BCM2B02 FINANCIAL ACCOUNTING, COMPANY ACCOUNTS - ISSUE OF DEBENTURES, MODULE 3, 2ND SEMESTER B. COM, UNIVERSITY OF CALICUT, 2019

1. COMPANY ACCOUNTS -
ISSUE OF DEBENTURES
BCM2B02 FINANCIAL ACCOUNTING
MODULE 3.2
UNIVERSITY OF CALICUT

2. Calculation of Goodwill or Capital Reserve
Sometimes, the purchase consideration paid to the vendor may be more than the value of net assets (i.e. Asset
purchased — Liabilities assumed) acquired or may be less than the value of net assets acquired.
The difference will be either goodwill or capital reserve, which may be calculated as follows:
Goodwill = Purchase consideration—Asset acquired — Liabilities taken over
Capital Reserve = Assets acquired—Liabilities taken over — Purchase Consideration
Accounting Treatment:
When Purchases consideration more than net value of assets
(i) To record goodwill:
S. Assets A/c Dr.
Goodwill A/c Dr. (Balancing figure)
To Vendor A/c
To Liabilities A/c
When Purchase consideration is less than net value of asset
(ii) To record capital reserve:
S. Assets A/c Dr.
To Vendor A/c
To Liabilities A/c
To Capital Reserve (Balancing figure)

3. Problem : 11
• Star Automobiles Ltd. took over assets of Rs. 2,35,000 and liabilities of Rs.
40,000 of Ashoka Automobiles Ltd. for the purchase consideration of Rs.
2,20,000. Purchase consideration was payable by issuing debentures of Rs.
100 at 10% premium. Give journal entries in the books of Star Automobiles
Ltd.
The purchase consideration is Rs. 2,20,000 against net assets being value (2,35,000 – 40,000) Rs.
1,95,000. The difference of Rs. 25,000 is goodwill.

4. Problem : 12
A Company issued debentures of Rs.100 each at par for the purchases of
the following assets and liabilities from Gupta Bros. at purchase
consideration of Rs. 15,00,000
Plant– Rs. 3,50,000
Stock Rs. 4,50,000
Land and Building Rs. 6,00,000
Sundry Creditors Rs. 1,00,000
Pass necessary Journal entries.
When Purchases consideration is more than net value of assets

6. Problem 13
Zee Ltd. Took over the following assets and liabilities of business
of Usha Ltd.
Assets : Machinery-Rs.1,00,000, Furniture Rs. 1,80,000 Stock Rs.
20,000 Liabilities-Creditors Rs. 80,000
The purchases price was agreed at Rs. 1,08,000.
This is to settle by issue of 12% Debentures at premium of 20%
pass necessary Journal entries.
When Purchases consideration is less than net value of assets

7. Net assets = Total assets-liabilities = Rs. 3,00,000 – Rs. 80,000 = Rs. 2,20,000
Capital reserve = Net assets – Purchases consideration = Rs. 2,20,000 – Rs. 1,08,000 = Rs.
1,12,000

8. ISSUE OF DEBENTURES AS
COLLATERAL SECURITY
• Security provided to lender in addition to the principal security. It is a
subsidiary or secondary security.
• In addition to the principal security.
• The lender will have a right over such debentures only when
company fails to pay the loan amount and the principal security is
exhausted. In case the need to exercise the right does not arise
debentures will be returned back to the company.
• No interest is paid on the debentures issued as collateral security
because company pays interest on loan
• TWO methods

10. (i) First method : No Journal entry to be made in the books of accounts
of the company for debentures issued as collateral security.
(ii)Second method : Entry to be made in the books of accounts of the
company. A journal entry is made on the issue of debentures as a
collateral security, Debentures Suspense Account is debited because
no cash is received for such issue.

11. Problem 14
X Ltd. Had L12,00,000, 11% Debentures outstanding on 1st April, 2012. During the
year, it took a loan of Rs. 4 Lakh from Canara Bank for which company deposited
debentures of Rs. 5 Lakh as collateral security. Pass journal entries and show how
these transactions will appear in Balance Sheet of the company.

12. 1st Method 2nd Method

13. REDEMPTION OF DEBENTURE
Meaning : Redemption of debentures means repayment of the due amount of
debentures to the debenture holders. It may be at par or at premium.
Time of Redemption:
(a) At maturity : When repayment is made at the date of maturity of debentures which
is determined at the time of issue of debentures.
(b) Before maturity : If articles of association and terms of issue mentioned in
prospectus allows, then a company can redeem its debentures before maturity date.
Redemption Methods :
(1) Redemption in Lump-sum : When redemption is made at the expiry of a specific
period, as per the terms of issue.
(2) Redemption by draw of lots : In this method a certain proportion of debentures are
redeem each, year, the debenture for which repayment is to be made is selected by
draw of lots.
(3) Redemption by purchases in open market : If articles of association of a company
authorize, it may purchases its own debentures from open market i.e. stock
exchange

14. Advantages:
(1) When market price of own debentures is low than the redeemable
value is less then the amount payable on maturity.
(2)Decrease the amount of interest payable to outsiders.
(3) If term of issue is provided that debentures are to be redeemed at
premium then such premium can be reduced.
Reasons:
1. To maintain the solvency ratio.
2. To utilize the surplus money or funds which are lying idle with the
company.
3. When rate of interest on debentures is more than the current
market rate of interest on debentures in the industry.

15. •Par
•Premium
•Discount
Par
•Par
•Premium
•Discount
Premium
Issue
Redemption

17. Problem 15
Give Journal entries for the following:
1.Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at par and redeemable at
par.
2.Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at premium of 5% but
redeemable at par.
3.Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at discount of 5%
repayable at par.
4.Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at par but repayable at a
premium of 5%.
5.Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at discount of 5% but
redeemable at premium of 5%.
6.Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at premium of 5% and
redeemable at premium of 5%.

18. JOURNAL
DATE PARTICULARS LF
AMT.
(DR.)
AMT. (CR.)
CASE 1 Bank A/c Dr. 1,00,000
To. 9% Debentures A/c 1,00,000
(Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at par
and redeemable at par.)
CASE 2 Bank A/c Dr. 1,05,000
To. 9% Debentures A/c 1,00,000
To. Securities Premium A/c 5,000
(Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at
premium of 5% but redeemable at par.)
CASE 3 Bank A/c Dr. 95,000
Discount on Issue of Debentures A/c Dr. 5,000
To. 9% Debentures A/c 1,00,000
(Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at
discount of 5% repayable at par.)

19. CASE 4 Bank A/c Dr. 1,00,000
Loss on Issue of Debentures A/c Dr. 5,000
To. 9% Debentures A/c 1,00,000
To. Premium on Redemption of Debentures A/c 5,000
(Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at par
but repayable at a premium of 5%)
CASE 5 Bank A/c Dr. 95,000
Loss on Issue of Debentures A/c Dr. 10,000
To. 9% Debentures A/c 1,00,000
To. Premium on Redemption of Debentures A/c 5,000
(Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at
discount of 5% but redeemable at premium of 5%.)
CASE 6 Bank A/c Dr. 1,05,000
Loss on Issue of Debentures A/c Dr. 5,000
To. 9% Debentures A/c 1,00,000
To. Premium on Redemption of Debentures A/c 5,000
To. Securities Premium A/c 5,000
(Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at
premium of 5% and redeemable at premium of 5%)

20. • When interest is due and tax is deducted at source:
Interest on Debentures A/c Dr.
To Debenture holders’ A/c Cr.
To Income Tax(TDS) Payable A/c Cr.
(Amount of interest due on debenture and tax deducted at source)
• For payment of interest to debenture holders :
Debenture holders A/c Dr.
To Bank A/c Cr.
(Amount of interest paid to debenture holders)
• On transfer debenture Interest Account to statement of Profit and Loss :
Statement of Profit and Loss Dr.
To Interest on Debentures A/c Cr.
(Debenture interest transferred to profit and loss A/c)
• On payment of tax deducted at source to the Government :
Income Tax(TDS) Payable A/c Dr.
To Bank A/c Cr.
(Payment of tax deducted at source on interest on debentures)
Interest
of
Debentures

21. Problem 16
On 1st April 2017, T.T. Ltd. issued 500, 9% Debentures of ₹ 500 each at
a discount of 4% redeemable at a premium of 5% after three years.
Pass necessary Journal entries for the issue of debentures and
debenture interest for the year ended 31st March 2018 assuming that
interest is payable on 30th September and 31st March and the rate of
T.D.S. is 10%. On 31st March every year, the company closes its books.
Problem 17
A company issues 11 % debentures of 11 lakhs, redeemable at par after
6 years from the issue date. The company pays the Interest on
debentures annually. The TDS rate is 20%. Pass the journal entries for
year 1.
https://efinancemanagement.com/sources-of-finance/interest-on-debentures

22. Date Particulars Amount (Dr) Amount (Cr)
2017
April 1 Bank A/c (500 x ₹ 480) Dr. 2,40,000
To Debentures Application and Allotment A/c Cr. 2,40,000
(Being the receipt of application money for 500
debentures @ ₹ 480 each)
Debentures Application and Allotment A/c Dr. 2,40,000
Loss on Issue of Debentures A/c Dr. 22,500
To 9% Debentures A/c Cr. 2,50,000
To Premium on Redemption of Debentures A/c Cr. 12,500
(Being the issue of 500, 9% Debentures of ₹ 500 each
at 4% discount and redeemable at 5% premium)
Sept 30 Interest on Debentures A/c Dr. 11,250
To Debentureholders’ A/c Cr. 10,125
To TDS Payable A/c Cr. 1,125
(Being the interest payable on 9% Debentures for 6
months and TDS @ 10%)
Problem
16

23. 2018
March 31 Interest on Debentures A/c Dr. 11,250
To Debentureholders’ A/c Cr. 10,125
To TDS Payable A/c Cr. 1,125
(Being interest payable on 9% Debentures for 6 months
and tax deducted at source @ 10%)
March 31 Debentureholders’ A/c Dr. 10,125
TDS Payable A/c Dr. 1,125
To Bank A/c Cr. 11,250
(Being payment of interest to debenture holders and
deposit of tax deducted at source in the bank)
March 31 Statement of Profit and Loss Dr. 22,500
To Interest on Debentures A/c Cr. 22,500
(Being transfer of the interest in debentures to
Statement of Profit and Loss)
Problem
16

24. Treatment of Fraction Debentures
Must be settled in cash
X Ltd., purchased an established business for Rs. 11,00,000, payable
Rs. 1,02,000 in cash and balance by issue of 8% Debentures of Rs.100
each at discount of 10% in full satisfaction. Give journal entries.