Conversion of Debentures into Equity Shares, Preference Shares and Debentures

 

Redemption by Conversion

Convertible debentures holders have right to convert their debentures into equity shares or preference shares or new debentures.

Conversion may be at par, discount or premium.

Under this method, debenture holders are given an option to convert their debentures into new debentures or shares.

Those debenture holders who does not like to this option, they can take value of their debentures in cash.

Both conversion and prepayment may be at par, discount or premium.

No. of debentures or shares

Issued at par Issued at discount Issued at premium

= = =

Value of debenture ÷ Face value of shares Value of debenture ÷ (Face value of shares – Discount) Value of debenture ÷ (Face value of share + Premium)

 

 

Conversion of Debentures into Equity Shares

PROBLEM: 12

XYZ Company Ltd redeemed 50,000; 7% debentures of Rs 100 each at par, redeemable at 5% premium by converting into equity shares of Rs 100 each at 5% discount.

Required: Journal entry

SOLUTION

Journal Entries

In the book of XYZ Company Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
	Debentures transfer to debenture holders
	7% Debentures account Premium on redemption of debentures                                                        To Debentures holders account (Being- 50,000 debentures of Rs 100 each transfer to debenture holders  at 5% premium)	Dr Dr		50,00,000 2,50,000	52,50,000
	Conversion of debentures
	Debenture holders account   Discount on issue of share account             To Equity shares capital account  (Being- 50,000 debentures of Rs 100 each converted into 55,263 equity shares @ 5% discount)	Dr Dr		52,50,000 2,76,300	55,26,300

 

Given and working note:

No. of shares = Value of debenture ÷ (Face value of shares – Discount) = 52,50,000 ÷ (100–5D) = 55,263

 

PROBLEM: 13

Shanker Group Ltd issued 60,000; 8% debentures of Rs 100 each at par, redeemable at par. The company provided debenture holders an option to convert their debentures into equity shares of Rs 100 each at 10% premium. Debenture holders of 44,000 debentures exercised this option. Remaining debentures redeemed by cash.

Required: Journal entry for:

        (1) Issue of debentures; (2) Conversion of debentures; (3) Redemption of debentures

[Answer: No. of debentures = 44,000; Share premium = Rs 400,000]

SOLUTION

Journal Entries

(In the book of Shanker Group Ltd)

Date	Particulars		LF	Amount Dr	Amount Cr
	Issued at par, redeemable at par
	Bank account                   To 8% Debentures account (Being- 60,000; 8% debentures of Rs 100 each issued at par, redeemable at par)	Dr		60,00,000	60,00,000
	Conversion of debentures
	Debenture holders account            To Equity shares capital account            To Premium on issue of shares account (Being- 40,000 equity shares of Rs 100 each issued at 10% premium, to convert 44,000 debentures of Rs 100 each)	Dr		44,00,000	40,00,000 4,00,000
	Redemption of debentures
	Debenture holders account            To Bank account           (Being- 16,000 debentures of Rs 100 each redeemed at par)	Dr		16,00,000	16,00,000

Given and working note:

No. of shares = Value of debenture ÷ (Face value of shares + Premium) = 44,00,000 ÷ (100+10P) = 40,000

Remaining debentures = 60,000 – 44,000 = 16,000

  

Conversion of Debentures into Preference Shares and Debentures

 

PROBLEM: 14

Asian Foods Ltd issued 80,000; 8% debentures of Rs 100 each at par, redeemable at 10% premium 5 years ago. Now the company provided debenture holders option to convert their debentures into equity shares of Rs 100 each at 10% premium or 10% preference shares of Rs 100 each at 5% discount or 9% debenture of Rs 1,000 each at par. Debenture holders of 39,600 debentures choose equity shares; debenture holders of 9,975 debentures choose preference share and 20,000 debenture holders choose new debentures. Remaining debentures redeemed by cash.

Required: Journal entry for:

(1) Issue of debentures; (2) Conversion of debentures; (3) Redemption of debentures;

[Answer: (1) Loss on issue = Rs 8,00,000; (2) No. of ES = 36,000; No. of PS = 10,500;

No. of debentures = 2,000; (3) Premium on redemption = Rs 104,250]

SOLUTION

Journal Entries

In the book of Asian Foods Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
	Issued at par, redeemable at 10% premium
	Bank account Loss on issue of debentures account         To 8% Debentures account         To Premium on redemption of debentures account       (Being- 80,000; 8% debentures of Rs 100 each issued at par, Redeemable at 10% premium)	Dr Dr		80,00,000 8,00,000	80,00,000 8,00,000
	Conversion to equity shares
	8% Debenture account                 To Equity shares capital account         To Premium on issue of equity shares account (Being- 39,600 debentures of Rs 100 each transferred to debenture holders and converted to 36,000 equity shares of Rs 100 each at 10% premium)	Dr		39,60,000	36,00,000 3,60,000
	Conversion to preference share
	8% Debenture account Discount on issue of preference shares account         To 10% Preference shares capital account (Being- 9,975 debentures of Rs 100 each transferred to debenture holders and converted to 10,500 preference shares of Rs 100 each at 5% discount)	Dr Dr		9,97,500 52,500	10,50,000
	Conversion to new debenture
	8% Debenture account         To 9% Debenture account (Being- 20,000 old debenture of Rs 100 each transferred to debenture holders and converted into 2,000 new debentures of Rs 1,000 each at par)	Dr		20,00,000	20,00,000
	Redemption of debentures
	Debenture holders account Premium on redemption of debentures account         To Bank account (Being- 10,425 debentures of Rs 100 each transferred to debenture holders and redeemed at 10% premium)	Dr Dr		10,42,500 1,04,250	11,46,750

Given and working note:

No. of equity shares = Value of debenture ÷ (Face value of shares + Premium) = (39,600 x 100) ÷ (100+10P) = 36,000

No. of pref. shares = Value of debenture ÷ (Face value of shares + Premium) = (9,975 x 100) ÷ (100 –5D) = 10,500

No. of debenture = Value of debenture ÷ (Face value of shares + Premium) = (20,000 x 100) ÷ (1,000) = 2,000

Remaining debentures = 80,000 ‒ 39,600 ‒ 9,975 ‒ 20,000           = 10,425

 

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PROBLEMS   AND   ANSWERS

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

Basic Problem: 8                    [Conversion]

Kaski Company Limited issued 8,000; 8% debentures of $/₹/Rs 100 each at 10% discount redeemable at 10% premium. Debenture holders are given an option to convert their debentures into equity shares of Rs 100 each at par. The debenture holders of 3,000 debentures exchanged their debentures into equity shares. Remaining debentures were redeemed at 10% premium by cash.

Required:   (1) Issue of debentures; (2) Conversion into shares; (3) Redemption by cash;

(4) Opening balance sheet

 [Answer: No. of equity shares = 3,300; Cash/bank = Rs 550,000]

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

AP: 3           [Conversion of debentures]

Koshi Jute Mills Ltd issued 1,000; 10% redeemable debenture of Rs 100 each at a discount of 10% 5 years ago. This year the company decided to convert 800 debentures into equity shares of Rs 10 a premium of 10%. The remaining debentures were discharged at par.

Required: Journal entries for (1) Issue (2) Conversion; (3) Redemption

[Answer: (2) Bank = Rs 90,000 (Dr); (3) Bank = Rs 20,000 (Cr);

*No of shares = 7,273]

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

AP: 4          [Conversion of debentures]

MK Company Ltd issued 1,000; 8% debentures of Rs 100 each five ago at 10% discount redeemable at par end of this year. The holders of 800 debentures however, agreed to convert their holding into equity shares of Rs 10 each at a discount of 20% the remaining debentures were redeemed at par.

Required: Journal entries (1) Issue of debenture; (2) Conversion into shares; (3) Redemption of debenture   

 [Answers: (i) Bank = Rs 90,000(Dr) (ii) Share capital = Rs 100,000(Cr)

 (iii) Bank = Rs 20,000(Cr); * No of shares = 10,000]

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

AP: 5           [Conversion of debentures]

Himal Cargo Limited issued 2,000; 8% debentures of Rs 100 each at 10% discount with redeemable condition on 1^st January 2015. Now, on 31 December 2019 the debenture holders of 1,000 debentures agreed to convert into 10% debentures of Rs 100 each at par. The debenture holders of 750 debentures agreed to convert into equity shares of Rs 100 each @ 10% premium. Remaining debentures were redeemed at par by cash.

Required: Journal entries (1) Issue of debentures; (2) Conversion into debentures and shares

                   (3) Redemption by cash; (4) Opening balance sheet

 [Answer: No. of new debentures = 1,000;

No. of equity shares = 681; Bank = Rs 25,000]

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

AP: 6           [Conversion of debentures]

Butwal Dhago Karkhana Limited issued 5,000; 10% debentures of Rs 100 each at 5% premium with redeemable condition on 1^st January 2013. Now, on 31 December 2019 the debenture holders of 2,000 debentures agreed to convert into 9% debentures of Rs 100 each at par. The debenture holders of 2,500 debentures agreed to convert into 8% preference shares of Rs 100 each @ 10% discount. Remaining debentures were redeemed at 5% premium by cash.

Required: (1) Issue of debentures; (2) Conversion into debentures and shares

                   (3) Redemption by cash; (4) Opening balance sheet

 [Answer: No. of new debentures = 2,000; No. of preference shares = Rs 2,778;

Cash/bank = Rs 50,000]

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