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CA Intermediate · Advanced Accounting · Internal Reconstruction

Kaveri Engineering Ltd has 10,000 equity shares of ₹10 each and 5,000 9% preference shares of ₹100 each, all fully paid. Preference dividend for the last two years is in arrears and has not been provided in the books. Under the reconstruction scheme, equity shares are reduced to ₹4 each and preference shares to ₹70 each, and the preference shareholders waive the arrears. What amount is credited to Capital Reduction account?

₹2,10,000 is credited to Capital Reduction account: ₹60,000 from equity shares (10,000 × ₹6) plus ₹1,50,000 from preference shares (5,000 × ₹30). Arrears of preference dividend were not provided in the books, so their waiver creates no accounting entry.

  1. A₹2,10,000Correct
  2. B₹1,50,000
  3. C₹3,00,000
  4. D₹60,000

Explanation

Equity reduction = 10,000 × ₹6 = ₹60,000. Preference reduction = 5,000 × ₹30 = ₹1,50,000. Total = ₹2,10,000. Arrears of ₹90,000 (5,00,000 × 9% × 2) were never recorded as a liability, so their waiver gives no entry; including it would wrongly give ₹3,00,000.

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