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karnataka class 12 commerce Accountancy Issue of debentures for consideration other than cash

karnataka class 12 commerce Accountancy Issue of debentures for consideration other than cash

karnataka class 12 commerce Accountancy Issue of debentures for consideration other than cash

Sometimes a company purchase assets from vendors and instead of making payment in cash issues debentures for consideration thereof. Such issue of debentures is called debentures issued for consideration other than cash. In that case also, the debentures may be issued at par, at a premium or at a discount then entries made in such a situation are similar to those of the shares issued for consideration other than cash, which are as follows :

  1. On purchase of assets

Sundry Assets A/c Dr. To

Vendor’s

  1. On issue of debentures

(a) At par

Vendors Dr.

To Debentures A/c

(b) At premium

Vendors Dr.

To Debentures A/c

To Securities Premium A/c

(c) At a discount Vendors Dr.

Discount on Issue of Debenture A/c Dr.

To Debentures A/c

Illustration Aashirward Company Limited purchased assets of the book value of Rs 2,00,000 from another company and agreed to make the payment of purchase consideration by issuing 2,000, 10% debentures of Rs 100 each. Record the necessary journal entries.

karnataka class 12 commerce Accountancy Issue of debentures for consideration other than cash

Illustration Rai Company purchased assets of the book value of Rs 2,20,000 from another company and agreed to make the payment of purchase consideration by issuing 2,000, 10% debentures of Rs 100 each at a premium of 10%. Record necessary journal entries.

karnataka class 12 commerce Accountancy Issue of debentures for consideration other than cash

Illustration – National Packaging Company purchased assets of the value of Rs 1,90,000 from another company and agreed to make the payment of purchase consideration by issuing 2,000, 10% debentures of Rs 100 each at a discount of 5%. Record necessary journal entries.

karnataka class 12 commerce Accountancy Issue of debentures for consideration other than cash

Illustration  G.S.Rai company purchased assets of the book value of Rs 99,000 from another firm. It was agreed that purchase consideration be paid by issuing 11% debentures of Rs 100 each. Assume debentures have been issued. 1. At par 2. At discount of 10%, and 3. At a premium of 10%. Record necessary journal entries

karnataka class 12 commerce Accountancy Issue of debentures for consideration other than cash

Sometimes a company may purchase the assets as well as takeover its liabilities of another concern. It happens usually in case of purchase of the whole business of the other concern. In such a situation, the purchase consideration will be equal to the value of net assets (Assets – Liabilities) taken over, and if the whole amount of the consideration is paid by issue of debentures, the journal entry will be:

Sundry Assets A/c Dr.

To Sundry Liabilities A/c

To Vendors

(Purchase of the Vendors’ business)

karnataka class 12 commerce Accountancy Issue of debentures for consideration other than cash

Issue of Debentures as a Collateral Security A collateral security may be defined as a subsidiary or secondary or additional security besides the primary security when a company obtains a loan or overdraft from a bank or any other financial Institution. It may pledge or mortgage some assets as a secured loan against the said loan. But the lending institutions may

insist on additional assets as collateral security so that the amount of loan can be realised in full with the help of collateral security in case the amount from the sale of principal security falls short of the loan money. In such situation, the company may issue its own debentures to the lenders in addition to some other assets already pledged. Such an issue of debentures is known as ‘Debentures issued as Collateral Security’.

 If the company fails to repay the loan along with interest, the lender is free to receive his money from the sale of primary security and if the realisable value of the primary security falls short to cover the entire amount, the lender has the right to invoke the benefit of collateral security whereby debentures may either be presented for redemption or sold in the open market.

 Debentures issued as collateral security can be dealt within two ways in the books of the company:
First Method No entry is made in the books of accounts since no liability is created by such issue. However, on the liability side of the balance sheet, below the item of loan, a note to the effect that it has been secured by issue of debentures as a collateral security is appended. For example, X Company has issued 9%, 10,000 debentures of Rs 100 each for a loan of Rs 10, 00,000 taken from a bank. This fact may be shown in the balance sheet as under:

karnataka class 12 commerce Accountancy Issue of debentures for consideration other than cash

Second Method The issue of debentures as a collateral security may be recorded by means of journal entry as follows:

Journal Entries

  1. Issue of 10,000, 9% debentures of Rs 100 each as collateral security for bank loan of Rs 10,00,000.

Debenture Suspense A/c Dr. 10,00,000

To 9% Debentures A/c 10,00,000

  1. For cancellation of 9% debentures as collateral security on repayment of bank loan.

Debenture Suspense account will appear as a deduction from the debentures on the liability side of the balance sheet. When loan is repaid the above entry will be cancelled by a reverse entry :

9% Debentures A/c Dr. 10,00,000

To Debenture Suspense A/c 10,00,000

karnataka class 12 commerce Accountancy Issue of debentures for consideration other than cash

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 installment:

(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 installments, i.e., on application and allotment.

karnataka class 12 commerce Accountancy Issue of debentures for consideration other than cash

Must read:

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Karnataka class 12 commerce Accountancy CH4 PARTNERSHIP ACCOUNTS RETIREMENT AND DEATH OF A partner

Karnataka class 12 commerce Accountancy Ratios in connection with retirement of a partner

karnataka class 12 commerce Accountancy Issue of debentures for consideration other than cash

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