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Karnataka 2nd PUC Accountancy Question Bank Chapter 7 Issue and Redemption of Debentures
2nd PUC Accountancy Issue and Redemption of Debentures Text Book Questions and Answers
Short Questions and Answers
Question 1.
What is meant by a Debenture?
Answer:
The word Debenture is derived from a Latin word ‘debere’ which means to borrow. A debenture is issued in the form of a certificate under the seal of a company and containing a contract for the repayment of the principal sum after a fixed period of time and payment of interest at regular intervals, generally half yearly. Debentures are issued by a company for acquiring long-term borrowings.
Question 2.
What does a Bearer Debenture mean?
Answer:
When a company does not maintain any record of the debenture holders and the debenture is transferable mere by delivery, then the type of the debenture held by the holders is termed as Bearer Debenture. Interests on such debentures are paid to the persons who produce the interest coupons that are attached with these debentures in a specified bank.
Question 3.
State the meaning of ‘Debentures issued as a Collateral Security’.
Answer:
The term collateral security means additional or secondary security in addition to the primary security. Sometimes, when a company takes loan from a financial institution, then besides the primary security, the company may issue debenture for additional security (as collateral security).
The lender who receives debenture as collateral security is not entitled for interest on these debentures. If any default is made by the company in paying back the principal amount(i.e. the loan amount) or interest on the loan, then the lender has the full right to recover his/her dues from the sale of primary security. But, if the primary security is not sufficient to recover the amount of the debt, then the debentures issued as collateral may be used for recovery of the remaining amount.
Question 4.
What is meant by ‘Issue of debentures for Consideration other than Cash’?
Answer:
If a company purchases assets from its suppliers or vendors, then instead of paying them in cash the company issues debentures to them. This is known as issue of debenture for consideration other than cash. The issue of debenture for consideration other than cash serves the purpose of both the vendor as well as of the purchaser (company).
From the purchaser’s point of view, purchasing an asset against the issue of debentures requires no additional cost for raising loans or arranging funds immediately. On the other hand, the vendor gets interest on the amount of debentures received. In this case, payment is deferred by issue of debentures and interest is paid for time lag payment. Debentures may be issued at par, premium or discount to the vendor.
Question 5.
What is meant by ‘Issue of debenture at discount and redeemable at premium?
Answer:
When debentures are issued below its par value (or the face value) but are redeemed at price higher than its par value, then it is termed as issue of debenture at discount and redeemable at premium. The difference between the issue price and the redemption price is treated as loss on issue of debenture.
Question 6.
What is ‘Capital Reserve’?
Answer:
Capital Reserve is a reserve that is created out of capital profits i.e. gains or profits arising from other than the normal activities of business operations i.e. activities other than sale or purchase of goods and services. This reserve is utilised to meet future capital losses, if any, and to issue bonus shares. It cannot be distributed as dividend among the share holders.
Question 7.
What is meant by an ‘Irredeemable Debenture’?
Answer:
Irredeemable Debentures are those debentures that are not repayable or redeemable by a company during its life time. These are repayable only at the time of winding up of the company. These are also known as Perpetual Debentures that means debentures having indefinite life. In India, now a days, no company can issue irredeemable debentures.
Question 8.
What is a ‘Convertible Debenture’?
Answer:
Convertible Debentures are those debentures that can be converted into equity shares after a specified period of time. These are of following two types:
1. Fully Convertible Debentures: When the whole amount of a debenture is convertible into equity shares worth of equivalent amount, then these debentures are called Fully Convertible Debentures. There is no need to maintain Debenture Redemption Reserves for such debentures.
2. Partly Convertible Debentures: When only a part of the amount of a debenture is convertible into equity share, then these debentures are called Partly Convertible Debentures. In this regards, the Debenture Redemption Reserve is maintained only for the non-convertible part of the debenture.
Question 9.
What is meant by ‘Mortgaged Debentures’?
Answer:
Mortgaged Debentures are those debentures that are secured against asset/s of a company. These are also known as secured debentures. If the debentures are secured against a particular asset, then it is called fixed charge whereas, if the debentures are secured against all the assets of a company, then it is called floating charge.
In case the company fails to pay back the principal amount of debenture or fails to meet its interest obligations on the due date, then the debenture holders have the right to sell the mortgage asset in order to realise their amount due to the company.
Question 10.
What is discount on issue of debentures?
Answer:
When the debentures are issued at a price below its par value or face value, then it is said that the debentures are issued at discount. The difference between the issue price and the face value of the debenture is regarded as a capital loss.
As per the Revised Schedule VI of the Companies Act, Discount on Issue of Debentures is shown in the Notes to Accounts of Other Non-Current Assets. The final balance is shown on the Assets side of the Company’s Balance Sheet under the main head of Non-Current Assets.
Question 11.
What is meant by ‘Premium on Redemption of Debentures’?
Answer:
When the debentures are redeemed at a price more than its face value or the par value, then it is said that the debentures are redeemed at premium. The difference between the redeemed price and the par value is regarded 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.
Question 12.
How are debentures different from shares? Give two points.
Answer:
Question 13.
Name the head under which ‘discount on issue of debentures’ appears in the Balance Sheet of a company.
Answer:
Discount on Issue of Debentures is regarded as a capital loss. As per the Revised Schedule VI of the Companies Act, Discount on Issue of Debentures is shown in the Notes to Accounts of Other Non-Current Assets. The final balance is shown on the Assets side of the Company’s Balance Sheet under the main head of Non-Current Assets.
Question 14.
What is meant by redemption of debentures?
Answer:
Redemption of debenture means repayment of debentures by the company to the debenture holders. In other words, it implies the discharge of liabilities by repaying the amount due to the debenture holders as per the terms and conditions determined at the time of issue of debentures. Debentures may be redeemable at par, premium or discount, but, now a days, these are mostly redeemable at par or premium. The redemption can be done out of profits or 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 installments by draw’ of lots at the end of each year,
- By purchase in open market whenever price is below its face value,
- By converting debentures into shares or new debentures,
Question 15.
Can the company purchase its own debentures?
Answer:
Yes, a company can purchase its own debentures provided it is authorised by its Article of Association. As per the Company Act, if a company is authorised by its Article of Association, only then it may purchase its own debentures from the open market. The main purposes of such purchase are as follows:
1. For immediate cancellation of debenture liability, if the interest rate on its debenture is higher than the market rate of interest.
2. A company may also purchase its own debentures with the motive of investment and sell them at higher price in future and there by earn profit.
Question 16.
What is meant by redemption of debentures by conversion?
Answer:
When a debenture holder can convert his/her debentures into shares or new’ debentures after the expiry of a specified period of time, then it is known as redemption of debentures by conversion. As the company do not need to pay any funds for the redemption, so there is no need to maintain the Debenture Redemption Reserve (DRR). The new shares or debentures may be issued at par, premium or at discount.
Question 17.
How would you deal with ‘Premium on Redemption of Debentures’?
Answer:
When the debentures are redeemed at a price more than its face value or the par value, then it is said that the debentures are redeemed at premium. The difference between the redeemed price and the par value is regarded 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:
Question 18.
What is meant by ‘Redemption out of Capital?
Answer:
When debentures are redeemed out of capital and no profits are utilised for redemption, then such redemption is termed as redemption out of capital. In such a situation, no profits are transferred to the Debenture Redemption Reserve.
Question 19.
What is meant by redemption of debentures by ‘Purchase in the Open Market’?
Answer:
According to the Company Act, if a company is authorised by its Article of Association, only then it may purchase its own debentures from the open market. The main purpose of such purchase is as follows:
1. For immediate cancellation of debenture liability, if the interest rate on its debenture is higher than the market rate of interest.
2. A company may also purchase its own debentures with the motive of investment and sell them at higher price in future and thereby earnprofit.
Question 20.
Under which head is the ‘Debenture Redemption Reserve’ shown in the Balance Sheet?
Answer:
As per the Revised Schedule VI, Debenture Redemption Reserve (DRR) is shown in the Notes to Accounts of Reserve and Surplus. The final balance after adding DRR, is shown as the subhead ‘Reserves and Surplus’ under the main head of Shareholders’ Funds on the Equity and Liabilities side of the Company’s Balance Sheet.
Long Questions and Answers
Question 1.
Explain the different types of debentures?
Answer:
Debentures are issued by a company for acquiring long -term borrowings.
They can be classified on the following basis.
1. On the basis of Security.
a. Secured Debentures: Mortgaged Debentures are those debentures that are secured against asset/s of a company. These are also known as secured debentures. In case the company fails to pay back the principal amount of debenture of fails to meet its interest obligation on the due date, then the debenture holders have the right to sell the mortgaged asset in order to realise their amount due to the company.
b. Unsecured Debentures: These debentures are treated as unsecured creditors. They do not have any security. These are uncommon now day.
2. On the basis of Tenure
a. Redeemable Debenture: These debentures are payable after the expiry of a specific period. These debentures can be redeemed at par or premium either in lump sum or in installment. Generally all debentures are redeemable.
b. Irredeemable Debenture: Irredeemable Debentures are those debentures that cannot be repayable or redeemable by a company. These are also known as Perpetual Debentures that means debentures having indefinite life. In India, now a days, no company can issue irredeemable debentures.
3. On the basis of Mode of Redemption
a. Convertible Debentures: Convertible Debentures are those debentures that can be converted into equity shares after a speficied period of time. These are of following two types:
1. Fully Convertible Debentures: When the whole amount of a debenture is convertible into equity shares of equivalent amount, then these debentures are called Fully Convertible Debentures. There is no need to maintain Debenture Redemption Reserves for such debentures.
2. Partly Convertible Debentures: When only a part of the amount of a debenture is convertible into equity shares, then these debentures are called Partly Convertible Debentures. In this regards, the Debenture Redemption Reserve is maintained only for the non convertible part of the debenture.
4. On the basis of Coupon Rate
a. Zero coupon Rate: These debentures do not contain a specific rate of interest and can be issued to discount. The excess of the face value of the debenture over its issue price is considered as interest amount.
b. Specific Rate: These debentures carry a specific rate of interest which may be fixed or floating.
5. On the basis of Registration
a. Registered Debenture: While issuing such debentures, the company maintains a record regarding name, address and number of holding of debentures in the Register of Debenture Holders of the company.
Question 2.
Distinguish between a debenture and a share. Why is debenture known as loan capital? Explain.
Answer:
Issue of debentures implies incurring long-term indebtedness. Generally, a company issues debentures for acquiring long-term borrowings to achieve its long-run targets and growth. Like the owner’s capital, interest is also payable on the principal amount of the debenture. The interest paid is regarded as an expense for the company and is deductible under Income Tax Act.
Therefore, debentures are also known as loan capital because they are redeemable after a long period of time.
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?
Answer:
The term collateral security means additional or secondary security in addition to the primary security. Sometimes, when a company takes loan from a financial institution, then besides the primary security, the company may issue debenture for additional security (as collateral security). The lender who receives debenture as collateral security is not entitled for interest on these debentures.
If any default is made by the company in paying back the principal amount(i.e. the loan amount) or interest on the loan, then the lender has the full right to recover his/her dues from the sale of primary security. But, if the primary security is not sufficient to recover the amount of debt, then the debentures issued as collateral may be used for recovery of the remaining amount.
Accounting Treatment
There are two ways to record issue of debentures as collateral security:
1. No Entry
As no liability has been created so no Journal entry is recorded in the books of account. As per the Revised Schedule-VI of the Companies Act, the issue of debenture as collateral security is shown as a Long-Term Borrowings under the heading of Non-Current Liabilities on the Equity and Liabilities side of the Balance Sheet.
In the Notes to Accounts of Long-Term Borrowings, the Loan so taken is shown. And in the Notes to Accounts of Cash and Cash Equivalents, the amount of loan so received (in cash) is shown. This can be better understood with the help of the below explained example.
Example: Suppose Best Bus Ltd. issued 4,000 9% Debentures of Rs 100 each as collateral security to NBP bank for a loan of Rs 3,00,000.
2. By Making Entry
In order to record the issue of debentures as collateral security, the following necessar Journal entries are made in,the books of account.
At the time of Issue of Debentures as Collateral Security
In this case, as per the Revised Schedule VI of the Companies Act, Debentures so issued as collateral security will be shown as Long-Term Borrowings under the head of Non-Current Liabilities of the Equity and Liabilities side of the Company’s Balance Sheet. Unlike Method-1, in this method, Debentures Suspense Account is deducted from the Debentures Account in the Notes to Accounts of Long-Term Borrowings.
Question 4.
How is ‘Discount on Issue of Debentures’ treated in the books of accounts? How will you deal with the ‘discount in issue of debentures’ when the debentures are to be redeemed in installments?
Answer:
When the debentures are issued at a price below its par value or face value, then it is said that the debentures are issued at discount. The difference between the issue price and the face value of the debenture is regarded as a capital loss. As per the Revised Schedule VI of the Companies Act, Discount on Issue of Debentures is sown in the Notes to Accounts of Other Non-Current Assets. The final balance is shown on the Assets side of the Company’s Balance Sheet under the main head of Non-Current Assets.
The following are the two methods of writing-off discount on issue of debentures, when debentures are redeemable in installments.
(Students must note that this portion is not in the syllabus as prescribed by CBSE)
1. Fixed Installment Method/Equal Installment Method: Under this method, the total amount of discount (loss) is written off in equal installments over the life of the debenture. It is used when debentures are redeemable in lump sum after a specified period of time. The formula for calculating amount of discount written off every year is given by:
2. Fluctuating Installment Method/Variable Installment Method/Proportion Method: This method is used when the debentures are redeemed in installments. The discount on issue of debentures is written off in proportion to the debentures outstanding at the end of each year. For example, if a company has issued 10% debentures of Rs 6,00,000 at 5% discount redeemable annually by Rs 2,00,000 each year. The total amount of discount on Rs 6,00,000 debentures @ 5% is Rs 30,000, i.e. (6,00,000 × 5/100 = Rs 30,000). The amount of discount to be written off every year is calculatedas:
Hence, the amount of the total discount of Rs 30,000 will be written off in the ratio of 3:2:1, i.e. Rs 15,000, Rs 10,000 and Rs 5,000 respectively.
Question 5.
Explain the different terms for the issue of debentures with reference to their redemption.
Answer:
The different terms for the issue of debentures with reference to their redemption can be the combinations of at par, at premium and at discount. Normally, the debentures are not redeemable at discount. The permutation and the combination of the various terms of issue and redemption of debentures give rise to following six situations:
- Issue at Par, Redeemable at Par.
- Issue at Premium, Redeemable at Par.
- Issue at Discount, Redeemable at Par.
- Issue at Par, Redeemable at Premium.
- Issue at Premium, Redeemable at Premium.
- Issue at Discount Redeemable at Premium.
1. Issue at Par and Redeemable at Par: When the debentures are issued and are redeemed at their face value, then the following Journal entry is passed.
2. Issue at Premium and Redeemable at Par- When the debentures are issued at premium and are redeemable at par, then the following Journal entry is passed. As premium is a gain for a company so it is credited in the Journal entry.
3. Issue at Discount and Redeemable at Par- When the debentures are issued at discount and are redeemable at par, then the following Journal entry is passed. As discount is a loss for a company so it is debited in the Journal entry.
4. Issue at Par and Redeemable at Premium- When debentures are issued at par and redeemable at premium, then the following Journal entry is passed. In such case, the company did not suffer any loss at the time of issue but there will be loss at the time of redemption.
5. Issued at Premium and Redemption at Premium- When the debentures are issued and redeemable at premium, then the following Journal entry is passed.
6. Issue of Discount and Redemption at Premium- When the debentures are issued at discount and redeemable at premium, then the following Journal entry is passed.
Question 6.
Differentiate between redemption of debentures out of capital and out of profits. Redemption of Debentures out of Capital
Answer:
When debentures are redeemed out of capital and no profits are utilised for redemption, then such redemption is termed as redemption out of capital. In such a situation, no profits are transferred to the Debenture Redemption Reserve(DRR).
As per the guideline laid down by Securities and Exchange Board of India (SEBI) and the Section 117C of Company Act of 1956, the creation of DRR is mandatory (DRR). Therefore, it is not possible to redeem debentures purely out of capital, as it reduces the value of assets. The following companies are exempted from the creation of DRR.
1. Infrastructure companies (i.e. those companies that are engaged in the business of developing, maintaining and operating infrastructure facilities)
2. A Company that issues debentures with a maturity up to 18 months
Redemption of Debenture Out of Profits: When debentures are redeemed out of profit then no capital is utilised for redemption. Before redeeming the debentures profits are transferred to DRR from Profit and Loss Appropriation Account. The creation of DRR is mandatory as per the guidelines laid down by Securities and Exchange Board of India (SEBI). SEBI mandates transferring amount equal to 50% of debentures issued to DRR before redeeming debentures.
In this method, as profits are transferred to the DRR Account, thereby reducing the total amount of profits, therefore this method is termed as Redemption of Debentures Out of Profits. In this method, first of all, the required profits are transferred from Statement of Profit and Loss to the DRR Account. The working of which is shown in the Notes to Accounts of Reserves and Surplus (as prescribed in Revised Schedule VI).
The final balance (after considering DRR) is shown as the sub-head ‘Reserves and Surplus’ under the main head of Shareholders’ Funds on the Equity and Liabilities side of the Company’s Balance Sheet. Lastly, when all the debentures are redeemed, then DRR account is closed by transferring its amount to the General Reserve.
Question 7.
Explain the guidelines of SEBI for creating Debenture Redemption Reserve.
Answer:
The following are the main points of SEBI’s guidelines for creation of Debenture Redemption Reserve (DRR).
- Every company that issues debentures with a maturity of more than 18 months shall create DRR.
- An amount equal to 50% of debenture issued shall be transferred to DRR before starting redemption of debentures.
- Creation of DRR is applicable only for Non-Convertible Debentures and for non-convertible part of Partly Convertible Debentures.
- Any withdrawal from DRR is allowed only after 10% of debentures are redeemed.
Thus, as per the SEBI’s guidelines, 50% of the debentures issued should be redeemed out of the profits that are transferred to DRR and the remaining 50% of the debentures issued can be redeemed either out of profits or out of capital. Hence, no company can redeem all the debentures issued purely out of the capital.
As per the SEBI’s guidelines the following companies are exempted from the creation of DRR.
1. Infrastructure companies (i.e. those companies that are engaged in the business of developing, maintaining and operating infrastructure facilities)
2. A Company that issues debentures with a maturity up to 18 months
Question 8.
Describe the steps for creating Sinking Fund for redemption of debentures.
Answer:
The various steps involved in the creation of Sinking Fund for redemption of debentures can be better understood by the help of the example explained below.
A Company issued 10% Debentures of Rs 5,00,000 for 3 years. The investment is expected to earn 6% p.a. The Sinking Fund table shows that 0.31411 invested annually at 6% amount to Rs 1 in 3 years.
Step 1: Calculate the amount of installment to be required every year for investment with the help of the Sinking Fund table. Like in the example Rs 1,57,055 (i.e.0.31411 × 5,00,000) is required every year.
Step 2: The amount of installment calculated in the above step is transferred to the Debenture Redemption Fund (Sinking Fund) by debiting from Profit and Loss Appropriation Account.
Step 3: In the first year, the above installment is invested to yield amount required for redemption of debenture by debiting Debenture Redemption Fund Investment Account.
Step 4: The interest on investment is received on half yearly or annual basis. In the example, the interest of Rs 9,423 is received on annual basis.
(1,57,055 × \(\frac { 6 }{ 10 }\) = Rs. 9423)
Step 5: The total amount of investment, i.e. interest plus installment is invested in the subsequent year. In the example, Rs 1,66,478 (i.e. Rs 1,57,055 + Rs 9,423) is invested in the next year.
Step 6: Repeat the Step 2, 3, 4 for each subsequent years up to the end of the life of the debenture. In the year of redemption, the installment (i.e. the last installment) will be debited to the Profit and Loss Appropriation Account but will not be invested.
Step 7: In the year of redemption, the investment is sold off.
Step 8: The profit (loss) on the sale of the investment is transferred by debiting (crediting) Debenture Redemption Fund Investment Account to the Debenture Redemption Fund Account.
Step 9: The payment to the debenture holder is made.
Step 10: The balance of Debenture Redemption Fund Account if any, is transferred to the General Reserve.
Question 9.
Can a company purchase its own debentures in the open market? Explain.
Answer:
Yes, a company can purchase its own debentures provided it is authorised by its Article of Association. As per the Company Act, if a company is authorised by its Article of Association, only then it may purchase its own debentures from the open market. The main purposes of such purchase are as follows:
1. For immediate cancellation of debenture liability, if the interest rate on its debenture is higher than the market rate of interest.
2. A company may also purchase its own debentures with the motive of investment and sell them at higher price in future and thereby earn profit.
Question 10.
What is meant by conversion of debentures? Describe the method of such a conversion.
Answer:
When a debenture holder can convert his/her debentures into shares or new debentures after the expiry of a specified period of time, then it is known as redemption of debentures by conversion. As the company does not need to pay any funds for the redemption, so there is no need to maintain Debenture Redemption Reserve (DRR). The new shares or debentures may be issued at par, premium or at discount.
If a debenture holder exercises the conversion option, then the issue price of shares must be equal to or less than the amount actually received from debentures.
2nd PUC Accountancy Issue and Redemption of Debentures Numerical Questions and Answers
Question 1.
G.Ltd. issued 75,00,000, 6% debentures 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 debentures. Record necessary entries in the books of Company.
Answer:
Question 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.
Answer:
Question 3.
A.Ltd. issued 10,000, 10% debentures of Rs 100 each at a premium of 5% payable as follows:
Rs 10 on Application;
Rs 20 along with premium on allotment and balance on first and final call.
Record necessary Journal Entries.
Answer:
Question 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.
Answer:
Question 5.
A.Ltd. issued 4,000, 9% debentures of Rs 100 each on the following terms:
Rs 20 on Application;
Rs 20 on Allotment;
Rs 30 on First call; and
Rs 30 on Final call.
The public applied for 4,800 debentures. Applications for 3,600 debentures were accepted in full. Applications for 800 Debentures were allotted 400 debentures and applications for 400 Debentures were rejected.
Answer:
Question 6.
T. Ltd. offered 2,00,000, 8% debenture of Rs 500 each on June 30, 2014 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 debentures 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 debentures.
Answer:
Question 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, applications for 5000 debentures were alloted 40% of received application, and the remaining applications were rejected. The surplus money on partially allotted applications is utilised towards allotment. All the sums due are duly received.
Answer:
Question 8.
R.Ltd. offered 20,00,000, 10% debentures 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.
Answer:
Question 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% debentures of Rs 100 each. Record necessary entries in the books of M. Ltd.
Answer:
Question 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.
(Note: Goodwill Rs 30,000)
Answer:
Question 11.
X.Ltd. purchased a Machinery from Y Ltd. at an agreed purchase consideration of Rs 4,40,000 to be satisfied by the issue of 12% debentures of Rs 100 each at a premium of Rs 10 per debenture. Journalise the transactions.
Answer:
Question 12.
X.Ltd. issued 15,000, 10% debentures of Rs 100 each. Give journal entries and present it in 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 Rs 12,00,000; and
(iv) The debentures are issued to a supplier of machinery costing Rs 13,50,000.
Answer:
(ii)
(iii) No Entry will be passed for issuing debentures as a collateral security.
(iv)
Question 13.
Journalise the following:
(i) A debenture issued at Rs 95, repayable at Rs 100;
(ii) A debenture issued at Rs 95, repayable at Rs 105; and
(iii) A debenture issued at Rs 100, repayable at Rs 105;
The face value of debenture in each of the above cases is Rs 100.
Answer:
Question 14.
A.Ltd. issued 50,00,000, 8% debentures of Rs 100 at a discount of 6% on April 01, 2009, redeemable at premium of 4% by draw of lots as under:
20.0. 000 debentures on March, 2011
10.0. 000 debentures on March, 2013
20.0. 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:
Loss on issue of debenture = 6% (discount on issue) + 4% (premium on redemption) = 10% 10
= 50,000 × 100 × \(\frac { 10 }{ 100 }\) = 5,00,00,000
Question 15.
A company issues the following debentures:
(i) 10,000, 12% debentures of Rs 100 each at par but redeemable at premium of 5% after 5 years;
(ii) 10,000, 12% debentures oi Rs 100 each at a discount of 10% but redeemable at par after 5 years;
(iii) 5,000, 12% debentures of Rs 1000 each at a premium of 5% but redeemable at par after 5 years;
(iv) 1,000, 12 % debentures of Rs 100 each issued to a supplier of machinery costing Rs 95.000. The debentures are repayable after 5 years; and
(v) 300, 12% debentures of Rs lo0 each as a collateral security to a bank which has advanced a loan of Rs 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:
Question 16.
A company issued debentures of the face value of Rs,5,00,000 at a discount of 6% on January 01, 2011. 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. Calculate the amount of discount to be written-off each year. Give journal entries also.
Answer:
Amount of discount of Issue of Debenture = 50,000 × 100 × \(\frac { 6 }{ 100 }\) = 30,000
Question 17.
A company issued 10% debentures of the face value of Rs,1,20,000 at a discount of 6% on April 01, 2011. The debentures are payable by annual drawings of Rs 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:
Question 18.
B.Ltd. issued debentures at 94% for Rs 4,00,000 on April 01, 2011 repayable by five equal drawings of Rs 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:
2011 Rs 6,000;
2012 Rs 6,800;
2013 Rs 5,200;
2014 Rs 3,600:
2015 Rs 2,000;
2016 Rs 400;
Answer:
Debenture issued = 4,00,000 @ 94%
Discount on issue =6%
Amount on discount on Issue of Debenture = 4,00,000 × \(\frac { 6 }{ 100 }\) = 2,000
Amount of discount to written off every year In 2000 = Rs 6,000
In 2001 = 2,000 + 4,800 = Rs 6,800
In 2002 = 1,600 + 3,600 = Rs 5,200
In 2003 = 1,200 + 2.400 = Rs 3,600
In 2004 = 800 + 1,200 = Rs 2,000 .
In 2005 = Rs 400
Question 19.
B. Ltd. issued 1,000, 12% debentures of Rs 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:
Question 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 at par; and
(c) when debentures were issued at discount with a condition to redeem them at premium?
Answer:
Question 21.
On January 01, 2012, 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, 2014 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.
Answer:
Question 22.
On April 01, 2011 a company issued 15% debentures of Rs 10,00,000 at par. The debentures were redeemable at par after three years from the date of Issue. 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.l at the end of 3 years, one has to invest Rs 0.31411 every year together with interest that will be earned. On March 31, 2014, all the Government securities were sold at a total loss of Rs 6,000 and the debentures were redeemed at par. Prepare Debentures Account Sinking Fund Account, Sinking Fund Investment Account and Interest on Sinking Fund Investment Company closes its books of accounts every year on March 31.
Answer:
Question 23.
On April 01, 2013 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 March 31, 2014, 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.
Answer:
Question 24.
The following balances appeared in the books of A.Ltd. on April 01, 2014
On April 01, 2014, the company redeemed all the debentures at 105 per cent out of funds raised by selling all the investments at Rs 3,48,000. Prepare the necessary ledger accounts
Answer:
Question 25.
The following balances appeared in the books of Z.Ltd. on April 01, 2013
The annual instalment added to the fund is Rs 20,575. On March 31, 2014, the Bank balance after the receipt of interest on the investment was Rs 39,100. On that date, all the investments were sold at 83 per cent and the debentures were duly redeemed. Show the necessary ledger accounts for the year 2013-14 (Loss Rs 2,575).
Answer:
Question 26.
What entries for the redemption of debentures will be done when:
(a) debentures are redeemed by annual drawings out of profits;
(b) debentures are redeemed by drawing a lot out of capital; and
(c) debentures are redeemed by purchasing them in the open market when sinking fund for the redemption of debentures is not maintained – (i) vvhen out of profit, and (ii) when out of capital?
Answer:
Question 27.
A. Ltd. Company issued Rs,5,00,000 debentures at a discount of 5% repayable at par by annual drawings of Rs 1,00,000.
Make the necessary ledger accounts in the books of the company for the first year.
Answer:
Discount of Issue of Debenture = 5,00,000 × \(\frac { 5 }{ 100 }\) = 25,000
Question 28.
X.Ltd. issued 5,000, 15% debentures of Rs 100 each on January 01, 2014 at a discount of 10%, redeemable at a premium of 10% in equal annual drawings in 4 years out of capital.
Give journal entries both at the time of issue and redemption of debentures. (Ignore the treatment of loss on issue of debentures and interest).
Answer:
Question 29.
Z.Ltd. issued 2,000, 14% debentures of Rs 100 each on January 01, 2010 at a discount of 10%, redeemable at a premium of 10% in equal annual drawings in 4 years out of profits.
Give journal entries both at the time of issue and redemption of debentures. (Ignore the treatment of loss on issue of debentures and interest).
Answer:
Question 30.
A.Ltd. purchased its own debentures of the face value of Rs 2,00,000 from the open market for immediate cancellation at Rs 92. Record the journal entries.
Answer:
Question 31.
X.Ltd. redeemed 1,000, 12% debentures of Rs 50 each by converting them into 15% New Debentures of Rs 100 each. Journalise.
Answer:
Test Your Understanding – I
State whether the following statements are True (T) or False (F):
- Debenture is written instrument acknowledging a debt under the common seal of the company.
- Debenture is a part of owned capital.
- The payment of interest on debentures is a charge on the profits of the company.
- The debentures cannot be issued at a discount of more than 10% of the face value.
- Redeemable debentures are those debentures, which are payable on the expiry of the specific period.
- Perpetual debentures are also known as irredeemable debentures.
- Debentures cannot be converted into shares.
- Debentures cannot be issued at a premium.
- A collateral security is a subsidiary’ security.
- Debentures cannot be issued at a premium and redeemable at par.
- Loss on issue of debentures account is a revenue loss.
- Premium on redemption of debentures account is shown under the ‘Securities Premium’ in the balance sheet.
Answers
- True
- False
- True
- False
- True
- True
- False
- False
- True
- False
- False
- False.
Test Your Understanding – II
Select the correct answer for the following multiple choice questions:
Question 1.
Debentures which are transferable by mere delivery are:
(a) Registered debentures,
(b) First debentures,
(c) Bearer debentures.
Answer:
(c) Bearer debentures.
Question 2.
The following journal entry appears in the books of X Co. Ltd.
(a) 15%
(b) 5%
(c) 10%.
Answer:
(b) 5%
Question 3.
X Co. Ltd. purchased assets worth Rs 28,80,000. It issued debentures of Rs 100 each at a discount of 4 per cent in full satisfaction of the purchase consideration. The number of debentures issued to vendor is:
(a) 30,000
(b) 28,800
(c) 32,000.
Answer:
(a) 30,000
Question 4.
Convertible debentures cannot be issued at a discount if:
(a) They are to be immediately converted
(b) They are not to be immediately converted
(c) None of the above.
Answer:
(a) They are to be immediately converted
Question 5.
Discount on issue of debentures is shown under the following head in the Balance Sheet:
(a) Statement of profit and loss
(b) Other non-Corrent Assets
(c) Debentures account.
Answer:
(b) Other non-Corrent Assets
Question 6.
When debentures are issued at par and are redeemable at a premium, the loss on such an issues debited to :
(a) Statement of profit and loss
(b) Debentures applications and allotment account
(c) Loss on issue of debentures account.
Answer:
(c) Loss on issue of debentures account.
Question 7.
Excess value of net assets over purchase consideration at the time of purchase of business is credited to :
(a) General reserve
(b) Capital reserve
(c) Vendors’ account.
Answer:
(b) Capital reserve
Question 8.
When all the debentures are redeemed, balance in the debentures redemption fund account is transferred to :
(a) Capital reserve
(b) General reserve
(c) Statement of profits and loss.
Answer:
(b) General reserve
Question 9.
The nominal and book values of debenture redemption fund investments account are respectively Rs 1,00,000 and Rs 96,000. The company sold investments of nominal value of Rs 30,000 at a price which was just sufficient to redeem debentures of Rs 30,000 at 10% premium, the profit on sale of investment is :
(a) Rs 4,200
(b)Rs 3,000
(c) Rs Nil.
Answer:
(a) Rs 4,200
Question 10.
Own debentures are those debentures of the company which:
(a) The company allots to its own promoters,
(b) The company allots to its Director,
(c) The company purchases from the market and keeps them as investments.
Answer:
(c) The company purchases from the market and keeps them as investments.
Question 11.
Profit on cancellation of own debentures is transferred to :
(a) Statement of profit and loss
(b) Debenture redemption reserve,
(c) Capital reserve.
Answer:
(c) Capital reserve.
Question 12.
When debentures are redeemed out of profits, an equal amount is transferred to :
(a) General reserve
(b) Debenture redemption reserve
(c) Capital reserve.
Answer:
(b) Debenture redemption reserve
Question 13.
Profit on sale of debenture redemption fund investments in the first instance is credited to
(a) Debenture redemption fund account
(b) Statement of profit and loss
(c) General reserve account.
Answer:
(a) Debenture redemption fund account
Question 14.
The balance of sinking fund investment account after the realisation of investments is transferred to
(a) Statement of Profit and Loss
(b) Debentures account
(c) Sinking fund account.
Answer:
(c) Sinking fund account.
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:
(a) Debentures account,
(b) Premium on redemption of debentures account,
(c) Loss on issue of debentures account.
Answer:
(c) Loss on issue of debentures account.
Test Your Understanding – III
I. Identify the account to be debited in case of the following transactions.
Question 1.
Issue of debentures to a vendor in consideration of the business purchase.
Answer:
Vendors Account
Question 2.
Setting aside the amount for creating sinking fund for redemption of debentures.
Answer:
Surplus Le, Balance in Statement of Profit and Loss
Question 3.
The balance of debenture redemption reserve account after redemption of the debentures.
Answer:
Debenture Redemption Reserve Account,
Question 4.
Purchase of own debentures by the company.
Answer:
Own Debentures Account
Question 5.
Writing-off discount on issue of debentures.
Answer:
Statement of Profit and Loss.
II. Identify the account to be credited in case of the following transactions.
Question 1.
Debentures issued at a discount and are redeemable at par.
Answer:
Debenture Account
Question 2.
Transfer of interest on Sinking fund investments to sinking fund account.
Answer:
Sinking Fund Account
Question 3.
Balance of DRR account after the redemption of Debentures.
Answer:
General Reserve Account
Question 4.
Profit on sale of sinking fund investment account.
Answer:
Sinking Fund Account
Question 5.
Writing-off the loss on issue of debentures.
Answer:
Loss on Issue of Debentures Account.