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CA Intermediate · Advanced Accounting · Internal Reconstruction

Ganga Ltd has 50,000 equity shares of Rs 10 each fully paid, Rs 1,20,000 debit balance in Profit and Loss Account and Rs 30,000 preliminary expenses outstanding. Under a reconstruction scheme the equity shares are reduced to Rs 4 each. What is the total amount available in the Capital Reduction Account for writing off these fictitious assets and losses?

The Capital Reduction Account is credited with Rs 3,00,000. Each of the 50,000 shares is reduced by Rs 6, from Rs 10 to Rs 4, so the reduction is 50,000 x 6. This amount is then used to write off the losses and fictitious assets.

  1. ARs 3,00,000Correct
  2. BRs 2,00,000
  3. CRs 1,50,000
  4. DRs 5,00,000

Explanation

Reduction in capital = 50,000 x (10 - 4) = Rs 3,00,000 credited to Capital Reduction Account. Check: original capital 5,00,000 less new 2,00,000 = 3,00,000. Rs 2,00,000 is wrong as it is the new capital, not the reduction. Rs 1,50,000 is just the debit balance plus preliminary expenses, which is the amount to be written off.

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