Chapter 14: Accounting for Internal Reconstruction - Test 3: answer key

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

Scenario. Sterling Garments Ltd. as at 31 March 2026 had 1,00,000 equity shares of ₹10 each fully paid, 5,000 8% preference shares of ₹100 each fully paid, 9% debentures ₹6,00,000, trade payables ₹2,00,000 and general reserve ₹1,00,000. Its assets comprised property, plant and equipment (PPE) ₹14,30,000, inventory ₹2,50,000, patents ₹1,20,000, goodwill ₹80,000, preliminary expenses ₹40,000, discount on issue of shares ₹30,000 and debit balance in Profit and Loss A/c ₹4,50,000. The NCLT sanctioned a scheme effective 1 April 2026. Equity shares are reduced to ₹4 each fully paid and preference shares to ₹60 each fully paid. Debenture holders waive 20% of their claim and accept fresh 10% debentures for the balance. Trade payables accept 20,000 equity shares of ₹4 each fully paid in full settlement. PPE is written down by ₹1,50,000 and inventory by ₹50,000. Patents, goodwill, preliminary expenses, discount on issue and the Profit and Loss A/c debit balance are to be written off through Capital Reduction A/c. Any remaining balance in Capital Reduction A/c is transferred to Capital Reserve. The NCLT order directs that 'and Reduced' be added to the company's name. Ignore taxation and scheme expenses.

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

1. ₹10,40,000 (correct answer)
2. ₹9,20,000
3. ₹10,80,000
4. ₹9,60,000

Answer: A — ₹10,40,000

Explanation. Equity reduction is 1,00,000 × (₹10 − ₹4) = ₹6,00,000. Preference reduction is 5,000 × (₹100 − ₹60) = ₹2,00,000. Debenture waiver is 20% × ₹6,00,000 = ₹1,20,000. Trade payable waiver is ₹2,00,000 − (20,000 shares × ₹4) = ₹1,20,000. Total credit = ₹6,00,000 + ₹2,00,000 + ₹1,20,000 + ₹1,20,000 = ₹10,40,000.

Where it goes wrong. Omitting the trade payable waiver or using the full creditor claim instead of the shares issued.

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

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

After writing off all fictitious assets, overvalued assets and the Profit and Loss A/c debit balance, what amount is transferred to Capital Reserve?

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

Answer: B — ₹1,20,000

Explanation. Total credit is ₹10,40,000. Utilisation is PPE ₹1,50,000 + inventory ₹50,000 + patents ₹1,20,000 + goodwill ₹80,000 + preliminary expenses ₹40,000 + discount on issue ₹30,000 + P&L debit ₹4,50,000 = ₹9,20,000. Balance transferred to Capital Reserve = ₹10,40,000 − ₹9,20,000 = ₹1,20,000.

Where it goes wrong. Forgetting to write off discount on issue or preliminary expenses, which changes the balance.

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

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

What is the carrying amount of property, plant and equipment in the post-reconstruction balance sheet?

1. ₹14,30,000
2. ₹11,50,000
3. ₹12,80,000 (correct answer)
4. ₹13,00,000

Answer: C — ₹12,80,000

Explanation. Original PPE is ₹14,30,000. The scheme writes it down by ₹1,50,000. The post-reconstruction carrying amount is ₹14,30,000 − ₹1,50,000 = ₹12,80,000. The write-down is debited to Capital Reduction A/c and not to Profit and Loss A/c.

Where it goes wrong. Using the original PPE figure or deducting the entire Capital Reduction balance from PPE.

Authority. ICAI Study Material Ch.14, writing down fixed assets; Schedule III Division I

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

What is the total of assets in the post-reconstruction balance sheet of Sterling Garments Ltd.?

1. ₹13,60,000
2. ₹15,20,000
3. ₹14,00,000
4. ₹14,80,000 (correct answer)

Answer: D — ₹14,80,000

Explanation. After reconstruction, PPE is ₹12,80,000 and inventory is ₹2,00,000. All fictitious assets and the P&L debit balance are written off. Total assets = ₹12,80,000 + ₹2,00,000 = ₹14,80,000. This equals the post-reconstruction liabilities: equity ₹4,80,000, preference ₹3,00,000, debentures ₹4,80,000, general reserve ₹1,00,000 and capital reserve ₹1,20,000.

Where it goes wrong. Including written-off assets such as patents or goodwill in total assets.

Authority. Schedule III Division I; ICAI Study Material Ch.14, post-reconstruction balance sheet

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

Scenario. Zenith Technologies Pvt Ltd. as at 31 March 2026 had 50,000 equity shares of ₹10 each fully paid, 2,000 10% preference shares of ₹100 each fully paid, 12% debentures ₹3,00,000, trade payables ₹1,00,000 and general reserve ₹50,000. Its assets were PPE ₹5,20,000, inventory ₹1,50,000, patents ₹60,000, trademarks ₹40,000, preliminary expenses ₹20,000, discount on issue of shares ₹10,000 and debit balance in Profit and Loss A/c ₹3,50,000. A scheme sanctioned by the NCLT effective 1 April 2026 provides: equity shares are reduced to ₹3 each fully paid and preference shares to ₹40 each fully paid; debenture holders waive 25% of their claim and accept fresh 9% debentures for the balance; trade payables accept 5,000 equity shares of ₹3 each fully paid in full settlement; PPE is written down by ₹80,000 and inventory by ₹30,000; patents, trademarks, preliminary expenses, discount on issue and the Profit and Loss A/c debit balance are written off through Capital Reduction A/c; any surplus in Capital Reduction A/c is transferred to Capital Reserve. The NCLT order permits the suffix 'and Reduced'. Ignore taxation and scheme expenses.

What is the total amount credited to Capital Reduction A/c before utilization?

1. ₹6,30,000 (correct answer)
2. ₹5,90,000
3. ₹6,70,000
4. ₹5,50,000

Answer: A — ₹6,30,000

Explanation. Equity reduction = 50,000 × (₹10 − ₹3) = ₹3,50,000. Preference reduction = 2,000 × (₹100 − ₹40) = ₹1,20,000. Debenture waiver = 25% × ₹3,00,000 = ₹75,000. Trade payable waiver = ₹1,00,000 − (5,000 × ₹3) = ₹85,000. Total = ₹3,50,000 + ₹1,20,000 + ₹75,000 + ₹85,000 = ₹6,30,000.

Where it goes wrong. Omitting the trade payable waiver or computing it on the original liability without deducting shares issued.

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

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

What amount is transferred to Capital Reserve after writing off all losses and overvalued assets?

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

Answer: B — ₹40,000

Explanation. Total credit is ₹6,30,000. Utilisation is PPE ₹80,000 + inventory ₹30,000 + patents ₹60,000 + trademarks ₹40,000 + preliminary expenses ₹20,000 + discount on issue ₹10,000 + P&L debit ₹3,50,000 = ₹5,90,000. Surplus transferred to Capital Reserve = ₹6,30,000 − ₹5,90,000 = ₹40,000.

Where it goes wrong. Forgetting to write off trademarks or discount on issue, which changes the surplus.

Authority. ICAI Study Material Ch.14, transfer of surplus to Capital Reserve; Section 66 of Companies Act, 2013

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

What is the total of assets in the post-reconstruction balance sheet of Zenith Technologies Pvt Ltd.?

1. ₹5,20,000
2. ₹5,80,000
3. ₹5,60,000 (correct answer)
4. ₹6,00,000

Answer: C — ₹5,60,000

Explanation. Post-reconstruction PPE = ₹5,20,000 − ₹80,000 = ₹4,40,000. Post-reconstruction inventory = ₹1,50,000 − ₹30,000 = ₹1,20,000. All other assets are written off. Total assets = ₹4,40,000 + ₹1,20,000 = ₹5,60,000. This matches post-reconstruction liabilities of ₹5,60,000.

Where it goes wrong. Including written-off patents or trademarks in total assets.

Authority. Schedule III Division I; ICAI Study Material Ch.14, post-reconstruction balance sheet

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

Which statement is correct regarding the suffix 'and Reduced' in the name of Zenith Technologies Pvt Ltd. after reconstruction?

1. It must be added in all internal reconstructions.
2. It is never added to the company's name.
3. It is added only if the Registrar of Companies orders it.
4. It is added only if the NCLT order permits it. (correct answer)

Answer: D — It is added only if the NCLT order permits it.

Explanation. The words 'and Reduced' are added after the company's name only when the court or NCLT order so directs. They are not automatic in every internal reconstruction. The suffix informs users that the company has undergone a reduction of capital under the sanctioned scheme.

Where it goes wrong. Assuming 'and Reduced' is mandatory for every internal reconstruction or requires ROC approval.

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

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

Scenario. A company has Capital Reduction credit of ₹5,00,000. It writes off Profit and Loss A/c debit balance ₹3,00,000, preliminary expenses ₹50,000 and patents ₹80,000. What is the balance transferred to Capital Reserve?

A company has Capital Reduction credit of ₹5,00,000. It writes off Profit and Loss A/c debit balance ₹3,00,000, preliminary expenses ₹50,000 and patents ₹80,000. What is the balance transferred to Capital Reserve?

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

Answer: A — ₹70,000

Explanation. Total write-off = ₹3,00,000 + ₹50,000 + ₹80,000 = ₹4,30,000. Balance in Capital Reduction A/c = ₹5,00,000 − ₹4,30,000 = ₹70,000. This balance is transferred to Capital Reserve under Reserves and Surplus.

Where it goes wrong. Adding the write-offs incorrectly or omitting patents, yielding ₹1,20,000 or ₹1,50,000.

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

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

Scenario. Capital Reduction A/c has a credit balance of ₹4,00,000. The company has a Profit and Loss A/c debit balance of ₹2,50,000, goodwill of ₹60,000, and PPE overvalued by ₹1,00,000. After writing off the fictitious assets, how much is available to write down PPE?

Capital Reduction A/c has a credit balance of ₹4,00,000. The company has a Profit and Loss A/c debit balance of ₹2,50,000, goodwill of ₹60,000, and PPE overvalued by ₹1,00,000. After writing off the fictitious assets, how much is available to write down PPE?

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

Answer: B — ₹90,000

Explanation. Fictitious assets to be written off first are P&L debit ₹2,50,000 and goodwill ₹60,000, totaling ₹3,10,000. Balance available in Capital Reduction A/c = ₹4,00,000 − ₹3,10,000 = ₹90,000. This is the amount available to write down PPE, though the required write-down is ₹1,00,000, leaving a shortfall of ₹10,000.

Where it goes wrong. Writing down PPE first or ignoring goodwill, which changes the available balance.

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

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

Scenario. A company has 10,000 equity shares of ₹10 each fully paid reduced to ₹5 each fully paid, and 1,000 10% preference shares of ₹100 each fully paid reduced to ₹80 each fully paid. What is the credit to Capital Reduction A/c from share reduction?

A company has 10,000 equity shares of ₹10 each fully paid reduced to ₹5 each fully paid, and 1,000 10% preference shares of ₹100 each fully paid reduced to ₹80 each fully paid. What is the credit to Capital Reduction A/c from share reduction?

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

Answer: C — ₹70,000

Explanation. Equity reduction = 10,000 × (₹10 − ₹5) = ₹50,000. Preference reduction = 1,000 × (₹100 − ₹80) = ₹20,000. Total credit to Capital Reduction A/c = ₹50,000 + ₹20,000 = ₹70,000. The credit represents the sacrifice by shareholders.

Where it goes wrong. Using the new paid-up amounts or computing only one class of shares.

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

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

Scenario. A company writes off ₹80,000 from property, plant and equipment under a scheme of internal reconstruction. For how many years must this amount be disclosed in the balance sheet?

A company writes off ₹80,000 from property, plant and equipment under a scheme of internal reconstruction. For how many years must this amount be disclosed in the balance sheet?

1. 3 years
2. 7 years
3. 10 years
4. 5 years (correct answer)

Answer: D — 5 years

Explanation. Where fixed assets are written off under a scheme of reconstruction, the amount written off must be disclosed for five years. This allows users to understand the effect of the reconstruction on the carrying amount of fixed assets. The disclosure is made in the notes to the balance sheet.

Where it goes wrong. Disclosing for three years or ten years instead of the prescribed five years.

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

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

Scenario. Capital Reduction A/c has a balance of ₹60,000 after writing off all losses and overvalued assets. Where is this balance transferred?

Capital Reduction A/c has a balance of ₹60,000 after writing off all losses and overvalued assets. Where is this balance transferred?

1. Capital Reserve (correct answer)
2. General Reserve
3. Profit and Loss A/c
4. Share Capital

Answer: A — Capital Reserve

Explanation. Any unutilized credit balance in the Capital Reduction/Reconstruction A/c after writing off losses and overvalued assets is transferred to Capital Reserve under Reserves and Surplus. It is not transferred to General Reserve, Profit and Loss A/c or Share Capital.

Where it goes wrong. Transferring the surplus to General Reserve or retaining it in the Capital Reduction A/c.

Authority. ICAI Study Material Ch.14, transfer of surplus to Capital Reserve; Section 66 of Companies Act, 2013

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

Scenario. A company has Profit and Loss A/c debit balance ₹1,20,000, preliminary expenses ₹30,000 and discount on issue of shares ₹20,000. Capital Reduction credit is ₹2,00,000. After writing off these items, what is the balance in Capital Reduction A/c?

A company has Profit and Loss A/c debit balance ₹1,20,000, preliminary expenses ₹30,000 and discount on issue of shares ₹20,000. Capital Reduction credit is ₹2,00,000. After writing off these items, what is the balance in Capital Reduction A/c?

1. ₹50,000
2. ₹30,000 (correct answer)
3. ₹70,000
4. Nil

Answer: B — ₹30,000

Explanation. Total write-off = ₹1,20,000 + ₹30,000 + ₹20,000 = ₹1,70,000. Balance in Capital Reduction A/c = ₹2,00,000 − ₹1,70,000 = ₹30,000. This balance will be transferred to Capital Reserve if no further write-offs are required.

Where it goes wrong. Omitting discount on issue or preliminary expenses, yielding ₹50,000 or ₹70,000.

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

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

Scenario. A scheme results in Capital Reduction credit of ₹4,00,000. Losses and overvalued assets to be written off total ₹4,60,000. The company has a general reserve of ₹1,00,000. How much of the general reserve is used?

A scheme results in Capital Reduction credit of ₹4,00,000. Losses and overvalued assets to be written off total ₹4,60,000. The company has a general reserve of ₹1,00,000. How much of the general reserve is used?

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

Answer: C — ₹60,000

Explanation. Capital Reduction A/c absorbs ₹4,00,000 of the ₹4,60,000 write-off. The shortfall is ₹4,60,000 − ₹4,00,000 = ₹60,000. This shortfall is adjusted against the general reserve of ₹1,00,000, leaving ₹40,000 in general reserve. The entire general reserve is not used.

Where it goes wrong. Using the full general reserve of ₹1,00,000 or writing off the entire ₹4,60,000 against reserves.

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

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

Scenario. A company had PPE of ₹5,00,000 and inventory of ₹2,00,000. Under a scheme, PPE is written down by 20% and inventory by 10%. What is the total carrying amount of these assets after reconstruction?

A company had PPE of ₹5,00,000 and inventory of ₹2,00,000. Under a scheme, PPE is written down by 20% and inventory by 10%. What is the total carrying amount of these assets after reconstruction?

1. ₹5,50,000
2. ₹6,20,000
3. ₹7,00,000
4. ₹5,80,000 (correct answer)

Answer: D — ₹5,80,000

Explanation. Post-reconstruction PPE = ₹5,00,000 − 20% = ₹4,00,000. Post-reconstruction inventory = ₹2,00,000 − 10% = ₹1,80,000. Total = ₹4,00,000 + ₹1,80,000 = ₹5,80,000. The write-downs are debited to Capital Reduction A/c.

Where it goes wrong. Applying the write-down percentages to the total or to the wrong base, yielding ₹5,50,000 or ₹6,20,000.

Authority. ICAI Study Material Ch.14, writing down assets to fair value; Section 66 of Companies Act, 2013

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

Scenario. Which of the following is NOT written off from Capital Reduction A/c under a scheme of internal reconstruction?

Which of the following is NOT written off from Capital Reduction A/c under a scheme of internal reconstruction?

1. Trade receivables (correct answer)
2. Preliminary expenses
3. Discount on issue of shares
4. Patents

Answer: A — Trade receivables

Explanation. Preliminary expenses, discount on issue of shares and patents are fictitious or intangible assets that may be written off through Capital Reduction A/c. Trade receivables are real current assets and are not written off through Capital Reduction A/c merely because of reconstruction; they are subject to normal provision for doubtful debts.

Where it goes wrong. Treating trade receivables as a fictitious asset to be eliminated through reconstruction.

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

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

Scenario. A company has Capital Reduction credit of ₹3,00,000. It writes off Profit and Loss A/c debit ₹1,00,000, goodwill ₹50,000, patents ₹40,000 and writes down inventory by ₹30,000. What is the balance transferred to Capital Reserve?

A company has Capital Reduction credit of ₹3,00,000. It writes off Profit and Loss A/c debit ₹1,00,000, goodwill ₹50,000, patents ₹40,000 and writes down inventory by ₹30,000. What is the balance transferred to Capital Reserve?

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

Answer: B — ₹80,000

Explanation. Total write-off = ₹1,00,000 + ₹50,000 + ₹40,000 + ₹30,000 = ₹2,20,000. Balance in Capital Reduction A/c = ₹3,00,000 − ₹2,20,000 = ₹80,000, transferred to Capital Reserve. All four items are valid utilisations under the scheme.

Where it goes wrong. Omitting the inventory write-down or goodwill, yielding ₹1,00,000 or ₹1,20,000.

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

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

Scenario. In the balance sheet of a reconstructed company, the words 'and Reduced' are added after the company's name:

In the balance sheet of a reconstructed company, the words 'and Reduced' are added after the company's name:

1. Always
2. Never
3. Only if the NCLT orders (correct answer)
4. Only if the ROC orders

Answer: C — Only if the NCLT orders

Explanation. The suffix 'and Reduced' is added only when the court or NCLT order directs it. It is not automatic in every internal reconstruction and does not depend on the ROC. The suffix indicates that the company has reduced its capital under a sanctioned scheme.

Where it goes wrong. Assuming the suffix is mandatory or requires ROC approval rather than NCLT order.

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

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

Scenario. A company has 20,000 equity shares of ₹10 each fully paid reduced to ₹6 each fully paid, and 1,000 12% preference shares of ₹100 each fully paid reduced to ₹75 each fully paid. What is the total credit to Capital Reduction A/c from share reduction?

A company has 20,000 equity shares of ₹10 each fully paid reduced to ₹6 each fully paid, and 1,000 12% preference shares of ₹100 each fully paid reduced to ₹75 each fully paid. What is the total credit to Capital Reduction A/c from share reduction?

1. ₹80,000
2. ₹25,000
3. ₹1,20,000
4. ₹1,05,000 (correct answer)

Answer: D — ₹1,05,000

Explanation. Equity reduction = 20,000 × (₹10 − ₹6) = ₹80,000. Preference reduction = 1,000 × (₹100 − ₹75) = ₹25,000. Total credit = ₹80,000 + ₹25,000 = ₹1,05,000. This amount is credited to Capital Reduction A/c as the shareholders' sacrifice.

Where it goes wrong. Adding only the equity reduction ₹80,000 or the preference reduction ₹25,000, instead of both.

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