Following is the Balance Sheet of Ellora Limited as at 31 st March, 2025: Particulars Note Amount (₹) Equity and Liabilities Shareholders' Funds…

CA Intermediate · Advanced Accounting · RTP · May 2026
Following is the Balance Sheet of Ellora Limited as at 31 st March, 2025: Particulars Note Amount (₹) Equity and Liabilities Shareholders' Funds Share Capital 1 46,00,000 Reserves and Surplus 2 (21,40,000) Non-current Liabilities Long Term borrowings 3 15,00,000 Current Liabilities Trade Payables 12,00,000 Short Term Borrowings – Bank Overdraft 7,80,000 Other Current Liabilities 4 4,90,000 Short Term Provisions-Provision for Taxation 4,00,000 Total 68,30,000 Assets Non-current Assets Property, Plant and Equipment 5 23,00,000 Intangible Assets 6 6,70,000 Non-current Investments 7 2,20,000 Current Assets Inventories 17,00,000 Trade Receivables 19,40,000 Total 68,30,000 Notes to Accounts Particulars Amount (₹) 1 Share Capital Equity Share Capital 3,00,000 Equity Shares of 10 each, fully paid up 30,00,000 Preference Shares Capital 16,000 6% Cumulative Preference Shares of 100 each, fully paid up 16,00,000 Total 46,00,000 2 Reserves and Surplus Debit balance of Profit and Loss Account (21,40,000) 3 Long Term Borrowings Secured 6% Debentures (secured on the freehold property) 15,00,000 4 Other Current Liabilities Loan from Directors 4,00,000 Interest Payable on Debentures 90,000 Total 4,90,000 5 Property, Plant and Equipment Freehold Property 17,00,000 Plant and Machinery 6,00,000 Total 23,00,000 6 Intangible Assets Goodwill 5,20,000 Patents and Trademarks 1,50,000 Total 6,70,000 7 Non-current Investments Investments in Marketable Securities – valued at Cost (Market Value - 5,40,000) 2,20,000 Due to continued losses and liquidity constraints, it was decided to reconstruct the company. The following scheme of internal reconstruction was approved by the shareholders and sanctioned by the Tribunal: The Equity Shares shall be written down to 2 each and the Preference Shares shall be written down to 75 each.Of the Preference Shares' Dividends which are in arrears for four years, the Preference Shareholders have agreed to forego their claim for arrears of dividends for three years and accept allotment of Equity Shares of 2 each towards dividend for the fourth year.Interest payable on Debentures is paid in cash.The Debenture holders have agreed to take over freehold property, book value - 4,00,000 at a valuation of 4,80,000 in part repayment of their holdings. Besides they have agreed to provide additional funds of 5,20,000 secured by a floating charge on the company's assets at an interest rate of 9%.Inventory is to be written down by - 2,60,000Provision for bad and doubtful debts is to be created for 2,74,000.Intangible Assets and Debit balance of Profit and Loss Account are to be written off.The remaining freehold property after giving to Debenture holders is to be revalued at 15,50,000,The Non-current Investments are sold off for 5,60,000.A contingent liability of 1,00,000 is payable, which has arisen due to the wrong action of one of the Directors. He has agreed to compensate this loss out of the loan given by him to the company. For the remaining loan of 3,00,000, the Directors have agreed to accept a cash payment of 20,000 and allotment of 1,30,000 Equity Shares of 2 each in full settlement.There is a capital commitment of 10,00,000. The contract is cancelled on payment of 5% of the contract price as a penalty.The company issued 2,00,000 new Equity shares of 2 each at par, payable in full on allotment. The issue was underwritten for a commission of 5%. Shares were fully taken up.The taxation liability of the company is settled at 3,00,000 and the same is paid immediately.The expenses of reconstruction amounted to 15,000, You are required to: (a) Pass the Journal Entries to record the above transactions (including cash transactions) in the books of the company. (b) Prepare Capital Reduction Account.

Suggested Answer and Working Notes:

Journal Entries in the Books of Ellora Limited Amount (Dr) (₹) Amount (Cr) (₹) 1 Equity Share Capital A/c (10) Dr. 30,00,000 To Equity Share Capital A/c (2) 6,00,000 To Capital Reduction A/c 24,00,000 (Reduction of Share Capital of 10each to Shares of 2each as per the Scheme of Reconstruction) 2 6% Cumulative Preference Share Capital A/c (100) Dr. 16,00,000 To 6% Cumulative Preference Share Capital A/c (75) 12,00,000 To Capital Reduction A/c 4,00,000 (Reduction of Preference Shares of 100/- each to shares of 75each as per the Scheme of Reconstruction) 3 Capital Reduction A/c Dr. 96,000 To Equity Share Capital A/c (2) 96,000 (Arrears of Preference Dividend satisfied by the issue of equity shares, 25% of the amount due - 3,84,000) 4 Freehold Property A/c Dr. 3,30,000 To Capital Reduction A/c 3,30,000 (Appreciation in the value of Property Book Value - 4,00,000 Revalued figure - 4,80,000 Book Value - 13,00,000 Revalued figure - 15,50,000, Total - 17,00,000 Revalued figure - 20,30,000) 5 6% Debentures A/c Dr. 4,80,000 To Freehold Property A/c 4,80,000 (Claims of Debenture holders, in part, in respect of principal, discharged by transfer of freehold property vide Scheme of Reconstruction) 6 Interest Payable A/c Dr. 90,000 To Bank A/c 90,000 (Debenture Interest paid) 7 Bank A/c Dr. 5,20,000 To 9% Debentures A/c 5,20,000 (9% Debentures issued for cash) 8 Bank A/c Dr. 5,60,000 To Investment A/c 2,20,000 To Capital Reduction A/c 3,40,000 (Sale of Investment for 5,60,000/, cost being - 2,20,000 Profit - 3,40,000 credited to Capital Reduction A/c) 9 Loan from Directors A/c Dr. 1,00,000 To Provision for Contingent Liability A/c 1,00,000 (Being provision for contingent liability as it is payable, and the same is adjusted against loan from Directors) 10 Loan from Directors A/c Dr. 3,00,000 To Equity Share Capital A/c (2) 2,60,000 To Bank A/c 20,000 To Capital Reduction A/c 20,000 (Remaining loan from Directors discharged by issue of Equity Shares of 2,60,000, and cash of 20,000 in full settlement) 11 Capital Reduction Dr. 50,000 To Bank A/c 50,000 (Penalty charges for cancellation of contract (5% of 10,00,000) paid in cash) 12 Bank A/c Dr. 4,00,000 To Equity Share Application A/c 4,00,000 (Issue of 2,00,000 equity Shares of 2each fully paid up) 13 Equity Share Application A/c Dr. 4,00,000 To Equity Share Capital A/c (₹ 2/.) 4,00,000 (Share Application Money transferred to Share Capital A/c) 14 Capital Reduction A/c Dr. 20,000 To Bank A/c 20,000 (Underwriting commission on fresh issue of equity share capital paid) 15 Provision for Taxation A/c Dr. 4,00,000 To Bank A/c 3,00,000 To Capital Reduction A/c 1,00,000 (Tax liability settled at 3,00,000 and the balance credited to Capital reduction A/c) 16 Capital Reduction A/c Dr. 15,000 To Bank A/c 15,000 (Expenses on Scheme of reconstruction paid) 17 Capital Reduction A/c Dr. 34,09,000 To Inventory A/c 2,60,000 To Provision for Bad and Doubtful Debts A/c 2,74,000 To Goodwill A/c 5,20,000 To Patents and Trademarks, A/c 1,50,000 To Profit and Loss A/c 21,40,000 To Capital reserve A/c (balancing figure) 65,000 (Writing off Inventory, Goodwill, Patents and Trademarks, Debit balance of Profit and Loss Account, making provision for Bad and doubtful debts and transferring the balance to Capital reserve A/c) Capital Reduction A/c Particulars Amount (₹) Particulars Amount (₹) To Equity Share Capital 96,000 By Equity Share Capital A/c (10) 24,00,000 To Bank A/c 50,000 By 6% Cumulative Preference Share Capital A/c (100) 4,00,000 To Bank A/c 20,000 By Freehold Property A/c 3,30,000 To Inventory A/c 2,60,000 By Investments or Bank A/c 3,40,000 To Provision for Bad and Doubtful Debts A/c 2,74,000 By Loan from Directors A/c 20,000 To Goodwill A/c 5,20,000 By Provision for Taxation A/c 1,00,000 To Patents and Trademarks, A/c 1,50,000 To Profit and Loss A/c 21,40,000 To Capital Reserve A/c (balancing figure) 65,000 Total 35,90,000 Total 35,90,000

Topics: Accounting for Reconstruction of Companies

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