Unit-I

Issue, Forfeiture and Re-issue of Shares

1.1 Issue, Forfeiture and Re-issue of Shares: Redemption of Preference Shares

Concept

A company may be a group of individuals who donate money or price to common shares and use it for a standard purpose. Within the words of Judge James, "a company may be a group of individuals united for a standard purpose." Article 3 (1) (i) of the Businesses Act of 1956 defines a corporation as "a company established and registered under this Act or an existing company".

Company Characteristics

1. It's a voluntary association of individuals.
2. There's a separate legal entity.
3. There's a standard seal.
4. It's permanent inheritance.

Company Type

1. Supported Formation

1. Chartered Company – a corporation established under a special Chartered Company by a king or sovereign, like the Malay Archipelago Company.
2. Legislative Companies – These companies are formed by special legislative or parliamentary legislation like RBI.
3. Registered Companies-Such companies were established under the businesses Act of 1956 or were registered under the previous Companies Act.

II.            Based On Responsibility

1. Limited Companies-In these companies, the liability of every member is restricted to the face value of the shares he holds.
2. Guarantee Company-The liability of a member of such a corporation is restricted to the quantity he undertakes to contribute to the Debentures 's assets if the company is liquidated.
3. Unlimited Companies – In these companies, the members have unlimited liability and therefore the members are personally susceptible to the creditors of the Debentures that creates up for the shortfall. Such companies are rare lately.

III.            Based on Public Investment

1. Private Companies – These are companies thereunder clause,

a)     Limiting the number of members to 50,

b)    Prohibiting invitations to the overall public to subscribe shares or Debentures,

c)     Restrict the transfer of shares.

B.    Public Companies – These are non-private companies.

Share Capital

The total capital of a corporation is split into small units. Each is named a share. Consistent with Article 2 (46) of the businesses Act of 1956, shares are defined as shares of the company's equity capital. Includes shares unless the excellence between shares is explicitly or implied.

Share Class

A. Preferred Shares

Shares that enjoy preferential dividends and capital repayments when the Debentures is liquidated instead of shares are called preferred share. Holders of preferred shares receive fixed rate of interest dividends.

Types of Preferred Shares

1. Cumulative Preferred Share – For these shares, the delinquent dividend is going to be carried forward and paid from subsequent year's profits.
2. Non-Cumulative Preferred Shares – If dividends don't accumulate and aren't carried forward to next year, they're called non-cumulative preferred shares.
3. Participating Preferred Shares – A balance of interests shared by some preferred shareholders (after meeting the share dividend) additionally to fixed dividends. Such shares are participation preferred shares.
4. Non-Participating Preferred Shares – These shares only receive fixed rate dividends. These aren't a part of the excess profit.
5. Redeemable Preferred Shares – If the well-liked share is returned to shareholders after a period of your time, these preferred shares e-shares are called redeemable preferred shares.
6. Convertible Preferred Shares – These shares are entitled to conversion into shares within a specified period or on a specified date, subject to issuance conditions.

B. Shares

Shares aren't preferred shares. Shares don't provide a preferential benefit in terms of dividends or capital repayments. Therefore, these are referred to as common shares. There's no fixed dividend rate paid to shareholders, and this rate can vary from year to year. At the time of liquidation, equity capital is going to be repaid last. However, shareholders do have full voting rights.

Types of Share Capital

1. Authorized (Registered or Nominal) Capital – This is often the utmost amount of capital that a corporation is allowed to boost through a public subscription.
2. Issued Capital – a number of the authorized capital generally provided for subscriptions is named Issued Capital.
3. Participating Capital – The portion of issued capital that receives an application from a public institution is named Participating Capital.
4. Called Capital – The portion of the subscribed capital called or requested by the Debentures is named called capital.
5. Paid-In Capital – The portion of the called capital provided by the member and truly paid is named paid-in capital. The outstanding balance of the called capital is named the outstanding capital or delinquent call.
6. Reserve Capital – The portion of uncalled capital that's called only the Debentures is liquidated.

Difference between Equity Shares and Preference Shares

Issue of Share Capital

Shares can be issued at face value, premium, or discount. If a shareholder needs to pay the company the par value of the shares, the shares are said to be issued at par. Shares are said to be issued at a premium if shareholders are required to pay more than par by the company. Shares are said to be issued at a discounted price if shareholders need to pay the company less than par. For example, a company issues shares with a par value of Rs.10 at Rs.10. It's a par issue. When issued in Rs. 12, the problem is premium. If issued in Rs.8, the issue will be discounted.

The issue price of the shares can be received in one installment or in another installment. If the issue is a different installment payment, you may be paid for the application, allocation, and one or more calls. The application amount is called the application amount, the membership fee is called the allocated amount, and the rest is called the billed amount. According to the SEBI guidelines, the application fee issued must be at least 25% of the issue price (5% according to the Cost Act).

Share Allocation

Allocation of shares means accepting the applicant's offer to purchase shares. The Directors have the discretion to reject or accept the application. However, a public company cannot allocate its shares unless a minimum subscription is subscribed to by the general public and the amount of application is received. After allocating shares to applicants who will become shareholders of the company.

Journal Entries for Share Issue

1. On receipt of application money:

Bank A/C Dr

To Share Application A/C

2.    On Acceptance of Application:

Share Application A/C                      Dr

To Share Capital A/C

3.    On Allotment Money Due:

Share Allotment A/C                          Dr

To Share Capital A/C

4.    On Receipt of Allotment Money:

Bank A/C Dr

To Share Allotment A/C

5.    On Making First Call Due:

Share First Call A/C Dr

To Share Capital A/C

6.    On Receipt of First Call Money:

Bank A/C Dr

To Share First Call A/C

(Note: similar entries may be passed for second call, third call, if any)

Problem 1

Bharat Trading Co. Ltd. With registered capital of Rs.100000 issued 5000 shares of Rs.10 respectively, Rs.2 at the time of application, Rs.2 at the time of allocation, Rs.3 at the first call, and the last Issued Rs.3 on the call. Pass journal entry assuming that the issued shares are fully subscribed and money has been received.

A1.             Journals in the books of Bharat Trading Co Ltd.

Issue of Shares at Premium

Shares are said to be issued at a premium if shareholders are required to pay more than par by the company. The excess amount received above par is called the share premium. Receipt of capital. The share premium will be transferred to "Securities Premium A / c". It should appear under the heading "Reserves and Surplus" on the liabilities side of the balance sheet.

Journal Entries:

(a) If Premium is Received with Application Money:

(i)   Bank A/C Dr

To Share Application A/C

(ii) Share Application A/C Dr (With Total)

To Share Capital A/C (Application Money)

To Securities Premium A/C (Premium)

(b) If Premium is Received with Allotment Money:

(i)   Share Allotment A/C Dr (Total)

To Share Capital A/C (Allotment Money Due)

To Securities Premium A/C (Premium)

(ii) Bank A/C Dr

To Share Allotment A/C

Issue of Shares at Discount

Shares are said to be issued at a discounted price if shareholders need to pay the company less than par. The share issuance discount is a capital loss and must be debited in a separate account called the share issuance discount A / c. It is displayed in "Miscellaneous expenses" on the asset side of the Balance Sheet. The discount rate must not exceed 10% of the nominal value of the share. Issuance discounts are usually recorded at the time of allocation. In addition, newly registered companies cannot issue shares at a discounted price. The journal entry is

Problem 2

The limited liability company issued 5000 shares of 10 rupees each with a premium of 5 rupees per share. The amount was paid as Rs.3 at the time of application, Rs.7 to the quota (including premium), and the balance of the first and last calls. All shares have been subscribed and the money has been properly received. Shows journal entries.

A2.                                        Journal Entries

When Both Preferred Share and Share Are Issued

If the company issues both preferred shares and shares, the journal entries will be written separately for each type of equity capital.

Under Share Subscription

The application for shares received may be less than the number of shares issued. It is called under the subscription. In this case, the allotment will be the same as the number of tendered shares, not the number of issued shares.

Share Oversubscription

The application for shares accepted may exceed the number of shares issued. This is called oversubscription. If you have an oversubscription, you may not be able to issue shares to all applicants. In such situations, the Company shall reject some applications altogether, allocate the full amount to some applications, and prorate some applications. Proportioning is the ratio of the number of shares to be allotted to the number of shares to be applied, and is to be distributed to each application. If the application is completely rejected, it will be returned to the applicant. With proportional distribution, the excess is adjusted at the time of allocation or call. The surplus will be refunded to the applicant even after the adjustment. The journal is

1. When Application money is returned: Share Application A/c Dr

To Bank A/c

2.   When excess Application is adjusted towards Allotment or Call:

3.     Share Application A/c Dr (total)

To Allotment A/c (amount adjusted towards Allotment)

To Call (if any) (amount adjusted towards Call)

Problem 4

Sun Ltd. Will issue 100,000 shares of Rs.10 to Rs.3 at the time of application, Rs.5 at the time of allocation, and Rs.2 at the first and last calls. There were applications for 250,000 shares. The company returned the application for 24,000 shares, and the excess application fees from the remaining applicants were carried over with partial satisfaction with the allotted amount of shares allocated. Received the balance of the allocation. The company didn't make the first and last call. Journal the transaction.

A4.                                            Entries in the books of Sun Ltd

Calls in Arrears and Calls in Advance

Shareholders may neglect to pay reserves or make phone calls. Such membership fees are called overdue calls. It appears on the balance sheet as a deduction from the recalled capital. Directors are entitled to charge interest on overdue calls at the rates stated in the article. Without it, the interest will not exceed 5% pa. If shareholders pay more than they are billed, the excess is called pre-billing. The company must pay interest on the call-in advance at the rate specified in Articles. Without it, the company is obliged to pay interest at an annual interest rate of 6%. However, shareholders cannot pay dividends by telephone in advance.

Forfeiture of Shares

Cancellation of shares due to non-payment of allowances or call money within a certain period of time is called forfeiture of shares. This is a forced termination of membership of a defaulting shareholder. He also loses all the money he has paid to the company so far. A company may confiscate shares only if approved by that clause. Forfeiture will only occur after 14 days' notice to the defaulting shareholders. The balance of expired shares A / c must be presented in addition to the capital summoned to the liabilities side of the balance sheet until the shares are reissued.

Journal Entries:

1. Forfeiture of shares which were issued at Par:

2.     Forfeiture of shares which were issued at Premium:

1. When Allotment money (incl. premium) and call money not paid

3.     Forfeiture of shares which were issued at discount:

Problem 5:

Kerala Ltd issued 5000 shares of Rs.10 as Rs.3 at the time of application, Rs.2 at the time of allocation, Rs.3 at the first call and Rs.2 at the last call. Ali was allocated 50 shares and failed to pay the quota and make the first call. If those shares are forfeited, please enter a journal.

A5.

Problem 6

Malabar Ltd has Rs.3 at the time of application, Rs.4 (including premium) at the time of allocation, Rs.3 at the first call, and Rs.2 premium paid at the last call as Rs.2. Issued 5000 shares. Mr. Ajay was allocated 50 shares and failed to pay the quota and make his first call. If those shares are forfeited, please enter a journal

A6

Problem 7

Jay Ltd issued 5000 shares of Rs.10 at a 10% discount, Rs.3 at the time of application, R.1 at the time of allocation, Rs.3 at the first call and Rs.2 at the last call. Mr. Raju was allocated 50 shares and failed to pay for the first and last phone calls. If those shares are forfeited, please enter a journal.

A7.

Reissue of Forfeited Shares

The forfeited shares can be reissued by the company for PR, premium, or discount. However, the reissue discount must not exceed the forfeited amount.

Journal Entries:

1. On reissue at par (issued at par or premium):

Bank A/c     Dr (amount received on reissue) 

To share capital A/c (amount paid up)

2.     On reissue of at a discount (issued at par or premium):

Bank A/c                 Dr (amount received on reissue) Forfeited shares A/c Dr (amount of discount on reissue)

To share capital A/c (amount paid up)

3.     On reissue at a premium (issued at par or premium):

Bank A/c Dr (amount received on reissue) 

To share capital A/c (amount paid up)

To security premium A/c (premium on reissue)

4.     On reissue at a discount (issued at a discount):

Bank A/c    Dr (amount received on reissue) Discount on issue of shares A/c Dr (amount of original discount)

Forfeited shares A/c Dr (excess of discount on reissue over original issue)

To share capital A/c (amount paid up)

If all forfeited shares have been reissued, the credit balance in forfeited shares A/c (capital profit) shall be transferred to capital Reserve A/c by passing the following entry

Forfeited shares A/c Dr

To capital reserve A/c

If all forfeited shares are not reissued, only the profit on shares which are issued is transferred to Capital reserve A/c.

Problem 8

The directors of A Ltd have resolved to confiscate the 2000 shares for which Rs.10 and Rs.7.50 were paid, respectively, due to the unpaid final call of Rs.2.50. Of the above shares, 1800 were reissued for Rs 6 per share. Shows journal entries.

A8.

Problem 9:

Arjun Ltd invited 10000 shares of Rs.100 with a premium of 5% each as Rs.25 at the time of application, Rs.45 for allocation (including premium) and Rs.35 for first and last calls. There were 9000 shares submitted and all were accepted. All monetary membership fees were received, except for the call for 100 shares confiscated. Of these 50 shares, they were reissued with the fully paid Rs.90. Pass the journal

A9. 

Redemption of Preferred Shares

If Preferred Share is issued, the company will reimburse such shareholders after the expiration of a set period of time, regardless of whether the company is liquidated.

In accordance with Article 80 of the Companies Act, a limited liability company may redeem preferred share in accordance with the following conditions.

1. All shares to be redeemed must be paid in full.
2. Such shares may be redeemed from either profits or income from the issuance of new shares. However, these cannot be redeemed from the issuance of new Debentures or the sale of company assets.
3. The premium paid at the time of redemption must be provided from the company's profit or the company's securities premium account.
4. If the shares are redeemed from profits, the amount equal to the nominal amount of the shares so redeemed must be transferred from the profits to the reserve account, i.e., the capital redemption reserve A / c.
5. Capital Redemption Reserve A / c can only be used to issue fully paid bonus shares.

Preferred share can be redeemed at face value or premium (but not at a discount). Redemption premiums are offered from existing Security Premium accounts or newly issued Security Premiums. If they are not sufficient, the redemption premium should be provided from the income statement or general reserve.

Redemption Method

There are three ways to Redeem Preferred Share. They are:

1. Redemption by issuing new shares
2. Redemption from profit
3. Partly redemption from new issuance and part from profit

Accounting Entries:

1. Ensure that the redeemable preference shares are fully paid. If they are partly paid, the following entries are passed to make them fully paid.

(a) Preference Share Final Call A/c Dr

To Preference Share Capital A/c

(b) Bank A/c Dr

To Preference Share Final Call A/c

2.     Entry for total amount due to preference

Shareholders

Preference Shares Capital A/c Dr (face value)

Premium on Redemption A/c                           Dr (premium on redemption)

To Preference Shareholders A/c (total amount payable on redemption)

3.     Entry for issue of equity shares either with or without premium

Bank A/c Dr (amount received)

Discount on issue of shares A/c Dr (if shares issued at discount)

To Equity share capital A/c  (face value of shares issued)

To Security Premium A/c  (if shares issued at premium)

4.     Entry for providing premium on redemption

Security premium A/c

Or P& L A/c

Or General Reserve A/c Dr

To Premium on Redemption A/c

5.     Entry for appropriation from divisible profits to meet deficiency of amount on redemption (or if redemption is out of profit)

P & L A/c or General Reserve A/c Dr

To Capital Redemption Reserve A/c

6.     Entry for payment to preference shares

Preference Shareholders A/c Dr

To Bank A/c

Problem 10

Sun Ltd had 8000, each with 8% redeemable preferred share of Rs.25, and Rs.20 was called. The company has decided to redeem the preferred share at a premium of 5% by issuing a sufficient number of shares of Rs 10 paid in full at a premium of 10%. Pass the journal related to the redemption.

A10.    Nominal value of shares to be redeemed200000

Premium on redemption 10000

Total amount required for redemption 210000

No. Of shares to be issued (except premium) 200000 = 20000

10

Problem 11

The following is an excerpt from Raja Ltd.’s Balance Sheet as of December 31, 2011.

1. 10000 rupees share 10,000 rupees 100,000 rupees each

2.     10000, 8% Preferred Share of each Rs.10 Rs.100000

3.     Capital reserve Rs.50000

4.     General reserve Rs.30000

5.     P & L A / c Rs.85000

The company will redeem the Preferred Share on January 1, 2012. Please fill in the journal.

A11.

Problem 12:

The company has 10,000, each fully paid 11% Redeemable Preferred Share of Rs 100. The company will redeem the shares at face value. For this purpose, we will issue 50,000 shares of 10 rupees each and make the balance available from the cumulative profit (P & L A / c). The issue was completely subscribed. Enter the journal.

A12.

Use of equation for determining the face value of shares to be issued

An equation can be applied when the given amount of premium in security premium A / c in the balance sheet plus amount of premium to be obtained from fresh issue of shares is not sufficient to pay premium on redemption of preference shares. Premium A / c given in balance sheet cannot be used for redeeming the face value of shares.

(a) When fresh issue is to be made at a premium:

[Redeemable preference share capital + premium on redemption] = [{Balance in security premium A / c in B / S} + {Revenue profit available for redemption} + {N} + {N x% rate of premium on fresh issue}]

(b) When fresh issue of shares is to be made at a discount:

[Redeemable preference share capital + premium on redemption] = [{Balance in security premium A / c in B / S} + {Revenue profit available for redemption} + {N}-{N x% rate of discount on fresh issue}]

Note: N = Nominal value of fresh issue of shares to be made for redemption

Problem 13:

The amount of new shares to be issued will be determined from the following information related to A Ltd. Redeemable Preferred Stock Rs.200000, Redemption Premium 10%, Splitable Profit Rs.60000, General Reserve Balance Rs.40000, Security Premium A / c Rs.15000. If the new issue is (I) 5% premium and (II) 10% discount.

1. A13. If fresh issue is made at a premium of 5%:

Redeemable preference share capital + premium on redemption] = [{Balance in security premium A/c in B/S} + {Revenue profit available for redemption} + {N} + {N x % rate of premium on fresh issue}]

[200000 + 20000] = [15000+ 60000+ 40000+N + 0.05N] 1.05N = 220000‐115000

N = 105000 = Rs. 100000

1.05

II.            If fresh issue is made at a discount of 10%:

[Redeemable preference share capital + premium on redemption] = [{Balance in security premium A/c in B/S} + {Revenue profit available for redemption} + {N} ‐ {N x % rate of discount on fresh issue}]

[200000 + 20000] = [15000+ 60000+ 40000+N ‐ 0.1N] 0.9N = 220000‐115000

N = 105000 = Rs. 116667

0.9

Key takeaways:

1. Shares represent the ownership of a company or financial asset owned by an investor who exchanges capital in exchange for these units.
2. Common stock enables voting rights and possible profits through rising prices and dividends.
3. Preferred Share does not offer price increases, but can be redeemed at attractive prices and offer regular dividends.
4. Most companies have shares, but the stock exchange only has shares in listed companies.
5. Shares of a listed company lost or abandoned because the owner did not comply with certain purchase agreements or restrictions are considered confiscated.
6. If the shares are confiscated, the shareholders will no longer bear the remaining balance and waive the potential profitability of the shares.
7. Expired shares are returned to the issuer, such as when an employee leaves the company before stock options are fully vested.
8. The issuer can reissue the confiscated shares at the desired price. Reissues are usually discounted from the initial price.
9. The price discovery process involves generating and recording investor demand for stocks before they reach the issue price.
10. Book building is the de facto mechanism for companies to price IPOs and is highly recommended by all major stock exchanges as the most efficient way to price securities.
11. Stock bonus issuance is stock issued by the company in lieu of cash dividends. Shareholders can sell their shares to satisfy their liquidity needs.
12. Bonus stock increases the company's equity capital, but not its net worth.
13. A rights issue is to encourage existing shareholders to buy additional new shares in the company.
14. At the rights offering, each shareholder is entitled to purchase a proportional distribution of additional shares at a specific price within a specific period of time (typically 16 to 30 days).
15. Shareholders are not obliged to exercise this right.
16. Underfunded businesses can look to rights issues to raise money when they really need it.
17. A rights issue is a way for companies struggling to raise funds frequently to repay their debts.
18. Shareholders can purchase new shares at a discounted price for a certain period of time.
19. In a rights issue, more shares are issued to the market, which can dilute and fall stock prices.
20. Repurchase is when a company buys its own stock on the stock market.
21. Repurchase reduces the number of issued shares, thereby increasing the (positive) profit per share and often the value of the shares.
22. A share buyback can show investors that they have enough cash in case of an emergency and are unlikely to have an economic problem.
23. Preferred stock (preferred stock) is the stock of a company in which dividends are paid to shareholders before dividends on common stock are paid.
24. There are four types of preferred stock: cumulative (guaranteed), non-cumulative, participatory, and convertible.
25. Preferred stocks are ideal for risk-averse investors and are callable (issuers can redeem them at any time).

1.2 Issue and Redemption of Debentures, Underwriting of Shares and Debentures.

The term "Debenture" comes from the Latin word "debere" which means "borrow". Debentures are a written means given by a company that recognizes debt received from the public.

The Companies Act defines Debentures as "Bonds include Debentures, or other securities, whether or not they constitute a claim against a company's assets."

Debenture Characteristics

1. It is a means of debt issued by the company under that seal.
2. It carries a fixed interest rate.
3. Debentures are part of the borrowed capital.
4. Will be repaid after a long period of time.
5. Generally fixed.

Debenture classification

1. Secured or Mortgage Debentures – These Debentures are secured by either certain assets or the company's general assets.
2. Unsecured or Bare Debentures – These Debentures do not incur charges on the company's assets.
3. Registered Debentures – These Debentures are paid to the person recorded in the register of the company's Debenture holder and can only be transferred with the knowledge of the company.
4. Bearer Debentures-For these Debentures, the company does not maintain the Debenture holder registration and these are transferable by mere delivery.
5. Redeemable Debentures – These Debentures will be repaid in one lump sum or in installments after a period of time.
6. Permanent or non-redeemable Debentures – These Debentures will not be repaid for the life of the company.
7. Convertible Debentures – These Debentures may be converted into shares within or after a specified period of time, at the discretion of the holder.
8. Non-convertible Debentures – These Debentures cannot be converted into shares.

Issue of Debentures

Issue of Debentures can be studied in the following two points of view

1. From Consideration Point of view

1. For consideration in cash: Debentures can be issued either at par, at premium or at discount. The entry will be

Bank A/c Dr

Discount on issue of Debentures A/c Dr (if issue at discount)

To Debentures A/c

To                                                            (if issue at premium)

b.    For Consideration other than Cash: The entries are

1. For Purchase of Assets

Sundry Assets A/c          Dr

To Vendor A/c

Ii.    For issuing Debentures for payment of Purchase Consideration Vendor A/c              Dr

To Debentures A/c

c.     As collateral security: When Debentures are issued as subsidiary or secondary security in addition to the principal security against a loan or bank over draft such an issue of Debentures is called issue of Debentures as collateral security.

2.     From Price Point of view

From this point of view Debentures can be issued either at Par, at Premium or at Discount.

1. When Debentures are issued at Par

Bank A/c Dr (with face value)

To Debentures A/c

b.    When Debentures are issued at Discount

Bank A/c Dr (net amount received)

To Discount on issue of Debentures A/c  (amount of discount)

To Debentures A/c (with face value)

c.     When Debentures are issued at Premium

Bank A/c Dr (total amount)

To Debentures A/c (with face value)

To Security premium A/c (amount of premium)

Problem 14

X Ltd has issued 1000 9% Debentures bonds of 100 rupees each. Write journal entries published at (a) face value, (b) 20% premium, and (c) 10% discount.

A14. 

Problem 15

One company issued 10000 Debentures bonds of R.100 each for subscription. Bonds will be paid as Rs.30 at the time of application, Rs.40 at the time of allocation, Rs.20 on the first call and Rs.10 on the second call. Person 9 holding 200 Debentures bonds does not pay the amount payable at the time of allocation. But he pays this amount with his first call money. Another person holding 400 Debentures bonds prepaid all calls at the time of allocation. Enter the journal in the company's books.

A15.

3. From the Perspective of Redemption

There are six cases based on the issuance conditions and the redemption conditions of the bonds. They are:

1. Issued by Par and can be redeemed by Par.
2. It is issued as a Premium and can be redeemed at Face value.
3. It is issued at a Discounted Price and can be redeemed at Face value.
4. It is issued in Par and can be redeemed for a Premium.
5. It is issued at a Discounted Price and is available as a Premium.
6. It is issued as a Premium and can be used as a Premium.

1. Issued by Par and can be redeemed by Par

Bank A/c Dr

To Debentures A/c

2.It is issued as a Premium and can be redeemed at Face value.

Bank A/c Dr (Face Value+ Premium)

To Debentures A/c (Face Value)

To Security Premium A/c (Premium)

1. When issued at discount and redeemable at Par.

Bank A/c Dr (amount received)

Discount on issue of Debentures A/c Dr (Discount)

To Debentures A/c (face value)

2.     When issued at Par and redeemable at Premium.

Bank A/c Dr (Amount received)

Loss on issue of Debentures A/c Dr (Premium on Redemption)

To Debentures A/c (Face Value)

To Premium on Redemption A/c (Premium on Redemption)

3.     When issued at discount and redeemable at Premium.

Bank A/c Dr (Amount received)

Loss on issue of Debentures A/c Dr (Issue Discount+ Redemption Premium)

To Debentures A/c (Face Value)

To Premium on Redemption A/c (Redemption Premium)

4.     When issued at Premium and redeemable at Premium.

Bank A/c Dr (Amount received)

Loss on issue of Debentures A/c Dr

(Redemption Premium)

To Debentures A/c (face value)

To Security Premium A/c (issue Premium)

To Premium on Redemption A/c (Redemption Premium)

Problem 16

When issuing Rs.100 bonds, the following transactions will be journalized.

1. Debentures issued at Rs.95 and repaid at Rs.100.
2. Debentures issued at Rs.95 and repaid at Rs.105.
3. Debentures issued at Rs.100 and repaid at Rs.105.
4. Debentures issued at Rs.105 and repaid at Rs.100.
5. Debentures issued at Rs.102 and repaid at Rs.105.

A16.

Bond issuance discounts or losses

The Premium for bond issuance Discounts or Losses and Redemptions is capital loss. They are shown on the Balance Sheet under the heading "Miscellaneous Expenses". As it is a loss, it is amortized against Capital Reserve or Securities Premium A / c. Without it, it will be amortized to P & L A / c during the life of the bond. The entry is

Capital Reserve / Securities Premium A / c / P & L A / c Dr

To Discount / Debentures Issuance Loss A / c.

Debt Redemption

Debenture Redemption refers to the exemption of liability from a bond. It simply means repayment of corporate bonds. In accordance with the Companies Act, bonds must be redeemed in accordance with the issuance conditions.

The following entries are passed for redemption of debentures.

1. When debentures are redeemed at Par
   1. Debentures A/c Dr

To debenture holder’s A/c

Ii.    Debenture holder’s A/c Dr

To Bank A/c

b.    When debentures are redeemed at Premium

1. Debentures A/c Dr

Premium on redemption A/c Dr

To Debenture holder’s A/c

Ii.    Security Premium/ General reserve/P&L A/c Dr

To Premium on Redemption A/c

Iii.  Debenture holder’s A/c Dr

To Bank A/c

Source of Debenture Redemption

Debentures can be considered from the following sources:

1. Redemption from new problems.

The company may issue new shares and / or bonds to redeem existing bonds.

Problem 17

Redeemable with Moon Ltd 10%, 5000 corporate bonds of each Rs.100, 5% premium. For redemption purposes, the company issued 40,000 shares of 10 rupees each at a 10% premium and 1000 and 9% corporate bonds of 100 rupees respectively at par. Pass the journal

A17.

2. Redemption from Capital

When a bond is redeemed from capital, no divisible profit is secured for the redemption of the bond. Redemption from capital reduces the liquid resources available to the company. In accordance with the guidelines issued by SEBI, a company must create a bond redemption reserve (DRR) equivalent to 50% of the bond issuance before it can begin redemption. However, it is not necessary to create a DRR in the following cases.

1. Debentures with a maturity of 18 months or less
2. Full Convertible Debenture

3. Redemption from Profit

If sufficient profit is transferred from the P & L budget A / c to the bond redemption reserve A / c at the time of bond redemption, such redemption is said to be out of profit. It reduces the profit available for dividends. The next entry is passed for the transfer of profits

P & L Appropriation A/c Dr

To Debenture Redemption Reserve A/c

In accordance with SEBI guidelines, DRR (50% of issued corporate bonds) is required for corporate bonds with a maturity of more than 18 months. When all bonds have been redeemed, DRR A / c will be transferred to the general reserve and will be terminated. The entries are as follows

Debenture Redemption Reserve A / c   Dr

To General Reserve A / c

Problem 18

On October 1, 2010, Abin Ltd issued 12,000 corporate bonds of 100 rupees each, with a redemption perspective that one-third of the corporate bonds can be redeemed every six months. Journal the transaction.

A18.   

Note: An amount equal to the amount of redeemed bonds will be transferred from the P & L budget A / c to DRRA / c.

4. Redemption by Sinking Fund

With this redemption method, a part of the profit (fixed amount) is secured every year, and a bond reduction fund (corporate bond redemption fund) is created. A sinking fund that I invested in external securities. Interest received on such investments will be reinvested as usual, with an amount set separately from the profit. It lasts until the bond redemption date. The investment is sold and the cash thus realized is used to repay the corporate bonds. With this method, a sinking fund A / c (bond redemption fund A / c) and a sinking fund investment A / c (bond redemption fund investment A / c) are opened. After redemption, the balance of the sinking fund A / c will be transferred to the general reserve. This method requires the following entries:

At the end of first year:

1. For the amount set aside every year

P & L Appropriation A/c Dr

To Sinking Fund A/c

Ii.       For investment of sinking fund

Sinking Fund Investment, A/c Dr

To Bank A/c

At the end of second and subsequent years:

1. For interest received on investment

Bank A/c     Dr

To Interest on Sinking Fund Investment A/c

Ii.     For transferring interest to Sinking Fund

Interest on Sinking Fund Investment A/c   Dr

To Sinking Fund A/c

Iii.  For annual amount set aside

P & L Appropriation A/c    Dr

To Sinking Fund A/c

Iv.     For investment of annual installment and interest

Sinking Fund Investment, A/c Dr

To Bank A/c

At the end of last year:

All the entries except entry (iv) in second and subsequent year should be passed.

1. For amount realized on sale of investment Bank A/c Dr

To Sinking Fund Investment A/c

Ii.            For profit on sale of investment

Sinking Fund Investment, A/c Dr

To Sinking Fund A/c

(Note: if loss the above entry is reversed)

Iii.            For amount due to debenture holders

Debentures A/c Dr

Premium on redemption A/c Dr (if redemption at premium)

To Debenture holder’s A/c

Iv.                For amount paid to debenture holders

Debenture holder’s A/c Dr

To Bank A/c

v.                For transfer of balance in sinking fund A/c Sinking Fund A/c Dr

To General Reserve A/c

Problem 19

On January 1, 2007, Balu Ltd issued a 6% corporate bond of Rs 1000. Each bond will be repaid at a premium of 10% at the end of four years. It was decided to create a sinking fund for that purpose. The investment is expected to result in a net return of 5%. According to the table of the Sinking Fund, the annual investment amount of Re.0.232012 will be Re.1 of 5% in 4 years. The investment was made only in multiples of 100. On December 31, 2010, the bank balance was Rs.40000 and the investment was Rs.82000. The bond has paid off. Enter the journal to display the ledger account excluding interest on corporate bonds.

A19. Amounts annually set aside = (100000+10% premium) x 0.232012 = Rs.25521

6% Debentures A/c

Premium on Redemption of debentures A/c

Debenture holder’s A/c

Sinking Fund, A/c

Sinking Fund Investment, A/c