LEARNING OBJECTIVES
I)
Understand the meaning and features of debentures.
II)
Differentiate between shares and debentures.
III)
Understand different classes of debentures
IV)
Journal entries regarding issue of debentures for cash
and for consideration other than cash.
V)
Accounting treatment of debentures issued as collateral
security
VI)
Accounting treatment of issue and redemption of
debentures at par, discount and at premium.
VII)
Understand the methods of redemption of debentures.
VIII)
Accounting treatment of redemption of debentures out of
capital and profit.
IX)
Understand the redemption of debentures by purchase in
the open market
X)
Understand redemption of debentures by conversion into
shares and new debentures.
1)
What do you meant by Debentures?
Debentures is an instrument of debt owned by a company as an acknowledgement of
debt, such measurements are issued under the seal of company and duly signed by
authorized signatory.
2)
Write any four types of debentures
i) Redeemable debentures
ii) Perpetual Debentures
iii) Convertible debentures
i)
Secured debentures
3) What
is debenture Trust Deed?
Debenture trust deed is a document
created by the company whereby trustee is appointed to protect the interest of debenture holders
before they are offered for public subscription.
4) What is meant by convertible debentures?
Convertible debentures are those, the holders of which
are given an option to exchanging the
amount of their debentures with equity shares or other securities after a
specified period.
5)
Why is premium on the issue of debentures considered as a capital
profit?
Premium on the issue of debentures is considered a
capital profit because it is not an income arising from the normal course of
business operations.
6)
Explain deep discount Bond
When debentures are issued without interest rate and issue price is thereby
discounted, the issue of debenture is said
to have been made as deep discount bond.
7)
Differentiate between shareholders and debenture holder,
|
Point of Difference
|
Share holder
|
Debenture holder
|
|
1)
Status
|
There are the owners of the company
|
They are the creditors of the company
|
|
2)
Return
|
They are paid Dividend
|
They are paid interest
|
|
3)
Security
|
Shares are not secured
|
Debentures are ordinarily secured
|
8) What is the nature of interest on
debentures?
Interest on debentures is a charge
against profits.
9) State
in brief, the SEBI Guidelines regarding Debenture Redemption Reserve.
Ans. At per SEBI Guidelines, an amount equal
to 50% of the debenture issue must be transferred to DRR before the redemption
begins. In other words, before redemption, at least an amount equal to 50% of
the debenture issue must stand to the credit of DRR
10) Name the head under which discount on
issue of debentures appears in the Balance Sheet of "C" Company.
Ans. Discount
on issue of debentures will appear under the heading Miscellaneous Expenditure.
11) What are the exceptions for creating
debenture Redemption Reserve?
(i)
An infrastructure company, (ii) Debentures are issued
for less than 18 months maturity period (iii) if debentures issued by private
placement.
12) What do you mean by debentures issued as
collateral security?
The issue of debentures as a
collateral security means the issue of debentures as an additional security
against the loan in addition to principal security that may be offered.
13) Show the accounting treatment of debentures
issued as collateral security.
Debentures issued as collateral
security can be shown in the books in two different ways
(i)
The disclosure of issue of debenture as collateral
security in the balance sheet is shown as
below
|
LIABILITIES
|
Amount(Rs.)
|
Assets
|
Amount(Rs.)
|
|
Loan
(
security by x% debentures of Rs…… each as collateral security)
|
|
|
|
(ii)
By way of Journal entry
|
Date
|
Particulars
|
Debit
Amt
|
Credit
Amt
|
|
|
Bank
a/c
Dr.
To Bank Loan a/c
(Being
loan taken from Bank)
|
|
|
|
|
Debentures
Suspense a/c Dr.
To Debenture a/c
(
Being Debentures issued as collateral
security)
|
|
|
Debenture suspense account will be written off
after the loan is paid off.
14) A Ltd issued 5,000 13%
debentures of Rs.100 each at par and raised a loan of
Rs.80, 000 from Bank.
Collaterally secured by Rs. 100,000 13% debentures. How will You show the
debenture in the Balance Sheet of the Company assuming that the company has recorded the issue of Debentures as
collateral security in the books.
Balance Sheet|
Liabilities
|
Assets
|
||
|
Secured Loans
13% Debenture
5,000 deb of Rs. 100 each
at par
Bank loan (secured by the issue of
1000 13% deb of Rs.100 each)
|
Amount
500000
80000
|
Current assets
Bank
a/c
|
Amount
500000
|
Pass journal entries and also show how the debentures and bank loan will appear in the balance sheet.
|
|
Bank
a/c
Dr.
To Bank loan a/c
(Being
loan taken from bank)
|
3,00,000
|
3,00,000
|
|
|
Debenture
suspense a/c Dr.
To 12 % Debenture a/c
(Being
Debentures issued as collateral security )
|
3,60,000
|
3,60,000
|
16) XYZ Co. Ltd., issued 10000 10% debentures of Rs.100 each at a premium of Rs. 5 payable as follows
On application Rs.40, on Allotment Rs.65 (including premium)
All the debentures were subscribed and money was received, pass necessary journal entries to record the issue of debentures
Journal Entries
|
1) Bank a/c Dr.
To 10% Debenture application
(Being application money received)
|
4,00,000
|
4,00,000
|
|
2) 10% Deb Application a/c Dr.
To 10% Debenture a/c
(Being application money transferred to debenture a/c)
|
4,00,000
|
4,00,000
|
|
3) 10% Deb allotment
a/c Dr.
To Debenture a/c
To S Premium a/c
(Being debenture allotment due)
|
6,50,000
|
6,00,000
50,000
|
|
4) Bank a/c
Dr.
To 10% Deb allotment a/c
(Being allotment money received)
|
6,50,000
|
6,50,000
|
17) Pass Journal Entries to record the Issue of Debentures
1) 5000 15% debenture of Rs.100 each issued at Discount of 5% and redeemable at premium at 5% after 5 years.
2) 10000 15% debenture of Rs.100 each issued at a premium of 10% and redeemable at par after 6 years.
Ans: Journal Entries
|
1) Bank a/c
Dr.
loss on
issue of Deb a/c Dr.
To15% debenture a/c
To premium on redemption of debenture (Being issue of debenture at discount and
redeemable at 5% premium)
|
4,75,000
50,000
|
5,00,000
25,000
|
|
2) Bank a/c
Dr.
To Debenture a/c
To Premium a/c
To
premium a/c (Being issue of debenture at premium and redeemable at par)
|
1100000
|
1000000
100000
|
18) Journalise the following transactions:
(a)
10 debentures issued at Rs. 100 repayable at Rs. 100.
(b) 10
debentures issued at Rs. 95, repayable at Rs. 100
(c)
10 debentures issued at Rs. 105 , repayable at Rs. 100
(d) 10
debentures issued at Rs. 100, payable at Rs. 105.
(e)
10 debentures issued at Rs. 95, Repayable at Rs. 105.
|
Date
|
Particulars
|
Debit
Amt
|
Credit
Amt
|
|
(a)
|
Bank a/c Dr.
To debenture Application a/c
Being
Debenture application money received)
|
1,000
|
1,000
|
|
|
Debenture
Application a/c Dr.
To Debenture a/c
(Being
10 debentures of Rs. 100 each issued at par redeemable at par)
|
1,000
|
1,000
|
|
(b)
|
Bank a/c Dr.
To debenture Application a/c
Being
Debenture application money received)
|
950
|
950
|
|
|
Debenture
Application a/c Dr.
Discount
on issue of Debentures Dr.
To Debenture a/c
(Being
10 debentures of Rs. 100 each issued at a discount of 5% and repayable at par.)
|
950
50
|
1,000
|
|
(c)
|
Bank a/c Dr.
To debenture Application a/c
Being
Debenture application money received)
|
1,050
|
1050
|
|
|
Debenture
Application a/c Dr.
To Debenture a/c
To Securities premium a/c
(Being
10 debentures of Rs. 100 each issued at premium of 5% and redeemable at par)
|
1,050
|
1,000
50
|
|
(d)
|
Bank a/c Dr.
To debenture Application a/c
Being
Debenture application money received)
|
1,000
|
1,000
|
|
|
Debenture Application a/c Dr.
Loss
on issue of debentures a/c Dr.
To Debentures a/c
To Premium on redemption of debentures
a/c
(Being
10 debentures of Rs. 100 each issued at par but repayable at a premium of 5%)
|
1,000
50
|
1,000
50
|
|
(e
)
|
Bank a/c Dr.
To debenture Application a/c
Being
Debenture application money received)
|
950
|
950
|
|
|
Debenture Application a/c Dr.
Loss
on issue of debentures a/c Dr.
To Debentures a/c
To Premium on redemption of debentures
a/c
(Being
10 debentures of Rs. 100 each issued at discount of 5% but repayable at a
premium of 5%)
|
950
100
|
1,000
50
|
Ans: Journal entries
|
1) Building a/c
Dr.
To vendors a/c
(Being
purchasing of a building on credit)
|
110000
|
110000
|
|
2) Vendors a/c
Dr.
To 12% debentures a/c
To securities premium a/c
(Being issue of 12% debentures at 10%
premium)
|
110000
|
100000
10000
|
20) Raghav Limited purchased a running
business from Krishna traders for a sum of Rs. 15,00,000 payable Rs. 3,00,000
by cheque and for the balance issued 9% debentures of Rs. 100 each at par.
The assets and liabilities consisted of the following:
Plant and Machinery 4, 00,000
Building 6,
00,000
Stock 5, 00,000
Debtors 3,
00,000
Creditors 2,
00,000
Record necessary journal entries
in the books of Raghav Limited.|
Date
|
Particulars
|
L.F
|
Dr.
(Rs.)
|
Cr.(Rs.)
|
|
|
Plant
and Machinery a/c Dr.
Building a/c Dr.
Stock
a/c Dr.
Debtors
a/c Dr.
To Creditor’s a/c
To Krishna Traders
To Capital Reserve ( Bal. Fig)
(
Being assets and liabilities taken over from the vendor company).
|
|
4,00,000
6,00,000
5,00,000
3,00,000
|
2,00,000
15,00,000
1,00,000
|
|
|
Krishna
Traders a/c Dr.
To Bank
To
9% Debentures a/c
(
Being issues of 12,000 debentures of Rs.. 100 each at par and rest paid by a
cheque)
|
|
15,00,000
|
3,00,000
12,00,000
|
21) What do you mean by Redemption of
debentures by purchase in the open market?
A company, if authorised by its
Articles of Association, can redeem its own debentures by purchasing them in
the open market. This is called redemption of debentures by purchase in the
open market. Debentures may be purchased at par or at a premium. But this
procedure is usually adopted by the company only when its debentures are quoted
at a discount in the open market.
22)
LCM Ltd., purchased for cancellation its own 10, 00,000, 9% debenture of Rs.500
each of Rs.480 each. Record necessary Journal entries.
Journal Entries
|
1) Own debentures a/c Dr.
To Bank a/c
(Being purchased its own debenture at
Rs.480/- each)
|
480000000
|
480000000
|
|
2) 9% Debentures a/c Dr.
To Own debentures a/c
To Profit on cancellation of debentures.
|
500000000
|
480000000
2000000
|
23) A company authorized its Rs.1, 10,000 debenture holders to convert them into preference shares. Pass the necessary journal entry if
a) Debentures were converted into shares of Rs.100 at par
b) Debentures were converted into shares of Rs.100 at a premium of 10%
Ans: a) Debentures A/c Dr. 1, 10,000
T0 preference Share capital a/c 1, 10,000
b) Debentures a/c Dr. 1, 10,000
To preference share capital a/c 1, 00,000
To securities premium a/c 10,000
(Being debentures converted into preference
Shares issued at 10% premium)
24) White
Ltd., issued 8,00,000 8% debentures of Rs.100 each redeemable at a premium of
10%. According to the terms of redemption, the company redeemed 25% of the
above debentures by converting them into shares of 50 each issued at a
premium of 60% pass Journal entry
regarding redemption of debentures.
1)
8% debentures a/c
Dr.
2, 00, 00,000
Premium on redemption of debentures a/c
Dr.
20,00,000
To Debenture holders
a/c
2, 20, 00,000
(Being 25% of debentures redeemed at a
premium)
2)
Debenture holders A/c
Dr. 2, 20, 00,000
To share
capital
1, 37, 50,000
To security premium
a/c
82, 50,000
(Being issue of 2, 75,000 shares of Rs.50 each at a
Premium of 60% to the debenture holders
on conversion of 2,00,000 debentures)
25). Journalise the following
transactions in the books of Raja Ltd.,
1)
200 12% debentures of Rs.100 each issued it a discount of 10% were converted
into 10% preference shares of Rs.100 each issued at a premium of 25%. The
debentures were converted at the option of the debentures-holders before the
date of redemption.
2)
Issued 1000 12% debentures of Rs.100 each at a discount of 10% redeemable at a
premium of 5%.
Journal
EntriesAns
|
1) 12% Debenture a/c Dr.
To discount on issue of debenture a/c
To debenture holders a/c
(Being the amount due to debenture holders
on conversion of 200, 12% debenture)
|
20,000
|
2,000
18,000
|
|
2) Debenture holders a/c Dr.
To 10% preference share Capital
To securities premium
(Being issue of 144, 12% preference
shares
Of Rs.100 each.)
|
18,000
|
14,400
3,600
|
|
3) Bank a/c
Dr.
Loss on Issue of Deb a/c Dr.
To 12% Debenture a/c
To premium on redemption of deb a/c
(Being
issue of 1000, 12% debenture of Rs.100 each at a discount of 10% and
redeemable at premiums of 5%).
|
90,000
15,000
|
100,000
5,000
|
26) On January 1st, 2006 S Ltd issued
1,000 10% debentures of Rs. 500 each at par redeemable after 7 years. However
the company gave an option to debenture holder to get debentures converted into
equity shares of Rs. 100 each at a premium of Rs. 25 per share any time after
the expiry of one year.
Arvind the holder of 200
debentures informed on Jan, 2006 that he wanted to excise the option of
conversion of debentures into equity shares.
Pass necessary Journal
entries to record the issue of debentures on Jan, 2004 and conversion of debentures
on Jan, 2006.
Journal of S Limited
|
Date
|
Particulars
|
L.F
|
Dr.(Rs.)
|
Cr.(Rs.)
|
|
|
Bank a/c Dr.
To 10% Debenture a/c ( Being Debenture money received) |
|
5,00,000
|
5,00,000
|
|
|
10% Debenture a/c Dr.
To Debenture holder a/c( Being Amount due to debenture holders on redemption.) |
|
1,00,000
|
1,00,000
|
|
|
Debenture holders a/c Dr.
To Equity share capital a/c
To Securities Premium a/c
Being payment made to
debenture holders)
|
|
1,00,000
|
80,000
20,000
|
|
|
|
|
|
|
(i) For cash at par Rs. 50,000 nominal
(ii) For creditors of Rs. 45,000 against purchase of machinery Rs. 35,000 nominal
(iii) To SBI bank against a loan of Rs. 10,000 as collateral security Rs. 15,000 nominal
Pass
Journal entries.
|
Date
|
Particulars
|
L.F
|
Dr.(Rs.)
|
Cr.(Rs.)
|
|
|
Debenture
Application a/c Dr.
To 12% Debentures a/c
(Being
12% Debentures issued at par)
|
|
50,000
|
50,000
|
|
|
Bank
a/c
To Debenture Application a/c
(Being
Application money received on 500 debentures @ Rs. 100 )
|
|
50,000
|
50,000
|
|
|
Machinery
a/c Dr.
To Vendor a/c
(
Being Machinery purchased )
|
|
45,000
|
45,000
|
|
|
Vendor
a/c Dr.
To
12% Debentures a/c
To Securities Premium a/c
(Being
Debentured issued to vendor at premium.)
|
|
45,000
|
35,000
10,000
|
|
|
Bank
a/c Dr.
To Bank Loan a/c
(
Being Loan borrowed )
|
|
10,000
|
10,000
|
|
|
Debenture
Suspense a/c Dr.
To 12% Debentures a/c
(
Being Debentures issued as collateral security)
|
|
15,000
|
15,000
|
(i)
4,000 debentures were purchased @ Rs. 95.
(ii)
3,000 debentures were purchased @ Rs. 93
(iii)
1,000 debentures were purchased @ Rs. 97.50.
The expenses on purchase of own debentures
amounted to Rs. 200.
The debentures were purchased for immediate
cancellation. Pass journal entries.
Journal Entries
|
Date
|
particulars
|
L.F
|
Dr.(Rs.)
|
Cr.(Rs.)
|
|
|
P/L
appropriation a/c
Dr.
To Debenture Redemption Reserve a/c
(Being Debenture redemption reserve
created @ 50% of debentures.)
|
|
4,00,000
|
4,00,000
|
|
|
Own
Debentures a/c Dr.
To Bank a/c
(
Being Own debentures purchased )
|
|
7,56,700
|
7,56,700
|
|
|
11%
Debentures a/c Dr.
To Own Debentures a/c
To Gain on cancellation of own
Debentures a/c
(Being Own debentures cancelled)
|
|
8,00,000
|
7,56,700
43,300
|
|
|
Gain
on cancellation of own Debentures a/c
To capital reserve a/c
(Being
Gain transferred to capital reserve)
|
|
43,300
|
43,300
|
|
|
DRR
a/c Dr.
To General reserve a/c
Being
DRR transferred to general Reserve)
|
|
4,00,000
|
4,00,000
|
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