Test: Issue Of Debentures - 1 - Commerce MCQ

According to Companies Act, underwriting commission should not exceed 5 per cent of the nominal value of a share and 2½ per cent in the case of debentures.

To calculate the loss on the issue of debentures, we need to consider the following components:

1. Issue Price: Debentures are issued at a discount of 4%, so the issue price is 96% of the face value.
2. Redemption Price: Debentures are redeemable at a premium of 6%, so the redemption price is 106% of the face value.

Let's calculate the loss:

1. Total Face Value of Debentures: 1,00,000 debentures × Rs. 100 each = Rs. 1,00,00,000

2. Total Issue Price: 96% of Rs. 1,00,00,000 = Rs. 96,00,000

3. Total Redemption Price: 106% of Rs. 1,00,00,000 = Rs. 1,06,00,000

4. Loss on Issue of Debentures:

   • Loss = Total Face Value - Total Issue Price
   • Loss = Rs. 1,00,00,000 - Rs. 96,00,000 = Rs. 4,00,000

So, the loss on the issue of debentures is:

1. Rs. 4,00,000

Value of machinery = 4,00,000

Debenture cost =100 issued at 20% discount 

                           =80

No. of Debenture = 4,00,000/80= 5,000

Jounral entry; 

F Ltd. A/C Dr.4,00,000

Debenture issued at at discount Dr. 1,00,000

To 10% Debenture A/C =5,00,000

To calculate the amount of interest on the debentures, you can use the following formula:

Interest=Number of Debentures×Face Value of Each Debenture×Interest Rate

Given:

• Number of Debentures = 1,00,000
• Face Value of Each Debenture = Rs. 100
• Interest Rate = 12%

Now, substitute the values into the formula:

Interest=1,00,000×100×12/100

​ Interest=1,00,000×100×0.12=1,20,00,000 (Rs.)

So, the amount of interest on the debentures is Rs. 12,00,000.

Option 2 : Profit and Loss Account
Important PointsSinking Fund - 

• A sinking fund is a specific kind of fund that is established with the intention of paying off debt.
• The account holder routinely sets aside a specified sum of money and utilizes it only for that reason.
• Corporations frequently use it for bonds and deposit funds to purchase issued bonds or portions of bonds before the maturity date.
• Each year, profits are used to fund a sinking fund or debt redemption fund in an equal amount.
• After debentures are redeemed, the remaining funds in the Debentures Sinking Fund are moved to the General Reserve account.
• It is transferred to the general reserve account since it is the portion of the redeemed debenture proceeds that is held apart.

The number of equity shares issued will be 5,000. 

We can find the number by following the steps given below-

We know that the amount of premium is calculated on the face value of the share.

Amount of premium=20% of the face value of a share

=20% of Rs. 10

=20×10/100

=Rs.2

So, the value per equity share= Face value of share+ amount of premium

=10+2

= Rs.12

Amount to be raised by issuing debentures= Number of debentures× face value of debentures

=6000×10

= Rs.60,000

Now, we know that the debentures were discharged and this amount is to be raised by issues equity shares.

So, the number of shares to be issued will be calculated by dividing the amount to be raised by the value per equity share

Number of equity shares= Amount to be raised by issuing shares/ Value per share

=60,000/12

=5,000

Therefore, the number of equity shares issued will be 5,000.

Correct option is D)

Loss on issue of debentures eans the difference between the Redeemable Value and the Face Value. It is treated as a Miscellaneous expenditure and is debited to "Loss on Issue of Debentures Account."

The false statement is:

- B: Debentures can be forfeited for non-payment of call money.

Explanation:
- Debentures cannot be forfeited for non-payment of call money, unlike shares which can be forfeited for non-payment of allotment or call money.
- Debentures are long-term debt instruments issued by companies to raise funds and typically do not have the feature of forfeiture for non-payment of call money.
- Forfeiture is a concept more relevant to shares, not debentures.

Thus, option B is the false statement.

Loss on Redemption of Debentures

To calculate the loss on redemption of debentures in the fourth and fifth year, we need to consider the premium amount and the face value of the debentures.

Given:
- Number of debentures issued = 10,000
- Face value of each debenture = Rs. 10
- Premium on each debenture = 30%

Step 1: Calculate the Premium Amount

The premium on each debenture is 30% of the face value. So, the premium amount per debenture is:

Premium amount = 30/100 * Rs. 10 = Rs. 3

Step 2: Calculate the Total Premium Amount

To calculate the total premium amount, we multiply the premium amount per debenture by the number of debentures issued.

Total Premium Amount = Rs. 3 * 10,000 = Rs. 30,000

Step 3: Calculate the Redemption Value

The redemption value is the sum of the face value and the premium amount. In this case, since the debentures are redeemable in equal lots over 5 years, the redemption value will remain the same for each lot.

Redemption Value = Face Value + Premium Amount = Rs. 10 + Rs. 3 = Rs. 13

Step 4: Calculate the Loss on Redemption

The loss on redemption is the difference between the redemption value and the face value. In this case, since the debentures were issued at par, the face value is equal to the issue price.

Loss on Redemption = Redemption Value - Face Value = Rs. 13 - Rs. 10 = Rs. 3

Step 5: Allocate the Loss on Redemption

Since the debentures are redeemable in equal lots over 5 years, we need to allocate the loss on redemption over these years. The total loss on redemption is Rs. 3 for each debenture.

In the fourth year, 1/5th of the debentures will be redeemed. So, the loss on redemption in the fourth year will be:

Loss on Redemption in Fourth Year = Rs. 3 * (1/5) * 10,000 = Rs. 6,000

In the fifth year, the remaining 4/5th of the debentures will be redeemed. So, the loss on redemption in the fifth year will be:

Loss on Redemption in Fifth Year = Rs. 3 * (4/5) * 10,000 = Rs. 24,000

Therefore, the correct answer is option D: Rs. 6,000, Rs. 24,000.