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:

Correct answer: C) Debit Capital Reduction Account and credit Equity Share Capital by ₹2,00,000

Explanation

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.