Page 102 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 5: Internal Reconstruction of Companies

Illustration 10 notes

The following scheme of capital reduction was duly sanctioned by the court:
(i) Equity shares to be reduced by ` 90 each
(ii) Preference shares to be reduced by ` 90 each.
(iii) The debenture-holders to waive their outstanding interest.

(iv) One equity share ` 5 paid will be issued for every ` 100 of preference dividend which was
in arrear for one year.
(v) Share premium and all intangible assets to be written off.

(vi) Both types of fixed assets to be reduced proportionately by the balance available.
The Balance Sheet of D. K. Manufacturing Company Limited as on 30 June, 2006 is as under:
th
liabilities ` assets `
Share Capital:
12,000 8% Cumulative Preference
Shares of ` 100 each. 12,00,000 Fixed Assets:
Goodwill 1,36,000
Freehold Assets 8,80,000
-Depreciation 1,60,000 7,20,000
16,000 Equity Shares of ` 100 each Machinery 17,60,000
16,00,000 -Depreciation 3,20,000 14,40,000
Share Premium 4,00,000 Patents 1,76,000
7% Debentures 4,00,000 Stock 1,20,000
Interest on Debentures: Debtors 2,49,600
Accrued 24,000 Preliminary Expenses 2,58,400
Creditors 1,60,000 P&L A/c 6,84,000
37,84,000 37,84,000
You are required to give journal entries and prepare Balance Sheet after capital reduction.

Solution

D. k. manufacturing co. ltd.
Journal
Date Particulars L.F. ` `
Equity Share (` 100) Capital A/c Dr. 16,00,000
To Equity Share (` 10) Capital A/c 1,60,000
To Reconstruction A/c 14,40,000
(Being reduction in capital by converting 16,000 equity
shares of ` 100 each in 16,000 equity shares of ` 10 each)
10% Preference Shares (` 100) A/c Dr. 12,00,000
To 10% Preference Shares (` 90) A/c 10,80,000
To Reconstruction A/c 1,20,000
(Being reduction in capital by converting 12,000
Preference Shares of ` 100 each in 12,000 Preference
Shares of ` 90 each.)

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