Issue of Debentures - 2

  • Debenture interest is the amount paid to debenture holders at a pre determined rate.
  • When debentures are issued to vendors they are known as issue of debentures for consideration other than cash. The value of debentures issued in this is generally equal to the price of goods and services purchased.
  • Debentures can be issued against purchase of business. In this case a company purchases business of another company along with its assets and liabilities.
  • If purchase consideration is more than net assets, difference is transferred to goodwill account and if it is less, than difference is transferred to capital reserve account.
  • When debentures are issued as a secondary security in addition to primary security for a bank loan or debt, it is considered as debentures issued as collateral security.
  • In case of default, the lender will first realise amount from principal security.
  • There are two methods that can be followed in this. In first method no entry is passed at the time of issue and it is only presented in Balance Sheet. In second method, an entry is passed in which debenture suspense account is debited and debentures account is credited.
  • Debenture suspense account is deducted from debentures itself under Long Term Borrowings to nullify the effect.
  • Interest accrued and due is shown under Current Liabilities and Interest accrued and not due is shown under Other Current Liabilities head of the Balance Sheet.

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  • Q1

    INR 36, 00,000 are paid by issue of INR 100 debentures at par. Number of debentures will be

    Marks:1
    Answer:

    36,000.

    Explanation:

    Number of debentures = 36, 00,000/100 = 36,000.

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  • Q2

    INR 36,00,000 are repaid by issue of INR 100 debenture at 20% premium. Number of debentures will be

    Marks:1
    Answer:

    30000.

    Explanation:

    Number of debentures to be issued = 36,00,0000/120= 30,000.

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  • Q3

    Ludhiana Textile had 20,00,000 12% debentures outstanding on 1st April, 2013. During the year company took a loan of 4,00,000 from Punjab National Bank by placing Debentures for 5,00,000 as Collateral Security. The debenture suspense account will be debited with

    Marks:1
    Answer:

    5,00,000.

    Explanation:

    Debenture Suspense Account is debited with the amount of debentures issued as a collateral security. Debentures account is credited in this case.

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  • Q4

    Debentures issued as a collateral security is credited to

    Marks:1
    Answer:

    debenture account.

    Explanation:

    Debentures issued as a collateral security is credited to percentage debentures account.

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  • Q5

    The account to be credited in case of issue of debentures at a premium, redeemable at par is

    Marks:1
    Answer:

    securities premium account.

    Explanation:

    When debentures are issued at a premium, securities premium account is credited.

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