The following is the Balance Sheet of Diverse Ltd. having an authorised capital of Rs. 1,000 Crores as on 31st March, 1997:
(Rs. in crores) Rs. Rs.
Sources of funds:
Shareholders’ funds:
Share capital
Equity shares of Rs. 10 each fully paid in cash 250
Reserves and surplus (Revenue) 750 1,000
Loan funds:
Secured against: (a) Fixed assets Rs. 300 Cr.
(b) Working capital Rs. 100 Cr. 400
Unsecured: 600 1,000
2,000
Employment of funds:
Fixed assets:
Gross block 800
Less: Depreciation 200 600
Investments at cost (Market value Rs. 1,000 Cr.) 400
Net current assets:
Current assets 3,000
Less: Current liabilities 2,000 1,000
2,000
Capital commitments : Rs. 700 crores.
The company consists of 2 divisions:
(i) Established division whose gross block was Rs. 200 crores and net block was Rs. 30 crores; current assets were Rs. 1,500 crores and working capital was Rs. 1,200 crores; the entire amount being financed by shareholders’ funds.
(ii) New project division to which the remaining fixed assets, current assets and current liabilities related.
The following scheme of reconstruction was agreed upon:
(a) Two new companies Sunrise Ltd. and Khajana Ltd. are to be formed. The authorised capital of Sunrise Ltd. is to be Rs. 1,000 crores. The authorised capital of Khajana Ltd. is to be Rs. 500 crores.
(b) Khajana Ltd. is to take over investments at Rs. 800 crores and unsecured loans at balance sheet value. It is to allot equity shares of Rs. 10 each at par to the members of Diverse Ltd. in satisfaction of the amount due under the arrangement.
(c) Sunrise Ltd. is to take over the fixed assets and net working capital of the new project division along with the secured loans and obligation for capital commitments for which Diverse Ltd. is to continue to stand guarantee at book values. It is to allot one crore equity shares of Rs. 10 each as consideration to Diverse Ltd. Sunrise Ltd. made an issue of unsecured convertible debentures of Rs. 500 crores carrying interest at 15% per annum and having a right to convert into equity shares of Rs. 10 each at par on 31.3.2002. This issue was made to the members of Sunrise Ltd. as a right who grabbed the opportunity and subscribed in full.
(d) Diverse Ltd. is to guarantee all liabilities transferred to the 2 companies.
(e) Diverse Ltd. is to make a bonus issue of equity shares in the ratio of one equity share for every equity share held by making use of the revenue reserves.
Assume that the above scheme was duly approved by the Honourable High Court and that there are no other transactions. Ignore taxation.
You are asked to:
(i) Pass journal entries in the books of Diverse Ltd., and
(ii) Prepare the balance sheets of the three companies giving all the information required by the Companies Act, 1956 in the manner so required to the extent of available information. (20 marks) (May, 1997)
Answer
Journal of Diverse Ltd.
(Rs. in crores)
Dr. Cr.
1 Khajana Ltd. A/c Dr. 800
To Investments A/c 400
To Members A/c 400
(Being transfer of investments at agreed
value of Rs. 800 crores under the scheme of
reconstruction approved by the high court)
2 Unsecured loans A/c Dr. 600
To Khajana Ltd. 600
(Being unsecured loans taken over by Khajana
Ltd. under the scheme of reconstruction
approved by the honourable high court)
To Khajana Ltd. 200
(Being allotment by Khajana Ltd. of 20 crore
equity shares of Rs. 10 each to the members
of the company in the ratio of 4 equity
shares of Khajana Ltd. for every 5 equity
shares held in the company)
To Capital reserve 200
(Being balance in Members A/c transferred
to capital reserve)
5 Sunrise Ltd. A/c Dr. 10
Provision for depreciation A/c Dr. 30
Secured loans against fixed assets A/c Dr. 300
Secured loans against working capital A/c Dr. 100
Current liabilities A/c Dr. 1,700
To Fixed assets A/c 600
To Current assets A/c 1,500
To Capital reserve A/c 40
(Being assets and liabilities of new project
division transferred to Sunrise Ltd.
along with capital commitments of Rs. 700
crores, the difference between consideration
and the book values at which transferred
assets and liabilities appeared being
credited to capital reserve)
6 Equity shares of Sunrise Ltd. Dr. 10
To Sunrise Ltd. 10
(Being the receipt of one crore equity
shares of Rs. 10 each from Sunrise Ltd. in
full discharge of consideration on transfer
of assets and liabilities of the new project
division)
7 Investment in debentures A/c Dr. 500
To Bank A/c 500
(Being issue of unsecured convertible
debentures by Sunrise Ltd., subscribed in full)
8 Revenue reserves A/c Dr. 250
To Equity share capital A/c 250
(Being allotment of 25 crores equity
shares of Rs. 10 each as fully paid bonus
shares to the members of the company by
using revenue reserves in the ratio of one
equity share for every equity share held)
Diverse Ltd.
Balance Sheet after the scheme of arrangement
Schedule (Rs. in crores)
No.
I SOURCES OF FUNDS
(1) Shareholders’ funds:
(a) Capital A 500
(b) Reserves and surplus B 740
1,240
(2) Loan funds:
(a) Secured against:
Fixed assets –
Working capital –
(b) Unsecured – –
TOTAL 1,240
II APPLICATION OF FUNDS
(1) Fixed assets: C
(a) Gross block 200
(b) Less: Depreciation 170
(c) Net block 30
(2) Investments D 10
(3) Current assets 1,500
Less: Current liabilities 300
Net current assets 1,200
TOTAL 1,240
1. Capital commitments Nil
2. Contingent Liability
Guarantee given in respect of:
Capital commitments by Sunrise Ltd. 700
Liabilities transferred to Sunrise Ltd. 2,100
Liabilities transferred to Khajana Ltd. 600
I couldn't understand how Sunrise Ltd became a fully owned subsidiary of Diverse Ltd & shares allotted by Sunrise Ltd to Diverse Ltd were shown as "Investment in Shares" of a fully owned subsidiary on the "Assets" Side of DIVERSE LTD....Please help me to understand this concept....thanks in advance.
CAclubindia
