Accounting for Debentures

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Questions:

Generic 3

15 x 3 = 45

What do you mean by Reproduction of debentures by purchase in the open market?

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

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

Ashoka Ltd. had Rs. 5, 00,000 12% debentures outstanding as on 1^st 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.

State in brief, the SEBI Guidelines regarding Debenture Redemption Reserve

What is the nature of interest on debentures?

Differentiate between shareholders and debenture holder,

Explain deep discount Bond

Anupama Ltd. had 10,000, 9% debentures of Rs.100 each which is due for redemption on March 31,2015. The company has a debenture redemption reserve a balance of Rs.2,00,000 on that date. Record the necessary journal entries at the time of redemption of debentures, assuming that the company has required balance in Debenture Redemption Investment A/c.

10.

Bright Ltd. issued 2,00,000, 9% debentures of Rs.100 payable as follows:

On Application	Rs 30
On Allotment	Rs 70

The debentures were fully subscribed and all the money was duly received. As per terms of the prospectus, the debentures are redeemable at Rs.110 per debenture. Give necessary entries regarding regarding issue of debentures in the books of company.

11.

Pass necessary journal entries relating to issue of debentures for the following:
(i) Issued Rs.4,00,000, 9% debentures of Rs.100 each at a premium of 8%, redeemable at 10% premium.
(ii) Issued Rs.6,00,000, 9% debentures of Rs.100 each at par, repayable at premium of 10%.
(iii) Issued Rs.10,00,000, 9% debentures of Rs.100 each at a premium of 5%, redeemable at par.

12.

Sargam Ltd issued ₹1,00,000, 6% debentures of 10 each at a premium of 2 per debenture on 1st April, 2012. The issue was fully subscribed. Interest will be paid at the end of each financial year. Pass necessary journal entries for the year 2012-13.

13.

Vishesh Ltd. issued 10,000, 10% debentures of Rs.100 interest on Debentures each on 1st April 2012. the issue was fully subscribed. According to the terms of issue, interest on the debentures is payable half-yearly on 30th September and 31st March and the tax deducted at source is 10%. Pass necessary journal entries related to the debenture interest for the half-yearly ending 31st March, 2013 and transfer of interest on debentures of the year to the Statement of Profit and Loss.

14.

X Ltd. purchased machinery for Rs.5,50,000 from Y Ltd. Rs.55,000 were paid by X Ltd. in cash and the balance was paid by issue of 9% depentures of Rs.1,000 each at 10 % premium redeemable after three years. Pass necessary journal entries in the books of the company.

15.

Deepak Ltd. Purchased furniture Rs.2,20,000 from M/s Furniture Mart. 50% of the amount was paid to Furniture Mart by accepting a bill of exchange and for the balance the company issued 9% debentures of Rs.100 each at a premium of 10% in favour of Furniture Mart.
Pass necessary journal entries in the books of Deepak Ltd. for the above transactions.

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Answers Key:

Generic 3

15 x 3 = 45

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.

Journal entries

Particulars		Debit Amount (Rs.)	Credit Amount (Rs.)
Building a/c	Dr.	110000
To vendors a/c			110000
(Being purchasing of a building on credit)
Vendors a/c	Dr.	110000
To 12% debentures a/c			100000
To securities premium a/c			110000
(Being issue of 12% debentures at 10% premium)

Journal Entries

Particulars		Debit Amount (Rs.)	Credit Amount (Rs.)
Bank a/c	Dr.	4,00,000
To 10% Debenture application			4,00,000
(Being application money received)
10% Deb Application a/c	Dr.	4,00,000
To 10% Debenture a/c			4,00,000
(Being application money transferred to debenture a/c)
10% Deb allotment a/c	Dr.	6,50,000
To Debenture a/c			6,50,000
To S Premium a/c
(Being debenture allotment due)
Bank a/c	Dr.	6,50,000
To 10% Deb allotment a/c			6,50,000
(Being allotment money received)

Particulars		Debit Amount (Rs.)	Credit Amount (Rs.)
Bank a/c	Dr.	3,00,000
To Bank loan a/c			3,00,000
(Being loan taken from bank)
Debenture suspense a/c	Dr.	3,60,000
To 12 % Debenture a/c			3,60,000
(Being Debentures issued as collateral security )

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

Interest on debentures is a charge against profits.

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

When debentures are issued without interest rate and issue price thereby discounted, the issue of debenture is said to have been made as deep discount bond.

(i) Dr. Bank A/c, Cr. Debenture Redemption Investment A/c by Rs. 1,50,000 i.e., investment made 15% on Rs. 10,00,000 now encased
(ii) Dr. Surplus in Statement of Profit and Loss, Cr. Debenture Redemption Reserve A/c by Rs. 50,000
(iii) Dr. 9% Debentures A/c, Cr. Debentureholders A/c by Rs. 10,00,000 (iv) Dr. Debentureholders, Cr. Bank by Rs. 10,00,000
(v) Dr. Debenture Redemption Reserve, Cr. General Reserve A/c by Rs. 2,50,000.

10.

(i) Bank A/c, Cr.Debenture Application A/c by 60,00,000,
(ii) Dr. Debenture Application A/c, Cr.9% Debenture A/c by Rs.60,00,000
(iii) Dr. Debentures Allotment A/c Rs.1,40,00,000, and Loss on Issue of Debentures A/c Rs.20,00,000; Cr.9% Debentures A/c 1,40,00,000 and Premium on Redemption of Debentures A/c Rs.20,00,000,
(iv) Dr. Bank A/c, Cr. Debenture Allotment A/c Rs.1,40,00,000.

11.

(i) (a) Dr.Bank A/c; Cr.Debenture Application and Allotment A/c by Rs.4,32,000
(b) Dr.Debenture Application and Allotment A/c Rs.4,32,000 and Loss on Issue of Debentures Rs.40,000, Cr.9% Debentures A/c Rs.4,00,000, Securities Premium Reserve A/c Rs.32,000 and Premium on Redemption of Debentures A/c Rs.40,000.
(ii) (a) Dr.Bank A/c; Cr.Debenture Application and Allotment A/c by Rs.6,00,000
(b) Dr.Debenture Application and Allotment A/c Rs.6,00,000 and Loss on Issue of Debentures Rs.40,000, Cr.9% Debentures A/c Rs.4,00,000, Securities Premium Reserve A/c Rs.60,000; Cr.9% Debenture, A/c Rs.6,00,000 and Premium on Redemption of Debentures Rs.60,000 .
(iii) (a) Dr.Bank A/c; Cr.Debenture Application and Allotment A/c by Rs.10,50,000
(b) Dr.Debenture Application and Allotment A/c Rs.10,50,000, Cr.9% Debentures A/c Rs.10,00,000 and Securities Premium Reserve A/c Rs.50,000.

12.

Journal
Date	Particulars		LF	Amt(Dr)	Amt(Cr)
2012	Bank A/c (10,000 x 12)	Dr		1,20,000
Apr -1	To Debenture Application and AIlotment A/c				1,20,000
	(Being lumpsum of Rs.12 received at the time of issue of debenture)
Apr -1	Debenture Application and Allotment A/c	Dr		1,20,000
	To 6% Debentures A/c (10,000 x 10)	Dr			1,00,000
	To Securities Premium Reserve A/c (10,000 x 2)				20,000
	(Being application and allotment money transferred to debentures and securities premium account)
2013
Mar 31	Debenture Interest A/c (1.00,000 x 6%)		Dr	6,000
	To Debentureholders A/c				6,000
	(Being annual interest made due @ 6%)
Mar 31	Debentureholders' A/c		Dr	6,000
	To Bank A/c				6,000
	(Being interest paid to debentureholders)
Mar 31	Statement of Profit and Loss		Dr	6,000
	To Debenture Interest A/c				6,000
	(Being debenture interest charged to statement of profit and loss)

13.

(i) 31.03.2013 Interest on debentures A/c, Cr. Debentureholders by Rs.50,000
(ii) Dr.Debentureholders A/c Rs.50,000, Cr.Bank A/c Rs. 45,000 and TDS from Debenture Interest Rs.5,000
(iii) Dr.Statement of profit and Loss, Cr.Interest on Debentures by Rs.1,00,000.

14.

(i) Dr.Machinery A/c, Cr.Y Ltd. by Rs.5,50,000.
(ii) Dr.Y Ltd., Cr.Cash by Rs.55,000.
(iii) Dr.Y Ltd. Rs.4,95,000; Cr.9% Debentures A/c Rs.4,50,000; Securities Premium Reserve Rs.45,000. (No. of debentures issued 450, i.e., Rs.\(4,95,000\div 1,100\) ).

15.

(i) Dr.Furniture, Cr.M/s Furniture Mart by Rs.2,20,000.
(ii) Dr.M/s Furniture Mart, Cr.B/P A/c by Rs.1,10,000
(iii) Dr.M/s Furniture Mart Rs.1,10,000; Cr.9% Debentures Rs.1,00,000 and Securities Premium Reserve Rs.10,000. (No. of Debentures issued 1,000, i.e., Rs.\(1,10,000\div 110\) ).