Following is the summarized Balance Sheet of Star Ltd. as on 31st March, 2025. Particulars Amount (₹) Liabilities Authorized and Issued Share…

CA Intermediate · Advanced Accounting · MTP · January 2026
Following is the summarized Balance Sheet of Star Ltd. as on 31st March, 2025. Particulars Amount (₹) Liabilities Authorized and Issued Share Capital (a) 15,000 8% Preference shares of 50 each 7,50,000 (b) 18,750 Equity shares of 50 each 9,37,500 Profit and Loss Account (5,63,750) Loan 7,16,250 Trade Payables 2,58,750 Other Liabilities 43,750 Total 21,42,500 Assets Building at cost less depreciation 5,00,000 Plant at cost less depreciation 3,35,000 Trademarks and goodwill at cost 3,97,500 Inventory 5,00,000 Trade Receivables 4,10,000 Total 21,42,500 (Note: Preference shares dividend is in arrear for last five years). The Company is running with the shortage of working capital and not earnings profits. A scheme of reconstruction has been approved by both the classes of shareholders. The summarized scheme of reconstruction is as follows: (i) The equity shareholders have agreed that their 50 shares should be reduced to 5 by cancellation of 45.00 per share. They have also agreed to subscribe for three new equity shares of 5.00 each for each equity share held. (ii) The preference shareholders have agreed to forego the arrears of dividends and to accept for each 50preference share, 4 new 6% preference shares of 10 each, plus 3 new equity shares of 5.00 each, all credited as fully paid. (iii) Lenders to the company for 1,87,500 have agreed to convert their loan into shares and for this purpose they will be allotted 15,000 new preference shares of 10 each and 7,500 new equity shares of 5.00 each. (iv) The directors have agreed to subscribe in cash for 25,000 new equity shares of 5.00 each in addition to any shares to be subscribed by them under (i) above. (v) Of the cash received by the issue of new shares, 2,50,000 is to be used to reduce the loan due by the company. (vi) The equity share capital cancelled is to be applied: (a) To write off the debit balance in the Profit and Loss A/c, and (b) To write off - 43,750 from the value of plant. Any balance remaining is to be used to write down the value of trademarks and goodwill. The nominal capital, as reduced, is to be increased to 8,12,500 for preference share capital and - 9,37,500 for equity share capital. You are required to pass journal entries to show the effect of above scheme and prepare the Balance Sheet of the Company after reconstruction.

Suggested Answer and Working Notes:

In the books of Star Ltd. Journal Entries Particulars Debit (₹) Credit (₹) 1. Equity share capital A/c (50) Dr. 9,37,500 To Equity share capital A/c (5) 93,750 To Capital reduction A/c* 8,43,750 (Being equity capital reduced to nominal value of 5each) 2. Bank A/c Dr. 2,81,250 To Equity share capital 2,81,250 (Being 3 right shares against each share was issued and subscribed) 3. 8% Preference share capital A/c (50) Dr. 7,50,000 Capital reduction A/c Dr. 75,000 To 6% Preference share capital (10) 6,00,000 To equity share capital (50) 2,25,000 (Being 8% preference shares of 50each converted to 6% preference shares of 10each and also given to them 3 equity shares for every share held) 4. Loan A/c Dr. 1,87,500 To 6% Preference share capital A/c (15,000 x 10) 1,50,000 To Equity share capital A/c (7,500 x 5) 37,500 (Being loan to the extent of 1,50,000 converted into share capital) 5. Bank A/c (25,000 x 5) Dr. 1,25,000 To Equity share application A/c 1,25,000 (Being shares subscribed by the directors) 6. Equity share application A/c Dr. 1,25,000 To Equity share capital A/c 1,25,000 (Being application money transferred to capital A/c) 7. Loan A/c Dr. 2,50,000 To Bank A/c 2,50,000 (Being loan repaid) 8. Capital reduction A/c Dr. 7,68,750 To Profit and loss A/c 5,63,750 To Plant A/c 43,750 To Trademarks and Goodwill A/c (Bal. fig.) 1,61,250 (Being losses and assets written off to the extent required) Balance sheet of Star Ltd. (and reduced) as on 31.3.2025 Particulars Notes ₹ Equity and Liabilities 1 Shareholders' funds a Share capital 1 15,12,500 2 Non-current liabilities a Long-term borrowings (7,16,250-1,87,500-2,50,000) 2,78,750 3 Current liabilities a Trade Payables 2,58,750 b Other current liabilities 43,750 Total 20,93,750 Assets 1 Non-current assets a Property, Plant and Equipment 2 7,91,250 b Intangible assets 3 2,36,250 2 Current assets a Inventories 5,00,000 b Trade receivables 4,10,000 c Cash and cash equivalents 4 1,56,250 Total 20,93,750 Notes to accounts: ₹ 1 Share Capital Authorized capital: 81,250 Preference shares of 10each 8,12,500 1,87,500 Equity shares of 5each 9,37,500 17,50,000 Issued, subscribed and paid up: 1,52,500 equity shares of 5each 7,62,500 75,000, 6% Preference shares of 10each 7,50,000 15,12,500 2 Property, Plant and Equipment Building at cost less depreciation 5,00,000 Plant at cost less depreciation 2,91,250 7,91,250 3. Intangible assets Trademarks and goodwill 2,36,250 4 Cash and cash equivalents Bank (2,81,250+1,25,000-2,50,000) 1,56,250 Note: *In place of Capital Reduction Account, Reconstruction Account or Internal Reconstruction Account may also be used.

Topics: Accounting for Reconstruction of Companies

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