Financial Reporting and Ethics - The Institute of Chartered ...

FINANCIAL REPORTING AND ETHICSILLUSTRAUSTRATION TION 3.7A debit balance in the capital reduction account means that thescheme has not been well formulated, as it has not been able towipe out accumulated loss. This could be written off againstcapital reserve if it exists; otherwise it should be carried forwardas such to be written off subsequently to trading profits.Note that the term capital reduction is used loosely. Someexamination questions may ask for capital reduction andreorganisation account while others may be on capital reductionand reconstruction account. All one needs to do is to substitutecapital reduction account. Accounting entries will remain asshown above.Having laid the foundation, the mechanics of formulating acapital reconstruction scheme may now be considered as follows:Peepee Construction Company Plc is in financial difficulty. The following is theTrial Balance of the company as at 30 June, 2008.DRCRLand 580,000Building (Net) 136,230Ordinary shares of 1 each 500,0005% cum-preference shares at 1 each 350,0008% Debenture (2013) 400,000Equipment (Net) 53770Goodwill 200,000Investment in shares (quoted) 135,000Stock and work in progress 501,235Debtors 253,460Profit/Loss Account 199,105Interest payable on debenture 64,000Trade creditors 481,235Loan from Directors 80,000Bank draft _________ 183,5652,058,800 2,058,800Authorized capital is 1,000,000 ordinary shares of 1.00 each and 500,0005% cumulative preference shares of 1.00 each.During the meeting of the shareholders and directors it was decided to carryout a scheme of internal reconstruction.The following scheme was agreed:(i) Each ordinary share is to be reduced to a share of 25k.54