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CA Intermediate · Advanced Accounting · Internal Reconstruction

Sundaram Textiles Ltd has 50,000 equity shares of ₹10 each, fully paid. Under a court-approved scheme of internal reconstruction, each share is reduced to ₹4 fully paid. What is the correct entry effect for the reduction of equity share capital?

Equity Share Capital is debited and Capital Reduction account credited by ₹3,00,000, because each of the 50,000 shares loses ₹6 of paid-up value. The sacrifice is credited to Capital Reduction account, which is then applied to write off losses and overvalued assets.

  1. AEquity Share Capital account debited and Capital Reduction account credited by ₹3,00,000Correct
  2. BCapital Reduction account debited and Equity Share Capital account credited by ₹3,00,000
  3. CEquity Share Capital account debited and Capital Reduction account credited by ₹2,00,000
  4. DEquity Share Capital account debited and Capital Reduction account credited by ₹5,00,000

Explanation

Each share is reduced by ₹6 (₹10 - ₹4), so 50,000 × ₹6 = ₹3,00,000. This amount is debited to Equity Share Capital to reduce the liability and credited to Capital Reduction account, which is then used to absorb losses. The ₹2,00,000 figure is the remaining capital, not the reduction.

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