ICAI Notes 9.4 - Issue of Debentures (Part - 3) CA Foundation Notes | EduRev

Fundamentals of Accounting for CA CPT

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CA Foundation : ICAI Notes 9.4 - Issue of Debentures (Part - 3) CA Foundation Notes | EduRev

The document ICAI Notes 9.4 - Issue of Debentures (Part - 3) CA Foundation Notes | EduRev is a part of the CA Foundation Course Fundamentals of Accounting for CA CPT.
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8. ISSUE OF DEBENTURES IN CONSIDERATION OTHER THAN FOR CASH

Just like shares, debentures can also be issued for consideration other than for cash, such as for purchase of land, machinery, etc. In this case, the following entries are passed :

ICAI Notes 9.4 - Issue of Debentures (Part - 3) CA Foundation Notes | EduRev

Illustration 13 

X Company Limited issued 14% Debentures of the nominal value of Rs 10,00,000 as follows: (a) To sundry persons for cash at 90% Rs 5,00,000 nominal. (b) To a vendor for Rs 2,00,000 for purchase of fixed assets – Rs 2,50,000 nominal. (c) To the banker as collateral security for a loan of Rs 1,00,000 – Rs 2,50,000 nominal.
Pass necessary Journal Entries.

Solution

In the books of X company Ltd.

Journal entries

ICAI Notes 9.4 - Issue of Debentures (Part - 3) CA Foundation Notes | EduRev
ICAI Notes 9.4 - Issue of Debentures (Part - 3) CA Foundation Notes | EduRev

Note : No entry is made in the books of account of the company at the time of making issue of such debentures. In the Balance Sheet the fact that the debentures being issued as collateral security and outstanding are shown under the respective liability. 

9. TREATMENT OF DISCOUNT/LOSS ON ISSUE OF DEBENTURES

The discount on issue of debentures is amortised over a period between the issuance date and redemption date. It should be written-off in the following manner depending upon the terms of redemption:

(a) If the debentures are redeemable after a certain period of time, say at the end of 5 years, the total amount of discount should be written-off equally throughout the life of the debentures (applying the straight line method). The main advantage of this method is that it spreads the burden of discount equally over the years.

(b) If the debentures are redeemable at different dates, the total amount of discount should be written-off in the ratio of benefit derived from debenture loan in any particular year (applying the sum of the year’s digit method). This method is suitable when debentures are redeemed by unequal instalments. 

The accounting entries would be as follows :

ICAI Notes 9.4 - Issue of Debentures (Part - 3) CA Foundation Notes | EduRev

Loss on issue of debentures is also a capital loss and should be written off in a similar manner as discount on debentures issued. In the balance sheet both the items (Discount and Loss) are shown as Non-current/current assets depending upon the period for which it has to be written off.

Illustration 14

HDC Ltd issues 10,000, 12% Debentures of Rs 100 each at Rs 94 on 1st January,  2010. Under the terms of issue, the debentures are redeemable at the end of 5 years from the date of the issue. Calculate the amount of discount to be written-off in each of the 5 years.

Solution

Total amount of discount comes to Rs 60,000 (Rs 6 X 10,000). The amount of discount to be writtenoff in each year is calculated as under :

ICAI Notes 9.4 - Issue of Debentures (Part - 3) CA Foundation Notes | EduRev

Illustration 15 

HDC Ltd. issues 10,000, 12% Debentures of Rs 100 each at Rs 94 on 1st January, 2008. Under the terms of issue, 1/5th of the debentures are annually redeemable by drawings, the first redemption occurring on 31st December, 2010. Calculate the amount of discount to be written-off from 2008 to 2014. 

Solution

Calculation of amount of discount to be written-off 

ICAI Notes 9.4 - Issue of Debentures (Part - 3) CA Foundation Notes | EduRev

10. INTEREST ON DEBENTURES

Interest payable on coupon debenture is treated as a charge against the profits of the company. Interest on debenture is paid periodically and is calculated at coupon rate on the nominal value of debentures. The company will pay interest net of tax to the debenture holders because the company is under obligation to deduct tax at source at the rates applicable under tax rules from time to time. The companies will deposit the tax so deducted with income tax authorities. Following accounting entries are to be recorded in this regard:

ICAI Notes 9.4 - Issue of Debentures (Part - 3) CA Foundation Notes | EduRev

Illustration 16

A company issued 12% debentures of the face value of ` 2,00,000 at 10% discount on 1-1-2014. Debenture interest after deducting tax at source @ 10% was payable on 30th June and 31st of December every year. All the debentures were to be redeemed after the expiry of five year period at 5% premium.

Pass journal entries for the accounting year 2014.

Solution

Journal entries

   Dr.
Rs
Cr.
Rs
1-1-2014Bank A/cDr.1,80,000 
 Debenture Discount A/cDr.20,000 
 Loss on Issue of Debentures A/cDr.10,000 
   To 12% Debentures A/  2,00,000
   To Premium on Redemption of Debentures A/c  10,000
 (For issue of debentures at discount redeemable at premium)   
30-6-2014 Debenture Interest A/cDr.12,000 
   To Debentureholders A/c  10,800
   To Tax Deducted at Source A/c  1,200
 (For interest payable)   
 Debentureholders A/cDr.10,800 
 Tax Deducted at Source A/cDr.1,200 
   To Bank A/c  12,000
 (For payment of interest and TDS)   
31-12-2014Debenture Interest A/cDr.12,000 
   To Debentureholders A/c  10,800
   To Tax Deducted at Source A/c  1,200
 (For interest payable)   
 Debentureholders A/cDr.10,800 
 Tax Deducted at Source A/cDr.1,200 
   To Bank A/c  12,000
 (For payment of interest and tax)   
 Profit and Loss A/cDr.24,000 
   To Debenture Interest A/c  24,000
 (For transfer of debenture interest to profit and loss account at the end of the year)    
 Profit and Loss A/cDr.4,000 
   To Debenture Discount A/c  4,000
 (For proportionate debenture discount written off, i.e., 20,000 x 1/5)   
 Profit and Loss A/cDr.2,000 
 To Loss on Issue of Debenture A/c  2,000
 (For proportionate loss on issue written off, i.e., 1/5 x 10,000)   


It may be noted that loss on issue of debenture is also written off in the ratio of debentures outstanding during different accounting years.

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