Issue of Debentures - Test Papers

CBSE Test Paper 01

Issue of Debentures

Premium on redemption of debentures is in the nature of
1. None of these
2. Personal account
3. Real account
4. Nominal account
When debentures are issued as secondary securities it is called
1. Issue for consideration other than cash
2. Issued at premium
3. Issue as collateral securities
4. Issued at a discount
Debenture holders do not have right for ____
1. To apply for Redemption of debentures on maturity
2. Dividend and Interest both
3. Interest
4. Dividend
A Debenture of a company represents
1. Shareholders Fund
2. Debt
3. Capital
4. Assets
A debenture is ______
1. Debtors equity
2. An internal equity
3. An external equity
4. Owners’ equity
Fill in the blanks:
Discount on issue of debenture is ________ loss of the company.
What is meant by Convertible Debentures?
Why would an investor prefer to invest in the Debentures of a Company rather than in its Shares?
Narain Laxmi Ltd invited applications for issuing 7,500, 12% debentures of Rs.100 each at a premium of Rs.35 per debenture. The full amount was payable on application.
Applications were received for 10,000 debentures. Applications for 2,500 debentures were rejected and the application money was refunded. Debentures were allotted to the remaining applicants.
Pass necessary journal entries for the above transactions in the books of Narain Laxmi Ltd.
‘Sangam Woollens Ltd/ Ludhiana, are the manufacturers and exporters of woollen garments. The company decided to distribute free of cost woollen garments to 10 villages of Lahaul and Spiti District of Himachal Pradesh. The company also decided to employ 50 young persons from these villages in its newly established factory. The company issued 40,000 equity shares of Rs.10 each and 1,000 9% debentures of Rs.100 each to the vendors for the purchase of machinery of t 5,00,000.
Pass necessary journal entries. Also, identify anyone value that the company wants to communicate to the society.
(Issue of Debentures to Vendors at a Discount).
Exe Ltd. purchased assets of ₹8,40,000 and took over liabilities of ₹80,000 of Whe Ltd. at a value of ₹7,20,000. Exe Ltd. issued 10% Debentures of ₹100 each at 10% discount in full satisfaction of the price. The company decided to write off Discount on Issue of Debentures from Securities Premium Reserve of ₹1,00,000. Pass Journal entries in the books of Exe Ltd.
‘Nandan Ltd’ is a manufacturer of heavy machines in a town of Telangana. It follows high standards of environmental safety in the process of manufacturing. The company runs a school to provide quality education and a medical centre to address health issues of the residents of that area. The company is doing well and is going to start a new manufacturing unit in Jharkhand creating a livelihood for people, especially those from disadvantaged sections of the society. In order to raise funds, the company decided to issue 50,000 shares of Rs.100 each at par and 80,000, 10% debentures of Rs.50 each.
Pass necessary journal entries for the issue of shares and debentures. Also, identify the value which the company wants to communicate to the society.
1. On 15-2-2017 A Ltd. invited applications for issue of 1,00,000, 9% debentures of ₹100 each at a discount of 6%, redeemable at par after 3 years. The full amount was payable on application and the debentures were issued on 15-3-2017. Pass the journal entries for the above transactions.
2. R Ltd. issued 10,000, 12% Debentures of ₹100 each at a discount of 5%. Pass Journal entries.
Savoy Ltd. invited applications for 4,000 Debentures of ₹100 each issued at a premium of 20%. Applications were received for 6,000 debentures and it was decided to deal with the same as follows:
1. To refuse allotment to applicants for 1,200 debentures.
2. To give full allotment to applicants for 400 debentures.
3. To allot the remaining debentures on a pro rata basis among other applicants.
4. To utilise excess application money in part payment of allotment money.
Journalise the above transactions (including cash transactions) assuming that
1. The total amount is payable along with the application, and
2. when the amount is payable in installments - on applications ₹20, on allotment ₹50 (including premium), and balance as first and final call.
On 1st April, 2016, Sunstar Ltd. issued 10,000 12% Debentures of ₹100 each at a discount of 5% redeemable at par as follows:
On 31st March 2017 2,000 Debentures;
On 31st March 2018 5,000 Debenture;
On 31st March 2019 3,000 Debentures.
Interest is paid annually on 31st March.
You are required to pass the Journal entries, including for interest for the three years and prepare Discount on Issue of Debentures Account.

CBSE Test Paper 01
Issue of Debentures

Solution

(d) Nominal account
Explanation: Nominal account
(c) Issue as collateral securities
Explanation: Issue as collateral securities
(d) Dividend
Explanation: Debenture holders do not have dividend right. They can’t claim for dividend because dividend is only for the shareholders. Debenture holders get a fixed interest annually.
(b) Debt
Explanation: A debenture of a company represents debt of the company. Amount raised through debentures is treated as long term borrowings.
(c) An external equity
Explanation: Debentures are external equity i.e. outsiders liability. Capital contributed by the shareholders is called internal equity but amount contributed by the debenture holders is called external equity.
Capital
Convertible Debentures are those debentures which are convertible into Equity Shares or other securities either at the option of debentures holders or at the option of the company as the case may be, after a specified period.
An investor would prefer to invest in debentures because:
1. Interest on debentures is payable irrespective of the Company making a profit or incurring a loss whereas dividend on shares is paid only when the Company makes a profit.
2. Debentures are mostly secured whereas a share is always unsecured.

Journal

Bank A/c.....Dr.	13,50,000
To Debenture Application & Allotment A/c		13,50,000
( Being application received.)

Debenture Application & Allotment A/c......Dr.	13,50,000
To 12% Debenture A/c		7,50,000
To Security Premium Reserve A/c		2,62,500
To Bank A/c		3,37,500
( Being debenture application money transfer.)

The Value Company want to communicate to society:
Social Welfare is going to be done by the company and also want to provide employment to the youth of Himachal Pradesh.

Journal

Date	Particulars		L.F.	Debit ( Rs. )	Credit ( Rs. )
1.	Machinery A/c	Dr.		5,00,000
	To Vendor’s A/c				5,00,000
	( Being machinery Purchased from vendor )

2.	Vendor’s A/c	Dr.		5,00,000
	To Equity Share Capital A/c				4,00,000
	To 9% Debenture A/c				1,00,000
	( Being amount paid to the vendor by issuing shares and 9% debenture )

JOURNAL OF EXE LTD.

Date	Particulars		L.F.	Dr.(₹)	Cr.(₹)
	Sundry Assets A/c	Dr.		8,40,000
	To Sundry Liabilities A/c				80,000
	To Capital Reserve A/c (Note 2)				40,000
	To Whe Ltd.				7,20,000
	(Being the purchase of business of Whe Ltd.)
	Whe Ltd.	Dr.		7,20,000
	Discount on Issue of Debentures A/c	Dr.		80,000
	To 10% Debentures A/c				8,00,000
	(Being the issue of 8,000; 10% Debentures at 10% discount)
	Securities Premium Reserve A/c	Dr.		80,000
	To Discount on Issue of Debentures A/c				80,000
	(Being the discount on issue of debentures written off)

Notes:-

Calculation of the number of Debentures:
₹ 7,20,000/₹ 90 = 8,000 debentures of ₹ 100 each.
$∴$ Debentures issued are of ₹ 8,00,000 at discount of 10%, i.e. ₹ 80,000.
Capital Reserve = Net Assets (i.e., Sundry Assets - Sundry Liabilities) - Purchase Consideration
= ₹ (8,40,000 - 80,000) - ₹ 7,20,000 = ₹ 40,000

Books of Nandan Ltd.

JOURNAL

Particulars		Amt (Dr)	Amt (Cr)
Bank A/c (50,000 x 100)	Dr	50,00,000
To Equity Share Application and Allotment A/c			50,00,000
(Being application money received on 50,000 equity shares of 100 each at par)

Equity Share Application and Allotment A/c	Dr	50,00,000
To Share Capital A/c			50,00,000
(Being the application money transferred to share capital account)
Bank A/c (80,000x50)	Dr	40,00,000
To Debenture Application and Allotment A/c			40,00,000
(Being the application money received on 80,000 debentures of 50 each)

Debenture Application and Allotment A/c	Dr	40,00,000
To 10% Debentures A/c			40,00,000
(Being the amount transferred to debentures account)

Value which the company wants to communicate to the society are (anyone)

When amount on shares are received in lump sum then Equity Share Application and Allotment Account is credited.

Environment Protection
Care and concern towards people belonging to under previlliged section of the society.

A Ltd.
Journal

Date	Particulars		Dr. (₹)	Cr. (₹)
15-02-17	Bank A/c	Dr.	94,00,000
	To 9% Debenture Application & Allotment A/c			94,00,000
	(Application money received for 1,00,000 debentures @ ₹94 each)
15-03-17	9% Debenture Application & Allotment A/c	Dr.	94,00,000
	Discount on Issue of Debenture A/c	Dr.	6,00,000
	To 9% Debentures A/c			1,00,00,000
	(Application money transferred to Debentures A/c consequent upon allotment issued at 6% discount)

R Ltd.
Journal

Particulars		Dr. (₹)	Cr. (₹)
Bank A/c	Dr.	9,50,000
To 12% Debenture Application & Allotment A/c			9,50,000
(Application money received for 10,000 debentures @ ₹95 each)
12% Debenture Application & Allotment A/c	Dr.	9,50,000
Discount on Issue of Debentures A/c	Dr.	50,000
To 12% Debenture A/c			10,00,000
(Application money transferred to Debentures A/c consequent upon allotment, issued at 5% discount)

JOURNAL OF SAVOY LTD.

Date	Particulars		L.F	Dr.(₹)	Cr.(₹)
(a)	If the total amount is payable along with the application:
	Bank A/c	Dr.		7,20,000
	To debentures Application and Allotment A/c				7,20,000
	(Being the application money received)
	Debentures Application and Allotment A/c	Dr.		7,20,000
	To ...% Debentures A/c				4,00,000
	To securities Premium Reserve A/c				80,000
	To Bank A/c				2,40,000
	(Being the application money adjusted and surplus refunded)
(b)	If the amount is payable in instalments:
	Bank A/c	Dr.		1,20,000
	To Debentures Application A/c				1,20,000
	(Being the application money received)
	Debentures Application A/c	Dr.		1,20,000
	To ....% Debentures A/c				80,000
	To Debentures Allotment A/c				16,000
	To Bank A/c				24,000
	(Being the application money adjusted and surplus refunded)
	Debentures Allotment A/c	Dr.		2,00,000
	To ...% Debentures A/c				1,20,000
	To Securities Premium Reserve A/c				80,000
	(Being the allotment money due)
	Bank A/c	Dr.		1,84,000
	To Debentures Allotment A/c				1,84,000
	(Being the allotment money received)
	Debentures First and Final Call A/c	Dr.		2,00,000
	To ....% Debentures A/c				2,00,000
	(Being the call money due)
	Bank A/c	Dr.		2,00,000
	To Debentures First and Final Call A/c				2,00,000
	(Being the call money received)

Journal of Sunstar Ltd.

Date	Particulars		Dr. (₹)	Cr.(₹)
2016 April 1	Bank A/c	Dr.	9,50,000
	To Debentures Application and Allotment A/c			9,50,000
	(Being the debentures application money received)
	Debentures Application and Allotment A/c	Dr.	9,50,00
	Discount on Issue of Debentures A/c	Dr.	50,000
	To 12% Debentures A/c			10,00,000
	(Being 10,000; 12% Debentures of ₹100 each allotted at 5% discount)
2017 March 31	Debentures' Interest A/c	Dr.	1,20,000
	To Debenturesholders' A/c			1,20,000
	(Being the interest due @ 12% p.a on ₹10,00,000)
	Debenture holders' A/c	Dr.	1,20,000
	To Bank A/c			1,20,000
	(Being the interest paid)
	Statement of Profit and Loss (Finance Cost)	Dr.	1,20,000
	To Debentures' Interest A/c			1,20,000
	(Being the transfer of Debentures' interest to Statement of Profit and Loss)
	Statement of Profit and Loss (Finance Cost)	Dr.	50,000
	To Discount on Issue of Debentures A/c			50,000
	(Being the discount on Issue of Debentures written off)
2018 March 31	Debentures' Interest A/c	Dr.	96,000
	To Debentureholders' A/c			96,000
	(Being the interest due @ 12% p.a.on ₹8,00,000)
	Debenture holders' A/c	Dr.	96,000
	To Bank A/c			96,000
	(Being the interest paid)
	Statement of Profit and Loss (Finance Cost)	Dr.	96,000
	To Debentures' Interest A/c			96,000
	(Being the transfer of Debentures Interest to Statement of Profit and Loss)
2019 March 31	Debentures' Interest A/c	Dr.	36,000
	To Debentureholders'			36,000
	(Being the interest due @ 12% p.a. on ₹3,00,000)
	Debentureholders' A/c	Dr.	36,000
	To Bank A/c			36,000
	(Being the interest paid)
	Statement of Profit and Loss (Finance Cost)	Dr.	36,000
	To Debentures' Interest A/c			36,000
	(Being the transfer of Debentures' Interest to Statement of Profit and Loss)

Dr.	Discount on Issue of Debentures Account				Cr.
Date	Particulars	₹	Date	Particulars	₹
2016 April 1	To 12% Debentures A/c	50,000	2017 March 31	By Statement of Profit and Loss	50,000
		50,000			50,000

On 31st March 2017	2,000 Debentures;
On 31st March 2018	5,000 Debenture;
On 31st March 2019	3,000 Debentures.