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CA Intermediate · Advanced Accounting · Internal Reconstruction

Tapi Ltd has Rs 6,00,000 capital reduction credit available. It must write off a Rs 2,50,000 debit Profit and Loss balance and Rs 50,000 of preliminary expenses, and revalue assets: land up by Rs 1,00,000 and stock down by Rs 1,60,000. What is the balance of Capital Reduction Account after these adjustments, and how is it treated?

A credit balance of Rs 2,40,000 remains and is transferred to Capital Reserve. Credits are Rs 6,00,000 plus the land gain of Rs 1,00,000, while debits are the loss of Rs 2,50,000, preliminary expenses Rs 50,000 and stock reduction Rs 1,60,000.

  1. ARs 2,40,000 credit, transferred to Capital ReserveCorrect
  2. BRs 3,00,000 credit, transferred to Capital Reserve
  3. CRs 2,40,000 debit, carried forward as a loss
  4. DNil, as all items are fully adjusted

Explanation

Write-offs: 2,50,000 + 50,000 + 1,60,000 stock = Rs 4,60,000. Land appreciation Rs 1,00,000 is credited. Net credit = 6,00,000 + 1,00,000 - 4,60,000 = Rs 2,40,000. Rs 3,00,000 ignores the stock write-down and land gain combined correctly only partly. The balance is shown as Capital Reserve.

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