Accounting for Companies Chapter 7 & 8 PDF

ACCOUNTING FOR COMPANIES CHAPTER – 08 CHAPTER – 07 ISSUE OF DEBENTURES Meaning of Debentu...

ACCOUNTING FOR COMPANIES CHAPTER – 08 CHAPTER – 07 ISSUE OF DEBENTURES Meaning of Debenture: The term, ‘debenture’ has been debenture holder can move the court and realise the derived from the Latin word “debre” which means “to money by getting the assets of the company sold. borrow”. Thus, it is a written document acknowledging a debt 7. Funds raised by the issue of debentures are of long term under the common seal of the company and containing a nature and usually the debentures are repaid after a long contract for the repayment of the principal sum at a specified period, such as eight years, ten years. As such, the loan date and for the payment of interest (usually half-yearly) at a raised by issue of debentures is called ‘Loan Capital’. fixed rate percent until the principal sum is repaid. Difference Between Share and Debenture: → “Debenture includes debenture stock, bonds and any other securities of a company whether constituting a Basis of Share Debenture charge on the assets of the company or not.”- Section Distinction 2(30) of the Companies Act, 2013 Capital vs Loan A share is part of the A debenture is a capital of the part of the loan Characteristics or features of debentures: company, therefore, and as such, the 1. A debenture is issued by a company in the form of the shareholders are debenture holders certificate, which is a written acknowledgement of debt the owners of the are the creditors taken by the company. company. of the company. 2. A debenture is issued under the seal of the company. Dividend vs A shareholder gets A debenture 3. It contains a contract for the repayment of principal sum Interest dividend from the holder gets at a specified date. company. interest from the 4. As per Companies Act,2013 no company is allowed to company. issue debentures having a maturity date of more than 10 Fluctuating or Dividend is paid only The rate of years from the date of issue. However, a company Fixed rate of if there are profits. interest is fixed engaged in infrastructure projects can issue debentures dividend or The rate of dividend and it must be for more than 10 years but not exceeding 30 years. interest may fluctuate from paid irrespective 5. Usually the debenture are issued with a specified rate of year to year of the company interest, which is called ‘Coupon Rate’. A debenture depending upon the making a profit or holder receives interest on his debentures at the profits earned by the loss. specified rate, as mentioned in the certificate. Payment of company. interest is made, normally after every six months, Voluntary or It is at option of the The amount of whether the company makes profit or not. Compulsory company to return debentures must Redemption the amount of shares be returned 6. A company is generally secured by a charge on the assets by buying back to its according to the of the company. This means that if the company is unable shares. terms of the issue. to repay the debentures as per terms of issue, the  Priority of In case of winding In case of winding debenture is paid to the person whose name appears in repayment of up, the payment of up, the payment of the company’s register. principal in share capital is made debentures is case of after the repayment made before the (d) Redeemable Debentures: Redeemable debentures are winding up of debentures. payment of share those that will be repaid by the company either in lump capital. sum at the end of a specific period or by instalments Unsecured or A share is always Debentures are during the lifetime of the company. Most of the Secured unsecured. Hence, usually secured on debentures are generally of this type. they bear more risk the assets of the (e) Irredeemable /Perpetual Debentures: Irredeemable company. Hence debentures are those that are not repayable during the they bear little lifetime of the company. These debentures are repayable risk. only at the time of liquidation of the company. Restriction on Under Section 53 of There are no issue at the Companies restriction on the (f) Convertible Debentures: Convertible debentures are discount Act,2013 shares issue of those the holder of which is given an option of cannot be issued at debentures at exchanging the amount of their debenture for equity discount except discount. shares after a specified period. When only a part of sweat equity shares. amount of debentures is convertible into shares, such Voting rights Share confers on its A holder of debentures are called ‘Partly convertible debentures. holder the right to debentures When the full amount of debenture is convertible into participate in and neither possesses shares, such shares are called ‘Fully Convertible vote at Company’s any voting right in Debentures’ meetings. the company's meetings nor can (g) Bearer Debentures: Names and addresses of the he participate in holders of such debentures are not recorded in the meetings Company and these debentures are repayable by mere delivery. Payments of principal and interest is made to Types of Debentures: bearer of such debentures. Coupons are attached with these debentures and the interest is paid to such persons (a) Secured/Mortgage Debentures: These debentures are who produce the coupons in the specified bank. those which are secured either on particular assets of the Company called fixed charge or on all assets of the Bonds: Company in general, called a floating charge. Fixed It is very much similar to that of debenture. Main distinction charge denies the Company from dealing with mortgaged between Debenture and Bond is with respect to the rate of assets, whereas the floating charge does not prevent the interest. Debentures are issued with a fixed rate of interest Company from using the assets. If the Company is unable whereas bonds can be issued without pre determined rate of to repay the debentures on the due date, the debenture interest as in case of deep discount bonds or zero coupon holders can realise their money from the assets bonds. A deep discount bond or zero coupon bond is one mortgaged with them. First mortgage debentures are which is issued without prefixed rate of interest and its issue those that have a first claim on the assets charged and price is heavily discounted. The difference between issue second mortgage debentures are those having a second price and the redemption price represents the total interest claim on the assets charged. In India, debentures have charged to Statement of Profit and Loss every year over the necessarily to be secured. life time of bond. Issue of Debentures: Debentures can be issued at par, at a (b) Unsecured/Naked Debentures: Unsecured Debentures premium, or at a discount. They can also be issued for do not have a specific charge on the assets of the consideration other than cash or as Collateral Security. company. The holders of these debentures are treated as Accounting treatment regarding the issue of debenture is unsecured creditors at the time of liquidation of the done in the same manner as in the case of the issue of share. company. The only difference is that ‘Debenture’ in place of ‘Share’ and ‘Debenture A/e’ in place of ‘Share Capital A/c’ is substituted. (c) Registered Debentures: Names and addresses of the holders of such debentures are recorded in Registrar of Issue of Debentures at Par: Debentures are said to have the company called “Register of Debentureholders”. Such been issued at par when the issue price is equal to their face debentures are not freely transferable. The transfer of value. such debentures requires the execution of a proper Following entries will be passed on the issue of debentures transfer deed. Principal amount and interest on such a (assuming that the debentures carry 11% interest. 1. On receipt of application money:  Bank A/c Dr. Statement of Profit and Loss Dr. To 11% Debenture Application A/c To Discount on issue of Debentures A/c (Application Money received) Discount is generally recorded at the time of allotment entry. 2. On transfer of application money to Debenture Over Subscription: When the number of debentures applied Account: for is more than the number of debentures offered to the 11% Debenture Application A/c Dr. public, the issue is said to be oversubscribed. The excess To 11% Debentures A/c money received on oversubscription may be retained for (Application money transferred) adjustment towards allotment and respective calls when the 3. On refund of money on totally rejected applications: amount is payable in Instalments or excess money will be 11% Debenture Application A/c Dr. refunded. To Bank A/c (Application money returned on rejected application) Issue of Debentures for Consideration Other than 4. On transfer of surplus application money on Cash: When the company purchases some assets (including partially accepted applications: services) and instead of making the payment to the supplier 11% Debenture Application A/c Dr. in the form of cash, issues its fully paid debentures, such issue To Debenture Allotment A/c of debentures is called the Issue of Debentures for 5. On making allotment money due: Consideration Other than Cash. Such debentures can be 11% Debenture Allotment A/c Dr. issued at par, a premium, or at a discount. To 11% Debentures A/c Following entries will be passed for this purpose: 6. On receipt of allotment money: Bank A/c Dr. 1. On purchase of assets: To 11% Debenture Allotment A/c Assets A/c Dr. 7. On making the call money due: To Vendor’s A/c 11% Debenture First Call A/c Dr. 2. For issue of debentures to vendor at par: To 11% Debentures A/c Vendor’s A/c Dr. (First call money due) To Debentures A/c 8. On receipt of call money: 3. For issue of debentures to vendor at premium: Bank A/c Dr. Vendor’s A/c Dr. To 11% Debenture First Call A/c To Debentures A/c (First call money received) To Securities Premium Reserve A/c 4. For issue of debentures to vendor at discount: Similar entries like can be made for the second call and Vendor’s A/c Dr. final call. Discount on Issue of Debentures A/c Dr. To Debentures A/c Issue of Debentures at Premium If the purchase consideration is greater than the value of When the debentures are issued at more than their face value, the net assets acquired (i.e., the difference between the they are said to have been issued at premium. For example, if agreed value of the assets taken over and the agreed a debenture of ₹100 is issued as ₹110, ₹10 is the premium. value of liabilities taken over), the difference is treated as The premium received is a capital profit and should, a capital loss which should be debited to Goodwill A/c. therefore, be used in writing off the capital losses, such as Sundry Assets A/c Dr. discount on issue of shares and debentures, premium on Goodwill A/c Dr. redemption of debentures etc. To Sundry Liabilities A/c Accounting Treatment: To Vendor’s A/c On Issue of Debenture at Premium Or Debenture Allotment A/c Dr. If the amount of the purchase consideration is lower than To Debentures A/c the value of the net assets acquired, the difference is To Securities Premium A/c treated as a capital profit which should be credited to Capital Reserve A/c. Issue of Debentures at a Discount: When the debentures Sundry Assets A/c Dr. are issued at less than the face value, it is said to be issued at To Sundry Liabilities A/c discount. It is a capital loss and should be written off as early To Vendor’s A/c as possible but within the lifetime of the debentures. It can be To Capital Reserve A/c written off by debiting to Securities Premium Reserve Account or Statement of Profit and Loss. Following entry is Issue of Debentures as Collateral Security: When a passed for writing off discount or loss on issue of debentures company takes a loan from a bank or any other party and Securities Premium A/c Dr. gives some additional security in the shape of debentures, the only given as collateral security. As such, under this debentures are said to be issued as collateral security. In such method entry is passed only for taking a loan. If loan is a case, the lender has the absolute right over the debentures taken from Bank, the entry will be : unless and until the loan is repaid. On repayment of the loan, Bank A/c Dr. the lender is legally bond to release the debenture forthwith. To Bank Loan A/c In case the loan is not repaid by the company on the due date, 2. Second Method: If it is desired that such an issue of the lender has the right to retain these debentures and realize debentures is to be recorded in the books, the following them. The holder of such debentures is entitled to interest entries are recorded: only on the amount of loan, but not on the debentures. (a) On the issue of Debentures as Collateral Security Debentures issued as collateral security can be dealt with in Debentures Suspense A/c Dr. two ways in the books. To Debentures A/c (b) On repayment of the loan 1. First Method: No accounting entry is required to be shown in the books at the time of issue of such Debentures A/c Dr. debentures, as no debentures are not actually issued, but To Debentures Suspense A/c Accounting for Issue of Debentures Considering the terms and Conditions of Redemption 1. When debentures are issued at par and are redeemable at par: For Example, if a debenture of ₹100 is issued at ₹100 and is redeemable at ₹100, the following entries will be passed: Entries for Issue: Entries for Redemption: Bank A/c Dr. 100 Debentures A/c Dr. 100 To Debenture Application 100 To Debentureholders A/c 100 & Allotment A/c Debenture Application 100 Debentureholders A/c Dr. 100 & Allotment A/c Dr. To Bank A/c 100 To Debentures A/c 100 2. When debentures are issued at a discount and are redeemable at par: For example, if a debenture of ₹100 is issued at Rs 95 and is redeemable at ₹100, the following entries will be passed: Entries for Issue: Entries for Redemption: Bank A/c Dr. 95 Debentures A/c Dr. 100 To Debenture Application 95 To Debentureholders A/c 100 & Allotment A/c Debenture Application 95 Debentureholders A/c Dr. 100 & Allotment A/c Dr. To Bank A/c 100 Discount on Issue of 5 Debentures A/c Dr. To Debentures A/c 100 3. When debentures are issued at a premium and are redeemable at par : For example, if a debenture of ₹100 is issued at Rs 105 and is redeemable at ₹100, the following entries will be passed: Entries for Issue: Entries for Redemption: Bank A/c Dr. 105 Debentures A/c Dr. 100 To Debenture Application 105 To Debentureholders A/c 100 & Allotment A/c Debenture Application Debentureholders A/c Dr 100 & Allotment A/c Dr. 105 To Bank A/c 100 To Debentures A/c 100 To Securities Premium Reserve A/c 5 4. When debentures are issued at par and are redeemable at a premium: Sometimes the debentures are issued with the specific condition that the Company will pay a premium at the time of their redemption. Although, such premium will be  paid at the time of actual redemption, but as it is a known loss, the Company records such loss at the time of issue by debiting an account called, “Loss on issue of debentures A/c”. It is done in keeping with the convention of conservatism. For example, if a debenture of ₹100 is issued at ₹100 and is redeemable at ₹105, the following entries will be passed: Entries for Issue: Entries for Redemption: Bank A/c Dr. 100 Debentures A/c Dr. 100 To Debenture Application Premium on Redemption of & Allotment A/c 100 Debenture A/c Dr. 5 To Debentureholders A/c 105 Debenture Application Debentureholders A/c Dr. 105 & Allotment A/c Dr. 100 To Bank A/c 105 Loss on Issue of Debentures A/c Dr. 5 To Debentures A/c 100 To Premium on Redemption 5 of Debentures A/c 5. When debentures are issued at a discount and are redeemable at a premium: For example, if a debenture of ₹100 is issued at ₹98 and is redeemable at ₹105, the following entries will be passed: Entries for Issue: Entries for Redemption: Bank A/c Dr. 98 Debentures A/c Dr. 100 To Debenture Application 98 Premium on Redemption of Debentures A/c & Allotment A/c Dr. 5 To Debentureholders A/c 105 Debenture Application Debentureholders A/c Dr. 105 & Allotment A/c Dr. 98 To Bank A/c 105 Loss on Issue of Debentures A/c 7 To Debentures A/c 100 To Premium on redemption of Debentures 5 A/c 6. When debentures are issued at a premium and are redeemable at a premium: For example, if a debenture of ₹100 is issued at ₹106 and is redeemable at ₹110, the following entries will be passed: Entries for Issue: Entries for Redemption: Bank A/c Dr. 106 Debentures A/c Dr. 100 To Debenture Application 106 Premium on Redemption of Debentures A/c Dr. 10 & Allotment A/c To Debentureholders A/c 110 Debenture Application Debentureholders A/c Dr. 110 & Allotment A/c Dr. 106 To Bank A/c 110 Loss on Issue of Debentures A/c 10 To Debentures A/c 100 To Premium on redemption of Debentures A/c 10 To Securities Premium Reserve A/c 6 Interest on Debentures: Interest on debentures is a charge the face value of the debenture. According to Income-tax Act against the profits of the company and is payable irrespective the company must deduct income tax at the prescribed rate of the fact whether there are profits or not. It is calculated on from the gross amount of interest payable on debenture To Bank A/c before the annual amount is paid to debenture holders. 4. On Closing of Debenture Interest A/c Statement of Profit and Loss Dr. Accounting Treatment: To Debenture Interest A/c 1. When Interest is due and tax is deducted at source: (Interest transferred to Statement of Profit and Loss) Interest on Debentures A/c Dr. Writing off Discount/Loss on Issue of Debentures: The To Debentureholders A/c discount/ loss on the issue of debentures is a capital loss and To TDS Payable A/c therefore must be written off before debentures are (Interest due on debenterholder and tax deducted at redeemed. Section 52 of the Companies Act, 2013 permits the source) utilization of Securities Premium for writing off the 2. When interest is paid to the debenture holders: discount/loss on the issue of the debenture. Debenture holder A/c Dr. Entry is following: To Bank A/c Statement of Profit and Loss Dr. (Payment of interest) To Discount/Loss on Issue of Debenture A/c 3. For Payment of Tax to deducted at source TDS Payable A/c Dr. Solved Examples Q1. Ram Ltd. issued 5,000, 12% Debentures of ₹100 each, at par, payable as follows: On Application ₹20; On Allotment ₹20; On First Call ₹30; and On Final Call ₹30. Public applied for 6,000 debentures. Applications for 4,500 debentures were accepted in full. Applications for 800 debentures were allotted 500 debentures and applications for 700 debentures were rejected. Money overpaid on applications was utilised towards allotment. Pass journal entries assuming that all moneys due were duly received, except final call on 200 debentures. Solution: JOURNAL OF RAM LTD. Date Particulars L.F. Dr. (₹) Cr. (₹) Bank A/c Dr. 1,20,000 To 12% Debenture Application A/c 1,20,000 (Application money received on 6,000 debentures @ ₹20 each) 12% Debenture Application A/c Dr. 1,20,000 To 12% Debentures A/c 1,00,000 To 12% Debenture Allotment A/c 6,000 To Bank A/c 14,000 (Application money transferred) 12% Debenture Allotment A/c Dr. 1,00,000 To 12% Debentures A/c 1,00,000 (Allotment money due on 5,000 debentures @ ₹20 each) Bank A/c Dr. 94,000 To 12% Debenture Allotment A/c 94,000 (Balance of allotment money received, i.e., ₹1,00,000 -₹6,000) 12% Debenture First Call A/c Dr. 1,50,000 To 12% Debentures A/c 1,50,000 (First Call due) Bank A/c Dr. 1,50,000 To 12% Debenture First Call A/c 1,50,000 (First Call money received) 12% Debenture Second & Final Call A/c Dr. 1,50,000 To 12% Debentures A/c 1,50,000 (Second & Final Call due) Bank A/c Dr. 1,44,000 To 12% Debenture Second & Final Call A/c 1,44,000 (Second & Final Call money received on 4,800 Debentures @ ₹30 per Debenture) Q2. Sagar Chemicals Ltd. of Jalandhar issued 1,00,00,000, 10% Debentures of ₹ 100 each at a premium of 10% payable as ₹40 on application and ₹70 on allotment. Debentures are redeemable on March 31, 2010. Record necessary entries to record issue of debentures assuming that the issue is fully subscribed and all the money due is received. Solution: JOURNAL OF SAGAR CHEMICALS LTD. Date Particulars L.F. Dr. (₹) Cr. (₹) Bank A/c Dr. 40,00,00,000 To 10% Debenture Application A/c 40,00,00,000 (Application money received) 10% Debenture Application A/c Dr. 40,00,00,000 To 10% Debentures A/c 40,00,00,000 (Application money transferred to 10% Debentures account consequent upon allotment) 10% Debenture Allotment A/c Dr. 70,00,00,000 To 10% Debentures A/c 60,00,00,000 To Securities Premium Reserve A/c 10,00,00,000 (Allotment due) Bank A/c Dr. 70,00,00,000 To 10% Debenture Allotment A/c 70,00,00,000 (Allotment money received) Q3. Mega Ltd. issued 2,500, 15% Debentures of ₹100 each at a discount of 10% payable as follows: ₹25 on application; ₹25 on allotment and the balance on First Call. Applications were received for 2,000 debentures and the allotment was made. All the moneys were duly received. Expenses on issue of debentures amounted to ₹8,000. Directors decided to write off 1/5th of “Expenses on Issue A/c” and “Discount on Debentures A/c” from Statement of Profit and Loss each year. Pass journal entries (for first year only). Solution: JOURNAL OF MEGA LTD. Date Particulars L.F. Dr. (₹) Cr. (₹) Bank A/c Dr. 50,000 To 15% Debenture Application A/c 50,000 (Application money received for 2,000 debentures @ ₹25 each) 15% Debenture Application A/c Dr. 50,000 To 15% Debentures A/c 50,000 (Application money transferred) 15% Debenture Allotment A/c Dr. 50,000 Discount on Debentures A/c Dr. 20,000 To 15% Debentures A/c 70,000 (Allotment due) Bank A/c Dr. 50,000 To 15% Debentures Allotment A/c 50,000 (Amount received on allotment) 15% Debentures First & Final Call A/c Dr. 80,000 To 15% Debentures A/c 80,000 (First & Final Call due) Bank A/c Dr. 80,000 To 15% Debentures First & Final Call A/c 80,000 (Amount received on First & Final Call) Expenses on Issue A/c Dr. 8,000 To Bank A/c 8,000 (Expenses paid on issue of debentures Statement of Profit & Loss Dr. 5,600 To Discount on Debentures A/c 4,000 To Expenses on Issue A/c 1,600  (1/5 of ‘Discount on debentures’ and 1/5th of ‘expenses on issue’ written off) It should be noted that in case, the full amount of a debenture is received in one instalment, the amount should be credited to ‘Debenture Application & Allotment A/c’, instead of ‘Debenture Application A/c’. Q4. A company purchased assets of the book value of ₹99,000 from another Co. It was agreed that the purchase consideration be paid by issuing 11% Debentures of ₹100 each. Assume that the debentures have been issued (i) at par, (ii) at a discount of 10%, and (iii) at a premium of 10%. Give necessary journal entries in the books of purchasing company. Journal Date Particulars L.F. Dr. (₹) Cr. (₹) Sundry Assets A/c Dr. 99,000 To Vendor’s A/c 99,000 (Assets purchased) (1) When Debentures are issued at par: Vendor’s A/c Dr. 99,000 To 11% Debentures A/c 99,000 (Issue of debentures at par) (2) When Debentures are issued at Discount: Vendor’s A/c Dr. 99,000 Discount on Issue of Debentures A/c Dr. 11,000 To 11% Debentures A/c 1,10,000 (Issue of 1,100 debentures of ₹100 each at 10% discount) 99,000 Calculated as follows: 90 = 1,100 debentures (3) When debentures are issued at premium: Vendor’s A/c Dr. 99,000 To 11% Debentures A/c 90,000 To Securities Premium Reserve A/c 9,000 (Issue of 900 debentures of ₹100 each at 10% each at 10% premium,) 99,000 Calculated as follows: 110 = 900 debentures) Q5. A Company had ₹10,00,000, 12% Debentures outstanding as on 1st April, 2017. During the year company took a loan of ₹2,00,000 from the State Bank of India for which the Company placed with the bank debentures for ₹2,50,000 as Collateral Security. Pass journal entries, if any. Also show how the Debentures and Bank Loan will appear in the Company’s Balance Sheet as at 31st March,2018. Solution: First Method: No entry is passed for the issue of debentures in this method. Entry is passed only for taking a loan from the bank, as under: Bank A/c Dr. 2,00,000 To Bank Loan A/c 2,00,000 (Loan taken from the Bank and ₹2,50,000 debentures deposited as collateral security) EXTRACT OF BALANCE SHEET as at 31st March, 2018 Particulars Note No. 31st March, 2018 31st March, 2017 I. EQUITY AND LIABILITIES: ₹ ₹ Non-Current Liabilities: Long-term Borrowings 1 12,00,000 10,00,000 Notes to Accounts: ₹ (1) Long-term Borrowings: 12% Debentures (In addition, Debentures for ₹2,50,000 10,00,000 Have been issued as collateral security) Bank Loan (On collateral security of Debentures of ₹2,50,000) 2,00,000 12,00,000  Second Method: Following entries are passed in this method: 1. Bank A/c Dr. 2,00,000 To Bank Loan A/c 2,00,000 (Loan taken from the Bank) 2. Debentures Suspense A/c Dr. 2,50,000 To 12% Debentures A/c 2,50,000 (Issue of ₹2,50,000 debentures as collateral Security to secure a loan of ₹2,00,000 from the Bank) EXTRACT OF BALANCE SHEET as at 31st March, 2018 Particulars Note No. 31st March, 2018 31st March, 2017 I. EQUITY AND LIABILITIES: ₹ ₹ Non-Current Liabilities: Long-term Borrowings 1 12,00,000 10,00,000 Notes to Accounts: ₹ (1) Long-term Borrowings: 12% Debentures 12,50,000 Less: Debenture Suspense A/c (2,50,000) 10,00,000 Bank Loan (On collateral security of Debentures of ₹2,50,000) 2,00,000 12,00,000 Q6. Give journal entries for the issue of debentures in the following conditions. I. Issued 2,000, 12% debentures of ₹100 each at par, redeemable also at par. II. Issued 2,000, 12% debentures of ₹100 each at a discount of 2%, redeemable at par. III. Issued 2,000, 12% debentures of ₹100 each at a premium of 5%, redeemable at par. IV. Issued 2,000, 12% debentures of ₹100 each at par but redeemable at 5% premium. V. Issued 2,000, 12% debentures of ₹100 each at a discount of 2%, redeemable at a premium of 5%. VI. Issued 2,000, 12% debentures of ₹100 each at a premium of 5%, redeemable at a premium of 10%. Solution: I. JOURNAL Date Particulars L.F. Dr. (₹) Cr. (₹) Bank A/c Dr. 2,00,000 To 12% Debenture Application & Allotment A/c 2,00,000 (Application money received) 12% Debenture Application & Allotment A/c Dr. 2,00,000 To 12% Debentures A/c 2,00,000 (Transfer of application money to Debentures Account, issue at par) II. JOURNAL Date Particulars L.F. Dr. (₹) Cr. (₹) Bank A/c Dr. 1,96,000 To 12% Debenture Application & Allotment A/c 1,96,000 (Application money received) 12% Debenture Application & Allotment A/c Dr. 1,96,000 Discount on issue of Debentures A/c Dr. 4,000 To 12% Debentures A/c 2,00,000 (Transfer of application money to Debentures Account, issued at a discount of 2%) III. JOURNAL Date Particulars L.F. Dr. (₹) Cr. (₹) Bank A/c Dr. 2,10,000  To 12% Debenture Application & Allotment A/c 2,10,000 (Application money received) 12% Debenture Application & Allotment A/c Dr. 2,10,000 To 12% Debentures A/c 2,00,000 To Securities Premium Reserve A/c 10,000 (Transfer of application money to Debentures Account, issued at a premium of 5%) IV. JOURNAL Date Particulars L.F. Dr. (₹) Cr. (₹) Bank A/c Dr. 2,00,000 To 12% Debenture Application & Allotment A/c 2,00,000 (Application money received) 12% Debenture Application & Allotment A/c Dr. 2,00,000 Loss on issue of debentures A/c Dr. 10,000 To 12% Debentures A/c 2,00,000 To Premium on Redemption A/c 10,000 (Transfer of application money to Debentures Account, issued at par, but redeemable at a premium of 5%) V. JOURNAL Date Particulars L.F. Dr. (₹) Cr. (₹) Bank A/c Dr. 1,96,000 To 12% Debenture Application & Allotment A/c 1,96,000 (Application money received) 12% Debenture Application & Allotment A/c Dr. 1,96,000 Loss on issue of Debenture A/c(1) Dr. 14,000 To 12% Debentures A/c 2,00,000 To Premium on Redemption A/c 10,000 (Transfer of application money to Debentures Account, issued at a discount of 2% and redeemable at a premium of 5%) Note 1: Loss on issue A/c has been debited by ₹14,000 by grouping together the discount on issue ₹4,000 and premium on redemption ₹10,000. VI. JOURNAL Date Particulars L.F. Dr. (₹) Cr. (₹) Bank A/c Dr. 2,10,000 To 12% Debenture Application & Allotment A/c 2,10,000 (Application money received) 12% Debenture Application & Allotment A/c Dr. 2,10,000 Loss on issue of debentures A/c Dr. 20,000 To 12% Debentures A/c 2,00,000 To Securities Premium Reserve A/c 10,000 To Premium on Redemption A/c 20,000 (Transfer of application money to Debentures Account, issued at a premium of 5% and redeemable at a premium of 10%) Q7. On 1.4.2015, R.S. Ltd. issued 8,000, 9% redeemable at ₹1,000 each at a discount of 6%, redeemable at a premium of 5% after three years. The company closes its books on 31st March every year. Interest on 9% debentures is payable on 30th September and 31st March every year. The rate of tax deducted at source is 10%. Pass necessary journal entries for the issue of debentures and debenture interest for the year ended 31.3.2016. Solution: JOURNAL OF R.S. LTD. Date Particulars L.F. Dr. (₹) Cr. (₹)  2015 April 1 Bank A/c Dr. 75,20,000 To Debenture Application & Allotment A/c 75,20,000 (Amount received on Application) April 1 Debenture Application & Allotment A/c Dr. 75,20,000 Loss on Issue of Debentures A/c Dr. 8,80,000 To 9% Debentures A/c 80,00,000 To Premium on Redemption of Debentures A/c 4,00,000 (Issue of Debentures at 6% discount and redeemable at 5% premium) Sept. 30 Interest on Debentures A/c Dr. 3,60,000 To Debenture holders A/c 3,24,000 To TDS Payable A/c 36,000 (Half-yearly interest due on debentures and tax deducted at source) Sept. 30 Debentureholders A/c Dr. 3,24,000 To Bank A/c 3,24,000 (Payment of interest) Sept. 30 TDS Payable A/c Dr. 36,000 To Bank A/c 36,000 (TDS deposited in Government Account) 2016 March 31 Interest on Debentures A/c Dr. 3,60,000 To Debentureholders A/c 3,24,000 To TDS Payable A/c 36,000 (Half-yearly interest due on debentures and tax deducted at source) March 31 Debentureholders A/c Dr. 3,24,000 To Bank A/c 3,24,000 (Payment of interest) March 31 TDS Payable A/c Dr. 36,000 To Bank A/c 36,000 (TDS deposited in Government Account) March 31 Statement of Profit & Loss Dr. 7,20,000 To Interest on Debentures A/c (₹3,60,000 + ₹3,60,000) 7,20,000 (Interest transferred to Statement of Profit and Loss) Q8. On 1st April, 2012, a Limited Company issued 11% ,₹10,00,000 debentures at a discount of 6%, repayable at the end of 5 years at par. Pass journal entries for the issue of debentures and prepare Discount on Issue of Debentures Account for five years. Assume that the accounts are closed on 31st March each year. Solution: JOURNAL ENTRIES FOR ISSUE OF DEBENTURES Date Particulars L.F. Dr. (₹) Cr. (₹) 2012 April 1 Bank A/c Dr. 9,40,000 To 11% Debenture Application & Allotment A/c 9,40,000 (Receipt of application money on debentures) April 1 11% Debenture Application & Allotment A/c Dr. 9,40,000 Discount on Issue of Debentures A/c Dr. 60,000 To 11% Debentures A/c 10,00,000 (Issue of Debentures at 6% discount and redeemable at par)  Dr. DISCOUNT ON ISSUE OF DEBENTURES A/C Cr. Date Particulars ₹ Date Particulars ₹ 2012 2013 April 1 To 11% Debentures A/c 60,000 March 31 By Statement of P & L 12,000 (1/5 of ₹ 60,000) March 31 By Balance c/d 48,000 60,000 60,000 2013 2014 April 1 To Balance b/d 48,000 March 31 By Statement of P & L 12,000 March 31 By Balance c/d 36,000 48,000 48,000 2014 2015 April 1 To Balance b/d 36,000 March 31 By Statement of P & L 12,000 March 31 By Balance c/d 24,000 36,000 36,000 2015 2016 April 1 To Balance b/d 24,000 March 31 By Statement of P & L 12,000 March 31 By Balance c/d 12,000 24,000 24,000 2016 2017 April 1 To Balance b/d 12,000 March 31 By Statement of P & L 12,000 12,000 12,000 Q9. A company issued debentures of the face value of ₹10,00,000 at a discount of 6% on 1st April, 2012. These debentures are redeemable by annual drawings of ₹2,00,000 made on 31st March each year. The directors decided to write off discount based on the debentures outstanding each year. Prepare Discount on Issue of Debentures account for five years. Solution: 6 Total Discount on the issue of debentures = ₹10,00,000 × 100 = ₹60,000. Since debentures amounting to ₹2,00,000 are to be redeemed each year, the amount of discount written off from Statement of P & L is determined as follows: Debentures Outstanding Amount of Discount to be written off each year Year ending Ratio* ₹ ₹ ₹ 31 March 2013 10,00,000 st 5 or 5/15 60,000 × 5/15 = 20,000 31st March 2014 8,00,000 4 or 4/15 60,000 × 4/15 = 16,000 31st March 2015 6,00,000 3 or 3/15 60,000 × 3/15 = 12,000 31st March 2016 4,00,000 2 or 2/15 60,000 × 2/15 = 8,000 31st March 2017 2,00,000 1 or 1/15 60,000 × 1/15 = 4,000 15 60,000 *Ratio has been obtained by dividing Debentures Outstanding by 2,00,000. Dr. DISCOUNT ON ISSUE OF DEBENTURES ACCOUNT Cr. Date Particulars ₹ Date Particulars ₹ 2012 2013 April 1 To Debentures A/c 60,000 March 31 By Statement of P & L 20,000 March 31 By Balance c/d 40,000 60,000 60,000 2013 2014 April 1 To Balance b/d 40,000 March 31 By Statement of P & L 16,000 March 31 By Balance c/d 24,000 40,000 40,000 2014 2015 April 1 To Balance b/d 24,000 March 31 By Statement of P & L 12,000  March 31 By Balance c/d 12,000 24,000 24,000 2015 2016 April 1 To Balance b/d 12,000 March 31 By Statement of P & L 8,000 March 31 By Balance c/d 4,000 12,000 12,000 2016 2017 April 1 To Balance b/d 4,000 March 31 By Statement of P & L 4,000 4,000 4,000 QUESTIONS FOR PRACTICE (b) Mortgage Debentures MCQ (c) Naked Debentures (d) Convertible Debentures 1. The following journal entry appears in the books of X Co. 8. Debentures which do not carry any specific rate of Ltd. interest are known as: Bank A/c Dr 4,75,000 (a) Registered Debentures Loss on Issue of Debenture A/c Dr 75,000 (b) Zero Coupon Rate Debentures To 12% Debentures A/c 5,00,000 (c) Bearer Debentures To Premium on Redemption of Debenture (d) First Debentures A/c 50,000 9. If debentures are issued at premium, then they can be Debentures have been issued at a discount of redeemed at (a) 15% (b) 5% (a) par (b) premium (c) 10% (d) 20% (c) Both (a) and (b) (d) can’t be redeemed 2. At the time of issue, Debentures Account is: 10. Company can utilise premium received on issue of (a) credited by the amount received debentures for which purpose? (b) credited by the face value of debentures (c) credited by the issue price of the debentures (a) Writing-off discount allowed on issue (d) none of the above. (b) For writing-off preliminary expenses (c) Both (a) and (b) 3. For recording the issue of debentures as collateral (d) None of the above security, the amount of debentures issued is debited to: (a) Statement of Profit and Loss 11. ‘X’ Limited purchased the assets from ‘Y’ Limited from (b) Debentures Suspense Account ₹16,20,000. ‘X’ Limited issued 10% debentures of ₹ 10 (c) Debentures Account each at 10% discount against the payment. The number (d) General Reserve Account of debentures issued by ‘X’ Limited will be 4. X Co Ltd. purchased assets worth ₹28,80,000. It issued (a) 16,200 (b) 18,000 debentures of ₹100 each at a discount of 4 per cent in full (c) 1,80,000 (d) 1,62,000 satisfaction of the purchase consideration. The number 12. Shashi Ltd. issued 6,000 Debentures of ₹100 each at a of debentures issued to vendor is premium of ₹10. It will credit Debentures Account by: (a) 30,000 (b) 28,800 (a) 6,60,000 (b) 6,00,000 (c) 32,000 (d) 40,000 (c) 4,50,000 (d) None of these 5. Premium received on issue of debentures is credited to: 13. X Ltd. issued 10,000, 8% debentures of ₹ 10 each, payable (a) Capital Reserve on application and redeemable at par at any time after 6 (b) Securities Premium Reserve years. Record the entries for the application money (c) General Reserve received in the books of X Ltd. (d) None of these (a) Bank A/c Dr 80,000 6. The discount on issue of debentures is: To Debenture Application and (a) Capital profit (b) Capital gain Allotment A/c 80,000 (c) Capital loss (d) All of the above (b) Bank A/c Dr 1,00,000 7. Those debentures in which the holders are given option To Debenture Application to partially or fully convert debentures into equity shares and Allotment A/c 1,00,000 after a specified period are known as: (c) Debenture Application and (a) Registered Debentures Allotment A/c Dr Dr 80,000  To 8% Debentures A/c 80,000 (a) Machinery A/c Dr 2,18,500 (d) None of the above To Vendor’s A/c 2,18,500 14. Goel Ltd. invited applications for issuing 6,000, 12% (b) Vendor’s A/c Dr 2,18,500 debentures of ₹ 100 each at a premium of ₹ 50 per To 12% Debentures A/c 1,90,000 debenture. The full amount was payable on application. To Securities Premium Applications were received for 8,000 debentures. Reserve A/c 28,500 Applications for 2,000 debentures were rejected and (c) Vendor's A/c Dr 2,18,500 application money was refunded. Debentures were To Machinery A/c 2,18,500 allotted to the remaining applicants. Based on the (d) 12% Debentures A/c Dr 1,90,000 information, pass the journal entry for adjusting the Securities Premium application money received in the books of Goel Ltd. Reserve A/c Dr Dr 2,18,500 (a) Bank A/c Dr 12,00,000 To Vendor’s A/c 2,18,500 To Debenture Application and Allotment A/c 12,00,000 17. Name the sub-head under which the ‘premium on redemption of debentures’ appears in the balance sheet? (b) Debenture Application (a) Shareholders’ fund and Allotment A/c Dr 9,00,000 (b) Long term provisions To 12% Debentures A/c 9,00,000 (c) Other long-term liabilities (c) Debenture Application (d) None of the above and Allotment A/c Dr 12,00,000 To 12% Debentures A/c 6,00,000 18. On 1st Oct., 2018 PK Ltd. issued 500, 9% Debentures of To Securities Premium ₹500 each at a discount of 4%. Debentures interest for Reserve A/c 3,00,000 the year ended 31st March, 2019 will be: (a) ₹11,250 (b) ₹10,800 To Bank A/c (2,000 × 150) 3,00,000 (c) ₹22,500 (d) None of these (d) None of the above 19. Which of the following alternatives are available for the 15. A company ‘Vansh Ltd.’ has purchased an asset costing ₹ company at the time of oversubscription? 22,00,000. Vendor issued 10% debentures of ₹ 100 each (i) Pro-rata at 10% premium as consideration against asset (ii) Rejection of excess application purchased. Calculate number of debentures to be issued. Alternatives (a) 26,000 debentures (b) 24,000 debentures (a) Only (i) (b) Only (ii) (c) 20,000 debentures (d) 22,000 debentures (c) Both (a) and (b) (d) None of these 16. During the year 2019-20, Network 10 Ltd. issued 12% 20. A company AB Ltd issued 12% debentures of ₹ 10,00,000 debentures of ₹ 100 each as per the details given. A of ₹ 100 each to public. In the terms of issue, these debentures are redeemable after 10 months ending on machine was purchased for ₹2,18,500. The Vendor was 31st January, 2022. These debentures will be shown in paid by the issue of 1,900 debentures at a premium of balance sheet as on 31st March, 2021 under the heading 15%, to be redeemed at par. The entry for the payment (a) long-term liability (b) current liability will be (c) fixed assets (d) current assets SUBJECTIVE QUESTIONS Applications for 600 debentures were received. Pro-rata 1. Narain Laxmi Ltd. invited applications for issuing 7,500, 12% debentures of ₹100 each at a premium of ₹35 per allotment was made to all the applicants. debenture. The full amount was payable on application. Pass necessary journal entries for the issue of debentures Applications were received for 10,000 debentures. assuming that the whole amount was payable with Applications for 2,500 debentures were rejected and the application. application money was refunded. Debentures were 3. Disha Ltd. purchased machinery from Nisha Ltd. and paid allotted to the remaining applicants. to Nisha Ltd. as follows: Pass necessary journal entries for the above transactions (i) By issuing 10,000, equity shares of ₹10 each at a in the books of Narain Laxmi Ltd. premium of 10%. 2. X Ltd. invited applications for issuing 500, 12% (ii) By issuing 200, 9% debentures of ₹100 each at a debentures of ₹100 each at a discount of 5%. These discount of 10%. debentures were redeemable after three years at par. (iii) Balance by accepting a bill of exchange of ₹50,000 payable after one month.  Pass necessary journal entries in the books of Disha Ltd. 7. KTR Ltd. issued 365, 9% Debentures of ₹1,000 each on for the purchase of machinery and making payment to 4th March, 2016. Pass necessary journal entries for the Nisha Ltd. issue of debentures in the following situations: 4. BG Ltd. issued 2,000, 12% debentures of ₹100 each on (a) When debentures were issued at par, redeemable at a premium of 10%. 1st April, 2012. The issue was fully subscribed. According to the terms of issue, interest on the debentures is (b) When debentures were issued at 6% discount, payable half-yearly on 30th September and 31st March redeemable at 5% premium. and the tax deducted at source is 10%. 8. Pass the necessary journal entries for issue of 1,000, 7% Pass necessary journal entries related to the debenture Debentures of ₹100 each in the following cases: interest for the half-yearly ending 31st March, 2013 and (a) Issued at 5% premium redeemable at a premium of transfer of interest on debentures of the year to the 10%. Statement of Profit and Loss. (b) Issued at a discount of 5% redeemable at par. 5. Deepak Ltd. purchased furniture of ₹2,20,000 from M/S 9. On 1st April, 2018, R.J. Ltd. issued ₹10,00,000 9% Furniture Mart. 50% of the amount was paid to Furniture debentures of ₹100 each at a discount of 10%. These Mart by accepting a bill of exchange and for the balance, debentures were redeemable at a premium of 5% after company issued 9% debentures of ₹100 each at a four years. premium of 10% in favour of Furniture Mart. Pass necessary journal entries for the issue of debentures Pass necessary journal entries in the books of Deepak and prepare 9% Debentures Account. Ltd. for above transactions. 10. Rahil Ltd. issued 20,000, 9% Debentures of ₹100 each at 6. Nano Ltd. purchased assets of Dow Ltd. for ₹3,00,000. It 5% discount, redeemable at par after 5 years, payable at also agreed to take over the liabilities of Dow Ltd. ₹40 on application and the balance on allotment. The amounting to ₹50,000 for a purchase consideration of ₹ whole issue was subscribed and all money was duly 2,75,000. The payment to Dow Ltd. was made by issue of received. 8% Debentures of ₹50 each at a premium of 10%. Pass necessary journal entries for the issue of debentures Pass necessary journal entries for the above transactions and for writing off discount on issue of debentures as per in the books of Nano Ltd. AS–16 in the books of Rahil Ltd. and prepare the Balance Sheet. HOMEWORK 1. Which of the following is not a feature of debentures? 4. Debentures which are transferred by executing s transfer (a) These are written document acknowledging a debt. deed are: (b) The mode and payment of principal and interest is (a) Registered Debentures fixed. (b) Bearer Debentures (c) Interest on debentures is an appropriation of profit. (c) Naked Debentures (d) They may be secured by way of charge on assets of (d) Convertible Debentures the company. 5. Premium on redemption of debentures is a : 2. Which of the following is not a characteristic of Bearer (a) Personal A/c (b) Real A/c Debenture? (c) Nominal A/c (d) Suspense A/c (a) They are treated as negotiable instruments 6. Debentures which are transferred by mere delivery are: (b) Their transfer requires a deed of transfer (a) Registered Debentures (b) Bearer Debentures (c) They are transferable by mere delivery (c) First Debentures (d) Irredeemable (d) The interest on it is paid to the holder irrespective of Debentures identity Direction for Question (7 to 10): Read the given case study 3. Loss on debentures arises when: carefully and answer the following questions: (a) Debentures are issued at par and redeemable at Moonlight India Ltd. is to produce and distribute green premium energy in the backward areas of India. It has also taken up a (b) Debentures are issued at premium and redeemable project of giving vocational training to the girls belonging to at par the backward areas of Rajasthan. To meet the requirements (c) Debentures are issue par and redeemable at par of funds to serve the purpose, company issued 40,000 (d) All of these debentures of ₹100 each at a premium of ₹25, payable as follows ₹ 20 per share on application ₹ 45 per share on allotment (including premium of ₹ 15) (c) Voting rights in the company ₹ 60 per share on first and final call (including premium of ₹ (d) Interest at the fixed rate 10) 16. Rate of interest on debentures is : The issue was oversubscribed by 20,000 debentures. (a) 12% p.a. (b) 20% p.a. Applicants of 16,000 were allotted only 2,000 debentures and (c) Fixed Rate (d) 15% p.a. applicants of 2,000 debentures were sent letter of regret. Excess amount received at the time of application was to be 17. AB Ltd. purchased assets worth ₹6, 80,000 and took over adjusted only against allotment and payments exceeding the liabilities of ₹80,000. It was agreed to pay the purchase price of ₹6,40,000, of which ₹2,00,000 was to paid be in amount due in the allotment were to be refunded. All the cash and rest through issue of debentures at 10% money due on allotment and calls was duly received. premium. Calculate the number of debentures issued. 7. Amount refunded to debenture holders will be (a) 4,000 (b) 4,500 (a) ₹2,60,000 (b) ₹2,50,000 (c) 3,800 (d) 4,200 (c) ₹2,30,000 (d) ₹2,00,000 18. Which of following statements is false? 8. What amount will be received on allotment? (a) At maturity, debenture holders get back their money (a) ₹16,30,000 (b) ₹16,00,000 (b) Debentures can be forfeited for non-payment of call (c) ₹18,00,000 (d) ₹18,30,000 money (c) In company’s Balance sheet, debentures are shown 9. What pro-rata allotment is made in this case other than under the head Long term borrowings the One already mentioned? (d) Interest on debentures is a charge against profits (a) 44,000 : 40,000 (b) 42,000 : 38,000 (c) 60,000: 40,000 (d) 42,000 : 36,000 19. In case of issue of debentures as a collateral security for loan from the bank which account will be debited : 10. Amount of security premium transferred to balance (a) Debentures Holdings Account sheet will be (b) Bank Loan Account (a) ₹6,00,000 (b) ₹10,00,000 (c) Debentures Account (c) ₹4,00,000 (d) ₹14,00,000 (d) Debentures Suspense Account 11. On 1st April,2017, Mehta Ltd. issued 5,000, 8% 20. If debentures of ₹4,50,000 are issued for the debentures of ₹100 each at a discount of 5%. What will consideration of net assets of ₹5,00,000 balance ₹50,000 be total amount of interest for the year ending 31st will be credited to: March,2018? (a) Profit & Loss A/c (b) Goodwill A/c (a) ₹38,000 (b) ₹42,000 (c) General Reserve A/c (d) Capital Reserve A/c (c) ₹40,000 (d) ₹25,000 Direction (Q. Nos. 21 to 24) There are two statements 12. Which of following statements is false? marked as Assertion (A) and Reason (R). Read the statements (a) At maturity, debenture holders get back their money. and choose the appropriate option from the options given (b) Debentures can be forfeited for non-payment of call below. money. (a) Both Assertion (A) and Reason (R) are true and Reason (c) In company’s balance sheet, debentures are shown (R) is the correct explanation of Assertion (A) under the head Long term Borrowings. (b) Both Assertion (A) and Reason (R) are true, but Reason (d) Interest on debentures is a charge against profits. (R) is not the correct explanation of Assertion (A) 13. Which of following is not a characteristic of Bearer (c) Assertion (A) is true, but Reason (R) is false Debentures? (d) Assertion (A) is false but Reason(R) is true (a) They are treated as negotiable instruments. 21. Assertion (A): Shares and debentures are not alike. (b) Their transfer requires a deed of transfer. Reason (R): Debenture holders are owners and (c) They are transferable by mere delivery. shareholders are creditors of the (d) The interest on it is paid to the holder irrespective of company. the identity. 22. Assertion (A): Debentures is an instrument 14. Which of the following is false? acknowledging a debt. (a) A company can issue redeemable debentures Reason (R): It is the denomination of loan. (b) A company can issue debentures with voting rights 23. Assertion (A): Debentures being borrowings of the (c) A company can buy its own shares company are shown on liabilities side of (d) A company can buy its own debentures the balance sheet. 15. A debenture holder is entitled to : Reason (R): Debentures are current liabilities of a (a) Fixed dividend company. (b) Share in profits 24. Assertion (A): A company can issue debentures for 27. Total interest payable by the company will amount to raising long-term borrowings. (a) ₹52,000 (b) ₹5,200 Reason (R): The power to issue debentures must be (c) ₹66,000 (d) ₹16,000 mentioned in articles of association. 28. Zero coupon bonds are issued : Direction: Read the following case study and answer the (a) At Zero Interest Rate question no. 25 to 28 on the basis of the same. (b) With Specified Rate of Interest `Golden Blankets Ltd' are the manufacturers of woollen (c) Without Specified Rate of Interest blankets. Blankets of the company are exported to many (d) None of these countries. The company decided to distribute blankets free of 29. Match the following cost to five villages of Kashmir valley destroyed by the recent Column - I Column -II floods. It also decided to employ 100 young persons from these villages in their newly established factory at Solan in A. Received Oversubscription (i) Debentures Suspense Himachal Pradesh. To meet the requirements of funds for A/c starting its new factory, the company issued 50,000, 10% B. Debentures issued to (ii) Rejection of excess debentures of ₹10 each and 2000, 8% debentures of ₹100 promoters application each to the vendor of the machinery purchased for ₹ 7,00,000. C. Issued Debentures as (iii) Goodwill collateral security 25. Debentures issued to vendor of machinery, would be classified as A B C (a) issue of debentures in cash (a) (i) (ii) (iii) (b) issue of debentures for consideration other than (b) (ii) (iii) (i) cash (c) (ii) (i) (iii) (c) issue if debentures as collateral security (d) (iii) (ii) (i) (d) None of the above 30. Loss on issue of debentures would be written-off out of 26. How many debentures should be issued, if 8% (i) securities premium reserve debentures of ₹100 each are issued at 20% discount (ii) capital reserve amounting to ₹2,00,000? (iii) profit and loss account (a) ₹2,500 (b) ₹1,000 (a) Only (i) (b) (i) and (ii) (c) ₹1,500 (d) ₹2,000 (c) (ii) and (iii) (d) (i), (ii) and (iii) SUBJECTIVE QUESTIONS 1. MNC Ltd. issued 12,500, 10% Debentures of ₹100 each. and the balance by issue of 6% debentures of ₹100 each Give journal entries and the Balance Sheet when the at a discount of 20%. debentures were issued at a premium of 20%. Pass necessary journal entries for the above transactions 2. 15,000, 8% Debentures were issued by Madhu Sports in the books of 'UZ Ltd.' Ltd. During the year 2018-19, the company suffered a 5. On 1st April, 2015, K.K. Ltd. issued 500, 9% Debentures huge loss. Will debenture holders be entitled to interest of ₹500 each at a discount of 4%, redeemable at a of that year? premium of 5% after three years. 3. Power and Utility Ltd. issued 2,500 8% Debentures of Pass necessary Journal Entries for the issue of ₹100 each at a discount of 10% on 1st April, 2017 debentures and debentures’ interest for the year ended redeemable at par after five years. The company has a 31st March, 2016 assuming that interest is payable on 30th September and 31st March and the rate of tax balance of ₹15,000 in Securities Premium Reserve. The company decided to use the Securities Premium Reserve deducted at source is 10%. The company closes its books on 31st March every year. for writing off the loss on issue of debentures and also decided to write off the remaining discount in the first 6. (a) Mohit Ltd. took over assets of ₹8,40,000 and year itself. liabilities of ₹80,000 of Ram Ltd. at an agreed value Pass the Journal entries for issue of debentures and of ₹7,20,000. Mohit Ltd. paid to Ram Ltd., by issue of writing off the discount on Issue of debentures. You are 9% debentures of ₹100 each at a premium of 20%. also required to prepare Discount on Issue of Debentures Pass necessary journal entries to record the above Account. transactions in the books of Mohit Ltd. 4. ‘UZ Ltd.’ purchased Plant and Machinery from Elk (b) Give Journal entries in each of the following cases if Machine Ltd. for ₹6,90,000. Elk Ltd. was paid by the face value of a 9% debenture is ₹100. accepting a draft of ₹90,000 payable after three months (i) A debenture issued at ₹100 repayable at ₹105.  (ii) A debenture issued at ₹105 repayable at ₹105. date, Bhawani Ltd. completed the following transactions also: 7. Shikhar Ltd. issued 10,000, 10% debentures of ₹100 (i) It purchased business of Swami Ltd. by taking over each, payable as follows: ₹10 on application, ₹20 on sundry assets of ₹4,50,000 and sundry liabilities of allotment, and ₹30 on first call and ₹40 on second and ₹70,000 for the purchase consideration of ₹4,80,000. final call. It paid the purchase consideration by issuing 10% Arun, who holds 500 debentures failed to pay the amount Debentures at 4% discount. due on allotment. He, however, pays this amount with the (ii) Bhawani Ltd. borrowed a loan of ₹80,000 from SBI first call money. Dinesh, who holds 800 debentures paid for 5 years and issued 10% Debentures of ₹1,00,000 all the calls in advance on allotment. Pass journal entries. to Bank as a collateral security. 8. SSS Ltd. issued 25,000; 10% Debentures of ₹100 each. The interest on debentures is paid half yearly on 30th Give Journal entries and the Balance Sheet in each of the September and 31st March every year. You are required following cases when: to pass the journal entries in the books of Bhawani Ltd. (i) the debentures were issued at a premium of 20%. to record the above transactions for the year ended 31st (ii) the debentures were issued as a collateral security March, 2018 assuming that the company has sufficient to Bank against a loan of ₹20,00,000. balance in its Securities Premium Reserve Account at the year end and it has decided to write off loss on issue of 9. On 1st April, 2017 Bhawani Ltd. issued 5,000, 10% debentures from Securities Premium Reserve Account. Debentures of ₹100 each at a discount of 10%, redeemable at 5% premium after 5 years. On the same 10. Fill in the blanks in the following entries: GG Ltd. Journal SOLUTION FOR PRACTICE QUESTIONS SOLUTION FOR MCQ QUESTIONS 1. (b): (75,000 −50,000) × 100 = 5% 5. (b) 6. (c) 7. (d) 5,00,000 8. (b) 9. (c) 10. (c) 2. (b) 16,20,000 16,20,000 3. (b) 11. (c): Number of Debentures = 10−10% of 10 = 9 28,80,000 = 1,80,000 4. (a): Number of debentures = 96 (100−4) 12. (b) 13. (b) 14. (c) 15. (c): Number of Debentures Issued 18. (a) 19. (c) 22,00,000 = 110 (100 + 10) = 20,000 debentures 20. (b): Whenever debentures are issued for less than 12 months or debentures are redeemable within 12 16. (b) months, then these are shown under ‘current 17. (c): The ‘premium on redemption of debentures’ appears liability’. under the head ‘non-current liabilities’ and sub-head ‘Other long term liabilities’. SOLUTIONS FOR SUBJECTIVE QUESTIONS 1. Journal Date Particulars L.F. Dr. (₹) Cr. (₹) Bank A/c (10,000 × 135) Dr. 13,50,000 To Debenture Application and Allotment A/c 13,50,000 (Being application money received) Debenture Application and Allotment A/c Dr. 13,50,000 To 12% Debentures A/c (7,500 × 100) 7,50,000 To Securities Premium Reserve A/c (7,500 × 35) 2,62,500 To Bank A/c (2,500 × 135) 3,37,500 (Being application money transferred to 12% debentures account, securities premium reserve and excess refunded) 2. Books of X Ltd. Journal 3. Disha Ltd. JOURNAL 4. In the Books of BG Ltd. Journal Date Particulars L.F. Dr. (₹) Cr. (₹) 2012 Sept. 30 Debenture Interest A/c Dr. 12,000 To Debentureholders A/c 10,800 To TDS Payable A/c 1,200 (Being the interest due on debentures for the half-year ended 30th Sept. 2012; TDS deducted @10% Debentureholders A/c Dr. 10,800 TDS Payable A/c Dr. 1,200 To Bank A/c 12,000 (Being the interest paid to debentureholders and TDS deposited in Government Account) 2013 Mar. 31 Debenture Interest A/c Dr. 12,000 To Debentureholders A/c 10,800 To TDS Payable A/c 1,200 (Being the interest due on debentures for the half-year ended 31st March, 2013, TDS deducted @10%) Debentureholders A/c Dr. 10,800 TDS Payable A/c Dr. 1,200 To Bank A/c 12,000 (Being the interest paid and TDS deposited in the Government Account) Statement of Profit and Loss (Finance cost) Dr. 24,000 To Debenture Interest A/c 24,000  (Being the interest transferred to Statement of Profit and Loss as Finance Cost at the year end) 5. Journal Date Particulars L.F. Dr. (₹) Cr. (₹) Furniture A/c Dr. 2,20,000 To M/s Furniture Mart 2,20,000 (Being furniture purchased from M/s Furniture Mart) M/s Furniture Mart Dr. 1,10,000 To Bills Payable A/c 1,10,000 (Being bills payable accepted in part payment) M/s Furniture Mart Dr. 1,10,000 To 9% Debentures A/c (1,000 × 100 ) 1,00,000 To Securities Premium Reserve A/c (1,000 × 10) 10,000 (Being debentures issued at 10% premium to furniture mart in part payment) Working Note: Total Amount Due 1,10,000 Number of Debentures = Issue Price Per Debenture = 110 = 1,000 debentures 6. In the Books of the Nano Ltd. Journal 7. (a) Journal Date Particulars L.F. Dr. (₹) Cr. (₹) 2016 Bank A/c Dr. 3,65,000 Mar. 4 To 9% Debenture Application and Allotment A/c 3,65,000 (Being application money received) 2016 9% Debenture Application and Allotment A/c Dr. 3,65,000 Mar. 4 Loss on Issue of Debentures A/c Dr. 36,500 To 9% Debentures A/c 3,65,000 To Premium on Redemption of Debentures A/c 36,500 (Being transfer of application money to debenture account issued at par, but redeemable at premium of 10%) (b) Journal  Date Particulars L.F. Dr. (₹) Cr. (₹) 2016 Bank A/c Dr. 3,43,000 Mar. 4 To 9% Debenture Application and Allotment A/c