NCERT Solutions Class 12 Accountancy Chapter 2 Issue and Redemption of Debentures

Do It Yourself I

 

Question 1. Amrit Company Limited purchased assets of the book value of Rs.2,20,000 from another company and agreed to make the payment of purchase consideration by issuing 2,000, 10% debentures of Rs.100 each at a premium of 10%. Record necessary journal entries.
Answer:

In simple words: First, we record the acquisition of assets from the vendor. Next, we record the settlement of the vendor's claim by issuing debentures at a premium, allocating the base value to debentures and the premium to the securities premium account.

Exam Tip: Be sure to compute the premium on the face value of the debentures (10% of Rs. 100 = Rs. 10 per debenture) to correctly determine the total premium amount of Rs. 20,000.

 

Question 2. A company purchased assets of the value of Rs.1,90,000 from another company and agreed to make the payment of purchase consideration by issuing 2,000,10% debentures of Rs.100 each at a discount of 5%. Record necessary journal entries.
Answer:

In simple words: We record the purchased assets by debiting Assets and crediting the Vendor. When paying them off with debentures at a discount, the discount is treated as a loss and is debited to the Discount on Issue account.

Exam Tip: Always credit the Debentures Account with the full nominal (face) value (Rs. 2,00,000), while debiting the vendor with the actual agreed price of Rs. 1,90,000.

 

Question 3. Rose Bond Limited purchased a business for Rs. 22,00,000. Purchase Price was paid by 6% debentures. Debentures of Rs. 20,00,000 were issued at a premium of 10% for the purpose. Record necessary journal entries.
Answer:

In simple words: The business acquisition is set up by crediting the vendor for Rs. 22,00,000. This is settled by issuing debentures worth Rs. 20,00,000 face value along with a premium of Rs. 2,00,000.

Exam Tip: Verify that the total credit side (nominal value of Rs. 20,00,000 plus premium of Rs. 2,00,000) perfectly matches the total debit of Rs. 22,00,000 assigned to the vendor.

 

Question 4. Nikhil and Ashwin Limited bought business of Agarwal Limited consisting sundry assets of Rs. 3,60,000, sundry creditors Rs. 1,00,000 for a consideration of Rs. 3,07,200. It issued 14% debentures of Rs. 100 each fully paid at a discount of 4% in satisfaction of purchase consideration. Record necessary journal entries.
Answer:

Working Note:
Number of Debentures issued = \( \frac{\text{Purchase Price}}{\text{Issue Price}} = \frac{3,07,200}{96} = 3,200 \)

Please note: When a business is acquired with specified assets and liabilities at a given price, a journal entry is passed to record this transfer. If the debit total is smaller, balance it using 'Goodwill'; if the credit side falls short, use 'Capital Reserve'.

In simple words: When acquiring a business, if the sum of liabilities and the purchase price is larger than the total value of assets purchased, the gap is recorded as Goodwill. The payment is made by issuing debentures at a 4% discount.

Exam Tip: Calculate the quantity of debentures to be issued before writing the second entry by dividing the purchase price by the discounted issue price (Rs. 100 - Rs. 4 = Rs. 96).

 

Do It Yourself II

 

Question 2. Record necessary journal entries in each of the following cases:
a. 27,000, 7% debentures of Rs. 100 each issued at par, redeemable at par.
b. 25,000, 7% debentures of Rs. 100 each issued at par redeemable at 4% premium.
c. 20,000, 7% debentures of Rs. 100 each issued at 5% discount and redeemable at par.
d. 30,000, 7% debentures of 100 each issued at 5% discount and redeemable at 2½ % premium.
e. 35,000, 7% debentures of Rs. 100 each issued at 4% premium and redeemable.
Answer:

Case (a): Issued at par, redeemable at par

Case (b): Issued at par, redeemable at 4% premium

Case (c): Issued at 5% discount, redeemable at par

Case (d): Issued at 5% discount, redeemable at 2½ % premium

Case (e): Issued at 4% premium, redeemable at par

In simple words: These journal entries handle the issue and redemption of debentures under different conditions. Any future premium payable at the time of redemption must be set up as a loss at the time of issue.

Exam Tip: Remember that "Loss on Issue" includes both the discount given on issue and any premium offered on redemption, combined into a single debit account.

 

Do It Yourself III

 

Question 1. Diwakar enterprises Ltd. Issued 10, 00,000, 6% debentures on April 1, 2002. Interest is paid on September 30, 2002 and March 31, 2003. Record necessary journal entries assuming that income tax is deducted @30% of the amount of interest. (Amount of tax Rs.18, 000 for the year ending March 31, 2003)
Answer:

Working Note:
Interest: \(10,00,000 \times \frac{6}{100} \times \frac{6}{12} = 30,000\)
Tax: \(30,000 \times \frac{30}{100} = 9,000\)
Tax Paid = 9,000 of Sept 2002 + 9,000 of March 2003 = 18,000

Clarification: The problem assumes that the total nominal value of issued debentures is Rs. 10,00,000, rather than the quantity of debentures being ten lakhs.

In simple words: The company pays 6% annual interest half-yearly. Out of the Rs. 30,000 interest due every 6 months, 30% tax (Rs. 9,000) is held back for the government, and the remaining Rs. 21,000 goes to the debenture holders.

Exam Tip: Ensure that the total tax withheld (Rs. 18,000) is deposited with the government before the end of the financial year and debited from the Income Tax Payable account.

 

Question 2. Laser India Ltd. Issued 7, 00,000, 8% debentures of Rs. 100 each at par. Company deducts income tax from the interest of these debentures at source. Interest is to be paid on these debentures half-yearly on September 30 and March 31, every year. Amount of income tax deducted half-yearly Rs. 2, 80,000.
Answer:

Working Note: Interest = \(7,00,00,000 \times \frac{8}{100} \times \frac{6}{12} = 28,00,000\)

In simple words: The total value of debentures is Rs. 7,00,00,000. Interest is paid twice a year, amounting to Rs. 28,00,000 each period, with Rs. 2,80,000 deducted as tax each time. At the end of the year, the full interest of Rs. 56,00,000 is written off to Profit and Loss.

Exam Tip: Do not miss the final compound journal entry that transfers the total annual interest expenses (Rs. 56,00,000) directly to the Profit and Loss Account.

 

Do It Yourself IV

 

Question 1. X Ltd. Issued 2,000, 10% debentures of Rs.100 each at a discount of 8% on 1 Jan, 1992 which are redeemable at par by annual drawings in 4 years commencing from 31st March 1993 as per the following redemption plan: Ist Draw 10%, 2nd Draw 20%, 3rd Draw 30%, and 4th Draw 40%. Calculate the amount of discount to be written-off each year assuming that X Ltd. Follows calendar year as its accounting year.
Answer:

Total Discount = \(2,000 \text{ (debentures)} \times 100 \times \frac{8}{100} = 16,000\)

In simple words: Since the company uses the calendar year but redemptions occur in March, we use the product method to calculate the exact outstanding debenture balances month-by-month and write off the discount proportionately.

Exam Tip: Ensure that the sum of the written-off amounts across all five years equals the total discount of Rs. 16,000 exactly.

 

Question 2. Z Ltd. issued 15,00,000, 10% debenture of Rs.50 each at premium of 10% payable as Rs.20 on application and balance on allotment. Debentures are redeemable at par after 6 years. All the money due on allotment was called and duly received. Record necessary entries when premium money is included:
(i) in application money
(ii) in allotment money
Answer:

(i) When premium is included in Application Money

(ii) When premium is included in Allotment Money

In simple words: Premium is 10% of Rs. 50 (which equals Rs. 5). Depending on the case, we credit Securities Premium either with the application stage or allotment stage entries.

Exam Tip: Be careful with the face value split: in Case (i), nominal application is Rs. 15 and allotment is Rs. 35. In Case (ii), nominal application is Rs. 20 and allotment is Rs. 30.

 

Question 3. Z Ltd. issued 5,00,000 10% debentures of Rs.100 each at a discount of 10% on 1.1.2005. The debentures are to be redeemed every year draw of lots – 1,000 debenture to be redeemed every year starting on 31.12.2005. Record the necessary journal entries including the payment of interest and writing off the discount on issue of debentures. The interest is payable on 30th June and 31st December. Z Ltd. Closes its books of accounts on 31st December.
Answer:

Journal Entries for 2005 and 2006

Note: (i) The identical sequence of five entries recur annually, with adjustments made solely to the figures. (ii) Interest calculations are based on the remaining balance of debentures outstanding at that point in time.

Working Note:
Discount on Debentures = \( 5,00,000 \times \frac{10}{100} = 50,000 \)

Discount to be written off each year:

In simple words: Since 1,000 debentures are redeemed every year, the remaining debt drops annually. As a result, both the interest paid and the proportion of discount written off decrease systematically each year using a 5:4:3:2:1 ratio.

Exam Tip: Be sure to compute interest on the actual outstanding balance of the debentures for that half-year (e.g., Rs. 5,00,000 in 2005, and Rs. 4,00,000 in 2006).

 

Question 4. M Ltd. issued 10,00,000 8% debentures of Rs.100 each at a premium of 10% on 1.1.2004. It purchased sundry assets of the value of Rs.2,50,000 and took over the liabilities of Rs,1,90,000 and issued 8% debentures at a discount of 5% to the vendor. On the same date it took loan from the Bank for Rs.1 ,00,000 and issued 8% debentures as Collateral Security. Record the relevant journal entries in the books of M Ltd. and prepare the extract of balance sheet on 31.12.2004. Ignore interest.
Answer:

Balance Sheet as of 31.12.2004

Working Note:
Number of debentures to be issued = \( \frac{\text{Purchase Price}}{\text{Price Per Debenture}} = \frac{60,000}{95} = 631.57 \)

Keep in mind: Since fractional debentures cannot be allocated, the company issues a rounded figure of 632 debentures.

In simple words: This problem features a public issue of debentures, business purchase with a fractional debenture issue settled by a rounded number of units (offset to P&L), a bank loan backed by collateral debentures, and the correct presentation in the Balance Sheet.

Exam Tip: Since a fractional debenture cannot be issued, round up to the next full debenture (632 units) and debit the minimal adjustment (Rs. 40) directly to the Profit and Loss Account.

 

Question 5. On 1.1.2005 Fast Computers Ltd. issued 20, 00,000, 6% debentures of Rs.100 each at a discount of 4%, redeemable at a premium of 5% after three years. The amount was payable as follows: On application Rs.50 per debenture, Balance on allotment, Record the necessary journal entries for issue of debentures.
Answer:

Journal Entries (In lakhs of Rs.)

Working Note:
Loss on Issue = 4% Discount on Issue + 5% Premium on Redemption = 9% of 20,00,00,000
\( = \frac{9}{100} \times 20,00,00,000 = 1,80,00,000 \text{ (Rs. 180 lakhs)} \)

In simple words: Debentures are issued with payment collected in two stages (Application and Allotment). The total loss (4% discount plus 5% redemption premium, totaling 9%) is fully recorded at the allotment stage.

Exam Tip: Remember to book the "Loss on Issue" (which incorporates both the discount and redemption premium) during the allotment 'due' stage, and not the application stage.

Question 6. D Ltd. Purchased machinery worth Rs.2,00,000 from E Ltd. on 1.1.2001. Rs.50,000 were paid immediately and the balance was paid by issue of Rs.1,60,000, 12% Debentures in D Ltd. Record the necessary journal entries for recording the transactions in the books of D Ltd.
Answer:

Note: The gap between the debentures' face value and the final amount owed to E Ltd is treated as a discount on debenture issue.
In simple words: When a business buys machinery, it first records the purchase. Then, the down payment is logged, and finally, the issue of debentures at a discount is recorded to clear the remaining balance.

 

Exam Tip: Always make sure the total debits equal total credits for each journal entry. Clearly label the discount on issue of debentures as a debit because it represents a loss for the company.

 

Test Your Understanding I

State whether the following statements are True (T) or False (F)

 

Question 1. Debenture is written instrument acknowledging a debt under the common seal of the company.
Answer: True
In simple words: A debenture is simply a formal written certificate that proves a company has borrowed money and promises to pay it back.

Exam Tip: Remember that a debenture is a debt instrument, not capital, and always bears the common seal of the company to make it a legal contract.

 

Question 2. Debenture is a part of owned capital.
Answer: False
In simple words: Debentures represent borrowed funds (loans) rather than ownership shares in a business.

Exam Tip: Keep in mind that debenture holders are creditors of the company, not owners, and they do not have voting rights.

 

Question 3. The payment of interest on debentures is a charge on the profits of the company.
Answer: True
In simple words: The company must pay interest on debentures even if it makes a loss, unlike dividends which depend on profits.

Exam Tip: A "charge on profits" is a charge that must be paid regardless of profit levels, which makes it an expense in the Profit and Loss Account.

 

Question 4. The debentures cannot be issued at a discount of more than 10% of the face value.
Answer: False
In simple words: The Companies Act, 2013 does not place a general 10% limit on the discount for issuing debentures.

Exam Tip: Be careful not to confuse shares with debentures; shares cannot generally be issued at a discount, but debentures can be.

 

Question 5. Redeemable debentures are those debentures, which are payable on the expiry of the specific period.
Answer: True
In simple words: Redeemable debentures are loans that the company promises to repay after a certain fixed time.

Exam Tip: Look for terms like "redeemable" which always indicate that the principal amount will be paid back within the company's lifetime.

 

Question 6. Perpetual debentures are also known as irredeemable debentures.
Answer: True
In simple words: Perpetual debentures are those that do not have a fixed return date and are only repaid when the company closes down.

Exam Tip: "Perpetual" means forever, which aligns with "irredeemable" as these are only repaid upon liquidation.

 

Question 7. Debentures cannot be converted into shares.
Answer: False
In simple words: Convertible debentures can easily be changed into equity or preference shares after a set period.

Exam Tip: Remember that debentures can be convertible or non-convertible, allowing holders the option to become shareholders later.

 

Question 8. Debentures cannot be issued at a premium.
Answer: False
In simple words: A company with a high reputation can issue debentures at a price higher than their face value.

Exam Tip: When debentures are issued at a premium, the extra amount is credited to the Securities Premium Account.

 

Question 9. A Collateral Security is a Subsidiary Security.
Answer: True
In simple words: Collateral security is an extra asset given to a lender to secure a loan, in addition to the main security.

Exam Tip: Remember that collateral security is only secondary; the lender first uses the primary asset to recover the loan if default occurs.

 

Question 10. Debentures cannot be issued at a premium and redeemable at par.
Answer: False
In simple words: It is completely fine to sell debentures for more than their face value now and pay back only the face value later.

Exam Tip: Under this case, the premium received at issue is simply a capital profit and is credited to Securities Premium.

 

Question 11. Loss on issue of debentures account is a revenue loss.
Answer: False
In simple words: The loss from issuing debentures (like discounts or premium on redemption) is a capital loss, not a normal day-to-day business expense.

Exam Tip: Capital losses are written off over time through Securities Premium or Profit and Loss, and are not categorized as revenue expenses.

 

Question 12. Premium on redemption of debentures account is shown under the ‘Securities Premium’ in the Balance Sheet.
Answer: False
In simple words: Premium on redemption is a liability and is shown under Non-Current or Current Liabilities, not as reserves.

Exam Tip: Always show the "Premium on Redemption of Debentures" under "Long-Term Liabilities" or "Other Long-Term Liabilities" in the Balance Sheet.

 

Do It Yourself V

 

Question 1. X Ltd. decides to redeem 8,000, 10% debentures of Rs.100 each on January 1, 2004 at a premium of 5%. The company has a balance of Rs.9, 00,000 at the credit of its profit and loss account. The company closes its books on December 31 every year. What journal entries the company will be recorded to redeem the above debentures.
Answer:

Note: Here, we assume that the redemption of these debentures is funded fully out of profits.
In simple words: To redeem debentures out of profits, we first set aside the required reserve (DRR) from our earnings. Then we record the amount due to debenture holders (including the 5% premium), pay them via bank, and finally transfer the DRR back to the general reserve.

 

Exam Tip: When debentures are redeemed completely out of profits, ensure that 100% of the nominal value (Rs. 8,00,000) is transferred to the Debenture Redemption Reserve (DRR) before redemption.

 

Question 2. G Ltd. issued 5,00,000, 12 % debenture of Rs.100 each on April 1, 2002 redeemable at par on July 1, 2003. The company received applications for 6, 00,000 debentures and the allotment was made to all the applicants on pro-rata basis. The debenture were redeemed on due date. How much amount of Debenture Redemption Reserve is to be created before the redemption is carried out? Also record necessary journal entries regarding issue and redemption of debenture. Ignore tax deducted at source.
Answer:

Note: Since the duration until maturity is under 18 months, there is no legal requirement to establish a Debenture Redemption Reserve (DRR).
In simple words: We first collect the application money for the 6 lakh debentures, allot 5 lakhs of them and refund the extra cash. Since these debentures mature in just 15 months (less than 18 months), we do not need to create any DRR, and we repay them directly when due.

 

Exam Tip: Remember that as per guidelines, no Debenture Redemption Reserve (DRR) is created if the maturity of the debentures is under 18 months. Always state this as a working note to secure full marks.

 

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
In simple words: Bearer debentures belong to whoever physically holds them, meaning they can be transferred to someone else just by handing them over.

Exam Tip: Make sure to distinguish between bearer debentures (transferable by delivery) and registered debentures (which require a formal transfer deed).

 

Question 2. The following journal entry appears in the books of X Co. Ltd.
Bank A/c Dr. 4,75,000
Loss on issue of debenture A/c Dr. 75,000
To 12% Debentures A/c 5,00,000
To Premium on Redemption of Debenture A/c 50,000
Debentures have been issued at a discount of
(a) 15%
(b) 5%
(c) 10%
Answer: (b) 5%
In simple words: The total loss on issue is Rs. 75,000, which includes a Rs. 50,000 redemption premium. This means the actual issue discount is Rs. 25,000, which is exactly 5% of the Rs. 5,00,000 face value.

Exam Tip: Remember that "Loss on Issue" includes both the discount given at the time of issue and the premium payable on redemption. Subtract the premium to find the discount.

 

Question 3. X Co Ltd purchased assets worth Rs. 28,80,000. It issued debentures of Rs. 100 each at a discount of 4% 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
In simple words: Since the Rs. 100 debentures are sold at a 4% discount, each debenture is issued at Rs. 96. Dividing the total payment of Rs. 28,80,000 by Rs. 96 gives us 30,000 debentures.

Exam Tip: Always divide the total purchase consideration by the issue price (Face Value - Discount) of the debenture to find the correct number of debentures to issue.

 

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 options
Answer: (a) they are to be immediately converted
In simple words: If debentures are meant to be changed into shares right away, they cannot be sold at a discount because that would indirectly issue shares at a discount, which is illegal.

Exam Tip: Under Section 53 of the Companies Act, shares cannot be issued at a discount. Thus, immediate conversion of discounted debentures is restricted.

 

Question 5. Discount on issue of debentures is shown under the following head in the Balance Sheet
(a) Profit and loss account
(b) Miscellaneous expenditure
(c) Debentures account
Answer: (b) Miscellaneous expenditure
In simple words: Any discount given when selling debentures is treated as a deferred expense and sits under the miscellaneous expenditure head until it is completely written off.

Exam Tip: Note that modern accounting treatments under Schedule III show unamortized discount under "Other Current/Non-Current Assets," but as per traditional textbook formats, it was listed under "Miscellaneous Expenditure."

 

Question 6. When debentures are issued at par and are redeemable at a premium, the loss on such an issue debited to
(a) Profit and loss account
(b) Debentures applications and allotment account
(c) Loss on issue of debentures account
Answer: (c) Loss on issue of debentures account
In simple words: The extra premium we promise to pay upon redeeming the debentures is a future loss, so we debit it to the Loss on Issue of Debentures Account right away.

Exam Tip: When debentures are redeemable at a premium, always debit "Loss on Issue of Debentures" and credit "Premium on Redemption of Debentures" at the time of issue.

 

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) Vendor’s account
Answer: (b) Capital reserve
In simple words: If we buy a business and get more net assets than the price we actually paid, the extra profit is a capital gain and goes to the Capital Reserve.

Exam Tip: Remember that net assets minus purchase consideration equals Capital Reserve (if positive) or Goodwill (if negative).

 

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) Profits and loss appropriation account
Answer: (b) General reserve
In simple words: Once all the debentures have been paid back, the money we set aside in the redemption reserve is no longer needed there, so we move it to the general reserve.

Exam Tip: Any remaining balance in the Debenture Redemption Reserve (DRR) or Sinking Fund is always transferred to the General Reserve after full redemption.

 

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) Nil
Answer: (a) Rs. 4,200
In simple words: We sold investments with a book value of Rs. 28,800 for Rs. 33,000 to cover the redemption. Subtracting the book value from the sale price gives a profit of Rs. 4,200.

Exam Tip: To find the book value of the sold portion, calculate: (Rs. 96,000 / Rs. 1,00,000) * Rs. 30,000 = Rs. 28,800. The sale price is Rs. 30,000 * 1.10 = Rs. 33,000.

 

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 purchase from the market and keeps them as investments
Answer: (c) the company purchase from the market and keeps them as investments
In simple words: Own debentures are a company's own debt certificates that it buys back from the open market to hold as an investment instead of cancelling them immediately.

Exam Tip: Own debentures can either be cancelled immediately or kept as an investment to be released or cancelled at a later date.

 

Question 11. Profit on cancellation of own debentures is transferred to
(a) Profit and loss appropriation account
(b) Debenture redemption reserve
(c) Capital reserve
Answer: (c) Capital reserve
In simple words: When we cancel our own debentures at a profit, this gain is capital in nature, so it is transferred directly to the Capital Reserve.

Exam Tip: Any profit earned during the redemption or cancellation of liabilities is a capital profit and cannot be used for distributing dividends.

 

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
In simple words: If we redeem debentures using our profits, we must transfer a matching sum of profits into the Debenture Redemption Reserve (DRR).

Exam Tip: Redeeming out of profits protects the company's working capital by forcing it to lock some profits in a reserve before making the payouts.

 

Question 13. Profit on sale of debenture redemption fund investments in the first instance is credited to
(a) Debenture redemption fund account
(b) Profit and loss appropriation account
(c) General reserve account
Answer: (a) Debenture redemption fund account
In simple words: Any profit we make from selling redemption investments is initially added to the Sinking Fund or Debenture Redemption Fund itself.

Exam Tip: All transactions, including interest received and profits/losses on sale of fund investments, are funneled through the Debenture Redemption Fund Account.

 

Question 14. The balance of sinking fund investment account after the realisation of investments is transferred to
(a) Profit and loss account
(b) Debentures account
(c) Sinking fund account
Answer: (c) Sinking fund account
In simple words: After we sell off the sinking fund investments, we close that account by sending any remaining balance to the main Sinking Fund Account.

Exam Tip: The Sinking Fund Investment Account must be completely closed out by transferring its final balance (profit or loss) to the Sinking Fund Account before the final redemption is recorded.

 

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
In simple words: Both the discount on issue and the redemption premium are capital losses, so we debit their total to the Loss on Issue of Debentures Account.

Exam Tip: Debiting "Loss on Issue of Debentures" allows a company to record the total cost of borrowing (discount + premium) in one go at the time of issue.

 

Test Your Understanding III

Indicate 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: Vendor A/c
In simple words: When we buy a business, we first credit the vendor for the purchase price. When we pay them by issuing debentures, we debit their account to clear our liability.

Exam Tip: Remember that when debentures are issued to a vendor, the vendor's personal account is always debited to close out the outstanding payable.

 

Question 2. Setting aside the amount for creating sinking fund for redemption of debentures.
Answer: Profit and Loss Appropriation A/c
In simple words: Setting aside money to redeem debentures means we take a portion of our profits from the Profit and Loss Appropriation Account.

Exam Tip: Creating reserves or sinking funds represents an appropriation of profit, so we debit the Profit and Loss Appropriation Account.

 

Question 3. The balance of debenture redemption reserve account after redemption of the debentures.
Answer: Debenture Redemption Reserve A/c
In simple words: After the debentures are paid back, we debit the Debenture Redemption Reserve (DRR) to transfer its balance into the General Reserve.

Exam Tip: Note that during the closing process of DRR, we debit DRR Account and credit General Reserve Account.

 

Question 4. Purchase of own debentures by the company.
Answer: Own debentures A/c
In simple words: When a company buys back its own debentures from the market, it debits the Own Debentures Account as a temporary asset or holding account.

Exam Tip: Debiting "Own Debentures" is the first step in buying back debt from the open market, whether for cancellation or investment.

 

Question 5. Writing off discount on issue of debentures.
Answer: Profit and Loss A/c
In simple words: The discount given when debentures were issued is written off by debiting the Profit and Loss Account (or Statement of Profit and Loss).

Exam Tip: Writing off capital losses like discount on issue is treated as a charge, hence debited to the Statement of Profit and Loss.

 

Indicate the account to be credited in case of the following transactions:

 

Question 6. Debentures issued at a discount and are redeemable at par.
Answer: On Issue - Debenture A/c; On Redemption - Bank A/c
In simple words: When we issue debentures, the Debentures Account is credited. When we redeem them later, the Bank Account is credited because cash goes out.

Exam Tip: Always credit the Debentures Account with the nominal value at issue, and credit the Bank Account when cash is paid out at redemption.

 

Question 7. Transfer of interest on sinking fund investments to sinking fund account.
Answer: Sinking Fund A/c
In simple words: When we earn interest on the sinking fund investments, we credit it to the Sinking Fund Account to increase our total savings.

Exam Tip: All interest income earned on sinking fund investments is capitalized by transferring (crediting) it to the Sinking Fund Account.

 

Question 8. Balance of DRR account after the redemption of Debentures.
Answer: General Reserve A/c
In simple words: After redeeming the debentures, the balance left in the DRR is no longer needed, so we transfer it to the General Reserve by crediting General Reserve.

Exam Tip: Always credit the General Reserve Account to transfer the free reserve balance once the purpose of DRR is fully achieved.

 

Question 9. Profit on sate of sinking fund investment account.
Answer: Profit transferred to Debenture Sinking Fund A/c
In simple words: Any profit we get from selling Sinking Fund investments is credited to the Sinking Fund Account to boost our redemption fund.

Exam Tip: Since the sinking fund is designed to accumulate funds, any profit on selling its investments directly increases the fund balance and must be credited there.

 

Question 10. Writing off the loss on issue of debentures.
Answer: Loss on Issue of Debentures A/c
In simple words: To write off the loss on issue, we credit the Loss on Issue of Debentures Account to close it out.

Exam Tip: We credit "Loss on Issue of Debentures" because we are reducing or closing this asset-like deferred debit balance.

 

Do It Yourself VI

 

Question 1. G Ltd. has 800 lakhs, 10% debentures of Rs.100 each due for redemption on March 31, 2003. Assume that Debenture Redemption Reserve has a balance of Rs. 3,40,00,00,000 on that date. Record necessary entries at the time of redemption of debenture.
Answer:

Note: Debentures of 80,000 (lakhs) need to be redeemed. As per SEBI regulations, a 50% debenture redemption reserve must be maintained. For a total of Rs. 80,000 (lakhs), this requirement equals 40,000 (lakhs). Since the books already show a reserve of Rs. 34,000 (lakhs), we record a journal entry for the remaining Rs. 6,000 (lakhs).
In simple words: The company needs a total of Rs. 40,000 lakhs in its DRR. Since it already has Rs. 34,000 lakhs, it transfers the remaining Rs. 6,000 lakhs from its profits. After paying back the Rs. 80,000 lakhs to debenture holders, the Rs. 40,000 lakhs reserve is transferred to the general reserve.

 

Exam Tip: Always calculate the required DRR amount first and compare it with the existing balance to find the net amount to be transferred from Profit and Loss Appropriation.

 

Question 2. R Ltd. issued 88,00,000, 8 % debenture of Rs. 50 each at a premium of 5 % on July 1, 2000 redeemable at par by conversion of debenture into shares of Rs.20 each at a premium of Rs.2 per share on June 30, 2003. Record necessary entries for redemption of debenture.
Answer:

Working Note:
Total shares to be issued = Total nominal value of debentures / Issue price per share
= Rs. 44,00,00,000 / Rs. 22
= 2,00,00,000 shares
In simple words: The total amount we owe to debenture holders is Rs. 44,00,00,000. Instead of cash, we give them shares valued at Rs. 22 each (Rs. 20 face value plus Rs. 2 premium), which means we issue exactly 2,00,00,000 shares.

 

Exam Tip: Always calculate the number of shares to be issued by dividing the total due amount by the issue price per share (face value + premium), never by the face value alone.

 

Question 3. C Ltd. has outstanding 11,00,000, 10% debentures of Rs.200 each, on April 1, 2003. The Board of Directors have decided to purchase 20% of own debenture for cancellation at Rs.200 each. Record necessary entries for the same.
Answer:

Working Note:
Debentures to be redeemed = 20% of 11,00,000 = 2,20,000 debentures
Value of debentures = 2,20,000 * Rs. 200 = Rs. 4,40,00,000 (or Rs. 440 lakhs)
In simple words: The company buys back 2,20,000 of its own debentures from the market for Rs. 440 lakhs. It then cancels these debentures, which reduces both its investments and its outstanding debenture liability by Rs. 440 lakhs.

 

Exam Tip: When own debentures are purchased and cancelled immediately, pass two journal entries: first, debit Own Debentures and credit Bank; second, debit Debentures and credit Own Debentures.

 

Question 4. Record necessary journal entries in the books of the Company in following case for redemption of 1,000, 12% Debentures of Rs.10 each issued at par:
(a) Debentures redeemed at par by conversion into 12% Preference Shares of Rs.100 each,
(b) Debentures redeemed at a premium of 10% by conversion into Equity Share issued at par,
(c) Debentures redeemed at a premium of 10% by conversion into Equity Shares issued at a premium of 25%.
Answer:

Case (a)

Working Note: Number of Preference Shares = Rs. 10,000 / Rs. 100 = 100 Preference Shares

Case (b)

Case (c)

Working Note for Case (c):
Assuming each equity share has a face value of Rs. 10:
Premium per share = 25% of Rs. 10 = Rs. 2.50
Issue Price per share = Rs. 10 + Rs. 2.50 = Rs. 12.50
Number of shares to be issued = Rs. 11,000 / Rs. 12.50 = 880 Equity Shares
In simple words: We are paying back 1,000 debentures of Rs. 10 each. In the first case, we pay the Rs. 10,000 by giving 100 preference shares of Rs. 100 each. In the second case, we owe Rs. 11,000 (with a 10% premium) and pay it with equity shares at par. In the third case, we pay the Rs. 11,000 using 880 equity shares valued at Rs. 12.50 each.

 

Exam Tip: Always state the assumed face value of shares (such as Rs. 10) in your working notes if it is not explicitly mentioned in the question.

 

Question 5. On 31.1.2005 Janta Ltd. converted its Rs.88,00,000, 6% debentures into equity shares of Rs.20 each at a premium of Rs.2 per share. Record necessary journal entries in the books of the company for redemption of debentures.
Answer:
Journal Entries

Working Note:
Number of Equity Shares to be issued = \( \frac{88,00,000}{22} = 4,00,000 \text{ Equity Shares} \)
In simple words: When a company converts its debentures into new shares, we divide the total amount owed (Rs.88,00,000) by the new share price including premium (Rs.20 + Rs.2 = Rs.22) to find how many shares to give the investors.

 

Exam Tip: Always show the working for the number of shares issued to ensure you receive full step-marks in conversion-related problems.

 

Question 6. Anirudh Ltd. has 4,000, 8% debentures of Rs.100 each due for redemption on March 31, 2005. The company has a debenture redemption reserve of Rs.1,50,000 on that date. Assuming that no interest is due record the necessary journal entries at the time of redemption of debentures.
Answer:
Journal Entries

Working Note:
The company needs to redeem debentures worth Rs. 4,00,000. Under SEBI regulations, a Debenture Redemption Reserve (DRR) equal to 50% of the nominal value (Rs. 2,00,000) must be maintained. Since a DRR balance of Rs. 1,50,000 is already present in the books, we only transfer the remaining Rs. 50,000 from the Profit and Loss Account.
In simple words: Since we are paying back Rs.4,00,000, we must have Rs.2,00,000 (50%) in our reserve fund. Since we already have Rs.1,50,000, we top it up with Rs.50,000 from profits before making the payment and then close the reserve by moving it to general reserve.

 

Exam Tip: Always remember to transfer the entire balance of the Debenture Redemption Reserve (DRR) to the General Reserve once all relevant debentures have been successfully redeemed.

 

Short Answer Type Questions

 

Question 1. What is meant by a Debenture?
Answer: The term "Debenture" comes from the Latin term "debere," signifying an obligation to borrow. It is a formal written document issued under the company's common seal that acknowledges a debt. This document serves as a contract detailing the return of the principal amount after a designated time, in installments, or when the firm chooses, along with periodic interest payments at a set rate, typically on a semi-annual or annual basis. Furthermore, Section 2(12) of the Companies Act of 1956 specifies that debentures encompass debenture stock, bonds, and various other corporate securities, regardless of whether they create a charge over company assets.
In simple words: A debenture is a written certificate given by a company to show that it has borrowed money from you. The company promises to pay you regular interest and return your main money later.

Exam Tip: When defining a debenture, always state that it is a written acknowledgment of debt under the company's common seal, and highlight key terms like principal repayment and fixed-rate interest.

 

Question 2. What does a Bearer Debenture mean?
Answer: These are debt instruments that can be transferred simply by physical delivery to another person. The issuing firm maintains no official register of who owns these debentures. Consequently, interest payments are made directly to whichever individual presents the detachable interest coupons that are linked with the certificate.
In simple words: A bearer debenture belongs to whoever holds it in their hands. The company does not write down the owner's name, and anyone who brings the coupon gets the interest.

Exam Tip: Highlight that bearer debentures require no endorsement or registration for transfer, making them highly liquid, and emphasize how coupons are used for interest payments.

 

Question 3. State the meaning of ‘Debentures issued as a Collateral Security’.
Answer: An extra security offered to a lender alongside the main backing is known as a collateral security. If a business secures a loan, it can issue its own debentures to the bank or financial house as secondary protection. This differs significantly from standard debenture issues, since these collateral instruments do not carry any right to regular interest payments. However, if the business defaults on repaying the principal or interest of the loan, the lender can exercise its rights to sell these debentures in the open market to recover their dues. It is crucial to note that the lender must first liquidate the primary security before utilizing these collateral debentures.
In simple words: When a company borrows money, it might give the bank extra debentures as a backup guarantee. The bank does not get interest on these backup debentures unless the company fails to pay back the loan.

Exam Tip: Clarify that no interest is payable on collateral debentures, and that the bank can only claim rights on them if the company defaults on the main loan.

 

Question 4. What is meant by Issue of debentures for consideration other than Cash’?
Answer: Usually, when a business buys assets, it must pay the seller in cash. If liquid funds are limited, the business can instead hand over its debentures to settle the purchase price. This transaction represents an allotment of debentures for consideration besides cash, which benefits both parties involved. For the buying firm, it avoids the immediate financial strain and expense of securing a loan to buy assets. For the seller, it ensures regular interest returns on the debentures received, deferring the cash receipt while earning a yield. These instruments can be allotted to the seller at their face value, at a premium, or at a discount.
In simple words: Instead of paying cash to buy land, buildings, or machinery, a company can give its debentures to the seller. The seller gets regular interest, and the company does not have to spend cash right away.

Exam Tip: Be prepared to show journal entries for this situation, showing how the asset account is debited and the debentures are credited, noting any premium or discount on the allotment.

 

Question 5. What is meant by ‘Issue of debentures at discount and redeemable at premium?
Answer: Depending on current market conditions, a business might raise capital by offering debentures below their nominal value and promising to pay them back at a value exceeding their nominal rate. This setup is described as issuing debentures at a discount with redemption at a premium. The entire gap between what is received at issue and what is paid back at redemption represents a capital loss, which is categorized under "Loss on Issue of Debentures" and displayed under miscellaneous expenditures on the asset side until written off. For example, if a 10% debenture of Rs.100 is issued at a 5% discount and will be paid back at a 5% premium, the accounting record is recorded as follows:

In simple words: When a company sells a Rs.100 debenture for Rs.95 (discount) and promises to pay back Rs.105 (premium), it loses Rs.5 at the start and will lose another Rs.5 at the end. This total loss of Rs.10 is recorded in the books.

 

Exam Tip: Note that the premium on redemption (Rs.5) is a liability and is shown in the Balance Sheet, while both the discount and redemption premium are combined as a total "Loss on Issue" of Rs.10 in standard practice, though some textbooks show them separately.

 

Question 6. What is ‘Capital Reserve’?
Answer: A capital reserve represents funds set aside from capital-related gains rather than normal trading activities. Capital profits originate from events outside routine business operations, such as gains from selling fixed assets, premiums earned when issuing stocks or debentures, profits on debenture redemption, or gains from reallotting forfeited shares. These reserves are primarily used to cover subsequent capital losses. It is important to note that capital reserves cannot be distributed as dividends to shareholders, though they can be utilized to issue bonus shares.
In simple words: Capital reserves are created from one-off profits, like selling a building or reissuing shares. You cannot use this money to pay normal cash dividends to owners, but you can use it to give them free bonus shares.

Exam Tip: Remember that capital profits are non-recurring in nature, and capital reserves cannot be used for cash dividend distribution under normal circumstances.

 

Question 7. What is meant by a ‘Irredeemable Debenture’?
Answer: These are debt instruments that the company does not promise to repay during its active lifetime. Instead, they only become repayable if the company goes into liquidation or ceases operations. Throughout the operational lifespan of the business, the holders of these instruments receive regular interest payments. In modern corporate practice, companies almost never issue these types of debentures.
In simple words: Irredeemable debentures are loans that a company never has to pay back as long as it is running. The company just pays interest forever, and only pays the main amount if it closes down.

Exam Tip: State clearly that irredeemable debentures are also called "perpetual debentures" because they have no fixed maturity date during the lifetime of the company.

 

Question 8. What is a ‘Convertible Debenture’?
Answer: These instruments grant owners the option to trade their debt for equity shares after a predetermined duration, as defined during the initial offering. They are generally classified into two groups:
(i) Partly Convertible Debentures: Only a specified portion of the debt can be changed into equity, while the remaining balance continues as normal debt.
(ii) Fully Convertible Debentures: The entire nominal value of the instrument is converted into equity shares upon the completion of the timeframe specified in the company's prospectus.
In simple words: Convertible debentures are loans that can be changed into company shares later on. It can be partly converted (only some of it becomes shares) or fully converted (the whole loan becomes shares).

Exam Tip: Clearly distinguish between partly and fully convertible debentures, as this affects how the final redemption and capital structure are calculated in advanced problems.

 

Question 9. What is meant by ‘Mortgaged Debentures’?
Answer: Debentures backed by a claim on the company's assets are referred to as secured or mortgaged debentures. These instruments generally fall into two categories:
- Fixed Charge Debentures: These are secured against a specific, identifiable asset of the firm (such as land or buildings), which the firm cannot dispose of without the lenders' consent.
- Floating Charge Debentures: These are secured against the general, shifting assets of the business (like inventory or cash), which can be used in normal operations unless a default occurs. If the company fails to pay the interest or return the principal amount, the debenture holders gain the right to sell the secured assets to recover what they are owed.
In simple words: Mortgaged debentures are loans secured by the company's property. If the company cannot pay back the money, the lenders can sell the property to get their money back.

Exam Tip: Be sure to mention the difference between a "fixed charge" (on specific assets) and a "floating charge" (on general, changing assets) when explaining secured debentures.

 

Question 10. What is discount on issue of debentures?
Answer: When a business offers its debt instruments for a price below their nominal value, they are issued at a discount. The gap between the nominal value and the lower issue price constitutes this discount. Accounting-wise, the Cash or Bank Account is debited with the actual money received, the Discount on Issue Account is debited with the concession allowed, and the Debentures Account is credited with the total nominal amount. Notably, there are no legal caps or restrictions under the Companies Act regarding the maximum discount rate a company can provide. The Act does, however, mandate that any unamortized discount be presented on the assets side of the balance sheet under miscellaneous expenditures until it is fully written off against profits.
In simple words: If a company sells a Rs.100 bond for Rs.90, the Rs.10 difference is the discount. This discount is a loss for the company and is kept in the books under assets until it is written off.

Exam Tip: Keep in mind that unlike shares, which cannot be issued at a discount (with minor exceptions), there is no legal restriction on issuing debentures at a discount.

 

Question 11. What is meant by ‘Premium on Redemption of Debentures’?
Answer: If a corporation pays back its debentures at an amount higher than their original nominal value, the repayment is made at a premium. This extra payment is viewed as a capital loss and is gradually written off over the term of the debentures. Until the actual repayment occurs, this premium liability is shown on the equity and liabilities side of the balance sheet, typically grouped under non-current liabilities or provisions.
In simple words: When a company pays you back more than the nominal value of the loan (for example, paying Rs.105 for a Rs.100 loan), the extra Rs.5 is called a premium. It is a future liability and a loss for the company.

Exam Tip: Note that "Premium on Redemption of Debentures" is a personal account and represents a liability, which is why it is credited at the time of issue and shown on the liabilities side of the Balance Sheet.

 

Question 12. How debentures are different from shares? Give two points.
Answer: The key distinctions between shares and debentures include:
- Nature: A share represents unit ownership in the company's equity capital, whereas a debenture is a certificate acknowledging a long-term loan taken by the firm.
- Returns: Shareholders receive dividends, which are only declared if the company generates sufficient profits. In contrast, debenture holders receive fixed interest, which must be paid regardless of whether the company makes a profit or incurs a loss.
- Ownership Status: Equity shareholders are owners of the company with voting rights, while debenture holders are simply creditors of the firm without administrative control.
In simple words: Shares make you a part-owner of the company, and you only get paid if the company makes a profit. Debentures make you a lender, and the company must pay you interest even if it is losing money.

Exam Tip: In exams, present this distinction in a neat table under clear headings like "Nature of Return", "Ownership", and "Charge vs Appropriation of Profits".

 

Question 13. Name the head under which ‘Discount on Issue of Debentures’ appears in the Balance Sheet of a company.
Answer: Since the discount on debentures represents a capital loss that is written off against profits over future periods, the unamortized portion is presented on the assets side of the balance sheet under the main heading of "Other Non-Current Assets" or "Miscellaneous Expenditures."
In simple words: The discount is a capital loss. The part that hasn't been written off yet is shown on the assets side under miscellaneous expenses.

Exam Tip: Under current Schedule III of the Companies Act, unamortized discount is shown under "Other Non-Current Assets" (for the portion to be written off after 12 months) and "Other Current Assets" (for the portion to be written off within 12 months).

 

Question 14. What is meant by redemption of debentures?
Answer: Redemption means settling and clearing the debt liability arising from the agreements in the debenture trust deed. Simply put, paying off the amount due to debenture holders is called redemption. This process follows the specific guidelines set during the issue. While debentures can theoretically be paid back at par, discount, or premium, repayment at par or premium is standard practice. Funding for this repayment can come from retained profits or from proceeds of a fresh issue of shares or new debentures. The primary methods for redeeming these instruments are:
(i) Payment in a lump sum after a specified term
(ii) Annual drawings (lottery system)
(iii) Conversion into equity shares or new series of debentures
(iv) Buyback of own debentures from the open market
(v) At the redemption option of the company (call option)
In simple words: Redemption is when a company pays back the money it borrowed from debenture holders. The company can pay them back in a lump sum, in yearly parts, by giving them shares, or by buying them back from the market.

Exam Tip: Be familiar with the sources of redemption - out of capital, out of profits, or out of provision of fresh capital - as each has different accounting rules regarding Debenture Redemption Reserve (DRR).

 

Question 15. Can the company purchase its own debentures?
Answer: Yes, provided its Articles of Association allow it, a corporation can buy back its own debentures from the open market. The two main objectives of doing this are:
(i) Immediate Cancellation: The company buys its debentures and cancels them right away to reduce its overall liabilities, which is particularly beneficial if the debentures carry an interest rate higher than current market rates.
(ii) Holding as Investment: The firm buys its own debentures and holds them as an investment, intending to resell them later at a higher price for a profit, or to save on interest payments in the meantime.
In simple words: Yes, if its rules allow, a company can buy its own bonds from the market. It does this either to cancel them and get rid of the loan, or to keep them as a smart investment to sell later.

Exam Tip: Highlight that buying debentures for cancellation results in a profit or loss on redemption, which is a capital profit transferred to the Capital Reserve.

 

Question 16. What is meant by redemption of debentures by conversion?
Answer: Although debentures are typically paid back in cash, firms sometimes offer holders the option to swap their debt for equity shares or a new class of debentures. Settling the debt by issuing new shares or bonds instead of paying cash is known as redemption by conversion, and the instruments that offer this option are called convertible debentures.
In simple words: Redemption by conversion means instead of giving cash back to the lenders, the company gives them shares or new bonds to settle the old loan.

Exam Tip: Note that if debentures were originally issued at a discount, they cannot be converted into shares at face value if it violates the rules regarding discount issues under the Companies Act.

 

Question 17. How would you deal with ‘Premium on Redemption of Debentures?
Answer: Paying back debentures at a value higher than their face value is known as redemption at a premium. This extra payment is a capital loss, which is written off over the period of the debentures. Until they are fully paid back, the premium on redemption is shown as a liability on the balance sheet under "Non-Current Liabilities" (specifically as a Long-term Liability). The accounting entries for managing the premium on redemption are:

At the Time of the Issue of Debenture

For Loss Written off

At the time of Redemption of Debentures

In simple words: The premium is recorded as a loss when the debentures are first issued, and we also show a future liability. When we pay them back, we close both the debenture account and the premium account.

 

Exam Tip: Do not forget to debit "Loss on Issue of Debentures Account" at the time of issue to represent the future premium that must be paid back at redemption.

 

Question 18. What is meant by ‘Redemption out of Capital’?
Answer: Redemption out of capital means paying back debentures using the company's active cash resources without utilizing its accumulated profits. This payment reduces the company's working capital by that same amount. In practice, a firm cannot redeem its debentures entirely out of capital. It must redeem at least 50% of the value out of profits by establishing a Debenture Redemption Reserve (DRR), while the rest can come from capital. Under the Companies Act of 1956, an adequate portion of profits must be transferred to the DRR annually before redemption. While the Act itself does not specify the exact proportion, SEBI guidelines mandate that an amount equal to 50% of the debenture issue must be transferred to this reserve before paying back the debt. The main exceptions where a DRR is not required include:
(i) Infrastructure companies involved in creating, maintaining, or operating public infrastructure.
(ii) Debentures issued with a maturity period of 18 months or less.
(iii) Convertible debentures (or the convertible portion of partly convertible debentures).
In simple words: Redemption out of capital means using the company's cash to pay back loans instead of using profits. By law, most companies must save at least 50% of the amount in a special reserve from their profits first, unless they are infrastructure companies or the loans are very short-term.

Exam Tip: Remember that for companies subject to DRR rules, 50% must be set aside (according to SEBI guidelines under older rules) as stated in the textbook, even though modern rules may have updated thresholds.

 

Question 19. What is meant by redemption of debentures by ‘Purchase in the Open Market?
Answer: If permitted by its internal bylaws (Articles of Association), a company can pay off its debentures by buying them back directly from the open market. This approach offers several benefits:
(i) It cuts down on future interest expenses by canceling the purchased debentures.
(ii) If market prices are low, the company can buy them at a discount, saving cash and generating a gain on redemption.
(iii) The purchased debentures can be held active as an investment and resold in the market if the firm needs to raise cash again later. The main goals for purchasing own debentures are:
(i) To cancel them immediately and lower the debt.
(ii) To hold them as a financial investment.
In simple words: A company can buy its own debt from the stock market like a regular investor. It does this to save on interest by canceling the debt, or to hold it as a temporary investment.

Exam Tip: Note that any profit earned by buying back debentures at a discount is a capital profit and must be transferred to the Capital Reserve account.

 

Question 20. Under which head is the ‘Debenture Redemption Reserve’ shown in the Balance Sheet.
Answer: The Debenture Redemption Reserve (DRR) is presented under the "Shareholders' Funds" section, under the sub-head "Reserves and Surplus" on the equity and liabilities side of the Balance Sheet.
In simple words: This reserve is shown on the liabilities side under "Reserves and Surplus" because it represents profits set aside for a specific purpose.

Exam Tip: In exams, always list the complete pathway: Equity and Liabilities -> Shareholders' Funds -> Reserves and Surplus.

 

Long Answer Type Questions

 

Question 1. What is meant by a debenture? Explain the different types of debentures?
Answer: A debenture is a written document issued under a company's official seal that serves as an acknowledgment of a loan. Derived from the Latin term "debere" (to borrow), it outlines a contract specifying the repayment of principal at a set future date or in periodic installments, along with regular interest at a fixed rate, paid semi-annually or annually. Under Section 2(12) of the Companies Act of 1956, "debenture" encompasses bonds, debenture stock, and other securities of a corporation, whether or not they involve a charge on company assets. The various classifications of debentures include:

(i) From Security Perspective:
- (a) Naked or Simple Debentures: These carry no security or backing on the assets of the company for interest or principal repayment. Lenders rely solely on the general creditworthiness of the corporation.
- (b) Secured or Mortgaged Debentures: These are backed by a charge on the company's property. If the company defaults, holders can sell the mortgaged assets to recover their dues. Companies often appoint trustees to oversee these mortgaged properties for the benefit of the lenders.

(ii) From Permanence Perspective:
- (a) Redeemable Debentures: These are issued with a specific maturity date on which the principal must be repaid. Once redeemed, they can be reissued unless officially cancelled.
- (b) Perpetual or Irredeemable Debentures: These are not repaid during the lifetime of the company, becoming due only during winding up or upon a persistent default on interest. The company may also reserve the right to pay them off by issuing prior notice.

(iii) From Priority Perspective:
- (a) First Debentures: These hold priority and must be paid off before any other debentures are settled.
- (b) Second Debentures: These are settled only after the first group has been fully paid.

(iv) From Registration/Recording Perspective:
- (a) Bearer Debentures: These are highly negotiable instruments transferable by simple physical delivery without any need for corporate registration. Interest is paid directly to anyone presenting the coupons.
- (b) Registered Debentures: These are issued to specific individuals whose names are recorded in the company's register. Transferring them requires a formal deed similar to share transfers, and interest is paid only to the registered owner.

(v) From Convertibility Perspective:
- (a) Convertible Debentures: These grant holders the right to exchange their debt for equity or preference shares at specified terms after a certain period. They provide companies with stable working capital while offering safety and growth potential to investors.
- (b) Non-Convertible Debentures: These cannot be converted into equity shares and must be paid back in cash at maturity.
In simple words: Debentures can be classified in five ways: by security (secured vs unsecured), permanence (payable vs perpetual), priority (first vs second), recording (bearer vs registered), and convertibility (convertible vs non-convertible).

Exam Tip: This is a highly scoring long-answer question. Memorize the five main classification bases and provide brief, clear sub-points for each to secure maximum marks.

 

Question 2. Distinguish between a debenture and a share. Why debenture is known as loan capital? Explain.
Answer: A debenture is referred to as loan capital because it represents long-term funds raised by a company through borrowing rather than through issuing ownership shares. It is a debt instrument where the company acts as a borrower and the holder acts as a lender. The funds raised are treated as a liability, requiring regular interest payments (interest is a charge on profits) and a commitment to return the principal at maturity, unlike equity capital which represents ownership and has no mandatory repayment terms.

The key differences between shares and debentures are:

In simple words: Shares represent ownership and only get paid dividends from profits, while debentures are loans (loan capital) that must receive fixed interest regardless of profit.

 

Exam Tip: When distinguishing between shares and debentures, always use a table with a "Basis of Difference" column as it makes your answer highly structured and easier to grade.

 

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: When a business borrows funds, it must offer some asset as security. It can do this by issuing its own debentures to the lender as a backup. If the firm repays the principal and interest on time, the lender returns these debentures, and they are cancelled by the firm. If the firm defaults, the lender can either assume ownership of the debentures as a holder or sell them to recover the outstanding balance. This practice is termed issuing debentures as collateral security.
There are two approaches to the accounting treatment in the books:

Method 1: No Journal Entry is Passed
Since these debentures are not active liabilities unless a default occurs, no formal accounting entry is made in the ledger. Instead, a clear disclosure note is added directly under the main loan item on the liabilities side of the Balance Sheet.

Method 2: Journal Entry is Passed
If the company decides to record the collateral issue in its ledger, it debits the "Debentures Suspense Account" and credits the "Debentures Account." In the Balance Sheet, the debentures are displayed on the liabilities side, while the Debentures Suspense balance is shown as a deduction from the debentures (or on the assets side) to balance the entry. Once the main debt is cleared, this entry is reversed by debiting "Debentures Account" and crediting "Debentures Suspense Account."
In simple words: If a company uses debentures as backup security for a loan, it can either write a simple footnote in the Balance Sheet (Method 1) or record a temporary entry using a "Debentures Suspense Account" (Method 2).

 

Exam Tip: Be ready to write the journal entry for Method 2: Debit Debenture Suspense A/c and Credit Debentures A/c. Under Method 1, remember that only a descriptive note is presented under the loan liability in the Balance Sheet.

 

Question 4. How is ‘Discount on Issue of Debentures’ treated in the books of accounts? How will you deal with the ‘Discount on issue of debentures’ when the debentures are to be redeemed in instalments?
Answer: If debentures are issued at an amount lower than their nominal or face value, it is referred to as issuing them at a discount. This gap between what is received and the face value is treated as a capital loss. We write off this loss gradually over the tenure of these debentures until they are fully paid back.

Typically, this unwritten-off loss is presented on the assets side of the Balance Sheet, categorized under Miscellaneous Expenditure (or as per modern reporting, under Other Non-Current or Current Assets depending on the write-off period).

The accounting treatment for discount on issue of debentures involves the following entries:

At the time of issue of debentures at a discount:

At the end of each year when writing off the discount:

(i) Fixed Instalment Method / Equal Instalment Method: This approach applies when debentures are paid back in one lump sum after a designated period. Here, an identical portion of the total discount is cleared off each year throughout the debentures' life. The formula is: \[ \text{Annual Discount Written Off} = \frac{\text{Total Amount of Discount/Loss}}{\text{Number of Years after which Debentures are Redeemed}} \]
(ii) Fluctuating Instalment Method / Variable Instalment Method / Proportion Method: When debentures are redeemed in instalments or through annual drawings, we write off the discount in proportion to the outstanding debenture amount at the close of each financial year. Consequently, the written-off amount decreases annually, which is why this is also termed the Reducing Instalment Method.

For instance, assume a business issues 10% debentures worth Rs. 12,00,000 at a 5% discount, to be redeemed annually in parts of Rs. 2,40,000. The aggregate discount is Rs. 60,000 (calculated as \( 12,00,000 \times \frac{5}{100} \)). The yearly discount amortization is computed as follows:

Therefore, the overall discount of Rs. 60,000 gets amortized in the ratio of 5 : 4 : 3 : 2 : 1, giving yearly write-offs of Rs. 20,000, Rs. 16,000, Rs. 12,000, Rs. 8,000, and Rs. 4,000 respectively.
In simple words: Discount on debentures is a loss that is not cleared all at once. Instead, it is divided and written off over the years - either in equal parts if paid back at the end, or in changing proportions if paid back in instalments.

 

Exam Tip: Remember that when debentures are redeemed in instalments, the discount is written off in the ratio of outstanding debentures at the beginning of each year. Showing the ratio calculation clearly in a table helps secure full working-note marks.

 

Question 5. Explain the different terms for the issue of debentures with reference to their redemption.
Answer: Debentures may be issued at par, at a premium, or at a discount, and they can be redeemed either at par or at a premium. However, redemption at a discount is not possible. The following details the primary scenarios for the issuance and subsequent redemption of debentures:

(i) Issue at Par and Redeemable at Par: When debentures are issued and subsequently repaid at their nominal face value, the journal entries are as follows:

(ii) Issue at Premium and Redeemable at Par: When debentures are issued above their face value and are later redeemed at par, the premium amount is a corporate gain. Thus, we credit this amount in the journal entry:

(iv) Issue at Discount and Redeemable at Par: When debentures are issued at a discount and are repayable at their nominal value, we record the discount as a loss by debiting it. The journal entry is as follows:

(v) Issue at Par and Redeemable at Premium: When debentures are issued at face value but redeemed at a premium, the company does not face any loss during the initial issue. However, a premium redemption loss is anticipated and accounted for at this stage. The journal entry is:

(vi) Issue at Premium and Redeemable at Premium: When debentures are issued at a premium and are also redeemable at a premium, the journal entries are as follows:

In simple words: Companies can issue debentures at face value, with extra charge, or at a discount, and they must pay them back either at face value or with a bonus. These different situations need different journal entries to show the profits or losses.

 

Exam Tip: Any premium payable on redemption is a loss known at the time of issue. Always debit this to 'Loss on Issue of Debentures A/c' and credit 'Premium on Redemption of Debentures A/c' to comply with the conservatism principle.

 

Question 6. Differentiate between redemption of debentures out of capital and out of profits.
Answer: We can redeem debentures either from capital or from profits. The key distinctions between these two approaches are explained below:

Redemption of Debentures Out of Capital: This method refers to paying off debentures using capital assets without dedicating any corporate profits for this purpose. Under a strict out-of-capital approach, there is no requirement to transfer profits to a Debenture Redemption Reserve (DRR).

However, note that a complete redemption solely out of capital is not permitted for most firms. Under SEBI regulations and Section 117C of the Companies Act, 1956 (now updated under the Companies Act, 2013), enterprises must set up a DRR equivalent to a certain percentage of the total issued debentures before commencing redemption.

Thus, pure capital-based redemption is restricted as it directly depletes corporate assets. Certain entities are exempt from this rule:
(i) Infrastructure businesses involved in building, running, or maintaining infrastructure projects.
(ii) Firms that issue debentures with short tenures of up to 18 months.
(iii) Convertible debentures or the convertible portions of partly convertible debentures.

Redemption of Debentures Out of Profits: This means the debentures are settled entirely using the company's earnings, leaving the capital untouched. Before paying off the debenture holders, profits are transferred from the Profit and Loss Appropriation Account to the DRR. SEBI rules mandate this reserve creation.

Under older SEBI guidelines, a sum equal to 50% of the issued debentures must be placed in the DRR before redemption begins. Because this transfer from the Profit and Loss Appropriation Account limits the profits available for dividend distribution, it is termed redemption out of profits.

The DRR is presented under 'Reserves and Surplus' on the equity and liabilities side of the Balance Sheet. Once all debentures are fully redeemed, we close the DRR account by transferring its remaining balance to the General Reserve.
In simple words: Redemption out of capital uses the company's assets to pay back debentures, whereas redemption out of profits sets aside part of the company's earnings in a special reserve (DRR) so that dividends are restricted and assets are preserved.

Exam Tip: Be sure to mention that DRR is created by debiting the Profit and Loss Appropriation Account, and the final balance of DRR is always transferred to the General Reserve once redemption is complete.

 

Question 7. Explain the guidelines of SEBI for creating Debenture Redemption Reserve.
Answer: The Securities and Exchange Board of India (SEBI) outlines specific rules for redeeming debentures. The primary rules include:

(i) Companies must set up a Debenture Redemption Reserve (DRR) if the issued debentures have a redemption period exceeding 18 months from their date of issuance.
(ii) Creating a DRR is mandatory solely for non-convertible debentures and the non-convertible segments of partly convertible debentures.
(iii) Before beginning the redemption process, an organization must build a DRR equal to at least 50% of the total issued debenture value.
(iv) A company is only allowed to withdraw from the DRR after it has successfully reduced its total debenture liability by at least 10%.

These SEBI regulations do not apply to:
(i) Infrastructure enterprises that focus entirely on constructing, maintaining, and managing infrastructure units.
(ii) Businesses that issue debentures with a short maturity period of 18 months or less.
In simple words: SEBI requires companies to keep a safety fund (DRR) of at least 50% of the debentures' value to protect investors, unless the debentures are short-term (under 18 months) or issued by infrastructure firms.

Exam Tip: Note that while older guidelines specified a 50% DRR, current Ministry of Corporate Affairs (MCA) rules have changed these requirements for various types of companies. However, answer based on the textbook guidelines provided in your syllabus.

 

Question 8. Describe the steps for creating Sinking Fund for redemption of debentures.
Answer: To establish and operate a Sinking Fund for the purpose of redeeming debentures, follow these steps:

(i) Determine the exact sum of profit to be allocated each year, using standard sinking fund valuation tables.
(ii) Reserve this calculated amount from profits at the close of every financial year, crediting it to the Debenture Redemption Fund (DRF) Account.
(iii) Invest an identical sum in external securities at the end of the first year, debiting the Debenture Redemption Fund Investment (DRFI) Account.
(iv) Collect interest earned on these external investments at the end of each subsequent year.
(v) Reinvest a sum equal to the annual installment plus any interest collected in all subsequent years, except the final year of redemption.
(vi) Collect the investment interest for the final year.
(vii) Allocate the regular annual installment of profit in the final year.
(viii) Sell or liquidate all investments at the end of the final year when redemption is due.
(ix) Compute any gain or loss from selling the investments, and transfer this balance from the DRFI Account to the DRF Account.
(x) Settle the outstanding payments due to the debenture holders.
(xi) Transfer the remaining balance in the DRF Account over to the General Reserve.
In simple words: A sinking fund is like a savings plan where a company saves a fixed amount of profit and invests it every year. In the final year, they sell the investments to get the cash needed to pay back the debenture holders.

Exam Tip: Remember that in the final year of redemption, no new investments are purchased because the existing investments are sold off to cash. The final transfer of the DRF balance to the General Reserve is a crucial closing entry.

 

Question 9. Can a company purchase its own debentures in the open market? Explain.
Answer: Subject to authorization in its Articles of Association, a company is permitted to buy its own debentures directly from the open market. The primary motives behind this action are:

(i) Immediate cancellation to lower its overall debt burden, particularly when the coupon rate on its debentures exceeds current market interest rates.
(ii) Holding them as a temporary investment with the intention of reselling them at a higher price later to generate a profit.

When open-market purchases are made for cancellation, they can be bought either at a premium or at a discount. The corresponding accounting treatments for both scenarios are:

(i) If Debentures are Purchased at a Discount for Cancellation: When a company buys its own debentures at a discount and cancels them immediately, the journal entries are:

(ii) If Debentures are Purchased at a Premium for Cancellation: When a company buys its own debentures at a premium and cancels them immediately, the journal entries are:

In simple words: A company can buy its own debentures from the stock market either to cancel them immediately (saving on interest) or to hold them as an investment to sell later. If they cancel them at a lower price than face value, the savings go to a capital reserve.

 

Exam Tip: Remember that any profit earned on the cancellation of own debentures is a capital profit and must be transferred to the Capital Reserve Account, not the general profit and loss account.

 

Question 10. What is meant by conversion of debentures? Describe the method of such a conversion.
Answer: Redemption of debentures can also be executed by converting them into equity shares or a fresh series of debentures. When the terms allow, and the holders find the proposition advantageous, they can opt for this conversion after a specified time frame. This method is called redemption by conversion.

Importantly, a Debenture Redemption Reserve (DRR) is not required for conversion because no cash outflow or liquid funds are needed to settle the debt.

When holders choose to convert, the total issue price of the new shares must not exceed the actual nominal value or amount received from the original debentures. The standard journal entries for this transaction are:

In simple words: Conversion means paying back debenture holders by giving them company shares or new debentures instead of cash. Since no actual cash is paid out, the company does not need to set aside any DRR.

 

Exam Tip: On conversion, always ensure the total nominal value of new shares issued does not exceed the amount due. Pay attention to whether the new shares are issued at par, premium, or discount, as it affects the number of shares issued.

 

Numerical Problems

 

Question 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.
Answer: The journal entries in the books of G. Ltd. are:

Note: The accounting process for issuing debentures closely resembles that of equity shares, except that we substitute the word 'Capital' with 'Debentures'.
In simple words: We record the money received for debentures in two stages: first on application (Rs. 15 per debenture) and second on allotment (Rs. 35 per debenture), transferring both amounts to the 6% Debentures account.

 

Exam Tip: Always double-check your calculations when dealing with large numbers like 75,00,000. In exams, write down the calculation (e.g., 75,00,000 x Rs. 15) in parentheses within the narration to clarify your working.

 

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: The journal entries in the books of Y. Ltd. are:

In simple words: The company collects the total Rs. 100 in three parts: Rs. 25 first, then Rs. 50, and finally Rs. 25. For each part, we first record the money as due and then record its receipt in the bank.

 

Exam Tip: Ensure that you create separate journal entries for making the call money due and then receiving it. Do not club these steps together, as marks are awarded for each individual entry.

 

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: The journal entries in the books of A. Ltd. are:

In simple words: The company issued debentures at Rs. 105 instead of Rs. 100. We record the extra Rs. 5 per debenture in a 'Securities Premium' account during the allotment stage, and the rest is collected on application and the final call.

 

Exam Tip: Carefully calculate the 'balance' amount on the first and final call. Total face value is Rs. 100 and the total issue price is Rs. 105. Subtracting Rs. 10 (application) and Rs. 25 (allotment with premium) leaves Rs. 70 as the call amount.

 

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:
Journal Entries

Note: Alternatively, a single combined journal entry can be recorded by debiting Bank A/c and Discount on Issue of Debentures A/c while crediting 9% Debentures A/c.
In simple words: When debentures are issued at a discount, we receive less money than their face value. The amount we do not receive is called discount on issue and is recorded as a loss, which is debited.

 

Exam Tip: Be sure to calculate the discount correctly (8% of Rs. 50 = Rs. 4 per debenture). Ensure the discount account is debited at the time of allotment or transfer of application money.

 

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:
Journal Entries

Working Note:
Amount due on allotment (4,000 × 20) = Rs. 80,000
(-) Amount received on application (400 × 20) = (Rs. 8,000)
Net amount received on allotment = Rs. 72,000
In simple words: When more people apply for debentures than what is offered, we refund the money for rejected applications and use the excess money of accepted partial allotments to lower their next payment on allotment.

 

Exam Tip: Always show a clear working note for the adjustment of excess application money against the allotment stage, as this is a high-yield mark-bearing step.

 

Question 6. T. Ltd. offered 2,00,000, 8% Debenture of Rs.500 each on June 30, 2002 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 debenture 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 debenture.
Answer:
Journal Entries

In simple words: Out of Rs. 200 application money, Rs. 50 is premium and Rs. 150 is face value. Since we have excess applications, the surplus money of Rs. 2,00,00,000 is transferred to allotment to reduce the balance due.

 

Exam Tip: Remember to split the premium portion (Rs. 50) and transfer it to the Securities Premium Account. Also, clearly show the adjustment of the excess application money on allotment.

 

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, 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.
Answer:
Journal Entries

In simple words: The company gets applications for 13,500 debentures but only issues 10,000. It rejects 500 applications entirely and sends back their money, while using the surplus application cash from the pro-rata group to reduce their allotment bills.

 

Exam Tip: Calculate the allocation of applications carefully: 8,000 got 100%, 5,000 got 40% (2,000 debentures), meaning 500 debentures are rejected. Ensure the remaining call amount is correctly derived as Rs. 20 (Rs. 100 - Rs. 20 - Rs. 60).

 

Question 8. R.Ltd. offered 20,00,000, 10% Debenture 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:
Journal Entries

In simple words: Debentures are issued at Rs. 186 (Rs. 200 minus Rs. 14 discount). Since they must be paid back at Rs. 216 in the future, the extra Rs. 16 to be paid is recorded as a loss today, and we also set up a liability for the future premium.

 

Exam Tip: Keep the discount on issue (Rs. 14 per debenture) and the premium on redemption (Rs. 16 per debenture) in separate debit entries as shown, or combined under "Loss on Issue of Debentures" if preferred, but separate is highly recommended for clarity.

 

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%Debenture of Rs.100 each. Record necessary entries in the books of M. Ltd.
Answer:
Journal Entries

Working Note:
Amount Payable to S, Ltd by M Ltd = Rs. 8,30,00,000
8% Debentures of Rs. 100 each to be issued = \(\frac{8,30,00,000}{100}\) = 8,30,000 Debentures
In simple words: When we buy another company's business, we take over its assets and liabilities. The difference is what we owe them, and we settle this debt by issuing our own debentures.

 

Exam Tip: Calculate the net purchase consideration (Assets minus Liabilities) first. Divide this purchase consideration by the issue price per debenture to find the exact number of debentures to be issued.

 

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.
Answer:

Case (a): Issued at Par
Journal Entries

Working Note:
Amount payable to Mohan Bros = Rs. 3,80,000
Number of debentures to be issued at par = \(\frac{3,80,000}{100}\) = 3,800 Debentures

 

Case (b): Issued at Discount
Journal Entries

Working Note:
Amount payable to Mohan Bros = Rs. 3,80,000
Number of debentures to be issued at discount of 5% (assuming 5% discount as none is specified in the question) = \(\frac{3,80,000}{95}\) = 4,000 Debentures

 

Case (c): Issued at Premium of 10%
Journal Entries

Working Note:
Amount payable to Mohan Bros = Rs. 3,80,000
Number of debentures to be issued at 10% premium = \(\frac{3,80,000}{110}\) = 3,454.54 Debentures
Number of fully rounded debentures to be issued = 3,454 Debentures
Value of debentures issued (including premium) = 3,454 × Rs. 110 = Rs. 3,79,940
Fraction paid in cash = Rs. 3,80,000 - Rs. 3,79,940 = Rs. 60
In simple words: When the purchase price of net assets is more than their actual book value, the extra amount we agree to pay is treated as Goodwill. If we issue debentures at a premium and get a fraction, we issue full debentures and pay the remainder in cash.

 

Exam Tip: If the purchase consideration exceeds the net assets (Assets - Liabilities), debit the difference to Goodwill. Always calculate fractional debentures carefully and show the final cash settlement via the Bank Account.

 

Question 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.
Answer:
Journal Entries

Working Note:
Amount payable to Y = Rs. 4,40,000
Number of debentures to be issued at 10% premium = \(\frac{4,40,000}{110}\) = 4,000 Debentures
In simple words: First, we record buying the machinery on credit from Y. Second, we pay Y by giving him 4,000 debentures valued at Rs. 110 each (which includes the Rs. 10 premium).

 

Exam Tip: Keep the premium amount separate from the face value of the debentures by crediting Securities Premium Account. Always calculate the number of debentures by dividing the total purchase price by the issue price (Rs. 100 + Rs. 10).

 

Question 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.
Answer:

Case (i): Issued at a Premium of 10%
Journal Entries

Balance Sheet

 

Case (ii): Issued at a Discount of 5%
Journal Entries

Balance Sheet

 

Case (iii): Issued as Collateral Security to Bank
No entry will be passed for issuing debentures as a collateral security.
Balance Sheet

Alternative Method:
Journal Entries

Balance Sheet

 

Case (iv): Issued to a Supplier of Machinery Costing Rs. 13,50,000
Journal Entries

Balance Sheet

Working Note:
Price of debenture = \(\frac{\text{Amount due to Vendor}}{\text{Number of debentures issued}}\) = \(\frac{13,50,000}{15,000}\) = Rs. 90 each
Discount per debenture = Rs. 100 - Rs. 90 = Rs. 10 each
In simple words: This problem shows how to account for debentures in four scenarios: at a premium (which goes to Reserves), at a discount (which is a temporary asset/expenditure), as a collateral backup for a bank loan, and to buy machinery at a discount.

 

Exam Tip: For collateral security, be prepared to show both methods in the exam. In the first method, mention the collateral details in parenthetical notes under the loan; in the second method, debit the Debenture Suspense Account and credit the Debentures Account.

 

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:
Journal Entries

In simple words: When we agree to repay debentures at a premium in the future, we record that premium as a loss today. This loss is debited, and we credit the Premium on Redemption of Debentures Account as a future liability.

 

Exam Tip: For case (ii), note that the total debit to "Loss on Issue" includes both the issue discount of Rs. 5 and the redemption premium of Rs. 5, totaling Rs. 10.

 

Question 14. A.Ltd. issued 50,00,000, 8% Debenture of Rs.100 at a discount of 6% on April 01, 2000 redeemable at premium of 4% by draw of lots as under:
20,00,000 Debentures on March, 2002
10,00,000 Debentures on March, 2004
20,00,000 Debentures on March, 2005
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:

Calculation of Loss on Issue of Debentures:
Loss on issue of debentures = 6% (discount on issue) + 4% (premium on redemption) = 10% on face value
Total face value of debentures = 50,00,000 × Rs. 100 = Rs. 50,00,00,000
Total loss to be written off = Rs. 50,00,00,000 × 10% = Rs. 5,00,00,000

Table showing the calculation of loss to be written off every year:

 

Dr. Cr.

 

In simple words: When debentures are redeemed in steps or lots, the total loss on issue is written off in proportion to the amount of debentures used during each year. This method links the year's expense directly to the benefit of the borrowed funds.

 

Exam Tip: Calculate the outstanding debenture amounts carefully for each financial year to establish the writing-off ratio. Remember that the ratio is based on the period for which the funds were actually utilized.

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 of Rs.100 each at a discount of 10% but redeemable at par after 5 years;
(iii) 5,00,000 (represented as 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.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.
Answer:
(a) Journal Entries - Issue of Debentures

(b) Journal Entries - Repayment of Debentures

In simple words: When debentures are issued, the company records the money received, and any discount or premium on issue/redemption. Later, during repayment, the company closes these debenture accounts and pays back the holders.

 

Exam Tip: When debentures are redeemable at a premium, remember to record 'Loss on Issue of Debentures' on the debit side and 'Premium on Redemption of Debentures' on the credit side at the time of issue itself.

 

Question 16. A company issued debentures of the face value of Rs.5,00,000 at a discount of 6% on January 01, 2001. 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:
Calculation of Discount on Issue of Debentures:
Discount = \( 5,00,000 \times \frac{6}{100} = \text{Rs. } 30,000 \)

The ratio of debentures outstanding at the beginning of each year is calculated as follows:

Journal Entries

In simple words: Since the company is paying back Rs. 1,00,000 of debentures each year, the amount of debt is decreasing. So, we write off the discount in a ratio matching the outstanding debt of each year.

 

Exam Tip: To calculate the ratio for writing off discount on debentures, list the outstanding face value at the beginning of each year, simplify these numbers to get a ratio, and distribute the total discount based on this ratio.

 

Question 17. A company issued 10% Debentures of the face value of Rs.1,20,000 at a discount of 6% on January 01, 2001. 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 December 31.
Answer:
Discount on Issue of Debentures Account

Working Note:
Amount of Discount on Issue of Debenture = \( 1,20,000 \times \frac{6}{100} = \text{Rs. } 7,200 \)

 

In simple words: We write off the Rs. 7,200 discount over five years. Since the first drawing happens at the end of the third year, the company enjoys the full Rs. 1,20,000 loan for three full years, after which the loan amount decreases by Rs. 40,000 each year. We use these annual outstanding balances to find the writing-off ratio.

 

 

Exam Tip: Remember that when drawings begin from the end of a specific year, the outstanding balance remains constant for the preceding years. Do not decrease the balance until the actual date of redemption.

 

Question 18. B.Ltd. issued debentures at 94% for Rs.4,00,000 on April 01, 2000 repayable by five equal drawings of Rs.80,000 each. The company prepares its final accounts on December 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: 2000 Rs.6,000; 2001 Rs.6,800; 2002 Rs.5,200; 2003 Rs.3,600; 2004 Rs.2,000; 2005 Rs.400).
Answer:
Debentures face value = 100%
Debenture issued = 94%
Therefore, Discount on issue = 6%
Amount of Discount on issue of debenture = \( 4,00,000 \times \frac{6}{100} = \text{Rs. } 24,000 \)

The amount of discount to be written off each year is as follows:

• In 2000 = Rs. 6,000
• In 2001 = \( 2,000 + 4,800 = \text{Rs. } 6,800 \)
• In 2002 = \( 1,600 + 3,600 = \text{Rs. } 5,200 \)
• In 2003 = \( 1,200 + 2,400 = \text{Rs. } 3,600 \)
• In 2004 = \( 800 + 1,200 = \text{Rs. } 2,000 \)
• In 2005 = Rs. 400

Working Note:
Calculation of amount of discount to be written off each year:

In simple words: When the accounting year of the company ends on December 31, but the debentures are redeemed on April 1 every year, the loan outstanding changes mid-year. To resolve this, we break each year's outstanding debt down by months and write off the discount based on a weighted ratio of time and amount.

 

Exam Tip: When the accounting year-end differs from the date of redemption, always calculate the weighted ratio using the formula: Ratio × Months. This ensures the discount written off matches the exact portion of the year the funds were used.

 

Question 19. B. Ltd. issued 1,000, 12% debentures of Rs.100 each on January 01, 2005 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 December 31, 2005 assuming that interest is paid half yearly on June 30 and December 31 and tax deducted at source is 10%. B.Ltd. follows calendar year as its accounting year.
Answer:
Journal Entries

In simple words: When we issue debentures at a discount but redeem them at a premium, the total loss (discount + premium) is debited as 'Loss on Issue'. For interest, we calculate 12% on the face value for six months, deduct 10% TDS, and pay the rest to the debenture holders. At the end of the year, we transfer the total interest to the Profit and Loss Account.

 

Exam Tip: Always remember that TDS is calculated as a percentage of the gross interest. Debit 'Debenture Interest' with the full gross interest, and credit 'Income Tax Payable/TDS' and 'Debenture Holders' with their respective shares.

 

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 that at par; and (c) when debentures were issued at discount with a condition to redeem them at premium?
Answer:
Journal Entries

In simple words: When debentures are redeemed, we pay back the holders. If we promised to redeem them at a premium, we must debit the 'Premium on Redemption' account to close it alongside the 'Debenture' account, and then pay the total amount from the bank.

 

Exam Tip: When debentures are redeemed at a premium, the Premium on Redemption account must be debited because it was originally credited at the time of issue. This ensures that the liability is fully settled and closed.

 

 

 

Question 21. On January 01, 1998, 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, 2000 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:

Journal Entries in the books of X Ltd.

Ledger Accounts

8% Debentures Account

Cumulative Sinking Fund Account

Cumulative Sinking Fund Investment Account

Bank Account

 

Question 1. On 1st January, 2011, a company issued Rs. 10,00,000, 15% Debentures, redeemable at par on 31st December, 2013. It was decided to set up a Sinking Fund for their redemption. The annual appropriation from profit is Rs. 3,14,110. Sinking Fund Investments earn interest at 6% p.a. On 31st December, 2013, the investments were sold, and after redemption of debentures, a loss of Rs. 6,000 was incurred on the sale of Sinking Fund Investments. Prepare 15% Debentures Account and Sinking Fund Account for the years 2011, 2012, and 2013.
Answer: The required ledger accounts are prepared below:

 

In simple words: The Debentures Account shows a credit balance of Rs. 10,00,000 each year, which is transferred to the debenture holders on maturity. The Sinking Fund Account collects annual allocations from profits and interest on investments, culminating in a final balance of Rs. 10,00,000, which is then adjusted for any investment loss and moved to the General Reserve.

 

 

Exam Tip: Always calculate the annual interest on the Sinking Fund based on the opening balance of the fund for that year, and make sure that the final accumulated balance of the Sinking Fund is transferred to the General Reserve when the debentures are paid off.

Please note that cumulative sinking funds are currently excluded from the CBSE curriculum.
In simple words: A cumulative sinking fund sets aside equal annual sums and invests them so they grow with 4% interest over three years. When the investments are sold and combined with the final year's instalment, the company has the necessary cash ready to pay back the debenture holders.

Exam Tip: In the final year, the investments are sold for cash to pay the debenture holders, so do not create another investment entry on December 31 of the final year. Also, adjust the final year's interest for rounding to ensure the fund balance matches the redemption liability perfectly.

Question 22. On January 01, 2003 a company issued 15% debentures of Rs.10,00,000 at par. The debentures were redeemable at par after three years on December 31, 2003. 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.1 at the end of 3 years, one has to invest Rs.0.31411 every year together with interest that will be earned. On December 31, 2005, 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 December 31.
Answer:

Note - Sinking Fund is not in syllabus of CBSE.
In simple words: This problem presents a Sinking Fund setup where a fixed sum is allocated yearly and invested to repay debentures. At maturity, the investments are sold at a loss of Rs. 6,000, which is adjusted in the Sinking Fund Account before shifting the remaining balance to the General Reserve.

 

Exam Tip: Always make sure to calculate the annual contribution accurately using the sinking fund factor, and transfer the remaining balance of the sinking fund to the general reserve once redemption is complete.

 

Question 23. On January 01, 2004 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 December 31, 2004, 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:

 

 

In simple words: Here, investments with a face value of Rs. 90,000 are sold at 92%, realizing Rs. 82,800. This generates a gain of Rs. 2,800 which is credited to the reserve fund, and the entire fund balance is finally relocated to the General Reserve.

 

Exam Tip: Be careful with the calculation of interest (4% of the face value of Rs. 90,000 = Rs. 3,600) and ensure the profit on sale (Rs. 2,800) is credited to the Reserve Fund Account.

 

Question 24. The following balances appeared in the books of A.Ltd. on January 01, 2004

On January 01, 2004, 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:

 

 

In simple words: This problem features a redemption at 105% (premium of Rs. 20,000) using funds from selling investments at a Rs. 12,000 loss. The premium on redemption is adjusted against the Securities Premium Account, and the loss on sale of investments is written off against the Sinking Fund.

 

Exam Tip: Keep in mind that the premium on redemption (Rs. 20,000) should be met out of the Securities Premium Account, and any loss on investment sale is adjusted directly to the Redemption Fund.

 

Question 25. The following balances appeared in the books of Z.Ltd. on January 01, 2004

The annual instalment added to the fund is Rs.20,575. On December 31, 2004, 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 2004.
Answer:

 

 

Working Note:
Value of Investments sold = Face value \(\times\) 83%
\[ = 1,47,500 \times \frac{83}{100} = \text{Rs. } 1,22,425 \]
In simple words: This problem features investments with a face value of Rs. 1,47,500 which are sold off at 83% (for Rs. 1,22,425), leading to a loss of Rs. 2,575. The loss is adjusted against the Sinking Fund, and the final fund balance is moved over to the General Reserve.

 

Exam Tip: Be sure to compute interest on the nominal value (3% of Rs. 1,47,500 = Rs. 4,425) and include the annual installment (Rs. 20,575) in the Debentures Redemption Reserve Fund Account.

 

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) when out of profit, and (ii) when out of capital?
Answer:

In simple words: This guide outlines the standard journal entries for different forms of debenture redemption. When paying out of profits, we always reserve a portion of the earnings first, whereas redemption out of capital is recorded directly as a payment without setting up reserves.

 

Exam Tip: Remember that whenever a redemption is made out of profits, you must transfer an equal amount to the Debentures Redemption Reserve (DRR), and later transfer it to the General Reserve.

 

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:

Working Note:
Discount on Issue of Debenture = \( 5,00,000 \times \frac{5}{100} = 25,000 \)

Writing off Discount of Issue of Debenture:

 

In simple words: When debentures are repaid in equal annual parts, the initial 5% discount (totaling Rs. 25,000) must be written off proportionally over the 5 years based on the outstanding balances (ratio of 5:4:3:2:1).

 

 

Exam Tip: Be sure to compute the ratios correctly based on the outstanding debenture amounts at the start of each year to find the proper discount amount to write off.

 

Question 28. X.Ltd. issued 5,000, 15% debentures of Rs.100 each on January 01, 2004 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:

Working Note:
Loss on issue of Debenture includes 10% discount on issue and 10% premium on redemption i.e., 20% on face value:
\[ \frac{20}{100} \times 5,00,000 = 1,00,000 \]
In simple words: At issue, the 10% discount and 10% premium are combined into a single Rs. 1,00,000 loss on issue. Over four years, Rs. 1,25,000 (plus Rs. 12,500 premium) is redeemed annually from capital.

 

Exam Tip: Since redemption is made out of capital in equal installments, ensure you divide the total debenture value and the redemption premium by 4 for the annual entries.

 

Question 29. Z.Ltd. issued 2,000, 14% debentures of Rs.100 each on January 01, 2005 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:

In simple words: Since this redemption is out of profits, we first transfer the full nominal value of Rs. 2,00,000 to the Debentures Redemption Reserve (DRR) in the first year. Each year, 500 debentures (Rs. 50,000 plus a Rs. 5,000 premium) are redeemed, and once all four batches are paid off, the DRR is closed by shifting it to the General Reserve.

 

Exam Tip: Do not forget that when redemptions are made out of profits, the DRR must be created for the total amount of the issue upfront, and then transferred to the General Reserve only when the entire redemption process is completed.

 

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. Pass the journal entries.
Answer:

Working Note:
Number of Debenture purchase = \( \frac{2,00,000}{100} = 2,000 \text{ Debentures} \)
Profit on 2,000 debentures = \( (100 - 92) \times 2,000 = \text{Rs. } 16,000 \)

In simple words: When a firm buys back its own debentures from the market at a lower price than their actual face value, it makes a profit. This saved money is transferred to the capital reserve because it is a capital gain.

Exam Tip: Remember to transfer the face value of the cancelled debentures to the Debenture Redemption Reserve (DRR) before executing the cancellation entries.

 

Question 31. A.Ltd. purchased for cancellation Rs.50,000 of its 15% debentures at Rs.98. The expenses of purchase amounted to Rs.50.
Answer:

Working Note:
Number of Debentures Purchased = \( \frac{50,000}{100} = 500 \)
Profit on purchase = \( (100 - 98) \times 500 = 1,000 \)
Less expenses of purchase = \( 50 \)
Profit on cancellation = \( 950 \)

In simple words: The firm bought back Rs. 50,000 worth of its own debentures for Rs. 49,000. After adding the Rs. 50 processing expense, the total cost came to Rs. 49,050. This leaves a net savings of Rs. 950, which is moved to the capital reserve.

Exam Tip: Be sure to add transaction expenses directly to the purchase cost of the own debentures, which consequently reduces the net gain on cancellation.

 

Question. On January 01, 2002, X.Ltd. issued 40,000, 9% debentures of Rs.100 each at Rs.95. The terms of issue provided that, beginning with 1999, Rs.2,00,000 debentures should be redeemed either by drawings at par or by purchase in the open market every year. The expenses of issue amounted to Rs.12,000 which were written-off in 2002. The company also wrote off Rs.40,000 every year from Discount on Debentures Account. At the end of 2004, debentures to be redeemed were repaid by drawings. During 2005, the company purchased for cancellation 2,000 debentures at the market price of Rs.98 on December 31, the expenses being Rs.400. Interest on debentures is payable at the end of every calendar year. Pass the journal entries in the books of the company to record these transactions.
Answer:

Working Note:
Calculation of Interest for 2012, 2013, 2014 = \( 40,00,000 \times \frac{9}{100} = 3,60,000 \)
Calculation of Interest for 2015 = \( 38,00,000 \times \frac{9}{100} = 3,42,000 \)
Note: This question is not given the serial number in the book.

In simple words: This ledger shows how a company records its annual debenture interest payments alongside writing off discount costs. It also shows how the balances change as parts of the debentures are redeemed year by year.

Exam Tip: Pay special attention to the decrease in outstanding debentures for interest calculation in 2015, adjusting the face value down to Rs. 38,00,000.

 

Question 32. A.Ltd. redeemed 8,000, 12% debentures of Rs.100 each which were issued at a discount of 5%, by converting them into equity shares of Rs.10 each at par.
Answer:

Working Note:
Number of shares to be issued = \( \frac{\text{Amount due to Debenture Holders}}{\text{Agreed Price of share}} = \frac{7,60,000}{10} = 76,000 \text{ shares} \)

In simple words: When debentures originally issued at a discount are settled by issuing shares, the original discount is cancelled out. Only the remaining net balance is paid off using fresh equity shares.

Exam Tip: Be sure to write off the proportional discount on debentures to ensure the correct net amount is transferred to the debenture holders' account.

 

Question 33. Y.Ltd. redeemed 4,800, 12% debentures of Rs.100 each which were issued at par, at 110 per cent by converting them into equity shares of Rs.10 each issued at a discount of 4%. Journalise.
Answer:

Working Note:
Amount due to Debenture Holders = \( 4,800 \times 110 = 5,28,000 \)
Number of shares to be issued = \( \frac{\text{Amount due to Debenture Holders}}{\text{Agreed Price of share}} = \frac{5,28,000}{9.60} = 55,000 \text{ shares} \)
Note: 4% discount on Rs. 10 share = Rs. 0.40. Therefore, agreed price per share = Rs. 9.60.

In simple words: The debentures are paid back at a 10% premium, making the total amount due Rs. 5,28,000. This sum is settled by giving the investors shares valued at a discounted rate of Rs. 9.60 each.

Exam Tip: Calculate the number of shares by dividing the total amount payable (inclusive of premium) by the discounted value of each share.

 

Question 34. Z.Ltd. redeemed 2,000, 12% debentures of Rs.100 each which were issued at a discount of 5%, by converting them into equity shares of Rs.10 each issued at a premium of 25%. Journalise.
Answer:

Working Note:
Number of shares to be issued = \( \frac{1,90,000}{12.50} = 15,200 \text{ shares} \)

In simple words: The original debentures had a discount of 5%, so the net value to be settled is Rs. 1,90,000. Since the equity shares are issued at a 25% premium, the agreed price per share is Rs. 12.50, meaning fewer shares are needed to clear the debt.

Exam Tip: Always make sure to deduct the original discount percentage from the debenture value before computing the required number of shares.

 

Question 35. X.Ltd. redeemed 1,000, 12% debentures of Rs.50 each by converting them into 15% New Debentures of Rs.100 each. Journalise.
Answer:

Working Note:
Total Amount Payable = \( 1,000 \times 50 = \text{Rs. } 50,000 \)
Number of 15% New Debentures to be issued = \( \frac{50,000}{100} = 500 \text{ Debentures} \)

In simple words: The old debentures worth Rs. 50,000 are swapped for new ones that carry a 15% interest rate. Because the new debentures have a higher face value of Rs. 100, the company issues exactly 500 of them.

Exam Tip: When converting one class of debentures directly into another, first credit the debenture holders' account before setting up the liability for the new series.