Page 98 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 5: Internal Reconstruction of Companies

Preliminary Exps. 7,500 notes
Profit and Loss A/c 1,10,000
Less: Profit for the year 6,000 1,04,000
6,52,125 6,52,125
The directors have had a valuation made of the machinery and find it overvalued by
` 50,000. It is proposed to write down this asset to its true value and to extinguish the deficiency
in the profit and loss account and to write off the goodwill and preliminary expenses, by the
adoption of the following course:
(i) Forfeit the shares on which the call is outstanding.
(ii) Reduce the paid up capital by ` 3 per share.
(iii) Reissue the forfeited shares as fully paid shares of ` 7 each at ` 5 per share.

(iv) Utilize the provision for taxation, if necessary.
The shares on which the calls were in arrear were duly forfeited and reissued on payment of ` 5
per share.
You are required to-

(a) Draft the necessary journal entries
(b) Draw the company’s balance sheet immediately after the implementation of the scheme of
reconstruction.

Solution

galgotia industries ltd.
Journal
Date particulars l.f. ` `
Share Capital Account Dr. 1,50,000
To Forfeited Shares Account 1,05,000
To Calls-in-Arrear Account 45,000
(Being forfeiture of 15,000 shares for non-payment of final call
of ` 3 per share)
Bank Account Dr. 75,000
Forfeited Shares Account Dr. 30,000
To Share Capital Account 1,05,000
(Being reissue of 15,000 shares of ` 7 each at ` 5 each)
Forfeited Shares Account Dr. 75,000
To Capital Reserve Account 75,000
(Being transfer of the balance of forfeited shares account to
capital reserve account)
Share Capital (` 3) Account Dr. 1,35,000
To Capital Reduction Account 1,35,000
(Being reduction in capital by reducing ` 3 per share on
45,000 equity shares)
Capital Reduction Account Dr. 2,11,500
To Machinery Account 50,000

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