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CA Intermediate · Advanced Accounting · Internal Reconstruction

Meru Industries Ltd has 40,000 equity shares of ₹10 each and 10,000 preference shares of ₹100 each, all fully paid. Preference dividend arrears are ₹90,000. Under the scheme: equity shares are reduced to ₹3 each; preference shares to ₹70 each; preference shareholders waive the arrears; creditors of ₹2,00,000 accept ₹1,50,000 in full settlement. The following are to be written off through Capital Reduction Account: Profit and Loss debit ₹4,20,000, intangible assets ₹1,10,000, inventory write-down ₹40,000, preliminary expenses ₹20,000 and reconstruction expenses ₹10,000. What is the resulting balance in Capital Reduction Account?

The balance is ₹30,000 credit. Reductions of capital and the creditors' concession total ₹6,30,000, while the write-offs and reconstruction expenses total ₹6,00,000. The waived preference dividend arrears were not a recorded liability, so they do not enter the account.

  1. A₹1,20,000 credit
  2. B₹40,000 credit
  3. C₹20,000 debit
  4. D₹30,000 creditCorrect

Explanation

Credits: equity 40,000 × ₹7 = ₹2,80,000; preference 10,000 × ₹30 = ₹3,00,000; creditors' sacrifice ₹50,000; total ₹6,30,000. The waived arrears were never recorded as a liability, so there is no entry. Debits: ₹4,20,000 + ₹1,10,000 + ₹40,000 + ₹20,000 + ₹10,000 = ₹6,00,000. Balance = ₹30,000 credit. Adding the arrears gives the wrong ₹1,20,000.

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