undefined | unit 4 amalgamation of companies

UNIT 4

Amalgamation of Firms

Question Bank

Q1) What is a "Merger" of a Partner Company? State its purpose.

A1) Amalgamation means a merger or merger. When two or more entities merge or combine into one entity, it is known as a "Merger." Similarly, when two or more union corporations merge, it is a "merger of union corporations".

Including the merger of her two or more single traders into the company

The scope of this chapter is broad enough to include situations where two or more individual traders merge to form a new partnership. This is generally known as a "merger to a partner company".

It also includes the merger of one or more single traders and one or more of his partnerships.

The scope of this chapter also includes situations where one or more sole ownerships he merges with one or more partnership companies to establish a new company.

Purpose of the Amalgamation of Companies:

The main purposes of the merger of the businesses are:

1. To avoid competition:

The main purpose of a merger is to avoid competition between companies. this provides the corporate a foothold over its competitors.

2. To Scale Back Costs:

The merged company can cash in of operating costs by lowering production costs. this is often possible for a "large economy".

3. The way to get financially:

The merged company will benefit financially within the sort of tax benefits, improved creditworthiness and lower borrowing rates.

4. To realize growth:

The merged company can pool resources to market internal growth and stop the emergence of latest competitors.

5. To diversify activities:

Diversifying your business across two or more industries can reduce your company's risk. In some cases, it can act to hedge weaker merger operations with stronger ones.

Q2) What are the Various forms of corporate "merger"?

A2)

Q3) Explain the Accounting Procedure in own words.

A3) You need to study the accounting of "old companies" and "new companies".

Old Company: If there is a merger of companies, in the case of an old company, there are basically four things that happen.

The old company has dissolved: The old company has dissolved. They are involved. All results of the dissolution (see Chapter 3) follow. Assets and liabilities are either taken over by the new company or disposed of.

Financial Statements: As a result, the company's accounting books are closed as they were in the case of dissolution.

Asset and Liability Valuation: For this purpose, it is necessary to revaluate the existing assets and liabilities of the old company. Unrecorded assets and liabilities must also be considered for such valuations. This is done by mutual agreement.

Partner's final capital to check: At the time of the merger, the assets and liabilities of the old company will be taken over by the new company and an amount equal to this value (as mutually agreed) will be credited to the new company's capital account. When an old company partner becomes a new company partner. Therefore, needs to confirm the final capital of the partners of the old company, and the same becomes the starting capital of these partners of the new company.

New Office

Establishment of new company: Except in the case of absorption (Section 4.4), a new company will be established and take over the business of the old company.

Taking over the assets and liabilities of the old company: The basic purpose of the new company is to take over the running business using the assets and liabilities of the old company at an agreed price. The agreed value of an asset minus the agreed value of an inherited liability is called the "purchase consideration" or "price".

New Company Partner Capital: The "purchase consideration" above will not be paid in cash to the old partner as in the case of a normal dissolution. The “Purchase Consideration” will be credited to the capital account of the new company's old partner, as confirmed and explained in Section 5.1.4.

Devising a new share of profits: Partners united in a merger must agree to a new share of profits.

Partner Capital Restructuring: Often, the new company's partner's capital is restructured based on the new profit share. This may require the introduction of additional cash capital and, in some cases, the withdrawal of surplus capital. Excesses / shortages may even be transferred to your partner's checking / loan account.

Q4) What are the ways to close the books of an old company?

A4) In the case of a merger, "Old Enterprise: Dissolve. Therefore, conceptually, all the principles described in Chapter 3," Dissolution of Partnership Farms "apply to such farms. The old company passes the following entries:

The entries are:

Step 1: Open a Realization Account and a Partner's Capital Account.

Step 2: Same as step 1 of the reassessment method (see Section 6.1.1). Transfer the partner's capital to the partner's capital A / C credit side and transfer the past profits and reserves. The entries are:

Reserve P/L A/c Dr.

To Partners Capital A/c

(Various past profit transferred)

Step 3: Transfer all assets to the realization account. The entries are:

Realisation A/c Dr.

To Concerned asset A/c

(Various assets transferred)

XXX

What students should be aware of here is that the new company will take over due to the merger, so cash and bank balances (accounts) will be transferred.

However, you should not transfer your cash / bank account to a cash account if all your assets and liabilities are not taken over by the company.

Step 4: Transfer all debt to the realized account. The entries are:

Concerned liabilities A/c Dr.

To Realisation A/c

(Various liabilities transferred)

XXX

Step 5: Find out the consideration for the new company's takeover of assets and liabilities. A separate statement is usually created for the "Purchase Consideration". Then the following entry is passed:

Business purchase A/c Dr.

To Realisation A/c

(Value of purchase consideration on amalgamation now recorded)

XXX

Step 6: Assets that were not taken over by the new company and were sold to the outside world / taken over by a partner:

Cash/Bank/Partners capital A/c Dr.

To Concerned asset A/c

(Entry at agreed value)

XXX

Gain / Loss of such sale / acquisition transferred to Realization A / c:

Profit	Asset A/c Dr. To Realisation A/c	XXX	XXX
Loss	Realisation A/c Dr. To Asset A/c	XXX	XXX

Step 7: Partner disclaims / takes over responsibility instead of new company taking over responsibility

Concerned Liability A/c Dr.

To Cash/Bank/Partners Capital A/c

(Entry at agreed value)

XXX

Gains / losses from such emissions / take-backs transferred to Realization A / c:

Profit	Concerned Liability A/c Dr. To Realisation A/c (Surplus Transferred as Liability taken over at Lower Value)	XXX	XXX
Loss	Realisation A/c Dr. To Concerned liability A/c	XXX	XXX

Profit	Realisation A/c Dr. To Partners Capital A/c	XXX	XXX
Loss	Partners’ Capital A/c Dr. To Realisation A/c	XXX	XXX

Step 8: Realization A / c is closed by transferring profit or loss to the partner's capital account at a profit-sharing ratio.

Step 9: The final entry:

Partners’ capital A/c Dr.

To Business Purchase A/c

(Entry to Close the Books of the “Old Firm”)

XXX

Q5) Write short note on Accounting for Mergers.

A5) ICAI has made this AS mandatory since January 4, 1995. The AS handles the accounting for mergers and the processing of the resulting goodwill or reserves. This is primarily intended for businesses, and only some of its requirements apply to partners' accounts, etc.

It states that there are two main ways to account for a merger.

The use of the "equity pooling method" is not discussed here as it is limited to mergers of companies.

The purchase method of accounting for mergers applies the same principles to the purchase of this regular asset. The problem in is solved using this method.

In this way, the assets and liabilities of the transferring company are either taken over by the new company at their existing value or the consideration is allocated to the individual assets and liabilities based on their fair value at that time, according to the contract. The date of the merger. The reserve will not be taken over by the new company, but will be distributed among the partners of the merged company.

AS 14 sets out the accounting procedures that should be followed in the books of the purchasing / transferring company, but does not specify the specific method that should be followed when closing the books of the merged company.

In the above accounting, students are aware of the following:

(i) If the consideration paid exceeds the net assets (assets-liabilities) acquired, the resulting amount is "GOOD WILL".

(ii) Alternatively, if the consideration paid is less than the net assets acquired, it is a "capital reserve".

Such goodwill resulting from the merger should be systematically amortized by the new company over its useful life. Generally, the amortization period should not exceed 5 years.

Para 45 of AS 14 sets disclosure requirements in the first financial statements of the new company after the merger.

Q6) Define Amalgamation.

A6) You have studied the units related to the final accounting of a partnership company in the XIIth standard. These final accounts are similar to the final accounts of individual traders, but with certain changes in the profit / loss distribution of partners in the profit-sharing ratio. However, there are various transactions that affect the accounting of a general partnership, such as partnership, retirement, death of the partnership, partnership, dissolution, and conversion of the partnership.

In this unit we will understand the need to learning Accounting for Mergers of Partnership Companies.

Meaning of Amalgamation of Partnership Companies:

A merger means merging or merging two or more business units that operate the same type of business to form a new business unit.

A merger of union corporations means that two or more union corporations merge to form a new union corporation. The merger of two or more existing partnership companies doing the same type of business, terminating another entity and forming a new company is called a partnership company merger.

Mergers can be formed in one of the following ways:

Q7) Write short note on Books of the New Firm.

A7) The entries in the books of the new firm can be divided into following stages:

1. Recording of the assets and liabilities taken over:

Debit: all assets’ accounts (which are taken over)

Credit: all liabilities accounts (which are taken over)

Credit: Partner’s capital accounts (as per the final balances in the capital accounts in the old firm)

With this entry the final capitals of the partners in the old firm become their initial capitals in the new firm.

2. Restructuring of partners capitals:

The partners may decide a particular capital structure in the new firm, which has to be contributed by the partners in their new profit-sharing ratio. Accordingly, the partners may bring further capital or withdraw excess capital. Alternatively, the excess or deficit may be transferred to current or loan accounts.

3. Removing effects of inter firm transactions of old firms:

(1) If debtors of one of the old firms, are creditors of the other firm the same party will be reflected as both debtor and creditor in the amalgamated firm.

Q8) What entries are being passed at time of cancellation of Debtors and Creditors Account.

A8) (1) If one of the debtors of the old company is the creditor of the other company, the same party will be reflected in both the debtor and the creditor of the merged company, and the common amount will be cancelled as follows.

Sunday Creditors A/c Dr.

To Sundry Debtors A/c

XXX

(2) If the old company before the merger was a debtor / creditor of each other, the common amount will be cancelled in the company after the merger as follows.

Sundry Creditors A/c Dr.

To Sundry Debtors A/c

XXX

(3) Similarly, if the old companies were accepting or withdrawing bills from each other, the same procedure would be performed.

Bills Payable A/c Dr.

To Bills Receivable A/c

XXX

A similar method is used for cancellation of business-to-business loans.

(4) If one company purchased goods from the other company prior to the merger and all or part of the goods are still in stock or on the date of the merger, by the company that sold those goods. The amount of profit obtained is reduced from the combined inventory value as follows.

Goodwill A/c Dr.

To Stock A/c

XXX

Q9) Distinguish between Amalgamation v/s Absorption.

A9) Where two or more existing business entities merge themselves to form a new business entity it is “amalgamation”. Therefore, the old entities are taken over by the newly formed business entity, e.g., where two firms viz. M/s AB & Co. and M/s. CD & Co. merge to form a new firm M/s. ABCD & Co.

In absorption, one or more existing business entities are taken over by another existing business entity. No new business entity is formed for the purpose. E.g., where a firm AB & Co. ‘absorbs’ another firm CD & Co., it is known as absorption of CD & Co. by AB & Co.

Hence, whereas in amalgamation, all the old business entities are closed and a new business entity is formed, in absorption, one old entity will continue after taking over the other entity or entities.

Comparison Table Between Amalgamation and Absorption

Parameter of Comparison	Amalgamation	Absorption
Meaning	Two or more different companies join to become one, the process is called Amalgamation.	When one company takes over the business of another company, the process is called Absorption.
New entity	The new entity is formed.	No new entity is formed.
Minimum number of companies involved	In the process of amalgamation, there are at least three companies involved (two liquidating and one newly formed).	While in Absorption there are at least two companies involved.
Liquidating companies	At least two companies liquidate.	Only one company is liquidated (whose business is overtaken by the other).
Domination	No company dominates any other company.	The bigger company dominates the weaker company.

Q10) What are the different forms of ‘Amalgamation’ of firms?

A10) Amalgamation of firms may take any of the following forms:

Amalgamation of Two or more Sole-traders: Here, two or more sole-traders amalgamate themselves into a new partnership firm. E.g., Mr. A and Mr. B, two Chartered Accountants, practicing separately, merge their practice to form a new firm of Chartered Accountants viz. M/s AB.

Amalgamation of Sole-trader and Firm: Here, one or more existing sole-traders merge with one or more existing partnership firms, so that the existing entities lose their identity and a new partnership firm is formed to take over their businesses. E.g., Mr. X, a proprietor and M/s. YZ, a partnership firm, who are doing businesses separately, amalgamate to form a new firm, M/s. XYZ.

Amalgamation of Two or more Partnership Firms: Here, two or more existing partnership firms merge and form a new firm to take over the businesses of the existing firms. E.g., M/s. PQ and M/s. RS, two partnership firms doing competing businesses, amalgamate to form a new partnership firm viz. M/s PQRS. In all the above cases, A, B, X, YZ, PQ and RS lose their individual identity, close their businesses and new firms, M/s. AB, M/s. XYZ and M/s. PQRS respectively, come into existence to take over businesses.

Absorption: In this case, all the merging units do not lose their identity. One of them will continue to exist after taking over the other existing units. E.g., M/s. JK and M/s. MN are in competing business. M/s. JK absorbs or takes over M/s. MN so that M/s. MN is dissolved and M/s. JK continues to exist. It now has the assets and liabilities taken over from M/s. MN, in addition to its existing assets and liabilities.

Practical Problems

Q1) The following is the Balance Sheet of Kumar Ltd as on 30th September, 2009

Balance Sheet as on 30th September, 2009

Liabilities	Rs	Assets	Rs
Authorized Share Capital		Land & Buildings	200000
10000 Equity Shares of Rs100	1000000	Plant & Equipment’s	300000
1000 6% Preference Shares of
Rs 100 each	100000	Furnitures	65000
Total	1100000	Patents	45000
Issued capital		Sundry Debtors	149450
6,000 Equity Shares	600000	Inventory	68950
1000 6% Preference Shares of
Rs 100 each	100000	Cash	3700
10% Debentures	100000	Profit & loss A/C	307900
Sundry Creditors	100000
Bank Overdraft	240000
	1140000		1140000

A new Company Kishor Ltd was formed to take over this company. The Authorized capital of the new company was Rs 1500000 divided into 100000 Equity shares of Rs 10 each and 5000 7% Preference shares of Rs 100 each. The terms and conditions agreed for this were as follows:

10% debenture holders agreed to take new 9%Debentures of Rs.95000 in full satisfaction.

6% Preference shareholders were to receive 3 new 7% Preference shares of Rs.100 each for every 4 old preference shares.

The equity shareholders to receive 30,000 Equity shares of Rs.10 each, credited as Rs.8 paid up

Kishor Ltd. to issue 20,000 equity shares of Rs.10 each at par for cash

Kishor Ltd to make a call of Rs.2 per share on shares issued to Kumar Ltd.

You are required to give necessary Ledger A/c s to close the books of Kumar ltd and Journal entries in the books of Kishor Ltd and Balance Sheet of Kishor Ltd.

A1)

Statement of Purchase consideration: (Net Payment method)

750 7% Preference shares of Rs.100 each 75000

30,000 Equity shares of Rs.10 each Rs. 8 paid up 240000

315000

Goodwill/Capital reserve (Net Assets taken over)

Land & Buildings	200000
Plant & Equipments	300000
Furnitures	65000
Patents	45000
Sundry Debtors	149450
Inventory	68950
Cash	3700	832100

Less: Liabilities taken over at agreed values
10% Debentures	100000
Sundry Creditors	100000
Bank Overdraft	240000	440000
Net Assets taken over		392100
Purchase consideration		315000
Capital Reserve		77100

In the books of Kumar Ltd

Realization A/c

To Land & Buildings	200000	By 10% Debentures	100000
To Plant & Equipments	300000	By Sundry Creditors	100000
To Furnitures	65000	By Bank Overdraft	240000
To Patents	45000	By Kishor	315000
To Sundry Debtors	149450	By Pref Shareholders A/c	25000
To Inventory	68950	By Equity Share holders A/c	52100
To Cash	3700
	832100		832100

Equity Shareholders A/c

To Profit & Loss A/c	307900	By Equity Share Capital A/c	600000
To Realization A/c	52100
To Equity shares in Kishor Ltd	240000
	600000		600000

Kishor Ltd A/c

To Realisation A/c	315000	By Pref Shares in Kishor Ltd A/c By Equity Shares in Kishor Ltd A/c	75000 240000
	315000		315000

Preference Share Holders A/c

To Preference Shares in Kishor Ltd To Realisation A/c	75000 25000	By Preference Share capital A/c	100000
	100000		100000

Equity Shares in Kishor Ltd

To Kishor Ltd	240000	By Equity Share Holders A/c	240000
	240000		240000

Preference Shares in Kishor Ltd

To Kishor Ltd	75000	By Preference Share Holders	75000
	75000		75000

Journal Entries in the Books of Kishor Ltd.

1	Business Purchase A/c Dr To Liquidator of Kumar Ltd (Being Business Purchased)	315000	315000
2	Land and Buildings Dr Plant and Equipments Dr Furnitures Dr Patents Dr Sundry Debtors Dr Inventry A/c Dr Cash Dr To Business Purchase A/c To Sundry Creditors To Debentures To Bank Overdraft To Capital Reserve (Being Sundry Assets and Liabilities taken over recorded)	200000 300000 65000 45000 149450 68950 3700	315000 100000 100000 240000 77100
3	Liquidator of Kumar Ltd Dr To Equity Share Capital A/c To 7%Preference Share Capital A/c (Being Purchase Consideration Discharged.)	315000	240000 75000
4	Bank A/c Dr To Equity Share Capital A/c (Being 20000 Equity shares of Rs 10 each issued for cash.)	200000	200000
5	Equity Share Call A/c Dr To Equity Share Capital A/c (Being call made at Rs 2 per share on 30000 equity shares)	60000	60000
6	Bank A/c Dr To Equity Share Call A/c (Being Call amount received.)	60000	60000

Balance Sheet of Kishor Ltd.

Liabilities	Rs	Assets	Rs
Authorised Share Capital		Land & Buildings	200000
100000 Equity Shares of Rs10
each	1000000	Plant & Equipments	300000
5000 7% Preference Shares of
Rs 100 each	500000	Furnitures	65000
Total	1500000	Patents	45000
Issued capital		Sundry Debtors	149450
50000 Equity Shares of Rs 10
each	500000	Inventory	68950
750 7% Preference Shares of
Rs 100 each	75000	Cash	3700
Capital Reserve	77100	Bank Balance	20000
10% Debentures	100000
Sundry Creditors	100000
	852100		852100

Q2) The following are the Balance Sheets of P Ltd and S Ltd as on 31st March, 2009 Balance Sheet as on 31st March, 2009

Liabilities	P Ltd	S Ltd	Assets	P Ltd	S Ltd
Equity Share Capital (Rs			Land and Building	250,000	155000
10 each)	500,000	300,000
14% Preference Share
Capital (Rs 100 each)	220,000	170,000	Plant and Machinery	325,000	170000
General Reserve	50,000	25,000	Furniture and Fittings	57,500	35000
Export Profit Reserve	30,000	30,000	Investments	125,000	95000
Profit and Loss A/c	75,000	50,000	Stock	90,000	103000
13% Debentures	50,000	35,000	Debtors	72,500	52000
Sundry Creditors	65,000	50,000	Cash and Bank	70,000	50000
	990,000	660,000		990,000	660000

P Ltd takes over S Ltd on 1st April, 2009. P Ltd discharges the Purchase Consideration as below:

Issued 35000 equity shares of Rs 10 each at par to the equity shareholders of S Ltd.

Issued 15% Preference Shares of Rs 100 each to discharge the Preference share holders of S Ltd at 10% premium.

The Debentures of S Ltd will be converted into equivalent numbers of debentures of P Ltd.

You are required to give necessary ledger accounts to close the books of S Ltd and Journal entries in t the books of P Ltd and Balance sheet of P Ltd after absorption.

A2)

Statement of Purchase consideration: (Net Payment method)

35000 equity shares of Rs 10 each 350000

1870 15%Preference Shares of Rs 100 each

(Old Preference Share Capital 170000

Add : 10%Premium 17000 187000

537000

In the books of S Ltd

Realization A/c

To Land and Buildings	155000	By 13% Debentures	35000
To Plant and Equipments	170000	By Current Liabilities	50000
To Furnitures	35000	By P Ltd	537000
To Investment	95000	By Equity Share holders A/c	55000
To Inventory	103000
To Sundry Debtors	52000
To Cash	50000
To Preference Share
holders	17000
	677000		677000

Equity Shareholders A/c

To Realisation A/c To Equity Shares In P Ltd	55000 350000	By Equity Share Capital A/c By General Reserve A/c By Profit & Loss A/c By Export Profit Reserve	300000 25000 50000 300000
	405000		405000

P Ltd A/c

To Realisation A/c	537000	By Equity Shares in P Ltd By Preference Shares in P Ltd	350000 187000
	537000		537000

Preference Share Holders A/c

To Preference Shares in P Ltd	187000	By Preference Share capital A/c By Realisation A/c	170000 17000
	187000		187000

Equity Shares in P Ltd

To P Ltd A/c	350000	By Equity Share Holders A/c	350000
	350000		350000

Preference Shares in P Ltd

To P Ltd A/c	187000	By Preference Share Holders A/c	187000
	187000		187000

Journal Entries in the books of P Ltd

Sr.No	Particulars	Dr. Rs.	Cr. Rs.
i.	Business Purchase A/c Dr.	5,37,000
	To Liquidator of Q Ltd.		5,37,000
	(Being Business of Q Ltd. Purchased)

ii.	Building A/c Dr.	155000
	Machinery A/c. Dr.	170000
	Furniture and Fittings Dr	35000
	Investment Dr	95000
	Stock Dr.	103000
	Debtors Dr.	52000
	Cash and Bank A/c. Dr.	50000
	To 13 % Debentures		35000
	To Current Liabilities		50000
	To Business Purchase		537000
	To Capital Reserve		38000
	(Being sundry assets & liabilities taken over of Q Ltd. Recorded)

iv.	Liquidator of P Ltd. A/c Dr.	1875000
	To Equity share capital A/c		1250000
	To Securities Premium A/c		625000
	(Being Purchase consideration discharge)

v.	Liquidator of Q Ltd. A/c. Dr.	537000
	To Equity Share Capital A/c.		350000
	To 15% Preference Share Capital A/c.		187000
	(Being purchase consideration discharged)

vi.	Amalgamation Adjustment A/c. Dr.	30000
	To Export profit reserve		30000
	(Being statutory reserve maintained)

vii.	13% Debentures in Q Ltd. A/c. Dr	35000
	To 13% Debentures		35000

Balance Sheet as on 31st March, 2009

Liabilities	Rs	Assets	Rs
Equity Share Capital (Rs		Land and Building
10 each)	850,000		405,000
14% Preference Share
Capital (Rs 100 each)	220,000	Plant and Machinery	495,000
15% Preference Share
Capital (Rs 100 each)	187,000	Furniture and Fittings	92,500
General Reserve	50,000	Investments	220,000
Export Profit Reserve	60,000	Stock	193,000
Capital Reserve	38,000	Debtors	124,500
Profit and Loss A/c	75,000	Cash and Bank	120,000
13% Debentures	85,000	Amalgamation Adjustment A/c	30000
Current Liabilities	115,000
	1,680,000		1,680,000

Q3) The following is the Balance Sheet of Shy Ltd as on 30th September, 2009

Balance Sheet as on 30th September, 2009

Liabilities	Rs	Assets	Rs
Issued capital		Land & Buildings	85000
18000 Equity Shares of Rs10		Plant & Equipments	45000
General Reserve	24000	Furnitures	15000
Profit & loss	10400	Trademarks	7000
12% Debentures	80000	Investments	23000
Sundry Creditors	63720	Sundry Debtors	60000
		Stock	112000
		Bank	11120
	358120		358120

Shy Ltd was absorbed by Chai Ltd., on the following terms and conditions:

All liabilities and all assets are to be taken over except Investments which were sold by Shy Ltd. at 90% of book value.

Debentures of Shy Ltd, to be discharged at a discount of 10% by the issue of 14% debentures of Rs 100 each in Chai Ltd.

Trademarks were found useless.

Issue of one equity share of Rs 10 each in Chai Ltd., issued at Rs 12 and a cash payment of Rs 3 for every s hare in Shy Ltd.

Cost of absorption paid : Rs 1160

Shy Ltd. sold half the shares received from Chai Ltd. at Rs 15 per share.

You are required to give necessary Ledger A/c s to close the books of Shy Ltd. and Journal entries in the books of Chai Ltd.

A3)

Statement of Purchase consideration: (Net Payment method)

18000 Equity shares of Rs.10 each at Rs.12 per share 216000

Cash at Rs. 3 per share on 18000 Equity shares 54000

Purchase Consideration 270000

Goodwill/Capital reserve (Net Assets taken over)

Land & Buildings	85000
Plant & Equipments	45000
Furnitures	15000
Sundry Debtors	60000
Stock	112000
Bank	11120
		328120
Less :
Liabilities taken over
Debentures	80000
Creditors	63720	143720
Net assets taken over		184400
Less :
Purchase consideration		270000
Goodwill		85600

In the books of Shy Ltd

Realization A/c

To Land & Buildings	85000	By 10% Debentures	80000
To Plant & Equipments	45000	By Sundry Creditors	63720
To Furnitures	15000	By Chai Ltd.	270000
To Trademarks	7000	By Bank (Investment sold)	20700
To Sundry Debtors	60000	By Bank (shares sold)	27000
To Bank	11120
To Investments	23000
To Stock	112000
To Equity Share holders A/c	103300
	461420		461420

Equity Shareholders A/c

To Bank A/c To Equity Shares in Chai Ltd	209700 108000	By Equity Share Capital A/c By Profit & Loss A/c By General Reserve A/c By Realisation A/c	180000 10400 24000 103300
	317700		317700

Chai Ltd A/c

To Realisation A/c	270000	By Equity Shares in Chai Ltd By Bank	216000 54000
	270000		270000

Bank A/c

To Equity shares in Chai Ltd To Realisation A/c To Chai Ltd.	135000 20700 54000	By Equity Shareholders A/c	209700
	209700		209700

Equity Shares in Chai Ltd

To Chai Ltd. To Realisation A/c	216000 27000	By Bank By Equity Share Holders A/c	135000 108000
	243000		243000

Journal Entries in the Books of Chai Ltd.

1	Business Purchase A/c To Liquidator of Shy Ltd (Being Business Purchased)	Dr		270000	270000
2	Land and Buildings Dr Plant and Equipments Dr Furniture Dr Sundry Debtors Dr Stock Dr Bank Dr Goodwill (Bal Fig) Dr To Business Purchase A/c To Sundry Creditors To Debentures (Being Sundry Assets and Liabilities taken over recorded)			85000 45000 15000 60000 112000 11120 85600	270000 63720 80000
3	Liquidator of Shy Ltd To Equity Share Capital A/c To Securities Premium A/c To Bank (Being Purchase Consideration Discharged.)		Dr	270000	180000 36000 54000
4	Goodwill A/c To Bank (Being amalgamation expenses paid)	Dr.		1160	1160
5	Debentures in Shy A/c Dr. To Debentures in Chai Ltd A/c (Being new debentures issued in satisfaction of old Debentures)			72000	72000

Q4) A Ltd and B Ltd agreed to amalgamate and form a new company C Ltd. which will take over all the assets and liabilities of the two companies.

The assets and liabilities of A Ltd are to be taken over at a book value for shares in C Ltd. At the rate of 5 shares in C Ltd. at 10% premium (i.e. Rs 11 per share) for every four shares in A Ltd.

In the case of B Ltd:

The debentures of B Ltd. would be paid off by the issue of an equal no. of debentures in C Ltd.

The 11.5% Preference Shareholders of B Ltd. would be allotted four 12% Preferences of Rs 100 each in C Ltd. for every five Preference shares in B Ltd.

Sufficient shares of C Ltd would be allotted to the equity share holders to cover the balance on their account after adjusting asset values by reducing Plant and Machinery by 10% and providing 5% on sundry debtors.

The summarized Balance Sheets of the two companies just prior to amalgamation were as follows:

Liabilities	A Ltd.	B Ltd	Assets	A Ltd.	B Ltd
Issued capital			Plant & Equipments	800000	800000
Equity Capital of Rs10 each	400000	500000	Stock	65000	60000
11.5 Preference Shares of Rs 100 each.		300000	Profit and Loss A/c		140000
12% Debentures		200000	Sundry Debtors	95000	50000
Profit & loss A/C	500000		Bank	65000	40000
Sundry Creditors Contingency Reserve	75000 50000	90000
	1025000	1090000		1025000	1090000

Show the Journal entries in the books of both the companies.

A4)

Statement of Purchase consideration for A Ltd.(Net Payment Method)

5 Equity Shares of Rs 10 each at 10% premium for

every four shares in A Ltd. 550000

(40000 shares/4 x 5= 50000 shares x Rs.11)

Statement of Purchase Consideration for B Ltd(Net Assets Method) &

Net Assets taken over of A Ltd.

Assets Taken Over:	A Ltd	B Ltd
Plant & Equipments	800000	720000
Stock	65000	60000
Sundry Debtors	95000	47500
Bank	65000	40000
	1025000	867500
Less: Liabilities taken over
Debentures		200000
Sundry creditors	75000	90000
Net Assets	950000	577500
Less: P.C	550000
Capital Reserve	400000
P.C (Net Assets Method)		577500

In the books of A Ltd and B Ltd

Realization A/c

Particulars	A Ltd	B Ltd	Particulars	A Ltd	B Ltd
To Plant & Equipments A/c	800000	800000	By Debentures A/c		200000
To Stock A/c	65000	60000	By Creditors A/c	75000	90000
To Sundry Debtors A/c	95000	50000	By C Ltd A/c	550000	577500
To Bank A/c	65000	40000	By Preference Shareholders A/c		60000
			By Equity Share holders A/c	400000	22500
	1025000	950000		1025000	950000

C Ltd A/c

Particulars	A Ltd	B Ltd	Particulars	A Ltd	B Ltd
To Realisation A/c	550000	577500	By Equity Shares in C Ltd By Preference Shares in C Ltd	550000	337500 240000
To Realisation A/c	550000	577500	By Equity Shares in C Ltd By Preference Shares in C Ltd	550000	577500

Equity Shareholders A/c

Particulars	A Ltd	B Ltd	Particulars	A Ltd	B Ltd
To Profit & Loss A/c To Equity shares in C Ltd To Realisation A/c	550000 400000	140000 337500 22500	By Equity Share Capital A/c By Profit & Loss A/c By General Reserve A/c	400000 500000 50000	500000
	950000	500000		950000	500000

Preference Share Holders A/c

To Preference Shares in C Ltd To Realisation A/c		240000 60000	By Preference Share capital A/c		300000
		300000			300000

Equity Shares in C Ltd

To C Ltd A/c		337500	By Equity Share Holders A/c	550000	337500
	550000	337500		550000	337500

Preference Shares in C Ltd

To C Ltd	B Ltd 240000	By Preference Share Holders A/c	B Ltd 240000
	240000		240000

Journal Entries in the Books of C Ltd.

1	Business Purchase A/c Dr To Liquidator of A Ltd A/c To Liquidator of B Ltd A/c (Being Business Purchased)		1127500	550000 577500
2	Plant and Equipments A/c Dr Stock A/c Dr Debtors A/c Dr Bank A/c Dr To Business Purchase A/c To Sundry Creditors To Capital Reserve A/c (Being Sundry Assets and Liabilities taken over recorded)		800000 65000 95000 65000	550000 75000 400000
3	Plant and Equipments A/c Dr Stock A/c Dr Debtors A/c Dr Bank A/c Dr To Business Purchase A/c To Sundry Creditors To Debentures (Being Sundry Assets and Liabilities taken over recorded)		720000 60000 47500 40000	577500 90000 200000
4	Liquidator of A Ltd Dr To Equity Share Capital A/c To Security Premium A/c (Being Purchase Consideration Discharged.)		550000	500000 50000
5	Liquidator of B Ltd Dr To Equity Share Capital A/c To Preference Share Capital A/c (Being Purchase Consideration Discharged.)		577500	337500 240000
6	Old Debentures A/c To New Debenture A/c To Capital Reserve A/c (Being old Debentures settled at 10% discount.)	Dr	200000	180000 20000

Balance Sheet of C Ltd.

Liabilities	Rs	Assets	Rs
Issued capital		Plant & Equipments	1520000
Equity Capital of Rs10 each	837500	Stock	125000
11.5 Preference Shares of Rs
100 each.	240000	Sundry Debtors	142500
12% Debentures	180000	Bank	105000
Sundry Creditors	165000
Security Premium	50000
Capital Reserve	420000
	1892500		1892500

Q5) Following were the balance sheets as on March 2014 of two firm’s M/s A & B and M/s C & D:

Balance Sheet

Liabilities	A & B	C & D	Assets		A & B	C & D
Sundry Creditors	20,000	10,000	Cash at bank		15,000	8,000
Bills Payable	5,000	–	Investment at Cost		10,000	8,000
Bank Overdraft	2,000	10,000	Debtors	10,000
E’s Loan	6,000	–	Less: Provision	1,000
Capitals					9,000	8,000
A	35,000		Furniture		12,000	6,000
B	22,000		Premises		30,000	–
C		36,000	Land		–	50,000
D		20,000	Machinery		15,000	–
General Reserve	8,000	3,000	Goodwill		9,000	–
Investment Fluctuation	2,000	1,000
Fund
	1,00,000	80,000			1,00,000	80,000

It was decided by both the firms to amalgamate their business on 1st April 2014 for this purpose it was decided that the new firm shall not take furniture of both the firms and shall take over investment at 10

% Less than the cost land at 80,000 premises at 45,000, machinery at 9,000 New firm agreed to take over only trade liabilities of both the firms and to pay 12,000 to each firm as goodwill Unrecorded typewriter with C & D valued at 800 was not taken over by the new firm.

A5) Journal in the Books of M/s. A & B

Date 31/3/14	Particulars		L F	Debit	Credit
	Realisation A/c To Cash at Bank A/c To Investment A/c To Debtors To Furniture A/c To Premises A/c To Machinery A/c To Goodwill (Being Transfer of Assets to Realisation A/c)	Dr.		1,01,000
					15,000
					10,000
					10,000
					12,000
					30,000
					15,000
					9,000
	Creditors A/c Balance Payable A/c Bank OD A/c Provision for Doubtful Debt A/c A’S Loan A/c To Realisation (Being Transfer of Liabilities to Realisation A/c)	Dr. Dr. Dr. Dr. Dr.		20,000
				5,000
				2,000
				1,000
				6,000
					34,000
	Investment Fluctuation Fund A/c To Realisation A/c	Dr.		1,000
	Investment Fluctuation Fund A/c To Realisation A/c	Dr.			1,000

(Being Reduction in the Value of Investment Accounted for)
General Reserve A/c Dr. To A’s Capital A/c To A’s Capital A/c (Being Reserve Distributed to old Partners in Profit Sharing Ratio)		8,000	4,000 4,000
New Firm A/c To Realisation A/c (Being Purchase Consideration Recorded)	Dr.	66,000	66,000
A’s Capital A/c B’s Capital A/c To Realisation A/c (Being Furniture taken over by Partners)	Dr. Dr.	6,000 6,000	12,000
Investment Fluctuation Fund A/c Dr. To A’s Capital A/c To B’s Capital A/c (Being Surplus Balance Transferred to Partner’s Capital Accounts.		1,000	500 500
Realisation A/c Dr. To A’s Capital A/c To B’s Capital A/c (Being Profit on Realisation Distributed to Partners in Profit)		12,000	6,000 6,000
A’s Capital A/c B’s Capital A/c To New Firm A/c (Being balances in Partner’s Capital A/c Adjusted)	Dr. Dr.	39,500 26,500	66,000

Ledger Accounts

Dr. Realisation A/c


To Sundry Assets:			By Sundry Liabilities
Cash at Bank	15,000		Creditors	20,000
Investment	10,000		Bills Payable	5,000
Debtors	10,000		Bank Overdraft	2,000
Furniture	12,000		RDD	1,000
Premises	30,000		A’s Loan	6,000	34,000
Machinery	15,000		By Investment Fluctuation		1,000
			Fund A/c
Goodwill	9,000	1,01,000	By Business Purchase A/c		66,000
To Realisation Profit			By Partners Capital A/c		12,000
A	6,000		(Furniture taken over)
B	6,000	12,000
		1,13,000			1,13,000

Partner’s Capital A/c Cr.

	A	B		A	B
To Furniture	6,000	6,000	By Balance b/d	35,000	22,000
To Business Purchase A/c	39,500	26,500	By Realisation A/c By General Reserve By Inv.fluctuation Fund	6,000 4,000 500	6,000 4,000 500
	45,500	32,500		45,500	32,500

Dr. New Firm A/c (Business Purchase A/c) Cr.


To Realisation A/c	66,000	By Capital accounts: A B	39,500 26,500
	66,000		66,000

Working Note: Value of Business Purchase:

Particulars	A & B		C & D
Assets taken over: Cash (*15,000 –2,000 – 6,000) Investment Debtors Land/Premises Machinery Goodwill Less: Liabilities Creditors RDD Bills payable	*7,000		8,000
	9,000		7,200
	10,000		8,000
	45,000		80,000
	9,000		–
	12,000	92,000	12,000	1,15,200
	20,000		10,000
	1,000		–
	5,000	(26,000)		(10,000)
		66,000		1,05,200

Journal Entries in the Books of M/s. C & D

Date	Particulars		LF	Debit	Credit
	Realisation A/c To Bank A/c To Investment A/c To Debtors A/c To Furniture A/c To Land A/c (Being Assets Transferred)	Dr.		80,000
					8,000
					8,000
					8,000
					6,000
					50,000
	Creditors A/c To Realisation A/c (Being Liabilities transferred)	Dr.		10,000	10,000
	Investment Fluctuation Fund A/c To Realisation A/c To C’s Capital A/c To D’s Capital A/c (Being reduction in value of investments transferred to Realisation A/c and balance distributed to Partners in profit sharing ratio)	Dr.		1,000
					800
					100
					100
	General Reserve A/c	Dr.		3,000

To C’s Capital A/c To D’s Capital A/c (Being general reserve distributed to partners in profit sharing ratio)			1,500 1,500
Bank Overdraft A/c To C’s Capital A/c To D’s Capital A/c (Being Liabilities taken over by partners)	Dr.	10,000	5,000 5,000
New Firm A/c To Realisation A/c (Being Purchase Consideration Recorded)	Dr.	1,05,200	1,05,200
C’s Capital A/c D’s Capital A/c To Realisation A/c (Being Furniture taken over)	Dr. Dr.	3,000
		3,000
			6,000
C’s Capital A/c D’s Capital A/c To Realisation A/c (Being Type writer taken over)	Dr. Dr.	400
		400
			800
Realisation A/c To C’s Capital A/c To D’s Capital A/c (Being Profit on Realisation Transferred in Profit Sharing Ratio)	Dr.	42,800
			21,400
			21,400
C’s Capital A/c D’s Capital A/c To New Firm A/c (Being Balance in Partner’s Capital A/c Adjusted)	Dr.	60,600

Ledger Accounts

Dr. Realisation A/c Cr.


To Sundry Assets: Cash at Bank Investment Debtors Furniture Land To Partner’s Capital: C D	8,000 8,000 8,000 6,000 50,000	80,000 42,800	By Sundry liabilities: Creditors By Investment fluctuation fund By Business purchase A/c By Partner’s capital A/c (furniture) By Partner’s capital A/c (typewriter)	10,000 800 1,05,200 6,000 800
	21,400 21,400	80,000 42,800		10,000 800 1,05,200 6,000 800
		1,22,800		1,22,800

Dr. Partner’s Capital A/c Cr.

	C	D		C	D
To Realisation (Furniture)	3,000	3,000	By Balance b/d	36,000	20,000
To Realisation (typewriter)	400	400	By Realisation	21,400	21,400
To Balance c/d	60,600	44,600	By Bank o/d	5,000	5,000
			By General Reserve	1,500	1,500
			By Inv. Fluctuation Fund	100	100
	64,000	48,000		64,000	48,000

Dr. New Firm A/c (Business Purchase A/c) Cr.


To Realisation A/c	1,05,200	By Partners Capital A/c: C D	60,600 44,600
	1,05,200		1,05,200

Journal Entries in the Books of New Firm

Date 1/4/14	Particulars		LF	Debit	Credit
(1)	Bank A/c Investments A/c Debtors A/c Premises A/c Machinery A/c Goodwill A/c To Sundry Creditors A/c To Bill payable A/c To Provision for Doubtful Debts A/c To A’s Capital A/c To B’s Capital A/c (Being Assets and Liabilities Taken over at Revised Values Credited to Capital of A & B)	Dr. Dr. Dr. Dr. Dr. Dr.		7,000
				9,000
				10,000
				45,000
				9,000
				12,000
					20,000
					5,000
					1,000
					39,500
					26,500
(2)	Bank A/c Investments A/c Debtors A/c Land A/c Goodwill A/c To Sundry Creditors A/c To C’s Capital A/c To D’s Capital A/c (Being Assets and Liabilities of the Firm C and D taken over at Revised Value)	Dr. Dr. Dr. Dr. Dr.		8,000
				7,200
				8,000
				80,000
				12,000
					10,000
					60,600
					44,600
(3)	A Current A/c B’s Current A/c To A’s Capital A/c	Dr. Dr.		500
				13,500
					500

	To B’s Capital A/c (Being shortfall in amount of fixed capital debited to current A/cs)			13,500
(4)	C’s Capital A/c D’s Capital A/c To C’s Current A/c To D’s Current A/c (Being Amount Excess over the Fixed Capital Transferred to Respective Current A/cs)	Dr. Dr.	20,600
			4,600
				20,600
				4,600

Balance Sheet of New Firm as on 1st April 2014

Liabilities		Assets
Sundry Creditors	30,000	Bank Investment Debtors Less: Provision Machinery Premises Land Goodwill Partner’s Current A/cs: A B		15,000
Bills Payable	5,000			16,200
Partner’s Capital A/cs:			18,000
A	40,000		1,000	17,000
B	40,000
C	40,000			9,000
D	40,000			45,000
				80,000
Partner’s Current A/c				24,000
C	20,600		500
D	4,600		13,500	14,000
	2,20,200			2,20,000

Notes: 1. Loss on investment is to be net out of investment fluctuation fund. The remaining fund is treated as accumulated profit.

2. Since there is no sufficient bank balance in the firm C and D. Liabilities not taken over have been transferred to capital accounts. Alternatively, it can be presumed that they have brought in the required money to pay off the liabilities. Of course, the net effect would be the same.

3. Trade liabilities include liabilities on account of goods. Bank overdraft is a liability but not trade liability. Similarly, salary outstanding, loans, etc., are all liabilities but not trade liabilities.

Working Note: For adjustment of capital:

	A	B	C	D
Opening Balance	39,500	26,500	60,600	44,600
Surplus/Deficit	+500	+13,500	–20,600	–4,600
Required	40,000	40,000	40,000	40,000

Q6) J and K were in partnership sharing profits and losses in the ration of 3:2. They were dealing in retail merchandising in the trade name of J & Co. Their balance sheet as on December 31, 2014 was as follows:

Liabilities			Assets
Sundry Creditors		15,000	Cash at bank	4,000
Capital A/cs:			Sundry debtors	10,000
J	75,000		Stock-in-trade	16,000
K	60,000	1,35,000	Furniture and fixtures	15,000
			Delivery van Godown Land and building	25,000 5,000 75,000
		1,50,000		1,50,000

M and N were in partnership in the trade name of M & Co. sharing profit and losses in the ratio of 2:3 doing the same business as J & Co. The balance sheet of M & Co. As on December 31, 2014 was as follows:

Liabilities			Assets
Sundry Creditors		6,000	Sundry Debtors	8,000
Bank Overdraft		4,000	Stock in Trade	18,000
Capital A/cs:			Furniture and Fixtures	10,000
M	40,000		Delivery van	20,000
N	60,000	1,00,000	Land and Building	54,000
		1,10,000		1,10,000

It was mutually agreed by both the firms to amalgamate their businesses as on January 1, 2015 in trade name of F & Co. On the following terms and conditions:

	J & Co.	M & Co.
Stock-in-trade	18,000	14,000
Delivery Van	20,000	18,000
Furniture and Fixture	12,000	–
Land and Building	90,000	–
Goodwill	20,000	15,000

(1) F & Co. should take over the assets of the two firms, as detailed below:

(2) It was mutually agreed that F & Co., was not to take over the furniture and fittings and land and building of M & Co. However, these assets were sold at 72,000 in cash on January 1, 2015.

(3) K took over the possession of the godown of his firm for a consideration of 4,000.

(4) It was decided to make provision for doubtful debts at 10% on the sundry debtors and also make a provision for discount at 5% on sundry creditors of both the firms.

(5) All the partners unanimously agreed to have a new profit-loss sharing ratio as follows: J – 2: K – 1: M – 1: and N – 2.

(6) The capital of F & Co. was fixed at 2,40,000 and the partners were required to adjust their capitals in tune with their profit-loss sharing ratio, by making necessary adjustments in cash.

You are required to:

(i) Pass journal entries for opening new books.

(ii) Prepare Realisation accounts of the old partnership firms.

A6) Ledger Accounts in the Books of J & Co.

Dr. Realisation A/c Cr.

Particulars		Amount	Particulars	Amount
To Sundry Assets			By Sundry Creditors	15,000
Sundry Debtors		10,000	By K’s Capital A/c (Godown)	4,000
Stock		16,000	By F & C. A/c (Purchase	1,58,750
			Consideration)
Furniture and Fixtures		15,000
Delivery Van		25,000
Godown		5,000
Land and Building		75,000
Cash		4,000
To Profit Realisation Transferred to:
J’s Capital A/c	16,650
K’s Capital A/c	11,100	27,750
	11,100	1,77,750		1,77,750

Dr Realisation A/c Cr.

Liabilities		Assets
To Sundry Assets		By Sundry Creditors	6,000
Stock	18,000	By Bank Overdraft	4,000
Sundry Debtors	8,000	By F and Co. A/c (Purchase Consideration)	1,16,500
Furniture and fixture	10,000
Delivery Van Land and Building To Profit on Realisation Transferred to M’s Capital A/c 6,600 N’s Capital A/c 9,900	20,000 54,000 16,500
	1,26,500		1,26,500

Q7) R and S are partners of Don & Co. Sharing profits and losses in the ratio of 3:1 T and U are partners of John & Co. Sharing profits and losses in the ratio of 2:1. On 31st July 2014, they decided to amalgamate and form a new firm M/s Don & John where in R, S, T and U were to be the partners sharing profits and losses in the ratio of 4:2:3:2. Their balance sheets on that date were as under:

Liabilities	Don & Co.	John & Co.	Assets	Don & Co.	John & Co.
Creditors	16,000		Cash	10,000	5,000
Ram aur Shyam	40,000	–	Bank	15,000	20,000
Don & Co.	–	50,000	Debtors:
Others	60,000	58,000	John & Co.	50,000	–
Reserves Capital	25,000	50,000	Ram aur Shyam	–	30,000
R	1,20,000	–	Others	80,000	1,00,000
S	80,000	–
T	–	1,00,000	Stock	60,000	70,000
U	–	50,000	Furniture & Office
			Equipment	10,000	3,000
			Vehicles	–	80,000
			Plant & Machinery	75,000	–
			Building	25,000
	3,25,000	3,08,000		3,25,000	3,08,000

The amalgamated firm took over the business on the following terms:

(a) Goodwill of Don & Co. Was worth 60,000; Goodwill of John & Co. Was 50,000. However goodwill account was not to be opened in the books of accounts. The adjustments for the change in the profit share are to be recorded through the capital accounts of the partners.

(b) Buildings, plant and machinery and vehicles are taken over at 50,000. 90,000 and 1,00,000 respectively.

(c) Provision for doubtful debts has to be carried forward at 4,000 in the case of Don & Co. and 5,000 in the case of John & Co.

You are asked to:

Compute the adjustment for goodwill

2. Pass the entries in the books of Don and John assuming that excess capitals with reference to share in profits are to be transferred to loan accounts.

A7) Computation of Adjustment for Goodwill

	Old Share in Goodwill		New Share in Goodwill		Change

R	3/4 of 60,000	45,000	4/11	40,000	(–)5,000
S	1/4 of 60,000	15,000	2/11	20,000	(+)5,000
T	2/3 of 50,000	33,333	3/11	30,000	(-)3,333
U	1/3 of 50,000	16,667	2/11	20,000	(+)3,333
		1,10,000		1,10,000

Journal Entries M/s Don and John

Date 31/7/14		LF	Debit	Credit
(1)	Cash A/c Dr. Bank A/c Dr. John & Co’s A/c Dr. Debtors A/c Dr. Stock A/c Dr. Furniture and office equipment A/c Dr. Plant and machinery A/c Dr. Building A/c Dr. To Provision for doubtful debts A/c To Ram aur Shyam A/c To Creditors A/c To B capital A/c To S capital A/c (Being the assets and liabilities of Don & Co. Taken over)		10,000
			15,000
			50,000
			80,000
			60,000
			10,000
			90,000
			50,000
				4,000
				40,000
				60,000
				1,65,750
				95,250
			3,65,000	3,65,000

Note: Working to arrive at capital balance:

Particulars
Balance as per balance sheet		1,20,000	80,000
Reserves		18,750	6,250
Profit on revaluation:
Buildings	25,000
Plant	15,000
Provision for doubtful debts	40,000 4,000
Revaluation Profit (3:1)	36,000	27,000	9,000
		1,65,750	95,250

Note: Working for capitals.

Particulars
Balance as per Balance Sheet Reserves Profit on Revaluation Vehicles 20,000 Less: Provision for Doubtful Debts 5,000 Revaluation Profit (2:1) 15,000	1,00,000 33,333 10,000	50,000 16,667 5,000
	1,43,333	71,667

We now record adjusting entries for goodwill and writing off the inter-firm debts.

Date		LF	Debit	Credit
(3)	S’s capital A/c Dr. U’s capital A/c Dr. To R’s Capital A/c To T’s Capital A/c (Being the purchase of goodwill by the former partners from the latter partners on amalgamation of the two firms)		5,000 3,333	5,000 3,333
(4)	Don & Co.’s A/c Dr. To John & Co’s A/c (Being the closure of the above 2 accounts by transferring the balances on amalgamation of the 2 firms)		50,000	50,000

Working for Balance Sheet

(1) The debit balance in Ram aur Shyam’s account (vide entry No. 2 will be adjusted against the credit balance in Ram aur Shyam’s account (vide entry no. 1). Ram aur Shyam will appear as net creditor for only 10,000 ( 40,000 – 30,000)

(2) Capital balances:

Share	R 4/11	S 2/11	T 3/11	U 2/11
Entry no. 1 2	1,65,750 —	95,250 —	— 1,43,333	— 71,667
3 Capitals Required on the Basis of U’s Capital which is the Lowest	(+) 5,000 1,70,750 1,36,668	(–) 5,000 90,250 68,334	(+) 3,333 1,46,666 1,02,501	(–)3,333 68,334 68,334
Transfer to Loan	34,082	21,916	44,165	Nil

Date	Particulars	LF	Debit	Credit
(5)	B’s Capital A/c Dr. S’s Capital A/c Dr. T’s Capital A/c Dr. To R’s Loan A/c To S’s Loan A/c To T’s Loan A/c (Being Excess Capital with Reference to Share in Profits Transferred to Loan Accounts)		34,082 21,916 44,165	34,082 21,916 44,165

M/s Don and John Balance Sheet as on 1st August 2014

Liabilities			Assets
Ram aur Shyam		10,000	Cash	15,000
Other Creditors		1,18,000	Bank	35,000
Loans			Debtors 1,80,000
B	34,082		Less: Provision for Doubtful Debts 9,000	1,71,000
S	21,916
T	44,165	1,00,163	Stock	1,30,000
Capitals:			Furniture and Office Equipment	13,000
B	1,36,668		Vehicles	1,00,000
S	68,334		Plant and Machinery	90,000
T	1,02,501		Building	50,000
T	68,334	3,75,837
		6,04,000		6,04,000

Q8) A and Co. (consisting of A and B as partners sharing profits and losses in the ratio of 2:1) and C & Co. (consisting of A and B as partners) decide to amalgamate their businesses with effect from December 31, 2014 on which date their respective Balance Sheets as under:

Liabilities	A & Co.	C & Co.	Assets	A & Co.	C & Co.
Capitals			Goodwill	–	12,000
A	10,000	25,000	Motor Vehicle	10,000	8,000
B	10,000	–	Furniture	2,000	5,000
C	–	5,000	Stock	8,000	25,000
Investment Fluctuation			Debtors	8,000	2,000
Reserves	–	2,000	Investments:
Sundry Creditors	8,000	15,000	Shares in C Ltd.	–	–
Bills Payable	2,000	13,000	Cash at Bank	2,000	8,000
	30,000	60,000		30,000	60,000

Note: (1) Included in the above Balance Sheet was an amount of 1,000 owing by A & Co. To C & Co.

On the above date the investment held by C & Co. In C Ltd. Were realized at 5,500. These had earlier been fully written off.

Goodwill of A & Co. Was to be valued at Nil.

Show journal entries in the books of the new amalgamated firm to record the opening entries and prepare the Balance Sheet of the new firm.

A8) Journal Entries in Books of the Amalgamated Firm

Date 31/12/14	Particulars	LF	Debit	Credit
	Motor Vehicles A/c Dr. Furniture A/c Dr. Stock A/c Dr. Debtors A/c Dr. Bank A/c Dr. To Bills Payable A/c To Sundry Creditors A/c (8,000–1,000) To Sundry Debtors A/c (inter firm debts) To A’s Capital A/c To B’s Capital A/c (Being the Assets and Liabilities of M/s × & Co. Taken over)		10,000
			2,000
			8,000
			8,000
			2,000
				2,000
				7,000
				1,000
				10,000
				10,000
	Goodwill A/c Dr. Motor Vehicles A/c Dr. Furniture A/c Dr. Stock A/c Dr. Debtors A/c Dr. Debtors A/c (inter-firm debts) Dr. Bank A/c Dr. To Sundry Creditors A/c To Bills payable A/c To A’s capital A/c To C’s Capital (Being the assets and liabilities of M/s Z & Co. Taken over)		30,000	30,000
			12,000
			8,000
			5,000
			25,000
			1,000
			1,000
			13,500
				15,000
				13,000
				*28,750
				*8,750
			65,500	65,500

	X	Z
Capitals as per Balance Sheet	25,000	5,000
Investment Fluctuation Reserve	1,000	1,000
Profit re: Z Ltd. Shares	2,750	2,750
	28,750	8,750

Balance Sheet of the Amalgamated Firm as on 31 st December 2014

Liabilities			Assets
Capital Accounts:			Goodwill	12,000
A	38,750		Furniture	7,000
B	10,000		Motor Vehicles	18,000
C	8,750	57,500	Stock	33,000
Sundry Creditors		22,000	Debtors	9,000
Bills Payable		15,000	Bank	15,500
		94,500		94,500

Q9) M/s. A & Co. have A & B as partners decided to amalgamate with M/s. C & Co. having C and D partners on the following terms and conditions:

(i) The new firm M/s. MO & Co. To consider Goodwill of both the firms at 12,000 each.

(ii) The new firm to take over investments at 10% depreciation; Debtors and Furniture at book value; Premises at 53,000; Land at 66,800; Machinery at 9,000 and such cash which remained after discharge of partners’ loans by the respective old firms before amalgamation.

(iii) The new firm also assumed other liabilities of old firms.

The following were the Balance Sheets of both the firms on the date amalgamation:

Liabilities	A & Co.	C & Co.	Particulars	A & Co.	C & Co.
Creditors	20,000	10,000	Cash	15,000	12,000
Bills Payable	5,000	–	Investments	10,000	8,000
Loans: A	8,000	–	Debtors	9,000	4,000
C	–	10,000	Furniture	12,000	6,000
Reserves	10,000	4,000	Premises	35,000
Capital A	35,000	–	Land	–	50,000
B	22,000	–	Machinery	14,000
C	–	36,000	Goodwill	5,000
D	–	20,000
	1,00,000	80,000		1,00,000	80,000

Included in Debtors of A & Co. Was 3,000 receivable from X & Co. and included in creditors of C & Co. was 5,000 payable to X & Co.

Prepare following ledger Accounts in each case:

Realisation Account.

Partners’ Capital Accounts.

New Firm Account; and also prepare the Balance Sheet of the New Firm.

A9)

In the Books of A & Co.

Dr. Realisation A/c Cr.

Particulars		Particulars
To Sundry Assets: Cash (15,000 – 8,000) 7,000 Investment 10,000 Debtors 9,000 Furniture 12,000 Premises 35,000 Machinery 14,000 Goodwill 5,000 To Profit on Realisation to: M 9,500 N 9,500	92,000	By Sundry Liabilities: Creditors 20,000 Bills Payables 5,000 By MO & Co. A/c (Purchase Consideration)	25,000 86,000
	19,000
	1,11,000		1,11,000

In the Books of C & Co.

Dr. Realisation A/c Cr.

Particulars		Particulars
To Sundry Assets:		By Sundry Liabilities: Creditors By MO & Co. A/c (Purchase Consideration)
Cash (12000 – 10,000) 2,000			10,000
Investment 8,000
Debtors 4,000			88,000
Furniture 6,000
Land 50,000	70,000
To Profit on Realisation to:
C 14,000
D 14,000	28,000
	98,000		98,000

Partner’s Capital A/cs

Particulars	A	B	Particulars	A	B
To MO & Co. A/c	49,500	36,500	By Balance b/d	35,000	22,000
			By Reserves A/c	5,000	5,000
			By Realisation A/c	9,500	9,500
	49,500	36,500		49,500	36,500

Dr. MO & Co. A/c Cr.

Particulars		Particulars
To Realisation A/c	86,000	By M’s Capital A/c By N’s Capital A/c	49,500 36,500
	86,000		86,000

Partner’s Capital A/c

Dr Cr.

Particulars	C	D	Particulars	C	D
To MO & Co. A/c	52,000	36,000	By Balance b/c	36,000	20,000
			By Reserves A/c	2,000	2,000
			By Realisation A/c	14,000	14,000
	52,000	36,000		52,000	36,000

Dr. MO & Co. A/c Cr.

Particulars		Particulars
To Realisation A/c	88,000	By C’s Capital A/c By D’s Capital A/c	52,000 36,000
	88,000		88,000

MO & Co. Balance Sheet as at 31-12-2014

Liabilities			Assets
Capital Accounts:			Fixed Assets:
A	49,500		Goodwill	24,000
B	36,500		Land	66,800
C	52,000		Premises	53,000
D 36,000		1,74,000	Plant and Machinery	9,000
			Furniture	18,000
Current Liabilities:			Investments	16,200
Sundry Creditors (30,000 – 3,000)		27,000	Current Assets:
Bills Payable		5,000	Debtors (13,000 – 3,000)	10,000
			Cash in Hand	9,000
		2,06,000		2,06,000

Note: Since X & Co. Becomes both debtor and creditors, its debits are set off against credit

Q10) Raj and Rohan are two sole traders. Their Balance Sheets as on 1st January, 2014 are given below:

Raj’s Balance Sheet as at 1st January, 2014

Liabilities		Assets
Sundry Creditors Bank Overdraft Capital Account	10,000 5,000 15,000	Plant and Machinery Stock in Trade Sundry Debtors	7,500 10,000 12,500
	30,000		30,000

Rohan’s Balance Sheet as at 1st January, 2014

Liabilities		Assets
Sundry Creditors	8,500	Plant and Machinery	10,500
Capital Account	20,000	Stock in Trade	5,000
		Sundry Debtors	11,000
		Cash at Bank	2,000
	28,500		28,500

They agree to amalgamate their business as on 1st January, 2014. The following revaluations were to be made:

(1) Plant and Machinery were to be reduced by 10%

(2) Stock in Trade was to be reduced in case of Raj by 20% and in case of Rohan by 10%.

(3) A reserve of 2½% is to be raised against Sundry Debtors.

(4) Each partner is to be credited with Goodwill of 5,000.

(5) The bank overdraft of Raj is to be paid off by him.

Included in debtors of Raj is 2,000 due from Rohan and the same amount is included in creditors of Rohan.

You are required to give the journal entries for recording the above transactions in the books of Raj and Rohan. Give also the amalgamated balance sheet of the New Firm as on 1st January, 2014.

A10)

Journal Entries in the Books of Raj

Date 1/1/14	Particulars		LF	Debit	Credit
(1)	Realisation A/c	Dr.		30,000
	To Plant and Machinery A/c				7,500
	To Stock in Trade A/c To Stock in Debtors A/c (Being assets transferred to Realisation account)				10,000 12,500
(2)	Sundry Creditors A/c To Realisation A/c (Being liabilities transferred to realization account)	Dr.		10,000	10,000
(3)	M/s Raj and Rohan A/c To Realisation A/c (Being purchase consideration due)	Dr.		21,937	21,937
(4)	Realisation Raj To Raj Capital A/c (Being profit on realizations)	Dr.		1,937	1,937
(5)	Bank Overdraft A/c To Raj Capital A/c (Being bank overdraft taken over by Raj personally)	Dr.		5,000	5,000
(6)	Raj Capital A/c To M/s Raj and Rohan A/c (Being capital account settled)	Dr.		21,937	21,937

Journal Entries in the Books of Rohan

Date	Particulars		LF	Debit	Credit
(1)	Realisation A/c To Plant and Machinery A/c To Stock in Trade A/c To Sundry Debtors A/c To Cash at Bank A/c (Being assets transferred to realizations account)	Dr.		28,500
					10,500
					5,000
					11,000
					2,000
(2)	Sundry Creditors A/c To Realisation A/c (Being liabilities transferred to realizations account)	Dr.		8,500	8,500
(3)	M/s Raj and Rohan A/c To Realisation A/c (Being purchase consideration due)	Dr.		23,175	23,175
(4)	Realisation A/c To Rohan Capital A/c	Dr.		3,175

	(Being profit on realizations)			3,175
(5)	Rohan Capital A/c Dr. To M/s Raj and Rohan A/c (Being capital account settled)		23,175	23,175

M/s. Raj and Rohan Balance Sheet as at 1-1-2014

Liabilities			Assets
Capital Accounts:			Fixed Assets: Goodwill Plant and Machinery Current Assets Stock Debtors Less: Provision for Bad Debts Cash at Bank	21,500 (538)
Raj	19,987				10,000
Rohan	25,175				16,200
		45,162
Sundry Creditors		16,500			12,500
					20,962
					2,000
		61,662			61,662

Working Note

Particulars	Raj	Rohan
Assets:
Cash at Bank	–	2,000
Plant and Machinery (90% of book value)	6,750	9,450
Stock in Trade (Agreed value)	8,000	4,500
Debtors (book value)	10,500	11,000
Goodwill (agree value)	5,000	5,000
	30,250	31,950
Less: Liabilities:
RDD (2½% of debtors)	263	275
Creditors (book value)	10,000	6,500
	10,263	6,775
Purchase Consideration	19,987	25,175

Internal Reconstruction

Q1) What is Reconstruction? State the purpose of it.

A1) Rebuilding is the process of restructuring a company in terms of law, operations, ownership and other structures by revaluing assets and revaluing liabilities. It refers to the transfer of the business of a company or multiple companies to a new company. Therefore, this means that the old company will be liquidated, and therefore shareholders agree to acquire shares of equal value in the new company. The financial statements do not reflect the true and fair position of the business, as if the company has suffered losses over the years, it will need to be rebuilt and the net worth will be higher than the actual net worth.

In other words, "reconstruction" is the dissolution of an existing company and the transfer of its assets and liabilities to a new company established for the purpose of business succession or succession of the existing company. Shareholders of the existing company will become shareholders of the new company. The business content and shareholders of the new company are almost the same as those of the old company.

Purpose of Reconstruction

The main purposes of the reconstruction are:

Q2) What are the types of Reconstruction?

A2) Types of Reconstruction

The company can be rebuilt in one of two ways. these are:

External Restructuring: If a company suffers losses over the past few years and faces a financial crisis, it can sell its business to another newly established company. In fact, the new company was established to take over the assets and liabilities of the old company. This process is called external reconstruction. In other words, external reconstruction means selling the business of an existing company to another company established for that purpose. In the external reconstruction, one company will be liquidated and the other will be newly established. The liquidated company is called the "Vendor Company" and the new company is called the "Purchasing Company". The shareholders of the selling company are the shareholders of the purchasing company.

Internal Restructuring: Internal restructuring refers to the internal restructuring of a company's financial structure. It is also called a restructuring that allows an existing company to survive. In general, equity capital is reduced to amortize the company's past cumulative losses.

Q3) Write the significance of Internal Reconstruction.

A3) Internal reconstruction is done by the company in the following cases:

Conditions and regulations regarding Internal Reconstruction

1. Approval by Articles of Incorporation: The company must be approved by the Articles of Incorporation to appeal for capital reduction. The Articles of Incorporation contain all the details of the company's internal affairs and refer to provisions that include how to reduce capital.

2. Passing a special resolution: The company must pass a special resolution before appealing for a capital reduction. Special resolutions will only be passed if a majority of stakeholders agree to internal reconstruction. This special resolution must be signed by the arbitral tribunal and deposited with a registrar appointed under the Companies Act 2013.

3. Court Permission: The company must obtain the court or the court's legitimate permission before starting the capital reduction process. The court will only grant permission if the company is fair and is satisfied with the positive consent of all stakeholders.

4. Borrowing Payment: According to Article 66 of the Companies Act 2013, a company must repay all the amount deposited and its interest before reducing its capital.

5. Creditor Consent: The company that reduces the capital requires the written consent of the creditor. The court requires the company to secure the interests of the dissenting creditors. The company obtains the court's permission after the court determines that the reduction of capital does not harm the interests of the creditors.

6. Announcement: The company must announce according to the instructions of the tribe for a capital reduction. The company must also explain the justification.

Q4) Distinguish between Internal and External Reconstruction.

A4) The main difference between internal reconstruction and external reconstruction

Due to the difference between internal and external reconstructions, the subsequent points are relevant:

Internal restructuring is often defined as a restructuring of a corporation without liquidating an existing company and establishing a replacement one. On the opposite hand, external restructuring may be a sort of corporate restructuring that liquidates an existing company and creates a replacement company so as to continue the business of the prevailing company.

A new company won't substitute the interior reorganization. Conversely, a replacement company are going to be established for external reconstruction and therefore the business of the prevailing company is going to be appropriated.

Internal restructuring reduces the company's capital, and external liabilities like bond holders and creditors waive their debt at a reduction. On the opposite hand, external reconstruction doesn't reduce the company's capital.

Internal reconstruction requires court approval and court confirmation, as a discount in capital stock can affect shareholder rights. On the contrary, external reconstruction doesn't require such approval.

If the corporate goes through an indoor rebuilding process, the record created after the method will include the term "And Reduced". In contrast, within the case of external reconstruction, no particular term is employed on the record.

In internal reconstruction, no new company are going to be established, so there'll be no transfer of assets or liabilities.

Basis For Comparison	Internal Reconstruction	External Reconstruction
Meaning	Internal reconstruction refers to the method of corporate restructuring wherein existing company is not liquidated to form a new one.	External reconstruction is one in which the company undergoing reconstruction is liquidated to take over the business of existing company.
New company	No new company is formed.	New company is formed.
Use of specific terms in Balance Sheet	Balance Sheet of the company contains "And Reduced".	No specific terms are used in the Balance sheet.
Capital reduction	Capital is reduced and the external liability holders waive their claims.	No reduction in the capital
Approval of court	Approval of court is must.	No approval of court is required.
Transfer of Assets and Liabilities	No such transfer takes place.	Assets and liabilities of existing company are transferred to the new company.

Q5) What are the various methods of Internal Reconstruction?

A5) There are various methods of internal reconstruction, shown:

1. Alteration of Share Capital

If approved by the Articles of Incorporation, the limited liability company may change (change) the capital clause of the Articles of Incorporation. There are various ways to change stock capital:

 Increase in stock capital due to issuance of new shares

2. Reverse Stock Split

Consolidation refers to the conversion of shares with a smaller par value to shares with a larger par value.

Example: His 5000 shares of Rs. 10 pieces can be integrated into a stock of 500 rupees. 100 each.

3. Stock Split

Subdivision is the conversion of high par value stocks to low par value stocks.

Example: 5000 shares of Rs. Each 100 can be split into 50000 shares of Rs. 10 each.

4. Equity of Shares

The company can convert its shares into shares. Stocks can be fractions that are not possible in the case of stocks. Central government approval is required to convert shares into shares.

5. Transfer of Shares

Reconstruction plans may require shareholders to relinquish some of their ownership. Such a waiver may be issued prior to immediate cancellation or to satisfy some of the company's creditors.

6. Cancellation of Unissued Shares

If the company cancels unissued shares, it does not need to pass an accounting entry. The authorized share capital of the company will be the amount of unissued shares currently cancelled.

Q6) Write short note on Stock Split and Consolidation.

A6) If approved by the Articles of Incorporation, the company may, by passing a normal resolution, decide at the General Assembly to split or consolidate the shares into an amount less or higher than the amount stipulated in the Articles of Incorporation. The ratio of paid-in to unpaid shares will continue to be the same as for the original shares.

Notifications identifying changes must be submitted to the Registrar within 30 days of the changes.

For example, a company with capital of 10,000,000 split into 10,000 shares and paid 75 for every 100 shares decides to split 100 shares of 100 shares into 10 shares to recognize capital. each. The resulting entry passed in such a case is —

		Dr.	Cr.

Equity Share Capital ( 100) A/c	Dr.	7,50,000	7,50,000
To Equity Share Capital ( 10) A/c
(Being the sub-division of 10,000 shares of 100 each with 75 paid up thereon into 1,00,000 shares of 10 each with 7.50 paid up thereon as per the resolution of shareholders passed in the General Meeting held on...)

Similar entries are passed when consolidating a smaller amount of stock into a larger amount of stock.

Q7) How are Fully Paid-In Shares converted to Shares?

A7) According to Article 61 of the Companies Act 2013, a company may convert fully paid-in shares into shares and convert the shares back into shares. If approved by the Articles of Incorporation, the company may, by passing a normal resolution, convert the fully paid shares into shares and reconvert the shares into shares at a general meeting of shareholders. Stock is the integration of equity capital into one of his units that can be split into aliquot parts. A stock is a fully paid bundle of stock that, for convenience, can be split into any amount and transferred to any fraction and subdivision, regardless of the original par value of the stock. He cannot have one share of equity capital, but he can transfer any amount of shares. However, in reality, the company limits the transfer of shares to multiples, such as 100 times his. Companies can convert fully paid shares into shares. When the company converts its shares into shares, the bookkeeping items only record the transfer from the stock capital account to the stock account. Another share registration will be initiated where the details of the member's holdings are entered and the annual returns change accordingly.

Example

C Ltd. split the authorized capital of 5,000,000 into 100 shares each on March 12, 20X1, of which 4,000 were issued and paid in full. In June 220X2, the Company converted the issued shares into shares. Decided to do. However, in June 20X3, we reconverted the shares to his 10 shares and paid in full.

Pass an entry to show how equity capital appears in the balance sheet notes, such as 31-12-20X1, 31-12-20X2, 31-12-20X3.

Journal Entries

20X2
June	Equity Share Capital A/c	Dr	4,00,000
	To Equity Stock A/c			4,00,000
	(Being conversion of 4,000 fully paid Equity Shares of 100 into 4,00,000 Equity Stock as per resolution in general meeting dated…)
20X3
June	Equity Stock A/c	Dr	4,00,000
	To Equity Share Capital A/c			4,00,000
	(Being re-conversion of 4,00,000 Equity Stock into 40,000 shares of 10 fully paid Equity Shares as per resolution in General Meeting dated...)

Q8) What does changes in Shareholder Rights mean?

A8) Under Article 48 of the Companies Act 2013, if a company issues different types of shares and grants such shares different rights or privileges, the rights relating to dividends, voting rights, etc. may be changed in any way. I will. This is done by the written consent of his three or more owners of her quarter of the issued shares of that type, or by a special resolution adopted at another meeting of the owners of the issued shares of that type. I will. (a) If the company's memorandum or articles of incorporation include provisions for such variations. Or (b) if there is no such provision in the Memorandum of Understanding or the Articles of Incorporation, or if such changes are not prohibited by the terms and conditions of issuance of shares of that class, provided that changes made by a shareholder of one class are the rights of another shareholder. When Impacting Regarding the type of shareholders, the consent of three-quarters of the other types of shareholders shall also be obtained and the provisions of this section shall apply to such changes.

For example, a company may (a) Change the dividend rate of preferred stock or (b) Convert cumulative preferred stock to non-cumulative preferred stock without changing the amount of equity capital by going through the following journal: can.

Q9) Explain the process of Reduction of Stock Capital.

A9) Article 66 of the Companies Act 2013 provides procedures for reducing stock capital. Subject to court confirmation of the company's application, the company may, by special resolution, reduce its share capital in the following ways:

In general, the reduction of equity capital occurs when a company suffers continuous losses over a long period of time and is not truly reflected in its assets. In such cases, the capital reduction scheme must amortize the portion of the capital that has already been lost.

This reduction is a shareholder sacrifice, and the amount of the reduction or sacrifice is credited to a new account called a capital reduction account (or restructuring account). The accounting process is as follows.

(a) Shareholders' liability to extinguish or diminish their liability for the accrued amount of shares held by the shareholders

The shareholders are not required to pay the accrued amount of their shares in the future. For example, a company decides to reduce 10 per share from 10 to 7.5 by cancelling the unpaid amount of 2.5 per share. The entry in this case looks like this:

Share Capital (Partly Paid-Up) Account Dr. ( 7.5 X No. of Shares)

To Share Capital (Fully Paid-up) Account ( 7.5 X No. of Shares)

(b) If the paid-in excess capital is refunded: If the company is unable to secure profitability, it may decide to refund the paid-in capital as excess to shareholders. For example, if a company with 10 fully paid shares each decides to refund 2 shares per share to make 8 fully paid shares, the entry would be:

Share Capital Account ( 10) Dr. ( 10 X No. of Shares)

To Share Capital Account ( 8) ( 8 X No. of Shares)

To Sundry Shareholders Account ( 2 X No. of Shares) Sundry Shareholders Account Dr. ( 2 X No. of Shares)

To Bank Account ( 2 X No. of Shares)

Share Capital Account Dr. ( 90 X No. of Shares)

To Capital Reduction Account

(90 X No. of Shares)

Q10) Draw the Proforma of Capital Reduction Account

A10) Capital Reduction A/c

Particulars	Rs.	Particulars	Rs.
To P & L A/c (Loss written off) To Goodwill A/c (Written off) To Preliminary expenses A/c (Written off) To Discount on Shares/Debentures (Written off) To Assets A/c (Decrease in value) To Bank A/c (payment of unrecorded liability) To Bank A/c (payment of Reconstruction Expenses) To Bank A/c (Refund of Directors Fees) To Capital Reserve (Balancing figure)	XX XX XX XX XX XX XX XX XX	By Share Capital A/c (Amount of reduction) By Debentures A/c (Amount of Reduction) By Creditors A/c (Amount of Sacrifice) By Assets A/c (Increase in value) By Bank A/c (sate of unrecorded assets)	XX XX XX XX XX
	XXX		XXX

Practical Problems:

Q1) Following is the Balance sheet of M/s. Careful Ltd. as on 31st March, 2010.

Liabilities	Rs.	Assets	Rs.
50,000 – 8%		Goodwill Freehold Property Leasehold Property Plant & Machinery Furniture Stock Debtors Preliminary Exp. Profit & Loss A/c	1,00,000 1,50,000 2,40,000 3,00,000 1,00,000 50,000 1,00,000 9,000 2,07,000
Cumulative
Preference Shares of
Rs.10/- each.	5,00,000
40,000 – Equity Shares of Rs.10/- each.	4,00,000

Security Premium	8,000
9% Debentures	1,00,000
Accrued Debenture
interest	6,000
Sundry Creditors	1,00,000
Bank Overdraft	1,42,000
	12,56,000		12,56,000

Note –

Preference dividend was in arrears for 3 years.

There was a contingent liability of Rs.30,000/- for workmen compensation.

Following scheme of reconstruction was approved & implemented.

The Preference shares were reduced to Rs.8/- per share fully paid & Equity Shares to Rs.3/- per share fully paid.

One new Equity share of Rs.10/- each was issued of every Rs.50/- gross preference dividend in arrears.

After reduction, both classes of shares were consolidated into Rs.10/- shares.

The balance of Securities Premium was utilized.

Plant & Machinery was written of down to Rs.2,50,000/-.

Furniture was sold to Rs.75,000/-

Preliminary expenses debit balance in Profit & Loss A/c, debt of Rs.25,000/- & obsolete stock Rs.18,000/- were to be written off.

Contingent liability for which no provision has been made was settled at Rs.15,000/-. However, the amount of Rs.11,000/- was recovered from insurance company.

Debenture holders agreed to Forgo principal amount by Rs.50,000/- & accrued debenture interest in full.

Pass journal entries. Prepare capital reduction account & Balance sheet after reconstruction.

A1)

Journal of Careful Ltd.

Date	Particulars	Debit (Rs.)	Credit (Rs.)
1.	8% Preference Share Cap. A/c.....Dr. (50,000X10) To 8% Preference Share Capital A/c (50,000X8) To Capital Reduction A/c (50,000X2) (Being reduction in 8% Preference Capital.)	5,00,000	4,00,000 1,00,000
2.	8% Preference Share Capital A/c….Dr. (40,000X8) To 8% Preference Share Capital A/c (32,000X10) (Being consolidation of 8% Preference Shares.)	3,20,000	3,20,000
3.	Equity Share Capital A/c.........Dr. (40,000X10) To Equity Share Capital A/c (40,000X3) To Capital Reduction A/c (40,000X7) (Being reduction in Equity Share Capital)	4,00,000	1,20,000 2,80,000
4.	Equity Share Capital A/c.........Dr. (40,000X3) To Equity Share Capital A/c (12,000X10) (Being consolidation of Equity Shares.)	1,20,000	1,20,000
5.	Capital Reduction A/c............Dr. To Equity Share Capital A/c [(8%X5,00,000X 3)/50] (Being arrears of Preference dividend paid by issue of Equity shares.)	24,000	24,000
6.	Security Premium A/c............Dr. To Capital Reduction A/c (Being Security Premium used.)	8,000	8,000
7.	Bank A/c.....................Dr. Capital Reduction A/c...........Dr. To Furniture A/c (Being sale of Furniture at a loss of Rs.25,000/-)	75,000 25,000	1,00,000
8.	Capital Reduction A/c...........Dr. To Bank A/c (Being payment of contingent liability.)	15,000	15,000
9.	Bank A/c.....................Dr. To Capital Reduction A/c (Being recovery of claim from insurance company.)	11,000	11,000
10.	9% Debentures A/c.............Dr. Accrued Debenture interest A/c...Dr. To Capital Reduction A/c (Being sacrifice made by debenture holders)	50,000 6,000	56,000
11.	Capital Reduction A/c...........Dr. To Plant & Machinery A/c (3,00,000 – 2,50,000) To Preliminary Expenses A/c To Profit & Loss A/c To Sundry Debtors A/c To Stock A/c To Capital Reserve A/c (Being losses & Assets written off.)	3,91,000	50,000 9,000 2,07,000 25,000 18,000 82,000

Capital Reduction Account

Dr. Cr.

Particulars	Amt.	Particulars	Amt.
To Equity Share Cap. A/c	24,000	By 8% Pref. Share Cap. A/c By Equity Share Capital A/c By Security Premium By 9% Debentures By Accrued interest on debentures By Bank (Insurance)	1,00,000
(Preference Dividend)
To Furniture	25,000
To Plant & Machinery A/c	50,000		2,50,000
To Preliminary Expenses	9,000		8,000 50,000
To Profit & Loss A/c	2,07,000
To Sundry Debtors A/c	25,000
To Stock	18,000		6,000
To Bank	15,000		11,000
(Contingent liability)
To Capital Reserve	82,000
	4,55,000		4,55,000

Balance Sheet of Careful Ltd (AND REDUCED)

	Notes	Current Year
	Notes	(in Rs.)
EQUITY AND LIABILITIES
Shareholders Fund
Share Capital	1	5,44,000
Reserves & Surplus	2	82,000
Money Received against Warrants


Share Application Money pending allotment

Non-current Liabilities
Long Term Borrowings	3	50,000
Deferred Tax Liabilities (Net)
Other Long Term Liabilities
Long Term Provisions

Current Liabilities
Short Term Borrowings	4	71,000
Trade Payables		1,00,000
Other Current Liabilities
Short Term Provisions


Total		8,47,000

ASSETS
Non-current Assets
Fixed Assets	5
Tangible Assets		6,40,000
Intangible Assets		1,00,000
Capital Work-in-Progress
Intangible Assets under development
Non-current Investments
Deferred Tax Assets (Net)
Long Term Loans & Advances
Other Non-current Assets

Current Assets
Current Investments
Inventories		32,000
Trade Receivables		75,000
Cash and Cash Equivalents
Short Term Loans & Advances
Other Current Assets


Total		8,47,000

Schedules forming a part of Balance Sheet

Particulars	Amount Rs	Amount Rs
1. SHARE CAPITAL
Authorised Share Capital :		-
--- Equity Shares of Rs.-- each

Issued Subscribed and Paid Up Capital :
14,400 Equity Shares of Rs.10 each		1,44,000
4,00,000, 8% Preference shares of Rs 10 each		4,00,000

Total		5,44,000

2. RESERVES & SURPLUS

Capital Reserve		82,000

Total		82,000

3. LONG TERM BORROWINGS
Secured
9% Debentures(1,00,000-50,000)		50,000

Total		50,000

4. SHORT TERM BORROWINGS
Unsecured
Bank Overdraft		71,000
Total		71,000

5. FIXED ASSETS
Tangible
Freehold Property	1,50,000
Leasehold Property	2,40,000
Plant & Machinery	2,50,000	6,40,000


Intangible Assets
Goodwill		1,00,000

Total Assets		7,40,000

Q2) Following is the Balance Sheet of Shobha Ltd. as on 31st March, 2008.

Liabilities	Amt.	Assets	Amt.
Share Capital		Goodwill	3,00,000
1,50,000 Equity Shares		Land & Building	2,40,000
of Rs.5/- each fully paid	7,50,000	Equipment	2,10,000
		Sundry Debtors	2,00,970
5,000 6% Preference Shares of Rs.100/- each fully paid	5,00,000	Stock Investment Cash at Bank	3,32,440 44,000 21,000
8% Debentures	3,00,000	Profit & Loss A/c	7,51,590
Bank Overdraft	1,70,000
Sundry Creditors	3,80,000
(including Rs.22,000 int.
on Bank Overdraft)
	21,00,000		21,00,000

Note: Preference dividend is in arrears for Five years.

Following scheme of reconstruction was approved by the court.

1) Equity Shares be reduced to Rs.150/- each of then to be consolidated into shares of Rs.10/- each.

2) 6% Preference shares be reduced to Rs.50/- each & then to be subdivided into shares of Rs.10/- each.

3) Interest accrued but not due on 8% debentures. For half year ended 31st March 2008 has not been provided in the above Balance Sheet. The debenture holders have agreed to received 30% of this interest in cash immediately & provision for the balance be made in the books of account.

4) Rs.20,000/- be paid to Preference shareholders in lieu of arrears of Preference dividend.

5) The debenture holders have also agreed to accept equal number of 9% debentures of Rs.60/- each in exchange of 8% debentures of Rs.100/- each.

6) Bank has agreed to take over 50% stock in full satisfaction of its claim including interest. The remaining stock be revalued at Rs.80,000/-.

7) Investment be sold for Rs.39,000/-.

8) Tangible Fixed assets be appreciated by 15% & provision be made for doubtful debts of Rs.18,000/-.

Give journal entries for the above scheme of reconstruction. Prepare Capital Reduction Account in the books of Shobha Ltd. & Balance sheet of the company after reconstruction.

A2)

Journal of Shobha Ltd.

Sr No	Particulars	Debit (Rs.)	Credit (Rs.)
1.	Equity Shares Capital A/c (5)......Dr. To Equity Share Capital A/c(1.50) To Capital Reduction A/c (3.50) (Being 1,50,000 Equity Shares of Rs.5/- each reduced to Rs.1.50 each.)	7,50,000	2,25,000 5,25,000
2.	Equity Share Capital A/c (1.50)....Dr. To Equity Share Capital (10) (Being 1,50,000 Equity shares of Rs.1.50 consolidated into shares of Rs.10/- each.)	2,25,000	2,25,000
3.	6% Preference Share Capital A/c (100) ..Dr. To 6% Preference Share Capital A/c (50) To Capital Reduction A/c (Being 6% Preference shares of Rs.100/- each reduced to shares of Rs.50/- each.)	5,00,000	2,50,000 2,50,000
4.	6% Preference Share Capital A/c...Dr. To 6% Preference Shares Capital A/c (Being 6% Preference shares of Rs.50/- each subdivided into shares of Rs.10/- each.)	2,50,000	2,50,000
5.	Capital Reduction A/c...........Dr. To Bank A/c To Interest on Debentures A/c (Being payment of accrued interest on debentures to the extent of 30% & provided for the balance.)	12,000	3,600 8,400
6.	Capital Reduction A/c...........Dr. To Bank A/c (Being paid to preference share holders in lieu of arrears of dividend.)	20,000	20,000
7.	8% Preferences A/c (100)........Dr. To 9% Debentures A/c (60) To Capital Reduction A/c (Being exchanged 8% debentures by 9% debentures.)	3,00,000	1,80,000 1,20,000
8.	Bank Overdraft A/c.............Dr. Sundry Creditors A/c............Dr. (Interest on Bank Overdraft) To Stock A/c To Capital Reduction A/c (Being taken over 50% of the Stock by the bank in satisfaction of bank overdraft.)	1,70,000 22,000	1,66,220 25,780
9.	Capital Reduction A/c...........Dr. To Stock A/c (Being reduction in Stock.)	86,220	86,220
10.	Bank A/c.....................Dr. Capital Reduction A/c...........Dr. To Investment A/c (Being sale of investment at a loss.)	39,000 5,000	44,000
11.	Capital Reduction A/c...........Dr. To Profit & Loss A/c To Provision for doubtful debts A/c To Capital Reserve A/c (Being written off profit & loss account debit balance, provided for reduction redemption reserve & transferred the remaining amount to Capital Reserve Account.)	8,65,040	7,51,590 18,000 95,470
12.	Land & Building A/c............Dr. Equipment A/c................Dr. To Capital Reduction A/c (Being appreciation in Land & Building & Equipment.)	36,000 31,500	67,500

Capital Reduction Account

Dr. Cr.

Particulars	Amt.	Particulars	Amt.
To Bank A/c	3,600	By Equity Share Capital A/c By 6% Preference Share Capital A/c By 8% Debentures A/c By Bank Overdraft & Creditors A/c By Land & Building A/c By Equipment’s A/c	5,25,000 2,50,000 1,20,000 25,780 36,000 31,500
To Int. on debentures	8,400
To Bank A/c	20,000
To Stock A/c	86,220
To Investment A/c	5,000
To Profit & Loss A/c	7,51,590
To Provision for doubtful
debts.	18,000
To Capital Reserve	95,470
	9,88,280		9,88,280

Balance Sheet of Shobha Ltd (AND REDUCED)

	Notes	Current Year
	Notes	(in Rs.)
EQUITY AND LIABILITIES
Shareholders Fund
Share Capital	1	4,75,000
Reserves & Surplus	2	95,470
Money Received against Warrants


Share Application Money pending allotment

Non-current Liabilities
Long Term Borrowings	3	1,80,000
Deferred Tax Liabilities (Net)
Other Long Term Liabilities
Long Term Provisions

Current Liabilities
Short Term Borrowings
Trade Payables		3,58,000
Other Current Liabilities	4	8,400
Short Term Provisions


Total		11,16,870

ASSETS
Non-current Assets
Fixed Assets	5
Tangible Assets		5,17,500
Intangible Assets		3,00,000
Capital Work-in-Progress
Intangible Assets under development
Non-current Investments
Deferred Tax Assets (Net)
Long Term Loans & Advances
Other Non-current Assets

Current Assets
Current Investments
Inventories		80,000
Trade Receivables	6	1,82,970
Cash and Cash Equivalents		36,400
Short Term Loans & Advances
Other Current Assets


Total		11,16,870

Schedules forming a part of Balance Sheet

Particulars	Amount Rs	Amount Rs
1. SHARE CAPITAL
Authorised Share Capital :		-
--- Equity Shares of Rs.-- each

Issued Subscribed and Paid Up Capital :
22,500 Equity Shares of Rs.10 each		2,25,000
25,000, 6% Preference shares of Rs 10 each		2,50,000

Total		4,75,000

2. RESERVES & SURPLUS

Capital Reserve		95,470

Total		95,470

3. LONG TERM BORROWINGS
Secured
30,000, 9% Debentures of Rs 60 each		1,80,000

Total		1,80,000

4. OTHER CURRENT LIABILITIES
Interest payable on debentures		8,400

Total		8,400

5. FIXED ASSETS
Tangible
Land & Building	2,76,000
Equipments	2,41,500	5,17,500

Intangible Assets
Goodwill		3,00,000
Total Assets		8,17,500

6. TRADE RECEIVABLES
Sundry Debtors		2,00,970
Less: Provision for Doubtful Debts		(18,000)
		1,82,970

Q3) Following is the Balance sheet of Punjani Ltd. as on 31st March, 2010.

Liabilities	Amt.	Assets	Amt.
16,000 12% Preference	1,60,000 70,000 1,80,000 1,70,000 2,80,000 21,500 3,50,000	Goodwill	90,000
Shares of Rs.10/- each fully paid up		Patents Land & Building	50,000 1,50,000
1,40,000 10% Preference shares of Rs.10/-, Rs.5/- per		Plant & Machinery Furniture Investment	3,00,000 35,000 85,000
share paid up		Sundry Debtors	3,00,000
		Bills Receivables	1,20,000
18,000 Equity Share of		Bank	30,000
Rs.10/- each fully paid up		Profit & Loss A/c	71,500
12% Debenture of
Rs.100/- each
11% Debentures of
Rs.100/- each
Interest due on
debenture
Sundry Creditors
	12,31,500		12,31,500

The following scheme of reconstruction was submitted & approved by the court.

1) 12% Preference Shares of the Rs.10/- each fully paid were reduced to 13% Preference Shares of Rs.10/- each, Rs.6/- per share paid up.

2) 10% Preference share of Rs.10/- each, Rs.5/- per share paid up were reduced to 13% Preference shares of Rs.10/- each, Rs.4/- per share paid up.

3) Equity Shares of Rs.10/- each fully paid were reduced to the denomination of Rs.7/- each fully paid.

4) 11% Debenture holders agreed to accept 44,800 Equity Shares of Rs.5/- each in full settlement of their claims.

5) Debentures holders agreed to Forgo the interest due on debentures.

6) Sundry Creditors agreed to Forgo 20% of their claims.

7) The company recovered as damages as sum of Rs.60,000/- which was not recorded in the books.

8) Cost of reconstruction was paid Rs.3,000/-.

9) Assets are to be revalued as under : Land & Buildings Rs.2,05,000/-, Plant & Machinery Rs.2,50,000/-, Furniture Rs.10,000/-, Investment Rs.1,05,000/-, Sundry Debtors Rs.2,77,000/-.

10) All intangible assets & accumulated losses are to be written off.

You are required to –

i) Pass journal entries in the books of Punjani Ltd.

ii) Prepare Capital Reduction Account & Balance Sheet after reconstruction. A3.

Journal of Punjani Ltd.

Date	Particulars	Debit (Rs.)	Credit (Rs.)
1.	12% Preference Share Capital A/c..Dr. To 13% Preference Share Capital A/c To Capital Reduction A/c (Being reduction in 12% Preference Capital.)	1,60,000	96,000 64,000
2.	10% Preference Share Capital A/c..Dr. To 13% Preference Share Capital A/c To Capital Reduction A/c (Being reduction in 13% Preference Capital.)	70,000	56,000 14,000
3.	Equity Share Capital A/c.........Dr. To Equity Share Capital A/c To Capital Reduction A/c (Being reduction in Equity Share Capital.)	1,80,000	1,26,000 54,000
4.	11% Debenture A/c............Dr. To Equity Share Capital A/c To Capital Reduction A/c (Being reduction in debentures.)	2,80,000	2,24,000 56,000
5.	Interest due on Debenture A/c.....Dr. To Capital Reduction A/c (Being interest dues on debentures cancelled.)	21,500	21,500
6.	Creditors A/c.................Dr. To Capital Reduction A/c (Being Creditors dues reduced.)	70,000	70,000
7.	Bank A/c.....................Dr. To Capital Reduction A/c (Being damages recovered.)	60,000	60,000
8.	Capital Reduction A/c...........Dr. To Bank A/c (Being costs of reconstruction paid.)	3,000	3,000
9.	Land & Building A/c............Dr. Investment A/c................Dr. To Capital Reduction A/c (Being increase in valuations.)	55,000 20,000	75,000
10.	Capital Reduction A/c...........Dr. To Plant & Machinery A/c To Furniture A/c To Sundry Debtors A/c To Goodwill A/c To Patents A/c To Profit & Loss A/c To Capital Reserve A/c	5,01,500	50,000 25,000 23,000 90,000 50,000 71,500 1,02,000

Capital Reduction Account

Dr. Cr.

Particulars	Amt.	Particulars	Amt.
To Bank A/c	3,000	By 12% Preference Share Capital A/c By 10% Preference Share Capital A/c By Equity Share Capital A/c By 11% Debenture A/c By Interest due on debentures By Sundry Creditors By Bank A/c By Land & Building A/c By Investment A/c
To Plant & Machinery	50,000		64,000
To Furniture A/c	25,000
To Sundry Debtors A/c	23,000		14,000
To Goodwill A/c	90,000
To Patents A/c	50,000		54,000
To Profit & Loss A/c	71,500		56,000
To Capital Reserve A/c	10,200
			21,500
			70,000
			60,000
			55,000
			20,000
	4,14,500		4,14,500

Balance Sheet of Punjani Ltd (AND REDUCED)

	Notes	Current Year
	Notes	(in Rs.)
EQUITY AND LIABILITIES
Shareholders Fund
Share Capital	1	5,02,000
Reserves & Surplus	2	1,02,000
Money Received against Warrants


Share Application Money pending allotment

Non-current Liabilities
Long Term Borrowings	3	1,70,000
Deferred Tax Liabilities (Net)
Other Long Term Liabilities
Long Term Provisions

Current Liabilities
Short Term Borrowings
Trade Payables		2,80,000
Other Current Liabilities
Short Term Provisions


Total		10,54,000

ASSETS
Non-current Assets
Fixed Assets	4	4,65,000
Tangible Assets
Intangible Assets
Capital Work-in-Progress
Intangible Assets under development
Non-current Investments		1,05,000
Deferred Tax Assets (Net)
Long Term Loans & Advances
Other Non-current Assets

Current Assets
Current Investments
Inventories
Trade Receivables	5	3,97,000
Cash and Cash Equivalents		87,000
Short Term Loans & Advances
Other Current Assets


Total		10,54,000

Schedules forming a part of Balance Sheet

Particulars	Amount Rs	Amount Rs
1. SHARE CAPITAL
Authorised Share Capital :		-
--- Equity Shares of Rs.-- each

Issued Subscribed and Paid Up Capital :
18,000 Equity Shares of Rs.7 each		1,26,000
44,800 Equity Shares of Rs.5 each		2,24,000
16,000, 13% Preference shares of Rs 10 each, Rs 6 paid up		96,000
14,000, 13% Preference shares of Rs 10 each, Rs 4 paid up		56,000

Total		5,02,000

2. RESERVES & SURPLUS

Capital Reserve		1,02,000

Total		1,02,000

3. LONG TERM BORROWINGS
Secured
12% Debentures of Rs 100 each		1,70,000

Total		1,70,000

4. FIXED ASSETS
Tangible
Land & Building	2,05,000
Plant & Machinery	2,50,000
Furniture	10,000	4,65,000
Intangible Assets
		-
Total Assets		4,65,000

5. TRADE RECEIVABLES
Sundry Debtors		2,77,000
Bills Receivable		1,20,000
		3,97,000

Q4)

Following is the Balance sheet of Roshni Ltd. as on 31st March, 2009.

Liabilities	Amt.	Assets	Amt.
Share Capital		Fixed Assets
7,000 10% Preference		Goodwill	50,000
Share of Rs.10/- each.	7,00,000	Patents & Trade marks	30,000
40,000 Equity Shares		Building	3,20,000
of Rs.10/- each.	4,00,000	Plant & Machinery	2,80,000
		Furniture	1,20,000
Reserve & Surplus
Capital Reserve	40,000	Current Assets, Loans
		& Advances
Secured loans		Stock	1,55,000
6% Debentures of		Sundry Debtors	85,000
Rs.100/- each	2,00,000	Bank	85,000
Debentures interest		Cash	35,000
due	70,000
		Miscellaneous
Current Liabilities &		Expenditure
Provisions		Discount on
Sundry Creditors	1,40,000	debentures	35,000
		Profit & Loss A/c	3,55,000
	15,50,000		15,50,000

Note : Preference dividend is in arrears for three years. The following scheme of reconstruction was prepared & duly approved by the court.

1) The Preference Shares shall be converted into equal number of 11% Preference shares of Rs.50/- each.

2) The Equity Share shall be reduced to Rs.2/- each. However, the Face Value will remain the same.

3) 6% Debentures shall be converted into equal number of 7% debentures of Rs.85/- each. The debenture holders also agreed to waived 60% of the accrued interest.

4) Arrears of Preference dividend is to be reduced to one years dividend which is paid in cash.

5) The sundry creditors agreed to waived 40% of their claims & to accept Equity Shares for Rs.40,000/- in part settlement renewed claims.

6) The assets are to be revalued as under :

Building Rs.4,00,000/-

Plant & Machinery Rs.2,20,000/-

Furniture Rs.70,000/-

Stock Rs.1,00,000/-

Debtors Rs.70,000/-

7) Intangible assets & fictitious assets are to be written off.

Pass journal entries.

Prepare Capital Reduction Account

A4)

Journal of Roshni Ltd

Date	Particulars	Debit (Rs.)	Credit (Rs.)
1.	10% Preference Share Capital A/c..Dr. To 11% Preference Share Capital A/c To Capital Reduction A/c (Being 10% Preference shares converted into 11% Preference Shares.)	7,00,000	3,50,000 3,50,000
2.	Equity Share Capital A/c Dr. To Capital Reduction A/c (Being reduction in Equity Shares.)	3,20,000	3,20,000
3.	6% Debentures A/c Dr. To 7% Debentures A/c To Capital Reduction A/c (Being converted debentures into 7% debentures.)	2,00,000	1,70,000 30,000
4.	Debentures Interest Due A/c Dr. To Capital Reduction A/c (Being accrued interest on debentures waived.)	45,000	45,000
5.	Preference Dividend A/c Dr. To Cash / Bank A/c (Being paid on year‟s dividend.)	70,000	70,000
6.	Creditors A/c Dr. To Equity Share Capital A/c To Capital Reduction A/c (Being settled sundry creditors.)	96,000	40,000 56,000
7.	Building A/c..................Dr. To Capital Reduction A/c (Being appreciation in building.)	80,000	80,000
8.	Capital Reduction A/c...........Dr. To Discount on Debentures A/c To Profit & Loss A/c To Goodwill A/c To Patent & Trademark A/c To Preference Dividend A/c To Plant & Machinery A/c To Furniture A/c To Stock A/c To Debtors A/c To Capital Reserve A/c (Being assets/losses written off.)	8,81,000	35,000 3,55,000 50,000 30,000 70,000 60,000 50,000 55,000 15,000 1,61,000

Capital Reduction Account

Dr. Cr.

Particulars	Amt.	Particulars	Amt.
To Discount on		By 10% Preference Share Capital A/c By Equity Share Capital A/c By 6% Debentures A/c By Interest due on debentures A/c By Creditors A/c By Building A/c	3,50,000 3,20,000 30,000 45,000 56,000 80,000
debentures A/c	35,000
To Profit & Loss A/c	3,55,000
To Goodwill A/c	50,000
To Patent & Trademark
A/c	30,000
To Preference Dividend
A/c	70,000
To Plant & Machinery
A/c	60,000
To Furniture A/c	50,000
To Stock A/c	55,000
To Debtors A/c	15,000
To Capital Reserve A/c	1,61,000
	8,81,000		8,81,000

Q5)

Following is the balance sheet of Bhushan Ltd. as on 31st March, 2010.

Liabilities	Amt.	Assets	Amt.
Share Capital		Fixed Assets Premises Plant & Machinery Investment Current Assets, Loans & Advances Stock Debtors Deposits & Advance IV Miscellaneous Expenditure Publicity Campaign Expenses Profit & Loss Account
25,000 10% Preference			3,25,000
Shares of Rs.10/- each.	2,50,000		5,00,000
Equity Share of Rs.10/-
each.	4,50,000		1,50,000
Secured loans
16% Debentures of
Rs.100/- each	5,00,000		1,35,000
Current Liabilities & Provisions			1,00,000 50,000
Sundry Creditors	2,10,000
Bank Overdraft	1,30,000
Other Liability	1,10,000
			2,00,000
			1,90,000
	16,50,000		16,50,000

It is observed that the new product launched by the company has not succeeded even after three years of marketing. the management is of the opinion that the assets & liabilities are not valued correctly & also finds it difficult to raise finance.

To overcome the situation a scheme of reconstruction is prepared by the directors & approved by all authorities.

The salient features of the scheme are

1) Plant & Equipment having book value of Rs.10,000/- is obsolete. This is sold as scrap for Rs.36,000/-.

2) The auditors have pointed out that depreciation on plant is not provided to the extent Rs.30,000/-

3) Stock includes items valued Rs.50,000/- which is sold at a loss of 50%.

4) The present realizable value of investments is Rs.55,000/-.

5) Dividend on Preference Shares is in arrears for 3 years. This amount is not payable.

6) All losses & Fictitious assets are to be written off.

7) The expenses paid for forming & implementing scheme is Rs.10,000/-.

8) The paid up value of Equity Share is to be reduced to Rs.2/- per share & preference share to Rs.5/- per share. However, the face value remains unchanged.

9) The Creditors due are settled as.

• 30% immediate payment in Cash.

• 40% amount is cancelled.

• 30% paid by issue of 15% debentures.

10) Other Current liabilities includes Rs.45,000/- payable to directors towards remuneration. This liability is to be cancelled.

11) A call of Rs.3/- per share on Equity Share is made & received.

12) Bank Overdraft is paid off to the extent possible.

You are required to show :

i) Journal entries for above scheme of reconstruction.

ii) Show Bank A/c & Capital Reduction A/c

A5)

Journal In the books of Bhushan Ltd.

Date	Particulars	Debit (Rs.)	Credit (Rs.)
1.	Equity Share Capital A/c.........Dr. 10% Preference Share Capital A/c..Dr. To Capital Reduction A/c (Being reduction of Equity & Preference Share Capital.)	3,60,000 1,25,000	4,85,000
2.	Creditors A/c.................Dr. To Cash / Bank A/c (30%) To Capital Reduction A/c (40%) To 15% Debentures A/c (30%) (Being Creditors dues settled as per Scheme of reconstruction.)	2,10,000	63,000 84,000 63,000
3.	Other Liabilities A/c............Dr. To Capital Reduction A/c (Being dues to directors cancelled.)	45,000	45,000
4.	Cash / Bank A/c...............Dr. Capital Reduction A/c...........Dr. To Plant & Equipment A/c (Being sale of plant having book value of Rs.1,00,000/- for Rs.36,000/-.)	36,000 64,000	1,00,000
5.	Capital Reduction A/c...........Dr. To Plant & Equipment A/c (Being depreciation provided.)	30,000	30,000
6.	Cash / Bank A/c...............Dr. Capital Reduction A/c...........Dr. To Plant & Machinery A/c (Being sale of stock having took value of Rs.50,000/- at a loss of 50%.)	25,000 25,000	50,000
7.	Capital Reduction A/c...........Dr. To Investment A/c (Being reduction in value by Rs.95,000/-.)	95,000	95,000
8.	Capital Reduction A/c...........Dr. To Profit & Loss A/c To Publicity Campaign Expenses A/c (Being brought forward losses & fictitious assets written off as per scheme of reconstruction.)	3,90,000	1,90,000 2,00,000
9.	Capital Reduction A/c...........Dr. To Cash / Bank A/c (Being paid expenses on reconstruction.)	10,000	10,000
10.	Cash / Bank A/c (45,000X3).......Dr. To Equity Share Capital A/c (Being receipt of all money on 45,000 shares @ Rs.3/- each.)	1,35,000	1,35,000
11.	Bank Overdraft A/c.............Dr. To Cash / Bank A/c (Being balance in Cash / Bank used to pay off overdraft.)	1,23,000	1,23,000

Bank Account

Dr. Cr.

Particulars	Amt.	Particulars	Amt.
To Plant & Equipment A/c To Stock A/c To Equity Share Capital A/c	36,000 25,000 1,35,000	By Capital Reduction A/c By Sundry Creditors A/c By Bank Overdraft A/c	10,000 63,000 1,23,000
	1,96,000		1,96,000

Capital Reduction Account

Dr. Cr.

Particulars	Amt.	Particulars	Amt.
To Plant (Loss on sale)	64,000	By Equity Share Capital A/c By Preference Share Capital A/c By Creditors By Other dues (Directors)
To Plant (Depreciation)	30,000		3,60,000
To Stock	25,000
To Investment	95,000		1,25,000
To Profit & Loss A/c	1,90,000		84,000
To Publicity Expenses	2,00,000		45,000
To Cash (Exp.)	10,000
	6,14,000		6,14,000

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