Class 12-commerce NCERT Solutions Accountancy Chapter 2 - Issue and Redemption of Debentures

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Issue and Redemption of Debentures Exercise 136

Solution SA 1

A debenture is a debt instrument used by big companies to borrow money at a fixed rate of interest. The debenture is issued in the form of a certificate with the stamp of the company containing the date of repayment of the principal amount after a fixed period of time and the payment of interest at regular intervals, generally half yearly or annually. Debentures are issued by a company for acquiring medium to long-term borrowings.

Solution SA 2

Bearer debentures are debentures which are transferable merely by delivery. The company does not maintain a record of such debenture holders and therefore interest is paid to the person who presents interest coupons which are attached to these debentures in the specified bank.

Solution SA 3

Collateral security implies additional or secondary security, i.e. in addition to primary security. When a company takes a loan from a financial institution and the security offered is not sufficient, the company may issue debentures for additional security, i.e. collateral security. The lender who receives debentures as collateral security is not entitled to interest on such debentures. If the company makes any default for repayment of the loan amount or interest on the loan, then the lender has the full right to recover his/her dues by selling off the primary security. However, if the primary security is not adequate to repay the amount of the loan, then the debentures issued as collateral may be utilised to repay the remaining amount.

Solution SA 4

When a company purchases a running business (i.e. assets and liabilities) and issues debentures to the vendor instead of paying cash, it is known as issue of debenture for consideration other than cash.

Accounting Treatment for Issue of Debentures for Consideration other than Cash

1. For Purchase Assets:
Assets A/c	Dr.
------To Vendor A/c
(Being assets purchase)

2. For Issue of Debentures:
a. If debentures are issued at par
Vendor A/c	Dr.
------To Debentures A/c
(Being debenture issued to vendor at par)

b. If debentures are issued at premium
Vendor A/c	Dr.
------To Debentures A/c
------To Securities Premium A/c
(Being debenture issued to vendor at premium)

c. If debentures are issued at discount
Vendor A/c	Dr.
Discount on Issue of Debentures A/c	Dr.
------To Debentures A/c
(Being debenture issued to vendor at discount)

Solution SA 5

When the debentures are issued at a price less than its par value (or the face value) and redeemed at a price higher than its par value, then it is termed issue of debenture at discount and redeemable at premium. The difference between the issue price and the redemption price is considered loss on issue of debenture.

Example:

A 10% debenture of Rs.10,000 is issued at 5% discount and is redeemed at 10% premium.

Bank A/c	Dr.	9,500
Discount on Issue of Debenture A/c	Dr.	500
Loss on Issue of Debenture A/c	Dr.	1,000
------To 10% Debenture A/c			10,000
------To Debenture Redemption Premium A/c			1,000
(Being debenture issued)

Total loss

= Payment made at redemption - Amount received on issue of debenture

=11,000 - 9,500 = Rs.1,500

Solution SA 6

Capital reserve is a reserve which is created out of capital profits, i.e. profits earned from other than the normal course of business activities, i.e. activities other than purchase or sale of goods and services. Capital reserve can be used to meet future capital losses, if any, and to issue bonus shares. It cannot be distributed as dividend among shareholders. Capital reserve is generated out of the following activities:

Premium on issue of shares
Premium on issue of debentures
Profit on redemption of debentures
Profit on sale of fixed assets
Profit on sale of investment
Profit on reissue of forfeited shares
Profit before incorporation

Solution SA 7

Debentures which are not repayable by a company during its lifetime are known as irredeemable debentures. These are repayable only when the company is winding up. It is also known as perpetual debentures, i.e. debentures having indefinite life. Nowadays, in India, no company can issue irredeemable debentures.

Issue and Redemption of Debentures Exercise 137

Solution NUM 1

Books of G. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Bank A/c	Dr.		11,25,00,000
	------To 6% Debenture Application A/c				11,25,00,000
	(Being application money @ Rs.15 each received for 75,00,000 debentures)

	6% Debenture Application A/c	Dr.		11,25,00,000
	------To 6% Debenture A/c				11,25,00,000
	(Being application money of 75,00,000 debentures transferred to 6% debentures Account)

	6% Debenture Allotment A/c	Dr.		26,25,00,000
	------To 6% Debenture A/c				26,25,00,000
	(Being allotment money @ Rs.35 each due for 75,00,000 debentures)

	Bank A/c	Dr.		26,25,00,000
	------To 6% Debenture Allotment A/c				26,25,00,000
	(Being allotment money received @ Rs.35 each on 75,00,000 debentures)

Solution NUM 2

Books of Y. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Bank A/c	Dr.		50,000
	------To 6% Debenture Application A/c				50,000
	(Being application money @ Rs.25 each received for 2,000 6% debentures)

	6% Debenture Application A/c	Dr.		50,000
	------To 6% Debenture A/c				50,000
	(Being application money on 2,000 debentures transferred to 6% Debentures Account)

	6% Debenture Allotment A/c	Dr.		1,00,000
	------To 6% Debenture A/c				1,00,000
	(Being debenture allotment money @ Rs.50 each due for 2,000 6% Debentures)

	Bank A/c	Dr.		1,00,000
	------To 6% Debenture Allotment A/c				1,00,000
	(Being allotment money for 2,000 6% Debentures received)

	6% Debenture First and Final Call A/c	Dr.		50,000
	------To 6% Debenture A/c				50,000
	(Being debenture first and final call @ Rs.25 each due on 2,000 6% Debentures)

	Bank A/c	Dr.		50,000
	------To 6% Debenture First and Final Call A/c				50,000
	(Being first and final call for 2,000 6% Debentures received)

Solution NUM 3

Books of A. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Bank A/c	Dr.		1,00,000
	------To 10% Debenture Application A/c				1,00,000
	(Being application money received for 10,000 10% debentures application @ Rs.10each)

	10% Debenture Application A/c	Dr.		1,00,000
	------To 10% Debenture A/c				1,00,000
	(Being application money @ Rs.10 each transferred to 10% Debentures Account)

	10% Debenture Allotment A/c	Dr.		2,50,000
	------To 10% Debentures A/c				2,00,000
	------To Securities Premium A/c				50,000
	(Being allotment due @ Rs.25 each including premium Rs.5 on 10,000, 10% Debentures)

	Bank A/c	Dr.		2,50,000
	------To 10% Debenture Allotment A/c				2,50,000
	(Being allotment money received on allotment @Rs.25 each for 10,000 10% Debentures)

	10% Debenture First and Final Call A/c	Dr.		7,00,000
	------To 10% Debenture A/c				7,00,000
	(Being first and final call @ Rs.70 each due on 10,000 10% Debentures due)

	Bank A/c	Dr.		7,00,000
	------To 10% Debenture First and Final Call A/c				7,00,000
	(Being debenture first and final call received @Rs.70 each for 10,000 10% Debentures)

Solution SA 8

Debentures which can be converted to equity shares after a particular period of time are known as convertible debentures. These are of the following two types:

Fully Convertible Debentures: When the entire amount of a debenture is convertible into equity shares, the debentures are called fully convertible debentures. Debenture redemption reserve is not maintained.
Partly Convertible Debentures: When only a part of the amount of a debenture is convertible into equity share, the debentures are called partly convertible debentures. Debenture redemption reserve is maintained only for the non-convertible part of the debenture.

Solution SA 9

Debentures which are secured against any asset/s of a company are called mortgaged debentures. It is also known as secured debentures. If the debentures are secured against a particular asset, then it is called fixed charge. If the debentures are secured against all the assets of a company, then it is called floating charge. If the company fails to repay the principal amount of debenture or is not able to meet its interest obligations on the due date, then the debenture holders have the right to realise their amount due to the company by selling the mortgaged asset/s.

Solution SA 10

When debentures are issued at a price less than its par value or face value, it is said that debentures are issued at discount. The difference between the issue price and the face value of the debenture is considered as capital loss. According to the Revised Schedule VI of the Companies Act, discount on issue of debentures is shown in the Notes to Accounts.

Under Other Current Assets: With the amount which is to be written off within 12 months from the date of balance sheet.
Under Other Non-Current Assets: With the amount which is to be written off after 12 months from the date of balance sheet.

Solution SA 11

When the debentures are repaid or redeemed at a price more than its face value or the par value, it is said that the debentures are redeemed at premium. The difference between the redeemed price and the par value is considered capital loss and this loss is written off till the redemption of the debentures. The premium on redemption of debenture is shown in the Notes to Accounts under the sub-head of 'Other Long-term Liabilities'. The final balance is shown under the main head of 'Non-Current Liabilities' on the Equity and Liabilities side of the Company's Balance Sheet.

Accounting Treatment for Premium on Redemption on Debentures

1. At the time of the Issue of Debentures
Bank/Debenture Allotment A/c	Dr.
Loss on Issue of Debenture A/c	Dr.
------To __% Debenture A/c
------To Premium on Redemption A/c
(Being debenture issued with the term of redemption at premium)

2. At the time of Redemption of Debentures
__% Debenture A/c	Dr.
Premium on Redemption A/c	Dr.
------To Debenture Holder A/c
(Being amount of debentures due to debenture holders)

Solution SA 12

Basis of Comparisons	Debentures	Shares
1. Meaning	Debenture holders are creditors of a company as debentures are part of a loan.	Shareholders are owners of a company as shares form part of capital.
2. Voting Rights	Debenture holders do not have voting rights.	Shareholders have voting rights.

Solution SA 14

Redemption of debenture refers to repayment of debenture amount by the company to debenture holders. It implies the discharge of liabilities by repaying the amount due to the debenture holders according to the terms and conditions determined at the time of issue of debentures. Debentures may be redeemable at par, premium or discount; however, nowadays, they are generally redeemable at par or premium. Redemption can be out of profits or proceeds from the fresh issue of debentures or shares. Redemption of debentures may be done by the following methods:

In lump sum at the time of maturity
In instalments by draw of lots at the end of each year
By purchase in the open market whenever the price is below its face value
By converting debentures into shares or new debentures

Solution SA 15

Yes, a company can purchase its own debentures from the open market provided it is authorised by its Article of Association. According to the Companies Act, if a company is authorised by its Article of Association, only then it can purchase its own debentures from the open market. The main objectives of such purchase are as follows:

For immediate cancellation of debenture if the interest rate of its debenture is higher than the market rate of interest.
A company may also purchase its own debentures with the aim of investment and sell them at a higher price in the future and thereby earn profit.

Solution SA 16

When a debenture holder converts his/her debentures into shares or new debentures after the expiry of a specific period of time, it is known as redemption of debentures by conversion. There is no need to maintain the Debenture Redemption Reserve (DRR) as the company does not need to pay any funds for redemption. The new shares or debentures may be issued at par, premium or discount.

Solution SA 17

When the debentures are repaid or redeemed at a price higher than its face value or the par value, it is said that the debentures are redeemed at premium. The difference between the redeemed price and the par value is treated as a capital loss and this loss is written off till the redemption of the debentures. The Premium on Redemption of Debenture is shown in the Notes to Accounts under the sub-head of 'Other Long-term Liabilities'. The final balance is shown under the main head of 'Non-Current Liabilities' on the Equity and Liabilities side of the Company's Balance Sheet.

Accounting Treatment for Premium on Redemption on Debentures

1. At the time of the Issue of Debenture
Bank/Debenture Allotment A/c	Dr.
Loss on Issue of Debenture A/c	Dr.
------To __% Debenture A/c
------To Premium on Redemption A/c
(Being debenture issued with the term of redemption at premium)

2. At the time of Redemption of Debentures:
__% Debenture A/c	Dr.
Premium on Redemption A/c	Dr.
------To Debenture Holder A/c
(Being amount of debentures due to debenture holders)

Issue and Redemption of Debentures Exercise 138

Solution NUM 4

Books of A. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Bank A/c	Dr.		41,40,00,000
	Discount on Issue of Debenture A/c	Dr.		3,60,00,000
	------To 9% Debenture A/c				45,00,00,000
	(Being money received for 90,00,000 9% debentures @ Rs.50 each at discount of 8%)

Alternatively:

Books of A. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Bank A/c	Dr.		41,40,00,000
	------To 9% Debenture Application A/c				41,40,00,000
	(Being debenture application money received @ Rs.46each on 90,00,000, 9%debentures)

	9% Debenture Application A/c	Dr.		41,40,00,000
	Discount on Issue of Debenture A/c	Dr.		3,60,00,000
	------To 9% Debenture A/c				4,50,00,000
	(Being 9% Debentures application money transferred to 9% Debentures Account)

Solution NUM 5

Books of A. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Bank A/c	Dr.		96,000
	------To 9% Debenture Application A/c				96,000
	(Being 9% debentures application money received on 4,800 debentures @ Rs.20each)

	9% Debenture Application A/c	Dr.		96,000
	------To 9% Debenture A/c				80,000
	------To 9% Debenture Allotment A/c				8,000
	------To Bank A/c				8,000
	(Being 9% Debentures application money of 4000 debenture transferred to Debentures Account, 400 debentures rejected returned and remaining amount adjusted on allotment)

	9% Debenture Allotment A/c	Dr.		80,000
	------To 9% Debentures A/c				80,000
	(Being 9% Debentures allotment due on 4,000 Debentures @ Rs.20 each)

	Bank A/c	Dr.		72,000
	------To 9% Debenture Allotment A/c				72,000
	(Being 9% Debentures allotment money received)

	9% Debenture First Call A/c	Dr.		1,20,000
	------To 9% Debenture A/c				1,20,000
	(Being 9% Debentures first call due on 4000 debentures @ Rs.30 each)

	Bank A/c	Dr.		1,20,000
	------To 9% Debenture First Call A/c				1,20,000
	(Being 9% Debentures debenture first call received for 4,000 debentures @Rs.30 each )

	9% Debenture Final Call A/c	Dr.		1,20,000
	------To 9% Debenture A/c				1,20,000
	(Being 9% Debentures final call due on 4000 debentures @ Rs.30 each)

	Bank A/c	Dr.		1,20,000
	------To 9% Debenture Final Call A/c				1,20,000
	(Being 9% Debentures debenture final call received for 4,000 debentures @Rs.30 each )

Solution NUM 6

Books of T. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Bank A/c	Dr.		6,00,000
	------To 8% Debenture Application A/c				6,00,000
	(Being 8% debentures application money received for 3,00,000 debentures @ Rs.200 each)

	8% Debenture Application A/c	Dr.		6,00,00,000
	------To 8% Debenture A/c				3,00,00,000
	------To 8% Debenture Allotment A/c				2,00,00,000
	------To Securities Premium A/c				1,00,00,000
	(Being 8% Debentures application money of 2,00,000 debentures @Rs.200 each including Rs.50 premium transferred to Debentures Account and rest of the amount adjusted on allotment)

	8% Debenture Allotment A/c	Dr.		7,00,00,000
	------To 8% Debentures A/c				7,00,00,000
	(Being 8% Debentures allotment on 2,00,000 Debentures @ Rs.350 due)

	Bank A/c	Dr.		5,00,00,000
	------To 8% Debenture Allotment A/c				5,00,00,000
	(Being 8% Debentures allotment money received)

Solution NUM 7

Books of X. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Bank A/c	Dr.		2,70,000
	------To 14% Debenture Application A/c				2,70,000
	(Being 14% debentures application money for 13,500 debentures @ Rs.20 each received)

	14% Debenture Application A/c	Dr.		2,70,000
	------To 14% Debenture A/c				2,00,000
	------To 14% Debenture Allotment A/c				60,000
	------To Bank A/c				10,000
	(Being 14% Debentures application money of 10,000 @Rs.20 each transferred to 14% Debentures Account and 500 Debentures were rejected and returned and rest of the amount adjust on allotment)

	14% Debenture Allotment A/c	Dr.		6,00,000
	------To 14% Debentures A/c				6,00,000
	(Being 14% Debentures allotment money due on 10,000 Debentures @ Rs.60 each)

	Bank A/c	Dr.		5,40,000
	------To 14% Debenture Allotment A/c				5,40,000
	(Being 14% Debentures allotment money received)

	14% Debenture First and Final Call A/c	Dr.		2,00,000
	------To 14% Debenture A/c				2,00,000
	(Being debentures first and final call money due on 10,000 debentures @ Rs.20 each)

	Bank A/c	Dr.		2,00,000
	------To 14% Debenture First and Final Call A/c				2,00,000
	(Being 14% debenture first and final call received on 10,000 debentures Rs.20 each)

Solution NUM 8

Books of R. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Bank A/c	Dr.		37,20,00,000
	------To 10% Debenture Application and Allotment A/c				37,20,00,000
	(Being application and allotment money received for 20,00,000 10%debentures @ Rs.200each)

	10% Debenture Application and Allotment A/c	Dr.		37,20,00,000
	Loss on Issued of Debenture A/c	Dr.		3,20,00,000
	Discount on Issue of Debenture A/c	Dr.		2,80,00,000
	------To 10% Debenture A/c				40,00,00,000
	------To Premium on Redemption of Debentures A/c				3,20,00,000
	(Being allotment of 20,00,000 debenture @ Rs.200 each at 7% discount with the term of 8% premium on redemption)

Solution NUM 9

Books of M. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Sundry Assets A/c	Dr.		9,00,00,000
	------To Sundry Liabilities A/c				70,00,000
	------To S. Ltd. A/c				8,30,00,000
	(Being assets and liabilities of S. Ltd. Taken over)

	S. Ltd. A/c	Dr.		8,30,00,000
	------To 8% Debenture A/c				8,30,00,000
	(Being 8,30,000 8% debentures @ Rs.100 each issued to S. Ltd. in consideration of assets and liabilities )

Solution NUM 10

Case a.

Books of B. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Sundry Assets A/c	Dr.		4,00,000
	Goodwill A/c	Dr.		30,000
	------To Sundry Liabilities A/c				50,000
	------To Mohan Bros. A/c				3,80,000
	(Being assets and liabilities of Mohan Bros. taken over)

	Mohan Bros. A/c	Dr.		3,80,000
	------To Debenture A/c				3,80,000
	(Being 3,800 debentures of 100 each issued to Mohan Bros. in consideration of assets and liabilities )

Case b.

Books of B. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Sundry Assets A/c	Dr.		4,00,000
	Goodwill A/c	Dr.		30,000
	------To Sundry Liabilities A/c				50,000
	------To Mohan Bros. A/c				3,80,000
	(Being assets and liabilities of Mohan Bros. taken over)

	Mohan Bros. A/c	Dr.		3,80,000
	Discount on Issue of Debenture A/c	Dr.		42,222
	------To Debenture A/c				4,22,200
	------To Bank A/c				22
	(Being issued 4,222 debentures of Rs.100 each at 10% discount and balance paid in cash)

Case c.

Books of B. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Sundry Assets A/c	Dr.		4,00,000
	Goodwill A/c	Dr.		30,000
	------To Sundry Liabilities A/c				50,000
	------To Mohan Bros. A/c				3,80,000
	(Being assets and liabilities of Mohan Bros. taken over)

	Mohan Bros. A/c	Dr.		3,80,000
	------To Debenture A/c				3,45,400
	------To Securities Premium A/c				34,540
	------To Bank A/c				60
	(Being issued of 3,454 debentures at 10% Premium and balance paid in cash)

Issue and Redemption of Debentures Exercise 139

Solution NUM 11

Books of X. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Machinery A/c	Dr.		4,40,000
	------To Y A/c				4,40,000
	(Being machinery purchased from Y)

	Y A/c	Dr.		4,40,000
	------To 12% Debenture A/c				4,00,000
	------To Securities Premium A/c				40,000
	(Being allotted 4,000 debenture in consideration of machinery purchased)

Solution NUM 12

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

X. Ltd. Balance Sheet
Particulars	Note No.	Rs.
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

NOTES TO ACCOUNTS

Note No.	Particulars	Rs.
1	Reserves and Surplus
	Securities Premium	1,50,000

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

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

ii.

Books of X. Ltd. Journal Entries
Date	Particulars		L.F.	Debit Rs.	Credit Rs.
	Bank A/c	Dr.		14,25,000
	Discount on Issue of Debentures A/c	Dr.		75,000
	------To 10% Debentures A/c				15,00,000
	(Being issued 15,000 10% debentures of Rs.100 each at 5% discount)

X. Ltd. Balance Sheet
Particulars	Note No.	Rs.
I. Equity and Liabilities
1. Shareholders' Funds
2. Non-Current Liabilities
----------------Long - Term Borrowings	1	15,00,000
3. Current Liabilities
Total		15,00,000
II. Assets
1. Non-Current Assets
----------------Other Non-Current Assets	2	75,000
2. Current Assets
----------------Cash and Cash Equivalents	3	14,25,000
Total		15,00,000

NOTES TO ACCOUNTS

Note No.	Particulars	Rs.
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 debentures as a collateral security

X. Ltd. Balance Sheet
Particulars	Note No.	Rs.
I. Equity and Liabilities
Shareholders' Funds
Non - Current Liabilities
-------------------Long - Term Borrowings	1	12,00,000
3. Current Liabilities
Total		12,00,000
II. Assets
1. Non - Current Assets
2. Current Assets
----------------Cash and Cash Equivalents	2	12,00,000
Total		12,00,000

NOTES TO ACCOUNTS

Note No.	Particulars	Rs.
1	Long - Term Borrowings
	Bank Loan (Secured against issue Debentures of Rs.12,00,000)	12,00,000