ACCOUNTING FOR DEBENTURES


   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
 15)  Ashoka Ltd. had Rs. 5, 00,000 12% debentures outstanding as on 1st Jan, 2003. During the year company took a loan of Rs. 3, 00,000 from Bank of Punjab for which the company placed with the bank debentures of Rs. 3, 60,000 as collateral security.




 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
19)         A building has been purchased for Rs.1,10,000 from X Ltd., X Ltd., has been issued 12% debentures in Purchase Consideration at a Premium of 10%  Journalise the above transaction.
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 Entries
Ans
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





27) Animesh Ltd issued 1,000, 12 % Debenture of 100 each in the following manner:
        (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

 28)    Dipesh Ltd redeemed its 8,000, 11 % Debentures of Rs. 100 each in the following manner;
(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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