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CFA

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

  • for cash
  • for consideration other than cash
  • issued at par, payable at par
  • issued at discount, payable at par
  • issued at par, payable at premium
  • issued at discount, payable at premium
  • issued at par, payable at discount
  • issued at discount, payable at discount
  • 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:

  • On receipt of the application money
  • Bank A/c Dr.

    To Debenture Application & Allotment A/c

  • On Allotment of debentures
  • Debenture Application & Allotment A/c Dr.

    To Debentures A/c

    (b) If debenture amount is received in two instalments:

  • On receipt of application money
  • Bank A/c Dr.

     To Debenture Application A/c

  • For adjustment of applications money on allotment
  • Debenture Application A/c Dr.

    To Debentures A/c

  • For allotment money due
  • Debenture Allotment A/c Dr.

    To Debentures A/c

  • On receipt of allotment money
  • Bank A/c Dr.

    To Debenture Allotment A/c

    (c) If debenture money is received in more than two instalments

    Additional entries:

  • On making the first call
  • Debenture First Call A/c Dr.

    To Debentures A/c

  • On the receipt of the first call
  • 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 :

  • Pass the journal entries for the year ending 31st December, 2014.
  • Prepare (i) Debentures Redemption Reserve (DRR)A/c (ii) Debentures Redemption Reserve Investment (DRRI) A/c. (iii) 9% Debentures A/c (iv)Debenture holder’s A/c and (v) Bank A/c.
  • 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

  • Compute the liability of each underwriters as regards the number of shares to be taken up
  • Pass journal entries in the books of Gemini ltd to record the transactions relating to underwriters
  • 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

     

    X

    Y

    Company

    Total

    Gross Liability

             Less: Application received in the ratio of                             

                      30 : 50 : 20

    Net Liability

    30,000

     

    21,000

    50,000

     

    35,000

    20,000

     

    14,000

    1,00,000

     

    70,000

    9,000

    15,000

    6,000

    30,000

    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.