Sustain Limited is incurring losses due to adverse market conditions. It decided to reorganize is capital structure. The summarized Balance Sheet of…

CA Intermediate · Advanced Accounting · PYQS · January 2025
Sustain Limited is incurring losses due to adverse market conditions. It decided to reorganize is capital structure. The summarized Balance Sheet of the company as on 31st March, 2024 is as follows: Particulars Notes ₹ Equity and Liabilities 1. Shareholders' Fund (a) Share Capital 1 10,00,000 (b) Reserves and Surplus 2 (2,50,000) 2. Non-current liabilities Long term borrowing 3 4,50,000 3. Current liabilities (a) Trade Payables 1,30,000 (b) Short term borrowings – Bank Overdraft 65,000 (c) Other Current Liabilities (Interest payable on Debentures) 45,000 (d) Short term provision (Provision for Income Tax) 1,00,000 Total 15,40,000 Assets 1. Non-current assets (a) Property, Plant & Equipment 4 8,50,000 (b) Intangible assets 5 60,000 (c) Non-current investments 6 2,80,000 2. Current assets (a) Inventories 1,20,000 (b) Trade receivables 2,30,000 Total 15,40,000 Notes to accounts: ₹ 1. Share Capital Equity share capital: 50,000 Equity shares of 10 each fully paid up 5,00,000 25,000 Equity shares of 10 each, 8 paid up 2,00,000 Preference share capital: 30,000 8% Cumulative Preference shares of 10 each (Preference dividend has been in arrears for 3 years) 3,00,000 10,00,000 2. Reserves and Surplus Profit and Loss account (debit balance) (2,50,000) 3. Long-term borrowings Secured: 10% Debentures of 100 each 4,50,000 4,50,000 4. Property, Plant and Equipment Freehold property 1,00,000 Plant and machinery 7,50,000 8,50,000 5. Intangible assets Goodwill 60,000 60,000 6. Non-current investments Non-trade investments at cost 2,80,000 2,80,000 Subsequent to approval by court and all interested parties, the following scheme of reconstruction were agreed:- (1) Uncalled capital is to be called up in full and such shares and other fully paid -up equity shares to be reduced to 5 per share. (2) The preference shareholders will accept a reduction of 2.5 per share, in exchange the rate of dividend is to be increased to 9%. (3) Preference shareholders will forgo their claim of dividend for one year and one equity share of 5 each is to be issued for the remaining arrears of dividend. (4) Mr. X holds 10% debentures for 2,50,000. He is also a creditor for 50,000. He agreed to cancel 50% of his total debt, including interest on debentures, pay - 20,000 to the company and to receive new 12% debentures for the balance amount. (5) The remaining claim of the debenture holders, including outstanding interest to be reduced to 60%. In consideration of the reduction, the debenture holders are to receive new 9% preference shares at new face value. (6) The taxation liability is to be settled at 1,20,000. (7) Market value of Non-current Investments is 2,50,000. Investments to be brought to their market value. (8) Inventory equal to 1,00,000 at book value will be taken over by remaining creditors in full settlement of their claim. (9) A bad debt provision of 2% is to be created on trade receivables. (10) Plant and Machinery is to be written down by 20%. (11) The company will further issue 12% debentures for such amount which is sufficient to pay off bank overdraft and other outstanding liabilities and maintain its cash/bank balance at 85,000. (12) The amount available by the scheme shall be utilized in writing of Goodwill, debit balance of profit and loss a/c and balance of inventory. You are required to: (a) Show the journal entries, necessary to record the above transaction in the company's books and (b) Prepare a note to show revised Share capital structure of the company after completion of the scheme.

Suggested Answer and Working Notes:

(a) Journal Entries in books of Sustain Limited ₹ ₹ 1. Bank Account Dr. 50,000 To Equity Share Capital Account (Balance of 2per share on 25,000 equity shares called up) 50,000 2. Equity Share Capital (10) Account 7,50,000 To Equity Share Capital (5) Account 3,75,000 To Capital Reduction Account (Reduction of equity shares of 10each to shares of 5each as per reconstruction scheme) 3,75,000 3. 8% Cumulative Preference Share Capital (10) A/c Dr. 3,00,000 To 9% Cumulative Preference Share Capital (7.5) A/c 2,25,000 To Capital Reduction A/c (Being Preference shares of 10each reduced by - 2.5 each per share by changing the rate of dividend from 8% to 9% and the balance transferred to Capital Reduction A/c.) 75,000 4. Capital Reduction A/c Dr. 48,000 To Preference share dividend payable A/c (Being arrear of Preference share dividend payable for one year) 48,000 5. Preference share dividend payable A/c Dr. 48,000 To Equity Share Capital (5) A/c (Being Equity Shares of 5each issued against arrears of 2 years Preference Share dividend) (W.N.1) 48,000 6. 10% Debentures Account Dr. 2,50,000 Interest on Debentures Outstanding A/c Dr. 25,000 Trade payables Account Dr. 50,000 To Mr. X (The total amount due to X, transferred to his account) 3,25,000 7. Bank Account Dr. 20,000 To Mr. X (The amount paid by X under the reconstruction scheme) 20,000 8. Mr. X 3,45,000 To 12% Debentures Account 1,82,500 To Capital Reduction A/c (The cancellation of 50% of the total debt of Mr. X and the issue of 12% new debentures for the balance amount as per the reconstruction scheme) 1,62,500 9. 10% Debentures A/c Dr. 2,00,000 Interest on Debentures Outstanding A/c 20,000 To 9% Cumulative Preference Share capital A/c 1,32,000 To Capital Reduction A/c (Being 9% preference share capital issued to 10% debenture-holders for 60% of their claims. The balance is transferred to capital reduction account as per the reconstruction scheme) 88,000 10. Provision for Tax A/c Dr. 1,00,000 Capital Reduction A/c 20,000 To Bank A/c (Being payment of tax liability in full settlement) 1,20,000 11. Trade payables A/c (1,30,000-50,000) Dr. 80,000 Capital reduction A/c 20,000 To Inventory A/c [Being settlement of creditors by giving inventory] 1,00,000 12. Capital reduction A/c Dr. 1,84,600 To Investment A/c 30,000 To Provision for bad debt A/c (2,30,000 x 2%) 4,600 To Plant & Machinery (7,50,000x 20%) (Investment brought to their market value, Plant & machinery is written down by 20% & Provision for Bad debts of 2% created under the scheme of reconstruction) 1,50,000 13. Bank A/c Dr. 2,00,000 To 12% debentures A/c (New 12 % debentures issued to pay off bank overdraft and maintain cash balance) 2,00,000 14. Bank Overdraft Dr. 65,000 To Bank A/c (Bank overdraft paid) 65,000 15. Capital reduction A/c Dr. 4,27,900 To Goodwill A/c 60,000 To Profit and loss A/c 2,50,000 To Inventory 20,000 To Capital reserve A/c [Being goodwill and profit and loss account (Dr. bal.), balance inventory; and balance of capital reduction account transferred to Capital reserve] 97,900 (b) Notes to accounts ₹ 1. Share Capital Equity share capital Issued, subscribed and paid up 84,600 equity shares of 5each each (75,000+9,600) 4,23,000 47,600, 9% Cumulative Preference Shares of 7.50 each (30,000+17,600) 3,57,000 Total 7,80,000 Working note 1. Calculation of the number of equity shares issued for 2 years arrear of preference share dividend 3,00,000x 8%x 2 = 48,000 Equity share of 5per share issued= 48,000/5= 9,600 shares 2. Cash & bank Account To Uncalled capital 50,000 By Bank Overdraft 65,000 To Mr. X 20,000 By Tax 1,20,000 To 12% Debentures A/c (bal. fig.) 2,00,000 By Balance C/d 85,000 2,70,000 2,70,000 3. The new face value of preference share is 10-2.5= 7.5 Calculation of Number of 9% Preference shares issued in consideration of reduction: 1,32,000/7.5 = 17,600

Topics: Accounting for Reconstruction of Companies

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