NCERT Solutions Class 12th Accountancy. FREE Flip-BOOK by Study Innovations

Explain the guidelines of SEBI for creating Debenture Redemption Reserve.

Answer :
The following are the main points of SEBI's guidelines for creation of Debenture
Redemption Reserve (DRR).
1. Every company that issues debentures with a maturity of more than 18 months shall
create DRR.
2. An amount equal to 50% of debenture issued shall be transferred to DRR before
starting redemption of debentures.
3. Creation of DRR is applicable only for Non-Convertible Debentures and for non-
convertible part of Partly Convertible Debentures.
4. Any withdrawal from DRR is allowed only after 10% of debentures are redeemed.
Thus, as per the SEBI's guidelines, 50% of the debentures issued should be redeemed
out of the profits that are transferred to DRR and the remaining 50% of the debentures
issued can be redeemed either out of profits or out of capital. Hence, no company can
redeem all the debentures issued purely out of the capital.
As per the SEBI's guidelines the following companies are exempted from the creation of
DRR.
1. Infrastructure companies (i.e. those companies that are engaged in the business of
developing, maintaining and operating infrastructure facilities)
2. A Company that issues debentures with a maturity up to 18 months

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Q11 :
Describe the steps for creating Sinking Fund for redemption of debentures.

Answer :
The various steps involved in the creation of Sinking Fund for redemption of debentures
can be better understood by the help of the example explained below.

A Company issued 10% Debentures of Rs 5,00,000 for 3 years. The investment is
expected to earn 6% p.a. The Sinking Fund table shows that 0.31411 invested annually
at 6% amount to Rs 1 in 3 years.

Step1: Calculate the amount of installment to be required every year for investment with
the help of the Sinking Fund table. Like in the example Rs 1,57,055 (i.e.0.31411 ×
5,00,000) is required every year.

Step 2: The amount of installment calculated in the above step is transferred to the
Debenture Redemption Fund (Sinking Fund) by debiting from Profit and Loss
Appropriation Account.

Step 3: In the first year, the above installment is invested to yield amount required for
redemption of debenture by debiting Debenture Redemption Fund Investment Account.

Step 4: The interest on investment is received on half yearly or annual basis. In the
example, the interest of Rs 9,423 is received on annual

basis.

Step 5: The total amount of investment, i.e. interest plus installment is invested in the
subsequent year. In the example, Rs 1,66,478 (i.e. Rs 1,57,055 + Rs 9,423) is invested
in the next year.

Step 6: Repeat the Step 2, 3, 4 for each subsequent years up to the end of the life of
the debenture. In the year of redemption, the installment (i.e. the last installment) will be
debited to the Profit and Loss Appropriation Account but will not be invested.

Step 7: In the year of redemption, the investment is sold off.

Step 8: The profit (loss) on the sale of the investment is transferred by debiting
(crediting) Debenture Redemption Fund Investment Account to the Debenture
Redemption Fund Account.

Step 9: The payment to the debenture holder is made.

Step 10: The balance of Debenture Redemption Fund Account if any, is transferred to
the General Reserve.

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Q12 :
Can a company purchase its own debentures in the open market? Explain.

Answer :

Yes, a company can purchase its own debentures provided it is authorised by its Article of
Association. As per the Company Act, if a company is authorised by its Article of Association,
only then it may purchase its own debentures from the open market. The main purposes of such
purchase are as follows:

1. For immediate cancellation of debenture liability, if the interest rate on its debenture is higher
than the market rate of interest.

2. A company may also purchase its own debentures with the motive of investment and sell them
at higher price in future and thereby earn profit.

A company may purchase its own debentures at discount or at premium for cancellation.

1. If Debentures are purchased at Discount for Cancellation

When the company purchases its own debentures at discount for cancellation, then the following
Journal entries are recorded.

Own Debentures A/c Dr.
To Bank A/c

(Own debentures purchased)

Debentures A/c Dr. (with the face value)
To Own Debentures A/c (with the amount paid)
To Profit on Cancellation of Own Debentures A/c (with the difference between the face value an

(Own debentures cancelled) Dr.

Profit on Cancellation of Own Debentures A/c
To Capital Reserve A/c

(Profit on Cancellation of Own Debentures transferred to
Capital Reserve)

2. If Debentures are Purchased at Premium for Cancellation Dr.

Own Debentures A/c
To Bank A/c

(Own debentures purchased)

Debentures A/c Dr. (with the face value)
Loss on Redemption of Debentures A/c (with the difference between Amount paid

To Own Debentures A/c
(Own Debentures cancelled)

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Q13 :
What is meant by conversion of debentures? Describe the method of such a
conversion.

Answer :
When a debenture holder can convert his/her debentures into shares or new debentures after the
expiry of a specified period of time, then it is known as redemption of debentures by conversion.
As the company does not need to pay any funds for the redemption, so there is no need to
maintain Debenture Redemption Reserve (DRR). The new shares or debentures may be issued at
par, premium or at discount.

If a debenture holder exercises the conversion option, then the issue price of shares must be
equal to or less than the amount actually received from debentures.

Accounting Treatment
1. For amount due to debenture holders

Debenture A/c
To Debenture holders A/c

(Debentures redeemed)

2. For discharging liability to the debenture holders

Debenture holders A/c
To Shares/Debentures (New) A/c

(Debenture holder amount discharged)

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Numerical questions : Solutions of Questions on Page Number : 146
Q1 :
X.Ltd. invites application for the issue of 10,000, 14% debentures of Rs 100 each
payable as to Rs 20 on application, Rs 60 on allotment and the balance on call.
The company receives applications for 13,500 debentures, out of which
applications for 8,000 debentures are allotted in full, 5,000 only 40% and the
remaining rejected. The surplus money on partially allotted applications is
utilised towards allotment. All the sums due are duly received.

Answer :

Books of X. Ltd.
Journal

Date Particulars L.F. Debit
Dr. Amoun
Bank A/c
To 14% Debenture Application A/c Rs
2,70,
(14% Debenture application money for 13,500 debentures
@ 20 each received) Dr. 2,70,

14% Debenture Application A/c Dr. 6,00,
To 14% Debenture A/c
To 14% Debenture Allotment A/c
To Bank

(14% Debenture Application money of 10,000 @ Rs 20 each
transferred to 14% Debentures Account and 500 debentures
were rejected and returned and rest of the amount adjusted
on allotment)

14% Debenture Allotment A/c
To 14% Debenture A/c

(14% Debenture Allotment money due on 10,000 debentures @
Rs 60 each)

Bank A/c Dr. 5,40,
To 14% Debenture Allotment A/c Dr. 2,00,
Dr. 2,00,
(14% Debenture Allotment money received)

14% Debenture First and Final Call A/c
To 14% Debenture A/c

(14% Debenture First and Final Call money due on 10,000
debentures @ 20 each)

Bank A/c
To 14% Debenture First and Final Call A/c

(14% Debenture First and Final Call money received on 10,000
debentures @ Rs 20 each)

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Q2 :
R.Ltd. offered 20,00,000, 10% Debenture of Rs 200 each at a discount of 7%
redeemable at premium of 8% after 9 years. Record necessary entries in the
books of R. Ltd.

Answer :

Date Books of R.Ltd. L.F. Debit
Journal

Particulars

Bank A/c Amount
To 10% Debenture Application & Allotment A/c Rs

(Debenture Application and Allotment money received Dr. 37,20,00,000
for 20,00,000 10% Debentures @ Rs 200 each)

10% Debenture Application and Allotment A/c Dr. 37,20,00,000

Loss on Issue of Debenture A/c Dr. 3,20,00,000

Discount on Issue of Debentures A/c Dr. 2,80,00,000

To 10% Debenture A/c

To Premium on Redemption of Debentures A/c

(Allotment of 20,00,000 debenture @ Rs 200 each at 7%

discount with the term of 8% premium on redemption)

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Q3 :
M.Ltd. took over assets of Rs 9,00,00,000 and liabilities of Rs 70,00,000 of S.Ltd.
and issued 8%Debenture of Rs 100 each. Record necessary entries in the books
of M. Ltd.

Answer :

Date Books of M. Ltd. L.F. Debit
Journal

Particulars

Sundry Assets Amount
To Sundry Liabilities A/c Rs
To S.Ltd.
Dr. 9,00,00,000
(Assets and liabilities of S. Ltd. taken over)
Dr. 8,30,00,000
S. Ltd.
To 8% Debenture A/c

(8,30,000 8% debentures @ 100 each issued to S Ltd. in
consideration of assets and liabilities)

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Q4 :
B.Ltd. purchased assets of the book value of Rs 4,00,000 and took over the
liability of Rs 50,000 from Mohan Bros. It was agreed that the purchase
consideration, settled at Rs,3,80,000, be paid by issuing debentures of Rs 100
each.
What Journal entries will be made in the following three cases, if debentures are
issued: (a) at par; (b) at discount; (c) at premium of 10%? It was agreed that any
fraction of debentures be paid in cash.

Answer :

Case (a)

Book of B. Ltd.

Journal L.F. Debi
Amou
Date Particulars Dr.
Dr. Rs
Sundry Assets A/c 4,00
Goodwill A/c
30
To Sundry Liabilities A/c
To Mohan Bros. Dr. 3,80
(Assets and liabilities of Mohan Bros. taken over)
Dr. 4,00
Mohan Bros. Dr. 30
To Debenture A/c
Dr. 3,80
(3,800 debentures of 100 each issued to Mohan Bros. in Dr. 42
consideration of assets and liabilities)

Case (b)

Sundry Assets A/c
Goodwill A/c

To Sundry Liabilities A/c
To Mohan Bros.
(Assets and liabilities of Mohan Bros. taken over)

Mohan Bros.
Discount on Issue of Debenture A/c

To Debenture A/c

To Bank A/c
(Issued 4,222 debentures of Rs 100 each at 10% discount
and balance paid in cash)

Case (c)

Sundry Assets A/c Dr.
Goodwill A/c Dr.

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Q5 :
X.Ltd. purchased a Machinery from Y for an agreed purchase consideration of Rs
4,40,000 to be satisfied by the issue of 12% debentures of Rs 100 each at a
premium of Rs 10 per debenture. Journalise the transactions.

Answer :

Books of X. Ltd.
Journal

Date Particulars L.F. Deb
Dr. Amou
Machinery A/c
To Y Rs
4,4
(Machinery purchased from Y)

Y Dr. 4,4
To 12% Debentures A/c
To Securities Premium A/c

(Allotted 4,000 debentures of Rs 100 each at a premium
of Rs 10 per debenture in consideration of Machinery
purchased)

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Q6 :
X.Ltd. issued 15,000, 10% debentures of Rs 100 each. Give journal entries and the
Balance Sheet in each of the following cases:
(i) The debentures are issued at a premium of 10%;
(ii) The debentures are issued at a discount of 5%;
(iii) The debentures are issued as a collateral security to bank against a loan of Rs
12,00,000; and
(iv) The debentures are issued to a supplier of machinery costing Rs 13,50,000.

Answer : Books of X. Ltd. L.F. Debit
(i) Journal Dr. Amount

Date Particulars Rs
Bank A/c 16,50,00

To 10% Debentures A/c
To Securities Premium A/c
(Issued 15,000, 10% debentures of Rs 100 each at
10% premium)

X Ltd.
Balance Sheet

Particulars Note No. Amount
(Rs)
I. Equity and Liabilities 1
1. Shareholders' Funds 2 1,50,000
a. Reserves and Surplus 15,00,000
2. Non-Current Liabilities 16,50,000
a. Long-Term Borrowings
3. Current Liabilities 16,50,000
16,50,000
Total
Amount
II. Assets 3 (Rs)
1. Non-Current Assets 1,50,000
2. Current Assets 15,00,000
a. Cash and Cash 16,50,000
Equivalents

Total

NOTES TO ACCOUNTS

Note No. Particulars

1 Reserves and Surplus
2 Securities Premium
3
(ii) Long-Term Borrowings
10% Debentures (Secured)

Cash and Cash Equivalents
Cash at Bank

Bank A/c Dr. 14,25,00
Discount on Issue of Debentures A/c Dr. 75,00

To 10% Debentures
(Issued 15,000 10% Debenture of Rs 100 each at
5% discount)

X Ltd.
Balance Sheet

Particulars Note No. Amount
(Rs)
I. Equity and Liabilities 1
1. Shareholder's Funds 15,00,000
2. Non-Current Liabilities 15,00,000
a. Long-Term Borrowings
3. Current Liabilities

Total

II. Assets 2
1. Non-Current Assets
a. Other Non-Current
Assets

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Q7 :
Journalise the following:
(i) A debenture issued at Rs 95, repayable at Rs 100;
(ii) A debenture issued at Rs 95, repayable at Rs 105; and
(iii) A debenture issued at Rs 100, repayable at Rs 105;
The face value of debenture in each of the above cases is Rs 100.

Answer :

S.No. Particulars L.F. Debit

(i) Bank A/c Amount
Discount on Issue of Debenture A/c Rs
To Debenture A/c
(Debenture of Rs 100 issued at Rs 5 discount Dr.
with the term repayable at Rs 100) Dr.

(ii) Bank A/c Dr.
Loss on Issue of Debenture A/c Dr.
To Debenture A/c
To Premium on Redemption of Debentures Dr. 1
(Debenture of Rs 100 issued at a discount of Dr.
Rs 5 and with the term repayable at Rs 105)

(iii) Bank A/c
Loss on Issue of Debenture A/c
To Debenture A/c
To Premium on Redemption of Debenture A/c
(Debenture of Rs 100 issued with the term
repayable at Rs 105)

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Q8 :
A.Ltd. issued 50,00,000, 8% Debenture of Rs 100 at a discount of 6% on April 01,
2000 redeemable at premium of 4% by draw of lots as under:

20,00,000 Debentures on March, 2002
10,00,000 Debentures on March, 2004
20,00,000 Debentures on March, 2005
Compute the amount of discount to be written-off in each year till debentures are
paid. Also prepare discount/loss on issue of debenture account.

Answer :
Loss on issue of debenture = 6% (discount on issue) + 4% (premium on redemption) = 10%

At the end of Debenture Outstanding Ratio Loss to be written off ev
March 2001 50,00,00,000 5 =
March 2002 50,00,00,000 5 =
March 2003 30,00,00,000 3 =
March 2004 30,00,00,000 3 =
March 2005 20,00,00,000 2 =
18

Loss on Issue of Debenture Account

Dr. Particulars J.F. Amount Date Particulars
Date

2000 Rs
April 01 Debenture 2001

5,00,00,000 March 31 Profit and Loss
Balance c/d

5,00,00,000

2001 2002
April 01 Balance b/d 3,61,11,111 March 31 Profit and Loss

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Q9 :
A company issues the following debentures:

(i) 10,000, 12% debentures of Rs 100 each at par but redeemable at premium of
5% after 5 years;

(ii) 10,000, 12% debentures of Rs 100 each at a discount of 10% but redeemable at
par after 5 years;

(iii) 5,000, 12% debentures of Rs 1,000 each at a premium of 5% but redeemable at
par after 5 years;

(iv) 1,000, 12% debentures of Rs 100 each issued to a supplier of machinery
costing Rs 95,000. The debentures are repayable after 5 years; and

(v) 300, 12% debentures of Rs 100 each as a collateral security to a bank which
has advanced a loan of Rs 25,000 to the company for a period of 5 years.

Pass the journal entries to record the: (a) issue of debentures; and (b) repayment
of debentures after the given period.

Answer :

In the books of ..............
Journal

a) Issue of Debentures

Particulars L.F. Deb
Dr. Amo
S. No.
Rs
(i) Bank A/c 10,00
To 12% Debenture Application A/c

(Debenture Application money of 10,000 12% debentures
@ 100 each received)

12% Debenture Application A/c Dr. 10,00
50
Loss on Issue of Debenture A/c Dr.

To 12% Debenture A/c

To Premium on Redemption of Debenture A/c

(Debenture Application money of 10,000 12% debentures @ Rs 100 each
transferred to 12% Debentures Account and the Debentures are issued with term of
repayable at 5% premium)

(ii) Bank A/c Dr. 9,00
To Debenture Application and Allotment A/c

(Debenture Application money received excluding discount on issue)

12% Debenture Application & Allotment A/c Dr. 9,00
Discount on Issue of Debenture A/c Dr. 1,00

To Debentures A/c
(Debenture Allotment made due)

(iii) Bank A/c Dr. 52,50
To Debenture Application and Allotment A/c

(Debenture Application money received)

Debenture Application and Allotment A/c Dr. 52,50
To Debenture A/c
To Security Premium A/c

(Allotment of debenture at premium)

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Q10 :
A company issued debentures of the face value of Rs 5,00,000 at a discount of 6%
on January 01, 2001. These debentures are redeemable by annual drawings of
Rs,1,00,000 made on December 31 each year. The directors decided to write off
discount based on the debentures outstanding each year.

Calculate the amount of discount to be written-off each year. Give journal entries
also.

Answer :

Journal

Date Particulars De
L.F. Amo
2001 Bank A/c
Jan 1 To Debenture Application and Allotment A/c R
Dr. 4,7
(Debenture Application money received)
Dr. 4,7
Jan 1 Debenture Application and Allotment A/c Dr. 3
Discount on Issue of Debenture A/c

To Debentures A/c
(Debenture Application money transferred to Debenture Account)

Year Debenture outstanding Ratio Amount written of
2001 5,00,000 5 =

2002 4,00,000 4 =

2003 3,00,000 3 =

2004 2,00,000 2 =

2005 1,00,000 1 =

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Q11 :
A company issued 10% Debentures of the face value of Rs,1,20,000 at a discount
of 6% on January 01, 2001. The debentures are payable by annual drawings of Rs
40,000 commencing from the end of third year.

How will you deal with discount on debentures?

Show the discount on debentures account in the company ledger for the period
of duration of debentures. Assume accounts are closed on December 31.

Answer :

In the books of...............

Journal

Date Particulars Deb
L.F. Amo
2001 Bank A/c
Jan. 01 To Debenture Application and Allotment A/c R

(Debentures Application Money received) Dr. 1,1

Jan. 01 (Debentures Application and Allotment A/c Dr. 1,1
Discount on issue of Debenture A/c Dr.

To 10% Debenture A/c
(Debenture Application Money transferred to Debenture Account)

Dec. 31 Profit and Loss A/c Dr.
To Discount on Issue of Debentures A/c

(Discount on issue of debenture written off)

2002 Profit and Loss A/c Dr.
Dec. 31

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Q12 :
B.Ltd. issued debentures at 94% for Rs 4,00,000 on April 01, 2000 repayable by
five equal drawings of Rs 80,000 each. The company prepares its final accounts
on December 31 every year.

Indicate the amount of discount to be written-off every accounting year assuming
that the company decides to write off the debentures discount during the life of
debentures. (Amount to be written-off: 2000 Rs 6,000; 2001 Rs 6,800; 2002 Rs
5,200; 2003 Rs 3,600; 2004 Rs 2,000; 2005 Rs 400).

Answer :

Amount of discount to written off every year
In 2000 = Rs 6,000
In 2001 = 2,000 + 4,800 = Rs 6,800
In 2002 = 1,600 + 3,600 = Rs 5,200
In 2003 = 1,200 + 2,400 = Rs 3,600
In 2004 = 800 + 1,200 = Rs 2,000
In 2005 = Rs 400

Working Notes

i) Amount of discount to be written off every year

Year Debenture Ratio Months New Ratio Amount
2000 Outstanding (Ratio  Months)
Apr-Dec
2001 4,00,000 5 9 45

Jan-Mar 4,00,000 5 3 15

Apr-Dec 3,20,000 4 9 36
2002 3,20,000 4 3 12

Jan-Mar

Apr-Dec 2,40,000 3 9 27
2003 2,40,000 3 3 9

Jan-Mar

Apr-Dec 1,60,000 2 9 18

2004 1,60,000 2
Jan-Mar

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Q13 :
B. Ltd. issued 1,000, 12% debentures of Rs 100 each on January 01, 2005 at a
discount of 5% redeemable at a premium of 10%.

Give journal entries relating to the issue of debentures and debentures interest
for the period ending December 31, 2005 assuming that interest is paid half yearly
on June 30 and December 31 and tax deducted at source is 10%. B.Ltd. follows
calendar year as its accounting year.

Answer :

Date Particulars D
2005 L.F. Am

Jan. 01 Bank A/c Dr.
Loss on Issue on Debentures A/c Dr.
Dr.
To 12% Debenture A/c
To Premium on Redemption of Debentures A/c Dr.
(Debenture issued at discount and redeemable at Premium) Dr.

June 30 Debenture Interest A/c Dr.
To Income Tax Payable A/c Dr.
To Debenture Holders A/c

(Amount of interest on 12% debentures Rs 1,00,000 due for
6 months and 10% tax deducted at source)

June 30 Debenture Holders A/c
To Bank A/c

(Interest paid to Debenture Holders)

Dec. 31 Debenture Interest A/c
To Income Tax Payable A/c
To Debenture Holders A/c

(Amount of interest on 12% Debentures Rs 1,00,000 due for
6 months and 10% tax deducted at source)

Dec. 31 Debenture Holders A/c
To Bank A/c

(Interest paid to Debenture Holders)

Dec. 31 Profit and Loss A/c
To Debenture Interest A/c

(Interest on debentures transferred to Profit and Loss Account)

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Q14 :
What journal entries will be made in the following cases when company redeems
debentures at the expiry of period by serving the notice: (a) when debentures
were issued at par with a condition to redeem them at premium; (b) when
debentures were issued at premium with a condition to redeem that at par; and
(c) when debentures were issued at discount with a condition to redeem them at
premium?

Answer :

S.No. Particulars D
L.F. Am
(a) Debenture A/c Dr.
Premium on Redemption of Debenture A/c Dr.
To Debenture Holders A/c
(Amount due for redemption of Debentures) Dr.

Debenture Holders A/c Dr.
To Bank A/c

(Payment made to Debenture Holders)

(b) Debenture A/c
To Debenture Holders A/c

(Amount due for redemption of debentures that were issued at
premium with term of redeemable at par)

Debenture Holders A/c Dr.
To Bank A/c
Dr.
(Payment made to Debenture Holders) Dr.

(c) Debenture A/c Dr.
Premium on Redemption of Debenture A/c
To Debentures Holders A/c
(Amount due for redemption on debentures that were issued at
discount with the term of redeemable at premium)

Debenture Holders A/c
To Bank A/c

(Payment made to Debenture Holders)

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Q15 :
On January 01, 1998, X. Ltd. issues 5,000, 8% Debentures of Rs 100 each
repayable at par at the end of three years. It has been decided to set up a
cumulative sinking fund for the purpose of their redemption. The investments are
expected to realise 4% net. The Sinking Fund Table shows that Rs 0.320348
amounts to one rupee @4% per annum in three years. On December 31, 2000 the
balance at bank was Rs 2,42,360 and the investments realised Rs 3,25,000. The
debentures were paid off.

Give journal entries and show ledger account.

Answer :

Books of X. Ltd.
Journal

Date Particulars Deb
L.F. Amou
1998 Bank A/c
Jan 1 To Debentures A/c Rs
Dr. 5,00
(Issued 5,000 Debentures @ Rs 100 each)
Dr. 1,60
Dec 31 Profit and Loss Appropriation A/c
To Cumulative Sinking Fund A/c Dr. 1,60

(Annual Installment of Cumulative Sinking Fund debited to Profit Dr. 6
and Loss Appropriation Account)
Dr. 6
Cumulative Sinking Fund Investment A/c
To Bank A/c

(Amount invested into Cumulative Sinking Fund )

1999 Bank A/c
Dec 31 To Interest on Cumulative Sinking Fund Investment A/c

(Interest received @ 4% on Cumulative Sinking Fund Investment)

Interest on Cumulative Sinking Fund Investment A/c
To Cumulative Sinking Fund A/c

(Interest on Interest on Cumulative Sinking Fund Investment
transferred to Cumulative Sinking Fund)

Profit and Loss Appropriation A/c Dr. 1,60
To Cumulative Sinking Fund A/c Dr. 1,66

(Annual Installment of Cumulative Sinking Fund debited to Profit
and Loss Appropriation account)

Cumulative Sinking Fund Investment A/c
To Bank A/c

(Amount invested in Cumulative Sinking Fund Investment)

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Q16 :
On January 01, 2003 a company issued 15% debentures of Rs 10,00,000 at par.
The debentures were redeemable at par after three years on December 31, 2003. A
sinking fund was set up to raise funds for redemption of debentures. The amount
for the purpose was invested in 6% Government securities of Rs 100 each
available at par. The sinking fund table shows that if investments earn 6% per
annum, to get Re.1 at the end of 3 years, one has to invest Rs 0.31411 every year
together with interest that will be earned. On December 31, 2005, all the
Government securities were sold at a total loss of Rs 6,000 and the debentures
were redeemed at par.

Prepare Debentures Account Sinking Fund Account, Sinking Fund Investment
Account and Interest on Sinking Fund Investment Company closes its books of
accounts every year on December 31.

Answer :

Ledger

15% Debentures Account
Dr.

Amount

Date Particulars J.F. Rs Date Particulars
2003
Dec 31 Balance c/d 2003

2004 10,00,000 Jan 1 Bank
Dec 31 Balance c/d
10,00,000
2005
Dec 31 Debenture Holders 10,00,000 2004 Balance b/d
10,00,000 Jan 1

10,00,000 2005 Balance b/d
10,00,000 Jan 1

Sinking Fund Account

Dr.

Amount

Date Particulars J.F. Rs Date Particulars

2003 2003

Dec 31 Balance c/d 3,14,110 Dec 31 Profit and Loss Appropriation

3,14,110

2004 2004
Dec 31 Balance c/d 6,47,066 Jan 1 Balance b/d

Dec 31 Profit and Loss Appropriation
Dec 31 Interest on Sinking Fund

Investment

6,47,066

2005 2005
Dec 31 Sinking Fund Investment 6,000 Jan1 Balance b/d
9,94,000 Dec 31 Profit and Loss Appropriation
General Reserve
Dec 31 Interest on Sinking Fund
Investment

10,00,000

Sinking Fund Investment Account

Dr.
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Q17 :

On January 01, 2004 the following balances appeared in the books of Z. Ltd.:

6% Debentures
Debentures Redemption Reserve Fund
D.R. Reserve Fund Investments

The investments consisted of 4% Government securities of the face value of Rs 90,000.
The annual installment was Rs 16,400. On December 31, 2004, the balance at Bank was Rs
26,000 (after receipt of interest on D.R.Reserve Fund Investment). Investments were
realised at 92% and the Debentures were redeemed. The interest for the year had already
been paid.

Show the ledger accounts affecting redemption.

Answer :

Book of Z. Ltd.

6% Debentures Account

Dr.

Date Particulars Amount Date Particulars
J.F. Rs 2004 Balance b/d
2004 Jan 1
1,00,000
Dec 31 Debenture Holders 1,00,000

Debentures Redemption Reserve Fund

Dr.

Amount

Date Particulars J.F. Rs Date Particulars

2004 2004

Dec 31 General Reserve 1,02,800 Jan 1 Balance b/d

Dec 31 Interest on Debenture Redemption
Reserve Fund Investment (4% of
90,000)

Profit and Loss Appropriation

Debentures Redemption Reserve
Fund Investment

1,02,800

Debenture Redemption Reserve Fund Investment Account

Dr.

Amount

Date Particulars J.F. Rs Date Particulars

2004 2004

Jan 1 Balance b/d (face value Rs 90,000) 80,000 Dec 31 Bank (92% of 90,000)

Debentures Redemption Reserve 2,800
Fund

82,800

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Q18 :

The following balances appeared in the books of A.Ltd. on January 01, 2004

12% Debentures
Debentures Redemption Fund
Debentures Redemption Fund Investment
Securities Premium
Bank Balance

On January 01, 2004, the company redeemed all the debentures at 105 per cent out of
funds raised by selling all the investments at Rs 3,48,000. Prepare the
necessary ledger accounts.

Answer :

Books of A. Ltd.

12% Debentures Account

Dr.

Amount

Date Particulars J.F. Rs Date Particulars

2004 2004

Jan. 01 Debenture Holders 4,00,000 Jan. 01 Balance b/d

4,00,000

Debenture Redemption Fund Account

Dr. Amount

Date Particulars J.F. Rs Date Particulars
2004
Jan. 01 Debentures Redemption Fund 2004

Investment 12,000 Jan. 01 Balance b/d
General Reserve
3,48,000
3,60,000

Debenture Redemption Fund Investment Account
Dr.

Amount

Date Particulars J.F. Rs Date Particulars

2004 2004

Jan. 01 Balance b/d 3,60,000 Jan. 01 Bank

Debentures Redemption Fund (Loss

3,60,000

Cash Book (Bank Column)

Dr.

Amount

Date Particulars J.F. Rs Date Particulars

2004 Balance b/d 2004

Jan. Debentures Redemption Fund 1,00,000 Jan. 01 Debenture Holders
01 Investment

Balance c/d

3,48,000
4,48,000

Securities Premium Account

Dr.

Amount

Date Particulars J.F. Rs Date Particulars

2004 2004

Jan. 01 Premium on Redemption of 20,000 Jan. 01 Balance b/d
Debentures

Balance c/d

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Q19 :

The following balances appeared in the books of Z.Ltd. on January 01, 2004

12% Debentures
Debentures Redemption Fund
Debentures Redemption Fund Investment
(Represented by Rs 1,47,500, 3% Govt. Securities

The annual installment added to the fund is Rs 20,575. On December 31, 2004, the bank
balance after the receipt of interest on the investment was Rs 39,100. On that date, all the
investments were sold at 83 per cent and the debentures were duly redeemed.
Show the necessary ledger accounts for the year 2004.

Answer :

Books of Z. Ltd.

Journal

12% Debentures Account

Dr.

Amount

Date Particulars J.F. Rs Date Particulars
2004 Debenture Holders
Dec. 2004

1,50,000 Jan. 01 Balance b/d

31
1,50,000

Debenture Redemption Fund Account

Dr.

Amount

Date Particulars J.F. Rs Date Particulars

2004 Debentures Redemption Fund 2004
Investment
Dec. Jan. 01 Balance b/d
31
2,575

Dec. General Reserve 1,47,425 Dec. 31 Profit and Loss Appropriation
31

Dec. 31 Interest on Debentures Redemption
Fund Investment

1,50,000

Debenture Redemption Fund Investment Account

Dr.

Amount

Date Particulars J.F. Rs Date Particulars

2004 2004

Jan. 01 Balance b/d (Face value Rs 1,25,000 Dec. 31 Bank
1,47,500)

Debentures Redemption Fund
(Loss)

1,25,000

Bank Account

Dr.

Amount

Date Particulars J.F. Rs Date Particulars
Balance b/d
2004 Debentures Redemption Fund 2004

Dec. 39,100 Dec. 31 Debenture Holders
31

1,22,425 Balance c/d
1,61,525

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Q20 :
What entries for the redemption of debentures will be done when : (a) debentures
are redeemed by annual drawings out of profits; (b) debentures are redeemed by
drawing a lot out of capital; and (c) debentures are redeemed by purchasing them
in the open market when sinking fund for the redemption of debentures is not
maintained - (i) when out of profit, and (ii) when out of capital?

Answer :

S.No. Particulars L.F. Debit Credit
(a) Dr. Amount Amount
Profit and Loss Appropriation A/c
To Debentures Redemption Reserve A/c Rs Rs

(Profit transferred to Debentures Redemption Reserve)

Debenture A/c Dr.
To Debenture Holders

(Amount due of debentures to Debenture Holders)

Debenture Holders Dr.
To Bank A/c

(Amount of debentures paid to Debenture Holders)

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

(Amount of Debentures Redemption
Reserve transferred to General Reserve)

(b) Debenture A/c Dr.
To Debenture Holders A/c

(Amount of debentures due to Debenture Holders)

Debenture Holders Dr.
To Bank

(Amount of debentures paid to Debenture Holders)

(c) (i) Profit and Loss Appropriation A/c Dr.
To Debenture Redemption Reserve A/c

(Transfer of Profit to Debenture Redemption Reserve)

Own Debentures A/c Dr.
To Bank A/c

(Own debentures purchased from open market)

Debenture A/c Dr.

To Own Debentures A/c Dr.
(Own debentures cancelled) Dr.

(ii) Own Debenture A/c
To Bank A/c

(Own debentures purchased from open market)

Debenture A/c
To Own Debenture A/c

(Own debentures cancelled)

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Q21 :
A. Ltd. Company issued Rs,5,00,000 Debentures at a discount of 5% repayable at
par by annual drawings of Rs.1,00,000.
Make the necessary ledger accounts in the books of the company for the first
year.

Answer :

Books of A. Ltd.

Debenture Account

Dr. Particulars Amount Date Particulars
Date J.F. Rs

Bank (Redemption) 1,00,000 Bank
Balance c/d 4,00,000
Discount on Issue of
5,00,000 Debentures

Discount on Issue of Debentures

Dr.

Amount

Date Particulars J.F. Rs Date Particulars
1st year Debenture A/c
25,000 1st year Profit and Loss

Balance c/d

25,000

Writing of Discount on Issue of Debenture

Year Debenture Ratio Amount written off
2001 Outstanding 5

5,00,000

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Q22 :

X.Ltd. issued 5,000, 15% debentures of Rs.100 each on January 01, 2004 at a
discount of 10%, redeemable at a premium of 10% in equal annual drawings in 4
years out of capital.

Give journal entries both at the time of issue and redemption of debentures.
(Ignore the treatment of loss on issue of debentures and interest.)

Answer :

Books of X. Ltd.
Journal

Date Particulars L.F. Debit
Dr. Amoun
2004 Bank A/c
Jan 1 To Debenture Application and Allotment A/c Rs

(Application and allotment money received for 5,000 4,50,
15% Debentures @ Rs 90 each )

Debenture Application and Allotment A/c Dr. 4,50,
Loss on Issue of Debenture A/c Dr. 1,00,

To 15% Debentures A/c
To Premium on Issue of Debentures
(5,000 15% Debentures @ Rs 100 each with the term
of 10% discount on issue and repayable at 10%
premium allotted)

Dec 31 15% Debenture A/c Dr. 1,25,
Premium on Redemption of Debentures A/c Dr. 12,

To Debentureholders Dr. 1,37,
(1250 15% Debentures @ Rs100 each due for
redemption at 10% premium) Dr. 1,25,
Dr. 12,
Debentureholders
To Bank A/c

(Amount paid to debentureholders)

2005 15% Debenture A/c
Dec 31 Premium on Redemption of Debentures A/c

To Debentureholders
(1250 15% Debentures @ Rs100 each due for
redemption at 10% premium)

Debentureholders Dr. 1,37,
To Bank A/c Dr. 1,25,

(Amount paid to debentureholders)

2006
Dec 31 15% Debenture A/c

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Q23 :
Z.Ltd. issued 2,000, 14% debentures of Rs.100 each on January 01, 2005 at a
discount of 10%, redeemable at a premium of 10% in equal annual drawings in 4
years out of profits.

Give journal entries both at the time of issue and redemption of debentures.
(Ignore the treatment of loss on issue of debentures and interest.)

Answer :

Books of Z. Ltd.
Journal

Date Particulars Deb
L.F. Amo
2005 Bank A/c
Jan 1 To Debenture Application and Allotment A/c R
Dr. 1,8
(Debenture Application and Allotment money received for 2,000
14% Debentures of Rs 100 at Rs 90 each) Dr. 1,8
Dr. 4
Debenture Application and Allotment A/c
Loss on Issue of Debentures A/c

To 14% Debentures A/c
To Premium on Issue of Debentures A/c
(2000 14% Debentures @ Rs 100 each allotted with the term
of 10 % discount on issue and repayable at 10% premium)

Dec 31 Profit and Loss Appropriation A/c Dr. 2,0
To Debentures Redemption Reserve A/c 5
5
(Profit transferred to Debentures Redemption Reserve) 5

14% Debentures A/c Dr.
Premium on Redemption of Debentures A/c Dr.

To Debenture Holders A/c
(Amount due for redemption of debentures)

Bank A/c Dr.
To Debenture Holders A/c

(Amount of 500 14% Debentures paid to Debenture Holders)

2006 14% Debentures A/c Dr.
Dec 31 Premium on Redemption of Debentures A/c Dr.

To Debenture Holders A/c
(Amount due for redemption of Debentures)

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Q24 :
A.Ltd. purchased its own debentures of the face value of Rs.2,00,000 from the
open market for immediate cancellation at Rs.92. Pass the journal entries.

Answer :

In the books of A. Ltd.

Date Particulars L.F. De
Dr. Amo
Profit and Loss Appropriation A/c
To Debentures Redemption Reserve A/c R
2,0
(Profit transferred to Debenture Redemption Reserve)

Own Debentures A/c Dr. 1,8
To Bank A/c

(2,000 Own Debentures @ Rs 100 each at Rs 92 purchased)

Debenture A/c Dr. 2,0
To Own Debentures A/c
To Profit on Cancellation of Debentures A/c

(Debenture of Rs 2,00,000 cancelled)

Profit on Cancellation of Debentures A/c Dr. 1
To Capital Reserve A/c

(Transfer of profit on redemption of debenture to Capital
Reserve Account)

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Q25 :

A.Ltd. purchased for cancellation Rs.50,000 of its 15% debentures at Rs.98. The
expenses of purchase amounted to Rs.50.

Answer :

In the books of A. Ltd.

Date Particulars L.F. De
Dr. Amo
Own Debenture A/c
To Bank A/c R
4
(Debentures face value Rs 50,000 purchased for cancellation)

15% Debentures A/c Dr. 5
To Own Debenture A/c
To Profit on Cancellation of Debentures A/c

(Debentures face value of Rs 50,000 cancelled)

Profit on Cancellation of Debentures A/c Dr.
To Capital Reserve A/c

( Profit on cancellation of own debentures transferred to
Capital Reserve Account)

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Q26 :

On January 01, 2002, X.Ltd. issued 40,000, 9% debentures of Rs.100 each at
Rs.95.

The terms of issue provided that, beginning with 1999, Rs.2,00,000 debentures
should be redeemed either by drawings at par or by purchase in the open market
every year. The expenses of issue amounted to Rs.12,000 which were written-off
in 2002. The company also wrote off Rs.40,000 every year from Discount on
Debentures Account. At the end of 2004, debentures to be redeemed were repaid
by drawings. During 2005, the company purchased for cancellation 2,000
debentures at the market price of Rs.98 on December 31, the expenses being
Rs.400. Interest on debentures is payable at the end of every calendar year.

Pass the journal entries in the books of the company to record these
transactions.

Answer :

In the books of X. Ltd.

Date Particulars Deb
L.F. Amou
2002 Bank A/c
Jan 1 To 9% Debentures Application and Allotment A/c Rs
Dr. 38,0
(Debentures Application and Allotment money received)
Dr. 1
Expense on Issue of Debenture A/c
To Bank A/c Dr. 38,0
Dr. 2,0
(Expenses paid on issue of debentures)

9% Debenture Application and Allotment A/c
Discount on Issue of Debenture A/c

To Debentures A/c
(Debenture Application Money transferred to Debenture
Account)

Debenture Interest A/c Dr. 3,6
To Debenture Holders

(Amount of Interest due)

Debenture Holders A/c Dr.
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Q27 :
A.Ltd. redeemed 8,000, 12% debentures of Rs.100 each which were issued at a
discount of 5%, by converting them into equity shares of Rs.10 each at par.

Answer :

In the books of A. Ltd.

Date Particulars L.F. De
Dr. Amo
12% Debenture A/c
To Debenture Holders R
To Discount on Issue of Debentures A/c 8,0

(Amount of 12% Debentures due to Debenture Holders)

Debenture Holders Dr. 7,6
To Equity Share Capital A/c

(Equity Shares issued to Debenture Holders in lieu of debentures)

Note: Here it has been assumed that the debentures are converted into equity shares before the date of redempt
are converted into shares before maturity, then the net proceeds from the issue of debentures will be taken at th

Working Notes:-
Number of Shares to be issued

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Q28 :
Y.Ltd. redeemed 4,800, 12% debentures of Rs.100 each which were issued at par,
at 110 per cent by converting them into equity shares of Rs.10 each issued at a
discount of 4%. Journalise.

Answer :

Date Particulars L.F. Deb
Amou
12% Debentures A/c Dr.
Premium on Redemption of Debenture A/c Dr. Rs
4,80
To Debenture Holders A/c
(Amount of debentures due to Debenture Holders) 48

Debenture Holders A/c Dr. 5,28
Discount on Issue of Shares A/c Dr. 22

To Equity Share Capital A/c
(Equity shares issued to Debenture Holders in lieu of debentures)

Working Notes:-
Number of shares to be issued

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Q29 :
Z.Ltd. redeemed 2,000, 12% debentures of Rs.100 each which were issued at a
discount of 5%, by converting them into equity shares of Rs.10 each issued at a
premium of 25%. Journalise.

Answer :

In the books of Z. Ltd.

Date Particulars L.F. Debit
Dr. Amoun
12% Debentures A/c
To Debenture Holders Rs
To Discount on Issue of Debentures A/c 2,00,

(Amount of debentures due to Debenture Holders)

Debenture Holders A/c Dr. 1,90,

To Equity Share Capital A/c
To Securities Premium A/c
(15,200 equity shares @ Rs 10 each at 25% Premium issued to Debenture
Holders in lieu of debentures)

Note: Here it has been assumed that the debentures are converted into equity shares before the date of redempti
are converted into shares before maturity, then the net proceeds from the issue of debentures will be taken at the

Working Notes:-
Number of shares to be issued

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Q30 :
X.Ltd. redeemed 1,000, 12% debentures of Rs.50 each by converting them into
15% New Debentures of Rs.100 each. Journalise.

Answer :

In the books of X. Ltd.

Date Particulars L.F. Debit
Dr. Amoun
12% Debentures A/c
To Debenture Holders Rs
50,
(Amount of debentures due to Debenture Holders)