CBSE Class 12 Accountancy Issue And Redemption of Debentures Worksheet Set 02

Issue and Forfeiture of Shares

Q1. Anu Ltd invited application for 10,000 shares @ `10 at par payable as follows:-

On Application                `2 per share
On Allotment                  `3 per share
On First Call                   `3 Per share
On Second &Final Call     `2 Per share
Company received sufficient applications and all shares are allotted and money received. Pass Journal entries.

Q2. Amla Ltd invited application for 40,000 shares @ `10 at a premium of `2 payable as follows:-

On Application             `3 per share
On Allotment               `5 per share(including premium)
On First & Final Call     `4 Per share
Company received application for 50000 shares. Directors rejected all excess applications and money refunded. Mr. Kumar, holder of 300 shares failed to pay First and final call money. Pass journal entries.

Q.3. Arvind Ltd invited application for 50000 shares @ `10 at a premium of 10% payable as follows:-

On Application            `3 per share
On Allotment              `6 per share(including Premium)
On First & Final Call     `2 Per share
Company received application for 45,000 shares. Directors allotted shares to all the applicants. All money received except the final call on 1000 shares. Pass journal entries.

Q.4. Alia Ltd invited application for 20000 shares @ `10 at a premium of 10% payable as follows:-

On Application          `2 per share

On Allotment            `5 per share(including Premium)

On First & Final Call  `3 Per share

Company received application for 30000 shares. Directors allotted shares on pro rata basis to all the applicants. All money received except the final call on 300 shares. Pass journal entries.

Q.5. Anvi Ltd invited application for 40,000 shares @ `10 at a premium of 10% payable as follows:-

On Application           `2 per share
On Allotment             `5 per share(including premium)
On First & Final Call   `4 Per share
Company Received application for 60,000 shares. Directors rejected 12,000 shares application and remaining accepted on pro rata basis. All money received except the final call on 300 shares. Pass journal entries.

.Q.6. Akshay Ltd invited application for 20,000 shares @ `10 at a premium of 20% payable as follows:-

On Application                    `2 per share
On Allotment                      `5 per share(including premium)
On First Call                        `3 Per share
On Second and Final Call     `2 per share
Company Received application for 30000 shares. Directors allotted shares on pro rata basis to the applicants of 24000 shares and remaining applications were rejected. Mr. Kaju, holder 200 shares failed to pay the first call and final call money and Mr.Raju failed to pay final call money on 300 shares. Pass Journal entries.

Q.7. Ashwin Ltd invited application for 4000 shares @ `10 at a premium of 20% payable as follows:-

On Application                 `5 per share(including premium)
On Allotment                   `4 per share
On First & Final call Call    `3 Per share
Company Received application for 6000 shares. Directors rejected 1200 shares application and remaining accepted on pro rata basis. Mr. Allaska, holder 200 shares failed to pay the first and Final call money. Pass Journal entries.

Q.8.A Ltd invited application for 2000 shares @ `10 at a premium of `6 payable as follows:-

On Application                 `5 per share(including premium `2)
On Allotment                   `6 per share(including premium `3)
On First Call                    `3 Per share(including premium `1)
On Second & Final call      `2 per share
Company Received application for 3000 shares. Directors allotted shares on pro rata basis to the applicants of 2400 shares and remaining applications were rejected. Mr. Chaloo, holder 80 shares failed to pay the first call and Final call money. Pass Journal entries.

Q.9.A Ltd invited application for 10,000 shares @ `100 at a premium of `5 payable as follows:-

On Application                 `20 per share
On Allotment                  `55per share (including Premium)
On First & Final Call         `30 Per share
Company Received application for 15000 shares. Directors rejected 3000shares application and remaining accepted on pro rata basis. Mrs. Pinky, holder 120 shares failed to pay the first call money. Pass Journal entries.

Q.10.A Ltd invited application for 10000 shares @ `100 at par payable as follows:-

On Application and allotment   `20 per share
On First Call                           `30 Per share
On Second Call                       `50 per share
Company received application for 15000 shares. Directors rejected all excess application and allotted shares in full. Mrs. Sinky, holder 120 shares failed to pay the first call money and Second call money. Pass Journal entries.

Q.11.A Ltd with an authorised capital of `2,00,000 in shares of `100, issued 1000 shares to the public payable as follows.
On Application `20 per share, on allotment ` 20 per share ,`20 three months later and the balance as and when required. All money due on application and allotment were received but when the call of `20 per share was made one share holder holding 50 shares paid the entire amount due.

Q.12.A Ltd with an authorised capital of `500000 in shares of `100, issued 2000 shares to the public payable as follows.
On Application `30 per share, on allotment ` 20 per share ,`20 three months later and the balance after three months after First call. All money due on application and allotment were received but when the first call was made one share holder holding 50 shares failed to pay the First call money and another share holder holding 80 shares paid the entire amount.

CALCULATION OF CALLS IN ARREAR

Q13. A Ltd invited application for 40000 shares @ `10 at a premium of
10% payable as follows:-
On Application `2 per share
On Allotment `5 per share(including premium)

On First & Final Call `4 Per share
Company Received application for 60,000 shares. Directors rejected 12,000 shares application and remaining accepted on pro rata basis. All money received except the allotment money and final call on 400 shares.Pass journal entries.

True/False

Question 1. Shares are not borrowings of a company whereas Debentures are borrowings of the company.
Answer: True
In simple words: Shares represent ownership in the company. Debentures are loans the company borrows and must repay with interest.

Exam Tip: This is a key difference. Shareholders are owners; debentureholders are creditors who have loaned money to the company.

Question 2. When debentures are issued at par, they cannot be redeemed at premium.
Answer: False
In simple words: Even if debentures are issued at par (face value), the company can choose to redeem them at a premium — this is a later decision, not restricted by the issue price.

Exam Tip: Issue price and redemption price are separate. Rules do not tie them together. A company has flexibility.

Question 3. Debentures are normally shown as short-term borrowings under Current Liabilities.
Answer: False
In simple words: Debentures are long-term borrowings and appear under non-current liabilities (long-term loans). Only the portion due within one year goes to current liabilities.

Exam Tip: Check the tenure of the debenture — most are multi-year instruments classified as long-term debt, not short-term.

Question 4. A company has issued 5,000, 10% Debentures at Rs 1,000 each as collateral security for a loan of Rs 75,00,000. It may or may not pass an entry for the issue of such debentures.
Answer: True
In simple words: When debentures are used only as collateral security and are never to be offered to the public, the company may choose not to record a formal journal entry. These debentures serve as backing for the loan but don't represent a public issue.

Exam Tip: Collateral debentures are internal security arrangements. Depending on the company policy and legal requirements, the entry may be optional.

Question 5. Loss on issue of Debentures may be written off over the tenure of the debentures from Capital Reserve or Statement of Profit and Loss.
Answer: False
In simple words: Loss on issue of debentures must be written off over the debenture tenure, but only from the Statement of Profit and Loss (as an expense), not from Capital Reserve. Capital Reserve is restricted and cannot be used this way.

Exam Tip: Capital Reserves have limited use. Loss on issue is treated as an operating cost and spread through P&L over the loan period.

Fill in the Blanks

Question 1. Interest accrued on debentures is shown under the head _____________ and sub-head _____________.
Answer: Current Liabilities; Other Current Liabilities
In simple words: Interest that has been earned but not yet paid is a short-term debt of the company and must be shown as a current liability until it is paid out.

Exam Tip: Interest accrued but not paid is a current liability — it will be discharged within one year.

Question 2. Debentures Account is always credited with the _____________ value of the debentures.
Answer: nominal (face)
In simple words: The debentures account records the stated amount printed on each debenture certificate, regardless of whether they were sold at a premium or discount.

Exam Tip: Face value is the constant. Premiums and discounts are booked to separate accounts, keeping the debentures account clean.

Question 3. Interest on debentures is paid whether the company _____________ or _____________.
Answer: earns profit, incurs loss
In simple words: Debenture interest is a fixed obligation. The company must pay it regardless of whether the business made money or lost money in that period.

Exam Tip: This is a key contrast with dividends, which are only paid if profit is available. Interest is mandatory.

Question 4. A company has Loss on Issue of Debentures Account of Rs 40,000. It has a balance in Securities Premium Reserve of Rs 25,000. It will debit _____________ by Rs 25,000 and _____________ by Rs 15,000 in the year of issue.
Answer: Securities Premium Reserve; Statement of Profit and Loss (or Profit and Loss Account)
In simple words: First, use the available Securities Premium Reserve of Rs 25,000 to write off part of the loss. The remaining loss of Rs 15,000 goes to the P&L account as an expense in that year.

Exam Tip: Capital reserves are used first to offset debenture losses (up to available balance). Any remaining loss flows through the income statement.

Question 5. Interest is not paid on Debentures issued as _____________.
Answer: collateral security
In simple words: Debentures held as collateral backing for a loan do not generate interest payments. They serve as security only and are not actively traded or outstanding in the market.

Exam Tip: Distinguish between debentures issued for cash (which pay interest) and those issued as collateral (which do not).

Very Short Answer Questions

Question 1. Give the meaning of a Debenture.
Answer: A debenture is a document showing that a company has borrowed money. It holds a contract stating the amount borrowed, the rate of interest, and when the company will pay back the money.
In simple words: A debenture is a formal loan from an investor to a company. The company promises to pay back the money with fixed interest.

Exam Tip: Include both the acknowledgment of debt and the fixed interest rate in your definition.

Question 2. What is meant by 'Issue of Debentures as collateral security'?
Answer: Issuing debentures as collateral security means offering debentures as an additional safeguard that may be used against a loan in addition to the main security.
In simple words: The company gives debentures to the bank or lender as extra protection. If something goes wrong with the main loan, the lender can use these debentures as backup security.

Exam Tip: Collateral is always "extra" or "backup" security — remember this concept when answering.

Question 3. Pass the necessary Journal entry when 10,000 debentures of Rs 100 each are issued as collateral security against a bank loan of Rs 8,00,000.
Answer:

In simple words: A suspense account temporarily holds the debenture value. This entry records that debentures have been set aside as security without being sold to the public.

Exam Tip: Collateral entries use a Suspense account as an intermediate holding place. The actual debentures are not issued for cash in the normal way.

Question 4. What is meant by Bonds?
Answer: A bond is comparable to a debenture. It is an acknowledgment of debt where the rate of interest is not set ahead of time.
In simple words: A bond is a loan document, much like a debenture, but the interest rate is decided later rather than being fixed at the start.

Exam Tip: The key difference from a debenture is the timing of interest rate determination — bonds are flexible on this point.

Question 5. What are Zero Coupon Bonds?
Answer: Debentures issued without a set rate of interest are known as 'Zero Coupon Bonds' or 'Deep Discount Bond'.
In simple words: These are bonds where the investor gets no yearly interest. Instead, they buy at a big discount and receive the full face value when the bond matures.

Exam Tip: No periodic interest payments — the profit comes entirely from buying at a discount and receiving face value at maturity.

Question 6. Difference between shareholders and debentureholders on the basis of status.
Answer: Debentureholders are the creditors of a company and shareholders are the owners of a company.
In simple words: Shareholders own a piece of the business. Debentureholders have loaned money to the business and must be repaid, like a bank.

Exam Tip: Owner vs. creditor is the core distinction. This affects priority in payments and voting rights.

Question 7. What is Debenture Trust Deed?
Answer: A company issuing debentures by way of public issue is required to hire trustees and carry out a trust deed. A debenture trust deed is a document written by the company to guard the interest of debentureholders before they are given for public subscription.
In simple words: A trust deed is a legal agreement that protects investors who buy the debentures. Trustees ensure the company follows all the rules and treats debentureholders fairly.

Exam Tip: Public issues of debentures must have this protective document in place — it's a legal requirement, not optional.

Question 8. State the circumstances when debentures are issued for consideration other than cash.
Answer: (i) Issue of debentures for purchase of assets to the vendor, (ii) Issue of debentures for purchase of business of a company, (iii) Issue of debentures as collateral security.
In simple words: Instead of paying cash, a company can pay vendors and sellers by giving them debentures. It can also issue debentures to back up a loan.

Exam Tip: These three scenarios allow debentures to serve as payment without requiring immediate cash outlay.

Question 9. What is the nature of interest on debentures?
Answer: It is a charge to the profit of the company.
In simple words: Debenture interest is treated as an expense that reduces company profit. It comes off before calculating net earnings.

Exam Tip: Unlike dividends, interest is a mandatory expense and is deductible for tax purposes.

Question 10. Define irredeemable debentures.
Answer: These are those debentures whose repayment are not made during the life time of the company and they will be repaid only when the company is going to be wound up.
In simple words: The company never plans to pay back these debentures while it operates. Investors get their money only if the company closes or dissolves.

Exam Tip: This is a rare type — most debentures have a set maturity date. Irredeemable ones are indefinite until liquidation.

Question 11. What is the provision for settlement of debt of debentureholders?
Answer: Debentureholders are fully secured so they are paid before payment of shareholders.
In simple words: When a company liquidates or faces financial trouble, debentureholders get paid their full amount first. Shareholders only get whatever is left over.

Exam Tip: Priority in repayment is a major advantage of being a creditor (debentureholder) over being an owner (shareholder).

Question 12. Nishant Ltd. wants to issue shares and debentures at 10% discount. Is it possible?
Answer: Nishant Ltd. can easily issue debentures at 10% discount as the Companies Act, 2013 does not limit issue of debentures at discount. However, it cannot issue shares at discount as Section 53 of the Companies Act, 2013 lays down some limits on the issue of shares at discount.
In simple words: Debentures have no discount rules, so the company can freely discount them. Shares are heavily controlled — the law restricts share discounts to protect investors.

Exam Tip: Know the legal framework: debentures flexible, shares restricted. This is a common exam point.

Question 13. 15,000, 8% debentures were issued by the Times Sports Ltd. During the year, 2018-19, the company suffered a huge loss. Will debentureholders be entitled to interest of that year?
Answer: Debentureholders will be entitled to interest of the year 2018-19 as interest on debentures is a charge against profits of the company and is payable irrespective of the fact whether the company has earned profit or not.
In simple words: Even when the company loses money, debentureholders must still receive their interest. This is a fixed liability the company must honor.

Exam Tip: Interest is mandatory; profit is not required. This is the critical difference that makes debentures safer than shares.

Question 14. George adopts the policy of risk aversion while purchasing securities from the market. Which option George will select from the following:
(i) 1,500, 10% Debentures of Rs 100 each,
(ii) 2,000 equity shares expected to yield dividend of Rs 50,000 per year.
Answer: George will select the option (i) as by buying debentures he will be entitled to get interest irrespective of the fact whether the firm has earned profit or not.
In simple words: Debentures give a guaranteed fixed income. Equity shares give dividends only if the company makes profit. Since George is risk-averse, he wants the sure, safer income from debentures.

Exam Tip: Risk-averse investors favor fixed returns — debentures over equity shares. This is always the right choice for conservative investors.

Question 15. Beta Ltd. agreed to issue 10,000, 9% debentures of Rs 100 each at Rs 120 to the vendors for the purchase of machinery worth Rs 1,25,000. Pass the necessary journal entry for the settlement of purchase consideration.
Answer:

In simple words: The company bought machinery for Rs 1,25,000. It issued 1,041 debentures at Rs 120 each (total Rs 1,24,920) plus Rs 80 in cash to complete the payment. The premium of Rs 20 per debenture went to the Securities Premium Reserve.

Exam Tip: When debentures are issued above face value, split the price into face value and premium components — record them in separate accounts.

Question 16. Under which sub-head and head, the amount of 'Premium Payable on Redemption of Debentures' is shown in the Balance Sheet?
Answer: Premium Payable on Redemption of Debentures is shown as 'other non-current liability' under Non-current Liabilities in Equity and Liabilities part of Balance Sheet.
In simple words: When a company plans to repay debentures at a premium (above face value), that extra amount owed is shown as a long-term liability in the balance sheet under non-current liabilities.

Exam Tip: Premium on redemption is a future obligation — it belongs in non-current liabilities because it's payable when debentures mature.

Question 17. Dew Ltd. issued 1,000; 10% debentures of Rs 100 each on 1st April, 2015. Interest is payable half yearly in June and December. The company closes its books on 31st March every year. Find out the amount of (i) Interest accrued but not due (ii) Interest accrued and due if interest has not been paid on 31st March, 2016. Also state the head under which they will be shown in the Balance Sheet.
Answer: (i) Interest accrued but not due = 1,00,000 × \( \frac { 10 }{ 100 } \) × \( \frac { 3 }{ 12 } \) = Rs 2,500 (from Jan. 2016 to March 2016)

(ii) Interest accrued and due = 1,00,000 × \( \frac { 10 }{ 100 } \) × \( \frac { 6 }{ 12 } \) = 5,000 (June 2015 to Dec. 2015)

Both will be shown under 'Other Current Liabilities' in the Balance Sheet.
In simple words: Interest accrued but not due (Jan-March) has accumulated but won't be paid until later. Interest accrued and due (June-Dec) was supposed to be paid already. Both go under Current Liabilities because they will be paid within 12 months.

Exam Tip: The key is timing. "Not due" interest is still being earned; "due" interest was already earned and should have been paid. Both are liabilities, but the distinction matters for financial analysis.

Short Answer Questions

Question 1. Narain Laxmi Ltd. invited applications for issuing 7,500, 12% debentures of Rs 100 each at a premium of Rs 35 per debenture. The full amount was payable on application. Applications were received for 10,000 debentures. Applications for 2,500 debentures were rejected and the application money was refunded. Debentures were allotted to the remaining applicants. Pass necessary journal entries for the above transactions in the books of Narain Laxmi Ltd.
Answer:

In simple words: The company received applications for 10,000 debentures at Rs 135 each (Rs 100 + Rs 35 premium). It allotted only 7,500 debentures on a pro-rata basis. The rejected 2,500 applications (totalling Rs 3,37,500) were refunded. The face value went to Debentures Account and the premium went to Securities Premium Reserve.

Exam Tip: In pro-rata allotment, applicants who applied for more shares get fewer shares. Calculate the refund carefully using the excess amount from oversubscription.

Question 2. X Ltd. invited applications for issuing 500, 12% debentures of Rs 100 each at a discount of 5%. These debentures were redeemable after three years at par. Applications for 600 debentures were received. Pro-rata allotment was made to all the applicants. Pass necessary journal entries for the issue of debentures assuming that the whole amount was payable with application.
Answer:

In simple words: The company wanted 500 debentures but received applications for 600, so it allotted on a pro-rata basis. Each applicant received only 5/6 of what they applied for. The company issued at Rs 95 each (5% discount on Rs 100). The discount of Rs 2,500 (500 × Rs 5) is recorded separately, and the excess application money of Rs 9,500 is refunded.

Exam Tip: Pro-rata allotment means each applicant gets a fraction of their application based on oversubscription. Refund calculation must be precise.

Question 3. Disha Ltd. purchased machinery from Nisha Ltd. and paid to Nisha Ltd. as follows:
(i) By issuing 10,000, equity shares of Rs 10 each at a premium of 10%.
(ii) By issuing 200, 9% debentures of Rs 100 each at a discount of 10%.
(iii) Balance by accepting a bill of exchange of Rs 50,000 payable after one month. Pass necessary journal entries in the books of Disha Ltd. for the purchase of machinery and making payment to Nisha Ltd.
Answer:

In simple words: The company bought machinery worth Rs 1,78,000. It paid Nisha Ltd. in three ways: (i) 10,000 shares at Rs 11 each = Rs 1,10,000, (ii) 200 debentures at Rs 90 each = Rs 18,000 cash payment plus Rs 2,000 discount, making Rs 20,000 face value, and (iii) a note promising to pay Rs 50,000 after one month. This adds up to Rs 1,78,000.

Exam Tip: When purchasing assets using mixed payment (shares, debentures, and bills), ensure the total of all three methods equals the asset cost. Track premiums and discounts separately.

Question 4. BG Ltd. issued 2,000, 12% debentures of ₹100 each on 1st April, 2012. The issue was fully subscribed. According to the terms of issue, interest on the debentures is payable half-yearly on 30th September and 31st March and the tax deducted at source is 10%. Pass necessary journal entries related to the debenture interest for the half-yearly ending 31st March, 2013 and transfer interest on debentures of the year to the Statement of Profit and Loss.
Answer: The debenture interest entries are made to record the interest accrued and paid to debentureholders. On 30th September 2012, the interest accrued is ₹12,000 (2,000 debentures × ₹100 × 12% × 6/12 months). This amount is paid to debentureholders after deducting tax at source of 10%. The journal entry shows: Debenture Interest A/c (Dr.) ₹12,000, to Debentureholders' A/c (Cr.) ₹10,800 (after 10% tax), and to TDS Payable A/c (Cr.) ₹1,200. The debentureholders receive ₹10,800 via bank, and TDS of ₹1,200 is deposited with the government. The same entries repeat on 31st March 2013. At the year-end, the total debenture interest of ₹24,000 (two half-yearly payments) is moved to the Statement of Profit and Loss as a finance cost.
In simple words: The company pays interest to debentureholders twice a year. Each time, it must record the interest amount, the cash paid to holders (after tax), and the tax deducted. At year-end, all interest paid is shown as an expense in the profit and loss statement.

Exam Tip: Always split debenture interest into three parts: gross interest, debentureholder payment (net of tax), and tax payable. Transfer total interest to the Statement of Profit and Loss as a finance cost, not as part of operating expenses.

Question 5. Deepak Ltd. purchased furniture of ₹2,20,000 from M/s Furniture Mart. 50% of the amount was paid to Furniture Mart by accepting a bill of exchange and for the balance, company issued 9% debentures of ₹100 each at a premium of 10% in favour of Furniture Mart. Pass necessary journal entries in the books of Deepak Ltd. for above transactions.
Answer: Deepak Ltd. acquires furniture worth ₹2,20,000 and settles the purchase through two methods. First, ₹1,10,000 (50%) is paid by accepting a bill of exchange in favour of Furniture Mart. Second, the remaining ₹1,10,000 is paid by issuing 9% debentures at a 10% premium. The issue price per debenture is ₹110 (₹100 face value + 10% premium). Number of debentures issued = ₹1,10,000 ÷ ₹110 = 1,000 debentures. The journal entries are: (1) Furniture A/c (Dr.) ₹2,20,000, to M/s Furniture Mart (Cr.) ₹2,20,000 (being furniture purchased); (2) M/s Furniture Mart A/c (Dr.) ₹1,10,000, to Bills Payable A/c (Cr.) ₹1,10,000 (being bill of exchange accepted in part payment); (3) M/s Furniture Mart A/c (Dr.) ₹1,10,000, to 9% Debentures A/c (Cr.) ₹1,00,000, and to Securities Premium Reserve A/c (Cr.) ₹10,000 (being debentures issued at 10% premium for balance payment).
In simple words: The company buys furniture for ₹2,20,000. It pays half through a bill of exchange and half through issuing debentures at a premium. Each debenture costs ₹110, so the company issues 1,000 debentures. The extra ₹10 per debenture (the premium) goes to a special reserve account.

Exam Tip: When debentures are issued at a premium, always split the credit side: debenture face value goes to the debenture account, and the premium amount goes to Securities Premium Reserve. Calculate the number of debentures by dividing total amount by issue price, not face value.

Question 6. Nano Ltd. purchased assets of Dow Ltd. for ₹3,00,000. It also agreed to take over the liabilities of Dow Ltd. amounting to ₹50,000 for a purchase consideration of ₹2,75,000. The payment to Dow Ltd. was made by issue of 8% Debentures of ₹50 each at a premium of 10%.
Answer: Nano Ltd. buys the assets and liabilities of Dow Ltd. and settles the purchase by issuing debentures at a premium. Assets obtained are valued at ₹3,00,000, and liabilities assumed are ₹50,000. The net purchase consideration is ₹2,75,000. The difference between assets (₹3,00,000) and liabilities (₹50,000) gives a net asset value of ₹2,50,000, but the purchase consideration paid is ₹2,75,000, creating goodwill of ₹25,000. The debentures are issued at ₹55 per unit (₹50 face value + ₹5 premium at 10%). Number of debentures issued = ₹2,75,000 ÷ ₹55 = 5,000 debentures. The journal entries are: (1) Sundry Assets A/c (Dr.) ₹3,00,000, and Goodwill A/c (Dr.) ₹25,000, to Sundry Liabilities A/c (Cr.) ₹50,000, and to Dow Ltd. A/c (Cr.) ₹2,75,000 (being assets and liabilities purchased at higher consideration); (2) Dow Ltd. A/c (Dr.) ₹2,75,000, to 8% Debentures A/c (Cr.) ₹2,50,000, and to Securities Premium Reserve (Cr.) ₹25,000 (being purchase consideration paid by issuing 5,000 debentures at 10% premium).
In simple words: The company buys another company's assets and takes on its debts. The total price paid is ₹2,75,000, which is settled by issuing 5,000 debentures at ₹55 each. The difference between the price paid and net assets acquired is recorded as goodwill.

Exam Tip: In acquisition entries, always record assets at their stated values, liabilities at their amounts, and the difference between purchase consideration and net assets as goodwill. When debentures are issued, the face value and premium must be credited separately.

Question 7. KTR Ltd. issued 365, 9% Debentures of ₹1,000 each on 4th March, 2016. Pass necessary journal entries for the issue of debentures in the following situations: (a) When debentures were issued at par, redeemable at a premium of 10%. (b) When debentures were issued at 6% discount, redeemable at 5% premium.
Answer: (a) When debentures are issued at par but redeemable at a premium of 10%: The issue price is ₹1,000 per debenture (par value). At redemption, the company will pay ₹1,100 per debenture (₹1,000 + 10% premium = ₹100). The journal entry on issue is: Bank A/c (Dr.) ₹3,65,000 [365 × ₹1,000], to 9% Debenture Application and Allotment A/c (Cr.) ₹3,65,000 (being application money received). On allotment: 9% Debenture Application and Allotment A/c (Dr.) ₹3,65,000, Loss on Issue of Debentures A/c (Dr.) ₹36,500, to 9% Debentures A/c (Cr.) ₹3,65,000, and to Premium on Redemption of Debentures A/c (Cr.) ₹36,500 (being transfer of application money to debenture account and provision for redemption premium). The loss on issue represents the premium payable on redemption, which is booked as a deferred liability.
(b) When debentures are issued at 6% discount but redeemable at 5% premium: The issue price is ₹940 per debenture (₹1,000 - 6% discount = ₹60). Application money received = 365 × ₹940 = ₹3,43,100. On redemption, the company pays ₹1,050 per debenture (₹1,000 + 5% premium = ₹50). The journal entries are: Bank A/c (Dr.) ₹3,43,100, to 9% Debenture Application and Allotment A/c (Cr.) ₹3,43,100 (being application money received at discount). Then: 9% Debenture Application and Allotment A/c (Dr.) ₹3,43,100, Discount on Issue of Debentures A/c (Dr.) ₹21,900, Loss on Issue of Debentures A/c (Dr.) ₹18,250, to 9% Debentures A/c (Cr.) ₹3,65,000, and to Premium on Redemption of Debentures A/c (Cr.) ₹18,250 (being transfer of application money, recording discount on issue, and provision for redemption premium). Alternatively, a combined approach shows: 9% Debenture Application and Allotment A/c (Dr.) ₹3,43,100, Discount on Issue of Debentures A/c (Dr.) ₹21,900, Loss on Issue of Debentures A/c (Dr.) ₹18,250, to 9% Debentures A/c (Cr.) ₹3,65,000, and to Premium on Redemption of Debentures A/c (Cr.) ₹18,250.
In simple words: When debentures are issued at par (full face value) but will be redeemed at a premium, the extra amount to be paid at redemption must be recorded as a liability now. When issued at a discount (less than face value) and redeemed at a premium, both the discount on issue and the redemption premium are tracked separately in the accounts.

Exam Tip: Distinguish between issue price (what the investor pays now) and redemption price (what the company will pay later). Any difference is either a gain or loss on issue, and redemption premiums must always be provided for by creating a liability account at the time of issue, not at the time of redemption.

Question 8. Pass the necessary journal entries for issue of 1,000, 7% Debentures of ₹100 each in the following cases: (a) Issued at 5% premium redeemable at a premium of 10%. (b) Issued at a discount of 5% redeemable at par.
Answer: (a) When debentures are issued at 5% premium but redeemable at a premium of 10%: The issue price is ₹105 per debenture (₹100 + 5% premium = ₹5). Application money received = 1,000 × ₹105 = ₹1,05,000. At redemption, the company pays ₹110 per debenture (₹100 + 10% premium = ₹10). The journal entries are: Bank A/c (Dr.) ₹1,05,000, to Debenture Application and Allotment A/c (Cr.) ₹1,05,000 (being money received on 1,000, 7% debentures at 5% premium). Then: Debenture Application and Allotment A/c (Dr.) ₹1,05,000, Loss on Issue of Debentures A/c (Dr.) ₹10,000, to 7% Debentures A/c (Cr.) ₹1,00,000, to Securities Premium Reserve A/c (Cr.) ₹5,000, and to Premium on Redemption of Debentures A/c (Cr.) ₹10,000 (being debentures issued at 5% premium and redeemable at 10% premium). The premium received on issue (₹5,000) goes to Securities Premium Reserve. The additional premium payable at redemption (₹10,000 - ₹5,000 = ₹5,000 net) is recorded as loss on issue or premium on redemption.
(b) When debentures are issued at 5% discount but redeemable at par: The issue price is ₹95 per debenture (₹100 - 5% discount = ₹5). Application money received = 1,000 × ₹95 = ₹95,000. At redemption, the company pays ₹100 per debenture (par value). The journal entries are: Bank A/c (Dr.) ₹95,000, to Debenture Application and Allotment A/c (Cr.) ₹95,000 (being money received on 1,000, 7% debentures at 5% discount). Then: Debenture Application and Allotment A/c (Dr.) ₹95,000, Discount on Issue of Debentures A/c (Dr.) ₹5,000, to 7% Debentures A/c (Cr.) ₹1,00,000 (being debentures issued at discount and redeemable at par).
In simple words: When debentures are issued at a premium, the extra amount received goes to a reserve account. When issued at a discount, the shortfall is recorded as a loss. If the redemption price is higher than the issue price, the difference must be set aside as a liability at the time of issue.

Exam Tip: Always compare the issue price and redemption price. Premium received on issue is a gain and goes to Securities Premium Reserve. Premium payable on redemption (net of any premium received on issue) is a liability and must be provided for immediately through a Loss on Issue or Premium on Redemption account.

Question 9. On 1st April, 2018, R.J. Ltd. issued ₹10,00,000, 9% debentures of ₹100 each at a discount of 10%. These debentures were redeemable at a premium of 5% after four years. Pass necessary journal entries for the issue of debentures and prepare 9% Debentures Account.
Answer: R.J. Ltd. issues 10,000 debentures (₹10,00,000 ÷ ₹100) at 10% discount, meaning the issue price is ₹90 per debenture. The application money received is ₹9,00,000 (10,000 × ₹90). At redemption after four years, the company will pay ₹105 per debenture (₹100 + 5% premium = ₹5). The journal entries on 1st April, 2018 are: Bank A/c (Dr.) ₹9,00,000, to Debenture Application and Allotment A/c (Cr.) ₹9,00,000 (being applications received for 10,000, 9% debentures at 10% discount). Then: Debenture Application and Allotment A/c (Dr.) ₹9,00,000, Loss on Issue of Debentures A/c (Dr.) ₹1,50,000, to 9% Debentures A/c (Cr.) ₹10,00,000, and to Premium on Redemption of Debentures A/c (Cr.) ₹50,000 (being allotment of 10,000 debentures issued at 10% discount and redeemable at 5% premium). The loss on issue account reflects the total additional outlay: ₹1,00,000 (discount on issue) + ₹50,000 (redemption premium) = ₹1,50,000. The 9% Debentures Account shows the face value (₹10,00,000) on the credit side from the allotment entry. On the debit side, it remains open until redemption. The balance carried forward to 31st March, 2019 is ₹10,00,000.
In simple words: The company receives ₹9,00,000 now but must repay ₹10,50,000 after four years (face value plus 5% premium). The difference of ₹1,50,000 is recorded as a loss on issue, which includes both the discount given and the premium to be paid. The debenture account shows the face value owed to debentureholders.

Exam Tip: In questions asking for both journal entries and debenture account preparation, record the face value in the debenture account, and track the discount and redemption premium in separate accounts. At year-end, show the debenture face value as a liability on the balance sheet.

Question 10. Rahil Ltd. issued 20,000, 9% Debentures of ₹100 each at 5% discount, redeemable at par after 5 years, payable at ₹40 on application and the balance on allotment. The whole issue was subscribed and all money was duly received. Pass necessary journal entries for the issue of debentures and for writing off discount on issue of debentures as per AS-16 in the books of Rahil Ltd. and prepare the Balance Sheet.
Answer: Rahil Ltd. issues 20,000 debentures at 5% discount. The issue price per debenture is ₹95 (₹100 - 5% discount = ₹5). Total application money is ₹8,00,000 (20,000 × ₹40 on application). The balance on allotment is ₹1,50,000 per 100 debentures or ₹3,00,000 total (20,000 × (₹95 - ₹40)). The total cash received is ₹11,00,000 (₹8,00,000 + ₹3,00,000), but the face value is ₹20,00,000, so the discount is ₹1,00,000 (20,000 × ₹5). The journal entries are: Bank A/c (Dr.) ₹8,00,000, to Debenture Application A/c (Cr.) ₹8,00,000 (being application money received on 20,000 debentures at ₹40 per debenture). Then: Debenture Application A/c (Dr.) ₹8,00,000, Bank A/c (Cr.) ₹3,00,000, Loss on Issue of Debentures A/c (Dr.) ₹1,00,000, to 9% Debentures A/c (Cr.) ₹20,00,000 (being allotment of 20,000 debentures issued at 5% discount and redeemable at par; balance received on allotment). AS-16 requires the discount to be amortized over the debenture life (5 years) using the effective interest rate method or straight-line method. Using straight-line method, annual write-off = ₹1,00,000 ÷ 5 = ₹20,000. The journal entry each year is: Profit and Loss A/c (Dr.) ₹20,000, to Discount on Issue of Debentures A/c (Cr.) ₹20,000 (being amortization of discount). The Balance Sheet on the date of issue shows: 9% Debentures ₹20,00,000, Less: Discount on Issue of Debentures (₹80,000 after first year, ₹60,000 after second year, and so on, until fully written off in year 5). The net liability is shown as ₹20,00,000 - discount balance.
In simple words: The company issues debentures at 5% less than face value, collecting ₹40 upfront and ₹55 on allotment. The total discount of ₹1,00,000 is spread evenly over five years, reducing the reported liability each year. This method matches the expense to the period the debentures are outstanding.

Exam Tip: Under AS-16, discount on debenture issue must be amortized systematically over the debenture life using the effective interest rate method (preferred) or straight-line method. Always show the discount as a reduction from the debenture liability on the balance sheet, not as a separate intangible asset.

Question 11. MNC Ltd. issued 12,500, 10% Debentures of ₹100 each. Give journal entries and the Balance Sheet when the debentures were issued at a premium of 20%.
Answer: When debentures are issued at a premium, the application money received is transferred to the Debentures Account at face value, and the premium is set up in a separate Securities Premium Reserve Account.

Journal Entries:
1. On receipt of application money:
Bank A/c Dr. ₹15,00,000
To Debenture Application and Allotment A/c ₹15,00,000
(Being application money received for 12,500 debentures of ₹100 each at ₹120 per debenture)

2. On allotment of debentures:
Debenture Application and Allotment A/c Dr. ₹15,00,000
To 10% Debentures A/c ₹12,50,000
To Securities Premium Reserve A/c ₹2,50,000
(Being debentures allotted)

Balance Sheet (as at date of issue)

I. EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Reserves and Surplus: Securities Premium Reserve ₹2,50,000

2. Non-Current Liabilities
(a) Long-term Borrowings: 10% Debentures ₹12,50,000
Total: ₹15,00,000

II. ASSETS
1. Current Assets
(a) Cash and Cash Equivalents: Cash at Bank ₹15,00,000
Total: ₹15,00,000

In simple words: When debentures sell for more than their face value, the extra amount (premium) is kept separate in the Securities Premium Reserve. The face value goes into the Debentures account, and the cash received balances the assets side of the Balance Sheet.

Exam Tip: Always keep the face value of debentures in the Debentures account and record the premium separately in the Securities Premium Reserve. This shows the true liability to debenture holders.

Question 12. Prakash Ltd. had ₹10,00,000, 12% debentures outstanding as on 1st April, 2016. During the year company took a loan of ₹2,00,000 for 5 years from the State Bank of Patiala for which the Company placed with the bank debentures for ₹2,50,000 as Collateral Security. Pass journal entries, if any. Also show how the Debentures and Bank Loan will appear in the Company's Balance Sheet.
Answer: First Method: No entry is passed for the issue of debentures as collateral security, in this method. Entry is passed only for taking a loan from the bank, as under:

Bank A/c Dr. ₹2,00,000
To Bank Loan A/c ₹2,00,000
(Being loan taken from the Bank and ₹2,50,000 debentures deposited as collateral security)

Balance Sheet (an extract) as at 31st March, 2017

I. EQUITY AND LIABILITIES
1. Non-Current Liabilities
(a) Long-term Borrowings: 12% Debentures ₹10,00,000

Notes to Accounts
1. Long-term Borrowings
12% Debentures ₹10,00,000
Long-term Loan from State Bank of Patiala ₹2,00,000
(secured by issue of ₹2,50,000 debentures as collateral security)
Total: ₹12,00,000

Second Method: Following journal entries are passed in this method:
1. Bank A/c Dr. ₹2,00,000
To Bank Loan A/c ₹2,00,000
(Being loan taken from the Bank)

2. Debenture Suspense A/c Dr. ₹2,50,000
To 12% Debentures A/c ₹2,50,000
(Being issue of ₹2,50,000 debentures as collateral security to secure a Loan of ₹2,00,000 from the Bank)

Balance Sheet (an extract) as at 31st March, 2017

I. EQUITY AND LIABILITIES
1. Non-Current Liabilities
(a) Long-term Borrowings: 12% Debentures ₹10,00,000

Notes to Accounts
1. Long-term Borrowings
12% Debentures ₹10,00,000
Long-term Loan from State Bank of Patiala ₹2,00,000
₹2,50,000 Debentures issued as collateral security 2,50,000
Less: Debenture Suspense A/c (2,50,000)
Total: ₹12,00,000

In simple words: The First Method is simpler - just record the loan and mention the collateral in a note. The Second Method records the debentures given as security in a separate Suspense account to show the pledge clearly on the Balance Sheet. Both methods give the same final total of borrowings.

Exam Tip: When debentures are pledged as collateral, the First Method (no entry) is most commonly used. If using the Second Method, always offset the Debenture Suspense against the debentures to avoid showing the same amount twice in liabilities.

Question 13. Power and Utility Ltd. issued 2,500, 8% Debentures of ₹100 each at a discount of 10% on 1st April, 2017 redeemable at par after five years. The company has a balance of ₹15,000 in Securities Premium Reserve. The company decided to use the Securities Premium Reserve for writing off the loss on issue of debentures and also decided to write off the remaining discount in the first year itself.
Answer: The company received ₹2,25,000 (2,500 × ₹100 × 90/100) from the issue of debentures. The loss on issue is the discount of ₹25,000 (2,500 × ₹100 × 10/100). Using the Securities Premium Reserve of ₹15,000 against this loss, a remaining discount of ₹10,000 is written off in the first year through the Statement of Profit and Loss.

Journal Entries (in the books of Power and Utility Ltd.)

2017 April 1:
Bank A/c Dr. ₹2,25,000
To Debenture Application and Allotment A/c ₹2,25,000
(Being the application money received for 2,500, 8% debentures of ₹100 each at ₹90 per debenture)

Debenture Application and Allotment A/c Dr. ₹2,25,000
To 8% Debentures A/c ₹2,50,000
To Discount on Issue of Debentures A/c ₹(25,000)
(Being 2,500, 8% debentures allotted)

2018 March 31:
Securities Premium Reserve A/c Dr. ₹15,000
Statement of Profit and Loss (Finance Cost) Dr. ₹10,000
To Discount on Issue of Debentures A/c ₹25,000
(Being the discount on issue of debentures written off from Securities Premium Reserve and Statement of Profit and Loss)

Discount on Issue of Debentures Account

Dr. Side: 2017 Apr. 1 To 8% Debentures A/c ₹25,000
Cr. Side: 2018 Mar. 31 By Securities Premium Reserve A/c ₹15,000
2018 Mar. 31 By Statement of Profit and Loss (Finance Cost) ₹10,000
Total: ₹25,000 and ₹25,000

In simple words: When debentures are issued at a discount, the loss (discount) needs to be written off. The company can use the Securities Premium Reserve to pay for part of this loss, and any remaining amount is written off as a finance cost in the profit and loss statement.

Exam Tip: Remember that discount on issue of debentures is a capital loss and can only be written off using reserves (like Securities Premium Reserve) or gradually through the profit and loss account. Do not write it off all at once from profit unless specifically allowed in the question.

Question 14. "UZ Ltd.' purchased Plant and Machinery from Elk Machine Ltd. for ₹6,90,000. Elk Ltd. was paid by accepting a draft of ₹90,000 payable after three months and the balance by issue of 6% debentures of ₹100 each at a discount of 20%.
Answer: In the Books of UZ Ltd.

Journal Entries

1. Plant & Machinery A/c Dr. ₹6,90,000
To Elk Machine Ltd. ₹6,90,000
(Being machinery purchased from Elk Machine Ltd.)

2. Elk Machine Ltd. Dr. ₹90,000
To Bills Payable A/c ₹90,000
(Being bills accepted)

3. Elk Machine Ltd. Dr. ₹6,00,000
Discount on Issue of Debentures A/c Dr. ₹1,50,000
To 6% Debentures A/c ₹7,50,000
(Being 7,500, 6% debentures issued at 20% discount)

The face value of debentures is ₹7,50,000 (balance of ₹6,90,000 - ₹90,000 = ₹6,00,000 divided by 0.80 because they are issued at 20% discount). The discount on issue is ₹1,50,000 (7,500 debentures × ₹100 × 20%).

In simple words: When you buy machinery by giving both cash (draft) and debentures, you record the plant purchase first, then the draft accepted, and finally the debentures at their face value with the discount shown separately as a reduction.

Exam Tip: Always calculate the number of debentures by dividing the amount due by the issue price (face value minus discount), not by the face value alone. This ensures you arrive at the correct debenture account balance.

Question 1. On 1st April, 2015, K.K. Ltd. issued 500, 9% Debentures of ₹500 each at a discount of 4%, redeemable at a premium of 5% after three years.
Answer: Pass necessary Journal Entries for the issue of debentures and debentures' interest for the year ended 31st March, 2016 assuming that interest is payable on 30th September and 31st March and the rate of tax deducted at source is 10%. The company closes its books on 31st March every year.

Journal of KK Ltd.
 

In simple words: When debentures are issued at a discount, the difference between the face value and the price received is a capital loss. This loss, along with the interest paid on the debentures, gets transferred to the Statement of Profit and Loss at year-end. Interest must be divided into two parts - what goes to debentureholders and what gets paid to the tax authority.

Exam Tip: Always separate the discount (loss on issue) from the premium on redemption in your journal entries - they are handled differently and recorded in separate accounts.

Question 2. (a) Mohit Ltd. took over assets of ₹8,40,000 and liabilities of ₹80,000 of Ram Ltd. at an agreed value of ₹7,20,000. Mohit Ltd. paid to Ram Ltd., by issue of 9% debentures of ₹100 each at a premium of 20%. Pass necessary journal entries to record the above transactions in the books of Mohit Ltd.
Answer: The total value of assets taken over was ₹8,40,000 and the liabilities assumed was ₹80,000, making a net liability of ₹80,000. However, the agreed settlement value was ₹7,20,000, which means Mohit Ltd. gained a benefit on this merger. To pay this amount, the company issued debentures at a premium of 20%, so each debenture with a face value of ₹100 sold for ₹120. The total number of debentures issued was 6,000 (₹7,20,000 ÷ ₹120 per debenture).

Journal of Mohit Ltd.
 

In simple words: When one company takes over another, all assets and liabilities move to the acquiring company's books. If the agreed amount to pay is less than the net assets, a capital reserve (profit on merger) is created. Debentures issued at a premium mean the extra cash received is recorded in a Securities Premium Reserve account.

Exam Tip: The difference between assets taken and amount paid represents a capital gain - record it separately as a Capital Reserve, not as profit for the period.

Question 2. (b) Give Journal entries in each of the following cases if the face value of a 9% debenture is ₹100.
Answer:
(i) A debenture issued at ₹100 repayable at ₹105.
 

(ii) A debenture issued at ₹105 repayable at ₹105.

In simple words: When debentures are issued at par (face value) but redeemed at a premium, only the redemption premium is recorded. When issued at a premium and redeemed at a premium, the issue premium goes to Securities Premium Reserve, and only the extra redemption premium is shown as a loss.

Exam Tip: Always distinguish between premium on issue (credited to Securities Premium Reserve) and premium on redemption (debit to a separate account) - they are treated differently in accounting.

Question 3. Shikhar Ltd. issued 10,000, 10% debentures of ₹100 each, payable as follows: ₹10 on application, ₹20 on allotment, and ₹30 on first call and ₹40 on second and final call. Arun, who holds 500 debentures failed to pay the amount due on allotment. He, however, pays this amount with the first call money. Dinesh, who holds 800 debentures paid all the calls in advance on allotment. Pass journal entries.
Answer: Shikhar Ltd. issued 10,000 debentures of ₹100 each in instalments. Arun held 500 debentures but failed to pay the allotment money of ₹20 per debenture, totalling ₹10,000. He later paid this along with the first call. Dinesh held 800 debentures and paid all calls amounting to ₹80 per debenture (₹20 + ₹30 + ₹40) in advance at the allotment stage, paying ₹64,000 extra upfront.

Journal of Shikhar Ltd.
 

In simple words: When debentures are issued in stages, each instalment is recorded separately. If someone fails to pay at one stage, that amount becomes a call in arrears and gets collected later. If someone pays everything upfront, the extra amount is recorded as a call in advance and adjusted against future calls.

Exam Tip: Track calls in arrears (money still owed) and calls in advance (extra money paid) carefully - adjust them correctly when full payment is received to avoid double-counting.

Question 4. SSS Ltd. issued 25,000; 10% Debentures of ₹100 each. Give Journal entries and the Balance Sheet in each of the following cases when:
(i) the debentures were issued at a premium of 20%.
(ii) the debentures were issued as a collateral security to Bank against a loan of ₹20,00,000.
Answer:
(i) When debentures are issued at a premium of 20%, SSS Ltd. receives ₹120 per debenture instead of ₹100. With 25,000 debentures, the total cash received is ₹30,00,000 (25,000 × ₹120). The face value of debentures recorded is ₹25,00,000, and the extra ₹5,00,000 goes to the Securities Premium Reserve account.

Journal of SSS Ltd.
 

Balance Sheet of SSS Ltd.
as at......

(ii) When debentures are issued as collateral security to a bank, the company receives a loan of ₹20,00,000. The debentures remain as contingent liabilities and are shown in a Note to the Balance Sheet, not as a normal liability. The journal entry shows the receipt of cash from the bank, not from debenture holders.

Journal of SSS Ltd.

In simple words: When debentures are offered as collateral to secure a loan, no money comes from selling the debentures. The loan amount is what the bank gives, and the debentures stay with the company as security. They appear in a note to the Balance Sheet as a contingent liability, not as a regular liability.

Exam Tip: Remember - collateral debentures mean the bank holds the debentures as security but the company is still legally responsible. Show them as a contingent liability in notes, not in the main liabilities section.

Please click on below link to download CBSE Class 12 Accountancy Issue And Redemption of Debentures Worksheet Set B