Issue and Redemption of Debentures Important Questions for CBSE Class 12 Accountancy Introduction,Issue of Debentures and various cases from the point of view of Redemption

1.Meaning of Debenture It means a document of companies indebtedness issued under the seal of the company and containing a contract for the repayment of the principal sum at a specified date with interest at a fixed rate.

2.Definition of Debenture According to Section 2(30) of the Companies Act, 2013 ‘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.

3. Rond Bond is also an instrument of acknowledgement of debt. Bond is similar to debenture in terms of contents and texture. However, bonds can be issued without pre-determined rate of interest.

4.Issue of Debentures for Cash Debentures, like shares, issued for cash, may be issued
(i)at par (ii) at premium or (iii) at discount
(iv) Issue of Debentures at Par Debentures are said to be issued at par when the issue price and face value of the debentures is same.
(v)Issue of Debentures at a Premium Debentures are said to be issued at premium when the issue price is more than the face value.
(vi)Issue of Debentures at a Discount Debentures are said to be issued at discount when they are issued at a price below its nominal or face value.

5.Accounting Entries for Issue of Debentures for Cash
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6.Issue of Debentures for Consideration other than Cash When debentures are issued to vendors against purchase of assets or against purchase of business, it is termed as issue of debentures for consideration other than cash. In this case, consideration for issue of debentures is not cash but the assets or business. Debentures in this instance, can also be issued at par, premium or discount.
Following journal entries will be passed in this case:
(i)On Purchase of Assets or Business
(a)When assets are
purchased Sundry                                    Dr
Assets A/c To                                            Dr
Vendor’s A/c
(b)When business is purchased
Sundry Assets A/c                                            Dr
To Sundry Liabilities A/c To
Vendor’s A/c To
Capital Reserve A/c
(ii) On Issue of Debentures
(a)When debentures are issued at par
Vendor’s A/c                                                   Dr
To X% Debentures A/c
(b)When debentures are issued at premium
Vendor’s A/c                                                        Dr
To X% Debentures A/c To Securities Premium Reserve A/c
(c)When debentures are issued at discount
Vendor’s A/c                                                         Dr
Discount on Issue of Debentures A/c              Dr
To X% Debentures A/c
(i)Purchase consideration is the amount paid by the purchasing company for purchasing of assets/business from another enterprise.
(ii) If the purchase consideration is greater than the value of the net assets acquired, the difference is debited to goodwill account.
(iii) If the amount of purchase consideration is lower than the value of net assets acquired, the difference is credited to capital reserve account.
(iv)Either of the two i.e. capital reserve or goodwill will come.
(v)Number of Debentures to be Issued =Purchase Price of Assets/Issue Price of Debentures

7.Issue of Debentures as Collateral Security When a company takes a loan, it may provide primary security on its assets. However, the lending institution may insist on some more assets as secondary or collateral security. In such a situation, the company may issue debentures to the lender as secondary or collateral security, such an issue of debentures is known as ‘debentures issued as collateral security’.
If the company fails to repay the loan along with the interest and the primary security is insufficient to repay the loan, only in that case the lender is free to use the debentures as collateral security. The lender may either present such debentures for redemption or sell them in the open market.
Debentures issued as collateral security can be dealt in two ways
(i) First Method (Without Passing Journal Entry) In this method, no journal entry is passed in the books for issue of debentures as collateral security.
However, the fact of debentures issued as collateral security 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 (With Journal Entry) Debentures issued as collateral security may be recorded in the books of accounts.
Following journal entry will be passed for issue of debentures as collateral security:
Debenture Suspense A/c            Dr [This appears on assets side]
To X% Debentures A/c               [This appears on liabilities side]
When the loan is paid the above entry is cancelled by passing its reverse entry. In balance sheet, debentures issued as collateral security must be shown separately from other debentures.
Disclosure of Debenture Issued as Collateral Security in the Balance Sheet As debenture issued as collateral security is related to the loan of the company therefore it is shown in the note in which the loan secured by debenture is shown.
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8.Interest on Debentures Interest on debentures is calculated at a fixed rate on its face value and is usually payable half yearly. Debenture interest is a charge on profit and it is not an appropriation of profit. Hence, interest on debentures is payable even if the company suffers a loss, i.e. does not earn profit.
According to Income Tax Act 1961, a company paying interest on debentures is required to deduct income tax at the prescribed rate from the gross amount of debenture interest before any payment is made to debentureholders, it is called Tax Deducted at Source (TDS).
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9.Various Cases from the Point of View of Redemption Redemption means paying back the amout to debentureholders. As the issue can be made at par, at premium or at discount, the redemption of debentures can also be made at par, at premium or at discount.
Combining various conditions/ terms of issue and redemption of debentures, there may be the following possibilities
(i) When Debentures are Issued at Par and Redeemable at Par
(a)Bank A/c Dr
To Debenture Application and Allotment A/c
(b)Debenture Application and Allotment A/c Dr
To X % Debentures A/c
(ii) When Debentures are Issued at Discount and Redeemable at Par
(a)Bank A/c Dr
To Debenture Application and Allotment A/c
(b)Debenture Application and Allotment A/c Dr
Discount on Issue of Debentures A/c                   Dr
To X % Debentures A/c
(iii) When Debentures are Issued at Premium and Redeemable at Par
(a)Bank A/c Dr
To Debenture Application and Allotment A/c
(b)Debenture Application and Allotment A/c Dr
To X % Debentures A/c To Securities Premium Reserve A/c
(iv) When Debentures are Issued at Par and Redeemable at Premium
(a) Bank A/c          Dr
To Debenture Application and Allotment A/c
(b) Debenture Application and Allotment A/c           Dr
Loss on Issue of Debentures A/c                          Dr
To A % Debenture A/c
To Prefnium on Redemption of Debentures A/c
(v) When Debentures are Issued at Discount and Redeemable at Premium
(a)Bank A/c Dr
To Debenture Application and Allotment A/c
(b)Debenture Application and Allotment A/c Dr
Loss on Issue of Debentures A/c                          Dr
To A % Debentures A/c
To Premium on Redemption of Debentures A/c
(vi) When Debentures are Issued at Premium and Redeemable at Premium
(a)Bank A/c Dr
To Debenture Application and Allotment A/c
(b)Debenture Application and Allotment A/c Dr
Loss on Issue of Debentures A/c                         Dr
To A % Debentures A/c
To Securities Premium Reserve A/c
To Premium on Redemption of Debentures A/c

Previous Years’ Examination
1.Questions Mark
1.Give the meaning of ‘debenture’. (Delhi 2014)
Ans.It means a document showing a company’s indebtedness, issued under the seal of the company and containing a contract for the repayment of the principal sum at a specified date with interest at a fixed rate.

2.What is meant by a bond? (Compartment 2014)
Ans.Bond is an intrument of acknowledgement of debt, but it does not carry a pre-determined rate of interest.

3.Give the meaning of issue of debentures as collateral security. or
What is meant by issue of debentures as a collateral security? (All India 2014,2013)
Ans.When a company issues its own debentures to the lenders in addition to’some other asset already pledged or mortgaged, it is called issue of debentures as collateral security.

4.Pass the necessary journal entry when 10,000 debentures of Rs 100 each are issued as collateral security against a bank loan of 7 8,00,000.  (Delhi 2011)
Ans.
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5.SSS Ltd issued 25,000, 10% debentures of T 100 each. Give journal entry and the balance sheet in the following case when the debentures were issued as a collateral security to bank against a loan of Rs 20,00,000.  (Delhi 2011 c)
Ans.
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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 in the following case.When debentures are issued at a premium of 25% to the vendors for machinery purchased for Rs 6,25,000. (Delhi 2011 c)
Ans.
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7.SSS Ltd issued 25,000, 10% debentures of Rs 100 each. Give journal entries and the balance sheet in each of the following case when the debentures are issued to a supplier of machinery costing Rs 28,00,000 as his full and final payment. (Delhi 2011 c)
Ans.
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8.SSS Ltd issued 25,000, 10% debentures of? 100 each. Give journal entries and the balance sheet in the following case when the debentures were issued at a premium(Delhi 2011 c)

Ans.
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9.Why would an investor prefer to invest in the debentures of a company rather than in its share?(Delhi; All India; Foreign 2009)
Ans. An investor would prefer to invest in the debentures of a company rather than in its shares to ensure fixed and assured return as well as safety of his investments.

10.Why would an investor prefer to invest partly in shares and partly in the debentures Of a company? (All India; Delhi 2009)
Ans. An investor would prefer to invest partly in shares and partly in debentures to have high return as well as to reduce the risk.

11. Alfa Ltd issued 10,000, 9% debentures of Rs 100 each. Pass the necessary journal entries for issue of debentures in the following case.When debentures are issued at a premium of 25% to the vendors for the purchase of machinery worth Rs 1,25,000.  (Delhi 2009 c)
Ans.
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2 Marks Questions
12.Pass necessary journal entries for the following transaction-issued 60,000, 9% debentures of Rs 75 each at a premium of Rs 25 per debenture. (Delhi 2008)
Ans.
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13.Pass necessary journal entries in the books of Varun Ltd for the following transaction Issued 58,000, 9% debentures of Rs 1,000 each at a premium of 10%. (All India 2008)
Ans.
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14.Pass necessary journal entries in the books of Rachana Ltd for the following transaction Issued 1,875, 8% debentures of Rs 100 each at a premium of Rs 10 each redeemable after three years. (All India 2008)
Ans.
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3 Marks Questions
15. 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 entries related to the debenture interest for the half-yearly ending on 31st March, 2013 and transfer on interest on debentures to statement of profit and loss. (All India 2014)
Ans.
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16 . Sargam Ltd issued Rs 1,00,000, 6% debentures of Rs 10 each at a premium of Rs 2 per debenture on 1 st April, 2012. The issue was fully subscribed. Interest will be paid at the end of each financial year. Pass necessary journal entries for the year 2012-13.(Compartment 2014)
Ans.
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17.Fena Ltd issued Rs 7,00,000 12% debentures of Rs 100 each at a premium of 5% redeemable at a premium of 20%. Pass necessary journal entries at the time of issue Of (Compartment 2014)
Ans.
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18.Pass the necessary journal entries for the issue of debentures in the following cases
(i) Rs 40,000,15% debentures of Rs 100 each issued at par redeemable at 10% premium.
(ii) Rs 90,000, 15% debentures of Rs  100 each issued at a discount of 5% redeemable at premium of 10%.  (All India 2013)
Ans.
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19.Pass the necessary journal entries for the issue of debentures in the following cases
(i)Rs 40,000,12% debentures of Rs 100 each issued at a premium of 5% redeemable at par.
(ii)Rs 70,000,12% debentures of Rs 100 each issued at a premium of 5% redeemable at Rs 110.(Delhi 2013)
Ans.
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20.Pass the necessary journal entries for the issue of debentures in the following cases
(i)Rs 40,000,15% debentures of Rs 100 each issued at a discount of 10% redeemable at par.
(ii)Rs 80,000,15% debentures of Rs 100 each issued at a premium of 10% redeemable at a premium of 10%.     (All India 2013)
Ans.
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21.Pass the necessary journal entries for the issue of debentures in the following cases
(i) Rs  30,000,12% debentures of Rs 100 each issued at a discount of 5% redeemable at par.
(ii)Rs 60,000,12% debentures of Rs 100 each issued at a discount of 5% redeemable at Rs 105.(Delhi 2013)
Ans.
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22.Pass the necessary journal entries for issue of 1,000, 7% debentures of Rs 100 each in the following cases
(i) Issued at 5% premium, redeemable at a premium of 10%.
(ii) Issued at a discount of 5%, redeemable at par.   (Delhi 2013)
Ans.
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23.Pass the necessary journal entries for the issue of 7% debentures in the following cases
(i) 200 debentures of Rs 150 each issued at 10% premium redeemable at Rs 200 each.
(ii) 200 debentures of Rs 200 each issued at a discount of 10% redeemable at par(All India 2013).
Ans.
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24.Nav Lakshmi Ltd invited applications for issuing 3000, 12% debentures of Rs 100 each at a premium of Rs 50 per debenture. The 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.  (All India 2012)
Ans.
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25.What is meant by issue of debentures as collateral security? Explain with the help of an example. (Delhi 2010 c)
Example. Arihant Ltd secured a loan of Rs 1,60,000 from Punjab National Bank issuing 2,000; 9% debentures of Rs 100 each as collateral security. How will you show issue of debentures in the balance sheet?
Ans.
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26.X Ltd obtained a loan of Rs 4,00,000 from IDBI Bank. The company issued 5,000, 9% debentures of Rs 100 each as a collateral security for the same. Show how these items will be presented in the balance sheet of the company. (All India 2010)
Ans.
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27.What is meant by a debenture? State any two characteristics of a debenture.(All India 2010)
Ans. It means a document showing a company’s indebtedness, issued under the seal of the company and containing a contract for the repayment of the principal sum at a specified date with interest at a fixed rate.Two characteristics of debentures are as follows:
(i) It is a document acknowledging the debts of a company.
(ii) Mode and period of payment of principal and interest is fixed.

28.Give journal entries in each of the following cases, if the face value of a debenture is Rs 100.
(i) A debenture issued at Rs 110 repayable at Rs 100.
(ii) A debenture issued at Rs 100 repayable at Rs 105.
(iii)A debenture issued at Rs 105 repayable at Rs 105 (Delhi 2009)
Ans.
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29.Mohit Ltd took over assets of Rs 8,40,000 and liabilities of Rs 80,000 of Ram Ltd at an agreed value of Rs 7,20,000. Mohit Ltd paid to Ram Ltd by issue of 9% debentures of Rs 100 each at a premium of 20%.Pass necessary journal entries to record the above transactions in the bpoks of Mohit Ltd.  (Delhi 2009)
Ans.
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30.Maneesh Ltd took over assets of Rs 9,40,000 and liabilities of Rs 1,40,000 of Ram Ltd at an agreed value of Rs 7,80,000. Maneesh Ltd paid to Ram Ltd by issue of 9%Pass necessary journal entries to record the above transactions in the books of Maneesh Ltd.    (All India 2009)
Ans.
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31.Well Flo Ltd took over assets of Rs 9,80,000 and liabilities of Rs 40,000 of HDR Ltd at an agreed value of Rs 9,00,000. Well Flo Ltd paid to HDR Ltd by issue of 9% debentures of Rs 100 each at a premium of 20%.Pass necessary journal entries to record the above transactions in the books of Well Flo Ltd.(Foreign 2009)
Ans.
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32.Give journal entries in each of the following cases, if the face value of the debenture is Rs 100
(i)A debenture issued at Rs 105 repayable at Rs 100.
(ii)A debenture issued at Rs 100 repayable at Rs 105.
(iii)A debenture issued at Rs 110 repayable at Rs 105. (All India 2009)
Ans.
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33. Alfa Ltd issued 10,000, 9% debentures of Rs 100 each. Pass the necessary journal entries for issue of debentures in the following cases
(i)When debentures are issued at par and redeemable at par.
(ii)When debentures are issued at par and redeemable at premium of 10%.
(iii)When debentures are issued at a premium of Rs 250 each and are redeemable at par.(Delhi 2009 C)
Ans.
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34.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 in the following cases
(i)  When debentures are issued at 10% premium and redeemable at par.
(ii)  When debentures are issued at par and redeemable at 10% premium.
(iii) When debentures are issued at 5% premium and redeemable at 10% premium.(All India 2009)
Ans.
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35.X Ltd purchased machinery for Rs 5,50,000 from Y Ltd Rs 55,000 were paid by X Ltd in cash and the balance was paid by issue of 9% debentures of Rs  1,000 each at 10% premium redeemable after 3 years.
Pass journal entries in the books of the company.(Delhi 2008)
Ans.
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36.Y Ltd purchased machinery Rs 55,000 from Z Ltd 10% was paid by Y Ltd by accepting a bill of exchange in favour of Z Ltd and the balance was paid by issue of 9% debentures of Rs 100 each at par, redeemable after 5 years.Pass necessary journal entries in the books of Y Ltd.  (Delhi 2008)
Ans.
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37.Deepak Ltd purchased furniture Rs 2,20,000 from M/s Furniture Mart 50% of the amount was paid to Furniture Mart by accepting a bill of exchange and for the balance company issued 9% debentures of Rs 100 each at a premium of 10% in favour of Furniture Mart.
Pass necessary journal entries in the books of Deepak Ltd for above transactions.(All India 2008)
Ans.
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38.Somaly Ltd brought business of Romaly Ltd on 1st April, 2007 consisting of sundry assets of Rs 5,60,000 and creditors Rs 1,00,000. Rs 1,00,000 was paid in cash on 3rd April, 2007 and for the balance 6% debenture were issued at a premium of 20% on 5th April, 2007.
Pass necessary journal entries in the books of Somaly Ltd for the above mentioned transactions. (Delhi 2008 C)
Ans.
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39.Sharma Ltd bought the business of Verma Ltd on 1st April, 2007 consisting of sundry assets of Rs 2,80,000 and creditors Rs 50,000. Rs 50,000 was paid in cash on 3rd April, 2007 and for the balance 6% debentures were issued at a premium of 20% on 5th April, 2007. 
Pass necessary journal entries in the books of Sharma Ltd for the above mentioned transactions.(All India 2008)
Ans.
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40.Shruti Ltd bought the business of Shinkey Ltd on 1st April, 2007 consisting of sundry assets of RS 5,60,000 and creditors Rs 1,00,000, for a purchase consideration of Rs 5,00,000. Rs 1,00,000 was paid in cash on 3rd April, 2007 and for balance 6% debentures were issued at a premium of 25% on 5th April, 2007.
Pass necessary journal entries in the books of Shruti Ltd for the above mentioned transactions. (All India 2008)
Ans.
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