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CA Intermediate · Advanced Accounting · Internal Reconstruction

Kaveri Plastics Ltd. has 9% debentures of ₹10,00,000 and outstanding interest on them of ₹90,000 in its books. Under the reconstruction scheme the debenture holders accept new 10% debentures of ₹7,00,000 in full settlement of both the debentures and the accrued interest. What amount is transferred to Capital Reduction Account on this settlement?

₹3,90,000 is credited to Capital Reduction Account. The company extinguishes debentures of ₹10,00,000 plus accrued interest of ₹90,000, a total of ₹10,90,000, and issues new debentures of only ₹7,00,000. The difference of ₹3,90,000 is the sacrifice by debenture holders.

  1. A₹3,00,000
  2. B₹3,90,000Correct
  3. C₹4,80,000
  4. D₹2,10,000

Explanation

Liability discharged = ₹10,00,000 + ₹90,000 = ₹10,90,000. New debentures issued = ₹7,00,000. Gain = ₹10,90,000 - ₹7,00,000 = ₹3,90,000. Ignoring the interest gives ₹3,00,000, which is wrong because the interest is also settled.

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