EXTERNAL RECONSTRUCTION

Q.No 1
Pavani Company after a series of heavy losses resolve to go into voluntary liquidation and to
reconstruct by means of new company under the name New Pavani Company. On the date of
reconstruction, the Balance sheet of Pavani Company was as follows:

Liabilities Rs. Assets Rs.

Capital: Buildings 3,92,500
2,00,000 shares of 10,00,000
Rs. 5 each
Sundry creditors 30,000 Machinery 2,39,000
Bank loan 15,000 Motor lorry 19,400
Bills payable 10,000 Stock 91,410
Sundry debtors 1,09,100
Bank 3,590
P&L account 2,00,000
10,55,000 10,55,000

The following is the scheme of reconstruction:

a. The new company is to take over the assets of the old company and not the
liabilities.
b. Capital of the new company is to consist of 5,00,000 shares of Rs. 5 each.
c. The new company is to issue 2,80,000 shares of Rs. 5 each credited with Rs. 2.50
per share as paid up to the old company and to pay to it Rs. 1,00,000 in cash by
way of purchase consideration.
d. The balance of Rs. 2.50 per share payable by the members of the new company is
duly received.
Record the journal entries in the books of both the companies and prepare the
balance sheet of the new company.
Q.No 2
The following is the Balance Sheet of X Co. Ltd. as on 31.03.15.
Liabilities Rs. Assets Rs.
Share capital Land & Building 1,00,000
(Rs. 10 each) 1,20,000
Creditors 30,000 Plant & Machinery 40,000
Bank overdraft 28,000 Stock 15,000
Debtors 22,000
P&L account 1,000
1,78,000 1,78,000

The company went into voluntary liquidation and the assets were sold to Y Co. Ltd. For Rs.
1,50,000 payables as to Rs. 60,000 in cash and Rs. 90,000 in the form of 12,000 shares of Rs.
10 each of Y Co. Ltd. at Rs.7.50 per share paid-up to the shareholders of X Co. Ltd.
The creditors and bank overdraft are not to be taken over. The expenses of liquidation were
Rs. 2,000 to be paid by vendor company. In the books of X Co. Ltd. Prepare Realisation
account, Shareholders account and Y Co. Account. Also pass opening entries in the books of
Y Co.

INTERNAL RECONSTRUCTION
Q.No 1 The balance sheet of Ram dev Ltd. On 31.03.2015 was as follows:
Liabilities Amount Assets Amount
Authorised capital Goodwill 70000
6000 shares of Rs.100 each 600000 Buildings 80000
Issued capital 200000 Plant 150000
2000 shares of Rs.100 each
5% debentures of Rs.1000 each 200000 Stock 50000
Sundry creditors 50000 Debtors 43000
Bills payable 5000 Cash 2500
Bank overdraft 45000 Preliminary expenses 4500
Profit and loss account 100000
500000 500000
The following scheme of Reconstruction was adopted:
i. The paid-up value of each share to be reduced to Rs.50
ii. 5% debentures to be converted into 100, 7 ½ debentures of Rs.1000 each.
iii. Assets were revalued as under: Buildings Rs.72000, Plant Rs.140000, Stock Rs.45000,
Debtors subject to reserve for bad debts Rs.2500.
iv. Creditors agree to forego ¼ th of the amount due to them in return for shares for the balance.
v. Goodwill and other fictitious assets to be written off entirely.
Pass the Journal entries.

Q.No 2 Balance sheet of XY limited as at 31st March 2015 was as follows:

Liabilities Amount Assets Amount
Share capital 200000 Goodwill 15000
2000 preference shares of Rs.100 each
4000 equity shares of Rs.100 each 400000 Freehold premises 200000
5% mortgage debentures 100000 Plant 300000
Bank overdraft 50000 Stock 50000
Creditors 100000 Debtors 40000
Profit and loss account 245000
850000 850000
The following scheme was approved by the court for the company
i. Preference shares to be reduced to Rs.75 per share and the equity shares to Rs.37.50 per share.
ii. Debenture holders to take over stock and book debts in full satisfaction of the amount due to
them.
iii. Goodwill to be eliminated.
iv. Freehold premises to be depreciated by 50%.
v. Plant to be appreciated by Rs.50000.
Journalise and prepare the revised balance
sheet.
Q.No.3
Balance sheet of ABC Ltd stood as follows on 31.03.2018

Liabilities Amount Assets Amount

19,000 shares of Rs.100 each 19,00,000 Land and Building 1,00,000
Creditors 1,00,000 Machinery 2,60,000
Debentures 1,00,000 Furniture 20,000
Stock 3,70,000
Debtors 1,80,000
Goodwill 2,00,000
Profit and Loss A/c 9,70,000
21,00,000 21,00,000

The company is to be reconstructed as follows:

a) Shares of Rs.100 are to be reduced to an equal number of fully paid shares of Rs.40 each
b) To issue 100 new shares of Rs.40 each as fully paid up to debenture holders in full settlement
c) The amount available is to be utilised in writing off the goodwill and profit and loss account
and the balance in writing down the value of machinery
d) Authorised capital of the company is 20,000 shares of Rs.100 each
Give necessary journal entries. Prepare Capital Reduction Account and Reconstructed Balance sheet

Q.No 4
On the reconstruction of a company, the following terms were agreed upon:
The shareholders to receive in lieu of their present holding (50,000 shares of Rs.10 each) the following:
A) Fully paid Equity shares equal to 2/5th of their holdings.
B) 5% preference shares fully paid, to the extent of 1/5th of the above new Equity Shares.
C) Rs.60,000, 6% Second debentures.
An issue of Rs.50,000, 5% First debentures was made and allotted, payment for the same have been
received in cash.
 The goodwill, which stood at Rs.300000 was written down to Rs.150000.
 The plant and machinery, which stood at Rs.100000 were written down to Rs.75000.
 The Freehold and Leasehold premises, which stood at Rs.150000 were written down
to Rs.125000.
Make the journal entries in the books of the company necessitated by the above reconstruction.
Q.No 5 The paid-up capital of Bangalore Company Ltd. in Rs.500000 and it includes 2000, 5%
cumulative preference shares of Rs.100 each and 30000 Equity shares of Rs.10 Each.
Because of heavy losses, the company decided to reduce the burden of its capital and has secured the
required permission.
i. Reduction in the value of patents by Rs.70000, Machinery by Rs.17000 and Equipment by
Rs.2000.
ii. Cancellation of the balance of loss of Rs.198000 shown on the Profit and Loss account.
iii. Writing down the balance of research expenditure account by the using the balance remaining
in the capital reduction account. (the research expenditure is shown in the balance sheet at
Rs.79,000)
The approved scheme of capital reduction is as follows:
a. In exchange for every five 5% preference shares, issue of three 4% preference shares of
Rs.100 each and 20 ordinary shares of Rs.2 each.
b. Issue of one equity shares of Rs.2 each in payment of arrears of Preference shares dividend of
Rs.10 (the total arrears of preference divided is Rs.30,000, the dividend has not yet been
declared)
c. Issue of one new equity shares of Rs.2 each in exchange for every five old ordinary
shares. Draft suitable journal entries.