CA Intermediate · Advanced Accounting · Internal Reconstruction
Kaveri Textiles Ltd undertakes an internal reconstruction. The Capital Reduction Account is credited with ₹6,00,000 on reducing share capital. Goodwill of ₹1,00,000, the debit balance of Profit and Loss Account of ₹2,50,000 and plant overvalued by ₹2,00,000 are written off through this account. What is the balance left in the Capital Reduction Account, and how is it dealt with?
The Capital Reduction Account is left with a ₹50,000 credit balance, because ₹6,00,000 of credits exceeds ₹5,50,000 of write-offs. This surplus is a capital profit, so it is transferred to Capital Reserve and not to Securities Premium.
- A₹2,00,000 debit balance, shown as a miscellaneous expenditure to be written off later
- B₹50,000 credit balance, transferred to Securities Premium Account
- C₹5,50,000 credit balance, transferred to Capital Reserve
- D₹50,000 credit balance, transferred to Capital ReserveCorrect
Explanation
Credits are ₹6,00,000. Debits are 1,00,000 + 2,50,000 + 2,00,000 = ₹5,50,000. The balance is ₹50,000 credit. A surplus left after writing off losses and overvalued assets is a capital profit and is transferred to Capital Reserve, not Securities Premium.
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