Accounting for Debentures Class 12 Accountancy

Important Questions Answers at the Bottom

Ch-8 Accounting for Debenture

1. Raghav Limited purchased a running business from Krishna traders for a sum of

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₹15,00,000 payable ₹3,00,000 by cheque and for the balance issued 9% debentures of
₹100 each at par. The assets and liabilities consisted of the following: Plant and

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Machinery ₹4, 00,000 Building ₹6, 00,000 Stock ₹5,00,000 Debtors ₹3, 00,000
Creditors ₹2,00,000.Calculate amount of capital reserve
1. ₹200000
2. ₹100000
3. None of these
4. ₹150000
2. How would you show Debentures in the Balance sheet i.e. under which heading?
1. Share Capital
2. Reserve and Surplus
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3. Non-current Liabilities
4. Current Liabilities
3. The following are the types of debentures except
1. Perpetual Debentures
2. Equity Debentures
3. Convertible debentures
4. Redeemable debentures
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4. Vinod Limited redeem its 500 debentures of 100 each by purchasing these debentures
at ₹94 from the open market for cancellation. Calculate the profit on cancellation of
own debentures.
1. 3,000
2. 5000
3. 2500
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4. 2000
5. When does a company issue debentures as collateral security
1. When lender does not gives additional security
2. When lender demands additional security
3. When lender does not demands additional security
4. When lender gives additional security
6. Beta Ltd issued 5,000, 9% debentures of Rs.500 each. Pass the necessary journal
entries for the issue of debentures in the books of the company When debentures are
issued at a premium of 25% to the vendors for machinery purchased for Rs. 6,25,000.
7. What is meant by the purchase of own debentures?

8. State the provisions of Companies Act, 2013 for the creation of debenture redemption
reserve.

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 9. What is meant by convertible debentures?

10. State in brief, the SEBI Guidelines regarding Debenture Redemption Reserve.

11. Animesh Ltd. issued 1,000, 12 % Debenture of 100 each in the following manner:

1. For cash at par at Rs. 50,000 nominal value.

2. For creditors of Rs. 45,000 against purchase of machinery at nominal value of
Rs. 35,000.
3. To S.B.I. bank against a loan of Rs. 10,000 as collateral security at nominal value

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of Rs. 15,000.
Pass Journal entries.

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12. Tata Ltd issued 5,000, 10% debentures of Rs 100 each on 1st April, 2012. The issue
was fully subscribed. According to the terms of issue, interest on debentures is payable
half-yearly on 30th September and 31st March and tax deducted at source is 10%.
Pass the necessary journal entries related to the debenture interest for the half-yearly
ending on 31st March, 2013 and transfer of interest on debentures to statement of
profit and loss.

13. On 1st April, 2013, the following balances appeared in the books of Blue and Green
Ltd.
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12% debentures (Redeemable on 31st August, 2015) (Rs.) 20,00,000
Debenture Redemption Reserve (Rs.) 2,00,000
The company met the requirements of the Companies Act, 2013 regarding Debenture
Redemption Reserve and Debenture Redemption Investments and redeemed the
debentures.
Ignoring interest on investments pass necessary journal entries for the above
transactions in the books of company.
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14. On 1st April, 2015 KK 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.
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15. X Ltd. Had Rs.12,00,000, 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. Lakh as collateral security.

Pass journal entries and show how these transactions will appear in Balance Sheet of
the company.

Ch-8 Accounting for Debenture

Answer

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 1.
b. ₹100000, Explanation: Amount of Capital Reserve = 1,00,000

Plant and machinery 4,00,000

Building 6,00,000

Stock 5,00,000

Debtors 3,00,000

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To Creditors 2,00,000

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To Krishna Traders 15,00,000

To Capital Reserve 1,00,000 (Bal. fig.)

c. Non-current Liabilities, Explanation: Debentures issued are shown under the

heading of Non-current liabilities and sub-heading Long Term Borrowings.
b. Equity Debentures, Explanation: There are different types of debentures
except Equity Debentures.
1. Redeemable Debentures
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2. Perpetual Debentures
3. Convertible Debentures
4. Coupon Rate Debentures
a. 3,000, Explanation: Profit on cancellation of own debentures will be ₹3,000.
Profit per debentures is = 100 – 94 = 6 500 Debentures×6 = 3,000
b. When lender demands additional security, Explanation: A company issue its
debentures as collateral security when lender demands for the additional
security in addition to the prime or principal security.
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 2. Books of Beta Ltd.JOURNAL

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

Machinery A/c Dr 6,25,000

To Vendor’s A/c 6,25,000

(Being machinery purchased)

Vendor’s A/c Dr 6,25,000

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To 9% Debentures A/c (1,000××500) 5,00,000

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To Securities Premium Reserve A/c 1,25,000
(1,000××125)
(Being 9%debentures issued to vendor at
premium of 25%)

Working Note :
1. Number of Debentures Issued = Amount Due to Vendor Issue Price Per
Debenture =6,25,000625(500+125)=1,000= Amount Due to Vendor Issue Price Per
Debenture =6,25,000625(500+125)=1,000debentures
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2. Debentures are said to have been issued at premium when Debentures are issued
more than the nominal (face) value of debenture.

3. Premium on Issue of Debentures is capital receipt and is credited to Securities

Premium Reserve Account.

4. Amount of Premium = 500*25% = Rs. 125

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3. According to the Companies Act, 2013, a company can purchase its own debentures
from the open Market if it is authorised by its Articles of Association. This is known as
purchase of own debentures. It can done with motive for investment or for
cancellation.
4. As per Section 71(4) of the Companies Act, 2013 and companies (share capital and
debentures) rules, every company issuing debentures is required to create debenture
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redemption reserve of an amount that is atleast equal to 25% of the nominal (face)
value of debentures that are redeemable by it. If the company have an amount in their
profit than it can create it by 100% and if it is financial institutions than it will be nil.
5. The holders of such debentures are given an option to exchanging the amount of their
debentures with equity shares or other securities after a specified period.
6. As per SEBI Guidelines, an amount equal to 25% of face value of the debentures are to
be redeemed, must be transferred to DRR before the redemption begins.

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 7. Books of Animesh Ltd.Journal

Date Particulars L.F. Dr. Cr.

(Rs.) (Rs.)

Debentures application and allotment a/c Dr. 50,000 …..

To 12% Debentures a/c ….. 50,000

(Being 12% Debentures issued at par) ….. …..

Bank A/c Dr. 50,000 …..

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To Debentures application and allotment a/c ….. 50,000

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(Being money received on 500 debentures @ ….. …..
Rs. 100)

Machinery a/c Dr. 45,000 …..

To Vendor’s a/c ….. 45,000

(Being machinery purchased) ….. …..

Vendor a/c Dr. 45,000 …..

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To 12% Debentures a/c ….. 35,000

To Securities Premium a/c ….. 10,000

(Being Debentures issued to vendors at a ….. …..

premium)

Bank a/c Dr. 10,000 …..

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To Bank Loan a/c ….. 10,000

(Being Loan borrowed) ….. …..

Debentures suspense a/c Dr. 15,000 …..

To 12% Debentures a/c ….. 15,000

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(Being Debentures issued as collateral ….. …..

security)

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 8. Books of Tata Ltd.JOURNAL

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

2012

30-
Sep

Debenture Interest A/c (5,00,000×10100×612) Dr 25,000

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(5,00,000×10100×612)

To Income Tax Payable A/c (25,000 x 10%) 2,500

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To Debenture Holders A/c 22,500

(Being interest made due for half yearly ending

30th September)

30- Debenture Holders A/c Dr 22,500

Sep

To Bank A/c 22,500

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(Being interest paid to debenture holders)

30- Income Tax Payable A/c Dr 2,500

Sep

To Bank A/c 2,500

(Being payments of tax on interest on

debentures)
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2013

31- Debenture Interest A/c (5,00,000×10100×612) Dr 25,000

Mar (5,00,000×10100×612)

To Income Tax Payable A/c (25,000×10%) 2,500

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To Debentureholders’ A/c 22,500

(Being interest made due for half yearly ending

31st March)

31- Debentureholders’ A/c Dr 22,500

Mar

To Bank A/c 22,500

(Being interest paid to debentureholders’)

31- Income Tax Payable A/c Dr 2,500

Mar

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

To Bank A/c 2,500

(Being payment of tax or interest on debentures)

31- Statement of Profit and Loss Dr 50,000

Mar

To Interest on Debentures A/c 50,000

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(Being interest on debentures account transferred
to statement of profit and loss)

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NOTES :

T.D.S. payable is deducted before interest is paid to debenture and deposited to

government account.
Interest on Debenture is transferred to Statement of Profit and Loss at the end of
year.
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 9. Books of Blue Green Ltd.JOURNAL

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

2015 Surplus i.e., Balance In Statement of Dr 3,00,000

Mar Profit and Loss
31

To Debenture Redemption Reserve 3,00,000

A/c (W.N. 1)

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(Being the amount equal to 25% of
debentures transferred to D.R.R.)

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Apr Debenture Redemption Investment A/c Dr 3,00,000
30 (20,00,000××15%)

To Bank A/c 3,00,000

(Being the amount equal to 15% of

value of debentures to be redeemed
invested)

Aug Bank A/c Dr 3,00,000

31
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To Debenture Redemption Investment 3,00,000
A/c

(Being the investment encashed)

Aug 12% Debentures A/c Dr 20,00,000

31
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To Debentureholders’ A/c 20,00,000

(Being the amount due on redemption)

Aug Debentureholders’ A/c Dr 20,00,000

31

To Bank A/c 20,00,000

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(Being the payment made to

debentureholders)

2016 Debenture Redemption Reserve A/c 5,00,000

Mar
31

To General Reserve A/c 5,00,000

(Being the transfer of balance of

D.R.R. to General Reserve)

Working Note:

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 1. Amount Transferred to Debenture Redemption Reserve :

Required Debenture Redemption Reserve (25% of 20,00,000) = 5,00,000

(-) Existing Balance = (2,00,000)

Rs. 3,00,000

2. Debenture Redemption Investment should be redeemed by the company by 31st

March of next year and the amount should be invested on or before 30th April of the

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current year.

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3. The amount invested or deposited should not at any time fall below 15% of the
amount of debentures maturing by 31st March of the current year.

10. In the books of K Ltd.Journal

Date Particulars L/F Debit Credit

Amount Amount

(Rs) (Rs)

2015
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Bank A/c Dr 2,10,000 2,50,000
1 Discount on issue of debentures A/c Dr 40,000
Apr
To 9% Debentures A/c

(Being issued 500 9% debentures of Rs

500 each at a discount of 4%)

2015 Bank A/c Dr 20,250 22,500

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30 Tax Deducted at source A/c Dr 2,250
Sep
To 9% Debenture Interest A/c

(Being interest on debentures paid and

TDS deducted)
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2016 Bank A/c Dr 20,250 22,500

31 Tax Deducted at source A/c Dr 2,250
Mar
To 9% Debenture Interest A/c

(Being interest on debentures paid and

TDS deducted)

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 11. FIRST METHOD. NO ENTRY IS PASSED FOR DEBENTURESJournal

Date Particulars L.F. Debit Credit

(Rs.) (Rs.)

2012 Bank A/c Dr. 4,00,000 …

1st To Canara Bank’s loan A/c
April
(Loan has taken from the bank against …. 4,00,000
collateral security of debentures worth Rs.5
Lakhs)

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Balance Sheet of X Ltd.

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As at 1st April, 2012

Particulars Notes No. (Rs.)

Equity And Liabilities …

3. Non-Current Liabilities …

(a) Long-term Borrowing 1 16,00,000

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Notes to Balance Sheet …

Note No. 1 (Rs.)

Long-Term Borrowings: …

11% Debentures 12,00,000

Bank Loan (Against Collateral Security of Debentures Rs. 5,00,000) 4,00,000

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.Total 16,00,000

Second Method. Entry for issue of Debentures is passed.

Journal
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Date Particulars L.F. Debit Credit

(Rs.) (Rs.)

2012, Bank A/c Dr. 4,00,000 …

April 1

To Canara Bank’s Loan A/c … 4,00,000

(Loan Taken from bank) … …

Debentures Suspense A/c Dr. 5,00,000 …

To 11% Debentures A/c … 5,00,000

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 (Issue of Rs. 5,00,000 Debentures issued … …
as collateral Securities)

Presentation of Debentures and Bank Loan will remain same as explained Balance
Sheet Under 1st Method, however, presentation of information in note will differ.

Balance Sheet of X Ltd.

As at 31st March, 2013 (ASSUMED)

Particulars Notes No. (Rs.)

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1. Equity and Liabilities …

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2. Non-Current Liabilities …

(a) Long-term Borrowings 1 16,00,000

IInd Method

Notes to Balance Sheet

Particulars (Rs.) (Rs.)

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Note No. 1 … …

Other Long-term Borrowings: … …

11% Debentures (12,00,000 + 5,00,000) 17,00,000 …

Less: Debentures Suspense A/c 5,00,000 12,00,000

Bank Loan (Against Collateral Security of Debentures of … 4,00,000

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Rs. 5,00,000)

Total … 16,00,000

*When the loan is paid to the lender, the above entry is cancelled by passing a reverse
entry.
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* If the company fails to pay the loan along with interest in time,the lender may
recover the dues from the sale of primary security or by seeking redemption of
collateral security, i.e., debentures. When the loan is paid back, the debentures issued
as collateral security are returned to the company.These debentures do not carry any
right till the time loan is being repaid along with due interest and the lender has not
demanded the loan to be repaid.

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