The business of MA Limited was being carried on continuously at losses. The following are the extracts from the balance sheet of the company as on…

CA Intermediate · Advanced Accounting · PYQS · January 2026
The business of MA Limited was being carried on continuously at losses. The following are the extracts from the balance sheet of the company as on 31 st March, 2025: Particulars Amount (₹) ASSETS: Property, Plant & Equipment 6,50,000 Investments 2,55,000 Stock 5,10,000 Trade Receivables 3,40,000 Cash & Cash Equivalents 70,000 Profit and Loss A/c (debit balance) 3,25,000 TOTAL 21,50,000 EQUITY AND LIABILITIES: 10,000 Equity Shares @ 100 each 10,00,000 40,000, 8% Cumulative Preference Shares @ 10 each 4,00,000 (Dividends on cumulative preference shares are in arrears for 3 years.) 10% Debentures 2,00,000 Unsecured Loans (from directors) 80,000 Trade Payables 4,10,000 Outstanding interest on debentures 60,000 TOTAL 21,50,000 The following scheme of reconstruction has been agreed upon and duly approved by court: (1) Equity shares to be converted into 20,000 shares of 50 each (fully paid up) (2) After sub-division, each shareholder shall surrender to the company 60% of their holdings. (3) Preference shareholders agree to forego their right to arrears of dividends in consideration of which 8% Preference shares are to be converted into 9% Preference shares. (4) Trade Payables agree to reduce their claim by 60% in consideration of their getting shares of 1,50,000 out of surrendered equity shares. (5) The total claims of debentures holders were reduced to 40% and in consideration of the reduction, the debenture holders shall receive preference shares of 1,00,000 which are converted out of the surrendered shares. (6) Assets are valued at: Fixed assets - 4,40,000 Investments - 2,00,000 Trade Receivables - 2,50,000 Stock - 4,50,000 (7) Expenses of reconstruction amounted to 10,000. (8) Directors agree to forego the amount due on account of unsecured loan. (9) Balance of profit and loss account to be written off. (10) Further 8,000 equity shares were issued to the existing members for increasing the working capital. The issue was fully subscribed and paid up. (11) The shares surrendered and not re-issued shall be cancelled. You are required to: (a) Show the journal entries to record the above transaction in the company's books and prepare Reconstruction A/c. (b) Show revised share capital structure of the Company in Notes to Accounts.

Suggested Answer and Working Notes:

(a) Journal Entries in the books of MA Limited Particulars Debit (₹) Credit (₹) 1. Equity Share Capital (100) A/c To Equity Share Capital (50) A/c (Being subdivision of 10,000 shares of 100into 20,000 shares of 50each) Dr. 10,00,000 10,00,000 2. Equity Share Capital (50) A/c To Surrendered Shares A/c (Being 60% of shares surrendered by shareholders) Dr. 6,00,000 6,00,000 3. 8% Cumulative Preference Share Capital A/c To 9% Preference Share Capital A/c (Being conversion of 8% preference shares to 9% for waiving dividend arrears) Dr. 4,00,000 4,00,000 4. Trade Payables A/c To Reconstruction A/c (Being 60% claim waived by trade payables) Dr. 2,46,000 2,46,000 5. Surrendered Shares A/c To Equity Share Capital (50) A/c (Being issue of equity shares from pool to trade payables) Dr. 1,50,000 1,50,000 6. 10% Debenture A/c Interest on Debenture A/c To Reconstruction A/c (Being 60% of total debenture liability transferred to Reconstruction account for reduction) Dr. 1,20,000 Dr. 36,000 1,56,000 7. Surrendered Shares A/c To 9% Preference share capital A/c (Being preference shares issued to debenture holders from surrendered equity shares) Dr. 1,00,000 1,00,000 8. Unsecured Loans (Directors) A/c To Reconstruction A/c (Being amount waived by directors) Dr. 80,000 80,000 9. Surrendered Shares A/c To Reconstruction A/c (Being unutilized surrendered shares cancelled and transferred) Dr. 3,50,000 3,50,000 10. Bank A/c To Equity Share Capital A/c (Being issue of 8,000 fresh equity shares of 50each) Dr. 4,00,000 4,00,000 11. Reconstruction A/c To Bank A/c (Being payment of reconstruction expenses) Dr. 10,000 10,000 12. Reconstruction A/c To Profit and Loss A/c To Property, Plant & Equipment A/c To Investments A/c To Stock A/c To Trade Receivables A/c (Being accumulated losses and overvalued assets written off) Dr. 7,40,000 3,25,000 2,10,000 55,000 60,000 90,000 13. Reconstruction A/c To Capital Reserve A/c (Balancing figure) (Being transfer of surplus in Reconstruction A/c to Capital Reserve) Dr. 82,000 82,000 Reconstruction A/c Particulars ₹ Particulars ₹ To PPE A/c 2,10,000 By Trade payables A/c 2,46,000 To Investment 55,000 By 10% Debenture A/c 1,20,000 To Trade receivable 90,000 By Interest on Debenture 36,000 To Stock A/c 60,000 By Unsecured loan 80,000 To Bank A/c 10,000 By Share surrender 350,000 To Profit & Loss A/c 3,25,000 To Capital reserves A/c 82,000 8,32,000 8,32,000 (b) Share Capital Notes to Accounts Particulars ₹ Equity share capital 10,000 share @ 100 each 10,00,000 Sub divided 20,000 share @ 50 each 10,00,000 (less) 60% share surrender i.e. 12,000 shares (6,00,000) 8,000 share @ 50 each 4,00,000 3,000 share @ 50 each (Issued other than consideration for cash) 1,50,000 8,000 share @ 50 each 4,00,000 Issued & fully paid & subscribed 19,000 share @ 50 each 9,50,000 Preference share capital 40,000, 9% Preference share @ 10 each 4,00,000 10,000, 9% Preference share @10 each (Issued other than consideration for cash) 1,00,000 5,00,000

Topics: Accounting for Reconstruction of Companies

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