Debentures – CA Foundation Accounts Study Material

Debentures – CA Foundation Accounts Study Material is designed strictly as per the latest syllabus and exam pattern.

Debentures – CA Foundation Accounts Study Material

Question 1.
Meaning of debentures.
Answer:
Meaning of debentures:
→ Debenture means “an instrument in writing issued by a company under its common seal, acknowledging its indebtedness for a certain sum of money and undertaking to repay it on or after a fixed future date.”

→ According to sec. 2(12) of the Companies Act, 1956 (now Section 2(30) of Companies Act, 2013) “Debenture include debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.”

Characteristic features of a debenture:

  • It is issued by the company and is in the form of a certificate of indebtedness.
  • It usually specifies the date of redemption. It also provides for the re-payment of principal and interest at specified date or dates.
  • It generally creates a charge on the undertaking or undertakings of the company.
  • Usually the words pari passu appear in the terms and conditions of debentures.
  • This means that all the debentures of a particular class will receive the money proportionately in case the company is unable to discharge the whole obligation.

Question 2.
Discount on debentures.
Answer:
Discount on debentures:

  • The discount is a capital loss and it should be written off as early as possible.
  • Even whole amount can be written off in the year of issue itself against share premium or any other capital profit.
  • Otherwise Debenture Discount can be written off over the lifetime of debentures as follows (applying matching principle):
  • If the Debentures are redeemable at the end of a period, then the Discount will be written off equally over that period.

Debentures – CA Foundation Accounts Study Material

Question 3.
Issue of Debentures as Collateral Security.
Answer:
Issue of Debentures as Collateral Security:
Issue of Debentures as Collateral Security means issue of debentures as an additional security, i.e., in addition to the prime security. It is to be realised only when the prime security fails to pay the amount of the loan. For example, when a company takes a loan of ₹ 10,00,000 from a bank, it may have to issue debentures as collateral security in addition to the principal security.

Debentures issued as a collateral security can be dealt with in the book in two ways:
(i) First Method:
Journal entry is not passed in the books of account at the time of issue of debentures as collateral security. However, it is disclosed by way of information below debentures, which are shown as Long-term Borrowings under Non-Current Liabilities or as Short-term Borrowings under Current Liabilities.

(ii) Second Method:
Debentures issued as collateral security may be recorded in the books of account. The Journal entry passed is :
Debentures Suspense A/c          Dr.         [This appears on the assets side]
To …. % Debentures A/c                           [This appears on the liabilities side]
When the loan is paid the above entry is cancelled by means of a reverse entry.

Question 4.
Premium on issue of debentures and Premium on redemption of debentures.
Answer:
Premium on issue of debentures and Premium on redemption of debentures:

Premium on Issue of Debentures Premium on Redemption of Debentures
1. It is a capital profit and used in writing off the capital loss. It is a capital loss.
2. The balance of premium on issue of Debentures Account, (Securities Premium) is shown on the liabilities side, under the head ‘Shareholders’ Funds’ and sub-head ‘Reserves and Surplus’. It is a liability and appears under the head ‘Non-Current Liabilities’ and sub-head ‘Long-term Borrowing’ till the redemption of debentures.

Question 5.
Company issued 1000,9% debentures @ ₹ 100 each, in following manner
Application ₹ 40
Allotment ₹ 30-10
First call ₹ 20
Second and final call ₹ 10
Mr. R holder of 20 debentures failed to pay the 1st and 2nd call money. Company decided to charge ₹ 35 as Interest on calls-in-arrear. Give necessary journal entries in the books of the company.
Solution:
Journal Entries
Debentures – CA Foundation Accounts Study Material 1

Question 6.
A Company purchased some plant costing ₹ 4,30,000 at an agreed price of ₹ 4,00,000. Company decided to issue its 896 debentures of ₹ 100 each against purchased consideration. Give necessary accounting entries in the following
cases:-
(a) If debenture were issued @ ₹ 100 per debenture
(b) If debenture were issued @ ₹ 80 per debenture
(c) If debenture were issued @ ₹ 125 per debenture
Solution:
Journal Entries
Debentures – CA Foundation Accounts Study Material 2

Working Note:
Debentures – CA Foundation Accounts Study Material 3

Question 7.
A Company took a bank loan of ₹ 5,00,000 from SBI and issued its 6000, 10% debentures of ₹ 100 each as collateral security to loan. Give necessary accounting treatment.
Solution :
Ist method:
When debenture issued as collateral security are not shown as issued debentures in the balance sheet of the company.

(i) Bank a/c                                                                                            Dr.
To Bank loan a/c
(Being bank loan taken on issue of 6000, 10% debentures of ₹ 100 each as collateral security)
5,00,000  

5,00,000

(ii) No entry required for issuing debentures.

Balance sheet (Extract) as at ………….
Debentures – CA Foundation Accounts Study Material 4

Note:
(1) Long term borrowings:

Bank Loan from SBI

(on collateral security of 6,000, 10% debentures of ₹ 100 each).

5,00,000

Debentures – CA Foundation Accounts Study Material

Question 8.
A Company issued 1000, 12% debentures of ₹ 100 each on 1st Jan 2016 at a premium of 10%. Interest was given/payable on 30th June and 31st December, every year subject to 10% TDS. Give necessary journal entries for the year 2016.
Solution:
Journal Entries
Debentures – CA Foundation Accounts Study Material 5

Question 9.
ABC company issued 1000, 9% debentures of ₹ 100 each at a discount of 5% on 1st Jan, 2011. These debentures were to be redeemed after 5 years. Show necessary journal entries at the time of issue of debentures. Also prepare discount on issue of 9% debentures a/c.
Solution :
At the time of issue:
Journal Entries
Debentures – CA Foundation Accounts Study Material 6
Discount on issue of 9% debenture a/c
Debentures – CA Foundation Accounts Study Material 7
Balance sheet as at 31st December 2011

Assets Note No.
Non-current assets other non-current assets 3,000
Current assets other current assets 1,000

Working Note:
(1) \(\frac{₹ 5,000}{5 \text { years }}\) = ₹ 1,000/-

Debentures – CA Foundation Accounts Study Material

Question 10.
Suppose company decided to redeem its debentures in the following manner

  • At the end of the year 2011 ₹ 20,000
  • At the end of the year 2012 ₹ 30,000
  • At the end of the year 2013 ₹ 10,000
  • At the end of the year 2014 ₹ 20,000
  • At the end of the year 2015 ₹ 20,000

Calculate the amount to be written off at the end of every year.
Debentures – CA Foundation Accounts Study Material 8
At the beginning of the year or before redemption

Question 11.
Pure Ltd. issues 1,00,000 12% Debentures of ₹ 10 each at ₹ 9.40 on 1st January, 2018. Under the terms of issue, the Debentures are redeemable at the end of 5 years from the date of issue.
Calculate the amount of discount to be written-off in each of the 5 years.
Solution:
Total amount of Discount = 1,00,000 x 0.60 = ₹ 60,000

At the end of Year Amount of outstanding debentures Ratio Amount of discount to be written off
1st 10,00,000 1/5 60,000 = 12000
2nd 10,00,000 1/5 60,000 = 12000
3rd 10,00,000 1/5 60,000 = 12000
4th 10,00,000 1/5 60,000 = 12000
5th 10,00,000 1/5 60,000 = 12000

Question 12.
On 1st January 2018, Ankit Ltd. issued 10% debentures of the face value of ₹ 20,00,000 at 10% discount. Debenture interest after deducting tax at source @10% was payable on 30th June and 31st December every year. All the debentures were to be redeemed after the expiry of five year period at 5% premium.
Pass necessary journal entries for the accounting year 2018.
Solution:
Journal Entries
Debentures – CA Foundation Accounts Study Material 9

True or False

Question 1.
Debenture Redemption Premium Account and Discount on issue of debentures Account are Nominal Accounts.
Answer:
False: Debenture Redemption Premium Account is a Personal Account but Discount on issue of Debentures Account is a Nominal Account.

Debentures – CA Foundation Accounts Study Material

Question 2.
Now Debentures can be issued at Par/Premium but not at discount.
Answer:
False: Debentures can be issued at Par/Premium/discount since there are no restrictions on issue of debentures at discount.

Question 3.
Like Shares a Company can issue debentures with voting rights.
Answer:
False: A Company cannot issue debentures with voting rights.

Leave a Comment

Your email address will not be published.