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CMA Final · Corporate Financial Reporting · Internal Reconstruction (Capital Reduction)

Kaveri Ltd has 2,00,000 equity shares of Rs 10 each and 10,000 8% preference shares of Rs 100 each, all fully paid. A scheme reduces equity shares to Rs 2 each and preference shares to Rs 60 each. Preference holders also waive arrears of dividend of Rs 1,20,000 which were never provided as a liability. Assets to be written off total Rs 14,00,000 and the debit balance of Profit and Loss is Rs 4,00,000. Equity reduction is Rs 16,00,000 and preference reduction is Rs 4,00,000. What is the balance in Capital Reduction Account after the write-offs, and how is the dividend waiver treated?

The balance is Rs 2,00,000 credit, from reduction of Rs 20,00,000 less write-offs of Rs 18,00,000. The waived preference dividend arrears were never recorded as a liability, so no entry arises for the waiver; it is merely disclosed.

  1. ARs 2,00,000 credit; waiver of arrears is credited to the account
  2. BRs 2,00,000 credit; no entry for the waiver as arrears were never providedCorrect
  3. CRs 3,20,000 credit; waiver is credited to the account
  4. DRs 1,20,000 credit; waiver is deducted from the account

Explanation

Total reduction = 16,00,000 + 4,00,000 = Rs 20,00,000. Write-offs = 14,00,000 + 4,00,000 = Rs 18,00,000. Balance = Rs 2,00,000. Arrears of dividend not provided are only a contingent claim and not in the books, so waiving them needs no journal entry. Crediting the waiver would add Rs 1,20,000 and give an overstated Rs 3,20,000.

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