DO IT YOURSELF I
1. Amrit Company Limited purchased assets of the book value of Rs.2,20,000 fromanother company and agreed to make the payment of purchase consideration by issuing 2,000, 10% debentures of Rs.100 each at a premium of 10%. Record necessary journal entries.
2. A company purchased assets of the value of Rs.1,90,000 from another company and agreed to make the payment of purchase consideration by issuing 2,000,10% debentures of Rs.100 each at a discount of 5%. Record necessary journal entries.
3. Rose Bond Limited purchased a business for Rs. 22,00,000. Purchase Price was paid by 6% debentures. Debentures of Rs. 20,00,000 were issued at a premium of 10% for the purpose. Record necessary journal entries.
4. Nikhil and Ashwin Limited bought business of Agarwal Limited consisting sundry assts of Rs. 3,60,000, sundry creditors Rs. 1,00,000 for a consideration ofRs. 3,07,200. It issued 14% debentures of Rs. 100 each fully paid at a discount of 4% in satisfaction of purchase consideration. Record necessary journal entries.
DO IT YOURSELF II
2. Record necessary journal entries in each of the following cases:
DO IT YOURSELF III
1. Diwakar enterprises Ltd. Issued 10,00,000, 6% debentures on April 1, 2002. Interest is paid on September 30, 2002 and March 31, 2003.
2. Laser India Ltd. Issued 7,00,000, 8% debentures of Rs. 100 each at par.Company deducts income tax from the interest of these debentures at source. Interest is to be paid on these debentures half-yearly on September 30 andMarch 31, every year. Amount of income tax deducted half-yearly iRs. 2,80,000.
DO IT YOURSELF IV
1. X Ltd. Issued 2,000, 10% debentures of Rs.100 each at a discount of 8% on1 Jan, 1992 which are redeemable at par by annual drawings in 4 yearscommencing from 31st March 1993 as per the following redemption plan:Ist Draw 10%, 2nd Draw 20%, 3rd Draw 30%, and 4th Draw 40%. Calculate theamount of discount to be written-off each year assuming that X Ltd. followscalendar year as its accounting year.
2. Z Ltd. issued 15,00,000, 10% debenture of Rs.50 each at premium of 10% payable as Rs.20 on application and balance on allotment. Debentures are redeemable at par after 6 years. All the money due on allotment was calledand duly received. Record necessary entries when premium money is included:
3. Z Ltd. issued 5,000, 10% debentures of Rs.100 each at a discount of 10% on 1.1.2005. The debentures are to be redeemed every year draw of lots – 1,000 debenture to be redeemed every year starting on 31.12.2005. Record the necessary journal entries including the payment of interest and writing off the discount on issue of debentures. The interest is payable on 30th June and 31st December. Z Ltd. Closes its books of accounts on 31st December.
4. M Ltd. issued 10,000, 8% debentures of Rs.100 each at a premium of 10% on 1.1.2004. It purchased sundry assets of the value of Rs,2,50,000 and took over the liabilities of Rs,1,90,000 and issued 8% debentures at a discount of 5% to the vendor. On the same date it took loan from the Bank for Rs.1,00,000 and issued 8% debentures as Collateral Security. Record the relevant journal entries in the books of M Ltd. and prepare the extract of balance sheet on 31.12.2004. Ignore interest.
5. On 1.1.2005 Fast Computers Ltd. issued 20,00,000, 6% debentures of Rs.100 each at a discount of 4%, redeemable at a premium of 5% after three years.
6. D Ltd. Purchased machinery worth Rs.2,00,000 from E Ltd. on 1.1.2001. Rs.50,000 were paid immediately and the balance was paid by issue of Rs.1,60,000, 12% Debentures in D Ltd. Record the necessary journal entries for recording the transactions in the books of D Ltd.
TEST YOUR UNDERSTANDING I
• State whether the following statements are True (T) or Fasle (F)
Question 2. Debenture is a part of owned capital.
Question 3. The payment of interest on debentures is a charge on the profits of the company.
Question 4. The debentures cannot be issued at a discount of more than 10% of the face value.
Question 6. Perpetual debentures are also known as irredeemable debentures.
Question 7. Debentures cannot be converted into shares.
Question 8. Debentures cannot be issued at a premium.
Question 10. Debentures cannot be issued at a premium and redeemable at par.
Question 11. Loss on issue of debentures account is a revenue loss.
Question 12. Premium on redemption of debentures account is shown under the ‘Securities Premium’ in the Balance Sheet.
DO IT YOURSELF V
1. X Ltd. decides to redeem 8,000, 10% debentures of Rs.100 each on January 1, 2004 at a premium of 5%. The company has a balance of Rs.9, 00,000 at the credit of its profit and loss account. The company closes its books on December 31 every year. What journal entries the company will be recorded to redeem the above debentures.
2. G Ltd. issued 5,00,000, 12 % debenture of Rs.100 each on April 1, 2002 redeemable at par on July 1, 2003. The company received applications for 6,00,000 debentures and the allotment was made to all the applicants on pro-rata basis. The debenture were redeemed on due date. How much amount of Debenture Redemption Reserve is to be created before the redemption is carried out? Also record necessary journal entries regarding issue and redemption of debenture. Ignore tax deducted at source.
TEST YOUR UNDERSTANDING II
Select the correct answer for the following multiple choice questions:
Question 3. X Co Ltd purchased assets worth ? 28,80,000. It issued debentures of ? 100 each at a discount of 4% in full satisfaction of the purchase consideration. The number of debentures issued to vendor is
Question 4. Convertible debentures cannot be issued at a discount if 1 (a) they are to be immediately converted
Question 5. Discount on issue of debentures is shown under the following head in the Balance Sheet
Answer (b) Miscellaneous expenditure
Question 6. When debentures are issued at par and are redeemable at a premium, the loss on such an issue debited to
Question 7. Excess value of net assets over purchase consideration at the time of purchase of business is credited to
Question 8. When all the debentures are redeemed, balance in the debentures redemption fund account is transferred to
Question 9. The nominal and book values of debenture redemption fund investments account are respectively ? 1,00,000 and ? 96,000.
Question 10. Own debentures are those debentures of the company which
Question 11. Profit on cancellation of own debentures is transferred to
Question 12. When debentures are redeemed out of profits, an equal amount is transferred to
Question 13. Profit on sale of debenture redemption fund investments in the first instance is credited to
Question 14. The balance of sinking fund investment account after the realisation of investments is transferred to
Question 15. When debentures are issued at a discount and are redeemable at a premium, which of the following accounts is debited at the time of issue
TEST YOUR UNDERSTANDING III
• Indicate in the column below, the account to be debited in case of the following transactions.
• Indicate in the column below, the account to be credited in case of the following transactions
DO IT YOURSELF VI
1. G Ltd. has 800 lakhs, 10% debentures of Rs.100 each due for redemption on March 31, 2003. Assume that Debenture Redemption Reserve has a balance of Rs. 3,40,00,00,000 on that date. Record necessary entries at the time of redemption of debenture.
2. R Ltd. issued 88,00,000, 8 % debenture of Rs. 50 each at a premium of 5 % on July 1, 2000 redeemable at par by conversion of debenture into shares of Rs.20 each at a premium of Rs.2 per share on June 30, 2003. Record necessary entries for redemption of debenture.
3. C Ltd. has outstanding 11,00,000, 10% debentures of Rs.200 each, on April 1, 2003. The Board of Directors have decided to purchase 20% of own debenture for cancellation at Rs.200 each. Record necessary entries for the same.
4. Record necessary journal entries in the books of the Company in following case for redemption of 1,000, 12% Debentures of Rs.10 each issued at par:
5. On 31.1.2005 Janta Ltd. converted its Rs.88,00,000, 6% debentures into equity shares of Rs.20 each at a premium of Rs.2 per share. Record necessary journal entries in the books of the company for redemption of debentures.
6. Anirudh Ltd. has 4,000, 8% debentures of Rs.100 each due for redemption on March 31, 2005. The company has a debenture redemption reserve of Rs.1,50,000 on that date. Assuming that no interest is due record the necessary journal entries at the time of redemption of debentures.
Debenture forRs.4,00,000 were to be redeemed. As per SEBI guidelines, 50% debenture redemption reserve is to be maintained. For Rs.14,00,000 it comes to Rs.2,00,000. Debenture redemption reserve already in books of account was Rs.1,50,000. Hence, entry for balance Rs. 50,000 was passed in this solution.
SHORT ANSWER TYPE QUESTIONS
Question 1. What is meant by a Debenture?
Question 2. What does a Bearer Debenture mean?
Question 3. State the meaning of ‘Debentures issued as a Collateral Security’.
Question 4. What is meant by Issue of debentures for consideration other than Cash’?
Question 5. What is meant by ‘Issue of debentures at discount and redeemable at premium?
Question 6 What is ‘Capital Reserve’?
A capital reserve can be utilised for meeting the future capital losses. Here it is to be remembered that capital reserve cannot be used for distributing dividend to the share holders but bonus shares can be issued out of the capital reserve.
Question 7 What is meant by a ‘Irredeemable Debenture?
Question 8. What is a ‘Convertible Debenture?
Question 9. What is meant by ‘Mortgaged Debentures?
Question 10. What is discount on issue of debentures?
Question 11. What is meant by ‘Premium on Redemption of Debentures’?
Question 12. How debentures are different from shares? Give two points.
Dividend or Interest :Dividend on shares is paid only when there are profits in
Ownership Equity share holders are the owners of the company on the other hand debenture holders are the creditors of the company.
Question 13. Name the head under which ‘Discount on Issue of Debentures’ appears in the Balance Sheet of a company.
Question 14. What is meant by redemption of debentures ?
Question 15. Can the company purchase its own debentures?
Question 16. What is meant by redemption of debentures by conversion?
Question 17. How would you deal with ‘Premium on Redemption of Debentures?
Question 18. What is meant by ‘Redemption out of Capital’?
In other words when debentures are redeemed out of capital and no profits are utilised for redemption, then such redemption is termed as redemption out of capital.
A company cannot redeem its debentures purely out of capital. At least 50% of debentures issued must be redeemed out of profits by creating a ‘Debenture Redemption Reserve’ and the balance of debentures issued may be redeemed out of profits or out of capital.
According to the Companies Act, 1956 when debentures are to be redeemed an adequate amount of profits is required to be transferred to ‘Debenture Redemption Reserve’ every year before the redemption begins. It is to be noted that the Companies Act, 1956 does not spell out at to what is the adequate amount.
For this one can refer to SEBI Guidelines which stipulates that an amount equal to 50% of the debentures issue should be transferred to ‘Debenture Redemption Reserve’ before the redemption begins.
Question 19. What is meant by redemption of debentures by ‘Purchase in the Open Market?
Question 20. Under which head is the ‘Debenture Redemption Reserve’ shown in the Balance Sheet.
LONG ANSWER TYPE QUESTIONS
Question 1. What is meant by a debenture? Explain the different types of debentures?
In case of mortgage debentures, a company may prefer to appoint trustees who will hold the property given by way of security in trust for the benefits of debentures holders.
(ii) From Permanence Point of View From Permanence point of view the debentures may be Redeemable or Irredeemable debentures.
The company has the option of cancelling its liability to the debenture holders at any time by giving due notice to them.
(iii) From Priority Point of View :From this point of view the debentures may be First and Second debentures.
Question 2. Distinguish between a debenture and a share. Why debenture is known as loan capital? Explain.
Question 3. Describe the meaning of ‘Debenture Issued as Collateral Securities’. What accounting treatment is given to the issue of debentures in the books of accounts?
If the Company makes a default, the bank may either keep the debenture and become debenture-holder or sell them and realise money. This type of issue by the Company is called Issue of Debenture as Collateral Security.
When debentures are issued by the company, they are not really alive and no accounting entry is made in the books of the Company for it. Only a note is given in the balance sheet for it as under
If accounting record for these debentures is to be made Debentures Suspense A/c is debited and deoentures A/c credited, debentures are shown in the liability side and balance of debentures Suspense A/c is shown in the assets side of the Balance Sheet. When debt is paid off by the Company, Debentures A/c is debited and Debentures Suspense A/c is credited.
Question 4. How is ‘Discount on Issue of Debentures’ treated in the books of accounts? How will you deal with the ‘Discount on issue of debentures’ when the debentures are to be redeemed in instalments?
The loss on the issue of debenture is shown on the Assets side of the Balance Sheet under the heading of Miscellaneous Expenditures.
Accounting Treatment for Discount on Issue of Debentures:
e.g., if a company has issued 10% debentures of Rs. 12,00,000 at 5% discount redeemable annually by Rs. 2,40,000 each year. The total amount of discount on Rs.12,00,000 debentures @ 5% is Rs. 60,000, i.e., (12,00,000 x 5/100 =Rs. 60,000). The amount of discount to be written off every year is calculated as
Hence, the amount of the total discount of’ 60,000 will be written off in the ratio of ,5 : 4 : 3 : 2 :1 i.e.,’ 20,000,’ 16,000,’ 12,000,’ 8,000 and 4,000 respectively.
Question 5. Explain the different terms for the issue of debentures with reference to their redemption.
Question 6. Differentiate between redemption of debentures out of capital and out of profits.
SEBI mandates transferring amount equal to 50% of debentures issued to DRR before redeeming debentures. As transfer of amount (profits) to the DRR from Profit and Loss Appropriation Account reduces the amount of profit available for distribution of dividend, so this redemption process is known as redemption out of profit.
DRR is shown under the head of Reserves and Surpluses on the Liabilities side of the Balance Sheet. DRR account is closed by transferring it to General Reserve only when all the debentures are redeemed.
Question 7. Explain the guidelines of SEBI for creating Debenture Redemption Reserve.
SEBI guidelines would not apply under the following situations:
Question 8. Describe the steps for creating Sinking Fund for redemption of debentures.
Question 9. Can a company purchase its own debentures in the open market? Explain.
When a company purchase its own debenture,in the open market it can happen in either of the two ways first debentures may be purchased at premium for cancellation and debenture may be purchase at discount for cancellation. The following will be the accounting treatment in both the situation
(i) If Debentures are Purchased at Discount for Cancellation :When the company purchase its own debentures at discount for cancellation, then the following Journal entries are recorded.
Question 10. What is meant by conversion of debentures? Describe the method of such a conversion.
1. G.Ltd. issued 75,00,000, 6% Debenture of Rs.50 each at par payable Rs.15 on application and Rs.35 on allotment, redeemable at par after 7 years from the date of issue of debenture. Record necessary entries in the books of Company.
2. Y.Ltd. issued 2,000, 6% Debentures of Rs.100 each payable as follows: Rs.25 on application; Rs.50 on allotment and Rs.25 on First and Final call.
3. A.Ltd. issued 10,000, 10% Debentures of Rs.100 each at a premium of 5% payable as follows:
4. A. Ltd. issued 90,00,000, 9% Debenture of Rs.50 each at a discount of 8%, redeemable at par any time after 9 years. Record necessary entries in the books of A. Ltd.
5. A.Ltd. issued 4,000, 9% Debentures of Rs.100 each on the following terms:
6. T. Ltd. offered 2,00,000, 8% Debenture of Rs.500 each on June 30, 2002 at a premium of 10% payable as Rs.200 on application (including premium) and balance on allotment, redeemable at par after 8 years. But application are received for 3,00,000 debenture and the allotment is made on pro-rata basis. All the money due on application and allotment is received. Record necessary entries regarding issue of debenture.
7. X.Ltd. invites application for the issue of 10,000, 14% debentures of Rs.100 each payable as to Rs.20 on application, Rs.60 on allotment and the balance on call. The company receives applications for 13,500 debentures, out of which applications for 8,000 debentures are allotted in full, 5,000 only 40% and the remaining rejected. The surplus money on partially allotted applications is utilised towards allotment. All the sums due are duly received.
8. R.Ltd. offered 20,00,000, 10% Debenture of Rs.200 each at a discount of 7% redeemable at premium of 8% after 9 years. Record necessary entries in the books of R. Ltd.
9. M.Ltd. took over assets of Rs.9,00,00,000 and liabilities of Rs.70,00,000 of S.Ltd. and issued 8%Debenture of Rs.100 each. Record necessary entries in the books of M. Ltd.
10. B.Ltd. purchased assets of the book value of Rs.4,00,000 and took over the liability of Rs.50,000 from Mohan Bros. It was agreed that the purchase consideration, settled at Rs,3,80,000, be paid by issuing debentures of Rs.100 each. What Journal entries will be made in the following three cases, if debentures are issued: (a) at par; (b) at discount; (c) at premium of 10%? It was agreed that any fraction of debentures be paid in cash.
11. X.Ltd. purchased a Machinery from Y for an agreed purchase consideration of
12. X.Ltd. issued 15,000, 10% debentures of Rs.100 each. Give journal entries and the Balance Sheet in each of the following cases:
13. Journalise the following:
14. A.Ltd. issued 50,00,000, 8% Debenture of Rs.100 at a discount of 6% on April 01,
15. A company issues the following debentures:
16. A company issued debentures of the face value of Rs,5,00,000 at a discount of 6% on January 01, 2001. These debentures are redeemable by annual drawings of Rs,1,00,000 made on December 31 each year. The directors decided to write off discount based on the debentures outstanding each year.
17. A company issued 10% Debentures of the face value of Rs,1,20,000 at a discount of 6% on January 01, 2001. The debentures are payable by annual drawings of Rs.40,000 commencing from the end of third year.
18. B.Ltd. issued debentures at 94% for Rs.4,00,000 on April 01, 2000 repayable by five equal drawings of Rs.80,000 each. The company prepares its final accounts on December 31 every year.
19. B. Ltd. issued 1,000, 12% debentures of Rs.100 each on January 01, 2005 at a discount of 5% redeemable at a premium of 10%. Give journal entries relating to the issue of debentures and debentures interest for the period ending December 31, 2005 assuming that interest is paid half yearly on June 30 and December 31 and tax deducted at source is 10%. B.Ltd. follows calendar year as its accounting year.
20. What journal entries will be made in the following cases when company redeems debentures at the expiry of period by serving the notice: (a) when debentures were issued at par with a condition to redeem them at premium; (b) when debentures were issued at premium with a condition to redeem that at par; and (c) when debentures were issued at discount with a condition to redeem them at premium?
21. On January 01, 1998, X. Ltd. issues 5,000, 8% Debentures of Rs.100 each repayable at par at the end of three years. It has been decided to set up a cumulative sinking fund for the purpose of their redemption. The investments are expected to realise 4% net. The Sinking Fund Table shows that Rs.0.320348 amounts to one rupee @4% per annum in three years. On December 31, 2000 the balance at bank was Rs.2,42,360 and the investments realised Rs.3,25,000. The debentures were paid off. Give journal entries and show ledger account.
22. On January 01, 2003 a company issued 15% debentures of Rs.10,00,000 at par. The debentures were redeemable at par after three years on December 31, 2003. A sinking fund was set up to raise funds for redemption of debentures. The amount for the purpose was invested in 6% Government securities of Rs.100 each available at par. The sinking fund table shows that if investments earn 6% per annum, to get Re.1 at the end of 3 years, one has to invest Rs.0.31411 every year together
23. On January 01, 2004 the following balances appeared in the books of Z. Ltd.:
The investments consisted of 4% Government securities of the face value of Rs.90,000. The annual instalment was Rs.16,400. On December 31, 2004, the balance at Bank was Rs.26,000 (after receipt of interest on D.R.Reserve Fund Investment). Investments were realised at 92% and the Debentures were redeemed. The interest for the year had already been paid. Show the ledger accounts affecting redemption.
24. The following balances appeared in the books of A.Ltd. on January 01, 2004
25. The following balances appeared in the books of Z.Ltd. on January 01, 2004
26.What entries for the redemption of debentures will be done when : (a) debentures
27. A. Ltd. Company issued Rs,5,00,000 Debentures at a discount of 5% repayable at
28. X.Ltd. issued 5,000, 15% debentures of Rs.100 each on January 01, 2004 at a
29. Z.Ltd. issued 2,000, 14% debentures of Rs.100 each on January 01, 2005 at a
30. A.Ltd. purchased its own debentures of the face value of Rs.2,00,000 from the
32. A.Ltd. redeemed 8,000, 12% debentures of Rs.100 each which were issued at a discount of 5%, by converting them into equity shares of Rs.10 each at par.
33. Y.Ltd. redeemed 4,800, 12% debentures of Rs.100 each which were issued at par, at 110 per cent by converting them into equity shares of Rs.10 each issued at a discount of 4%. Journalise.
34. Z.Ltd. redeemed 2,000, 12% debentures of Rs.100 each which were issued at a discount of 5%, by converting them into equity shares of Rs.10 each issued at a premium of 25%. Journalise.