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CA Intermediate · Advanced Accounting · Internal Reconstruction

Under a scheme of internal reconstruction, Kaveri Engineering Ltd has ₹5,00,000 of 12% debentures outstanding, with ₹60,000 of interest accrued and unpaid. The debenture holders agree to accept ₹3,00,000 of new 10% debentures and equity shares worth ₹1,00,000 in full settlement of principal and accrued interest. What amount will be credited to the Reconstruction (Capital Reduction) Account on this settlement?

₹1,60,000 is credited. The company owes ₹5,60,000 (debentures plus accrued interest) and settles it by issuing ₹4,00,000 of new debentures and shares. The ₹1,60,000 difference is the holders' sacrifice, which is credited to the Reconstruction Account.

  1. A₹1,60,000Correct
  2. B₹1,00,000
  3. C₹2,20,000
  4. D₹60,000

Explanation

Liability discharged = ₹5,00,000 + ₹60,000 = ₹5,60,000. Consideration given = ₹3,00,000 + ₹1,00,000 = ₹4,00,000. Gain = ₹1,60,000, credited to the Reconstruction Account. The ₹1,00,000 option ignores the accrued interest that is also settled.

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