Chapter 2 Issue and Redemption of Debentures Solutions

Question - 41 : - X.Ltd. purchased a Machinery from Y for an agreed purchase consideration of ₹ 4, 40,000 to be satisfied by the issue of 12% debentures of ₹ 100 each at a premium of ₹ 10 per debenture. Journalise the transactions.

Answer - 41 : -

Books of X. Ltd. Journal
Date	Particulars		L.F.	Debit Amount ₹	Credit Amount ₹
	Machinery A/c	Dr.		4,40,000
	To Y				4,40,000
	(Machinery purchased from Y)

	Y	Dr.		4,40,000
	To 12% Debentures A/c				4,00,000
	To Securities Premium A/c				40,000
	(Allotted 4,000 debentures of ₹ 100 each at a premium of ₹ 10 per debenture in consideration of Machinery purchased)

Question - 42 : -
X.Ltd. issued 15,000, 10% debentures of ₹ 100 each. Give journal entries and the Balance Sheet in each of the following cases:
(i) The debentures are issued at a premium of 10%;
(ii) The debentures are issued at a discount of 5%;
(iii) The debentures are issued as a collateral security to bank against a loan of ₹ 12, 00,000; and
(iv) The debentures are issued to a supplier of machinery costing ₹ 13, 50,000.

Answer - 42 : -

(i)

Books of X. Ltd. Journal
Date	Particulars					L.F.	Debit Amount ₹	Credit Amount ₹
	Bank A/c				Dr.		16,50,000
		To 10% Debentures A/c						15,00,000
		To Securities Premium A/c						1,50,000
	(Issued 15,000, 10% debentures of ₹ 100 each at 10% premium)


X Ltd.
Balance Sheet
Particulars			Note No.	Amount (₹)
I. Equity and Liabilities
1. Shareholders’ Funds
a. Reserves and Surplus			1	1,50,000
2. Non-Current Liabilities
a. Long-Term Borrowings			2	15,00,000
3. Current Liabilities
Total				16,50,000

II. Assets
1. Non-Current Assets
2. Current Assets
a. Cash and Cash Equivalents			3	16,50,000
Total				16,50,000

ACCOUNTNOTES

Note No.	Particulars	Amount (₹)

1	Reserves and Surplus
	Securities Premium	1,50,000

2	Long-Term Borrowings
	10% Debentures (Secured)	15,00,000

3	Cash and Cash Equivalents
	Cash at Bank	16,50,000

(ii)


	Bank A/c			Dr.	14,25,000
	Discount on Issue of Debentures A/c			Dr.	75,000
		To 10% Debentures				15,00,000
	(Issued 15,000 10% Debenture of ₹ 100 each at 5% discount)


X Ltd.
Balance Sheet
Particulars			Note No.	Amount (₹)
I. Equity and Liabilities
1. Shareholder’s Funds
2. Non-Current Liabilities
a. Long-Term Borrowings			1	15,00,000
3. Current Liabilities
Total				15,00,000

II. Assets
1. Non-Current Assets
a. Other Non-Current Assets			2	75,000
2. Current Assets
a. Cash and Cash Equivalents			3	14,25,000
Total				15,00,000

ACCOUNTNOTES

Note No.	Particulars	Amount (₹)

1	Long-Term Borrowings
	10% Debentures (Secured)	15,00,000

2	Other Non-Current Assets
	Discount on Issue of Debentures	75,000

3	Cash and Cash Equivalents
	Cash at Bank	14,25,000

(iii) No entry will be passed for issuing debenturesas a collateral security

X Ltd.
Balance Sheet
Particulars	Note No.	Amount (₹)
I. Equity and Liabilities
1. Shareholders’ Funds
2. Non-Current Liabilities
a. Long-Term Borrowings	1	12,00,000
3. Current Liabilities
Total		12,00,000

II. Assets
1. Non-Current Assets
2. Current Assets
a. Cash and Cash Equivalents	2	12,00,000
Total		12,00,000

ACCOUNTNOTES

Note No.	Particulars	Amount (₹)

1	Long-Term Borrowings
	Bank Loan (Secured against issue Debentures of ₹ 12,00,000)	12,00,000

2	Cash and Cash Equivalents
	Cash at Bank	12,00,000

AlternativeMethod


	Debenture Suspense A/c				Dr.	15,00,000
		To 10% Debentures A/c					15,00,000
	(Issued 15,000 10% Debentures of ₹ 100 each as collateral security to bank against a loan of ₹ 12,00,000)


X Ltd.
Balance Sheet
Particulars			Note No.	Amount (₹)
I. Equity and Liabilities
1. Shareholders’ Fund
2. Non-Current Liabilities
a. Long-Term Borrowings			1	12,00,000
3. Current Liabilities
Total				12,00,000

II. Assets
1. Non-Current Assets
2. Current Assets
a. Cash and Cash Equivalents			2	12,00,000
Total				12,00,000

ACCOUNTNOTES

Note No.	Particulars		Amount (₹)

1	Long Term Borrowings
	Secured:
	Bank Loan		12,00,000
	10 % Debentures (Secured against issue of Debentures of ₹ 12,00,000)	15,00,000
	Less: Debenture Suspense Account	15,00,000	–
			12,00,000
2	Cash and Cash Equivalents
	Cash at Bank		12,00,000

(iv)


	Machinery A/c		Dr.	13,50,000
		To Vendor A/c			13,50,000
	(Machinery purchased from vendor)

	Vendor A/c		Dr.	13,50,000
	Discount on Issue of Debentures A/c		Dr.	1,50,000
		To 10% Debenture A/c			15,00,000
	(15,000 10% Debentures @ ₹ 100 each issued at 10% discount to the vendor in consideration of Machinery of ₹ 13,50,000)


X Ltd.
Balance Sheet
Particulars			Note No.	Amount (₹)
I. Equity and Liabilities
1. Shareholders’ Funds
2. Non-Current Liabilities
a. Long Term Borrowings			1	15,00,000
3. Current Liabilities
Total				15,00,000

II. Assets
1. Non-Current Assets
a. Fixed Assets
i. Tangible Assets			2	13,50,000
b. Other Non-Current Assets			3	1,50,000
2. Current Assets
Total				15,00,000

ACCOUNTNOTES

Note No.	Particulars	Amount (₹)

1	Long Term Borrowings
	10% Debentures (Secured)	15,00,000

2	Tangible Assets
	Plant and Machinery	13,50,000

3	Other Non-Current Assets
	Discount on Issue of Debentures	1,50,000

Question - 43 : -
Journalise the following:
(i) A debenture issued at ₹ 95, repayable at ₹ 100;
(ii) A debenture issued at ₹ 95, repayable at ₹ 105; and
(iii) A debenture issued at ₹ 100, repayable at ₹ 105;
The face value of debenture in each of the above cases is ₹ 100.

Answer - 43 : -

S.No.	Particulars			L.F.	Debit Amount ₹	Credit Amount ₹
(i)	Bank A/c		Dr.		95
	Discount on Issue of Debenture A/c		Dr.		5
		To Debenture A/c				100
	(Debenture of ₹ 100 issued at ₹ 5 discount with the term repayable at ₹ 100)

(ii)	Bank A/c		Dr.		95
	Loss on Issue of Debenture A/c		Dr.		10
		To Debenture A/c				100
		To Premium on Redemption of Debentures				5
	(Debenture of ₹ 100 issued at a discount of ₹ 5 and with the term repayable at ₹ 105)

(iii)	Bank A/c		Dr.		100
	Loss on Issue of Debenture A/c		Dr.		5
		To Debenture A/c				100
		To Premium on Redemption of Debenture A/c				5
	(Debenture of ₹ 100 issued with the term repayable at ₹ 105)

Question - 44 : -
A.Ltd. Issued 50, 00,000, 8% Debenture of ₹ 100 at a discount of 6% on April 01, 2009 redeemable at premium of 4% by draw of lots as under:
20, 00,000 Debentures on March, 2011
10, 00,000 Debentures on March, 2013
20, 00,000 Debentures on March, 2014
Compute the amount of discount to be written-off in each year till debentures are paid. Also prepare discount/loss on issue of debenture account.

Answer - 44 : -

Loss on issue ofdebenture = 6% (discount on issue) + 4% (premium on redemption) = 10%

At the end of		Debenture Outstanding			Ratio		Loss to be written off every year
March 2010		50,00,00,000			5				=	1,38,88,889
March 2011		50,00,00,000			5				=	1,38,88,889
March 2012		30,00,00,000			3				=	83,33,333
March 2013		30,00,00,000			3				=	83,33,333
March 2014		20,00,00,000			2				=	55,55,556
					18					Rs 5,00,00,000

Loss on Issue of Debenture Account
Dr.												Cr.
Date	Particulars		J.F.	Amount ₹		Date		Particulars			J.F.	Amount ₹
2009 April 01	Debenture			5,00,00,000		2010 March 31		Profit and Loss				1,38,88,889
								Balance c/d				3,61,11,111
				5,00,00,000								5,00,00,000

2010 April 01	Balance b/d			3,61,11,111		2011 March 31		Profit and Loss				1,38,88,889
								Balance c/d				2,22,22,222
				3,61,11,111								3,61,11,111

2011 April 01	Balance b/d			2,22,22,222		2012 March 31		Profit and Loss				83,33,333
								Balance c/d				1,38,88,889
				2,22,22,222								2,22,22,222

2012 April 01	Balance b/d			1,38,88,889		2013 March 31		Profit and Loss				83,33,333
								Balance c/d				55,55,556
				1,38,88,889								1,38,88,889

2013 April 01	Balance b/d			55,55,556		2014 March 31		Profit and Loss				55,55,556
				55,55,556								55,55,556

Question - 45 : -
A company issues the following debentures:
(i) 10,000, 12% debentures of ₹ 100 each at par but redeemable at premium of 5% after 5 years;
(ii) 10,000, 12% debentures of ₹ 100 each at a discount of 10% but redeemable at par after 5 years;
(iii) 5,000, 12% debentures of ₹ 1,000 each at a premium of 5% but redeemable at par after 5 years;
(iv) 1,000, 12% debentures of ₹ 100 each issued to a supplier of machinery costing ₹ 95,000. The debentures are repayable after 5 years; and
(v) 300, 12% debentures of ₹ 100 each as a collateral security to a bank which has advanced a loan of ₹ 25,000 to the company for a period of 5 years.
Pass the journal entries to record the: (a) issue of debentures; and (b) repayment of debentures after the given period.

Answer - 45 : -

In the books of …………..

Journal

a)Issue of Debentures

S. No.	Particulars			L.F.	Debit Amount ₹	Credit Amount ₹
(i)	Bank A/c		Dr.		10,00,000
		To 12% Debenture Application A/c				10,00,000
	(Debenture Application money of 10,000 12% debentures @ 100 each received)

	12% Debenture Application A/c		Dr.		10,00,000
	Loss on Issue of Debenture A/c		Dr.		50,000
		To 12% Debenture A/c				10,00,000
		To Premium on Redemption of Debenture A/c				50,000
	(Debenture Application money of 10,000 12% debentures @ ₹ 100 each transferred to 12% Debentures Account and the Debentures are issued with term of repayable at 5% premium)

(ii)	Bank A/c		Dr.		9,00,000
		To Debenture Application and Allotment A/c				9,00,000
	(Debenture Application money received excluding discount on issue)

	12% Debenture Application & Allotment A/c		Dr.		9,00,000
	Discount on Issue of Debenture A/c		Dr.		1,00,000
		To Debentures A/c				10,00,000
	(Debenture Allotment made due)

(iii)	Bank A/c		Dr.		52,50,000
		To Debenture Application and Allotment A/c				52,50,000
	(Debenture Application money received)

	Debenture Application and Allotment A/c		Dr.		52,50,000
		To Debenture A/c				50,00,000
		To Security Premium A/c				2,50,000
	(Allotment of debenture at premium)

(iv)	Machinery A/c		Dr.		95,000
		To Vender A/c				95,000
	(Machinery purchased from supplier)

	Vender A/c		Dr.		95,000
	Discount on Issue of Debenture		Dr.		5,000
		To 12% Debenture A/c				1,00,000
	(Debenture issue at discount to vender of machinery)

(v)	12% Debenture Suspense A/c		Dr.		30,000
		To Debenture A/c				30,000
	(300, 12% Debentures of ₹ 100 each issued as collateral security to the bank against a loan of ₹ 25,000)

b)Repayment of Debentures

S.No.	Particulars			L.F.	Debit Amount ₹	Credit Amount ₹
(i)	12% Debentures A/c		Dr.		10,00,000
	Premium on Redemption of Debenture A/c		Dr.		50,000
		To Debenture Holders A/c				10,50,000
	(Amount due on redemption of debentures)

	Debenture Holders A/c		Dr.		10,50,000
		To Bank A/c				10,50,000
	(Payment made to Debenture Holders)

(ii)	12% Debenture A/c		Dr.		10,00,000
		To Debenture Holders A/c				10,00,000
	(Amount due on redemption of debentures)

	Debenture Holders A/c		Dr.		10,00,000
		To Bank A/c				10,00,000
	(Payment made to Debenture Holders)

(iii)	12% Debenture A/c		Dr.		50,00,000
		To Debenture Holders A/c				50,00,000
	(Amount due on redemption of debentures)

	Debenture Holders A/c		Dr.		50,00,000
		To Bank A/c				50,00,000
	(Payment made to Debenture Holders)

(iv)	12% Debenture A/c		Dr.		1,00,000
		To Vender A/c				1,00,000
	(Amount due to vender)

	Vender A/c		Dr.		1,00,000
		To Bank				1,00,000
	(Payment made to vender)

(v)	12% Debenture A/c		Dr.		30,000
		To Debenture Suspense A/c				30,000
	(Debenture and debenture Suspense Account closed)

Question - 46 : -
A company issued debentures of the face value of ₹ 5, 00,000 at a discount of 6% on April 01, 2012. These debentures are redeemable by annual drawings of ₹, 1, 00,000 made on March 31 each year. The directors decided to write off discount based on the debentures outstanding each year.

Calculate the amount of discount to be written-off each year. Give journal entries also.

Answer - 46 : -

Journal
Date	Particulars				L.F.	Debit Amount ₹	Credit Amount ₹
2012
Apr 1	Bank A/c		Dr.			4,70,000
		To Debenture Application and Allotment A/c					4,70,000
	(Debenture Application money received)

Apr 1	Debenture Application and Allotment A/c			Dr.		4,70,000
	Discount on Issue of Debenture A/c			Dr.		30,000
		To Debentures A/c					5,00,000
	(Debenture Application money transferred to Debenture Account)

Assuming that theamount of discount on issue of debentures is to be written off in 5 years.

Year		Debenture outstanding				Ratio		Amount written off
2012		5,00,000				5			=		10,000
2013		4,00,000				4			=		8,000
2014		3,00,000				3			=		6,000
2015		2,00,000				2			=		4,000
2016		1,00,000				1			=		2,000
						15					30,000

Date	Particulars						L.F.			Debit Amount ₹		Credit Amount ₹
2013 Mar 31	Profit and Loss A/c				Dr.					10,000
			To Discount on Issue of Debentures A/c									10,000
	(Discount on issue of debentures written off)

2014
Mar 31	Profit and Loss A/c				Dr.					8,000
			To Discount on Issue of Debentures A/c									8,000
	(Discount on issue of debentures written off)

2015
Mar 31	Profit and Loss A/c				Dr.					6,000
				To Discount on Issue of Debenture A/c								6,000
	(Discount on issue of debentures written off)

2016
Mar 31	Profit and Loss A/c				Dr.					4,000
			To Discount on issue of Debentures A/c									4,000
	(Discount on issue of debenture written off)

2017
Mar 31	Profit and Loss A/c				Dr.					2,000
			To Discount on Issue of Debenture A/c									2,000
	(Discount on issue of debenture written off)

Question - 47 : -
A company issued 10% Debentures of the face value of ₹, 1, 20,000 at a discount of 6% on April 01, 2011. The debentures are payable by annual drawings of ₹ 40,000 commencing from the end of third year.
How will you deal with discount on debentures?
Show the discount on debentures account in the company ledger for the period of duration of debentures. Assume accounts are closed on March 31 every year.

Answer - 47 : -

In the books of……………

Journal

Date

Particulars

L.F.

Debit

Amount

₹

Credit

Amount

₹

2011

Apr. 01

Bank A/c

Dr.

1,12,800

To Debenture Application and Allotment A/c

1,12,800

(Debentures Application Money received)

Apr. 01

Debentures Application and Allotment A/c

Dr.

1,12,800

Discount on issue of Debenture A/c

Dr.

7,200

To 10% Debenture A/c

1,20,000

(Debenture Application Money transferred to Debenture Account)

2012

Mar. 31

Profit and Loss A/c

Dr.

1,800

To Discount on Issue of Debentures A/c

1,800

(Discount on issue of debenture written off)

2013

Mar. 31

Profit and Loss A/c

Dr.

1,800

To Discount on Issue of Debenture A/c

1,800

(Discount on issue of debenture written off)

2014

Mar. 31

Profit and Loss A/c

Dr.

1,800

To Discount on Issue of Debenture A/c

1,800

(Discount on issue of debenture written off)

2015

Mar. 31

Profit and Loss A/c

Dr.

1,200

To Discount on Issue of Debentures A/c

1,200

(Discount on issue of debenture written off)

2016

Mar. 31

Profit and Loss A/c

Dr.

600

To Discount on Issue of Debentures A/c

600

(Discount on issue of debenture written off)

Discount on Issue of Debentures

Dr.

Cr.

Date

Particulars

J.F.

Amount

₹

Date

Particulars

J.F.

Amount

₹

2011

Apr. 01

10% Debentures

7,200

2012

Mar. 31

Profit and Loss

1,800

Balance c/d

5,400

7,200

2012

Apr. 01

Balance b/d

5,400

2013

Mar. 31

Profit and Loss

1,800

Balance c/d

3,600

5,400

2013

Apr. 01

Balance b/d

3,600

2014

Mar. 31

Profit and Loss

1,800

Balance c/d

1,800

3,600

2014

Apr. 01

Balance b/d

1,800

2015

Mar. 31

Profit and Loss

1,200

Balance c/d

600

1,800

2015

Apr. 01

Balance b/d

600

2016

Mar 31

Profit and Loss

600

i)Working Note:

Amount of Discount onIssue of Debenture:

Year	Debenture Outstanding	Ratio	Amount written off every year
2011-12	1,20,000	3		=	1,800
2012-13	1,20,000	3		=	1,800
2013-14	1,20,000	3		=	1,800
2014-15	80,000	2		=	1,200
2015-16	40,000	1		=	600
		12			₹ 7,200

Question - 48 : -
B. Ltd. issued debentures at 94% for ₹ 4, 00,000 on April 01, 2011 repayable by five equal drawings of ₹ 80,000 each. The company prepares its final accounts on March 31 every year.
Indicate the amount of discount to be written-off every accounting year assuming that the company decides to write-off the debentures discount during the life of debentures. (Amount to be written-off: 2012 ₹ 8,000; 2013 ₹ 6,400; 2014 ₹ 4,800; 2015 ₹ 2,000; 2016 ₹ 1,600).

Answer - 48 : -

Amount of discount to written off every year

In 2012 = ₹8,000

In 2013 = ₹6,400

In 2014 = ₹4,800

In 2015 = ₹3,200

In 2016 = ₹1,600

WorkingNotes:

Year	Debentures Outstanding	Ratio	Months	New Ratio (Ratio × Months)	Amounts written off
2012
Apr-Mar	3,20,000	5	12	60	24,000×60180=₹8,00024,000×60180=₹8,000
2013
Apr-Mar	2,40,000	4	12	48	24,000×48180=₹6,40024,000×48180=₹6,400

2014
Apr-Mar	1,60,000	3	12	36	24,000×36180=₹4,80024,000×36180=₹4,800
2015
Apr-Mar	80,000	2	12	24	24,000×24180=₹3,20024,000×24180=₹3,200
2016
Apr-Mar	80,000	1	12	12	24,000×12180=₹1,60024,000×12180=₹1,600
				180

Important Note: As per NCERT textbook, ₹2,000 discount has been written off in the year 2015 which is incorrect because then the total discount amounts to ₹22,800. Therefore, it should be ₹3,200.

Question - 49 : -
B. Ltd. issued 1,000, 12% debentures of ₹ 100 each on April 01, 2014 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 March 31, 2015 assuming that interest is paid half yearly on September 30 and March 31 and tax deducted at source is 10%.

Answer - 49 : -

Date	Particulars				L.F.	Debit Amount ₹	Credit Amount ₹
2014
Apr. 01	Bank A/c			Dr.		95,000
	Loss on Issue on Debentures A/c			Dr.		15,000
		To 12% Debenture A/c					1,00,000
		To Premium on Redemption of Debentures A/c					10,000
	(Debenture issued at discount and redeemable at Premium)

Sept. 30	Debenture Interest A/c			Dr.		6,000
		To Income Tax Payable A/c					600
		To Debenture Holders A/c					5,400
	(Amount of interest on 12% debentures ₹ 1,00,000 due for 6 months and 10% tax deducted at source)

Sept. 30	Debenture Holders A/c			Dr.		5,400
		To Bank A/c					5,400
	(Interest paid to Debenture Holders)

2015 Mar. 31	Debenture Interest A/c			Dr.		6,000
		To Income Tax Payable A/c					600
		To Debenture Holders A/c					5,400
	(Amount of interest on 12% Debentures ₹ 1,00,000 due for 6 months and 10% tax deducted at source)

Mar. 31	Debenture Holders A/c			Dr.			5,400
		To Bank A/c					5,400
	(Interest paid to Debenture Holders)

Mar. 31	Profit and Loss A/c		Dr.			12,000
		To Debenture Interest A/c					12,000
	(Interest on debentures transferred to Profit and Loss Account)

Question - 50 : - 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?

Answer - 50 : -

S.No.	Particulars			L.F.	Debit Amount ₹	Credit Amount ₹
(a)	Debenture A/c		Dr.
	Premium on Redemption of Debenture A/c		Dr.
		To Debenture Holders A/c
	(Amount due for redemption of Debentures)

	Debenture Holders A/c		Dr.
		To Bank A/c
	(Payment made to Debenture Holders)

(b)	Debenture A/c		Dr.
		To Debenture Holders A/c
	(Amount due for redemption of debentures that were issued at premium with term of redeemable at par)

	Debenture Holders A/c		Dr.
		To Bank A/c
	(Payment made to Debenture Holders)

(c)	Debenture A/c		Dr.
	Premium on Redemption of Debenture A/c		Dr.
		To Debentures Holders A/c
	(Amount due for redemption on debentures that were issued at discount with the term of redeemable at premium)

	Debenture Holders A/c		Dr.
		To Bank A/c
	(Payment made to Debenture Holders)

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Chapter 2 Issue and Redemption of Debentures Solutions

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