undefined | unit 3 redemption of debentures

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Unit IIIRedemption of Debentures Q1) What is the repayment of bonds?A1) Typically, it can be described as the process of repaying bonds issued by an entity to its debtors. In other words, it is the process of repaying the principal amount to debtors. It is a remarkable transaction for most companies as the amount required for repayment is quite substantial. As soon as bonds are redeemed, the issuing company unloads its share of liability and takes it off the balance sheet. As a result, companies build up a robust provision from their profits and accumulate capital for the recovery of bonds. As a rule, the repayment terms are specified in the promissory note certificate. In particular, the approach behind the repayment of bonds can be understood by looking at these following notes –

Bonds can be redeemed at either premium or par.

Repayment means- repayment of the number of bonds to debtors.

All Redemption conditions are listed in the prospectus of a company that initiates an invitation to issue bonds.

Q2) What are the Methods of repayment of debt securities?A2) Methods of repayment of debt securitiesDifferent companies may choose different methods of repayment of bonds. These following are some popular ways to do this:

Lump sum payment to a preceding date

This unique method is considered one of the simplest redemption options. According to this method, debtors receive the promised sum on the preceding date.If the bonds are not redeemed with a discount or premium, the lump sum, calculated by the sum of the net present value of all bonds, will be paid on the pre-specified or maturity date specified in the bond agreement. The issuing company may decide to pay off the amount of the bond before its due date. Since companies know in advance when to pay for the bond, they are better positioned to streamline it. The accounting treatment of the repayment of debt securities in this method is specified below

S.N.	Particulars	Amount (Rs.)	Amount (Rs.)
1.	Bank A / C (Dr) To Repay The Investment A / C (investment sold)	xxx	xxx
2.	Use of profit And loss a / C (Dr) To For Debt Repayment A / C (The amount of the transferred profit)	xxx	xxx
	Debt Redemption Fund A / C (Dr) To The General Reserve A / C To The Capital Reserve A / C (Profit from the sale of investments)	xxx	xxx

2. Payment in annual rateThis method is considered to be similar to the redemption process of a temporary loan. According to this method, companies pay a portion of the capital of a bond to the holders each year until their due date. Total liability is divided by the number of investment years and the result is paid out each year.3. Debenture redemption reserveThis is also called a sinking fund. Essentially, it is a reserve that is built up by accumulating at least 25% of the face value of the bond each year until maturity. The main objective of this reserve is to protect the interests of debtors. Under the Indian Companies Act of 1956, companies issuing bonds are required to form this reserve before the maturity date of a particular bond. 4. Call and put optionSome companies issue bonds with both calls and put options for repayment. Typically, the call option allows companies to purchase their bonds either before or on the maturity date at a predetermined price. The put option, on the other hand, allows debtors to claim the right to sell the bond back to the company either before or on the due date at an agreed price. 5. Conversion into sharesThis particular method is directed against convertible bonds. Such bonds include a clause allowing holders to convert their shares into common shares of the company. It is at this point of conversion that the entire liability of debt securities is discharged. 6. You buy from the open marketCompanies can also buy bonds from an open market if their shares are traded on a regulated exchange. It saves you the effort of being subject to administrative documents. In addition, bonds are often traded at a discount on the market. In turn, it allows individuals to lower the payout and helps retain more revenue. Regardless of this, investors and issuers must weigh the advantages and disadvantages of their repayment in the prevailing market condition before repaying bonds. In addition, one should be clear about their purpose of repayment of these debt securities and research in detail about their prospects.

a) When buying a premium

S.N.

Particulars

Amount (Rs.)

Bond A/c Dr

Loss on repayment A/c Dr

To Bank A/c

xxx

Profit & Loss A / C (Dr)

To Loss on redemption A / C

xxx

b) When buying with a discount

S.N.

Particulars

Amount (Rs.)

Debenture A / C (Dr)

To benefit from repayment A / C (Dr))

To Bank A / C

xxx

Profit on redemption A / C (Dr)

To the capital reserve a / c

xxx

Q3) What are the provisions relating to the issue of bonds, together with the penalties for non-compliance with them?A3) The authority to issue bonds may be exercised on behalf of the company as a Board Meeting pursuant to Section 179 (3) of the Companies Act 2013. Further, Section 71 of the Companies Act, 2013 deals with the provisions relating to the issue of bonds, together with the penalties for non-compliance with them, which may be summarized as follows:

A company may issue bonds with the option to convert all or part of these bonds into shares at the time of redemption. Provided that the issue of bonds with the option to convert these bonds into shares is approved by a special resolution of the shareholders at a duly convened annual general meeting of the company.

Companies may issue secured and unsecured bonds. Secured bonds may be issued by an entity under the prescribed conditions. The company cannot issue bonds that do not protect voting rights.

The company creates a debenture repayment reserve account from the profits of the company available for the payment of the dividend, and the amount credited to this account is not used by the company with the exception of the repayment of debentures.

The company may not issue a prospectus or make an offer or invitation to the public or its members for more than five hundred to subscribe for its bonds unless it has appointed one or more bond trustees prior to such issue or offer.

A debt trustee shall take measures to protect the interests of debtors and remedy their complaints in accordance with the rules that may be prescribed.

Any provision contained in a trust deed to secure the issuance of bonds, or in a contract with debtors secured by a trust deed, shall be void to the extent that it would result in a trustee being exempted from it, or exempting him from liability for breaches of trust, unless he demonstrates the degree of care and duty of care required of him as a trustee, taking into account the provisions of the trust deed that confer upon him power, authority or discretion; Provided that the liability of the debtor trustee is subject to the exceptions that may be agreed upon by the majority of debtors holding at least three-quarters of the total debt securities in a meeting held for this purpose.

A company pays interest and redeems the bonds in accordance with the terms of its issue.

If, at any time, the debt trustee concludes that the company's assets are insufficient or likely not to be sufficient to pay the principal when it becomes due, the debt trustee may file an application with the court, and the court, after hearing the company and any other person interested in the matter, May, by order, impose such restrictions on the formation of further liabilities of the company that the court deems necessary in the interest of the debtors.

If a company does not redeem the bonds on the due date or does not pay the interest on the bonds on the due date, the court May, at the request of one or all debtors or debt trustees and after hearing the parties concerned, request the company to redeem the bonds immediately against payment of the capital and interest due thereon.

If a default is made in accordance with the order of the court under this Section, any officer of the company who is in default will be punished with a custodial sentence for a term that may extend up to three years or with a fine not less than two lakh rupees, but which may extend up to five lakh rupees, or with both.

A contract with the company to receive and pay bonds of the company may be enforced by a decree for certain services.

And finally, the central government may prescribe the procedure for securing the issuance of bonds, the form of the promissory note, the procedure for debtor holders to examine the trust deed and obtain copies of it, the necessary reserves for the repayment of bonds and such other matters.

(Share Capital and Debentures) Rules, 2014 ("2014 Rules"), which prescribes certain conditions to be met by a corporation for issuing secured bonds, provides " rule 18 of the businesses "The company may not issue secured bonds unless it meets the following conditions, namely:-

Secured bonds may be issued provided that the date of their repayment does not exceed ten years from the date of issue. Provided that a company setting up infrastructure projects can issue secured bonds for a period of more than ten but not more than thirty years;

Such issuance of debt securities is secured by the creation of a levy on the company's real estate or assets with a value sufficient for the repayment of the amount of the debt securities and interest due;

the Company shall appoint a debt trustee prior to the issue of the prospectus or the letter of offer to subscribe to its bonds and shall issue a debt deed to protect the interests of the debtors no later than sixty days after the bonds have been allotted; and

the security for the Bonds by a levy or mortgage will be paid to the debtor trustee on-

 any specific movable property of the company (not in the nature of pledge); or any specific property, wherever situate, or have an interest in it. Q4) What is the Procedure for issuing bonds under the companies act, 2013?A4) Procedure for issuing bonds under the companies act, 2013:[Applicable provisions: articles 56, 72 of the businesses Act, 2013 pursuant to rules 18 and 19 of the businesses Rules (share capital and bonds), 2014]:

Call and hold a board meeting and decide which types of bond are issued by the company.

If the company decides to issue secured bonds, the company must comply with the conditions set out in Rule 18 of the companies (Share Capital & Debentures) Rules, 2014.

In the case of the appointment of a debt trustee, approval is obtained from a Sebi-registered debt trustee, who is proposed to be appointed. If bonds to be issued are collateralized bonds, a bond certificate in form no. SH-12 or as close as possible shall be executed by the company for the benefit of Debenture Trustees within sixty days of the allocation of Debentures.

Resolutions adopted at the board meeting for

a) approval of the offer letter for the private placement in form no. PAS-4 and application forms (in the case of private placement of bonds)b) Debenture Trustee Agreement and appointment of a Debenture Trustee (in the case of secured bonds only) should be approved ; c) appointment of an expert for valuation (in the case of private placement of bonds);d) to approve the increase in lending powers, if necessary; e) to approve the preparation of fees for the assets of the company; f) to approve the promissory note agreement; g) to set the date, date and time for the Extraordinary General Meeting of shareholders.5. Draft of the following should be prepared

Agreement of Debenture Subscription;

the private placement should provide the offer letter in form PAS-4 and application forms;

records of a private placement offer in form PAS-5;

Debenture Trustee Agreement;

mortgage agreement to prepare fees for the company's assets.

6. Issue notices of the extraordinary general meeting together with the statement of reasons.7. Hold an extraordinary general meeting and adopt a special resolution to issue convertible bonds and to increase the company's borrowing and to authorize the executive board to incur a charge on the company's assets.8. File Form No. PAS-4 and PAS-5 in the form not. Transmit GNL – 2 with the Registrar of Companies.9. File offer letter in form no. MGT-14 with the Registrar of companies. Q5) Mention the detailed process for issuing bonds.A5) Through these articles we will discuss the detailed process for issuing bonds and the same can be completed as follows:

Convene and hold a Board meeting and this Board meeting:

Determine the type of bond to be issued after the debt securities have been resolved.The draft offer letter should be accepted to be placed privately in the form no PAS 4 in the debentures subscription agreementA draft offer for a private placement should also be approved for form no. PAS 5The appointment of the trustee for the bond should also be resolved if the bond is secured in natureThe executive board should be authorized to invest the burden on the company's assets in the form of CHG-9 in respect of secured bonds.Open a separate bank account to receive subscription money to continue issuing CCDs.The Extraordinary General Meeting of shareholders should be dealt with in accordance with Section 180(1) (C) if the borrowing of the board of Directors is increased.Notice of the extraordinary general meeting together with the reasonsPursuant to Section 42, the board of directors should be authorized to open a separate account for the proposed issue. 2. Call The Extraordinary General MeetingTo examine and approve the increase of the Executive Board mandates with a special resolution. MGT-14 must be submitted within 30 days from the date of adoption of a special decision.Letter of approval to be sent to shareholdersThe application format attached to the offer letter should be used by the applicant to request the allocation of securities by paying the application fee.Decision on the allocation of CCDsThe offer letter should be submitted to ROC by completing Form PAS-4 and PAS-5 as an attachment together with GNL-2.Approval for the submission of form PAS-3Approval for submission of the form FC-GPR in the case of a foreign subscriber is involved.3. The Board meeting should be convened, to approve the following ;Pursuant to Section 42(6), bonds should be issued within 60 days of the date of receipt of the funds. CHG-9 should be filed within 30 days from the date of special settlement (if the company has issued secured debentures)Return to the allotment for the PAS to be submitted 3 within thirty days from the date of allotment with list of allottees, board resolution for allotment, evaluation report, copy of special resolution passed.Debenture trust deed draft will be approved at Secured Debentures. (if the company has issued secured bonds).Debenture certificate to be issued.4. Items of note in the appointment of Debenture Trustee or Trustees (if the company has not issued secured debentures).Debenture trustees must be appointed before the issue of the letter, but not later than 60 days after the allotment. Debenture trustee should obtain Written consent 5. A trust deed in form no SH. 12 or as close as possible shall be executed by the company issuing bonds in favour of the bond trustees within three months of the closing of the issue or offer (if the company has issued secured bonds).6. the company must comply with the Debenture Redemption Reserve (DRR) requirements and the investment or deposit of the amount in respect of debt securities maturing during the year ended December 31, 2018.7. Reserve for debt securities is formed from profits of the company that are available for the distribution of the dividend;For unlisted companies with the exception of all Indian financial institutions and banking companies, the adequacy of the redemption reserve for debt securities is ten percent of the value of the outstanding debt securities. Q6) What are the Amendment to rule 18-debt securities?A6) Amendment to rule 18-debt securities: According to the amended rules, the requirement to create DRR by certain business classes has been abolished. The summary of the changes in the DRR provisions and the comparison of the changed rules with the existing rules are given in the table under:  Sr. Nr. Class of companies According to the existing rules According to the amended rules

All Indian financial institutions regulated by the Reserve Bank of India (RBI) and banking companies

 Public Issue:

No disaster preparedness required

 Private Problem:

No disaster preparedness required

 DRR provisions as provided in the existing rules 2. Other Financial Institutions According To § 2 (72) Companies Act, 2013

DRR provisions apply to NBFCs registered with the RBI

DRR provisions as provided in the existing rules

3. For listed companies (with the exception of all Indian financial institutions and banking companies, as stated in serial number 1 Above) a) All listed NBFCs and listed HFCs  Public Issue:DRR amounted to 25% of the value of the outstanding bonds issued by public issue  Private Problem:No disaster preparedness required  Public Issue:No disaster preparedness required b) Other listed companies  Public Issue:DRR amounted to 25% of the value of the outstanding bonds  Private Problem:DRR amounted to 25% of the value of the outstanding bonds  Public Issue:No disaster preparedness required  Private Problem:No disaster preparedness required 4. For unlisted companies (excluding all Indian financial institutions and banking companies as per serial number 1 Above)) a) All listed NBFCs and Unlisted HFCs  Public issue [according to Sebi (issuance and listing of debt securities) Regulations, 2008]: DRR amounted to 25% of the value of the outstanding bonds b) Other unlisted companies  Public issue [according to Sebi (issuance and listing of debt securities) Regulations, 2008]: DRR amounted to 25% of the value of the outstanding bonds  Private Problem:

DRR amounted to 25% of the value of the outstanding bonds

DRR is 10% of the value of the outstanding bonds

In addition, each company required to establish a DRR had to invest or deposit, in accordance with applicable rules, at least 15% of the amount of its debt securities maturing during the year ending March 31 of the following year in a separate fund recognised as a Debenture Reserve Fund ("DRF") on or before April 30 of each year.However, under the revised rules, only certain types of companies need to invest or deposit this amount. The list of such companies that need to invest in DRF is as follows:

All listed NBFCs registered with the Reserve Bank of India;

All listed HFCs registered with the National Housing Board;

All other listed companies (except all Indian financial institutions, banking companies and other financial institutions) and

All unlisted companies that are not NBFCs and HFCs

BDO comments:The amended rules have provided the necessary clarity on the limitation of votingrights up to which a company can issue shares with different voting rights.In addition, the change has expanded not only the types of companies that nowqualify for the start-ups category, but also a relaxation for such start-ups byincreasing the sales limit and the period of years up to which they can beconsidered as start-ups.The amendment also abolished the requirement to create DRR for listed companiesand also lowered the DRR threshold for unlisted companies. On the other hand, theamended rules make it mandatory for listed companies to invest in DRF, althoughDRR is not applicable to them. In addition, it would have been helpful if clarity hadbeen provided regarding the DRR requirements for unlisted NBFCs and unlistedHFCs in the case of public debt issuance.The amendments contained in the application shall enter into force from 16 June2018. Q7) What do you mean by depreciation discount? Explain its method.A7) Meaning of depreciation discountThe loss or discount on the issuance of debt securities is usually a capital loss or a notional asset and must therefore be written off during the term of the debt securities. The amount of the loss or discount on the issuance of debt securities shall not be written off in the year of issue, as the benefit of the debt securities would accumulate with the company until they are repaid or repaid. The loss or discount, therefore considered as a capital loss. The discount can either be charged to Securities Premium A/c or written off over three to five years through the income statement in accordance with guidelines published by ICAI (the Institute of Chartered Accountants of India). If there are no capital gains or if the capital gains are not sufficient, the amount of such a loss or discount can be written off each year by passing on the magazine entry below to the revenue gain :

Income statement Dr.

Discount / loss on issuance of bonds a / c

(Discount / losses on issuance of debt securities written off)

Some of the methods used to treat the discount in the issuance of debentures are the following: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. It is desirable that it be cancelled as soon as possible. Discount in issuance of debentures, as it is a loss of capital nature, it can be amortized in two ways.First method:In this case, the total amount of discount on obligations is distributed equally over the life of the obligations. Assume that the bonds are issued at a discount to be redeemed after five years. The amount of the discount will be divided by five and the amount thus obtained will be charged to the profit and loss account for five years. This method is followed when the bonds are redeemed at the end of a specified period.Second method:In this method, the discount is cancelled each year in proportion to the amount of debentures used each year. This method is followed when the bonds are exchanged each year by notification and lottery. Q8) X Co. Ltd. issues Rs. 1, 00,000 debentures on January 1, 2012, with a 10 percent discount. Calculate the amount of discount that will be cancelled each year in each of the following cases:

Obligations will be repaid after four years.

The company redeems Rs. 25,000 debentures each year by drawing starting on December 31, 2012.

A8)1. The company will reimburse obligations after 4 years. Therefore, the discount amount to be cancelled each year will be Rs. 10,000 / 4 or Rs. 2,500.2. The company redeems debentures worth Rs. 25,000 every year. Therefore, the discount will be amortized proportionally.It is calculated as follows:

Year

Amount of debentures used(Rs)

Ratio

Discount to be written

1,00,000

75,000

50,000

25,000

10,000 x 4/10 = 4,000

10,000 x 3/10 = 3,000

10,000 x 2/10 = 2,000

10,000 x 1/10 = 1,000

10,000

Q9) One company issued bonds for the face value of Rs. 1, 00,000 with a discount of 6%. The obligations were repaid by annual drafts of Rs. 20,000. How would you calculate the discount on debentures? Show the discount account in the company's general ledger for the duration of the obligations.A9) The discount of obligations can be amortized in two ways:(a) Likewise during the life of the obligations. Since the obligations are for five years, each year one fifth of the discount can be taken to the profit and loss account.(b) In proportion to the amount used. Since in this case the redemption plan is given, it is possible to cancel the discount in the proportion of the amount used.If done then it will be cancelled as in:

Year

Debenture Outstanding

Ratio

Discount written off

1st year

2nd year

3rd year

1,00,000

80,000

60,000

5/15 x Rs 6,000 = 2,000

4/15 x Rs 6,000 = 1,600

3/15 x Rs 6,000 = 1,200

Year

Debenture Outstanding

Ratio

Discount written off

4th year

5th year

40,000

20,000

2/15 x Rs 6,000 = 800

1/15 x Rs 6,000 = 400

6,000

The debenture discount account in the second case will appear as under:Debenture Discount

Date	Particular	Rs	Date	Particular	Rs
1st year Jan. 1	To debenture	6,000	1st Dec.31	By Profit and Loss By closing balance	2,000 4,000
		6,000
					6,000

2nd year Jan. 1	To Opening balance	4,000	2nd Dec. 3	By Profit and Loss By closing balance	1,600 2,400
		4,000
					4,000
3rd year Jan. 1	To Opening Balance	2,400	3rd year Dec. 31	By Profit and Loss By closing balance	1,200 1,200
		2,400
					2,400
4th year Jan. 1	To Opening Balance	1,200	4th year Dec. 31	By Profit and Loss By closing balance	800 400
		1,200
					1,200
5th year Jan. 1	To Opening Balance	400	5th year Dec. 31	By Profit and Loss	400
		4,00
					400

Q10) AB Ltd. bought assets worth Rs. 6, 80,000 and assumed liabilities of Rs. 80,000. It was accepted to pay the purchase price of Rs. 6.40,000 through the issuance of debentures valued at Rs. 4.40,000 of Rs. 100 each with a 10% premium and cash balance. Record the transaction in the books of the buying company.A10) Journal Entries

Sundry Assets Account) Dr.

Goodwill (Bal, figure) Dr.

To Liabilities Account

To Vendor Account

(Being purchase of business for a consideration of Rs. 6,40,000)

6,80,000

40,000

80,000

6,40,000

Vendor Account ) Dr.

To Debenture Account

To Premium on Issue of

Debenture Account

To Bank Account

(Being the purchase consideration)

6,40,000

4,00,000

40,000

2,00,000

NB: No of Debentures = Rs 4,40,000 / Rs, 100 + Rs. 10 = 4,000 DebenturesTherefore, premium = 4,000 x Rs. 100 x 10% = Rs. 40,000 Q11) You must approve the journal entries for the issuance of the following obligations:(a) 120 10% Rs. 1,000 bonds are issued at a 5% discount and are repayable at par.(b) Others 150 7% Rs. 1,000 bonds are issued with a 5% discount and refundable with a 10% premium.(c) Plus 80 9% Rs. 1,000 bonds are issued with a 5% premium.(d) In addition, another 400 8% Rs. 100 bonds are issued as collateral against a loan of Rs. 40,000. (ICWA Inter)A11) Journal Entries Dr. Cr.

(a)

Bank Account Dr.

Discount on issue of Debentures Account ) Dr.

To 10% Debentures Account

(Being the receipt of money on issue of 120 10% Debentures at a discount of 5%)

1,14,000

6,000

1,20,000

(b)

Bank Account Dr.

Loss on Issue of Debentures Account Dr.

Top 7% Debentures Account

TO Premium on Redemption of Debentures Account

(Being the receipt of money on issue of 150 7% Debentures at 5% discount and repayable at a premium of 10%)

1,42,500

22,500

1,50,000

15,000

(c)

Bank Account Dr.

To 9% Debentures Account

To Premium on Issue of Debentures Account

(Being the receipt of money on issue of 80 9% Debentures)

84,000

80,000

4,000

(d)

Debentures Suspense Account Dr.

To 8% Debentures Account

(Being issue of 400 8% Debentures as collateral security against a loan of Rs. 40,000)

40,000

Q12) B.K. Ltd. issued at Rs 1, 00,000 10% to 95% bond. Subscriptions are paid up to Rs 20,000 on application and balance on assignment. The cost of the issue is 500 rupees.Show the journal entries and the Company Balance Sheet.A12) Journal Entries Dr. Cr.

Bank Account Dr. To 10% Debenture Application Account (Being issue of debentures and receipt of application money)	Rs 20,000	Rs 20,000
10% Debentures Application Account Dr. To 10% Debenture Account (Being application money transferred to Debenture Account on allotment)	20,000	200,000
10% Debenture Allotment Account Dr. Discount on Issue of Debentures Account Dr. To 10% Debenture Account (Being allotment money due to debentures)	75.,000 5,000	80,000
Bank Account Dr. To 10% Debenture Allotment Account (Being money received on allotment)	75,000	75,000
Expenses on Subscription Account Dr. To Bank Account (being expenses paid on issue of debentures)	500	500

Balance Sheet of B.K. Ltd.

Liabilities

Assets

Secured Loans:

10% Debentures

1,00,000

Current Assets:

Bank

Misc. Expenses:

Expenses on Subscription 500

Discount on Debentures 5,000

94,500

5,500

1,00,000

Q13) On a company's balance sheet, the discount on obligations shows a debit balance of 15,000 rupees. Every year 5,000 rupees is charged to the profit and loss account. How will the discount on the liability account appear at the end of the first year and the second year on the company's balance sheet?A13) Balance Sheet (First Year)

Asset Side	Rs	Rs
Misc. Expenditure: Discount on Debentures Less: Charged to Profit and Loss Account	15,000 5,000	10,000
Balance Sheet (Second Year)
Asset Side	Rs	Rs
Misc. Expenditure: Discount on Debentures Less: Charged to Profit and Loss	10,000 5,000	5,000

Q14) One Company issued Rs 2.00,000 Bonds at 10% of Rs 100 each at par, repayable at the end of 5 years with a 5% premium. Regarding the deed of trust, a sinking fund would be created in order to accumulate sufficient funds for this purpose. Investments were made with a 5% interest received at the end of each year. All investments, including reinvestments of interest received, were made at the end of the year. All investments were sold in the fifth year for Rs 1, 63,805.You must show journal entries and general ledger accounts for 5 years.Note:Rs 2, 71462 invested at the end of each year at 5% compounded interest will amount to Rs 15 at the end of 5 years.The calculation can be done to the nearest rupee.A14) Amount required for the redemption of debentures:(a) Nominal value of debentures = Rs 2,00,000(b) Premium on redemption at5% = Rs 10,000 = Rs 2,10,000When the amount required id Rs 15, annual instalment= Rs 2.71462When the amount required is Rs 2,10,000, annual instalment = 2,10,000 × 2.71462/15 = Rs. 38,005 (approximate) (Without Narration)

1st year

Jan. 1

Bank Account Dr

Loss on Issue of Debenture Account Dr

To 10% Debenture Account

To Premium on Redemption Account

2,00,000

10,000

2,00,000

10,000

Dec 31

Profit and Loss Appropriation A/c Dr

To Sinking Find Account

Sinking Fund Investment Account Dr

To Bank Account

38,005

		2nd year		3rd year		4th year		5th year
Dec 31.	Bank Account To Interest on S.F.I Account	Rs 1,900	Rs 1,900	Rs 3,896	Rs 3,896	Rs 5,991	Rs 5,991	Rs 8,190	Rs 8,190
	Interest on S.F.I A/c To Sinking Fund	19,000	1900	3,896	3,896	5,991	5,991	8,190	8,190
	P & L Appropriation Account To Sinking fund A/c	38,005	38,005	38,005	38,005	38,005	38,005	38,005	38,005
	S.F.I. Account To Bank A/c	39,905	39,905	41,901	41,901	43,996	43,996		Nil

Dr. Cr

V Year Dec.31	Bank Account To Sinking Fund Investment Account Dr	Rs 1,63,805	Rs 1,63,805
“	Sinking Fund Account Dr To Sinking Fund Investment A/c	2	2
“	10% Debenture Account Dr Premium on Redemption Account Dr To Debenture-holder’s Account	2,00,000 10,000	2,10,000
Dec.31	Debenture holder’s Account Dr To Bank Account	2,10,000	2,10,000
“	Sinking Fund Account Dr To General Reserve Account	2,00,000	2,00,000

Q15) On January 1, 1993, a company issued 10,000 bonds at 6% of Rs 100 each, repayable at par after 15 years. The terms of the issue, however, established that the debentures could be exchanged with 6 months' notice at any time after 5 years with a premium of 4%, either through payment in cash or through the allocation of preferred shares and / or other obligations in accordance with the option of the bondholders.On April 1, 2004, the company informed the bondholders to repay the bonds on October 1, 2004, either by cash payment or by allocating 8% of preferred shares of Rs 100 each to Rs 130 per share or 7% of second bonds from Rs 100 each to Rs 96 per bond.Holders of 4,000 debentures accepted the offer of 8% preferred shares, holders of 4,800 debentures accepted the offer of 7% of 2nd Debenture and the remainder demanded cash. Provide journal entries that record the previous redemption.A15) Journal Entries Dr. Cr.

2004

Oct. 1

6% Debentures Account Dr.

Premium on Redemption Account Dr.

To Debentures-holders Account

(Being amount payable on redemption of debentures including premium 4%)

10,00,000

40,000

10,40,000

Oct. 1

Debenture holder’s Account (4,000 x Rs 104) Dr.

To 8% Preference Share Capital Account

(4,16,000 x 100/130)

To Share Premium Account

(4,16,000 x 30/ 130)

(Being Debenture holders are satisfied by allotment or preference shares of Rs. 100 each at a premium of Rs 30 per share)

4,16,000

3,20,000

96,000

Oct. 1

Debenture holder’s Accoutn (4,800 x Rs 104) Dr.

Discount on Issue of Debentures Account .

(4,99,200 x 4/96) Dr.

To 7% Second Debentures Account

(Being Debentures holders are satisfied by allotment of debentures of Rs 100 each at a discount of 4%

4,99,200

20,800

5,20,000

Oct. 1

Debenture holder’s Account Dr.

To Bank Account

(Being amount due to Debenture holders paid off)

1,24,800

Oct. 1

Share Premium Account (40,000 + 20,800) Dr.

To Premium on Redemption Account

To Discount o Issue of Debenture Account

(Being Premium on Redemption and Discount on Issue of debentures are written off against Share Premium Account)

60,800

40,000

20,800

Dr.

Debentureholder’s Account

Cr.

2004

Ocr. 1

8% Preference Share

Capital Account

To Share Premium A/c

To 7% Second Debenture Account (5,20,000 – 20,800)

To Bank Account

3,20,000

96,000

4,99,200

1,24,800

2004

Oct. 1

“ “

By 6% Debentureholder’s Account

By Premium on Redemption A/c

10,00,000

40,00,000

10,40,000

Q16) Summarize the entries of issue of debentures.A16) Summary entries for typical cases are given below:(a) Journal Entries (Debentures Issued at Par)

On recepipt pplication money

Bank Account Dr

To Debenture Application A/c

On allotment of debentures

Debentures Application A/c Dr.

To Debenture Account

On making allotment or calls

Debentures Allotment/ Call A/c Dr.

To Debentures Account

On receipt of money

Bank Account

To Debenture Allotment / Call A/c Dr.

(b) Journal Entries (Debentures issued at Premium)When issue price of debentures is more than the face value of debentures they ar said to be issued at premium.Generally, premium money is collected alongwith allotment money. As already said, procedure for issue of debentures is the same as tht for issue of shres. Therefore, only the journal entry relating to premium is given below:

Allotment money along with premium is due

Debenture Allotment A/c Dr

To Debenture Account

To Debenture Premium A/c

When cash received

Bank Accoutn Dr.

To Debenture Allotment/Call A/c

Allotment money is due and discount allowed

Debenture Allotment A/c Dr.

Discount on Issue of Debentures A/c Dr.

TO Debenture Account

When cash received

Bank Account Dr.

Debenture Allotment A/c

The name Issue Premium has been changed to Securities Premium. Obligations are also securities. Therefore, the premium in the issuance of debentures, logically, can be credited to the Securities Premium Account. Then, the restrictions on the use of the premium in the issuance of shares will also apply to the use of the premium in the issuance of debentures.The Bonds Redemption Premium must be distinguished from the Share Issue Premium; The first is a liability that is shown together with the Obligations in the Long-term Loans item, while the second is a capital gain that is shown in Reserves and Surpluses.Alternatively, the discount allowed in the issuance of debentures, as well as the amount of the premium payable in the reimbursement, can be charged to the Loss Account in the Issuance of Debentures, in which case the journal entry will be as follows: Q17) White Ltd. issues 10,000 secured bonds at 12% Rs. 100 each. Indicate journal entries if the Notes can be exchanged at par and are issued (i) at par, (ii) with a 2 percent discount and (iii) with a 3 percent premium. Also indicate the entries that will be made if the Notes are redeemable with a premium of 5 percent and are issued (i) at par and (ii) with a discount of 2 percent. Also indicate in each case how the figures will appear on the balance sheet. Journal Entries Dr. Cr.

Debenture redeemable at par

(i) Issued at par:-

Bank Dr.

To 12% Debentures

Issue of 10,000 12% Debentures of Rs 100 each at a par

10,00,000

(ii) Issued at a discount:-

Bank Dr.

Discount on Issue of Debentures Account Dr,

TO 12% Debentures

Issue of 10,000 12% Debentures of Rs100 each at a discount 12%

9,80,000

20,000

10,00,000

(iii) Issued at a premium :-

Bank Dr.

To 12% Debentures

TO Premium on Issue of Debentures Account / Securities Premium Account

Issue 10,000 12% Debentures of Rs 100 each at a premium 3%.

10,30,000

10,00,000

30,000

(i ) Debentures issued at apar but redeemable at a premium of 50%

Bank Dr.

Loss on Issue of Debentures Account Dr.

To 12% Debentures

TO premium on Redemption of Debenture Account at par but redeemable at a premium of 5%

10,00,000

50,000

10,00,000

50,000

(ii ) Debentures issued at a discount of 12% but redeemable at a premium of 5%:-

Bank Dr.

Loss on Issue of Debenture Account Dr.

TO 12% Debentures

TO Premium on Redemption of Debentures Account

Issue of 10,000 12% Debentures issued at a discount of 2% but redeemable at a premium of 5%

9,80,000

70,000

10,00,000

50,000

Balance Sheet (i) Debentures issued at par and redeemable at per

Particulars

Note No

Equity and Liabilities

Non-current liabilities

Long-term borrowings

10,00,000

II. Assets

Current Assets

Cash and Cash equivalence

10,00,000

Notes: RS

Long term Borrowings

12% Debentures 10,00,0002. Cash and Cash equivalence Balance with Bank 10,00,000(ii) Debenture issued at a discount and redeemable at per

Particulars

Note No

Equity and Liabilities

Shareholder’s Funds

Reserve and surplus

Non-current liabilities

Long-term borrowings

(20,000)

10,00,000

9,80,000

II. Assets

Current Assets

Cash and Cash equivalence

9,80,000

Notes:

Reserve and Surplus

Discount on Issue of Debentures (20,000) 2. Long term Borrowings12% Debentures 10,000 3. Cash and Cash EquivalentsBalance with Bank 9,80,000 (iii) Debentures issued as premium and redeemable at par

Particulars

Note No

Equity and Liabilities

Shareholder’s Funds

Reserve and surplus

Non-current liabilities

Long-term borrowings

(30,000)

10,00,000

10,30,000

II. Assets

Current Assets

Cash and Cash equivalence

10,30,000

Notes:

Reserve and Surplus

Securities Premium Account (30,000) 2. Long term Borrowings12% Debentures 10,00,000 3. Cash and Cash EquivalentsBalance with Bank 10,30,000 (iv) Debentures issued at par and redeemable at a premium of 5%

Particulars

Note No

Equity and Liabilities

Shareholder’s Funds

Reserve and surplus

Non-current liabilities

Long-term borrowings

(50,000)

10,50,000

10,00,000

II. Assets

Current Assets

Cash and Cash equivalence

10,00,000

Notes:

Reserve and Surplus

Loss on Issue of Debentures (30,000) 2. Long term Borrowings12% Debentures 10,00,000Premium on Redemption of Debentures 50,000 10,50,000 3. Cash and Cash EquivalentsBalance with Bank 10,00,000 (v) Debentures issued at a discount and redeemable at a premium

Particulars

Note No

Equity and Liabilities

Shareholder’s Funds

Reserve and surplus

Non-current liabilities

Long-term borrowings

(70,000)

10,50,000

9,80,000

II. Assets

Current Assets

Cash and Cash equivalence

980,000

Notes:

Reserve and Surplus

Loss on Issue of Debentures (70,000) 2. Long term Borrowings12% Debentures 10,00,000Premium on Redemption of Debentures 50,000 10,50,000 3. Cash and Cash EquivalentsBalance with Bank 9,80,000 The bonds can be issued in exchange for a consideration other than cash. This issue can be done at par, with a premium or with a discount. When a company takes over a running business, it very often discharges part of the consideration in the form of obligations. Q18) Pee Co. Limited took over certain fixed assets for Rs. 3.15,000 from the liquidator of Tee Limited that was being liquidated and assigned 3,000 obligations of 13% with a premium of 5% to the liquidator to satisfy the consideration. The company then issued a prospectus inviting the public to subscribe 10,000 12% Dentures of Rs100 each at a discount of 12%, payable as follows:- RsWith application 35On allotment 23On first and final call 40Applications were received for 9,000 debentures only. All the application were accepts. In course of time the call was also made. All the money’s were duly received.Prepare the Cash Book and the Journal. A18) Dr. Cash Book (Bank Columns Only) Cr.

To 12% Debentures Applications and Allotment Account (Application money on 9,000 12% Debentures @ Rs 35 each)	Rs 3,15,000	By Balance c/d	Rs 8,82,000
To 12% Debentures Applications and Allotment Account (Allotment money on 9,000 12% Debentures@ Rs 23 each)	2,07,000
To 12% First and Final Call Account (Final and final call @ Rs 40 each) To Balance b/d	3,60,000
	8,82,000		8,82,000
	8,82,000

Journal Dr. Cr.

Fixed Assets Dr.

To Liquidator of Tee Ltd

Purchase of fixed Assets for an agreed value of Rs 3,15,000

3,15,000

Liquidator of Tee Ltd. Dr.

To 13% Debentures

To Premium on Issue of Debentures / Securities Premium

Issue of 3,000 13% Debentures of Rs 100 each at a premium of 5% in discharge of consideration.

12% Debenture Application and Allotment Account Dr.

3,15,000

5,22,000

3,00,000

15,000

Q19) On April 1, 2008, a company issued 1,000 debentures at 14% of 1,000 rupees each at 950 rupees. The issuance conditions stipulated that as of April 2010, 50,000 rupees of bonds should be exchanged, either by drawing at par or by buying in the market year. Expenses for the issue amounted to Rs 8,000 which was cancelled in 2008-09. The company cancelled Rs 10,000 of the bond issue discount each year. In 2010-11, the obligations to be exchanged were reimbursed at the end of the year by lottery. In 2011-2012, the company purchased 50 bonds for cancellation at the prevailing price of Rs 980 on March 31, 2012, with expenses being Rs 500.Interest is paid annually. Each year, an appropriate amount was also credited to the Reserve for the exchange of obligations. Ignore the income tax. Provide the journal entries and balance sheet (as it relates to obligations) as of March 31, 2012.A19) Journal Dr. Cr

2008

April 1

Bank Dr.

Discount on Issue of Debentures Account Dr.

To 14%, Debentures

The issue of 1,000 14% debentures of Rs 1,000 each at Rs 950

9,50,000

50,000

10,00,00

“ “

Debenture Issue Expense Account Dr.

To Bank

The Expense of Rs 8,000 incurred on issue of the debentures.

8,000

2009

Mar.31

Interest on Debentures Account Dr.

To Bank

Payment of interest for the year on debentures

1,40,000

“ “

Profit and Loss Account

To Interest on Debentures Account

To Debenture Issue Expenses Account

To Discount on Issue of Debentures Account

Transfer of Interest on Debentures Account and Debentures

Issue Expense Account to Profit and Loss Account and writing off Rs 10,000 of discount on Issue of Debentures

1,58,000

1,40,000

8,000

10,000

“ “

Profit and Loss Appropriation Account Dr.

TO Debentures Redemption Reserve

Creation of Debentures Redemption Reserve for redemption of debentures

2,50,000

2010

Mar.31

Interest on Debentures Account Dr.

TO Bank

Payment of interest for the year on debentures

1,40,000

“ “

Profit and Loss Account Dr

TO Interest on Debentures Account

TO Discount on Issue of Debentures Account

Transfer of Interest on Debentures Account to Profit and Loss account and writing off Rs 10,000 of Discount of Issue of Debentures.

1,50,000

3,40,000

10,000

2010

May. 31

Profit and Loss Appropriation Account Dr.

To Debentures Redemption Reserve

Bringing up Debentures Redemption Reserve equal to

50% of the amount of Debentures to facilitate part redemption of debentures to

2,50,000

2011 Mar.31	Interest on debentures Account Dr. 14% Debentures Dr. To Bank Payment of yearly interest on debentures and redemption of debentures of the paid up value of Rs50,000 at par by draw of lots.	Rs 1,40,000 50,000	Rs 1,90,000
“ “	Profit and Loss Account Dr. To Interest on Debentures Account To Discount on Issue of Debentures Account Transfer of Interest on Debentures Account to Profit And Loss Account and writing off Rs 10,00 of Discount on Issue of Debentures	1,50,000	1,40,000 10,000
“ “	Profit and Loss application Account Dr. To Debentures Redemption Reserve Increase made in Debenture Redemption Reserve to General Reserve	2,50,000	2,50,000
“ “	Debenture Redemption Reserve Dr. To General Reserve Transfer of the par value of debentures redeemed this year from Debenture Redemption Reserve to General Reserve	50,000	50,000
2012 Mar. 31	Interest on Debentures Account Dr. To Bank Payment of yearly interest on debentures for Rs 9,50,000	1,33,000	1,33,000
“ “	14% Debentures Dr. To Bank To Profit on Redemption of Debentures Purchase of 50 Debentures in the Debentures market for cancellation @ Rs 980 plus expense Rs 500	50,000	49,500 500
“ “	Profit on Redemption of Dr. To Discount on Issue of Debentures Account Use of Profit on redemption of debentures to partly write off discount o issue of debentures.	500	500
“ “	Profit and Loss Account Dr. To Interest on Debentures Account To Discount on Issue of Debentures Account Transfer of Interest on Debentures Account to Profit and Loss Account and writing off Rs9,500 of discount on Issue of Debentures, making total write off for the year equal to Rs 10,000	1,42,500	1,33,500 9,500
“ “	Profit and Loss Appropriation Account Dr. To Debenture Redemption Reserve Further credit to Debenture Redemption reserve, making the total credit equal to the face value of debentures issued.	2,50,000	2,50,000
“ “	Debenture Redemption Reserve Dr. Transfer from Debenture Redemption Reserve to General Reserve, the face value of debentures redeemed during the year.	50,000	50,000

Balance Sheet as on March 31, 2012(Items relating to debentures only)

Reserve and Surplus

Long term borrowings

Note No.

9,90,000

9,00,000

Notes:

Reserve and Surplus

Debentures Redemption Reserve 9,00,000 General Reserve 1,00,000Discount on issue of Debentures (10,000) 9,90,0002. Long term borrowings 900 14% Debentures @ Rs 7,000 each 9,00,000 Q20) Kalpana Ltd. obtained a bank loan of 2.50,000 rupees and issued 250 bonds of 14% of 1,000 rupees as collateral. In addition, the company issued to the public 8,000 12% bonds of Rs 100 each with a 2% discount payable on Rs 50 on application and balance on award.The issue was subscribed by M / s Ajanta Underwriters for a commission of 1% of the nominal value of the subscribed obligations. The entire issue was subscribed to by members of the public. The company paid the underwriting fee in the form of 12% bonds of Rs 100 each issued at par. Pass journal entries for the above-mentioned transactions and draw the balance sheet of Kalpana Ltd.A20) Journal

Bank Dr.

To Bank Loan

Amount of bank loan raised

2,50,000

14% Debentures Suspense Account Dr.

To 14% Debentures Account

Issue of 14% Debentures in favour of bank by way of a collateral security

2,50,000

Bank To 12% Debentures Application Account Receipt of application money on 8,000 12% Debentures @ Rs 50 per debenture.	4,00,000	4,00,000
12% Debentures Application Account Dr. 12% Debentures Allotment Account Dr. Discount on Issue of Debentures Account Dr. To 12% Debentures Account Allotment of 8,000 12% Debenture of Rs 100 each at a discount of Rs 2 per debentures.	4,00,000 3,84,000 16,000	8,00,000
Underwriting Commission on Issue of Debentures Account Dr. To M/c Ajanta Underwriters Underwriting commissions payable to M/s Ajanta Underwriters @ 1% on Rs 8,00,000, the nominal value of debentures underwritten	8,000	8,000
M/s Ajanta Underwriters Dr. To 12% Debentures Account Allotment of 80 12% Debentures of Rs 100 each at par to M/c Ajanta Underwriters by way of payment of underwriting commission due to them	8,000	8,000
Bank Dr. To 12% Debenture Allotment Account Receipt of allotment money on 8,000 12% Debentures @ Rs 48 per debenture.	3,84,000	3,84,000

Balance Sheet of Kalpan Ltd. as on ….
	Note No	Rs
Equity and Liabilities Shareholder’s fund’s Reserve and surplus Non-Current liabilities Long-term borrowings	1 2	(24,000) 10,58,000
	1 2	10,34,000
2. Assets Current assets Cash and cash equivalents	3	10,34,000

Notes: Rs Rs

Reserved and Surplus

Underwriting Commission on (16,000) Issue of Debentures (8,000) (24,000)2. Long-term Borrowings14% Debentures 2,50,000Less: 14% DebenturesSuspense Account 2,50,000 Nil 12% Debentures 8,08,000Bank Loan 2,50,000 10,58,000 3. Cash and Cash EquivalentsBalance with Bank 10,34,000 Working Notes:- Dr. Cash Book (Bank Column Only) Cr.

To Bank Loan

To 12% Debentures Application Account

To 12% Debenture Allotment Account

To Balance b/d

2,50,000

4,00,000

3,84,00

10,34,000

By Balance c/d

10,34,000

Dr. 12% Debenture Account Cr.

To Balance c/d