diff --git a/modules/blocks/chain.js b/modules/blocks/chain.js
index 5a5b87564b0..40e564308d4 100644
--- a/modules/blocks/chain.js
+++ b/modules/blocks/chain.js
@@ -587,29 +587,31 @@ Chain.prototype.deleteLastBlock = function (cb) {
 
 	async.waterfall(
 		[
-			function (waterCb) {
+			function popLastBlock (waterCb) {
 				// Delete last block, replace last block with previous block, undo things
 				__private.popLastBlock(lastBlock, function (err, newLastBlock) {
 					if (err) {
 						library.logger.error('Error deleting last block', lastBlock);
 					} else {
 						// Replace last block with previous
-						lastBlock = modules.blocks.lastBlock.set(newLastBlock);
+						modules.blocks.lastBlock.set(newLastBlock);
 					}
-					return setImmediate(waterCb, err, lastBlock);
+					return setImmediate(waterCb, err, newLastBlock);
 				});
 			},
-			function (newLastBlock, waterCb) {
-				modules.transactions.receiveTransactions(
-					lastBlock.transactions.reverse(),
-					false,
-					function (err) {
-						if (err) {
-							library.logger.error('Error receiving transactions after deleting block', err);
-						}
-						return setImmediate(waterCb, null, lastBlock);
+			function receiveTransactionsFromDeletedBlock (newLastBlock, waterCb) {
+				library.balancesSequence.add(function (balanceSequenceCb) {
+					modules.transactions.receiveTransactions(
+						lastBlock.transactions.reverse(),
+						false,
+						balanceSequenceCb
+					);
+				}, function (err) {
+					if (err) {
+						library.logger.error('Error receiving transactions after deleting block', err);
 					}
-				);
+					return setImmediate(waterCb, null, newLastBlock);
+				});
 			}
 		],
 		cb
diff --git a/test/system/blocks/chain.js b/test/system/blocks/chain.js
new file mode 100644
index 00000000000..5b0dd2c5101
--- /dev/null
+++ b/test/system/blocks/chain.js
@@ -0,0 +1,91 @@
+var async = require('async');
+var sinon = require('sinon');
+var chai = require('chai');
+var expect = require('chai').expect;
+var Promise = require('bluebird');
+var _  = require('lodash');
+var common = require('../common.js');
+var genesisBlock = require('../../genesisBlock.json');
+var node = require('../../node.js');
+var slots = require('../../../helpers/slots.js');
+var application = require('../../common/application');
+
+describe('chain', function () {
+
+	var library;
+
+	before('init sandboxed application', function (done) {
+		application.init({sandbox: {name: 'lisk_test_block_deletion'}}, function (scope) {
+			library = scope;
+			done();
+		});
+	});
+
+	after('cleanup sandboxed application', function (done) {
+		application.cleanup(done);
+	});
+
+	describe('deleteLastBlock', function () {
+
+		var transactions;
+
+		before('forge a block with 25 transactions', function (done) {
+			transactions = _.range(25).map(function () {
+				var account = node.randomAccount();
+				return node.lisk.transaction.createTransaction(account.address, 1000000000*100, node.gAccount.password);
+			});
+			common.addTransactionsAndForge(library, transactions, done);
+		});
+
+		describe('after deleting last block', function () {
+
+			var lastBlock;
+			var receiveTransactionsSpy;
+
+			before(function (done) {
+				receiveTransactionsSpy = sinon.spy(library.modules.transactions, 'receiveTransactions');
+				lastBlock = library.modules.blocks.lastBlock.get();
+				library.modules.blocks.chain.deleteLastBlock(done);
+			});
+
+			after(function () {
+				receiveTransactionsSpy.restore();
+			});
+
+			it('should remove block from the database', function (done) {
+				library.balancesSequence.add(function (balanceSequenceCb) {
+					common.getBlocks(library, function (err, blockIds) {
+						expect(blockIds).to.not.include(lastBlock.id);
+						balanceSequenceCb();
+						done();
+					});
+				});
+			});
+
+			it('should set the last block to genesis block', function (done) {
+				library.balancesSequence.add(function (balanceSequenceCb) {
+					common.getBlocks(library, function (err, blockIds) {
+						expect(blockIds.length).to.equal(1);
+						expect(blockIds).to.include(genesisBlock.id);
+						expect(library.modules.blocks.lastBlock.get().id).eql(genesisBlock.id);
+						balanceSequenceCb();
+						done();
+					});
+				});
+			});
+
+			it('should call modules.transactions.receiveTransactions with the deleted transactions', function () {
+				var reappliedTransactionIds = _.map(receiveTransactionsSpy.args[0][0], 'id');
+				transactions.map(function (transaction) {
+					expect(reappliedTransactionIds).to.contain(transaction.id);
+				});
+			});
+
+			it('should put the block transactions back in the queue', function () {
+				transactions.forEach(function (trs) {
+					expect(library.modules.transactions.transactionInPool(trs.id)).to.equal(true);
+				});
+			});
+		});
+	});
+});