- The company was undergoing financial difficulties and reconstruction was needed. - Under the reconstruction plan, equity shares were reduced to Rs. 5 per share and preference shares to Rs. 80 per share. New shares were issued in exchange for old shares. - Equity shares were also issued at Rs. 5 per share to pay off 50% of accumulated preference share dividends in arrears. - Other aspects of the plan included writing down the freehold property value and eliminating intangible assets and share premium from the balance sheet. - Journal entries were made to record the changes and a new balance sheet was presented.

1. RECONSTRUCTION OF COMPANIES:
SOLVED PROBLEM : 4
ARREARS OF PREFERENCE DIVIDEND

2. PROBLEM : 4
Balance Sheet
Liabilities Amont Assets Amount
Share Capital : Goodwill 30,000
1500 7% Cumulative P.S. of
Rs 100 each
1,50,000
Freehold Property 2,37,500
Plant and Machinery 80,000
27,500 Equity Shares of Rs.
100 each 2,75,000 Stock 35,000
Share Premium A/c 40,000 Debtors 22,500
Sundry Creditors 40,000 Preliminary Expenses 25,000
Profit and Loss Account 75,000
5,05,000 5,05,000
The following is the balance Sheet of Rathi Co. as on 31st dec, 2020 :

3. Note : Dividend on Preference Shares was in arrears as from 1st
January, 2018.
The following scheme of reconstruction was sanctioned :
1. The Equity shares were to be reduced to Rs. 5 per share.
2. The Preference Shares were to be reduced to Rs. 80 per share.
3. One equity share of Rs. 5 to be issued for Rs. 10 of gross preference
dividends in arrears.
4. Freehold property to be written down to Rs. 1,85,000.
5. Write off intangible assets and the share premium account.
6. The chairman of the company agreed to advance a loan of Rs.
50,000 at 6% on the mortgage of freehold property. the amount is to
be used as working capital.
Give Journal Entries and draw up the new Balance sheet.

4. Explanatory Notes :
1. Payment of Arrears of Pref. Dividend :
A) Dividend for one year (1,50,000*7/100) = Rs. 10,500
B) Dividend for Three year (1,50,000*3) = Rs. 31,500
C) Equity Shares Issued : Rs. 5 for Rs.10 i.e. for 50% of arrears (15,750/5) = 3150
2. Cancellation of Arrears of Preference Dividends :
No entry is required for the cancellation of 50% of the arrears of Preference dividend as the arrears have not
been brought into account as a liability.
3. Capital Reserve :
Surplus in capital reduction A/c is transferred to “Capital reserve A/c” which is shown on liability side of
balance sheet. It may be used to write down assets or capital losses in future.
4. Share Premium Written off :
This account shows a credit balance. In order to eliminate it, the account should be debited with the same
amount. Hence the debut in entry no. 4.
5. No. of equity Shares :
No of equity Shares As per old B/S. 27,500
Add : Equity Shares issued in payment of arrears of preference dividend 3150
No of Equity Shares in New Balance Sheet 30,650

5. JOURNAL ENTRIES IN THE BOOKS OF RATHI COMPANY
Date Particulats
L.
F.
Debit
Amount
Credit
Amount
31/12
/202
0
Old Equity Share Capital A/c (10) Dr
To New Equity Share Capital A/c(5)
To Capital reduction A/c (5)
(Being issue of new equity shares in exchange for
old)
2,75,000
1,37,500
1,37,500
31/12
/202
0
Old 7% P.S. Capital A/c (100) Dr
To New 7% P.S. Capital A/c (80)
To Capital reduction A/c (20)
(Being issue of new preference shares in exchange
for old)
1,50,000
1,20,000
30,000
31/12
/202
0
Capital Reduction A/c. Dr
To Equity Share Capital A/c
(Being issue of equity shares in payment of
arrears of preference dividend)
15,750
15,750
31/12
/202
0
Share Premium A/c Dr
To Capital Reduction A/c
(Being elimination of share premium)
40,000
40,000

6. JOURNAL ENTRIES IN THE BOOKS OF RATHI COMPANY
Date Particulats
L.
F.
Debit
Amount
Credit
Amount
31/12
/2020
Capital Reduction A/c Dr
To Goodwill A/c
To Preliminary Expenses A/c
To Profit and Loss A/c
To Freehold Property A/c
To Capital Reserve (balancing fig) A/c
(Being transfer of surplus in capital reduction
account to capital reserve A/c)
1,91,750
30,000
25,000
75,000
52,500
9,250
31/12
/2020
Cash A/c Dr
To 6% Mortgage Loan A/c
(Being loan from chairman)
50,000
50,000

7. NEW BALANCE SHEET
AS ON 31ST DEC, 2020
Balance Sheet
Liabilities Amont Assets Amount
Share Capital : Freehold Property 1,85,000
1500 7% Cumulative P.S. of
Rs 80 each fully paid
1,20,000
Plant and Machinery 80,000
Stock 35,000
30,650 Equity Shares of Rs.
5 each, fully paid
1,53,250 Debtors 22,500
6% Mortgage Loan 50,000 Cash 50,000
Capital Reserve 9,250
Sundry Creditors 40,000
3,72,500 3,72,500

8. THANK YOU