GSEB Class 12 Accounts Solutions Chapter 2 Accounting for Debentures

1. Select The Correct Option For Each Question :

Question 1. Debenture is ................ for a company.
(A) capital
(B) receivable
(C) liability
(D) asset
Answer: (C) liability
In simple words: A debenture represents a financial obligation or debt for the company that issues it, meaning it is a liability.

🎯 Exam Tip: Understanding the fundamental nature of debentures as a company's debt is crucial for correctly classifying them in financial statements.

 

Question 2. Company gives ................ on their debentures to debenture holders.
(A) dividend
(D) both interest and dividend
Answer: (B) interest
In simple words: Debenture holders are creditors, not owners, and thus receive periodic interest payments on their investment, not dividends.

🎯 Exam Tip: Differentiating between interest (for debentures) and dividends (for shares) is a key concept in financial accounting and corporate finance.

 

Question 3. At what rate debentures would be issued at discount?
(A) 10%
(B) 5%
(C) 20%
(D) rates as decided by board of directors
Answer: (D) rates as decided by board of directors
In simple words: The specific discount rate at which debentures are issued is determined by the company's board of directors, not a fixed percentage.

🎯 Exam Tip: Board decisions on discount rates reflect market conditions and the company's financial strategy, which is important for valuation.

 

Question 4. The issued debentures by the company are shown under which head in the balance sheet?
(A) Non-current liabilities
(B) Share capital and reserves
(C) Current liabilities
(D) Investments
Answer: (A) Non-current liabilities
In simple words: Debentures, being long-term financial obligations, are typically categorized under non-current liabilities in a company's balance sheet.

🎯 Exam Tip: Proper classification of liabilities into current and non-current is essential for accurate financial reporting and analysis of a company's liquidity.

 

Question 5. The amount of premium received on issuing debentures at premium is transferred to which account?
(A) Capital reserve A/c
(B) General reserve A/c
(C) Securities premium reserve A/c
(D) Statement of profit and loss A/c
Answer: (C) Securities premium reserve A/c
In simple words: Any premium collected during the issuance of debentures is allocated to the Securities Premium Reserve Account, as per accounting standards.

🎯 Exam Tip: Understanding the treatment of securities premium is important as it's a capital receipt with specific permitted uses, not available for general distribution.

 

Question 6. The amount of premium received on issuing debentures at premium is ................
(B) capital loss
(C) revenue loss
(D) capital profit
Answer: (D) capital profit
In simple words: The premium received when issuing debentures is considered a capital profit because it arises from a capital transaction, not regular operations.

🎯 Exam Tip: Recognizing the nature of capital profits versus revenue profits helps in understanding their accounting treatment and restrictions on usage.

 

Question 7. When full amount of the debenture is called on application by the company then, that amount is credited to which account?
(A) Debenture application A/c
(B) Debenture application and allotment A/c
(C) Debenture allotment A/c
(D) Debenture holders A/c
Answer: (B) Debenture application and allotment A/c
In simple words: If the entire debenture amount is collected upfront with the application, it is credited to a combined 'Debenture Application and Allotment Account'.

🎯 Exam Tip: Correctly identifying the account for initial debenture receipts is fundamental to journal entry preparation in debenture accounting.

 

Question 8. Before the company decides to redeem the debentures out of capital, the company has to transfer ................ % of total face value of issued debentures to debenture redemption reserve A/c.
(A) 10
(B) 25
(C) 100
(D) 15
Answer: (B) 25
In simple words: As per regulations, a company must transfer 25% of the debentures' face value to a Debenture Redemption Reserve before redeeming them from capital.

🎯 Exam Tip: The Debenture Redemption Reserve (DRR) requirement is a crucial compliance point to ensure funds are available for debenture redemption, protecting investors.

 

Question 9. Before the company decides to redeem the debentures out of profit, the company has to transfer ................ % of total face value of issued debentures to debenture redemption reserve A/c.
(A) 10
(B) 25
(C) 100
(D) 15
Answer: (C) 100
In simple words: When debentures are redeemed entirely from profits, the company is required to transfer 100% of their face value to the Debenture Redemption Reserve.

🎯 Exam Tip: The percentage transferred to DRR varies depending on whether debentures are redeemed from capital or profit, highlighting the importance of understanding specific regulatory guidelines.

 

Question 10. As per companies rules 2014, the amount that is at least ................ % of face value of the debentures to be redeemed by the end of financial year. i.e. 31st March, should be invested at the beginning of the year i.e. upto 30th April.
(A) 25
(B) 15
(C) 100
(D) 10
Answer: (B) 15
In simple words: Companies Act 2014 mandates that at least 15% of the face value of debentures due for redemption by March 31st must be invested by April 30th of the preceding financial year.

🎯 Exam Tip: Compliance with Debenture Redemption Investment (DRI) rules is vital for ensuring liquidity for redemption and avoiding penalties, often tested in board examinations.

2. Answer In Two Or Three Sentences :

Question 1. What is debentures?
Answer: Debentures are a form of long-term funding where a company borrows capital from the public. In exchange for these funds, the company issues a document or certificate that formally acknowledges its indebtedness to the investor.
In simple words: A debenture is essentially a loan certificate issued by a company to the public, confirming that it owes money to the holder.

🎯 Exam Tip: Knowing the definition of debentures as a debt instrument is foundational to understanding their role in corporate finance and balance sheet presentation.

 

Question 2. Who is called debenture holder?
Answer: A debenture holder is an individual or entity who acquires debentures either by providing funds directly to the company or by purchasing them from the secondary market.
In simple words: A debenture holder is someone who owns debentures, either by directly lending money to the company or by buying them from another investor.

🎯 Exam Tip: Distinguishing debenture holders as creditors from shareholders as owners is crucial for understanding their respective rights and claims against a company.

 

Question 3. According to Companies Act 2013, for what duration can a company issue debentures?
Answer: Under the Companies Act 2013, a company is permitted to issue debentures for a maximum duration of 10 years. However, for companies involved in infrastructure development projects, this period can be extended up to 30 years.
In simple words: Generally, companies can issue debentures for up to 10 years, but infrastructure companies have a longer limit of 30 years under the Companies Act 2013.

🎯 Exam Tip: Remembering the maximum tenure for debenture issues, especially the exception for infrastructure companies, is a common point tested in corporate law and accounting exams.

 

Question 4. Under which head ‘Securities premium reserve account' appears in balance sheet?
Answer: The 'Securities Premium Reserve Account' is presented on the Equity and Liabilities side of the balance sheet, specifically categorized under the 'Reserve and Surplus' heading.
In simple words: The Securities Premium Reserve Account is shown on the Liabilities side of the balance sheet within the 'Reserves and Surplus' section.

🎯 Exam Tip: Correctly placing the securities premium reserve on the balance sheet under reserves and surplus demonstrates an understanding of its capital nature.

 

Question 5. What is meant by debenture discount?
Answer: Debenture discount occurs when a company issues its debentures at a price below their nominal or face value. This difference between the debenture's face value and its lower issue price constitutes the debenture discount.
In simple words: A debenture discount is the amount by which a debenture's issue price is less than its face value.

🎯 Exam Tip: Understanding debenture discount is essential for calculating the actual cost of borrowing and for accounting entries related to debenture issuance.

 

Question 6. Give the provision for writing off the amount of discount on debentures.
Answer: The discount or loss incurred on the issuance of debentures is treated as a capital loss. This amount must be amortized as soon as practicable, ideally within the operational life of the debentures. Typically, it is written off against the securities premium reserve account or the statement of profit or loss.
In simple words: The debenture discount is a capital loss that needs to be written off over the debentures' life, usually against the securities premium reserve or profit and loss statement.

🎯 Exam Tip: The treatment of debenture discount as a capital loss and its write-off mechanism are important for assessing the true financial impact of debenture issues.

 

Question 7. What is meant by 'Issue of debentures for consideration other than cash'?
Answer: Issuing debentures for consideration other than cash refers to situations where a company provides debentures as payment for acquiring assets such as land, buildings, plant, machinery, or even an entire business, instead of receiving a direct cash payment.
In simple words: It means a company gives out debentures as payment for buying assets or a business, rather than paying with cash.

🎯 Exam Tip: This method of issue is important for companies that wish to conserve cash while acquiring significant assets or other businesses, and understanding the journal entries is crucial.

 

Question 8. What is meant by 'Loss on issue of debentures?
Answer: A 'loss on issue of debentures' arises when a company is obligated to pay a premium to debenture holders upon the maturity and redemption of the debentures. This premium amount paid at the time of repayment is considered a loss for the issuing company.
In simple words: A loss on issue of debentures occurs when a company has to pay an extra amount (premium) to debenture holders when their debentures are repaid.

🎯 Exam Tip: This loss is a capital loss recognized at the time of debenture issue, even though the actual cash outflow happens at redemption, requiring careful accounting treatment.

 

Question 9. What are arrangements by the company to fulfill the required amount for the redemption of debentures?
Answer: A company can arrange for debenture redemption through several methods: by issuing new shares and debentures, by utilizing capital, or by setting aside profits for this purpose. The following are the methods of redemption of debentures:
• Redemption of debentures from the fresh issue of shares and debentures.
• Redemption of debentures out of capital.
• Redemption of debenture out of profit.
In simple words: Companies can redeem debentures by issuing new shares or debentures, using company capital, or allocating profits.

🎯 Exam Tip: Knowing the various sources for debenture redemption helps in assessing a company's financial flexibility and its ability to meet long-term obligations.

 

Question 10. Explain the methods of redemption of debentures.
Answer: Debentures can be redeemed using several methods, including a lump-sum payment on a specific date, repayment in installments, purchasing the company's own debentures from the open market, or by converting the debentures into equity shares. Following are the methods of redemption of debentures :
• To pay total amount on particular date.
• Payment through instalments.
• Purchase of own debentures from the open market.
• By converting debentures into shares.
In simple words: Debentures can be repaid in full on a set date, in parts over time, bought back from the market, or swapped for company shares.

🎯 Exam Tip: Familiarity with different redemption methods is crucial for understanding how companies manage their long-term debt and the accounting implications for each method.

3. Give Answer Of The Following Questions In Detail :

Question 1. Explain the types of debentures.
Answer: The classification of debentures is categorized based on various criteria, as detailed below:
ℹ️ चित्र व्याख्या (Diagram Explanation): यह आरेख डिबेंचरों के वर्गीकरण को चार मुख्य मानदंडों-सुरक्षा, परक्राम्यता और मोचन प्रक्रिया, मोचन की शर्तें और परिवर्तनीयता के आधार पर दर्शाता है। सुरक्षा के तहत, डिबेंचरों को सुरक्षित या असुरक्षित वर्गीकृत किया जाता है। परक्राम्यता और मोचन प्रक्रिया के आधार पर, वे पंजीकृत या धारक होते हैं। मोचन शर्तों के लिए, डिबेंचर मोचनीय या अमोचनीय हो सकते हैं। अंत में, परिवर्तनीयता के संबंध में, वे परिवर्तनीय या गैर-परिवर्तनीय होते हैं।

Types of Debenture
↓	↓	↓	↓
(A) On the Basis of Security	(B) As per Negotiability and Procedure for Redemption	(C) As per Conditions of Redemption	(D) On the Basis of Conditions for Convertibility
↓	↓	↓	↓
Secured Debenture	Registered Debenture	Redeemable Debenture	Convertible Debenture
Unsecured Debenture	Bearer Debenture	Irredeemable Debenture	Non-Convertible Debenture

(A) On the basis of Security :
(i) Secured or Mortgage Debenture: Secured or Mortgage Debentures are those for which a company offers some or all of its assets as security upon issuance. First mortgage debentures grant their holders the primary claim over the secured assets, while second mortgage debentures hold a secondary claim.
(ii) Unsecured or Simple or Naked Debentures: Unsecured, simple, or naked debentures are issued by a company without any specific assets being charged as security, meaning no lien or claim is created on the company's assets for these debentures.
(B) As per Negotiability and Procedure for Redemption :
(i) Registered Debenture: Registered debentures are meticulously recorded in a specific register maintained by the company, which includes essential details such as the name, address, and other relevant information of the debenture holders.
(ii) Bearer Debenture: Bearer debentures are transferable simply by delivery; the purchaser acquires them by making payment directly to the seller. Interest payments on these debentures can typically be collected through a designated bank.
(C) As per Conditions of Redemption :
(i) Redeemable Debenture: Redeemable debentures are debt instruments whose principal amount can be repaid by the issuing company after a specified period, as per the terms of their issuance.
(ii) Irredeemable or Perpetual Debenture: Irredeemable or perpetual debentures are debt instruments that do not have a fixed repayment date during the company's operational existence. Typically, their principal amount is only repaid upon the liquidation of the company.
(D) On the basis of Conditions of Convertibility :
(i) Convertible Debenture: Convertible debentures offer the option for their holders to convert them into equity shares or other specified securities of the company, at a predetermined conversion rate, within a given timeframe.
(ii) Non-Convertible Debenture: Non-convertible debentures are straightforward debt instruments that do not provide the option for conversion into equity shares or any other type of securities.
In simple words: Debentures are classified by how secure they are (secured/unsecured), how they can be transferred (registered/bearer), when they are paid back (redeemable/irredeemable), and if they can be converted into shares (convertible/non-convertible).

🎯 Exam Tip: A thorough understanding of debenture types is critical for accurately accounting for them and for comprehending their legal and financial implications.

 

Question 2. Explain the procedure for issue of debentures.
Answer: The procedure for issuing debentures involves several key steps:
• The Board of Directors must first pass a resolution outlining key details such as the total number of debentures to be issued, the face value per debenture, the aggregate issue amount, and the applicable interest rate.
• When issuing debentures, the company must adhere to the Companies Act and SEBI regulations. A prospectus or a statement in lieu of a prospectus, containing comprehensive information, should be released to invite public subscriptions for the debentures.
• The allotment of debentures must correspond to the number of debenture applications received, matching the total debentures issued. To facilitate this process, the company is required to open an account with a scheduled bank.
• According to the Companies Act 2013, the minimum subscription threshold for debentures is set at 90% of the total issued amount.
• Companies can opt to collect the entire debenture amount upfront with the application, or they may choose to collect it in several installments.
• Upon the closure of the subscription period, allotment letters are dispatched to successful applicants, while application money is refunded to those whose applications were not allotted any debentures.
• Debentures can be issued at their face value (at par), at a price higher than their face value (at a premium), or at a price lower than their face value (at a discount).
• While debentures can be issued at a discount, the specific rate of premium or discount applied to the issue is determined by the company's Board of Directors.
In simple words: Issuing debentures involves the board's approval, following legal rules, inviting public applications through a prospectus, ensuring minimum subscription, allotting debentures, and either collecting full payment or installments, potentially at a premium or discount.

🎯 Exam Tip: Understanding the comprehensive procedure for debenture issuance, from board resolution to allotment and regulatory compliance, is essential for practical application and exam success.

 

Question 3. Write a note on 'Debentures issued at a premium'.
Answer: Debentures are considered 'issued at a premium' when their issue price exceeds their face value. For instance, if a debenture with a face value of Rs. 100 is issued for Rs. 120, the Rs. 20 difference represents the premium. In accordance with the Companies Act 2013, the premium collected on debenture issuance is allocated to the 'Securities Premium Reserve Account'. This debenture premium is regarded as a capital profit and can be utilized to offset capital losses incurred by the company. It is important to note that debenture premium cannot be distributed as dividends to shareholders. The Securities Premium Reserve Account is displayed on the equity and liabilities side of the balance sheet, falling under the broader category of 'Reserve and Surplus'.
In simple words: Debentures issued at a premium means they are sold for more than their face value, with the extra amount (capital profit) going into a 'Securities Premium Reserve Account' that can be used to write off capital losses but not for dividends.

🎯 Exam Tip: Knowledge of debenture premium accounting, its nature as capital profit, and restrictions on its use is vital for understanding a company's financial health and regulatory compliance.

 

Question 4. Write a note on 'Debentures issued at a discount.'
Answer: Debentures are deemed 'issued at a discount' when their issue price is below their face value. For example, if a Rs. 100 face value debenture is issued for Rs. 80, the discount amounts to Rs. 20. The Companies Act does not impose a limit on the maximum discount permissible for debenture issues. Therefore, if the company's Articles of Association do not specify restrictions, debentures can be issued at a discount. The discount amount on debentures is recorded as a debit to the 'Discount on Debenture A/c'. In accordance with Accounting Standard-26, the debenture discount or loss on issue is presented in the balance sheet. The specific sub-head under which the debenture discount amount is categorized depends on the agreed terms of the debentures.
In simple words: Debentures issued at a discount are sold below their face value. This discount is recorded as a 'Discount on Debenture A/c' and is shown on the balance sheet, with no legal limit on the discount amount unless specified by the company's articles.

🎯 Exam Tip: Understanding how debenture discounts are accounted for, their presentation in financial statements, and the absence of a legal maximum discount are crucial for practical accounting scenarios.

 

Question 5. Explain the accounting treatment of debentures issued as collateral security.
Answer: When a company obtains a loan from a bank or another lending institution, it may be required to issue debentures as a secondary or auxiliary security, alongside the primary security. These specific debentures are referred to as debentures issued as collateral security. Should the company promptly repay its loan obligations to the bank, the bank will return the debentures. Subsequently, the company will proceed to cancel these debentures. Conversely, if the company defaults on its loan or interest payments, the lender will first liquidate the primary security. If any outstanding balance remains, the lender can then recover it by selling the debentures held as collateral. The journal entry for issuing debentures as collateral security is recorded as follows:

Particulars	Debit (Rs.)	Credit (Rs.)
Debenture suspense A/c	Dr.
To Debenture A/c
(Being issue of debentures as collateral security against loan)

Once the company fully repays the loan, the bank returns the debentures. At this point, the initial accounting entry passed for collateral security is reversed.
In simple words: Debentures used as collateral security are extra security for a loan. If the loan is repaid, debentures are returned; if not, they can be sold by the lender. Accounting involves a specific suspense account entry.

🎯 Exam Tip: Understanding collateral security and its accounting treatment, including the reversal upon loan repayment, is important for comprehensive debenture accounting.

 

Question 6. Write a note on 'Interest on Debentures'.
Answer: Interest on debentures is typically disbursed semi-annually and is recognized as an expense in the company's statement of profit or loss. Unlike dividends, this interest payment is a mandatory charge against profits and must be paid consistently, irrespective of whether the company generates a profit or incurs a loss. The interest rate applicable to debentures is fixed and determined at the time of their issuance. Under the Income Tax Act, companies are mandated to deduct income tax at a stipulated rate from the gross debenture interest before making payments to holders. This deducted tax, known as Tax Deducted at Source (TDS), is then remitted to the income tax department on behalf of the debenture holders. When preparing final accounts, appropriate provisions must be made for any accrued interest on debentures, accounting for differing payment dates. If a company regularly pays interest on its debentures every six months, but a payment becomes overdue, the unpaid amount is then classified as 'Interest accrued and due'.
In simple words: Debenture interest is a fixed, mandatory expense paid usually semi-annually, recorded in the profit and loss statement, and subject to TDS. If unpaid, it's termed 'Interest accrued and due'.

🎯 Exam Tip: Key aspects of debenture interest—its mandatory nature, accounting as an expense, TDS implications, and treatment of accrued interest—are frequent examination topics.

 

Question 7. Write a note on 'Redemption of debentures by the purchase of own debentures in the open market'.
Answer: Subject to the provisions in its Articles of Association, a company may redeem its debentures by repurchasing its own debentures from a recognized stock exchange in the open market. This method is typically employed when the market price of the debentures is lower than their face value or their redemption amount, allowing the company to buy them back at a discount. Following the acquisition of its own debentures from the open market, the company has two main options:
1. The company can choose to immediately cancel the purchased debentures after a Board of Directors' resolution. This applies particularly when debentures are acquired at a price below their face value. The journal entries for immediate cancellation when purchased at a price less than face value are:

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
(i)	Own Debenture A/c		Dr.	.....
	To Bank A/c			.....
(Being debentures purchased from open market)
(ii)	Debenture A/c		Dr.	.....
	To Own Debentures A/c			.....
	To Profit on redemption of debentures A/c			.....
(Being cancellation of own purchased debentures)

Conversely, when debentures are purchased at a price higher than their face value, the following entries are made:

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
(i)	Own Debenture A/c		Dr.	.....
	To Bank A/c			.....
(Being debentures purchased from the market)
(ii)	Debenture A/c		Dr.	.....
	Loss on redemption of debenture A/c		Dr.	.....
	To Own Debentures A/c			.....
(Being cancellation of own purchased debentures)

Instead of immediate cancellation, a company might choose to hold onto its repurchased debentures, classifying them as an 'Investment in own debentures'. These debentures can then be reissued by the company at a later date. When a company acquires its own debentures from the open market with the intention of holding them as an investment, the following journal entry is passed:

Particulars	Debit (Rs.)	Credit (Rs.)
Investment in own Debenture A/c	Dr.	.....
To Bank A/c		.....
(Being debentures purchased from the market for investment)

Such investments in own debentures are presented on the assets side of the balance sheet under 'non-current assets' at their purchase price. When the investment in own debentures is subsequently utilized for the cancellation of debentures, the journal entries are as follows:

Particulars	Debit (Rs.)	Credit (Rs.)
Debenture A/c	Dr.
Loss on redemption of debenture A/c (if any)	Dr.
To Investment in own debenture A/c		.....
To Profit on redemption of debenture A/c		.....
(Being company has used the investment in the own debentures for the cancellation of issued debentures)

In simple words: A company can buy back its own debentures from the open market, usually to cancel them if bought cheaply or hold them as an investment if market conditions are favorable, with specific accounting entries for each action.

🎯 Exam Tip: Redemption by open market purchase is a strategic decision; understanding the accounting implications of both immediate cancellation and holding as investment is critical.

 

Question 8. Distinguish between Shares and Debentures.
Answer: The key distinctions between shares and debentures are outlined in the following table:

Points of Distinction	Shares	Debentures
1. Meaning	The capital of a company, divided into transferable small denominations, with each unit known as a share.	A document or certificate issued by a company to investors, acknowledging its long-term debt borrowed from the public.
2. Type of capital	Represents ownership capital; a shareholder is considered an owner of the company.	Represents borrowed capital; a debenture holder is considered a creditor of the company.
3. Certainty of return	No return is guaranteed to shareholders if the company does not generate profit, implying no surety of return.	Debenture holders receive interest payments as per the issue terms, regardless of whether the company makes a profit or loss.
4. Charge or security	As an ownership security, shares typically do not require the company to offer any security against them.	As a credit security, a company usually creates a fixed or floating charge on its assets to secure debentures.
5. Rights	Shareholders possess the right to participate in company administration and have voting rights.	Debenture holders do not have voting rights or the right to participate in the company's administration.
6. Discount	Generally, shares cannot be issued at a discount, with the exception of sweat equity shares.	Debentures can be issued at a discount.
7. Convertibility	Shares cannot be converted into debentures.	Debentures can often be converted into shares.
8. For redemption	A company is not obligated to return the share capital during its operational lifetime.	Debenture proceeds are generally repaid after a fixed, predetermined period.

In simple words: Shares represent ownership, yield dividends based on profit, have voting rights, and are generally not secured. Debentures represent debt, yield fixed interest regardless of profit, lack voting rights, and are usually secured.

🎯 Exam Tip: A clear understanding of the distinctions between shares and debentures is fundamental for financial analysis, investment decisions, and preparing accurate financial statements.

 

Question 4. Sachin Marble Limited issued 12,000 debentures of Rs. 100 each for public subscriptions. Interest is to be paid at the rate of 10% p.a. The amount were called upper debenture as under: With application Rs. 30, On allotment Rs. 45, On-call Rs. 25
Application were received by company of 15,000 debentures. After allotment of 12,000 debentures, rejected excess applications of debentures and refunded the money to applicants. All the amounts due on allotment and call were duly received. Write journal entries in the books of the company.
Answer: Necessary Calculation :
(1) At the time of application : 15,000 debentures x Rs. 30 = Rs. 4,50,000
(2) At the time of allotment : 12,000 debentures x Rs. 45 = Rs. 5,40,000
(3) At the time of call : 12,000 debentures x Rs. 25 = Rs. 3,00,000
Journal entries in the books of Sachin Marble Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Bank A/c	Dr.	4,50,000
	To 10% Debenture application A/c			4,50,000
(Being receipt of application money on 15,000 debentures at 30 per debenture)
2.	10% Debenture application A/c	Dr.	4,50,000
	To 10% Debenture A/c			3,60,000
	To Bank A/c			90,000
(Being transfer money to debenture account on the allotment of 12,000 debentures and refund money on rejected 3,000 debentures)
3.	10% Debenture allotment A/c	Dr.	5,40,000
	To 10% Debenture A/c			5,40,000
(Being allotment money due on 12,000 debentures at 45 per debenture)
4.	Bank A/c	Dr.	5,40,000
	To 10% Debenture allotment A/c			5,40,000
(Being receipt of full amount of allotment money on debenture)
5.	10% Debenture call A/c	Dr.	3,00,000
	To 10% Debenture A/c			3,00,000
(Being call money due on 12,000 debentures at 25 per debenture)
6.	Bank A/c	Dr.	3,00,000
	To 10% Debenture A/c			3,00,000
(Being receipt of full amount on call money on debentures)
	Total		25,80,000	25,80,000

In simple words: Sachin Marble Limited issued debentures, receiving excess applications which were refunded. Journal entries are prepared to record the receipt of application money, its transfer to the debenture account, the allotment money due and received, and the call money due and received.

🎯 Exam Tip: Accurately handling oversubscription, rejections, and pro-rata allotments in journal entries is crucial for scoring well in debenture issue problems.

 

Question 5. Pasvadal Steel Limited issued 15,000, 9% debentures of Rs. 100 each at a price of Rs. 80 per debenture. The amount per debenture was payable as under: Rs. 25 with application, Rs. 35 on allotment (After discount), Rs. 20 on call.
The company received applications for 15,000 debentures and all are sanctioned. The company received the full money called on allotment and received full amount on call. Except call on 800 debentures. Pass necessary journal entries in the books of company.
Answer: Necessary Calculation :
(1) At the time of application : 15,000 debentures × Rs. 25 = Rs. 3,75,000
(2) At the allotment :
    15,000 debentures × Rs. 35 = Rs. 5,25,000
    Debenture Discount    15,000 debentures × Rs. 20 = Rs. 3,00,000
    Debentures A/c = Rs. 8,25,000
(3) At the time of call :
    15,000 debentures × Rs. 20 = Rs. 3,00,000
    Less: Calls in arrears    800 debentures × Rs. 20 = Rs. 16,000
    Bank A/c = Rs. 2,84,000
Journal entries in the books of Pasvadal Steel Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Bank A/c	Dr.	3,75,000
	To 9% Debenture application A/c			3,75,000
(Being receipt of application money on 15,000 debenture at 25 per debenture)
2.	9% Debenture application A/c	Dr.	3,75,000
	To 9% Debenture A/c			3,75,000
(Being transfer of application money to debenture account)
3.	9% Debenture allotment A/c	Dr.	5,25,000
	Debenture discount A/c	Dr.	3,00,000
	To 9% Debenture A/c			8,25,000
(Being amount due on allotment after deducting discount of 20 at 35 per debenture)

In simple words: Pasvadal Steel Limited issued discounted debentures. The calculations show amounts received on application, due on allotment (including discount), and due on call. Journal entries reflect the receipt of application money, its transfer, the allotment money due with discount, and the call money due, accounting for any calls in arrears.

🎯 Exam Tip: When debentures are issued at a discount, ensure that the discount amount is correctly debited to the 'Debenture Discount A/c' and accounted for at the time of allotment.

 

Question 6. Dynamic Limited of Ankleshwar issued 30,000, 12% debentures, each with a face value of Rs. 100. The payment schedule was: Rs. 35 on application, Rs. 40 on allotment, and Rs. 25 on the first and final call. All debentures were applied for. Palak, a holder of 1,000 debentures, paid the full amount with the allotment. Akash, a holder of 400 debentures, failed to pay the allotment and call amounts. Prepare the journal entries in the company's books.

Answer:

To record the transactions for Dynamic Limited, the following calculations and journal entries are made:

Necessary Calculation:
(1) At the time of application: 30,000 debentures x Rs. 35 = Rs. 10,50,000
(2) At the time of allotment:
30,000 debentures x Rs. 40 = Rs. 12,00,000
+ Calls in advance (Palak): 1,000 debentures x Rs. 25 = Rs. 25,000
Total = Rs. 12,25,000
Less: Calls in arrears (Akash): 400 debentures x Rs. 40 = Rs. 16,000
Bank A/c receipt = Rs. 12,09,000
(3) At the time of first & final call:
30,000 debentures x Rs. 25 = Rs. 7,50,000
Less: Calls in advance (Palak): 1,000 debentures x Rs. 25 = Rs. 25,000
Less: Call in arrears (Akash): 400 debentures x Rs. 25 = Rs. 10,000
Bank A/c receipt = Rs. 7,15,000

Journal entries in the books of Dynamic Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Bank A/c Dr.     To 12% Debenture application A/c (Being received debenture application money on 30,000 debentures at Rs. 35 per debenture)		10,50,000	10,50,000
2.	12% Debenture application A/c Dr.     To 12% Debentures A/c (Being transfer of debenture application money to debenture account)		10,50,000	10,50,000

In simple words: This question demonstrates how to record the issuance of debentures in installments, including handling calls-in-advance and calls-in-arrears, by presenting the necessary calculations and journal entries for each stage of the debenture issue process.

🎯 Exam Tip: Focus on accurately calculating calls-in-advance and calls-in-arrears amounts, and ensure these are correctly reflected in the journal entries for application, allotment, and call stages to secure full marks.

 

Question 7. Charmi Fashion Limited issued 1,20,000, 10% debentures with a face value of Rs. 200 each, at a 10% premium. Payments were structured as: Rs. 100 on application (inclusive of premium) and the remaining balance on allotment. These debentures are slated for redemption after 7 years. The company received applications for 1,50,000 debentures and allotted 1,20,000 debentures on a pro-rata basis. Excess application money was transferred to the allotment account, and the full amount due on allotment was received. Prepare the journal entries for the debenture issue in the company's books.

Answer:

The following calculations and journal entries illustrate the debenture issue process for Charmi Fashion Limited:

Necessary Calculation:
(1) Face value of debenture = Rs. 200
+ 10% Premium = Rs. 20
Total = Rs. 220
Amount requested at application (including premium) = Rs. 100
Amount requested at allotment = Rs. 120

(2) At the time of application:
Debenture A/c (1,20,000 debentures x Rs. 80) = Rs. 96,00,000
+ Security Premium Reserve A/c (1,20,000 debentures x Rs. 20) = Rs. 24,00,000
+ Debenture Allotment A/c (30,000 debentures x Rs. 100) = Rs. 30,00,000
Total Bank A/c = Rs. 1,50,00,000
(3) At the time of allotment:
1,20,000 debentures x Rs. 120 = Rs. 1,44,00,000
Less: Amount received in advance at application (30,000 debentures x Rs. 100) = Rs. 30,00,000
Bank A/c receipt = Rs. 1,14,00,000

Journal entries in the books of Charmi Fashion Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Bank A/c Dr.     To 10% Debenture application A/c (Being received application money on 1,50,000 debenture applications at Rs. 100 per debenture)		1,50,00,000	1,50,00,000
2.	10% Debenture application A/c Dr.     To 10% Debenture A/c (1,20,000 x Rs. 80)     To Securities premium reserve A/c (1,20,000 x Rs. 20)     To 10% Debenture allotment A/c (30,000 x Rs. 100) (Being application money transferred to Debenture A/c and Securities Premium Reserve A/c, and excess application money transferred to Debenture Allotment A/c)		1,50,00,000	96,00,000 24,00,000 30,00,000
3.	10% Debenture allotment A/c Dr.     To 10% Debenture A/c (Being amount due on 1,20,000 debentures at Rs. 120 per debenture at allotment stage)		1,44,00,000	1,44,00,000
4.	Bank A/c Dr.     To 10% Debenture allotment A/c (Being due amount received on debenture)		1,14,00,000	1,14,00,000

In simple words: This entry sequence illustrates issuing debentures at a premium, handling oversubscription with pro-rata allotment, and adjusting excess application money towards allotment, ensuring all financial flows are properly recorded.

🎯 Exam Tip: Pay close attention to distinguishing between face value, issue price, and premium amounts, and correctly allocating funds between debenture capital and securities premium reserve, especially when dealing with oversubscription and pro-rata allotment.

 

Question 8. Janki Marbal Ltd. of Palanpur issued 50,000, 11% Debentures of Rs. 100 each, at a premium of Rs. 20 per debenture. The entire amount was payable upon application. The company received applications for 60,000 debentures. Applications for 10,000 debentures were rejected, and the corresponding money was refunded. Debentures were allotted to the remaining applicants. Prepare the necessary journal entries for these transactions in the books of Janki Marbal Ltd.

Answer:

Journal entries in the books of Janki Marbles Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Bank A/c Dr.     To 11% Debenture application A/c (Being receipt of application money on 60,000 debentures at Rs. 120 per debenture)		72,00,000	72,00,000
2.	11% Debenture application and allotment A/c Dr.     To 11% Debenture A/c (50,000 x Rs. 100)     To Securities premium reserve A/c (50,000 x Rs. 20)     To Bank A/c (10,000 x Rs. 120) (Being transfer of 50,000 debentures at Rs. 100 per debenture to debenture a/c and Rs. 20 per debenture to debenture premium a/c; amount refunded on non-allotted 10,000 debentures at Rs. 120 per debenture)		72,00,000	50,00,000 10,00,000 12,00,000
Total			1,44,00,000	1,44,00,000

In simple words: This records the process of receiving applications for debentures at a premium, allocating them to successful applicants, crediting the premium to a reserve, and refunding money to those whose applications were rejected due to oversubscription.

🎯 Exam Tip: When dealing with oversubscribed debenture issues at a premium, ensure accurate calculation of the premium and the correct treatment of excess application money, distinguishing between amounts transferred to debenture capital, premium reserve, and refunds.

 

Question 9. Mansuri Limited of Dahod issued 8,000, 10% debentures of Rs. 100 each at a 10% discount on 1-4-2017. The payment schedule was: Rs. 30 with application, Rs. 35 on allotment, and the balance on final call. The company received applications for 10,500 debentures, allotted 8,000, and refunded the money for rejected applications. All amounts due on allotted debentures were received. Expenses for issuing debentures amounted to Rs. 22,000. The directors decided to write off 1/5th of "Expenses on Issue A/c” and “Discount on Debenture A/c" from the statement of profit and loss each year. Prepare journal entries for the first year only based on these transactions in the company's books.

Answer:

Journal entries in the books of Mansuri Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Bank A/c Dr.     To 10% Debenture application A/c (Being application money received on 10,500 debentures at Rs. 30 per debenture)		3,15,000	3,15,000
2.	10% Debenture application A/c Dr.     To 10% Debenture A/c     To Bank A/c (Being application money on allotted debentures transferred to debenture a/c and rejected debenture amount refunded)		3,15,000	2,40,000 75,000
3.	10% Debenture allotment A/c (8,000 x Rs. 35) Dr. Discount on debenture A/c (8,000 x Rs. 10) Dr.     To 10% Debenture A/c (8,000 x Rs. 45) (Being amount due on allotment (after discount) of Rs. 35 per debenture)		2,80,000 80,000	3,60,000
4.	Bank A/c Dr.     To 10% Debenture allotment A/c (Being receipt of full amount on allotment)		2,80,000	2,80,000
5.	10% Debenture final Call A/c Dr.     To 10% Debenture A/c (Being amount due on final call at Rs. 25 per debenture)		2,00,000	2,00,000
6.	Bank A/c Dr.     To 10% Debenture final call A/c (Being receipt of full amount on final call)		2,00,000	2,00,000
7.	Expense on issue of debenture A/c Dr.     To Bank A/c (Being expenses incurred at the time of issue of debenture)		22,000	22,000
8.	Statement of profit and loss A/c Dr.     To Discount on debenture A/c (1/5th of Rs. 80,000)     To Expense on issue of debenture A/c (1/5th of Rs. 22,000) (Being expense written off by transfer to statement of profit and loss for the current year)		20,400	16,000 4,400
Total			17,12,400	17,12,400

In simple words: This set of journal entries details the process of issuing debentures at a discount, managing oversubscription, collecting installment payments, and annually writing off the debenture discount and issue expenses from the profit and loss statement.

🎯 Exam Tip: When recording debenture issues with discounts and expenses, ensure proper accounting for both elements and correctly determine the annual write-off amount from the profit and loss statement, as per company policy, to reflect true profitability.

 

Question 10. Aadinath Limited acquired machinery valued at Rs. 18,00,000 from Shikhar Machinery Ltd. on 10-9-2017. An initial payment of Rs. 3,00,000 was made immediately, and the remaining balance was settled by issuing 9% debentures. If Aadinath Ltd. pays Rs. 15,80,000 for the balance amount in 9% debentures, record the necessary journal entries in the books of Aadinath Ltd. Additionally, if Aadinath Ltd. instead pays Rs. 14,10,000 for the balance amount in 9% debentures, how would the journal entry be recorded?

Answer:

The acquisition of machinery and subsequent debenture issuance for payment requires specific journal entries based on whether the debentures are issued at a discount or premium.

Journal entries in the books of Aadlnath Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
2017
10/9	Machinery A/c Dr.     To Shikhar Machinery Limited A/c (Being purchase of machinery from Shikhar Machinery Ltd.)		18,00,000	18,00,000
10/9	Shikhar Machinery Limited A/c Dr.     To Bank A/c (Being Rs. 3,00,000 paid immediately against purchase of machinery)		3,00,000	3,00,000
10/9	Shikhar Machinery Ltd. A/c Dr. Discount on debenture A/c Dr.     To 9% Debenture A/c (Being issue of debentures of Rs. 15,80,000 against balance amount of Rs. 15,00,000)		15,00,000 80,000	15,80,000
Note: If Aadinath Limited issued debentures for the balance amount then the entry will be changed.
10/9	Shikhar Machinery Ltd. A/c Dr.     To 9% Debentures A/c     To Securities premium reserve A/c (Being issue of debentures of Rs. 14,10,000 against balance amount of Rs. 15,00,000 so, difference amount is transfer to Securities Premium Reserve A/c)		15,00,000	14,10,000 90,000

In simple words: This question demonstrates the accounting for asset acquisition where part payment is in cash and the remainder by issuing debentures, illustrating both discount and premium scenarios for debenture issuance.

🎯 Exam Tip: When assets are acquired by issuing debentures, carefully determine if the debentures are issued at par, discount, or premium relative to the acquisition balance, and correctly record the corresponding accounts like 'Discount on Debenture' or 'Securities Premium Reserve'.

 

Question 11. Voltas Electric Limited acquired assets and liabilities from Navrang Traders and decided to pay a purchase consideration of Rs. 15,36,000. Voltas Electric Ltd. settled this by issuing 11% debentures of Rs. 100 each at a 20% premium. Prepare the journal entries in the company's books.

Answer:

The following calculations and journal entries detail the acquisition of a business and payment through debentures issued at a premium:

Necessary Calculation:
Purchase consideration = Rs. 15,36,000 (given)
Total assets (given) = Land-Building + Machinery + Furniture + Stock + Debtors
= Rs. 8,00,000 + Rs. 2,75,000 + Rs. 1,20,000 + Rs. 2,25,000 + Rs. 80,000
= Rs. 15,00,000
Total liabilities (Creditors) = Rs. 80,000
Net Assets = Total Assets – Total Liabilities = Rs. 15,00,000 - Rs. 80,000 = Rs. 14,20,000
Goodwill = Purchase consideration - Net assets = Rs. 15,36,000 - Rs. 14,20,000 = Rs. 1,16,000

Here, the purchase consideration of Rs. 15,36,000 is paid by issuing 11% debentures of Rs. 100 at a premium of 20%. The number of debentures is not specified, so we calculate it:
Debenture face value = Rs. 100
Premium = 20% of Rs. 100 = Rs. 20
Issue price per debenture = Rs. 100 + Rs. 20 = Rs. 120
Number of debentures = \(\frac{\text{Purchase Consideration}}{\text{Amount per debenture}}\) = \(\frac{15,36,000}{120}\) = 12,800 debentures

Journal entries in the books of Voltas Electric Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Goodwill A/c Dr. Land-Building A/c Dr. Machinery A/c Dr. Furniture A/c Dr. Stock A/c Dr. Debtors A/c Dr.     To Creditors A/c     To Navrang Traders A/c (Being purchase of assets and liabilities of Navrang Traders)		1,16,000 8,00,000 2,75,000 1,20,000 2,25,000 80,000	80,000 15,36,000
2.	Navrang Traders A/c Dr.     To 11% debentures A/c (12,800 x Rs. 100)     To Securities premium reserve A/c (12,800 x Rs. 20) (Being issue of 12,800 debentures at 20% premium for purchase consideration)		15,36,000	12,80,000 2,56,000

In simple words: This process records the acquisition of another business by purchasing its assets and liabilities, calculating any goodwill, and then settling the purchase consideration by issuing new debentures at a premium.

🎯 Exam Tip: When accounting for business acquisition by issuing debentures, always calculate the net assets acquired, identify any goodwill or capital reserve arising, and ensure the debenture issue (including premium) correctly matches the purchase consideration.

 

Question 12. A company issued Rs. 21,00,000 worth of 10.5% debentures on 1st April 2017. During the fiscal year, on 10th August 2017, the company secured a loan of Rs. 5,50,000 from the bank. To secure this loan, the company issued new 10.5% debentures amounting to Rs. 5,00,000 as collateral security. Record the necessary journal entries under the following methods in the company's books if debentures are issued as collateral security: (1) if recorded in the company's books and (2) if not recorded in the company's books. Also, present the details of debentures and bank loan in the company's balance sheet as of 31st March 2018.

Answer:

The accounting treatment for debentures issued as collateral security varies based on whether the issue is recorded in the company's books or merely disclosed.

(a) As per first method: Recording collateral security in the books

Journal entries in the books of Company

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Bank A/c Dr.     To Bank Loan A/c (Being loan taken from the bank)		5,50,000	5,50,000
2.	Debenture suspense A/c Dr.     To 10.5% Debentures A/c (Being issue of 10.5% debenture of Rs. 5,00,000 as collateral security against a loan from the bank)		5,00,000	5,00,000

Balance sheet as on 31st March 2018

Particulars	Note No.	31/3/2018 (Rs.)	31/3/2017 (Rs.)
Equity and Liabilities:
Shareholders Fund:
Non-current Liabilities:
Long term borrowings:
10.5% Debentures		21,00,000
10.5% Debentures issued as collateral security 5,00,000 Less: Debenture suspense A/c 5,00,000 Bank loan (on collateral security of debentures of Rs. 5,00,000)		-
Bank loan		5,50,000

(b) As per second method: Not recording collateral security in the books

Journal entries in the books of Company

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Bank A/c Dr.     To Bank Loan A/c (Being loan obtained from the bank)		5,50,000	5,50,000
Here, no entry is passed for the issue of debentures as security against loan.

Balance sheet as on 31st March 2018

Particulars	Note No.	31/3/2018 (Rs.)	31/3/2017 (Rs.)
Equity and Liabilities:
Shareholders Fund:
Non-current Liabilities:
Long term borrowings:
10.5% Debentures		21,00,000
Bank loan (on collateral security of debentures of Rs. 5,00,000)		5,50,000

In simple words: This solution shows how to record a bank loan where debentures are used as collateral security, distinguishing between explicitly recording the debenture issue and merely disclosing it in the financial statements, and how this impacts the balance sheet presentation.

🎯 Exam Tip: When debentures are issued as collateral, remember the two accounting methods: either record the debentures in a suspense account or simply disclose them in notes to accounts. The balance sheet presentation will differ significantly between these approaches.

 

Question 13. Alibaba Limited issued 18,000, 12% debentures, each with a face value of Rs. 100, on 1st April 2017. Interest on these debentures is disbursed semi-annually on 30th September and 31st March. Assuming an income tax rate of 20% for calculations, prepare the necessary journal entries for these transactions for the financial year ending 31st March 2018.

Answer:

The journal entries below record the issuance of debentures and the semi-annual interest payments, including TDS deductions and deposits, for Alibaba Limited.

Journal entries in the books of Alibaba Limited Company

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1/4/17	Bank A/c Dr.     To Debenture application and allotment A/c (Being received amount on 18,000 debentures at Rs. 100 per debenture)		18,00,000	18,00,000
1/4/17	Debenture application and allotment A/c Dr.     To 12% Debenture A/c (Being amount received at application stage transferred to debenture a/c)		18,00,000	18,00,000
30/9/17	Interest on debenture A/c Dr.     To Debenture holders A/c     To TDS payable A/c (Being interest due on 30th Sept. on 12% debenture and income tax deducted at source)		1,08,000	86,400 21,600
30/9/17	Debenture holders A/c Dr.     To Bank A/c (Being payment of interest to debentureholders)		86,400	86,400
30/9/17	TDS payable A/c Dr.     To Bank A/c (Being TDS deposited in income tax dept.)		21,600	21,600
31/3/18	Interest on debenture A/c Dr.     To Debenture holders A/c     To TDS payable A/c (Being interest due on 31st March on 12% debenture and income tax deducted at source)		1,08,000	86,400 21,600
31/3/18	Debenture holders A/c Dr.     To Bank A/c (Being payment of interest to debentureholders)		86,400	86,400
31/3/18	TDS payable A/c Dr.     To Bank A/c (Being TDS deposited in income tax department)		21,600	21,600
31/3/18	Statement of profit and loss A/c Dr.     To Interest on debenture A/c (Being amount of debenture interest for the full year transferred to statement of profit and loss (1,08,000 + 1,08,000))		2,16,000	2,16,000
Total			42,48,000	42,48,000

In simple words: This question demonstrates the full accounting cycle for debentures, from issuance to regular interest payments with tax deductions, and finally, transferring the annual interest expense to the profit and loss account.

🎯 Exam Tip: For debenture interest, remember to account for both the gross interest due and the net amount paid after deducting TDS, and ensure the TDS amount is separately shown as a liability until deposited with the tax authorities.

 

Question 14. Prepare the journal entries solely for the issuance of debentures, without narrations, for the following transactions:
(1) Issued 8,500, 9.5% debentures of Rs. 100 each at par, redeemable at par.
(2) Issued 9,500, 9.5% debentures of Rs. 100 each at a 10% discount, redeemable at par.
(3) Issued 10% debentures of Rs. 200 each at a 10% premium, redeemable at par.

Answer:

The journal entries below record various scenarios of debenture issuance without narrations.

(1) Debenture issued at Rs. 100 each, redeemable at Rs. 100 each:
Journal entries in the books of Company

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Bank A/c Dr.     To Debenture application and allotment A/c (8,500 Debentures x Rs. 100)		8,50,000	8,50,000
2.	Debenture application and allotment A/c Dr.     To 9.5% Debenture A/c (8,500 Debentures x Rs. 100)		8,50,000	8,50,000
3.	9.5% Debenture A/c Dr.     To Debenture holders A/c		8,50,000	8,50,000
4.	Debenture holders A/c Dr.     To Bank A/c		8,50,000	8,50,000

(2) Debenture issued price of Rs. 90 each, redeemable at Rs. 100 each:
Journal entries in the books of Company

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Bank A/c Dr.     To Debenture application and allotment A/c (9,500 debentures x Rs. 90)		8,55,000	8,55,000
2.	Debenture application and allotment A/c Dr. Debenture discount A/c Dr.     To 9.5% Debenture A/c (9,500 debentures x Rs. 100)		8,55,000 95,000	9,50,000
3.	9.5% Debenture A/c Dr.     To Debenture holders A/c		9,50,000	9,50,000
4.	Debenture holders A/c Dr.     To Bank A/c (Returned debenture amount)		9,50,000	9,50,000

(3) Debenture issued price of Rs. 220 each and redeemable at Rs. 200 each:
Journal entries in the books of Company

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Bank A/c Dr.     To Debenture application and allotment A/c		17,60,000	17,60,000
2.	Debenture application and allotment A/c Dr.     To 10% Debenture A/c     To Securities premium reserve A/c		17,60,000	16,00,000 1,60,000

In simple words: This question demonstrates how to record the issuance of debentures under different conditions: at par, at a discount, and at a premium, by showing the specific journal entries for each scenario.

🎯 Exam Tip: Mastering the journal entries for debenture issuance at par, discount, and premium is crucial. Remember to correctly credit the 'Debenture A/c' with face value, debit 'Discount on Issue of Debentures' or credit 'Securities Premium Reserve' as appropriate.

 

Question 15. Catunm Limited issued 12,000, 8% debentures of Rs. 100 each at par on 1-7-2017. These debentures are scheduled for redemption on 30-6-2023 at Rs. 115 per debenture. Prepare the necessary journal entries in the company's books for both the issuance and redemption of debentures, without narrations.

Answer:

The journal entries below record the issuance of debentures at par and their subsequent redemption at a premium, including the necessary provisions for the premium on redemption at the time of issue.

Journal entries in the books of Satyam Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1-7-17	Bank A/c (12,000 debentures x Rs. 100) Dr.     To Debenture application and allotment A/c		12,00,000	12,00,000
1-7-17	Debenture application and allotment A/c Dr. Loss on issue on debentures A/c Dr.     To 8% debentures A/c (12,000 debentures x Rs. 100)     To Premium on redemption of debentures A/c		12,00,000 1,80,000	12,00,000 1,80,000
30-6-23	8% Debenture A/c Dr. Premium on redemption of debenture A/c Dr.     To Debentureholders A/c		12,00,000 1,80,000	13,80,000
30-6-23	Debentureholders A/c Dr.     To Bank A/c		13,80,000	13,80,000

In simple words: This outlines the journal entries for issuing debentures at their face value, recognizing the future premium payable on redemption as a loss at the time of issue, and then settling the debentures with that premium upon maturity.

🎯 Exam Tip: When debentures are issued at par but redeemable at a premium, always account for the "Loss on Issue of Debentures" (equal to the premium on redemption) and "Premium on Redemption of Debentures A/c" at the time of issuance to ensure proper financial reporting.

 

Question 16. On 1-4-2017, Shivam Limited issued 8,000, 7.5% debentures of Rs. 250 each at a 5% discount. All debentures are to be redeemed after 5 years, on 31-3-2022, at a 10% premium. Prepare the necessary journal entries in the company's books, without narrations.

Answer:

The journal entries below record the issuance of debentures at a discount and their subsequent redemption at a premium, including the necessary provisions for both the discount on issue and the premium on redemption.

Journal entries in the books of Shivam Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1-4-17	Bank A/c Dr.     To Debenture application and allotment A/c (8,000 debentures x Rs. 237.50)		19,00,000	19,00,000
1-4-17	Debenture application and allotment A/c Dr. Discount on debenture A/c Dr. Loss on issue of debentures A/c Dr.     To 7.5% Debentures A/c (8,000 debentures x Rs. 250)     To Premium on redemption of debenture A/c (8,000 debentures x Rs. 25)		19,00,000 1,00,000 2,00,000	20,00,000 2,00,000
31-3-22	7.5% debenture A/c Dr. Premium on redemption of debenture A/c Dr.     To Debenture holders A/c		20,00,000 2,00,000	22,00,000
31-3-22	Debentureholders A/c Dr.     To Bank A/c (8,000 debentures x Rs. 275)		22,00,000	22,00,000

In simple words: This demonstrates how to record the complex scenario of issuing debentures at a discount while simultaneously preparing for their future redemption at a premium, ensuring both initial issuance costs and future redemption liabilities are accounted for.

🎯 Exam Tip: When debentures are issued at a discount and redeemed at a premium, ensure that both the discount on issue and the premium on redemption are debited to a 'Loss on Issue of Debentures' account at the time of issuance, accurately reflecting the total cost of capital.

 

Question 17. On 1-7-2017, Sundaram Limited issued 14,000, 8% debentures of Rs. 300 each at a 5% premium. These debentures are to be redeemed on 30-6-2023 at Rs. 330 per debenture. Prepare the necessary journal entries in the company's books, without narrations.

Answer:

The following journal entries document the issuance of debentures at a premium and their subsequent redemption, also at a premium, making provisions for the redemption premium at the time of issue.

Journal entries in the books of Siddhpur Sundaram Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1-7-17	Bank A/c Dr.     To Debenture application and allotment A/c (14,000 debentures x Rs. 315)		44,10,000	44,10,000
1-7-17	Debenture application and allotment A/c Dr. Loss on issue of debentures A/c Dr.     To 8% debenture A/c (14,000 debentures x Rs. 300)     To Securities premium Reserve A/c (14,000 debentures x Rs. 15)     To Premium on redemption of debenture A/c (14,000 debentures x Rs. 30)		44,10,000 4,20,000	42,00,000 2,10,000 4,20,000
30-6-23	8% debenture A/c Dr. Premium on redemption of debenture A/c Dr.     To Debentureholders A/c (14,000 debentures x Rs. 330)		42,00,000 4,20,000	46,20,000
30-6-23	Debentureholders A/c Dr.     To Bank A/c		46,20,000	46,20,000

In simple words: This covers the journal entries for issuing debentures at a premium, while also accounting for the anticipated loss due to their future redemption at an even higher premium, and finally recording the actual redemption payment.

🎯 Exam Tip: When debentures are issued at a premium but redeemed at a higher premium, meticulously identify and record both the issue premium (to Securities Premium Reserve) and the redemption premium (as a loss on issue of debentures) at the time of initial issuance for accurate financial portrayal.

 

Question 18. On 1-7-2017, Paras Pharma Limited issued 20,000, 9% debentures of Rs. 400 each, which are to be redeemed after 7 years at a 12% premium. As per the prospectus, Rs. 125 per debenture was payable on application, and the balance amount was due at the time of allotment. Prepare the necessary journal entries for the issue of debentures in the company's books.

Answer:

The journal entries below record the issuance of debentures in installments, acknowledging that they will be redeemed at a premium in the future.

Journal entries in the books of Paras Pharma Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Bank A/c Dr.     To 9% Debenture application A/c (Being received amount on 20,000 debentures at Rs. 125 per debenture)		25,00,000	25,00,000
2.	9% Debenture application A/c Dr.     To 9% debenture A/c (Being application money on allotted debentures transferred to debenture A/c)		25,00,000	25,00,000
3.	9% Debenture allotment A/c Dr. Loss on issue of debentures A/c Dr.     To 9% debentures A/c     To Premium on redemption of debenture A/c (Being amount called on 20,000 debentures at Rs. 275 per debenture and debentures to be redeemed at 12% premium)		55,00,000 9,60,000	55,00,000 9,60,000
4.	Bank A/c Dr.     To 9% Debenture allotment A/c (Being received amount of allotment)		55,00,000	55,00,000

In simple words: This solution illustrates recording the issuance of debentures in installments, ensuring that the future premium payable on redemption is recognized as a loss at the time of issuance, accurately reflecting the true cost associated with these financial instruments.

🎯 Exam Tip: For debentures issued in installments with a premium on redemption, it's critical to debit 'Loss on Issue of Debentures' (representing the redemption premium) when recording the allotment, alongside the regular debenture capital, for accurate financial disclosure.

 

Question 20. Nupur Limited issued 16,000,9% debentures of Rs. 100 each at a premium of 10% on 1st April 2013, redeemable on 31st March 2018. The issue was fully subscribed. The board of directors decided to transfer the required amount to Debenture Redemption Reserve as on 31st March 2018 and debentures to be redeemed out of capital. They were also decided to invest required amount into Debenture Redemption Investment on 30th April 2017. Investments were sold on the date of redemption of debentures and required amount for redemption of debentures were paid to debenture holders. Pass necessary journal entries for issue and redemption of debentures in the books of company and also prepare Debenture Redemption Investment A/c and Debenture Redemption Reserve A/c.
Answer:
Journal entries in the books of Nupur Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1-4-13	Bank A/c To 9% Debenture application and allotment A/c (Being received money on 16,000 debenture at Rs. 110 per debenture)	Dr.	17,60,000	17,60,000
1-4-13	9% debenture application and allotment A/c To 9% Debenture A/c To Securities Premium Reserve A/c (Being application money transfer to debenture a/c and premium a/c)	Dr.	17,60,000	16,00,000 1,60,000
30-4-17	Debenture Redemption Investments A/c To Bank A/c (Being investment made at 15% on the face value (16,00,000) of debenture)	Dr.	2,40,000	2,40,000
31-3-18	Bank A/c To Debenture Redemption Investment A/c (Being investment for the redemption of debenture is sold)	Dr.	2,40,000	2,40,000
31-3-18	Surplus in statement of profit and loss A/c To Debenture Redemption Reserve A/c (Being transfer profit equal to 25% of the nominal value of debentures issued to debenture redemption reserve A/c (16,00,000 x 25%))	Dr.	4,00,000	4,00,000
31-3-18	9% Debentures A/c To Debenture holders A/c (Being amount due on redemption of debentures)	Dr.	16,00,000	16,00,000
31-3-18	Debenture holders A/c To Bank A/c (Being due amount paid to debenture holders)	Dr.	16,00,000	16,00,000
31-3-18	Debenture redemption reserve A/c To General reserve A/c (Being after redemption of all the debentures amount of debentures redemption reserve A/c transfer to general reserve A/c)	Dr.	4,00,000	4,00,000
Total			80,00,000	80,00,000

 

Dr. Debenture Redemption Investment Account Cr.
Date	Particulars	L.F.	Amt. (Rs.)	Date	Particulars	L.F.	Amt. (Rs.)
30-4-17	To Bank A/c		2,40,000	31-3-18	By Bank A/c		2,40,000
			2,40,000				2,40,000

 

Dr. Debenture Redemption Reserve Account Cr.
Date	Particulars	L.F.	Amt. (Rs.)	Date	Particulars	L.F.	Amt. (Rs.)
31-3-18	To General Reserve A/c		4,00,000	31-3-18	By Surplus in Statement of Profit & Loss A/c		4,00,000
			4,00,000				4,00,000

In simple words: This question demonstrates the complete accounting cycle for debentures, from their issuance at a premium to their ultimate redemption from capital, including the creation and dissolution of the Debenture Redemption Reserve and Investment accounts.

🎯 Exam Tip: Pay close attention to the dates for investment, reserve creation, and redemption, as these are critical for correct journal entries and account postings. Accuracy in premium and discount calculations is vital for full marks.

 

Question 21. Hiteshi Limited issued 10,000,11% debentures of Rs. 200 each on April 1, 2014, at a premium of 6%, which are redeemable at a premium of 10% on March 31, 2020. According to provisions of Companies Act, the required investment was made in 7% Gujarat State Government unencumbered securities on April 30 of the financial year in which redemption is due. For the redemption of debentures, the provision for money is to be made out of capital. Debentures were redeemed on the due date. Pass journal entries for issue and redemption of debentures. Also prepare Debenture Redemption Investment A/c and debenture redemption reserve A/c.
Answer:
Journal entries in the books of Hiteshi Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1-4-14	Bank A/c To 11% Debenture application and allotment A/c (Being received amount on 10,000 debenture at Rs. 212 per debenture at application time)	Dr.	21,20,000	21,20,000
1-4-14	11% Debenture application and allotment A/c Loss on issue of debentures A/c To 11% Debenture A/c To Securities premium reserve A/c To Premium on redemption of debentures A/c (Being transfer to debenture a/c and securities premium a/c from application money and also to give an effect of premium on redemption of debenture a/c)	Dr. Dr.	21,20,000 2,00,000	20,00,000 1,20,000 2,00,000
30-4-19	Debenture Redemption Investments A/c To Bank A/c (Being investment made in 7% govt. securities at the rate of 15% of the face value of debenture) \( (20,00,000 \times 15\%) \)	Dr.	3,00,000	3,00,000
31-3-20	Bank A/c To Debentures redemption investment A/c To Interest earned A/c (Being investment for debenture redemption is sold and on this interest received for 11 months)	Dr.	3,19,250	3,00,000 19,250
	Note: \( 3,00,000 \times \frac{7}{12} \times \frac{11}{12} = \text{Rs. } 19,250 \)
31-3-20	Surplus in statement of profit and loss A/c To Debenture redemption reserve A/c (Being 25% of total face value of debenture transfer to debenture redemption reserve (25% of Rs. 20,00,000))	Dr.	5,00,000	5,00,000
31-3-20	Debentureholders A/c To Bank A/c (Being payment of amount due to debenture holders)	Dr.	22,00,000	22,00,000
31-3-20	Debenture redemption reserve A/c To General reserve A/c (Being transfer amount of debenture redemption reserve to general reserve a/c after the redemption of the debentures)	Dr.	5,00,000	5,00,000
31-3-20	Interest earned A/c To Statement of profit and loss A/c (Being interest transfer to statement of profit and loss)	Dr.	19,250	19,250
Total			1,04,78,500	1,04,78,500

 

Dr. Debenture Redemption Investment Account Cr.
Date	Particulars	L.F.	Amt. (Rs.)	Date	Particulars	L.F.	Amt. (Rs.)
30-4-19	To Bank A/c		3,00,000	31-3-20	By Bank A/c		3,00,000
			3,00,000				3,00,000

 

Dr. Debenture Redemption Reserve Account Cr.
Date	Particulars	L.F.	Amt. (Rs.)	Date	Particulars	L.F.	Amt. (Rs.)
31-3-20	To General Reserve A/c		5,00,000	31-3-20	By Surplus in Statement of Profit & Loss A/c		5,00,000
			5,00,000				5,00,000

In simple words: This problem illustrates the complete accounting for debentures issued at a premium and redeemable at a premium, including the mandated investment in government securities and the transfer to Debenture Redemption Reserve, culminating in their full redemption.

🎯 Exam Tip: When debentures are issued at a premium but redeemed at a higher premium, always account for the 'Loss on Issue of Debentures' at the time of issue, which includes the redemption premium. Ensure correct calculation of interest earned on investments.

 

Question 22. Parth Engineering Limited redeemed 9% debentures at face value of Rs. 30,00,000 at a premium of 12% as on 31-3-2018. For this, provision for money was made out of profit of the company. The company invested the required amount as on 30th April 2017. Pass journal entries for the redemption of debentures in the books of company with the assumption that company has fulfilled provisions of Companies Act. Also prepare Debenture Redemption Investment A/c and Debenture Redemption Reserve A/c.
Answer:
Journal entries in the books of Parth Engineering Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
30-4-17	Debenture redemption investment A/c To Bank A/c (Being investment made at 15% on Rs. 30,00,000 before redemption of debentures)	Dr.	4,50,000	4,50,000
31-3-18	Bank A/c To Debenture redemption investment A/c (Being investment encashed for redemption of debentures)	Dr.	4,50,000	4,50,000
31-3-18	Surplus in statement of profit and loss A/c To Debenture redemption reserve A/c (Being amount to create debenture redemption reserve a/c from profits, amount equal to the nominal value of redeemable debentures)	Dr.	30,00,000	30,00,000
31-3-18	9% Debentures A/c Premium on redemption of debentures A/c To Debentureholders A/c (Being amount due on redemption of debenture with premium)	Dr. Dr.	30,00,000 3,60,000	33,60,000
31-3-18	Debentureholders A/c To Bank A/c (Being payment of amount due to debenture holders)	Dr.	33,60,000	33,60,000
31-3-18	Debenture redemption reserve A/c To General reserve A/c (Being transfer of balance of debenture redemption reserve a/c amount to general reserve a/c on the redemption of all the debentures)	Dr.	30,00,000	30,00,000
Total			1,36,20,000	1,36,20,000

 

Dr. Debenture Redemption Investment Account Cr.
Date	Particulars	L.F.	Amt. (Rs.)	Date	Particulars	L.F.	Amt. (Rs.)
30-4-17	To Bank A/c		4,50,000	31-3-18	By Bank A/c		4,50,000
			4,50,000				4,50,000

 

Dr. Debenture Redemption Reserve Account Cr.
Date	Particulars	L.F.	Amt. (Rs.)	Date	Particulars	L.F.	Amt. (Rs.)
31-3-18	To General Reserve A/c		30,00,000	31-3-18	By Surplus in Statement of Profit & Loss A/c		30,00,000
			30,00,000				30,00,000

In simple words: This problem illustrates the redemption of debentures at a premium, financed from the company's profits, including the essential steps of making the required investment, encashing it, creating the Debenture Redemption Reserve, and finally settling the debenture holders.

🎯 Exam Tip: For redemption out of profit, remember to create the Debenture Redemption Reserve (DRR) equal to 100% of the nominal value of debentures being redeemed. Ensure DRR investment is made and realized correctly.

 

Question 23. Munj Software Limited redeemed Rs. 24,00,000, 12% debentures at a premium of 8% out of profit on 1-10-2017. The company had a Debenture Redemption Reserve of Rs. 11,00,000. It was decided to invest the required amount in proper time in debenture redemption investment as per companies act. Pass necessary journal entries for the redemption of debentures in the books of company.
Answer:
Journal entries in the books of Munj Software Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
31-3-17	Surplus in statement of profit and loss A/c To Debenture redemption reserve A/c (Being necessary amount out of profit transfer to debenture redemption reserve a/c) (As per Note No. 1)	Dr.	13,00,000	13,00,000
31-4-17	Debenture redemption investment A/c To Bank A/c (Being investment made at 15% on Rs. 24,00,000 i.e. total face value of the redeemable debentures)	Dr.	3,60,000	3,60,000
1-10-17	Bank A/c To Debenture redemption investment A/c (Being amount received on investment for the redemption of debentures)	Dr.	3,60,000	3,60,000
1-10-17	12% Debentures A/c Premium on redemption of debentures A/c To Debentureholders A/c (Being amount due on redemption of debenture on Rs. 24,00,000 at 8%)	Dr. Dr.	24,00,000 1,92,000	25,92,000
1-10-17	Debentureholders A/c To Bank A/c (Being payment made on due date)	Dr.	25,92,000	25,92,000
1-10-17	Debenture redemption reserve A/c To General reserve A/c (Being transfer amount of debenture redemption reserve account to general reserve account on the redemption of all the debentures)	Dr.	24,00,000	24,00,000
Total			96,04,000	96,04,000

In simple words: This problem demonstrates how to record the redemption of debentures at a premium from profits, including the creation of additional Debenture Redemption Reserve, making and encashing the required investment, and finally paying the debenture holders.

🎯 Exam Tip: When an existing DRR is insufficient, remember to create the balance amount from the Surplus in Statement of Profit and Loss. Always calculate the DRR investment (15% of face value) and premium on redemption accurately.

 

Question 24. A company purchased its own 1500 debentures of Rs. 100 each at Rs. 96 in the open market and immediately cancels them after purchase. Pass journal entries in the books of company.
Answer:
Journal entries in the books of Company

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Own debentures A/c To Bank A/c (Being purchased 1,500 debentures from the market at Rs. 96 per debenture)	Dr.	1,44,000	1,44,000
2.	Debenture A/c To Own debentures A/c To Profit on redemption of debentures A/c (Being cancellation of own purchased debentures)	Dr.	1,50,000	1,44,000 6,000

In simple words: This entry shows that a company bought back its own debentures from the market at a lower price than their face value and then canceled them, resulting in a profit on redemption.

🎯 Exam Tip: When a company purchases its own debentures at a price lower than their face value and cancels them, the difference is recorded as 'Profit on Redemption of Debentures'. Remember that own debentures become an asset until cancellation.

 

Question 25. A company purchased its own 6000 debentures of Rs. 400 each at Rs. 415 in the open market and immediately cancels them after purchase. Pass journal entries in the books of company.
Answer:
Journal entries in the books of Company

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Own debentures A/c To Bank A/c (Being purchased 6,000 debentures from the market at Rs. 415 per debenture)	Dr.	24,90,000	24,90,000
2.	Debenture A/c Loss on redemption of debentures A/c To Own debentures A/c (Being cancellation of own purchased debentures)	Dr. Dr.	24,00,000 90,000	24,90,000

In simple words: This entry demonstrates a company buying back its own debentures from the open market at a price higher than their face value and then canceling them, resulting in a loss on redemption.

🎯 Exam Tip: When a company repurchases its own debentures at a price exceeding their face value for cancellation, the excess amount paid is recorded as a 'Loss on Redemption of Debentures'. Be precise with purchase price versus face value.

 

Question 26. Jaspreet Aperals Limited issued 6000, 12% debentures of Rs. 300 each. The board of directors was purchased 2500 own debentures from the market at a price of Rs. 280 each for investment purpose. After few months, company sold these purchased debentures at Rs. 310 per debenture in the market. Record necessary journal entries from the above transactions.
Answer:
Journal entries in the books of Jaspreet Aperals Limited –

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1.	Bank A/c To Debenture application and allotment A/c (Being application money received on 6,000 debenture at Rs. 300 per debenture)	Dr.	18,00,000	18,00,000
2.	Debenture application and allotment A/c To 12% Debenture A/c (Being application money transferred to debenture account)	Dr.	18,00,000	18,00,000
3.	Investments in own debentures A/c To Bank A/c (Being purchase of 2,500 debentures at Rs. 280 per debenture from the market for investments)	Dr.	7,00,000	7,00,000
4.	Bank A/c To Investments in own debentures A/c To Profit on sale of investments A/c (Being investment in own debenture sold at Rs. 310 each)	Dr.	7,75,000	7,00,000 75,000
5.	Profit on sale of investment A/c To Statement of profit and loss A/c (Being profit on sale of investment due to revenue profit transferred to statement of profit and loss)	Dr.	75,000	75,000
Total			51,50,000	51,50,000

In simple words: This problem illustrates a company issuing debentures, then buying back some of its own debentures as an investment (not for cancellation), and later selling those invested debentures for a profit.

🎯 Exam Tip: Distinguish between purchasing own debentures for cancellation and for investment. If for investment, treat them as an asset. Any gain or loss on selling these 'own debentures held as investment' is treated as a revenue item, not a capital item.

 

Question 27. As on 1st April 2014, Ravindra Copper Limited issued 12,000, 12.5% convertible debentures of Rs. 400 each at par. As per the terms of issue of debentures, all the debentures will be converted into equity shares of Rs. 10 each at a premium of 50% after 5 years. On 1st April 2019, debentures were converted into equity shares as per the agreed terms. Pass the necessary journal entries in the books of company.
Answer:
Necessary Calculation :
Total amount received on issued of debentures = \( 12,000 \text{ debenture} \times \text{Rs. } 400 = \text{Rs. } 48,00,000 \)
Price of each equity share to be issued against debentures =
= Rs. 10 original price + Rs. 5 premium = Rs. 15
No. of equity share to be issued against debentures = \( \frac{48,00,000}{15} = 3,20,000 \text{ shares} \)
Journal entries in the books of Ravindra Copper Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1-4-14	Bank A/c To Debenture application and allotment A/c (Being receipt of application money on 12,000 debentures of Rs. 400 per debenture)	Dr.	48,00,000	48,00,000
1-4-14	Debenture application and allotment A/c To 12% debenture A/c (Being application money transfer to debenture account)	Dr.	48,00,000	48,00,000
1-4-19	12.5% Debenture A/c To Debenture holders A/c (Being debenture to be converted at face value into equity shares)	Dr.	48,00,000	48,00,000
1-4-19	Debentures holders A/c To Equity share capital A/c \( (3,20,000 \text{ shares} \times \text{Rs. } 10) \) To Securities premium reserve A/c \( (3,20,000 \text{ shares} \times \text{Rs. } 5) \) (Being 3,20,000 shares at Rs. 10 each at a premium of 50% on it issued against 12,000 debentures)	Dr.	48,00,000	32,00,000 16,00,000
Total			1,92,00,000	1,92,00,000

In simple words: This problem demonstrates the issuance of convertible debentures at par and their subsequent conversion into equity shares at a premium after a specified period, involving accounting for both share capital and securities premium.

🎯 Exam Tip: When convertible debentures are exchanged for shares, ensure the debenture account is debited with the face value, and the equity share capital and securities premium accounts are credited based on the conversion terms. Accurate calculation of the number of shares issued is crucial.

 

Question 28. On 1st January 2014, Rajan Limited issued 8,000, 11% debentures of Rs. 100 each. According to terms of the issue of debentures, the debentures were to be redeemed at 6% premium by giving 6 months notice at any time after 4 years. The redemption of debentures was to be made by cash or by preference shares or by new debentures as per the option to be exercised by the debenture holders. On 1st March 2018, the company issued the required notice to the debenture holders for the redemption of the debentures. The company gave three option for the redemption of the debentures on 1st March 2018. (1) Amount will be paid in cash. (2) 9% preference shares of Rs. 100 each will be issued at Rs. 130 per share. (3) New 7% debentures of Rs. 100 each will be issued at 96 each. Holders of 3600 debentures accepted new debentures, holders of 3315 debentures accepted preference shares and rest opted for cash. Write the necessary journal entries to record above transactions.
Answer:
Necessary Calculation :
(1) Total 8,000 Debentures :

\( \implies \) 3,600 debenture holders accepted new debenture means at 7% of Rs. 100 for Rs. 96.

\( \implies \) 3,315 debenture holders accepted preference shares means at 9% of Rs. 100 for Rs. 130.

\( \implies \) Remaining debenture holders demanded cash \( (8,000 - 3,600 - 3,315) = 1085 \) debenture holders wants cash.
(2) 1,085 debentures \( \times \) Rs. 106 \( ( \text{Rs. } 100 \text{ original price } + \text{ Rs. } 6 \text{ premium}) = \text{Rs. } 1,15,010 \)
(3) Redemption of debenture at Rs. 106 (with 6% premium)
3,600 debentures \( \times \) Rs. 106 = Rs. 3,81,600

Price	Debenture
96	1
3,81,600	\( \frac{3,81,600}{96} = 3,975 \) New debentures

(4) Redemption of debenture at Rs. 106
3,315 benentures \( \times \) Rs. 106 = Rs. 3,51,390

Price	Debenture
130	1
3,51,390	\( \frac{3,51,390}{130} = 2,703 \) Preference shares

2,703 \( \times \) Rs. 100 = Rs. 2,70,300 Preference shares, 2,703 \( \times \) Rs. 30 = Rs. 81,090 Securities premium
Journal entries in the books of Rajan Limited

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1-1-14	Bank A/c To Debenture application and allotment A/c (Being application money received on 8,000 debentures)	Dr.	8,00,000	8,00,000
1-1-14	Debenture application and allotment A/c Loss on issue of debentures A/c To 11% Debenture A/c To Premium on redemption of debentures A/c (Being application money transfer to debenture account and premium to be paid on redemption of debentures)	Dr. Dr.	8,00,000 48,000	8,00,000 48,000
1-3-18	9% Debentures A/c Premium on redemption of debentures A/c To Debenture holders A/c (Being amount due on 8,000 debenture with 6% premium)	Dr. Dr.	8,00,000 48,000	8,48,000
1-3-18	Debentureholders A/c Discount on debenture A/c To 7% New debentures A/c (Being issued 3,975 debentures at 96 per debenture to 3,600 debentureholders)	Dr. Dr.	3,81,600 15,900	3,97,500
1-3-18	Debentureholders A/c To Preference share capital A/c To Securities premium A/c (Being issued 2,703 preference shares at 30 premium to 3,315 debentureholders at 100 per debenture)	Dr.	3,51,390	2,70,300 81,090
1-3-18	Debentureholders A/c To Bank A/c (Being cash paid to 1,085 debentureholders at 106 per debenture)	Dr.	1,15,010	1,15,010
Total			33,59,900	33,59,900

In simple words: This problem showcases a complex debenture redemption scenario where debenture holders have multiple options: receiving cash, preference shares, or new debentures, requiring detailed accounting for each method.

🎯 Exam Tip: When multiple redemption options are offered, calculate the number of debentures corresponding to each option first. Ensure that the premium on redemption and any discount/premium on the issuance of new securities (shares or debentures) are correctly accounted for.