Corporate Accounting - Notes

School of Distance Education
MODULE – 1
1.1 ACCOUNTING FOR SHARE CAPITAL
A company organisation grew out of the limitations and drawbacks of earlier forms of
organisations – Individual proprietorship, Partnership, etc. A company represents the third state
in the evolution of business organisations. The increased need of modern industry and commerce
could not be fulfilled by the earlier organisations. Thus most of the large scale industries or
business establishments are organised as Joint Stock Company.
DEFINITION
A company is a voluntary and autonomous association of certain persons with capital divided
in to numerous transferable shares formed to carry out a particular purpose in common. It is
created by following a process of law. It is an artificial person; it is invisible and intangible.
According to Section 3(1) (i) of the companies Act 1956 defines a company as “company formed
and registered under this act or an existing company”.
CHARACTERISTICS OF A COMPANY
a. Separate legal entity – It is a distinct legal person existing independent of its members.
b. Limited Liability – Liability of the members is limited to the extent of the face value of
shares held by them.
c. Separation of ownership and management – Though a company is an artificial person yet
it acts through human beings who are called directors of the company. There is a divorce
between ownership and management.
d. Capital Contribution – Capital is contributed by persons called shareholders in the name
of shares and the share capital can be increased or reduced only in accordance with the
provisions of the Indian Companies Act.
e. Distribution of Profit – Profit is distributed according to the provisions of the articles by
the directors.
f. Transferability of shares – The shares of a company are freely transferrable except in case
of a private limited company. Transferability of shares has given perpetual succession to a
company.
g. Common seal – A company being artificial personality, it acts through natural persons,
called directors and its distinct existence is evidenced by a common seal.
KINDS OF COMPANIES
ON THE BASIS OF INCORPORATION
a. Chartered company- Companies which are incorporated under a special charter by Royal
Charter which lays down objectives, rights, duties etc. Of the companies are known as
Chartered companies. For example, East India Company
b. Statutory company - Companies which are brought into existence and governed by special
Acts of the legislature are known as statutory companies. For example, RBI, LIC, UTI etc.
c. Registered company - Companies which are formed and registered under the Companies
Act 1956 or registered under the previous companies Act.
ON THE BASIS OF LIABILITY
a. Limited company- A company in which the liability of each member is limited to the
extent of face value of shares held by him such company is called companies limited by
shares.
b. Guarantee company- Where the liability of the members of a company is limited by
Memorandum to a fixed amount which the members undertake to contribute to the assets of
the company in case of its winding up, the company is called Guarantee Company.
c. Unlimited company- Unlimited companies are companies not having any limit on the
liability of its members. In the event of winding up, the members are liable to the full extent
of their fortunes to meet the obligations of the company.
Corporate Accounting Page 5

ON THE BAIS OF PUBLIC INVESTMENT
a. Private company- A private company means a company which by its articles a)
Restricts the transfer of its shares b) Number of members to two hundred c)
Prohibits any invitation to the public for any shares d) Prohibits acceptance of
deposits from the persons.
b. Public company- Public companies are those companies which are not private
companies. All the above four restrictions are not imposed on such companies.
COMPANIES DEEMED TO BE PUBLIC

A private company will be deemed to be a public company in the circumstances given below:-
1. If 25% or more of its paid-up capital is held by one or more bodies corporate, or
2. If it holds 25% of the paid up capital of a public company, or
3. If its average annual turnover is not less than rupees ten crores subject to change in
ceiling, or
4. If it invites deposits from the public or renews deposits from the public other than its
members, directors or their relatives.
SHARE CAPITAL OF THE COMPANY

Capital is essential for a trading concern. A company collects capital by inviting the public to
buy its shares through a document known as prospectus. The capital is usually divided into
different units with definite value called shares. Section 2(46) of the companies act defines a
share as “a share in the share capital of the company and includes stock except where a
distinction between stock and share is expressed or implied”. A share is not a sum of money but
is an interest measured by a sum of money, and made up of various rights contained in the
contract. A share is a fractional part of the share capital which forms the basis of ownership in a
company.
Share capital refers to the amount of capital raised or to be raised by a company by the issue
of shares. The main divisions of share capital are as follows:-
1. Authorised capital - The amount of capital with which the company intends to be
registered is called Nominal or Registered or Authorised capital. It is the maximum
amount which the company is authorised to raise by way of public subscription.
2. Issued capital – The part of the authorised capital which is offered to the public for
subscription is called issued capital.
3. Subscribed capital – It is that part of the issued share capital which is actually taken up
by the public. If the whole issued share capital is not subscribed for by the public, the
balance of the issued share capital is called unsubscribed share capital.
4. Called up capital – It is that portion of the subscribed capital which has been called up
by the company. The difference between subscribed capital and called up capital is
known as uncalled capital
5. Paid up capital – It represents the amount received against the calls made on the shares.
The unpaid balance of the called up capital is known as calls in arrears.
6. Reserve capital – Under Sec 99, Reserve capital is the amount of uncalled capital which
the company has, by special resolution, decided not to call up except in the event of
winding up of the company; reserve capital is available only to the creditors at the time of
winding up of the company. Whereas Capital reserve is the capital profit earned by the
business, not by the normal trading concerns. Capital reserve cannot be distributed as
dividend to share holders. Eg. Share premium, profit prior to incorporation, forfeited
shares a/c.etc.

TYPES OF SHARES
The shares which can be issued by a company are of two types - Preference shares and
Equity shares.
1. PREFERNCE SHARES
The preference shares are those which have some preferential rights over the other types of
shares. A share to be preference share must have two preferential rights:
a. They have a preferential right to be paid dividend during the life time of the company.
b. They have a preferential right to the return of capital when the Company goes in to
liquidation.
The preference shares are of the following types:-
1. Cumulative and Non - cumulative Preference shares – Cumulative preference shares are
those its dividend accumulated until it is paid off. The arrears of one year are carried
forward to next year. If dividend not to accumulate and carried forward to next year are
called non-cumulative preference shares. Preference shares are always cumulative unless
otherwise stated.
2. Convertible and Non-Convertible Preference shares - The holders of the shares have a
right to get their preference shares converted into equity shares within a certain period is
called Convertible preference shares. If the preference shares cannot be converted in to
equity shares then it is said to be Non- convertible preference shares.
3. Participating and Non-participating preference shares - In addition to the fixed
dividend, balance of profit (after meeting equity dividend) shared by some preference
shares. Such shares are participating preference shares. The holders of the preference shares
are entitled to a fixed dividend and not in the surplus profits; they are called Non-
participating preference shares.
4. Redeemable and Irredeemable preference shares – If preference shares are returned after
a specified period of time to share holders are called redeemable preference shares. If
preference shares are not redeemed (it is continue till the winding up) known as
irredeemable preference shares.
2. EQUITY SHARES
Equity shares, with reference to any company limited by shares, are those which are not
preference shares [(Sec. 85(2)]. Equity shares are also known as Ordinary shares. Equity share
holders will get dividend and repayment of capital after meeting the claims of preference share
holders. There will be no fixed rate of dividend to be paid to the equity shareholders and its rate
may vary from year to year. The rate of dividend is determined by the directors of the company.
SWEAT EQUITY SHARE

Sweat equity share means the equity shares issued by a company at a discount or for
consideration other than cash for providing know-how or making available rights in the nature of
intellectual property rights.
STOCK
As per Section 94(1) (c) of the Companies Act, 1956, when all the shares of a company have
been fully paid up, they may be converted in to stock if so authorised by the articles of
association. It is another type of unit of share capital of a company. Share capital of a company
cannot be offered directly in the form of stock. Stock is a consolidation of fully paid shares. It is
a set of shares put together in a bundle and stock has no definite value.

Difference between shares and stock

Shares Stock
Shares may be fully or partly paid up. For the purpose of conversion into stock, shares
must be fully paid up.
It is not possible to transfer fractions of Stock may be split up into fractional parts and
a share. transferred as such.
Shares are distinctively numbered. Stock bears no such number.
It is originally issued by a company. Stock cannot be issued originally.
It may be always registered. It may or may not registered.
Shares are individual units of the capital Stocks are aggregate of fully paid up shares.
of a company.
ISSUE OF SHARES
When a public limited company gets the certificate of incorporation, it issues a
prospectus or a statement in lieu of prospectus inviting public to subscribe to the share capital of
the company. That is the invitation is made through a document called prospectus. The
prospectus is simply an invitation to an offer but is not an offer. If one is interested, application,
which is prescribed and printed by the company, is filled, signed and sent to the company along
with the prescribed application amount. These applications are considered by the Board of
directors who take decision as to their acceptance or rejection, within a reasonable time. If the
share applications are accepted by the company then shares are allotted and thereby, there arises
a contract between the company and the applicant. That is, allotment results in a binding contract
between the company and the prospective shareholders. The allotment must be communicated to
the person making the application so that it is legally complete. From the accounting point of
view, the following may be noted:
1. Every prospectus must mention the number of shares issued i.e. offered to the public.
The excess applications received over the issued shares are to be rejected;
2. Prospectus must mention the minimum subscription. No allotment shall be made unless the
amount stated in the prospectus as minimum subscription has been subscribed and the sum
payable on application for the amount so stated has been paid in cash and received by the
company. The minimum amount of share capital is determined to cover 1) the purchase price of
any property purchased or to be purchased, 2) preliminary expenses, 3) money borrowed for the
foregoing matters and 4) working. If this minimum capital is not applied for, share cannot be
allotted. As per the SEBI’s guidelines the minimum application money to be paid shall not be
less than 25% of the issue price. Statutory minimum application money as per Section 69(3) of
the Companies Act is 5% of the nominal value of shares. Hence, 25% of the issue price cannot
be less than 5% of the nominal value of shares.
3. Each application for shares must be accompanied by the prescribed application money. The
application money must not be less than 5% of the nominal value of each share.
4. All application money must be kept intact in a scheduled bank and should not be used unless a
certificate of commencement of business from the registrar has been obtained.
5. If the allotment takes place, a letter of allotment is sent to the allottees. If no allotment of share is
made, a letter of regret together with application money is sent to the applicants.
6. The directors make the allotment of shares on the basis of the application. The directors reserve
the right to allot less number of shares applied for or to reject an application at their discretion.
On allotment, the allottee has to pay a part of the amount of the face value of the shares called
allotment money. After the receipt of the allotment money, the company issues Share Certificate.
7. The balance due on shares may be called by the company in instalments. Each such instalment is
called a Call and the amount payable is known as call money, between two calls there must be a
gap of one month.
8. Share capital Suspense Account – Application money received on shares is transferred to share
capital account on allotment of shares. But if the Balance sheet of the company is to be prepared
after receipt of the application money but before allotment of shares, it will not be proper to
show the application money as share capital because shares have not yet been allotted. In such a
case, the application money received may be shown as share capital suspense account under the
head share capital till the shares is allotted.
BOOK BUILDING
Book building is a process of fixing price for an issue of securities on a feedback from
potential investors based upon their perception about a company. It involves selling an issue
step-wise to investors at an acceptable price with the help of a few intermediaries/merchant
bankers who are called book runners. Under book building process, the issue price is not
determined in advance, it is determined by the offer of potential investors.
EMPLOYEES STOCK OPTION
Employees stock option means the option given to the whole time directors, officers or
employees of a company, which gives such directors , officers, or employees the benefit or right
to purchase or subscribe at a future date , the securities offered by the company at a pre-
determined price.
ISSUE OF SHARES AT DIFFERENT VALUES
Shares may be issued at a price which is termed as: (i) at par; (ii) at a premium; and (iii) at a
discount
(i) At par – if the price required to be paid to the company for the share is equal to the nominal
value of that share, it is called issue at par, e.g., a Rs. 10 equity share issued at a price of Rs.10
(ii) At a premium – if the price required to be paid to the company for the share is more than the
nominal value of that share, it is called at a premium , e.g., a Rs. 10 equity share issued at a
price of Rs.15
(iii) At a discount – if the price required to be paid to the company for the share is less than the
nominal value of that share, it is called at a discount, e.g., a Rs.10 equity share issued at a price
of Rs.8
Accounting Treatment of Issue of Shares
Specimen Journal Entries
1. On receipt of application money:
Bank A/c Dr
To Share Application A/c
2. On transferring of application money to capital account
Share application A/c Dr
To Share Capital A/c
3. On allotment money due:
Share allotment A/c Dr
To Share capital A/c
4. On receipt of allotment money:
Bank A/c Dr
To Share allotment A/c
5. On making first call due:
Share first call A/c Dr
6. On receipt of first call money:
Bank A/c Dr
To Share first call A/c
7. On making second call due:
Share second call A/c Dr
8. On receipt of second call money:
Bank A/c Dr
To Share second call A/c
9. On making final call due:
Share final call A/c Dr
10. On receipt of final call money:
Bank A/c Dr
To Share final call A/c
Illustration - 1
The authorised capital of a limited company is Rs. 2,00,000 divided in to 20,000 equity
shares of Rs.10 each. Out of these, 15,000 shares have been issued to the public, payable Rs. 2
on application, Rs. 4 on allotment, Rs. 2 on first call and Rs. 2 on second and final call. Pass
necessary journal entries and prepare Balance sheet. All amounts have been duly received.
Solution
Journal entries
Bank A/c Dr 30,000

To Equity Share Application A/c 30,000
(Receipt of Application money on 15000 shares @ Rs. 2/
share ) 30,000
Equity Share application A/c Dr 30,000
To Equity Share Capital A/c
(Transfer of application money to share capital) 60,000
Equity Share allotment A/c Dr 60,000
To Equity Share capital A/c
(Allotment money due on 15,000 shares @ Rs.4 per share) 60000
Bank A/c Dr 60,000
To Equity Share allotment A/c
(Allotment money received) 30,000
Equity Share first call A/c Dr 30,000
(First call money due on 15,000 shares @ Rs.2 per share ) 30,000
Bank A/c Dr 30,000
To Equity Share first call A/c
(First call money received) 30,000
Equity Share final call A/c Dr 30,000
(Final call money due on 15,000 shares @ Rs.2 per share ) 30,000
Bank A/c Dr 30,000
To Share final call A/c
(Final call money received)

Liabilities Assets
Authorised Capital Cash at Bank 1,50,000
20,000 Equity shares of Rs. 10 2,00,000
each
Issued, Subscribed, called up and

1,50,000
paid up capital
15,000 Equity shares of Rs. 10 1,50,000 1,50,000
each fully called up

Calls in Arrears
It often happens that some share holders fails to pay the allotment / call money due by
them to the company. The total of such unpaid amount is known as calls in arrears. Though it is
an outstanding asset, it is not shown on the asset side of the balance sheet; instead it is shown as
a deduction from called up capital on the liability side of the balance sheet. Where a company
maintains calls in arrears account, the journal entry is as follows:
Calls in Arrears A/c Dr
To Share allotment /Particular Call A/c
On calls in arrears, if there is a provision in the articles of the company, directors may
charge interest @ 5% for the period between the day fixed for payment of allotment or call
money and the date of actual payment.
Calls in Advance
Some of the shareholders may pay the balance amount on their shares along with
allotment money or call money though not demanded by the company. Such amounts received in
advance by the company from its shareholders are known as Calls in advance.
Accounting entries
1. When calls in advance is to be credited to calls in advance account –
Bank A/c Dr
To Calls in Advance
2. When Call money becomes due, the amount of calls in advance will be adjusted against
the amount due
Calls in Advance A/c Dr
To Particular Call A/c
A call in advance is a liability to the company. According to the provisions of articles of
the company, interest not exceeding 6% per annum is paid to shareholders for the period from
the date of receipt of calls in advance up to the date when calls is due for payment.
Issue of shares for purchase of Assets

If the shares have been allotted to any person or firm from whom the company has
purchased any asset, the following entry will be passed:
Asset A/c Dr
This fact should also be disclosed in the Balance sheet while showing the issued,
subscribed and paid up capital.

Issue of shares to promoters
Promoters are persons firms or companies who promote a company. They are paid
remuneration for their services. If the remuneration is paid in the form of shares, the following
journal entry will be passed:
Goodwill A/c Dr
Goodwill account is debited and should be shown on the asset side of the Balance sheet.
Under Subscription, Over Subscription and Pro-rata Allotment
The company does not receive application equal to the number of shares offered for
subscription, there may be two situations:
(i) Under subscription
(ii) Over subscription
(i) Under Subscription
The issue is said to have been under subscribed when the company receives applications
for less number of shares than offered to the public for subscription. In this case company is not
to face any problem regarding allotment since every applicant will be allotted all the shares
applied for. But the company can proceed with allotment provided the subscription for shares is
at least equal to the minimum required number of shares termed as minimum subscription.
(ii) Over Subscription
When shares are issued by well managed and financially strong companies to the public, they
often receive more number of application than that they offer through prospectus and intend to
allot. This is known as over subscription. In this situation, it becomes necessary to refuse
allotment to some applicants. For this the directors make a decision about allotment of shares on
a proportionate or an equitable basis to the applicants. It is called pro-rata allotment. In this case
no application is fully accepted or fully rejected. Each applicant gets allotment for certain
number of shares on the basis of number of shares applied for, number of shares that the
company intends to allot and total number of applications received. In case of over subscription,
company has the following options:
Option I
(i) Rejection of Excess Applications a n d Money Returned
The company may reject the applications for shares in excess of the shares offered for issue
and a letter of rejection is sent to such applicants. In this case the application money received
from these applicants is refunded to them in full. The journal entry made is as follows:
Share Application A/c Dr
To Bank A/c
(Application money on … shares refunded to the applicants)
(ii) Excess application money adjusted towards sums due on allotment.
Journal entry made is:
Shares Application A/c Dr
To Share Allotment A/c
(Excess application money adjusted towards sums due on allotment)
If the application money received on partially accepted applications is more than the amount
required for adjustment towards allotment money, the excess money is refunded. However, if
the Articles of the company so authorise, the directors may retain the excess money as calls in
advance to be adjusted against the call/calls falling due later on and the following entry is made:
To Call-in-advance A/c
(The adjustment of excess share application money retained as call-in- advance in respect of ...
shares).

Option I I
Partial acceptance o f Applications.
In some cases the company accepts the applications for subscription partially. It means that
the company does not allot the full number of shares applied for. For example if an applicant
has applied for 5000 shares and is allotted only 2000 shares, then the applications is said to
have been partially accepted. The company may evolve some formula of accepting
applications partially or making proportionate allotment/ the Prorata allotment which means that the
applicants are allotted shares proportionately. In such a case the company adjusts the excess
share money received on application towards share allotment money due on partially accepted
applications. The journal entry recording the adjustment of application money towards share
allotment money is as under:
To Share Allotment A/c
(Share application money transferred to Share Allotment Account in respect of ... shares).
Illustration - 2
The Full Health Care Ltd has offered to public for subscription 20000 shares of Rs 100 each
payable as Rs 30 per share on application, Rs 30 per share on allotment and the balance on call.
Applications were received for 30000 shares. Applications for 5000 shares were rejected all together
and application money was returned. Remaining applicants were allotted the offered shares. Their
excess application money was adjusted towards some due on allotment. Calls were made and
duly received. Make journal entries in the books of the company.
Solution
Journal entries Full Health Care Ltd
Bank A/c Dr 900000
To Share Application A/c 900000
(Application money received for

30000 shares @ Rs 30 per share)
Share Application A/c Dr 900000
To Share Capital A/c 600000
To Bank A/c 150000
To Share Allotment A/c 150000

(Application money of 20000 shares
transferred to share capital A/c on their
allotment. That of 5000 shares returned
and of 5000 shares adjusted towards sum
due on allotment.
Share Allotment A/c Dr 600000
To Share Capital A/c… 600000
(Allotment money due)

Bank A/c Dr
450000
To Share Allotment A/c. 450000
(Allotment money received)
Share First and Final call A/c. Dr

800000
(Call money due)
Bank A/c Dr
800000
To Share First and Final call A/c. 800000
(Call money received)
Issue of Shares at Premium

If a company issues its shares at a price more than its face value, the shares are said to have been
issued at Premium. The difference between the issue price and face value or nominal value is
called ‘Premium’. If a share of Rs 10 is issued at Rs 12, it is said to have been issued at a
premium of Rs 2 per share. The money received as premium is transferred to Securities Premium
A/c. A company issues its shares at premium only when its financial position is very sound. It is
a capital gain to the company. The Premium money may be demanded by the company with
application, allotment or with calls The Companies Act has laid down certain restrictions on the
utilisation of the amount of premium.
According to Section 78 of this Act, the amount of premium can be utilised for:
(i) Issuing fully-paid bonus shares;
(ii) Writing off preliminary expenses, discount on issue of shares, underwriting
commission or expenses on issue;
(iii) Paying premium on redemption of Preference shares or Debentures.
Accounting treatment of Premium on issue of shares:

(a) Securities premium collected with share Application money :
If the Securities premium is collected on application and the company has taken decision
about the allotment of shares, the following journal entry is made :
Share Application A/c. Dr

To Securities Premium A/c
(The amount of Securities premium received on application of the allotted shares is
transferred to Securities Premium A/c)
(b) Premium collected with Allotment money or Calls.
If the company decides to demand the premium with share Allotment or/and share call
money, the journal entry made is:
Share Allotment A/c Dr
Or/and
Share Call A/c Dr
(Adjustment of share premium due on……shares @Rs…….per share.)

Illustration 3
Luxuary Cars Ltd. issued 100000 shares of Rs 10 each at a premium of Rs 5 per share,
payable as: On application Rs. 4 (including Rs 2 premium) per share On allotment Rs 8
(including Rs 3 premium) per share On call Rs. 3 per share. Applications were received for
100000 shares and allotment was made to all. Make journal entries.
Solution Journal entries
Books of Luxury Cars Ltd.
Bank A/c Dr. 400000
To Share Application A/c 400000
(Amount received for 1,00,000
shares)
Share Application A/c Dr 400000
To Securities Premium A/c 200000
(Share application money transferred
to share capital A/c and securities
Premium A/c)
Bank A/c Dr 800000
To Share Allotment A/c 800000
(Share allotment money is

received on 1,00,000
shares @ Rs 8 per share)
Share Allotment A/c Dr 800000

(Share allotment money made
Due)
Share First and Final Call A/c Dr 300000
(Share call money made due

on 1,00,000 shares @
Rs 3 per share.)
Bank A/c Dr 300000
To Share First and Final Call A/c 300000
(Share call money received
on 1,00,000 shares @ Rs 3 per
share.)
Issue of Shares at discount

When the issue price of share is less than the face value, shares are said to have been
issued at discount. For example if a company issues its shares of Rs 100 each at Rs. 90 each, the
shares are said to be issued at discount. The amount of discount is Rs 10 per share (i.e. Rs 100 –
Rs 90). Discount on shares is a loss to the company. The Companies Act, permits issue of
shares at a discount subject to the following conditions. (sec. 79) –
(a) The issue must be of a class of shares already issued.

(b) Not less than 1 year has at the date of issue elapsed since the date on which
the company became entitled to commence business.
(c) The issue at a discount is authorized by a resolution passed by the company in
the general meeting & sanctioned by the company law board.
(d) The maximum rate of discount must not exceed 10% or such rate as the
company law board may permit.
(e) The shares to be issued at a discount must be issued within two months of the
sanction by the company law board or within such extended time as the company
law board may allow.
Accounting Treatment of Shares Issued at Discount
The amount of discount is generally adjusted towards share allotment money and the
following journal entry is made:
Share Allotment A/c Dr
Discount on issue of shares A/c Dr
Allotment money due on….shares @Rs ……per share after allowing discount @Rs ….per
share.
Illustraion 4
Sri Krishna Agro Chemical Ltd. was registered with a capital of Rs 5000000 divided into 50000
shares of Rs 100 each. It issued 10000 shares at discount of Rs 10 per share, payable as : Rs 40
per share on application Rs 30 per share on allotment Rs 20 per share on call. Company
received applications for 15000 shares. Applicants for 12000 shares were allotted 10000 shares
and applications for the remaining shares were sent letters of regret and their application money
was returned. Call was made. Allotment and call money was duly received. Make journal entries
in the books of the company.
Sri Krishna Agro Chemicals
1 Bank A/c Dr. 6,00,000
To Share Application A/c 6,00,000
(Application money received for 15000 shares @ Rs 40 per Share)
2. Share Application A/c Dr 4,00,000

(Application money of 10000 4,00,000
shares transferred to share Capital A/c on their allotment)
3. Share Application A/c Dr 2,00,000
To Share Allotment A/c 80,000
To Bank A/c 1,20,000
(Application money of 3000 shares returned and of 2000
shares adjusted towards sum due on allotment)

4. Shares Allotment A/c Dr 3,00,000

Share discount A/c Dr 1,00,000
To Share Capital A/c. (Allotment money 4,00,000
due)
5. Bank A/c Dr 2,20,000
To Share Allotment A/c 2,20,000

6. Share First & Final Call A/c Dr 2,00,000
To Share Capital A/c 2,00,000

Amount due on call
7. Bank A/c Dr 2,00,000
To Share First & Final Call A/c 2,00,000

(Call money received)
Forfeiture of Shares
When shares are allotted to an applicant, it becomes a contract between the shareholder & the
company. The shareholder is bound to contribute to the capital and the premium if any of the
company to the extent of the shares he has agreed to take. as & when the Directors make the
calls. If he fails to pay the calls then his shares may be forfeiture by the directors if authorised
by the Articles of Association of the company.
The Forfeiture can be only for non-payment of calls on shares and not for any other reasons.
When the directors forfeiture the shares the person loses his membership in the company as
well as the amount already paid by him towards the share capital and premium. His name is
removed from the register of members. The directors must observe strictly all the legal
formalities required by the Articles of Association before forfeiting the shares.
Share Capital A/c Dr (no of forfeited shares * amount called up per
shares)
Security Premium A/c Dr (to the extent premium not received)
To Calls in Arrears A/c
To Share Forfeiture A/c (amount received towards share received)
Note: Once the security premium is collected it cannot be cancelled later on. Therefore if he
Forfeited shares were issued at a premium and the premium money is already received on those
Forfeited shares, security premium A/c will not be cancelled or debited.
Conditions for forfeiture of shares
The authority to forfeit shares is given to the Board of Directors in Articles of Association of
the company. The Board of Directors has to give at least fourteen days notice to the defaulting
members calling upon them to pay outstanding amount with or without interest as the case may
be before the specified date. The notice must also state that if the shareholders fail to remit the
amount mentioned therein within the stipulated period, their shares will be forfeited. If they still
fail to pay the amount within the specified period of time, the Board of Directors of the
company may decide to forfeit such shares by passing a resolution. The decision regarding the
forfeiture of shares should be communicated to the concerned allottees and should be asked to
return the allotment letters and share certificates of the forfeited shares to the company.

Accounting treatment for forfeiture of shares
When shares issued at par are forfeited the accounting treatment will be as follows:
(i) Debit Share Capital Account with amount called up (whether received or not) per share up
to the time of forfeiture.
(ii) Credit Share Forfeited A/c. with the amount received up to the time of forfeiture.
(iii) Credit ‘Unpaid Calls A/c’ with the amount due on forfeited shares. This cancels the effect of
debit to such calls which take place when the amount is made due.
The journal entry is :
Share capital A/c Dr (Amount called up)
To share forfeited A/c (Amount paid)
To unpaid calls A/c (Amount called but not paid)
Note : (i) Amount called up = No. of shares × called up per share
(ii) Amount paid = No. of shares × Amount paid per share
(iii) Amount called but not paid = No. of shares × Amount called but not paid per share
Illustration 4
X, a shareholder, holding 100 shares of Rs 10 each has paid application money of Rs 2 per share
and allotment money of Rs 3 per share, but has failed to pay the first call of Rs 2 per share and
second call of Rs 3 per share. His shares were forfeited. Make the journal entry to record the
forfeiture of shares.
Share Capital A/c (100 × Rs 10) Dr 1000

To Share forfeited A/c (100 × Rs 5) 500
To Share First Call A/c (100 × Rs 2) 200
To Share Second and Final Call A/c (100 × Rs 3) 300
(forfeiture of 100 shares)
Illustration 5
Alpha Ltd. issued 10000 shares of Rs 100 each payable as: Rs 25 on application. Rs 25 on
allotment Rs 20 on First call and Rs 30 on second and final call. 9000 shares were applied for
and allotted. All the payments were received with the exception of allotment money, first call and
second and final call money on 300 shares allotted to Ganesh. The Board of Directors decided
to forfeit these shares. Make journal entry to record transaction relating to forfeiture of shares.
Share Capital A/c (300 × Rs 100) Dr 30000
To Share forfeited A/c (300 × Rs 25) 7500

To Share allotment A/c (300 × Rs 25) 7500
To Share first call A/c (300 × Rs 20) 6000
To Share second call A/c (300 × Rs 30) 9000
(300 shares of Rs 100 each forfeited due to non
payment of allotment money and calls money)

Forfeiture of shares issued at premium
In case shares are issued at premium and thereafter forfeited there can be two situations :
1. Premium on shares has been received prior to the forfeiture.
2. Amount of premium on shares has not been received and it still stands credited to
the Securities Premium A/c.
1. Premium money has been received prior to the forfeiture
If the amount of premium on shares forfeited has been received by the company prior to
the forfeiture, securities Premium A/c will not get affected. In this case the journal entry of
forfeiture of shares will be similar to the entry made as if the shares had been issued at par.
The journal entry will be :
Share Capital A/c Dr
To Share forfeited A/c
To Unpaid Calls A/c./Calls in arrears A/c
(Forfeiture of share issued at premium)
Illustration 6
ABC Software Ltd. issued Rs 500000 capital divided into equity shares of Rs 10 each. The
shares were issued at a premium of Rs 4 per share and were payable as : Rs 3 per share on
application, Rs 7 (including premium) per share on allotment and the balance on call. All the
shares applied for and were duly allotted. All the money was duly received except on 500 shares
on which the call money was not received. Company decided to forfeit these shares. Make
journal entry to record the forfeiture of 500 shares.
Solution
Journal entries
Share Capital A/c Dr. 5000

To Share Forfeited A/c 3000
To Share First & Final Call A/c 2000
(Forfeiture of 500 shares of Rs 10 each due to on non
payment of call money of Rs 4 per share)
2. Premium on shares has not been received and stands credited to Securities
Premium A/c as due but not paid.
When a share is forfeited on which the amount of premium has been made due but has not been
received, either wholly or partially, the Securities Premium A/c will be cancelled. At the time of
making due, Securities Premium A/c will be credited. The journal entry will be as follows:
Share Capital A/c Dr

Securities Premium A/c Dr
To Share Forfeited A/c
To Unpaid call A/c.
(Forfeiture of shares originally issued at premium
due to non payment of dues).

Illustration 7
The L & T Company Ltd. offered to public for subscription of 50,000 shares of Rs. 20 each at a
premium of Rs. 5 per share. The amount was payable as under:
On application Rs. 5 per share
On allotment Rs. 12 per share (Including premium of Rs 5 per share)

On first call Rs. 4 per share
On Second and Final call Rs. 4 per share

Applications were received for all the shares. Allotment was made to all the applicants in full.
M r . A failed to pay allotment and call money on 200 shares held by him. Mr.B was allotted 300
shares. He did not pay the call money. Their shares were forfeited. Make necessary journal entry
for the forfeiture only.
Share Capital A/c (200 × 20) Dr. 4000

Securities Premium A/c (200 × 5) Dr.
To Share Forfeited A/c (200 × 5) 1000
To Share Allotment A/c (200 × 12)
To Share First Call A/c (200 × 4)
To Share Second and Final call A/c (200 × 4) 1000
(Forfeiture of 200 shares held by M r . A 2400

who did not pay allotment and call money).
800
800
Share Capital A/c (200 × 20) Dr.
To Shares forfeited A/c 6000

3600
To Share First Call A/c
1200
To Share Second Call A/c
1200
(Forfeiture of 300 shares held by M r . B)
Forfeiture of shares issued at discount

Discount on issue of shares is a loss to the company. When shares issued at a discount
are forfeited for non payment of dues, the discount allowed on such shares is written back.
At the time of issue of shares, Discount on issue of Shares A/c is debited and when forfeited,
this account is credited to cancel the discount allowed on such shares. In this case the following
journal entry is made :
Share Capital A/c Dr.
To Share Forfeited A/c
To Discount on Issue of Shares A/c
To Unpaid call A/c
(Forfeiture of shares originally issued at discount for non payment of dues).

Illustration 8
The S n o w white L t d . invited applications for 200 shares of Rs. 50 each at a

discount of 10% payable as follows: On application Rs. 10 per share On allotment Rs.
20 per share On call Rs. 15 per share Whole of the issue was subscribed and paid for except
the calls money on 200 shares which were forfeited by the company. Make journal entry for
forfeiture of shares.
Share Capital A/c (200 × 50) Dr. 10000
To Shares forfeited A/c (200 × 30) 6000
To Discount on Issue of Shares A/c (200 × 5) 1000

To Share First and Final call A/c (200 × 15) 3000
(Forfeiture of 200 shares of Rs 50 each issued at discount of 10% on non payment of call
money)
Reissue of Forfeited shares
Shares are forfeited because only a part of the due amount of such shares is received and the
balance remains unpaid. On forfeiture the membership of the original allottee is cancelled. He/she
cannot be asked to make payment of the remaining amount. Such shares become the property of
the company. Therefore company may sell these shares. Such sale of shares is called ‘reissue of
shares’. Thus reissue of shares means issue of forfeited shares. The Directors may reissue the
Forfeited shares at par, at premium or at a reissued at a discount; the maximum discount is
restricted to the amount Forfeited on these shares + the original discount.
The maximum permissible discount at the time of reissue of forfeited shares is ascertained in
different situations in the following manner:
(i) Shares o r i g i n a l l y i s s u e d at par: When the shares are originally issued at par, the
maximum permissible discount for reissue of shares is equal to the amount forfeited on
such shares
(ii) Shares originally issued at premium: In case of shares originally issued at premium,
there can be two situations: (a) premium has not been received on the forfeited shares, and
(b) premium has been received on such shares. The amount forfeited is the amount that has
been received including the amount of premium if it has been received and the maximum
discount that can be allowed on reissue of such shares is the amount so forfeited.
(iii) Shares originally issued at discount: In this case the actual amount received becomes the
forfeited amount. But the maximum permissible discount on reissue of shares will be equal
to the amount forfeited plus the amount of discount initially allowed on these shares at
the time of their original issue.
Reissue of forfeited shares at a discount: When the shares forfeited are reissued at discount,
Bank account is debited by the amount received and Share capital account is credited by the paid
up amount. The amount of discount allowed is debited to Share Forfeited Account. This is for
adjusting the amount of discount so allowed from the amount forfeited at the time of
forfeiture.
Bank A/c (the amount received on reissue) Dr.
Share Forfeited A/c (the amount allowed as discount) Dr.
To Share Capital A/c (paid up amount)
The amount of discount is less than the amount forfeited; the remaining forfeited amount will be
profit for the company. This profit is a capital gain to the company and is transferred to Capital
Reserve account. Journal entry of the same will be as follows:
Share forfeited A/c Dr
To Capital Reserve A/c
In case, only a part of the forfeited shares are reissued and others remain cancelled, the amount
forfeited on forfeited shares not reissued will remain in the Shares Forfeited Account. For
adjustment of forfeited amount on share reissued will be calculated as:
Amount to be adjusted = Total forfeited amount * No. of shares reissued
Total No. of shares forfeited
Illustration 9
Jai Company Ltd. forfeited 200 shares of Rs 10 each, fully called up on which Rs. 7 have been
received and final call of Rs. 3 per share remains unpaid. These shares were later on reissued for
Rs. 8 per share fully paid up. Make journal entry for recording the forfeiture and reissue of
shares.
Share Capital A/c Dr 2000
To Shares Forfeited A/c 1400

To Shares Final call A/c 600
(Forfeiture of 200 shares of Rs. 10 each

due to non payment of final call of Rs 3
per share)
Bank A/c Dr 1600
Shares Forfeited A/c Dr 400
To Share capital A/c 2000
(Reissue of 200 forfeited shares of Rs 10

each for Rs. 8 per share as fully paid up)
Shares forfeited A/c Dr 1000
To Capital Reserve A/c 1000
(The Balance amount in Share Forfeited
A/c transferred to Capital Reserve A/c)
Illustration 10
India infrastructure Ltd. has issued its shares of Rs. 20 each at a discount of Rs 2 per share.
Mahima holding 100 shares did not pay final call of Rs 5 per share. Her shares were
forfeited. Later on the company reissued 100 shares of these forfeited shares at (I) Rs. 15 per
share (II) Rs. 20 per share, and (III) Rs. 25 per share Make journal entries for the forfeiture and
reissue of the shares in the books of company.
Share Capital A/c Dr 2000
To Shares Forfeited A/c 1300
To Discount on Issue of Shares A/c 200
To Shares Final Call A/c 500
(Forfeiture of 200 shares issued at discount for
non payment of final call)
Reissue of shares: Reissued at Rs 15 per share
I. (i) Bank A/c Dr 1500
Discount on Issue of Shares A/c Dr 200
(100 shares reissued at Rs 15 per share)
(ii) Shares Forfeited A/c Dr 1000
(Balance in share Forfeited A/c of 100 shares reissued transferred to Capital Reserve A/c)
II. Bank A/c Dr 2000
(100 shares reissued at Rs 20 per share)
(Balance in shares forfeited A/c transferred to Capital Reserve A/c)

III. Reissued at Rs. 25 per share
Bank A/c Dr 2500

Discount on issue of share A/c Dr 200
(Reissue of discounted shares at Rs 25 per share)
To Capital Reserve 1300
(Balance in shares forfeited A/c transferred to capital Reserve A/c)
Illustration 11
A Company issued for public subscription 40,000 equity shares of Rs. 10 each at a premium of
Rs. 2 per share payable as under:
On application Rs. 2 per share
On Allotment Rs. 5 per share (including premium)
On first call Rs. 2 per share
On final call Rs. 3 per share
Applications were received for 70,000 Shares. Allotment was made pro-rata to the applicants
for 50,000 shares, the remaining applications being refused. Money overpaid on applications
was applied towards sum due on allotment. A, to whom, 1,500 shares were allotted, failed to pay
the allotment and call money. B, to whom 2,000 shares were allotted, failed to pay the two calls.
The shares of A and B were subsequently forfeited after the second call was made. 3,000 of the
forfeited shares were reissued @ Rs. 8 per share fully paid. The reissued shares included all of
A’s shares. Pass journal entries in the books of the company to record the above transactions.
Solution
Working Notes :
40,000 shares were issued to applicants for 50,000 shares
Ratio of allotment is 4:5
A was allotted 1,500 shares so he applied for =1500×5 = 1875 shares
A paid on application 1875 × 2 = 3,750
A was allotted 1,500 shares and was to pay on application = 3,000
Surplus transferred to Share Allotment = 750
Total Amount due on allotment = 40,000 × 5 = 2,00,000
Less: Surplus adjusted from Share Application = 20,000
Balance amount due = 1,80,000
Less: Arrears from A (Due Rs. 7,500 Less: Surplus Application amount Rs 750) = 6,750
Amount received on allotment = 1,73,250
Amount due on share First Call = 40,000 × 2 = 80,000
Less: Arrears from A & B [(1,500+2,000) × 2] = 7,000
Hence amount received = 73,000
Amount due on Second and Final Call = 40,000 × 3 = 1,20,000
Less: Arrears from A & B [(1,500+2,000) × 3] = 10,500
Amount Received = 1,09,50
Amount Forfeited A & B = 13,750
From A = 3,750
From B (2,000×5 = 10,000
Amount forfeited on 3,000 shares [From A Rs. 3,750
And From B (10,000 ÷ 2,000) × 1,500] = 3,750
+ 7,500
= 11,250
Less: Discount allowed on re-issue = 6,000
Balance transferred to Capital Reserve = 5,250

Journal entries
Bank A/c 1,40,000

To Share Application A/c 1,40,000
(Being share application money received on 70,000 shares @ Rs. 2 per
share)
Share Application A/c 1,40,000
To Share Capital A/c 80,000
To Share Allotment A/c 20,000
To Bank A/c 40,000
(Being share application money transferred to Share Capital account,
Share Allotment account and balance refunded)
Share Allotment A/c 2,00,000
To Securities Premium A/c 80,000
(Being share allotment money due on 40,000 share@ Rs. 5 per shares,
including premium of Rs. 2 per share)
Bank A/c 1,73,250
Calls in Arrears A/c 6,750,
To Share Allotment A/c 1,80,000
(Being the amount received on share allotment)
Share First Call A/c 80,000
(Being share first call money due on 40,000 shares @ Rs. 2 per share)
Bank A/c 73,000

Calls in Arrears A/c 7,000
To Share First Call A/c 80,000
(Being share first call money due on 36,500 shares @ Rs. 2 per share)
Share Second and Final Call A/c 1,20,000
(Being share second and final call money due on 40,000 shares @ Rs. 3
per share)
Bank A/c 1,09,500
Call in Arrears A/c 10,500
To Share Second and Final Call A/c 1,20,000
(Being amount received on 36,500 shares @ Rs. 3 per share)
Share Capital A/c 35,000
Securities Premium A/c 3,000
To Calls in Arrears A/c 24,250
To Share Forfeited A/c 13,750
(Being 3,500 shares forfeited for non-payment of call in arrears)
Bank A/c 24,000
Share Forfeited A/c 6,000
(Being reissue of 3,000 shares @ Rs. 8 per share as fully paid)
Share Forfeited A/c 5,250
To Capital Reserve A/c 5,250
(Being the surplus of amount forfeited in respect of shares reissued
transferred to Capital Reserve)
Surrender of Shares
A shareholder who is not able to pay the call money may surrender his shares to the
company. The company cancels such surrender shares. Surrender is a voluntary act on the
part of the shareholder, whereas Forfeiture is a compulsory act on part of the company. The
effect of both surrender & Forfeiture is the same, i.e. cancellation of the shares. The company
can accept surrender of shares if permitted by its Articles of Association. The accounting
treatment in respect of surrender of shares is same as that of Forfeiture of Shares.

Lien on Shares
Lien on shares is an equitable charge on shares to secure any debt which may be
recoverable from the shareholder of the company. Right of lien can be exercised on dividends
payable and final amounts to be settled on dissolution of the company.
Right Issue or Pre-emptive Right
According to Section 81(1) when a company proposes to issue further share capital , the
new shares shall first be offered to existing share holders in proportion of their existing
shareholding. Such right is called Pre-emptive right or right issue.
Advantages
a. Control of the company is retained in hands of the existing share holders.
b. Existing shareholders get right issue at a price lower than the market price of share.
c. The expenses of issue are lower than the fresh issue of shares.
d. When the right issues are made from time to time, the image of the company improves and
the existing shareholders remain satisfied.
e. There is more certainty of getting capital in the case of right issue than the public issue.
Valuation of right issue
a. Calculate the market value of shares already held by a shareholder.
b. Add to the above price paid for the fresh shares.
c. Find out the average price of existing shares and fresh shares using following formula:-
Market price of existing shares + Issue price of right shares
No. of existing shares + No. of Right shares
d. The average price of the share should be deducted from market price, that amount is the
value of right.
(Value of right = Market price of shares – Average price of shares)
1.2 REDEMPTION OF PREFERENCE SHARES

Under section 100 of the Companies Act, a company is not allowed to return to its
shareholders the share money without the permission of the court. But permission of the court is
not necessary, if the refund is to be made to the preference shareholders.
When the capital is raised by issuing redeemable preference shares, it is to be paid back
by the company to such shareholders after the expiry of stipulated period whether the company is
to be wound up or not. Preference shares which are repayable after the expiry of a stipulated
period are called redeemable preference shares. As per the latest amendment, all preference
shares are to be redeemed within ten years.
The following are the important provisions regarding the redemption of preference shares
which are given under Section 80 of the Companies Act:
1. The shares shall be redeemable only if they are fully paid up. If the shares to be redeemed are
partly paid up, they should be made fully paid up before they are redeemed.
2. Shares shall be redeemed either out of profits of the company available for dividends or out
of proceeds of fresh issue of shares made for the purpose of redemption.
3. Premium if any, payable on redemption, should be provided out of the profits or out of the
share premium account of the company.
4. Where any such shares are redeemed out of profits, an amount equal to face value of shares
redeemed must be transferred to capital redemption reserve account.
5. The Capital Redemption Reserve Account can be utilised for issuing fully paid bonus shares
to the shareholders.
The redemption of preference shares should not be regarded as a reduction of the
authorised capital of the company and as such the reduced shares should remain as part of the
authorised capital and must be shown in the balance sheet.

Capital Redemption Reserve (CRR)
If the preference shares are redeemed out of accumulated profit, it will be necessary to
transfer an amount equal to the amount repaid on the redemption to Capital Redemption Reserve
Account. If the company issues any fresh shares for redemption purpose, the transferred amount
will be the difference between nominal value of shares redeemed and the nominal value of shares
issued (i.e. amount transferred to CRR = Nominal value of shares redeemed – Nominal value of
shares issued). The capital redemption reserve account can be used for issuing fully paid bonus
shares.
The importance of creation of capital redemption reserve account is to a) protect the
interest of creditors and b) maintain working capital. Redemption of preference shares involves
repayment of capital before paying creditors of the company. It may affect the interest of
creditors. In addition to that the working capital of the company will be depleted as a result of
outflow of cash due to redemption. The amount is capitalized by creating the capital redemption
reserve account. As a result this amount will not be available for distribution of dividend. It helps
to protect the interest of creditors and on the other hand it replenishes working capital.
Accounting Entries
The redeemable preference shares can be redeemed by a) the proceeds of a fresh issue of
equity shares/ preference shares, b) the capitalization of undistributed profit i.e. creating capital
redemption reserve account, or c) a combination of both (a) and (b). Let us see the accounting
entries required for redemption of preference shares.
i) When new shares are issued at par:
Bank A/c …………………Dr.
To Share Capital A/c.
ii) When new shares are issued at premium:
Bank A/c ……………………..Dr.
iii) When new shares are issued at a discount:
Bank A/c ………………Dr.
Discount on Issue of Share Capital………..Dr.
To Share Capital A/c.
iv) Conversion of partly paid shares into fully paid shares:
a) Share Call A/c ………..Dr.
b) Bank A/c ……………..Dr.
To Share Call A/c.
v) When preference shares are redeemed at par:
Redeemable Preference Share Capital A/c ………………Dr.
To Preference shareholders A/c.
vi) When preference shares are redeemed at a premium:
Redeemable Preference Share Capital A/c ………………Dr
Premium of Redemption Preference Share Capital A/c….Dr.
To Preference shareholders A/c.
vii) Adjustment of premium on redemption:
Profit and Loss A/c………………..Dr.
Securities Premium A/c ……………….Dr.
To Premium of Redemption Preference Share Capital A/c
viii) Transferring the amount to Capital Redemption Reserve Account:
General Reserve A/c …………….Dr.
Profit and Loss A/c …………….Dr.
To Capital Redemption Reserve A/c
ix) Expenses on issue of shares:
Expenses on Issue of shares A/c…………….Dr.
To Bank A/c.
x) When payment is made to preference shareholders:
Preference Shareholders A/c ……………Dr.
To Bank A/c.
xi) When the fully paid bonus shares are issued:
Capital Redemption Reserve A/c ……………. Dr.
General Reserve A/c …………………………..Dr.
Securities Premium A/c ……………………………Dr.
Profit & Loss A/c …………………………….. Dr.
To Bonus to Shareholders A/c
xii) Capitalization of profit:
Bonus to Shareholders A/c ………………Dr.
To Equity share capital A/c
Illustration - 12
ABC Co. Ltd. had part of its share capital in 2000 preference shares of Rs.10 each fully paid up
and these have become due for redemption. The preference share capital was to be redeemed out
of a fresh issue of equity shares at par made particularly for this purpose and the general reserve
of the company stood at Rs.25,000. Show the journal entries for the above transactions.
Solution
Journal entries
Date Particulars LF Dr.(Rs.) Cr.(Rs.)
2010 Preference share capital A/c Dr. 20,000

April To Preference shareholders A/c
1 (Being amount payable on redemption of 20,000
2000 preference shares)
2010 Bank A/c Dr. 20,000

April To Equity Share Capital A/c
1 (Being the amount received on issue of 20,000
2000 equity shares of Rs.10 each made for
the purpose of redemption of preference
shares as per Board’s Resolution dated).
2010 Preference shareholders A/c Dr. 20,000

April To Bank
1 (Being the amount due to preference 20,000
shareholders paid)

Illustration – 13
X Co. Ltd. Issued 50,000 Equity shares of Rs.10 each and 3000, 10% Preference shares of
Rs.100 each, all shares being fully paid. On 31.3.08, Profit and Loss Account showed an
undistributed profit of Rs..50,000 and General Reserve Account stood at Rs.1,20,000. On 2.4.08,
the directors decided to issue 1500, 6% Preference shares of Rs.100 each for cash and to redeem
the existing preference shares at Rs.105 utilizing as much as would be required for the purpose.
Show the journal entries to record the transactions.
2008 10% Preference share capital A/c Dr. 3,00,000

April Premium on Redemption of Preference shares 15,000
2 capital A/c Dr. 3,15,000
To Preference shareholders A/c
(Being amount payable on redemption of 3000
preference shares, with premium of 5%).
" Bank A/c Dr. 150,000

To 6% Preference Share Capital A/c 150,000
(Being the amount received on issue of 1500,
6% Preference shares of Rs.100 each made for
the purpose of redemption of preference shares
as per Board’s Resolution dated…………).
" General Reserve A/c Dr. 15,000

To Premium on Redemption of Preference 15,000
shares capital A/c
(Being the amount written off against general
reserve)

Profit & Loss A/c Dr. 45,000
To Capital Redemption Reserve A/c 150,000
( Being amount transferred equal to the
difference between the nominal value of shares
redeemed and proceeds of new issue).
" Preference shareholders A/c Dr. 315,000

To Bank 315,000
(Being the amount due to preference
shareholders paid).

Illustration – 13
X Co. Ltd. Issued 50,000 Equity shares of Rs.10 each and 3000, 10% Preference shares of
Rs.100 each, all shares being fully paid. On 31.3.08, Profit and Loss Account showed an
undistributed profit of Rs..50,000 and General Reserve Account stood at Rs.1,20,000. On 2.4.08,
the directors decided to issue 1500, 6% Preference shares of Rs.100 each for cash and to redeem
the existing preference shares at Rs.105 utilizing as much as would be required for the purpose.
Show the journal entries to record the transactions.

April Premium on Redemption of Preference shares 15,000
2 capital A/c Dr.
To Preference shareholders A/c 3,15,000
(Being amount payable on redemption of 3000
preference shares, with premium of 5%).
" Bank A/c Dr. 150,000

To 6% Preference Share Capital A/c 150,000
(Being the amount received on issue of 1500, 6%
Preference shares of Rs.100 each made for the
purpose of redemption of preference shares as per
Board’s Resolution dated…………).

To Premium on Redemption of Preference 15,000
shares capital A/c
(Being the amount written off against general
reserve)

To Capital Redemption Reserve A/c
( Being amount transferred equal to the difference 1,50,000
between the nominal value of shares redeemed
and proceeds of new issue).
" Preference shareholders A/c Dr. 315,000

To Bank 3,15,000
(Being the amount due to preference shareholders
paid).

Illustration – 14
The Producers Ltd.’s Balance sheet shows the following balance s on 31-3-08. 30,000 equity
shares of Rs.10 each fully paid; 18,000 10% Redeemable Preference shares of Rs.10 each fully
paid; 4000, 15% Redeemable Preference shares of Rs.10 each, Rs.8 paid up. General Reserve
Rs.12,000; Securities Premium Rs.15,000; Profit Loss Account Rs.80,000 and capital Reserve
Rs.20,000. Preference shares are redeemed on 1-4-08 at a premium of Rs.2 per share. For
redemption, 4000 equity shares of Rs.10 each are issued at 10% premium. A bonus issue of
equity share was made at par, two shares being issued for every five held on that date. Show the
journal entries to record the above transactions
2008 10% Preference share capital A/c Dr. 180,000

April Premium on Redemption of Preference 36,000
1 shares capital A/c Dr.
(Being amount payable on redemption of 216,000
18000 preference shares, with premium of
2%).
" Bank A/c Dr. 44,000

To Equity Share Capital A/c 40,000
To Securities Premium A/c 4,000
(Being the amount received on issue of
4000, Equity shares of Rs.10 each made
with premium of 10% for the purpose of
redemption of preference shares as per
Board’s Resolution dated…………).
" Securities Premium A/c Dr. 19,000

Profit And Loss A/c Dr. 17,000
To Premium on Redemption of
Preference shares capital A/c 36,000
(Being the amount written off against
general reserve)
" General Reserve A/c Dr. " 120,000

To Capital Redemption Reserve A/c 140,000
difference between the nominal value of
shares redeemed and proceeds of new
issue).

" Preference shareholders A/c Dr. " 216,000

To Bank 216,000
shareholders paid).
" Capital Redemption Reserve A/c Dr. " 120,000

To Bonus to Shareholders A/c 120,000
Being the amount utilised for issue of bonus
shares in 5:2 ratio as per shareholders
Resolution No. Dated…) 30,000x2/5xRs.10
" Bonus to Shareholders A/c Dr. 120,000

To Equity Share capital A/c 120,000
(Being the amount capitalised by issue of
bonus shares)
Illustration - 15
The preference shares were redeemed on April 1, 2008 at a premium of Rs.5.00 per share, the
whereabouts of the holders of 1500 such shares not being known. At the same time, a bonus
issue of equity share was made at par, one share being issued for every four equity shares held.
Show the journal entries to record the above transactions and the Balance sheet as it would
appear after the redemption. The following is the balance sheet of Black & White Co. Ltd. as at
31st March, 2008.
Liabilities Amount(Rs.) Assets Amount(Rs.)
Issued & Subscribed Capital: 40,000 Fixed 7,00,000

Equity shares of Rs.10 each fully paid Assets
18,000, 8% Preference shares of Rs.10 each 4,00,000
fully paid 1,80,000 Current 4,00,000
Reserves & Surplus: 4,80,000 Assets
Profit & Loss Account 40,000
Current Liabilities:
Sundry Creditors
11,00,000 11,00,000

Solution
Journal Entries

April 1 Premium on Redemption of Preference shares 90,000
capital A/c Dr.
(Being amount payable on redemption of
18000 preference shares, with premium of 270,000
Rs.5 each).
" Profit And Loss A/c Dr. 90,000

To Premium on Redemption of 90,000
Preference shares capital A/c
(Being the amount written off against Profit
And Loss A/c)
" Profit & Loss A/c Dr. " 1,80,000

To Capital Redemption Reserve A/c 1,80,000
nominal value of shares redeemed and
proceeds of new issue).
' Capital Redemption Reserve A/c Dr. 1,00,000

To Bonus to Shareholders A/c 1,00,000
(Being issue of 1 bonus share to every 4
equity shares held as per shareholders
Resolution No. Dated…) 40,000x1/4xRs.10
" Bonus to Shareholders A/c Dr. 1,00,000

To Equity Share capital A/c 1,00,000
(Being the amount capitalised by issue of
bonus shares)
" Preference shareholders A/c Dr. 2,47,000

To Bank 2,47,000
shareholders paid except 1500 share
holders).

Balance Sheet
Liabilities Amount(Rs.) Assets Amount(Rs.)
Issued & Subscribed Capital: Fixed Assets 7,00,000

50,000 Equity shares of Rs.10 Current Assets 1,52,500
each fully paid (Rs.400000-
(of the above shares, 10,000 247500)
shares have been allotted as fully 5,00,000
paid bonus shars)
Reserves & Surplus: 80,000
Capital Redemption Reserve 2,10,000
Account (Rs.180000-100000) 40,000
Profit & Loss Account 22,500
(Rs.480000-90000-180000)
Current Liabilities:
Sundry Creditors
Outstanding claim (Pref.
Shareholders)
8,52,500 8,52,5000
1.3 BUY BACK OF SHARES

Buyback of shares means that any company may purchase their own shares or other
specified securities. According to section 77A (1) of the companies Act 1999, a company
may purchase its own shares or other securities out of:
(i) Its free reserves or
(ii) The securities premium account or
(iii) The proceeds of any shares or other specified securities.
Specified securities include employee’s stock option or other securities as may be notified
by the Central Government from time to time. Buyback of shares of any kind is not allowed out
of fresh issue of shares of the same kind. In other words, if equity shares are to be bought back,
preference shares or debentures may be issued for buyback of equity shares. Companies are
allowed to buy back their own shares if they fulfil certain conditions as given in section 77A (2)
of the companies Act 1999.
No company shall purchase its own shares or other specified securities unless:
(a) The buyback is authorised by its articles.
(b) A Special resolution has been passed in general meeting of the company authorising the
buyback.
(c) The buyback is for less than 25% of the total paid up capital and free reserves of the company.
(d) It also provides that buyback shall not be exceeding 25% of total paid up capital.
(e) The debt equity ratio should not be more than 2:1 after such buyback.
(f) All the shares or other specified securities for buyback are fully paid up.
(g) The buyback of the shares or other specified securities listed on any recognised stock exchange
is in accordance with the regulations made by the Securities and Exchange Board of India in
this behalf.
(h) The buyback in respect of shares or other specified securities other those specified in clause
(i) The buyback should be completed within 12 months from the date of passing the special
resolution.

1. Entry for Assets sold for Buyback:
Bank A/c Dr.
Profit & Loss A/c Dr. (In Case of Loss)
To Assets A/c
To Capital Reserve A/c (In case of Profit)
2. Entry for issue of debentures or other securities for the purpose of buyback
Bank A/c Dr
Discount on issue Dr.
To Debentures A/c
To Other securities A/c
3. Entry for the cancellation of shares bought back :
Equity Share Capital A/c Dr.
Free Reserves or Securities Premium A/c Dr.
To Shareholders A/c
4. Entry for transfer of nominal value of shares bought back to CRR
General Reserves A/c Dr. Or
Profit & Loss A/c Dr. Or
Any other reserve A/c Dr.
To Capital Redemption Reserve
5 Entry for making the payment of buyback shares:
Shareholders A/c Dr.
To Bank A/c
6 Entry for expenses incurred in buyback of shares:
Buyback Expenses A/c Dr.
To Bank A/c
7 E n t r y for transfer of buyback of expenses to P & L A/c
Profit & Loss A/c Dr.
To Expenses A/c
Advantages of Buy Back of Shares:
1. The buyback facility enables the companies to manage their cash effectively. Many co’s in
this country are faced with a problem of surplus cash without having any idea of where to invest
them. It would be better for them to return surplus cash to shareholders rather than to go on
spending simply for want to alternative.
2. Companies having large amount of free reserves are free is use funds to acquire shares and
other specified securities under the buyback process.
3. Buyback shares in helpful co. to reduce its share capital.
4. Buyback of shares is helpful to improvement in the values of shares.
5. Avoid high financial risk and ensure maximum return to the shareholders.
6. Buyback of shares helps the promoters to formulate an effective defence’s strategy against
hostile takeover bids.
Disadvantages of buy back of shares:
1. All the control of buy back of shares in the hands of promoters, so results of co.’s which the
position of minority shareholders in weak.
2. The promoters before the buy back, may understand the earnings by manipulating accounting
policies and highlight other unfavourable factors affecting the earnings.
3. High buy back of share may lead to artificial manipulation of stock price in the stock
exchange. Confusion is much more.
Escrow account
Under the scheme of buyback of shares, the company in order to perform its obligations,
is required to open an Escrow Account i.e., cash deposited in a commercial bank. Or bank
guarantee or deposit of acceptable securities or a combination the three.
Illustration - 16
The Balance sheet of ABC Ltd is given below:
Liabilities Assets
Paid up Capital
Fixed assets 80,00,000
8,00,000 Equity shares of Rs. 10 80,00,000 Stock 48,00,000
Debtors 40,00,000
each Bank 72,00,000
Securities premium 8,00,000
General Reserve 72,00,000
40,00,000
13% Debentures
40,00,000
Current liabilities
2,40,00,000 2,40,00,000
It was decided at the meeting of shareholders;

1. to buyback 20% of equity shares @ Rs.12 per share
2. to utilise general reserve for buyback of shares
3. to utilise securities premium for premium payable on buyback of shares
Pass journal entries
Solution
Journal entries
Mar
31 General Reserve A/c Dr 16,00,000
To Capital Redemption Reserve 16,00,000
(Being nominal value of Rs.16,00,000 bought back out
of general reserve)
16,00,000
Equtiy share capital A/c Dr
‘’
3,20,000
Securities premium A/c Dr
To Shareholders A/c 19,20,000
(Being amount due on buy back of 1,60,000 shares)

19,20,000
Shareholders A/c Dr
‘’
To Bank A/c 19,20,000
(Being amount paid for buyback of 1,60,000 shares @ Rs.10

each @ Rs. 12 per share)

Illustration – 17
Following figures have been extracted from the books of Metals product Ltd. as on 31-03-2012.
Paid up capital – 9,00,000 e. Shares of Rs. 10 each 90,00,000
General Reserve 15,00,000
P/L A/c 5,00,000
Securities premium 3,00,000
14% Debentures 10,00,000
Bank balance 20,00,000
The company decided to buy back 25% of the paid up equity shares at face value. It was
also decided to issue further 14% debentures of Rs. 10,00,000 at par for the purpose of buy back
of shares. Journalise the above transactions relating to buyback of shares.
Solution
Journal entries
Mar
31 Bank A/c Dr 10,00,000
To 14% Debenture
(Being the issue of debentures of Rs.10,00,000 at par 10,00,000
for the purpose of buyback)
Equtiy share capital A/c Dr 22,50,000

‘’
To Shareholders A/c 22,50,000
(Being the cancellation of 25% of the paid up capital

on account of 25% shares bought back)
General Reserve A/c Dr 12,50,000

‘’ To Capital Redemption Reserve A/c 12,50,000
(Being amount paid for buyback of 1,60,000 shares @

Rs.10 each @ Rs. 12 per share)
Shareholders A/c Dr 22,50,000

To Bank A/c 22.50,000
‘’
(Being payment made t for shares bought back)
1.4 ISSUE AND REDEMPTION OF DEBENTURES

A Debenture is a unit of loan amount. When a company intends to raise the loan
amount from the public it issues debentures. A person holding debenture or debentures is
called a debenture holder. A debenture is a document issued under the seal of the company.
It is an acknowledgment of the loan received by the company equal to the nominal value of the
debenture. It bears the date of redemption and rate and mode of payment of interest. A
debenture holder is the creditor of the company. As per section 2(12) of Companies Act 1956,
“Debenture includes debenture stock, bond and any other securities of the company whether
constituting a charge on the company’s assets or not”.
Types of Debentures
Debenture can be classified as under:
1. From Security point of view
(i) Secured or Mortgage Debentures: These are the debentures that are secured by a charge on
the assets of the company. These are also called mortgage debentures. The holders of secured
debentures have the right to recover their principal amount with the unpaid amount of interest
on such debentures out of the assets mortgaged by the company. In India, debentures must be
secured. Secured debentures can be of two types:

(a) First mortgage debentures: The holders of such debentures have a first claim on the assets
charged.
(b) Second mortgage debentures:The holders of such debentures have a second claim on the
assets charged.
(ii) Unsecured Debentures: Debentures which do not carry any security with regard to the
principal amount or unpaid interest are called unsecured debentures. These are called simple
debentures.
2. On the basis of Redemption
(i) Redeemable Debentures : These are the debentures which are issued for a fixed period.
The principal amount of such debentures is paid off to the debenture holders on the expiry of
such period. These can be redeemed by annual drawings or by purchasing from the open
market.
(ii) Non-redeemable Debentures : These are the debentures which are not redeemed in the life
time of the company. Such debentures are paid back only when the company goes into
liquidation.
3. On the basis of Records
(i) Registered Debentures: These are the debentures that are registered with the
company. The amount of such debentures is payable only to those debenture holders whose
name appears in the register of the company.
(ii) Bearer Debentures: These are the debentures which are not recorded in a register of
the company. Such debentures are transferrable merely by delivery. Holder of these
debentures is entitled to get the interest.
4. On the basis of Convertibility
(i) Convertible Debentures: These are the debentures that can be converted into shares of the
company on the expiry of pre decided period. The term and conditions of conversion are
generally announced at the time of issue of debentures.
(ii) Non-convertible Debentures : The debenture holders of such debentures cannot convert
their debentures into shares of the company.
5. On the basis of Priority

(i) First Debentures: These debentures are redeemed before other debentures.
(ii) Second Debentures : These debentures are redeemed after the redemption of first
debentures
The procedure of issue of debentures by a company is similar to that of the issue of
shares. A Prospectus is issued, applications are invited, and letters of allotment are issued. On
rejection of applications, application money is refunded. In case of partial allotment, excess
application money may be adjusted towards subsequent calls.
Difference between Shares and Debentures.
Shares Debentures
1. Amount collected through shares 1. Amount collected through debentures
Constitute capital of the company. Constitute borrowed fund of the
company.
2. A shareholder is a member of the company. 2. A debenture holder is only a creditor.
3. A shareholder gets a share in the profits called 3. A debenture holder receives interest at
dividend. a fixed rate.
4. A shareholder is entitled to vote at meetings. 4. A debenture holder is not entitled to

vote.

Issue of Debenture takes various forms which are as under:

1. Debentures issued for cash
2. Debentures issued for consideration other than cash
3. Debentures issued as collateral security. Further, debentures
may be issued
(i) At par, (ii) At premium, and (iii) At discount
Accounting treatment of issue of debentures for cash
1. Debentures issued for cash at par: Following journal entries will be made: (i)
Application money is received
Bank A/c Dr
To Debentures Application A/c
(Application money received for Debentures)
(ii) Transfer of debentures application money to debentures account on their allotment
Debentures Application A/c Dr
To Debentures A/c
(Application money transferred to debenture account on
allotment)
(iii) Money due on allotment
Debentures Allotment A/c Dr

To Debentures A/c
(Allotment money made due)
(iv) Money due on allotment is received
Bank A/c Dr
To Debentures Allotment A/c
(Receipt of Debenture allotment money)
(v) First and final call is made
Debentures First and Final call A/c Dr

To Debentures A/c
(First and Final call money made due on ............... debentures)
(vi) Debentures First and Final call money is received
Bank A/c Dr
To Debentures First and Final call A/c
(Receipt of Amount due on call)
Note: Two calls i.e. first call and second call may be made
Journal entries will be made on the lines made for first and final call.
Illustration 18
Star India Ltd. issued 5000 8% Debentures of Rs 100 each payable as follows
Rs 20 on Application
Rs 30 on Allotment
Rs. 50 on First and Final call
All the debentures were applied for and allotted. All the calls were duly received. Make
necessary journal entries in the books of the company.
Bank A/c ... Dr 100000
To Debentures Application 100000
A/c
(Application money received for
5000 debentures)
Debentures Application A/c Dr 100000
To 8% Debentures 100000
A/c
(Application money transferred to
Debentures
Debentures A/c on allotment)
Allotment a/c Dr 150000
To 8% Debentures A/c 150000
(Allotment money due on 5000
debentures @ Rs 30 per
debenture)
Bank A/c Dr 150000
To Debentures Allotment A/c 150000
Debentures First and Final call A/c Dr 250000
(Debentures first and final call
money made due @ Rs 50 per
debenture)
Bank A/c Dr
250000
To Debentures First and Final call 250000
A/c
(Receipt of Debentures first and
final call money)
Issue of Debentures at Premium and Discount
Debentures are said to be issued at premium when these are issued at a value which is more than
their nominal value. For example, a debenture of Rs 100 is issued at Rs 110. This excess
amount of Rs 10 is the amount of premium. The premium on the issue of debentures is
credited to the Securities Premium A/c as per section 78 of the Companies Act, 1956.
Journal entry will be as follows:
Debentures Allotment A/c Dr
To Debentures Account
(Amount due on allotment along with premium of Rs ....)

Illustration 19
A company has issued 5000 10% Debentures of Rs 100 each at a premium of 20% payable as
Rs 60 on application Rs 60 on allotment (including premium) All the debentures were
subscribed for and money was duly received. Make journal entries.
Solution
Journal entries
1. Bank A/c Dr 300000

To Debentures Application A/c 300000
(Application money received)
2. Debentures Application A/c Dr 300000
300000
To 10% Debentures A/c
(Application money transferred to
Debenture A/c)
3. Debentures Allotment A/c Dr 300000
(Amount due on allotment along with
premium)
4. Bank A/c Dr To 300000

Debentures Allotment A/c (Allotment
money received) 300000
When debentures are issued at less than their nominal value they are said to be issued at
discount. For example, debenture of Rs 100 each is issued at Rs 90 per debenture. Companies
Act, 1956 has not laid down any conditions for the issue of debentures at a discount as have
been laid down in case of issue of shares at discount. However, there should be provision for
issue of such debentures in the Articles of Association of the Company.
Journal entry for issue of debentures at discount (at the time of allotment) Debentures
Allotment A/c Dr
Discount on issue of debentures A/c Dr
To Debentures A/c
(Allotment money due. The amount of discount is @ Rs. . . . per debenture)
Illustration 20
A company has issued 2000 9% debentures of Rs 100 each at a discount of 10% payable as
Rs 40 on application, Rs 50 on allotment Make necessary journal entries.

Bank A/c Dr 80000

80000
To Debentures Application A/c
(Application money received
Debentures Application A/c Dr 80000
(Application money transferred to debenture A/c)

Debentures Allotment A/c Dr 100000
Debentures Discount A/c Dr 20000
To 9% Debenture A/c 120000
(Amount due on allotment, along with discount
amount Rs 10 per debenture)
Bank A/c Dr 100000
To Debentures Allotment 100000
(Receipt of allotment money)
Issue of Debentures for consideration other than cash

When a company purchases some assets and issues debentures as a payment for the
purchase, to the vendors it is known as issue of debentures for consideration other than cash.
Debentures can be issued to vendors at par, at premium and at discount
Accounting Treatment:
1. Purchase of Assets
Sundry Assets A/c Dr
(Individually)
To Vendors A/c
(Purchase of assets)
2. Allotment of debentures
(i) At par
Vendors' A/c Dr
To Debentures A/c
(Issue of debentures at par to vendors)
(ii) At discount
Vendors' A/c Dr
Debentures Discount A/c Dr
To Debentures A/c
(Issue of debentures to vendors at a discount of Rs... per debenture)
Illustration 21
VG. Electronics Ltd. purchased machinery for Rs 198000 and issued 9% debentures of Rs 100
each to the vendors. Make journal entries if the debentures were issued
(a) at par
(b) at a premium of Rs 10
(c) at a discount of Rs 10

Machinery A/c Dr 198000

To Vendors A/c 198000
(Machine purchased)
Vendors A/c Dr 198000

(1980 debentures of Rs 100 each
issued to vendors)
Vendors A/c Dr 198000 180000
(1800 debentures issued at a premium of

Rs 10 per debenture)
Issue of Debentures with conditions Stipulated to their Redemption

(Journal entry)
(i) Issued at par redeemable at par
Bank A/c Dr
To Debentures Account
(Issue of debentures of Rs .... at par)
(ii) Issued at discount and redeemable at par
Bank A/c Dr
Discount on issue of Debentures A/c Dr
To Debentures A/c
(Issue of debentures of Rs ... at a discount
of Rs ....)
(iii) Issued at premium redeemable at par
Bank A/c Dr
To Debentures A/c
(Issue of ... debentures of Rs .... at a premium of Rs ....)

(iv) Issued at par, redeemable at premium
Bank A/c Dr
Loss on Issue of Debentures A/c Dr
To Debentures A/c
To Premium on Redemption of Debenture A/c
(Issue of ... debentures of Rs ... a redeemable at a premium of Rs ...)
(v) Issued at discount and redeemable at premium
Bank A/c Dr
Discount on Issue of Debentures A/c Dr
Loss on Issue of Debentures A/c Dr
To Debentures A/c
To Premium on Redemption of Debenture A/c
(Issue of ... debentures of Rs ... at a discount of Rs ... redeemable at a premium of Rs
....)

Illustration – 22
Make journal entries if 200 debentures of Rs 500 each have been issued as:
(i) Issued at Rs 500, redeemable at Rs 500

(ii) Issue at Rs 450; redeemable at Rs 500
(iii) Issued at Rs 550; redeemable at Rs 500
(iv) Issued at Rs 500; redeemable at Rs 550
(v) Issued at Rs 450; redeemable at Rs 550
Bank A/c Dr 100000

To Debentures A/c 100000
(Issue of 200 debentures @ Rs. 500 each
Bank A/c. Dr. 90000
Discount on issue of Debentures A/c Dr. 10000
To Debentures A/c. 100000
(Issue of 200 debentures @ Rs.50 each at Rs.
450)
Bank A/c Dr. 110000
To Debentures A/c 100000
To Securities Premium A/c. 10000
( Issue of 200 debentures of 500 each at
Rs.550)
Bank A/c Dr 100000
Loss on Issue of Debentures A/c Dr. 10000
To redemption of debentures A/c 10000
( Issue of 200 debentures of 500 each at
Rs.550)
Bank A/c Dr 90000

Loss on Issue of Debentures A/c Dr. 10000
Discount on issue of Debentures A/c. Dr. 10000
To Premium on Redemption of 10000
debentures A/c
( Issue of 200 debentures of 500 each at Rs.45
repayable at Rs.550)
Discount on issue of Debentures and loss on issue of debentures

In case company issues debentures on discount the total amount of discount is not charged to
profit and Loss Account of the company in the accounting
The amount of debenture discount can be written off in two ways:
1. All debentures are to be redeemed after a fixed period.
When the debentures are to be redeemed after a fixed period, the amount of discount will be
distributed equally within the number of years spread between the issue of debentures and their
redemption. The amount of discount on issue of debentures to be written off each year is
calculated as
Amount of discount written off = Total amount of Discount
No. of years

Journal entry;-
P/L A/c Dr
To Discount on issue of Debenture
2. Debentures are redeemed in instalments
Debentures may also be redeemed in instalments but over a fixed period. In that case the amount
of debenture discount will be written off each year in proportion to the amount of debentures
redeemed
Interest on Debenture
Debenture interest is the rate of interest per annum that will be paid to the debenture holders.
Companies generally pay interest on its debentures after every six months. Journal entries that
are made in the books of the company are as follows;
(i) Payment of Interest on Debentures
Debenture Interest A/c Dr

To Bank A/c
(Interest on ....% Debentures paid for six months ending ...@ ....% pa)
(ii) Transfer of Debenture Interest to Profit and Loss A/c
Profit and Loss A/c Dr
To Debenture Interest A/c
(Debenture Interest transferred to Profit and Loss A/c)

Redemption of N o n -convertible Debenture out of Profits
According to section 117 C(1) of the Companies Act, 1956, when debenture are to be redeemed
out of profits, an adequate amount of profits is required to be transferred to Debenture
Redemption Reserve every year before the redemption begins. It is to be noted that the
Companies Act 1956, vide Section117C (1) does not spell out as to what is the adequate amount?
For this one has to refer to SEBI Guidelines in this behalf. SEBI Guideline No. 10.3.2 (c)(a)
stipulates that an amount equal to 50% of the debenture issue should be transferred to Debenture
Redemption Reserve before the redemption begins. Implication of these provisions is that
whenever redemption of debenture is made, at least an amount equal to 50% of the debenture issue
should stand to the credit of the Debenture Redemption Reserve Account. Suppose a limited
company issued debenture of Rs. 5 crores with the condition to start redemption in the third year. In
such a case, before the debenture redemption begins in 3rd year, the Debenture Redemption
Reserve Account should have a balance at least equal to 0.5 × Rs. 5 crores = Rs. 2.50 crores. This
is applicable only in case of non-convertible debenture and non-convertible portion of partly
convertible debenture.
Following accounting entries are to be recorded in this regard:
Accounting entry for creation of Debenture Redemption R e s e r v e

Profit and Loss Appropriation a/c Dr.
To Debenture Redemption Reserve a/c
In the year of redemption, the debenture holders will be credited with the amount
due according to the terms of redemption.
(i) If the debenture are redeemable at par, the par value of debenture to be redeemed will
be transferred to debenture holders account by recording following entries :
Debenture a/c Dr.
To Debenture holders A/c
(ii) In case the debenture are redeemable at premium, the amount of premium will also be
transferred to debenture holders account by recording following entry :
% Debenture a/c Dr.
Debenture Redemption Premium A /c Dr.
To Debenture holders A /c
(iii) For payment to debenture holders
Debenture holders a/c Dr.
To Bank a/c
Illustration 23
Gunjan Ltd. issued 5,00,000, 12% debenture of Rs. 100 each on April 1, 2002 redeemable at
par on June1, 2003. The company received applications for
6,00,000 debentures and the allotment was made to all the applicants on pro-rata basis. The
debenture were redeemed on due date. How much amount of Debenture Redemption Reserve is
to be created before the redemption is carried out? Also record necessary journal entries
regarding issue and redemption of debenture.
Bank a/c Dr. 6,00,00,000
Debenture application a/c 6,00,00,000
(For receiving application money)
Debentures application a/c Dr. 6,00,00,000
12 % Debenture a/c 5,00,00,000
Debenture allotment a/c (Debenture 1,00,00,000
application money transferred to debenture
account consequent upon allotment of debenture)
Interest a/c Dr. 60,00,000
Debenture holders a/c 60,00,000
(For interest due)
Bank a/c
(For payment of interest) 60,00,000
Profit and Loss a/c Dr.
Interest a/c 60,00,000
(For writing off interest)
Profit and Loss a/c Dr. 2,50,00,000
Debenture Redemption Reserve a/c 60,00,000 2,50,00,000
(Appropriation of profit to DRR as per 60,00,000
Sec.117C(1)of The Companies Act, 1956)
Interest a/c Dr. 10,00,000
Debenture holders a/c 10,00,000 10,00,000
(Interest due for two months) 10,00,000
12 % Debentures a/c Dr. 5,00,00,000
Debenture holders a/c 5,00,00,000
(Payment on redemption of debentures due to
debentureholders
Debenture holders)a/c Dr. 5,00,00,000
5,10,00,000
Bank a/c 5,00,00,000
5,10,00,000
(Payment due to debenture holders discharged)
Profit and Loss a/c Dr. 10,00,000
Interest a/c 5,10,00,000 10,00,000
(Transfer of interest) 5,10,00,000
Debenture Redemption Reserve a/c Dr. 2,50,00,000
General Reserve a/c 2,50,00,000
(For transfer of DRR to general reserve)
10,00,000
Corporate Accounting 10,00,000 Page 45
Illustration 24
Ganeshan Ltd. has 800 lakhs 10% debenture of Rs. 100 each due for redemption on March 31, 2003.
Assume that Debenture Redemption Reserve has a balance of Rs. 3,40,00,00,000 on that date.
Record necessary entries at the time of redemption of debenture
Solution
Journal Entries
Mar.31 Profit and Loss Appropriation a/c Dr. 60,00,00,000
Debenture Redemption Reserve (For 60,00,00,000
transfer of profits to as per SEBI guidelines)
Mar.31 10 % Debenture a/c Dr. 8,00,00,00,000

Debenture holders a/c 8,00,00,00,000
( Amount becomes due to debenture holders
on redemption )
Debenture holders a/c Dr. 8,00,00,00,000
Mar.31 Bank a/c 8,00,00,00,000
(Amount due to debenture holders paid)
Debenture Redemption Reserve Dr. 4,00,00,00,000
Mar.31 General Reserve 4,00,00,00,000
(Debenture Redemption
Reserve transferred to General Reserve)
Financing of Debenture Redemption

The redemption of debentures require huge amount of cash whenever non- convertible debenture
are to be paid off. To meet this requirement, the Board of Directors may decide, at their own
discretion, to invest money appropriately and judiciously in securities or bonds of the other
business entities. In this situation, funds allocated are invested periodically outside the business.
For this purpose, an appropriate amount may be transferred to Debenture Redemption Sinking
Fund. An appropriate amount will be calculated by referring to Sinking Fund Factor, depending
upon the interest rate on investments and the number of years for which investments are made.
Sinking Fund Factor at ‘r’ rate of interest for ‘n’ number of years will be the reciprocal of Future
Value Factor annuity for ‘n’ years (FVIFA). Sinking Fund Factor = 1/FVIFA, ‘r’, ‘n’. FVIFA
table is given in the appendix. Debenture Redemption Sinking Fund account will be credited
every year so as to ensure that sufficient amount accumulates in this account before debenture
redemption takes place. It is to be noticed that Debenture Redemption Sinking Fund will serve the
purpose of Debenture Redemption Reserve as required by the Law. Therefore, for this purpose the
amount transferred to Debenture Redemption Sinking Fund be treated same as Debenture
Redemption Reserve. Therefore, the appropriated amount is transferred to Debenture Redemption
Reserve Account instead of Debenture Redemption Sinking Fund to meet the statutory
requirement. The journal entries in this regard can be categorised into three groups:
1. Entries at the end of first year

Entries relating to issue of debenture, payment of interest and amortization of discount/ loss
on issue of debenture have already been discussed in the earlier sections. The other related
entries at the end of first year are as under:
a) For transfer of profits to Debenture Redemption Reserve
Debenture Redemption Reserve a/c
b) For purchase of Debenture Redemption Sinking Fund Investments withthe amount

of Debenture Redemption Reserve set aside above.
Debenture Redemption Sinking Fund Investment a/c Dr.
Bank a/c
2. Entries at the end of second and subsequent years
In the second and subsequent years the company will start receiving interest on previous
years investments which will be transferred to Debenture Redemption Reserve. The
company will purchase investments with the amount of Debenture Redemption Reserve
kept aside and interest received on Debenture Redemption Sinking Fund Investments in
the respective years. The journal entries are as under :
a) For receiving of interest on Debenture Redemption Sinking Fund Investments
Bank a/c Dr.
Interest on Debenture Redemption Sinking Fund Investment a/c
b) For interest received transferred to Debenture Redemption Reserve
Interest on Debenture Redemption Sinking
Fund Investment a/c Dr.
Debenture Redemption Reserve
c) For transfer of profits to Debenture Redemption Reserve
d) For purchase of investments with the amount of Debenture Redemption Reserve
and interest received
Debenture Redemption Sinking
Fund Investment a/c Dr.
Bank a/c
3. Year of Redemption
The year in which the redemption of debenture is due, the entries for receipt of interest, its transfer
to Debenture Redemption Reserve and setting aside the profits for Debenture Redemption Reserve
will be recorded as usual. But instead of purchase of investments, all investments purchased
in previous years will be sold out to provide liquidity for redemption of debenture. After all the
debentures are redeemed on maturity, Debenture Redemption Reserve account will be closed by
transferring its balance to general reserve account. In case of redemption of debentures by draw
of lots, withdrawal from Debenture Redemption Reserve can be made after redemption of 10 %
of the debenture. Following entries are to be recorded :
(a) For receipt of interest on Debenture Redemption Sinking Fund Investments
Bank a/c Dr.
Interest on Debenture Redemption Sinking Fund Investment a/c
(b) For transfer of Interest to Debenture Redemption Reserve
Interest on Debenture Redemption
Sinking Fund Investment a/c Dr.
(c) For transfer of profits to Debenture Redemption Reserve
(d) (i) For sale of Debenture Redemption Sinking Fund Investments, (it is to be noted
that gain or loss on sale of Debenture Redemption Sinking Fund Investments, if
any, will be transferred to Debenture Redemption Reserve account.)
(ii) Investment sold at book value
Bank a/c Dr. (Sale price of Investment)
Debenture Redemption Sinking Fund Investment a/c
(Investment sold at cost price)
Or
(iii) Investment sold at less than book value
Bank a/c Dr.
Debenture Redemption Reserve Dr (Loss on sale of investments)
To Debenture Redemption Sinking Fund Investment a/c
Or
(iv) Investment sold at more than book value
Bank a/c Dr.
To Debenture Redemption Sinking Fund Investment a/c
To Debenture Redemption Reserve a/c(Gain on sale of Investment)
(e) On redemption of debenture at par, amount due to debenture holders
Debenture a/c Dr.
To
Debenture holders a/c
Or
In case the debenture are redeemed at premium, following entry will be recorded:
Debenture a/c Dr.
Debenture Redemption Premium a/c Dr.
To Debenture holders a/c
(f) Amount due to debenture holders paid :
Bank a/c
(g) After the debenture are redeemed, Debenture Redemption Reserve Account is
transferred to General Reserve Account by recording the following entry :
Debenture Redemption Reserve Dr.
General Reserve a/c
Illustration - 25
Anshu Detergents Ltd. issued 2,00,000, 10 % debenture of Rs. 10 each on January 1, 2000
redeemable after 4 years. For this purpose, the company established a Debenture Redemption
Sinking Fund Investment. The investments are expected to earn interest @ 4 % p.a. Sinking
Fund Factor Table shows that Re. 0.2355 invested annually at @ 4 % will accumulate to Re. 1
at the end of 4th years. On December 31, 2003, the investments realised Rs. 15,00,000. The
debentures were paid off as per terms of issue of debenture. Give journal entries to record
transaction relating to issue and investment of reserve and redemption of debenture.
2000 Bank a/c Dr.
Jan 1 Debenture application a/c 20,00,000 20,00,000
( Debenture application money received
Jan 1 Debenture application a/c Dr.
10 % Debenture a/c 20,00,000
20,00,000
( Application money transferred to 10 %
debentures consequent upon allotment)
Dec. 31 Profit and Loss Appropriation a/c Dr.
Debenture Redemption Reserve a/c 4,71,000 4,71,000
( Profits transferred to Debenture Redemption
Reserve )
Dec 31 Debenture Redemption Sinking
Fund Investments a/c Dr. 4,71,000 4,71,000
Bank a/c
( Investments purchased)
2001 Bank a/c Dr.
Dec 31 Interest on Debenture Sinking 18,840
18,840
Fund Investments a/c
( Interest received on investment)

Dec 31 Interest on Sinking Fund Investments a/c Dr.
18,840
Debenture Redemption Reserve 18,840
( Interest transferred to Sinking Fund)
Dec 31 Profit and Loss Appropriation a/c Dr.
4,71,000
Debenture Redemption Reserve ( Profits 4,71,000
transferred to Debenture Redemption Reserve )
Dec 31 Debenture Sinking Fund Investments a/c Dr.
Bank a/c 4,89,840 4,89,840
( Rs. 4,71,000 + 18,840 = 4,89,840,
investments purchased )
2002 Bank a/c Dr.
Dec 31 Interest on Debenture Sinking 38,433.60 38,433.60
( Interest received on investment)
Dec 31 Interest on Sinking Fund Investments a/c Dr.
38,433.60
Debenture Redemption Reserve 38,433.60
Debenture Redemption Reserve 4,71,000 4,71,000
( Profits transferred to Debenture
Redemption Reserve )
Dec 31 Debenture Sinking Fund Investments a/c Dr.
Bank a/c 5,09,433.60 5,09,433.60
(Rs. 4,71,000 + 38,433.60= 5,09,433.60
investments purchased )
2003 Bank a/c Dr.
Dec 31 Interest on Debenture Sinking 58,810.94
58,810.94
( 4 % of Rs. 4,71,000 + Rs. 4,89,840
+ Rs. 5,09,433.60, interest received)
Dec 31 Interest on Sinking Fund Investments a/cr.
58,810.94
Debenture Redemption Reserve 4,70,915.46 4,70,915.46
( Profits transferred to Debenture
Redemption Reserve )
Dec 31 Bank a/c Dr.
Debenture Sinking Fund Investments a/c 14,70,273.60
( Investment sold at profit)
Dec 31 10 % Debenture a/c Dr.
Debentureholders a/c 20,00,000 20,00,000
( Payment to debentureholders due on
redemption)
Dec 31 Debentureholders a/c Dr.
20,00,000
Bank a/c 20,00,000
(Payment made to debenture holders)
Dec 31 Debenture Redemption Reserve Dr.
General Reserve 20,29,726.40
( After redemption, Debenture Redemption
Reserve Account closed by
transferring to general reserve)

Notes to the Solution
Annual amount to be transferred from profits to Debenture Redemption Reserve

0.2355 × Rs. 20,00,000 = Rs. 4,71,0001
Illustration 26
Shiwaliks Ltd. issued 10,00,000, 7 % debenture of Rs. 100 each on April 12001 redeemable
after four years. It has been decided to create Debenture Redemption Reserve for this purpose. The
Debenture Redemption Sinking Fund Table shows that Re. 0.221926 invested in 8 % Government
Securities will amount to Re. 1 in 4 years. On March 31, 2005 the balance at bank was Rs.
5,00,00,000. The debentures were redeemed according to the terms of offer document. You are
required to prepare ledger accounts till the debenture are redeemed.
Solution
8 % Debenture Account
Dr. Cr.
Date Particulars JF Amount Date Particulars JF Amount
2002 2001
Mar.31 Balance c/f 10,00,00,000 Apr.1 Bank 10,00,00,000
2003 Balance c/f 2002 Balance b/f
Mar.31 Balance c/f 10,00,00,000 Apr.1 Bank 10,00,00,000
2004 Debenture 2003 Balance b/f
Mar.31 holders 10,00,00,000 Apr.1 10,00,00,000
2005 2004
Mar.31 10,00,00,000 Apr.1 10,00,00,000
Debenture holders Account

Dr. Cr.
Date Particulars J. Amount Date Particulars J. Amount
F. (Rs.) F. (Rs.)
2005 2005
Mar.31 Bank 10,00,00,000 Mar.31 8 %Debentures 10,00,00,000
Debenture Redemption Reserve A c c o u n t

Dr. Cr.
Date Particulars J. Amount Date Particulars J. Amount
F. (Rs.) F. (Rs.)
2002 2002
Mar.31 Balance c/f 2,21,92,600 Mar.31 Profit and Loss 2,21,92,6001
Appropriation
2003
Mar.31 Balance c/f Apr.1 Balance b/f
4,61,60,608 2003 2,21,92,600
Mar.31 Interest on
Debenture 17,75,408
Redemption Sinking
Fund Investments
Profit and Loss
4,61,60,608 App. 2,21,92,600
4,61,60,608

2004 2003
Mar. 31 Balance c/f 7,20,46,056.64 Apr. 1 Balance b/f 4,61,60,608.00
2004
Mar. 31 Interest on 36,92,848.64
Debenture
Redemption Sinking
Fund Investments
Profit and Loss App. 2,21,92,600.00
2005
Mar.31 General Reserve 2004
7,20,46,056.64Apr. 1 Balance b/f 7,20,46,056.64
2005
Mar. 31 Interest on
10,00,02,341.17 Debenture 720,46,056.64
Redemption Sinking
Fund Investments 57,63,684.53
Profit and Loss a/c.
2,21,92,600.00
10,00,02,341.17 10,00,02,341.17
Interest on Debenture Redemption Sinking Fund Investment Account

Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount

(Rs.) (Rs.)
2003 2003
Mar. 31 Debenture 17,75,408 Mar. 31 Bank 17,75,408
Redemption
Reserve 2004
2004 Debenture 36,92,848.64 Mar. 31 Bank 36,92,848.64
Mar. 31 Redemption
Reserve 57,63,684.53 2005 57,63,684.53
2005 Debenture Mar. 31 Bank
Mar. 31 Redemption
Reserve
Debenture Redemption Sinking Fund Investment Account
Dr. Cr.

(Rs.) (Rs.)
2002 2002
Mar.31 Bank 2,21,92,600 Mar.31 Balance c/f 2,21,92,600
Balance b/f 2003
Apr.1 Bank 2,21,92,600 Mar. 31 Balance c/f 4,61,60,608
2003
Mar. 31 2,39,68,008
4,61,60,608 4,61,60,608

2003
Apr.1 Balance b/f 4,61,60,608.00 Mar. 31 Balance c/f 7,20,46,056.64

2004
Mar. 31 Bank 2,58,85,448.64
2005
Apr.1 Balance b/f 2005
7,20,46,056.64 Mar. 31 Bank 2 7,20,46,056.64
7,20,46,056.64 7,20,46,056.64
Bank Account
Dr. Cr.
(Rs.) (Rs.)
2005 2005
Mar.31 Balance b/f 5,00,00,000.00 Mar. Debenture 10,00,00,000.00
Interest on 31 holders 2,57,38,905.28
Debenture Balance c/f
Redemption
Sinking Fund 36,92,848.64
Investment
Debenture
Redemption 7,20,46,056.64
Sinking Fund
Investment
12,57,38,905.28 12,57,38,905.28
1 Amount to be appropriated = .221926 × Rs. 10,00,00,000 = Rs. 2,21,92,600.

2 It is assumed that Debenture Redemption Sinking Fund Investments are sold at no profit no loss.
Following are the journal entries to be recorded for discharging obligation in respect of
convertible debenture:
(A) Redemption of debenture at par through conversion into shares:
(i) For amount due to debenture holders
% Debenture a/c Dr.
Debenture holders’ a/c
(ii) For discharging debenture holders by issue of equity shares at par :
Debenture holders a /c Dr.
Equity share capital a /c
Or
(iii) For discharging Debenture holders by issue of equity share at premium :
Equity share capital a/c
Security premium a/c
Since shares are issued at premium, the number of shares to be issued will be
equal to the amount of debenture to be redeemed divided by issue price.
(B) Redemption of debenture (at premium) through conversion into shares :

(i) For amount due to

debentureholders
x% debenture a/c Dr.
Debenture Redemption Premium Dr.
(ii) For discharging debenture holders by issue of shares at par :

(iii) For discharging debenture holders by issuing share at premium :
Securities premium a/c
Illustration 27
Swati Detergents Ltd. issued 90,00,000, 6% debenture of Rs. 100 each redeemable after
4 years by converting them into equity shares of Rs. 10 each. Record journal entries for
issue and redemption of debenture. Ignore entries for payment of interest.
Solution
Journal entries
Bank a/c Dr. 90,00,00,000
Debenture application a/c 90,00,00,000
( Debenture application money received)
Debenture application a/c Dr.

6 % Debenture a/c 90,00,00,000
(Application money transferred to 6% 90,00,00,000
debenture account consequent upon
allotment)
6 % Debenture a/c Dr. 90,00,00,000
Debenture holders 90,00,00,000
( For amount due to debenture holders
on redemption)
Debenture holders a/c Dr. 90,00,00,000
Equity share capital a/c 90,00,00,000
( For amount due to debenture holders
discharge by issue of equity shares)
Redemption of Debenture through open market operations

The Companies Act, 1956 permits the issuer company to purchase and hold or cancel the
debenture through open market purchases, obviously at favourable prices, provided the
Articles of Association provide for this. When company purchases its own debentures with no
intention to cancel them, it is treated like any other investment and when such debentures are
subsequently sold in the market it will be similar to the sale of any other investment. A Company
may also purchase the debenture with an intention to cancel them. It is assumed that the Company
has sufficient amount in Debenture Redemption Reserve before initiating the purchase of debenture
for cancellation. The debentures may either be purchased:
(a) On the date(s) when interest on these debenture is due, or
(b) On the date(s) between the two interest dates.
Therefore, the accounting treatment for purchase of debenture in the two situations

above will be different due to accrual and non-accrual of interest.
(A) When purchase of debenture is on due date
(i) When debenture are purchased for investment purpose, the following journal
entry is recorded
Investment in own debenture a/c Dr.
Bank a/c
(ii) When own debenture are subsequently sold in the market, following entry is
recorded
Bank a/c Dr.
Investment in own debenture a/c
Or
When investment is sold at a price below its purchase price
Bank a/c Dr.
Loss on sale of investment Dr.
Or
When investment is sold at a price below its purchase price
Bank a/c
Gain on sale of investments a/c
It is to be noted that gain or loss on sale of investment is transferred to profit and loss
account.
On Cancellation of Own Debenture
Debenture purchased from the open market will be cancelled only after passing the
resolution by Board of Directors to this effect. The following journal entries are to be
recorded for the cancellation of debenture :
When debenture are purchased at nominal value of debenture
x % Debenture a/c Dr.
Or
When own debenture are purchased at price below nominal value of debenture
x % Debenture a/c Dr.
Own debenture a/c
Profit on cancellation a/c
Balance in profit on cancellation of debenture will be transferred to captial reserve or
may be utilised to write off discount/loss on issue of debenture. In this regard the following
journal entry is recorded :
Gain on cancellation a /c Dr.
Capital Reserve
Or
Gain on cancellation a /c Dr.
Discount/Loss a/c
Purchase of Debenture on a day other than the due date of Interest
Ex-Interest and Cum-Interest Quotations

It is assumed that the debentures were purchased immediately after the date of payment of interest
and therefore no interest has accrued on the date of purchase of debenture. However, in real life,
it may not be possible because the company will be guided by the prices prevailing in the
market to its advantage. In such a situation the company purchases debenture from the market as
and when it is beneficial to do so. The interest accrued from the date of last payment of interest
needs to be considered. The problem of ex-interest (exclusive of interest) and cum-interest

(cumulative of interest) arises only when the debentures are purchased on the date(s) other than
the date(s) on which interest is due. In such a situation, total cash to be paid on such debenture need
to be bifurcated into the capital portion (real price) and the revenue portion (interest accrued from
the date last it was paid up to the date of purchase) i.e. the interest for the expired period.
Therefore, it is very important to know whether the price quoted
Following accounting entries are to be recorded:
1. For Purchase of own debenture with the actual price paid, i.e., Ex-interest or Cum-
interest
Own Debenture a/c Dr. (Ex-interest price or

real price)
Interest on debenture a/c Dr. (Interest
Bank a/c accrued) (Total
2. Debenture purchased are now being cancelled cash paid)
x % Debenture a/c Dr. (Nominal value of debenture) Own
Debenture a/c (Real price)
Gain on cancellation (Difference in nominal value and
real price)
Debenture purchased for immediate cancellation
When debentures are purchased for immediate cancellation, then, the interest on
remaining debenture will be paid at the time when interest becomes due.
Illustration 28
Doorstep Delivery Ltd. has 1,00,000 9 % Debenture of Rs. 100 each outstanding on April 1, 2002.
The interest is payable on March 31 and September 30 every year. On July 1, 2002 company
purchased 8,000 Debentures at Rs. 97 (cum- interest) for immediate cancellation. Record
journal entries for purchase of debenture and cancellation and payment of interest on
September 30, 2002.
2002
July 1 Own debenture a/c Dr. 7,58,000
Interest on debenture Dr.
Bank a/c 18000
(Own debenture purchased) 7,76,000
9% Debenture a/c Dr.
July 1 Own debenture a/c 8,00,000
Profit on cancellation a/c
(Own debenture purchased are now 7,58,000
cancelled) 42,000
Interest on debenture a/c Dr.
Sept.30 (Interest due on debenture) 4,14,000
Bank a/c 4,14,000
(Interest due paid to debenture holders)
Sept.30 Profit and Loss a/c Dr. 4,14,000
Interest on debenture a/c
(For transfer of half yearly interest) 4,14,000
Sept.30 4,32,000
4,32,000

Illustration 29
Cripton India Ltd. has 1,00,000, 9% Debenture of Rs. 100 each outstanding on April 1, 2002. The
company pays interest on Sept. 30 and March 31 every year. Company purchased 10,000
debentures at Rs 96. (Ex-Interest) on May 1, 2002. It further purchased 2,000 debentures at Rs. 98
(cum-interest) on January 1, 2003. These entire debentures were cancelled on March 31, 2003.
Record the journal entries for purchase of debenture, payment of interest and cancellation of
debenture.
Date Particulars L.F. Debit Amount Credit Amount
(Rs.) (Rs.)
2002 Own debenture a/c Dr. 9,60,000
May 1 Interest on debenture a/c Dr. 7,500
Bank a/c 9,67,500
(Own debenture purchased)
Interest on debenture a/c Dr. 4,42,500
Sept.30 Interest on own debenture a/c 37,500
(Interest due on debenture)
Debenture holders a/c Dr. 4,05,000
Bank a/c 4,05,000
(Interest paid to debenture holders)
Sept.30
Own debenture a/c Dr.
1,91,500
2003 interest on debenture a/c Dr.
Bank a/c 4,500
Jan.1 1,96,000
(Own debenture purchased)
Interest on Debenture a/c Dr. 4,.45,500
Interest on own debenture a/c 49,500
Mar.31 (Interest due on debenture)
Mar.31 Debenture holders a/c Dr. 3.96,000
Bank a/c 3.96,000
(Interest paid to debenture holders)
Mar.31 Interest on own debenture a/c Dr. 87,000
Profit and Loss a/c 87,000
Interest on own debenture transferred to
profit and loss account)
Mar.31 Profit and Loss a/c Dr. 87,000
Interest on Debenture a/c 87,000
(Transfer of debenture interest)
Note to the Solution
1) May 1, 2002
(i) Interest accured on debenture purchased 10,000 × . 100 × × = 7,500
2) Sept. 30, 2002
(i) Interest on debenture held by outsiders 90,000 × . 100 × × = 4,05,000
(ii) Interest on own debenture 10,000 × . 100 × × = 37,000
3) Jan 1, 2003
(i) Interest accrued on debenture a/c purchased 2,000 × . 100 × × = 4,500
4) 31 Mar, 2003
(i) Interest on debenture held by outsiders 88,00,000 × . 100 × × = 3,96,000
(ii) Interest on own debenture 10,00,000 × . 100 × × = 45,000
(iii) Interest on own debenture 45,000 + 4,500 = 49,500

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School of Distance Education

Corporate Accounting Page 5

COMPANIES DEEMED TO BE PUBLIC

SHARE CAPITAL OF THE COMPANY

Corporate Accounting Page 6

SWEAT EQUITY SHARE

Corporate Accounting Page 7

Difference between shares and stock

Bank A/c Dr 30,000

Corporate Accounting Page 10

20,000 Equity shares of Rs. 10 2,00,000

Issued, Subscribed, called up and

15,000 Equity shares of Rs. 10 1,50,000 1,50,000

each fully called up

Issue of shares for purchase of Assets

Corporate Accounting Page 11

Corporate Accounting Page 12

To Share Application A/c 900000

(Application money received for

Share Application A/c Dr 900000

To Share Capital A/c 600000

To Bank A/c 150000

To Share Allotment A/c 150000

Share Allotment A/c Dr 600000

To Share Capital A/c… 600000

(Allotment money due)

Corporate Accounting Page 13

Share First and Final call A/c. Dr

Issue of Shares at Premium

Accounting treatment of Premium on issue of shares:

Share Application A/c. Dr

Corporate Accounting Page 14

Bank A/c Dr 800000

To Share Allotment A/c 800000

(Share allotment money is

Share Allotment A/c Dr 800000

Share First and Final Call A/c Dr 300000

To Share Capital A/c 300000

(Share call money made due

Issue of Shares at discount

(a) The issue must be of a class of shares already issued.

2. Share Application A/c Dr 4,00,000

Corporate Accounting Page 16

4. Shares Allotment A/c Dr 3,00,000

5. Bank A/c Dr 2,20,000

To Share Allotment A/c 2,20,000

6. Share First & Final Call A/c Dr 2,00,000

To Share Capital A/c 2,00,000

7. Bank A/c Dr 2,00,000

To Share First & Final Call A/c 2,00,000

Corporate Accounting Page 17

Share Capital A/c (100 × Rs 10) Dr 1000

To Share Second and Final Call A/c (100 × Rs 3) 300

(forfeiture of 100 shares)

Share Capital A/c (300 × Rs 100) Dr 30000

To Share forfeited A/c (300 × Rs 25) 7500

Corporate Accounting Page 18

Share Capital A/c Dr. 5000

Share Capital A/c Dr

Corporate Accounting Page 19