ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

Fundamentals of Accounting for CA CPT

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CA Foundation : ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

The document ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev is a part of the CA Foundation Course Fundamentals of Accounting for CA CPT.
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6. ISSUE OF DEBENTURES

6.1 ACCOUNTING ENTRIES FOR ISSUE OF REDEEMABLE DEBENTURES

Issue of redeemable debentures can be categorized into the following:

1. Debenture issued at a par and redeemable at par or at a discount;
2. Debenture issued at a discount and redeemable at par or at discount;
3. Debenture issued at premium and redeemable at par or at discount;
4. Debenture issued at par and redeemable at premium;
5. Debenture issued at a discount and redeemable at premium.

Journal entries in each of the above cases are discussed below:

1. debenture issued at par redeemable at par : When debenture are issued at par, the issue price is equal to par value, in this regard the following entries are recorded:

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

Illustration 1 

Amol Ltd. issued 40,00,000, 9% debentures of Rs 50 each, payable on application as per term mentioned in the prospectus and redeemable at par any time after 3 years from the date of issue. Record necessary entries for issue of debentures in the books of Amol Ltd.

Solution

Books of Amol Ltd.

Journal

Date Particulars L.F.Debit
 Amount
 Rs
Credit
 Amount
 Rs
 Bank A/cDr. 20,00,00,000 
   To Debenture Application A/c   20,00,00,000
 (Debenture application money received)    
 Debenture Application A/cDr.   
   To 9% Debentures A/c  20,00,00,000 
 (Application money transferred to 9% debentures account consequent upon allotment)   20,00,00,000


Illustration 2

Country Crafts Ltd. issued 20,00,000, 8% debentures of Rs100 each at par payable as Rs40 on application and Rs60 on allotment, redeemable at par after 5 years from the date of issue of debenture. Record necessary entries in the books of Country Crafts Ltd. 

Solution

Books of country crafts Ltd.

Journal

 

DateParticulars L.F.Debit
 Amount
 Rs
Credit
 Amount
 Rs
(a)Bank A/cDr. 8,00,00,000 
   To Debenture Application A/c   8,00,00,000
 (Debenture application money received)    
(b)*Debenture Application A/cDr. 8,00,00,000 
 Debenture Allotment A/cDr. 12,00,00,000 
   To 8% Debentures A/c   20,00,00,000
 (Debenture application and call made  consequent upon allotment money transferred to debenture account)    
(c)Bank A/cDr. 12,00,00,000 
   To Debenture Allotment A/c   12,00,00,000
 (Call made on allotment received)    
 *Alternatively, for entry (b) above, the following two entries can be made     
(i)Debenture Application A/cDr. 8,00,00,000 
   To 8% Debentures A/   8,00,00,000
 (Transfer of application money to 8% debentures account on consequent upon allotment)    
(ii)Debenture Allotment A/cDr. 12,00,00,000 
   To 8% Debentures A/c   12,00,00,000
 (Call made consequent upon allotment)    


2. debenture issued at discount and redeemable at par or at discount : When debentures are issued at discount, issue price will be less than par value. The difference between the two is considered as loss on issue on debentures and is to be written-off over the life of debentures. The entries with regards to issue are given below :

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

Illustration 3

Atul Ltd. issued 1,00,00,000, 8% debenture of Rs 100 each at a discount of 10% redeemable at par at the end of 10th year. Money was payable as follows :

Rs 30 on application
Rs 60 on allotment

Record necessary journal entries regarding issue of debenture.

Solution

Books of atul Ltd.

Journal

DateParticulars L.F.

Debit
Amount
Rs

Credit
Amount
Rs
 Bank A/cDr. 30,00,00,000 
   To Debenture Application A/c   30,00,00,000
 (Debenture application money received)    
 Debenture Application A/cDr. 30,00,00,000 
   To 8% Debentures A/c   30,00,00,000
 (Application money transferred to 8% debentures account consequent upon allotment)    
 Debenture allotment A/cDr. 60,00,00,000 
 Discount on issue of debentures A/cDr. 10,00,00,00070,00,00,000
   To 8% Debentures A/c    
 (Amount due on allotment)    
 Bank A/cDr. 60,00,00,000 
   To Debenture Allotment A/c   60,00,00,000
 (Money received consequent upon allotment)    


3. Debenture Issued at Premium and Redeemable at par or at discount

When debenture are issued at premium, the issue price is more than the par value. The premium is transferred to securities premium account. In this regard, the following journal entries are recorded:

When premium amount is received at the time of application;

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

When debentures are issued at par or premium value but redeemed at discount, then it means that the company will gain by paying less. This gain will not be recognised in the books at the time of issue of debentures as per the conservatism concept. 

Illustration 4

Koinal Chemicals Ltd. issued 15,00,000, 10% debenture of Rs 50 each at premium of 10%, payable as Rs 20 on application and balance on allotment. Debentures are redeemable at par after 6 years. All the money due on allotment was called up and received. Record necessary entries when premium money is included in application money

Solution

Books of Koinal Chemicals Ltd.

Journal

When premium money is received alongwith application money :

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev
ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

Illustration 5 

Koinal Chemicals Ltd. issued 15,00,000, 10% debentures of Rs 50 each at premium of 10%, payable as Rs20 on application and balance on allotment. Debentures are redeemable at par after 6 years. All the money due on allotment was called up and received. Record necessary entries when premium money is included in allotment money

Solution

Books of Koinal Chemicals Ltd.

Journal

When premium money is called on allotment :

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

4. debenture issued at par and redeemable at a premium 

Where debentures are to be redeemed at premium, an extra entry is to be made at the time of issue and allotment of debentures. This extra entry is to be passed for providing premium payable on redemption. Debenture Redemption Premium Account is a personal account which represents a liability of the company in respect of premium payable on redemption.
In this case, the issue price is same as par value but the redemption value is more than the par value, therefore redemption premium is recorded as a loss on issue of debentures at the time of allotment of debentures. Following journal entries are recorded in this regard:

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

Students can note that instead of passing the separate entries, a compound entry can be passed:

Bank A/cDr.
Loss on issue of debenture A/cDr.
  To …% Debenture A/c 
  To Debenture redemption premium A/c 


Illustration 6

Modern Equipments Ltd. issued 2,00,000, 12% debentures of Rs 1,000 payable as follows :

On application Rs 300
On allotment Rs 700

The debenture were fully subscribed and all the money was duly received. As per the terms of issue, debentures are redeemable at Rs 1,100 per debenture. Record necessary entries regarding issue of debentures.

Solution

Books of Modern Equipments Ltd.

Journal

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev
ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

5. debenture Issued at discount and redeemable at premium

In this situation the issue price is less than par value but redemption value is more than par value. The difference between the redemption price and the issue price is treated as discount/ loss on issue of debentures. Suppose, a 10% debentures of Rs 1,000 is issued at a discount of Rs 100 and redeemable at a premium of Rs 5 per debenture, the amount of loss will be equal to Rs900 – Rs 1,005 = Rs 105. This is to be treated as loss on issue. It is to be noted that premium on redemption of debentures is also credited by Rs 5.

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev
ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev
ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

Students can note that instead of passing the separate entries, a compound entry can be passed:

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

Illustration 7 

Agrotech Ltd. issued 1,40,00,000, 9% debentures of Rs 100 each at a discount of 6%, redeemable at a premium of 5% after 3 years payable as : Rs 50 on application and Rs 44 on allotment. Record necessary journal entries for issue of debentures.

Solution

Books of Agrotech Ltd.

Journal

DateParticulars L.F.Debit
 Amount
 Rs
Credit
 Amount 
 Rs
 Bank A/cDr. 70,00,00,000 
    To Debenture Application A/c   70,00,00,000
 (Debentures application money received)     
 Debenture Application A/cDr. 70,00,00,000  
   To 9% Debenturses A/c   70,00,00,000 
 (Application money transferred to 9% debentures account)    
 Debenture Allotment A/cDr. 61,60,00,000 
 Loss on issue of debenture A/cDr. 15,40,00,000 
   To 9% Debentures A/c   70,00,00,000
   To Debenture redemption premium A/c   7,00,00,000
 (Call made consequent upon allotment of debentures issued at discount and redeemable at premium)    
 Bank A/cDr. 61,60,00,000 
   To Debenture Allotment A/c   61,60,00,000
 (Allotment amount received)    


Working Notes :

Loss on issue of debentures =
Amount of discount on issue + Premium payable on redemption
= 6% of Rs 1,40,00,00,000 + 5% of Rs 1,40,00,00,000
= Rs 8,40,00,000 + Rs 7,00,00,000
= Rs 15,40,00,000

6. debenture Issued at premium and redeemable at premium

In this situation the issue price is more than par value and also redemption value is more than par value. The premium received at the time of issue of debentures is credited to Securities premium account and premium paid at the time of redemption is a loss to be provided at the time of issue of debentures. Suppose, a 10% debenture of Rs 1,000 is issued at a premium of Rs 100 and redeemable at a premium of Rs 5 per debenture. In the given case Rs 100 is to be credited to Securities premium account and Rs 5 will be the loss to be provided at the time of issue of debentures. It is to be noted that premium on redemption of debentures is also credited by Rs 5.

(a) For the receipt of application money

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

(b) At the time of making allotment

(i) Transfer of application money to debenture account

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

(ii) Call made consequent upon allotment of debenture at premium and redeemable 

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

Students can note that instead of passing the separate entries, a compound entry can be passed:

 Bank A/cDr. 
 Loss on issue of Debentures A/cDr.  
    To …% Debentures A/c  
    To  Securities Premium A/c  
    To Premium on redemption of debentures A/c  


6.2 ACCOUNTING FOR ISSUE OF DEBENTURES PAYABLE IN INSTALMENTS

Just like shares, money payable on debentures may be paid either in full with application or by instalments. Accounting entries will differ to some extent in either case.

6.2.1  debentures payable in Full on application

Where the amount due on debentures are payable in full on application, it is usual to open a separate Debentures Application Account for each class of debentures, such as 10% Debentures Application Account or 12% Debentures Application Account. These accounts record moneys received from the applicants of debentures. If an issue is over-subscribed, these accounts can be used to record the refund of moneys to the unsuccessful applicants. At the time of allotment of debentures, the amount in Debentures Application Account is transferred to the respective Debentures Account.

As in case of shares, debentures may also be issued at par, at a premium, or at a discount.

6.2.2  debentures Issued at par

The debentures which are issued at par are issued at the same price as their nominal value; that is, if a debt with a nominal value of Rs 100 is issued at par, the company receives Rs 100.

The accounting entries would be as follows:

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

Illustration 8

Simmons Ltd. issued 10,000, 12% Debentures of Rs 100 each at par payable in full on application by 1st April, Application were received for 11,000 Debentures. Debentures were allotted on 7th April. Excess money refunded on the same date.

You are required to pass necessary Journal Entries (including cash transactions) in the books of the company.

Solution

In the books of simmons Limited

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev
ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

6.2.3 debentures Issued at a premium

A company issues debentures at a premium when the market rate of interest is lower than the debentures interest rate. The debentures, which are issued at a premium, are issued at a higher price than their nominal value; that is, if a debenture with a nominal value of Rs 100 is issued at 10% premium, the company receives at Rs 110 where the investor gets slightly less interest than stated in the debenture. For example, 12% Debentures of Rs 100 issued at a premium of 10%. The investor will get Rs 1 p.a. for  his investment of 110. Therefore, the effective rate of interest on investment is (12/111x 100) = 10.91%.

The accounting entries would be as follows:

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev
ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

Illustration 9

Kapil Ltd. issued 10,000, 12% Debentures of Rs 100 each at a premium of 10% payable in full on application by 1st March, 2014. The issue was fully subscribed and debentures were allotted on 9th March, 2014.

Pass necessary Journal Entries (including cash transactions).

Solution

In the books of Kapil Limited 

Journal entries

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

6.2.4  debentures Issued at a discount

The Companies Act does not impose any restriction on the price at which debentures can be issued. Unlike shares, there is no maximum limit for discount on issue of debentures. This is why it is very common for debentures to be issued at a discount. The debentures which are issued at a discount are issued at a lower price than nominal value, that is, if a debenture with a nominal value of Rs 100 is issued at 10% discount, the company receives Rs 90 only. The issue of debentures at a discount slightly increases the true rate of interest payable. For example, 12% Debentures of Rs100 issued at a discount of 10%. The Company will have to pay Rs 12 for a loan of Rs 90. Therefore, the true rate of interest is (12/90 x 100) = 13.33%.

The company issues debentures at a discount when the market rate of interest is higher than the debenture interest rate. Like shares, Debentures Account is credited with the nominal value. The difference between the nominal value of debentures and cash received is transferred to “Discount on Issue of Debentures Account. In the subsequent years, Discount on Issue of Debentures is written-off proportionately by charging to the Statement of Profit and Loss. It is considered a normal practice to amortize discount on issue of debentures over the period of benefit, i.e., normally 3 to 5 years.

The accounting entries would be as follows :

(a) When Cash is received

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev
ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev
ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

Illustration 10

X Ltd. issued 10,000 12% Debentures of Rs 100 each at a discount of 10% payable in full on application by 31st May, 2014. Applications were received for 12,000 debentures. Debentures were allotted on 9th June, 2014. Excess monies were refunded on the same date. Pass necessary Journal Entries.

Solution

In the books of X Limited 

Journal entries

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev
ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

7. ISSUE OF DEBENTURES AS COLLATERAL SECURITY

Collateral security means secondary or supporting security for a loan, which can be realised by the lender in the event of the original loan not being repaid on the due date. Under this arrangement, the borrower agrees that a particular asset or a group of assets will be realized and the proceeds there from will be applied to repay the loan in the event that the amount due, cannot be paid.

Sometimes companies issue their own debentures as collateral security for a loan or a fluctuating overdraft. When the loan is repaid on the due date, these debentures are at once released with the main security. In case, the company cannot repay its loan and the interest thereon on the due date, the lender becomes the debentureholder who can exercise all the rights of a debentureholder. 

Accounting Entries

There are two methods of showing these types of debentures in the accounts of a company.

Method 1

Under this method, no entry is made in the books of account of the company at the time of making issue of such debentures. In the ‘Notes to Accounts’ of Balance Sheet, the fact of the debentures being issued and outstanding is shown by a note under the liability secured.

Illustration 11

X Ltd. obtains a loan from IDBI of Rs10,00,000, giving as collateral security of Rs15,00,000, 14%, First Mortgage Debentures. solution : In the Notes to Accounts of Balance Sheet of X Ltd., it is shown as follows:

Notes to Accounts of X Limited as at…(includes)

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

Under this method, the following entry is made to record the issue of such debentures:

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

The Debentures Suspense Account will appear on the assets side of the Balance Sheet and Debentures on the liabilities side of the Balance Sheet. When the loan is repaid, the entry is reversed in order to cancel it.

Illustration 12

Taking the same information of the above example, the entry on issue will be as follows :

In the Books of X Ltd.

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

balance sheet of X Limited as at….(extracts)

ICAI Notes 9.4 - Issue of Debentures (Part - 2) CA Foundation Notes | EduRev

Students should note that the Method 1 is much more logical from the accounting point of view. therefore we advice to follow Method 1. 

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