COC (CA- CPT) Issue of debenture SANTOSH KUMAR(CA/CMA)

ISSUE OF DEBENTURES
1. Introduction
A debenture is a bond issued by a company under its seal, acknowledging a debt and
containing provisions as regards repayment of the principal and interest.
Under section 71 (1) of the Companies Act 2013, a company may issue debentures with an
option to convert such debentures into shares, either wholly or partly at the time of
redemption. Provided that the issue of debentures with an option to convert such debentures
into shares, wholly or partly, shall be approved by a special resolution passed at a duly
convened general meeting. Section 71 (2) further provides that no company can issue any
debentures which carry any voting rights.
Section 71 (4) provides that where debentures are issued by a company under this section, the
company shall create a debenture redemption reserve account out of the profits of the
company available for payment of dividend and the amount credited to such account shall not
be utilized by the company for any purpose other than the redemption of debentures.

Issue of debentures for consideration other than cash

Question1 X Ltd purchased a machine costing Rs 99,000 payable by issue of 10% debentures of Rs 100
each at
Case 1. Par
Case 2. Premium of 10%
Case 3. Discount of 10%

Question2 Blue Prints Limited Purchases building worth Rs. 1,50,000, plant and machinery worth Rs.
1,40,000 and furniture for Rs. 10,000 from Wadhwa and Company and took over liabilities of Rs. 20,000 for
a purchase consideration Rs. 3,15,000. Blue Prints Limited paid the purchase consideration by issuing 12%
debentures of Rs. 100 each at a premium of 5%. Pass the necessary journal entries.

Question3 Assume in the previous question purchase consideration was Rs 2,70,000 and payment was
made by issue of 12% debentures of Rs 100 each at a discount of 10%.

Question4 (Issue of debentures to vendors with part payment in cash)

G.W.K Ltd. purchased assets worth Rs. 4,50,000 and took over liabilities of Rs. 35,000 of K.L.M. and Co. for a
purchase consideration of Rs. 4,00,000. The purchase price was paid by issue of Rs. 100, 12% debentures at a
premium of 10% The debentures of GWK Ltd. are quoted in the market at Rs. 140 at the relevant time. You are
required to give journal entries to record the above transactions in the books of the purchasing company.

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 pledge some assets as a security against the said loan. But the lending institution
may insist on some more assets as collateral 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. 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. 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 is not repaid on the due date.
TREATMENT OF ISSUE OF DEBENTURES AS COLLATERAL SECURITY
Question5 A Ltd borrowed loan of Rs 10,00,000 from HDFC Bank. Company pledged machinery worth Rs
40 lacs. In addition to machine company issued 40,000,12% debentures of Rs 100 each to the bank as
collateral security. Show its treatment in the book of A Ltd.

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COC (CA- CPT) Issue of debenture SANTOSH KUMAR(CA/CMA)

Issue of debentures for cash

Question6 (Terms of issue and redemption)
Give journal entries for the following:
(a) Issue of Rs. 1,00,000 – 9% Debentures at par and redeemable at par.
(b) Issue of Rs, 1,00,000 – 9% debentures at premium of 5% but redeemable at par
(c) Issue of Rs. 1,00,000 – 9% Debentures at a discount of 10%, repayable at par.
(d) Issue of Rs. 1,00,000 – 9% Debentures at par but repayable at a premium of 5%.
(e) Issue of Rs. 1,00,000 – 9% Debentures at discount of 5% but redeemable at premium of 5%.

Question7 Pass journal entries in year 1 in the case of the issue of debentures by ABC Co. Ltd.: Issued
Rs. 1,00,000,11% debentures at 95 per cent redeemable at the end of 10 years (i) at 102 per cent, and (ii)
at 98 per cent.
[C.A. (Inter) May 2000]
DEBENTURE INTEREST
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Question8 On 1 Jan 2010, X Ltd issued 12% debentures of Rs 2,00,000 at a premium of 15%. Interest is
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payable half yearly on 30 June and 31 December each year. Make journal entries assuming that
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accounts are closed on 31 December each year. Assume that interest due on 31 December has not yet
been paid.

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Question9 On 1 Jan 2010, X Ltd issued 12% debentures of Rs 2,00,000 at a discount of 10%. Interest is
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payable half yearly on 31 march and 30 September each year. Make journal entries assuming that
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accounts are closed on 31 December each year.

Question10 Babli Auto Limited had Rs. 10,00,000 -12% Debentures on which the interest is payable on 30
September and 31 March. Show the necessary journal entries relating to debenture interest for the year
ending on 31 March 2004 assuming that all payments to debenture holders and Government were made
in time. Tax deducted at source is 10%.

DISCOUNT/ LOSS ON ISSUE OF DEBENTURES

Question11 A company issued 9% Debentures of the face value of Rs. 2,00,000 at a discount of 6%. The
debentures were repayable by annual drawings of Rs. 40,000. How would you deal with the discount on
issue of debentures? Show the discount account in company's ledger for the duration of debentures.

Question12 A company issued 9% Debentures of the face value of Rs. 2,00,000 at a discount of 6%. The
debentures were repayable as follow
Year end amount repaid
2 40,000
4 1,20,000
5 40,000
How would you deal with the discount on issue of debentures? Show the discount account in company's
ledger for the duration of debentures.

Question13 Rashi Ltd. issued 12%Debentures at 94% for Rs. 1,00,000 on 1 July 2003 repayable by five
equal annual installments of Rs. 20,000 each. The company closes its accounts on 31 March every year.
Indicate the amount of discount to the written off every accounting year assuming that the company
decides to write off the debenture discount during the life of the debentures.

Question14 Indira Ltd. issued 10,000 debentures of Rs. 100 each at a discount of 6%. The expenses on
issue amounted to Rs. 35,000: The debentures have to be redeemed at the rate of Rs. 1,00,000 each year
commencing with the end of the fifth year. How much discount and expenses should be written off each
year.

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