Post-Reconstruction Balance Sheet and Practical Problems in Internal Reconstruction

Understand Post-Reconstruction Balance Sheet and Practical Problems

Key rules to remember

Sacrifice on a class of shares

Sacrifice = Number of shares × (Old paid-up value per share − New paid-up value per share)

Credit this to Capital Reduction Account. Do the same for preference shares if the scheme reduces them.

Sacrifice by creditors or debenture holders

Sacrifice = Old claim − Amount accepted (cash + shares + new debentures)

The accepted part is settled by cash or new securities. Only the waived part is credited to Capital Reduction Account.

Capital Reduction Account balance

Total credits (sacrifices) − Total debits (losses, write-downs, expenses) = Balance

Zero is the usual result. A credit balance goes to Capital Reserve as the scheme says.

Closing cash

Opening cash + Cash from new issues − Cash paid to creditors or others − Reconstruction expenses paid

Include only items settled in cash. Shares issued to creditors do not touch cash.

Balancing check

Total assets after scheme = Share capital + Reserves + Liabilities after scheme

Always test this before finalising the answer.

How to solve Post-Reconstruction Balance Sheet and Practical Problems questions

1. 1Read the scheme line by line and mark each item as a sacrifice, a write-off, a new issue or a cash payment.
2. 2Compute the share capital reductions: shares × reduction per share, for each class.
3. 3Compute creditor and debenture sacrifices as old claim less the amount accepted, and note how the accepted part is paid.
4. 4List all debits: debit balance of Profit and Loss, goodwill and other intangibles, asset write-downs, provisions and reconstruction expenses.
5. 5Prepare the Capital Reduction Account, with credits against debits. Check that it closes, or find the balance and treat it as the scheme says.
6. 6Update cash and other accounts for new share issues, payments to creditors and expenses.
7. 7Prepare the new balance sheet. Show shares, number and new face value, then reserves, liabilities, and each asset at its revised figure.
8. 8Check that total assets equal total equity and liabilities. If not, recheck your working before moving on.

Quickest way: Opening balances to closing balances in one grid

Common mistakes in Post-Reconstruction Balance Sheet and Practical Problems

• Reducing the number of shares instead of the paid-up value per share

  Students confuse reducing face value with cancelling shares.

  Fix: Read the scheme wording. If shares are reduced from ₹10 to ₹4, the share count stays the same and only the value falls. Change the number only if the scheme cancels shares.

• Crediting the whole creditor claim to Capital Reduction Account

  Students forget that part of the claim is still paid in cash or shares.

  Fix: Credit only the waived part: old claim less the amount accepted. Show the accepted part as a payment or a new issue.

• Leaving out reconstruction expenses or paying them from the wrong account

  The expenses are tucked away in a note in the question.

  Fix: Debit the expenses to Capital Reduction Account when the scheme says so, and credit cash. Reduce closing cash accordingly.

• Showing the Profit and Loss debit balance again in the new balance sheet

  Students copy the old balance sheet and miss the full write-off.

  Fix: If the scheme writes off the accumulated loss, the balance sheet shows nil for it. Tick it off in your list of debits.

• Adding shares issued to creditors to cash

  Students treat every new issue as a cash receipt.

  Fix: Shares issued to settle a liability reduce that liability and increase share capital. No cash moves. Only issues for cash raise cash.

• Not checking that the new balance sheet balances

  Time pressure makes students skip the final check.

  Fix: Spend one minute adding both sides. A mismatch usually points to a missed write-off, a wrong sacrifice figure or a cash error.

Worked examples