Internal Reconstruction

Question
Answer

Question
Answer

External
Reconstruction
Meaning

What is meant by Internal Reconstruction?

In case of internal reconstruction, the companys existing financial structure is
reorganized without dissolving the existing company and without forming a new company. Taking a wider
meaning of the term Internal Reconstruction. It includes:
a. Alteration of Share Capital under Section 94 to 97.
b. Reduction of Share Capital under Section 100 to 105.
c. Variation of Shareholders Rights under Section 106.
d. Scheme of Compromise/Arrangement under Sections 391 to 393 and 394A.
What is the difference between External and Internal Reconstruction.
Under Internal Reconstruction, there is no winding up, no few formation, no sale of business no purchase of
business. The assets and liabilities are revalued through capital reduction account. Profit and Loss Account,
debit balance and fictitious assets must be written off against capital reduction account even if the question is
silent on this point. If the final balance in capital reduction account is debit it should be transferred to
goodwill account, if there is credit balance it should be transferred to capital reserve account.
It is a type of Amalgamation where, a newly-formed company takes over the business of an existing
company. (One formation, one winding up).
Capital Reduction
Capital Reduction is the repayment or writing down of a companys different classes of capital, as a result of
large accumulated losses or an excess of funds without profitable use.
Though Capital Reduction may be effected when a company accumulates huge surplus funds far in
excess of its requirements, but it is more usually followed, when a company passes through a period of
financial difficulties, accumulates losses or has its assets over-valued.

Objective

When new capital has to be introduced to revive a company, the success of a new issue would however,
almost certainly be jeopardized by the existence of accumulated losses. Therefore, it is prudent and usual to
write-off these loses by putting a reconstruction scheme into effect.
The objective of Capital Reduction is the resumption of the payment of normal dividends out of the
expected future profits without the necessity of using those profits to write-off the debit balance of the Profit
and Loss Account.

Procedure

Following conditions are to be met to give effect of Share Capital Reduction in accordance with the
Companies Act, 1956
1- The company must be authorized by its articles of association to reduce the share capital.
2- If there is no provision in the article in this respect, it must pass a Special Resolution to alter its articles of
association. It should be noted that an authority to do so contained in the memorandum is of no avail.
The company must pass a Special Resolution to reduce the share capital.
3- The company must apply, by petitions, to the Court for an order confirming the reduction. If the Court is
satisfied that the creditors interests have been secured, it may confirm the reduction. However, it may
impose terms and conditions including a direction that the word and reduced should be added after the
name of the company for a certain period of time, and that the company should publish the reasons for such
reduction. (For failure to add the words and reduced a penalty of Rs 500 is payable.)
4- The company has to deliver to the Registrar a certified copy of the Courts order and minute approved by
the Court showing the details of the shares for registration.
The Registrar will then register the order and the minute. After registration of these, the Resolution to reduce
the share capital shall take effect. Notice of the registration shall be published in such a manner as the Court
may direct.

(i)
(ii)
(iii)
(iv)

(v)
(vi)

Form
(i)
(ii)
(iii)
Basis

The reduction of capital may take any of the following forms:

The company may reduce the liability of the shareholders in respect of any unpaid amount on the shares held
by them.
The company may pay-off any paid-up share capital which is in excess of its requirements.
The company may cancel any paid-up share capital which is lost or unrepresented by available assets.
(a) The present position of the company is bad but future is good, i.e., there must be better prospects if the
scheme is being implemented.
(b) The scheme must be approved by the shareholders and the creditors i.e. the scheme must be equitable
amongst the various parties as far as possible;
(c) Further contribution must be made by the shareholders and creditors (particularly for the purpose of working

capital).
Steps
The following steps should be taken if a reconstruction scheme is drafted by a company
(a) Estimating total loss
At first, total amount of also which is to be written-off should be ascertained. This includes debit
balance of Profit and Loss Account, all fictitious assets, like Goodwill, preliminary expenses, discount on
issue of shares and debentures etc., any fall in the value of assets, any increase in liability or arrears of
cumulative preference dividend etc. In short, only net assets are left.
(b) Writing-off the loss so ascertained
After ascertaining the total loss, it becomes necessary to reduce the capitals contributed by the various
parties, viz. equity shareholders, preference shareholders, unsecured creditors and creditors having a floating
charge. The above persons suffer the loss. Practically, equity shareholders are to suffer the maximum amount
of loss. They also agree to bear the loss to the maximum amount since they know very well that, in reality,
their capital does not exist at all. As a result, if the company goes into liquidation they will get nothing.
Therefore, for a better prospect, to get something in the form of dividend and bonus shares in future they
agree to share such losses. But if the amount of loss is so much which is not covered by the equity capital
alone, in that case, preference shareholders are asked to suffer such loss. The loss may also be borne by the
unsecured creditors and creditors having a floating charge. Under no circumstances, preferential creditors or
secured creditors (up to the extent of realizable value of assets pledged) are asked to make any sacrifice.
(c) Compensation to be made by the various parties
Distribution of loss among the various parties depends on the circumstances. If the loss is to be borne by
the equity shareholders alone on the understanding that the loss will ultimately be compensated by future
earnings, the question of compensation does not arise. But if preference shareholders are asked to make any
sacrifice (i.e. if they are to share the amount of loss) they must be compensated by increasing their rate of
dividend in such a way that their total earning must not be affected by the reduction of the capital. The same
can be done by a company only when the trend of profit is not fluctuating. Of course, there is another
alternative which can be followed for this purpose. That is, a part of preference share capital may be
converted into equity share capital which gives them an opportunity of exercising voting rights together with
the higher rate of dividend on this converted part in order to compensate their losses.
If debenture holders or creditors are asked to make any sacrifice they should also be compensated in the
same manner. They should be paid in cash for the balance or they should be given some sort of security for
the rest. Debenture holders may be given a high rate of interest.
Arrears of preference dividend are generally cancelled since it may create some difficulties if paid in
cash. In that case, deposit certificates may be issued as against compensation made to the preference
shareholders. This is preferable since (a) it will not affect the voting power, and (b) the certificates can be
redeemed when the opportunity will arise.
(d) Arrangements for working capital
Scheme of capital reduction will be successful only when there will be a proper provision for working
capital. The following methods may be advocated for the purpose:
(i) To issue some shares;
(ii) To request debenture holders to extend their loans;
(iii) To reduce the share capital to partly paid amount so that the rest of the call (money) may be made when
needed; and
(iv) To invite any fresh loan (short-term).

Que.1 Kanha Ltd. decided with the approval of the Court and the sanction of the parties concerned, upon a scheme of
reconstruction as at 31st March, 1996.
The summarized balance sheet of the Company as at that date is as under:
Liabilities
Rs.
Assets
Rs.
12% Preference Shares of Rs.10 each fully paid
4,20,000 Land, Buildings,
Equity shares of Rs. 10 each
8,20,000 Plant and Machinery
Capital Reserve
68,000 Stock: Work-in-progress
10% First Mortgage Debentures
3,15,000 Debtors
Interest accrued
5,950 Investment
10% Convertible Debenture of Rs. 100 each
6,38,000 Goodwill
Interest accrued
15,050 Discount and Expenses on
Loans from Banks secured
1,00,000 Issue of debentures

6,45,000
3,00,000
3,20,000
1,80,000
3,98,000
3,80,000
31,000

Creditors

94,000
27,76,000

Profit and Loss Account

2,22,000
27,76,000

The material monetary points in the scheme are :

(i)
Each convertible debenture is to be exchanged for Rs. 35 of non-convertible 10 per cent debenture, Rs.50 of 13 per cent
Preference share and Rs. 15 of Equity share.
(ii)
Each existing 12 per cent preference share is to be written down from Rs. 10 to Rs. 8 to which Rs. 5 will be represented
by 13 percent Preference share and Rs. 3 by Equity share.
(iii)
Each existing Equity share will be written down from Rs. 10 to Rs. 3.
(iv)
Both classes of shares will then be sub-divided into shares of Re. 1 each.
(v)
The State Finance Corporation has agreed to apply for Rs. 3,75,000 of Equity shares paying cash in full on application.
(vi)
The Bank loan is to be paid off.
(vii)
The reduction of capital reserves are to be applied in eliminating fictitious assets and the balance to be used in writing
down the Plant and Machinery are investment in the ratio of 3:1.
You are required to give the Journal entries recording the reduction and reorganization and the resulting summarized balance
sheet as on 1st April 1996.
Que. 2
The Balance Sheet of Hari Lal Limited as on 30th June, 1997 was as follows:
Rs. Assets
Liabilities
Share Capital Authorised, issued
Freehold Land and Buildings
Paid up:
Plants
10,000 6 per cent Cumulative
Tools and Dies
Preference Shares
1,00,000 Investments
15,000 Equity Shares of Rs. 10 each
1,50,000 Stocks
2,50,000 Debtors
7 percent Debentures
60,000
Research Expenditure
Interest due thereon
4,200
64,200 Profit and Loss A/c
Bank overdraft (Secured
On freehold land and Buildings and plant)
Creditors
20,000
50,000
3,84,200
The scheme of reorganization detailed below has been agreed by all the interested parties and approved by the court.
You are required to prepare (i) the journal entries recording the transaction in the books, including cash ; and (ii) the balance
sheet of the company as at 1st July, 1997 after completion of the scheme.
(a) The following assets are to revalued as shown down: Plant Rs. 59,000 ; Tools and dies Rs. 15,000; Stock Rs. 30,000; and
Debtors Rs. 48,700.
(b) The research expenditure and the debit balance of profit and loss account are to be written off.
(c) Price of land recorded in the books at Rs. 6,000 is valued at Rs. 14,000 and is to be taken over by the debenture-holders in
part repayment of principal. The remaining freehold land and buildings are to be revalued at Rs. 40,000.
(d) A creditor for Rs. 18,000 has agreed to accept a second mortgage debenture of 10 per cent per annum secured on the plant
for Rs. 15,500 in settlement of his debt. Other creditors totaling Rs. 10,000 agree to accept a payment of Re. 0.85 in the
rupee for immediate settlement.
(e) The investments, at a valuation of Rs. 22,000 are to be taken over by the bank.
(f) The ascertained Loss is to be met by writing down the ordinary shares to Re. 1 each and the preference shares to Rs. 8.00
each. The authorized share capital is to be increased immediately to the original amount.
(g) The ordinary shareholders agree to subscribe for two new ordinary shares at per for every share held. This cash is all
received.
(h) The costs of the scheme are Rs. 3,500. These have been paid and are to be written off.
The debenture interest has also been paid.

Rs.
34,000
96,000
27,300
15,000
42,500
53,400
18,000
98,000

3,84,200

Que. 3
The summarized Balance Sheet of Messers Great Ltd. as at 31 st December 1991 was as given below :
Liabilities

Rs.

Assets

Rs.

Share Capital :
4,00,000 Equity Shares of Rs. 5 each
3,00,000, 10 per cent preference
Shares of Rs. 5 each
10 percent A Debentures Secured by local
Works
9 percent B Debentures Secured by
Upcountry Works
Workmens Compensation Fund for:
Local works
25,000
Upcountry Works
10,000
Bank overdraft
Creditors

(a)
(b)
(c)
(d)
(e)
(f)

20,00,000

15,00,000
1,00,000

Local Works
Upcountry Works
Investment of Workmens
Compensation Fund
Stocks
Debtors
Preliminary Expenses
Profit and loss Account

20,00,000
10,00,000
35,000
1,15,000
50,000
12,500
16,22,500

2,50,000

35,000
7,50,000
2,00,000
48,35,000
48,35,000
The following scheme of reducing the lost capital was approved by all concerned parties:
The Equity Shares were reduced to 25 paise per share.
The Preference Shares were reduced to Rs. 3.75 per share and the rate of dividend was reduced to 9 per cent.
The Debenture-holders waived Rs. 42,000 being interest due to them. This amount is included in creditors.
The Directors agreed to refund Rs. 50,000 fees which they had received. This amount was refunded by them in cash.
The B Debenture-holders formed New Co. Ltd. to take over the Upcountry Works at Rs. 5,00,000. The price was settled by
surrender of B Debentures and the allotment of 25,000 equity shares of Rs. 10 each as fully paid up.
Investments were valued at Rs. 25,000, stock at Rs. 50,000 and Debtors at Rs. 40,000 there was no actual liability to Upcountry
Works employees. The assets were to be written down as above and the fictitious assets were to be wiped off. Necessary
Reserves were to be retained and the balance available was to be written off the book value of local works.
Prepare the necessary Ledger Account and the Balance Sheet of Messrs Great Ltd. giving effect to the
foregoing scheme and pass the necessary Journal entries without narratives.
Que. 4. The business of Rundown Limited was being carried on continuously at losses. The following are the extracts from the
Balance Sheet of the Company as on 31st March, 1985
Liabilities
Rs. Assets
Rs.
Authorised, Issued and Subscribed
Goodwill
50,000
Capital :
Plant
3,00,000
30,000 Equity Shares of Rs. 10 each
Loose Tools
10,000
fully paid
3,00,000 Debtors
2,50,000
2,000 8 per cent Cumulative Preference
Stock
1,50,000
share of Rs. 100 each fully paid
Cash
10,000
Security premium
2,00,000 Bank
35,000
Unsecured Loan (From Director)
90,000 Preliminary Expenses
5,000
Sundry Creditors
50,000 Profit & Loss Account
2,00,000
Outstanding Expenses (including
3,00,000
Directors remuneration Rs. 20,000)

1.
2.
3.
4.
5.
6.
7.

70,000
10,10,000
10,10,000
Note: Dividends on Cumulative Preference Shares are in arrears for 3 years.
The following scheme of reconstruction has been agreed upon and duly approved by the Court:
Equity shares to be converted into 1,50,000 shares of Rs. 2 each.
Equity shareholders to surrender to the Company 90 per cent of their holding.
Preference shareholder agree to forgo their right to arrears to dividends in consideration of which 8 per cent Preference shares are
to be converted into 9 per cent Preference Shares.
Sundry Creditors agree to reduce their claim by one-fifth in consideration of their getting shares of Rs. 35,000 out of the
surrendered equity shares.
Directors agree to forgo the amounts due on account on unsecured loan and Directors remuneration.
Surrendered shares not otherwise utilized to be cancelled.
Assets to be reduced as under:
Goodwill by
Rs. 50,000

Plant by
Rs. 40,000
Tools by
Rs. 8,000
Sundry Debtors by
Rs. 15,000
Stock by
Rs. 20,000
8. Any surplus after meeting the losses should be utilized in writing down the value of the Plant further.
9. Expenses of reconstruction amounted to Rs. 10,000.
10. Further 50,000 Equity Shares were issued to the existing members for increasing the working capital. The issue was fully
subscribed and paid-up.
11. There was a shareholder having 100 shares dissented to Scheme of reconstruction. So his shares ware purchased by a director by
payment of Rs. 1100.
12. Authorised Capital was suitably increased.
You are required to pass the journal entries for giving effect to the above arrangement and also to draw up the
result Balance Sheet of the Company.
Que. 5 The following is the Balance Sheet of Radhinka Ltd. as at March 31 st, 2002:
Liabilities
Fully paid equity shares of Rs. 10 each
Capital Reserve
12% Debentures
Debenture Interest Outstanding
Trade Creditors
Directors Remuneration Outstanding
Other Outstanding Expenses
Provisions

Rs. In Lacs
500
6
400
48
165
10
11
33
1,173

Assets
Goodwill
Land and Building
Plant and Machinery
Furniture and Fixtures
Stock
Debtors
Cash at Bank
Discount on Issue of Debentures
Profit and Loss Account

15
184
286
41
142
80
27
8
390
1,173
The following scheme of internal reconstruction was framed, approved by the Court, all the concerned parties and implemented:
(i) All the equity shares be converted into the same number of fully-paid equity shares of Rs. 2.50 P. each.
(j) Directors agree to forego their outstanding remuneration.
(k) The debenture holders also agree to forego outstanding interest, in return of their 12% debentures being converted into 13%
debentures.
(l) The existing share holders agree to subscribe for cash, fully paid equity shares of Rs. 2.50 P. each, for Rs. 125 lacs.
(m) Trade creditors are given the option of either to accept fully-paid equity shares of Rs. 2.50 each for the amount due to them or to
accept 80% of the amount due in cash. Creditors for Rs. 65 lacs accept equity shares whereas those for Rs. 100 lacs accept Rs. 80
lacs in cash in full settlement.
(n) The Assets are revalued as under:
Rs. In lacs
Land and Building
230
Plant and Machinery
220
Stock
120
Debtors
76
Pass Journal Entries for all the above mentioned transactions and draft the companys Balance Sheet immediately after the
reconsrtruction.
Que. 6. The following is the balance sheet of Sick Ltd. as on 31st March, 2000 :
Liabilities
Rs. Assets
13% Cum. Preference shares of Rs. 100
1,00,000 Fixed assets

Rs.
15,00,000

each
Equity shares of Rs. 10 each
8% Debentures
Current liabilities
Provision for taxation

(a)
(b)
(c)
(d)
(e)
(f)
(g)

Current assets
35,00,000
7,00,000 Profit and loss
3,00,000
3,00,000 Account
39,00,000
3,00,000
53,00,000
53,00,000
The following scheme of reorganization is sanctioned:
fixed assets are to be written down by 33 %.
Current assets are to be revalued at Rs. 27,00,000.
Preference share holders decide to forego their right to arrears of dividend which are in arrears for three years.
The taxation liability of the company is settled at Rs. 4,00,000 and the same is paid immediately.
One of the creditors of the company to whom the company owes Rs. 25,00,000 decides to forego 50% of his claim. He is allotted
1,00,000 equity shares of Rs. 5 each in part satisfaction of the balance of his claim.
The rate of interest on debentures is increased to 11%. The debenture holders surrender their debenture of Rs. 100 each and
exchange the same for fresh debentures of Rs. 75 each.
The existing equity and preference shares are reduced to Rs. 5 each Rs. 75 each respectively.
Pass necessary journal entries and show the new balance sheet of the company.
Q.7. The following is the Balance Sheet of Weak Ltd. as on 31.3.2006:
Liabilities
Rs. Assets
Rs.
Equity Shares of Rs 100 each
1,00,00,000 Fixed Assets
1,25,00,000
12% Cumulative Preference Shares of Rs 100
50,00,000 Investments (Market value Rs 9,50,000)
10,00,000
each
Current Assets
1,00,00,000
10% Debentures of Rs 100 each
40,00,000 Profit and Loss Account
4,00,000
Sundry Creditors
50,00,000 Preliminary Expenses
2,00,000
Provision for Taxation
1,00,000
2,41,00,000
2,41,00,000
The following scheme of reorganization is sanctioned:
(i)
All the existing equity shares are reduced to Rs 40 each.
(ii)
All preference shares are reduced to Rs 60 each.
(iii)
The rate of interest on debentures is increased to 12%. The debenture holders surrender their existing debentures
of Rs 100 each and exchange the same for fresh debentures of Rs 70 each for every debenture held by them.
(iv)
One of the creditors of the company to whom the company owes Rs 20,00,000 decides to forego 40% of his claim.
He is allotted 30,000 equity shares of Rs 40 each in full satisfaction of his claim.
(v)
Fixed assets are to be written down by 30%.
(vi)
Current assets are to be revalued at Rs 45,00,000.
(vii)
The taxation liability of the company is settled at Rs 1,50,000.
(viii)
Investments to be brought to their market value.
(ix)
It is decided to write off the fictitious assets.
Pass Journal Entries and show the Balance Sheet of the company after giving effect to the above.
Que. 8. As on 31st March, 1994, 2/3 of the Capital of Karan Ltd. , including goodwill has been lost. On that date the position was
as under:
Rs.
Rs.
Goodwill
20,00,000
2,00,000
Fixed Assets : Cost
5,00,000
Less Depreciation
15,00,000
Current Assets
4,50,000
21,50,000
Loan from I.D.B.I.
6,00,000
Current Liabilities
4,50,000
10,50,000
There was a capital reserve totaling Rs. 1,00,000. The Capital consisted of Equity Shares and 14% Preference Shares in the ratio
of 3:2, both shares being worth Rs. 100 each fully paid.
It was found that the fixed assets needed further depreciation to the extent of Rs. 15,00,000 and the current assets are worth Rs.
4,00,000. A scheme of internal reconstruction was prepared. The main features of the scheme were as under:
(i)
Equity Shares were to be reduced to Rs. 10 each, fully paid.

(ii)
(iii)
(iv)

Preference Share holders were to be issued 3 new 16% preference shares of Rs. 10 each, fully paid for each preference
share held.
Dividend on preference shares was in arrear for the previous four years. 1/5 of the arrear was paid in cash in full
settlement.
For every one equity share held, equity share holders were to subscribe for one equity share of Rs. 10 each fully paid.
Make necessary journal entries and prepare balance sheet after reconstruction is completed.

Q.9. The Balance Sheet of Fortune Ltd. as at 31.12.2007 was as follows:

Liabilities
Rs Assets
Rs
Paid up Capital:
Patents and Trade Marks
40,000
25,000 10% Pref. Shares of Rs 10 each fully paid up
2,50,000 Building
1,10,000
20,000 Equity Shares of Rs 10 each
2,00,000 Plant and Machinery
1,30,000
Capital Reserve
12,500 Furniture and Fixtures
25,000
10% Debentures of Rs. 100 each
1,00,000 Stock in trade
50,000
Accrued Interest on Debentures
15,000 Sundry Debtors
35,000
Sundry Creditors
77,500 Bank
25,000
Cash
11,250
Profit and Loss A/c
2,28,750
6,55,000
6,55,000
It is found that the Preference Dividend is in arrear for 3 years. The company prepared the following scheme of reconstruction
and it was approved by the Court:
(a) The 10% Preference Shares will be converted into 12% Preference Shares of Rs 5 each.
(b) The Equity Shares will be reduced to Rs 5 per share, Rs 3 paid-up. The call was to be made immediately for acquiring cash.
(c) 10% Debentures will be converted into 12% Debentures of Rs 75 each, the debenture holders agreed to forego 50% of the
accrued interest on the stipulation of payment of the balance amount in cash.
(d) Arrear preference dividend was agreed to be cancelled.
(e) Sundry creditors agrees to waive 40% of their claims in consideration of immediate payment of their dues.
(f) The assets were revalued: Building Rs 1,40,000; Plant and machinery Rs 1,20,000; Furniture Rs 38,000; Stock-in-trade Rs
50,000; Sundry Debtors Rs 30,000.
(g) Patents and Trade Marks and other fictitious assets are to be written-off as far as possible.
Drafts Journal Entries necessary to give effect to the aforesaid scheme and prepare the Balance Sheet. Detailed workings are
to be shown.
Que. 10. The Balance Sheet of A Co. Ltd. as on 31.12.01 is as follows:
Liabilities
Rs. Assets
Rs.
Share Capital :
Freehold Property
3,50,000
2,000, 6% Cumulative Preference
Plant
50,000
Share of Rs. 100 each, fully paid up 75,000
2,00,000 Trade Investments
Equity Shares of Rs. 10 each fully paid up
(at Cost)
60,000
6% Debentures (secured of Freehold property)
7,50,000 Debtors
4,00,000
3,75,000
Stock
2,00,000
Accrued Interest
22,500
Deferred Advertising Exp.
1,50,000
Creditors
3,97,500 Profit & Loss A/c
3,50,000
Directors Loans
12,500
2,00,000
15,60,000
15,60,000
The Court approved a scheme of re-organisation to take effect on 1.1.02 whereby:
(i)
Preference Shares to be written down to Rs. 75 each and Equity Shares to Rs. 2 each.
(ii)
Preference Dividends-in-arrears for 4 years, 75% to be waived and Equity Shares of Rs. 2 each to be allotted for the
remaining quarter.
(iii)
Accrued Debenture Interest to be paid in cash.
(iv)
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
companys assets at an interest rate of 10% p.a.
(v)
Deferred Advertising to be written-off.
(vi)
Stock to be written off fully.
(vii)
Rs. 2,33,000 to be provided as Bad Debts.

(viii)
(ix)
(x)
(xi)
(xii)

Remaining Freehold Property to be revalued at Rs. 4,00,000.

Investment sold out Rs. 1,50,000
In settlement of their loan, Directors are to accept Equity Shares of Rs. 2 each for 90% of their loans, waiving 10% of
the balance of their loan amount.
Capital commitments contracts totaling Rs. 3,00,000 are to be cancelled by payment of penalty @ 5% of Contract
Value.
Taxation and Cost of Scheme are to be ignored.
Show Journal entries reflecting the effect of the above transactions (including cash transactions) and draw up the
Balance Sheet after effecting the Scheme.

Que. 11
The ledger balance of A Ltd. on 31.12.2002 were as follows
50,000 equity shares of Rs. 100 each
50,00,000
25,000 10% preference share of Rs. 100 each
25,00,000
Preference dividend in arrears
3,00,000
Creditors
12,50,000
Fixed Assets
50,00,000
Current Assets
16,25,000
The following scheme reconstruction was adopted:
(i)
The fixed assets were valued at Rs. 30,00,000 and current assets at Rs. 12,50,000.
(ii)
The equity shares were sub-divided into shares of Rs. 5 each, fully paid 90% of these shares were surrendered.
(iii)
The total claims of preference share holders were reduced to Rs. 12,50,000 and in consideration of this, they were
allotted equity shares, out of surrendered shares amounting to Rs. 6,25,000.
(iv)
The creditors agreed to reduce their claims to Rs. 7,50,000, on third of which was to be satisfied by the issued of
equity shares out of these surrendered.
(v)
The remaining surrendered shares were cancelled.
Pass journal entries and give the Balance Sheet of the company after re-construction.
Q.12. Following is the Balance Sheet of W Ltd as on 31st March, 2000:
Liabilities
Rs Assets
Rs
1,00,000 Equity Shares of Rs 10 each, fully paid-up
10,00,000 Machinery
8,70,000
3,000, 12% Pref. Shares of Rs 100 each, fully paid
3,00,000 Furniture
1,00,000
11% Debentures
3,00,000 Patents and copyrights
40,000
Interest outstanding on debentures
33,000 Investments (market value Rs 27,500)
32,500
Loan from bank (including interest due)
86,400 Stock
3,00,000
Creditors
54,500 Debtors
2,19,500
Cash at bank
7,900
Profit and Loss Account
2,04,000
17,73,900
17,73,900
Note: Preference dividend is in arrear for two years.
The following scheme of reconstruction has been agreed upon and duly approved by the court:
(i)
The existing equity shares are converted into equal number of fully paid equity shares of Rs 7 each. The equity
shareholders also agree to take up 50,000 new equity shares of Rs 7 each, the total amount being paid by them
immediately.
(ii)
The preference shareholders agree to forego arrears of dividend and accept 85% of their capital amount by way of
redemption of all the preference shares.
(iii)
The debenture holders agree to give up their claim to outstanding interest in consideration of the rate of interest on
debentures being enhanced to 13.5%.
(iv)
Bank agrees to waive its claim to outstanding interest amounting to Rs 6,400 provided the balance of loan of Rs
80,000 to be paid off forthwith.
(v)
Investments are to appear at market value.
(vi)
Patents and copyrights are to be written off completely.
(vii)
Machinery is to be written down to the extent possible after writing off all other losses.
Pass journal entries necessary to implement the above-mentioned scheme and prepare the Balance Sheet of the company in
the prescribed form immediately after the implementation of the scheme.

Q.13. The Balance Sheet of Fortune Ltd. as at 31.12.2007 was as follows:

Liabilities
Rs Assets
Rs
Paid up Capital:
Patents and Trade Marks
40,000
25,000 10% Pref. Shares of Rs 10 each fully paid up
2,50,000 Building
1,10,000
20,000 Equity Shares of Rs 10 each
2,00,000 Plant and Machinery
1,30,000
Capital Reserve
12,500 Furniture and Fixtures
25,000
10% Debentures of Rs. 100 each
1,00,000 Stock in trade
50,000
Accrued Interest on Debentures
15,000 Sundry Debtors
35,000
Sundry Creditors
77,500 Bank
25,000
Cash
11,250
Profit and Loss A/c
2,28,750
6,55,000
6,55,000
It is found that the Preference Dividend is in arrear for 3 years. The company prepared the following scheme of reconstruction
and it was approved by the Court:
(h) The 10% Preference Shares will be converted into 12% Preference Shares of Rs 5 each.
(i) The Equity Shares will be reduced to Rs 5 per share, Rs 3 paid-up. The call was to be made immediately for acquiring
cash.
(j) 10% Debentures will be converted into 12% Debentures of Rs 75 each, the debenture holders agreed to forego 50% of
the accrued interest on the stipulation of payment of the balance amount in cash.
(k) Arrear preference dividend was agreed to be cancelled.
(l) Sundry creditors agrees to waive 40% of their claims in consideration of immediate payment of their dues.
(m) The assets were revalued: Building Rs 1,40,000; Plant and machinery Rs 1,20,000; Furniture Rs 38,000; Stock-in-trade
Rs 50,000; Sundry Debtors Rs 30,000.
(n) Patents and Trade Marks and other fictitious assets are to be written-off as far as possible.
Drafts Journal Entries necessary to give effect to the aforesaid scheme and prepare the Balance Sheet. Detailed workings are
to be shown.
Que.14
(a) Green Limited had decided to reconstruct the Balance Sheet since it had accumulated huge losses. The following is the Balance
Sheet of the Company on 31.3.2000 before reconstruction:
Balance Sheet of Green Limited as at 31.3.2000
Liabilities
Rs. Assets
Rs.
Shares Capital :
Fixed Assets:
Authorised:
Goodwill
20,00,000
1,50,000 equity Shares of Rs. 50 each
75,00,000 Building
10,00,000
Subscribed and Paid up capital :
Plant
10,00,000
50,000 equity Shares of Rs. 50 each
25,00,000 Computers
25,00,000
1,00,000 equity shares of Rs. 50 each, Rs. 40 per
Investments
Nil
share paid up
40,00,000 Current Assets
Nil
Secured Loans:
Profit and Loss A/c Loss
20,00,000
12% First Debentures
5,00,000
12% Second
Debentures
10,00,000
Current Liabilities :
Sundry Creditors
5,00,000
85,00,000
85,00,000
The following is the interest of Mr. X and Mr. Y in Green Limited :
Mr. X Rs.
Mr. Y Rs.
12% First Debentures
3,00,000
2,00,000
12% second Debentures
7,00,000
3,00,000
Sundry Creditors
2,00,000
1,00,000
12,00,000
6,00,000
Fully paid up Rs. 50 shares
3,00,000
2,00,000
Partly paid up Shares (Rs. 40 paid up)
5,00,000
5,00,000
The following Scheme of Reconstruction is approved by all parties interested and also by the Court:
(a) Uncalled capital is to be called up in full and such shares and the other fully paid up shares be converted into equity shares of Rs.
20 each.

(b) Mr. X is to cancel Rs. 7,00,000 of his total debt (other than share amount) and to pay Rs. 2 lakhs to the company and to receive
new 14% First Debentures for the balance amount.
(c) Mr. Y is to cancel Rs. 3,00,000 of his total debt (other than equity shares) and to accept new 14% First Debentures for the
balance.
(d) The amount thus rendered available by the scheme shall be utilized in writing off of Goodwill. Profit and Loss A/c and the
balance to write off the value of computers.
You are required to draw the Journal Entries to record the same and also show the Balance Sheet of the reconstructed company.
Question 15:The Directors of Hardluck Ltd. decided to recommend to the shareholders certain steps to put the affairs of the company back on
the rails. On 30th June 1987 the Balance Sheet of the company was as under.
Liabilities
Rs
Assets
Rs
Rs
Share Capital Authorised:
Fixed Assets
1,00,000 Equity Shares of Re.1 each
Goodwill at cost
22,600
issued & Paid up
1,00,000 Freehold Property at cost50,000
85,000 Equity Shares of Re.1 each fully
Less: Depreciation
8,500
paid
85,000
41,500
Reserve & Surplus
Plant and Machinery 1,19,000
Share Premium
15,000 Less: Depreciation
59,000
Current Liabilities
60,000
Trade Creditors
64,500
Investments
1,24,100
Bank Overdraft
56,500
Shares-at cost in associated companies
Loan from Bank
60,000
30,000
1,81,000 Other Quoted Investments at cost
16,000
46,000
Current Assets
Stock
23,000
Debtors
19,600
42,600
Profit and Loss A/c
68,300
2,81,000
2,81,000
The scheme of reconstruction as approved by the competent authorities, was as under:
(i) The issued ordinary shares were reduced to 5 paise each paid up, the unpaid value of the share was subsequently called by
the company and paid by all the shareholders.
(ii) The balance of unissued capital was allotted to the bank in part, discharge of the loan, the balance due was paid in cash;
(iii) The authorized capital of the company is to be increased by another 50,000 shares and these are to be issued to the existing
shareholders as rights issues. The accounts due from the shareholders was realized.
(iv) Trade creditors to give up 25% of their claims and the balance due to them to be converted into 12% secured debentures of
Rs. 100 each.
(v) Interest of Rs. 6,500 on overdraft to be waived by the bank and the balance overdraft to be paid off.
(vi) All amount available including share premium, to be utilized to write off losses, goodwill and the value of shares in
associated companies.
Show the Journal Entries to record the above and also draw the Balance Sheet of the company after the scheme is fully
implemented.
Question 16:The summarized Balance Sheet of E Ltd. as on 31.3.1984 was as follows:
Liabilities
Rs
Assets
Share Capital:
Fixed Assets:
Authorised Issued and fully paid:
Freehold Property
80,000, 6% Cum.-Pref. Shares of Rs. 10
Plant
each
8,00,000 Patents
1,50,000 Equity Shares of Rs. 10 each
Goodwill
Secured Loan:
15,00,000 Investment (at Cost)
6% Debentures (secured on Freehold
Current Assets:
Property)
7,50,000
Debtors
9,70,000
Accrued Interest
45,000
Stock
8,50,000

Rs
8,50,000
1,00,000
75,000
2,60,000
1,10,000

Deferred Advertising
Unsecured Loan:
Directors
Overdraft
Current Liabilities
Creditors

7,95,000
2,00,000
3,90,000

Profit and Loss A/c

2,00,000
20,20,000
8,70,000

5,90,000

6,00,000
42,85,000
42,85,000
Notes:
1. The Preference share dividends are four years in arrear.
2. There are Capital commitments totaling Rs. 5,00,000.
The Court approved a scheme of reorganization, submitted by the debenture holders and agreed by other interested
parties, to take effect on 1.4.1984, whereby:
(i) The Preference shares to be written down to Rs. 7.50 each and the Equity shares to Rs.2 each, each class of share then to be
converted into shares of Rs. 10 each.
(ii) Of the Preference dividend arrear, three-fourth to be waived and Equity shares to be allotted at par for the remaining onefourth.
(iii) The debenture holders to have their accrued interest paid in cash, to take over Freehold Property (Book value Rs. 2,00,000)
at a valuation of Rs. 2,40,000 in part payment of their holding and provide additional cash of Rs. 2,60,000 secured by a
floating charge on the companys assets at an interest rate of 8% p.a.
(iv) Patents, Goodwill and Deferred Advertising to be written off, Rs. 1,30,000 to be written off stock, Rs. 1,37,000 to be
provided for bad debts and the remaining Freehold Property to be revalued at Rs. 7,75,000.
(v) The Directors accept settlement of their loans as to 90% thereof by allotment of Equity shares at par and 5% in cash the
balance 5% being waived.
(vi) The Investments to be sold for Rs. 2,80,000.
(vii) The contracts for Capital expenditure to be cancelled on payment of 5% of the contract price as a penalty.
You are required to:
(a) Show the Journal Entries giving effect to the above arrangements (including cash transactions) and
(b) Prepare the Balance Sheet of E. Ltd., after completion of the scheme.
Question 17:The Balance Sheet of Fortunate Ltd., as on 31.3.1984 was as under:
Liabilities
Rs
Assets
Rs
Share Capital:
Fixed Assets
3,90,000
6,000 Equity Shares of Rs. 60 each, Rs. 30
Cash at Bank
2,70,000
paid up
1,80,000 Profit & Loss A/c
8,70,000
5% First Debentures
3,00,000
60% Second Debentures
6,00,000
Unsecured Creditors
4,50,000
15,30,000
15,30,000
Sri Ranjit holds the First Debentures for Rs. 3,00,000 and Second Debentures of Rs. 3,00,000. He is also an Unsecured
Creditors for Rs. 90,000.
Sri Vasant holds Second Debentures for Rs. 3,00,000 and is an Unsecured Creditor for Rs. 60,000. The following
scheme of reconstruction is proposed:
(i) Sri Ranjit is to cancel Rs. 2,10,000 of total debt owing to him; to advance Rs. 30,000 in cash and to take new First
Debentures (in cancellation of those already issued) for Rs. 5,10,000 in satisfaction of all his claims.
(ii) Sri Vasant to accept Rs. 90,000 in cash in satisfaction of all his claims.
(iii) Unsecured Creditors (other than Ranjit and Vasant) are to accept the allotment of 20,000 fully paid Equity shares of Rs. 7.50
each in satisfaction of 75% of their claims and the balance of 25% is to be postponed and to be payable at the end of four
years.
(iv) Uncalled Capital is to be called up in full and Rs. 52.50 per share cancelled thus making the share of Rs. 7.50 each.
The Nominal share capital is to be increased accordingly.
Assuming that the scheme is duly approved, give the necessary journal entries and the Balance Sheet of the company after
the scheme has been put into effect.