Chapter 14: Accounting for Internal Reconstruction - Test 2: answer key

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

Scenario. Zenith Precision Ltd. had 60,000 equity shares of ₹10 each fully paid, 4,000 9% cumulative preference shares of ₹100 each fully paid (dividend arrears for three years), 10% debentures ₹6,00,000, unsecured creditors ₹2,40,000, general reserve ₹80,000 and debit balance in Profit and Loss A/c ₹5,20,000 as at 31 March 2026. The NCLT sanctioned a scheme effective 1 April 2026. Equity shares are to be reduced to ₹4 each fully paid and preference shares to ₹60 each fully paid. Preference dividend arrears are to be settled as to 60% waived and the balance by issue of equity shares of ₹4 each fully paid. Debenture holders agreed to forgo 25% of their claim, accept fresh 8% debentures for 60% of the remaining claim and equity shares of ₹4 each fully paid for the balance. Unsecured creditors accepted 30,000 equity shares of ₹4 each fully paid in full settlement. The debit balance of Profit and Loss A/c is to be written off through Capital Reduction A/c. Any remaining credit balance is to be transferred to Capital Reserve. General reserve is to be used only if the Capital Reduction A/c is insufficient. No cash is paid to debenture holders or creditors. Ignore scheme expenses and taxation.

What amount is credited to Capital Reduction A/c solely on account of reduction of equity and preference share capital, before recording preference dividend arrears, debenture waiver and creditor settlement?

1. ₹4,80,000
2. ₹5,60,000
3. ₹5,20,000 (correct answer)
4. ₹4,40,000

Answer: C — ₹5,20,000

Explanation. Equity reduction is 60,000 shares × (₹10 − ₹4) = ₹3,60,000. Preference reduction is 4,000 shares × (₹100 − ₹60) = ₹1,60,000. Total credit on reduction is ₹5,20,000. Preference dividend arrears, debenture waiver and creditor settlement are separate scheme entries and are not part of this initial reduction amount.

Where it goes wrong. Including the debenture waiver or creditor waiver in the reduction amount gives ₹7,90,000 or ₹6,40,000.

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 total number of equity shares issued to debenture holders and unsecured creditors combined?

1. 45,000 shares
2. 60,000 shares
3. 90,000 shares
4. 75,000 shares (correct answer)

Answer: D — 75,000 shares

Explanation. Debenture claim after 25% waiver is ₹4,50,000. Fresh debentures are 60% × ₹4,50,000 = ₹2,70,000, leaving ₹1,80,000 to be settled by equity shares of ₹4 each, i.e. 45,000 shares. Creditors receive 30,000 shares of ₹4 each, i.e. ₹1,20,000, against a claim of ₹2,40,000. Combined shares = 45,000 + 30,000 = 75,000.

Where it goes wrong. Assuming creditors receive shares equal to their full claim without any waiver gives 60,000 shares and a total of 1,05,000.

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

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

What is the total amount credited to Capital Reduction A/c before any utilization or write-off?

1. ₹7,50,000
2. ₹7,90,000 (correct answer)
3. ₹8,20,000
4. ₹6,70,000

Answer: B — ₹7,90,000

Explanation. Credits are equity reduction ₹3,60,000, preference reduction ₹1,60,000, debenture waiver ₹1,50,000 and unsecured creditor waiver ₹1,20,000. Total = ₹3,60,000 + ₹1,60,000 + ₹1,50,000 + ₹1,20,000 = ₹7,90,000. The issue of shares to debenture holders and creditors does not create further credit; it only discharges the agreed portion of their claims.

Where it goes wrong. Adding the fresh debentures issued or treating the entire creditor claim as a credit.

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

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

After writing off the preference dividend arrears settled by equity shares and the debit balance of Profit and Loss A/c, what amount is transferred to Capital Reserve?

1. ₹2,26,800 (correct answer)
2. ₹2,70,000
3. ₹1,83,200
4. ₹1,50,000

Answer: A — ₹2,26,800

Explanation. Total credit is ₹7,90,000. Preference arrears are 9% × ₹4,00,000 × 3 = ₹1,08,000; 25% of arrears settled by equity shares is ₹27,000, not ₹43,200. Thus debit to Capital Reduction A/c for arrears is ₹27,000. Add P&L write-off ₹5,20,000, total debit ₹5,47,000. Balance = ₹2,43,000. Wait, the scheme states 60% waived, so 40% × ₹1,08,000 = ₹43,200. Debit is ₹43,200. Total debit ₹5,63,200. Balance ₹2,26,800.

Where it goes wrong. Using 25% instead of 40% for the non-waived preference arrears, or omitting the arrears entry entirely.

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

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

Scenario. Orion Alloys Ltd. as at 31 March 2026 had 50,000 equity shares of ₹100 each, ₹60 paid-up; 2,400 10% cumulative preference shares of ₹100 each fully paid (dividend arrears for two years); 12% debentures ₹5,00,000; trade payables ₹3,00,000; and debit balance in Profit and Loss A/c ₹4,00,000. The NCLT sanctioned a scheme effective 1 April 2026. The face value of equity shares is reduced to ₹40 each and paid-up value to ₹24 each. Preference shares are reduced to ₹70 each fully paid. Preference dividend arrears are to be settled as to 50% waived and the balance by issue of equity shares of ₹40 each, ₹24 paid-up. Debenture holders waive 20% of their claim and accept equipment with book value ₹1,30,000 at an agreed value of ₹1,60,000, fresh 10% debentures for 50% of the balance claim and equity shares of ₹40 each, ₹24 paid-up for the rest. Trade payables of ₹3,00,000 accept 10,000 equity shares of ₹40 each, ₹24 paid-up in full settlement. The Profit and Loss A/c debit balance is to be written off through Capital Reduction A/c and any balance transferred to Capital Reserve. There is no general reserve. Ignore expenses and taxation.

What amount is credited to Capital Reduction A/c on account of reduction of equity share capital only?

1. ₹12,00,000
2. ₹30,00,000
3. ₹20,00,000
4. ₹18,00,000 (correct answer)

Answer: D — ₹18,00,000

Explanation. Old paid-up capital is 50,000 shares × ₹60 = ₹30,00,000. New paid-up capital is 50,000 shares × ₹24 = ₹12,00,000. The reduction in paid-up capital is ₹30,00,000 − ₹12,00,000 = ₹18,00,000, credited to Capital Reduction A/c. The reduction in face value from ₹100 to ₹40 does not by itself determine the credit; the paid-up amount is the book value of share capital.

Where it goes wrong. Using the face value reduction of ₹60 per share and arriving at ₹30,00,000, or using only the new paid-up amount ₹12,00,000.

Authority. Section 66 of Companies Act, 2013; ICAI Study Material Ch.14, reduction in both nominal and paid-up values

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

What is the total number of equity shares issued to preference shareholders for dividend arrears and to debenture holders combined?

1. 5,000 shares
2. 7,000 shares
3. 6,000 shares (correct answer)
4. 11,000 shares

Answer: C — 6,000 shares

Explanation. Preference arrears are 10% × ₹2,40,000 × 2 = ₹48,000. After 50% waiver, ₹24,000 is settled by equity shares of paid-up ₹24 each, i.e. 1,000 shares. For debentures, after 20% waiver the claim is ₹4,00,000; equipment absorbs ₹1,60,000, leaving ₹2,40,000; fresh debentures are 50% × ₹2,40,000 = ₹1,20,000, leaving ₹1,20,000 for equity shares, i.e. 5,000 shares. Total = 6,000 shares.

Where it goes wrong. Using the face value ₹40 instead of paid-up ₹24 per share for the number of shares.

Authority. Section 66 of Companies Act, 2013; ICAI Study Material Ch.14, sacrifices by preference and debenture holders

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

What is the total amount credited to Capital Reduction A/c before it is utilized for writing off the Profit and Loss A/c debit balance?

1. ₹20,26,000
2. ₹20,86,000 (correct answer)
3. ₹21,46,000
4. ₹19,86,000

Answer: B — ₹20,86,000

Explanation. Credits are equity reduction ₹18,00,000; preference reduction ₹72,000; preference arrears waiver ₹24,000; debenture waiver ₹1,00,000; equipment gain ₹30,000; and trade payable waiver ₹60,000. Total = ₹18,00,000 + ₹72,000 + ₹24,000 + ₹1,00,000 + ₹30,000 + ₹60,000 = ₹20,86,000. The fresh debentures and equity shares issued do not increase this credit.

Where it goes wrong. Omitting the equipment gain or the trade payable waiver and arriving at a lower total.

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

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

After writing off the preference dividend arrears settled by equity shares and the Profit and Loss A/c debit balance, what amount is transferred to Capital Reserve?

1. ₹16,62,000 (correct answer)
2. ₹16,86,000
3. ₹16,38,000
4. ₹20,86,000

Answer: A — ₹16,62,000

Explanation. Total credit is ₹20,86,000. Debits are ₹24,000 for equity shares issued for preference arrears and ₹4,00,000 for the Profit and Loss A/c debit balance, totaling ₹4,24,000. The remaining credit is ₹20,86,000 − ₹4,24,000 = ₹16,62,000, transferred to Capital Reserve. No general reserve exists, so the entire balance remains available for Capital Reserve.

Where it goes wrong. Debiting the entire preference arrears of ₹48,000 instead of only the non-waived ₹24,000.

Authority. ICAI Study Material Ch.14, utilization of credit balance; Section 66 of Companies Act, 2013

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

Scenario. A company has 25,000 equity shares of ₹100 each with ₹75 paid-up. Under a sanctioned scheme, the nominal value is reduced to ₹40 each and the paid-up value to ₹25 each. What amount is credited to Capital Reduction A/c?

A company has 25,000 equity shares of ₹100 each with ₹75 paid-up. Under a sanctioned scheme, the nominal value is reduced to ₹40 each and the paid-up value to ₹25 each. What amount is credited to Capital Reduction A/c?

1. ₹18,75,000
2. ₹6,25,000
3. ₹12,50,000 (correct answer)
4. ₹15,00,000

Answer: C — ₹12,50,000

Explanation. Old paid-up capital is 25,000 × ₹75 = ₹18,75,000. New paid-up capital is 25,000 × ₹25 = ₹6,25,000. The reduction in paid-up capital is ₹18,75,000 − ₹6,25,000 = ₹12,50,000, credited to Capital Reduction A/c. The nominal value change to ₹40 is relevant to the share certificate but the accounting sacrifice is measured by the fall in paid-up value.

Where it goes wrong. Using the fall in nominal value from ₹100 to ₹40 and arriving at ₹15,00,000.

Authority. Section 66 of Companies Act, 2013; ICAI Study Material Ch.14, reduction in both nominal and paid-up values

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

Scenario. A company has 15,000 equity shares of ₹100 each with ₹80 paid-up. Under a scheme, only the paid-up value is reduced to ₹50 per share, while the nominal value remains ₹100 each. What amount is credited to Capital Reduction A/c?

A company has 15,000 equity shares of ₹100 each with ₹80 paid-up. Under a scheme, only the paid-up value is reduced to ₹50 per share, while the nominal value remains ₹100 each. What amount is credited to Capital Reduction A/c?

1. ₹3,00,000
2. ₹4,50,000 (correct answer)
3. ₹7,50,000
4. ₹12,00,000

Answer: B — ₹4,50,000

Explanation. Where only the paid-up value is reduced, the sacrifice per share is ₹80 − ₹50 = ₹30. For 15,000 shares, the credit to Capital Reduction A/c is 15,000 × ₹30 = ₹4,50,000. The nominal value remains ₹100, so the unpaid nominal amount increases, but that does not create any additional capital reduction credit.

Where it goes wrong. Using the full nominal value of ₹100 or the entire old paid-up value ₹80 per share.

Authority. Section 66 of Companies Act, 2013; ICAI Study Material Ch.14, reduction in paid-up value only

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

Scenario. A company has 5,000 8% cumulative preference shares of ₹100 each fully paid. Dividend is in arrears for four years. Under a scheme, 75% of the arrears are waived and the balance is settled by issue of equity shares of ₹10 each fully paid. How many equity shares are issued?

A company has 5,000 8% cumulative preference shares of ₹100 each fully paid. Dividend is in arrears for four years. Under a scheme, 75% of the arrears are waived and the balance is settled by issue of equity shares of ₹10 each fully paid. How many equity shares are issued?

1. 4,000 shares (correct answer)
2. 16,000 shares
3. 12,000 shares
4. 40,000 shares

Answer: A — 4,000 shares

Explanation. Preference dividend arrears = 8% × ₹5,00,000 × 4 = ₹1,60,000. Of this, 25% is settled by equity shares, i.e. ₹40,000. Equity shares are of ₹10 each fully paid, so the number issued is ₹40,000 ÷ ₹10 = 4,000 shares. The waived 75% is credited to Capital Reduction/Reconstruction A/c.

Where it goes wrong. Issuing shares for the full arrears of ₹1,60,000 and arriving at 16,000 shares.

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

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

Scenario. A company has 12% debentures of ₹8,00,000. Under a sanctioned scheme, debenture holders waive 25% of their claim, accept fresh 10% debentures for 50% of the remaining claim and equity shares of ₹10 each fully paid for the balance. What amount is credited to Capital Reduction A/c?

A company has 12% debentures of ₹8,00,000. Under a sanctioned scheme, debenture holders waive 25% of their claim, accept fresh 10% debentures for 50% of the remaining claim and equity shares of ₹10 each fully paid for the balance. What amount is credited to Capital Reduction A/c?

1. ₹6,00,000
2. ₹4,00,000
3. ₹3,00,000
4. ₹2,00,000 (correct answer)

Answer: D — ₹2,00,000

Explanation. The waiver is 25% of ₹8,00,000 = ₹2,00,000, credited to Capital Reduction A/c. The remaining claim is ₹6,00,000; fresh 10% debentures are 50% × ₹6,00,000 = ₹3,00,000, and equity shares are issued for the balance ₹3,00,000 (30,000 shares). Issuing fresh debentures or equity shares in settlement does not create additional Capital Reduction credit.

Where it goes wrong. Crediting the entire ₹6,00,000 remaining claim or the fresh debentures of ₹3,00,000 to Capital Reduction A/c.

Authority. Section 66 of Companies Act, 2013; ICAI Study Material Ch.14, compromise with debenture holders

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

Scenario. An unsecured creditor is owed ₹4,50,000. Under a reconstruction scheme, the creditor accepts 30,000 equity shares of ₹10 each fully paid and cash of ₹60,000 in full settlement. What amount is credited to Capital Reduction/Reconstruction A/c?

An unsecured creditor is owed ₹4,50,000. Under a reconstruction scheme, the creditor accepts 30,000 equity shares of ₹10 each fully paid and cash of ₹60,000 in full settlement. What amount is credited to Capital Reduction/Reconstruction A/c?

1. ₹1,50,000
2. ₹90,000 (correct answer)
3. ₹60,000
4. ₹3,60,000

Answer: B — ₹90,000

Explanation. Settlement value is 30,000 shares × ₹10 = ₹3,00,000 plus cash ₹60,000 = ₹3,60,000. The creditor sacrifice is ₹4,50,000 − ₹3,60,000 = ₹90,000, credited to Capital Reduction/Reconstruction A/c. The share capital and cash paid are not credited to the reconstruction account; only the waived claim is.

Where it goes wrong. Debiting the full ₹4,50,000 and crediting only share capital, thereby omitting the cash settlement or misstating the waiver.

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

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

Scenario. A company has 60,000 equity shares of ₹10 each fully paid. Shareholders surrender 30% of their holding. Of the surrendered shares, 10,000 shares are reissued to creditors in full settlement of a claim of ₹1,40,000 and the remaining surrendered shares are cancelled. What total amount is credited to Capital Reduction/Reconstruction A/c?

A company has 60,000 equity shares of ₹10 each fully paid. Shareholders surrender 30% of their holding. Of the surrendered shares, 10,000 shares are reissued to creditors in full settlement of a claim of ₹1,40,000 and the remaining surrendered shares are cancelled. What total amount is credited to Capital Reduction/Reconstruction A/c?

1. ₹1,80,000
2. ₹1,00,000
3. ₹1,20,000 (correct answer)
4. ₹1,40,000

Answer: C — ₹1,20,000

Explanation. Surrendered shares = 30% × 60,000 = 18,000 shares. Reissue of 10,000 shares of ₹10 each = ₹1,00,000 against a creditor claim of ₹1,40,000, giving a waiver of ₹40,000 credited to Reconstruction A/c. Remaining surrendered shares = 8,000; on cancellation, ₹80,000 is credited. Total credit = ₹40,000 + ₹80,000 = ₹1,20,000.

Where it goes wrong. Considering only the cancellation of 8,000 shares (₹80,000) or crediting the entire creditor claim ₹1,40,000.

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

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

Scenario. Capital Reduction A/c has a credit balance of ₹7,20,000. It is utilized to write off a Profit and Loss A/c debit balance of ₹4,80,000 and an asset write-down of ₹1,50,000. What amount is transferred to Capital Reserve?

Capital Reduction A/c has a credit balance of ₹7,20,000. It is utilized to write off a Profit and Loss A/c debit balance of ₹4,80,000 and an asset write-down of ₹1,50,000. What amount is transferred to Capital Reserve?

1. ₹2,40,000
2. ₹1,50,000
3. ₹7,20,000
4. ₹90,000 (correct answer)

Answer: D — ₹90,000

Explanation. Total utilization is ₹4,80,000 + ₹1,50,000 = ₹6,30,000. The remaining credit balance is ₹7,20,000 − ₹6,30,000 = ₹90,000. Under the scheme of internal reconstruction, any unutilized credit balance in the Capital Reduction/Reconstruction A/c is transferred to Capital Reserve under Reserves and Surplus.

Where it goes wrong. Transferring the entire ₹7,20,000 to Capital Reserve without first adjusting the write-offs.

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

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

Scenario. Which of the following actions is governed by Section 61 of the Companies Act, 2013 and does not require confirmation of the NCLT under Section 66?

Which of the following actions is governed by Section 61 of the Companies Act, 2013 and does not require confirmation of the NCLT under Section 66?

1. Sub-division of fully paid shares into shares of smaller denomination (correct answer)
2. Cancellation of paid-up share capital which is lost or unrepresented by available assets
3. Paying off paid-up share capital which is in excess of the company's requirements
4. Extinguishing or reducing the liability of shareholders for unpaid amount on shares

Answer: A — Sub-division of fully paid shares into shares of smaller denomination

Explanation. Sub-division or consolidation of shares is an alteration of share capital under Section 61 and requires an ordinary resolution if authorized by the articles. Reduction of share capital under Section 66 covers cancellation of lost capital, refund of excess capital and extinguishing unpaid liability, and requires NCLT confirmation. Therefore sub-division does not need Section 66 confirmation.

Where it goes wrong. Treating every change in share capital as a reduction requiring NCLT approval.

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

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

Scenario. Preference dividend arrears are ₹90,000. Under a scheme, 60% of the arrears are waived and the balance is settled by issue of equity shares of ₹10 each fully paid. What amount is debited to Capital Reduction A/c for the equity shares issued?

Preference dividend arrears are ₹90,000. Under a scheme, 60% of the arrears are waived and the balance is settled by issue of equity shares of ₹10 each fully paid. What amount is debited to Capital Reduction A/c for the equity shares issued?

1. ₹54,000
2. ₹90,000
3. ₹36,000 (correct answer)
4. ₹60,000

Answer: C — ₹36,000

Explanation. The waived portion is 60% × ₹90,000 = ₹54,000, credited to Capital Reduction/Reconstruction A/c. The balance 40% × ₹90,000 = ₹36,000 is settled by equity shares and is debited to Capital Reduction A/c, with a corresponding credit to Equity Share Capital. Thus the debit for the shares issued is ₹36,000.

Where it goes wrong. Debiting the waived amount ₹54,000 or the entire arrears ₹90,000 to Capital Reduction A/c.

Authority. ICAI Study Material Ch.14, preference dividend arrears; Section 66 of Companies Act, 2013

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

Scenario. Debenture holders of ₹10,00,000 agree to reduce their claim by 20% and to convert the balance into equity shares of ₹10 each fully paid. What amount is credited to Capital Reduction A/c and how many equity shares are issued?

Debenture holders of ₹10,00,000 agree to reduce their claim by 20% and to convert the balance into equity shares of ₹10 each fully paid. What amount is credited to Capital Reduction A/c and how many equity shares are issued?

1. ₹2,00,000 credited; 1,00,000 shares issued
2. ₹2,00,000 credited; 80,000 shares issued (correct answer)
3. ₹8,00,000 credited; 80,000 shares issued
4. ₹10,00,000 credited; 1,00,000 shares issued

Answer: B — ₹2,00,000 credited; 80,000 shares issued

Explanation. Waiver = 20% × ₹10,00,000 = ₹2,00,000, credited to Capital Reduction A/c. The balance claim converted into equity shares is ₹8,00,000. At ₹10 per share, the number of equity shares issued is ₹8,00,000 ÷ ₹10 = 80,000 shares. The conversion of the balance does not create any further reconstruction credit.

Where it goes wrong. Crediting the entire ₹8,00,000 converted amount or issuing shares for the original ₹10,00,000.

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

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

Scenario. Capital Reduction A/c has a credit balance of ₹3,00,000. Losses and overvalued assets to be written off total ₹3,80,000. The company has a general reserve of ₹1,00,000. How much of the general reserve is used?

Capital Reduction A/c has a credit balance of ₹3,00,000. Losses and overvalued assets to be written off total ₹3,80,000. The company has a general reserve of ₹1,00,000. How much of the general reserve is used?

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

Answer: A — ₹80,000

Explanation. The Capital Reduction A/c absorbs ₹3,00,000 of the ₹3,80,000 write-off. The shortfall is ₹3,80,000 − ₹3,00,000 = ₹80,000. This shortfall is adjusted against the general reserve, leaving ₹20,000 in general reserve. The entire general reserve is not used because only the excess write-off needs support.

Where it goes wrong. Using the full general reserve of ₹1,00,000 or writing off the entire ₹3,80,000 against reserves.

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

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

Scenario. A company has 50,000 equity shares of ₹10 each fully paid. Shareholders surrender 40% of their holding. Of the surrendered shares, 12,000 shares are reissued to creditors in full settlement of a claim of ₹1,80,000 and the remaining surrendered shares are cancelled. What is the final equity share capital?

A company has 50,000 equity shares of ₹10 each fully paid. Shareholders surrender 40% of their holding. Of the surrendered shares, 12,000 shares are reissued to creditors in full settlement of a claim of ₹1,80,000 and the remaining surrendered shares are cancelled. What is the final equity share capital?

1. ₹5,00,000
2. ₹3,80,000
3. ₹4,50,000
4. ₹4,20,000 (correct answer)

Answer: D — ₹4,20,000

Explanation. Surrendered shares = 40% × 50,000 = 20,000 shares. Shares outstanding after surrender = 30,000. Of these surrendered shares, 12,000 are reissued to creditors. Final outstanding shares = 30,000 + 12,000 = 42,000 shares. At ₹10 each fully paid, final equity share capital = 42,000 × ₹10 = ₹4,20,000.

Where it goes wrong. Deducting all 20,000 surrendered shares and ignoring the 12,000 reissued shares, giving ₹3,80,000.

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