Chapter -2

ISSUE AND REDEMPTION OF DEBENTURES

A debenture is an instrument acknowledging the debt made by company.

A debenture shows the amount of borrowing by company. A debenture

holder is treated as equal to a creditor. Each debenture contains the amount,
date of borrowing, date of repayment, the rate of interest, and other terms and
conditions.

Accounting procedure on debentures:-

Model 1:- The accounting procedure for issue of Debentures is Similar to the
procedure adopted in issue of shares. Debentures are also issued at par, at
premium and at discount.

EX-1 TO EX-3
Model 1:- Issue of Debentures at par; at Premium and at Discount

Application stage:

PARTICULARS LF DR CREDIT
A. Bank A/c Dr XXXX
To debenture application Account XXXX
[Being the application money
received]

b. Debenture application A/c Dr XXXX

To Debentures A/c XXXX
[Being the debenture application
money transferred to Debentures
account]

. Allotment stage:

PARTICULARS LF DR CREDIT

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A. Debentures allotment A/c Dr XXXX
To Debentures A/c XXXX
[Being the allotment due if issued at
par]

b. Debentures allotment A/c Dr XXXX

Discount on issue of debentures A/c XXXX
Dr
To Debentures A/c
[Being the allotment money due,
discount on issue of debentures]

c. . Bank A/c Dr
To Debentures A/c
To Debenture premium A/c
[Being the allotment money received
along with premium]

Calls stage:

PARTICULARS LF DR CREDIT
A. Debenture call A/c Dr XXXX
To Debentures A/c XXXX
[Being the call money due]

b. Bank A/c Dr To XXXX

Debenture call A/c XXXX
[Being the call money received]

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Model 2:- Accounting Treatment for issuing Debentures in one single lot/ for
Lump sum: EXERCISE NO:-4

PARTICULARS LF DR CREDIT
A. Bank A/c Dr XXXX
To Debentures A/c XXXX
[Being Debentures amount received
in lump sum]

MODEL 3: - Accounting treatment of Other aspects of Debentures :-

Debentures carry a specific % of Interest. It is debited to Profit and Loss A/c

at the time of preparing final accounts.

PARTICULARS LF DR CREDIT
A. Interest on Debentures A/c Dr XXXX
To bank A/c
XXXX
[Being the Interest on Debentures]

EXERCSIE 4-16

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Model 4. When Debentures are Issued at discount, the discount on issue of
debentures is written off each year to the profit and loss A/c by the following
entry: - [Ex-4 and Ex-16]

PARTICULARS LF DR CREDIT
A. Profit and Loss A/c Dr XXXX
To Discount on the issue of
Debentures A/c XXXX

[Being the discount on the issue of

Debentures written off to the Profit
and Loss A/c ]

Model 5. Debentures issued as consideration other than cash: [EXERCSIE 5-9]

PARTICULARS LF DR CREDIT
A. Assets A/c Dr XXXX
(Goodwill ) A/c Dr XXXX
To Liabilities A/c XXXX
To vendors A/c XXXX
To (Capital reserve) A/c
[Being the Purchase of Assets and XXXX
Liabilities taken, Goodwill/Capital
Reserve arisen]

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b. Vendor A/c Dr XXXX
To Debentures A/c XXXX
[Being the issue of Debentures to
vendors for the purchase of Assets]

Model 6. Terms and conditions of issue and Redemption: - [Ex 10 - Ex 16]

Case 1:- Debentures issued at PAR, and Redeemable at PAR:-

A) Entry for issue :-

PARTICULARS LF DR CREDIT
Bank A/c Dr XXXX
To Debentures A/c XXXX
[Being Debentures issued at par )

B) Entry for Redemption: -

PARTICULARS LF DR CREDIT
Debentures A/c Dr XXXX
To Bank A/c XXXX
[Being the redemption of
Debentures}

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Case 2:- Debentures issued at PREMIUM and Redeemable at PAR:-

A) Entry for issue :-

PARTICULARS LF DR CREDIT
Bank A/c Dr XXXX
To Debentures A/c XXXX
To Debenture Premium A/c
[Being the Debentures issued at XXXX
premium ]

PARTICULARS LF DR CREDIT
B) Entry for Redemption :
Debentures A/c XXXX
To bank A/c XXXX
[ Being the redemption of Debentures
at par]

Case 3:- Debentures issued at DISCOUNT, redeemable at PAR.

A) Entry for issue:-

PARTICULARS LF DR CREDIT
Bank A/c Dr XXXX
Discount on Debentures A/c Dr
To Debentures A/c XXXX

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 [Being the debenture issued at discount ] XXXX

b. Debentures A/c Dr XXXX

To Bank A/c XXXX
[Being the redemption of Debentures at Par]

Case 4:- Debentures issued at PAR and redeemable at PREMIUM:

PARTICULARS LF DR CREDIT
Bank A/c Dr XXXX
Loss on issue of Debenture Dr
To Debentures A/c XXXX
To Premium on Redemption of XXXX
Debenture A/c
[Being the issue of Debenture at Par
and redeemable at premium] XXXX

b. Redemption entry :-
Debentures A/c Dr XXXX
Premium on Redemption of
Debentures A/c XXXX
To Bank A/c XXXX
[Being the redemption of Debentures
at premium ]

Case 5:- Issue of Debentures at DISCOUNT and redeemable at PREMIUM.

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 A. At the Time of Issue:-

PARTICULARS LF DEBIT CREDIT

Bank A/c Dr XXXX
Loss on Issue of Debenture A/c Dr
(Discount +Premium on Redemption ) XXXX
To Debentures A/c
To Premium on redemption of Debentures
A/c. XXXX
{Being the issue of Debentures at discount
and redeemable at premium]
XXXX

B. At the time of Redemption :-

Particulars Lf Debit Credit

Debentures A/c Dr
Premium on Redemption of Debentures XXXX
A/c Dr
To Bank XXXX
[Being the Redemption of Debentures at XXXX
premium ]

EXERCISES
EXERCISE 1:- A Limited, Company issued 1,000 Debenture bonds of Rs.100/- each at a
premium of 10% repayable at the end of the 10th year. The
debenture bonds were payable 25% on application 35% on allotment
including premium and the balance on first and final call. All the
money was received by the company in due course. Pass Journal
entries in the books of the company?

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EXERCSIE 2:- A Limited Company issued 2,000 Debentures of Rs 100 each repayable at
par at the end of the 10TH year payable 25% on application, 25%, on
allotment and the balance on the first and final call. All the money
was received by the company. Pass entries in the books of the
company?
EXERCISE 3:- Lohiya Limited, issued 5,000 Debentures of Rs 100 each at a premium of
10% payable at the end of the 5th year. Amount Payable was 20% on
application, 40% on allotment including premium and the balance at
the first and final call. All the money was received by the company.
Pass entries?
EXERCISE 4:- Naveen Limited, issued Rs .1, 00,000/- 10% Debentures on 01.01.1994
at a discount of 5% repayable in annual-drawings of Rs.25, 000
commencing from 31st Dec.following. The company-year ends on 31St
Dec. Journalize the above transactions for 4 years ending 31st Dec.
assuming that the company decides to write off debenture discount
A/c during the life of the debentures?
EXERCISE 5:- A Company purchased assets of Rs.3, 50,000 and took over the Liabilities of
Rs.30, 000/- at a purchase price of Rs.3, 30,000 by the issue of
Debentures at a premium of 10%, the face value of the Debentures
being Rs 100 each. Pass entries?
EXERCISE 6:- A Limited Company took over the assets of Rs. 3, 60,000 and
liabilities of Rs 35,000. It agreed to pay the purchase price of 3,
34,950 by issuing Debentures of Rs.100 each at a premium of 10%
and at 5% by cash. Pass entries?
EXERCISSE 7:- A Limited Company took over assets of Rs 3, 00,000 and liabilities of
Rs 10,000 for an agreed purchase consideration of 2, 70,000 to be
satisfied by the issue of 15% Debentures of Rs 100 each at a
premium of 20% show the journal entries? [Apr 2009]
EXERCISE 8:- A Limited Company, purchased assets of Rs.3,80,000 and took over the
liabilities of 30,000 at an agreed value of 3,33,000 The Company
issued Debentures at a discount of 10% in full satisfaction of the
purchase price Pass entries?

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EXERCISE 9:- A Limited Company purchased assets of Rs.2, 60,000 and liabilities of
50,000 for a sum of 2, 00,000 .The purchase price is satisfied by the
issue of 9% Debentures of Rs 100 each at par. Journalize the
transactions?
EXERCISE 10:- X Limited, issues 2,000 -10% Debentures of Rs 100 each. Give the journal
entries in each of the following cases.
A. Debentures are issued and redeemable at par.
B. Debentures issued at a discount of 5% but redeemable at Par.
C. Debentures issued at a premium of 10% but redeemable at Par.
D. Debentures issued at par but redeemable at a premium of 10%
E. Debentures issued at a discount of 5% but redeemable at a premium of 10%
F. Debentures issued at a premium of 5% but redeemable at a premium of 10%

EXERCISE 11:- Journalize the following:-

A) P Limited, issues 5,000 -10% Debentures of Rs 100 each at a discount of 5%
redeemable at the end of 5 years at par.
B) Q Limited issues 5,000 – 11% Debentures of Rs 100 each at par, redeemable
at the end of 5 years at a premium of 5%
C) R Limited issues 5,000 -12% Debentures of 100 each at a premium of 5%,
redeemable at the end of 5 years at a premium of 5%.
D) Z Limited issues 5,000-15% Debentures of 100 Rs each at a discount of 5%,
redeemable at the end of 5 years at discount of 5%. [Apr 2008]
EXERCISE 12:- A Limited issued 10,000 Debentures of Rs 100 each on the terms
and conditions given below.
A. Issued at Rs.100/- and repayable at 100/-
B. Issued at Rs.90/- and repayable at Rs.100/-
C. Issued at Rs.110/- and repayable at Rs.100/-
D. Issued at Rs 100/-and repayable at Rs 110/-
E. Issued at Rs.90 /- and repayable at Rs .110
Write Journal entries in the above cases [Apr 2011]

EXERCISE 13:- Write Entries in the following cases:

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 A) A Company issues Rs 40,000 – 6% Debentures of Rs 100 each
redeemable at Par.
B) A Company issues 4000-6% Debentures of Rs.100 each at a discount of
10 % redeemable at par.
C) A Company issued Rs 4, 00,000 -6% Debentures of Rs 1,000 each at a
premium of 5% redeemable at Par.
D) A Company issued Rs. 40,000/ -6% Debentures at par redeemable at
premium of 10%
E) A Company issued Rs 50,000 Debentures at a discount of 5% and
redeemable at 5% premium.

EXERCISE 14:- Pass entries at the time of the issue and redemption of
Debentures

A) Debenture issued at Rs.95/- repayable at Rs 100

B) Debenture issued at Rs.95 repayable at Rs 105
C) Debentures issued at Rs.100 repayable at Rs 105
D) Debentures issued at Rs.105 repayable at Rs 100

EXERCISE 15:- Pass entries in the following cases:-

A) A Company issued Rs 90,000 -13% Debentures at a discount of 10%

redeemable at Par.
B) A company issued Rs 90,000 -13% Debentures at par redeemable at 10%
premium.
C) A company issued Rs 90,000 -13% Debentures at a discount 10 %
redeemable at 5% premium.

EXERCISE 16:- P Limited issued 4,000 -14% Debentures of 100 each at a

discount of 10% repayable in 4 years by annual drawings:-

A) Give journal entries for the date of issue and

B) Show the 14% Debentures A/c, Discount on issue of Debentures and
C) Debentures interest A/c for all the years? [Mar 2012]

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 Model 7:- Redemption out of profits /Sinking fund /Debenture
Redemption fund method:-
[D.R.F=Debenture Redemption Fund
D.R.I =Debenture Redemption fund investment
D.R.F is also called Sinking Fund
D.R.I is also called Sinking Fund Investments.]

EXERCISE 17-EXERCISE 20

Year of issue Subsequent years Year of redemption

Profit and loss App. A/c Dr (i)Bank A/c Dr (i) Bank A/c Dr
To D.R.F A/c To D.R.F A/c To D.R.F A/c
[Being the appropriation based on [Being the interest on [Being the interest on
annuity table ] D.R.Investment] D.R.Investment]

D.R.I A/c Dr (iii) Profit and Loss (ii) Profit and Loss App. A/c
To Bank A/c Appropriation A/c Dr Dr
[Being D.R.I Purchased] To D.R.F Account To D.R.F A/c
[Being the [Being the appropriation
appropriation based based on annuity table]
on annuity table]
(iii) D.R.I A/c Dr Sale of D.R.I in market :-
Xxxx Bank A/c Dr
To Bank A/c To D.R.I A/c
[Being D.R.I.Purchased] [Being the Sale of D.R.
(Interest+ Annual App.) Investments]

Notes: Entry (i) (ii) and Profit on the sale of

(iii) are passed in all Investments
the subsequent years. D.R.I .A/c Dr
To D.R.F A/c
Loss on sale of Investments

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 D.R.F A/c Dr
To D.R.I. A/c
Debentures A/c Dr
To Bank A/c
[Being the amount paid on
debentures]
D.R.F A/c Dr
To General Reserve A/c
[Being the balance in DRF A/c
closed by transfer to General
Reserve ]

EXERCISE 17:- On 01.01.2002 Metal Products Limited, issued Rs 1,

00,000 Debentures Redeemable after 5 years. The Company created a
reserve fund for the purpose of redemption. This fund is used to purchase
Tax Free Investments carrying 5% interest. The annual interest Accrued is
also used for investment. The investments were sold at a loss of Rs 300 at
the end of the fifth year. The Sinking fund table shows that the value of Rs.1
Stands at 0.18097.You are required to show the Debenture redemption fund
A/c and Debenture redemption fund investments A/c for all the five years?

EXERCISE 18:- On 01.01.2005 A Limited Company issued 10,000 -14%

Debentures of Rs.10 each redeemable after 3 years. It created a sinking fund for
redemption. The Sinking fund tables show that 0.33100 becomes Rs. 1 at 10%
after three years. The investments carried 10% interest. The Investments were
made in multiples of Rs 10 Prepare the ledger accounts for 3 Years?

EXERCISE 19:- On 01.04.2004 Gayatri Traders issued Debentures of Rs 6, 00,000

at par redeemable after 5 years at a premium of 10%. The Company created
Debenture redemption fund for the purpose of redemption. The amount in
debenture redemption fund was invested in the bonds of another company
carrying 5% interest. The D.R.F Tables show that 0.1809748 becomes Rs 1 after 5

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years at 5% interest. Assuming that the investments realized their book value,
show the ledger accounts. The investments were made in multiples of Rs 100?

EXERCISE 20:- XY Limited, issued 2,000 debentures of Rs 100 each on

01.01.1981, which are redeemable at 5% premium at the end of 4 years. A
Sinking fund was created for redemption. Show the necessary Journal entries
assuming that the annually invested amount earns 4% interest P.A. Interest table
shows that 0.235490 becomes Rs 1 at the end of 4 years at 4% interest P.A.
Investments realized Rs.1, 54,400 at the end of 4th year? [BBM OCT 2012]

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