1.1 Issue of Shares Forfeiture and Reissue of Forfeited Shares Concept process of Book Building Issue of rights and bonus shares Buy back of Shares Redemption of Preference Shares | unit 1 accounting for share capital debentures

UNIT -1

Accounting for Share Capital & Debentures

1.1 Issue of Shares, Forfeiture and Reissue of Forfeited Shares- Concept & process of Book Building, Issue of rights and bonus shares; Buy back of Shares, Redemption of Preference Shares

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-

It's a voluntary association of individuals.

There's a separate legal entity.

There's a standard seal.

It's permanent inheritance.

Company Type

Supported Formation

Chartered Company – a corporation established under a special Chartered Company by a king or sovereign, like the Malay Archipelago Company.

Legislative Companies – These companies are formed by special legislative or parliamentary legislation like RBI.

Registered Companies-Such companies were established under the businesses Act of 1956 or were registered under the previous Companies Act.

II.Based On Responsibility

Limited Companies-In these companies, the liability of every member is restricted to the face value of the shares he holds.

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.

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

Private Companies – These are companies thereunder clause,

a) Limiting the amount 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

Cumulative Preferred Share – For these shares, the delinquent dividend is going to be carried forward and paid from subsequent year's profits.

Non-Cumulative Preferred Shares – If dividends don't accumulate and aren't carried forward to next year, they're called non-cumulative preferred shares.

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.

Non-Participating Preferred Shares – these shares only receive fixed rate dividends. These aren't a part of the excess profit.

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.

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 are going to be repaid last. However, shareholders do have full voting rights.

Types of Share Capital

Authorized (Registered or Nominal) Capital – this is often the utmost amount of capital that a corporation is allowed to boost through a public subscription.

Issued Capital – a number of the authorized capital generally provided for subscriptions is named Issued Capital.

Participating Capital – The portion of issued capital that receives an application from a public institution is named Participating Capital.

Called Capital – The portion of the subscribed capital called or requested by the Debentures is named called capital.

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.

Reserve Capital – The portion of uncalled capital that's called only the Debentures is liquidated.

Difference between Equity Shares and Preference Shares

Equity Shares	Preference Shares
1 It is an ownership security 2 Dividend rate is not fixed 3 Capital is repaid only in winding up 4 These shares have voting rights 5 Face value is lower	It is a hybrid security Dividend rate is fixed Capital is repaid after a stipulated period 4 These shares generally do not have voting rights 5 Face value is higher

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 Cos 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

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.

Bank A/c To Share Application A/c (Application money received)	Dr	10000	10000
Share application A/c Dr To Share Capital A/c (Transfer of application money to share capital)		10000	10000
Share allotment A/c To Share capital A/c (Allotment money due)	Dr	10000	10000
Bank A/c To Share allotment A/c (Allotment money received)	Dr	10000	10000
Share first call A/c To Share capital A/c (First call money due)	Dr	15000	15000
Bank A/c To Share first call A/c (First call money received)	Dr	15000	15000
Share final call A/c To Share capital A/c (Final call money due)	Dr	15000	15000
Bank A/c To Share final call A/c (Final call money received)	Dr	15000	15000

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

Share Allotment A/C	Dr	(Allotment Money Due)
Discount on Issue of Shares A/C To Share Capital A/C	Dr	(Discount) (Total)

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

Bank A/c To Share Application A/c (Application money received)	Dr	40000
	Dr		40000
Share Application A/c Dr To Share Capital A/c (Transfer of application money to share capital)		40000
			40000
Share allotment A/c Discount on issue of shares A/c To Share capital A/c (Allotment money due at 10% discount)	Dr	60000 20000
	Dr		80000
Bank A/c To Share Allotment A/c (Allotment money received)	Dr	60000
Bank A/c To Share Allotment A/c (Allotment money received)	Dr		60000
Share first and final call A/c To Share capital A/c (First and final call money due)	Dr	80000
	Dr		80000
Bank A/c To Share first and final call A/c (First and final call money received)	Dr	80000	80000

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

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

Bank A/c To Share Application A/c (Application money received for 250000 shares)	Dr	750000
			750000
		372000
Share Application A/c Dr To Share Capital A/c To Bank A/c (Transfer of application money to share capital and 24000 applicants rejected and refunded)
			300000
			72000
Share Allotment A/c To Share Capital A/c (Allotment money due)	Dr	500000
			500000
Share Application A/c Bank A/c To Share Allotment A/c (Excess application money adjusted and balance received in cash)	Dr	378000
		122000
			500000

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:

Forfeiture of shares which were issued at Par:

Share Capital A/c	Dr	(Amount called up)
To share allotment A/c		(Allotment unpaid)
To share call A/c		(Call unpaid)
To forfeited shares A/c		(Total amount paid)

2. Forfeiture of shares which were issued at Premium:

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

Share Capital A/c	Dr	(Amount called up)
Security Premium A/c	Dr	(Premium unpaid)
To share Allotment A/c		(Allotment unpaid)
To share call A/c		(Call unpaid)
To forfeited shares A/c		(Total amount paid)

b. When call money not paid
Share Capital A/c	Dr	(Amount called up)
To Share call A/c		(Call unpaid)
To Forfeited Shares A/c		(Total amount paid)

3. Forfeiture of shares which were issued at discount:

Share Capital A/c	Dr	(Amount called up)
To Share Allotment A/c		(Allotment unpaid)
To Share Call A/c		(Call unpaid)
To Forfeited Shares A/c		(Total amount paid)

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.

Share Capital A/c Dr (50x8)

To share allotment A/c (50x2)

To first call A/c(50x3)

To forfeited shares A/c (50x3)

(Forfeiture of 50 shares due to non‐payment of allotment and first call)

400

100

150

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

Share Capital A/c Security premium A/c (50x2) To share allotment A/c (50x4) To first call A/c(50x3) To forfeited shares A/c(50x3) (Forfeiture of 50 shares due to non‐payment of allotment and first call)	Dr (50x8)	400
		100
			200
			150
			150

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.

Share Capital A/c Dr (50x10)

To First Call A/C (50x3)

To Final Call A/C(50x2)

To Forfeited Shares A/c(50x4)

To Discount on Issue of Shares, A/c(50x1)

(Forfeiture of 50 shares due to non‐payment of first and final call)

500

150

100

200

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:

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.

Share capital A/c Dr (2000x10) To final call A/c (2000x2.50) To Forfeited shares A/c (2000x7.50) (2000 shares forfeited due to nonpayment of final call)	20000
		5000 15000
	10800 7200
		18000
Bank A/c Dr (1800x6) Forfeited shares A/c Dr (1800x4) To Share Capital A/c (1800x10) (1800 of forfeited shares reissued @ Rs.6)	6300
		6300
Forfeited shares A/c Dr To Capital Reserve A/c(1800x7.5)‐ )‐ (1800x4) (Surplus received on forfeiture & reissue transferred)

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.

Bank A/c To Share Application A/c (Application money received)	Dr		225000
					225000
Share application A/c Dr To Share Capital A/c (Transfer of application money to share capital)			225000
					225000
Share allotment A/c To Share capital A/c To Security premium A/c (Allotment money due)		Dr		405000
						360000 45000
Bank A/c To Share allotment A/c (Allotment money received)		Dr		405000
						405000
Share final call A/c To Share capital A/c (Final call money due)		Dr		315000
						315000
Bank A/c To Share final call A/c (Final call money received)		Dr		311500
						311500
Share capital A/c Dr To share final call A/c To Forfeited shares A/c (100 shares forfeited)				10000
						3500 6500
				4500 500
Bank A/c Dr Forfeited shares A/c Dr To share capital A/c (50 shares reissued @ Rs.90)
						5000
				2750
						2750
Forfeited shares A/c Dr To Capital reserve A/c(65x50) ‐(500) (Balance of forfeited shares A/c transferred)

Surrender of shares

Shareholders may not be able to pay any further calls and may return their shares to the company for cancellation. The return of shares to such a voluntary company by the shareholders themselves is called a waiver of shares. Accounting for abandonment of shares is the same as accounting for confiscation of shares.

Redemption Of Preferred Share

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.

All shares to be redeemed must be paid in full.

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.

The premium paid at the time of redemption must be provided from the company's profit or the company's securities premium account.

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.

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:

Redemption by issuing new shares

Redemption from profit

Partly redemption from new issuance and part from profit

Accounting Entries:

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

Preference Shares Final Call A/C Dr To 8% Preference Share Capital A/C (Pref. Share Final Call Due)	40000
		40000
Bank A/C Dr To Preference Share Final Call A/C (Final Call Money Received)	40000
		40000
Bank A/C Dr To Equity Share Capital A/C To Security Premium A/C (Issue Of 20000 Equity Shares of Rs.10 Each At 10% Premium)	220000
		200000 20000
Security Premium A/C Dr To Premium on Redemption A/C (Provided Premium on Redemption At 5% Out Of Security Premium A/C )	10000
		10000
8% Preference Share Capital A/C Dr Premium On Redemption A/C Dr To Preference Shareholders A/C (Amount Due to Preference Shareholders)	200000 10000
		210000
Preference shareholders A/c Dr To Bank A/c (Payment to preference shareholders)	210000
		210000

Problem 11

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

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

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

Capital reserve Rs.50000

General reserve Rs.30000

P & L A / c Rs.85000

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

A11.

General Reserve A/c Dr P & L A/c Dr To Capital Redemption Reserve A/c (Transfer of an amount equal to nominal value of shares redeemed to CRR A/c)	30000 70000
		100000
	100000
		100000
8% Preference Share Capital A/C Dr To Preference Shareholders A/c (Amount due to Preference Shareholders)	100000
		100000
Preference Shareholders A/c Dr To Bank A/c (Payment to Preference Shareholders)

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.

Bank A/c To Equity Share Capital A/c (fresh issue of 50000 shares at Rs.10)	Dr	500000
			500000
P&L A/c Dr To Capital Redemption Reserve A/c (amount transferred to CRR)		500000
			500000
		1000000
11% Preference Share Capital A/c Dr To Preference Shareholders A/c (amount due to preference shareholders)
			1000000

Preference Shareholders A/c Dr

To Bank A/c

(Payment to preference shareholders)

1000000

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.

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

Buy Back of Shares

Buyback is a way to cancel stock capital. That simply means buying your own stock. That leads to a decrease in the company's stock capital.

Purpose of Buy Back

Return surplus cash to investors.

To improve financial condition.

How to increase EPS.

To raise the market price of stocks.

Benefits of Buyback

Helps return surplus cash to investors.

Helps increase EPS.

It increases promoter holdings in the company.

Helps rebuild the company's capital base.

Disadvantages of Buy Back

Means undervalued company stock.

May be used as a tool for insider trading.

May be used to manipulate the price of a stock.

How to buy back

Following the SEBI guidelines, there are two ways to buy back shares. they are:

Tender Offer-This allows a company to buy back its shares proportionally from existing shareholders.

Buy back from the public market – Companies can also buy back their shares from the public market through either the stock exchange or the Book Building Process.

Classification of Issues

(A) Public Issues

Initial public offering (IPO)

Follow the open involve participants (FPO)

(B) Rights Offering

(D) Private Placement

Priority issues

Eligible institutional placement

Publication Issue:

When a security is issued / offered for subscription / purchase generally, it's called a public issue. Public offerings are often further divided into initial public offerings (IPOs) and post-public offerings (FPOs).

Initial Public Offering (IPO):

When an unlisted company issues a replacement / first issue of a security, it's called an IPO.

Follow the general public Offering (FPO):

When a corporation that's already listed goes public, it's called a public offering follow (FPO). Therefore, the FPO process begins after the IPO.

Rights Issue

When an issuer issues securities to current / existing shareholders, it's called a right offering. Rights are provided at a selected ratio to the number of securities held as of the record date.

Bonus Issues

When an issuer issues additional securities to existing shareholders for free of charge, it's called a bonus issue.

Private Placement

Private placement may be a thanks to raise funds by selling securities to a comparatively small number of selected investors. Investors involved privately placements are usually large banks, mutual funds, insurance companies and pension funds. Private placements are different from open offerings. Public offering allows securities to be sold to all or any sorts of investors within the open market. There are two sorts of private placement of shares or convertible securities by listed issuers:

Priority Assignment:

When a listed issuer issues shares to a gaggle selected consistent with SEBI guidelines, it's called a preferred allotment. Issuers are required to suits various provisions, including pricing, notice disclosure, lock-in, etc., additionally to the wants specified by the businesses Act.

Qualified Institutional Placement (QIP): When a listed issuer issues shares to a professional institutional purchaser only from a regulatory perspective in accordance with SEBI guidelines, it's called a QIP. Qualified institutional investors are generally institutional investors with the expertise and financial strength to take a position in capital markets. "Qualified Institutional Investors" include:

Scheduled full-service bank.

Mutual fund;

Foreign institutional investors registered with SEBI.

Multilateral and bilateral development financial institutions.

risk capital funds registered with SEBI.

Foreign risk capital investors registered with SEBI.

State Industrial Development Corporation.

An insurance firm registered with the Insurance Regulatory Development Authority (IRDA).

Provident fund with an outlined minimum corpus

Pension fund with a minimum corpus

Public financial institutions as defined by the businesses Act 2013.

How to Price Public Issues

There are two ways

Fixed Price Method:

In an initial public offering (IPO), when shares are offered at a fixed price, such issuance is called a fixed price issue. This is the second preferred method of going public. In the offer document, the issuer must provide a fixed price reason and appropriate justification. In general, companies only address the fixed price issue if management determines that they can determine fair prices between companies without testing in the market as in book building.

B. Book Building Method

This is the process used in an IPO to efficiently find prices and determine the number of shares to be issued. The price at which the security is offered is initially unknown. It is only known after the end of the book building process. This is a common way to market new issues in some developed countries. In the book building method, the market discovers the price, not the company determines the price.

How the Book Building Method Works

With this method, the price of the stock is not fixed. Instead, the company fixes a price range in which the stock can be sold. The highest price cannot exceed 120% of the lowest price. The bid is then invited to the stock. The IPO must remain open for a minimum of 3 days, during which bids will be placed. Investors can bid within the lowest price or price range. The actual price of a stock is determined by the number of bids received from investors (depending on the price range).

The lead underwriter, known as the bookrunner, determines the level of interest from investors at various price levels and obtains commitment. While the book is being created, you will be able to see the demand at different prices and investors will be able to submit bids accordingly.

Bids will be collected from investors during the IPO period. The bid price may be above the minimum price or it may be the minimum price. The offer price will be fixed based on the bid you receive and will be fixed after the end date of the bid.

Example:

In this way, the company does not fix a specific price for the stock, but instead offers a price range such as Rs. 80 to 100. When bidding on a stock, the investor must determine the price at which to bid on the stock (eg Rs). 80 rupees 90 or Rs. 100. They can bid

For stocks of any price within this range. The final price is fixed based on the supply and demand of the stock.

The lowest price (Rs. 80) is called the lowest price and the highest price (Rs .100) is called the upper price. The price at which the stock is allocated is known as the cutoff price. The entire process begins with the selection of a lead manager, an investment banker whose job is to make the issue publicly available.

Both the lead manager and the issuer determine the price range and issue size. Next, syndicate members are hired to get bids from investors. The problem usually stays open for 5 days. At the end of the offering period, the chief manager and issuer determine the price at which the shares will be sold to investors.

If the issue price is lower than the maximum price, the investor who bids at the maximum price will receive a refund and the investor who bids at the minimum price will eventually pay additional money. For example, if the cutoff in the above example is fixed at Rs. Those who bid at 90, Rs. 80, you have to pay rupees. Those who bid for 10 rupees per share. You will get a refund of 100, Rs. 10 per share. Shares are allocated when each investor pays the actual issue price.

Book Building and Fixed Price Methods:

The main difference between the book-building method and the list-price method is that the issue price is not initially determined in the former. Investors must bid on stocks within a given price range. The issue price is determined based on the supply and demand of shares.

On the other hand, in the fixed price method, the price is decided from the beginning. Investors cannot choose the price. They have to buy the stock at the price decided by the company. The book building method shows the demand every day during the offer period, while the fixed price method shows the demand only after the issuance is finished.

Major financial intermediaries in the Book Building Process

Below are the financial intermediaries who participate in the book building process.

Merchant Bunker

Merchant Bunker has been appointed lead underwriter. If you need multiple merchant bunkers to manage the problem, all other merchant bunkers are called Co-Book Runners. The lead underwriter has the following responsibilities:

Appointment of Bookrunner / Joint Bookrunner.

Appointment of syndicate members.

Draft prospectus and other documents and submission to SEBI

Determine the size, timing, and price range of public publications with the help of syndicate members.

Appointment of registrar to the problem, banker to the problem, etc.

Submission of due diligence certificate to SEBI.

Preparation of advertising and promotional materials.

Announcement of start and end of subscription / bid collection.

Determining cut-off prices and stock allocations with the help of registrars.

Acquire shares listed on the stock exchange.

Prepare a final prospectus and submit it to SEBI and the registration company.

2. Syndicate member

They have the following responsibilities.

Determining size, timing of public issuance, price range.

Underwriting of shares.

Collecting bids and applications from branch offices of issuing banks.

3. Registrar to the problem

They have the following responsibilities-

Appointment of bankers to issue to collect application fees.

Draft prospectus, print application and bid form, and provide these to syndicate members.

Allocation of shares to investors.

Key points in the Book Building Process

The issuer planning the offer nominates the lead merchant bunker as a "bookrunner".

The issuer specifies the number of securities to issue and the bid price range.

The issuer also appoints syndicate members to be ordered by the investor.

Syndicate members place their orders in an "ebook". This process is called a "bid" and is similar to a public auction.

Books usually stay open for 5 days.

Bid must be entered in the specified price range.

The bid can be modified by the bidder before the book is closed.

At the end of the book building period, book runners will evaluate bids based on demand at different price levels.

Bookrunners and issuers determine the final price at which the security will be issued.

Normally, the number of shares is fixed. Issuance size will be frozen based on the final price per share.

Allocate securities to the highest bidder. The remaining bidders will receive a refund order.

Book Building Problem Steps

The key steps in issuing shares using the Book Building Method are:

A. Quantity Evaluation Stage

This stage includes the following activities:

1. Appointment of major financial intermediaries by issuers.

Appointment as lead manager of merchant bunker.

Appointment of the registrar in question.

Appointment of syndicate members.

2. Responsibilities of lead manager (role before issuance-Part 1)

Creating a Memorandum of Information (IM) containing all information about the company. However, the number of shares to be issued and the issue price are not specified in the Memorandum of Information (IM).

Send a copy of the Memorandum of Information (IM) to syndicate members and circulate it among investment trusts, financial institutions, foreign institutional investors, and more. Syndicate members are lead book runners who purchase this information from these institutions.

Based on this information. The lead underwriter and the issuing company determine the quantity and price range of the shares to be issued.

Syndicate members sign contracts with lead book runners to undertake certain amounts of stock and the prices they are willing to buy.

Creation of Red Herring Prospectus including issue date, issue quantity, and price range.

Creating a due diligence certificate

B. Pre-issue stage

This includes the following activities by the lead underwriter:

Submit the Red-Herring Prospectus and Due Diligence Certificate to SEBI. SEBI reviews both documents and reverts them to the lead book runner if they need explanations or changes.

Submit Red-Herring Prospectus to the stock exchange, Debentures registrant, and issuance registrant for approval. A listing agreement has been concluded with the stock exchange for the listing of the allotted shares.

An agreement with depository institutions (NSDL and CDS) to open a demat account and facilitate the electronic funds transfer of shares to the demat account of investors.

Appoint an advertising agency and hold a road show for an IPO.

The Red Herring Prospectus and IPO application will be printed and posted to Syndicate Members. They will be distributed to investors.

C. Actual Stage

This includes the following activities:

Issues exposed for investor bidding.

The investor fills out the application form and places an order with the Syndicate Member (the list of Syndicate Members is included in the application form).

Syndicate members provide bid information electronically to BSE / NSE and bid status is updated on the BSE / NSE website.

Syndicate members submit all physically filled forms and checks to the registrar in question.

Investors can modify their bids by filling out a form and submitting it to Syndicate Members.

Syndicate members will continue to update the stock exchange with the latest data.

The public issue ends due to an investor's bid.

D. Allocation Stage

It includes the following activities:

Based on the bids received, the lead manager will evaluate the final issue price.

Lead Book Runner updates "Red Herring Prospectus" at the final issue price and sends it to SEBI and the stock exchange.

The registrar will receive and process all application forms and checks from syndicate members. They send a clearance check and all fake applications are rejected.

The registrar creates an "allocation standard" and transfers the shares to the investor's Demat account. Refund the remaining money by ECS or check.

Once all the allotted shares have been transferred to the investor's Demat account, the lead manager will determine the issue date with the help of the stock exchange and finally the issuer's shares will be listed on the stock market.

Book Building: Benefits

1. Realization of high price:

Book building issuance is superior to fixed-price issuance because it helps issuers achieve higher prices for their shares.

2. Quick process:

Allotment of shares to investors shall be made within 15 days after the end of issuance.

3. Rapid availability of funds:

The issuing company can utilize the funds raised immediately after the share allotment.

4. Reduction of issuance cost:

The book building process involves several financial intermediaries, resulting in lower issuance costs.

5. Quick update:

The bidding process is electronic, so bid prices and quantities are available in real time.

6. Lack of uncertainty:

Syndicate members assess the demand for shares of the issuer long before the public issue. Therefore, there is less uncertainty about the price and quantity of shares offered.

7. Opportunity to correct bids:

Investors have multiple opportunities to modify bid prices and quantities in response to market reactions.

8. Quick list:

The shares will be listed on the stock exchange within 7 days of the end of issuance.

9. Reduction of management costs:

Since the number of shareholders is small, management costs are also low.

10. Institutional Preference:

The book-building issue has been well received because institutional investors are the largest buyers of stock.

Book Building: Disadvantages

1. Suitable for mega issues

Suitable for large-scale problems by large companies. Small businesses can't afford the book building problem.

2. Well-developed computerized system

Book building issues require a computerized trading and networking system.

3. Price fixing

Large investors are in a strong financial position and can manipulate prices. Therefore, small investors may find it difficult to buy stock.

4. Injustice allocation

The lead underwriter may favor large investors (investment trusts) in allocating stocks that affect small investors.

5. Centralized ownership

A small number of large investors can buy a large number of stocks and affect the market price of stocks on the stock exchange.

Key takeaways:

Shares represent the ownership of a company or financial asset owned by an investor who exchanges capital in exchange for these units.

Common stock enables voting rights and possible profits through rising prices and dividends.

Preferred Share does not offer price increases, but can be redeemed at attractive prices and offer regular dividends.

Most companies have shares, but the stock exchange only has shares in listed companies.

Shares of a listed company lost or abandoned because the owner did not comply with certain purchase agreements or restrictions are considered confiscated.

If the shares are confiscated, the shareholders will no longer bear the remaining balance and waive the potential profitability of the shares.

Expired shares are returned to the issuer, such as when an employee leaves the company before stock options are fully vested.

The issuer can reissue the confiscated shares at the desired price. Reissues are usually discounted from the initial price.

The price discovery process involves generating and recording investor demand for stocks before they reach the issue price.

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.

Stock bonus issuance is stock issued by the company in lieu of cash dividends. Shareholders can sell their shares to satisfy their liquidity needs.

Bonus stock increases the company's equity capital, but not its net worth.

A rights issue is to encourage existing shareholders to buy additional new shares in the company.

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).

Shareholders are not obliged to exercise this right.

Underfunded businesses can look to rights issues to raise money when they really need it.

A rights issue is a way for companies struggling to raise funds frequently to repay their debts.

Shareholders can purchase new shares at a discounted price for a certain period of time.

In a rights issue, more shares are issued to the market, which can dilute and fall stock prices.

Repurchase is when a company buys its own stock on the stock market.

Repurchase reduces the number of issued shares, thereby increasing the (positive) profit per share and often the value of the shares.

A share buyback can show investors that they have enough cash in case of an emergency and are unlikely to have an economic problem.

Preferred stock (preferred stock) is the stock of a company in which dividends are paid to shareholders before dividends on common stock are paid.

There are four types of preferred stock: cumulative (guaranteed), non-cumulative, participatory, and convertible.

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

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

It is a means of debt issued by the company under that seal.

It carries a fixed interest rate.

Debentures are part of the borrowed capital.

Will be repaid after a long period of time.

Generally fixed.

Debenture classification

Secured or Mortgage Debentures – These Debentures are secured by either certain assets or the company's general assets.

Unsecured or Bare Debentures – These Debentures do not incur charges on the company's assets.

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.

Bearer Debentures-For these Debentures, the company does not maintain the Debenture holder registration and these are transferable by mere delivery.

Redeemable Debentures – These Debentures will be repaid in one lump sum or in installments after a period of time.

Permanent or non-redeemable Debentures – These Debentures will not be repaid for the life of the company.

Convertible Debentures – These Debentures may be converted into shares within or after a specified period of time, at the discretion of the holder.

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

From Consideration Point of view

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

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.

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.

(a)	Bank A/c Dr To 9% Debentures A/c (issue of 1000, 9% Debentures at Rs.100)	100000
			100000
	Bank A/c Dr To 9% Debentures A/c To Security premium A/c (issue of 1000, 9% Debentures at Rs.100 at 20% premium)	120000
(b)			100000 20000
(c)		90000 10000
	Bank A/c Dr Discount on issue of Debentures A/c Dr To 9% Debentures A/c (issue of 1000, 9% Debentures at Rs.100 at 10% discount)
			100000

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.

Bank A/c To Debenture Application A/c (Application money received)	Dr	300000
	Dr		300000
Debenture application A/c Dr To Debentures A/c (Transfer of application money to debentures A/c)		300000
			300000
		400000
Debenture allotment A/c To Debentures A/c (Allotment money due)	Dr		400000
	Dr	404000
Bank A/c Dr To Debenture allotment A/c To Debentures calls in advance (Allotment money on 9800 debentures and call on 400 debentures as advance received)			392000 12000
		200000
Debenture first call A/c Dr To Debentures A/c (First call money due)			200000
		8000
			8000
Debentures calls in advance A/c Dr To Debentures first call A/c (Transfer of calls in advance to first call A/c)		200000
			8000 192000
Bank A/c Dr To Debenture allotment A/c To Debenture first call A/c (First call money received along with allotment due on 200 debentures)		100000
			100000
Debenture final call A/c To Debentures A/c (Final call money due)	Dr	96000 4000
	Dr		100000
Bank A/c Debentures calls in advance A/c To Share final call A/c (Final call money received)	Dr Dr		100000

3. From the Perspective of Redemption

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

Issued by Par and can be redeemed by Par.

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

It is issued at a Discounted Price and can be redeemed at Face value.

It is issued in Par and can be redeemed for a Premium.

It is issued at a Discounted Price and is available as a Premium.

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)

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.

Debentures issued at Rs.95 and repaid at Rs.100.

Debentures issued at Rs.95 and repaid at Rs.105.

Debentures issued at Rs.100 and repaid at Rs.105.

Debentures issued at Rs.105 and repaid at Rs.100.

Debentures issued at Rs.102 and repaid at Rs.105.

A16.

a.	Bank A/c Dr Discount on issue of debentures A/c Dr To Debentures A/c (issue of debenture at Rs.95, repayable at Rs.100)		95 5
				100
b.	Bank A/c Loss on issue of Debentures A/c To Debentures A/c To Premium on Redemption A/c (issue of debenture at Rs.95, repayable at Rs.105)	Dr	95 10
				100 5
c.			100 5
c.	Bank A/c Loss on issue of Debentures A/c To Debentures A/c To Premium on Redemption A/c (issue of debenture at Rs.100, repayable atRs.105)	Dr Dr	100 5
d.		Dr Dr		100 5
e.	Bank A/c To Debentures A/c To Security Premium A/c (Issue of Debenture at Rs.105, repayable atRs.100)	Dr	105	100 5
	Bank A/c Loss on issue of debentures A/c To Debentures A/c To Security Premium A/c To Premium on Redemption A/c (Issue of Debenture at Rs.102, repayable atRs.105)	Dr Dr	102 3
		Dr Dr		100 2 3

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.

When debentures are redeemed at Par

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

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.

10% Debentures A/c Premium on redemption A/c To Debenture holder’s A/c (10% debentures due for redemption)	Dr Dr	500000 25000
			525000
Bank A/c Dr To Equity share capital A/c To Security premium A/c (Issue of 40000 equity shares at 10% premium for redemption)		440000
			400000 40000
Bank A/c To 9% Debentures A/c (issue of 1000 debentures of Rs.100 each)	Dr	100000
			100000
Security Premium A/c To Premium on redemption A/c (provision for redemption premium)	Dr	25000	25000

Debenture holder’s A/c Dr To Bank A/c (Payment to debenture holders)		525000	525000

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.

Debentures with a maturity of 18 months or less

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.

2010 Oct 1	Bank A/c To 8% Debentures A/c (issue of 12000, 8% debentures)	Dr	1200000	1200000
2011Mar 31			400000	400000
	P & L Appropriation A/c Dr To Debenture Redemption Reserve A/c (Transfer of amount for debenture redemption)
	8% Debentures A/c To Debenture holder’s A/c (Amount due to debenture holders)	Dr	400000
	Debenture holder’s A/c To Bank A/c (Payment to debenture holders)	Dr		400000
			400000
	8% Debentures A/c To Debenture holder’s A/c (Amount due to debenture holders)	Dr		400000
2011 Sep			400000

30	Debenture holder’s A/c To Bank A/c (Payment to debenture holders)	Dr		400000
			400000
	P & L Appropriation A/c Dr To Debenture Redemption Reserve A/c (Transfer of amount for debenture redemption)			400000
2012Mar 31			800000	800000
	8% Debentures A/c To Debenture holder’s A/c (Amount due to debenture holders)	Dr
			400000
	Debenture holder’s A/c Dr To Bank A/c (Payment to debenture holders)			400000
			400000
	Debenture Redemption Reserve A/c To General Reserve A/c (Transfer of DRR to GR after redemption)	Dr		400000
			1200000	1200000

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:

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:

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.

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

2007 Jan 1	Bank A/c Dr Loss on issue of debentures A/c Dr To 6% Debentures A/c To premium on redemption of debentures A/c (issue of 1000, 6% debentures of Rs.100 each redeemable at 10% premium)		100000 10000
				100000 10000

Dec 31	P & L Appropriation A/c To Sinking Fund A/c	Dr	25521	25521

	(Transfer of profit to sinking fund)
		25500
			25500
	Sinking Fund Investment, A/c Dr To Bank A/c (Investment made to nearest multiple of 100)		25500
2008Dec 31		1275	1275
2008Dec 31	Bank A/c Dr To Interest on Sinking Fund Investment A/c (interest received @ 5% on investment)	1275	1275
		1275
			1275
	Interest on Sinking Fund Investment A/c Dr To Sinking Fund A/c (Transfer of interest to sinking fund)		1275
		25521
			25521
	P & L Appropriation A/c Dr To Sinking Fund A/c (Transfer of profit to sinking fund)		25521
		26800
			26800
	Sinking Fund Investment, A/c Dr To Bank A/c (Investment with interest 25521+1275)	2615
			2615
2009Dec 31	Bank A/c Dr To Interest on Sinking Fund Investment A/c (Interest received @ 5% on investment)	2615	2615
	Interest on Sinking Fund Investment A/c Dr To Sinking Fund A/c (Transfer of interest to sinking fund)	25521
			25521
	P & L Appropriation A/c Dr To Sinking Fund A/c (Transfer of profit to sinking fund)	28100
			28100
	Sinking Fund Investment, A/c Dr To Bank A/c (Investment with interest 25521+2615)	4020
			4020
	Bank A/c Dr To Interest on Sinking Fund Investment A/c (interest received @ 5% on investment)	4020
			4020
2010Dec 31	Interest on Sinking Fund Investment A/c Dr To Sinking Fund A/c (Transfer of interest to sinking fund)	25521	25521
	P & L Appropriation A/c Dr To Sinking Fund A/c (Transfer of profit to sinking fund)	82000
			82000
	Bank A/c Dr To Sinking Fund Investment A/c (sale of investment)		82000
		1600

Sinking Fund Investment, A/c Dr To Sinking Fund A/c (Transfer of profit on sale of investment)			1600
		100000 10000
6% Debentures A/c Dr Premium on redemption of debentures A/c Dr To Debenture holder’s A/c (Amount due to debenture holders)
			110000
		110000
			110000
Debenture holder’s A/c To Bank A/c (Amount paid to debenture holders)	Dr	10000
			10000
Sinking Fund, A/c Dr To loss on issue of debentures A/c (redemption provided out of sinking fund)		101594
			101594
Sinking Fund, A/c Dr To General Reserve A/c (Transfer of balance in sinking fund A/c to GR)

6% Debentures A/c

2007	To Balance c/d To Balance c/d To Balance c/d To Debenture holder’s A/c		2007 Jan 1 2008 Jan 1 2009 Jan 1 2010 Jan 1
Dec 31 2008 Dec 31		100000		By Bank	100000
Dec 31 2008 Dec 31		100000		By Balance b/d	100000
2009
Dec 31 2010 Dec 31				By Balance b/d By Balance b/d
		100000			100000 100000
		100000			100000 100000

Premium on Redemption of debentures A/c

2007	To Balance c/d To Balance c/d To Balance c/d To Debenture holders A/c		2007 Jan 1 2008 Jan 1 2009 Jan 1 2010 Jan 1	By loss on issue of debentures A/c By Balance b/d By Balance b/d By Balance b/d
Dec 31 2008 Dec 31		10000			10000
Dec 31 2008 Dec 31		10000			10000
2009
Dec 31 2010
		10000			10000
					10000
Dec 31		10000			10000

Debenture holder’s A/c

2010			2010	By 6% Debentures
Dec	To Bank A/c	110000	Dec 31	A/c	100000
31				By premium on
				redemption of	10000
				debentures A/c
		110000		debentures A/c	110000

Sinking Fund, A/c

2007 Dec 31 2008 Dec 31 2009 Dec 31	To Balance c/d To Balance c/d To Balance c/d To loss on issue of debentures To general reserve (balance transferred)	25521	2007 Jan 1 2008 Jan 1 Dec 31 2009 Jan 1 Dec 31	By P&L Appn A/c By Balance b/d By interest on S.F.I By P&L Appn A/c By Balance b/d By interest on S.F.I By P&L Appn A/c By Balance b/d By interest on S.F.I By P&L Appn A/c By S.F.I(profit on sale)	25521 25521 1275 25521 52317
		52317
		52317
		80453			52317 2615 25521
		80453			80453 80453 4020 25521 1600 111594
		10000 101594
		111594

Sinking Fund Investment, A/c

2007 Dec 31 2008 Jan 1 Dec 31	To Bank To Balance b/d To Bank	25500	2007 Dec 31 2008 Dec 31	By Balance c/d By Balance c/d By Balance c/d By Bank	25500 52300
		25500 26800
		52300			52300
2009 Jan 1 Dec 31	To Balance b/d To Bank	52300 28100	2009		80400
		80400	Dec 31		80400
2010 Jan 1 Dec 31	To Balance b/d To Sinking Fund A/c (profit)	80400 1600	2010 Dec 31		82000 82000
		82000

Bank A/c

2010 Dec 31	To Balance b/d	40000	2010 Dec 31	By Debenture holder’s A/c	110000
	To S.F.I A/c	82000		By Balance b/d	12000
		122000			122000

5. Redemption by Insurance Policy

This is an alternative to the sinking fund method. In this way, insurance policies are purchased by paying an annual premium. Such policies mature on the redemption date. This method provides funding for redemption and covers the risks associated with the transaction. The following entry is passed in this method:

During all the years till the policy maturity:

For amount of premium paid at the beginning of the year Debenture Redemption Policy A/c Dr

To Bank A/c

ii. For setting aside the profit at the end of the year

P & L Appropriation A/c Dr

To Debenture Redemption Fund A/c

2. During the last year in addition to the above two entries

For realizing the insurance policy

Bank A/c Dr

To Debenture Redemption Policy A/c

ii. For the transfer of profit on realization Debenture Redemption Policy A/c Dr

To Debenture Redemption Fund A/c

(Note: if loss the 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 Debenture Redemption Fund A/c

Debenture Redemption Fund A/c Dr

To General Reserve A/c

Problem 20

Athul Ltd has issued 1000 6% corporate bonds of 100 rupees each with a 10% premium and a redemption amount after 5 years. At the time of the issuance of corporate bonds on April 1, 2006, an insurance policy was signed to provide the necessary funds for redemption. The annual premium paid at the beginning of each year is Rs.18280. Shows the redemption account.

A20.

6% Debentures A/c

2007			2006
Mar 31 2011 Mar 31	To Balance c/d To Debenture holder’s A/c	100000	Apr 1 2010 Apr 1	By Bank (first year) By Balance b/d	100000 100000
		100000

Premium on redemption of debentures A/c

2007			2006	By loss on issue of
Mar 31 2011 Mar 31	To Balance c/d To Debenture holder’s A/c	10000	Apr 1 2010 Apr 1	debentures A/c By Balance b/d	10000 10000

Debenture Redemption Fund A/c

2007 Mar 31 2008 Mar 31	To Balance c/d To Balance c/d	18280	2007 Mar 31 Apr 1 2008 Mar 31	By P&L Appn A/c By Balance b/d By P&L Appn A/c	18280
2007 Mar 31 2008 Mar 31	To Balance c/d To Balance c/d	36560	2007 Mar 31 Apr 1 2008 Mar 31	By P&L Appn A/c By Balance b/d By P&L Appn A/c	18280 18280
		36560			36560
2009 Mar 31	To Balance c/d	54840	2008 Apr 1 2009 Mar 31	By Balance b/d By P&L Appn A/c	36560 18280
		54840			54840
2010 Dec 31 2011 Mar 31	To Balance c/d To loss on issue of debentures A/c To General Reserve	73120	2009 Apr 1 2010 Mar 31 2010 Apr 1 2011 Mar 31	By Balance b/d By P&L Appn A/c By Balance b/d By P&L Appn A/c By Debenture Redemption Policy (profit on realization – B.F)	54840 18280
		73120			73120 73120 18280 18600
		10000 100000			73120 73120 18280 18600
		110000			110000

Debenture Redemption Policy A/c (Investment)

2006 Apr 1 2007 Apr 1	To Bank To Balance b/d To Bank	18280	2007 Mar 31 2008 Mar 31	By Balance c/d By Balance c/d	18280
		18280 18280			36560
2008 Apr 1	To Balance b/d To Bank	36560	2009 Mar 31	By Balance c/d	36560
		36560 18280			54840
2009 Apr 1 2010 Apr 1 2011Mar 31	To Balance b/d To Bank To Balance b/d To Bank To Deb. Red. Fund (profit‐B.F)	54840	2010 Mar 31 2011 Mar 31	By Balance c/d By Bank (realization of policy)	54840 73120 73120
		54840 18280
		73120
		73120 18280 18600			110000
		110000			110000

Debenture holder’s A/c

			2011	By 6% Debentures
2011 Mar 31	To Bank A/c	110000	Mar 31	A/c By premium on	100000
				Redemption of debentures A/c	10000
		110000			110000

6. Redemption by Conversion

The bond holders of a company may be given the option to convert the bonds into shares or new bonds within a set period of time. New shares or bonds can be issued at par or at a premium or discount. The following entry is created for this purpose:

Old Debentures A/c Dr

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

To New Share Capital/ Debenture A/c

To Premium on issue of shares/ debentures A/c (if issue at premium)

Problem 22

On April 1, 2009, Fast Ltd issued 800 12% corporate bonds of Rs.1000, each at Rs.950. Bondholders had the option to convert their shares to 6% preferred stock of Rs 100 each with a premium of Rs 25 per share. On March 31, 2010, these unpaid bonds earned one-year interest. Holders of 50 corporate bonds have announced their intention to convert their shares to 13% preferred stock. As of March 31, 2010, we will journal the transaction.

A22.

2009 Apr 1	Bank A/c Dr Discount on issue of debentures A/c Dr To 12% Debentures A/c (Issue of 800, 12% debentures of Rs.1000 each at Rs.950)		760000 40000
				800000
2010 Mar 31			96000	96000
	Interest on debentures A/c To sundry debenture holder’s A/c (interest due on debentures)	Dr
	12% Debentures A/c Dr To 13% Preference Share Capital A/c To Security Premium A/c (Conversion of 50 debentures to 400,13% preference shares of Rs.100 each at a premium of Rs. 25)		50000	40000 10000
	Sundry debenture holder’s A/c To Bank A/c (Interest on 50,12% debentures paid on conversion)	Dr	6000
				6000
	P&L A/c Dr To interest on debentures A/c (Interest on debentures transferred to P&L A/c)		96000
				96000

Own Debentures

Directors may purchase bonds whenever they determine that the market price is favourable to the company. These purchased bonds can be cancelled by the company or stored as an investment called own bonds that can be reissued later when needed.

Purchases of corporate bonds are accounted for in the same way as regular investments. The entry looks like this:

Own Debentures A / c Dr (with purchase price)

To Bank A / c

Your corporate bond A / c will appear on the asset side of B / S (under “Investment”) until cancelled or reissued. If the company wants to cancel its investment in its corporate bonds, it will be passed the following entry:

Debentures A/c Dr (with face value)

Loss on redemption of debentures A/c Dr (for loss)

To own Debentures A/c (with purchase price

To Profit on Redemption of Debentures A/c (for profit)

For transfer of profit on redemption:

Profit on Redemption of Debentures A/c Dr To Capital Reserve

Problem 23

A company bought 6% corporate bonds of Rs.30000 and Rs.100 for investment at Rs.95 respectively. Six months later, the bond was cancelled. Display the journal.

A23.

Own Debentures A/c To Bank A/c (300 own debentures purchased for investment at Rs.95)	Dr	28500	28500
6% Debentures A/c To own debentures A/c To Profit on redemption of debentures A/c (Cancellation of debentures held as investment)	Dr	30000	28500 1500
Profit on redemption of debentures A/c Dr To Capital Reserve (Transfer of profit on redemption to C.R)		1500
			1500

Key takeaways:

A bond is a type of debt instrument that is not backed by collateral and normally has a maturity of more than 10 years.

Debt securities are only secured by the creditworthiness and reputation of the issuer.

Both companies and governments often issue bonds to raise capital or funds.

Some bonds may be converted into shares, others may not.

A debenture redemption reserve is a requirement imposed on Indian companies that issue bonds where they must create a debenture redemption service to protect investors from the possibility of a corporate default.

This rule provides investors with some level of protection, as debt securities are not backed by an asset, lien or other form of collateral.

The reserve must represent at least 25% of the nominal value of the bonds issued.

A lump sum payment is an amount that is paid at once, as opposed to an amount that is divided and paid in installments.

A lump sum payment is not the best option for all beneficiaries; For some, it may make more sense for the funds to be annualized as periodic payments.

Depending on interest rates, tax status, and penalties, an annuity can end up with a net present value (NPV) higher than the lump sum.

An installment debt is a loan that is paid in regular installments, like most mortgages and auto loans.

Installment loans are good for borrowers, as they are a way to finance expensive items, while providing lenders with regular payments.

Installment loans are generally less risky than alternative loans that do not have installment payments, such as balloon payment loans or interest-only loans.

The discount on the bond issue is a capital loss. It will appear on the asset side of the balance sheet until it is written off.

The debentures are issued in the same way as the shares are issued. The company issues a prospectus that invites applications along with a sum of money called application money.

The premium in the issuance of the bond account and the discount in the issue of the bond account take place in the securities premium account and the discount in the issue of the share account, respectively.

Since the debentures can be issued at par, at a premium, or at a discount and can be redeemed at par or at a premium, there are several possible cases of entries that must be approved at the time of issuance of the debentures.

The name Issue Premium has been changed to Securities Premium. Obligations are also securities

The discount in the issuance of the debenture account and the loss in the issuance of the debenture account can be transferred to the cost account of issuance of debentures.

The premium on issuance of the bond account represents a capital gain and must be transferred to Capital Reserve.

References:

Sehgal, Ashok and Deepak Sehgal. Corporate Accounting. Taxman Publication, New Delhi.

Gupta, Nirmal. Corporate Accounting. Sahitya Bhawan, Agra.

Jain, S.P. and K.L. Narang. Corporate Accounting. Kalyani Publishers, New Delhi.

Compendium of Statements and Standards of Accounting. The Institute of Chartered Accountants of India, New Delhi.

Bhushan Kumar Goyal, Fundamentals of Corporate Accounting, International Book House.

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