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karnataka class 12 commerce Accountancy Issue of debentures for cash

karnataka class 12 commerce Accountancy Issue of debentures for cash

karnataka class 12 commerce Accountancy Issue of debentures for cash

Issue of Debentures The procedure for the issue of debentures is the same as that for the issue of shares. The intending investors apply for debentures on the basis of the prospectus issued by the company. The company may either ask for the entire amount to be paid on application or by means of instalments on application, on allotment and on various calls. Debentures can be issued at par, at a premium or at a discount. They can also be issued for consideration other than cash or as a collateral security.

Issue of Debentures for Cash

Debentures are said to be issued at par when their issue price is equal to the face value. The journal entries recorded for such issue are as under:

(a) If whole amount is received in one instalment:

(i) On receipt of the application money

Bank A/c Dr.

To Debenture Application & Allotment A/c

(ii) On Allotment of debentures

Debenture Application & Allotment A/c Dr.

To Debentures A/c

(b) If debenture amount is received in two instalments:

(i) On receipt of application money

Bank A/c Dr.

To Debenture Application A/c

(ii) For adjustment of applications money on allotment

Debenture Application A/c Dr.

To Debentures A/c

(iii) For allotment money due

Debenture Allotment A/c Dr.

To Debentures A/c

(iv) On receipt of allotment money

Bank A/c Dr.

To Debenture Allotment A/c

(c) If debenture money is received in more than two instalments

Additional entries:

(i) On making the first call

Debenture First Call A/c Dr.

To Debentures A/c

(ii) On the receipt of the first call

Bank A/c Dr.

To Debenture First Call A/c

Note: Similar entries may be made for the second call and final call. However, normally the whole amount is collected on application or in two instalments, i.e., on application and allotment.

Illustration ABC Lmited issued Rs 10,000, 12% debentures of Rs 100 each payable Rs 30 on application and remaining amount on allotment. The public applied for 9,000 debentures which were fully allotted, and all the relevant allotment money was duly received. Give journal entries in the books of ABC Ltd., and exhibit the relevent information in the balance sheet.

Solution:

karnataka class 12 commerce Accountancy Issue of debentures for cash

Issue of Debentures at a Discount When a debenture is issued at a price below its nominal value, it is said to be issued at a discount. For example, the issue of Rs 100 debentures at Rs 95, Rs 5 being the amount of discount. Discount on issue of debentures is a capital loss and over a period of 3 to 5 years or is charged to “Securities Premium Account” as per the guidelines issued by ICAI. The discount on issue of debentures can be written-off either by debiting it to profit and loss or to securities premium account.

The Companies Act, 1956 does not impose any restrictions upon the issue of debentures at a discount.

Illustration 2 TV Components Ltd., issued 10,000, 12% debentures of Rs 100 each at a discount of 5% payable as follows:

On application Rs 40

On allotment Rs 55

Show the journal entries including those for cash, assuming that all the instalments were duly collected. Also show the relevant portion of the balance sheet.

Solution:

karnataka class 12 commerce Accountancy Issue of debentures for cash

Debentures issued at Premium A debenture is said to be issued at a premium when the price charged is more than its nominal value. For example, the issue of Rs 100 debentures for Rs 110, (Rs 10 is being the premium). The amount of premium is credited to Securities Premium account and is shown on the liabilities side of the balance sheet under the head “Reserves and Surpluses”.

Illustration XYZ Industries Ltd., issued 2,000, 10% debentures of Rs 100 each, at a premium of Rs 10 per debenture payable as follows:

On application Rs 50

On allotment Rs 60

The debentures were fully subscribed and all money was duly received. Record the journal entries in the books of a company. Show how the amounts will appear in the balance sheet.

karnataka class 12 commerce Accountancy Issue of debentures for cash

Meaning of Debentures

Debenture: The word ‘debenture’ has been derived from a Latin word ‘debere’ which means to borrow. Debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates. According to section 2(12) of The Companies Act,1956 ‘Debenture’ includes Debenture Inventory, Bonds and any other securities of a company whether constituting a charge on the assets of the company or not.

Bond: Bond is also an instrument of acknowledgement of debt. Traditionally, the Government issued bonds, but these days, bonds are also being issued by semi-government and non-governmental organisations. The terms ‘debentures’ and ‘Bonds’ are now being used inter-changeably

karnataka class 12 commerce Accountancy Issue of debentures for cash

TYPES OF DEBENTURES

A company may issue different kinds of debentures which can be classified as under:

From the Point of view of Security

(a) Secured Debentures: Secured debentures refer to those debentures where a charge is created on the assets of the company for the purpose of payment in case of default. The charge may be fixed or floating. A fixed charge is created on a specific asset whereas a floating charge is on the general assets of the company. The fixed charge is created against those assets which are held by a company for use in operations not meant for sale whereas floating charge involves all assets excluding those assigned to the secured creditors

karnataka class 12 commerce Accountancy Issue of debentures for cash

(b) Unsecured Debentures: Unsecured debentures do not have a specific charge on the assets of the company. However, a floating charge may be created on these debentures by default. Normally, these kinds of debentures are not issued.

karnataka class 12 commerce Accountancy Issue of debentures for cash

From the Point of view of Tenure

(a) Redeemable Debentures: Redeemable debentures are those which are payable on the expiry of the specific period either in lump sum or in Instalments during the life time of the company. Debentures can be redeemed either at par or at premium.

(b) Irredeemable Debentures: Irredeemable debentures are also known as Perpetual Debentures because the company does not give any undertaking for the repayment of money borrowed by issuing such debentures. These debentures are repayable on the winding-up of a company or on the expiry of a long period.

From the Point of view of Convertibility

(a) Convertible Debentures: Debentures which are convertible into equity shares or in any other security either at the option of the company or the debentureholders are called convertible debentures. These debentures are either fully convertible or partly convertible.

(b) Non-Convertible Debentures : The debentures which cannot be converted into shares or in any other securities are called nonconvertible debentures. Most debentures issued by companies fall in this category. 2.3.4

karnataka class 12 commerce Accountancy Issue of debentures for cash

From Coupon Rate Point of view

(a) Specific Coupon Rate Debentures: These debentures are issued with a specified rate of interest, which is called the coupon rate. The specified rate may either be fixed or floating. The floating interest rate is usually tagged with the bank rate.

(b) Zero Coupon Rate Debentures: These debentures do not carry a specific rate of interest. In order to compensate the investors, such debentures are issued at substantial discount and the difference between the nominal value and the issue price is treated as the amount of interest related to the duration of the debentures. 2.3.5

From the view Point of Registration

(a) Registered Debentures: Registered debentures are those debentures in respect of which all details including names, addresses and particulars of holding of the debentureholders are entered in a register kept by the company. Such debentures can be transferred only by executing a regular transfer deed.

(b) Bearer Debentures: Bearer debentures are the debentures which can be transferred by way of delivery and the company does not keep any record of the debentureholdeRs Interest on debentures is paid to a person who produces the interest coupon attached to such debentures

karnataka class 12 commerce Accountancy Issue of debentures for cash

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karnataka class 12 commerce Accountancy Issue of debentures for cash

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