Chapter 14: Accounting for Internal Reconstruction - Test 1: answer key

Question 1 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · hard

Scenario. Sterling Fabrics Ltd. is a listed textile company with accumulated losses. As at 31 March 2026, its summarised balance sheet showed: 80,000 equity shares of ₹10 each fully paid; 5,000 8% cumulative preference shares of ₹100 each fully paid; 9% debentures ₹8,00,000; trade payables ₹2,00,000; property, plant and equipment ₹7,50,000; and debit balance in Profit and Loss A/c ₹6,40,000. General reserve stood at ₹1,20,000. The NCLT sanctioned a scheme effective 1 April 2026: (i) equity shares are reduced to ₹4 each fully paid and preference shares to ₹60 each fully paid; (ii) preference dividend arrears for three years were ₹1,20,000; 75% was waived and the balance settled by issue of equity shares of ₹4 each fully paid; (iii) debenture holders took over equipment with book value ₹2,50,000 at an agreed value of ₹3,10,000 in part settlement; of the remaining debenture liability, 20% was waived and fresh 8% debentures were issued for the balance; (iv) remaining PPE was written down by ₹80,000; (v) the debit balance of Profit and Loss A/c was written off. The scheme is to be recorded through Capital Reduction A/c; general reserve is not to be applied unless specifically required. The words 'and Reduced' are to be used only if the NCLT order so directs. Ignore tax and scheme expenses.

What amount is credited to Capital Reduction A/c on account of reduction of equity and preference share capital only, before considering arrears, asset revaluation and debenture settlement?

1. ₹6,80,000 (correct answer)
2. ₹7,10,000
3. ₹8,38,000
4. ₹5,50,000

Answer: A — ₹6,80,000

Explanation. Equity reduction = 80,000 shares × (₹10 − ₹4) = ₹4,80,000. Preference reduction = 5,000 shares × (₹100 − ₹60) = ₹2,00,000. Total credit on reduction = ₹6,80,000. The arrears settlement, equipment gain and debenture waiver are separate entries and are not part of the initial reduction amount. Therefore ₹6,80,000 is correct.

Where it goes wrong. Including the debenture waiver or equipment gain in the reduction amount gives ₹8,38,000.

Authority. Section 66 of Companies Act, 2013; ICAI Study Material Ch.14, reduction of share capital

Question 2 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · medium

What is the equity share capital of Sterling Fabrics Ltd. immediately after giving effect to the reduction and issue of equity shares for preference dividend arrears?

1. ₹3,20,000
2. ₹3,50,000 (correct answer)
3. ₹3,80,000
4. ₹4,00,000

Answer: B — ₹3,50,000

Explanation. After reduction, 80,000 equity shares of ₹4 each = ₹3,20,000. Preference dividend arrears = 8% × ₹5,00,000 × 3 = ₹1,20,000. 25% of arrears = ₹30,000 is settled by issuing equity shares of ₹4 each, i.e. 7,500 shares. Revised equity capital = ₹3,20,000 + ₹30,000 = ₹3,50,000. Ignoring arrears shares gives ₹3,20,000.

Where it goes wrong. Using the old ₹10 face value or omitting the 7,500 arrears shares.

Authority. Section 66 of Companies Act, 2013; ICAI Study Material Ch.14, Capital Reduction Account

Question 3 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · hard

After all scheme entries are recorded, what amount is transferred to Capital Reserve from the Capital Reduction A/c, assuming general reserve is not applied?

1. ₹1,20,000
2. ₹30,000
3. ₹88,000 (correct answer)
4. ₹1,48,000

Answer: C — ₹88,000

Explanation. Credits: equity reduction ₹4,80,000 + preference reduction ₹2,00,000 + equipment gain ₹60,000 + debenture waiver ₹98,000 = ₹8,38,000. Debits: equity shares for arrears ₹30,000 + P&L write-off ₹6,40,000 + PPE write-down ₹80,000 = ₹7,50,000. Balance = ₹88,000, transferred to Capital Reserve. General reserve remains separate because the scheme does not require its use.

Where it goes wrong. Applying general reserve unnecessarily or omitting the equipment gain gives a different balance.

Authority. ICAI Study Material Ch.14, entries for internal reconstruction; Section 66 of Companies Act, 2013

Question 4 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · medium

What total amount is credited to Capital Reduction A/c from the debenture settlement, including the equipment gain and the waiver?

1. ₹98,000
2. ₹60,000
3. ₹3,10,000
4. ₹1,58,000 (correct answer)

Answer: D — ₹1,58,000

Explanation. Equipment gain = agreed value ₹3,10,000 − book value ₹2,50,000 = ₹60,000. Remaining liability = ₹8,00,000 − ₹3,10,000 = ₹4,90,000. Waiver = 20% × ₹4,90,000 = ₹98,000. Total credit = ₹60,000 + ₹98,000 = ₹1,58,000. Fresh debentures issued are ₹3,92,000. Applying waiver on the original ₹8,00,000 is incorrect.

Where it goes wrong. Computing 20% waiver on ₹8,00,000 instead of on the remaining liability after equipment transfer.

Authority. Section 66 of Companies Act, 2013; ICAI Study Material Ch.14, compromise and arrangement

Question 5 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · medium

Scenario. Orion Infrastructure Ltd. had 20,000 equity shares of ₹100 each fully paid, 12% debentures ₹4,00,000, trade payables ₹1,80,000, general reserve ₹60,000 and debit balance in Profit and Loss A/c ₹7,50,000 as at 31 March 2026. The NCLT sanctioned a scheme effective 1 April 2026. Each ₹100 equity share is subdivided into ten equity shares of ₹10 each fully paid. Each shareholder is to surrender 50% of the holding. Out of the surrendered shares: (i) 25,000 equity shares of ₹10 each are converted into 9% preference shares of ₹10 each fully paid and allotted to the debenture holders in full settlement of their claim of ₹4,00,000; (ii) 18,000 equity shares of ₹10 each are allotted to trade payables in full settlement of ₹1,80,000; and (iii) the remaining surrendered shares are cancelled. No cash is paid to debenture holders or trade payables. The amount credited to Capital Reduction/Reconstruction A/c from cancellation and from the debenture settlement is used to write off the debit balance of Profit and Loss A/c. Any shortfall is adjusted against the general reserve. Ignore scheme expenses and taxation.

What is the total share capital of Orion Infrastructure Ltd. immediately after the scheme is implemented?

1. ₹14,30,000 (correct answer)
2. ₹13,50,000
3. ₹15,00,000
4. ₹12,80,000

Answer: A — ₹14,30,000

Explanation. After subdivision there are 2,00,000 shares of ₹10 each. Shareholders retain 1,00,000 shares. Of the surrendered 1,00,000 shares, 25,000 become preference shares and 18,000 are issued as equity shares to trade payables. Equity outstanding = 1,00,000 + 18,000 = 1,18,000 shares × ₹10 = ₹11,80,000. Preference capital = 25,000 × ₹10 = ₹2,50,000. Total = ₹14,30,000.

Where it goes wrong. Treating all surrendered shares as cancelled or forgetting the 18,000 equity shares issued to creditors.

Authority. Section 61 of Companies Act, 2013; Section 66 of Companies Act, 2013

Question 6 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · medium

What amount is credited to Reconstruction/Capital Reduction A/c on cancellation of the unutilised surrendered shares?

1. ₹4,50,000
2. ₹5,70,000 (correct answer)
3. ₹6,00,000
4. ₹7,20,000

Answer: B — ₹5,70,000

Explanation. Surrendered shares = 50% of 2,00,000 = 1,00,000 shares. Used for preference shares = 25,000 and for trade payables = 18,000. Unutilised surrendered shares = 1,00,000 − 25,000 − 18,000 = 57,000 shares of ₹10 each. On cancellation, ₹5,70,000 is credited to Reconstruction/Capital Reduction A/c.

Where it goes wrong. Using 1,00,000 surrendered shares or 60,000 shares instead of the unutilised 57,000 shares.

Authority. ICAI Study Material Ch.14, surrender of shares; Section 66 of Companies Act, 2013

Question 7 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · hard

What is the balance in General Reserve after writing off the Profit and Loss A/c debit balance and adjusting the shortfall?

1. ₹60,000
2. Nil
3. ₹30,000 (correct answer)
4. ₹45,000

Answer: C — ₹30,000

Explanation. Total credit to Reconstruction A/c = cancellation ₹5,70,000 + debenture waiver ₹1,50,000 = ₹7,20,000. P&L debit to be written off = ₹7,50,000. Shortfall = ₹30,000. General reserve of ₹60,000 is reduced by ₹30,000, leaving ₹30,000. The debenture waiver arises because ₹4,00,000 claim is settled by 25,000 preference shares of ₹10 each, i.e. ₹2,50,000.

Where it goes wrong. Ignoring the debenture waiver and treating the whole P&L balance as adjustable against general reserve.

Authority. ICAI Study Material Ch.14, writing off accumulated losses; Section 66 of Companies Act, 2013

Question 8 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · hard

What is the total amount credited to Reconstruction/Capital Reduction A/c before it is used to write off the Profit and Loss A/c debit balance?

1. ₹5,70,000
2. ₹1,50,000
3. ₹7,50,000
4. ₹7,20,000 (correct answer)

Answer: D — ₹7,20,000

Explanation. Credit on cancellation of 57,000 unutilised surrendered shares = ₹5,70,000. Debenture holders' claim is ₹4,00,000 but they receive 25,000 preference shares of ₹10 each = ₹2,50,000; waiver = ₹1,50,000 credited to Reconstruction A/c. Total credit before write-off = ₹5,70,000 + ₹1,50,000 = ₹7,20,000. Trade payables are settled at par by 18,000 shares, so no waiver arises there.

Where it goes wrong. Adding a creditor waiver that does not exist or forgetting the debenture waiver.

Authority. ICAI Study Material Ch.14, reconstruction account; Section 66 of Companies Act, 2013

Question 9 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · medium

Scenario. A company has 12,000 equity shares of ₹100 each with ₹75 paid-up. It subdivides each share into five shares of ₹20 each and later consolidates every five such shares into one share of ₹100 each. What is the final number of shares and paid-up value per share?

A company has 12,000 equity shares of ₹100 each with ₹75 paid-up. It subdivides each share into five shares of ₹20 each and later consolidates every five such shares into one share of ₹100 each. What is the final number of shares and paid-up value per share?

1. 12,000 shares of ₹100 each, ₹75 paid-up (correct answer)
2. 60,000 shares of ₹20 each, ₹15 paid-up
3. 2,400 shares of ₹100 each, ₹75 paid-up
4. 12,000 shares of ₹100 each, ₹100 paid-up

Answer: A — 12,000 shares of ₹100 each, ₹75 paid-up

Explanation. Subdivision gives 60,000 shares of ₹20 each with paid-up ₹15 each, preserving the 75% paid-up proportion. Consolidating five ₹20 shares into one ₹100 share gives paid-up = 5 × ₹15 = ₹75. Number of shares = 60,000 ÷ 5 = 12,000. The final position is therefore the same as the original in substance.

Where it goes wrong. Assuming consolidation increases paid-up value to ₹100 or changes the number of shares incorrectly.

Authority. Section 61 of Companies Act, 2013; ICAI Study Material Ch.14, sub-division and consolidation

Question 10 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · medium

Scenario. Xenon Ltd. has 8,000 fully paid equity shares of ₹50 each. It converts them into stock and later reconverts the stock into fully paid equity shares of ₹10 each. What is the number of shares and share capital after reconversion?

Xenon Ltd. has 8,000 fully paid equity shares of ₹50 each. It converts them into stock and later reconverts the stock into fully paid equity shares of ₹10 each. What is the number of shares and share capital after reconversion?

1. 8,000 shares of ₹50 each, ₹4,00,000
2. 4,000 shares of ₹100 each, ₹4,00,000
3. 40,000 shares of ₹10 each, ₹4,00,000 (correct answer)
4. 80,000 shares of ₹5 each, ₹4,00,000

Answer: C — 40,000 shares of ₹10 each, ₹4,00,000

Explanation. Conversion into stock does not change the total capital: 8,000 × ₹50 = ₹4,00,000. On reconversion into ₹10 shares, the number is ₹4,00,000 ÷ ₹10 = 40,000 shares. The share capital remains ₹4,00,000. Stock is simply a bundle of fully paid shares and reconversion changes only the unit denomination.

Where it goes wrong. Retaining 8,000 shares or dividing by the old ₹50 face value.

Authority. Section 61 of Companies Act, 2013; ICAI Study Material Ch.14, conversion of shares into stock

Question 11 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · medium

Scenario. A company converts its 10% cumulative preference shares into 8% non-cumulative preference shares without changing the amount of share capital. Which accounting treatment is correct?

A company converts its 10% cumulative preference shares into 8% non-cumulative preference shares without changing the amount of share capital. Which accounting treatment is correct?

1. Debit Capital Reduction A/c and credit Preference Share Capital A/c
2. Pass no entry because only the dividend rate has changed
3. Debit Equity Share Capital A/c and credit Capital Reserve A/c
4. Debit old Preference Share Capital A/c and credit new Preference Share Capital A/c; no Capital Reduction A/c is opened (correct answer)

Answer: D — Debit old Preference Share Capital A/c and credit new Preference Share Capital A/c; no Capital Reduction A/c is opened

Explanation. Variation of shareholders' rights changes the rights attached to shares, such as dividend rate or cumulative/non-cumulative nature, but not the amount of capital. The old preference share capital account is debited and the new preference share capital account is credited. No sacrifice of capital arises, so no Capital Reduction/Reconstruction A/c is opened.

Where it goes wrong. Opening Capital Reduction A/c merely because the dividend rate and cumulative character have changed.

Authority. Section 48 of Companies Act, 2013; ICAI Study Material Ch.14, variation of shareholders' rights

Question 12 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · hard

Scenario. A company has 50,000 equity shares of ₹10 each with ₹6 paid-up. Under a scheme, the shares are made fully paid at ₹6 each by cancelling the unpaid liability of ₹4 per share. What amount is credited to Capital Reduction A/c?

A company has 50,000 equity shares of ₹10 each with ₹6 paid-up. Under a scheme, the shares are made fully paid at ₹6 each by cancelling the unpaid liability of ₹4 per share. What amount is credited to Capital Reduction A/c?

1. ₹5,00,000
2. ₹3,00,000
3. Nil (correct answer)
4. ₹2,00,000

Answer: C — Nil

Explanation. Where the liability on unpaid capital is extinguished or reduced, the called-up amount does not change. The existing partly paid share capital is replaced by fully paid share capital of the same paid-up amount. Hence there is no sacrifice credited to Capital Reduction A/c. The unpaid nominal amount of ₹4 per share is merely cancelled, not converted into a reconstruction credit.

Where it goes wrong. Crediting ₹2,00,000 by treating the cancelled unpaid amount as a capital reduction.

Authority. Section 66 of Companies Act, 2013; ICAI Study Material Ch.14, reduction of unpaid liability

Question 13 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · hard

Scenario. A company has 20,000 fully paid equity shares of ₹10 each. It decides to pay off ₹3 per share in cash, making the shares ₹7 fully paid. What is the balance in the Share Capital A/c after the entry?

A company has 20,000 fully paid equity shares of ₹10 each. It decides to pay off ₹3 per share in cash, making the shares ₹7 fully paid. What is the balance in the Share Capital A/c after the entry?

1. ₹2,00,000
2. ₹1,40,000 (correct answer)
3. ₹60,000
4. ₹1,80,000

Answer: B — ₹1,40,000

Explanation. The old share capital of ₹2,00,000 is debited. The new share capital is 20,000 × ₹7 = ₹1,40,000 and sundry shareholders are credited with 20,000 × ₹3 = ₹60,000, which is then paid in cash. Therefore the Share Capital A/c balance after the entry is ₹1,40,000. No Capital Reduction A/c arises in this refund case.

Where it goes wrong. Retaining ₹2,00,000 in share capital or crediting the ₹60,000 refund to Capital Reduction A/c.

Authority. Section 66 of Companies Act, 2013; ICAI Study Material Ch.14, excess paid-up capital paid off

Question 14 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · hard

Scenario. Vardhan Chemicals Ltd. has 40,000 equity shares of ₹10 each fully paid and 2,000 preference shares of ₹100 each fully paid. Under a sanctioned scheme, equity shares are reduced to ₹6 each and preference shares to ₹80 each. Scheme expenses of ₹10,000 are paid and the debit balance of Profit and Loss A/c of ₹1,50,000 is written off. What amount is transferred to Capital Reserve?

Vardhan Chemicals Ltd. has 40,000 equity shares of ₹10 each fully paid and 2,000 preference shares of ₹100 each fully paid. Under a sanctioned scheme, equity shares are reduced to ₹6 each and preference shares to ₹80 each. Scheme expenses of ₹10,000 are paid and the debit balance of Profit and Loss A/c of ₹1,50,000 is written off. What amount is transferred to Capital Reserve?

1. ₹2,00,000
2. ₹40,000 (correct answer)
3. ₹50,000
4. ₹1,90,000

Answer: B — ₹40,000

Explanation. Equity reduction = 40,000 × (₹10 − ₹6) = ₹1,60,000. Preference reduction = 2,000 × (₹100 − ₹80) = ₹40,000. Total credit = ₹2,00,000. Debit scheme expenses ₹10,000 and P&L ₹1,50,000 = ₹1,60,000. Balance = ₹40,000, transferred to Capital Reserve. Ignoring scheme expenses gives ₹50,000.

Where it goes wrong. Forgetting to debit scheme expenses to Capital Reduction A/c, yielding ₹50,000.

Authority. Section 66 of Companies Act, 2013; ICAI Study Material Ch.14, Capital Reduction Account

Question 15 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · hard

Scenario. A company has 1,00,000 equity shares of ₹10 each fully paid. Shareholders surrender 20% of their holding. Of the surrendered shares, 12,000 shares are issued to creditors in full settlement of a claim of ₹1,50,000 and the remaining surrendered shares are cancelled. What total amount is credited to Capital Reduction/Reconstruction A/c?

A company has 1,00,000 equity shares of ₹10 each fully paid. Shareholders surrender 20% of their holding. Of the surrendered shares, 12,000 shares are issued to creditors in full settlement of a claim of ₹1,50,000 and the remaining surrendered shares are cancelled. What total amount is credited to Capital Reduction/Reconstruction A/c?

1. ₹1,10,000 (correct answer)
2. ₹80,000
3. ₹30,000
4. ₹1,50,000

Answer: A — ₹1,10,000

Explanation. Surrendered shares = 20,000. Creditors receive 12,000 shares of ₹10 each = ₹1,20,000 against a claim of ₹1,50,000, giving a waiver of ₹30,000 credited to Reconstruction A/c. Unutilised surrendered shares = 20,000 − 12,000 = 8,000 shares; on cancellation ₹80,000 is credited. Total credit = ₹30,000 + ₹80,000 = ₹1,10,000.

Where it goes wrong. Considering only the cancellation amount of ₹80,000 and ignoring the creditor waiver.

Authority. ICAI Study Material Ch.14, surrender of shares; Section 66 of Companies Act, 2013

Question 16 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · medium

Scenario. Under the Companies Act, 2013, which of the following is required for a company to reduce its share capital under Section 66?

Under the Companies Act, 2013, which of the following is required for a company to reduce its share capital under Section 66?

1. An ordinary resolution and approval of the Board of Directors only
2. A special resolution and confirmation by the National Company Law Tribunal (correct answer)
3. A special resolution and approval of the Registrar of Companies only
4. A Board resolution and a creditors' meeting only

Answer: B — A special resolution and confirmation by the National Company Law Tribunal

Explanation. Section 66 permits reduction of share capital subject to confirmation by the Tribunal on an application by the company. The company must pass a special resolution and follow the prescribed procedure, including considering creditors' interests. An ordinary resolution or only ROC approval is insufficient. NCLT confirmation is the key legal safeguard for reduction of capital.

Where it goes wrong. Confusing reduction of capital with alteration of share capital under Section 61, which needs an ordinary resolution.

Authority. Section 66 of Companies Act, 2013

Question 17 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · hard

Scenario. Which statement about internal reconstruction and external reconstruction is correct?

Which statement about internal reconstruction and external reconstruction is correct?

1. Internal reconstruction always requires liquidation of the existing company.
2. External reconstruction is governed by Section 66 of the Companies Act, 2013.
3. Internal reconstruction may avoid liquidation, but a reduction of capital requires NCLT confirmation. (correct answer)
4. External reconstruction does not involve formation of a new company.

Answer: C — Internal reconstruction may avoid liquidation, but a reduction of capital requires NCLT confirmation.

Explanation. Internal reconstruction reorganises the same company without liquidation, but if capital is reduced, Section 66 requires NCLT confirmation. External reconstruction involves transfer to another company and is not governed by Section 66; it is regulated by provisions such as Section 232 and AS 14. Thus statement (c) is correct, while the others reverse the legal position.

Where it goes wrong. Treating external reconstruction as a Section 66 capital reduction or assuming internal reconstruction always liquidates the company.

Authority. Section 66 of Companies Act, 2013; Section 232 of Companies Act, 2013; AS 14

Question 18 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · hard

Scenario. In the balance sheet of a company that has undergone internal reconstruction, which disclosure practice is correct?

In the balance sheet of a company that has undergone internal reconstruction, which disclosure practice is correct?

1. The words 'and Reduced' are added only if the NCLT so orders; fixed asset amounts written off under the scheme are disclosed for five years. (correct answer)
2. The words 'and Reduced' are mandatory in every internal reconstruction; fixed asset write-offs are disclosed for three years.
3. No disclosure of fixed asset write-offs is required, and the name change is automatic.
4. The words 'and Reduced' are added only if the ROC orders; fixed asset write-offs are disclosed for ten years.

Answer: A — The words 'and Reduced' are added only if the NCLT so orders; fixed asset amounts written off under the scheme are disclosed for five years.

Explanation. After reconstruction, the words 'and Reduced' are used only where the court or NCLT order so directs. For fixed assets, the amount written off under the scheme must be disclosed for five years. These presentation requirements ensure users can see the effect of the reconstruction on asset carrying amounts and the company's legal name.

Where it goes wrong. Making 'and Reduced' automatic or disclosing fixed asset write-offs for the wrong number of years.

Authority. ICAI Study Material Ch.14, presentation after reconstruction; Schedule III Division I

Question 19 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · hard

Scenario. Which of the following methods of internal reconstruction does not require opening a Capital Reduction/Reconstruction A/c?

Which of the following methods of internal reconstruction does not require opening a Capital Reduction/Reconstruction A/c?

1. Reduction of share capital and surrender of shares
2. Compromise with creditors and surrender of shares
3. Conversion of shares into stock and reduction of share capital
4. Sub-division of shares and variation of shareholders' rights (correct answer)

Answer: D — Sub-division of shares and variation of shareholders' rights

Explanation. Sub-division or consolidation of shares and variation of shareholders' rights do not involve any sacrifice of capital or reduction in liabilities. They merely change denomination or rights, so no Capital Reduction/Reconstruction A/c is opened. Reduction of capital, compromise and surrender of shares generally involve sacrifice and therefore use the reconstruction account.

Where it goes wrong. Assuming every internal reconstruction method requires a Capital Reduction A/c.

Authority. ICAI Study Material Ch.14, entries in case of internal reconstruction; Section 61 of Companies Act, 2013; Section 48 of Companies Act, 2013

Question 20 · 2 marks · Chapter 14: Accounting for Internal Reconstruction · hard

Scenario. A creditor is owed ₹5,00,000. Under a sanctioned reconstruction scheme, the creditor accepts 40,000 equity shares of ₹10 each fully paid and cash of ₹50,000 in full settlement. What amount is credited to Capital Reduction/Reconstruction A/c?

A creditor is owed ₹5,00,000. Under a sanctioned reconstruction scheme, the creditor accepts 40,000 equity shares of ₹10 each fully paid and cash of ₹50,000 in full settlement. What amount is credited to Capital Reduction/Reconstruction A/c?

1. ₹1,00,000
2. ₹4,50,000
3. ₹5,00,000
4. ₹50,000 (correct answer)

Answer: D — ₹50,000

Explanation. Claim settled = 40,000 shares × ₹10 = ₹4,00,000 plus cash ₹50,000 = ₹4,50,000. Sacrifice by the creditor = ₹5,00,000 − ₹4,50,000 = ₹50,000. This sacrifice is credited to Capital Reduction/Reconstruction A/c. Crediting ₹5,00,000 would ignore the shares and cash given, while ₹1,00,000 wrongly treats only the shares as settlement.

Where it goes wrong. Debiting the full claim and crediting only share capital, thereby ignoring the cash settlement or the actual sacrifice.

Authority. ICAI Study Material Ch.14, compromise/arrangements; Section 66 of Companies Act, 2013