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SOLUTION: TEST 3
Solution 1
Journal Entries
Rs. Rs.
(i) Equity share capital (Rs.50) A/c Dr. 60,00,000
To Equity share capital (Rs.10) A/c 8,00,000
To 9% preference share capital (25,000 x Rs.8) A/c 2,00,000
To 10% debentures A/c (Rs.80) (6,000 x Rs. 80) 4,80,000
To Capital Reduction A/c 45,20,000
(Being payment made in lieu of equity share capital of Rs.50 each
by issue of equity shares of Rs.10 each, 9% Preference share
capital and 10% debentures as per reconstruction scheme)
(ii) 9% Preference share capital (Rs.10) A/c Dr. 40,00,000
To 9% Preference share capital (Rs.8) A/c 32,00,000
To Capital Reduction A/c 8,00,000
(Being 9% preference share capital of Rs.10 each reduced to Rs.8
each as per reconstruction scheme)
(iii) Bank A/c Dr. 16,00,000
To Equity Share capital A/c 16,00,000
(Being preference share holders subscribed for 2 new equity shares
of 10 each against every 5 shares)
(iv) (a) Provision for Taxation A/c Dr. 75,000
To Capital Reduction A/c 13,000
To Taxation Liability A/c 62,000
(Being liability for taxation settled)
(b) Taxation Liability A/c Dr. 62,000
To Bank A/c 62,000
(Being liability for taxation paid
(v) Trade payables A/c Dr. 1,00,000
To Equity share capital A/c 70,000
To Capital Reduction A/c 30,000
(Being payment made to creditors in shares to the extent of 70%
as per reconstruction scheme)
(vi) Trade Creditors A/c Dr. 5,00,000
To 9% Preference share capital A/c (43,750 x 8) 3,50,000
To Bank A/c 1,20,000
To Capital Reduction A/c 30,000
(Being payment made to creditors in shares and cash as per
reconstruction scheme)
(vii) Capital Reduction A/c Dr. 26,000
To Bank A/c 26,000
(Being contractual commitment settled by payment of 4%
penalty)
(viii) 7% Debentures A/c Dr. 23,00,000
To Plant & Machinery A/c 22,00,000
To Capital Reduction A/c 1,00,000
(ix) 8% Debentures A/c (34,000 x 50) Dr. 17,00,000
To 10% Debentures A/c (17,000 x 80) 13,60,000
To Capital Reduction A/c 3,40,000
(Being conversion of 8% debentures to 10% debentures at 1 for
every two debentures held by them as per reconstruction scheme)
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(x) Capital Reduction A/c Dr. 10,80,000
To Land & building A/c 3,75,000
To Profit and loss A/c 2,15,000
To Trade receivables A/c 3,00,000
To Inventories A/c 1,90,000
(Being amount of Capital Reduction utilized in writing off Profit
& loss Dr. bal. Land & building, Current Assets, Inventories
through capital reduction account)
(xi) Capital Reduction A/c Dr. 47,27,000
To Capital Reserve A/c 47,27,000
(Being balance in capital reduction account transferred to capital
reserve account)

Working Notes:
Capital Reduction Account
Particulars Rs. Particulars Rs.
To Land & building A/c 3,75,000 By Equity share capital A/c 45,20,000
To Machinery A/c 2,15,000 By Preference share capital 8,00,000
To Trade receivables A/c 3,00,000 By 7% Debentures 1,00,000
To Inventories A/c 1,90,000 By Provision for tax 13,000
To Bank 26,000 By Trade Payables (30,000+30,000) 60,000
To Capital Reserve (bal. fig.) 47,27,000 By 8% Debentures 3,40,000
58,33,000 58,33,000

Solution 2
Journal Entries in the Books of Z Ltd.
Particulars Debit (₹) Credit (₹)
1 Equity share capital A/c (₹ 10) Dr. 50,00,000
To Equity share capital A/c (₹ 5) 25,00,000
To Reconstruction A/c 25,00,000
(Being conversion of 5,00,000 equity shares of ₹ 10 each fully
paid into same number of fully paid equity shares of ₹ 5 each as
per scheme of reconstruction.
2 9% Preference share capital A/c (₹ 100) Dr. 20,00,000
To 10% Preference share capital A/c (₹ 50) 10,00,000
To Reconstruction A/c 10,00,000
(Being conversion of 9% preference share of ₹ 100 each into
same number of 10% preference share of ₹ 50 each and claims
of preference dividends settled as per scheme of reconstruction.)
3 10% Secured Debentures A/c Dr. 9,60,000
Trade payables A/c Dr. 1,00,000
Interest on Debentures Outstanding A/c Dr. 96,000
Bank A/c Dr. 1,00,000
To 12% Debentures A/c 6,78,000
To Reconstruction A/c 5,78,000
(Being ₹ 11,56,000 due to Y (including trade payables) cancelled
and 12% debentures allotted for the amount after waving 50% as
per scheme of reconstruction.)
4 10% Secured Debentures A/c Dr. 6,40,000
Trade payables A/c Dr. 60,000
Interest on Debentures Outstanding A/c Dr. 64,000
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 3
Bank A/c Dr. 60,000
To 12% Debentures A/c 4,42,000
To Reconstruction A/c 3,82,000
(Being ₹ 7,64,000 due to Z (including trade payables) cancelled
and 12% debentures allotted for the amount after waving 50% as
per scheme of reconstruction.)
5 Trade payables A/c Dr. 1,70,000
To Reconstruction 1,70,000
(Being remaining trade payables sacrificed 50% of their claim.)
6 Director’s Loan A/c Dr. 1,00,000
To Equity share capital A/c (₹ 5) 40,000
To Reconstruction 60,000
(Being Directors' loan claim settled by issuing 12,000 equity
shares of ₹ 5 each as per scheme of reconstruction.)
7 Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment made towards penalty of 5% for cancellation of
capital commitments of ₹ 3 Lakhs.)
8 Bank A/c Dr. 1,00,000
To Reconstruction A/c 1,00,000
(Being refund of fees by directors credited to reconstruction
A/c.)
9 Reconstruction A/c Dr. 15,000
To Bank A/c 15,000
(Being payment of reconstruction expenses.)
10 Provision for Tax A/c Dr. 1,00,000
To Bank A/c 75,000
To Reconstruction A/c 25,000
(Being payment of tax liability in full settlement against
provision for tax)
11 Land and Building A/c Dr. 2,00,000
To Reconstruction A/c 2,00,000
(Being appreciation in value of Land & Building recorded)
12 Reconstruction A/c Dr. 49,85,000
To Goodwill A/c 10,00,000
To Patent A/c 5,00,000
To Profit and loss A/c 14,60,000
To Discount on Issue of Debentures A/c 1,00,000
To Plant & Machinery A/c 6,50,000
To Furniture and Fixture A/c 1,00,000
To Trade Investment A/c 50,000
To Inventory A/c 2,50,000
To Trade Receivables A/c 1,00,000
To Capital Reserve A/c (Bal. Fig.) 7,75,000
(Being writing off of losses and reduction in the value of assets,
balance of reconstruction A/c transfer to Capital Reserve.)

Cash at Bank Account

Particulars ₹ Particulars ₹
To Reconstruction (Y) 1,00,000 By Balance b/d 1,00,000
To Reconstruction(Z) 60,000 By Reconstruction A/c 15,000
To Reconstruction A/c 1,00,000 By Reconstruction A/c 15,000
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By Provision for tax A/c 75,000
By Balance c/d (Bal. Fig.) 55,000
2,60,000 2,60,000
Reconstruction Account
Particulars ₹ Particulars ₹
To Bank (penalty) 15,000 By Equity share capital A/c 25,00,000
To Bank (reconstruction expenses) 15,000 By 9% Pref. Share capital A/c 10,00,000
To Goodwill 10,00,000 By Y A/c (settlement) 5,78,000
To Patent 5,00,000 By Z A/c (settlement) 3,82,000
To Profit and Loss A/c 14,60,000 By Trade Payables A/c 1,70,000
To Discount on issue of debentures 1,00,000 By Director’s loan 60,000
To P & M 6,50,000 By Bank 1,00,000
To Furniture and Fixtures 1,00,000 By Provision for tax 25,000
To Trade investment 50,000 By Land & Building 2,00,000
To Inventory 2,50,000
To Trade Receivables 1,00,000
To Capital Reserve (bal. fig.) 7,75,000
50,15,000 50,15,000

Solution 3
Journal Entries
Particulars Debit (Rs.) Credit (Rs.)
Sep Equity Share Capital A/c (Rs. 50) Dr. 9,90,000
2019 To Equity Share Capital A/c (Rs.10) 9,90,000
X (Being subdivision of 22,000 equity shares of Rs. 50 (Rs. 45 paid
Ltd. up) each into 1,10,000 shares of Rs. 10 each (Rs. 9 paid up) as
per resolution dated…)
Z Equity Share Capital A/c (Rs.10) Dr. 4,80,000
Ltd. To Equity Share Capital A/c (Rs.50) 4,80,000
(Being consolidation of 80,000 shares of Rs. 10, Rs. 6 paid up
each into 16,000 shares of Rs. 50 each (Rs. 30 paid up) as per
resolution dated…)

Solution 4
1. c
2. a
3. a

The copyright of these notes is with C.A. Nitin Goel

No part of these notes may be reproduced in any manner without his prior permission in writing