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CA Intermediate · Advanced Accounting · Internal Reconstruction

Kaveri Industries Ltd has 5,000 10% preference shares of ₹100 each and 20,000 equity shares of ₹10 each, all fully paid. Dividend on preference shares is in arrears for 2 years, but no liability for it appears in the books. Under the approved scheme, preference shares are reduced to ₹70 each, equity shares are reduced to ₹2 each, and preference holders waive the arrears. What is the total credit to the Capital Reduction Account?

The credit is ₹3,10,000. Preference shares reduced by ₹30 each give ₹1,50,000 and equity shares reduced by ₹8 each give ₹1,60,000. The waived dividend arrears are not in the books as a liability, so they do not enter the Capital Reduction Account.

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

Explanation

Preference reduction = 5,000 × 30 = ₹1,50,000. Equity reduction = 20,000 × 8 = ₹1,60,000. Total = ₹3,10,000. The arrears (5,000 × 100 × 10% × 2 = ₹1,00,000) were never recorded as a liability, so waiving them gives no entry; adding them gives the wrong figure ₹4,10,000 and subtracting them gives ₹2,10,000.

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