Chapter 3

1. On the reconstruction of a company, the following terms were agreed upon:

The shareholders to receive in lieu of their present holding (viz. 50,000 shares of ₨ 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) ₨ 60,000, 6% second debentures.
An issue of ₨ 50,000, 5% first debentures was made and allotted payment for the same having been
received in cash.
The Goodwill, which stood at ₨ 3,00,000 was written down to ₨ 1,50,000.
The plant and machinery, which stood at ₨ 1,00,000 were written down to ₨ 75,000.
The freehold and leasehold premises, which stood at ₨ 1,50,000 were written down to ₨ 1,25,000.
Make the journal entries in the books of the company necessitated by the above reconstruction.

2. The paid-up capital of Bangalore company ltd, in ₨ 5,00,000 and it includes 2,000 5% cumulative preference
shares of ₨ 100 each and 30,000 equity shares of ₨ 10 each.
Because of heavy losses, the company has decided to reduce the burden of its capital and has secured the
required permission.
i) Reduction in the value of patents by ₨ 70,000, machinery by ₨ 17,000 and equipment by 2,000.
ii) Cancellation of the balance of loss of ₨ 1,98,000 shown on the profit and loss account.
iii) Writing down the balance of research expenditure account by using the balance remaining in the capital
reduction account (the Research expenditure is shown in the balance sheet at ₨ 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 ₨ 100 each and 20
ordinary shares of ₨ 2 each.
b) Issue of one equity share of ₨ 2 each in payment of arrears of preference shares divided of ₨ 10 (the total
arrears of preference dividend is ₨ 30,000. The dividend has not yet been declared).
c) Issue of one new equity share of ₨ 2 each in exchange for every five old ordinary shares.
Draft Suitable journal entries.

3. The balance sheet of Ram dev ltd. on 31.3.2015 was as follows:

Liabilities ₨ Assets ₨
Authorized capital Goodwill 70,000
6,000 shares of ₨ 100 each 6,00,000 Buildings 80,000
Issued capital Plant 1,50,000
2,000 shares of ₨ 100 each fully paid 2,00,000 Stock 50,000
up Debtors 43,000
200, 5% debentures of ₨ 1,000 each 2,00,000 Cash 2,500
Sundry creditors 50,000 Preliminary expenses 4,500
Bills payable 5,000 P&L account 1,00,000
Bank overdraft 45,000
5,00,000 5,00,000
The following scheme of Reconstruction was adopted:
i) The paid up value of each share to be reduced to ₨ 50
ii) 5% debentures to be converted into 100, 7 ½ % debentures of ₨ 1,000 each
iii) Assets were revalued as under: Buildings ₨ 72,000, plant ₨ 1,40,000, stock ₨ 45,000, debtors subject to
Reserve for bad debts ₨ 2,500
 iv) Creditors agree to forgo 1/4th of the amount due to them in return for shares for the balance
v) Goodwill and other fictitious assets to be written off entirely
Give the necessary journal entries.

4. Balance sheet of XY ltd as at 31st March 2015 was as follows:

Liabilities ₨ Assets ₨
Share capital: Goodwill 15,000
2,000 preference shares of ₨ 100 each 2,00,000 Freehold premises 2,00,000
4,000 equity shares of ₨ 100 each 4,00,000 Plant 3,00,000
5% mortgage debentures 1,00,000 Stock 50,000
Bank overdraft 50,000 Debtors 40,000
Creditors 1,00,000 P&L account 2,45,000
8,50,000 8,50,000
The following scheme was approved by the Court for the company:
i) Preference shares to be reduced to ₨ 75 per share and the equity share to ₨ 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 ₨ 50,000
Journalize and prepare the revised balance sheet.

5. Balance sheet of a ABC ltd. company stood as follows on 31.3.2015:

Liabilities ₨ Assets ₨
19,000 shares of ₨ 100 each 19,00,000 Land & Buildings 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
P&L account 9,70,000
21,00,000 21,00,000
The company is to be reconstructed as follows:
a) Shares of ₨ 100 are to be reduced to an equal number of fully paid shares of ₨ 40 each.
b) To issue 1,000 new shares of ₨ 40 each as fully paid up to debenture holders in full settlement
c) The amount available is to be utilized in writing off the goodwill and profit & loss account and the balance in
writing down the value of machinery
d) Authorized capital of the company is 20,000 shares of ₨ 100 each
Give the necessary journal entries. Prepare capital reduction account and reconstructed balance sheet.

6. Given below is the balance sheet of Unsuccessful ltd as on 31.03.2015:

Liabilities ₨ Assets ₨
5,000 8% preference shares of ₨ 10 Goodwill 1,00,000
each 50,000 Buildings 4,000
5,000 equity shares of ₨ 10 each 50,000 Plant 5,000
Creditors 18,000 Debtors 1,200
Bank overdraft 20,000 Stock 22,000
Preliminary expenses 3,000
P&L account 2,500
Cash 300
 1,38,000 1,38,000
The following scheme of reconstruction was adopted:
a) ₨10 preference share were to be reduced to an equal number of fully paid shares of ₨ 8 each
b) ₨ 10 equity shares were to be reduced to an equal number of fully paid shares of ₨ 5 each
c) Creditors agreed to forego ₨ 8,000
d) The amount thus available was to be utilized to the nominal assets and the balance if any, to be written off
Goodwill
Pass journal entries and prepare reconstructed balance sheet.

7. The state of affairs of Earnest co. ltd on 31.03.2015 was as follows:

Liabilities ₨ Assets ₨
20,000 equity shares of ₨ 10 each 2,00,000 Goodwill 80,000
15,000 7% preference shares of ₨ 10 Buildings 1,75,000
each 1,50,000 Machinery 3,25,000
13,000, 5% preference shares of ₨ 10 Patents 54,000
each, ₨ 5 paid 65,000 Furniture 15,000
5% debentures 1,50,000 Investments 75,000
8% Debentures 3,00,000 Sundry debtors 4,15,000
Sundry creditors 4,50,000 Cash 2,000
Debenture interest due 19,500 Bank 18,000
P&L account 1,75,500
13,34,500 13,34,500
The following scheme of Capital reduction was submitted and approved by the court:
a) Equity shares of ₨ 10 each were to be reduced to Shares of ₨ 5 each.
b) 7% preference shares of ₨ 10 each fully paid were to be reduced to 6% preference shares of ₨ 10 each. ₨ 6
per share paid.
c) 5% preference shares of ₨ 10 each, ₨ 5 paid up were to be reduced to 4 ½ % preference shares of ₨ 10
each, ₨ 3 per share paid up.
The debenture holders agreed to forego the interest due to them. The company in the meantime recovered
as damages a sum of ₨ 74,000 from a third party and it was decided to use this amount also to write off the
Capital losses. The reconstruction expenses come to ₨ 7,250.
Give journal entries to record the above and draw the Reconstruction balance sheet.

8. The following is the balance sheet of Bright ltd. as on 31st March 2015.
Liabilities ₨ Assets ₨
Share capital: Leasehold premises 1,30,800
Authorized capital Plant & Machinery 42,200
10,000 preference shares of ₨ 100 10,00,000 Patents at cost 8,50,000
10,000 equity shares of ₨ 100 10,00,000 Sundry debtors 76,500
20,00,000 Stock in trade 55,000
Subscribed capital Cash in hand 500
7,500 preference shares of ₨ 100 each Discount on issue of shares 18,000
fully paid 7,50,000 Preliminary expenses 12,000
5,000 equity shares of ₨ 100 each fully P&L account 1,15,000
paid 5,00,000
Sundry creditors 30,000
Bank overdraft 20,000
13,00,000 13,00,000
 The company suffered heavy losses and was not getting on well. The following scheme of reconstruction was
adopted:
a) The preference shares be reduced to an equal number of fully paid shares of ₨ 50 each
b) The equity shares be reduced to an equal number of shares of ₨ 25 each
c) The amount so made available be used to write off ₨ 30,800 of the Leasable premise; ₨ 15,000, off stock;
20% of plant and machinery and Sundry debtors and balance available off patents.
Journalize the transactions and prepare the balance sheet after the reconstruction has been carried out.

9. The following is the balance sheet of Mysore sandal ltd as on 31st March 2015
Liabilities ₨ Assets ₨
13% cumulative preference shares of Fixed assets 15,00,000
₨ 100 each 1,00,000 Current assets 35,00,000
Equity shares of ₨ 10 each 7,00,000 P & L account 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 was adopted:
a) Fixed assets are to be written down by 33 1/3 %.
b) Current assets are to be revalued at ₨ 27,00,000
c) Preference shareholders decide to forego their right to arrears of dividend which are in arrears for three
years.
d) The taxation liability is settled at ₨ 4,00,000
e) One of the creditors of the company to whom the company owes ₨ 25,00,000 decides to forego 50% of his
claim. He is allotted 1,00,000 equity shares of ₨ 5 each in part satisfaction of the balance of his claim.
f) The rate of interest on debentures is increased to 11%. The debenture holders surrender their existing
debentures of ₨ 100 each and exchange the same for fresh debentures of ₨ 75 each
g) All existing equity shares are reduced to ₨ 5 each.
h) All preference shares are reduced to ₨ 75 each. Pass journal entries and show the balance sheet of the
company after giving effect to the above.

10. The following is the balance sheet of Acme ltd on 31-3-2015

Liabilities ₨ Assets ₨
Share capital: Goodwill 2,00,000
Shares of ₨ 10 each 10,00,000 Machinery 10,00,000
10% cumulative preference shares of ₨ 2,00,000 Stock 2,50,000
100 each Debtors 2,00,000
Sundry liabilities 10,00,000 Bank 50,000
P&L account 5,00,000
22,00,000 22,00,000
Preference dividends are in arrears for the last 4 years. The following scheme is approved by the court.
a) Equity shares to be reduced to Re. 1 each
b) 50% of the preference dividend in arrears to be paid in cash immediately and the balance of arrears is
agreed to be foregone.
c) Machinery to be depreciated by 5% and 10% RBD on the debtors to be provided.
d) All intangible assets to be written off.
e) Balance of Reconstruction account if any to be capitalized.
Journalize and prepare the Reconstruction balance sheet.
11. Balance sheet of Indian constructions ltd as on 31st March 2015
Liabilities ₨ Assets ₨
Authorized capital: Goodwill 10,000
20,000 equity shares of ₨ 10 2,00,000 Land & Buildings 20,500
each Machinery 50,850
Issued, Subscribed and Paid up Preliminary expenses 1,500
capital: 1,20,000 Stock 10,275
12,000 equity shares of ₨ 10 Books debts 15,000
each 9,000 Cash at Bank 1,500
Less: Calls in arrears (₨ 3 per 1,11,000 P&L account:
share on 3,000 shares) 15,425 Balance as per last
Sundry creditors 4,000 Balance sheet 22,000
Provision for taxes Less: Profit for the year 1,200 20,800

1,30,425 1,30,425
A valuation of machinery reveals that it is overvalued by ₨ 10,000. It is proposed to write down this asset to its
true value, to eliminate the deficiency in the Profit and Loss account and to write off goodwill and preliminary
expenses by adopting the following course:
a) Forfeit the shares on which call is outstanding
b) Reduce the paid up capital by ₨ 3 per share; face value remaining the same
c) Reissue the forfeited shares at ₨ 5 per share
d) Utilize the provision for taxes if necessary
All the above were duly put into action. Pass necessary journal entries and draw up the balance sheet of the
company after carrying out the terms of the scheme.