equity shares of ₹ 10 each fully paid up. 50% of the equity share capital would be surrendered to the company.
  2. Preference dividends are in arrear for 3 years. Preference shareholders agreed to waive 80% of the dividend claim and accept payment for the balance.
  3. Own debentures of ₹ 80,000 (nominal value) were sold at ₹ 98 cum interest and remaining own debentures were cancelled.
  4. Debenture holders of ₹ 3,00,000 agreed to accept one machinery of book value of ₹ 3,20,000 in full settlement.
  5. Creditors, Debtors and stock were valued at ₹ 5,00,000, ₹ 6,00,000 and ₹ 4,00,000 respectively. Goodwill, discount on issue of debentures and Profit and Loss account (Dr.) are to be written off.
  6. The company paid ₹ 20,000 as penalty to avoid capital commitments of ₹ 4,00,000.

On 02.04.2012, a scheme of absorption was adopted. K Ltd. would take over W Ltd. The purchase consideration was fixed as below:
(a) Equity shareholders of W Ltd. will be given 50 equity shares of t 10 each fully paid up, in exchange for every 5 shares held in W Ltd.
(b) Issue of 10% preference shares of ₹ 100 each in the ratio of 4 preference shares of K Ltd. for every 5 preference shares held in W Ltd.
(c) Issue of 12% debentures of ₹ 100 each of K Ltd. for every 12% debenture in W Ltd.
Pass necessary Journal entries in the books of K Ltd. and draw the resultant Balance Sheet as at 2nd April, 2012. (Nov 2012) (16 Marks)
Answer:
In the books of K Ltd.
Journal Entries
Internal Reconstruction – Advanced Accounts CA Inter Study Material 136

Internal Reconstruction – Advanced Accounts CA Inter Study Material 137

Balance Sheet of K Ltd. as on 2nd April, 2012
Internal Reconstruction – Advanced Accounts CA Inter Study Material 138

Notes to Accounts
Internal Reconstruction – Advanced Accounts CA Inter Study Material 139

Working Notes:
1. Computation Purchase Consideration
Internal Reconstruction – Advanced Accounts CA Inter Study Material 140

2. Capital Reserve
Internal Reconstruction – Advanced Accounts CA Inter Study Material 141

Internal Reconstruction – Advanced Accounts CA Inter Study Material

Note. In the question, summarised balance sheets of K Ltd. and W Ltd. as on 31.12.2011 are given. However, the internal reconstruction and amalgamation took place on 1.4.2012 and 2.4.2012 respectively. Since, no information have been provided for the intervening period of 3 months (i.e. from 1.1.2012 to 31.3.2012), the above answer is given assuming this date of summarised balance sheets as 31.3.2012 instead of 31.12.2011.

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