ದ್ವಿತೀಯ ಪಿ.ಯು.ಸಿ ಲೆಕ್ಕಶಾಸ್ತ್ರ ಅಧ್ಯಾಯ – 7 ನೋಟ್ಸ್ 2nd Puc Accountancy Chapter 7 Issue And Redemption Of Debentures Notes Question Answer Pdf Download Karnataka Kannada 2nd Puc Accountancy Chapter 7 Notes Pdf 2023 Issue And Redemption Of Debentures Questions And Answers Issue And Redemption Of Debentures Practical Questions Pdf Issue And Redemption Of Debentures Class 12 Solutions Kseeb Solution For Class 12 Accountancy Chapter 7 Notes
2nd Puc Accountancy Chapter 7 Notes
2nd Puc Accountancy Chapter 7 Notes
Short Questions With Answers
Q1. State the meaning of ‘Debentures issued as a Collateral Security.
Collateral security refers to an additional layer of security over and above the primary security. It is seen in the case of a company taking a loan from a financial institution, in such cases, the company issues debentures which are additional security or collateral security. The money lender will not be receiving any interest on these debentures. In case the company defaults in making payment and the primary security is not sufficient to cover the debt, then debentures can be used for recovering the amount.
Q2. What does a Bearer Debenture mean?
When records are not maintained for debenture and holders and the debenture can be transferred by delivery, such debentures are known as Bearer Debenture. These debentures are issued physically on paper and are payable to the bearer of the debenture. These are also called unregistered debentures.
Q3. What is meant by a Debenture?
The debenture is derived from the Latin word “debate” which translates to borrow. Debentures are not backed by any collaterals. These are issued by governments and corporations to raise funds or capital for long-term borrowing.
Q4. What is meant by ‘Issue of debenture at a discount and redeemable at a premium?
It may happen that due to challenging market conditions a company has to raise funds from the market by issuing debenture below its par value and to attract investor interest has to offer redeemable value higher than its par value, this is termed an issue of debenture at a discount and redeemable at a premium. The difference that is generated due to such an arrangement is treated as a loss on the issue of the debenture.
Q5. What is meant by ‘Issue of debentures for Consideration other than Cash’?
A company purchases any asset from its vendors or suppliers and issues debentures to them instead of paying in cash. This process is known as the issue of debenture for consideration other than cash. It helps both the seller and purchaser as the seller gets interested in debentures issued and the purchaser does not need to arrange cash immediately. Debentures are issued at par, premium, or at a discounted rate to the seller.
Q6. What is ‘Capital Reserve’?
The reserve that is created from the capital profits is called a Capital Reserve, these are profits that are obtained from activities that are different than normal business activities. Examples of such activities are profit obtained from reissuing of debentures, the premium on the issue of shares and debenture, profit redemption on debenture, profits obtained from the sale of fixed assets etc. These can be used to issue bonus shares but cannot be used for paying dividends. The capital reserve is used to meet future capital losses.
Q7. What is a ‘Convertible Debenture’?
Debentures that can be converted to equity shares after a specified time is called as Convertible Debenture. The time at which it can be converted to equity shares is mentioned when the debentures are issued. There are two types:
1. Partly convertible debentures: In this only a part of the debenture is eligible to be converted into equity shares.
2. Fully convertible debentures: In this all of the debentures can convert to equity shares.
Q8. What is meant by an ‘Irredeemable Debenture’?
Debentures that are not redeemable by a company during its lifetime are called irredeemable debentures. These debentures are only payable at the time of winding up of the company. Also called perpetual debentures because of their indefinite life span. These types of debentures are not issued in India.
Q9. What is a discount on the issue of debentures?
Debentures that are issued at a value less than its face value (nominal value) is said to be issued at discount. There is no restriction on companies for issuing debentures on discounts.
Q10. What is meant by ‘Mortgaged Debentures’?
Debentures that are secured against the asset/assets of a company are called as Mortgaged debentures. These are also called as secure debentures. There are two types:
1. Fixed Charge: Debentures secured against a specific asset or the firm of the computer
2. Floating Charge: Debentures secured against all assets of a company
Q11. How are debentures different from shares? Give two points.
| Basis of Comparison | Debentures | Shares |
| 1. Meaning | The holders of debentures are regarded as creditors of the company as debentures are a part of the loan. | As shares are a part of capital therefore shareholders are owners of the company. |
| 2. Voting Rights | No voting rights for holders | Holders have voting rights |
Q12. What is meant by ‘Premium on Redemption of Debentures’?
Debenture redeemed at premium refers to the situation where Debentures are redeemed at a price that is more than its face value or nominal value. The difference between the redeemed price and face value of the debenture is regarded as a capital loss and hence needs to be written off. The premium obtained on redemption of the debenture is shown on the liabilities side of the balance sheet.
Q13. Name the head under which ‘discount on issue of debentures’ appears in the Balance Sheet of a company.
Discount on the issue of debentures is treated as a capital loss. As per the revised schedule VI of the Companies Act, it should be shown on the Asset side of the balance sheet under the “Miscellaneous Expenditures” heading until it is written off.
Q14. Can the company purchase its own debentures?
Yes, it is possible if a company which is authorized by its Article of Association is able to purchase its own debentures. The debentures are purchased to serve the following purpose:
1. As a source of investment which can be sold at a higher price on a later date to earn more profit
2. To cancel debenture liabilities if the debenture rate is higher than the rate of interest in the market.
Q15. What is meant by redemption of debentures?
It refers to the repayment of debentures by the company to the debenture holders. In this process debenture holders get paid for the debentures they were issued and the repayment is made as per terms and conditions determined at the time of debenture issue. It may be redeemable at par, discount, or premium. Redemption takes place from profits or from a fresh batch of debentures. The following methods are used in redeeming debentures:
1. By conversion into equity shares and new debentures
2. By annual drawing in installments
3. By purchasing debentures in an open market
4. Lump sum payment on the maturity date
5. Utilizing the call or put option
Q16. How would you deal with ‘Premium on Redemption of Debentures’?
Debentures that are redeemed for a price that is more than its par value or nominal value is known as debentures redeemed at a premium. The difference between the par value (face value) and the price at which it is redeemed is known as capital loss and this will be written off till debentures are redeemed. It is shown on the liabilities part of the Balance Sheet till debentures are redeemed. The accounting treatment can be represented as:
Q17. What is meant by redemption of debentures by conversion?
The situation where a debenture holder is able to convert existing debentures into equity shares or new debentures after the expiry of the existing debenture’s time period is known as the redemption of debentures by conversion.
Q18. What is meant by ‘Redemption out of Capital?
It refers to the condition when the debentures are redeemed from the capital without utilizing the profits for redemption. Such a condition results in no profit being transferred to the Debenture Redemption Reserve, a reserve that needs to be created as debentures cannot be redeemed entirely from the capital. SEBI has issued guidelines for the redemption of debenture by creating a Debenture Redemption reserve. However, there are some industries that are exempted from creating a reserve and they are:
1. Companies that issue debentures with the maturity of 18 months
2. Companies involved in the infrastructure sector like maintenance, construction, and business development activities
Q19. Under which head is the ‘Debenture Redemption Reserve’ shown in the Balance Sheet?
The Debenture Redemption Reserve (DRR) is shown on the balance sheet under the header Reserves and Surplus as per the revised Schedule VI of the Company Act.
Q20. What is meant by redemption of debentures by ‘Purchase in the Open Market’?
Redemption of debentures by purchase in the open market refers to the condition when a company is authorized by its Article of Association to be able to purchase its own debentures. The debentures are purchased to serve the following purpose:
1. As a source of investment which can be sold at a higher price on a later date to earn more profit
2. To cancel debenture liabilities if the debenture rate is higher than the rate of interest in the market.
Karnataka 2nd PUC Accountancy Chapter 7 Issue and Redemption of Debentures Notes
Long Question And Practical Problems With Solutions
Q1. Distinguish between a debenture and a share. Why is debenture known as loan capital? Explain.
| Basis of Comparison | Shares | Debenture |
| Meaning | Shares are funds that are owned by the company | Debentures are funds that are borrowed from outside i.e. it is debt for the company |
| Dividend | Shareholders earn dividends from the profit of the company | Debenture holders earn interest for the amount taken as debt |
| Deduction | Being appropriation of profit is not liable to be deducted | Being an expense for business, deducted from profit |
| Conversion | Shares cannot be converted into debentures | Some debentures can be converted into shares after a period of time |
| Voting Right | Shareholders have voting right | No voting right |
| Risk | Shareholders have the highest risk | Debenture holders have the lowest risk |
| Compulsion to return | It is not mandatory to declare a dividend | It is mandatory to pay interest to creditors. |
| Status of Holders | Shareholders are owners | Debenture holders are creditors |
| Position in Financial Statement | Shown under Shareholder Funds on the equity and liabilities side of the Balance Sheet | Shown as non-current liabilities in the equity and liabilities side of the Balance Sheet. |
| Status at Liquidation | Payment made after clearing all liabilities | Payment made before shareholders. |
Debentures are also called as long-term debts. A company issues debentures for getting funding for achieving growth in the long term. Interest needs to be paid on those loans. This interest is an expense for the business and is deducted as per applicable tax laws. Hence, debentures are known as loan capital.
Q2. Explain the different types of debentures.
Debenture refers to a long-term instrument that companies use to borrow money from the market. It is the acknowledgment of a debt that is taken by a company. There are many types of debentures based on their nature which are:
1. Based on the tenure
i. Redeemable Debenture: Debentures that have a specific date of redemption that is mentioned on the certificate and the company is bound to pay the person/persons holding the debenture, the principal amount on that date.
ii. Perpetual/Irredeemable Debenture: Debentures that do not mention a specific date for redemption. The only way these can be redeemed is when the company is liquidated.
2. Based on Convertibility
i. Convertible Debenture: Those types of debentures that have the flexibility to convert into equity shares. The terms and conditions governing the conversion are clearly mentioned at the time of the issue of a debenture.
ii. Non-Convertible Debenture: These are debentures that do not have any special features and are not converted into equity shares.
3. Based on Security
i. Mortgage Debenture: A type of debenture that is backed by some asset or assets and such asset can be used to recover funds in case
ii. Naked Debenture: Debenture that is issued based solely on the basis of credibility of the issuer.
4. Based on Priority
i. First Debenture: Also known as a preferred debenture. These debentures are the first to be paid in case of winding up of a company.
ii. Second Debenture: These are ordinary debentures and are paid after the first debenture.
5. Based on registration:
i. Registered Debenture: Debentures that are registered with the age, name, address, etc. are added to the debenture.
ii. Bearer Debenture: These debentures are transferred by delivery to the new holder.
Q3. How is ‘Discount on Issue of Debentures’ treated in the books of accounts? How will you deal with the ‘discount in the issue of debentures’ when the debentures are to be redeemed in installments?
Debentures that are issued at a value less than their face value (nominal value) is said to be issued at discount. There is no restriction on companies for issuing debentures on discounts.
The following treatment is done when a discount is applied on the issue of debentures
There are two methods that are applicable when debentures are redeemed in installments.
1. Fixed Installment Method: Also known as an equal installment method. This method is used when debentures are redeemed in a lump sum and after a specific time period. In this method, an equal amount of discount or loss is written off till the debenture is not paid off. The formulae used to calculate the discount amount is given below
2. Variable Instalment Method: This method is also known as Fluctuating or Reducing Instalment Method or Proportion Method. In this method, debentures are paid in annual drawings or installments. The amount of discount that is written off every year should be in proportion to debentures that are outstanding at the beginning of each year. Therefore the amount of discount will vary each year, and it will be more in the initial years and will subsequently reduce at the end of redemption.
Q4. Explain the different terms for the issue of debentures with reference to their redemption.
Debentures can be issued in three ways: at par, premium, and at a discount while the debentures can be redeemed only at par and at a premium. The following combinations can be discussed:
1. Issued at Par and Redeemable at Par: This is the condition when debentures are issued and redeemed at their par value or face value. The following entries can be seen
2. Issued at Premium and Redeemable at Par: A situation where debenture is issued at a premium and is redeemable at par. Issuing debentures at a premium is gain, so it is credited.
3. Issue at Discount and Redeemable at Par: The situation in which debenture is issued at a discount and is redeemable at par. Discount being a loss is recorded as a debit entry.
4. Issue at Par and Redeemable at Premium: Here the share is issued at par and is redeemable at a premium. The following entries are recorded
5. Issued at Premium and Redemption at Premium: In this situation, both the issue and redemption of the debenture is at a premium. It will give rise to the following entries
6. Issue of Discount and Redemption at Premium: When debentures are issued at a discount and redeemable at a premium. The following entries can be recorded
Q5. Describe the meaning of ‘Debenture Issued as Collateral Securities’. What accounting treatment is given to the issue of debentures in the books of accounts?
Collateral security refers to an additional layer of security over and above the primary security. It is seen in the case of a company taking a loan from a financial institution, in such cases, the company issues debentures which are additional security or collateral security. The money lender will not be receiving any interest on these debentures. In case the company defaults in making payment and the primary security is not sufficient to cover the debt, then debentures can be used for recovering the amount.
Treatment of Debentures:
Debentures when issued for the first time by a company are not active and to make it active an accounting entry is required to be passed
For creating accounting records Debenture Suspense A/C is debited and the debenture account is credited. Debentures are represented on the liabilities side and Debenture suspense A/c is shown on the credit side. When the debt is paid off by the business debenture account is debited and the debenture suspense account gets credited
Q6. Explain the guidelines of SEBI for creating a Debenture Redemption Reserve.
These points need to be followed while creating Debenture Redemption Reserve (DRR):
1. DRR needs to be created for companies whose issue debentures with a maturity of more than 18 months.
2. For partly convertible debentures, DRR needs to be created for the non-convertible portion of the debenture in the same way as is done for fully non-convertible debenture issue.
3. Company should create DRR equivalent to 50% of the debenture issue before debenture redemption commences.
4. Withdrawal from DRR is permissible only after 10% of the debenture liability has been actually redeemed by the company.
As per SEBI’s guidelines, the following type of companies will be exempted from creating DRR:
1. Company issuing debentures with a maturity up to 18 months.
2. Companies involved in the infrastructure sector like maintenance, construction, and business development activities
Q7. Differentiate between the redemption of debentures out of capital and out of profits.
Redemption of Debentures Out of Capital
It refers to the condition when the debentures are redeemed from the capital without utilising the profits for redemption. Such a condition results in no profit being transferred to the Debenture Redemption Reserve, a reserve that needs to be created as debentures cannot be redeemed entirely from the capital. SEBI has issued guidelines for the redemption of debenture by creating Debenture Redemption reserve. However, there are some industries that are exempted from creating a reserve and they are:
1. Companies that issue debentures with the maturity of 18 months
2. Companies involved in the infrastructure sector like maintenance, construction, and business development activities
Redemption of Debenture Out of Profits
Debentures when redeemed out of profit do not utilize the capital for redemption. It is mandatory to create a DRR before redeeming the debenture. This rule has been created by SEBI (Securities and Exchange Board of India) and as per that, a company should transfer an amount equal to 50% of debentures issued, to DRR before redeeming the debentures. Profit gets transferred to DRR from the Profit and Loss Appropriation Account. This reduces the total profit and therefore this process is called Redemption of Debenture out of profits. DRR is shown under the Reserve and Surplus section of the Liabilities part of the balance sheet. After all, debentures are redeemed a DRR account is closed by transferring it to the general reserve.
Q8. Describe the steps for creating a Sinking Fund for the redemption of debentures.
The following steps are involved:
1. Calculate the amount from the profit that needs to be set aside every year with information obtained from Sinking Fund Table.
2. This amount that is set aside every year in Step 1 is transferred to a Debenture Redemption Fund (Sinking Fund) by debiting P & L Appropriation Account.
3. The installment hence determined is invested to obtain the amount essential for redeeming the debenture by debiting the DRF (Debenture Redemption Fund).
4. The interest on the amount thus invested will be received on a bi-annual or annual basis.
5. The total investment which includes investment and the interest is re-invested in the following year.
6. Repeat the steps of transferring and investing till the last installment which will be debited from the P & L appropriation account.
7. The investment is sold off at the year of redemption
8. The profit/loss that is obtained from the sale of investment is transferred appropriately by debiting/crediting Debenture Redemption Fund (DRF) investment account to the DRF Account.
9. Payment is processed for the holders of the debenture
10. The balance remaining, if any, from the DRF Account is transferred to the General Reserve.
Q9. Can a company purchase its own debentures in the open market? Explain.
Redemption of debentures by purchase in open market refers to the condition when a company is authorized by its Article of Association to be able to purchase its own debentures. The debentures are purchased to serve the following purpose:
1. As a source of investment which can be sold at a higher price on a later date to earn more profit
2. To cancel debenture liabilities if the debenture rate is higher than the rate of interest in the market.
Q10. What is meant by conversion of debentures? Describe the method of such a conversion.
The situation where a debenture holder is able to convert existing debentures into equity shares or new debentures after the expiry of the existing debenture’s time period is known as the redemption of debentures by conversion. The issue price of shares must be equal to or less than the amount that is received from debentures, this should be kept in mind by the debenture holder when exercising the conversion option.
Debentures that can be converted to equity shares after a specified time are called Convertible Debentures. The time at which it can be converted to equity shares is mentioned when the debentures are issued. There are two types:
1. Partly convertible debentures: In this only a part of the debenture is eligible to be converted into equity shares.
2. Fully convertible debentures: In this, all of the debentures can convert to equity shares.
The following treatment is provided for the conversion:
Q11. G.Ltd. issued 75, 00,000, 6% Debenture of ₹ 50 each at par payable ₹ 15 on application and ₹ 35 on the allotment, redeemable at par after 7 years from the date of issue of the debenture. Record necessary entries in the books of the Company.
The solution for this question is as follows:
Book of G. Ltd. Journal
| Date | Particulars | L.F. | DebitAmount₹ | CreditAmount₹ | |
| Bank A/c | Dr. | 11,25,00,000 | |||
| To 6% Debenture Application A/c | 11,25,00,000 | ||||
| (Application money @ ₹ 15 each received for 75,00,000 debentures) | |||||
| 6% Debenture Application A/c | Dr. | 11,25,00,000 | |||
| To 6% Debenture A/c | 11,25,00,000 | ||||
| (Application money of 75,00,000 debentures transferred to 6% Debentures Account) | |||||
| 6% Debenture Allotment A/c | Dr. | 26,25,00,000 | |||
| To 6% Debenture A/c | 26,25,00,000 | ||||
| (Allotment money @ ₹ 35 each due for 75,00,000 debentures ) | |||||
| Bank A/c | Dr. | 26,25,00,000 | |||
| To 6% Debenture Allotment A/c | 26,25,00,000 | ||||
| (Allotment money received @ ₹ 35 each on 75,00,000 debentures) |
Q12. Y.Ltd. issued 2,000, 6% Debentures of ₹ 100 each payable as follows: ₹ 25 on the application; ₹ 50 on the allotment, and ₹ 25 on the First and Final call.
The solution to this question is as follows:
Books of Y Ltd.
Journal
| Date | Particulars | L.F. | DebitAmount₹ | CreditAmount₹ | |
| Bank A/c | Dr. | 50,000 | |||
| To 6% Debentures Application A/c | 50,000 | ||||
| (Application money @ ₹ 25 each received for 2,0006% Debentures) | |||||
| 6% Debenture Application A/c | Dr. | 50,000 | |||
| To 6% Debenture A/c | 50,000 | ||||
| (Application money on 2,000 debentures transferred to6% Debentures Account) | |||||
| 6% Debenture Allotment A/c | Dr. | 1,00,000 | |||
| To 6% Debenture A/c | 1,00,000 | ||||
| (Debenture Allotment money @ ₹ 50 each due on 2,0006% Debentures) | |||||
| Bank A/c | Dr. | 1,00,000 | |||
| To 6% Debenture Allotment A/c | 1,00,000 | ||||
| (Allotment money for 2,000 6% Debentures received) | |||||
| 6% Debenture First and Final Call A/c | Dr. | 50,000 | |||
| To 6% Debenture A/c | 50,000 | ||||
| (Debenture First and Final Call @ 25 each due on 2,0006% Debentures) | |||||
| Bank A/c | Dr. | 50,000 | |||
| To 6% Debenture First and Final Call A/c | 50,000 | ||||
| (First and Final Call for 2,000 6% Debentures received) |
Q13. A Ltd. issued 10,000, 10% Debentures of ₹ 100 each at a premium of 5% payable as follows:
₹ 10 on Application;
₹ 20 along with premium on allotment and balance on the First and Final call. Record necessary Journal Entries.
The solution to this question is as follows:
Books of A. Ltd. Journal
| Date | Particulars | L.F. | DebitAmount₹ | CreditAmount₹ | |
| Bank A/c | Dr. | 1,00,000 | |||
| To 10% Debentures Application A/c | 1,00,000 | ||||
| (Application money received for 10,000, 10% Debenture Application @ ₹ 10 each) | |||||
| 10% Debentures Application A/c | Dr. | 1,00,000 | |||
| To 10% Debenture A/c | 1,00,000 | ||||
| (Application money @ ₹ 10 each transferred to10% Debenture Account) | |||||
| 10% Debenture Allotment A/c | Dr. | 2,50,000 | |||
| To 10% Debentures A/c | 2,00,000 | ||||
| To Securities Premium A/c | 50,000 | ||||
| (Allotment due @ ₹ 25 each including premium ₹ 5 on10,000, 10% Debentures) | |||||
| Bank A/c | Dr. | 2,50,000 | |||
| To 10% Debenture Allotment A/c | 2,50,000 | ||||
| (Allotment money received on allotment @ ₹ 25 each for10,000 10% Debentures) | |||||
| 10% Debenture First and Final Call A/c | Dr. | 7,00,000 | |||
| To 10% Debenture A/c | 7,00,000 | ||||
| (First and Final Calls @ ₹ 70 each on 10,00010% Debentures due) | |||||
| Bank A/c | Dr. | 7,00,000 | |||
| To 10% Debenture First and Final Call A/c | 7,00,000 | ||||
| (Debenture First and Final Call received @ ₹ 70 each for10,000 10% Debentures) |
Q14. A. Ltd. issued 90,00,000, 9% Debenture of ₹ 50 each at a discount of 8%, redeemable at par any time after 9 years. Record necessary entries in the books of A. Ltd.
The solution for this question is as follows
Books of A. Ltd. Journal
| Date | Particulars | L.F | DebitAmount₹ | CreditAmount₹ | |
| Bank A/c | Dr. | 41,40,00,000 | |||
| Discount on Issue of Debenture A/c | Dr. | 3,60,00,000 | |||
| To 9% Debenture A/c | 45,00,00,000 | ||||
| (Money received for 90,00,000 9% Debentures@ ₹ 50 each at discount of 8%) |
Alternative Method:
| Bank A/c | Dr. | 41,40,00,000 | |
| To 9% Debentures Application A/c | 41,40,00,000 | ||
| (Debenture Application money received @ ₹ 46 each on 90,00,000 9% Debentures) | |||
| 9% Debentures Application A/c | Dr. | 41,40,00,000 | |
| Discount on issue of Debentures A/c | Dr. | 3,60,00,000 | |
| To 9% Debenture A/c | 4,50,00,000 | ||
| (9% Debentures application money transferred to9% Debenture Account) |
Q15. A. Ltd. issued 4,000, 9% Debentures of ₹ 100 each on the following terms:
₹ 20 on Application;
₹ 20 on Allotment;
₹ 30 on the First call; and
₹ 30 on the Final call.
The public applied for 4,800 Debentures. Applications for 3,600 Debentures were accepted in full. Applications for 800 Debentures were allotted 400 Debentures and applications for 400 Debentures were rejected.
The solution to this question is as follows:
Books of A Ltd.
| Date | Particulars | L.F | DebitAmount₹ | CreditAmount₹ | |
| Bank A/c | Dr. | 96,000 | |||
| To 9% Debenture Application A/c | 96,000 | ||||
| (9% Debenture Application money received on 4,800 Debentures@ 20 each) | |||||
| 9% Debenture Application A/c | Dr. | 96,000 | |||
| To 9% Debenture A/c | 80,000 | ||||
| To 9% Debenture Allotment A/c | 8,000 | ||||
| To Bank A/c | 8,000 | ||||
| (9% Debenture Application money of 4000 debentures transferred to debentures Account, 400 debentures rejected returned and the remaining amount adjusted on allotment) | |||||
| 9% Debenture Allotment A/c | Dr. | 80,000 | |||
| To 9% Debenture A/c | 80,000 | ||||
| (9% Debenture Allotment due on 4,000 Debentures @ ₹ 20 each) | |||||
| Bank A/c | Dr. | 72,000 | |||
| To 9% Debenture Allotment A/c | 72,000 | ||||
| (9% Debenture Allotment money received) | |||||
| 9% Debenture First Call A/c | Dr. | 1,20,000 | |||
| To 9% Debenture A/c | 1,20,000 | ||||
| (9% Debenture First Call due on 4000 debentures @ ₹ 30 each) | |||||
| Bank A/c | Dr. | 1,20,000 | |||
| To Debenture First Call A/c | 1,20,000 | ||||
| (9% Debenture first call received for 4000 debentures@ ₹ 30 each) | |||||
| 9% Debenture Final Call A/c | Dr. | 1,20,000 | |||
| To 9% Debenture A/c | 1,20,000 | ||||
| (9% Debenture Final Call due on 4000 debentures@ ₹ 30 each ) | |||||
| Bank A/c | Dr. | 1,20,000 | |||
| To 9% Debenture Final Call A/c | 1,20,000 | ||||
| (9% Debenture Final Call received on 4000 debentures@ ₹ 30 each) |
Q16. T. Ltd. offered 2,00,000, 8% debenture of ₹ 500 each on June 30, 2014, at a premium of 10% payable as ₹ 200 on application (including premium) and balance on the allotment, redeemable at par after 8 years. But applications are received 3, 00,000 debentures, and the allotment is made on a pro-rata basis. All the money due on application and allotment is received. Record necessary entries regarding the issue of debentures.
The solution to this question is as follows:
Books of T. Ltd.Journal
| Date | Particulars | L.F. | Debit Amount(₹) | credit amount(₹) | |
| 2014 | |||||
| Jun. 30 | Bank A/c | Dr. | 6,00,00,000 | ||
| To 8% Debenture Application A/c | 6,00,00,000 | ||||
| (8% Debenture application money received for 3,00,000debentures @ ₹200 each) | |||||
| Jun.30 | 8% Debenture Application A/c | Dr. | 6,00,00,000 | ||
| To 8% Debenture A/c | 3,00,00,000 | ||||
| To 8% Debenture Allotment A/c | 2,00,00,000 | ||||
| To Securities Premium A/c | 1,00,00,000 | ||||
| (8% Debenture Application money of 2,00,000 debentures @₹200 each including ₹50 premium transferred to Debenture Account and rest of the amount adjusted on allotment) | |||||
| 8% Debenture Allotment A/c | Dr. | 7,00,00,000 | |||
| To 8% Debenture A/c | 7,00,00,000 | ||||
| (8% Debenture allotment on 2,00,000 debentures @₹350 due) | |||||
| Bank A/c | Dr. | 5,00,00,000 | |||
| To 8% Debenture Allotment A/c | 5,00,00,000 | ||||
| (8% Debenture Allotment money received) |
Q17. X.Ltd. invites applications for the issue of 10,000, 14% debentures of ₹ 100 each payable as to ₹ 20 on the application, ₹ 60 on the allotment, and the balance on a call. The company receives applications for 13,500 debentures, out of which applications for 8,000 debentures are allotted in full, 5,000 only 40%, and the remaining rejected. The surplus money on partially allotted applications is utilized towards allotment. All the sums due are duly received.
The solution for this question is as follows:
Books of X. Ltd. Journal
| Date | Particulars | L.F. | DebitAmount₹ | CreditAmount₹ |
| Bank A/c | Dr. | 2,70,000 | ||
| To 14% Debenture Application A/c | 2,70,000 | |||
| (14% Debenture application money for 13,500 debentures@ 20 each received) | ||||
| 14% Debenture Application A/c | Dr. | 2,70,000 | ||
| To 14% Debenture A/c | 2,00,000 | |||
| To 14% Debenture Allotment A/c | 60,000 | |||
| To Bank | 10,000 | |||
| (14% Debenture Application money of 10,000 @ ₹ 20 each transferred to 14% Debentures Account and 500 debentures were rejected and returned and the rest of the amount adjusted allotment) | ||||
| 14% Debenture Allotment A/c | Dr. | 6,00,000 | ||
| To 14% Debenture A/c | 6,00,000 | |||
| (14% Debenture Allotment money due on 10,000 debentures @₹ 60 each) | ||||
| Bank A/c | Dr. | 5,40,000 | ||
| To 14% Debenture Allotment A/c | 5,40,000 | |||
| (14% Debenture Allotment money received) | ||||
| 14% Debenture First and Final Call A/c | Dr. | 2,00,000 | ||
| To 14% Debenture A/c | 2,00,000 | |||
| (14% Debenture First and Final Call money due on 10,000debentures @ 20 each) | ||||
| Bank A/c | Dr. | 2,00,000 | ||
| To 14% Debenture First and Final Call A/c | 2,00,000 | |||
| (14% Debenture First and Final Call money received on 10,000debentures @ ₹ 20 each) |
Q18. R.Ltd. offered 20, 00,000, and 10% Debenture of ₹ 200 each at a discount of 7% redeemable at a premium of 8% after 9 years. Record necessary entries in the books of R. Ltd.
The solution to this question is as follows:
Books of R.Ltd. Journal
| Date | Particulars | L.F. | DebitAmount₹ | CreditAmount₹ | |
| Bank A/c | Dr. | 37,20,00,000 | |||
| To 10% Debenture Application & Allotment A/c | 37,20,00,000 | ||||
| (Debenture Application and Allotment money receivedfor 20,00,000 10% Debentures @ ₹ 200 each) | |||||
| 10% Debenture Application and Allotment A/c | Dr. | 37,20,00,000 | |||
| Loss on Issue of Debenture A/c | Dr. | 3,20,00,000 | |||
| Discount on Issue of Debentures A/c | Dr. | 2,80,00,000 | |||
| To 10% Debenture A/c | 40,00,00,000 | ||||
| To Premium on Redemption of Debentures A/c | 3,20,00,000 | ||||
| (Allotment of 20,00,000 debenture @ ₹ 200 each at 7%discount with the term of 8% premium on redemption) |
Q19. M.Ltd. took over assets of ₹ 9, 00, 00,000 and liabilities of ₹ 70, 00,000 of S.Ltd. and issued 8%Debenture of ₹ 100 each. Record necessary entries in the books of M. Ltd.
The solution to this question is as follows:
Books of M. Ltd. Journal
| Date | Particulars | L.F. | DebitAmount₹ | CreditAmount₹ | |
| Sundry Assets | Dr. | 9,00,00,000 | |||
| To Sundry Liabilities A/c | 70,00,000 | ||||
| To S.Ltd. | 8,30,00,000 | ||||
| (Assets and liabilities of S. Ltd. taken over) | |||||
| S. Ltd. | Dr. | 8,30,00,000 | |||
| To 8% Debenture A/c | 8,30,00,000 | ||||
| (8,30,000 8% debentures @ 100 each issued to S Ltd. in consideration of assets and liabilities) | |||||
Q20. B.Ltd. purchased assets of a book value of ₹ 4, 00,000 and took over the liability of ₹ 50,000 from Mohan Bros. It was agreed that the purchase consideration, settled at ₹, 3, 80,000, be paid by issuing debentures of ₹ 100 each.
What Journal entries will be made in the following three cases, if debentures are issued: (a) at par; (b) at discount; (c) at a premium of 10%? It was agreed that any fraction of debentures is paid in cash.
The solution to this question is as follows:
Case (a)
Book of B. Ltd. Journal
| Date | Particulars | L.F. | DebitAmount₹ | CreditAmount₹ | |
| Sundry Assets A/c | Dr. | 4,00,000 | |||
| Goodwill A/c | Dr. | 30,000 | |||
| To Sundry Liabilities A/c | 50,000 | ||||
| To Mohan Bros. | 3,80,000 | ||||
| (Assets and liabilities of Mohan Bros. taken over) | |||||
| Mohan Bros. | Dr. | 3,80,000 | |||
| To Debenture A/c | 3,80,000 | ||||
| (3,800 debentures of 100 each issued to Mohan Bros. in consideration of assets and liabilities) |
Case (b)
| Sundry Assets A/c | Dr. | 4,00,000 | |||
| Goodwill A/c | Dr. | 30,000 | |||
| To Sundry Liabilities A/c | 50,000 | ||||
| To Mohan Bros. | 3,80,000 | ||||
| (Assets and liabilities of Mohan Bros. taken over) | |||||
| Mohan Bros. | Dr. | 3,80,000 | |||
| Discount on Issue of Debenture A/c | Dr. | 42,222 | |||
| To Debenture A/c | 4,22,200 | ||||
| To Bank A/c | 22 | ||||
| (Issued 4,222 debentures of ₹ 100 each at 10% discountand balance paid in cash) |
Case (c)
| Sundry Assets A/c | Dr. | 4,00,000 | |||
| Goodwill A/c | Dr. | 30,000 | |||
| To Sundry Liabilities A/c | 50,000 | ||||
| To Mohan Bros | 3,80,000 | ||||
| (Assets and liabilities of Mohan Bros. taken over) | |||||
| Mohan Bros | Dr. | 3,80,000 | |||
| To Debentures A/c | 3,45,400 | ||||
| To Securities Premium A/c | 34,540 | ||||
| To Bank A/c | 60 | ||||
| (Issued of 3,454 debentures at 10% premium and balance paid in cash) |
Q21. X.Ltd. purchased Machinery from Y for an agreed purchase consideration of ₹ 4, 40,000 to be satisfied by the issue of 12% debentures of ₹ 100 each at a premium of ₹ 10 per debenture. Journalise the transactions.
The solution to this question is as follows
Books of X. Ltd. Journal
| Date | Particulars | L.F. | DebitAmount₹ | CreditAmount₹ | |
| Machinery A/c | Dr. | 4,40,000 | |||
| To Y | 4,40,000 | ||||
| (Machinery purchased from Y) | |||||
| Y | Dr. | 4,40,000 | |||
| To 12% Debentures A/c | 4,00,000 | ||||
| To Securities Premium A/c | 40,000 | ||||
| (Allotted 4,000 debentures of ₹ 100 each at a premium of ₹ 10 per debenture in consideration of Machinerypurchased) |
Q22. X.Ltd. issued 15,000, 10% debentures of ₹ 100 each. Give journal entries and the Balance Sheet in each of the following cases:
(i) The debentures are issued at a premium of 10%;
(ii) The debentures are issued at a discount of 5%;
(iii) The debentures are issued as collateral security to the bank against a loan of ₹ 12, 00,000; and
(iv) The debentures are issued to a supplier of machinery costing ₹ 13, 50,000.
The solution to this question is as follows:
(i)
Books of X. Ltd.Journal
| Date | Particulars | L.F | DebitAmount₹ | credit amount ₹ | |
| Bank A/c | Dr. | 16,50,000 | |||
| To 10% Debentures A/c | 15,00,000 | ||||
| To Securities Premium A/c | 1,50,000 | ||||
| (Issued 15,000, 10% debentures of ₹ 100 each at10% premium) | |||||
| X Ltd. | |||||
| Balance Sheet | |||||
| Particulars | Note No. | Amount (₹) | |||
| I. Equity and Liabilities | |||||
| 1. Shareholders’ Funds | |||||
| a. Reserves and Surplus | 1 | 1,50,000 | |||
| 2. Non-Current Liabilities | |||||
| a. Long-Term Borrowings | 2 | 15,00,000 | |||
| 3. Current Liabilities | |||||
| Total | 16,50,000 | ||||
| II. Assets | |||||
| 1. Non-Current Assets | |||||
| 2. Current Assets | |||||
| a. Cash and Cash Equivalents | 3 | 16,50,000 | |||
| Total | 16,50,000 | ||||
ACCOUNT NOTES
| Note No. | Particulars | Amount(₹) |
| 1 | Reserves and Surplus | |
| Securities Premium | 1,50,000 | |
| 2 | Long-Term Borrowings | |
| 10% Debentures (Secured) | 15,00,000 | |
| 3 | Cash and Cash Equivalents | |
| Cash at Bank | 16,50,000 | |
(ii)
| Bank A/c | Dr. | 14,25,000 | |||
| Discount on Issue of Debentures A/c | Dr. | 75,000 | |||
| To 10% Debentures | 15,00,000 | ||||
| (Issued 15,000 10% Debenture of ₹ 100 each at5% discount) | |||||
| X Ltd. | |||||
| Balance Sheet | |||||
| Particulars | Note No. | Amount (₹) | |||
| I. Equity and Liabilities | |||||
| 1. Shareholder’s Funds | |||||
| 2. Non-Current Liabilities | |||||
| a. Long-Term Borrowings | 1 | 15,00,000 | |||
| 3. Current Liabilities | |||||
| Total | 15,00,000 | ||||
| II. Assets | |||||
| 1. Non-Current Assets | |||||
| a. Other Non-Current Assets | 2 | 75,000 | |||
| 2. Current Assets | |||||
| a. Cash and Cash Equivalents | 3 | 14,25,000 | |||
| Total | 15,00,000 | ||||
ACCOUNT NOTES
| Note No. | Particulars | Amount(₹) |
| 1 | Long-Term Borrowings | |
| 10% Debentures (Secured) | 15,00,000 | |
| 2 | Other Non-Current Assets | |
| Discount on Issue of Debentures | 75,000 | |
| 3 | Cash and Cash Equivalents | |
| Cash at Bank | 14,25,000 | |
(iii) No entry will be passed for issuing debentures as a collateral security
X Ltd.
Balance Sheet
| Particulars | Note No. | Amount(₹) |
| I. Equity and Liabilities | ||
| 1. Shareholders’ Funds | ||
| 2. Non-Current Liabilities | ||
| a. Long-Term Borrowings | 1 | 12,00,000 |
| 3. Current Liabilities | ||
| Total | 12,00,000 | |
| II. Assets | ||
| 1. Non-Current Assets | ||
| 2. Current Assets | ||
| a. Cash and Cash Equivalents | 2 | 12,00,000 |
| Total | 12,00,000 |
ACCOUNT NOTES
| Note No. | Particulars | Amount(₹) |
| 1 | Long-Term Borrowings | |
| Bank Loan (Secured against issue Debentures of ₹ 12,00,000) | 12,00,000 | |
| 2 | Cash and Cash Equivalents | |
| Cash at Bank | 12,00,000 |
Alternative Method
| Debenture Suspense A/c | Dr. | 15,00,000 | |||
| To 10% Debentures A/c | 15,00,000 | ||||
| (Issued 15,000 10% Debentures of ₹ 100 each as collateral security to the bank against a loan of ₹ 12,00,000) | |||||
| X Ltd. | |||||
| Balance Sheet | |||||
| Particulars | Note No. | Amount (₹) | |||
| I. Equity and Liabilities | |||||
| 1. Shareholders’ Fund | |||||
| 2. Non-Current Liabilities | |||||
| a. Long-Term Borrowings | 1 | 12,00,000 | |||
| 3. Current Liabilities | |||||
| Total | 12,00,000 | ||||
| II. Assets | |||||
| 1. Non-Current Assets | |||||
| 2. Current Assets | |||||
| a. Cash and Cash Equivalents | 2 | 12,00,000 | |||
| Total | 12,00,000 | ||||
ACCOUNT NOTES
| Note No. | Particulars | Amount(₹) |
| 1 | Long Term Borrowings | |
| Secured: | ||
| Bank Loan | 12,00,000 | |
| 10 % Debentures (Secured against the issue of Debentures of ₹ 12,00,000) 1,5,00,000 | ||
| Less: Debenture Suspense Account 15,00,000 | – | |
| 12,00,000 | ||
| 2 | Cash and Cash Equivalents | |
| Cash at Bank | 12,00,000 | |
(iv)
| Machinery A/c | Dr. | 13,50,000 | |||
| To Vendor A/c | 13,50,000 | ||||
| (Machinery purchased from vendor) | |||||
| Vendor A/c | Dr. | 13,50,000 | |||
| Discount on Issue of Debentures A/c | Dr. | 1,50,000 | |||
| To 10% Debenture A/c | 15,00,000 | ||||
| (15,000 10% Debentures @ ₹ 100 each issued at10% discount to the vendor in consideration ofMachinery of ₹ 13,50,000) | |||||
| X Ltd. | |||||
| Balance Sheet | |||||
| Particulars | Note No. | Amount (₹) | |||
| I. Equity and Liabilities | |||||
| 1. Shareholders’ Funds | |||||
| 2. Non-Current Liabilities | |||||
| a. Long-Term Borrowings | 1 | 15,00,000 | |||
| 3. Current Liabilities | |||||
| Total | 15,00,000 | ||||
| II. Assets | |||||
| 1. Non-Current Assets | |||||
| a. Fixed Assets | |||||
| i. Tangible Assets | 2 | 13,50,000 | |||
| b. Other Non-Current Assets | 3 | 1,50,000 | |||
| 2. Current Assets | |||||
| Total | 15,00,000 |
ACCOUNT NOTES
| Note No. | Particulars | Amount(₹) |
| 1 | Long Term Borrowings | |
| 10% Debentures (Secured) | 15,00,000 | |
| 2 | Tangible Assets | |
| Plant and Machinery | 13,50,000 | |
| 3 | Other Non-Current Assets | |
| Discount on Issue of Debentures | 1,50,000 | |
Q23. Journalise the following:
(i) A debenture issued at ₹ 95, repayable at ₹ 100;
(ii) A debenture issued at ₹ 95, repayable at ₹ 105; and
(iii) A debenture issued at ₹ 100, repayable at ₹ 105;
The face value of debenture in each of the above cases is ₹ 100.
The solution to this question is as follows:
| S.No. | Particulars | L.F | DebitAmount₹ | CreditAmount ₹ | |
| (i) | Bank A/c | Dr. | 95 | ||
| Discount on Issue of Debenture A/c | Dr. | 5 | |||
| To Debenture A/c | 100 | ||||
| (Debenture of ₹ 100 issued at ₹ 5 discountwith the term repayable at ₹ 100) | |||||
| (ii) | Bank A/c | Dr. | 95 | ||
| Loss on Issue of Debenture A/c | Dr. | 10 | |||
| To Debenture A/c | 100 | ||||
| To Premium on Redemption of Debentures | 5 | ||||
| (Debenture of ₹ 100 issued at a discount of₹ 5 and with the term repayable at ₹ 105) | |||||
| (iii) | Bank A/c | Dr. | 100 | ||
| Loss on Issue of Debenture A/c | Dr. | 5 | |||
| To Debenture A/c | 100 | ||||
| To Premium on Redemption of Debenture A/c | 5 | ||||
| (Debenture of ₹ 100 issued with the termrepayable at ₹ 105) |
Q24. A.Ltd. Issued 50, 00,000, 8% Debenture of ₹ 100 at a discount of 6% on April 01, 2009, redeemable at a premium of 4% by draw of lots as under:
20, 00,000 Debentures on March, 2011
10, 00,000 Debentures on March, 2013
20, 00,000 Debentures on March, 2014
Compute the amount of discount to be written-off in each year till debentures are paid. Also, prepare discount/loss on the issue of debenture account.
The solution to this question is as follows:
Loss on issue of debenture = 6% (discount on issue) + 4% (premium on redemption) = 10%
| At the end of | Debenture Outstanding | Ratio | Loss to be written off every year | |
| March 2010 | 50,00,00,000 | 5 | = | 1,38,88,889 |
| March 2011 | 50,00,00,000 | 5 | = | 1,38,88,889 |
| March 2012 | 30,00,00,000 | 3 | = | 83,33,333 |
| March 2013 | 30,00,00,000 | 3 | = | 83,33,333 |
| March 2014 | 20,00,00,000 | 2 | = | 55,55,556 |
| 18 | Rs 5,00,00,000 |
Loss on Issue of Debenture Account
Dr. Cr.
| Date | Particulars | J.F. | Amount₹ | Date | Particulars | J.F. | Amount₹ |
| 2009April 01 | Debenture | 5,00,00,000 | 2010March 31 | Profit and Loss | 1,38,88,889 | ||
| Balance c/d | 3,61,11,111 | ||||||
| 5,00,00,000 | 5,00,00,000 | ||||||
| 2010April 01 | Balance b/d | 3,61,11,111 | 2011March 31 | Profit and Loss | 1,38,88,889 | ||
| Balance c/d | 2,22,22,222 | ||||||
| 3,61,11,111 | 3,61,11,111 | ||||||
| 2011April 01 | Balance b/d | 2,22,22,222 | 2012March 31 | Profit and Loss | 83,33,333 | ||
| Balance c/d | 1,38,88,889 | ||||||
| 2,22,22,222 | 2,22,22,222 | ||||||
| 2012April 01 | Balance b/d | 1,38,88,889 | 2013March 31 | Profit and Loss | 83,33,333 | ||
| Balance c/d | 55,55,556 | ||||||
| 1,38,88,889 | 1,38,88,889 | ||||||
| 2013April 01 | Balance b/d | 55,55,556 | 2014March 31 | Profit and Loss | 55,55,556 | ||
| 55,55,556 | 55,55,556 | ||||||
Q25. A company issues the following debentures:
(i) 10,000, 12% debentures of ₹ 100 each at par but redeemable at a premium of 5% after 5 years;
(ii) 10,000, 12% debentures of ₹ 100 each at a discount of 10% but redeemable at par after 5 years;
(iii) 5,000, 12% debentures of ₹ 1,000 each at a premium of 5% but redeemable at par after 5 years;
(iv) 1,000, 12% debentures of ₹ 100 each issued to a supplier of machinery costing ₹ 95,000. The debentures are repayable after 5 years; and
(v) 300, 12% debentures of ₹ 100 each as collateral security to a bank that has advanced a loan of ₹ 25,000 to the company for a period of 5 years.
Pass the journal entries to record the: (a) issue of debentures; and (b) repayment of debentures after the given period.
The solution for this question is as follows
In the books of …………..Journal
a) Issue of Debentures
| S. No. | Particulars | L.F. | DebitAmount₹ | CreditAmount₹ | |
| (i) | Bank A/c | Dr. | 10,00,000 | ||
| To 12% Debenture Application A/c | 10,00,000 | ||||
| (Debenture Application money of 10,000 12% debentures@ 100 each received) | |||||
| 12% Debenture Application A/c | Dr. | 10,00,000 | |||
| Loss on Issue of Debenture A/c | Dr. | 50,000 | |||
| To 12% Debenture A/c | 10,00,000 | ||||
| To Premium on Redemption of Debenture A/c | 50,000 | ||||
| (Debenture Application money of 10,000 12% debentures @ ₹ 100 each transferred to 12% Debentures Account and the Debentures are issued with term of repayable at 5% premium) | |||||
| (ii) | Bank A/c | Dr. | 9,00,000 | ||
| To Debenture Application and Allotment A/c | 9,00,000 | ||||
| (Debenture Application money received excluding discount on the issue) | |||||
| 12% Debenture Application & Allotment A/c | Dr. | 9,00,000 | |||
| Discount on Issue of Debenture A/c | Dr. | 1,00,000 | |||
| To Debentures A/c | 10,00,000 | ||||
| (Debenture Allotment made due) | |||||
| (iii) | Bank A/c | Dr. | 52,50,000 | ||
| To Debenture Application and Allotment A/c | 52,50,000 | ||||
| (Debenture Application money received) | |||||
| Debenture Application and Allotment A/c | Dr. | 52,50,000 | |||
| To Debenture A/c | 50,00,000 | ||||
| To Security Premium A/c | 2,50,000 | ||||
| (Allotment of debenture at a premium) | |||||
| (iv) | Machinery A/c | Dr. | 95,000 | ||
| To Vendor A/c | 95,000 | ||||
| (Machinery purchased from supplier) | |||||
| Vender A/c | Dr. | 95,000 | |||
| Discount on Issue of Debenture | Dr. | 5,000 | |||
| To 12% Debenture A/c | 1,00,000 | ||||
| (Debenture issue at discount to the vendor of machinery) | |||||
| (v) | 12% Debenture Suspense A/c | Dr. | 30,000 | ||
| To Debenture A/c | 30,000 | ||||
| (300, 12% Debentures of ₹ 100 each issued as collateral security to the bank against a loan of ₹ 25,000) |
b) Repayment of Debentures
| S.No. | Particulars | L.F. | DebitAmount₹ | CreditAmount₹ | |
| (i) | 12% Debentures A/c | Dr. | 10,00,000 | ||
| Premium on Redemption of Debenture A/c | Dr. | 50,000 | |||
| To Debenture Holders A/c | 10,50,000 | ||||
| (Amount due on redemption of debentures) | |||||
| Debenture Holders A/c | Dr. | 10,50,000 | |||
| To Bank A/c | 10,50,000 | ||||
| (Payment made to Debenture Holders) | |||||
| (ii) | 12% Debenture A/c | Dr. | 10,00,000 | ||
| To Debenture Holders A/c | 10,00,000 | ||||
| (Amount due on redemption of debentures) | |||||
| Debenture Holders A/c | Dr. | 10,00,000 | |||
| To Bank A/c | 10,00,000 | ||||
| (Payment made to Debenture Holders) | |||||
| (iii) | 12% Debenture A/c | Dr. | 50,00,000 | ||
| To Debenture Holders A/c | 50,00,000 | ||||
| (Amount due on redemption of debentures) | |||||
| Debenture Holders A/c | Dr. | 50,00,000 | |||
| To Bank A/c | 50,00,000 | ||||
| (Payment made to Debenture Holders) | |||||
| (iv) | 12% Debenture A/c | Dr. | 1,00,000 | ||
| To Vendor A/c | 1,00,000 | ||||
| (Amount due to vendor) | |||||
| Vender A/c | Dr. | 1,00,000 | |||
| To Bank | 1,00,000 | ||||
| (Payment made to the vendor) | |||||
| (v) | 12% Debenture A/c | Dr. | 30,000 | ||
| To Debenture Suspense A/c | 30,000 | ||||
| (Debenture and debenture Suspense Account closed) |
2nd Puc Accountancy Chapter 7 Notes
Q26. A company issued debentures of the face value of ₹ 5, 00,000 at a discount of 6% on April 01, 2012. These debentures are redeemable by annual drawings of ₹, 1, 00,000 made on March 31 each year. The directors decided to write off discounts based on the debentures outstanding each year.
Calculate the amount of discount to be written off each year. Give journal entries also.
The solution for this question is as follows
Journal
| Date | Particulars | L.F. | DebitAmount₹ | CreditAmount₹ | |
| 2012 | |||||
| Apr 1 | Bank A/c | Dr. | 4,70,000 | ||
| To Debenture Application and Allotment A/c | 4,70,000 | ||||
| (Debenture Application money received) | |||||
| Apr 1 | Debenture Application and Allotment A/c | Dr. | 4,70,000 | ||
| Discount on Issue of Debenture A/c | Dr. | 30,000 | |||
| To Debentures A/c | 5,00,000 | ||||
| (Debenture Application money transferred to Debenture Account) |
Assuming that the amount of discount on the issue of debentures is to be written off in 5 years.
| Date | Particulars | L.F. | DebitAmount₹ | CreditAmount₹ | |
| 2013Mar 31 | Profit and Loss A/c | Dr. | 10,000 | ||
| To Discount on the Issue of Debentures A/c | 10,000 | ||||
| (Discount on issue of debentures written off) | |||||
| 2014 | |||||
| Mar 31 | Profit and Loss A/c | Dr. | 8,000 | ||
| To Discount on the Issue of Debentures A/c | 8,000 | ||||
| (Discount on issue of debentures written off) | |||||
| 2015 | |||||
| Mar 31 | Profit and Loss A/c | Dr. | 6,000 | ||
| To Discount on the Issue of Debenture A/c | 6,000 | ||||
| (Discount on issue of debentures written off) | |||||
| 2016 | |||||
| Mar 31 | Profit and Loss A/c | Dr. | 4,000 | ||
| To Discount on issue of Debentures A/c | 4,000 | ||||
| (Discount on issue of debenture written off) | |||||
| 2017 | |||||
| Mar 31 | Profit and Loss A/c | Dr. | 2,000 | ||
| To Discount on Issue of Debenture A/c | 2,000 | ||||
| (Discount on issue of debenture written off) | |||||
| Year | Debenture outstanding | Ratio | Amount written off | |
| 2012 | 5,00,000 | 5 | = | 10,000 |
| 2013 | 4,00,000 | 4 | = | 8,000 |
| 2014 | 3,00,000 | 3 | = | 6,000 |
| 2015 | 2,00,000 | 2 | = | 4,000 |
| 2016 | 1,00,000 | 1 | = | 2,000 |
| 15 | 30,000 |
Q27. A company issued 10% Debentures of the face value of ₹, 1, 20,000 at a discount of 6% on April 01, 2011. The debentures are payable by annual drawings of ₹ 40,000 commencing from the end of the third year.
How will you deal with discounts on debentures?
Show the discount on debentures account in the company ledger for the period of duration of debentures. Assume accounts are closed on March 31 every year.
The solution to this question is as follows
In the books of……………Journal
| Date | Particulars | L.F. | DebitAmount₹ | CreditAmount₹ | |
| 2011Apr. 01 | Bank A/c | Dr. | 1,12,800 | ||
| To Debenture Application and Allotment A/c | 1,12,800 | ||||
| (Debentures Application Money received) | |||||
| Apr. 01 | Debentures Application and Allotment A/c | Dr. | 1,12,800 | ||
| Discount on issue of Debenture A/c | Dr. | 7,200 | |||
| To 10% Debenture A/c | 1,20,000 | ||||
| (Debenture Application Money transferred to Debenture Account) | |||||
| 2012Mar. 31 | Profit and Loss A/c | Dr. | 1,800 | ||
| To Discount on the Issue of Debentures A/c | 1,800 | ||||
| (Discount on issue of debenture written off) | |||||
| 2013Mar. 31 | Profit and Loss A/c | Dr. | 1,800 | ||
| To Discount on the Issue of Debenture A/c | 1,800 | ||||
| (Discount on issue of debenture written off) | |||||
| 2014Mar. 31 | Profit and Loss A/c | Dr. | 1,800 | ||
| To Discount on the Issue of Debenture A/c | 1,800 | ||||
| (Discount on issue of debenture written off) | |||||
| 2015 | |||||
| Mar. 31 | Profit and Loss A/c | Dr. | 1,200 | ||
| To Discount on the Issue of Debentures A/c | 1,200 | ||||
| (Discount on issue of debenture written off) | |||||
| 2016 | |||||
| Mar. 31 | Profit and Loss A/c | Dr. | 600 | ||
| To Discount on the Issue of Debentures A/c | 600 | ||||
| (Discount on issue of debenture written off) |
Discount on Issue of Debentures
Dr. Cr.
| Date | Particulars | J.F. | Amount₹ | Date | Particulars | J.F. | Amount₹ |
| 2011Apr. 01 | 10% Debentures | 7,200 | 2012Mar. 31 | Profit and Loss | 1,800 | ||
| Balance c/d | 5,400 | ||||||
| 7,200 | 7,200 | ||||||
| 2012Apr. 01 | Balance b/d | 5,400 | 2013Mar. 31 | Profit and Loss | 1,800 | ||
| Balance c/d | 3,600 | ||||||
| 5,400 | 5,400 | ||||||
| 2013Apr. 01 | Balance b/d | 3,600 | 2014Mar. 31 | Profit and Loss | 1,800 | ||
| Balance c/d | 1,800 | ||||||
| 3,600 | 3,600 | ||||||
| 2014Apr. 01 | Balance b/d | 1,800 | 2015Mar. 31 | Profit and Loss | 1,200 | ||
| Balance c/d | 600 | ||||||
| 1,800 | 1,800 | ||||||
| 2015Apr. 01 | Balance b/d | 600 | 2016Mar 31 | Profit and Loss | 600 | ||
| 600 | 600 |
i) Working Note:
Amount of Discount on Issue of Debenture:
| Year | Debenture Outstanding | Ratio | Amount written off every year | |
| 2011-12 | 1,20,000 | 3 | = | 1,800 |
| 2012-13 | 1,20,000 | 3 | = | 1,800 |
| 2013-14 | 1,20,000 | 3 | = | 1,800 |
| 2014-15 | 80,000 | 2 | = | 1,200 |
| 2015-16 | 40,000 | 1 | = | 600 |
| 12 | ₹ 7,200 |
Q28. B. Ltd. issued debentures at 94% for ₹ 4, 00,000 on April 01, 2011, repayable by five equal drawings of ₹ 80,000 each. The company prepares its final accounts on March 31 every year.
Indicate the amount of discount to be written off every accounting year assuming that the company decides to write off the debentures discount during the life of debentures. (Amount to be written-off: 2012 ₹ 8,000; 2013 ₹ 6,400; 2014 ₹ 4,800; 2015 ₹ 2,000; 2016 ₹ 1,600).
The solution for this question is as follows:
Amount of discount to be written off every year
In 2012 = ₹8,000
In 2013 = ₹6,400
In 2014 = ₹4,800
In 2015 = ₹3,200
In 2016 = ₹1,600
Working Notes:
| Year | Debentures Outstanding | Ratio | Months | New Ratio (Ratio × Months) | Amounts are written off |
| 2012 | |||||
| Apr-Mar | 3,20,000 | 5 | 12 | 60 | 24,000×60180=₹8,00024,000×60180=₹8,000 |
| 2013 | |||||
| Apr-Mar | 2,40,000 | 4 | 12 | 48 | 24,000×48180=₹6,40024,000×48180=₹6,400 |
| 2014 | |||||
| Apr-Mar | 1,60,000 | 3 | 12 | 36 | 24,000×36180=₹4,80024,000×36180=₹4,800 |
| 2015 | |||||
| Apr-Mar | 80,000 | 2 | 12 | 24 | 24,000×24180=₹3,20024,000×24180=₹3,200 |
| 2016 | |||||
| Apr-Mar | 80,000 | 1 | 12 | 12 | 24,000×12180=₹1,60024,000×12180=₹1,600 |
| 180 |
Important Note: ₹2,000 discount has been written off in the year 2015 which is incorrect because then the total discount amounts to ₹22,800. Therefore, it should be ₹3,200.
Q29. B. Ltd. issued 1,000, 12% debentures of ₹ 100 each on April 01, 2014, at a discount of 5% redeemable at a premium of 10%.
Give journal entries relating to the issue of debentures and debentures interest for the period ending March 31, 2015, assuming that interest is paid half yearly on September 30 and March 31 and tax deducted at source is 10%.
The solution to this question is as follows
| Date | Particulars | L.F. | DebitAmount₹ | CreditAmount ₹ |
| 2014 | ||||
| Apr. 01 | Bank A/c | Dr. | 95,000 | |
| Loss on Issue on Debentures A/c | Dr. | 15,000 | ||
| To 12% Debenture A/c | 1,00,000 | |||
| To Premium on Redemption of Debentures A/c | 10,000 | |||
| (Debenture issued at a discount and redeemable at Premium) | ||||
| Sept. 30 | Debenture Interest A/c | Dr. | 6,000 | |
| To Income Tax Payable A/c | 600 | |||
| To Debenture Holders A/c | 5,400 | |||
| (Amount of interest on 12% debentures ₹ 1,00,000 due for6 months and 10% tax deducted at source) | ||||
| Sept. 30 | Debenture Holders A/c | Dr. | 5,400 | |
| To Bank A/c | 5,400 | |||
| (Interest paid to Debenture Holders) | ||||
| 2015Mar. 31 | Debenture Interest A/c | Dr. | 6,000 | |
| To Income Tax Payable A/c | 600 | |||
| To Debenture Holders A/c | 5,400 | |||
| (Amount of interest on 12% Debentures ₹ 1,00,000 due for6 months and 10% tax deducted at source) | ||||
| Mar. 31 | Debenture Holders A/c | Dr. | 5,400 | |
| To Bank A/c | 5,400 | |||
| (Interest paid to Debenture Holders) | ||||
| Mar. 31 | Profit and Loss A/c | Dr. | 12,000 | |
| To Debenture Interest A/c | 12,000 | |||
| (Interest on debentures transferred to Profit and Loss Account) |
Q30. What journal entries will be made in the following cases when the company redeems debentures at the expiry of the period by serving the notice:
(a) when debentures were issued at par with a condition to redeem them at a premium;
(b) when debentures were issued at a premium with a condition to redeem that at par; and
(c) when debentures were issued at discount with a condition to redeem them at a premium?
The solution for this question is as follows:
| S.No. | Particulars | L.F. | Debit Amount₹ | credit amount | |
| (a) | Debenture A/c | Dr. | |||
| Premium on Redemption of Debenture A/c | Dr. | ||||
| To Debenture Holders A/c | |||||
| (Amount due for the redemption of Debentures) | |||||
| Debenture Holders A/c | Dr. | ||||
| To Bank A/c | |||||
| (Payment made to Debenture Holders) | |||||
| (b) | Debenture A/c | Dr. | |||
| To Debenture Holders A/c | |||||
| (Amount due for the redemption of debentures that were issued at a premium with a term of redeemable at par) | |||||
| Debenture Holders A/c | Dr. | ||||
| To Bank A/c | |||||
| (Payment made to Debenture Holders) | |||||
| (c) | Debenture A/c | Dr. | |||
| Premium on Redemption of Debenture A/c | Dr. | ||||
| To Debentures Holders A/c | |||||
| (Amount due for redemption on debentures that were issued at discount with the term of redeemable at a premium) | |||||
| Debenture Holders A/c | Dr. | ||||
| To Bank A/c | |||||
| (Payment made to Debenture Holders) | |||||
Concepts covered in this chapter –
- Meaning and definition of debentures
- Difference between Shares and Debentures
- Types of debentures
- Issue of debentures
- Oversubscription
- Interest on debentures
- Sinking fund method
FAQ:
The debenture is derived from the Latin word “debate” which translates to borrow. Debentures are not backed by any collaterals. These are issued by governments and corporations to raise funds or capital for long-term borrowing.
The Debenture Redemption Reserve (DRR) is shown on a balance sheet under the header Reserves and Surplus as per the revised Schedule VI of the Company Act.
The situation where a debenture holder is able to convert existing debentures into equity shares or new debentures after the expiry of the existing debenture’s time period is known as the redemption of debentures by conversion.
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