Question

NCERT Solutions Class 12, Accountancy Part-II, Chapter- 2, Issue and Redemption of Debentures

To gain a thorough understanding of Class 12 Accountancy and excel in Board exams and competitive tests, it is highly beneficial to use NCERT Solutions. Expertly developed, these solutions cover all the essential concepts from the chapter and are specifically aligned with the CBSE curriculum, providing comprehensive support for your academic success.

In these NCERT Solutions for Class 12 Accountancy, we have discussed all types of NCERT intext questions and exercise questions.

Concepts covered in Class 12 Accountancy Part-II Chapter- 2 Issue and Redemption of Debentures, are-

• Meaning and definition of debentures
• Difference between Shares and Debentures
• Types of debentures
• Issue of debentures
• Over subscription
• Interest on debentures
• Sinking fund method

Our NCERT Solutions for Class 12 Accountancy provide in-depth explanations to assist students with their homework and assignments. By mastering and extensively practicing the chapter’s concepts through these solutions, you can effectively secure top marks in your exams. Begin your preparation today to achieve excellence in your exams.

Easily access all solutions and practice questions to start your preparation and guarantee academic success.

Answer 1

NCERT Solutions Class 12, Accountancy Part-II, Chapter- 2, Issue and Redemption of Debentures

Short Answers

1. What is meant by a Debenture?

Solution:

The term debenture is derived from the Latin word “debere”, which translates to borrow. Debentures are not backed by any collaterals. These are issued by governments and corporations to raise funds or capital for long-term borrowing.

2. What does a Bearer Debenture mean?

Solution:

When records are not maintained for debenture and holders, and the debenture can be transferred by delivery, such debentures are known as Bearer Debentures. These debentures are issued physically on paper and are payable to the bearer of the debenture. These are also called unregistered debentures.

3. State the meaning of ‘Debentures issued as a Collateral Security’.

Solution:

Collateral security refers to an additional layer of security over and above the primary security. In case a company takes a loan from a financial institution, the company issues debentures which are additional security or collateral security. The money lender will not be receiving any interest on these debentures. In case the company defaults in making payment and the primary security is not sufficient to cover the debt, then debentures can be used to recover the amount.

4. What is meant by ‘Issue of debentures for Consideration other than Cash’?

Solution:

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.

Accounting treatment for Issue of Debentures for Consideration other than Cash

1) For purchase of Assets:

Assets A/c		Dr.
	To Vendor A/c
(Asset Purchased)

2) For Issue of Debenture

 a. If debentures are issued at Par:

Vendor A/c		Dr.
	To Debentures A/c
(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
(Debenture issued to Vendor at premium)

c. If debentures are issued at Discount

Vendor A/c		Dr.
Discount on Issue of Debentures		Dr.
	To Debentures A/c
(Debenture issued to Vendor at discount )

5. What is meant by ‘Issue of debenture at discount and redeemable at premium?

Solution:

It may happen that due to challenging market conditions, a company has to raise funds from the market by issuing debenture below its par value and, to attract investors’ interest, has to offer redeemable value higher than its par value. This is termed as the issue of debenture at discount and redeemable at premium. The difference that is generated due to such an arrangement is treated as a loss on the issue of a debenture.

6. What is ‘Capital Reserve’?

Solution:

The reserve that is created from the capital profits is called a Capital Reserve. These are profits that are obtained from activities that are different from normal business activities. Examples of such activities are profit obtained from reissuing of debentures, premium on issue of share and debenture, profit redemption on debenture, profits obtained from the sale of fixed assets, etc. These can be used to issue bonus shares but cannot be used for paying dividends. The capital reserve is used to meet future capital losses.

7. What is meant by an ‘Irredeemable Debenture’?

Solution:

Debentures that are not redeemable by a company during its lifetime are called irredeemable debentures. These debentures are only payable at the time of winding up of the company. They are also called perpetual debentures because of their indefinite life span. These types of debentures are not issued in India.

8. What is a ‘Convertible Debenture’?

Solution:

Debentures that can be converted to equity shares after a specified time are called Convertible Debentures. The time at which it can be converted to equity shares is mentioned when the debentures are issued. There are two types:

1) Partly convertible debentures: In this, only a part of debentures is eligible to be converted into equity shares.

2) Fully convertible debentures: In this, all of the debentures can be converted to equity shares.

9. What is meant by ‘Mortgaged Debentures’?

Solution:

Debentures that are secured against the asset/assets of a company are called Mortgaged Debentures. These are also called secure debentures. There are two types:

1) Fixed Charge: Debentures secured against a specific asset or the firm of the computer

2) Floating Charge: Debentures secured against all assets of a company

10. What is discount on issue of debentures?

Solution:

Debentures which are issued at a value less than their face value (nominal value) are said to be issued at a discount. There is no restriction on companies for issuing debentures at a discount.

11. What is meant by ‘Premium on Redemption of Debentures’?

Solution:

Debenture redeemed at premium refers to the situation where Debentures are redeemed at a price which is more than its face value or nominal value. The difference between the redeemed price and face value of the debenture is regarded as a capital loss and hence needs to be written off. The premium obtained on redemption of the debenture is shown on the liabilities side of the balance sheet.

12. How are debentures different from shares? Give two points.

Solution:

Basis of Comparison	Debentures	Shares
1. Meaning	The holders of debentures are regarded as creditors of the company, as debentures are a part of a loan.	As shares are a part of the capital,  shareholders are owners of the company.
2. Voting Rights	No voting rights for holders.	Holders have voting rights.

Answer 2

13. What is meant by redemption of debentures?

Solution:

It refers to the repayment of debentures by the company to the debenture holders. In this process, debenture holders get payment for the debentures they were issued, and the repayment is made as per terms and conditions determined at the time of debenture issue. It may be redeemable at par, discount or premium. Redemption takes place from profits or from a fresh batch of debentures. The following methods are used in redeeming debentures:

1. By conversion into equity shares and new debentures

2. By annual drawing in instalments

3. By purchasing debentures in an open market

4. Lump sum payment on the maturity date

5. Utilizing the call or put option

14. Can the company purchase its own debentures?

Solution:

Yes, it is possible if a company which is authorised by its Article of Association is able to purchase its own debentures. The debentures are purchased to serve the following purpose:

1. As a source of investment which can be sold at a higher price on a later date to earn more profit

2. To cancel debenture liabilities if the debenture rate is higher than the rate of interest in the market.

15. What is meant by redemption of debentures by conversion?

Solution:

The situation in which a debenture holder is able to convert existing debentures into equity shares or new debentures after the expiry of the existing debentures’ time period is known as the redemption of debentures by conversion.

16. How would you deal with ‘Premium on Redemption of Debentures’?

Solution:

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:

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
(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
(Amount of debentures due to debenture holders)

17. What is meant by redemption of debentures by ‘Purchase in the Open Market’?

Solution:

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 earn profit.

Long Answers

1. Explain the different types of debentures?

Solution:

Debenture refers to a long-term instrument that companies use to borrow money from the market. It is the acknowledgement of a debt that is taken by a company. There are many types of debentures based on their nature, which are:

1) Based on the tenure

i. Redeemable Debenture: Debentures that have a specific date of redemption that is mentioned on the certificate, and the company is bound to pay the person/persons holding the debenture, the principal amount on that date.

ii. Perpetual/Irredeemable Debenture: Debentures that do not mention a specific date for redemption. The only way these can be redeemed is when the company is liquidated.

2) Based on Convertibility

i. Convertible Debenture: Those types of debentures that have the flexibility to convert into equity shares. The terms and conditions governing the conversion are clearly mentioned at the time of the issue of a debenture.

ii. Non-Convertible Debenture: These are debentures that do not have any special features and are not converted into equity shares.

3) Based on Security

i. Mortgage Debenture: A type of debenture that is backed by some asset or assets, and such asset can be used to recover funds in case

ii. Naked Debenture: Debenture that is issued based solely on the basis of credibility of the issuer.

4) Based on Priority

i. First Debenture: Also known as a preferred debenture. These debentures are the first to be paid in case of the winding up of a company.

ii. Second Debenture: These are ordinary debentures and are paid after the first debenture.

5) Based on registration

i. Registered Debenture: Debentures that are registered with the age, name, address etc., are added to the debenture.

ii. Bearer Debenture: These debentures are transferred by delivery to the new holder.

2. Distinguish between a debenture and a share. Why is debenture known as loan capital? Explain.

Solution:

Basis of Comparison	Shares	Debenture
Meaning	Shares are funds that are owned by a company	Debentures are funds that are borrowed from outside, i.e. it is debt for a company
Dividend	Shareholders earn dividends from the profit of the company	Debenture holders earn interest for the amount taken as debt
Deduction	Being an appropriation of profit, not liable to be deducted	Being an expense for business, deducted from profit
Conversion	Shares cannot be converted into debentures	Some debentures can be converted into shares after a period of time
Voting Right	Shareholders have voting right	No voting right
Risk	Shareholders have the highest risk	Debenture holders have the lowest risk
Compulsion to return	It is not mandatory to declare a dividend	It is mandatory to pay interest to creditors.
Status of Holders	Shareholders are owners	Debenture holders are creditors
Position in Financial Statement	Shown under Shareholder Funds on the equity and liabilities side of the Balance Sheet	Shown as non-current liabilities in the equity and liabilities side of the Balance Sheet.
Status at Liquidation	Payment made after clearing all liabilities	Payment made before shareholders.

Debentures are also called long-term debts. A company issues debentures to get funding for achieving growth in the long term. Interest needs to be paid on those loans. This interest is an expense for the business and is deducted as per applicable tax laws. Hence, debentures are known as loan capital.

Answer 3

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?

Solution:

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.

NOTES TO ACCOUNTS

2. By Making Entry

In order to record the issue of debentures as collateral security, the following necessary 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.

NOTES TO ACCOUNTS

4. Explain the different terms for the issue of debentures with reference to their redemption.

Solution:

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:

1. Issue at Par, Redeemable at Par.
2. Issue at Premium, Redeemable at Par.
3. Issue at Discount, Redeemable at Par.
4. Issue at Par, Redeemable at Premium.
5. Issue at Premium, Redeemable at Premium.
6. 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.

5. Differentiate between redemption of debentures out of capital and out of profits.

Solution:

Redemption of Debentures Out of Capital

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.

Answer 4

6. Explain the guidelines of SEBI for creating Debenture Redemption Reserve.

Solution:

The following are the main points of SEBI’s guidelines for creation of Debenture Redemption Reserve (DRR).

1. Every company that issues debentures with a maturity of more than 18 months shall create DRR.

2. An amount equal to 50% of debenture issued shall be transferred to DRR before starting redemption of debentures.

3. Creation of DRR is applicable only for Non-Convertible Debentures and for non-convertible part of Partly Convertible Debentures.

4. 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

7. Describe the steps for creating Sinking Fund for redemption of debentures.

Solution:

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 instalment 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 instalment 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 instalment 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. 

\(\left(1,57,065 \times \frac 6 {100}=9,423\right)\)

Step 5: The total amount of investment, i.e. interest plus instalment 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 instalment (i.e. the last instalment) 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.

8. Can a company purchase its own debentures in the open market? Explain.

Solution:

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.

A company may purchase its own debentures at discount or at premium for cancellation.

1) If Debentures are purchased at Discount for Cancellation

When the company purchases its own debentures at discount for cancellation, then the following Journal entries are recorded.

2) If Debentures are Purchased at Premium for Cancellation

9. What is meant by conversion of debentures? Describe the method of such a conversion.

Solution:

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.

Accounting Treatment

1. For amount due to debenture holders

Debenture A/c		Dr.
	To Debenture holders A/c
(Debentures redeemed)

2. For discharging liability to the debenture holders

Debenture holders A/c		Dr.
	To Shares/Debentures (New) A/c
(Debenture holder amount discharged)

Answer 5

Numerical Questions

1. G.Ltd. issued 75,00,000, 6% Debenture 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 debenture. Record necessary entries in the books of Company.

Solution:

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. Record necessary entries in the books of the company.

Solution:

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.

The debentuers were fully subscribed and all money was duly received.

Record necessary Journal entries. Also show how the amount will appear in the balance sheet.

Solution:

4. A. Ltd. issued 90,00,000, 9% debenture of Rs. 50 each at a of 8%, redeemable at par any time after 9 years Record necessary entries in the books of A. Ltd., for issue of debentures.

Solution:

Alternative Method:

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. All money called and duly received. Record necessary journal entries.

Solution:

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 was received. Record necessary entries regarding issue of debentures.

Solution:

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, 5,000 only 40% and the remaining rejected. The surplus money on partially allotted applications is utilised towards allotment. All the sums due are duly received.

Solution:

Answer 6

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.

Solution:

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%. Debenture of Rs 100 each. Record necessary entries in the books of M. Ltd.

Solution:

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 10% discount; (c) at premium of 10%? It was agreed that any fraction of debentures be paid in cash.

(Note: Goodwill Rs. 30,000)

Solution:

Case (a)

Case (b)

Case (c)

11. X. Ltd. purchased a Machinery from Y for 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.

Solution:

12. X.Ltd. issued 15,000, 10% debentures of Rs 100 each. Give journal entries and the Balance Sheet in each of the following cases:

(i) The debentures are issued at a premium of 10%;

(ii) The debentures are issued at a discount of 5%;

(iii) The debentures are issued as a collateral security to bank against a loan of Rs 12,00,000; and

(iv) The debentures are issued to a supplier of machinery costing Rs 13,50,000.

Solution:

(i)

NOTES TO ACCOUNTS

(ii)

NOTES TO ACCOUNTS

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

NOTES TO ACCOUNTS

NOTES TO ACCOUNTS

(iv)

NOTES TO ACCOUNTS

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.

Solution:

14. A. Ltd. issued 50,00,000, 8% Debenture of Rs 100 at a discount of 6% on April 01, 2009 redeemable at premium of 4% by draw of lots as under:

20,00,000 Debentures on March, 2011

10,00,000 Debentures on March, 2013

20,00,000 Debentures on March, 2014

Compute the amount of discount to be written-off in each year till debentures are paid. Also prepare discount/loss on issue of debenture account.

Solution:

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

\(50,00,000 \times 100 \times \frac {10}{100} = 5,00,00,000\)

Answer 7

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 of Rs 100 each at a discount of 10% but redeemable at par after 5 years;

(iii) 5,000, 12% debentures of Rs 1,000 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 100 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.

Solution:

a) Issue of Debentures

b) Repayment of Debentures

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

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

Solution:

Amount of discount on issue of debenture = 5,00,000 × \(\frac6{100}\)  = 30,000

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

17. 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: 2012 Rs 8,000; 2013 Rs 6,400; 2014 Rs 4,800; 2015 Rs 2,000; 2016 Rs 1,600).

Solution:

Debenture issued = 4,00,000 @94%

Discount on issue = 6%

Amount on discount on issue of debenture = 4,00,000 x \(\frac6{100}\) = 24,000

Amount of discount to written off every year

In 2012 = ₹8,000
In 2013 = ₹6,400
In 2014 = ₹4,800
In 2015 = ₹3,200
In 2016 = ₹1,600

Working Notes:

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

18. 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%.

Solution:

19. Jay Kay Ltd. an ‘other listed company’ issued 60,000 12% debentures of Rs. 100 each at par redeemable at the end of 5 years at a premium of 20%. On this date, a balance of Rs. 5,00,000 in the securities premium reserve account. The company created the required amount of debenture redemption reserve in 3 equal instalments on March 31, 2017, 2018 and 2019. It invested in specified securities (DRI) the required amount on April, 01 of the financial year Debentures were duly redeemed on the record necessary journal entries for:

1. Issue of debentures
2. Writing off loss on issue of debentures.
3. Interest and debentures for 2015-16 assuring if are paid annually & tax deducted at service is 10%.
4. Regarding redemption of debentures.

Solution:

20. Madhur Ltd. has outstanding 9% debentures of Rs. 50,00,000 redeemable at par on January 01, 2020. Debenture Redemption Reserve of Rs. 2,00,000 on March 31, 2018 and balance of the required amount of DRR was created on March 31, 2019. The company invested in specified securities (DRI) the required amount on April 01, 2019. Debentures were redeemed on the due date. Record necessary journal entries in the books of the company and also prepare the ledger accounts (ignore interest).

Solution:

Answer 8

21. MK Ltd. has outstanding Rs. 30,000 11% debentures of Rs. 100 each redeemable at 10% premium as follows:

March 31, 2018 -	10,000 debentures
March 31, 2019 -	12,000 debentures
March 31, 2020 -	Remaining debentures

Pass necessary journal entries in the books of the company.

Solution:

22. X Ltd. had outstanding 20,000 12% debentures of Rs. 100 each redeemable on June 30, 2019. Record necessary journal entries at the time of redemption.

Solution:

Calculate the amount due on redemption

Outstanding debentures = 20,000

Redemption price = Rs. 100 per debenture

​​Total Amount due on redemption = Outstanding Debentures × Redemption price

= 20,000 × Rs. 100

= Rs. 20,00,000​

23. XYZ Ltd. Issued 6,000, 12% Debentures of ? 50 each on April 1, 2014. Interest on these debenture is payable annually 3151 March each year. The debentures are redeemable in four equal installments at end of third, fourth, fifth and sixth year. You are required to pan journal entries at the time of issue and redemption of debentures in the books of the company under following cases:

1. Debentures are issued at par and redeemable at par.
2. Debentures are issued at a premium of 10% and redeemable at par.
3. Debentures are issued at a discount of 10% and redeemable at par.
4. Debenture are issued at par but redeemable at a premium of 10%.
5. Debentures are issued at a premium of 10% and redeemable at premium of 10%.
6. Debenture are issued at a discount of 10% and redeemable at a premium of 10%.

Solution:

(i) Debentures are issued at par and redeemable at par.

(ii) Debentures are issued at a premium of 10% and redeemable at par.

(iii) Debentures are issued at a discount of 10% and redeemable at par.

(iv) Debenture are issued at par but redeemable at a premium of 10%.

(v) Debentures are issued at a premium of 10% and redeemable at premium of 10%.

(vi) Debenture are issued at a discount of 10% and redeemable at a premium of 10%.