Page 93 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Accounting for Companies – II

notes machinery by ` 45,000 and of goodwill by ` 20,000. (c) To reduce the value of investment to
market value by writing off ` 40,000.
The reduction was made by converting 25,000 preference shares of ` 20 each fully paid to the
same number of preference shares of ` 15 each fully paid and by converting 25,000 equity shares
of ` 20 each, ` 15 paid up into 25,000 equity shares of ` 10 each fully paid. Give journal entries
necessary in relation to the reduction of share capital and show how you would deal with the
balance of the reduction of share capital account.
Solution

Journal of ravi raghav co. ltd.
Date particulars l.f. ` `
Preference Shares (` 20) Capital Account Dr. 5,00,000
To Preference Shares (` 15) Capital Account 3,75,000
To Capital Reduction Account 1,25,000
(Being reduction in capital by converting 25,000 Pref. Shares of ` 20
each fully paid in 25,000 Preference Shares of ` 15 each fully paid)
Equity Share Capital (` 20) Account Dr. 3,75,000
To Equity Share Capital (` 10) Account 2,50,000
To Capital Reduction Account 1,25,000
(Being reduction in capital by converting 25,000 shares of ` 20,
` 15 Paid up into 25,000 shares of ` 10 each)
Capital Reduction Account Dr. 2,10,000
To Profit and Loss Account 1,05,000
To Goodwill Account 20,000
To Plant & Machinery Account 45,000
To Investment Account 40,000
(Being utilization of capital reduction into writing off debit balance
of P & L A/c, Goodwill, overvaluation of Plant & Machinery and
Investment)
Capital Reduction Account Dr. 40,000
To Capital Reserve Account 40,000
(Being transfer of balance of capital reduction to capital reserve account)
Illustration 5
On the reconstruction of ABC Ltd. the following terms were agreed upon:
The shareholders to receive in lieu of their present holding (viz 1,00,000 shares of ` 10 each) the
following:
(a) Fully paid equity shares equal to 2/5 of their holding.
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(b) 10% preference shares fully paid to the extent of 1/5 of the above new equity shares.
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(c) ` 1,20,000, 7% debentures.
An issue of ` 1,00,000, 6% debentures was made and allotted, payment for the same having been
received in cash. The goodwill, which stood at ` 6,00,000, was written down to ` 3,00,000. The
plant and machinery, which stood at ` 2,00,000, was written down to ` 1,50,000. The freehold and
leasehold premises, which stood at ` 3,00,000, were written down to ` 2,50,000. Make necessary
journal entries in the books of the company on the basis of above transactions.

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