TS Grewal Solution Class 12 Chapter 9 Company Accounts Issue of Debentures

About the chapter: TS Grewal Class 12 Chapter 9 explains concepts and provides questions relating to the Company Accounts Issue of Debentures. This chapter is very important as a lot of questions are asked in exams from here. There are detailed notes relating to the process of issuing debentures, types of debentures, advantages, and disadvantages, and accounting entries associated with the issuance of debentures. It also has concepts relating to redeemable, irredeemable, convertible, and non-convertible debentures. Other topics such as the benefits and drawbacks of issuing debentures, advantages of acquiring long-term capital for the company etc have been also explained. There are a lot of solved practical questions relating to different methods of issuing debentures such as at par, premium, and discount, and how the interest on debentures is calculated. Students should also learn the accounting treatment for the issue of debentures, including the preparation of journal entries, ledger accounts, and balance sheets.

Students will be able to get a detailed understanding of the issue of debentures and the accounting procedures associated with them. Please refer to the solutions for the practical questions provided in this chapter below. They have been prepared by expert accountancy teachers.

TS Grewal Class 12 Accounting for Companies
Textbook for CBSE Class 12
TS Grewal Solutions Class 12 Accountancy
Chapter 9 Company Accounts - Issue of Debentures

 

Question 12. Discount or Loss on issue of Debentures may be written off from Securities Premium Reserve. Why?

Discount or Loss on issue of Debentures is written off at the earliest but within the life, i.e., tenure of the debentures. It is a capital loss for the company and hence, is written off from Capital Reserve, if it has a balance. If Capital Reserve does not exist, it is written off from Securities Premium Reserve (Section 52(2)).

The Journal entry for writing off discount or loss is:

Securities Premium Reserve A/c                                 ……….Dr.

To Discount or Loss on Issue of Debentures A/c

 

Question 13. What is meant by ‘Debentures issued at Discount and Redeemable at Premium’?

The company incurs loss on two counts, i.e., discount allowed at the time of issue of debentures and premium payable at the time of its redemption.Both these losses are accounted at the time of issue of debentures following the principle of prudence. The entries are:

Bank A/c                                 ……….Dr.

To Debentures Application A/c

Debentures Application A/c                                 ……….Dr.

Discount on issue of Debentures A/c                  ……….Dr.

Loss on issue of Debentures A/c                         ..………Dr.

To Discount or Loss on Issue of Debentures A/c

 

Question 14. What is meant by ‘Premium of Redemption of Debentures Account’?

When Debentures are redeemable at premium the difference between redeemable value and the issue price is a loss for the company, which is debited to loss on issue of debentures account at the time of allotment of debentures following the principal of ‘prudence’. The entries are:

(a)   Bank A/c                       ……………..Dr.

To Debentures Application A/c

 

(b)   Debentures Application A/c                   ……………..Dr.

Loss on issue of debentures A/c                        ………………Dr.

To ….% Debentures A/c

To Premium on Redemption of Debentures A/c

 

Question 15. What is meant by ‘Debentures issued at Discount and Redeemable at premium’?

The company incurs loss on two counts, i.e., discount allowed at the time of issue of debentures and premium payable at the time of its redemption. Both these losses are accounted at the time of issue of debentures following the principle of prudence. The entries are:

(a)   Bank A/c                       ……………..Dr.

To Debentures Application A/c

 

(b)   Debentures Application A/c                    ……………..Dr.

Discount on issue of debentures A/c            ……………Dr.

Loss on issue of debentures A/c                           ……………Dr.

To ….% Debentures A/c

To Premium on Redemption of Debentures A/c

 

Question 16. How is Discount or Loss on issue of Debentures written off?

Discount or Loss on Issue of Debentures is a capital loss for the company, which should be written off at the earliest but within the tenure of the debentures, i.e., it should be written off within the period the debenture are to be redeemed. The company thus, may write off discount or loss on issue of debentures at any time before the debentures are due for redemption.

Discount or Loss on Issue of Debentures written off is a part of Finance Cost in Statement of Profit and loss. Discount or Loss on Issue of Debentures may be written off following any of the following options:

(i)             It may be written off in the first year itself; or

(ii)            It may be written off over the tenure (life) of the debentures.

 

Question 17. Can Discount or Loss on Issue of Debentures be written off from Securities Premium Reserve? Explain.

Discount or Loss may be written off from Capital Reserve or from Securities Premium Reserve or from Statement of Profit and Loss. Accounting entry will be as follows:

Securities Premium Reserve A/c             ……………Dr.

To Discount or Loss on Issue of Debentures A/c

 

Question 18. What is meant by ‘Issue of debentures for consideration other than cash’?

Issue of Debentures for consideration other than cash means that the company has not received amount (in cash or by cheque) against the debentures issued. Debentures may be issued for consideration other than cash under the following circumstances:

(i)             Issue of Debentures to Promoters

(ii)            Issue of Debentures to Venders

 

Question 19. What is meant by issue of debentures as purchase consideration?

Purchases Consideration is the amount agreed to be paid for taking over the business from another enterprise. Purchases consideration may be given in the question; otherwise it will be equal to Net Assets (i.e., Agreed value of Assets taken- Agreed amount of Liabilities assumed).

 

Question 20. Name the type debentures which are payable only to the person who is holding the debentures.

Bearer Debentures are payable only to the person who is holding the debentures.

 

Question 21. Is the interest on debentures calculated at the fixed percentage on the issue price?

Interest on debentures calculated at a fixed rate and always on the face value and not on the issue price.

 

Question 22. Name the head under which ‘interest accrued and due on debentures’ appears in the Balance Sheet of a company.

Interest Accrued (whether due or not) on Debentures is shown under the head ‘Current Liabilities’ and sub-head ‘Other Current Liabilities’.

 

Question 23. Name the head under which ‘interest accrued but not due on debentures’ appears in the Balance Sheet of a company.

Interest Accrued (whether due or not) on Debentures is shown under the head ‘Current Liabilities’ and sub-head ‘Other Current Liabilities’.

 

Question 24. What is meant by issue of debentures as Collateral Security?

Security given in addition to the prime or principal security is termed or known as Collateral Security.

 

Question 25. How are Debenture issued as Collateral Security shown in the Balance sheet?

Debentures issued as Collateral Security are shown separately from other debentures in the Balance sheet.

 

Question 26. What is the nature of Interest on Debentures?

Interest on debentures is a Charge against profit. It is, therefore, provided even if the company does not have profit or has inadequate profit.

 

Question 27. Why does a company pay interest on debentures before payment of dividend?

Interest on debentures is calculated at fixed rate on its nominal (face) value payable quarterly, half yearly or yearly as per the terms of issue. Rate of interest is prefixed to the debentures, say 9% Debentures and, therefore, is payable even if the company incurs loss.

 

Question 28. Why would an investor prefer to invest in the debentures of a company rather than in its shares?

Debentures provide a fixed return even in case of loss, so there is no risk to investor therefore an investor prefers to invest in the debentures of a company rather than in its shares.

 

Question 29. Why would an investor prefer to invest partly in share and partly in the debentures of a company?

Shares provide higher return than debentures but Debentures provide a fixed return even in case of loss. So by investing in both an investor gets higher return with lower risk.

 

Question 30. Why would an investor prefer to invest in the shares of a company rather than in the Debentures?

Shares provide higher return in short time so, investor prefer to invest in the shares of a company rather than in the Debentures.

 

Question 31. Pass Journal entry when 10,000 debentures of Rs. 100 each are issued as collateral security against a Bank Loan of Rs. 8,00,000.

Short Answer Type Questions:-

 

Question 1. What are debentures? What are the kinds of debentures?

Answer:

Debenture is a written instrument or document issued by the company acknowledging a debt. It contain terms of repayment of principal and also payment of interest (usually paid half-yearly) at a rate specified at time of its issue.

“Debenture includes debenture stock, bonds and any other instrument of the company evidencing a debt, whether constituting a charge on the assets of the company or not.”

A company may issue different kinds of debentures which can be classified as under:

1.   From Security Point of View

(i)      Secured Debentures: Secured Debentures are those debentures which are secured by either a fixed charge or a floating charge on the assets of the company. A charge on the assets of the company is registered with the Registrar of Companies.

(ii)    Unsecured Debentures: Unsecured Debentures are those debentures which are not secured by any charge on assets of the company.

 

2.   From Redemption Point of View

(i)      Redeemable Debentures: Redeemable Debentures are those debentures that are repayable by the company at the end of a specified period or by instalments during the existence of the company.

(ii)    Irredeemable Debentures: Irredeemable Debentures are those debentures that are not repayable during the lifetime of the company and hence are repaid only when the company is liquidated.

 

3.   From Records Point of View

(i)      Registered Debentures: Registered Debentures are the debentures that are registered in the company’s records in the name of the holder. Principal and interest of such debentures is payable to the registered debenture holder.

(ii)    Bearer Debentures: Bearer debentures are the debentures that are not registered in the records of the company in the name of the holder.

 

4.   From Priority Point of View

(i)      First Debentures: The debentures which have to be repaid before the other debentures are known as first debentures.

(ii)    Second Debentures: The debentures, which will be repaid after the first debentures are redeemed, are known as second debentures.

 

5.   From the Point of View of Coupon Rate

(i)      Specific Coupon Rate Debentures: These debentures are issued with a specified rate of interest, called the coupon rate.

(ii)    Zero Coupon Rate Debentures (Bonds): These debentures do not carry a specific rate of interest. In order to compensate the investors such debentures are issued at a substantial discount.

 

6.   From Convertibility Point of View

(i)      Convertible Debentures: Convertible Debentures are the debentures that are convertible into shares. If a part of the debenture amount is convertible into Equity Shares, they are known as Partly Convertible Debentures. If full amount of debentures is convertible into Equity shares, they are known as Fully Convertible Debentures.

(ii)    Non-Convertible Debentures: Non-convertible debentures are the debentures that are not convertible into shares.

 

Question 2. Give any three characteristics of a debenture.

Answer:

Below are the characteristics of debenture:-

1. Debenture is a written document or certificate acknowledging debt by the company.
2. Mode and period of repayment of principal and interest is fixed.
3. Rate of interest on the debenture is specified. It is practice to prefix ‘Debentures’ with the rate of interest. For example, if the rate of interest is 9%, the title of the debentures will be ‘9% Debentures’.

 

Question 3. Can a company issue debentures for ‘consideration other than cash’? If so, what accounting Journal entries such a company must pass?

Answer:

Yes, a company issue debentures for ‘consideration other than cash’. Issue of Debentures for consideration other than cash means that company has not received amount (in cash or by cheque) against the debentures issued. Debentures may be issued for consideration other than cash under the following circumstances:

(i)   Issued of Debentures to Promoters: A company may allot debentures to the promoters for rendering their services for incorporating the company. The entry is:

(a)  When assets are purchased and debentures are issued:

 

Question 4. Explain the meaning and accounting treatment of debentures issued as collateral security.

Answer:

Issue of debentures as Collateral Security means issue of debentures as additional security, i.e., in addition to the principal security. It is only to be realised when the principle security fails to pay the amount of loan. For example, when a company takes a loan of Rs. 10,00,000 from the bank, it may have to issue debentures as collateral security in addition to the principal security.

Accounting Treatment: Debentures issued as a collateral security can be dealt with in two ways:

(i)            First Method: Entry for issue of debentures as collateral security is not passed in the books of account at the issuing such debentures. It is disclosed under the head. Secured Method in the Equity and Liabilities part of the Balance Sheet that debentures have issued as collateral security as follows:

(a)   Debentures issued as collateral Security for Long-term loan from Bank.

 

Question 4. Explain the meaning and accounting treatment of debentures issued as collateral security.

Answer:

Issue of debentures as Collateral Security means issue of debentures as additional security, i.e., in addition to the principal security. It is only to be realised when the principle security fails to pay the amount of loan. For example, when a company takes a loan of Rs. 10,00,000 from the bank, it may have to issue debentures as collateral security in addition to the principal security.

Accounting Treatment: Debentures issued as a collateral security can be dealt with in two ways:

(i)            First Method: Entry for issue of debentures as collateral security is not passed in the books of account at the issuing such debentures. It is disclosed under the head. Secured Method in the Equity and Liabilities part of the Balance Sheet that debentures have issued as collateral security as follows:

 

 

Question 5. Write any three points of difference between equity shares and debentures.

Answer:

 

Question 6. What are the alternatives available to a company for the allotment of debentures when there is oversubscription of Debentures?

Answer:

Oversubscription of Debentures means that the company has received applications for more number of debentures than it has issued. In such a situation, the company may make allotment, by any of the following three options or combination:

First Alternative- Rejecting Excess Application.

Second Alternative- Partial or Pro rata Allotment.

Third Alternative- A Combination of the Above Two Alternatives.

Excess application money received on oversubscription may be retained for adjustment towards allotment and the respective calls, in case of pro rata allotment, if so provided in the terms of issue. However, application money is refunded to those applicants to whom debentures are not allotted.

 

Question 7. What is the nature of ‘interest on debentures’? Give Journal entries: (a) when the interest is due and (b) when the interest is paid (ignore tax).

Answer:

 

Exercise  ::--->

 

Question 1:   Vishwas Ltd. issued 2,000; 9% Debentures of Rs. 100 each payable as follows: Rs. 25 on application; Rs. 25 on allotment and Rs. 50 on first and final call. Applications were received for all the debentures along with the application money did allotment was made. Call money was also received on the due date. Pass necessary Journal entries in the books of the company.

Answer 1:

Number of 9% Debentures issued = 2,000

Number of Applications received = 2,000

 

Question 2:   A Ltd. issued 2,000; 9% Debentures of Rs. 100 each on the following terms: Rs.20 on applications ;Rs. 20 on allotment; Rs. 30 on first call ; Rs. 30 on final call. The public applied for 2,400 debentures. Applications for 1,800 debentures were accepted in full. Applications for 400 debentures were allotted 200 debentures and applications for 200 debentures were rejected. Pass necessary Journal entries.

Answer 2:

 

Question 3:   ABC Ltd. issued 40,000; 10% Debentures of Rs. 100 each at par for cash payable in full along with the application. Applications were received for 60,000 debentures. Debentures were allotted and excess application money was refunded. Pass Journal entries in the books of the company. 

Answer 3:

Point of Knowledge:-

1. Amount of Installment:-

Application = Rs. 100

 

Question 4:  Narain Laxmi Ltd. invited applications for issuing 7,500; 12% Debentures of Rs. 100 each at a premium of Rs. 35 per debenture. The full amount was payable on application. Applications were received for 10,000 Debentures. Allotment was made to all the applications on pro rata. Pass necessary Journal entries for the above transactions in the books of Narain Laxmi Ltd.

Answer 4: 

Point of Knowledge:-

Distribution of Debenture face value into installments:-

Application = Rs. 100 + Rs. 35 = Rs. 135

Number of Debentures issued = 7,500

Number of Application received = 10,000

 

Question 5:  Raj Ltd. issued 5,000;  8% Debentures of Rs. 100 each at a premium of 5% payable as follows: Rs. 10 on application; Rs. 20 along with premium on allotment and balance on first and final call. Pass necessary Journal entries.

Answer 5:

 

Question 6:  Nipa Limited issued Rs. 10,00,000 Debentures of Rs. 100 each at a premium of 10% , payable 25% on application (including premium) and the balance on allotment . The debentures were applied for and the amount was dully received. You are required to give Journal entries and prepare Cash Book.

Answer 6:

Point of Knowledge:-

 

Question 7:  Alok Ltd. issued 7,000, 10% Debentures of Rs. 500 each at a premium of Rs. 50 per debenture redeemable at a premium of 10% after 5 years. According to the terms of issue, Rs. 200 was payable on application and balance on allotment. Record necessary Journal entries at the time of issue of 10% Debentures.

Answer 7:

 

Question 8:  Vijay Laxmi Ltd. invited applications for 10,000; 12% Debentures of Rs. 100 each at a premium of Rs. 70 per debenture .The full amount was payable on application. Applications were received for 13,500 debentures. Applications for 3,500 debentures were rejected and application money was refunded. Debentures were allotted to the remaining applications.

Answer 8:

 

 

Question 9:  Iron Products Ltd. issued 5,000; 9% Debentures of Rs. 100 each at a premium of Rs. 40 payable as follows;

(i) Rs. 40 , including premium of Rs. 10 on applications;

(ii) Rs. 45, including premium of Rs. 15 on allotment; and

(iii) Balance as first and final call.

The issue was subscribed and allotment made. Calls were made and due amount was received. Pass Journal entries.

Answer 9:

 

 

Question 10:  X Ltd. issued 12,000; 8% Debentures of Rs.  100 each at a discount of 5% payable as 25% on application;20% on allotment and balance after three months. Pass Journal entries.

Answer 10: 

Point of Knowledge:- 

Distribution of Debenture face value into installment:-

Number of Application received = 12,000Number of Debentures issued = 12,000 

 

Question 11:  Alka Ltd. issued 5,000, 10% Debentures of Rs.  1,000 each at a discount of 10% redeemable at a premium of 5% after 5 years. According to the terms of issue Rs.  500 was payable  on application and the balance amount on allotment of debentures. Record necessary entries regarding issue of 10% Debentures.

Answer 11:

 

Question 13:  Joy Ltd. company bought a Building for Rs. 9,00,000 and the consideration was paid by issuing 10% Debentures of the normal (face) value of Rs. 100 each at a discount of 10%. Give Journal entries.

Answer  13:

 

Question 14:  Wye Ltd. purchased an established business for Rs. 2,00,000 payable as Rs.  65,000 by cheque and the balance by issuing 9% Debentures of Rs. 100 each at a discount of 10%. Give journal entries in the books of Wye Ltd.

Answer 14:

 

Question 15:  Newton Ltd. purchased a Machinery from B for Rs. 5,76,000 to be paid by the issue of 9% Debentures of  Rs. 100 each at 4% discount. Journalize the transactions.

Answer 15:

 

Question 16:  Reliance Ltd. purchased machinery costing Rs.  1,35,000. It was agreed that the purchase consideration be paid by issuing 9% Debentures of Rs.  100 each. Assume debentures have been issued.

(i)      at par and

(ii)     at a discount of 10%.

Give necessary journal entries.

Answer 16:

 

Question 17:   Deepak Ltd purchased furniture of Rs. 2,20,000 from M/s. Furniture Mart. 50% of the amount was paid to M/s. Furniture Mart by accepting a Bill of Exchanged and for the balance the company issued 9% Debenture of Rs.  100 each at a premium of 10% in favour of M/s. Furniture Mart. Pass Journal entries in the books of Deepak Ltd.

Answer 17:

 

Question 18:  Bright Ltd. took over the assets of Rs. 6,60,000 and liabilities of Rs. 80,000 of Star Ltd. for an agreed purchase consideration of Rs. 6,00,000 payable 10% in cash and the balance by the issue of 12% Debentures of Rs. 100 each. Give necessary Journal entries in the books of Bright Ltd., assuming that:

Case (a): The debentures are issued at par.

Case (b): The debentures are issued at 20% premium.

Case (c): The debentures are issued at 10% discount.

Answer 18:

 

Question 19:  Star Ltd. took over the assets of Rs. 6,60,000 and liabilities of Rs. 80,000 of Moon Ltd. for Rs. 6,00,000. Give necessary Journal entries in the books of Star Ltd. assuming that:

Case (a): The purchase consideration was payable 10% in cash and the balance in 5,400; 12% Debentures of Rs. 100 each.

Case (b): The purchase consideration was payable 10% in cash and the balance in 4,500; 12% Debentures of Rs. 100 each issued at 20% premium. 

Answer 19:

Point of Knowledge:- 

Case 1.

Case 2.

Question 20:  Romi Ltd. acquired assets of  Rs. 20 lakhs and took over creditors of  Rs. 2 lakhs from Kapil Enterprises. Romi Ltd. issued 8% Debentures  of  Rs. 100 each at a discount of 25% as purchase consideration.

Record necessary journal entries in the books of Romi Ltd.

Answer 20:

 

Question 23:  R Ltd. purchased the assets of S Ltd. for Rs.5,00,000. It also agreed to take over the liabilities of S Ltd. amounted to Rs. 2,00,000 for a purchase consideration of Rs.2,80,000 . The payment of S Ltd. was made by issue of 9% Debentures of Rs. 100 each at par. Pass necessary journal entries in the books of R Ltd.

Answer 23:

Question 24:  Green Ltd. purchased the assets of Strong Ltd. for Rs. 40,00,000 and took over liabilities of 7,00,000 at an agreed value of Rs. 32,40,000. Payment was made by issuing 10% Debentures of 100 each at a discount of 10%. Pass the necessary Journal entries in the books of Green Ltd.

Answer 24:

 

Question 25:  Wellbeing Ltd. took over assets of Rs. 9,80,000 and liabilities of Rs. 40,000 of HDR Ltd. at an agreed value of Rs. 9,00,000. Wellbeing Ltd. paid to HDR Ltd. by issue of 9% Debentures of Rs. 100 each at a premium of 20%. Pass necessary Journal entries to record the above transactions in the books of Wellbeing Ltd.

Answer  25:

Point of Knowledge:-

(i)      Issued of Debentures to Promoters: A company may allot debentures to the promoters for rendering their services for incorporating the company. The entry is:

(ii)    Issue of Debentures to Vendors: Debentures may also be issued to vendors against purchases of assets or business. The Journal entries passed are:

When assets are purchased and debentures are issued:

When a business is purchased, it means assets and also the liabilities have been taken over. The purchase consideration payable may be:

(i)             equal to the difference between the value of assets and the value of liabilities (i.e., net assets);

(ii)            more than the difference between the value of assets and the value of liabilities (i.e., net assets);

(iii)           less than the difference between the value of assets and the value of liabilities, (i.e., net assets).

 

Question 26:  Grown Ltd. issued 500, 10% Debentures of Rs. 1,000 each credited as fully paid-up to the promoters for their services to incorporate the company. It also issued 100, 10% Debentures of Rs. 1,000 each credited as fully paid-up to the underwriters towards their commission. Pass the Journal entries.

Answer 26: