SVKM’S NARSEE MONJEE COLLEGE OF COMMERCE AND ECONOMICS

AUTONOMOUS

BACHELOR OF COMMERCE

SECOND YEAR-SEMESTER III

Principles and Practices of Financial Accounting I

A.Y. : 2024-25

DEPARTMENT OF ACCOUNTANCY

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 SVKM’S
NARSEE MONJEE COLLEGE OF COMMERCE AND ECONOMICS Autonomous

B.COM HONOURS – Binder (2024-25)

Course Title: Principles and Practices of Financial Accounting I

Sr. No Particulars Page No.

1 Syllabus 03

3 Classwork

- Amalgamation of Partnership firms 13-23

- Accounting Standard 10 23-35

- Issue and Redemption of Debentures 36-48

- Redemption of preference shares (including issue of shares for consideration 49- 63

other than cash and Bonus shares)

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Detailed Syllabus for Sem III

Module Particulars
No.

1 Amalgamation of Partnership Firms

Meaning
Need and Objectives of Amalgamation
Accounting treatment in the books of Selling and buying entity as per Realization Method
including calculation of purchase consideration, journal entries, ledger preparation, Balance
Sheet of Purchasing firm, goodwill w/off adjustment and capital adjustments in case of -
1. Sole Trader and vendor firm amalgamating into a partnership firm
2. Sole traders amalgamating into Partnership Firm
3. Vendor Firms amalgamating into Partnership Firm
4. Sole trader / Firm taken over by another existing Partnership firm
2 Accounting Standard 10
Objectives
Scope
Definition (Bearer Plant, Biological Asset, Carrying Amount, Cost, Fair value, Gross carrying
amount of an asset, Property plant and equipment, Recoverable Amount, Residual value of an
asset, Useful life)
Recognition of PPE
Measurement of PPE @ Recognition
Measurement of PPE after Recognition
Retirement and Derecognition
Disclosure
(Syllabus does not include Paragraph 45 to 72 and 88 to 91)

3 Issue and Redemption of Debentures

Meaning and Types of debentures
Accounting treatment in case of
1. Issue of debentures for cash and non-cash consideration
2. Redemption of debentures out of Capital
3. Redemption of debentures out of Profit (DRR and Sinking Fund method)
4. Redemption of debentures by conversion
4 Redemption of Preference Shares ((including issue of shares for consideration other than
cash and Bonus shares)
Legal Provision
Divisible and Non divisible Profit
Redemption Fully out of Profits
Redemption Fully out of New Issue · Redemption Partly out of Profits and New Issue
Accounting treatment of Redemption of preference share
Accounting treatment in case of issue of shares for non-cash consideration and Bonus issue
(Conversion of Partly paid shares into Fully paid up and Allotment of Fully paid shares)

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 CLASSWORK

MODULE 1 ACCOUNTING STANDARD 10

Accounting Standard (AS) 10 Property, Plant and Equipment

(This Accounting Standard includes paragraphs set in bold italic type and plain type, which have equal
authority. Paragraphs in bold italic type indicate the main principles. This Accounting Standard should be
read in the context of General Instructions contained in part A of the Annexure to the Notification.)
Objective
1. The objective of this Standard is to prescribe the accounting treatment for property, plant and
equipment so that users of the financial statements can discern information about investment made by an
enterprise in its property, plant and equipment and the changes in such investment. The principal issues in
accounting for property, plant and equipment are the recognition of the assets, the determination of their
carrying amounts and the depreciation charges and impairment losses to be recognised in relation to them.
Scope
2. This Standard should be applied in accounting for property, plant and equipment except when another
Accounting Standard requires or permits a different accounting treatment.
3. This Standard does not apply to:
(a) biological assets related to agricultural activity other than bearer plants. This Standard applies to bearer
plants but it does not apply to the produce on bearer plants; and
(b) wasting assets including mineral rights, expenditure on the exploration for and extraction of minerals,
oil, natural gas and similar non-regenerative resources.
However, this Standard applies to property, plant and equipment used to develop or maintain the assets
described in (a) and (b) above.
4. Other Accounting Standards may require recognition of an item of property, plant and equipment based
on an approach different from that in this Standard. For example, AS 19, Leases, requires an enterprise to
evaluate its recognition of an item of leased property, plant and equipment on the basis of the transfer of
risks and rewards. However, in such cases other aspects of the accounting treatment for these assets,
including depreciation, are prescribed by this Standard.
5. Investment property, as defined in AS 13, Accounting for Investments, should be accounted for only in
accordance with the cost model prescribed in this standard.
Definitions
6. The following terms are used in this Standard with the meanings specified:
Agricultural Activity is the management by an enterprise of the biological transformation and harvest of
biological assets for sale or for conversion into agricultural produce or into additional biological assets.
Agricultural Produce is the harvested product of biological assets of the enterprise.
Bearer plant is a plant that (a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than a period of twelve months; and
(c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.
The following are not bearer plants:
(i) plants cultivated to be harvested as agricultural produce (for example, trees grown for use as lumber);
(ii) plants cultivated to produce agricultural produce when there is more than a remote likelihood that the
entity will also harvest and sell the plant as agricultural produce, other than as incidental scrap sales (for
example, trees that are cultivated both for their fruit and their lumber); and
(iii) annual crops (for example, maize and wheat).
When bearer plants are no longer used to bear produce they might be cut down and sold as scrap, for
example, for use as firewood. Such incidental scrap sales would not prevent the plant from satisfying the
definition of a bearer plant.
Biological Asset is a living animal5 or plant.

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5 An Accounting Standard on Agriculture is under formulation, which will, inter alia, cover accounting
for livestock. Till the time, the Accounting Standard on Agriculture is issued, accounting for livestock
meeting the definition of Property, Plant and Equipment, will be covered as per AS 10, Property, Plant
and Equipment.
Carrying amount is the amount at which an asset is recognised after deducting any accumulated
depreciation and accumulated impairment losses. Cost is the amount of cash or cash equivalents paid or
the fair value of the other consideration given to acquire an asset at the time of its acquisition or
construction or, where applicable, the amount attributed to that asset when initially recognised in
accordance with the specific requirements of other Accounting Standards.
Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Enterprise-specific value is the present value of the cash flows an enterprise expects to arise from the
continuing use of an asset and from its disposal at the end of its useful life or expects to incur when
settling a liability.
Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in
an arm’s length transaction.
Gross carrying amount of an asset is its cost or other amount substituted for the cost in the books of
account, without making any deduction for accumulated depreciation and accumulated impairment losses.
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount. Property, plant and equipment are tangible items that: (a) are held for use in the production or
supply of goods or services, for rental to others, or for administrative purposes; and
(b) are expected to be used during more than a period of twelve months.
Recoverable amount is the higher of an asset’s net selling price and its value in use.
The residual value of an asset is the estimated amount that an enterprise would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age
and in the condition expected at the end of its useful life.
Useful life is:
(a) the period over which an asset is expected to be available for use by an enterprise; or
(b) the number of production or similar units expected to be obtained from the asset by an enterprise.
Recognition
7. The cost of an item of property, plant and equipment should be recognised as an asset if, and only if:
(a) it is probable that future economic benefits associated with the item will flow to the enterprise; and
(b) the cost of the item can be measured reliably.
8. Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance
with this Standard when they meet the definition of property, plant and equipment. Otherwise, such items
are classified as inventory.
9. This Standard does not prescribe the unit of measure for recognition, i.e., what constitutes an item of
property, plant and equipment. Thus, judgement is required in applying the recognition criteria to specific
circumstances of an enterprise. An example of a ‘unit of measure’ can be a ‘project’ of construction of a
manufacturing plant rather than individual assets comprising the project in appropriate cases for the
purpose of capitalisation of expenditure incurred during construction period. Similarly, it may be
appropriate to aggregate individually insignificant items, such as moulds, tools and dies and to apply the
criteria to the aggregate value. An enterprise may decide to expense an item which could otherwise have
been included as property, plant and equipment, because the amount of the expenditure is not material.
10. An enterprise evaluates under this recognition principle all its costs on property, plant and equipment
at the time they are incurred. These costs include costs incurred:
(a) initially to acquire or construct an item of property, plant and equipment; and
(b) subsequently to add to, replace part of, or service it.
Initial Costs
11. The definition of ‘property, plant and equipment’ covers tangible items which are held for use or for
administrative purposes. The term ‘administrative purposes’ has been used in wider sense to include all
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business purposes other than production or supply of goods or services or for rental for others. Thus,
property, plant and equipment would include assets used for selling and distribution, finance and
accounting, personnel and other functions of an enterprise. Items of property, plant and equipment may
also be acquired for safety or environmental reasons. The acquisition of such property, plant and
equipment, although not directly increasing the future economic benefits of any particular existing item of
property, plant and equipment, may be necessary for an enterprise to obtain the future economic benefits
from its other assets. Such items of property, plant and equipment qualify for recognition as assets
because they enable an enterprise to derive future economic benefits from related assets in excess of what
could be derived had those items not been acquired. For example, a chemical manufacturer may install
new chemical handling processes to comply with environmental requirements for the production and
storage of dangerous chemicals; related plant enhancements are recognised as an asset because without
them the enterprise is unable to manufacture and sell chemicals. The resulting carrying amount of such an
asset and related assets is reviewed for impairment in accordance with AS 28, Impairment of Assets.
Subsequent Costs
12. Under the recognition principle in paragraph 7, an enterprise does not recognise in the carrying
amount of an item of property, plant and equipment the costs of the day-to-day servicing of the item.
Rather, these costs are recognised in the statement of profit and loss as incurred. Costs of day-to-day
servicing are primarily the costs of labour and consumables, and may include the cost of small parts. The
purpose of such expenditures is often described as for the ‘repairs and maintenance’ of the item of
property, plant and equipment.
13. Parts of some items of property, plant and equipment may require replacement at regular intervals. For
example, a furnace may require relining after a specified number of hours of use, or aircraft interiors such
as seats and galleys may require replacement several times during the life of the airframe. Similarly, major
parts of conveyor system, such as, conveyor belts, wire ropes, etc., may require replacement several times
during the life of the conveyor system. Items of property, plant and equipment may also be acquired to
make a less frequently recurring replacement, such as replacing the interior walls of a building, or to make
a non-recurring replacement. Under the recognition principle in paragraph 7, an enterprise recognises in
the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item
when that cost is incurred if the recognition criteria are met. The carrying amount of those parts that are
replaced is derecognised in accordance with the derecognition provisions of this Standard (see paragraphs
74-80).
14. A condition of continuing to operate an item of property, plant and equipment (for example, an
aircraft) may be performing regular major inspections for faults regardless of whether parts of the item are
replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the
item of property, plant and equipment as a replacement if the recognition criteria are satisfied. Any
remaining carrying amount of the cost of the previous inspection (as distinct from physical parts) is
derecognised.
15. The derecognition of the carrying amount as stated in paragraphs 13-14 occurs regardless of whether
the cost of the previous part / inspection was identified in the transaction in which the item was acquired
or constructed. If it is not practicable for an enterprise to determine the carrying amount of the replaced
part/ inspection, it may use the cost of the replacement or the estimated cost of a future similar inspection
as an indication of what the cost of the replaced part/ existing inspection component was when the item
was acquired or constructed.
Measurement at Recognition
16. An item of property, plant and equipment that qualifies for recognition as an asset should be
measured at its cost.
Elements of Cost
17. The cost of an item of property, plant and equipment comprises:
(a) its purchase price, including import duties and non–refundable purchase taxes,, after deducting trade
discounts and rebates.

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(b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management.
(c) the initial estimate of the costs of dismantling, removing the item and restoring the site on which it is
located, referred to as ‘decommissioning, restoration and similar liabilities’, the obligation for which an
enterprise incurs either when the item is acquired or as a consequence of having used the item during a
particular period for purposes other than to produce inventories during that period.
18. Examples of directly attributable costs are:
(a) costs of employee benefits (as defined in AS 15, Employee Benefits) arising directly from the
construction or acquisition of the item of property, plant and equipment;
(b) costs of site preparation;
(c) initial delivery and handling costs;
(d) installation and assembly costs;
(e) costs of testing whether the asset is functioning properly, after deducting the net proceeds from selling
any items produced while bringing the asset to that location and condition (such as samples produced
when testing equipment); and
(f) professional fees.
19. An enterprise applies AS 2, Valuation of Inventories, to the costs of obligations for dismantling,
removing and restoring the site on which an item is located that are incurred during a particular period as
a consequence of having used the item to produce inventories during that period. The obligations for costs
accounted for in accordance with AS 2 or AS 10 are recognised and measured in accordance with AS 29,
Provisions, Contingent Liabilities and Contingent Assets.
20. Examples of costs that are not costs of an item of property, plant and equipment are:
(a) costs of opening a new facility or business, such as, inauguration costs;
(b) costs of introducing a new product or service (including costs of advertising and promotional
activities);
(c) costs of conducting business in a new location or with a new class of customer (including costs of staff
training); and
(d) administration and other general overhead costs.
21. Recognition of costs in the carrying amount of an item of property, plant and equipment ceases when
the item is in the location and condition necessary for it to be capable of operating in the manner intended
by management. Therefore, costs incurred in using or redeploying an item are not included in the carrying
amount of that item. For example, the following costs are not included in the carrying amount of an item
of property, plant and equipment:
(a) costs incurred while an item capable of operating in the manner intended by management has yet to be
brought into use or is operated at less than full capacity;
(b) initial operating losses, such as those incurred while demand for the output of an item builds up; and
(c) costs of relocating or reorganising part or all of the operations of an enterprise.
22. Some operations occur in connection with the construction or development of an item of property,
plant and equipment, but are not necessary to bring the item to the location and condition necessary for it
to be capable of operating in the manner intended by management. These incidental operations may occur
before or during the construction or development activities. For example, income may be earned through
using a building site as a car park until construction starts. Because incidental operations are not necessary
to bring an item to the location and condition necessary for it to be capable of operating in the manner
intended by management, the income and related expenses of incidental operations are recognised in the
statement of profit and loss and included in their respective classifications of income and expense.
23. The cost of a self-constructed asset is determined using the same principles as for an acquired asset. If
an enterprise makes similar assets for sale in the normal course of business, the cost of the asset is usually
the same as the cost of constructing an asset for sale (see AS 2). Therefore, any internal profits are
eliminated in arriving at such costs. Similarly, the cost of abnormal amounts of wasted material, labour, or
other resources incurred in self-constructing an asset is not included in the cost of the asset. AS 16,

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Borrowing Costs, establishes criteria for the recognition of interest as a component of the carrying amount
of a self-constructed item of property, plant and equipment.
24. Bearer plants are accounted for in the same way as self-constructed items of property, plant and
equipment before they are in the location and condition necessary to be capable of operating in the
manner intended by management. Consequently, references to ‘construction’ in this Standard should be
read as covering activities that are necessary to cultivate the bearer plants before they are in the location
and condition necessary to be capable of operating in the manner intended by management.
Measurement of Cost
25. The cost of an item of property, plant and equipment is the cash price equivalent at the recognition
date. If payment is deferred beyond normal credit terms, the difference between the cash price equivalent
and the total payment is recognised as interest over the period of credit unless such interest is capitalised
in accordance with AS 16.
26. One or more items of property, plant and equipment may be acquired in exchange for a non-monetary
asset or assets, or a combination of monetary and non-monetary assets. The following discussion refers
simply to an exchange of one non-monetary asset for another, but it also applies to all exchanges
described in the preceding sentence. The cost of such an item of property, plant and equipment is
measured at fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value
of neither the asset(s) received nor the asset(s) given up is reliably measurable. The acquired item(s) is/are
measured in this manner even if an enterprise cannot immediately derecognise the asset given up. If the
acquired item(s) is/are not measured at fair value, its/their cost is measured at the carrying amount of the
asset(s) given up.
27. An enterprise determines whether an exchange transaction has commercial substance by considering
the extent to which its future cash flows are expected to change as a result of the transaction. An exchange
transaction has commercial substance if:
(a) the configuration (risk, timing and amount) of the cash flows of the asset received differs from the
configuration of the cash flows of the asset transferred; or
(b) the enterprise-specific value of the portion of the operations of the enterprise affected by the
transaction changes as a result of the exchange;
(c) and the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.
For the purpose of determining whether an exchange transaction has commercial substance, the
enterprise-specific value of the portion of operations of the enterprise affected by the transaction should
reflect post-tax cash flows. In certain cases, the result of these analyses may be clear without an enterprise
having to perform detailed calculations.
28. The fair value of an asset is reliably measurable if (a) the variability in the range of reasonable fair
value measurements is not significant for that asset or (b) the probabilities of the various estimates within
the range can be reasonably assessed and used when measuring fair value. If an enterprise is able to
measure reliably the fair value of either the asset received or the asset given up, then the fair value of the
asset given up is used to measure the cost of the asset received unless the fair value of the asset received is
more clearly evident.
29. Where several items of property, plant and equipment are purchased for a consolidated price, the
consideration is apportioned to the various items on the basis of their respective fair values at the date of
acquisition. In case the fair values of the items acquired cannot be measured reliably, these values are
estimated on a fair basis as determined by competent valuers.
30. The cost of an item of property, plant and equipment held by a lessee under a finance lease is
determined in accordance with AS 19, Leases.
31. The carrying amount of an item of property, plant and equipment may be reduced by government
grants in accordance with AS 12, Accounting for Government Grants.
Measurement after Recognition
32. An enterprise should choose either the cost model in paragraph 33 or the revaluation model in
paragraph 34 as its accounting policy and should apply that policy to an entire class of property, plant and
equipment.
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Cost Model
33. After recognition as an asset, an item of property, plant and equipment should be carried at its cost
less any accumulated depreciation and any accumulated impairment losses.
Revaluation Model
34. After recognition as an asset, an item of property, plant and equipment whose fair value can be
measured reliably should be carried at a revalued amount, being its fair value at the date of the revaluation
less any subsequent accumulated depreciation and subsequent accumulated impairment losses.
Revaluations should be made with sufficient regularity to ensure that the carrying amount does not differ
materially from that which would be determined using fair value at the balance sheet date.
35. The fair value of items of property, plant and equipment is usually determined from market-based
evidence by appraisal that is normally undertaken by professionally qualified valuers.
36. If there is no market-based evidence of fair value because of the specialised nature of the item of
property, plant and equipment and the item is rarely sold, except as part of a continuing business, an
enterprise may need to estimate fair value using an income approach (for example, based on discounted
cash flow projections) or a depreciated replacement cost approach which aims at making a realistic
estimate of the current cost of acquiring or constructing an item that has the same service potential as the
existing item.
37. The frequency of revaluations depends upon the changes in fair values of the items of property, plant
and equipment being revalued. When the fair value of a revalued asset differs materially from its carrying
amount, a further revaluation is required. Some items of property, plant and equipment experience
significant and volatile changes in fair value, thus necessitating annual revaluation. Such frequent
revaluations are unnecessary for items of property, plant and equipment with only insignificant changes in
fair value. Instead, it may be necessary to revalue the item only every three or five years.
38. When an item of property, plant and equipment is revalued, the carrying amount of that asset is
adjusted to the revalued amount. At the date of the revaluation, the asset is treated in one of the following
ways:
(a) the gross carrying amount is adjusted in a manner that is consistent with the revaluation of the carrying
amount of the asset. For example, the gross carrying amount may be restated by reference to observable
market data or it may be restated proportionately to the change in the carrying amount. The accumulated
depreciation at the date of the revaluation is adjusted to equal the difference between the gross carrying
amount and the carrying amount of the asset after taking into account accumulated impairment losses; or
(b) the accumulated depreciation is eliminated against the gross carrying amount of the asset.
The amount of the adjustment of accumulated depreciation forms part of the increase or decrease in
carrying amount that is accounted for in accordance with paragraphs 42 and 43.
39. If an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs should be revalued.
40. A class of property, plant and equipment is a grouping of assets of a similar nature and use in
operations of an enterprise. The following are examples of separate classes:
(a) land;
(b) land and buildings;
(c) machinery;
(d) ships;
(e) aircraft;
(f) motor vehicles;
(g) furniture and fixtures;
(h) office equipment; and
(i) bearer plants.
41. The items within a class of property, plant and equipment are revalued simultaneously to avoid
selective revaluation of assets and the reporting of amounts in the financial statements that are a mixture
of costs and values as at different dates. However, a class of assets may be revalued on a rolling basis

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provided revaluation of the class of assets is completed within a short period and provided the
revaluations are kept up to date.
42. An increase in the carrying amount of an asset arising on revaluation should be credited directly to
owners’ interests under the heading of revaluation surplus. However, the increase should be recognised in
the statement of profit and loss to the extent that it reverses a revaluation decrease of the same asset
previously recognised in the statement of profit and loss.
43. A decrease in the carrying amount of an asset arising on revaluation should be charged to the
statement of profit and loss. However, the decrease should be debited directly to owners’ interests under
the heading of revaluation surplus to the extent of any credit balance existing in the revaluation surplus in
respect of that asset.
44. The revaluation surplus included in owners’ interests in respect of an item of property, plant and
equipment may be transferred to the revenue reserves when the asset is derecognised. This may involve
transferring the whole of the surplus when the asset is retired or disposed of. However, some of the
surplus may be transferred as the asset is used by an enterprise. In such a case, the amount of the surplus
transferred would be the difference between depreciation based on the revalued carrying amount of the
asset and depreciation based on its original cost. Transfers from revaluation surplus to the revenue
reserves are not made through the statement of profit and loss.

Retirements
73. Items of property, plant and equipment retired from active use and held for disposal should be stated
at the lower of their carrying amount and net realisable value. Any write-down in this regard should be
recognised immediately in the statement of profit and loss.
Derecognition
74. The carrying amount of an item of property, plant and equipment should be derecognised
(a) on disposal; or
(b) when no future economic benefits are expected from its use or disposal.
75. The gain or loss arising from the derecognition of an item of property, plant and equipment should be
included in the statement of profit and loss when the item is derecognised (unless AS 19, Leases, requires
otherwise on a sale and leaseback). Gains should not be classified as revenue, as defined in AS 9,
Revenue Recognition.
76. However, an enterprise that in the course of its ordinary activities, routinely sells items of property,
plant and equipment that it had held for rental to others should transfer such assets to inventories at their
carrying amount when they cease to be rented and become held for sale. The proceeds from the sale of
such assets should be recognised in revenue in accordance with AS 9, Revenue Recognition.
77. The disposal of an item of property, plant and equipment may occur in a variety of ways (e.g. by sale,
by entering into a finance lease or by donation). In determining the date of disposal of an item, an
enterprise applies the criteria in AS 9 for recognising revenue from the sale of goods. AS 19, Leases,
applies to disposal by a sale and leaseback.
78. If, under the recognition principle in paragraph 7, an enterprise recognises in the carrying amount of
an item of property, plant and equipment the cost of a replacement for part of the item, then it
derecognises the carrying amount of the replaced part regardless of whether the replaced part had been
depreciated separately. If it is not practicable for an enterprise to determine the carrying amount of the
replaced part, it may use the cost of the replacement as an indication of what the cost of the replaced part
was at the time it was acquired or constructed.
79. The gain or loss arising from the derecognition of an item of property, plant and equipment should be
determined as the difference between the net disposal proceeds, if any, and the carrying amount of the
item.
80. The consideration receivable on disposal of an item of property, plant and equipment is recognised in
accordance with the principles enunciated in AS 9.
Disclosure

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81. The financial statements should disclose, for each class of property, plant and equipment:
(a) the measurement bases (i.e., cost model or revaluation model) used for determining the gross carrying
amount;
(b) the depreciation methods used;
(c) the useful lives or the depreciation rates used. In case the useful lives or the depreciation rates used are
different from those specified in the statute governing the enterprise, it should make a specific mention of
that fact;
(d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment
losses) at the beginning and end of the period; and
(e) a reconciliation of the carrying amount at the beginning and end of the period showing:
(i) additions;
(ii) assets retired from active use and held for disposal;
(iii) acquisitions through business combinations;
(iv) increases or decreases resulting from revaluations under paragraphs 34, 42 and 43 and from
impairment losses recognised or reversed directly in revaluation surplus in accordance with AS 28;
(v) impairment losses recognised in the statement of profit and loss in accordance with AS 28;
(vi) impairment losses reversed in the statement of profit and loss in accordance with AS 28;
(vii) depreciation;
(viii) the net exchange differences arising on the translation of the financial statements of a non-integral
foreign operation in accordance with AS 11, The Effects of Changes in Foreign Exchange Rates; and
(ix) other changes.
82. The financial statements should also disclose:
(a) the existence and amounts of restrictions on title, and property, plant and equipment pledged as
security for liabilities;
(b) the amount of expenditure recognised in the carrying amount of an item of property, plant and
equipment in the course of its construction;
(c) the amount of contractual commitments for the acquisition of property, plant and equipment;
(d) if it is not disclosed separately on the face of the statement of profit and loss, the amount of
compensation from third parties for items of property, plant and equipment that were impaired, lost or
given up that is included in the statement of profit and loss; and
(e) the amount of assets retired from active use and held for disposal.
83. Selection of the depreciation method and estimation of the useful life of assets are matters of
judgement. Therefore, disclosure of the methods adopted and the estimated useful lives or depreciation
rates provides users of financial statements with information that allows them to review the policies
selected by management and enables comparisons to be made with other enterprises. For similar reasons,
it is necessary to disclose:
(a) depreciation, whether recognised in the statement of profit and loss or as a part of the cost of other
assets, during a period; and
(b) accumulated depreciation at the end of the period.
84. In accordance with AS 5, an enterprise discloses the nature and effect of a change in an accounting
estimate that has an effect in the current period or is expected to have an effect in subsequent periods. For
property, plant and equipment, such disclosure may arise from changes in estimates with respect to:
(a) residual values;
(b) the estimated costs of dismantling, removing or restoring items of property, plant and equipment;
(c) useful lives; and
(d) depreciation methods.
85. If items of property, plant and equipment are stated at revalued amounts, the following should be
disclosed:
(a) the effective date of the revaluation;
(b) whether an independent valuer was involved;
(c) the methods and significant assumptions applied in estimating fair values of the items;
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(d) the extent to which fair values of the items were determined directly by reference to observable prices
in an active market or recent market transactions on arm’s length terms or were estimated using other
valuation techniques; and
(e) the revaluation surplus, indicating the change for the period and any restrictions on the distribution of
the balance to shareholders.
86. In accordance with AS 28, an enterprise discloses information on impaired property, plant and
equipment in addition to the information required by paragraph 81(e)(iv), (v) and (vi).
87. An enterprise is encouraged to disclose the following:
(a) the carrying amount of temporarily idle property, plant and equipment;
(b) the gross carrying amount of any fully depreciated property, plant and equipment that is still in use;
(c) for each revalued class of property, plant and equipment, the carrying amount that would have been
recognised had the assets been carried under the cost model;
(d) the carrying amount of property, plant and equipment retired from active use and not held for disposal.

PROBLEM SHEET

Question 1
ABC Ltd. is installing a new plant at its production facility. It has incurred these costs:
1. Cost of the plant (cost per supplier’s invoice plus taxes) Rs.25,00,000
2. Initial delivery and handling costs Rs.2,00,000
3. Cost of site preparation Rs.6,00,000
4. Consultants used for advice on the acquisition of the plant Rs.7,00,000
5. Interest charges paid to supplier of plant for deferred credit Rs.2,00,000
6. Estimated dismantling costs to be incurred after 7 years Rs.3,00,000
7. Operating losses before commercial production Rs.4,00,000

A discount rate of 10% p.a can be assumed, for which the PV factors are as follows:
Year 1 2 3 4 5 6 7

Disc 0.909 0.826 0.751 0.683 0.621 0.564 0.513

Factor

Please advise ABC Ltd. on the costs that can be capitalized in accordance with AS 10 (Revised).

Question 2
Determine if the following costs can be added/subtracted to the invoiced purchase price for the initial
recognition of the cost of the asset:
1. Consultants fees for choosing the new asset
2. A trade discount received of 5% of the purchase price of the asset
3. A discount received for paying the invoice within 90 days

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4. Interest paid on a short term loan taken to provide the necessary cash for payment of the purchase
price
5. Import duties paid
6. Shipping costs and cost of road transport
7. Insurance for the shipping
8. Operating cost incurred after installation
9. Cost of laying a new concrete slab and installing special rubber mounted footings for the new press in
order to reduce vibration during use.
10. Hire of a crane to transfer the press from the vehicles into the factory
11. Costs associated with removing a section of the factory roof to allow the machine to be dropped into
place and subsequently refitting the roof
12. Cost of installing soundproofing in the roof at the same time in order to provide protection for workers
in other parts of the factory building
13. Professional fees charged by consulting engineer for overseeing the installation process
14. Electricians fees for connecting the press to the power supply
15. A portion of the operating costs (salaries, office expenses) of the purchasing department
16. Costs of materials (papers and inks) used in calibrating the machine and setting it up for operation
17. Costs of training the operators of the new machine
18. A portion of the inefficiencies in production for the first month of use while the operators became
comfortable with using the machine.

Question 3
A Ltd. has carried out certain works on various machines in their engineering plant, which manufactures
high quality metal patterns and templates for use in industry.
Determine in each case whether the costs of the improvements can be added to the existing carrying value
of the assets concerned?
1. The cost of an annual machine maintenance which will maintain the originally assessed standard of
performance of the machine for the coming 12 months.
2. Modifications to a cutting machine which will increase its rate of output from 500 to 560 patterns per
shift.
3. Modifications to a lathe which will replace the current water-cooling system with an oil- based system,
thereby extending the life of the lathe by a forecast 2 years.
4. The upgrading of a cutting machine with new software which will improve the accuracy of its
measurement and cutting tolerances by a number of microns, thereby raising the quality of output.
5. Alterations to a production line which will allow automatic feeding from a machine to the next one in
the production process, thereby removing the need for an employee to manually load the second
machine.

Question 4
An entity bought a plot of land for development of office buildings. Development of the land was
scheduled into six phases. The land scheduled for development in phases five and six was leased to
another entity on a short-term basis as a parking lot for heavy vehicles. What is the treatment of rental
income from car parking lot?

Question 5
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An entity acquires the right to use an underground cave for gas storage purposes for a period of 50 years.
The cave is filled with gas, but a substantial part of that gas will only be used to keep the cave under
pressure in order to be able to get gas out of the cave. It is not possible to distinguish the gas that will be
used to keep the cave under pressure and the rest of the gas. Evaluate whether AS 10 would apply or AS 2?

Question 6
Entity A has an existing freehold factory property, which it intends to knock down and redevelop. During
the redevelopment period the company will move its production facilities to another (temporary) site. The
following incremental costs will be incurred:
1. Setup costs of Rs.5,00,000 to install machinery in the new location.
2. Rent of Rs.15,00,000
3. Removal costs of Rs.3,00,000 to transport the machinery from the old location to the temporary
location.
Can these costs be capitalised into the cost of the new building?

Question 7 (Operating costs incurred in the start-up period)

An amusement park has a 'soft' opening to the public, to trial run its attractions. Tickets are sold at a 50%
discount during this period and the operating capacity is 80%. The official opening day of the amusement
park is three months later. Management claim that the soft opening is a trial run necessary for the
amusement park to be in the condition capable of operating in the intended manner. Accordingly, the net
operating costs incurred should be capitalised. Comment.

Question 8 (Consideration received comprising a combination of non-monetary and monetary assets)

Entity A exchanges surplus land with a book value of Rs.10,00,000 for cash of Rs.20,00,000 and plant
and machinery valued at Rs.25,00,000. What will be the measurement cost of the assets received?

Question 9 (Exchange of assets that lack commercial substance)

Entity A exchanges car X with a book value of Rs.13,00,000 and a fair value of Rs.13,25,000 for cash of
Rs.15,000 and car Y which has a fair value of Rs.13,10,000. The transaction lacks commercial substance
as the company’s cash flows are not expected to change as a result of the exchange. It is in the same
position as it was before the transaction. What will be the measurement cost of the assets received?

Question 10 (Revaluation on a class by class basis)

Entity A is a large manufacturing group. It owns a number of industrial buildings, such as factories and
warehouses and office buildings in several capital cities. The industrial buildings are located in industrial
zones, whereas the office buildings are in central business districts of the cities. Entity A's management
want to apply the revaluation model as per AS 10 to the subsequent measurement of the office buildings
but continue to apply the historical cost model to the industrial buildings. State whether this is acceptable
under AS 10 or not with reasons?

Question 11
Valuation of fixed assets in special cases.
- Hire Purchase Assets
- Joint Ownership
- Several assets are purchased for a consolidated price
Page 14 of 56
Question 12
At what value should the assets acquired in exchange or for consideration in kind should be recorded in
books as per AS-10?
Induga Ltd. exchanges car X with a book value of Rs. 13,000 having a fair value of Rs. 13,250 for cash of
Rs. 150 and car Y which has a fair value of Rs. 13,100. The transaction lacks commercial substance as the
company’s cash flows are not expected to change as a result of the exchange; it is in the same position as
it was before the transaction. The Induga Ltd. recognizes the assets received at the book value of car X.
Therefore, it recognizes cash of Rs. 150 and car Y as property, plant and equipment with a carrying value
of Rs. 12,850.

Module 2 Amalgamation Of Firms

CLASSWORK

Meaning - Amalgamation means combination or merger. In ‘amalgamation of firms’, two firms come
together to get various advantages such as economies of large scale production, avoiding competition,
increasing efficiency, expansion and so on. Firms may combine in two ways: (a) amalgamation in which a
new firm is formed to take over the business of the old firm(s); or (b) absorption in which an existing firm
takes over the business of the old firm(s). For example, if the business of M/S ABC & Co. is taken over
by a new firm M/S XYZ & Co., it is called amalgamation; if its business is taken over by an existing firm
M/S PQR & Co., it is called absorption. The old firm which is taken over (M/S ABC & Co., in the above
example) is known as the ‘vendor firm’; and the firm which takes over (M/S XYZ & Co. or M/S PQR &
Co.) is known as the ‘purchasing firm’.

Objectives of Amalgamation
The main objectives of amalgamation are :
1. To avoid competition.
2. To have monopoly in the particular trade.
3. To avoid duplication of fixed expenses and to reduce the management expenses.
4. To unite persons of varying skills for the efficient conduct of the business.
5. To get more capital for expansion of the business.
6. To have large-scale business and enjoy the benefits of large-scale operations.

What is Purchase Consideration ?

Agreed Price of Business Transfer
Methods of Purchase Consideration? Net Assets Method
Purchase Consideration under Net Asset Method = Agreed value of all assets taken over less agreed value
of all liabilities taken over

Accounting treatment in the books of Vendor Company

The vendor (old) firm is dissolved on amalgamation. Therefore it can follow the normal accounting
procedure for dissolution (opening a Realisation A/c etc.) as studied in S.Y.J.C. The books of the old firm
are closed and the purchasing (new) firm starts with a fresh set of books. This is known as the Realisation
method. (We will be studying only the Realisation Method involving the dissolution of the vendor firms,
as prescribed under the syllabus. Another method, known as Revaluation method, is not prescribed for

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study.) The accounting procedure (which is almost the same as on Dissolution of Firms) is summarised
below:

1. Transfer of Assets
Realization Account Dr
To Assets Account……@ Book Value
 Cash and bank balances are also transferred if they are taken over by the new firm…..
 If Goodwill appears in the books, it too is transferred along with other assets
 Gross value of Debtors is transferred to the debit of the Realization A/c. Reserve/ provision for
bad/doubtful debts is transferred separately to the credit of the Realization A/c.
 Fictitious assets (accumulated losses) are transferred to the partners’ capitals

2. Outside liabilities are transferred

Liabilities ( including RDD/PDD) Account Dr……@ Book Value
To Realization Account

3. Purchase consideration is due

Purchasing Firm’s A/c Dr.……@ PC Value…
To Realization A/c…

4. Take over of asset (recorded / unrecorded) by a partner

Partner’s Capital A/c Dr…..@Agreed value
To Realization A/c

5. Sale of an asset (recorded / unrecorded)

Cash A/c Dr…..@ SP
To Realization A/c
6. Takeover of a liability / Expenses (recorded / unrecorded) by partner
Realization A/c Dr …….@Agreed Value
To Partner’s Capital A/c

7. Payment of a liability (recorded / unrecorded) / Expense on realization

Realization A/c Dr……@ Amount paid
To Cash /Bank A/c
 If an asset / liability is neither taken over by the new firm nor sold/paid it is presumed to be taken
over by all the partners of the old firm in their profit sharing ratio.

8. Profit on realization
Realization A/c Dr……@Amount of Profit
To Partners’ Capital Accounts
Realization Account is closed with this entry

9. Accumulated profits/Reserves
Profit & Loss A/c (Cr. balance) Dr….@ B/S Amount
General Reserve A/c Dr.….@ B/S Amount
To Partners’ Capital Accounts

10. Transfer credit balance of Current Accounts to Capital Accounts

Partner’s Current A/c Dr…..@Credit Balance
To Partner’s Capital A/c
Partners Current Accounts are closed with this entry
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11. Settle partner’s loan
Partner’s Loan A/c Dr…..@Amount of Loan
To Partner’s Capital/Cash A/c
 Any interest paid on such loans is debited to the Realization A/c. Any rebate or discount on
repayment on such loans is credited to the Realization A/c

12. Entry to settle capital balances

Partners’ Capital Accounts Dr…..@ Cr. Balance in Capital
To Purchasing Firm's A/c
Partners’ Capital Accounts and Purchasing Firm Account are closed with this entry.

Accounting treatment in the books of Purchasing Firm

1. Incorporating Assets and Liabilities of Old Firm

Assets Account Dr…………Ag. Value
To Liabilities Account…………………Ag. Value
To Partners Capital Account…………Closing balance of PCA in old firms
**** Ag Value of Assets less Liabilities is PC***

2. Dissolution / Realization Expenses of old firms paid by a New Firm

Goodwill Dr
To Cash / Bank

3. Goodwill is written off

All PCA Dr…….. New Ratio
To Goodwill Account

4. Capital Adjustment… Capital Contribution or Drawing

Cash / Bank / Current Account Dr
To Capital Account…..Capital contribution Amount

5. Capital Adjustment… Capital Contribution or Drawing

Capital Account Dr
To Cash/Bank/Current Account

PROBLEM SHEET

1. Kamal Arts and Rose Crafts decided to amalgamate on the following terms and
conditions on 1st April, 2017 when their Balance Sheet were as follows:

Kamal Rose Crafts Kamal Rose

Liabilities Assets
Arts (Rs.) (Rs.) Arts (Rs.) Crafts (Rs.)
Pankaj's Capital 86,400 - Building 50,000 -
Panna's Capital 63,600 - Furniture 31,600 48,600
Rina's Capital - 1,12,300 Investments 25,000 -
Riya's Capital - 42,200 Stock 34,100 49,500
Creditors 27,500 15,500 Debtors 40,000 50,000
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 Bank Loan 12,500 - Cash at Bank 9,300 21,900

1,90,000 1,70,000 1,90,000 1,70,000

Terms of Amalgamation:

I. In case of Kamal Arts:

a) Goodwill was valued at Rs. 60,000.
b) Pankaj took over Bank Loan.
c) Investments were taken over by the new firm at Rs. 30,000.
d) Building was taken to be worth Rs. 90,000.
e) Stock to be valued at Rs. 32,000.
f) Provision for doubtful debts to be created at 5% on debtors.

II. In case of Rose Crafts:

a) Goodwill was valued at Rs. 50,000.
b) Stock was valued at Rs. 42,000.
c) Provision for doubtful debts to be created at 4% on debtors.
Other assets and liabilities of both the firms were taken at book values.
You are required to show necessary ledger accounts in the books of Kamal Arts and
Rose Crafts and prepare Balance Sheet of New firm after amalgamation.

2. A & B firm and C & D firm decided to amalgamate on the following terms and
conditions on 1st April, 2017 when their Balance Sheets were as follows:

Balance Sheet as on 1st April, 2017

A&B C&D A&B C&D
Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
A's Capital 6,000 - Building 5,000 -
B's Capital 3,000 - Furniture 600 1,000
C's Capital - 3,300 Investments - 2,000
D's Capital - 2,200 Stock 3,000 2,600
Creditors 1,000 1,500 Debtors 2,000 2,400
Bank Loan 2,000 2,500 Cash at Bank 1,400 1,500

12,000 9,500 12,000 9,500

Terms of Amalgamation:

1. In case of A & B firm:

a) Goodwill was valued at Rs. 3,000.
b) A & B firm should pay its Bank Loan.
c) Building was taken to be worth Rs. 6,000.
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 d) Stock to be valued at Rs. 2,500.

2. In case of C & D firm:

a) Goodwill was valued at Rs. 2,000.
b) Investments were not taken over by the new firm.
c) Stock was valued at Rs. 1,880.
You are required to show necessary ledger accounts in the books of A & B firm and C&
D firm and prepare Balance Sheet of New firm after Amalgamation.

3. Two independent firms carrying on similar business under the name & style Tanaji &
Baji and Yesaji & Hiroji decided to amalgamate on 1st April, 2017; when their
respective balance sheets were as under:

Tanaji & Yesaji & Tanaji & Yesaji &

Liabilities Assets
Baji Hiroji Baji Hiroji
(Rs.) (Rs.) (Rs.) (Rs.)
Tanaji's Capital 40,000 - Building 39,000 36,000
Baji's Capital 20,000 - Furniture 8,000 20,000
Yesaji's Capital - 35,000 Stock 29,000 24,000
Hiroji's Capital - 28,000 Debtors 7,000 22,000
Creditors 28,000 35,000 Investments - 8,000
Mortgage Loan 12,000 - Cash 17,000 10,000
Bills Payable - 22,000

1,00,000 1,20,000 1,00,000 1,20,000

Terms of amalgamation were as under:

I. For Tanaji & Baji:

a) Firm should pay its mortgage loan.
b) Building to be increased to Rs. 60,000.
c) Furniture recorded 20% below cost should be recorded at its cost price.
d) Stock to be reduced by Rs. 4,000
e) Debtors should appear in the books at 95% of the book value.
f) Goodwill to be valued at Rs. 30,000.

II. For Yesaji & Hiroji:

a) Goodwill to be valued at Rs. 20,000.
b) Investments not to be taken over by the new firm.
c) Stock was recorded 20% above the book value. It is to be recorded at its original
cost.
d) Reduce debtors by 10%.

Page 19 of 56
III. It was further decided that:
Total capital of the new firm is to be fixed at Rs. 1,50,000 and the profit-sharing ratio
3:2:3:2 is to be maintained for individual capital contributions of the partners.
Adjustment in this respect is to be done through Currents Accounts.

IV. Goodwill Account in the new firm is to be written off.

Close the books of Tanaji & Baji and Yesaji & Hiroji by preparing necessary ledger
accounts and prepare Balance Sheet after amalgamation in the books of new firm.

4. The following were the Balance Sheets of two firms as on 31st March,2017:

A&B C&D A&B C&D

Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Sundry Creditors 27,000 23,000 Bank 7,000 1,000
Bills Payable - 4,000 Investments - 5,000
Capital Accounts Sundry Debtors 10,000 11,000
A 30,000 - Stock 30,000 47,000
B 20,000 - Furniture 5,000 3,000
C - 25,000 Buildings 25,000 -
D - 15,000

77,000 67,000 77,000 67,000

Profit sharing ratio of A & B was 3:1 and that of C & D was 7:3.
The two firms agreed to amalgamate as from 1st April, 2017. The revaluation and other
arrangements were as under:

A & B Firm
Sundry Debtors to be taken at Rs. 9,400.
Stock was found to be under-valued by Rs. 3,000. Furniture
was found to be over-valued by Rs. 1,000.
Buildings to be retained by A & B & to be rented out to the new firm at Rs.1,000 p.m.
Goodwill valued at Rs. 16,000.

C & D Firm
Sundry Debtors to be taken at Rs. 10,600.
They sold Investments for Rs. 5,200 and paid off the Bills Payable.
Stock was found to be under-valued by Rs. 1,000.
Furniture was found to be over-valued by Rs. 800
Creditors were to be taken at Rs. 21,000.
Goodwill valued at Rs. 10,000.

New Firm
Each partner to have a fixed capital of Rs. 20,000. Any adjustment in this respect is tobe
done through Current Accounts.
Partners to share profits and losses equally.
Page 20 of 56
 Prepare necessary ledger accounts to close the books of old firms and pass journal entries
to close the books of the old firms and Balance Sheet of the new firm and pass opening
entries in the books of new firm.

5. A & B were in partnership sharing profits and losses in the ratio of 3:2 dealing in retail
merchandising in the trade name of A & Co. Their Balance Sheet as on 31st March, 2017;
was as follows:

Liabilities Rs. Assets Rs.

Sundry Creditors 15,000 Cash at Bank 4,000
Capital Accounts Stock in Trade 16,000
A 75,000 Sundry Debtors 10,000
B 60,000 1,35,000 Furniture & Fixtures 15,000
Delivery Van 25,000
- Godown 5,000
- Land & Building 75,000
1,50,000 1,50,000

C & D were in partnership in the trade name of C & Co. sharing profits and losses in the
ratio of 2:3 doing the same business as A & Co. The Balance Sheet of C & Co. as on 31st
March, 2017; was as follows:

Liabilities Rs. Assets Rs.

Sundry Creditors 6,000 Stock in Trade 18,000
Bank Overdraft 4,000 Sundry Debtors 8,000
Capital Accounts Furniture & Fixtures 10,000
A 40,000 Delivery Van 20,000
B 60,000 1,00,000 Land & Building 54,000
-
-
1,10,000 1,10,000
Both the companies mutually agreed to amalgamate their business as on 1st April, 2017;in
trade name of E & Co. on the following terms and conditions:
a) E & Co. should take over the assets of the two firms:
i. Assets of A & Co.:

Particulars Rs.
Stock -in- Trade 18,000
Delivery Van 20,000
Furniture and Fixtures 12,000
Land and Buildings 90,000
Goodwill 20,000

ii. Assets of C & Co.:

Particulars Rs.

Page 21 of 56
 Stock -in- Trade 14,000
Delivery Van 18,000
Goodwill 15,000
b) It was mutually agreed that E & Co. was not to take over the furniture and fixtures and land
and building of C & Co. However, these assets were sold at Rs. 72,000 in cash on 1st January,
2015.
c) B took over the possession of the godown of the firm for a consideration of Rs.4,000.
d) It was decided to make provision for doubtful debts at 10% on the Sundry Debtors and also a
provision for discounts at 5% on Sundry Creditors of both the firms.
e) All the partners unanimously agreed to have new profit-sharing ratio as follows:A-2, B-1, C-1
and D-2.
f) The capital of E and Co. was fixed at Rs.2,40,000 and the partners were requiredto adjust their
capitals in tune with their new profit-sharing ratio, by making necessary adjustments in cash.
You are required to prepare necessary ledger accounts to close the books of oldfirms and Balance
Sheet of the new firm after amalgamation.

6. Shri Black and Shri White are in partnership as BW Firm. In the similar type of business,
Shri Fine and Shri Shine are in partnership as FS Firm. It was agreed that on 1st April,
2017; the partnership be amalgamated into one firm BWFS firm.
The profit-sharing ratio into old firm and new firm are as follows:

Black White Fine Shine

Old Firm 4 3 2 3
New Firm 6 5 3 4

As on 31st March, 2017; the Balance Sheet of their firm were to be as follows:

BW FS BW FS
Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Capitals: Land 40,000 54,000
Black 82,500 - Furniture 10,000 7,500
White 60,000 - Vehicles 15,000 9,750
Fine - 60,000 Stock 44,900 36,000
Shine - 40,000 Investments 4,500 -
Creditors 30,000 33,000 Debtors 52,500 32,250
Bank Overdraft - 6,500 Bank 5,600 -

1,72,500 1,39,500 1,72,500 1,39,500

The amalgamation was made on the following terms:

1. Provision for doubtful @ 5% to be made in respect of debtors of both firms.

2. New firm to take over the old firm’s assets as under:

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 BW FS
Particulars
Rs. Rs.
Stock 46,000 34,500
Vehicles 15,000 8,000
Furniture 8,500 7,500
Land 54,000 54,000
Goodwill 34,000 24,000
3. Shri White take over investments for Rs. 4,000
4. The capitals of the partners in the new firm to be Rs. 297,000 and to be contributed by
their profit-sharing ratio and any adjustments to be made in cash.
You are required to show the necessary ledger accounts in the books of BW Firms &FS
Firms.

7. Ajay and Vijay are partners who share profits and losses in the ratio of 2:3 in a business.In
the similar type of business Kailash and Manish are partners who share profits and losses
equally. It is agreed that both the firm have to be amalgamated into one firm on 1st April,
2017. On 31st March, 2017 the financial position of both the firms is as under.
Balance Sheet as on 31/03/2015

A&V K&M A&V K&M

Liabilities Assets
(Rs.) (Rs.) (Rs.) (Rs.)
Capitals: Goodwill 31,200 20,800
Ajay 1,04,000 - Machinery 1,40,400 1,09,200
Vijay 91,000 - Furniture 28,080 21,840
Kailash - 72,800 Motor Car 1,87,200 1,24,800
Manish - 65,000 Stock 88,660 76,700
General Reserve 26,000 20,800 Debtors 1,01,920 83,460
Creditors 1,02,700 74,100 Bills Receivable 30,940 28,080
Bills Payable 50,700 35,100 Cash & Bank 13,000 10,920
Loan from SBI 2,47,000 2,08,000

6,21,400 4,75,800 6,21,400 4,75,800

The firms are amalgamated on the following terms:
a) Creditors of both the firms are to be taken at a discount of 10%.
b) Machinery is subject to 5% depreciation of both the firms.
c) Motor car is to be appreciated by 10% both the firms.
d) Furniture of the both the firms is not taken over by the new firm.
e) Stock is to be appreciated by 20% of both the firms.
f) Goodwill of A & V firm is to be valued at Rs. 62,400 whereas of K & M firmit
is of Rs. 39,000.
g) Capital of the new firm is fixed at Rs.9,36,000 to be adjusted according to their
new profit sharing ratio, any adjustment to be made in cash.
h) The new profit sharing ratio is : Ajay 3/10, Vijay 2/10, Kailash 3/10, and 2/10
Manish.
You are required to close the books of both the firms and prepare the Balance Sheet of
new firm after amalgamation. Also pass journal entries to close the books of old firmsand
Page 23 of 56
 opening entries in the books of new firm.

8. In similar type business, Red and Yellow are in partnership as Orange Co. and Violet and
Blue as Indigo Co. It was mutually agreed that as on January 1, 2014 the partnership be
amalgamated into one firm, Rainbow Co. The profit-sharing ratios in the various firms
were and are to be follows:

Red Yellow Violet Blue

Old Firm 4 3 3 2
New Firm 6 5 4 3
As on December 31, 2013, the Balance Sheets of the firms were as follows:

Orange Indigo Orange Indigo

Liabilities Assets
Rs. Rs. Rs. Rs.
Capital Accounts: Property 7,400 10,000
Red 15,300 - Fixtures 1,800 1,400
Yellow 11,000 - Vehicles 3,000 1,800
Violet - 11,300 Stock 8,300 6,600
Blue - 7,400 Investment 800 -
Creditors 5,200 6,000 Debtors 6,800 5,800
Bank Overdraft 900 Bank Balance 3,400 -

31,500 25,600 31,500 25,600

The agreement to amalgamate contains the following provisions:
a) Provision for doubtful debts at the rate of 5% be made in respect of debtors, and a
provision for discount at the rate of 2.5% be made in respect of creditors.
b) Rainbow Co. to take over the old partnership assets at the following values:

Assets Orange Co. Rs. Indigo Co. Rs.

Stock 8,450 6,390
Vehicles 2,800 1,300
Fixtures 1,600 -
Property 10,000 -
Goodwill 6,300 4,500

c) The property and fixtures of Indigo Co. not to be taken over by Rainbow Co. These
assets were sold for Rs.13,500 cash on January 1, 2014.
d) Yellow to take over his firm’s investments at a value of Rs.760.
e) The capital of Rainbow Co. to be Rs.54,000 and to be contributed by the partners in
profit sharing ratios, any adjustments to be made in cash.
You are required to prepare necessary ledger accounts to close the books of old partnershipsand
opening Balance Sheet of the new firm after taking into account the provisions of the
agreement.
9. M/s White & Co. and M/s Red & Co. doing similar business decided to amalgamate into

Page 24 of 56
 Pink & Co. with effect from 1st April, 2012. Their respective Balance Sheets as on 31st
March, 2012 were as under:

Liabilities White & Red & Co. Assets White & Red & Co.
Co. Co.
Rs. Rs.
Rs. Rs.

B’s Capital 40,000 Goodwill – 20,000

C’s Capital 25,000 Plant 23,000 –

D’s Capital 15,000 Stock 34,000 9,000

Creditors 20,000 26,000 Debtors 17,000 15,000

Bank Overdraft 21,000 – Cash – 10,000

Bank – 12,000

A’s Capital 7,000 –

81,000 66,000 81,000 66,000

The following further information is given:

(a) C & D share profits and losses in the proportion of 2 : 1.
(b) Goodwill of White & Co. is fixed at Rs. 30,000 and that of Red & Co. at
Rs. 45,000. It was decided that the goodwill should be written off in the booksof new firm.
(c) White & Co. owes Rs. 12,000 to Red & Co.
(d) Stock of White & Co. includes Rs. 15,000 worth of goods purchased from Red & Co.
whose practice is to sell goods at cost plus 25%.
(e) The two pairs of partners as between themselves will share profits in the ratio of 2 : 1
but net profit sharing amongst the partners will remain undisturbed.
(f) Mr. B will make a gift of Rs. 12,000 to Mr. A towards his capital.
(g) The total capital of Pink & Co. will be Rs. 1,00,000. Each partner will contribute his
proportionate capital. Adjustment to be made on cash.
Give Journal entries in the books of Red & Co. and Opening Balance Sheet of Pink & Co.

10 A and B and C and D are the partners of AB & Co. and CD & Co. respectively. C and D are
sharing in the ratio of 2 : 1 and A and B are sharing in equal proportion. Their Balance Sheets
31st December, 2011 were as under:

Liabilities AB & Co. CD & Co. Assets AB & CD &

Rs. Rs. Co. Co.
Rs. Rs.

Page 25 of 56
 Capitals: Buildings 70,000 30,000
A 1,00,000 – Machinery 40,000 35,000
B 1,00,000 – Furniture 5,000 30,000
C – 80,000 Stock 30,000 20,000
D – 60,000 Debtors 80,000 30,000
Reserves 20,000 10,000 Bank 20000 10,000
Creditors 20,000 – Cash 5,000 5,000
Loans:
X 10,000 –
Y – 10,000
2,50,000 1,60,000 2,50,000 1,60,000

They decided to amalgamate and form a new firm called ABCD & Co. Terms of
Amalgamation:
(h) The new firm shall take over all the assets and liabilities of both the firms subject to
following revaluations:
AB & CO. – Buildings ` 75,000, Machinery ` 30,000, Stock ` 22,000CD & Co. –
Machinery ` 27,000, Stock ` 15,000.
(i) Provision for doubtful debts shall be made @ 5% on Debtors.
(j) Goodwill is to be valued at 2 year’s purchase of last four year’s averageprofits.
The aggregate profits for the last four years were ` 2,50,000 and ` 2,00,000 of AB & CO.
and CD & Co. respectively.
You are required to: Pass journal entries in the books of both the firms.
MODULE 3) ISSUE AND REDEMPTION OF DEBENTURES
Issue of Debentures
(1) Meaning : In addition to the funds raised by issue of shares, companies have to borrow large
amounts of money. It may not be possible for a few lenders to meet such loan requirement. Hence, a
corporate loan may be divided into many units called “debentures”. The debentures can be issued to
a large number of persons. A person who purchases a debenture is called a debentureholder. The
company issues to each debentureholder a debenture certificate under its seal as an
acknowledgement of the loan.
(2) Definition : As defined by Section 2(30) of the Companies Act, 2013 a “debenture” includes
debenture stock, bonds or any other securities of a company evidencing a debt whether constituting a
charge on the company’s assets or not. Normally debentures are issued as bonds. Debenture stock
differs from such bonds. In case of bonds, a debenture certificate acknowledges a debt by the
company to individual bondholders, while in case of stock, a separate Debenture Trust Deed
acknowledges the debt not to any individual debentureholder but to the trustees of
debentureholders. While bonds may not be fully paid, debenture stock must always be fully paid up.
While bonds must be transferred in round amounts as a whole, Debenture stock can be transferred
even in fractions or odd amounts.
(3) Features : A Debenture has the following basic features:
(1) It is a document which creates or acknowledges a debt.
(2) It is in the form of a certificate issued under the seal of the company.

Page 26 of 56
 (3) It usually shows the amount and date of repayment of the loan.
(4) It shows the rate or amount of interest payable.

Normally debentures are secured against the assets of the company

Debentures are classified on the basis of (a) security (b) transferability and (c) redemption as follows:
On the Basis of Security
(a) Secured Debentures : These debentures are secured by a charge on the assets of the company. The
debentureholders have a right to recover the outstanding loan and interest out of such charged assets.
The company enters into an agreement with the debentureholders called “Mortgage Deed” for this
purpose. Hence such debentures are also known as “Mortgage Debentures”. The mortgage (charge) is
registered with Registrar of Companies. The charge (security) may be of two types:
(i) a fixed charge or (ii) a floating charge.
(i) Fixed Charge : In case of a fixed charge, the debentureholder can recover their dues out of the
specific fixed assets of the company such as the plant and machinery or the factory building etc.
These assets are identified item-wise in the mortgage deed. The Company cannot sell such assets
until the debentures are repaid.
(ii) Floating Charge : In case of a floating charge, the debentureholders do not have a charge on any
specific assets of the of the company. The charge may be on the current assets of the company
such as stock or debtors. Obviously, in a floating charge it is not possible to identify the stock or
debtors item-wise since these keep changing all the time. The company, therefore, can deal with
and use such assets in the ordinary course of business. The floating charge becomes fixed only in the
event of default in payment of dues by the company. In the event of default, the debentureholders can
recover their dues out of the charged assets (stocks and debtors) as are presently available.
(b) Unsecured Debentures : These debentures are not secured against any assets of the company. In case
of winding up of the company, debentureholders holding unsecured debentures are treated as
unsecured creditors. If the company is solvent (able to pay all its debts), they will receive their full
dues; if the company is insolvent they will receive only part of the dues, pro rata. Such debentures
are also known as “simple or naked debentures”.

On the Basis of Transferability

(a) Registered Debentures: These debentures must be registered with the company. The details of
issue and transfer are recorded in the Register of Debentureholders kept by the company. Thus, the
company knows the names of the persons holding the debentures as on a particular date. Interest is
paid to the person holding the debentures on the specified date when interest falls due.
(b) Bearer Debentures : These debentures need not be registered with the company. Such debentures are
like currency notes and can be transferred by mere delivery. The transfer need not be registered with
the company. The company has no record of the debentureholders and is not aware of the names of
the debentureholders as on a particular day. The interest is paid to the person who submits to the
company the interest coupons attached to the debenture certificates.

On the Basis of Redemption

(a) Redeemable Debentures : These debentures are to be redeemed (repaid) at a specified future date.
The date of redemption is mentioned on the debenture certificate.
(b) Irredeemable Debentures : These debentures are not to be redeemed at all as long as the company
exists. These are repaid only when the company is wound up or liquidated.

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Accounting treatment in case of Issue of Debentures
No. Transaction / Entry Amount
(1) Debentures Issued For Cash At Par ; Redemption at Par :
Bank A/c Dr. [Nominal Value] To —%
Debentures A/c
(2) Debentures Issued For Cash At Premium ; Redemption at Par :
Bank A/c Dr. [Received]
To —%Debentures A/c [Nominal Value]
To Securities Premium A/c [Premium]
(3) Debentures Issued For Cash At Discount ; Redemption at Par :
Bank A/c Dr. [Received]
Discount on Issue of Debentures A/c Dr. [Discount Value] To —%
Debentures A/c [Nominal Value]
(4) Issue of Debentures at Par; Redemption At Premium :
Bank A/c Dr. [Received]
Loss on Issue of Debentures A/c Dr. [Prem. on redemption] To —%
Debentures A/c [Nominal value]
To Premium Due on Redemption of Debentures A/c [Prem. on redemption]
(5) Issue of Debentures at Discount; Redemption at Premium :
Bank A/c Dr. [Received]
Discount on Issue of Debentures A/c Dr. [Discount Allowed] Loss on Issue of
Debentures A/c Dr. [Prem. on redemption]
To —%Debentures A/c [Nominal Value]
To Premium Due on Redemption of Debentures A/c [Prem. on redemption]
Notes :
(a) If the debentures are to be redeemed at lump sum at the end of a given period; the total amount of
such discount is spread equally over the period of use of funds i.e.
Total Discount
Yearly write - off
Term of debentures
(b) If the debentures are to be redeemed in instalments; the total amount of such discount is written
off in the ratio of the amount of funds used.

TREATMENT OF DISCOUNT/LOSS ON ISSUE OF DEBENTURES

The discount on issue of debentures is amortized over a period between the issuance date and
redemption date. It should be written-off in the following manner depending upon the terms of
redemption:

If the debentures are redeemable after a certain period of time, say at the end of 5 years, the total
amount of discount should be written-off equally throughout the life of the debentures (applying
the straight-line method). The main advantage of this method is that it spreads the burden of
discount equally over the years.

If the debentures are redeemable at different dates, the total amount of discount should be written-
off in the ratio of benefit derived from debenture loan in any particular year (applying the sum of
the year’s digit method). This method is suitable when debentures are redeemed by unequal
instalments.

Page 28 of 56
 The accounting entries would be as follows

Profit and Loss Account Dr.

To Discount on Issue of Debentures Account

(Being the amount of discount on issue of debentures written-off)

Loss on issue of debentures is also a capital loss and should be written off in a similar manner as
discount on debentures issued. In the balance sheet both the items (Discount and Loss) are shown
as Non-current/current assets depending upon the period for which it has to be written off.

Issue of Debentures as a Collateral Security

• Collateral security means secondary or supporting security for a loan, which can be realized by the
lender in the event of the original loan not being repaid on the due date. Under this arrangement,
the borrower agrees that a particular asset or a group of assets will be realized and the proceeds
there from will be applied to repay the loan if the amount due, cannot be paid.

• Sometimes companies issue their own debentures as collateral security for a loan or a fluctuating
overdraft. When the loan is repaid on the due date, these debentures are at once released with the
main security. In case, the company cannot repay its loan and the interest thereon on the due date,
the lender becomes the debenture holder who can exercise all the rights of a debenture holder.

The holder of such debentures is entitled to interest only on the amount of loan, but not on
the debentures.

Accounting treatment

Method 1

Under this method, no entry is made in the books of account of the company at the time of making
issue of such debentures. In the ‘Notes to Accounts’ of Balance Sheet, the fact of the debentures
being issued and outstanding is shown by a note under the liability secured.

Method 2

• Under this method, the following entry is made to record the issue of such debentures:

Debentures Suspense Account Dr.

To % Debentures Account

(Being the issue of…debentures collaterally as per Board’s Resolution No…..dated)

The Debentures Suspense Account will appear on the assets side of the Balance Sheet under Other
Non- Current Assets and Debentures on the liabilities side of the Balance Sheet. When the loan is
repaid, the entry is reversed in order to cancel it.

Students should note that the Method 1 is much more logical from the accounting point of
view. Therefore, it is advised to follow Method 1.
Page 29 of 56
 Issue of Debentures for Consideration other than cash

Just like shares, debentures can also be issued for consideration other than for cash, such as for
purchase of land, machinery, etc. In this case, the following entries are passed:

Sundry Assets AccountDr. [Assets taken over]

To Sundry Liabilities Account [Liabilities assumed]

To Vendors Account [Purchase consideration]

(Being the assets and liabilities taken over)

Vendors Account Dr.

To Debentures Account

(Being the issue of….debentures to satisfy purchase consideration)

Further it should be noted that these debentures can be issued at par, premium and at discount. In
each case the second entry for issue of debentures would be done accordingly.

Difference between premium on issue of debentures and premium on redemption of debentures is

summed up in the following Exhibit.
Basis Premium on Issue of Premium on Redemption of
Debentures Debentures
1. Capital Profit/Loss It is a capital profit and is used for It is a capital loss.
the purposes specified
in Section 52(2) of the
Companies Act, 2013.
2. Nature It is a reserve. It is a liability….
3. Outflow of Cash It does not involve outflow of It is paid when the debentures are
cash. redeemed.
4. How shown in The Balance is shown on the It is shown on the liabilities part
Balance Sheet liabilities part of the Balance of the Balance Sheet under the
Sheet under main-head main-head "Non- current
Shareholders' Funds and sub-head Liabilities" and sub- head "Other
Reserves and Surplus. Long-term Liabilities".

Redemption of Debentures - Out of Capital Method - On redemption, the debenture holders are paid out
of the cash or bank account. If no amount is set aside out of profits for such redemption, such redemption
is said. In practice, and especially in view of legal requirements ,such full redemption out of capital is not
possible. However, All India Financial Institutions or Banking Companies are exempt from requirement
of redemption out of profit and hence can redeem debentures out-of capital.

Redemption out of Profit - In this case, the debenture holders are paid out of the profits of the company.
When adequate profits are transferred from the profits to a Reserve Account before the redemption of
debentures, such redemption is said to be out of profits. This may be done by creating debenture
redemption reserve / sinking fund out of profits of every year.
Page 30 of 56
DRR Method

As per Rule 18(7) of the Companies(Share Capital and Debentures) Amendment Rules 2019, requires a
company to create Debenture Redemption Reserve (DRR) of an amount that is at least equal to 10% of
the total nominal (face) value of debentures that are redeemable by it.

Few categories of companies are exempt from creating DRR

• In case of partly convertible debentures, DRR shall be created in respect of nonconvertible

portion of debenture issue in accordance with this sub-rule

DRR Method
Debenture Redemption Investment :
Every company is required to create / maintain DRR shall on or before the 30th April of each year,
deposit or invest, as the case may be, a sum which shall not be less than fifteen percent of the amount
of its debentures maturing during the year ending on the 31st day of March next year.

Modes: Such investment shall be in any one or more of the following modes, namely :

• In deposits with any scheduled bank, free charge or lien

• In unencumbered securities of the Central Government or of any State Government;
• InIndian
unencumbered securities mentioned in clauses (a) to (d) and (e) of section 20 of the
Trust Act, 1882;

• Insection
unencumbered bonds issued by any other company which is notified under clause (f) of
20 of the Indian Trust Act, 1882);

Use : The amount deposited or invested, as the case may be, above shall not be utilized for any
purpose other than for the repayment of debentures maturing during the year referred above, provided
that the amount remaining deposited or invested, as the case may be, shall not at any time fall below
15 per cent of the amount debentures maturing during the 31st day of March of that year.

Type of Companies Type of DRR Per

Debentures cent

Page 31 of 56
i)All India Financial Institutions regulated by the Reserve Bank of India Nil
Public and privately
(RBI) and Banking Companies
placed debentures

ii) For other Financial Institutions within the meaning of clause (72) of Public and privately Same as
section 2 of the Companies Act, placed debentures
NBFC
2013, Public Financial Institutions (e.g LIC, IDFC, UTI)

Publicly issued NIL

iii) for listed Companies s (other than All India Financial Institutions and debentures
Banking Companies as specified in sub-clause (i))
Privately placed NIL
NBFCs registered with Reserve Bank of India under section 45-IA of the debentures
RBI Act, 1934 and for Housing
Finance Companies registered with National Housing Bank; and Other listed
Companies

iv)Unlisted (other than All India Financial Institutions and Banking

Companies as specified in sub-clause
(i)) –
privately
(A)for NBFCs registered with RBI under section 45-IA of the Reserve Bank placeddebentures
of India Act, 1934 and for NIL
Publicly issued
Housing Finance Companies registered with National Housing Bank debentures 10%

(B) for other unlisted companies Publicly issued as well 10%

as privately issued
debentures

Transaction / Entry

1.Investment made @ 15% of the face value ofdebentures to be redeemed Debenture

Redemption investment A/c Dr.
To Bank A/c

2. Creation of DRR Profit & Loss A/c Dr.

General Reserve A/c Dr.

To Debenture Redemption Reserve A/c

Page 32 of 56
 3. Interest on Investment received (Each Year) ( Interest is not reinvested in this method)

Bank A/c Dr.

To Interest Earned
4. Investment encased (At the end of maturity period of debentures)

Bank A/c Dr.

To Debenture Redemption Investment A/c

To DRR (Profit on sale)

5. When all the debentures are redeemed ( DRR is transferred)

Debenture Redemption Reserve A/c Dr.
To General Reserve A/c

6.Debentures are redeemed Debentures A/c Dr.

To Debenture holders A/c

Page 33 of 56
Basis Capital Redemption Reserve Debenture Redemption Reserve

1. Purpose of It is created at the time of It is created for redemption ofdebentures.

Creation redemption of preferenceshares
out of profits.

2. Use It can be used only for issue of The balance of DRR is transferred to
fully paid bonus shares. general reserve after redemption of
debentures which can be used for various
purposes.

3. Quantum It is created equal to nominal 'Adequate' amount of profits are transferred

value of presence shares for creation of DRR. It should not be less
redeemed out of profits. than 10% of the amount of the debentures
except where exemption has been given.

4. Deposit or There is no such requirement. Every company required to create DRR

Investment shall on or before the 30th day of April in
each year, should invest or deposit at least
15% of the amount of debentures maturing
during the year ending on 31st day of
March of that year.

Sinking Fund / Debenture Redemption Fund Method

• When the amount of DRR (whether the minimum amount prescribed by law or more) is invested or
deposited outside the company, a Sinking Fund or a Debenture Redemption Fund can be created.

• Out of the fund, the company purchases investments or makes a deposit in prescribed instruments.
• The Sinking Fund may by cumulative or non-cumulative.
• Inreinvested.
case of Cumulative Sinking Fund, the income from the investments is added back to the fund and

• InProfitcase&ofLossNon-cumulative
Account.
Sinking Fund Interest received on Sinking Fund Investments is credited to

• The investments are sold on the date of redemption in order to obtain money required to pay off the
debenture holders.

Problem Sheet
Page 34 of 56
Part 1 Issue of Debentures

Illustration 1:

Triplex Ltd. issued 10,000, 6% Debentures of 100 each at a premium of 10% payable 25 on
application, 35 on allotment (including premium) and the balance on first and final call.

Applications were received for 15,000 debentures. All allotments were made proportionately,
over subscriptions being applied to the amount due on allotment. All sums due were received by
the company in due course. Journalize the above transactions in the books of Triplex Ltd.

Illustration 2

Give journal entries for issue of debentures in the following case and also prepare balance sheet.
Issued 1,000 7% debentures of 100 each at par, redeemable at par.

Illustration 3

Give journal entries for issue of debentures in the following case and also prepare balance sheet.
Issued 1,000 7% debentures of 100 at a premium of 5%, redeemable at par.

Illustration 4 (Issue at Discount; Redeemable at Par)

Give journal entries for issue of debentures in the following case and also prepare balance sheet.
Issued 1,000 7% debentures of 100 each at a discount of 5%, redeemable at par.

Illustration 5 (Issue at Par; Redeemable at Premium)

Give journal entries for issue of debentures in the following case and also prepare balance sheet.
Issued 1,000 7% debentures of 100 each at par, redeemable at 5% premium.

Illustration 6 (Issue at Discount; Redeemable at Premium)

Give journal entries for issue of debentures in the following case and also prepare balance sheet.
Issued 1,000 7% debentures at a discount of 5%, redeemable at a premium of 5%.

Illustration 7 (Issue at Premium; Redeemable at Premium)

Give journal entries for issue of debentures in the following case and also prepare balance sheet.
Issued 1,000 7% debentures at a premium of 5%, redeemable at a premium of 8% ( FV Rs. 100)

Illustration 8 (Debentures Repayable at Premium)

What Journal entries be made if 1,000 6% Debentures of 100 each are

(a) Issued at par, repayable at a premium of 10%

(b) Issued at a premium of 10%, also repayable at a premium of 20% and

(c) Issued at a discount of 10%, repayable at a premium of 20%

Page 35 of 56
Illustration 9 (Debentures Issued at Premium for non-cash consideration)

X Limited took over assets valued at 8,00,000 and liabilities amounting to 50,000 of Y Ltd. for the
purchase consideration of 8,80,000. X Ltd. paid the purchase consideration by issuing 10%
Debentures of 100 each at a premium of 10%. Show the Journal entries in the books of X Ltd.

Illustration 10

On April 1, 2010 Nikhil Jain Ltd. issued 1,00,00,000, 7% debenture of 100 each at a discount of 4%,
redeemable after 5 years at a premium of 6%. Record necessary Journal entries for issue of debenture
and writing off loss on issue of debenture account. Also prepare loss on issue of debenture account.

Illustration 11 : (Issue of Debentures as a Collateral Security)

A Ltd. secured a loan of 1,80,000 from the Canara Bank by issuing 2,000, 15% debentures of

100 each as collateral Security.

How will the issue of such debentures be reflected in the Final accounts of the company.

Chapter - Issue and Redemption of Debentures

Part 2 Redemption of Debentures

Illustration 1 : (Redemption fully out of capital in annual instalments)

Bharat Bank Ltd. issued 50,000 15% debentures of 1,000 each at 952 per debenture. The
debentures are redeemable in five annual instalments of 20% each. It is decided to write off
discount in proportion to the amount of debenture finance usage over the various years.

You are asked to :

(i) Prepare statement for write off of discount over the five year period.
(ii) Pass appropriate journal entries in year 1 and year 2.
Assume that the redemption is out of capital.

Illustration 2 (DRR Method)

Noida Toll Bridge Corporation Ltd. (other Unlisted Company) has outstanding 50,000, 8%
debentures of 100 each issued in 2005 due for redemption on March 31, 2015. It was decided to
invest the required amount in investment earning 10% p.a. interest on April 30th, 2014. How
much minimum amount of Debenture Redemption Reserve should be credited before the
redemption of debentures begin? Record necessary entries regarding redemption of debentures,
assuming that investment was sold at par on the date of redemption.

Illustration 3 (DRR Method)

Page 36 of 56
Assume that investment was sold on the date of redemption at par. Ignore Debenture Interest

Illustration 4 : (Entire Redemption out of Profits)

X Ltd. had Rs 10,00,000, 9% debentures due to be redeemed fully out of profits on 1st October
2015 at a premium of 5%. The company had a Debenture Redemption Reserve of 4,14,000. It was
decided to invest the required amount of Debenture Redemption Investment. Pass necessary journal
entries at the time of redemption. Investment was sold on the date of redemption at par. Assume
FY

Illustration 5 (DRR Method)

Manish Ltd. issued Rs 38,00,000; 8% Debentures of 100 each on 1st April, 2013. The terms of
issue stated that the debentures were to be redeemed at a premium of 5% on 30th June, 2015. The
company decided to transfer out of profits 5,50,000 to Debenture Redemption Reserve on 31st
March, 2014 and 4,00,000 on 31st March, 2015 and make the necessary investments in time.

Pass the necessary Journal entries regarding the issue and redemption of debentures, without
providing for either the interest or loss on issue of debentures, if investment was sold at par on
the date of redemption.

Illustration 6: (When All the Debentures are Redeemed Journal and Ledger- DRR Method)

The following balances appeared in the books of X Ltd. as on 1st January 2013.

9% Debentures 2,50,000
10% DRR (represented by 2,00,000, 10% Govt. Stock) 1,80,000
The annual contribution to the Debenture Redemption Reserve was 50,000 made on 31st December
each year. On 31st December, 2013, balance at bank before the receipt of interest was 70,000. On
the date all the investments were sold at 95% and the debentures were duly redeemed. Ignore
Debenture Interest

Required

(a) Pass the Journal entries for the year ending 31st December, 2013.
(b) Prepare (i) Debentures Redemption Reserve (DRR) A/c, (ii) Debenture Redemption Reserve
Investment (DRRI) A/c (iii) 9% Debentures A/c (iv) Debenture holders' A/c and (v) Bank
A/c.
Illustration 7 : (When All the Debentures are Redeemed - Journal and Ledger – Deb Red /
Sinking Fund Method))

The following balances appeared in the books of X Ltd. as on 1st January 2013.

9% Debentures 2,50,000

10% Debentures Redemption Fund (represented by 2,00,000, 10% Govt. Stock) 1,80,000

The annual contribution to the Debenture Redemption Fund was 50,000 made on 31st December
each year.

Page 37 of 56
On 31st December, 2013, balance at bank before the receipt of interest was 70,000. On the date
all the investments were sold at 95% and the debentures were duly redeemed.

Required :

(a) Pass the Journal entries for the year ending 31st December, 2013.
(b) Prepare (i) Debentures Redemption Fund A/c, (ii) Debenture Redemption Fund Investment
(DRRI) A/c (iii) 9% Debentures A/c (iv) Debenture holders' A/c and (v) Bank A/c.
Illustration 8 : (Red. @ Prem; Ledger for last yr.; Inv. sold at Profit – Sinking Fund Method)

On 30th September, 2013 the following balances stood in the books of S. P. Ltd.who follows FY

Particulars ` Particulars `
7% Second Mortgage Debentures 4,00,000 Sinking Fund Investments :
Income Received on Sinking Fund (a) ` 80,000, 5% State 76,000
Investments 14,500 Development Loans
Discount on Issue of Debentures 25,000 (b) ` 90,000, 6% National
Sinking Fund 3,65,500 Defence Bonds 1,00,000
(c) ` 70,000, 7% Plan Progress
70,000
Loans
(d) ` 1,80,000, 7½% Central 1,85,000
Securities
On the same day the investments were sold

The 5% State Development loans at 90,

The 6% National Defense Bonds at par,

The 7% Plan Progress Loans at 115

and the 7½% Central Securitiesat 120.

On 1st Oct., 2013 the debentures of 3,00,000 were redeemed at a premium of 2½%. On the very
same day 8% Moon Landing Investments of 1,00,000 were purchased at a premium of 3%.

Annual contribution for redemption was 50,000. Ignore interest.

Prepare the following accounts

(i) 7% Debenture; (ii) Sinking Fund; (iii) Sinking Fund Investments.

Illustration 9: (Red. @ Par; JV + Ledger for 3 years; Inv. sold at Profit – Sinking Fund
method)

ITC Ltd. issued 1,100 5% debentures of 100 each on 1st January, 2011 redeemable at par. The
company decided to set aside every year a sum of 34,893 to be invested @ 5% outside the
business. The investments were sold at 71,580 at the end of the third year and the debentures were
redeemed. Give Journal entries. Also prepare Sinking Fund Account and Sinking Fund
Investments Account.

Page 38 of 56
 Illustration 10 (Conversion method)

The summarised Balance Sheet of Nipa Ltd. on March 31, 2017 was as follows :

Liabilities ` Assets `
Share Capital : Fixed Assets at Cost less
6% Redeemable Preference 2,00,000 Depreciation 4,12,000
Shares of ` 10 each 4,00,000 Goodwill 2,00,000
Equity Shares of ` 10 each 4,50,000
2,50,000 Stock
Profit and Loss A/c 2,15,000
Sundry Debtors
5% Debentures 3,00,000 Discount on Debentures 12,000
Bank Loan 50,000
Sundry Creditors 89,000
12,89,000 12,89,000
Wanting to redeem the Preference Shares and the Debentures, the company offered to the Redeemable
Preference Shareholders and the Debenture holders the option to convert their holding into Equity Shares
to be issued at a premium of 2.50 per share. Half of the Preference Shareholders And one-third of the
Debenture holders agreed to do this. The company issued 30,000 Equity Shares at 12.50 to the public
for cash and with the funds available paid off the bank loan and redeemed the remaining redeemable
Preference Shares and Debentures.
Journalize the transactions.

Illustration 11 ( Conversion method))

Hindustan Pvt. Ltd. had issued 5000 - 12% debentures of 100 each redeemable on 31-12-2013 atpar.
The Company offered three options to the debenture holders as under:
(i) 14% Preference shares of 10 each at 12.
(ii) 15% Debentures of 100 each at par.
(iii) Redemption in cash.
The options were accepted as under
Option (i) by holders of 1500 debentures Option (ii) by holders of 1500 debentures Option (iii) by
holders of 2000 debentures. The redemption was carried out by the Co. Pass journal entries in the
books of Hindustan Pvt. Ltd. without narration. Company decided to use the minimum amount of
profits required by law.

MODULE 4) REDEMPTION OF PREFERENCE SHARES (INCLUDING ISSUE OF SHARES

FOR CONSIDERATION OTHER THAN CASH)

Redemption of preference shares refers to the process by which a company repurchases or pays off its
preference shares. Preference shares are a type of equity security that typically entitles shareholders to a
fixed dividend payment before any dividends are paid to holders of common shares. These shares may
also carry other preferential rights, such as priority in asset distribution in the event of liquidation.

Companies may choose to redeem preference shares for various reasons, such as to reduce debt,
restructure their capital, or eliminate a fixed dividend obligation. The redemption process involves the
company repurchasing the preference shares from shareholders at an agreed-upon price, typically at par
value or at a premium as specified in the terms of the preference shares.
Page 39 of 56
 Redemption of preference shares can be either mandatory or voluntary, depending on the terms outlined
in the company's articles of association or the terms of the preference share issue. Mandatory redemption
might be triggered by a specific event, such as reaching a predetermined date or achieving certain
financial milestones. Voluntary redemption, on the other hand, is initiated at the discretion of the
company's management.

It's important to note that the redemption of preference shares can have financial implications for both the
company and the shareholders. Shareholders may receive a return of their initial investment along with
any accrued dividends, while the company may benefit from reduced financial obligations and increased
flexibility in its capital structure.

Types of Preference shares

Preference shares come in various types, each with its own set of characteristics and rights. Some
common types of preference shares include:

1. Cumulative Preference Shares: These shares entitle shareholders to receive dividends even if the
company does not make a profit or declares a dividend in a particular year. Any unpaid dividends
accumulate and must be paid out in future years before dividends are distributed to holders of common
shares.

2. Non-cumulative Preference Shares: Unlike cumulative preference shares, non-cumulative preference

shares do not accumulate unpaid dividends. If the company does not declare a dividend in a given year,
shareholders of non-cumulative preference shares have no right to receive dividends for that year, and
the unpaid dividends are not carried forward to future years.

3. Participating Preference Shares: Shareholders of participating preference shares have the right to
receive additional dividends beyond the fixed rate specified in the share terms. These additional
dividends are typically distributed after dividends have been paid to common shareholders at a
predetermined rate.

4. Non-participating Preference Shares: Non-participating preference shares only entitle shareholders to

receive dividends at the fixed rate specified in the share terms. Shareholders do not have the right to
receive additional dividends beyond this fixed rate, even if the company's profits exceed expectations.

5. Convertible Preference Shares: Convertible preference shares give shareholders the option to convert
their preference shares into a specified number of common shares after a predetermined period or under
certain conditions. This conversion feature provides shareholders with the opportunity to participate in
the company's growth potential by converting their fixed-income investment into equity.

6. Redeemable Preference Shares: Redeemable preference shares are shares that the company can
repurchase or redeem at a predetermined date or under certain conditions, as specified in the share
terms. This provides the company with the flexibility to adjust its capital structure by reducing its
financial obligations or restructuring its equity.

Page 40 of 56
These are some of the common types of preference shares, but it's essential to note that the terms and
characteristics of preference shares can vary widely depending on the company and the specific terms
outlined in the share agreement or articles of association.

Divisible Profit
Divisible profit refers to the portion of a company's profits that is available for distribution to its
shareholders in the form of dividends. It represents the amount of profit that is not needed for
reinvestment in the business or for other purposes such as debt repayment or reserves

Examples -

• Profit and Loss Account

• General Reserve

• Dividend Equalization Reserve

• Reserve

• Investment Fluctuation Reserve

• Voluntary Debenture Redemption Fund

• Workmen Compensation Fund**

• Workmen Accident Fund**

• Insurance Fund**

• Debenture Redemption Reserve ( Debentures are redeemed.)

** Only to the extend of free reserve i.e. above the actual liability

Non divisible profit

Non-divisible profit refers to the portion of a company's profits that is not

available for distribution to its shareholders as dividends. Instead, this
profit is typically earmarked for specific purposes within the company,
such as reinvestment in the business, repayment of debt, or allocation to
reserves.

Examples
• Capital Reserve

• Security Premium

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 • Capital Redemption Reserve (Old Balance)

• Investment Allowance Reserve

• Development Rebate Reserve

• Share Forfeiture Balance

• Profit prior to incorporation

• Revaluation Reserve

• Statutory Reserve

• Debenture Redemption Reserve ( Debentures are not redeemed.)

Conditions of Redemption of Preference shares

Condition 1

Face Value of Preference shares to be redeemed = Net Proceed of Fresh Issue + CRR

Condition 2

Premium payable on Redemption is to be written off by using Divisible Profit

Journal Entries for the Scheme of

Redemption of Preference Shares

1. Preference share become due for Redemption @ Premium

Pref. Shares Dr 100

Red. Pr. Dr 10

To PSH 110

2. Fresh issue is made @ SP

Bank Dr 60

To S.CAP 50….Net Proceed …Amt collected towards cap

To SP 10

3. CRR is created.

DP Dr 50
Page 42 of 56
TO CRR 50

4.RP is written off

DP Dr 10

To RP 10

5.PSH are paid

PSH Dr 110

To Bank 110

Issue of Shares for Consideration other than Cash

Bonus Issue

A bonus issue, also known as a bonus share issue or a scrip issue, is a corporate action in which a
company distributes additional shares to its existing shareholders free of charge. These additional shares
are issued to existing shareholders in proportion to their current holdings. No cash payment is required
from shareholders to receive these bonus shares.

The purpose of a bonus issue can vary, but it is often used as a way for a company to capitalize its
retained earnings or reserves while maintaining the proportionate ownership interests of existing
shareholders. It does not increase the total market capitalization of the company because no new capital is
raised through the issuance of bonus shares. Instead, the bonus issue reallocates the company's existing
reserves or retained earnings into additional shares.

Bonus issues are typically undertaken when a company has accumulated sufficient profits or reserves that
it wishes to distribute to shareholders without paying out cash dividends. By issuing bonus shares instead
of cash dividends, the company retains liquidity while still rewarding shareholders. Bonus issues can also
increase the liquidity of the company's shares in the market, as the increased number of shares available
for trading may attract more investors.

Issue of Fully paid bonus shares

1. DP / CRR/SP Dr

To Bonus to SH

2. Bonus to SH Dr

To Equity Share Capital

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Converting partly paid shares into fully paid up

1. Final Call Dr

To Equity Share Capital

2. DP Dr

To Bonus to SH

Bonus to SH Dr

To Final Call

Issue in the Scheme of Amalgamation

1. Assets Account Dr ….Agreed value

To Liabilities Account……………………………Agreed value

To Vendor Firm /Company……………………..PC

2. Vendor Firm /Company Account Dr…PC

To Equity/Preference share capital

To Debentures

To Security Premium

To Bank

Issue to underwriters

1. Underwriting Commission Account Dr.

To Underwriter Account

2. Underwriter Account Dr.

To Equity/Preference share capital

To Debentures

To Security Premium

To Bank

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Issue to Promoters

1. Goodwill Account Dr.

To Equity/Preference share capital

To Debentures

To Security Premium

To Bank

. Issue to vendor of LT Asset

1. LT Asset Dr

To Vendor Account

2. Vendor Account Dr

To Equity/Preference share capital

To Debentures

To Security Premium

To Bank

Problem Sheet
Redemption of Preference shares
Illustration 1

Shahid Ltd. has 2,000 12% Redeemable Preference shares of ₹ 100 each. Repayable at a
premium of 5% The shares are now due for redemption it is decided that the whole amount will
be redeemed out of a fresh issued of 20,000 equity shares of ₹ 10 each at ₹ 11 each the whole
amount is received in cash and the 12% preference shares are redeemed. Show the necessary
journal entries in the books of the company. The company has sufficient balance in the profit and
loss A/c.
Illustration: 2

Gemini limited has issued 1,50,000 10% Preference shares of ₹ 10/- each, redeemable at
premium of 10% on 31st December 2017 The Company has adequate balance in General Reserve
Page 45 of 56
 to provide funds for redemption company.
(i) Sold Investment costing ₹ 2,00,000 for ₹3,00,000.
(ii) Issued for cash 2,500 15% Debenture of ₹ 100 at par
(iii) Issued 50,000 equity shares of ₹ 10 at premium of ₹ 4/- per share.
Show Journal Entries in the books of company.

Illustration: 3
Alphanso Ltd. Whose issued share capital on 31.12.2018, Consisted of 12,000 8% redeemable
Preference shares of ₹ 100 each fully paid and 40,000 equity shares of ₹ 100 each, ₹ 80 paid up
decided to redeem preference shares at a premium of ₹ 10 per share. The company’s balance
sheet 31.12.2018. showed a general reserve of ₹18,00,000 and capital reserve of ₹ 1,70,000.
The redemption was affected partly out of profit and partly out of the proceeds of new issue of
6,000 7.5% cumulative preference share of 100 each at a premium of ₹ 25 per share.
You are required to pass necessary journal entries.
Illustration: 4

Balance sheet of Azad Ltd. on 31st March 2018.was as under:

Liabilities ₹ Assets ₹
10% Preference shares of Fixed Assets 1100000
Rs.100 each fully paid 500000 Investment 400000
Equity Share of Rs.10 each fully paid 1000000 Bank 90000
Securities Premium 400000 Other current Assets 1400000
General Reserve 300000 Preliminary Expenses 10000
8% Debenture of Rs.100 each 400000
Current Liabilities 400000
30,00,000 30,00,000

Page 46 of 56
 On the above date the company decided to redeem its preference shares at a 10% premium.
for the purpose the company sold its investments at a profit 10% and issued 25,000 equity
shares of ₹ 10 each at par. Preference shares were duly redeemed. All the money under new
issue was received and all money on redemption was paid. You are required to give
necessary journal entries for the above transactions keeping in view all the legal
requirements.
Illustration: 5

The Following item appear in the Balance Sheet of Devendra Limited as on 31st March 2018.
(a) Share Capital:
Equity Authorized -5,00,000 Share of ₹ 10 each issued subscribed called and paid up
40,0000 Share of ₹ 10 each.
Preference Authorized issue and subscribed 60,000 12% preference shares of ₹ 20 each,
fully paid.
(b) Investments ₹ 3,50,000.
(c) Profit & Loss account (credit) Balance ₹7,00,000
It was decided to redeem the preference shares at a premium of 5% as on 31st
March,2017 it was further decided to:
(1) Sell Investment for ₹ 3,00,000;
(2) Finance part of the redemption fully out of profit; subject to leaving a balance of ₹
1,40,000 inthe profit and loss account; and
(3) Issue sufficient number of equity shares at a premium of ₹ 2 to raise the balance of the
fun in required. The above decisions have been carried out and the preference shares
redeemed

Give Journal Entries to record the above transactions.

Illustration:6
The books of RK ltd. Showed the following balances on 31st march,2017: ₹
15,000 equity shares of ₹10 each fully paid 1,50,000
2,500, 10% Redeemable preference shares of ₹ 100 each fully paid 2,50,000
General Reserve 1,75,000
Profit and loss account 1,60,000
Securities premium 15,000
Investment 1,20,000
Cash at bank 39,000
On 1 April,2017 board of directors decided to redeem the preference shares at a premium of
st

8%. In order to pay-off preference shareholders the company also decided to sell investments,
use companies fund and to raise the balance by issue of sufficient number of Equity shares of
₹10 each at a premium of ₹ 1 per share subject to leaving a minimum bank balance of ₹ 10,000
after such redemption. Investments were sold at ₹ 1,08,000.
Show the necessary journal entries to record the transactions.

Page 47 of 56
Illustration:7

Following is the Balance Sheet of Riya Auto Ltd as on 31.3.2018

Liabilities Assets
3,000 9% Redeemable Preference Fixed Assets 1200000
Share of Rs 100 each Rs80 paid up 240000 Investment (at cost) 290000
1,20,000 Equity share of Rs 10 Bank Balance 170000
each Fully paid 1200000 Other Current Assets 400000
Revenue Reserve 150000
8% Debenture 200000
Current Liabilities 270000
20,60,000 20,60,000
On the above date 9% preference Shares were redeemable at a premium of 5%
1. The company made final call of ₹ 20 per share on these shares. All the Shareholders paid
the call Money.
2. The company issued 20,000 equity shares of ₹ 10 each at a premium of 2 per shares for
cash consideration. The issue was fully subscribed and paid for.
3. Part of the Investments were sold for ₹ 1,32,000 at a profit of 10% on cost.
4. The company redeemed the preference shares as per the terms. One preference
shareholder Holding 100 shares was untraceable, hence payment could not be made to
him.
You are required to pass necessary journal Entries in the books of Riya Auto Ltd. to
record the above transactions.

Illustration 8

Following is the Balance Sheet of Ankit Limited as on 31st March 2018:

Liabilities Assets
2,000 8% Redeemable Preference Fixed Assets 1575000
shares of Rs.100 each fully paid 200000 Bank 218000
1,00,000 Equity Share of Investment 150000
Rs.10 each fully paid 1000000 (market Value Rs.1,90,000)
Securities Premium 35000
Profit & Loss Account 450000
Sundry Creditors 258000

19,43,000 19,43,000
On the above date, the directors of the company took following steps to redeem 8%
preference shares at a premium of 5%.
(a) The company issued 4000 Equity shares of ₹ 10 at a premium of ₹ 2 per share for the
purpose of redemption of preference shares.

Page 48 of 56
 (b) Investment were sold at market price
(c) All the payments were made to the preference shareholders except those holding 100
shares who could not be traced.
You are required to:
(1) Pass necessary journal Entries in the books of Ankit Limited complying with requirement
of companies Act 2013
(2) Prepare the Balance Sheet of the company after redemption of preference Shares.

Illustration:9

The Balance Sheet of Miracle Co Ltd. as on 31st March 2017.

Liabilities ₹ Assets ₹
Share Capital: Fixed Assets 2300000
Authorized: Cash at Bank 300000
1,00,000 9% Redeemable
Preference
Shares of Rs.10 each 1000000
2,50,000 Equity Shares of Rs 10
Each 2500000
Issued and Paid up:
50,000 9% Redeemable Preference
Shares of Rs.10 each, Fully Paid 500000
1,00,000 Equity shares of Rs.10
each
Fully Paid 1000000
Sundry Creditor 750000
Profit and Loss A/c 350000
2600000 2600000
The Redeemable Preference shares were redeemed on 15 April 2017, at a premium of 5% The
th

profit available being not sufficient to redeem the whole issue, the company issued 25,000
Equity shares of ₹ 10 each at par on 1-4-2017 which were duly taken up and paid for.
The company decided to utilize the capital Redemption Reserve for issuing Equity shares as
bonus shares. Pass the necessary Journal entries and show the Balance Sheet after redemption.

Illustration: 10

The Summary Balance Sheet of Ishika Ltd. as on 31st March, 2018 is given below.

Liabilities ₹ Assets ₹
Authorized Share Capital: Fixed Assets 300000
10,000 Equity Shares of Rs.1000
each 1000000 Investment 200000
20,000 9% Redeemable Preference Cash at Bank 10000
Shares of Rs.10 each 200000 Other Current Assets 400000

Issued and Paid-up capital:

5000 Equity shares of Rs.100 each
Page 49 of 56
 Fully Paid up 500000
9% Redeemable Preference shares
of Rs.10 each, Fully Paid up 200000
Profit and Loss A/c 200000
Current Liabilities 10000
910000 910000
On 1st April 2018 the Company:
(i) Redeemed the preference shares at a premium of ₹2 pre shares.
(ii) Realized Investment at 80% of the cost
(iii) Issued at a premium of 40 per share, such number of equity shares for the purpose of
aforesaid redemption as to ensure to redemption of preference share. The credit
balance in profit and loss A/c would be ₹ 25000.
(iv) Issued as Bonus, Equity share at par at the rate of one share of every for every twenty
shares held on31st March ,2018 out of the said balance in capital redemption reserve
A/c
You are required to:
Show necessary journal entries to record the above transactions.
Illustrations 11

The Following is the summary Balance Sheet of Arvind Ltd. As on 31st March 2018:

Liabilities ₹ Assets ₹
2000 8% Redeemable Preference Fixed Assets 8000000
shares of Rs.100 each fully paid 2000000 Stock 1400000
40,000 Equity Share of Investment 800000
Rs.100 each fully paid 4000000 (market Value Rs.880000.)
Securities Premium 120000 Debtors 1400000
General Reserve 1200000 Bank Balance 400000
Profit & Loss Account 520000
Current liabilities 4160000

1,20,00,000 1,20,00,000

The 8% Redeemable Preference shares are to be redeemed at a premium of 10%. Fresh issued of
equity shares to be made to the extent required in terms of the provision of the companies Act
2013.All the Investment are to be sold off at market value. Temporary bank Overdraft is to be
arranged in case of shortage of fund.
The Company redeemed the preference shares on 1st April 2018. Except in case of one shareholder
holding 200 preference shares who could not be traced.
Subsequently the company issued bonus shares in the ratio of one equity share for every four-
equity share held including the new issue.
Give necessary Journal Entries to record the above transactions in books of Arvind Ltd.

Page 50 of 56
Illustration 12

Following Is the Summery Balance Sheet of Manish Ltd. As on 31.12.2018

Liabilities ₹ Assets ₹
2000 Equity Shares of Rs.100 each 200000 Fixed Assets 300000
1000 9% Redeemable Preference Current Assets
(including Bank Balance of
Share of Rs 100 each 100000 Rs.100000) 220000
Less: Calls in Arrears
(Rs.25 per Share) 500 99500
General Reserve 48000
Sundry Creditors 122500
Bill Payable 50000

520000 520000

The Directors Forfeited preference shares for non-payment of calls after giving notice to the
shareholders and thereafter redeemed the preference shares at a premium of 10%
For the purpose of redemption, the company made a fresh issue of 640 equity shares of ₹ 100
each at a premium of 5%. All the shares were subscribed and fully paid
Pass Journal Entries for the above transactions and prepare balance sheet of the company after
redemption.

Illustration: 13

Following is the Summary Balance Sheet of Vasant Ltd. as on 31st March 2018.

Liabilities ₹ Assets ₹
4000 8% Redeemable Preference Sundry Assets 1600000
Share of Rs 100 each fully paid up 400000 Investment 200000
3000 7% Redeemable Preference Bank 660000
Share of Rs 100 each Rs.80 paid
up 240000
1,00,000 Equity Share of Rs 10
each 1000000
Revenue Reserve 570000
Trade Payables 250000
2460000 2460000
It was decided to redeem both classes of preference shares at a premium of 10%. For this
purpose the Company:
1. Made a final call of ₹20 per share on 7% Redeemable Preference Shares, which was paid
by all the shareholders.
2. Issued 18,000 Equity Shares of ₹ 10 each at a premium of ₹ 2/- per share. This issue was

Page 51 of 56
 fully subscribed and all monies were duly received.
3. Sold Investment at a profit of 10%.
4. Issued Bonus shares to the Equity shareholders in the ratio of one bonus share for every
two-share held. (Excluding fresh issue).
All the payment were made except to the shareholders holding 100. 8% preference shares
who could not be traced.
Illustration: 14

You are required to pass journal entries.

The following balances are appearing in the Books of All Xerox Ltd. on 1-4-2017

Redeemable Preference Share Capital (Shares of Rs. 10 each) 2,00,000

Calls-in-Arrears 2,000

General Reserve 1,00,000

Share Premium 5,000

The Preference shares are fully called up and due for redemption at a premium of 10%. Calls-in- arrear
are in respect of final call at the rate of Rs. 4 per share and these shares are held by Mr. Rahul whose
whereabouts are not known.

The Board of Directors decided that 50% of the General Reserve is to be utilised for the purpose of
redemption of redeemable preference share capital and to meet the further requirement of funds, further
14,500 numbers of Equity shares of Rs. 10 each were issued at a premium of 20%. The redemption of
Preference Shares were duly carried out and subsequently the company utilised the balance of Capital
Redemption Reserve Account to issue Equity Shares of Rs.10 each as bonus to shareholders.

Illustration: 15

Change Ltd. has an issued share capital of 6,500 7% redeemable cumulative preference shares of Rs. 10
each and 22,500 ordinary shares of Rs. 10 each. The preference shares are redeemable at a premium of
7.5% on 1st August 2016.
As on 31st July, 2016 the company’ s Summary Balance Sheet showed the following position:

Liabilities ₹ Assets ₹
Issued Share Capital: Assets Sundry 3,46,000
6,500 7% redeemable cumulative Balance at Bank
preference shares of Rs. 10 each 47,500
fully paid 65,000
22,500 ordinary shares of Rs. 10
each fully paid 2,25,000
Profit and Loss Account 50,875
Sundry Creditors 52,625

3,93,500 3,93,500
Page 52 of 56
 In order to facilitate the redemption of the preference shares, it was decided:
(a) to finance part of the redemption from company funds, subject to leaving a balance on Profit and
Loss Account of Rs. 10,000 and
(b) to issue sufficient number of ordinary shares at a premium of Rs. 2.50 per share to raise the balance
of funds required.
The preference shares were redeemed on the due date, and the issue of ordinary shares was fully
subscribed.

You are required to pass journal entries.

Issue of shares for consideration other than cash

Question 1) N Limited was registered with share capital of 50,00,000 in 10 Rs. FV per shares. The
company acquired the business of S & Co. for 15,00,000 payable as to 12,00,000 in fully paid shares
and balance in cash. The directors also decided to issue 10,000 shares credited as fully paid up to the
promoters for their services. 2,00,000 shares were issued for cash and were taken up by public and
fully paid for. M/s UW & Co. were the underwriters of the whole issue. Their underwriting
commission @ 5% of the issue price was agreed to be satisfied by issue of shares. Show the Journal
entries

Question 2) Summary Balance Sheet of X Ltd. as at 31st March, 2017

Liabilities ` Assets `
Authorized Capital : Sundry Assets 2,00,000
10,000 Equity Shares of 10 1,50,000
each
Issued and Paid-up Capital : 80,000
10,000 Equity Shares of 50,000
` 10 each. 8 paid-up
Reserve and Surplus : 70,000
Security Premium 6000
General Reserve 44000 2,00,000
Current Liabilities :
Trade Creditors
2,00,000

Necessary resolutions were passed :-

Partly paid shares to be converted into fully paid-up shares.
Issue 2,000 fully paid up bonus shares of 10 each to the existing shareholders.
Pass necessary Journal Entries to record the above.

Page 53 of 56
Question 3 ) The Balance Sheet of A Ltd. as at 31-3-2017 is as follows

Liabilities ` Assets `
SHARE CAPITAL : Sundry Assets 17,00,000
Authorised 15,00,00
1,50,000 Equity Shares of 10 0
each Issued, Subscribed and Paid
up 80,000 Equity Shares of 6,00,000
7.50 each called-up and paid-up 1,50,000
Reserve and Surplus : Capital 20,000
Redemption Reserve Plant 1,50,000
Revaluation Reserve Securities 2,30,000
Premium Development Rebate 2,50,000
Reserve Investment Allowance 3,00,000
Reserve General Reserve 17,00,000 17,00,000

The company wanted to issue bonus shares to its shareholders at the rate of one share for every two shares
held. Necessary resolution were passed; requisite legal requirements were complied with. You are
required to give effect to the proposal by passing journal entries in the books of A Ltd.

Question 4) Following items appear in the trial balance of Bharat Ltd. (a listed company) as on 31st
March, 20X1

Particulars Amount (Rs.)

40,000 Equity shares of ` 10 each 4,00,000
Capital Redemption Reserve 55,000
Securities Premium (collected in cash) 30,000
General Reserve 1,05,000
Surplus i.e. credit balance of Profit and Loss 50,000
Account

The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 4
shares held and for this purpose, it decided that there should be the minimum reduction in free reserves.
Pass necessary journal entries.

Question 5) Pass Journal Entries in the following circumstances:

i. A Limited company with subscribed capital of ` 5,00,000 consisting of 50,000 Equity shares of
` 10 each; called up capital ` 7.50 per share. A bonus of 1,25,000 declared out of General
Reserve to be applied in making the existing shares fully paid up.
ii. A Limited company having fully paid up capital of ` 50,00,000 consisting of Equity shares of `
10 each, had General Reserve of ` 9,00,000. It was resolved to capitalize ` 5,00,000 out of General
Reserve by issuing 50,000 fully paid bonus shares of ` 10 each, each shareholder to get one such
share for every ten shares held by him in the company.

Page 54 of 56
 Declaration
These notes are prepared solely for educational purposes. The notes are
intended to facilitate learning and understanding and they are provided free
of cost to students and educators of SVKM’s Narsee Monjee College of
Commerce and Economics (Autonomous) Mumbai, to aid in their
academic endeavors. We encourage the dissemination of knowledge and
the advancement of education.
These notes are strictly for the private circulation.
SVKM’s Narsee Monjee College of Commerce and Economics
(Autonomous) Mumbai shall not be held liable in any manner to any
person for any mistake or omission in the contents of the course outline.

Page 55 of 56
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