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CA Intermediate · Advanced Accounting · Internal Reconstruction

Rohini Textiles Ltd has 50,000 equity shares of ₹10 each, fully paid. Under a scheme of internal reconstruction, each share is reduced to ₹4 fully paid. The credit to Capital Reduction Account is first used to write off the debit balance of Profit and Loss Account of ₹2,00,000 and preliminary expenses of ₹40,000. The balance is to be used to reduce the value of plant. What is the amount by which plant is written down?

Plant is written down by ₹60,000. The capital reduction credit is 50,000 shares × ₹6 = ₹3,00,000. After writing off the ₹2,00,000 accumulated loss and ₹40,000 preliminary expenses, the remaining ₹60,000 is available to reduce the plant's carrying value.

  1. A₹60,000Correct
  2. B₹2,40,000
  3. C₹3,00,000
  4. D₹5,40,000

Explanation

Reduction in capital = 50,000 × (₹10 − ₹4) = ₹3,00,000. Less P&L debit balance ₹2,00,000 and preliminary expenses ₹40,000, total ₹2,40,000. Balance available for plant = ₹60,000. ₹2,40,000 is wrong as it is the amount already absorbed by the losses, not the balance left.

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