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'Sangam Woollens Ltd.', Ludhiana, are the manufacturers and exporters of woollen garments. The company decided to distribute free of cost woollen garments to 10 villages of Lahaul and Spiti District of Himachal Pradesh. The company also decided to employ 50 young persons from these village in its newly established factory. The company issued 40,000 equity shares of Rs 10 each and 1,000 9% debentures of Rs 100 each to the vendors for the purchase of machinery of Rs 5,00,000.
Pass necessary Journal Entries. Also identify any one value that the company wants to communicate to the society.
Values involved in the above scenario:
(i) Creation of employment opportunities in rural areas.
(ii) An attempt for balanced regional development.
Bharat Ltd. had an authorized capital of Rs 20,00,000 divided into 2,00,000 equity shares of Rs 10 each. The company issued 1,00,000 shares and the dividend paid per share was Rs 2 for the year ended 31-3-2008. The management of the company decided to export its products to the neighbouring countries Nepal, Bhutan, Sri Lanka and Bangladesh. To meet the requirement of additional funds the financial manager of the company put up the following three alternatives before its Board of Directors:
(i) Issue 54,000 equity shares
(ii) Obtain a loan from Import and Export Bank of India. The loan was available at 12% per annum interest.
(iii) To issue 9% Debentures at a discount of 10%.
After comparing the available alternatives the company decided on 1-4-2008 to issue 6,000 9% debentures of Rs 100 each at a discount of 10%. These debentures were redeemable in four installments starting from the end of third year. The amount of debentures to be redeemed at the end of third, fourth, fifth and sixth year was as follows:
| Year | Profit Rs |
| III | 1,00,000 |
| IV | 1,00,000 |
| V | 2,00,000 |
| VI | 2,00,000 |
Prepare 9% Debentures Account for the year 2008-09 to 2013-14.
Give the meaning of 'Debenture'.
Debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for the repayment of the principal sum after a fixed period of time and payment of interest at regular intervals.
What is meant by issue of debentures as a collateral security?
A collateral security is a secondary or additional security besides the primary security when a company obtains a loan or overdraft from a bank or financial Institution. When a company issues its own debentures to the lender in addition to some other assets already pledged, it is known as ‘Debentures issued as a Collateral Security’.
Taneja Constructions Ltd. has an outstanding balance of Rs. 5,00,000, 7% debentures of Rs. 100 each redeemable at a premium of 10%. According to the terms of redemption, the company redeemed 30% of the above debentures by converting them into shares of Rs. 50 each at a premium of 20%. Record the entries for redemption of debentures in the books of Taneja Constructions Ltd.
Working Note:
Number of debentures to be redeemed= 5000*30%=1500 debentures.
Number of equity shares to be issued =165000/(60) i.e. 50+20% of 50= (50+10)= 60
=2750 equity shares
Give any one advantage for the redemption of debentures by purchase in the open market?
One of the advantages of redemption of debenture by purchase in the open market is that, the company can redeem at its convenience whenever it has surplus fund.
Narain Laxmi Ltd. invited applications for issuing 7500, 12% Debentures of Rs100 each at a premium of Rs 35 per Debenture. The full amount was payable on application.
Applications were received for 10,000 Debentures. Applications for 2500 Debentures were rejected and the application money was refunded. Debentures were allotted to the remaining applicants.
Pass necessary Journal Entries for the above transactions in the books of Narain Laxmi Ltd.
|
Date |
Particulars |
LF |
Debit (Rs) |
Credit (Rs) |
|
|
Bank a/c Dr To 12% Debenture application a/c Being application money received for 10000,12% debentures of Rs 100 each, issued at a premium of Rs 35 per debenture) |
|
13,50,000
10,12,500
3,37,500 |
13,50,000
7,50,000 2,62,500
3,37,500
|
|
12% Debenture application a/c Dr To 12% debenture a/c To debenture premium a/c Transfer of application money of 7500 debentures on allotment) |
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|
12% debenture application a/c Dr To Bank a/c ( being application money of 2500 applications oversubscribed refunded) |
Pass necessary Journal Entries for the following transactions in the books of Sudarshan Ltd:
(i) Redeemed 750, 12% Debentures of Rs 75 each by converting into Equity Shares of Rs 100 each. The Equity Shares were issued at a discount of 10%.
(ii) Converted 550, 12% Debentures of Rs 1,000 each into New 13% Debentures of Rs 100 each. The New Debentures were issued at a premium of 10%.
Journal entries
|
Date |
Particulars |
LF |
Debit (Rs) |
Credit(Rs) |
|
(i)
(ii) |
12% debentures a/c Dr To debenture holders a/c (being 750 debentures @ Rs 75 each redeemed to debenture holders) |
|
56,250
56,250 6250
5,50,000
5,50,000
|
56,250
62500
5,50,000
5,00,000
50,000
|
|
Debenture holders a/c Dr Discount on issue of shares a/c Dr To equity share capital a/c (being 12% debentures converted to equity shares of Rs 100 each issued at a discount of 10%) |
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|
12% debentures a/c Dr To debenture holders a/c (being 12% debentures due to debenture holders) |
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|
Debentures holders a/c Dr To 13% debentures a/c To premium on issue of debenture a/c (being 550, 12% debentures of Rs 1000 each converted to 13% debentures of rs 100 each at 10% premium) |
Working note:
(i) Amount due to debenture holders 56250 i.e.(750*75)
Number of equity shares to be issued at 10% discount =56250/90 =625 shares
Discount on issue of shares =625*10=6250
(ii) 550, 12% debentures @ 1000 each =5,50,000
Number of 13% debentures to be issued =5,50,000/110= 5000 shares
Premium on issue of debentures = 5000*10=50,000
Pass the necessary Journal entry when 10,000 debentures of Rs. 100 each are issued as collateral security against a Bank loan of Rs. 8,00,000.
|
Particulars |
LF |
Debit (Rs) |
Credit (Rs) |
|
Debenture suspense a/c Dr (Being 10,000 debentures of Rs 100 each issued as a collateral security against a bank loan of Rs 8,00,000) |
|
10,00,000 |
10,00,000 |
X Ltd. redeemed 100, 6% Debentures of Rs. 100 each by converting them into Equity Shares of Rs. 100 each. The 6% Debentures were redeemable at 10% premium for which the Equity Shares were issued at 25% premium. Pass the necessary Journal entries for the redemption of above-mentioned debentures in the books of X Ltd.
Journal Entries
|
Particulars |
LF |
Debit |
Credit |
|
6% Debenture a/c Dr Premium on redemption of debentures a/c Dr To Debenture Holders a/c (Being amount due to debenture holders)
|
|
10000 1000
11000 |
11000
8800 2200 |
|
Debenture Holders a/c Dr To Equity share capital a/c To Security premium a/c (Being 88 equity shares @ 100 each issued at 25% premium) |
Working note: Calculation of amount of equity share capital = (11000/125) * 100 = 8800.
On 1st April, 2008'a company made an issue of Rs. 2,00,000, 6% Debentures of Rs. 100 each, repayable at a premium of 10%. The terms of issue provided for the redemption of 400 debentures every year starting from the end of 31-3-2010 either by purchase from the open market or by draw of lots at the company's option.
On 31-3-2010, the company purchased for cancellation 300 Debentures at 95% and 100 Debentures at 90%.
Pass the necessary Journal entries for the issue and redemption of debentures assuming that the company had already created the Debenture Redemption Reserve A/c by the required amount.
|
Date |
Particulars |
LF |
Debit(Rs) |
Credit(Rs) |
|
1, April, 2008 |
Bank a/c Dr
To 6% Debentures application and allotment a/c
(Being amount received on issue of 2000 6% debenture @ Rs100 each
|
|
200000
200000
20000
28500
30000
9000
|
200000
200000
20000
28500
28500
1500
9000
9000
1000
|
|
6% Debenture application and allotment a/c Dr
Loss on issue of debenture a/c Dr
To 6% debenture a/c
To Premium on redemption of debentures a/c
(being issue of 2000, 6% debentures of Rs 100 each at par and redeemable at premium)
|
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Own debentures a/c Dr
To Bank a/c ( Being purchase of own 300 debentures of Rs 100 each @ 95 per debenture)
|
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6% debenture a/c Dr
To own debentures a/c
To profit on cancellation of debentures a/c (being cancellation of 300 debentures of Rs 100 each purchasing at Rs 95 per debenture)
|
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|
Own debenture a/c Dr
To bank a/c
(being the purchase of own 100 debentures of Rs 100 each @ Rs 90 per debenture)
|
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|
6% debenture a/c Dr
To own debenture a/c
To profit on cancellation of debentures a/c
(being the cancellation of 100 debentures of Rs 100 each by purchasing @Rs 90 per share)
|
State the provisions of the Companies Act, 2013 for the creation of 'Debenture Redemption Reserve'
As per Section 71 (4) of the Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014, every company issuing Debentures is required to create Debenture Redemption Reserve of at least an amount equal to 25% of the value of debentures issued at the time of redemption of debentures.
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