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CA Intermediate · Advanced Accounting · Internal Reconstruction

Tulsi Ltd has 10,000 equity shares of Rs 100 each fully paid. It owes Rs 4,00,000 to a creditor who agrees to accept 2,000 new fully paid equity shares of Rs 100 each (issued at par) in full settlement. A debit of Rs 6,00,000 exists in Statement of Profit and Loss. Shares are reduced to Rs 40 each. After settling the creditor, what is the net amount in Capital Reduction Account, assuming the creditor's sacrifice is also transferred to it?

Capital reduction is Rs 6,00,000 and the creditor's sacrifice is Rs 2,00,000 (Rs 4,00,000 owed less Rs 2,00,000 of shares issued), giving Rs 8,00,000 of credits. After writing off the Rs 6,00,000 loss, Rs 2,00,000 credit remains.

  1. ARs 2,00,000 creditCorrect
  2. BRs 8,00,000 credit
  3. CRs 6,00,000 credit
  4. DRs 4,00,000 credit

Explanation

Reduction = 10,000 x 60 = Rs 6,00,000. Creditor settled by shares worth Rs 2,00,000 at par, so Rs 2,00,000 is the face of shares issued; the creditor's sacrifice is 4,00,000 - 2,00,000 = Rs 2,00,000 credited to Capital Reduction. Total credits = Rs 8,00,000. Less loss written off Rs 6,00,000 = Rs 2,00,000 credit balance.

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