St.

Joseph’s College of Commerce, Bangalore (Autonomous)

INTERNAL RECONSTRUCTION

1. The paid up capital of Arjuna Ltd. amounted to Rs. 2,50,000 consisting of 25,000 Equity
Shares of Rs. 10 each. Due to losses incurred by the company continuously, the Directors of
the company prepared a scheme for reconstruction which was duly approved. The terms of
reconstruction were as follows:
a) In lieu of their present holdings, the Shareholders are to receive:
i) Fully paid Equity Shares equal to 2/5th of their holdings.
ii) 5% Preference Shares fully paid-up to the extent of 20% of the above new Equity
Shares.
iii) 3,000 6% Debentures of Rs. 10 each.
b) An issue of 2,500 5% Debentures of Rs. 10 each was made and fully subscribed in cash.
c) The assets were reduced as follows:
i) Goodwill from Rs. 1,50,000 to Rs. 75,000.
ii) Machinery from Rs. 50,000 to Rs. 37,500.
iii) Leasehold Premises from Rs. 75,000 to Rs. 62,500.

Show the Journal Entries to give effect to the above scheme of reconstruction.

2. The following scheme of reconstruction has been approved for Bheema Ltd.
a) The Shareholders to receive in lieu of their present holding at 1,00,000 shares of Rs. 10
each the following:
i) New fully paid Rs. 10 Equity Shares equal to 3/5 th of their holding.
ii) 10% Preference shares fully paid to the extent of 1/5 th of the above new Equity
Shares.
iii) Rs. 40,000 8% Debentures.
b) An issue of Rs. 1,00,000 10% Debentures was made and allotted, payment for the same
being received in cash forthwith.
c) Goodwill which stood at Rs. 1,40,000 was completely written off.
d) Plant and Machinery which stood at Rs. 2,00,000 was written down to Rs. 1,50,000.
e) Freehold Property which stood at Rs. 1,50,000 was written down by Rs. 50,000.

Show the Journal Entries to give effect to the above scheme of reconstruction.

3. The following is the Balance Sheet of Dayalan Ltd. as at 31 st March. 20XX

Particulars Note Current Previous

No. Reporting Reporting
Period Period
A ASSETS:
1 NON-CURRENT ASSETS:
a) Property, Plant and Equipment 1 11,50,000
b) Other Intangible Assets (Patents & Copyrights) 70,000
c) Financial Assets
(i) Investments (Market Value Rs. 55,000) 68,000

2 CURRENT ASSETS:
a) Inventories 14,00,000

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b) Financial Assets
(i) Trade Receivables 14,39,000
(ii) Cash and Cash Equivalents 2 -1,40,000

TOTAL ASSETS 39,87,000

B EQUITY AND LIABILITIES:

1 EQUITY:
a) Equity Share Capital 3 20,00,000
b) Other Equity (Profit and Loss) -4,05,000

2 LIABILITIES:
2A NON-CURRENT LIABILITIES:
a) Financial Liabilities
i) Borrowings 4 18,00,000

2B CURRENT LIABILITIES:
a) Financial Liabilities
i) Trade Payables 5,92,000

TOTAL EQUITY AND LIABILITIES 39,87,000

Note: 1: Property, Plant and Equipment:

Rs.
Plant and Machinery 9,00,000
Furniture and Fixtures 2,50,000
Total 11,50,000
Note: 2: Cash and Cash Equivalents:

Rs.
Cash 10,000
Bank Overdraft -1,50,000
Total -1,40,000
Note: 3: Equity Share Capital:

Rs.
2,00,000 Equity Shares of Rs. 10 each fully paid up 20,00,000

Total 20,00,000
Note: 4: Borrowings:

Rs.
6,000 8% Redeemable Cumulative Preference shares of Rs. 100 each 6,00,000
9% Debentures of Rs. 100 each 12,00,000
Total 18,00,000

The following scheme of reconstruction was finalized.

a. Preference Shareholders would give up 30% of their capital in exchange for allotment of
11% Debentures to them.

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b. Debenture holders having charge on Plant and Machinery, would accept Plant and
Machinery in full settlement of their dues.
c. Stock equal to Rs. 5,00,000 in Book Value will be taken over by Sundry Creditors in full
settlement of their dues.
d. Investment Value to be reduced to Market Price.
e. The Company would issue 11% Debentures for Rs. 3,00,000 and augment its working
capital requirement, after settlement of bank overdraft.

Pass necessary Journal Entries, prepare Capital Reduction Account and Balance Sheet of the
Company after Internal Reconstruction.

4. The following is the Balance Sheet of Garuda Ltd. as on 31 st March 20XX.

Particulars Note Current Previous

No. Reporting Reporting
Period Period
A ASSETS:
1 NON-CURRENT ASSETS:
a) Property, Plant and Equipment 1 30,00,000
b) Goodwill 90,000

2 CURRENT ASSETS:
c) Inventories 2,60,000
d) Financial Assets
Trade Receivables 2,80,000
Cash and Cash Equivalents 2 -5,70,000

TOTAL ASSETS 30,60,000

B EQUITY AND LIABILITIES:

1 EQUITY:
Equity Share Capital 3 24,00,000
Other Equity (Profit and Loss) -14,40,000

2 LIABILITIES:
2A NON-CURRENT LIABILITIES:
Financial Liabilities
Borrowings 4 18,00,000

2B CURRENT LIABILITIES:
Financial Liabilities
Trade Payables 3,00,000

TOTAL EQUITY AND LIABILITIES 30,60,000

Note: 1: Property, Plant and Equipment:

Rs.
Land and Building 12,00,000

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Plant and Machinery 18,00,000

Total 30,00,000

Note: 2: Cash and Cash Equivalents:

Rs.
Cash 30,000
Bank Overdraft -6,00,000
Total -5,70,000
Note: 3: Equity Share Capital:

Rs.
24,000 Equity Shares of Rs. 100 each 24,00,000

Total 24,00,000
Note: 4: Borrowings:

Rs.
12,000 10% Redeemable Cumulative Preference Shares of Rs. 100 each 12,00,000
10% Debentures of Rs. 100 each 6,00,000
Total 18,00,000

On the above date, the company adopted the following scheme of reconstruction:
a) Equity Shares to be reduced to Rs. 40 each fully paid, and Preference Shares to be
reduced to fully paid shares of Rs. 75 each
b) Debenture holders took over stock and debtors in full satisfaction of their claims.
c) Land and Building to be appreciated by 30% and Plant and Machinery to be depreciated
by 30%.
d) Fictitious and intangible assets are to be eliminated. Expenses of reconstruction
amounted to Rs. 5,000.

Pass necessary Journal Entries, prepare Reconstruction Account and Balance Sheet of the
Company after Internal Reconstruction.

5. The summarized Balance Sheet of Garuthman Ltd. as on 1 st April 20XX was as follows:

Particulars Note Current Previous

No. Reporting Reporting
Period Period
A ASSETS:
1 NON-CURRENT ASSETS:
Property, Plant and Equipment 1 2,80,000
Goodwill 20,000
Financial Assets
Investments 24,000
Trade Receivables

2 CURRENT ASSETS:
Inventories 54,000

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Financial Assets
Trade Receivables 1,18,000
Cash and Cash Equivalents 2 -10,800

TOTAL ASSETS 4,85,200

B EQUITY AND LIABILITIES:

1 EQUITY:
Equity Share Capital 3 3,00,000
Instrument entirely equity in nature
Other Equity (Profit and Loss) -1,42,800

2 LIABILITIES:
2A NON-CURRENT LIABILITIES:
Financial Liabilities
Borrowings 4 2,80,000

2B CURRENT LIABILITIES:
Financial Liabilities
Trade Payables 48,000

TOTAL EQUITY AND LIABILITIES 4,85,200

Note: 1: Property, Plant and Equipment:

Rs.
Land and Building 1,60,000
Plant and Machinery 1,20,000
Total 2,80,000
Note: 2: Cash and Cash Equivalents:

Rs.
Cash 6,000
Bank O/d -16,800
Total -10,800
Note: 3: Equity Share Capital:

Rs.
40,000 Equity Shares of Rs. 10 each (Rs. 7.50 paid up) 3,00,000
Total 3,00,000
Note: 4: Borrowings:

Rs.
2,000 9% Redeemable Cumulative Preference Shares of Rs. 100 each fully 2,00,000
paid
Unsecured Loans 80,000
Total 2,80,000
Notes: Dividend on Preference Shares has not been declared for 2 years.
No provision has been made for Sales Tax Liability of Rs. 9,000.
The following Scheme of Reconstruction has been approved.

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a) Uncalled capital is to be called up in full, and Equity shares are to be reduced to Rs. 5 per
share.
b) Sales tax liability of Rs. 9,000 is to be paid immediately.
c) Land and building are to be shown in the Balance Sheet at full Market Value of Rs.
2,20,000 and Goodwill is to be written off.
d) Trade creditors have consented for 25% of remission of liability, on a condition that 25%
of the net liability after remission is paid forthwith and the balance is paid within one
year.
e) Investments are to be taken over by bank in full settlement of the overdraft balance.
f) Preference Shareholders have agreed to give up their right for the two years dividend,
and accept 12 fully paid equity shares of Rs. 5 each for each fully paid preference share.

Required:

i) Pass necessary Journal Entries recording the above transactions, and

ii) Draw up a fresh Balance Sheet after giving effect to the scheme of reconstruction.

6. Kauravas Ltd. which had experienced trading difficulties decided to reorganize its finances.
On 31st March 20XX, a Final Trial Balance extracted from the books of the Company showed
the following position:

Particulars Debit (Rs.) Credit (Rs.)

Share Capital, Authorised and Issued:
1,500 6% Cumulative Redeemable Preference Shares 1,50,000
of Rs. 100 each
2,000 Equity Shares of Rs. 100 each 2,00,000
Capital Reserve 36,000
Profit and Loss A/c 1,17,625
Goodwill at Cost 50,000
Trade Payables 42,500
Trade Receivables 30,200
Bank Overdraft 51,000
Leasehold Property at cost 80,000
Leasehold Property – Provision for Depreciation 30,000
Plant and Machinery at Cost 2,10,000
Plant and Machinery – Provision for Depreciation 57,500
Inventories 79,175
Total 5,67,000 5,67,000

Approval from appropriate authorities was obtained for the following scheme for Reduction
of Capital:
a) Preference Shares to be reduced to Rs. 75 per share and Equity shares to be reduced to
Rs. 12.50 per shares.
b) One Rs. 12.50 Equity share to be issued for each Rs. 100 of Gross Preference Dividend
Arrears, the Preference Dividend has not been paid for three years.
c) The balance in Capital Reserve Account to be utilized.
d) Plant and Machinery to be written down to Rs. 75,000.

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e) Profit and Loss account balance and all intangible assets to be written off.

At the same time as the resolution to reduce capital was passed, another resolution was
approved restoring the total authorized capital to Rs. 3,50,000 consisting of 1,500 6%
Cumulative Redeemable Preference Shares of Rs. 75 each and the balance in Equity Shares
of Rs. 12.50 each. As soon as the above resolution had been passed, 5,000 Equity shares
were issued at par for cash payable in full upon application. The same were fully subscribed
and paid.

You are required:

i) To show the Journal Entries necessary to record the above transactions in the
Company’s books, and
ii) To prepare the Balance Sheet of the Company, after completion of the scheme.

7. Enkan Ltd. which had experienced trading difficulties decided to reorganize its finances. On
31st March 20XX, a Final Trial Balance extracted from the books of the Company showed the
following position:

Particulars Debit (Rs.) Credit (Rs.)

Freehold Property 5,00,000
Plant and Machinery 1,80,000
Investments at cost 1,70,000
Sundry Debtors 4,50,000
Stock in trade 2,00,000
Deferred Advertisement Expenditure 1,50,000
Profit and Loss A/c 3,65,000
Equity Shares of Rs. 10 each fully paid (80,000 Shares) 8,00,000
6% Cumulative Redeemable Preference Shares of Rs. 100 each 5,00,000
fully paid
6% Debentures (Secured by Freehold Property) 3,75,000
Arrears of Interest on Debentures 22,500
Sundry Creditors 17,500
Director’s loan 3,00,000

TOTAL 20,15,000 20,15,000

st
The court approved a scheme of reorganization to take effect on 1 April, 20XX, and the
terms are given below:
a) Preference Shares are to be written down to Rs. 75 each and Equity Shares to Rs. 2 each.
b) Preference Dividend is in arrear for 4 years. This is to be waived by 75% and for the
balance equity shares of Rs. 2 each to be allotted.
c) Arrears of debenture interest to be paid off.
d) Debenture holders agreed to take one Freehold Property (book value Rs. 3,00,000) at a
valuation of Rs. 3,00,000 in part payment of their holding. Balance debentures to
remain as liability of the company.
e) Deferred Advertisement Expenditure to be written off.
f) Stock value to be written off fully in the books.
g) 50% of the sundry debtors to be written off as bad debts.

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h) Remaining Freehold Property (after take over by Debenture Holders) to be valued at Rs.
3,50,000.
i) Investments sold out for Rs. 2,00,000.
j) 80% of the Director’s loan to be waived and for the balance equity shares of Rs. 2 each
to be issued.
k) Company’s contractual commitments amounting to Rs. 5,00,000 to be cancelled by
paying penalty at 3% of contractual value.
l) Cost of reconstruction scheme is Rs. 20,000.

Show the Journal Entries to give effect to the above transactions, prepare Reconstruction
A/c and draw the balance sheet after effecting the scheme.

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