Issue of Debentures -1

  • Debenture is written acknowledgement of debt. Debenture document contains conditions and provisions regarding repayment of principal and payment of interest.
  • Debentures include debenture stock, bond and any other instrument acknowledging debt.
  • Debenture is issued under the common seal, provides for a fixed rate of interest and repayment of principal, may or may not be covered by a charge.
  • On the basis of security, debentures can be secured against assets of the company or can also be unsecured debenture. Floating charge is created on all the assets of organisation.
  • On the basis of redemption, debentures can be redeemable i.e., repaid during existence of company or can be irredeemable that can be repaid only when company is liquidated.
  • On the basis of conversion, debentures can be convertible that can be converted into shares or non convertible that cannot be converted into shares.
  • On the basis of rate of coupon, debentures can have specified coupon rate or zero coupon rates.
  • On the basis of registration, debentures can be registered in which name of holders appear in the register of debenture holders or bearer in which company does not maintain any record of debenture holders.
  • Bond is similar to debenture that can be issued by the Government, Semi-Government and non-Government organisations.
  • Debenture Trust deed is an agreement between company and trustees. Debenture Trustees are appointed to protect rights of debenture holders in a company.
  • Debentures can be issued at par (Face value is equal to issue price), at premium (issue price is more than face value) or at discount (issue price less than face value).
  • Discount allowed on Issue of Debentures is a capital loss. It is written off in the year in which it occurs. It is written off from Securities Premium Reserve (if it exists) or General Reserve (if it exists) or Surplus, i.e., Balance in Statement of Profit and Loss.
  • Oversubscription of debentures is a situation where shares applied by public are more than applications invited.

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  • Q1

    ABC. Ltd. issued 10,000, 12% debentures of 100 each at a discount of 5% payable as follows:

    On Application 40

    On Allotment 55

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

    Marks:6
    Answer:

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  • Q2

    Alka limited issued 5,000, 10% debentures of 100 each, at a premium of 10 per debenture payable as follows:

    On application 25

    On allotment 45

    On First and Final Call 40

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

    Marks:6
    Answer:

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  • Q3

    X Ltd. issued 10,000, 12% debentures of 100 each payable 40 on application and 60 on allotment. The public applied for 14,000 debentures. Applications of 9,000 debentures were accepted in full; applications for 2,000 debentures were allotted 1,000 debentures and the remaining application, were rejected. All money was duly received. Journalise the transactions.

    Marks:6
    Answer:

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  • Q4

    What do you mean by floating charge on assets?

    Marks:1
    Answer:

    A floating charge is generally created for security of loans taken by the company on all assets except those assigned for specific charge. If some assets are sold by the company and in place, some new assets are purchased, it will move to the new assets. That is why it is called floating charge.

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  • Q5

    Give the journal entries in each of the following alternatives cases, if the face value of each debenture is 100:
    (i) A 15% debenture issued at 120 and repayable at 100.
    (ii) A 15% debenture issued at 80 and repayable at 100.
    (iii) A 15% debenture issued at 100 and repayable at 100.
    (iv) A 15% debenture issued at 100 and repayable at 120.
    (v) A 15% debenture issued at 80 and repayable at 120.
    (vi) A 15% debenture issued at 120 and repayable at 150.

    Marks:8
    Answer:

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