NCERT Solution for Class 12 Accountancy Chapter 2 - Issue and Redemption of Debentures

NCERT Solutions are said to be an extremely helpful book while preparing for the CBSE Class 12 Accountancy examinations. This study material owns a deep knowledge and the Solutions collected by the subject matter exerts are no distinct.
NCERT Solution For Class 12 Accountancy Chapter 2 – Issue And Redemption Of Debentures furnishes us with an all-inclusive data to all the concepts. As the students would have learnt the basic fundamentals about the subject of accountancy in class 11, this curriculum for class 12 is a continual part of it; which explains the concepts in a great way.

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Access the Solution for class 12 Accountancy Chapter 2 – Issue And Redemption Of Debentures

Short Questions for NCERT Accountancy Solutions Part 2 Class 12 Chapter 2

1. What is meant by a Debenture?

Debenture is derived from the Latin word “debere” 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.

2. 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 bearer of the debenture. These are also called as unregistered debentures.

3. 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 case of company taking a loan from a financial institution, in such cases, 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.

4. 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 issue of debenture for consideration other than cash. It helps both the seller and purchaser as the seller gets interest on debentures issued and the purchaser do not need to arrange cash immediately. Debentures are issued at par, premium or at a discounted rate to the seller.

 

 

 

 

5. What is meant by ‘Issue of debenture at discount and redeemable at premium?

It may happen that due to challenging market conditions a company has to raise funds from 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 as issue of debenture at discount and redeemable at premium. The difference that is generated due to such arrangement is treated as loss on issue of debenture. 

6. What is ‘Capital Reserve’?

The reserve that is created from the capital profits is called as Capital Reserve, these are profits that is obtained from activities that are different than the normal business activities. Examples of such activities are: profit obtained from reissuing of debentures, premium on issue of share and debenture, profit redemption on debenture, profits obtained from sale of fixed asset etc. These can be used to issue bonus shares but cannot be used for paying dividend. The capital reserve is used to meet future capital losses.

7. What is meant by an ‘Irredeemable Debenture’?

Debentures that are not redeemable by a company during its life time are called irredeemable debentures. These debentures are only payable at the time of winding up of the company. Also called as perpetual debentures because of indefinite life span. These type of debentures are not issued in India.

8. 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 debenture is eligible to be converted into equity shares.

2. Fully convertible debentures: In this all of the debenture can convert to equity shares.

9. 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

10. What is discount on issue of debentures?

Debentures which 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 discount.

11. What is meant by ‘Premium on Redemption of Debentures’?

Debenture redeemed at premium refers to the situation where Debentures are redeemed at a price which is more than its face value or nominal value. The difference between the redeemed price and face value of debenture is regarded as a capital loss and hence needs to be written off. The premium obtained on redemption of debenture is shown on liabilities side of balance sheet.

12. 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 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

 

 

13. Name the head under which ‘discount on issue of debentures’ appears in the Balance Sheet of a company.

Discount on 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 balance sheet under “Miscellaneous Expenditures” heading until it is written off.

14. 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 payment 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. Following methods are used in redeeming debentures:

1. By conversion into equity shares and new debentures

2. By annual drawing in instalments

3. By purchasing debentures in an open market

4. Lump sum payment on maturity date

5. Utilizing call or put option

15. Can the company purchase its own debentures?

Yes, it is possible if a company which is authorised 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 market.

16. 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 debentures time period is known as redemption of debentures by conversion.

17. How would you deal with ‘Premium on Redemption of Debentures’?

Debentures which are redeemed for a price which is more than its par value or nominal value is known as debentures redeemed at 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 Balance Sheet till debentures are redeemed. The accounting treatment can be represented as:

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 18. What is meant by ‘Redemption 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 maturity of 18 months

2. Companies involved in infrastructure sector like maintenance, construction, business development activities

19. What is meant by redemption of debentures by ‘Purchase in the Open Market’?

Redemption of debentures by purchase in open market refers to the condition when a company is authorised 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 market.

20. Under which head is the ‘Debenture Redemption Reserve’ shown in the Balance Sheet?

The Debenture Redemption Reserve (DRR) is shown on balance sheet under header Reserves and Surplus as per the revised Schedule VI of the Company Act.

Long Questions for NCERT Accountancy Solutions Part 2 Class 12 Chapter 2

1. 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 acknowledgement of a debt that is taken by a company. There are many types of debentures based on the nature which are:

1. Based on 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 type 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 issue of 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 basing solely on the basis of credibility of the issuer.

4. Based on Priority

i. First Debenture: Also known as preferred debenture. These debentures are the first to be paid in case of winding up of a company.

ii. Second Debenture: These are ordinary debenture 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 and to the debenture.

ii. Bearer Debenture: These debenture are transferred by delivery to the new holder.

2. 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 company

Debentures are funds that are borrowed from outside i.e. it is debt for company

Dividend

Shareholders earn dividend from the profit of the company

Debenture holders earn interest for the amount taken as debt

Deduction

Being appropriation of profit not liable to be deducted

Being a 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 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 equity and liabilities side of Balance Sheet

Shown as non-current liabilities in equity and liabilities side of 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.

 

3. 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 case of company taking a loan from a financial institution, in such cases, 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

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For creating accounting record Debenture Suspense A/C is debited and debenture account is credited. Debentures are represented in liabilities side and Debenture suspense A/c is shown on credit side. When the debt is paid off by the business debenture account is debited and debenture suspense account gets credited.

4. How is ‘Discount on Issue of Debentures’ treated in the books of accounts? How will you deal with the ‘discount in issue of debentures’ when the debentures are to be redeemed in instalments?

Debentures which 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 discount.

The following treatment is done when discount is applied on issue of debentures

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There are two methods that are applicable when debentures are redeemed in installments.

1. Fixed Installment Method: Also known as equal installment method. This method is used when debentures are redeemed in 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

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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 instalments. 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.

5. 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 discount while the debentures can be redeemed only at par and at 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

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2. Issued at Premium and Redeemable at Par: A situation where debenture is issued at premium and is redeemable at par. Issuing debentures at premium is gain, so it is credited.

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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.

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4. Issue at Par and Redeemable at Premium: Here the share is issued at par and is redeemable at premium. The following entries are recorded

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5. Issued at Premium and Redemption at Premium: In this situation both the issue and redemption of the debenture is at premium. It will give rise to following entries

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6. Issue of Discount and Redemption at Premium: When debentures are issued at discount and redeemable at premium. The following entries can be recorded

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6. Differentiate between 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 maturity of 18 months

2. Companies involved in infrastructure sector like maintenance, construction, business development activities

Redemption of Debenture Out of Profits

Debentures when redeemed out of profit does not utilize capital for redemption. It is mandatory to create a DRR before redeeming 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 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 Reserve and Surplus section of Liabilities part of balance sheet. After all debentures are redeemed a DRR account is closed by transferring it to general reserve.

7. Explain the guidelines of SEBI for creating 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 debenture with maturity of more than 18 months.

2. For partly convertible debentures, DRR needs to be created for non-convertible portion of debenture in the same way as is done for fully non-convertible debenture issue.

3. Company should create DRR equivalent to 50% of debenture issue before debenture redemption commences.

4. Withdrawal from DRR is permissible only after 10% on 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 infrastructure sector like maintenance, construction, business development activities

8. Describe the steps for creating Sinking Fund for redemption of debentures.

Following steps are involved:

1. Calculate the amount from 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 instalment hence determined is invested to obtain 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 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 instalment which will be debited from 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 debenture

10. The balance remaining, if any, from the DRF Account is transferred to the General Reserve.

9. 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 authorised 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 market.

 

 

 

 

 10. 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 debentures time period is known as 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 debenture holder when exercising the conversion option.

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 debenture is eligible to be converted into equity shares.

2. Fully convertible debentures: In this all of the debenture can convert to equity shares.

Following treatment is provided for the conversion:

 

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Numerical Questions for NCERT Accountancy Solutions Part 2 Class 12 Chapter 2

1. G.Ltd. issued 75, 00,000, 6% Debenture of ₹ 50 each at par payable ₹ 15 on application and ₹ 35 on allotment, redeemable at par after 7 years from the date of issue of debenture. Record necessary entries in the books of Company.

 

The solution for this question is as follows:

Book of G. Ltd.

 

Journal

 

Date

Particulars

L.F.

Debit

Amount

Credit

Amount

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2. Y.Ltd. issued 2,000, 6% Debentures of ₹ 100 each payable as follows: ₹ 25 on application; ₹ 50 on allotment and ₹ 25 on First and Final call.

The solution for this question is as follows:

Books of Y Ltd.

 

Journal

 

Date

Particulars

L.F.

Debit

Amount

Credit

Amount

 

Bank A/c

Dr.

 

50,000

 

 

 

To 6% Debentures Application A/c

 

 

50,000

 

(Application money  @ ₹ 25 each received for 2,000

6% Debentures)

 

 

 

 

 

 

 

 

 

6% Debenture Application A/c

Dr.

 

50,000

 

 

 

To 6% Debenture A/c

 

 

50,000

 

(Application money on 2,000 debentures  transferred to

6% 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 2,000

6% 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 2,000

6% 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 3. 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 First and Final call. Record necessary Journal Entries.

The solution for this question is as follows:

Books of A. Ltd.

 

Journal

 

Date

Particulars

L.F.

Debit

Amount

Credit

Amount

 

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 to

10% 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 on

10,000, 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 for

10,000 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 Call @ ₹ 70 each on 10,000

10% 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 for

10,000 10% Debentures)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 4. 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.

Debit

Amount

Credit

Amount

 

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 to

9% Debenture Account)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5. A. Ltd. issued 4,000, 9% Debentures of ₹ 100 each on the following terms:

₹ 20 on Application;

₹ 20 on Allotment;

₹ 30 on First call; and

₹ 30 on 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 for this question is as follows:

 

Books of A Ltd.

 

Date

Particulars

L.F.

Debit

Amount

Credit

Amount

 

 

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

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6. 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 allotment, redeemable at par after 8 years. But application are received for 3, 00,000 debentures and the allotment is made on pro-rata basis. All the money due on application and allotment is received. Record necessary entries regarding issue of debentures.

The solution for 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 3,00,000

debentures @ ₹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)

 

 

 

 

 

 

 

 

7. X.Ltd. invites application for the issue of 10,000, 14% debentures of ₹ 100 each payable as to ₹ 20 on application, ₹ 60 on allotment and the balance on 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 utilised 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.

Debit

Amount

Credit

Amount

 

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 rest of the amount adjusted

on 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 10,000

debentures @ 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 10,000

debentures @ ₹ 20 each)

 

 

 

 

 

 

 

 

 

 

8. R.Ltd. offered 20, 00,000, and 10% Debenture of ₹ 200 each at a discount of 7% redeemable at premium of 8% after 9 years. Record necessary entries in the books of R. Ltd.

The solution for this question is as follows:

 

Books of R.Ltd.

 

Journal

 

Date

Particulars

L.F.

Debit

Amount

Credit

Amount

 

Bank A/c

Dr.

 

37,20,00,000

 

 

 

To 10% Debenture Application & Allotment A/c

 

 

37,20,00,000

 

(Debenture Application and Allotment money received

for 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 9. 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 for this question is as follows:

 

Books of M. Ltd.

 

Journal

 

Date

Particulars

L.F.

Debit

Amount

Credit

Amount

 

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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10. B.Ltd. purchased assets of the 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 premium of 10%? It was agreed that any fraction of debentures be paid in cash.

The solution for this question is as follows:

 

 

Case (a)

Book of B. Ltd.

 

Journal

 

Date

Particulars

L.F.

Debit

Amount

Credit

Amount

 

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% discount

and 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11. X.Ltd. purchased a 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 for this question is as follows

Books of X. Ltd.

 

Journal

 

Date

Particulars

L.F.

Debit

Amount

Credit

Amount

 

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 Machinery

purchased)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12. 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 a collateral security to 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 for this question is as follows:

(i)

Books of X. Ltd.

Journal

 

Date

Particulars

L.F.

Debit

Amount

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 at

10% 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 at

5% 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 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 issue of Debentures of ₹ 12,00,000)

15,00,000

 

 

 

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 at

10% discount to the vendor in consideration of

Machinery 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

 

 

 

 

13. 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 for this question is as follows:

 

S.No.

Particulars

L.F.

Debit

Amount

Credit

Amount ₹

(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 discount

with 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 term

repayable at ₹ 105)

 

 

 

 

 

 

 

 

 

 

 

14. A.Ltd. Issued 50, 00,000, 8% Debenture of ₹ 100 at a discount of 6% on April 01, 2009 redeemable at 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 issue of debenture account.

The solution for 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

2009

April 01

Debenture

 

5,00,00,000

2010

March 31

Profit and Loss

 

1,38,88,889

 

 

 

 

 

Balance c/d

 

3,61,11,111

 

 

 

5,00,00,000

 

 

 

5,00,00,000

 

 

 

 

 

 

 

 

2010

April 01

Balance b/d

 

3,61,11,111

2011

March 31

Profit and Loss

 

1,38,88,889

 

 

 

 

 

Balance c/d

 

2,22,22,222

 

 

 

3,61,11,111

 

 

 

3,61,11,111

 

 

 

 

 

 

 

 

2011

April 01

Balance b/d

 

2,22,22,222

2012

March 31

Profit and Loss

 

83,33,333

 

 

 

 

 

Balance c/d

 

1,38,88,889

 

 

 

2,22,22,222

 

 

 

2,22,22,222

 

 

 

 

 

 

 

 

2012

April 01

Balance b/d

 

1,38,88,889

2013

March 31

Profit and Loss

 

83,33,333

 

 

 

 

 

Balance c/d

 

55,55,556

 

 

 

1,38,88,889

 

 

 

1,38,88,889

 

 

 

 

 

 

 

 

2013

April 01

Balance b/d

 

55,55,556

2014

March 31

Profit and Loss

 

55,55,556

 

 

 

55,55,556

 

 

 

55,55,556

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15. A company issues the following debentures:

(i) 10,000, 12% debentures of ₹ 100 each at par but redeemable at 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 a collateral security to a bank which 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.

Debit

Amount

Credit

Amount

(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 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 premium)

 

 

 

 

 

 

 

 

 

 

 

(iv)

Machinery A/c

Dr.

 

95,000

 

 

 

To Vender 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 vender 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.

Debit

Amount

Credit

Amount

(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 Vender A/c

 

 

1,00,000

 

(Amount due to vender)

 

 

 

 

 

 

 

 

 

 

 

 

Vender A/c

Dr.

 

1,00,000

 

 

 

To Bank

 

 

1,00,000

 

(Payment made to vender)

 

 

 

 

 

 

 

 

 

 

 

(v)

12% Debenture A/c

Dr.

 

30,000

 

 

 

To Debenture Suspense A/c

 

 

30,000

 

(Debenture and debenture Suspense Account closed)

 

 

 

 

 

 

 

 

 

 

16. 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 discount 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.

Debit

Amount

Credit

Amount

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 issue of debentures is to be written off in 5 years.

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

 

 

 

 

 

 

 

 

 

 

Date

Particulars

L.F.

Debit

Amount

Credit

Amount

2013

Mar 31

 

Profit and Loss A/c

 

Dr.

 

 

10,000

 

 

 

To Discount on 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 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 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17. 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 third year.

How will you deal with discount 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 for this question is as follows

In the books of……………

Journal

 

 

Date

Particulars

L.F.

Debit

Amount

Credit

Amount

 

2011

Apr. 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

Mar. 31

Profit and Loss A/c

Dr.

 

1,800

 

 

 

 

To Discount on Issue of Debentures A/c

 

 

1,800

 

 

(Discount on issue of debenture written off)

 

 

 

 

 

 

 

 

 

 

 

 

 

2013

Mar. 31

Profit and Loss A/c

Dr.

 

1,800

 

 

 

 

To Discount on Issue of Debenture A/c

 

 

1,800

 

 

(Discount on issue of debenture written off)

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

Mar. 31

Profit and Loss A/c

Dr.

 

1,800

 

 

 

 

To Discount on 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 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 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

2011

Apr. 01

10% Debentures

 

7,200

2012

Mar. 31

Profit and Loss

 

1,800

 

 

 

 

 

Balance c/d

 

5,400

 

 

 

7,200

 

 

 

7,200

 

 

 

 

 

 

 

 

2012

Apr. 01

Balance b/d

 

5,400

2013

Mar. 31

Profit and Loss

 

1,800

 

 

 

 

 

Balance c/d

 

3,600

 

 

 

5,400

 

 

 

5,400

 

 

 

 

 

 

 

 

2013

Apr. 01

Balance b/d

 

3,600

2014

Mar. 31

Profit and Loss

 

1,800

 

 

 

 

 

Balance c/d

 

1,800

 

 

 

3,600

 

 

 

3,600

 

 

 

 

 

 

 

 

2014

Apr. 01

Balance b/d

 

1,800

2015

Mar. 31

Profit and Loss

 

1,200

 

 

 

 

 

Balance c/d

 

600

 

 

 

1,800

 

 

 

1,800

 

 

 

 

 

 

 

 

2015

Apr. 01

Balance b/d

 

600

2016

Mar 31

Profit and Loss

 

600

 

 

 

600

 

 

 

600

 

 

 

 

 

 

 

 

 

i) Working Note:

 

Amount of Discount on Issue of Debenture:
12-12

 

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

 

 

 

 

 

 

 

18. 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:

12-13

Amount of discount to 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 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: As per NCERT textbook, ₹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. 


 

19. 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 for this question is as follows

Date

Particulars

L.F.

Debit

Amount

Credit

Amount ₹

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 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 for

6 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)

 

 

 

 

 

 

 

 

2015

Mar. 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 for

6 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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20. What journal entries will be made in the following cases when company redeems debentures at the expiry of period by serving the notice: (a) when debentures were issued at par with a condition to redeem them at premium; (b) when debentures were issued at premium with a condition to redeem that at par; and (c) when debentures were issued at discount with a condition to redeem them at 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  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 redemption of debentures that were issued at

premium with 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 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
  • Over subscription
  • Interest on debentures
  • Sinking fund method

Conclusion

NCERT solutions for class 12 Accountancy chapter 2 provides a wide degree of illustrative examples; which assists the students to comprehend and learn quickly. The above mentioned are the illustrations for class 12 CBSE syllabus. For more solutions and study materials of NCERT solutions for class 12 Accountancy visit BYJU’S or download the app for more information.
 

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