Commerce Exam  >  Commerce Notes  >  Crash Course of Accountancy - Class 12  >  Other Cases - Issue of Debentures

Other Cases - Issue of Debentures | Crash Course of Accountancy - Class 12 - Commerce PDF Download

Consideration Other Than Cash:
Case 1. When assets are purchased
Assets a/c
      To vendor a/c
Case 2. When assets are liabilities both are purchased (running business is purchased)
Assets a/c
        To liabilities a/c
        To vendor a/c (difference amount)
Case 3. When assets and liabilities both are purchased and the amount of vendor is also given and there is a difference in the debit side (cr. Side > dr. side)-for the difference amount goodwill be raised in dr. side
Assets a/c
Goodwill a/c (difference amount)
        To liabilities a/c

        To vendor a/c 

Case 4. When assets and liabilities both are purchased and the amount of vendor is also given and there is a difference in the credit side (Dr. Side > Cr. side)-for the difference amount capital reserve be raised in cr. side
Assets a/c
       To liabilities a/c
       To vendor a/c
       To capital reserve a/c (difference amount)

Settlement of vendor’s account:
Amount of vendor is also known as Purchase consideration, agreed sum, agreed value, business price, purchased sum, supplier or creditor of a capital expenditure (fixed assets)
Case 1. vendor is paid by cheque or a bank draft
Vendor a/c
        To bank a/c
Case 2. vendor is paid in cash
Vendor a/c
        To cash a/c
Case 3. vendor is paid by issuing bills of exchange, promissory note and bills payable
Vendor a/c
        To B/P a/c
Case 4. vendor is paid by issuing debentures
 At par (Fv=Mv)
Vendor a/c
        To 10% debentures
 At a premium (Fv + Premium= Mv)
Vendor a/c
        To 10% debentures
        To S.premium (difference amount)

 At a discount (Fv-discount = Mv)
Vendor a/c
Discount on issue (difference amount)
        To 10% debentures
Amount of 10% debentures = vendor x FV

                                                     MV
number of 10% debentures = vendor
                                                     MV

As A Colleteral Security:
 For bank loan
Bank a/c
       To Bank Loan a/c
 For issuing debentures as a collateral security:
10 % Debenture suspense a/c
       To 10 % Debenture
Disclosure in the balance sheet:
Alfa Ltd. obtained Loan of 1, 00,000 from Indian Bank and issued 1200, 10% Debentures of 100 each as Collateral security. (or any other example) Treatment:
 An extract of Balance sheet of Alfa Ltd.
as at ----------------

ParticularsNote No.Rs.
Equity And Liabilities
Non- current liabilities
Long Term Borrowings


1


1,00,000

Note to Accounts:

Note No.
Particulars
Rs.
1Long Term Borrowings
Loan from Indian Bank
1,200. 10% Debentures of Rs. 1,00 each issued as collateral security 1,20,000
less: debenture suspense                                                                           (1,20,000)

1,00,000

______


1,00,000


Treatment of Interest:
Interest is a nominal account and is an expense for the business so it is always debited. When interest is paid:

Interest on debentures a/c
      To bank a/c
When interest is not paid:
 Interest on debentures a/c
        To O/S Interest on debentures a/c
When Interest is Transferred to Statement of P&L A/c at the end of year:
Statement of P&L a/c
      To Interest on debentures a/c
Treatment of Interest with income tax (T.D.S.):
1) Interest on debentures a/c
       To debenture holders a/c
       To income tax payable a/c
2) debenture holders a/c
     income tax payable a/c
              To Bank a/c

Debentures are issued in cash:

Case
Issue
Redemption(repayment)
1At par(issued at 100)
Bank a/c            100
   To 10% debenture application& allotment a/c 100

10% debenture application& allotment a/c 100
   To 10% debenture a/c                                           100
At par(repayable at 100)
10% debenture a/c                   100
   To debenture holder a/c                   100

debenture holder a/c      100
   To bank a/c                              100
2At premium(issued at 110)
Bank a/c            110
   To 10% debenture application& allotment a/c 110

10% debenture application& allotment a/c 110
   To 10% debenture a/c                                           100
   To security premium a/c                                        10
At par(repayable at 100)
10% debenture a/c                   100
  To debenture holder a/c                    100

debenture holder a/c  100
   To bank a/c                         100
3At discount (issued at 90)
Bank a/c            90
   To 10% debenture application& allotment a/c 90

10% debenture application & allotment a/c 90                 discount on issue a/c                                   10
    To 10% debenture a/c                                  100
At par(repayable at 100)
10% debenture a/c     100
   To debenture holder a/c     100

debenture holder a/c
   To bank a/c     100
4At par(issued at 100)
Bank a/c            100
   To 10% debenture application& allotment a/c 100

10% debenture application& allotment a/c 100
loss on issue a/c                                             10
    To 10% debenture a/c                                           100       To premium on redemption a/c                            10
At premium(repayable at 110)
10% debenture a/c                   100
premium on redemption a/c     10
    To debenture holder a/c                110

debenture holder a/c      110
     To bank a/c                             110
5At premium(issued at 105)
Bank a/c            105
   To 10% debenture application& allotment a/c 105

10% debenture application& allotment a/c 105
loss on issue a/c                                             10
   To 10% debenture a/c                                           100
   To security premium a/c                                         5         To premium on redemption a/c                              10
At premium(repayable at 110)
10% debenture a/c                  100
premium on redemption a/c   10
   To debenture holder a/c                 110

debenture holder a/c      110
    To bank a/c                           110
6At discount (issued at 90)
Bank a/c            90
   To 10% debenture application& allotment a/c 90

10% debenture application& allotment a/c 90 discount on issue a/c                                   10
loss on issue a/c                                            10
   To 10% debenture a/c                                           100       To premium on redemption a/c                           10
At premium(repayable at 110)
10% debenture a/c                     100
premium on redemption a/c      10
    To debenture holder a/c                   110

debenture holder a/c      110
    To bank a/c                             110


Writing-off Discount/Loss on Issue of Debentures:
• The discount/loss on issue of debentures is a capital loss or a fictitious asset and, therefore, must be written-off during the life time of debentures.
• The amount of discount/loss on issue of debentures should normally not be written-off in the year of issue itself since the benefit of the debentures would accrue to the company till their redemption.
• The discount/loss on it is, therefore, treated as capital loss. The discount may be charged to securities premium A/c or may be written-of fover 3 to 5 years through statement of profit and loss as per guidelines issued by ICAI. On the asset side of Balance Sheet.

The document Other Cases - Issue of Debentures | Crash Course of Accountancy - Class 12 - Commerce is a part of the Commerce Course Crash Course of Accountancy - Class 12.
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FAQs on Other Cases - Issue of Debentures - Crash Course of Accountancy - Class 12 - Commerce

1. What are debentures in commerce?
Ans. Debentures are long-term debt instruments issued by companies to raise funds from the public. They represent a loan agreement between the company and the debenture holders, who are entitled to receive fixed interest payments and the principal amount at maturity.
2. What is the difference between debentures and shares?
Ans. Debentures and shares are both ways for companies to raise funds, but there are key differences between them. Debentures represent loans taken by the company and have a fixed interest rate, while shares represent ownership in the company and provide a share of profits through dividends. Debenture holders have no voting rights, whereas shareholders have voting rights in company matters.
3. What are the advantages of issuing debentures for a company?
Ans. Issuing debentures offers several advantages for a company. Firstly, it provides an alternative source of long-term finance without diluting ownership. Secondly, the interest paid on debentures is tax-deductible, reducing the overall tax liability. Additionally, debenture holders do not have voting rights, allowing the company to maintain control over decision-making.
4. What are the risks associated with investing in debentures?
Ans. Investing in debentures carries certain risks. The main risk is the possibility of default by the company in repaying the principal amount or interest. If the company faces financial difficulties or bankruptcy, debenture holders may not receive their full investment back. Additionally, changes in interest rates can affect the market value of debentures, impacting the potential returns for investors.
5. Can debentures be converted into shares?
Ans. Yes, debentures can be convertible into shares based on the terms and conditions set by the company. Convertible debentures give the debenture holders the option to convert their debentures into shares at a predetermined price or conversion ratio. This provides an opportunity for investors to benefit from the potential appreciation in the company's share price while initially receiving fixed interest payments.
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