KUNAL SIR 9871518388

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FINANCIAL ACCOUNTING
B.COM Hons.

INTERNAL RECONSTRUCTION

Q1. Balance sheet of X Ltd. as on 31st December, 2017

LIABILITIES AMOUNT ASSETS AMOUNT

Equity share capital of ₹ 10 Machine 4,00,000
each, fully paid 3,00,000 Furniture 2,00,000
Preference share capital of Building 5,00,000
₹ 10 each, fully paid 2,00,000 Debtors 1,20,000
General reserve 1,50,000 Cash 80,000
16% bank Loan 2,50,000 Goodwill 2,50,000
18% debentures 4,00,000 P & L A/C (Dr.) 1,20,000
Creditors 2,00,000 Discount on shares 80,000
Bills Payable 2,50,000
17,50,000 17,50,000
Under the scheme of reconstruction, following agreements were made:
1. Assets were valued as under:
Machine 2,80,000
Furniture 1,20,000
Building 5,50,000
2. Interest rate on Bank Loan reduced to 8%.
3. 18% debentures converted into 10% debentures and their claim was also reduced by
₹ 2,50,000.
4. Creditors also agreed to reduce their claim by ₹ 1,50,000.
5. B/P agreed to continue business on existing terms
6. F.V. of each equity share reduced by ₹ 1 per share.
7. Paid up value of each preference share reduced by ₹ 1 per share.

Q2. Balance Sheet of Bakwas Ltd. is given below on 31st March, 2017:
LIABILITIES AMOUNT ASSETS AMOUNT
Equity share capital @ ₹ 20 5,00,000 Fixed Assets 6,00,000
Preference share capital @ Investment (market value ₹
₹ 10 3,00,000 2,50,000) 4,00,000
Profit and loss A/C 1,00,000 Current assets 5,00,000
Security Premium 1,50,000 Discount on shares 3,00,000
Capital reserve 2,50,000
8% Debentures 2,00,000

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Provision for tax 1,00,000
Creditors 2,00,000
18,00,000 18,00,000
The following scheme of reconstruction is sanctioned and approved by court:
(i) Fixed assets reduced to 4,00,000
(ii) Investment to reflect their market value.
(iii) Current assets revalued at Rs. 5,50,000.
(iv) 8% debentures were converted into 10,000 equity share of Rs. 20 each.
(v) Creditors were agreed to continue business on existing terms.
(vi) Taxation liability settled at Rs. 1,50,000.
(vii) 10,000 new preference shares were issued @ Rs. 10 each to the public. Shares were
fully subscribed by the public.
(viii) Each equity share reduced by Rs. 2 per share.
Pass entries and prepare reconstruction A/c and new balance sheet.

Q3. Balance Sheet of Satyam Ltd. is given below on 31st March, 2017:
Balance Sheet of Satyam Ltd.
LIABILITIES AMOUNT ASSETS AMOUNT
Equity share capital @ 10 4,00,000 Bank 2,00,000
10% preference share 3,00,000 Other Assets 1,80,000
capital Discount on issue of shares 3,00,000
12% debentures @ 100 5,00,000
Creditors 3,00,000
Bills Payable 5,00,000
Other liability 3,00,000
23,00,000 23,00,000
Note: Preference dividends are in arrear for 2 years.
(i) Preference shareholders agreed to forgo their rights of arrears of dividend.
(ii) Creditors agreed to continue business on existing terms if they are paid 20% of their
dues immediately.
(iii) 12% debentures were converted into 9% debentures. Face value of each debentures
also reduced by ₹ 25 per debenture.
(iv) Face value of each equity share reduced to Rs. 8.
(v) Bills payable were paid off at a discount of 20%
(vi) Cost of reconstruction Rs. 5000 paid off.
(vii) Company issued 20,000 new 10% preference shares @ Rs. 10 each for cash. Shares
were fully subscribed by the public.
(viii) Surplus if any will be utilized to write down the value of other assets.
Make entries and prepare reduction A/c (re-organization A/c)

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Q4. The balance sheet of Sick Ltd. s on 31/12/2017:
LIABILITIES AMOUNT ASSETS AMOUNT
13% cumulative preference Fixed assets 15,00,000
shares of ₹ 100 each 1,00,000 Current assets 35,00,000
Equity shares of ₹ 10 each 7,00,000 Profit and loss A/C 3,00,000
8% debentures 3,00,000
Current Liabilities 39,00,000
Provision for taxation 3,00,000
53,00,000 53,00,000
The following scheme of reconstruction is sanctioned:
(i) Fixed assets are to be written down by 33-1/3%.
(ii) Current assets are to be revalued at Rs. 27,00,000.
(iii) Preference shareholders decided to forgo their right to arrears of dividend which are
in arrears for 3 years.
(iv) The taxation liability of the company settled at Rs. 4,00,000.
(v) One of the creditors of the company, to whom the company owes Rs. 25,00,000
decides to forgo 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.
(vi) The rate of interest on debentures increased to 11%. The debenture holders
surrender their exiting debentures of Rs. 100 each and exchange the same for fresh
debentures of Rs. 75 each.
(vii) All exiting equity shares are reduced to Rs. 5 each.
(viii) All preference shares are reduced by Rs. 25 each.
Pass journal entries to give effect to the above.

Q5. The financial position of H.L. Ltd. on 30th June, 2016 is:
LIABILITIES AMOUNT ASSETS AMOUNT
Share Capital: Freehold property 34,000
Authorised, issued and fully Plant 96,000
called up 15,000 ordinary Tools and dies 27,300
shares 1,50,000 Investments 15,000
10,000 – 6% preference Stocks 42,500
shares 1,00,000 Debtors 53,400
7% secured debentures 60,000 R and D expenditure 18,000
Accrued interest on Profit and loss A/C 98,000
debentures 4,200
Loan-secured 20,000
Creditors 50,000
3,84,00 3,84,200
The scheme of organization detailed below is agreed and approved by the court:

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(i) Assets to be revalued at – plant Rs. 59,000, Tools and Dies Rs. 15,000, stock Rs. 30,000
and debtors Rs. 48,700.
(ii) R and D expenses and profit and loss account to be written off.
(iii) Land at book value of Rs. 6,000 valued at Rs.14,000 is taken over by debenture
holders in part payment. The remaining property is valued at Rs. 40,000.
(iv) The investments valued at Rs. 22,000 to be taken over by loan creditors, Rs. 2,000 is
refunded to company.
(v) The creditors for Rs. 18,000 have agreed to accept new second mortgage debentures
carrying interest @ 10% p.a. in settlement of Rs. 15,500. Another creditor for Rs. 10,000
agrees to accept cash at a discount of 15%.
(vi) The ordinary shares are to be written down to Re. 1 per share and preference shares
to Rs. 8 per share.
(vii) The cost of scheme amounting Rs. 3,500 to be paid up written off.
(viii) Ordinary shareholders to subscribe and pay for two new shares of Rs. 1 each for
every one share held.
You are required to show the journal entries, reorganization account and resultant
balance sheet.

Q6. Vidushi Ltd. decided to reorganize following a period of adverse trading conditions. The
balance sheet of the company as on 31 March, 2017 showed the following:
LIABILITIES AMOUNT ASSETS AMOUNT
Authorised and issued Goodwill 55,000
capital: Freehold property 60,000
20,000, 8% cumulative Leasehold property:
preference shares of ₹ 10 Cost 1,40,000
each 2,00,000 Less: depreciation (18,000) 1,22,000
15,000 equity shares of ₹ 10 Plant and Machinery:
each 1,50,000 Cost 2,20,000
Security premium account 5,000 Less: depreciation (60,000) 1,60,000
9% debenture (secured Trade investment at cost 40,000
against property) 60,000 Stock 30,000
Accrued interest on Debtors 60,000
debentures 2,700 Discount on debentures 2,500
Creditors 85,000 Profit and loss Account 69,200
Bank overdraft 96,000
5,98,700 5,98,700
Preference dividends are in arrears for four years.
Subsequent to the approval of the court of a scheme for the reduction of capital, the
following steps were taken:
(i) The preference shares were reduced to Rs. 7.50 per share and the equity shares were
reduced to Rs. 2 per share. After reduction, preference shares and equity shares were
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consolidated into Rs. 10 shares. The authorized capital was restored to Rs. 2,00,000 8%
cumulative preference shares and Rs. 1,50,000 equity shares, both of Rs. 10 each.
(ii) One new equity share of Rs. 10 was issued for every Rs. 40 of gross preference
dividend in arrears.
(iii) The balance on security premium account was utilized.
(iv) The debenture holders took over the freehold property at an agreed figure of Rs.
75,000 and paid the balance to the company after deducting the amount due to them.
(v) Plant and machinery was written down to Rs. 1,40,000.
(vi) Trade investment was sold for Rs. 32,000.
(vii) Goodwill, discount on debentures, debts of Rs. 8,600 and obsolete stock of 10,000
were written off.
(viii) Contingent liability for which no provision had been made was settled at Rs. 7,000
and of the amount Rs, 6,300 was recovered from the insurers.
(ix) Available cash is deposited in bank overdraft.
Required: (a) journal entries necessary to record the above transactions in the
company’s books. (b) a bank account and (c) to prepare the balance sheet after
completion of the scheme.

Q7. The balance sheet as on 31st March, 1993 was as follows:

LIABILITIES AMOUNT ASSETS AMOUNT
Share Capital: Fixed Assets 11,40,000
2,00,000 equity shares of ₹ Patents and copyrights 80,000
10 each, ₹ 5 paid 10,00,000 Investment at cost (market
6,000, 8% preference shares value ₹ 55,000) 65,000
of ₹ 100 6,00,000
9% debentures 6,00,000 Current Assets:
Accrued interest on Stock 4,00,000
debentures 1,08,000 Debtors 4,39,000
Bank overdraft 1,50,000 Bank 10,000
Accrued interest on bank Profit and Loss A/C 4,08,000
overdraft 15,000

Current Liabilities
Creditors 69,000
25,42,000 25,42,000
Note: preference dividends are in arrear for one year.
(1) Preference shareholders to give up their claim, inclusive of dividends, to the extent of
30% and desire to be paid off.
(2) Debenture holders agree to give up their claims to interest in consideration of their
interest being enhanced to 12%.

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(3) Bank agrees to give up 50% of its interest outstanding in consideration of its being
paid off at once.
(4) Creditors would like grant a discount of 5% if they are paid immediately.
(5) Balance of profit & loss Account, patent and copy rights and debtors of Rs 30,000 to
be written off.
(6) Fixed assets to be written down by Rs 34,000.
(7) Investments are to reflect their market value.
(8) To the extent not specifically stated, equity shareholders suffer on reduction on their
rights. Cost of reconstruction is Rs 3,350.
Draft journal entries in the books of the company assuming that the scheme has been
put through fully with the equity shareholders bringing in necessary cash to pay off the
parties and to leave a working capital of Rs 30,000, and prepare the Balance sheet after
reconstruction.

Q8. The Balance Sheet of A and Co. Ltd. as on 31/12/2017 is as follows:

LIABILITIES AMOUNT ASSETS AMOUNT
Share Capital: Fixed Assets:
4,000 6% cum preference Freehold Property’ 4,25,000
shares of ₹ 100 each 4,00,000 Plant 50,000
75,000 equity shares of ₹ 10 7,50,000 Patent 37,500
6% Debentures (secured on Goodwill 1,30,000
freehold property) 3,75,000 Trade Investment (at cost) 55,000
Accrued interest on
debenture 22,500 Current Assets:
Debtors 4,85,000
Current Liabilities Stock 4,25,000
Bank overdraft 1,95,000 Deferred advertising 1,00,000
Creditors 3,00,000 Profit and Loss A/C 4,35,000
Director’s Loan 1,00,000
21,42,500 21,42,500
THE COURT APPROVED A SCHEME OF RE-ORGANISATION TO TAKE EFFECT ON 1-1-2018,
WHEREBY:
1. The preference share to be written down to Rs 75 each and equity shares to Rs 2
each.
2. Of the preference share dividends, which are in arrears for four years, three fourth to
be waived and equity shares of Rs 2 each to be allotted for the remaining quarter.
3. Accrued interest on debentures to be paid in cash.
4. Debentures-holders agreed to take over freehold property, book value Rs 1,00,000 at
a valuation of Rs 1,20,000 in part repayment of their holding and to provide additional
cash of Rs 1,30,000 secured by a floating charge on the company’s assets at an interest
rate of 8% p.a.
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5. Patents, goodwill and deferred advertising to be written off.
6. Stock to be written off by Rs 65,000.
7. Amount of Rs 68,500 to be provided for bad debts.
8. Remaining freehold property to be re-valued at Rs 3,87,500.
9. Trade investment be sold for Rs 1,40,000.
10. Directors to accept settlement of their loans as to 90% thereof by allotment of equity
shares of Rs 2 each and as to 5% in cash, and balance 5% being waived.
There were capital commitments totalling Rs 2,50,000. These contracts are to be
cancelled on payment of 5% of the contract price as penalty.
You are required to show journal entries and prepare the balance sheet of the company.

Q9. A Ltd. has become sick since a few years. The management feels the company has
recently turned the corner. Balance sheet of the company as at 31st March, 1998 and
other relevant particulars are given below:
A Ltd.
Balance Sheet as on 31st March, 1988
LIABILITIES AMOUNT ASSETS AMOUNT
Equity share capital of ₹ 10 Land and Building 1,00,000
each fully paid up 6,00,000 Plant and Machinery 2,00,000
6% preference share capital Stock 2,00,000
of ₹ 100 each fully paid up 2,00,000 Sundry Debtors 2,00,000
9% debentures of ₹ 300 Cash and bank balance 30,000
each 3,00,000 Profit and loss A/C 8,20,000
Trade creditors 4,00,000
Expense creditors 50,000

15,50,000 15,50,000
(i) Land and buildings are worth Rs. 4,00,000
(ii) Stock and sundry debtors are expected to fetch 20% less.
(iii) Equity shares are to be reduced to Rs. 2.50 each, fully paid up.
(iv) Preference shares are to be reduced to Rs. 50 each, fully paid up. The rate of
preference dividend being raised proportionately.
(v) Debentures are to be reduced to Rs. 200 each fully paid up. The rate of interest being
raised proportionately.
(vi) Trade creditors and expense creditors will wait for payment and continue business
on exiting terms if 20% of their dues are paid forthwith.
(vii) Directors are willing to bring is Rs. 1,00,000 in the form of equity capital. Rs. 20,000
is estimated expenditure for completing the formalities.
You are required to prepare reconstruction Account and Balance sheet as may be
appropriate for the given scheme of capital reduction.

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Q10. S.P Construction Co. finds itself in financial difficulty. The following is the balance sheet
on 31st December,2017
LIABILITIES AMOUNT ASSETS AMOUNT
Share Capital: Land 1,56,000
20,000 equity shares of ₹ 10 Building 27,246
each fully paid up 2,00,000 Equipment 10,754
5% cum. Preference share Goodwill 60,000
of ₹ 10 each fully paid up 70,000 Investments 27,000
8% Debentures 80,000 Stock 1,20,247
Director’s loan 16,000 Sundry Debtors 70,692
Bank overdraft 36,713 Profit and loss A/C 39,821
Creditors 96,247
Accrued interest on
debentures 12,800
2,11,760 5,11,760
The authorized capital of the company is 20,000 Equity shares of Rs 10 each and 10,000
5% cum. preference shares of Rs 10 each.
During a meeting of shareholders and directors, it was decided to carry out a scheme of
internal reconstruction. The following scheme has been agreed:
1. The equity shareholders are to accept reduction of Rs 7.50 per share and each equity
is to be re-designated as a share of Rs 2.50 each.
2. The equity shareholders are to subscribe for a new share on the basis of 1 for 1 at a
price of Rs 3 per share.
3. The existing 7,000 preference shares are to be exchanged for a new issue of 3,500 8%
cum. pref. shares of Rs 10 each.
4. The debentures holders are to accept 2,000 Equity shares of Rs 2.50 each in lieu of
interest payable. The interest rate is to be increased to 9.5%. Further Rs 9000 of this
9.5% Debentures are to be issued and taken up by the existing holders at Rs 90 for Rs
100.
5. Rs 6,000 of directors loan is to be debited. The balance is to be fully settled by issue of
1,000 equity shares of Rs 2.50 each.
6. Goodwill and profit and loss account is to be written off.
7. The investment is sold at current market value of Rs 60,000.
8. The bank overdraft is to be written off.
9. Rs 46,000 is to be paid to trade creditors now and balance at quarterly intervals.
10. 10% of the debtors are to be written off.
11. The remaining assets were professionally valued and should be included in the books
on account as follows:
Land ₹ 90,000 Equipment ₹ 10,000
Building ₹ 80,000 Stock ₹ 50,000

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12. It is expected that due to changed condition and new management operating profit
will be earned at the rate of Rs 50,000 p.a. after depreciation but before interest and
tax.
Due to losses brought forward it is unlikely that any tax liability will arise until 2018.
You are required to show the necessary journal entries and prepare the balance sheet of
the company immediately after the reconstruction.

Q11. The following is the Balance Sheet of X ltd. as on 31st March, 1998
LIABILITIES AMOUNT ASSETS AMOUNT
Authorised capital: Goodwill 10,000
Ordinary shares of ₹ 10 Building 20,500
each 2,00,000 Machinery 50,850
Issued, subscribed and paid Discount on shares 1,500
up: Stock 10,275
12,000 shares of ₹ 10 each Book Debts 15,000
1,20,000 Cash at bank 1,500
Less: call in arrears (9,000) 1,11,000 P/L A/C 20,800
(₹ 3 per share)
Sundry Creditors 15,425
Provision for taxes 4,000
1,30,425 1,30,425
The directors find that the machinery is overvalued by Rs 10,000. It is now proposed to
written down this asset to its true value and extinguish goodwill account, profit and loss
account and preliminary expenses Account by adopting the following scheme:
(a) Forfeit the shares on which the calls are outstanding.
(b) Reduce the paid up value by Rs 3 per share
(c) Reissue the forfeited shares at Rs 5 per share.
(d) Utilise the provision for taxes if necessary.
Draft the journal entries necessary for giving effect to the above scheme and prepare
the reconstructed balance Sheet of the company…

KUNAL SIR 9871518388

( EDUCATION + PASSION = EDUPASSION )