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CA Intermediate · Advanced Accounting · Internal Reconstruction

Kaveri Engineering Ltd has 5,000 10% preference shares of ₹100 each, fully paid, with dividend arrears for two years (not recorded in the books). Under the scheme, each preference share is reduced to ₹70 fully paid, and the arrears are settled by issuing equity shares of ₹10 each at par worth ₹60,000 (the rest of the arrears being waived). What is the net credit to the Capital Reduction Account arising from the preference shareholders' part of the scheme?

The net credit is ₹90,000. Preference capital reduction gives ₹1,50,000, but the equity shares of ₹60,000 issued to settle arrears are debited to the account. The waived arrears were never recorded as a liability, so they give no credit.

  1. A₹90,000Correct
  2. B₹1,50,000
  3. C₹1,90,000
  4. D₹2,10,000

Explanation

Reduction in preference capital = 5,000 × 30 = ₹1,50,000 (credit). Arrears were never recorded as a liability, so the waiver gives no credit. The equity shares issued for arrears of ₹60,000 are debited to Capital Reduction Account. Net credit = 1,50,000 − 60,000 = ₹90,000. ₹1,90,000 wrongly credits a ₹40,000 waiver of an unrecorded amount.

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