CA Inter P1 · Chapter 12
Internal Reconstruction MCQs with Answers
8 multiple-choice questions on Internal Reconstruction for CA Inter P1 Advanced Accounting. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Case: Under a reconstruction scheme of Kiran Ltd, holders of 12% debentures of ₹20,00,000 agree to accept 9% debentures of ₹15,00,000 and equity shares of ₹3,00,000 in full settlement. The amount credited to the Capital Reduction Account is:
- A) ₹0
- B) ₹3,00,000
- C) ₹2,00,000
- D) ₹5,00,000
Show answer & explanation
Answer: C) ₹2,00,000
The debenture holders give up 20,00,000 and receive 15,00,000 + 3,00,000 = 18,00,000. Their sacrifice of 20,00,000 - 18,00,000 = ₹2,00,000 is credited to the Capital Reduction Account.
Question 2
Under the Companies Act, 2013, a reduction of share capital by a company limited by shares (for example, by cancelling paid-up capital lost or unrepresented by available assets) requires:
- A) A special resolution confirmed by the Tribunal under section 66
- B) Only a board resolution
- C) Only an ordinary resolution of the shareholders
- D) Approval of the Registrar of Companies without any shareholder resolution
Show answer & explanation
Answer: A) A special resolution confirmed by the Tribunal under section 66
Section 66 permits a company to reduce its share capital by a special resolution, subject to confirmation by the Tribunal on an application by the company. Ordinary or board resolutions alone are not sufficient for a reduction of capital.
Question 3
Case: Under a scheme of internal reconstruction, the 5,00,000 fully paid equity shares of ₹10 each of Harit Ltd are reduced to ₹4 each fully paid. The amount credited to the Capital Reduction Account is:
- A) ₹12,00,000
- B) ₹30,00,000
- C) ₹20,00,000
- D) ₹50,00,000
Show answer & explanation
Answer: B) ₹30,00,000
The entry is: Equity Share Capital (₹10) Dr 50,00,000; to Equity Share Capital (₹4) 20,00,000; to Capital Reduction Account 30,00,000. The reduction of ₹6 per share on 5,00,000 shares = ₹30,00,000.
Question 4
Case: The Capital Reduction Account of Ishan Ltd shows a credit of ₹30,00,000 under an approved scheme. It is used to write off the debit balance of profit and loss ₹18,00,000, goodwill ₹6,00,000, preliminary expenses ₹2,00,000 and overvaluation of PPE ₹3,00,000. The balance remaining in the Capital Reduction Account should be:
- A) Transferred to Capital Reserve: ₹12,00,000
- B) Transferred to General Reserve: ₹1,00,000
- C) Transferred to Capital Reserve: ₹1,00,000
- D) Credited to the statement of profit and loss: ₹1,00,000
Show answer & explanation
Answer: C) Transferred to Capital Reserve: ₹1,00,000
Total write-offs = 18,00,000 + 6,00,000 + 2,00,000 + 3,00,000 = 29,00,000. Balance = 30,00,000 - 29,00,000 = 1,00,000. Since it arises from a reduction of capital, it is a capital profit and is transferred to Capital Reserve; it cannot be credited to revenue or a free reserve.
Question 5
Case: Jhanvi Ltd sub-divides its equity shares of ₹10 each into equity shares of ₹1 each, without any change in the total paid-up capital. This is:
- A) An internal reconstruction requiring writing off of accumulated losses
- B) A reduction of share capital requiring Tribunal confirmation under section 66
- C) An alteration of share capital under section 61, which does not require confirmation by the Tribunal
- D) A buyback of shares under section 68
Show answer & explanation
Answer: C) An alteration of share capital under section 61, which does not require confirmation by the Tribunal
Sub-division (and consolidation) of shares is an alteration of share capital under section 61, permitted if authorised by the articles and approved by the members in general meeting. It does not reduce paid-up capital or return capital to shareholders, so confirmation by the Tribunal under section 66 is not required.
Question 6
Case: Kumud Ltd has cumulative preference dividend in arrears of ₹4,00,000, which has not been recorded in the books. Under its reconstruction scheme, the preference shareholders forgo half the arrears, and the balance is satisfied by issue of equity shares. The journal entry for the issue of these equity shares is:
- A) Debit Capital Reduction Account and credit Equity Share Capital by ₹4,00,000
- B) No entry is required because the arrears were never recorded
- C) Debit Capital Reduction Account and credit Equity Share Capital by ₹2,00,000
- D) Debit Preference Dividend Payable and credit Equity Share Capital by ₹2,00,000
Show answer & explanation
Answer: C) Debit Capital Reduction Account and credit Equity Share Capital by ₹2,00,000
Arrears of cumulative preference dividend are not a liability until declared and are only disclosed as a contingent liability, so there is no 'dividend payable' to debit and no entry for the half forgone. The half to be satisfied (₹2,00,000) is a cost of the scheme, so Capital Reduction Account is debited and Equity Share Capital credited.
Question 7
Case: The scheme of internal reconstruction of Lohit Ltd provides for: (i) 4,00,000 equity shares of ₹10 each fully paid to be reduced to ₹3 each; (ii) 1,00,000 8% preference shares of ₹100 each to be reduced to ₹80 each; (iii) trade payables of ₹12,00,000 to forgo 25% of their dues; and (iv) a director's loan of ₹5,00,000 to be waived. The total credit to the Capital Reduction Account is:
- A) ₹51,00,000
- B) ₹56,00,000
- C) ₹1,00,00,000
- D) ₹48,00,000
Show answer & explanation
Answer: B) ₹56,00,000
Equity: 4,00,000 x 7 = 28,00,000. Preference: 1,00,000 x 20 = 20,00,000. Trade payables: 25% x 12,00,000 = 3,00,000. Director's loan waived: 5,00,000. Total = ₹56,00,000.
Question 8
Which of the following best distinguishes internal reconstruction from external reconstruction?
- A) Internal reconstruction always requires a new company to be formed
- B) External reconstruction never involves liquidation of the existing company
- C) Internal reconstruction can be carried out only by issuing bonus shares
- D) In internal reconstruction the existing company continues without liquidation, whereas in external reconstruction a new company is formed to take over the business of the existing company, which is liquidated
Show answer & explanation
Answer: D) In internal reconstruction the existing company continues without liquidation, whereas in external reconstruction a new company is formed to take over the business of the existing company, which is liquidated
Internal reconstruction reorganises the capital structure of a company, typically by reducing capital and settling with stakeholders, while the company continues as the same legal entity. External reconstruction involves winding up the existing company and transferring its business to a newly formed company, and is accounted for as an amalgamation under AS 14.