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CA Intermediate · Advanced Accounting · Internal Reconstruction

Under a scheme of internal reconstruction of Sagar Engineering Ltd, 60,000 equity shares of ₹10 each, fully paid, are reduced to ₹3 each, fully paid. Creditors of ₹5,00,000 agree to accept ₹3,00,000 in full settlement. The Reconstruction Account is used to write off: Profit and Loss debit balance ₹3,50,000, goodwill ₹80,000, inventory write-down ₹40,000, plant write-down ₹1,00,000, provision for doubtful debts ₹30,000 and reconstruction expenses paid ₹15,000. Any balance left is transferred to Capital Reserve. What is the amount transferred to Capital Reserve?

₹5,000 is transferred to Capital Reserve. Credits are ₹4,20,000 from share reduction and ₹2,00,000 from creditors' sacrifice, totalling ₹6,20,000. Write-offs and reconstruction expenses total ₹6,15,000, so the surplus is ₹5,000. Leaving out the expenses would wrongly give ₹20,000.

  1. A₹5,000Correct
  2. B₹20,000
  3. C₹35,000
  4. D₹1,95,000

Explanation

Credits: capital reduction 60,000 × ₹7 = ₹4,20,000 plus creditors' sacrifice ₹2,00,000 = ₹6,20,000. Debits: 3,50,000 + 80,000 + 40,000 + 1,00,000 + 30,000 + 15,000 = ₹6,15,000. Balance = ₹5,000. ₹20,000 omits the reconstruction expenses; ₹1,95,000 ignores the creditors' sacrifice.

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