Sky Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses. The following is the balance sheet of the company as…

CA Intermediate · Advanced Accounting · MTP · September 2025
Sky Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses. The following is the balance sheet of the company as on 31st March, 2025 before reconstruction: Particulars Note No. Amount (₹ in lakh) [I] Equity and Liabilities (1) Shareholders' Funds (a) Share Capital 1 4,200 (b) Reserves and Surplus 2 (1,566) (2) Non-Current Liabilities (a) Long term Borrowings 3 2,100 (3) Current Liabilities (a) Trade Payables 4 306 (b) Other Liabilities 5 72 Total 5,112 [II] Assets (1) Non-Current Assets: (a) PPE 6 2,250 (2) Current Assets (a) Current Investments 7 600 (b) Inventories 8 900 (c) Trade Receivables 9 1,350 (d) Cash and Cash Equivalents 10 12 Total 5,112 Notes to Accounts: (₹ in lakh) (1) Share Capital Authorised: 600 lakh shares of 10 each 6,000 24 lakh, 8% Preference Shares of 100 each 2,400 Total 8,400 Issued, Subscribed and Paid up: 300 lakh Equity Shares of 10 each, fully paid up 3,000 12 lakh 8% Preference Shares of 100 each, fully paid up 1,200 Total 4,200 (2) Reserves and Surplus Debit balance of Profit and Loss A/c (1,566) (3) Long Term Borrowings 6% Debentures (Secured by Freehold Property) 1,200 Director's Loan 900 Total 2,100 (4) Trade Payables Trade payables for Goods 306 (5) Other Liabilities Interest Accrued and Due on 6% Debentures 72 (6) PPE Freehold Property 1,650 Plant & Machinery 600 Total 2,250 (7) Current Investment Investment in Equity Instruments 600 (8) Inventories Finished Goods 900 (9) Trade Receivables Trade receivables for Goods 1,350 (10) Cash and Cash Equivalents Balance with Bank 12 The Board of Directors of the company decided upon the following scheme of reconstruction: Preference Shares are to be written down to 75 each and Equity Shares to 2 each.Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for balance 1/3rd, Equity Shares of 2 each to be allotted.Debenture holders agreed to take one Freehold Property at its book value of 900 lakh in part payment of their holding. Balance Debentures to remain as liability of the company. The Board of Directors of the company decided upon the following scheme of reconstruction with the consent of respective shareholders:Interest accrued and due on Debentures to be paid in cash.Remaining Freehold Property to be valued at 1,100 lakh.All investments sold out for 850 lakh.70% of Directors' loan to be waived and for the balance, Equity Shares of 2 each issue.40% of Trade receivables and 80% of Inventories to be written off.Company's contractual commitments amounting to 1,800 lakh have been settled by paying 8% penalty of contract value. You are required to: (a) Pass Journal Entries for all the transactions related to internal reconstruction; (b) Prepare Capital Reduction Account, Bank Account; and (c) Prepare Notes to Accounts on Share Capital & PPE, immediately after the implementation of internal reconstruction.

Suggested Answer and Working Notes:

(a) Journal Entry of Sky Ltd As on 31st March, 2025 Particulars Amount (₹ in lakh) Amount (₹ in lakh) 1 8% Preference Share Capital A/c Dr. 1,200 To 8% Preference Share Capital A/c 900 To Capital Reduction A/c 300 (Being Preference Shares of 100each reduced to 75 each, balance transferred to Reconstruction A/c) 2. Equity Share Capital A/c Dr. 3,000 To Equity Share Capital A/c 600 To Capital Reduction A/c 2,400 (Being equity shares of 10each reduced to 2 each, and balance transferred to Reconstruction A/c) 3. Capital Reduction A/c Dr. 96 To Equity Share Capital A/c 96 (Being Preference Share dividend in arrears of 3 years waived by 2/3rd and for balance 1/3rd equity shares of 2each allotted) 4. 6% Debentures A/c Dr. 900 To Freehold Property A/c 900 (Being transfer of title deed on freehold property to debenture holders of the company) 5. Interest Accrued & due on Debentures A/c Dr. 72 To Cash A/c 72 (Being Interest Accrued and due on debentures paid in cash) 6. Freehold Property A/c Dr. 350 To Capital Reduction A/c 350 (Being balance freehold property re-valued) 7. Bank A/c Dr. 850 To Investment A/c 600 To Capital Reduction A/c 250 (Being investments sold for 850lakhs) 8. Loan for Director's A/c Dr. 900 To Capital Reduction A/c 630 To Equity Share Capital A/c 270 (Being 70% of Director's loan waived off and the balance equity shares allotted) 9. Capital Reduction A/c Dr. 2,970 To Stock A/c 720 To Trade Receivables A/c 540 To Profit & Loss A/c 1,566 To Bank A/c 144 (Being writing off of losses, penalty paid for contractual commitments, and reduction in the value of assets) 10. Capital Reduction A/c Dr. 864 To Capital Reserve A/c 864 (Being balance in Capital Reduction A/c transferred to Capital Reserve) (b) Capital Reduction A/c Particulars (₹) Particulars (₹) To Equity Share Capital A/c 96 By 8% Preference Share Capital A/c 300 To Stock A/c 720 By Equity Share Capital A/c 2,400 To Trade Receivable A/c 540 By Freehold Property A/c 350 To Profit & Loss A/c 1,566 By Loan from directors A/c 630 To Bank A/c 144 By Bank 250 To Capital Reserve A/c* 864 3,930 3,930 Bank A/c Particulars Amount ₹ Particulars Amount ₹ To Balance b/d 12 By Interest accrued & due on debentures A/c 72 To Investment A/c 600 By Capital Reduction A/c 144 To Capital Reduction A/c (Gain of Sale) 250 By Balance c/d 646 862 862 (c) Notes to Accounts on Share Capital & PPE after implementation of internal reconstruction (₹ in lakhs) (₹ in lakhs) Authorised: Share Capital 600 lakh shares of 2each 1,200 24 lakh, 8% Preference shares of 75each 1,800 3,000 Issued, subscribed and paid up: 483 lakhs Equity shares of 2each 966 (Out of which 183 lakh shares have been issued for consideration other than cash) 12 lakhs, 8% Preference shares of 75each fully paid up 900 Total 1,866 PPE: Freehold property 1,650 Less: Utilized to pay Debenture holders (900) Add: Appreciation 350 1,100 Plant and machinery 600 Total 1,700 Working Note: Calculation of number of equity shares issued: Particulars No. of Shares (lakhs) i) To equity shareholders 300 ii) To Preference Shareholders 48 iii) To Directors 135 Total 483

Topics: Accounting for Reconstruction of Companies

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