Chapter issue-and-redemption-of-debentures: Issue and Redemption of Debentures Case Study Questions | accountancy Class 12 CBSE

Chapter issue-and-redemption-of-debentures: Issue and Redemption of Debentures Case Study Questions | accountancy Class 12 CBSE | ByteNotes.in

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Case Set 1

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Sunrise Ltd., a listed company, decided to raise long-term funds by issuing 10,000, 12% Debentures of Rs. 100 each. The company invited applications from the public and received applications for 12,000 debentures. The board decided to allot debentures to 9,000 applicants in full, partially allot to 2,000 applicants (1,000 debentures), and reject the remaining applications. The debentures were payable Rs. 40 on application and Rs. 60 on allotment. All money was duly received. The finance manager was asked to record the journal entries and prepare the relevant balance sheet extract showing debentures as long-term borrowings.

Question 1: What is meant by 'over subscription' of debentures?

Over subscription occurs when the number of debentures applied for by the public is more than the number of debentures offered by the company for subscription.
In this case, 12,000 debentures were applied for against the offer of 10,000 debentures, making it oversubscribed by 2,000 debentures.

Question 2: How will the excess application money received from partially allotted applicants be treated in the books of Sunrise Ltd.?

The excess application money received from applicants who received partial allotment will be adjusted (transferred/credited) towards allotment money due from them.
The surplus reduces the amount payable by those applicants on allotment, and the net amount is collected as balance allotment money.

Question 3: Journalise the entry for transfer of application money and allotment of debentures showing refund of rejected applications and adjustment of excess money.

12% Debenture Application A/c Dr. 4,80,000 (12,000 × 40)
To 12% Debentures A/c 4,00,000 (10,000 × 40)
To Debenture Allotment A/c 40,000 (excess from partial allotment)
To Bank A/c 40,000 (refund to rejected applicants)
This entry reflects: full allotment to 9,000 applicants, partial allotment of 1,000 debentures to 2,000 applicants, rejection of remaining applications.

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Case Set 2

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Bharat Electronics Ltd. issued 5,000, 10% Debentures of Rs. 100 each at a discount of 5%, redeemable at par after 10 years. The debentures were payable Rs. 40 on application and Rs. 55 on allotment. All instalments were duly collected. The company had a balance of Rs. 30,000 in Securities Premium Reserve. The accountant was required to pass journal entries for issue and write off the discount. The company follows the policy of writing off discount in the year of issue itself.

Question 1: What is meant by 'Issue of Debentures at a Discount'? How is it shown in the balance sheet?

When debentures are issued at a price below their face/nominal value, they are said to be issued at a discount. For example, issuing Rs. 100 debentures at Rs. 95.
Discount on issue to be written off within 12 months is shown under 'Other Current Assets'; discount to be written off after 12 months is shown under 'Other Non-Current Assets'.

Question 2: How will the discount of Rs. 25,000 on issue of debentures be written off, given a Securities Premium Reserve of Rs. 30,000?

The discount on issue (Rs. 25,000) can be written off from Securities Premium Reserve since it has a sufficient balance.
Journal entry: Securities Premium Reserve A/c Dr. 25,000 | To Discount on Issue of Debentures A/c 25,000

Question 3: Pass journal entries for (i) receipt of application money, (ii) allotment of debentures at discount, and (iii) writing off discount on issue.

(i) Bank A/c Dr. 2,00,000 | To 10% Debenture Application A/c 2,00,000
(ii) 10% Debenture Application A/c Dr. 2,00,000; Discount on Issue of Debentures A/c Dr. 25,000 | To 10% Debentures A/c 2,75,000; 10% Debenture Allotment A/c Dr. 2,75,000 | To 10% Debentures A/c 2,75,000 (adjusted)
(iii) Securities Premium Reserve A/c Dr. 25,000 | To Discount on Issue of Debentures A/c 25,000

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Case Set 3

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Aryan Constructions Ltd. purchased machinery worth Rs. 1,98,000 from Suppliers Ltd. The company agreed to pay the purchase consideration by issuing 12% Debentures of Rs. 100 each. The finance team was asked to pass entries under three different scenarios: (i) debentures issued at par, (ii) debentures issued at 10% discount, and (iii) debentures issued at 10% premium. The accountant noted that the number of debentures to be issued would differ in each case, and calculated accordingly before recording the journal entries.

Question 1: What is meant by 'Issue of Debentures for Consideration other than Cash'?

When a company issues debentures to vendors or suppliers in lieu of payment for assets purchased, instead of paying cash, such an issue is called 'Issue of Debentures for Consideration other than Cash'.
In this case, Aryan Constructions Ltd. issued debentures to Suppliers Ltd. in settlement of purchase consideration for machinery.

Question 2: Calculate the number of debentures to be issued when debentures are issued at (i) 10% discount and (ii) 10% premium.

(i) At 10% discount: Issue price = Rs. 100 - Rs. 10 = Rs. 90; Number of debentures = Rs. 1,98,000 ÷ Rs. 90 = 2,200 debentures
(ii) At 10% premium: Issue price = Rs. 100 + Rs. 10 = Rs. 110; Number of debentures = Rs. 1,98,000 ÷ Rs. 110 = 1,800 debentures

Question 3: Pass journal entries for (i) purchase of machinery and (ii) issue of debentures at par, at 10% discount, and at 10% premium separately.

Purchase: Machinery A/c Dr. 1,98,000 | To Suppliers Ltd. 1,98,000
At par: Suppliers Ltd. Dr. 1,98,000 | To 12% Debentures A/c 1,98,000 (1,980 debentures)
At 10% discount: Suppliers Ltd. Dr. 1,98,000; Discount on Issue of Debentures A/c Dr. 22,000 | To 12% Debentures A/c 2,20,000 (2,200 debentures)
At 10% premium: Suppliers Ltd. Dr. 1,98,000 | To 12% Debentures A/c 1,80,000; To Securities Premium Reserve A/c 18,000 (1,800 debentures)

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Case Set 4

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Prism Ltd. needed additional funds and took a loan of Rs. 15,00,000 from Punjab National Bank. The bank had already taken business premises worth Rs. 18,00,000 as primary security. To further secure the loan, the bank asked for collateral security. Prism Ltd. agreed to issue 10% Debentures of Rs. 100 each for Rs. 18,00,000 as collateral security. The company's accountant was asked to show the treatment in the books using both the accepted methods and to present the relevant balance sheet extract.

Question 1: Define 'Collateral Security' in the context of debentures.

A collateral security is a subsidiary, secondary, or additional security provided to a lender over and above the primary security.
When a company issues its own debentures to a lender in addition to the primary security already pledged, such an issue is known as 'Debentures issued as Collateral Security'.

Question 2: Explain the First Method of recording debentures issued as collateral security in the books of accounts.

Under the First Method, no journal entry is made in the books of accounts because no actual liability is created by the issue of debentures as collateral security.
However, a note is appended below the item of loan on the liability side of the balance sheet stating that the loan has been secured by issue of debentures as collateral security.

Question 3: Pass the journal entry under the Second Method for issue of debentures as collateral security and show the relevant balance sheet extract for Prism Ltd.

Journal Entry: Debenture Suspense A/c Dr. 18,00,000 | To 10% Debentures A/c 18,00,000
Balance Sheet Extract (Non-current Liabilities — Long-term borrowings): Bank Loan = Rs. 15,00,000
Notes to Accounts: Long-term borrowings: Bank loan 15,00,000; 10% Debentures of Rs. 100 each 18,00,000; Less: Debenture Suspense 18,00,000 = Nil; Net = 15,00,000
The debenture suspense account is shown as a deduction from debentures in notes to accounts.

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Case Set 5

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Nova Chemicals Ltd. issued 2,000, 10% Debentures of Rs. 100 each at par, with terms specifying that the debentures are redeemable at a premium of 5% at the end of 5 years. The company's accountant noted that this situation creates a unique accounting treatment at the time of issue itself. The company had no balance in Securities Premium Reserve. Interest is payable annually at 10% on face value. The accountant was required to pass entries at the time of issue and record the liability created for future premium payment.

Question 1: Why is 'Loss on Issue of Debentures A/c' debited when debentures are issued at par but redeemable at a premium?

When debentures are issued at par but redeemable at a premium, the company will have to pay more than the nominal value at the time of redemption.
This future payment of premium represents a loss/cost to the company, which is recognised at the time of issue by debiting 'Loss on Issue of Debentures A/c' and crediting 'Premium on Redemption of Debentures A/c'.

Question 2: Under which head is 'Premium on Redemption of Debentures A/c' shown in the balance sheet and why?

'Premium on Redemption of Debentures A/c' is shown under the head 'Non-current Liabilities' under sub-head 'Long-term Borrowings' until the debentures are actually redeemed.
It is a liability payable in the future and represents a provision for the premium amount that will be paid to debentureholders at the time of redemption.

Question 3: Pass the complete journal entries at the time of issue of debentures for Nova Chemicals Ltd. (issued at par, redeemable at 5% premium).

Bank A/c Dr. 2,00,000 | To 10% Debenture Application & Allotment A/c 2,00,000 (Application money received)
10% Debenture Application & Allotment A/c Dr. 2,00,000; Loss on Issue of Debentures A/c Dr. 10,000 | To 10% Debentures A/c 2,00,000; To Premium on Redemption of Debentures A/c 10,000
The premium on redemption (2,000 × Rs. 5 = Rs. 10,000) is recognised as a liability and loss at the time of issue itself.
Statement of Profit & Loss A/c Dr. 10,000 | To Loss on Issue of Debentures A/c 10,000 (written off in year of issue)

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Chapter sections

Chapter issue-and-redemption-of-debentures: Issue and Redemption of Debentures | Case Study Questions

Passage

Question 1: What is meant by 'over subscription' of debentures?

Question 2: How will the excess application money received from partially allotted applicants be treated in the books of Sunrise Ltd.?

Question 3: Journalise the entry for transfer of application money and allotment of debentures showing refund of rejected applications and adjustment of excess money.

Passage

Question 1: What is meant by 'Issue of Debentures at a Discount'? How is it shown in the balance sheet?

Question 2: How will the discount of Rs. 25,000 on issue of debentures be written off, given a Securities Premium Reserve of Rs. 30,000?

Question 3: Pass journal entries for (i) receipt of application money, (ii) allotment of debentures at discount, and (iii) writing off discount on issue.

Passage

Question 1: What is meant by 'Issue of Debentures for Consideration other than Cash'?

Question 2: Calculate the number of debentures to be issued when debentures are issued at (i) 10% discount and (ii) 10% premium.

Question 3: Pass journal entries for (i) purchase of machinery and (ii) issue of debentures at par, at 10% discount, and at 10% premium separately.

Passage

Question 1: Define 'Collateral Security' in the context of debentures.

Question 2: Explain the First Method of recording debentures issued as collateral security in the books of accounts.

Question 3: Pass the journal entry under the Second Method for issue of debentures as collateral security and show the relevant balance sheet extract for Prism Ltd.

Passage

Question 1: Why is 'Loss on Issue of Debentures A/c' debited when debentures are issued at par but redeemable at a premium?

Question 2: Under which head is 'Premium on Redemption of Debentures A/c' shown in the balance sheet and why?

Question 3: Pass the complete journal entries at the time of issue of debentures for Nova Chemicals Ltd. (issued at par, redeemable at 5% premium).

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