Question

On January 1, 2011, X Ltd issue 5,000, 8% Debentures of Rs. 100 each repayable at par at the end of three years. It has been decided to set up a cumulative sinking fund for the purpose of their redemption. The investments are expected to realise 4% net. The Sinking Fund Table shows that Rs. 0.320348 amounts to one rupee @ 4% per annum in three years. On December 31, 2013 the balance at bank was Rs. 2,42,360 and the investments realised Rs. 3,25,000. The debentures were paid off. Give journal entries and show ledger account.

Answer 1

$\text{Journal Entries}$
$\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{LF}& \text{Amt. (Dr)}& \text{Amt.(Cr)}\\ 2011& & & & & \\ \text{Jan 1}& \text{Bank A/c}& \text{Dr}& & 5,00,000& \\ & \text{To Debenture A/c}& \text{Dr}& & & 5,00,000\\ & \text{(Being issued 5,000 debentures @ Rs. 100 each}& & & & \\ & \underset{–}{}& & & & \\ \text{Dec 31}& \text{Profit and Loss Appropriation A/c}& \text{Dr}& & 1,60,174& \\ & \text{To Cumulative Sinking Fund A/c}& & & & 1,60,174\\ & \text{(Being annual instalment of cumulative sinking fund}& & & & \\ & \text{debited to Profit and loss appropriation account}& & & & \\ & 5,00,000\times 0.320348)& & & & \\ & \underset{–}{}& & & & \\ & \text{Cumulative Sinking Fund Investment A/c}& \text{Dr}& & 1,60,174& \\ & \text{To Bank A/c}& & & & 1,60,174\\ & \text{(Being amount invested into cumulative sinking}& & & & \\ & \text{fund)}& & & & \\ & \underset{–}{}& & & & \\ 2012& & & & & \\ \text{Dec 31}& \text{Bank A/c}& \text{Dr}& & 6,407& \\ & \text{To Interest on Cumulative Sinking Fund}& & & & 6,407\\ & \text{(Being interest received @ 4\% on cumulative}& & & & \\ & \text{sinking fund investment)}& & & & \\ & \underset{–}{}& & & & \\ & \text{Interest on Cumulative Sinking Fund}& & & 6,407& \\ & \text{To Cumulative Sinking Fund A/c}& & & & 6,407\\ & \text{(Being interest on cumulative sinking fund)}& & & & \\ & \text{investment transferred to cumulative fund)}& & & & \\ & \underset{–}{}& & & & \\ & \text{Profit and Loss Appropriation A/c}& \text{Dr}& & 1,60,174& \\ & \text{To Cumulative Sinking Fund A/c}& & & & 1,60,174\\ & \text{(Being annual instalment of cumulative sinking}& & & & \\ & \text{fund debited to profit and loss appropriation)}& & & & \\ & \text{account)}& & & & \\ & \underset{–}{}& & & & \\ & \text{Cumulative Sinking Fund Investment A/c}& \text{Dr}& & 1,66,581& \\ & \text{To Bank A/c(1,60,174 + 6,407)}& & & & 1,66,581\\ & \text{(Being amount invested in cumulative sinking)}& & & & \\ & \text{fund investment)}& & & & \\ & \underset{–}{}& & & & \\ 2013& & & & & \\ \text{Dec 31}& \text{Bank A/c}& \text{Dr}& & 13,070& \\ & \text{To Interest on Cumulative Sinking Fund}& & & & 13,070\\ & \text{(Being interest received @ 4\% on Cumulative}& & & & \\ & \text{sinking fund investment)}& & & & \end{array}$

$\begin{array}{cccccc}\text{Date}& \text{Particulars}& & \text{LF}& \text{Amt. (Dr)}& \text{Amt.(Cr)}\\ & \text{Investment on Cumulative Sinking Fund}& \text{Dr}& & 13,070& \\ & \text{To Cumulative Sinking Fund A/c}& & & & 13,070\\ & \text{(Being interest on cumulative sinking fund}& & & & \\ & \text{investment transferred to cumulative sinking fund}& & & & \\ & \text{account}& & & & \\ & \underset{–}{}& & & & \\ & \text{Profit and Loss Appropriation A/c}& \text{Dr}& & 1,60,174& \\ & \text{To Cumulative Sinking Fund A/c}& & & & 1,60,174\\ & \text{(Being annual instalment of cumulative sinking}& & & & \\ & \text{fund debited to profit and loss appropriation}& & & & \\ & \text{account}& & & & \\ & \underset{–}{}& & & & \\ & \text{Bank A/c}& \text{Dr}& & 3,25,000& \\ & \text{To Cumulative Sinking Fund Investment A/c}& & & & 3,25,000\\ & \text{(Being cumulative sinking fund investment sold}& & & & \\ & \underset{–}{}& & & & \\ & \text{Cumulative Sinking Fund A/c}& \text{Dr}& & 1,755& \\ & \text{To cumulative Sinking Fund Investment A/c}& & & & 1,755\\ & \text{(Being loss on sale of cumulative sinking fund}& & & & \\ & \text{investment transferred to cumulative sinking fund}& & & & \\ & \text{account)}& & & & \\ & \underset{–}{}& & & & \\ & \text{Debenture A/c}& \text{Dr}& & 5,00,000& \\ & \text{To Debenture Holders A/c}& & & & 5,00,000\\ & \text{(Being amount of debentures due to debenture}& & & & \\ & \text{holders)}& & & & \\ & \underset{–}{}& & & & \\ & \text{Debenture Holders A/c}& \text{Dr}& & 5,00,000& \\ & \text{To Bank A/c}& & & & 5,00,000\\ & \text{(Being amount due for debentures paid to}& & & & \\ & \text{debenture holders)}& & & & \\ & \underset{–}{}& & & & \\ & \text{Cumulative Sinking Fund A/c}& \text{Dr}& & 4,89,245& \\ & \text{To General Reserve A/c}& & & & 4,89,245\\ & \text{(Being transfer of credit balance of cumulative}& & & & \\ & \text{sinking fund account to general reserve account)}& & & & \end{array}$

$\text{Dr}\text{8\% Debentures Account}\text{Cr}$

$\begin{array}{cccccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}& \text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}\\ 2011& & & & 2011& & & \\ \text{Dec 31}& \text{Balance c/d}& & 5,00,000& \text{Jan 1}& \text{Bank A/c}& & 5,00,000\\ & & & \underset{–}{\overline{\underset{–}{5,00,000}}}& & & & \underset{–}{\overline{\underset{–}{5,00,000}}}\\ 2012& & & & 2012& & & \\ \text{Dec 31}& \text{Balance c/d}& & 5,00,000& \text{Jan 1}& \text{Balance b/d}& & 5,00,000\\ & & & \underset{–}{\overline{\underset{–}{5,00,000}}}& & & & \underset{–}{\overline{\underset{–}{5,00,000}}}\\ 2013& & & & 2013& & & \\ \text{Dec 31}& \text{Debenture Holders}& & 5,00,000& \text{Jan 1}& \text{Balance c/d}& & 5,00,000\\ & & & \underset{–}{\overline{\underset{–}{5,00,000}}}& & & & \underset{–}{\overline{\underset{–}{5,00,000}}}\end{array}$

$\text{Dr}\text{Cumulative Sinking Fund Account}\text{Cr}$
$\begin{array}{cccccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}& \text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}\\ 2011& & & & 2011& & & \\ \text{Dec 31}& \text{Balance c/d}& & 1,60,174& \text{Dec 31}& \text{Profit and Loss Appropriation}& & 1,60,174\\ & & & & & \text{Loss}& & \\ & & & & & \text{Appropriation}& & \\ & & & \underset{–}{\overline{\underset{–}{1,60,174}}}& & & & \underset{–}{\overline{\underset{–}{1,60,174}}}\\ 2012& & & & 2012& & & \\ \text{Dec 31}& \text{Balance c/d}& & 3,26,755& \text{Jan 1}& \text{Balance b/d}& & 1,60,174\\ & & & & \text{Dec 31}& \text{Profit and}& & 1,60,174\\ & & & & & \text{Loss}& & \\ & & & & & \text{Appropriation}& & \\ & & & & & \text{Interest on}& & \\ & & & & & \text{Cumulative}& & 6,407\\ & & & & & \text{Sinking Fund}& & \\ & & & & & \text{Investment A/c}& & \\ & & & \underset{–}{\overline{\underset{–}{3,26,755}}}& & & & \underset{–}{\overline{\underset{–}{3,26,755}}}\\ 2013& & & & 2013& & & \\ \text{Dec 31}& \text{Cumulative}& & 1,755& \text{Jan 1}& \text{Balance b/d}& & 3,26,755\\ & \text{Sinking}& & & & & & \\ & \text{Fund}& & & & & & \\ & \text{Invest A/c}& & & & & & \\ & \text{General}& & 4,89,245& \text{Dec 31}& \text{Interest on}& & \\ & \text{Reserve}& & & & \text{Cumulative}& & \\ & \text{(Balancing}& & & & \text{Sinking}& & 13,071\\ & \text{Figure)}& & & & \text{Fund}& & \\ & & & & & \text{Investment A/c}& & \\ & & & & & \text{Profit and}& & 1,60,174\\ & & & & & \text{Loss}& & \\ & & & & & \text{Appropriation A/c}& & \\ & & & \underset{–}{\overline{\underset{–}{5,00,000}}}& & & & \underset{–}{\overline{\underset{–}{5,00,000}}}\end{array}$

$\text{Dr}\text{Cumulative Sinking Fund Investment Account}\text{Cr}$
$\begin{array}{cccccccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}& \text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}& & \\ 2011& & & & 2011& & & & & \\ \text{Dec 31}& \text{Bank}& & 1,60,174& \text{Dec 31}& \text{Balance c/d}& & 1,60,174& & \\ & & & \underset{–}{\overline{\underset{–}{1,60,174}}}& & & & \underset{–}{\overline{\underset{–}{1,60,174}}}& & \\ 2012& & & & 2012& & & & & \\ \text{Jan 1}& \text{Balance b/d}& & 1,60,174& \text{Dec 31}& \text{Balance b/d}& & 3,26,755& & \\ \text{Dec 31}& \text{Bank}& & & 1,66,581& & & & & \\ & & & \underset{–}{\overline{\underset{–}{3,26,755}}}& & & & \underset{–}{\overline{\underset{–}{3,26,755}}}& & \\ 2013& & & & 2013& & & & & \\ \text{Jan 1}& \text{Balance b/d}& & 3,26,755& \text{Dec 31}& \text{Bank}& & 3,25,000& & \\ & & & & & \text{Cumulative}& & & & \\ & & & & & \text{Sinking}& & 1,755& & \\ & & & & & \text{Fund}& & & & \\ & & & & & \text{(Balancing}& & & & \\ & & & & & \text{figure)}& & & & \\ & & & \underset{–}{\overline{\underset{–}{3,26,755}}}& & & & \underset{–}{\overline{\underset{–}{3,26,755}}}& & \end{array}$

$\text{Dr}\text{Bank Account}\text{Cr}$
$\begin{array}{cccccccc}\text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}& \text{Date}& \text{Particulars}& \text{JF}& \text{Amt. (Rs)}\\ 2011& & & & 2013& & & \\ \text{Dec 31}& \text{Balance b/d}& & 2,42,360& \text{Dec 31}& \text{Debenture Holders}& & 5,00,000\\ & \text{Debenture}& & & & & & \\ & \text{Redemption Fund}& & & & \text{Balance c/d}& & 67,360\\ & \text{Investment}& & 3,25,000& & & & \\ & & & \underset{–}{\overline{\underset{–}{5,67,360}}}& & & & \overline{\underset{–}{5,67,360}}\\ 2014& & & & & & & \\ \text{Jan 1}& \text{Balance b/d}& & 67,360& & & & \end{array}$

Note Sinking fund is not in syllabus of CBSE.