UNIT 2
Issue and redemption of debentures
Q1) Explain issue of debentures
A1) A debenture is a document evidencing debt to the debenture holder, generally secured by a fixed or floating charge.
The definition of ‘debentures’ as contained in section 2(12) of the Companies Act does not explain the term. It simply reads “debenture includes debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not.”
Issue of debentures
The procedure for the issue of debentures is the same as that for the issue of shares. The intending investors apply for debentures on the basis of the prospectus issued by the company. The company may either ask for the entire amount to be paid on application or by means of installments on application, on allotment and on various calls. Debentures can be issued
Issue of Debentures for Cash
Debentures are said to be issued at par when their issue price is equal to the face value. The journal entries recorded for such issue are as under:
(a) If whole amount is received in one instalment:
Bank A/c Dr.
To Debenture Application & Allotment A/c
Debenture Application & Allotment A/c Dr.
To Debentures A/c
(b) If debenture amount is received in two instalments:
Bank A/c Dr.
To Debenture Application A/c
Debenture Application A/c Dr.
To Debentures A/c
Debenture Allotment A/c Dr.
To Debentures A/c
Bank A/c Dr.
To Debenture Allotment A/c
(c) If debenture money is received in more than two instalments
Additional entries:
Debenture First Call A/c Dr.
To Debentures A/c
Bank A/c Dr.
To Debenture First Call A/c
Debentures issued at different terms
A company may issue debentures at different terms. These terms may not only relate to the issue of debentures but also to their redemption. For example, just as the issue can be made at par, at a premium or at a discount, the redemption can also be stipulated at par, at a premium or at a discount. In practice, however, the redemption is never made at a discount. Thus, combining such terms of issue and redemption of debentures, the following five possibilities are commonly found in practice.
a. Debentures issued a par and redeemable at par
b. Debentures issued at a premium and redeemable at par.
c. Debentures issued at a discount and redeemable at par.
d. Debentures issued at par and redeemable at a premium.
e. Debentures issued at a discount and redeemable at a premium.
Let us now see how journal entries he passed at the time of the issue in these five situations.
Issued at par, redeemable at par
Bank A/c Dr.
To Debentures A/c.
Issued at a premium, redeemable at par
Bank A/c Dr.
To Debentures A/c
To Premium on Issue of Debentures A/c
Issued at a discount, redeemable at par
Bank A/c Dr.
Discount on Issue of Deb. A/c Dr.
To Debentures A/c
Issued at par, redeemable at a premium
Bank A/c Dr.
Loss on Issue of debentures A/c. Dr.
To Debentures A/c
To Premium on Redemption of Deb. A/c
Issued at a discount, redeemable at premium
Bank A/c Dr.
Loss on Issue of Debentures A/c. Dr.
To Debenture A/c
To Premium on Redemption of Deb. A/c
Note: Loss on Issue of Debentures in the last entry includes the amount of discount on issue of the debentures as well as premium on redemption.
Q2) On January 1, 1988, Akash Ltd. offered 2,000 Debentures of Rs. 1,000 each at a discount of. It50 per debenture The amount was paid Rs, 200 on application, Rs. 400 on allotment and the balance on 1st and final call on May 30, 1988. Interest was payable half yearly @ 6% p.a.
The first coupon payable on June 30, 1988 being for 2%. The issue was fully taken up. Journalise the above transactions in the book of Akash Ltd.
A2)
IN THE BOOKS OF AKASH Ltd.
DATE | PARTICULARS | LF | Dr. (Rs.) | Cr. (Rs.) |
1-1-98 | Bank A/c Dr To 6% Debenture Application A/c |
| 4,00,000 |
4,00,000 |
1-1-98 | 6% Debenture Application A/c Dr To 6% Debenture A/c |
| 4,00,000 |
4,00,000 |
1-1-98 | 6% Debenture Allotment A/c Dr Discount on issue of Debenture A/c Dr To Debentures A/c |
| 8,00,000 1,00,000 |
9,00,000 |
1-1-98 | Bank A/c Dr To 6% Debenture Allotment A/c |
| 8,00,000 |
8,00,000 |
30-5-98 | Debenture First &Final Call A/c Dr To 6% Debenture A/c |
| 7,00,000 |
7,00,00 |
30-5-98 | Bank A/c Dr To Debenture First &Final Call A/c |
| 7,00,000 |
7,00,000 |
30-6-98 | Debenture Interest A/c Dr To Bank A/c |
| 40,000 |
40,000 |
31-12-98 | Debenture Interest A/c Dr To Bank A/c |
| 60,000 |
60,000 |
31-12-98 | Profit &Loss A/c Dr To Debenture Interest A/c |
| 1,00,000 |
1,00,000 |
Note: Since the money on debentures was received on different dates, the interest on June 30 is calculated for first six months at a flat rate of 2% as given and not on different amounts received on different dates.
Q3) Kapil Ltd. issued 10,000, 12% Debenture of Rs. 100 each at a premium of 10% payable in full on application by 1st March, 2017. The issue was fully subscribed and debenture were allotted on 9th March, 2017.
Pass the necessary Journal Entries
A3)
IN THE BOOKS OF KAPIL Ltd.
DATE | PARTICULARS | LF | Dr. (Rs.) | Cr. (Rs.) |
1-3-17 | Bank A/c Dr. To 12% Debenture Application A/c |
| 11,00,000 |
11,00,000 |
9-3-17 | Debenture Application A/c Dr. To 12% Debenture A/c To Debenture Premium A/c |
| 11,00,000
|
10,00,000 1,00,000 |
9-3-17 | Debenture Premium A/c Dr. To Capital Reserve A/c |
| 1,00,000 |
1,00,000 |
Q4) Simmons Ltd. issued 10,000. 8% Debenture of Rs. 100 each par payable in full on Application by 1st April, 2007. Application were received for 11,000 Debenture. Debentures were allotted on 7th April, 2007. Excess money were refunded on same date.
You required to pass necessary Journal Entries in the books of the company.
A4)
IN THE BOOKS OF SIMMONS Ltd.
DATE | PARTICULARS | LF | Dr. (Rs.) | Cr. (Rs.) |
1-4-07 | Bank A/c Dr. To 8% Debenture Application A/c |
| 11,00,000 |
11,00,000 |
7-4-07 | Debenture Application A/c Dr. To 8% Debenture A/c To Bank A/c |
| 11,00,000
|
10,00,000 1,00,000 |
Q5) The following balance appeared in the books of Y Ltd. as on 1st January 2014.
9% Debentures | 2,50,000 |
10 % Debentures Redemption Reserve (represented by Rs. 2,00,000, 10% Govt. Stock) | 1,80,000 |
The annual contribution to the Debenture Redemption Reserve was Rs.50,000 made on 31st December each year. On 31st December, 2014, Balance at bank before the receipt of interest was Rs. 70,000. On the date all the investments were sold at 95% and the debentures were duly redeemed.
Required :
A5)
IN THE BOOKS OF Y Ltd.
DATE | PARTICULARS | LF | Dr. (Rs.) | Cr. (Rs.) |
31-12-14 | Bank A/c. Dr. To Interest DRRI A/c |
| 20,000 |
20,000 |
31-12-14 | Interest on DRRI A/c Dr. To Debenture Redemption Reserve |
| 20,000 |
20,000 |
31-12-14 | Profit and loss A/c. Dr. To Debenture Redemption Reserve A/c |
| 50,000 |
50,000 |
31-12-14 | Bank A/c. Dr. To DRRI A/c |
| 1,90,000 |
1,90,000 |
31-12-14 | DRRI A/c Dr. To DRR A/c |
| 10,000 |
10,000 |
31-12-14 | 9%Debenture A/c. Dr. To Debenture holders A/c |
| 2,50,000 |
2,50,000 |
31-12-14 | Debenture holders A/c. Dr. To Bank A/c |
| 2,50,000 |
2,50,000 |
31-12-14 | Debenture Redemption Reserve A/c. Dr. To General Reserve A/c |
| 2,60,000 |
2,60,000 |
Dr. DEBENTURE REDEMPTION RESERVE A/c. Cr.
DATE | PARTICULAR | AMOUNT | DATE | PARTICULAR | AMOUNT |
31-12-14 | To General Reserve A/c | 2,60,000 | 1-1-14 | By Balance b/d | 1,80,000 |
|
|
| 31-12-14 | By Interest on DRRI A/c | 20,000 |
|
|
| 31-12-14 | By Profit and Loss A/c | 50,000 |
|
|
| 31-12-14 | By DRRI A/c | 10,000 |
| TOTAL | 2,60,000 |
| TOTAL | 2,60,000 |
Dr. DEBENTURE REDEMPTION RESERVE INVESTMENT A/c. Cr.
DATE | PARTICULAR | AMOUNT | DATE | PARTICULAR | AMOUNT |
1-1-14 | To Balance b/d | 1,80,000 | 31-12-14 | By Bank A/c (95% of 2,00,000) | 1,90,000 |
31-12-14 | To DRR A/c (Profit) | 10,000 |
|
|
|
| TOTAL | 1,90,000 |
| TOTAL | 1,90,000 |
Dr. 9% DEBENTURE A/c. Cr.
DATE | PARTICULAR | AMOUNT | DATE | PARTICULAR | AMOUNT |
31-12-14 | To Debenture holder’s | 2,50,000 | 1-1-14 | By Balance b/d | 2,50,000 |
| TOTAL | 2,50,000 |
| TOTAL | 2,50,000 |
Dr. DEBENTURE HOLDER'A/c. Cr.
DATE | PARTICULAR | AMOUNT | DATE | PARTICULAR | AMOUNT |
31-12-14 | To Bank | 2,50,000 | 31-12-14 | By 12% Debenture A/c | 2,50,000 |
| TOTAL | 2,50,000 |
| TOTAL | 2,50,000 |
Dr. BANK A/c Cr.
DATE | PARTICULAR | AMOUNT | DATE | PARTICULAR | AMOUNT |
31-12-14 | To Balance b/d | 70,000 | 31-12-14 | By Debenture holder’s | 2,50,000 |
31-12-14 | To Interest on DRRI A/c | 20,000 | 31-12-14 | By balance b/d | 30,000 |
31-12-14 | To Debenture Redemption Reserve Investment A/c | 1,90,000 |
|
|
|
| TOTAL | 2,80,000 |
| TOTAL | 2,80,000 |
Q6) MASAN Ltd. has 6,000, 8% of debentures of Rs. 100 each due for redemption in four equal annual installments starting from March 31, 2013. Debenture Redemption Reserve has a balance of Rs. 70,000 on that date. Record necessary journal entries. The company complied with the requirements with respect to investment made in government Securities on 30th April,2012.
A6)
IN THE BOOKS OF MASAN Ltd.
DATE | PARTICULARS | LF | Dr. (Rs.) | Cr. (Rs.) |
30-4-12 | Debenture Redemption Fund Investment A/c Dr. To Bank A/c |
| 22,500 |
22,500 |
31-3-13 | Profit and Loss A/c. Dr. To Debenture Redemption Reserve A/c |
| 80,000 |
80,000 |
31-3-13 | 8%Debenture A/c. Dr. To Debenture holders A/c |
| 1,50,000 |
1,50,000 |
31-3-13 | Debenture holders A/c. Dr. To Bank A/c |
| 1,50,000 |
1,50,000 |
31-3-14 | 8%Debenture A/c. Dr. To Debenture holders A/c |
| 1,50,000 |
1,50,000 |
31-3-14 | Debenture holders A/c. Dr. To Bank A/c |
| 1,50,000 |
1,50,000 |
31-3-15 | 8%Debenture A/c. Dr. To Debenture holders A/c |
| 1,50,000 |
1,50,000 |
31-3-15 | Debenture holders A/c. Dr. To Bank A/c |
| 1,50,000 |
1,50,000 |
31-3-16 | Bank A/c. Dr. To DFRI A/c |
| 22,500 |
22,500 |
31-3-16 | 8%Debenture A/c. Dr. To Debenture holders A/c |
| 1,50,000 |
1,50,000 |
31-3-16 | Debenture holders A/c. Dr. To Bank A/c |
| 1,50,000 |
1,50,000 |
31-3-16 | Debenture Redemption Reserve A/c. Dr. To General Reserve A/c |
| 1,50,000 |
1,50,000 |
NOTE :- In case of redemption in installments, investment is made for first installment and it remains invested till the last installment. In this question, the Company has made investment on 30th April, 2012 which remains invested till the last installment i.e. up to 31st March, 2016.
Q7) Gemini ltd came up with public issue of 30,00,000 equity shares of Rs. 10 each at rs. 15 per share. A, B and C took underwriting of the issue in 3:2:1 ratio.
Applications were received for 27,00,000 shares.
The marked application was received as under:
A 8,00,000 shares
B 7,00,000 shares
C 6,00,000 shares
Commission payable to underwriter is at 5% on the face value of shares
A7)
(i) Computation of liability of underwriters in respect of shares
| (In shares) | |||
| A | B | C | |
Gross liability (Total Issue of 30,000 equity shares) in agreed ration of 3 : 2 : 1 Less: Unmarked applications (Subscribed shares – marked shares) in 3 : 2 : 1 Marked shares as per agreed ratio Less: Marked application actually received Shortfall / surplus in marked shares Surplus of C distributed to A & B in 3:2 ratio Net liability for underwriting shares |
15,00,000
(3,00,000) 12,00,000 (8,00,000) 4,00,000 (1,20,000) 2,80,000 |
10,00,000
(2,00,000) 8,00,000 (7,00,000) 1,00,000 (80,000) 20,000 |
5,00,000
(1,00,000) 4,00,000 (6,00,000) (2,00,000) 2,00,000 Nil | |
(ii) Journal Entries in the books of Gemini Ltd.
| A | B |
A’s Account (2,80,000 x 15) Dr. B’s Account (20,000 x 15) Dr. To Share Capital Account (3,00,000 x 10) To Securities Premium Account (3,00,000 x 5) (Being the shares to be taken up by the underwriters) | 42,00,000 3,00,000 |
30,00,000 15,00,000 |
Underwriting Commission Account Dr. To A’s Account (15,00,000 x 10 x 5%) To B’s Account (10,000 x 10 5%) To C’s Account (5,00,000 x 10 x5%) (Being the underwriting commission due to the underwriters) | 15,00,000 |
7,50,000 5,00,000 2,50,000 |
Bank Account Dr. To A’s Account (Being the amount received from underwriters A for the shares taken up by him after adjustment of his commission) B’s Account Dr. To Bank Account (Being the amount paid t underwriter B after adjustment of the share taken by him against underwriting commission due to him) | 34,50,000
2,00,00
|
34,50,000
2,00,000 |
C’s Account Dr. TO Bank Account (Being the underwriting commission paid to C) | 2,50,000 |
2,50,00 |
Note: C has sold in excess of the underwriting obligation and hence he will not be required to purchase any shares but will get commission for underwriting.
Q8) A company issued 10,000 shares of which 75% was underwritten by an underwriter. Applications for 6,000 shares were received out of which 4,800 shares were marked by the underwriter. Determine the net liability of the underwriter.
A8) Gross Liability = 75% of 10,000 = 7,500 shares
Less: Marked Applications = 4,800
Net Liability = 2,700
Q9) A Company issued 1, 00,000 shares of Rs. 100 each.
These shares were underwritten as follows:
X — 30,000 shares and Y — 50,000 shares.
The public applied for 70,000 shares. Determine the liability of X, Y and the Company.
A9)
Marked applications are not given in the problem. Therefore, applications be credited to underwriters including the Company on the basis of gross liability. The Company itself to be treated as an underwriter for 20,000 shares.
Statement Showing Individual Underwriter’s Liability
ALTERNATIVELY: Unsubscribed shares = 1,00,000 – 70,000 = 30,000 Thus the net liability of X = 30,000 x 30/100 = 9,000 shares Y = 30,000 x 50/100 = 15,000 shares Company = 30,000 x 20/100 = 6,000 shares
|
Q10) A firm which was carrying on business from 1st January, 2009 gets itself incorporated as a company on 1st May, 2009. The first accounts are drawn up to 30th September, 2009. The gross profit for the period is Rs.56,000. The general expenses are Rs.14,220, directors’ fee Rs.12,000 p.a.; formation expenses Rs.1,500. Rent up to 30th June is Rs.1,200 p.a., after which it is increased to Rs.3,000 per annum. Salary of the manager, who upon incorporation of the company was made a director, is Rs.6,000 p.a. His remuneration thereafter is included in the above figure of fee to directors. Give Profit and Loss Account showing pre-and post-incorporation profits. The net sales are Rs.8,20,000, the monthly average of which, for the first four months of 2009 is half of that of the remaining period, the company earned a uniform profit. Interest and tax may be ignored.
A10)
Profit and Loss Account for 9 months ended on 30th September, 2009
PARTICULARS | Total (Rs.) | Pre-incorporation 1.1.2009 to 30.4.2009 | Post-incorporation 1.5.2009 to 30.9.2009 | PARTICULARS | Total (Rs.) | Pre-icorporation 1.1.2009 to 30.4.2009 | Post-incorporation 1.5.2009 to 30.9.2009 |
To General Expenses | 14,220 | 6,320 | 7,900 | By Gross profit | 56,000 | 16,000 | 40,000 |
To Directors fees | 5,000 | - | 5,000 |
|
|
|
|
To Formation expenses | 1,500 | - | 1,500 |
|
|
|
|
To Rent | 1,350 | 400 | 950 |
|
|
|
|
To Managers salary | 2,000 | 2,000 | - |
|
|
|
|
To Net profit – Capital reserve – P n L Appropriation | 31,930
- | 7,280
- | -
24,650 |
|
|
|
|
| 56,000 | 16,000 | 40,000 |
| 56,000 | 16,000 | 40,000 |
Working Notes:
(1) Let the average monthly sales of first four months be Rs.100. Then the average monthly sales of next five months will be Rs.200.
Total sales of first four months = Rs.100 4 = Rs.400 and that of next five months = Rs.200 5 = Rs.1,000. The ratio of sales = 400:1000 or 2:5 The gross profit is apportioned on the basis of sales, i.e., 2:5.
Therefore, the gross profit is apportioned as:
Pre-Rs.56,000/7x2=Rs.16,000 ; Post-Rs.56,000/7x5=Rs.40,000
(2) General expenses accrue evenly throughout the period and are, therefore, divided on the basis of time.
Pre-Rs.14,220/9x4=Rs.6,320 ; Post-Rs.14,220/9x5=Rs7,900
(3) Directors’ fees payable @ Rs.1,000 per month. It is to be found in company only. So Rs.5,000 (5 × Rs.1,000) must naturally be shown in post-period incorporation period.
(4) Formation expenses though incurred in point of time, before the company was in incorporated, are charge against the post incorporation profit.
(5) Rent for first four months = Rs.100 × 4 = Rs.400. For next five months = (Rs.100 × 2) + (Rs.250 × 3) = Rs.950.
(6) Salary to manager is related to pre-incorporation period only. Salary to be charged = Rs.500 × 4 = Rs.2,000.
