Over Subscription on Debentures

 

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.

 

 

Over Subscription on Debentures

Sometimes when company is well-known or earning high profit, debentures applicants like to purchase more debentures.

In such a condition public applied more than offered debentures of the company.

When debentures applicants applied more than offered debentures, it is called over subscription.

Normally the company allots debentures in proportion.

But sometimes company uses these three methods.

1.    Full rejection of excess applications

2.    Pro-rata allotment

3.    Mixes methods

Full rejection of excess applications

Under this method, excess applications are rejected. Excess money is returned to applicants with a letter of regret.

Pro rata allotment

Under this method, excess applications are allotted in proportion. 

For example the company received 5,000 applications and allotted 1,000 shares. Now 5,000: 1,000 or 5: 1.

Here, the applicant of five debentures received one debenture.

Mixed allotment

Under this method:

Some applications are rejected (nil),

Some applications are allotted in full (100%),

Some excess applications are allotted in proportion (pro-rata),

Generally, excess money of pro-rata is adjusted on allotment and subsequent calls.

 

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

PROBLEM: 7

Excel Corporation Ltd issued 100,000; 9% debentures of Rs 100 each payable as under:

On application Rs 30; on allotment Rs 20; on first and final call Rs 50

The Company received applications for 120,000 debentures and allotment was made on pro rata basis. The BOD has authority to utilize excess money toward allotment. The entire amount was duly received.

Required: Journal entries

Solution:

 

Given and working note:

Shares Issued	Issued Price	Installation		Arrears and Advance		Share Applied	Shares Allotted
100,000	100	Application Allotment First & Final call	30 20 50			120,000	100,000

 

Excess money    

= Difference in pro rata debentures x Always application money

= (120,000 – 100,000) debentures x Rs 30     

= 20,000 x Rs 30

= Rs 600,000*

Journal Entries

In the book of Excel Company Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
Received	Amount received on application
	Bank account          To Debentures application account (Being- amount received on 120,000 debentures @ Rs 30)	Dr		36,00,000	36,00,000
Transfer	Amount transfer of application
	Debentures application account          To  9% Debentures account          To  Debentures allotment account (excess) (Being- amount transfer of application to debentures)	Dr		36,00,000	30,00,000 6,00,000
Due	Amount due/receivable on allotment
	Debentures allotment account          To 9% Debentures account (Being- amount due/ receivable on allotment)	Dr		20,00,000	20,00,000
Received	Amount received on allotment
	Bank account          To  Debentures allotment account  (Being- amount received on 100,000 debentures @ Rs 20 And excess adjusted 20,00,000 – 6,00,000* = Rs 14,00,000)	Dr		14,00,000	14,00,000
Due	Amount due/receivable on calls
	Debentures first and final call account          To 9% Debentures account (Being- amount due/ receivable on calls)	Dr		50,00,000	50,00,000
Received	Amount received on calls
	Bank account          To  Debentures first and final call account (Being- amount received on 100,000 debentures @ Rs 50)	Dr		50,00,000	50,00,000

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PROBLEMS   AND   ANSWERS

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

AP: 11        [over subscription pro rata and reject]

NP Garments Limited has invited applications for 20,000; 12% Debenture of $/₹/Rs 1,000 each @ Rs 1,200 per share. The amount was payable as under:

On application Rs 40; on allotment Rs 40; on first call Rs 20; on second and final call balance amount

The company has received applications for 25,000 debentures. Allotment was made on pro-rata basis. Excess money was utilized on allotment. All the debentures were subscribed, allotted and the entire amount was received.

Required: Journal entries

[Answer: excess for allotment = 20,00,000]

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