Problem No.

: 1 (March 2018)
st
Following is the Balance Sheet of Prathamesh Ltd. as on 31 March 2016 :
Liabilities ₹ Assets ₹
Shares Capital : 16,00,000 Goodwill 6,80,000
3,20,000 equity shares of ₹ 5 each Land & Building 5,20,000
fully paid Equipments 5,00,000
8,000 8% cumulative preference s Sundry Debtors 4,81,940
hares of ₹ 100 each fully paid 8,00,000 Stock 6,60,680
8% debentures (₹ 100 each) 8,00,000 Investment 90,900
Bank overdraft 3,00,000 Cash & Bank 40,480
Sundry Creditors 6,80,720 Profit & Loss Accounts 12,06,720
(including ₹ 40,000 interest due on
bank overdraft)
41,80,720 41,80,720

Note : Preference Dividends are in arrears for five years.

The following scheme of reconstruction was approved & implemented :
1. Equity shares be reduced to ₹ 1.25 each and then to be consolidated into equity shares of ₹ 10 each.
2. 8% preference shares be reduced to ₹ 40 each and then to be subdivided into shares of ₹ 10 each.
3. ₹ 48,000 be paid to preference shareholders in lieu of arrears of preference dividend.
4. The debenture holders have also agreed to accept equal number of 9% debentures of ₹ 60 each in exc
hange of 8% debentures of ₹ 100 each.
5. Bank has agreed to take over 50% of stock in full satisfaction of its claim including interest. The rem
aining stock be revalued at ₹ 2,40,000.
6. Investments are sold for ₹ 80,000.
7. Tangible fixed assets to be appreciated by 20%, Goodwill to be written off and provision to be made
for doubtful debts of ₹ 40,000.

Pass necessary journal entries in the books of Prathamesh Ltd to record the above transactions.

Solution. :

Dr. Cr.

Capital Reduction A/C

Particular ₹ Particular ₹
To Liabilities [Paid Dividend] 48,000 By Equity shares 12,00,000
To Investment 10,900 By Preference shares 4,80,000
To Goodwill w/f 6,80,000 By 8% Debentures 3,20,000
To R.D.D 40,000 By Bank overdraft 9,660
To Profit & loss A/C 12,06,720 By Land & Building 1,04,000
To Stock 90,340 By Equipment 1,00,000

To Capital Reserve 1,37,700

 22,13,660 22,13,660

Journal Entries In The Books Of Prathamesh Ltd.

Sr.no Particular Dr. ₹ Cr. ₹

1 Equity Shares
Equity shares A/C Dr 12,00,000
To Capital Reduction A/C 12,00,000

Old Equity Shares capital A/C Dr 4,00,000

To New Equity shares capital A/C 4,00,000
2 Preference Shares
Old Prefrence Shares capital A/C Dr 8,00,000
To New Prefrence Shares capital A/C 4,80,000
To Capital Reduction A/C 3,20,000
3 Paid Dividend
Capital Reduction A/C Dr 48,000
To Liabilitie [Paid Devidend] A/C 48,000
4 Debenture
8% Debentures A/C Dr 8,00,000
To 9% Debentures A/C 4,80,000
To Capital Reduction A/C 3,20,000

5 Bank overdraft
Bank overdraft A/C Dr 3,00,000
Sundry Creditors A/C Dr 40,000
To 50% Settlement A/C 3,30,340
To Capital Reduction A/C 9,660
5.B Stock revalue
Capital Reduction A/C Dr 90,340
To Stock A/C 90,340
6 Investment Sold
Capital reduction A/C Dr 10,900
Cash & Bank A/C Dr 80,000
To Investment A/C 90,900
7 Tangible Fixed Assets Appreciated
Land & Building A/C Dr 1,04,000
Equipment A/C Dr 1,00,000
To Capital reduction A/C Dr 2,04,000
7.B Goodwill w/f & made doubtful debts
Capital reduction A/C Dr 7,20,000
To Goodwill A/C 6,80,000
To R.D.D 40,000
8 Profit & loss Balance transfer
Capital reduction A/C Dr 12,06,720
To Profit & loss A/C 12,06,720