CBSE Class 12 Accountancy Accounting For Debentures Assignment

Question. The nominal and book values of debenture redemption fund investments account are respectively Rs 1,00,000 and Rs 96,000. The company sold investments of nominal value of Rs 30,000 at a price which was just sufficient to redeem debentures of Rs 30,000 at 10% premium, the profit on sale of investment is
a) Rs 4,200
b) Rs 3,000
c) Nil
d) Rs 5,000

Answer : A

Question. If debentures are issued at premium, then they can be redeemed at
a) par
b) premium
c) Both (a) and (b)
d) can’t be redeemed

Answer : C

Question. A company wants to issue debentures in the upcoming month. For the issue, the company has to create debenture trust deed. But the accountant of the company does not know its meaning. Tell the meaning of debenture trust deed.
a) It shows the list of debentureholders
b) It protects the interest of debentureholders
c) It is created after public subscription
d) It tells that in case of losses, there will be no interest

Answer : B

Question. Own debentures are those debentures of the company which
a) the company allots to its own promoters
b) the company allots to its director
c) the company purchases from the market and keeps them as investments
d) None of the above

Answer : C

Question. Loss on issue of debentures is written-off out of
a) securities premium reserve
b) general reserve and statement of profit and loss account
c) Both (a) and (b)
d) discount on issue of debentures account

Answer : C

Question. Company can utilise premium received on issue of debentures for which purpose?
a) Writing-off discount allowed on issue
b) For writing-off preliminary expenses
c) Both (a) and (b)
d) None of the above

Answer : C

Question. Profit on cancellation of own debentures is transferred to
a) statement of profit and loss
b) debenture redemption reserve
c) capital reserve
d) None of the above

Answer : C

Question. X Ltd. issued 10,000, 8% debentures of Rs 10 each, payable on application and redeemable at par at any time after 6 years. Record the entries for the application money received in the books of X Ltd.
a) Bank A/c                  Dr          80,000
         To Debenture Application and
               Allotment A/c                             80,000
b) Bank A/c                  Dr          1,00,000
               To Debenture Application
                 and Allotment A/c                     1,00,000
c) Debenture Application and
    Allotment A/c       Dr          1,00,000
           To 8% Debentures A/c                       1,00,000
d) None of the above

Answer : B

Question. ‘X’ Limited purchased the assets from ‘Y’ Limited from Rs 16,20,000. ‘X’ Limited issued 10% debentures of Rs 10 each at 10% discount against the payment. The number of debentures issued by ‘X’ Limited will be
a) 16,200
b) 18,000
c) 1,80,000
d) 1,62,000

Answer : C

Question. Goel Ltd. invited applications for issuing 6,000, 12% debentures of Rs 100 each at a premium of Rs 50 per debenture. The full amount was payable on application. Applications were received for 8,000 debentures.
Applications for 2,000 debentures were rejected and application money was refunded. Debentures were allotted to the remaining applicants. Based on the information, pass the journal entry for adjusting the application money received in the books of Goel Ltd.
a) Bank A/c                        Dr                   12,00,000
         To Debenture Application
                     and Allotment A/c                                 12,00,000
b) Debenture Application
     and Allotment A/c           Dr                   9,00,000
                    To 12% Debentures A/c                           9,00,000
c) Debenture Application
    and Allotment A/c            Dr                12,00,000
                     To 12% Debentures A/c                           6,00,000
                     To Securities Premium Reserve A/c           3,00,000
                     To Bank A/c (2,000 × 150)                       3,00,000
d) None of the above

Answer : C

Question. Which of the following alternatives are available for the company at the time of oversubscription?
(i) Pro-rata (ii) Rejection of excess application Alternatives
a) Only (i)
b) Only (ii)
c) Both (a) and (d)
d) None of these

Answer : C

Question. Debentures may be issued …… .
a) for cash
b) for consideration other than cash
c) as collateral security
d) All of these

Answer : D

Question. Firewall agreed to pay purchase consideration of Rs1,30,000 by issuing fully paid-up debentures of Rs 100 at Rs 120. How many debentures will be issued?
a) 1,083
b) 1,084
c) Can’t be determined
d) None of these

Answer : A

Question. A company ‘Vansh Ltd.’ has purchased an asset costing Rs 22,00,000. Vendor issued 10% debentures of Rs 100 each at 10% premium as consideration against asset purchased. Calculate number of debentures to be issued.
a) 26,000 debentures
b) 24,000 debentures
c) 20,000 debentures
d) 22,000 debentures

Answer : C

Question. When debenture amount is received in lumpsum, ……… is credited with bank account.
a) debenture application and allotment account
b) debenture account
c) debenture allotment account
d) None of the above

Answer : A

Question. During the year 2019-20, Network 10 Ltd. issued 12% debentures of Rs 100 each as per the details given. A machine was purchased for Rs 2,18,500. The Vendor was paid by the issue of 1,900 debentures at a premium of 15%, to be redeemed at par. The entry for the payment will be
a) Machinery A/c                Dr               2,18,500
                To Vendor’s A/c                                     2,18,500
b) Vendor’s A/c                  Dr               2,18,500
                To 12% Debentures A/c                         1,90,000
    To Securities Premium
                Reserve A/c                                           28,500
c) Vendor’s A/c                   Dr               2,18,500
                To Machinery A/c                                    2,18,500
d) 12% Debentures A/c      Dr                1,90,000
    Securities Premium
    Reserve A/c                   Dr                28,500
                To Vendor’s A/c                                       2,18,50

Answer : B

Question. Discount on issue of debentures is
a) capital loss
b) capital income
c) revenue loss
d) revenue income

Answer : A

Question. Name the sub-head under which the ‘premium on redemption of debentures’ appears in the balance sheet?
a) Shareholders’ fund
b) Non-current liabilities
c) Long-term borrowings
d) None of the above

Answer : C

Question. Name the account to which the amount of premium received on the issue of debentures wil be credited?
a) Premium on redemption of debentures account
b) Security premium reserve account
c) % debentures account
d) None of the above

Answer : B

Question. A company AB Ltd issued 12% debentures of Rs 10,00,000 of Rs 100 each to public. In the terms of issue, these debentures are redeemable after 10 months ending on 31st January, 2022. These debentures will be shown in balance sheet as on 31st March, 2021 under the heading
a) long-term liability
b) current liability
c) fixed assets
d) current assets

Answer : B

Question. The balance of sinking fund investment account after the realisation of investments is transferred to
a) statement of profit and loss
b) debentures account,
c) sinking fund account
d) None of the above

Answer : C

Question. The following journal entry appears in the books of X Co. Ltd.
Bank A/c                                 Dr 4,75,000
Loss on Issue of Debenture A/c Dr 75,000
              To 12% Debentures A/c               5,00,000
              To Premium on Redemption of
                 Debenture A/c                         50,000
Debentures have been issued at a discount of
a) 15%
b) 5%
c) 10%
d) 20%

Answer : B

Question. Discount on issue of debentures is shown under the following head in the balance sheet.
a) Statement of profit and loss
b) Other non-current assets
c) Debentures account
d) None of the above

Answer : B

Question. Profit on sale of debenture redemption fund investments in the first instance is credited to
a) debenture redemption fund account,
b) statement of profit and loss,
c) general reserve account
d) None of the above

Answer : A

Question. When debentures are redeemed out of profits, an equal amount is transferred to
a) general reserve
b) debenture redemption reserve
c) capital reserve
d) debenture redemption investment

Answer : B

Question. A company had issued debentures and DRR is made as required by law. Accountant is of the view that this DRR is to be transferred into capital reserve because this is a profit in the nature of capital.
Tell him that DRR is to be transferred to .......... at the end of redemption.
a) capital reserve
b) profit and loss account
c) general reserve
d) None of these

Answer : C

Question. X Co Ltd. purchased assets worth Rs 28,80,000. It issued debentures of Rs 100 each at a discount of 4 per cent in full satisfaction of the purchase consideration. The number of debentures issued to vendor is
a) 30,000
b) 28,800
c) 32,000
d) 40,000

Answer : A

Question. When debentures are issued at a discount, which of the following accounts is debited at the time of issue?
a) Debentures account
b) Securities premium reserve
c) Discount on issue of debentures
d) None of the above

Answer : C

Question. Arihant Ltd. issued 8,000, 12% debentures of Rs 100 each at par on 1st April, 2020 which are redeemable at 5% premium in five equal instalments. First redemption to be made on 31st March, 2021. The company complied with legal requirements. Calculate amount which is required to be legally invested?
a) Rs 1,20,000
b) Rs 24,000
c) Rs 60,000
d) Rs 96,000

Answer : B

Question. Excess value of net assets over purchase consideration at the time of purchase of business is credited to
a) general reserve
b) capital reserve
c) vendors’ account
d) Both (a) and (b)

Answer : B

ACCOUNTING FOR DEBENTURES

LEARNING OBJECTIVES
I) Understand the meaning and features of debentures.
II) Differentiate between shares and debentures.
III) Understand different classes of debentures.
IV) Journal entries regarding issue of debentures for cash and for consideration other than cash.
V) Accounting treatment of debentures issued as collateral security.
VI) Accounting treatment of issue and redemption of debentures at par, discount and at premium.
VII) Understand the methods of redemption of debentures.
VIII) Accounting treatment of redemption of debentures out of capital and profit.
IX) Understand the redemption of debentures by purchase in the open market.
X) Understand redemption of debentures by conversion into shares and new debentures.

Question 1. What do you meant by Debentures?
Answer: Debentures is an instrument of debt owned by a company as an acknowledgement of debt, such measurements are issued under the seal of company and duly signed by authorized signatory.
In simple words: A debenture is a written certificate issued by a company acknowledging a loan taken from the public.

Exam Tip: Always mention that debentures represent long-term borrowings and holders are creditors of the company.

Question 2. Write any four types of debentures
(i) Redeemable debentures
(ii) Perpetual Debentures
(iii) Convertible debentures
(iv) Secured debentures
Answer: The four types of debentures are Redeemable debentures, Perpetual debentures, Convertible debentures, and Secured debentures.
In simple words: Debentures are classified based on security, redemption, convertibility, and registration.

Exam Tip: Memorize at least four clear categories with brief definitions for classification questions.

Question 3. What is debenture Trust Deed?
Answer: Debenture trust deed is a document created by the company whereby trustee is appointed to protect the interest of debenture holders before they are offered for public subscription.
In simple words: A trust deed is a legal agreement protecting debenture holders' rights and securing their investment through trustees.

Exam Tip: Highlight the role of trustees in safeguarding investor interests.

Question 4. What is meant by convertible debentures?
Answer: Convertible debentures are those, the holders of which are given an option to exchanging the amount of their debentures with equity shares or other securities after a specified period.
In simple words: These are debentures that can be converted into shares after a certain time period.

Exam Tip: Note that conversion can be fully or partly convertible as per issue terms.

Question 5. Why is premium on the issue of debentures considered as a capital profit?
Answer: Premium on the issue of debentures is considered a capital profit because it is not an income arising from the normal course of business operations.
In simple words: Premium received on issuing debentures is a capital gain, not regular business revenue.

Exam Tip: Capital profits cannot be used for distributing normal dividends.

Question 6. Explain deep discount Bond
Answer: When debentures are issued without interest rate and issue price is thereby discounted, the issue of debenture is said to have been made as deep discount bond.
In simple words: Deep discount bonds are sold at a massive discount to face value and redeemed at par without periodic interest payments.

Question 7. Differentiate between shareholders and debenture holder
Answer:

In simple words: Shareholders are owners earning dividends, while debenture holders are lenders earning fixed interest.

Exam Tip: Tabular comparison is best for differentiating status, return, and security.

Question 8. What is the nature of interest on debentures?
Answer: Interest on debentures is a charge against profits.
In simple words: Interest must be paid by the company regardless of whether it makes a profit or incurs a loss.

Exam Tip: Always remember interest is a charge against profit, unlike dividend which is an appropriation of profit.

Question 9. State in brief, the SEBI Guidelines regarding Debenture Redemption Reserve
Answer: At per SEBI Guidelines, an amount equal to 50% of the debenture issue must be transferred to DRR before the redemption begins. In other words, before redemption, at least an amount equal to 50% of the debenture issue must stand to the credit of DRR.
In simple words: Companies must create a Debenture Redemption Reserve of 50% of the value of debentures before starting redemption.

Exam Tip: Note current regulations exempt certain financial institutions and infrastructure companies from DRR requirements.

Question 10. Name the head under which discount on issue of debentures appears in the Balance Sheet of "C" Company.
Answer: Discount on issue of debentures will appear under the heading Miscellaneous Expenditure.
In simple words: Unamortized discount on debentures is shown as miscellaneous expenditure until written off.

Exam Tip: Under revised Schedule III, unamortized portions are split into current and non-current other non-current/current assets.

Question 11. What are the exceptions for creating debenture Redemption Reserve?
Answer: (i) An infrastructure company, (ii) Debentures are issued for less than 18 months maturity period, (iii) If debentures issued by private placement.
In simple words: Infrastructure companies, short-term debentures under 18 months, and privately placed debentures do not need DRR.

Exam Tip: List all three statutory exceptions clearly to get full marks.

Question 12. What do you mean by debentures issued as collateral security?
Answer: The issue of debentures as a collateral security means the issue of debentures as an additional security against the loan in addition to principal security that may be offered.
In simple words: Collateral security means pledging debentures as secondary backup security for a bank loan.

Exam Tip: Mention both methods of accounting for collateral security (with or without opening Debenture Suspense Account).

Question 13. A Ltd issued 5,000 13% debentures of Rs. 100 each at par and raised a loan of Rs. 80,000 from Bank. Collaterally secured by Rs. 100,000 13% debentures. How will You show the debenture in the Balance Sheet of the Company assuming that the company has recorded the issue of Debentures as collateral security in the books.
Answer:
Balance Sheet

In simple words: Show the primary debenture issue under long-term borrowings and note the collateral debentures against the bank loan.

Exam Tip: Ensure presentation strictly matches standard balance sheet format requirements.

Question 15. Ashoka Ltd. had Rs. 5,00,000 12% debentures outstanding as on 1st Jan, 2003. During the year company took a loan of Rs. 3,00,000 from Bank of Punjab for which the company placed with the bank debentures of Rs. 3,60,000 as collateral security. Pass journal entries and also show how the debentures and bank loan will appear in the balance sheet.
Answer:
Journal Entries
1. Bank a/c Dr. 3,00,000
    To Bank loan a/c 3,00,000
(Being loan taken from bank)
2. Debenture suspense a/c Dr. 3,60,000
    To 12% Debenture a/c 3,60,000
(Being Debentures issued as collateral security)
In simple words: Record the bank loan receipt and then record the issue of debentures to suspense account as collateral.

Exam Tip: Debenture suspense account is shown as a deduction from long-term borrowings in the balance sheet.

Question 16. XYZ Co. Ltd., issued 10,000 10% debentures of Rs. 100 each at a premium of Rs. 5 payable as follows: On application Rs. 40, on Allotment Rs. 65 (including premium). All the debentures were subscribed and money was received, pass necessary journal entries to record the issue of debentures.
Answer:
Journal Entries
1. Bank a/c Dr. 4,00,000
    To 10% Debenture application a/c 4,00,000
(Being application money received)
2. 10% Deb Application a/c Dr. 4,00,000
    To 10% Debenture a/c 4,00,000
(Being application money transferred to debenture a/c)
3. 10% Deb allotment a/c Dr. 6,50,000
    To Debenture a/c 6,00,000
    To Securities Premium a/c 50,000
(Being debenture allotment due)
4. Bank a/c Dr. 6,50,000
    To 10% Deb allotment a/c 6,50,000
(Being allotment money received)
In simple words: Pass standard application, transfer, allotment due, and receipt entries accounting for the premium.

Exam Tip: Total issue price is \(100 + 5 = 105\). Allotment includes \(60\) for debenture and \(5\) for premium.

Question 17. Pass Journal Entries to record the Issue of Debentures:
1) 5000 15% debenture of Rs. 100 each issued at Discount of 5% and redeemable at premium at 5% after 5 years.
2) 10000 15% debenture of Rs. 100 each issued at a premium of 10% and redeemable at par after 6 years.
Answer:
Journal Entries
1. Bank a/c Dr. 4,75,000
Loss on issue of Deb a/c Dr. 50,000
    To 15% debenture a/c 5,00,000
    To premium on redemption of debenture a/c 25,000
(Being issue of debenture at discount and redeemable at 5% premium)
2. Bank a/c Dr. 11,00,000
    To 15% Debenture a/c 10,00,000
    To Securities Premium a/c 1,00,000
(Being issue of debenture at premium and redeemable at par)
In simple words: Account for issue losses, discounts, and redemption premiums according to conservative accounting principles.

Exam Tip: Loss on issue includes both the discount on issue and premium payable on redemption.

Question 18. Journalise the following transactions:
(a) 10 debentures issued at Rs. 100 repayable at Rs. 100.
(b) 10 debentures issued at Rs. 95, repayable at Rs. 100.
(c) 10 debentures issued at Rs. 105, repayable at Rs. 100.
(d) 10 debentures issued at Rs. 100, payable at Rs. 105.
(e) 10 debentures issued at Rs. 95, Repayable at Rs. 105.
Answer:
Journal Entries
(a) Issue at par, redeemable at par:
Bank a/c Dr. 1,000
    To Debenture Application a/c 1,000
(Being debenture application money received)
Debenture Application a/c Dr. 1,000
    To Debenture a/c 1,000
(Being 10 debentures of Rs. 100 each issued at par redeemable at par)

(b) Issue at discount, redeemable at par:
Bank a/c Dr. 950
    To Debenture Application a/c 950
(Being debenture application money received)
Debenture Application a/c Dr. 950
Discount on issue of Debentures a/c Dr. 50
    To Debenture a/c 1,000
(Being 10 debentures of Rs. 100 each issued at a discount of 5% and repayable at par)

(c) Issue at premium, redeemable at par:
Bank a/c Dr. 1,050
    To Debenture Application a/c 1,050
(Being debenture application money received)
Debenture Application a/c Dr. 1,050
    To Debenture a/c 1,000
    To Securities Premium a/c 50
(Being 10 debentures of Rs. 100 each issued at premium of 5% and redeemable at par)

(d) Issue at par, redeemable at premium:
Bank a/c Dr. 1,000
    To Debenture Application a/c 1,000
(Being debenture application money received)
Debenture Application a/c Dr. 1,000
Loss on issue of debentures a/c Dr. 50
    To Debentures a/c 1,000
    To Premium on redemption of debentures a/c 50
(Being 10 debentures of Rs. 100 each issued at par but repayable at a premium of 5%)

(e) Issue at discount, redeemable at premium:
Bank a/c Dr. 950
    To Debenture Application a/c 950
(Being debenture application money received)
Debenture Application a/c Dr. 950
Loss on issue of debentures a/c Dr. 100
    To Debentures a/c 1,000
    To Premium on redemption of debentures a/c 50
(Being 10 debentures of Rs. 100 each issued at discount of 5% but repayable at a premium of 5%)
In simple words: Handle all combinations of issue prices and redemption terms systematically using loss on issue of debentures.

Exam Tip: Loss on issue includes both discount on issue and premium on redemption.

Question 19. A building has been purchased for Rs. 1,10,000 from X Ltd., X Ltd., has been issued 12% debentures in Purchase Consideration at a Premium of 10% Journalise the above transaction.
Answer:
Journal Entries
1. Building a/c Dr. 1,10,000
    To Vendors a/c 1,10,000
(Being purchasing of a building on credit)
2. Vendors a/c Dr. 1,10,000
    To 12% debentures a/c 1,00,000
    To Securities premium a/c 10,000
(Being issue of 12% debentures at 10% premium)
In simple words: Calculate number of debentures by dividing purchase price by issue price including premium (\(1,10,000 / 110 = 1,000\) debentures).

Exam Tip: Always verify that total debitude equals total credits in purchase consideration entries.

Question 20. Raghav Limited purchased a running business from Krishna traders for a sum of Rs. 15,00,000 payable Rs. 3,00,000 by cheque and for the balance issued 9% debentures of Rs. 100 each at par. The assets and liabilities consisted of the following: Plant and Machinery 4,00,000, Building 6,00,000, Stock 5,00,000, Debtors 3,00,000, Creditors 2,00,000. Record necessary journal entries in the books of Raghav Limited.
Answer:
Journal Entries
Plant and Machinery a/c Dr. 4,00,000
Building a/c Dr. 6,00,000
Stock a/c Dr. 5,00,000
Debtors a/c Dr. 3,00,000
    To Creditor's a/c 2,00,000
    To Krishna Traders 15,00,000
    To Capital Reserve (Bal. Fig.) 1,00,000
(Being assets and liabilities taken over from the vendor company)
Krishna Traders a/c Dr. 15,00,000
    To Bank 3,00,000
    To 9% Debentures a/c 12,00,000
(Being issue of 12,000 debentures of Rs. 100 each at par and rest paid by a cheque)
In simple words: Record asset acquisition, balance the difference as capital reserve, and settle payment via bank and debentures.

Exam Tip: If purchase consideration exceeds net assets, the difference is Goodwill; if net assets exceed purchase consideration, it is Capital Reserve.

Question 21. What do you mean by Redemption of debentures by purchase in the open market?
Answer: A company, if authorised by its Articles of Association, can redeem its own debentures by purchasing them in the open market. This is called redemption of debentures by purchase in the open market. Debentures may be purchased at par or at a premium. But this procedure is usually adopted by the company only when its debentures are quoted at a discount in the open market.
In simple words: Open market purchase means buying back own debentures from the stock market to cancel them and reduce liability.

Exam Tip: Mention that purchasing at a discount results in a capital profit on cancellation.

Question 22. LCM Ltd., purchased for cancellation its own 10,00,000, 9% debenture of Rs. 500 each of Rs. 480 each. Record necessary Journal entries.
Answer:
Journal Entries
1. Own debentures a/c Dr. 48,00,00,000
    To Bank a/c 48,00,00,000
(Being purchased its own debenture at Rs. 480/- each)
2. 9% Debentures a/c Dr. 50,00,00,000
    To Own debentures a/c 48,00,00,000
    To Profit on cancellation of debentures 2,00,00,000
(Being debentures cancelled)
In simple words: Record purchase of own debentures at market price and then cancel them against face value, transferring the profit to capital reserve.

Exam Tip: Profits on cancellation of debentures are transferred to Capital Reserve account.

Question 23. A company authorized its Rs. 1,10,000 debenture holders to convert them into preference shares. Pass the necessary journal entry if:
a) Debentures were converted into shares of Rs. 100 at par
b) Debentures were converted into shares of Rs. 100 at a premium of 10%
Answer:
Journal Entries
a) Converted at par:
Debentures A/c Dr. 1,10,000
    To Preference Share Capital a/c 1,10,000
(Being debentures converted into preference shares issued at par)
b) Converted at 10% premium:
Debentures a/c Dr. 1,10,000
    To Preference Share Capital a/c 1,00,000
    To Securities Premium a/c 10,000
(Being debentures converted into preference shares issued at 10% premium)
In simple words: Debit debentures and credit share capital and securities premium based on the issue price of shares.

Question 24. White Ltd., issued 8,00,000 8% debentures of Rs. 100 each redeemable at a premium of 10%. According to the terms of redemption, the company redeemed 25% of the above debentures by converting them into shares of 50 each issued at a premium of 60% pass Journal entry regarding redemption of debentures.
Answer:
Journal Entries
1. 8% debentures a/c Dr. 2,00,00,000
Premium on redemption of debentures a/c Dr. 20,00,000
    To Debenture holders a/c 2,20,00,000
(Being 25% of debentures redeemed at a premium)
2. Debenture holders A/c Dr. 2,20,00,000
    To Share capital 1,37,50,000
    To Security premium a/c 82,50,000
(Being issue of 2,75,000 shares of Rs. 50 each at a premium of 60% to the debenture holders on conversion of 2,00,000 debentures)
In simple words: Calculate 25% of total debentures (\(2\text{ crores}\)), add redemption premium, and issue shares at a premium to settle the amount.

Exam Tip: Issue price per share is \(50 + 60\% \text{ of } 50 = 80\). Number of shares = \(2,20,00,000 / 80 = 2,75,000\).

Question 25. Journalise the following transactions in the books of Raja Ltd.,:
1) 200 12% debentures of Rs. 100 each issued at a discount of 10% were converted into 10% preference shares of Rs. 100 each issued at a premium of 25%. The debentures were converted at the option of the debenture-holders before the date of redemption.
2) Issued 1000 12% debentures of Rs. 100 each at a discount of 10% redeemable at a premium of 5%.
Answer:
Journal Entries
1. 12% Debenture a/c Dr. 20,000
    To Discount on issue of debenture a/c 2,000
    To Debenture holders a/c 18,000
(Being the amount due to debenture holders on conversion of 200, 12% debenture)
2. Debenture holders a/c Dr. 18,000
    To 10% preference share Capital 14,400
    To Securities premium 3,600
(Being issue of 144, 12% preference shares of Rs. 100 each)
3. Bank a/c Dr. 90,000
Loss on Issue of Deb a/c Dr. 15,000
    To 12% Debenture a/c 1,00,000
    To premium on redemption of deb a/c 5,000
(Being issue of 1000, 12% debenture of Rs. 100 each at a discount of 10% and redeemable at premiums of 5%)
In simple words: Write off unamortized discount upon conversion and record new debenture issue with issue discount and redemption premium.

Exam Tip: Track unamortized discount carefully when debentures are converted prematurely.

Question 26. On January 1st, 2006 S Ltd issued 1,000 10% debentures of Rs. 500 each at par redeemable after 7 years. However the company gave an option to debenture holder to get debentures converted into equity shares of Rs. 100 each at a premium of Rs. 25 per share any time after the expiry of one year. Arvind the holder of 200 debentures informed on Jan, 2006 that he wanted to excise the option of conversion of debentures into equity shares. Pass necessary Journal entries to record the issue of debentures on Jan, 2004 and conversion of debentures on Jan, 2006.
Answer:
Journal of S Limited
Bank a/c Dr. 5,00,000
    To 10% Debenture a/c 5,00,000
(Being Debenture money received)
10% Debenture a/c Dr. 1,00,000
    To Debenture holder a/c 1,00,000
(Being Amount due to debenture holders on redemption)
Debenture holders a/c Dr. 1,00,000
    To Equity share capital a/c 80,000
    To Securities Premium a/c 20,000
(Being payment made to debenture holders in equity shares)
In simple words: Record initial debenture issue, transfer amount due upon conversion, and allot equity shares at a premium.

Exam Tip: Number of equity shares = \(1,00,000 / 125 = 800\) shares of Rs. 100 each at Rs. 125.

Question 27. Animesh Ltd issued 1,000, 12% Debenture of 100 each in the following manner:
(i) For cash at par Rs. 50,000 nominal
(ii) For creditors of Rs. 45,000 against purchase of machinery Rs. 35,000 nominal
(iii) To SBI bank against a loan of Rs. 10,000 as collateral security Rs. 15,000 nominal
Pass Journal entries.
Answer:
Journal Entries
1. Bank a/c Dr. 50,000
    To Debenture Application a/c 50,000
(Being Application money received on 500 debentures @ Rs. 100)
Debenture Application a/c Dr. 50,000
    To 12% Debentures a/c 50,000
(Being 12% Debentures issued at par)
2. Machinery a/c Dr. 45,000
    To Vendor a/c 45,000
(Being Machinery purchased)
Vendor a/c Dr. 45,000
    To 12% Debentures a/c 35,000
    To Securities Premium a/c 10,000
(Being Debentures issued to vendor at premium)
3. Bank a/c Dr. 10,000
    To Bank Loan a/c 10,000
(Being Loan borrowed)
Debenture Suspense a/c Dr. 15,000
    To 12% Debentures a/c 15,000
(Being Debentures issued as collateral security)
In simple words: Pass individual entries for cash issue, vendor consideration with premium, and bank loan collateral security.

Exam Tip: Keep each transaction distinct with proper narration.

Question 28. Dipesh Ltd redeemed its 8,000, 11% Debentures of Rs. 100 each in the following manner:
(i) 4,000 debentures were purchased @ Rs. 95.
(ii) 3,000 debentures were purchased @ Rs. 93.
(iii) 1,000 debentures were purchased @ Rs. 97.50.
The expenses on purchase of own debentures amounted to Rs. 200.
The debentures were purchased for immediate cancellation. Pass journal entries.
Answer:
Journal Entries
1. P/L appropriation a/c Dr. 4,00,000
    To Debenture Redemption Reserve a/c 4,00,000
(Being Debenture redemption reserve created @ 50% of debentures)
2. Own Debentures a/c Dr. 7,56,700
    To Bank a/c 7,56,700
(Being Own debentures purchased including expenses: \(4000 \times 95 + 3000 \times 93 + 1000 \times 97.50 + 200 = 3,80,000 + 2,79,000 + 97,500 + 200 = 7,56,700\))
3. 11% Debentures a/c Dr. 8,00,000
    To Own Debentures a/c 7,56,700
    To Gain on cancellation of own Debentures a/c 43,300
(Being Own debentures cancelled)
4. Gain on cancellation of own Debentures a/c Dr. 43,300
    To Capital reserve a/c 43,300
(Being Gain transferred to capital reserve)
5. DRR a/c Dr. 4,00,000
    To General reserve a/c 4,00,000
(Being DRR transferred to general Reserve)
In simple words: Create DRR, purchase own debentures below par, cancel them to record capital profit, and transfer DRR to general reserve after complete redemption.

Exam Tip: Include brokerage and expenses in the cost of purchase of own debentures.