Notes And Questions NCERT Class 12 Accountancy Chapter 2 Issue and Redemption of Debentures

Please refer to Issue and Redemption of Debentures Class 12 Accountancy notes and questions with solutions below. These revision notes and important examination questions have been prepared based on the latest Accountancy books for Class 12. You can go through the questions and solutions below which will help you to get better marks in your examinations.

Class 12 Accountancy Issue and Redemption of Debentures Notes and Questions

ACCOUNTING FOR ISSUE OF DEBENTURES

Meaning of Debentures: Debentures are one of the frequently used methods by which a business can procure long-term funds for its initial financial needs or for its subsequent requirements of growth and modernization. Funds acquired by means of debentures represent debt and its holders are the company’s creditors. Debenture is merely a written instrument signed by the company under its common seal, acknowledging the debt due by it to its holders. Through this instrument the company promises to pay a specific amount of money as stated therein at a fixed date in future together with periodic payment of interest to compensate the holders for the use of the funds.

Types of Debentures

There are various types of debentures that a company can issue, based on security, tenure, convertibility etc. Let us take a look at some of these types of debentures.

Secured Debentures:

These are debentures that are secured against an asset/assets of the company. This means a charge is created on such an asset in case of default in repayment of such debentures. So in case, the company does not have enough funds to repay such debentures, the said asset will be sold to pay such a loan. The charge may be fixed, i.e. against a specific assets/assets or floating, i.e. against all assets of the firm.

Unsecured Debentures: These are not secured by any charge against the assets of the company, neither fixed nor floating. Normally such kinds of debentures are not issued by companies in India.

Redeemable Debentures:
These debentures are payable at the expiry of their term. Which means at the end of a specified period they are payable, either in the lump sum or in installments over a time period. Such debentures can be redeemable at par, premium or at a discount.

Irredeemable Debentures: Such debentures are perpetual in nature. There is no fixed date at which they become payable. They are redeemable when the company goes into the liquidation process. Or they can be redeemable after an unspecified long time interval.

Fully Convertible Debentures: These shares can be converted to equity shares at the option of the debenture holder. So if he wishes then after a specified time interval all his shares will be converted to equity shares and he will become a shareholder.

Partly Convertible Debentures: Here the holders of such debentures are given the option to partially con-vert their debentures to shares. If he opts for the conversion, he will be both a creditor and a shareholder of the company.

Non-Convertible Debentures: As the name suggests such debentures do not have an option to be converted to shares or any kind of equity. These debentures will remain so till their maturity, no conversion will take place. These are the most common type of debentures.

Issue of Debentures:

Debentures can be issued in following ways:
a) for cash
b) for consideration other than cash
c) As collateral security

Terms of Issue
Debentures can be issued in following ways:
a) Issue of Debentures at Par
b) Issue of Debenture at Premium
c) Issue of Debentures at Discount.
d) Debenture Payable in Installments First installment paid along with application is called as application money.
Second installment paid on allotment is called as allotment money. Subsequent installments paid are called as call money calls can be more than one and called First call, sec-ond call or as the case may be.

Issue of Debentures for Cash

(a) When Debentures amount received in lump sum with the application

Collateral Security : Collateral security means security provided to lender in addition to the principal secu-rity. It is a subsidiary or secondary security. Whenever a company takes loan from bank or from any financial institution it may issue its debentures as secondary security which is in addition to the principal security. Such an issue of debentures is known as ‘issue of debentures as collateral security’. The lender will have a right over such debentures only when company fails to pay the loan amount and the principal security is exhausted. In case the need to exercise the right does not arise debentures will be returned back to the com-pany. No interest is paid on the debentures issued as collateral security because company pays interest on loan.
In the accounting books of the company issue of debentures as collateral security can be credited in two ways :
First method : No Journal entry to be made in the books of accounts of the company for debentures issued as collateral security. A note of this fact is given in this case.
Second method : Entry to be made in the books of accounts of the company.
A journal entry is made on the issue of debentures as a collateral security, Debentures Suspense Account is debited because no cash is received for such issue.
Following journal entry will be made
Journal entry is made on the issue of debentures as a collateral security, Debentures Suspense Account is debited because no cash is received for such issue.
Following journal entry will be made
Journal
Debenture Suspense A/c Dr.
To % Debentures A/c
(Being the issue of Debentures of Rs…. each issued as collateral security)

VARIOUS CASES FROM THE POINT OF VIEW OF REDEMPTION
Debentures can be redeemed at Par or at Premium. Conditions of issue and conditions of redemptions are given below: Journal entries in the different situations:

Interest on Debentures
Interest on Debentures is calculated at a fixed rate on its face value and is usually payable half yearly & is paid even company is suffering from loss because it is charge on profit.
When interest is Due and tax is ignored
Debentures Interest A/c Dr. (Gross Interest)
To Debentures holder A/c (Net Interest)
To Income Tax Payable A/c (Income Tax Deducted

When Interest is paid
Debentures Holder A/c Dr. (With Interest) To Bank A/c

On Transfer of Interest on Debenture to statement of profit and Loss A/c (Tax deducted at source)
Statement of Profit and Loss Dr.
To Debenture Interest A/c (Amount of Interest)

Writing off discount or loss on issue of debentures
discount or loss on issue of debentures is a capital loss for a company, which is written off in the year it is incurred , i.e ., in the year the debentures are allotted from;
1) Securities premium reserve , if it has a balance
2) Statement of profit and loss

Journal entry passed is
Securities premium reserve A/c Dr
Statement of profit and loss A/c Dr
To Discount or loss on issue of debentures A/c
(being the discount or loss on issue of debenture written off)

VERY SHORT ANSWER – QUESTIONS

Question. Debenture holders are
(a) Debtors of the Company
(b) Creditors of the Company
(c) External users
(d) Owners of the Company

Question. Debenture Application A/c is in the form of
(a) Current Account
(b) Nominal Account
(c) Personal Account
(d) Real Account

Question. A company issued Rs.50,000 10% debentures at a discount of 5% redeemable after 5 years at a pre-mium of 5%.Loss on issue of debentures will be Rs.…………………….

Question. Dharm Ltd issues 2,000 ,10% debentures of Rs.100 each at a premium of 20%.The total amount of interest on debentures for one year will beRs.………………………….

Question. Debenture holders are the creditor of a company True /Falase.

Question. Name the head under which “discount on issue of debentures “ appears in the Balance sheet of a company.

Question. Name the type of debentures whose ownership passes on mere delivery of debentures certificates.

Question. Company can issue debenture to its vendor True/False.

Question. Debentures issued as collateral security will be debited to:
(a) Bank Account
(b) Debentures Suspense Account
(c) Debentures Account
(d) Bank Loan Account

Question. When debentures of ₹1,00,000 are issued as Collateral Security against a loan of ₹1,50,000, the entry for issue of debentures will be :
(a) Credit Debentures ₹1,50,000 and debit bank A/c ₹1,50,000
(b) Debit Debenture Suspence A/c ₹1,00,000 and Credit Bank A/c ₹1,00,000
(c) Debit Debenture Suspence A/c ₹1,00,000 and Credit Debentures A/c ₹1,00,000.
(d) Debit Cash A/c ₹1,50,000 and Credit Bank A/c ₹1,50,000.

11 Debentures are shown in the Balance Sheet of a company under the head of
(a) Non-current Liabilities
(b) Current Liabilities
(c) Share Capital
(d) None of these

Question. When debentures are to be redeemed at premium an extra entry has to be made at the time of issue of debentures, which a/c should be credited in this entry?
(a) Loss on issue of debentures a/c
(b) Debenture redemption premium a/c
(c) Bank a/c
(d) Debenture holder’s a/c

Question. Debentures represent the :
(a) Long term Borrowings of a company
(b) The Investment of Equity-Shareholders
(c) Directors’ shares in a company
(d) Short-term Borrowings of a Company

Question. Premium on Redemption of Debentures Account is:
(a) Personal Account
(b) Real Account
(c) Nominal Account
(d) All of the above

Question. X Ltd. acquired assets of ₹20 lakhs and took over creditors of ₹20 thousand from Y Ltd. X Ltd. issued 8% debentures of ₹200 each at a discount of 10% as purchase consideration. Number of debentures issued will be:
(a) 11,000
(b) 9,000
(c) 10,000
(d) 10,100

SHORT ANSWER TYPE QUESTIONS

Question. Give journal entries for the issue of debentures in the following conditions.
A) Issued 2,000, 12% debentures of Rs. 100 each at a discount of 2%, redeemable atpar.
B) Issued 2,000, 12% debentures of Rs. 100 each at a premium of 5%, redeemable at a premium of10%.
Answer.

Question. National Packaging 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.

Question. Complete the following journal entries.

Answer.

Goodwill a/c Dr 1,00,000
Discount on issue of Debentures A/c Dr 2,00,000
To bills payable A/c 20,000
To Debenture A/C 3,80,000

Question. A company took a loan of Rs. 10,00,000 from Punjab National Bank and issued 10% debentures of Rs. 12,00,000 of Rs. 100 each as a collateral security. Explain how you will deal with the issue of debentures in the books of the company.
Answer.

Question. ABC Lmited issued Rs 10,000, 12% debentures of Rs 100 each payable Rs 30on application and remain-ing amount on allotment. The public applied for 9,000debentures which were fully allotted, and all the rele-vant allotment money was duly received. Give journal entries in the books of ABC Ltd., .
Answer.

Question.Aashirward Company Limited purchased assets of the book value of Rs 2,00,000
from another company and agreed to make the payment of purchase consideration by issuing 2,000, 10% debentures of Rs 100 each. Record the necessary journal entries.
Answer.Sundry Assets A/c Dr. 2,00,000
To Vendors 2,00,000
(Assets purchased from vendors)
Vendors Dr. 2,00,000
To 10% Debentures A/c 2,00,000
(allotment of debentures to vendors as purchase consideration)

Question. TV Components Ltd., issued 10,000, 12% debentures of Rs 100 each at a discount of 5% payable as follows:
On application Rs 40
On allotment Rs 55
Show the journal entries including those for cash, assuming that all the instalments were duly collected.
Answer.Books of TV Components Ltd.
Bank A/c Dr. 4,00,000
To 12% Debenture Application A/c 4,00,000
(Receipt of application money @ Rs 30 per debenture)
12% Debenture Application A/c Dr. 4,00,000
To 12% Debenture A/c 4,00,000
(Transfer of application money to debenture account)
12% Debenture Allotment A/c Dr. 5,50,000
Discount on Issue of Debentures A/c 50,000
To 12% Debenture A/c 6,00,000
(Allotment money due on debentures)
Bank A/c Dr. 5,50,000
To 12% Debenture Allotment A/c 5,50,000
(Receipt of allotment money on debentures)

Question. XYZ Industries Ltd., issued 2,000, 10% debentures of Rs 100 each, at a premium
of Rs 10 per debenture payable as follows:
On application Rs 50
On allotment Rs 60
The debentures were fully subscribed and all money was duly received.
Record the journal entries in the books of a company
Answer.Books of XYZ Industries Limited
Bank A/c Dr. 1,00,000
To 10% Debenture Application A/c 1,00,000
(Application money Rs 50 per debentures received)
10% Debenture Application A/c Dr. 1,00,000
To 10% Debentures A/c 1,00,000
(Transfer of application money )
10% Debenture Allotment A/c Dr. 1,20,000
To 10% Debentures A/c 1,00,000
To Securities Premium A/c 20,000
(Allotment money due on debentures including the premium)
Bank A/c Dr. 1,20,000
To 10% Debenture Allotment A/c 1,20,000
(Allotment money received)

Question. Rai Company 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.Books of Rai Company Limited
Sundry Assets A/c Dr. 2,20,000
To Vendors 2,20,000
(Assets purchased from vendors)
Vendors Dr. 2,20,000
To 10% Debentures A/c 2,00,000
To Securities Premium A/c 20,000
(Allotment of 2,000 debentures of Rs 100 each at a premium of 10% as purchase consideration)

Question. A Limited took over the assets of Rs 3,00,000 and liabilities of Rs 10,000 from B & Co. Ltd. for an agreed purchase consideration of Rs 2,70,000 to be satisfied by issue of 15% debentures of Rs 100 at 20% premium. Show the journal entries
in the journal of A Limited.
Answer.Books of A Limited
Sundry Assets A/c Dr. 3,00,000
To Sundry Liabilities A/c 10,000
To B & Co. Ltd. 2,70,000
To Capital Reserve 20,000
(Purchased assets and took over liabilities from B Ltd.)
B & Co. Ltd. Dr. 2,70,000
To 15% Debentures A/c 2,25,000
To Securities Premium A/c 45,000
(Issue of 2,250 debentures of Rs 100 each at a premium of 20%)

LONG ANSWER TYPE QUESTIONS

Question. Star Ltd. took over the assets of ₹ 6,60,000 and liabilities of ₹ 80,000 of Moon Ltd. for ₹ 6,00,000. Give necessary Journal entries in the books of Star Ltd. assuming that:
Case (a): The purchase consideration was payable 10% in cash and the balance in 5,400; 12% Debentures of ₹ 100 each.
Case (b): The purchase consideration was payable 10% in cash and the balance in 4,500; 12% Debentures of ₹ 100 each issued at 20% premium.
Answer.

Question. X Limited Issued 10,000, 12% debentures of Rs. 100 each payable Rs. 40 on application and Rs. 60 on allotment. The public applied for 14,000 debentures. Applications for 9,000 debentures were accepted in full; applications for 2,000 debentures were allotted 1,000 debentures and the remaining applications, were rejected. All money was duly received. Journalise the transactions.
Answer.

Question. On 1st April, 2017, S Ltd. issued 6,000, 8% Debentures of nominal (face) value of Rs. 100 each redeema-ble at 5% premium in equal proportions at the end of 5, 10 and 15 year It has a balance of Rs. 10,000 in Securities Premium Reserve.
Pass Journal entries. Also give Journal entry for writing off Loss on Issue of Debentures.
Answer.

Question. A company issued debentures of the face value Rs 10,00,000 at a discount of 6% on 1st April 2012. These debentures are redeemable by annual drawings of Rs 2,00,000 made on 31st march each year. The directors decided to write off discount based on debentures outstanding each year.

Question. Amount of discount to be written off on 31st march 2013
(a) 20000
(B) 15000
(c) 25000
(d) 10000

Question. Amount of discount to be written off on 31st march 2014
(a) 12000
(B) 14000
(c) 16000
(d) 18000

Question. Amount of discount to be written off on 31st march 2015
(a) 8000
(B) 10000
(c) 12000
(d) 14000

Question. Amount of discount to be written off on 31st march 2016
(a) 5000
(B) 6000
(c) 7000
(d) 8000

Question. Nandan Ltd.’ Is a manufacturer of heavy machines in a town of Telangana. It follows high standards of environment 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 resident of the resident of that area.
The company is doing well and is going to start new manufacturing unit in Jharkhand creating livelihood for people, especially those from disadvantage section of the society. To raise fund company decided to issue 50,000 shares of ₹100 each at par and 80,000, 10% debentures of ₹100 at 95, repayable at ₹105.

Question. Total Fund raised by the company:
(a) 50,000
(b) 1,30,00,000
(c) 1,26,00,000
(d) 80,00,000

Question. When debentures are allotted, 10% debenture account is:
(a) Debited with ₹ 80,00,000
(b) Credited with ₹80,00,000
(c) Debited With ₹ 76,00,000
(d) Credited with ₹ 76,00,000

Question. Loss on issue of debenture:
(a) 4,00,000
(b) 80,000
(c) 8,00,000
(d) None of the above

Question. Wellbeing Ltd. took over assets of ₹ 9,80,000 and liabilities of ₹ 40,000 of HDR Ltd. at an agreed value of ₹ 9,00,000. Wellbeing Ltd. paid to HDR Ltd. by issue of 9% Debentures of ₹ 100 each at a premium of 20%. Pass necessary Journal entries to record the above transactions in the books of Wellbeing Ltd.
Answer.

CBSE BOARD QUESTIONS

Question. Blue Prints Ltd., purchased building worth Rs 1,50,000, machinery worth Rs 1,40,000 and furniture worth Rs 10,000 from XYZ Co., and took over its liabilities of Rs 20,000 for a purchase consideration of Rs 3,15,000. Blue Prints Ltd., paid the purchase consideration by issuing 12% debentures of Rs 100 each at a premium of 5%. Record necessary journal entries.
Answer.CBSE QUESTION PAPER SOLUTION
Building A/c Dr. 1,50,000
Plant & Machinery A/c Dr. 1,40,000
Furniture A/c Dr. 10,000
Goodwill A/c 1 Dr. 35,000
To Liabilities (Sundry) 20,000
To XYZ Co. 3,15,000
(Purchase of assets and taking over of liabilities of XYZ Co.)
XYZ Co. Dr. 3,15,000
To 12% Debentures A/c 3,00,000
To Securities Premium A/c 15,000
(Issue of 3,000 debentures at a premium of 5%)
Note: 1. Since the purchase consideration is more than net assets taken over, the
difference has been debited to goodwill account.
2. No. of debentures issued = Purchase Consideration
Issue Price of a Debenture
= Rs 3,15,000/105 = 3,000

Question. Y Ltd. issued Rs. 2,00,000, 10% Debentures at a discount of 5% .The terms of issue provide the repayment at the end of 4 years . Y Ltd. has a balance of Rs. 5, 00,000 in Securities Premium Reserve. The company decided to write off discount on issue of debentures from Securities Premium Reserve in the first year.
Pass the journal entry.
Answer.                                         Debit Rs.          Credit Rs.
Securities Premium Reserve A/c Dr   10,000
To Discount on issue of debentures A/c                    10,000
(Being Discount on issue of debentures written off)
Note: Discount on issue of Debentures = 2, 00,000×5% = Rs 10,000

Question. Pass the necessary journal entries for the issue of 7,500,9% Debenture of Rs. 50 each at discount of 6%, redeemable at premium of 10%.
Answer.

Question. XYZ Industries Ltd., issued 2,000, 10% debentures of Rs 100 each, at a premium of Rs 10 per debenture payable as follows:
On application Rs 50
On allotment Rs 60
The debentures were fully subscribed and all money was duly received.
Record the journal entries in the books of a company.
Answer.
Bank A/c Dr. 1,00,000
To 10% Debenture Application A/c 1,00,000
(Application money Rs 50 per debentures received)
10% Debenture Application A/c Dr. 1,00,000
To 10% Debentures A/c 1,00,000
(Transfer of application money )
10% Debenture Allotment A/c Dr. 1,20,000
To 10% Debentures A/c 1,00,000
To Securities Premium A/c 20,000
(Allotment money due on debentures including the premium)
Bank A/c Dr. 1,20,000
To 10% Debenture Allotment A/c 1,20,000
(Allotment money received)