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CA Intermediate · Advanced Accounting · Internal Reconstruction

Kaveri Industries Ltd has 10,000 8% preference shares of ₹100 each, fully paid, with dividend arrears of ₹2,40,000 not provided in the books, and 1,00,000 equity shares of ₹10 each, fully paid. Under a scheme of internal reconstruction, preference holders waive all arrears and accept a reduction of their shares to ₹70 each, fully paid. Equity shares are reduced to ₹2 each, fully paid. What is the total amount credited to Capital Reduction Account?

The Capital Reduction Account is credited with ₹11,00,000. Preference capital falls by ₹30 on 10,000 shares, giving ₹3,00,000, and equity falls by ₹8 on 1,00,000 shares, giving ₹8,00,000. Waived dividend arrears were never booked as a liability, so they create no credit.

  1. A₹8,00,000
  2. B₹11,00,000Correct
  3. C₹13,40,000
  4. D₹3,00,000

Explanation

Preference reduction = 10,000 × ₹30 = ₹3,00,000. Equity reduction = 1,00,000 × ₹8 = ₹8,00,000. Total = ₹11,00,000. The arrears of ₹2,40,000 were never recorded as a liability, so their waiver gives no accounting entry; adding them (₹13,40,000) is wrong.

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