Advanced AccountingSubjectiveICAI Descriptive / Internal Reconstruction SchemesQuestion 12491 of 300
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**Practical Problem — Internal Reconstruction Schemes (Marks: 8)** Pinnacle Motors Ltd. has suffered heavy losses over the last few years and decides to execute a Scheme of Internal Reconstruction sanctioned by the Court as on 31st March 2024: 1. Paid-up Equity Share Capital of ₹100 each is reduced to ₹20 each. 2. 10% Preference Share Capital of ₹68,500,000 is reduced from ₹100 each to ₹60 each. 3. Trade Creditors amounting to ₹34,250,000 agreed to forego 20% of their claims in consideration of allotment of equity shares of ₹20 each for ₹13,700,000. 4. Accumulated P&L debit balance of ₹61,650,000 and unamortized preliminary expenses of ₹6,850,000 are to be completely written off. 5. Plant and Machinery is to be written down by ₹17,125,000. **You are required to:** Draft necessary Journal Entries in the books of Pinnacle Motors Ltd. and show the Capital Reduction Account.

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Detailed Solution & Explanation

### Suggested Solution — ICAI Advanced Accounting #### Journal Entries in the books of Pinnacle Motors Ltd. (Reconstruction Scheme):
DateParticularsDebit (₹)Credit (₹)
2024 Mar 31Equity Share Capital (₹100) A/c ...Dr.
  To Equity Share Capital (₹20) A/c
  To Capital Reduction A/c
*(Reduction of equity shares from ₹100 to ₹20)*		137,000,00027,400,000
109,600,000
2024 Mar 3110% Preference Share Capital (₹100) A/c ...Dr.
  To 10% Preference Share Capital (₹60) A/c
  To Capital Reduction A/c
*(Reduction of preference shares from ₹100 to ₹60)*		68,500,00041,100,000
27,400,000
2024 Mar 31Trade Creditors A/c ...Dr.
  To Capital Reduction A/c
  To Equity Share Capital (₹20) A/c
  To Bank / Balance A/c
*(Creditors forewent 20% and received equity shares)*		34,250,0006,850,000
13,700,000
13,700,000
2024 Mar 31Capital Reduction A/c ...Dr.
  To Profit & Loss A/c (Accumulated Loss)
  To Preliminary Expenses A/c
  To Plant & Machinery A/c
  To Capital Reserve A/c (Surplus transferred)
*(Utilization of Capital Reduction balance)*		143,850,00061,650,000
6,850,000
17,125,000
58,225,000

Key Concepts to Understand

Consideration

Something of value exchanged for a promise. 'Quid Pro Quo' (Something for something).

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