Issue of Debenture at Discount

  

Meaning of Debentures

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.

  

Debenture Issued at Discount

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).

 

 

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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