NIOS Class 12 Accountancy Chapter 30 Issue of Debentures

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NIOS Class 12 Accountancy Chapter 30 Issue of Debentures

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Issue of Debentures

Chapter: 30

Module – 5: Company Accounts

INTEXT QUESTIONS 30.1

Name the type of debentures against each of the following :

(i) Debentures that are redeemed before other debentures.

Ans: First Debentures.

(ii) Debentures the holders of which have a first claim on the assets charged.

Ans: First Debentures.

(iii) Debentures that are transferable merely by delivery.

Ans: Bearer Debentures.

(iv) Debentures that are paid back only when the company goes into liquidation.

Ans: Non-redeemable Debentures.

INTEXT QUESTIONS 30.2

(i) List the various forms in which debentures can be issued:

(a)_____________________________.

(b) _____________________________.

Ans: (a) Issued for cash.

(b) Issued for consideration other than cash.

(ii) A company issued 10000 10% debentures of Rs. 100 each. Rs. 30 per debenture was to be paid along with application. Applications were received for 12000 debentures. What can the company do with the excess application money i.e. Rs. 60000 (2000 × Rs. 30)

Ans: The company can refund the excess application money or adjust it towards allotment or future calls.

INTEXT QUESTIONS 30.3

A company purchased a building for Rs. 3,15,000 and issued 10% debentures of Rs. 100 each at a premium of 5%. Calculate:

(i) the number of debentures issued to the vendors.

Ans: 3000 Debentures.

(ii) make journal entry for the issue.

Ans: Vendors A/c Dr. – 3,15,000.

To 10% Debentures A/c – 3,00,000.

To Securities Premium A/c – 15,000.

II. Fill in the blanks with appropriate word/words, figure/figures:

(i) A 10% debenture of nominal value of Rs. 100 has been issued at Rs. 90 is said to be issued at _________.

Ans: Discount.

(ii) A 9% debenture of a nominal value of Rs. 100 has been issued at Rs. 120 debentures are said to be issued at _________.

Ans: Premium.

(iii) 100 8% debentures of Rs. 100 each has been issued to vendors for plant purchased the debentures are said to be issued __________.

Ans: For consideration other than cash.

(iv) A company can issue its debentures at a discount if a provision in this regard has been made in its __________.

Ans: Articles of Association.

INTEXT QUESTIONS 30.4

Answer the following in one word/words :

(i) Name the security which is issued in addition to the principal security.

Ans: Collateral Security.

(ii) Which account is debited while making a journal entry in the books of the company on issue of debentures as collateral security.

Ans: Debenture Suspense A/c.

(iii) On which side of the balance sheet of a company issuing debentures as collateral security is written the Debentures Suspense A/c?

Ans: Assets side.

(iv) When does a company issue debentures as collateral security?

Ans: When the lender demands additional security.

INTEXT QUESTIONS 30.5

Answer the following :

(i) Why is the amount of Discount on Issue of Debentures written in the Balance sheet ?

Ans: It is treated as a capital loss.

(ii) 1000 10% Debentures are issued at a discount of 10% to be redeemed after five years. Calculate the amount of Debenture Discount to be written off each year.

Ans: Rs. 2,000 per year.

(iii) 5000 10% Debentures of Rs. 100 each were issued by company on 1 Jan. 2014. Interest is payable on 30 June & 31 Decembers each year. Calculate the amount of interest paid to debenture holders during 2015.

Ans: Rs. 25,000 on 30 June 2015 and Rs. 25,000 on 31 December 2015.

TERMINAL EXERCISE

1. What do you mean by debenture? State in brief the various types of debentures.

Ans: A debenture is a unit of loan amount issued by a company to raise funds from the public. It is a document issued under the seal of the company as an acknowledgment of the loan received. It contains details such as rate of interest, date of redemption, and terms of repayment. A person holding debentures is called a debenture holder and is treated as a creditor of the company.

Types of Debentures:

(i) On the basis of Security:

(a) Secured or Mortgage Debentures: These are secured by a charge on the assets of the company.

(b) Unsecured Debentures: These are not secured by any asset of the company.

(ii) On the basis of Redemption:

(a) Redeemable Debentures: These are repayable after a fixed period.

(b) Non-redeemable Debentures: These are not repaid during the lifetime of the company.

(iii) On the basis of Records:

(a) Registered Debentures: Recorded in the register of the company.

(b) Bearer Debentures: Transferable by mere delivery and not recorded.

(iv) On the basis of Convertibility:

(a) Convertible Debentures: Can be converted into shares.

(b) Non-convertible Debentures: Cannot be converted into shares.

(v) On the basis of Priority:

(a) First Debentures: Redeemed before other debentures.

(b) Second Debentures: Redeemed after first debentures.

2. When are debentures said to be over subscribed? What accounting treatment is given in case debentures are oversubscribed?

Ans: Debentures are said to be over subscribed when the company receives applications for more number of debentures than the number offered for subscription. In such a case, the company cannot allot all the debentures applied for.

The accounting treatment of over subscription is as follows:

(i) Refund of excess application money: If applications are rejected, the excess money is refunded.

(ii) Adjustment of excess money: In case of partial allotment, excess application money is adjusted towards allotment or future calls.

(iii) Part refund and part adjustment: A part of excess money is refunded and the remaining is adjusted against allotment.

3. What is the accounting treatment in the following cases :

(a) Debentures are issued at premium.

Ans: When debentures are issued at a price higher than their nominal value, the excess amount is called premium. This premium is credited to Securities Premium Account.

Journal Entry:

Debentures Allotment A/c Dr.
To Debentures A/c
To Securities Premium A/c

(b) Debentures are issued at discount.

Ans: When debentures are issued at a price lower than their nominal value, the difference is called discount. It is treated as a capital loss.

Journal Entry:

Debentures Allotment A/c Dr.
Discount on Issue of Debentures A/c Dr.
To Debentures A/c

(c) Debentures are issued in consideration other than cash.

Ans: When a company purchases assets and issues debentures instead of paying cash, it is called issue of debentures for consideration other than cash.

Accounting Treatment:

(i) Purchase of assets:

Sundry Assets A/c Dr.
To Vendors A/c

(ii) Issue of debentures:

(a) At par: Vendors A/c Dr. → To Debentures A/c

(b) At discount: Vendors A/c Dr., Discount A/c Dr. → To Debentures A/c

(c) At premium: Vendors A/c Dr. → To Debentures A/c, To Securities Premium A/c

4. What is meant by debentures issued as collateral security? How is it treated in the books of accounts of the company?

Ans: Debentures issued as collateral security means debentures issued as an additional or secondary security for a loan taken by the company. The lender can use this security only if the company fails to repay the loan and the primary security is exhausted. No interest is paid on such debentures as interest is paid on the loan itself.

The accounting treatment is as follows:

(i) No entry method: No journal entry is passed. It is shown as a note to accounts in the Balance Sheet under borrowings.

(ii) Entry method – A journal entry is passed as:

Debenture Suspense A/c Dr.
To Debentures A/c

This entry is reversed when the loan is repaid.

5. Explain debentures issued at a discount. How is the amount of discount treated in the books of the company?

Ans: Debentures are said to be issued at a discount when they are issued at a price lower than their nominal value. The difference between the nominal value and issue price is called discount. This discount represents a loss to the company.

The amount of discount is not written off in the same year because the benefit of debentures is received over a number of years. Therefore, it is treated as a capital loss and is written off gradually over the period of debentures.

The accounting treatment is as follows:

(i) It is initially recorded as “Discount on Issue of Debentures Account”.

(ii) It is shown on the asset side of the Balance Sheet under “Miscellaneous Expenditure”.

(iii) It is written off every year by debiting Profit and Loss Account.

(iv) The amount is distributed equally over the life of debentures or in proportion to outstanding debentures.

6. MBS Company Ltd has issued 5000 9% debentures of Rs.100 each at a premium of Rs. 20 per debenture payable Rs.60 (including premium) on application and allotment and the balance on call. Applications were received for 6500 debentures. Applications for 500 debentures were outrightly rejected and allotment was made on pro rata basis to the remaining applicants.

All the money was duly called up. Make journal entries for the issue in the books of the company.

Ans: Working Notes

Particulars	Calculation	Amount (₹)
Debentures Issued	5,000 × ₹100	5,00,000
Securities Premium	5,000 × ₹20	1,00,000
Total Issue Price	5,000 × ₹120	6,00,000
Application & Allotment Money Due	5,000 × ₹60	3,00,000
Call Money Due	5,000 × ₹60	3,00,000
Application Money Received	6,500 × ₹60	3,90,000
Refund to Rejected Applicants	500 × ₹60	30,000
Net Application Money	3,90,000 − 30,000	3,60,000
Excess Application Money	3,60,000 − 3,00,000	60,000
Call Money Received	3,00,000 − 60,000	2,40,000

Journal Entries:

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
	Bank A/c Dr.		3,90,000
	To 9% Debenture Application & Allotment A/c			3,90,000
	(Being application and allotment money received for 6,500 debentures)
	9% Debenture Application & Allotment A/c Dr.		3,90,000
	To 9% Debentures A/c			2,00,000
	To Securities Premium A/c			1,00,000
	To 9% Debenture Call A/c			60,000
	To Bank A/c			30,000
	(Being application money adjusted, excess transferred to call and refund made to rejected applicants)
	9% Debenture Call A/c Dr.		3,00,000
	To 9% Debentures A/c			3,00,000
	(Being call money due on 5,000 debentures)
	Bank A/c Dr.		2,40,000
	To 9% Debenture Call A/c			2,40,000
	(Being call money received after adjustment of excess application money)

7. New Ventures Ltd. purchased plant of the book value of Rs. 4,95,000 from another firm. The purchase consideration was paid by issuing 10% debentures of Rs.100 each. Assume debentures have been issued, (i) at par, (ii) at discount of 10%, (iii) at premium of 10%.

Ans: Working Notes

Particulars	At Par	At 10% Discount	At 10% Premium
Purchase Consideration	₹4,95,000	₹4,95,000	₹4,95,000
Issue Price per ₹100 Debenture	₹100	₹90	₹110
Face Value of Debentures Issued	₹4,95,000	₹5,50,000	₹4,50,000
Discount on Issue	–	₹55,000	–
Securities Premium	–	–	₹45,000

(i) At Par

Particulars	Dr. (₹)	Cr. (₹)
Plant A/c Dr.	4,95,000
To Vendor A/c		4,95,000
(Being plant purchased from vendor)
Vendor A/c Dr.	4,95,000
To 10% Debentures A/c		4,95,000
(Being debentures issued at par to vendor)

(ii) At Discount 10%

Particulars	Dr. (₹)	Cr. (₹)
Plant A/c Dr.	4,95,000
To Vendor A/c		4,95,000
(Being plant purchased from vendor)
Vendor A/c Dr.	4,95,000
Discount on Issue of Debentures A/c Dr.	55,000
To 10% Debentures A/c		5,50,000
(Being debentures issued at 10% discount to vendor)

(iii) At Premium 10%

Debentures issued = 4,95,000 ÷ 110% = 4,50,000

Premium = 45,000

Particulars	Dr. (₹)	Cr. (₹)
Plant A/c Dr.	4,95,000
To Vendor A/c		4,95,000
(Being plant purchased from vendor)
Vendor A/c Dr.	4,95,000
To 10% Debentures A/c		4,50,000
To Securities Premium A/c		45,000
(Being debentures issued at 10% premium to vendor)

8. XYZ Co Ltd. has purchased the business of ABC Ltd. consisting assets of ` 4,50,000 and liabilities of Rs. 1,50,000 for a consideration of Rs. 4,00,000. It issued 10% debentures of Rs. 100 each fully paid in satisfaction of purchase consideration.

Make journal entries.

Ans: Net Assets = 4,50,000 − 1,50,000 = 3,00,000

Purchase Consideration = 4,00,000