Issue of Debenture

12th class issue of debentures CA/CMA Santosh kumar
ISSUE OF DEBENTURES
MEANING OF DEBENTURE: Debenture is a written instrument or document issued by the company acknowledging
a debt. It contains terms of repayment of principal and also payment of interest at a rate specified at the time of its
issue.
"Debenture includes debenture stock, bonds and any other instrument of the company evidencing a debt, whether
constituting a charge on the assets of the company or not." (section 2(30) of companies Act 2013.
A Debenture called Debenture Certificate is an acknowledgement of debt by the company. It is an agreement

between the company and the debenture holders for repayment of principal amount on the specified date and
payment of interest at the specified rate until the principal amount is repaid.
The persons to whom debentures are issued are called 'Debenture holders' and are lenders to the company.
Characteristics or Features of a Debenture
1. Debenture is a written document or certificate acknowledging debt by the company.
2. Mode and period of repayment of principal and interest is fixed.
3. Rate of interest on the debenture is specified. It is a practice to prefix 'Debentures' with the rate of interest. For
example, if the rate of interest is 9%, the title of the debentures will be '9% Debentures'
4. It is considered as an external equity or long-term borrowings of the company.
5. It is normally secured by way of charge on the assets of the company.
6. Interest on Debentures is a charge against profit.
Bond:- Bond, like debenture, is an acknowledgement of debt issued by the company and signed by an authorized
signatory. The expression 'Bond' has become synonymous with the debt instrument where the rate of interest is
not predetermined. Examples of bonds are Deep Discount Bond and Zero Coupon Bond.
Difference between Debenture and Share
Basis Debenture Share

1.Ownership Debenture means debt taken by the company. Share means capital. Hence, a shareholder
Therefore, a debenture holder is a lender. is the owner.
2.Return Debenture holder gets interest at the stated rate A shareholder gets dividend on investment.
whether the company earns profit or not.
3.Repayment Debentures are issued for a specified period. Hence, Normally, the amount of share is not repaid
the amount of debentures is repaid on the due date. during the lifetime of the company.
However, preference shares have a
specified life and are redeemed on due
date.
4.Issue at Debentures can be issued at discount. Shares cannot be issued at discount except
Discount sweat Equity shares.
5.Security Debentures may or may not be secured by a charge on Shares are not secured.
the assets of the company.
6.Convertibility Debentures can be converted into shares. Shares cannot be converted into any other
kind of security.
7.Voting Right Debenture holders do not have voting right. Shareholders (Equity) have a right to attend
and vote in the general meetings.
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8.Risk Debenture holders are relatively safe. Secured Shareholders are at a greater risk. They can
debentures are almost risk free. even lose the amount invested in shares.
9.Priority as to Payment of debentures is made before the payment of Payment of share capital is made after
repayment of share capital. repayment of debentures.
principal during
winding-up
Difference between Shareholder and Debenture holder
Basis Shareholder Debenture holder

1.Status Shareholder is the owner of the company. Debenture holder is the lender of the company.
2.Return A shareholder gets dividend. A debenture holder gets interest at the specified
rate whether the company earns profit or not.
3.Control A shareholder has a right of control over the A debenture holder has no such right to control.
working of the company by attending and voting in
the General Meeting.
4.Risk Shareholders are at a greater risk. They can even Debenture holders are relatively safe. Secured
lose the amount invested in shares. debenture holders have almost no risk.
TYPES OF DEBENTURES :- A company may issue different kinds of debentures which can be classified as under:
1. From Security Point of View
(i) Secured Debentures: Secured Debentures are those debentures which are secured by either a fixed charge or a
floating charge on the assets of the company. A charge on the assets of the company is registered with the
Registrar of Companies.
(ii)Unsecured Debentures: Unsecured Debentures are those debentures which are not secured by any charge on
assets of the company.
Charge:- The expression 'charge' means securing the loan by mortgaging specific assets towards the loan. It means,
if the company fails to meet its obligation, the lender can secure his payment from the assets mortgaged or in case
of winding-up of the company from the official liquidator. A charge may be either fixed or floating.
A charge created on definite assets of a permanent nature, such as land, building, machinery, etc., is known as
Fixed Charge.
A charge is a Floating Charge when no specific asset but all assets (except those charged by way of fixed charge) is
charged as security. A Floating Charge holder has a preference over an unsecured creditor for settling his claims, in
the event of winding-up of the company.
2. From Redemption Point of View
(i) Redeemable Debentures: Redeemable Debentures are those debentures that are repayable by the company at
the end of a specified period or by installments during the existence of the company.
(ii) Irredeemable Debentures: Irredeemable Debentures are those debentures that are not repayable during the
lifetime of the company and hence are repaid only when the company is liquidated.
3. From Records Point of View
(i) Registered Debentures: Registered Debentures are the debentures that are registered in the company's
records in the name of the holder. Principal and interest of such debentures is payable to the registered debenture
holders. The transfer of debentures in this case requires the execution of a transfer deed.

(ii) Bearer Debentures: Bearer debentures are the debentures that are not registered in the record of the
company in the name of the holder. These debentures are transferable by mere delivery. Interest is paid to the
person who produces coupons attached to the debenture.
4. From Priority Point of View
(i) First Debentures: The debentures which have to be repaid before the other debentures known as first
debentures.
(ii) Second Debentures: The debentures, which will be repaid after the first debentures are redeemed, are known
as second debentures.
5. From the Point of View of Coupon Rate
(i) Specific Coupon Rate Debentures: These debentures are issued with a specified rate of interest, called the
coupon rate. For example, 10% Debentures. The specified rate may either be fixed or floating. The floating interest
rate is usually linked with the bank rate.
(ii) Zero Coupon Rate Debentures (Bonds): These debentures do not carry a specific rate of interest. In order to
compensate the investors such debentures are issued at a substantial discount. The difference between the face
value and the issue price is the total amount of interest related to the duration of debentures.
6. From Convertibility Point of View
(i) Convertible Debentures: Convertible Debentures are the debentures that are convertible into shares. lf a part
of the debenture amount is convertible into Equity Shares, they are known as Partly Convertible Debentures. If full
amount of debentures is convertible into Equity Shares, they are known as Fully Convertible Debentures.
(ii) Non-convertible Debentures: Non-convertible Debentures are the debentures that are not convertible into
shares.
Debentures Trust Deed :- Company issuing debentures to public is required to appoint trustees and execute a
Trust Deed. The trustees are duty bound to protect the interest of the debenture holders through the powers
granted by the Trust Deed.
ISSUE OF DEBENTURES :- The company issues prospectus inviting public to subscribe debentures of the company.
The company can also make private placement of debentures following the prescribed procedure. The company
may call the amount for debentures to be paid in lump sum or in installments. If debentures are issued, amount
being payable whether in lump sum or in installments procedure followed is same as is in the case of shares.
Minimum Subscription
According to Section 39(1) of the Companies Act, 2013, a company cannot allot securities unless minimum
subscription stated in the prospectus is received. Thus, the Act does not specify the minimum subscription but has
to be decided by the company.
However, SEBI has prescribed that 75% of the issue should be subscribed before a company allots debentures.
Debentures may be issued:
(i) For Cash;
(ii) For consideration other than Cash;
(iii) As Collateral Security.

Debentures, whether issued for cash or for consideration other than cash, may be issued:
(i) At par;
(ii) At premium; or
(iii) At discount.
Issue of Debentures for Cash
Debentures issued for cash may be issued at par, at premium or at discount.
(i) Issue of Debentures at Par: Debentures are said to have been issued at par when the issue price of a debenture
is equal to its nominal (face) value. For example, if a debenture of Rs 100 is issued for Rs 100, it will be known as
Issue of Debentures at Par.
Question 1. Y Ltd. issued 20,000; 9% Debentures of Rs 100 each at par payable on application by 1st April, 2018.
Applications were received for 20,000 debentures. Debentures were allotted on 5th April, 2018. Pass necessary
Journal entries in the books of the company.
Question 2. A Company issued 4,000; 10% Debentures of Rs 100 each, payable Rs 20 on application and balance
amount on allotment. The debentures are redeemable after 5 years. Applications were received for the issued
debentures and allotment was made to all the applicants. The amount was received on due dates. Pass the Journal
entries and prepare the Balance Sheet.
(ii) Issue of Debentures at Premium
Debentures are said to have been issued at premium when the issue price of a debenture is more than the
nominal (face) value of a debenture. For example, a debenture of Rs 100 is issued for Rs 110, Rs 10 is premium.
Premium on Issue of Debentures is a capital receipt and is credited to Securities Premium Reserve Account.
Note 1:-. If the question does not specify when the premium is called to be paid, it is assumed to have been called
along with the allotment money.
Note 2. Utilization of Securities Premium
The amount of Securities Premium Reserve Account is utilized for the purposes specified in Section 52(2) of the
Companies Act, 2013. The purposes for which Securities Premium Reserve can be used are:
(a) For issuing fully paid bonus shares;
(b) For writing off preliminary expenses;
(c) For writing off expenses of, or commission paid or discount allowed on debentures of the company;
(d) For providing premium payable on the redemption of redeemable preference shares or debentures of the
company; or
(e) For purchase of own shares or securities of the company.
Question 3 (Issue of Debentures at Premium, Payment in Lump sum). Intex Ltd. issued 10,000, 10% Debentures of
Rs 100 each at a premium of 10%, payable along with application. Applications were received for all the
debentures issued and allotment was made. Pass the Journal entries.
Question 4. Lemon Tree Ltd. issued 5,000; 9% Debentures of Rs 100 each at a premium of 20% payable as follows:
On Application – Rs 50,
On Allotment — Balance.

Applications were received for the debentures issued and also the amount due on allotment, Pass the Journal
entries for the above and prepare balance sheet(extract)
(iii) Issue of Debentures at Discount: Debentures are said to have been issued at discount when the issue price is
less than its nominal (face) value. For example, if a debenture of Rs 100 is issued for Rs 95, it means debentures are
issued at discount of Rs 5. The amount of discount debited to an account titled Discount on Issue of Debentures
Account.
Note: The amount demanded on allotment should be taken as net of discount unless stated otherwise.
Question 5. Exe Ltd. issued 20,000; 9% Debentures of Rs 100 each at a discount of 4% on 1st April, 2018, payable
Rs 30 on application and the balance on allotment. The debentures are redeemable after 5 years. Pass Journal
entries for the issue of debentures.
Oversubscription of Debentures
Oversubscription of Debentures means that the company has received applications for more number of
debentures than it has issued. In such a situation, the company may make allotment, by any of the following three
options or combination:
First Alternative—Rejecting Excess Applications.
Second Alternative—Partial or Pro rata Allotment.
Third Alternative—A Combination of the Above Two Alternatives.
Question 6. Nav Lakshmi Ltd. invited applications for 3,000; 12% Debentures of Rs 100 each at a premium of Rs 50
per debenture. Full amount was payable on application. Applications were received for 4,000 debentures.
Applications for 1,000 debentures were rejected and application money was refunded. Debentures were allotted
to the remaining applicants.
Pass necessary Journal entries for the above transactions in the books of Nav Lakshmi Ltd.
Question 7. Exe Ltd. issued 10,000, 9% Debentures of Rs 100 each at a premium of 10% payable Rs 25 on
application, Rs 35 on allotment (including premium) and the balance on first and final call, Applications were
received for 15,000 debentures. Allotment was made on pro rata basis excess application money being applied
towards amount due on allotment. All sums due were received by the company on due dates.
Journalize the above transactions in the books of Exe Ltd. and prepare extract of the Balance Sheet showing
Securities Premium Reserve and Debentures.
Question 8 (Pro rata Allotment and Rejection) X Ltd. invited applications for 4,000 Debentures of Rs 100 each
issued at a premium of 20%. Applications were received for 6,000 debentures and it was decided to deal with the
same as follows:
(i) To refuse allotment to applicants for 1,200 debentures.

(ii) To give full allotment to applicants for 400 debentures.
(iii) To allot the remaining debentures on Pro rata basis among other applicants.
(iv) To utilize excess application money in part payment of allotment money.
Journalize the above transactions (including cash transactions) assuming that (i) the total amount is payable along
with the application, and (ii) when the amount is payable in installments—on applications Rs 20, on allotment Rs
50 (including premium), and balance as first and final call.

Solution: JOURNAL OF X LTD.
Date Particulars L.F Dr. (Rs) Cr. (Rs)

(a) If total amount is payable along with the application:
Bank A/c …Dr. 7,20,000
To Debentures Application and allotment A/c 7,20,000
(Being the application money received)
Debentures Application and Allotment A/c …Dr. 7,20,000
To Debentures A/c 4,00,000
To Securities Premium Reserve A/c 80,000
To Bank A/c 2,40,000
(Being the application money adjusted and surplus refunded)
(b) If the amount is payable in installments:

Bank A/c …Dr. 1,20,000
To Debentures Application A/c
(Being the application money received) 1,20,000
Debentures Application A/c ...Dr. 1,20,000
To Debenture A/c 80,000
To debentures Allotment A/c 16,000
To Bank A/c 24,000
(Being the application money adjusted and surplus refunded)
Debentures Allotment A/c …Dr. 2,00,000
To …% Debentures A/c 1,20,000
(Being the allotment money due)
Bank A/c …Dr. 1,84,000
To Debentures Allotment A/c 1,84,000
(Being the allotment money received)
Debentures First and Final Call A/c …Dr. 2,00,000
To …% Debentures A/c 2,00,000
(Being the call money due)
Bank A/c …Dr. 2,00,000
To Debentures First and Final Call A/c 2,00,000
(Being the call money received)
Under subscription of Debentures:- Under subscription of Debentures means that applications have been
received for lesser number of debentures than offered for subscription. For example, the company issued 10,000,
9% Debentures of Rs 100 each for subscription and it received applications for 9,000, 9% Debentures. It is a case of
under subscription.
In the case of under subscription, allotment is made to all the applicants. Since allotment is made to all the
subscribers of the debentures, Journal entries are passed for the number of debentures subscribed.
Question 9. Citizen Watches Ltd. issued 7,500, 8% Debentures of Rs 100 each at par for subscription payable
along with application. Subscription was received for 7,000 debentures. The debentures were duly allotted.
Pass the necessary Journal entries.

Question 10. Elegant Ltd. issued for subscription 10,000, 11% Debentures of Rs 100 at a premium of 10%, payable
along with application. Subscription was received for 9,000 debentures and all the applicants were allotted the
debentures. Pass the Journal entries for the above.
Solution: In the Books of Elegant LTD
Date Particulars L.F. DR. (Rs) Cr. (Rs)

Bank A/c …Dr. 9,90,000
To Debentures Application and Allotment A/c 9,90,000
(Being the application received for 9,000; 11% Debentures
@ Rs 110 per debenture)
To 11% Debentures A/c 9,00,000
(Being 9,000; 11% Debentures allotted at 10% premium)
Question 11. Honey Ltd. issued 10,000, 9% Debentures of Rs 100 each for subscription, payable Rs 60 on
application and balance on allotment. Subscription was received for 9,000 debentures. Allotment was made to all
the applicants and due amount was received. Pass the Journal entries for issue and allotment of debentures.
Solution: In the Books of Honey Ltd.
Date Particulars L.F. Dr. (Rs) Cr.(Rs)

Bank A/c …Dr. 5,40,000
To Debentures Application A/c 5,40,000
(Being the applications received for 9,000; 9% Debentures
@ Rs 60 per debenture)
5,40,000
Debentures Application A/c …Dr.
5,40,000
To 9% Debentures A/c
(Being 9,000; 9% Debentures allotted)
3,60,000
Debentures Allotment A/c …Dr. 3,60,000
(Being the allotment money due) 3,60,000
3,60,000
Bank A/c …Dr.
To Debentures Allotment A/c
Issue of Debentures for Consideration other than Cash

Issue of Debentures for consideration other than cash means that the company has not received amount (in cash
or by cheque) against the debentures issued. Debentures may be issued for consideration other than cash under
the following circumstances:
(i) Issue of Debentures to Promoters: A company may allot debentures to the promoter for rendering their
services for incorporating the company. The entry is:

Incorporation Expenses A/c
To ...% Debentures A/c
(Being the debentures allotted to promoters)
(ii) Issue of Debentures to Vendors: Debentures may also be issued to vendors against purchase of assets or
business for pre-determined purchase consideration.
Note :- Purchase Consideration is the amount agreed to be paid for taking over the business from another
enterprise. Purchase consideration may be given in the question; otherwise it will be equal to Net Assets (i.e.,
Agreed value of Assets taken — Agreed amount of Liabilities assumed).
Question 12. A company purchased assets of 9,90,000 from another firm. it was agreed that the purchase
consideration will be paid by issuing 11% Debentures of 100 each. Pass Journal entries when debentures have
been issued: (i) at par, (ii) at a premium of 10% and (iii) at a discount of 10%.
Question 13. Exe Ltd. took over assets of 7,00,000 and liabilities of 60,000 of Wye Ltd. for the purchase
consideration of 6,60,000. Exe Ltd. paid the purchase consideration by issuing 9% Debentures of 100 each at 10%
premium. Pass Journal entries in the books of Exe Ltd.
Question 14. Z Ltd. purchased building for 22,00,000. Half the payment was made by cheque and the balance half
by issue of 9% Debentures of 100 each at a premium of 10%. Pass necessary Journal entries.
Question 15. Lemon Tree Ltd. purchased a piece of land from JSS Ltd. and paid the consideration as follows:
(i) Issued a cheque for 10,00,000;

(ii) Issued a Bill of Exchange for 3 months for 5,00,000;
(iii) Issued 5,000; 9% Debentures of 100 each at par redeemable at 10% premium after 5 years. Pass the
Journal entry.
Question 16. Exe Ltd, purchased assets of 8,40,000 and took over liabilities of 80,000 of Whe Ltd. at an agreed
value of 7,20,000. Exe Ltd. issued 10% Debentures of 100 each at 10% discount in full satisfaction of the price. Pass
Journal entries in the books of Exe Ltd.
Question 17. Pass Journal entries for the following transactions:
Z Ltd. purchased plant and machinery for 2,00,000 payable as 65,000 immediately in cash/cheque and balance by
issue of 6% Debentures of Rs 100 each at a discount of 10%.
3. Debentures issued as a collateral security:-a collateral security may be defined as additional security
in addition to some principal security. When a limited company obtains a loan from bank or any other financial
institutions, it may mortgage some assets as a security against the said loan. But the lending institution may insist
on some more assets as collateral security(additional security) so that the amount of loan can be realized in full
with the help of collateral security. In such case company may issue its debentures as collateral security.
Debentures are issued as collateral security when the borrower is not in a position to give any other asset as a
collateral security. The collateral security will not be used or realized as long as company fulfills its obligation
regarding payment of interest when due and repayment of loan on the maturity date. In case of default of
payment by company, firstly principal security will be sold. If the amount realized from sale of principal security
falls short of the loan money, then loan of lending institution converted into debentures of the company and
lending institution claims all the right of being a debenture holders. Debentures issued as collateral security will be
realized by the lender only in case the loan/interest is not repaid on the due date.

Question 18. (Debentures issued as Collateral Security). X Ltd. obtained loan of Rs 8,00,000 from State Bank of
India and issued 10,000; 9% Debentures of Rs 100 each as collateral security. How will issue of debentures be
shown in the Balance Sheet?
Question 19. A Ltd. issued 5,000; 9% Debentures of Rs 100 each at par and also raised a loan of 80,000 from bank,
collaterally secured by 1,00,000; 9% Debentures. How will be the Debentures shown in the Balance Sheet of the
company assuming that the company has passed Journal entry for issue of Debentures as collateral security in the
books?
Question 20. Zee Ltd. issued 10,000, 10% Debentures of Rs 100 each as collateral security for a loan of Rs 8,00,000
from Dena Bank. The company was unable to repay the loan on which interest payable was Rs 2,00,000 as on 31st
March, 2018.
Dena Bank, on 31st March, 2018, exercised the right vested in it by way of debentures being issued as collateral
Security. Pass Journal entries in the books of Zee Ltd on 31st March, 2018.
Various Cases Of Issue Of Debentures From The Point Of View Of Redemption

Debentures issued at par, at premium or at discount may be redeemed either at par or at premium. If the
debentures are redeemed at premium, premium payable at the time of redemption is provided in the books of
account at the time of issue following the Prudence Concept of accounting.
The term Redeemable at par means debentures are redeemable at their nominal (face) value. For example, a
debenture has a nominal (face) value of Rs 100 and is to be redeemed by paying Rs 100, it is a case of redemption
of debentures at par.
The term Redeemable at Premium means debentures are redeemable at a value that is higher than their nominal
(face) value. For example, a debenture has a nominal (face) value of Rs 100, and is to be redeemed by paying Rs
110, it is a case of redemption of debentures at premium.
Depending on the terms of issue and redemption of debentures, there may be six cases redemption as follows:
Case Conditions of Issue Conditions of Redemption

1. Issued at par Redeemable at par
2. Issued at discount Redeemable at par
3. Issued at premium Redeemable at par
4. Issued at par Redeemable at premium
5. Issued at discount Redeemable at premium
6. Issued at premium Redeemable at premium
Difference between Premium on Issue of Debentures and Premium on Redemption of Debentures
Basis Premium on issue of Debentures Premium on Redemption of Debentures

1. Capital Profit/Loss It is a capital loss.
It is a capital profit and is used for the
purposes specified in Section S2(2) of the
Companies Act, 2013.
2. Nature It is a reserve. It is a liability.

3. outflow of cash It does not involve outflow of cash. It is paid when the debentures are redeemed.
4. how shown in The Balance is shown in the Equity and It is shown in the Equity and Liabilities part of the
sheet Liabilities as part of the Balance Sheet under Balance Sheet under the main-head 'Non-current
main-head Shareholders' Funds and sub-head Liabilities' and sub-head other Long-term
Reserves and Surplus. Liabilities'.

Question 21. Chand Ltd. issued 50,000; 8% Debentures of Rs 100 each payable on application and redeemable at
par after 6 years. Pass necessary entries for issue of debentures in the books of Chand Ltd.
Solution: JOURNAL OF CHAND LTD.
Date Particulars L.F. Dr. (Rs) Cr. (Rs)

Bank A/c …Dr. 50,00,000
(Being the application money received @ Rs 100 each on 50,000
debentures)
, (Being the application money transferred to 8% Debentures Account)
Question 22. Anushree Ltd. issued 10,000; 9% Debentures of Rs 50 each at a discount of 8% redeemable at par
after 7 years. Pass necessary entries in the books of Anushree Ltd.
Solution: JOURNAL OF ANUSHREE LTD.

Bank A/c 4,60,000
(Being the application money received on 10,000; 9% Debentures)
4,60,000
Debentures Application and Allotment A/c 40,000
Discount on Issue of Debentures A/c 5,00,000
(Being 10,000; 9% Debentures issued at 8% discount redeemable at par)
Question 23. (Debentures are issued at premium and are redeemable at par). Green Ltd. issued Rs. 8,00,000; 9%
Debentures of Rs 100 each at a premium of 5% redeemable at par. Give journal entries.
Solution: Journal of Green Ltd.

Bank A/c …Dr. 8,40,000
To debentures Application and allotment A/C 8,40,000
(Being the debentures application money received)
Debentures Application and Allotment A/c 8,40,000
(Being 8,000; 9% Debentures issued at 5% premium and redeemable at
par)
Points to be kept in Mind:
1. Loss on Issue of Debentures is debited at the time of issue of debentures following the Prudence Concept of
accounting. The concept requires to provide all possible losses and expenses. Since, it is certain that premium will
be paid at the time of redemption, it is provided for.

2. Loss on Issue of Debentures is written off from Capital Reserve and/or from Securities Premium Reserve and/or
from Statement of Profit and Loss.
3. 'Loss on Issue of Debentures Account' is an Expense Account and 'Premium on Redemption of Debentures
Account' is a Liability Account.
4. 'Premium on Redemption of Debentures Account' is debited at the time of payment, i.e., redemption of
debentures.
Question 24. (Debentures are issued at Par and are Redeemable at Premium).
Blue Ltd. issued Rs 8,00,000; 9% Debentures of 100 each at par and redeemable at 10% premium at the end of
sixth year. Pass Journal entries.
Solution: JOURNAL OF BLUE LTD.

Bank A/c 8,00,000
(Being the debentures application money received)
Loss on Issue of Debentures A/c 80,000
To Premium on Redemption of Debentures A/c 80,000
(Being 8,000; 9% Debentures issued at par and redeemable at 10%
Premium)
Question 25. (Issue of Debentures at Par and Redeemable at Premium — Amount Payable in Installments)
Adarsh Cosmetics Ltd. issued 5,000; 9% Debentures of Rs 100 each on 1st April, 2018 redeemable at a premium of
8% after 10 years. According to the terms of prospectus Rs 40 is payable on application and balance on allotment
of debentures. Pass the necessary entries regarding issue of debentures.
Solution: JOURNAL OF ADARSH COSMETICS LTD.
Date Dr. (Rs) Cr. (Rs)

2018 Bank A/c 2,00,000
April 1 To Debentures Application 2,00,000
(application money received on 5,000 @ Rs 40 per debenture)
April 1 2,00,000
Debentures Application A/c
2,00,000
(Being the application money transferred to 9% Debentures Account)
April 1 Debentures Allotment A/c 3,00,000
To Premium on Redemption of Debentures A/c 40,000
(Being allotment of 9% Debentures at par and redeemable
At 8% premium)
Bank A/c 3,00,000
To Debentures Allotment A/c 3,00,000

Important Note:- Debentures when issued at premium or discount and amount is payable in instalments, it is
presumed that premium, is received or discount is allowed along with allotment, unless specified otherwise in the
question.
Question 26. KTR Ltd., issued 365, 9% Debentures of 1,000 each on 4th March, 2016. Pass necessary Journal
entries for the issue of debentures in the following situations:
(i) When debentures were issued at par, redeemable at a premium of 10%.

(ii) When debentures were issued at 6% discount, redeemable at 5% premium. (DELHI 2016)
Solution: (i) JOURNAL
Date Particulars Dr. (Rs) Cr. (Rs)

2016
March 4 Bank A/c 3,65,000
(Being the application and allotment money received on
365; 9% Debentures @ Rs 1,000 each)
March 4 3,65,000
Debentures Application and Allotment A/c
36,500
Loss on Issue of Debentures A/c
3,65,000
36,500
To Premium on Redemption of Debentures A/c
(Being 365; 9% Debentures allotted and premium payable on
Redemption @ 10% provided)
(ii) JOURNAL

2016
March 4 Bank A/c 3,43,100
(Being the application and allotment money received on
365; 9% Debentures @ Rs 1,000 per debenture less 6% Discount)
March 4 3,43,100
Debentures Application and Allotment A/c
40,150
Loss on Issue of Debentures A/c
3,65,000
18,250
To Premium on Redemption of Debentures A/c
(Being 365; 9% Debentures allotted at 6% Discount and premium payable
on redemption of debentures @ 5% provided)
Important Note
1. Debentures Account is always credited with the nominal (face) value of the debentures.
2. Premium on Redemption of Debentures Account is a personal account (under the traditional classification) and a
liability account (under the modern classification) because it is a liability of the company to pay in future, that is, at
the time of redemption. This account is shown in the Equity and Liabilities part of the Balance Sheet under the
head 'Non-current Liabilities' and sub-head 'Other Long-term Liabilities'.

3. The amount of loss on issue of debentures is debited to a separate account called Loss on Issue of Debentures
Account. It is a capital loss and is written off from Capital Reserve, if it has a balance. If Capital Reserve does not
exist, it is written off either from Securities Premium Reserve or from the Statement of Profit and Loss but not later
than the life (tenure) of the debentures.
Question 27. F Ltd. issues Rs 7,00,000; 10% Debentures of Rs 100 each at a premium of 5% redeemable at 110%
after 5 years. Journalise.
Solution: JOURNAL OF F LTD.

Bank A/c 7,35,000
(Being the debentures application money received
(Being the issue of 7,000; 10% Debentures of Rs 100 each 70,000
At a premium of 5% and redeemable at a premium of 10%)
Question 28. Pass Journal entries for issue of debentures in each of the following alternative cases:
(i) 10% Debenture of Rs 100 each issued at Rs 100, repayable at Rs 100.

(ii) 10% Debenture of Rs 100 each issued at Rs 95, repayable at Rs 100.
(iii) 10% Debenture of Rs 100 each issued at Rs 105, repayable at Rs 100.
(iv) 10% Debenture of Rs 100 each issued at Rs 100, repayable at Rs 105.
(v) 10% Debenture of Rs 100 each issued at Rs 95, repayable at Rs 105.
(vi) 10% Debenture of Rs 100 each issued at Rs 105, repayable at Rs 110.
Question 29. Pass Journal entries to record the following transactions:
(1) B Ltd. issues 30,000; 10% Debentures of Rs 100 each at a discount of 5 % to be repaid at par at the end of 5
years.
(2) C Ltd. issues 10% Debentures of Rs 100 each for the total nominal (face) value of Rs 40,00,000 at a premium
of 5% to be redeemed at par at the end of 5 years.
(3) D Ltd. issues Rs 50,00,000; 12% Debentures of Rs 100 each at par but redeemable at the end of 10 years at
105%.
(4) E Ltd. issues Rs 60,00,000; 12% Debentures of Rs 100 each at a discount of 5% repayable at a premium of
10% at the end of 5 years.
(5) F Ltd. issues Rs 70,00,000; 12% Debentures of Rs 100 each at a premium of 5% redeemable at 110% at the
end of 10 years.
ACCOUNTING OF INTEREST ON DEBENTURES

IMPORTANT POINTS:
1. Interest on debentures is a Charge against profit of the company and is payable whether company earns
profit or incurs loss.
2. Interest on debentures is calculated at a fixed rate of interest on the nominal (face) value.
3. Interest is not payable on debentures issued as collateral security.

4. Interest rate payable on debentures is prefixed on debentures. For example, if the rate of interest is 10%
p.a. then debentures will be titled '10% Debentures'.
5. The balance in Debentures' Interest Account is transferred to Statement of Profit and Loss (Finance Cost)
at the end of the year.
6. If the amount of interest accrued and due is not paid, it is known as Interest Accrued and Due or Interest
Outstanding.
7. If the date of payment of interest and accounting date are different, Interest Accrued and Not Due
Account is credited at the end of the year to maintain accounting records on accrual basis.
8. Interest Accrued (whether due or not) on Debentures is shown under the head 'Current Liabilities' and
sub-head 'Other Current Liabilities'.
Question 30. Times Sports Ltd. issued 15,000; 10% Debentures of Rs 100 each on 1st April, 2018. The issue was
fully subscribed. According to the terms of issue, interest is payable on half-yearly basil Pass Journal entries for
Interest on Debentures for the year ended 31st March, 2019 (Ignore TDS).
Question 31. On 1st April, 2015, K. K. Ltd. issued 500, 9% Debentures of Rs 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,
2016 assuming that interest is payable on 30th September and 31st March and the rate of tax deducted at source
is 10%. The company closes its books on 31st March every year. (DELHI 2017)
Question 32. BG Ltd. issued 2,000, 12% Debentures of Rs 100 each on 1st April, 2012. The issue was fully
subscribed. According to the terms of issue, Interest on the debenture is payable half-yearly on 30th September
and 31st March and the tax deducted at source is 10%.
Pass necessary Journal entries related to the debenture interest for the half-yearly ending 31st March, 2013 and
transfer of Interest on debentures of the year to the Statement of Profit and Loss.
Writing off Discount or Loss on Issue of Debentures

Discount or Loss on Issue of Debentures is a capital loss for the company, which should be written off at the
earliest but within the tenure of the debentures, i.e., it should be written off within the period the debentures are
to be redeemed. The company thus, may write off discount or loss on issue of debentures at any time before the
debentures are due for redemption.
Discount or Loss on Issue of Debentures written off is a part of Finance cost in Statement of Profit and Loss.
Discount or Loss on Issue of Debentures may be written off following any of the following options:
(i) It may be written off in the first year itself; or

(ii) It may be written off over the tenure (life) of the debentures.
(i) Discount or Loss may be written off from Capital Reserve and/or from Securities Premium Reserve and/or
from Statement of Profit and Loss.
Question 33. On 1st April, 2018, Amro Ltd. issued 10,000, 9% Debentures of Rs 100 each at a discount of 10%
redeemable after 5 years. The issue price is payable along with application. The debentures were subscribed. It
has a balance of Rs 1,75,000 in Capital Reserve. It decided to write off discount in year ended 31st March, 2019
from Capital Reserve.
Pass the Journal entries for issue of debentures and writing off the discount and prepare Discount on Issue of
Debentures Account.

Question 34. On 1st May, 2018, Solar Energy Ltd. issued 10,000, 9% Debentures of Rs 100 each at a discount of
10% redeemable at par after five years. All the debentures were subscribed. It has a balance of Rs 60,000 in Capital
Reserve and Rs 1,00,000 in Securities Premium Reserve which the company decided to use for writing off the loss.
It decided to write off the discount in the first year itself.
Pass the Journal entries for writing off the discount. Also prepare Discount on Issue of Debentures Account.
Question 35. Solar Power Ltd. on 1st April, 2018 issued 40,000, 8% Debentures of Rs 100 each at a discount of 5%
redeemable at a premium of 5% after 5 years payable along with application. The debentures were fully
subscribed. It had balance of 1,00,000 in Capital Reserve and 1,00,000 in Securities Premium Reserve. It decided to
write off discount in the first year.
Pass the Journal entries for issue of debentures and writing off the loss.
Question 36. (Fixed Installment Method). A Limited Company issued 20,000 debentures of Rs 100 each at a
discount of 5%, redeemable at the end of 5 years. Show the Discount on Issue of Debentures Account in the ledger
for the period.
Question 37. (Fluctuating Instalment Method). Moon Ltd. issued 9% Debentures of the nominal (face) value of
20,00,000 at a discount of 6%. The debentures were repayable by annual drawings of Rs 4,00,000 starting from the
end of first year of issue. Prepare Discount on Issue of Debentures Account.
Question.38 (Writing off Loss equally over life of the debentures). On 1st June, 2014, Goodluck Ltd. issued 50,000,
10% Debentures of Rs 100 each at par redeemable after five years at a premium of 10%. It was decided to write off
Loss on Issue of Debentures in five years equally beginning 31st March, 2015.
Pass the Journal entries for issue of debentures and writing off the loss and prepare Loss on Issue of Debentures
Account till it is completely written off.
Question 39. X Ltd. issued 20,000, 10% Debentures of Rs 100 each at 8% discount redeemable a Debentures are
redeemable by drawings method in the following manner:
Year end Face Value (Rs)

2 2,00,000
3 4,00,000
4 6,00,000
5 8,00,000
Prepare Discount on Issue Of Debentures Account.
Question 40.On 1st October, 2015, Nimrat Ltd. issued 20,000, 10% Debentures of Rs 100 at Rs 71 each redeemable
at par as follows:
On 31st March, 2017 3,000 Debentures;
On 31st March, 2020 8,000 Debentures.
How much discount will be written off each year by the company?
Question 41. (Debentures Discount, when First Redemption Due in Next Accounting Period).

X Ltd. issued 10,000, 10% Debentures of Rs 100 each at a discount of 6% on 1st July, 2015 repayable by five equal
annual instalments of Rs 2,00,000 each.
The company closes its accounts on 31st March, every year. Determine the amount of discount to be written off in
every accounting year if the debentures are to be redeemed equally every year beginning from 30th June, 2016.
Also prepare Discount on Issue of Debentures Account.
Question 42. On 1st April, 2017, Relaxo Ltd. purchased assets of Rs 50,00,000 and took over liabilities of Rs
9,00,000 of Greg Ltd. at an agreed value of Rs 38,00,000. It issued to the vendor, 10% Debentures of Rs 100 each at
5% discount, redeemable at par after 5 years, in full satisfaction of the purchase price.
On the same date, the company issued 5,000, 11% Debentures of Rs 100 each as a collateral security to a bank
who had advanced a loan of Rs 4,50,000 to it for a period of 3 years and also issued 50,000, 12% Debentures of Rs
100 each at par, redeemable after 3 years at 5% premium.
Additional Information:
Interest on debentures is paid half-yearly on 30th September and 31st March each year. Tax deducted at source
@ 20%. The Company had Rs 12,00,000 in its Securities Premium Reserve Account at the end of the year. It was
decided by the company to write off Loss on Issue of Debentures in the first year itself. (Ignore interest on bank
loan).
You are required to pass Journal entries in the books of Relaxo Ltd. for the year d 31st March, 2018.
Question 43. On 1st April, 2017, Infosys Ltd. issued 10,00,000, 10% Debentures of Rs 100 each at 8% discount
payable:
Rs 40 on application, and
The balance on allotment.
These debentures were to be redeemed at a premium of 5% after five years. All the debentures were subscribed.
Interest on debentures was to be paid half-yearly which was duly paid by the company.
You are required to:
(i) Pass Journal entries in the first year of debenture issue (including entries for debenture interest).
(ii) Prepare 10% Debentures Account for the year ending 31st March, 2018.
(iii) Prepare Loss on Issue of Debentures Account for the year ended 31 st March, 2018.
(iv) Prepare the Extract of Balance Sheet as at 31St March, 2018 showing Loss on Issue of Debentures.
Question 44. On 1st April, 2016, GSC Infotech Ltd. took over assets of Rs 4,50,000 and liabilities of Rs 60,000 of
GSMS Ltd. for the purchase consideration of Rs 4,40,000. It paid the purchase consideration by issuing 8%
Debentures of Rs 100 each at 10% premium. On the same date, it issued another 30,000, 8% Debentures of Rs 100
each at a discount of 10%, redeemable at a premium of 5% after 5 years. According to the terms of the issue Rs 30
is payable on application and the balance on the allotment of debentures.
You are required to:
(i) Pass Journal entries in the books of GSC Infotech Ltd. to record the above transactions and writing off
Loss on Issue of Debentures for two years. (Ignore interest on Debentures).
(ii) Prepare Loss on Issue of Debentures Account for the years ended 31st March, 2017 and 31st March,
2018.

Question 45. Pilot Pens Ltd. issued 5,000, 6% Debentures of Rs 100 each at a discount of 20%. It had balance in
Securities Premium Reserve of Rs 60 000. It decided to write off discount in the first year itself using Securities
Premium Reserve to the extent possible.
Prepare Note to Accounts to show how Discount on Issue of Debentures will be shown.

Issue of Debenture

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Issue of Debenture

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12th class issue of debentures CA/CMA Santosh kumar

A Debenture called Debenture Certificate is an acknowledgement of debt by the company. It is an agreement

Characteristics or Features of a Debenture

1. Debenture is a written document or certificate acknowledging debt by the company.

2. Mode and period of repayment of principal and interest is fixed.

4. It is considered as an external equity or long-term borrowings of the company.

5. It is normally secured by way of charge on the assets of the company.

6. Interest on Debentures is a charge against profit.

Difference between Debenture and Share

Basis Debenture Share

CONCEPTONLINECLASSES.COM 1 MOB. 9999631597, 9811455109, 9999358518, 8448322142

Basis Shareholder Debenture holder

1. From Security Point of View

2. From Redemption Point of View

3. From Records Point of View

CONCEPTONLINECLASSES.COM 2 MOB. 9999631597, 9811455109, 9999358518, 8448322142

4. From Priority Point of View

5. From the Point of View of Coupon Rate

6. From Convertibility Point of View

Debentures may be issued:

(i) For Cash;

(ii) For consideration other than Cash;

(iii) As Collateral Security.

CONCEPTONLINECLASSES.COM 3 MOB. 9999631597, 9811455109, 9999358518, 8448322142

Issue of Debentures for Cash

Debentures issued for cash may be issued at par, at premium or at discount.

(ii) Issue of Debentures at Premium

Note 2. Utilization of Securities Premium

(a) For issuing fully paid bonus shares;

(b) For writing off preliminary expenses;

(e) For purchase of own shares or securities of the company.

CONCEPTONLINECLASSES.COM 4 MOB. 9999631597, 9811455109, 9999358518, 8448322142

First Alternative—Rejecting Excess Applications.

Second Alternative—Partial or Pro rata Allotment.

Third Alternative—A Combination of the Above Two Alternatives.

(i) To refuse allotment to applicants for 1,200 debentures.

CONCEPTONLINECLASSES.COM 5 MOB. 9999631597, 9811455109, 9999358518, 8448322142

Solution: JOURNAL OF X LTD.

Date Particulars L.F Dr. (Rs) Cr. (Rs)

(b) If the amount is payable in installments:

Pass the necessary Journal entries.

CONCEPTONLINECLASSES.COM 6 MOB. 9999631597, 9811455109, 9999358518, 8448322142

Solution: In the Books of Elegant LTD

Date Particulars L.F. DR. (Rs) Cr. (Rs)

Solution: In the Books of Honey Ltd.

Date Particulars L.F. Dr. (Rs) Cr.(Rs)

Issue of Debentures for Consideration other than Cash

CONCEPTONLINECLASSES.COM 7 MOB. 9999631597, 9811455109, 9999358518, 8448322142

Incorporation Expenses A/c

To ...% Debentures A/c

(Being the debentures allotted to promoters)

(i) Issued a cheque for 10,00,000;

Question 17. Pass Journal entries for the following transactions:

CONCEPTONLINECLASSES.COM 8 MOB. 9999631597, 9811455109, 9999358518, 8448322142

Various Cases Of Issue Of Debentures From The Point Of View Of Redemption

Case Conditions of Issue Conditions of Redemption

Basis Premium on issue of Debentures Premium on Redemption of Debentures

2. Nature It is a reserve. It is a liability.

CONCEPTONLINECLASSES.COM 9 MOB. 9999631597, 9811455109, 9999358518, 8448322142

Solution: JOURNAL OF CHAND LTD.

Date Particulars L.F. Dr. (Rs) Cr. (Rs)

Solution: JOURNAL OF ANUSHREE LTD.

Date Particulars L.F. Dr. (Rs) Cr. (Rs)

Solution: Journal of Green Ltd.