Debentures are also known bonds and debt but there are slightly differences.
Company issues debentures; government and semi government issues bonds.
Both debentures and bonds are long-term loan.
The owner of debentures is called debenture holders.
Debentures have fixed interest rate and maturity period.
Normally, interest is payable annually or sometime half yearly.
Debenture holders have priority to receive interest and refund money before equity shareholder at the time dissolution of firm.
When a company issues its debentures less than par or face value, it is called debentures issued at discount.
Discount on issue of debentures is capital loss.
It is debited in journal entry and is shown in assets side of balance sheet.
This discount should be written off in subsequent year as per decision of the board of directors (BOD).
Value of one debenture Rs 100 ® issued at Rs 90 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
PROBLEM: 2
XYZ Company Ltd issued 50,000; 6% debentures of Rs 100 each for Rs 90 per Debentures. The amount payable as under:
On application Rs 20; on allotment Rs 30; on first and final call Rs 40
All the debentures were issued, called and paid up.
Required: (1) Journal entries; (2) Cash book (bank column); (3) Balance sheet
[Answer: Discount = Rs 500,000]
Solution:
Given and working note:
Shares Issued |
Issued Price |
Installation |
|
Arrears and Advance |
|
Share Applied |
Shares Allotted |
100,000 |
100–10D |
Application Allotment First & Final call |
20 30 [40C–10D] 50 |
|
|
|
|
Note: lack of information, discount is adjusted with allotment
C = capital; D = discount; P = premium
Journal Entries
In the book of XYZ Company Ltd
Date |
Particulars |
|
LF |
Amount Dr |
Amount Cr |
Received |
Amount received on application |
|
|
|
|
|
Bank account To Debentures application account (Being- amount received on 50,000 debentures @ Rs 20) |
Dr |
|
10,00,000
|
10,00,000 |
Transfer |
Amount transfer of application |
|
|
|
|
|
Debentures application account To 6% Debentures account (Being- amount transfer of application to debentures) |
Dr
|
|
10,00,000
|
10,00,000 |
Due |
Amount due/receivable on allotment |
|
|
|
|
|
Debentures allotment account Discount on issue of debentures account To 6% Debentures account (Being- amount due/ receivable on allotment and discount adjusted) |
Dr Dr
|
|
15,00,000 5,00,000 |
20,00,000 |
Received |
Amount received on allotment |
|
|
|
|
|
Bank account To Debentures allotment account (Being- amount received on 50,000 debentures @ Rs 30) |
Dr
|
|
15,00,000
|
15,00,000 |
Due |
Amount due/receivable on calls |
|
|
|
|
|
Debentures first and final call account To 6% Debentures account (Being- amount due/ receivable on calls) |
Dr
|
|
20,00,000 |
20,00,000 |
Received |
Amount received on calls |
|
|
|
|
|
Bank account To Debentures first and final call account (Being- amount received on 50,000 debentures @ Rs 40) |
Dr
|
|
20,00,000 |
20,00,000 |
Cash Book (bank column only)
Receipt |
Amount |
Payment |
Amount |
To 6%Debentures application To 6%Debentures allotment To 6%Debentures first & final call |
10,00,000 15,00,000 20,00,000 |
By Balance c/d |
45,00,000
|
45,00,000 |
45,00,000 |
Balance sheet
XYZ Company Ltd
Liabilities + capital + profit |
Amount |
Assets |
Amount |
50,000 Debentures @ Rs 100
|
50,00,000 |
Discount on issue of debentures Bank balance |
5,00,000 45,00,000 |
50,00,000 |
50,00,000 |
Or
Extracted Balance sheet
Particulars |
Note No. |
As on 31 Mar CY |
As on 31 Mar LY |
(I) EQUITY AND LIABILITIES |
|
|
|
(2) Non-current liabilities: |
|
|
|
(a) Long-term borrowings (debenture) |
|
50,00,000 |
|
(b) Differed tax liabilities |
|
|
|
(c) Long-term provisions |
|
|
|
Total liabilities |
|
50,00,000 |
|
(II) ASSETS |
|
|
|
(1) Non-Current Assets |
|
|
|
(a) Fixed asset: |
|
|
|
(i) Tangible assets |
|
|
|
(ii) Intangible assets (Discount on issue of debentures) |
|
5,00,000 |
|
|
|
|
|
(2) Current Assets |
|
|
|
(a) Inventories (closing stock) |
|
|
|
(b) Trade receivables |
|
|
|
(c) Cash and bank balance |
|
45,00,000 |
|
Total assets |
|
50,00,000 |
|
#####
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#####
PROBLEMS AND ANSWERS |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
Basic Problem: 2 [issued at discount]
ABC Company Ltd issued 100,000; 8% debentures of Rs 100 each at Rs 90, payable as under:
Rs 30 on application; Rs 40 on allotment; Rs 20 on first and final call
All the debentures were subscribed and allotted. All the money was duly received.
Required: Journal entry for the issue of debentures
[Answer: Discount = Rs 10,00,000]
***********
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