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CA Intermediate · Advanced Accounting · Internal Reconstruction

Mahalaxmi Foods Ltd has 12% debentures of ₹8,00,000 outstanding, with one year's interest of ₹96,000 accrued and unpaid and shown as a liability. As part of internal reconstruction, the debenture holders accept new 9% debentures of ₹6,00,000 and equity shares of ₹1,00,000 in full settlement of the principal and accrued interest. What amount is credited to the Capital Reduction Account on this settlement?

₹1,96,000 is credited. The liability extinguished is ₹8,96,000 (debentures plus accrued interest), and the holders receive securities worth ₹7,00,000. The difference is the holders' sacrifice, which is credited to the Capital Reduction Account.

  1. A₹1,96,000Correct
  2. B₹1,00,000
  3. C₹96,000
  4. D₹2,96,000

Explanation

Total liability discharged = 8,00,000 + 96,000 = ₹8,96,000. Settlement given = 6,00,000 + 1,00,000 = ₹7,00,000. Sacrifice = 8,96,000 − 7,00,000 = ₹1,96,000, credited to Capital Reduction Account. ₹1,00,000 ignores the accrued interest that is also extinguished.

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