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CA Intermediate · Advanced Accounting · Internal Reconstruction

Under a scheme of internal reconstruction, Rathore Industries Ltd reduces 20,000 equity shares of ₹100 each to ₹40 paid up and 5,000 preference shares of ₹100 each to ₹70 paid up. Creditors waive ₹1,00,000. Land is revalued upward by ₹1,20,000. The debit items to be adjusted are: Profit and Loss Account ₹9,00,000, goodwill ₹2,00,000, inventory write-down ₹80,000, provision for doubtful debts ₹70,000 and a contingent liability for damages that crystallises at ₹60,000. After all adjustments, what is the balance transferred to Capital Reserve?

₹2,60,000 is transferred to Capital Reserve. Total credits are ₹15,70,000: share reductions of ₹13,50,000, creditors' waiver of ₹1,00,000 and land appreciation of ₹1,20,000. Debits are ₹13,10,000: losses, goodwill, inventory, doubtful debts and the crystallised damages. The difference is ₹2,60,000.

  1. A₹2,60,000Correct
  2. B₹1,40,000
  3. C₹3,20,000
  4. D₹20,000

Explanation

Credits: equity reduction 20,000 × 60 = ₹12,00,000; preference reduction 5,000 × 30 = ₹1,50,000; creditors ₹1,00,000; land ₹1,20,000. Total ₹15,70,000. Debits: 9,00,000 + 2,00,000 + 80,000 + 70,000 + 60,000 = ₹13,10,000. Balance = ₹2,60,000. The ₹1,40,000 option omits the land revaluation gain; ₹3,20,000 omits the crystallised liability.

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