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CA Intermediate · Advanced Accounting · Internal Reconstruction

Vihaan Textiles Ltd has completed an internal reconstruction under a court-approved scheme. After crediting the Capital Reduction Account with the sacrifice by shareholders and debiting it with all the losses and asset write-downs the scheme required, a credit balance remains in that account. How should this balance be treated?

The remaining credit balance in the Capital Reduction Account is transferred to Capital Reserve. It arises from capital reduction, so it is a capital profit and not an operating income. It is therefore not credited to the profit and loss statement or paid out as dividend.

  1. ATransferred to the Capital Reserve accountCorrect
  2. BCredited to the Statement of Profit and Loss as other income
  3. CDistributed to equity shareholders as dividend
  4. DUsed to write off the securities premium account

Explanation

Under the reconstruction scheme, the Capital Reduction Account is first used to write off the losses and fictitious assets and to reduce overvalued assets. Any credit balance left over is a capital profit, so it is transferred to Capital Reserve. It is not an operating income and cannot be distributed as dividend.

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