Q.Rai Company purchased assets of the book value of ₹2,20,000 from another company and agreed to make the payment of purchase consideration by issuing 2,000, 10% debentures of ₹100 each at a premium of 10%. Record necessary journal entries.
Concept understanding — Purchase Consideration
What is Purchase Consideration? Start with an everyday intuition
Imagine you want to buy a small shop from its owner. You don't just pay for the goods on the shelves — you also pay for the shop's name, its customer base, the furniture, the pending bills, and maybe even the goodwill. The total amount you agree to pay the seller for everything — all assets, all liabilities, the whole business — is the purchase consideration.
In simple terms: when one business buys another business (not just its products), the lump sum paid is purchase consideration. It is the price of the entire business as a going concern.
The precise meaning (as per NCERT / Class 12)
Purchase Consideration is the agreed amount payable by the purchasing company to the vendor company (the one being sold) for the acquisition of its business.
It is not the same as the net assets (assets minus liabilities). It is a negotiated figure — often different from the book value of net assets. If the purchase consideration is higher than the net assets, the difference is goodwill. If lower, it is capital reserve.
Why does it matter?
Because the entire accounting entry for the purchase of a business hinges on this one number. You cannot record the acquisition without first determining:
- How much to pay the old firm
- Whether goodwill arises or capital reserve is created
- How to settle the payment (cash, shares, debentures, or a mix)
In board exams, the most common mistake is confusing purchase consideration with net assets. They are not the same.
Methods of calculating Purchase Consideration
NCERT prescribes four methods. You need to know all, but the Net Assets Method is the most frequently tested.
| Method | Basis |
|---|---|
| Net Assets Method | Purchase consideration = Agreed value of assets taken over – Agreed value of liabilities taken over |
| Net Payment Method | Purchase consideration = Total of all payments made by the purchasing company (cash, shares, debentures) to the vendor |
| Lump Sum Method | A single fixed amount agreed upon, no breakup |
| Intrinsic Value / Share Exchange Method | Based on the number of shares issued and their intrinsic value |
In the Net Assets Method, you use agreed values, not book values. If the vendor's machinery is worth ₹5,00,000 in the books but both parties agree it is worth ₹6,00,000, you take ₹6,00,000.
Accounting Treatment — The Journal Entry
When the purchasing company acquires the business, it records the following:
Step 1: Record the assets and liabilities taken over
The journal entry in the books of the purchasing company is:
Sundry Assets A/c Dr. [Agreed value of assets taken over]
Goodwill A/c (if PC > Net Assets) Dr. [Difference]
To Sundry Liabilities A/c [Agreed value of liabilities taken over]
To Vendor (or Business Purchase) A/c [Purchase Consideration]
To Capital Reserve A/c (if PC < Net Assets) [Difference]
Goodwill and Capital Reserve cannot both appear in the same entry. Only one of them arises — the difference between purchase consideration and net assets.
Step 2: Discharge of purchase consideration
When the purchasing company pays the vendor:
Vendor (or Business Purchase) A/c Dr. [Purchase Consideration]
To Bank A/c (if paid in cash)
To Share Capital A/c (if shares issued)
To Debentures A/c (if debentures issued)
The format / proforma for the Net Assets Method
In your exam, you will often be asked to compute purchase consideration using the Net Assets Method. Here is the standard working note format:
Net Assets Method – Computation of Purchase Consideration
| Particulars | Amount (₹) |
|---|---|
| Assets taken over (at agreed values) | |
| Goodwill | xx,xxx |
| Land & Building | xx,xxx |
| Plant & Machinery | xx,xxx |
| Stock | xx,xxx |
| Debtors | xx,xxx |
| Cash at Bank | xx,xxx |
| Total Assets (A) | X,XX,XXX |
| Less: Liabilities taken over (at agreed values) | |
| Sundry Creditors | (xx,xxx) |
| Bills Payable | (xx,xxx) |
| Outstanding Expenses | (xx,xxx) |
| Total Liabilities (B) | (X,XX,XXX) |
| Purchase Consideration (A – B) | X,XX,XXX |
If the purchase consideration is more than (A – B), the excess is Goodwill. If it is less, the shortfall is Capital Reserve. The purchase consideration itself is the agreed amount, not the computed net assets.
A concrete example (no invented data, just a standard textbook pattern)
Suppose Firm X buys Firm Y's business. Agreed values:
- Assets: ₹10,00,000
- Liabilities: ₹2,00,000
- Purchase consideration agreed: ₹9,00,000
Net assets = ₹10,00,000 – ₹2,00,000 = ₹8,00,000
Purchase consideration (₹9,00,000) > Net assets (₹8,00,000)
Difference = ₹1,00,000 → Goodwill
Journal entry in Firm X's books:
Sundry Assets A/c Dr. 10,00,000
Goodwill A/c Dr. 1,00,000
To Sundry Liabilities A/c 2,00,000
To Vendor (Business Purchase) A/c 9,00,000
If instead the purchase consideration was ₹7,00,000 (less than net assets of ₹8,00,000), the difference of ₹1,00,000 would be Capital Reserve, and the entry would be:
Sundry Assets A/c Dr. 10,00,000
To Sundry Liabilities A/c 2,00,000
To Vendor (Business Purchase) A/c 7,00,000
To Capital Reserve A/c 1,00,000
One final point for exams
The Vendor account (or Business Purchase account) is always credited with the purchase consideration. It is later debited when the payment is made. This account is not an expense — it is a liability account representing what is owed to the old firm.
When you see a question that says "Calculate purchase consideration," first check which method is specified. If none is given, the Net Assets Method is the default. And remember: use agreed values, not book values.
Rai Company settles its vendor by issuing debentures at a premium, so the vendor's account (equal to the assets' value) is credited partly to the Debentures account at face value and partly to the Securities Premium Reserve for the premium earned. The number of debentures (2,000) is given directly in the question, so no working is needed to find it.
Vendors A/c Dr. ₹2,20,000 / To 10% Debentures A/c ₹2,00,000 / To Securities Premium Reserve A/c ₹20,000 (after the asset-purchase entry of ₹2,20,000).
Rai Company issues 2,000, 10% debentures of ₹100 each at a 10% premium to settle a vendor's claim of ₹2,20,000 — the face value of ₹2,00,000 goes to the Debentures account and the ₹20,000 premium goes to Securities Premium Reserve.
Concept
When debentures are issued at a premium as purchase consideration, the vendor's account is still debited for the full purchase consideration, but the credit is split: the face value of the debentures issued goes to the Debentures account, and the excess (the premium) goes to Securities Premium Reserve A/c, since the company owes the vendor no more once the market value of what it hands over equals what it owes.
Working Note
Number of debentures issued = 2,000 (given). Face value credited to Debentures A/c = 2,000 × ₹100 = ₹2,00,000. Premium credited to Securities Premium Reserve A/c = 2,000 × ₹10 (10% of ₹100) = ₹20,000. Total credit = ₹2,20,000, which equals the vendor's claim.
Solution
Books of Rai Company Limited
Journal
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Sundry Assets A/c Dr. | 2,20,000 | |||
| To Vendors A/c | 2,20,000 | |||
| (Assets purchased from vendors) | ||||
| Vendors A/c Dr. | 2,20,000 | |||
| To 10% Debentures A/c | 2,00,000 | |||
| To Securities Premium Reserve A/c | 20,000 | |||
| (Allotment of 2,000 debentures of ₹100 each at a premium of 10% as purchase consideration) |
Sundry Assets A/c Dr. ₹2,20,000 To Vendors A/c ₹2,20,000; then Vendors A/c Dr. ₹2,20,000 To 10% Debentures A/c ₹2,00,000, To Securities Premium Reserve A/c ₹20,000.
Showing the 12 most recent of 17 on this concept.
- CBSE 2026Set 67/3/11 markMCQQ.Mogra Ltd. purchased assets of ₹ 14,40,000 from DK Ltd. It issued 9% Debentures of ₹ 100 each at a discount of 4% in full satisfaction of the purchase consideration. The number of debentures issued to DK Ltd. were : (A) 14,400 (B) 15,000 (C) 3,60,000 (D) 1,500
›Reveal solutionSolution
Mogra Ltd. issued 15,000 debentures of ₹100 each at a4% discount to settle a purchase consideration of ₹14,40,000. The correct answer is option (B).
Concept First: Why This Entry Works
When a company buys assets and pays by issuing debentures, the seller (DK Ltd.) is not paying cash — they are accepting debentures as full payment. The total value of what the seller gives up (the assets) must equal the total value of what they receive (the debentures). This is the purchase consideration.
The tricky part here is the discount. Mogra Ltd. is issuing ₹100 face-value debentures but only receiving ₹96 per debenture in terms of settlement value (because of the 4% discount). So the company must issue more debentures than the face value would suggest, to make up the full ₹14,40,000.
The journal entry follows the golden rule: Debit what comes in (assets), Credit what goes out (debentures and discount). The assets account is debited with the full value of assets acquired. The 9% Debentures account is credited with the face value of debentures issued. The difference — the discount — is debited to a Discount on Issue of Debentures account (a loss for the company).
Watch outCommon Mistake
Many students calculate the number of debentures as ₹14,40,000 ÷ ₹100 = 14,400 debentures. This is wrong because it ignores the discount. The seller is not accepting debentures at face value — they are accepting them at the issue price of ₹96 each. Always divide the purchase consideration by the issue price, not the face value.
Solution
Step 1: Calculate the Issue Price per Debenture
Face value of each debenture = ₹100
Discount = 4% of ₹100 = ₹4
Issue price = ₹100 − ₹4 = ₹96
Step 2: Calculate the Number of Debentures Issued
Number of debentures = Purchase Consideration ÷ Issue Price per Debenture
= ₹14,40,000 ÷ ₹96
= 15,000 debentures
TipShortcut
When the discount is given as a percentage, you can use: Number of debentures = Purchase Consideration ÷ (Face Value × (1 − Discount Rate)). Here: 14,40,000 ÷ (100 × 0.96) = 15,000.
Step 3: Journal Entry in the Books of Mogra Ltd.
Date Particulars L.F. Debit (₹) Credit (₹) Assets A/c Dr. 14,40,000 Discount on Issue of Debentures A/c Dr. (15,000 × ₹4) 60,000 To 9% Debentures A/c (15,000 × ₹100) 15,00,000 (Being assets purchased from DK Ltd. and 9% debentures issued at 4% discount in full satisfaction of purchase consideration) Step 4: Verify the Accounting Equation
Total debits: ₹14,40,000 (Assets) + ₹60,000 (Discount) = ₹15,00,000
Total credits: ₹15,00,000 (Debentures)
Balanced.
The discount of ₹60,000 will be written off over the life of the debentures, typically charged to the Profit & Loss account each year.
✓Final answerMogra Ltd. issued 15,000 debentures of ₹100 each at a 4% discount to settle the purchase consideration of ₹14,40,000. The correct option is (B) 15,000.
- CBSE 2026Set 67/4/11 markMCQQ.White Ltd. purchased Plant and Machinery worth ₹ 3,96,000 from Nath Ltd. The purchase consideration was paid by issue of 9% Debentures of ₹ 100 each at 10% discount. The number of debentures issued were : (A) 3,960 (B) 4,000 (C) 4,400 (D) 3,600
›Reveal solutionSolution
White Ltd. issues 4,400 debentures of ₹100 each at 10% discount to discharge a purchase consideration of ₹3,96,000; the answer is (C) 4,400.
Concept: Purchase Consideration and Issue of Debentures at Discount
When a company acquires an asset and pays for it by issuing debentures (rather than cash), the purchase consideration — the agreed price of the asset — must equal the amount credited to the vendor. If debentures are issued at a discount, the company must issue more debentures than the face value would suggest, because each debenture is accepted by the vendor at less than its nominal (face) value.
Here the debentures have a face value of ₹100 each but are issued at 10% discount, meaning each debenture is issued at ₹90. The vendor (Nath Ltd.) receives debentures whose issue price totals ₹3,96,000, even though the face value (the liability recorded in the books) will be higher.
The accounting treatment is:
Account Debit Credit Rule Plant and Machinery A/c ₹3,96,000 Asset acquired (debit the receiver / what comes in) Discount on Issue of Debentures A/c (to be found) Loss/expense (debit; it is a capital loss, written off over the life of debentures or against Securities Premium) 9% Debentures A/c Face value Liability created (credit) Nath Ltd. (Vendor) A/c ₹3,96,000 Liability to vendor discharged by issue of debentures The key relationship:
Issue Price per Debenture=Face Value−Discount=100−10=₹90
Number of Debentures=Issue Price per DebenturePurchase Consideration=903,96,000
Solution
Working Note 1: Calculation of Number of Debentures Issued
Particulars Amount (₹) Purchase Consideration (Plant and Machinery) 3,96,000 Face Value per Debenture 100 Discount per Debenture (10% of ₹100) 10 Issue Price per Debenture 90 Number of Debentures = ₹3,96,000 ÷ ₹90 4,400 The vendor Nath Ltd. is paid by issuing 4,400 debentures, each accepted at ₹90 (the discounted price), which exactly equals the purchase consideration of ₹3,96,000.
Working Note 2: Face Value and Discount (for completeness)
Particulars Amount (₹) Number of Debentures issued 4,400 Face Value per Debenture 100 Total Face Value of Debentures (Liability) 4,40,000 Total Issue Price (Purchase Consideration) 3,96,000 Discount on Issue of Debentures 44,000 The company records a liability of ₹4,40,000 (the face value it must eventually redeem) and a capital loss (Discount on Issue of Debentures) of ₹44,000.
Journal Entry in the Books of White Ltd.
Date Particulars L.F. Debit (₹) Credit (₹) Plant and Machinery A/c Dr. 3,96,000 Discount on Issue of Debentures A/c Dr. 44,000 To 9% Debentures A/c 4,40,000 (Being Plant and Machinery purchased from Nath Ltd. for ₹3,96,000 by issue of 4,400, 9% Debentures of ₹100 each at 10% discount)
Watch outA common mistake is to divide the purchase consideration by the face value (₹100) instead of the issue price (₹90), yielding 3,960 debentures — option (A). That would leave the vendor short by ₹39,600. Always remember: the vendor receives debentures at their issue price, not their face value.
TipQuick check: Multiply your answer by the issue price. Here, 4,400×90=3,96,000 ✓. If it doesn't match the purchase consideration, revisit your denominator.
✓Final answerWhite Ltd. must issue 4,400 debentures of ₹100 each at 10% discount (issue price ₹90 each) to pay the purchase consideration of ₹3,96,000 for Plant and Machinery. The correct answer is (C) 4,400.
- CBSE 2026Set 67/5/11 markMCQQ.Universal Ltd. took over machinery of ₹ 3,30,000, furniture of ₹ 1,60,000 and liabilities of ₹ 80,000 from Amol Ltd. for a purchase consideration of ₹ 4,50,000. The payment to Amol Ltd. was made by issue of 10% Debentures of ₹ 50 each at a discount of 10%. The number of debentures issued to Amol Ltd. was : (A) 1,000 (B) 4,500 (C) 45,000 (D) 10,000
›Reveal solutionSolution
The number of 10% debentures issued is 10,000 (Option D). The purchase consideration of ₹4,50,000 is settled by issuing debentures of face value ₹50 each at a 10% discount, meaning each debenture is issued at ₹45.
Concept First: Purchase Consideration and Settlement
When one company (Universal Ltd.) takes over the business of another (Amol Ltd.), the buying company must pay a purchase consideration — the agreed price for the net assets acquired. This consideration can be paid in cash, or by issuing shares or debentures of the buying company.
The key accounting principle here is that the purchase consideration is the total amount payable to the selling company, regardless of the form of payment. It is not the same as the net assets taken over (assets minus liabilities). The purchase consideration is a negotiated figure — in this case, ₹4,50,000 — while the net assets acquired are ₹3,30,000 (machinery) + ₹1,60,000 (furniture) - ₹80,000 (liabilities) = ₹4,10,000. The difference of ₹40,000 is capital reserve or goodwill, depending on the agreement.
Now, the question focuses on how Universal Ltd. settles this ₹4,50,000 consideration. They issue 10% Debentures of ₹50 each at a discount of 10%. This means:
- Face value of each debenture = ₹50
- Discount = 10% of ₹50 = ₹5
- Issue price per debenture = ₹50 - ₹5 = ₹45
The selling company (Amol Ltd.) receives debentures worth the purchase consideration amount. So, the number of debentures issued is simply:
Number of debentures = Purchase Consideration / Issue Price per Debenture
Watch outCommon Pitfall
Students often mistakenly divide the purchase consideration by the face value (₹50) instead of the issue price (₹45). Remember: when debentures are issued at a discount, the company receives less than the face value per debenture. The selling company gets debentures whose total issue price equals the purchase consideration, not whose total face value equals it.
Solution
Calculation of Number of Debentures
Particulars Amount (₹) Purchase Consideration 4,50,000 Face Value of each Debenture 50 Discount @ 10% 5 Issue Price per Debenture (₹50 - ₹5) 45 Number of Debentures Issued (₹4,50,000 / ₹45) 10,000 TipShortcut
If the issue price is ₹45 per debenture, then for every ₹45 of consideration, 1 debenture is issued. For ₹4,50,000, the number is simply 4,50,000 ÷ 45 = 10,000.
Journal Entry in the Books of Universal Ltd.
Date Particulars L.F. Debit (₹) Credit (₹) Machinery A/c Dr. 3,30,000 Furniture A/c Dr. 1,60,000 To Liabilities A/c 80,000 To Amol Ltd. (Purchase Consideration) 4,50,000 (Being assets and liabilities taken over from Amol Ltd. as per agreement) Amol Ltd. Dr. 4,50,000 Discount on Issue of Debentures A/c Dr. 50,000 To 10% Debentures A/c (10,000 × ₹50) 5,00,000 (Being 10,000 debentures of ₹50 each issued at 10% discount to Amol Ltd. in settlement of purchase consideration) NoteWhy the Discount is Debited
The discount on issue of debentures (₹50,000) is a loss for Universal Ltd. — they received only ₹4,50,000 worth of consideration but issued debentures with a face value of ₹5,00,000. This discount is written off over the life of the debentures, typically through the Profit & Loss A/c.
Verification
- Total face value of debentures issued: 10,000 × ₹50 = ₹5,00,000
- Discount: 10% of ₹5,00,000 = ₹50,000
- Net amount received by Amol Ltd. (issue price): ₹5,00,000 - ₹50,000 = ₹4,50,000 ✓
✓Final answerThe number of 10% debentures issued to Amol Ltd. is 10,000 (Option D). Each debenture of face value ₹50 is issued at a discount of 10% (i.e., at ₹45), so 10,000 debentures × ₹45 = ₹4,50,000, which exactly equals the purchase consideration.
- CBSE 2026Set ANNUAL1 markMCQQ.Read the following and give answers (Q. No. xi to xiv): "Vishakha Limited had purchased a plant of ₹ 2,97,000 from Snehlata Limited. It was agreed that purchase consideration is to be paid by issuing 8% debentures of ₹ 1,000 each at discount of 10%." How many numbers of 8% debentures will be issued in above question? A) 330 B) 297 C) 270 D) 275
›Reveal solutionSolution
330 debentures must be issued to settle the ₹2,97,000 purchase consideration - option (A).
Issue price per debenture = Face value - Discount = ₹1,000 - 10% of ₹1,000 = ₹1,000 - ₹100 = ₹900.
Number of debentures = Purchase consideration / Issue price
= 2,97,000 / 900
= 330 debentures.
✓Final answer330 debentures will be issued — option (A).
- CBSE 2026Set ANNUAL1 markMCQQ.(Based on the passage: "Vishakha Limited had purchased a plant of ₹ 2,97,000 from Snehlata Limited. It was agreed that purchase consideration is to be paid by issuing 8% debentures of ₹ 1,000 each at discount of 10%.") Which account will be credited on purchase of the plant? A) Snehlata Ltd.'s A/c B) Vishakha Ltd.'s A/c C) Plant A/c D) 8% Debenture A/c
›Reveal solutionSolution
The vendor Snehlata Ltd.'s Account is credited on purchase of the plant - option (A).
When assets are bought from a vendor, the entry is:
Plant A/c ... Dr (asset acquired)
To Vendor's (Snehlata Ltd.'s) A/c (amount payable)
So Plant A/c is debited and Snehlata Ltd.'s A/c (the seller) is credited. The 8% Debentures A/c is credited only later, when the debentures are actually issued to discharge Snehlata Ltd.'s account.
✓Final answerSnehlata Ltd.'s A/c is credited — option (A).
- CBSE 2026Set ANNUAL1 markMCQQ.Sweekar Ltd. purchased assets worth ₹ 16,20,000 from Rajashree Ltd. By issuing 8% Debentures of ₹ 150 per debenture at a premium of 20%. What is the total number of debentures issued by the company to settle this purchase consideration ?(a) 16,200 Debentures(b) 13,500 Debentures(c) 10,800 Debentures(d) 9,000 Debentures
›Reveal solutionSolution
Number of debentures issued = Purchase Consideration ÷ Issue price per debenture = 16,20,000 ÷ 180 = 9,000 debentures.
Step 1 — Find the issue price per debenture:
Face value per debenture = ₹150
Premium on issue = 20% of ₹150 = ₹30
Issue price per debenture = ₹150 + ₹30 = ₹180
Step 2 — Find the number of debentures to be issued:
When a company purchases assets from a vendor and settles the purchase consideration by issuing debentures (instead of cash), the number of debentures issued is calculated as:
Number of Debentures = Purchase Consideration ÷ Issue Price per Debenture
= ₹16,20,000 ÷ ₹180
= 9,000 Debentures
Check: 9,000 debentures × ₹180 = ₹16,20,000, which exactly equals the purchase consideration — confirming the figure is correct.
The journal entries for this transaction (in Sweekar Ltd.'s books) would be:
Sundry Assets A/c Dr. 16,20,000
To Rajashree Ltd. 16,20,000
(Being assets purchased from Rajashree Ltd.)
Rajashree Ltd. A/c Dr. 16,20,000
To 8% Debentures A/c (9,000 × 150) 13,50,000
To Securities Premium A/c (9,000 × 30) 2,70,000
(Being 9,000 8% Debentures of ₹150 each issued at 20% premium to settle the purchase consideration)
✓Final answer9,000 Debentures are issued to settle the purchase consideration.
- CBSE 2025Set 67/6/11 markMCQQ.Shyamla Ltd. purchased machinery of ₹ 9,50,000 from Rohini Ltd. The payment was made by issue of 9% debentures of ₹ 100 each at a discount of 5% redeemable at a premium of 10% after four years. The number of debentures issued in favour of Rohini Ltd. will be : (A) 10,000 (B) 9,500 (C) 9,050 (D) 8,636
›Reveal solutionSolution
Shyamla Ltd. must issue 10,000 debentures of ₹100 each to Rohini Ltd. to discharge the purchase consideration of ₹9,50,000, because the debentures are issued at a discount of 5% (₹95 per debenture).
Concept: Purchase Consideration and Issue of Debentures as Consideration
When a company acquires an asset and pays for it by issuing debentures instead of cash, the purchase consideration (the agreed price of the asset) must equal the issue price of the debentures, not their face value or redemption value.
Here, Shyamla Ltd. buys machinery worth ₹9,50,000. Payment is made by issuing 9% debentures of ₹100 face value each, but these debentures are issued at a discount of 5%. This means each debenture is issued at:
Issue Price per Debenture=Face Value−Discount=₹100−5% of ₹100=₹100−₹5=₹95
The number of debentures to be issued is determined by dividing the purchase consideration by the issue price per debenture:
Number of Debentures=Issue Price per DebenturePurchase Consideration=₹95₹9,50,000
The redemption premium of 10% and the four-year maturity are relevant for future accounting (the liability at redemption and the amortization of discount/premium), but they do not affect the number of debentures issued today. The vendor, Rohini Ltd., receives debentures whose current issue value equals the machinery's price.
Watch outA common mistake is to use the face value (₹100) or the redemption value (₹110) to calculate the number of debentures. The issue price—what the debentures are worth at the time of issue—is the correct denominator, because that is the consideration actually given to the vendor.
Solution
Working Note 1: Calculation of Number of Debentures
Number of Debentures=₹95₹9,50,000=10,000 debentures
Verification:
- Face Value of 10,000 debentures = 10,000 × ₹100 = ₹10,00,000
- Discount on Issue = 5% of ₹10,00,000 = ₹50,000
- Issue Price (amount credited to vendor) = ₹10,00,000 − ₹50,000 = ₹9,50,000 ✓
The accounting entries in Shyamla Ltd.'s books would be:
Particulars L.F. Debit (₹) Credit (₹) Machinery A/c Dr. 9,50,000 Discount on Issue of Debentures A/c Dr. 50,000 To Rohini Ltd. 10,00,000 (Being machinery purchased and debentures issued at discount) Rohini Ltd. Dr. 10,00,000 To 9% Debentures A/c 10,00,000 (Being debentures allotted to Rohini Ltd.) The Discount on Issue of Debentures (₹50,000) will be written off over the four-year period, and the Premium on Redemption (10% of ₹10,00,000 = ₹1,00,000) will be provided for separately, but these do not alter the number of debentures issued.
✓Final answerThe number of debentures issued in favour of Rohini Ltd. is 10,000 debentures (Option A). This is calculated by dividing the purchase consideration of ₹9,50,000 by the issue price per debenture of ₹95 (face value ₹100 less 5% discount).
- CBSE 2025Set ANNUAL1 markMCQQ.A company purchased machinery for Rs. 1,15,000 and in consideration issued shares at 15% premium. The face value of shares issued will be ________. (A) Rs. 97,750 (B) Rs. 1,00,000 (C) Rs. 1,15,000 (D) Rs. 1,32,250
›Reveal solutionSolution
Face Value of shares issued = Purchase Consideration ÷ (1 + premium rate) = 1,15,000 ÷ 1.15 = Rs. 1,00,000.
When shares are issued as purchase consideration at a premium, the Issue Price (what the consideration is actually worth) equals Face Value plus the premium:
Issue Price = Face Value × (1 + Premium %)
1,15,000 = Face Value × (1 + 0.15)
1,15,000 = Face Value × 1.15
Face Value = 1,15,000 ÷ 1.15 = Rs. 1,00,000
Check: Rs. 1,00,000 face value shares issued at 15% premium = 1,00,000 + 15,000 (premium) = Rs. 1,15,000, which matches the purchase consideration.
✓Final answer(B) Rs. 1,00,000
- CBSE 2025Set ANNUAL1 markQ.Manav Ltd. purchased Sundry Assets from Varun Ltd. for Rs. 28,60,000. The amount was paid by issuing fully paid Equity shares of Rs. 100 each at a premium of 10%. How many Equity shares are issued to Varun Ltd.?
›Reveal solutionSolution
When shares are issued at a premium to discharge a purchase consideration, the number of shares to be issued = Purchase Consideration ÷ Issue Price per share (face value + premium).
Step-by-step working
Step 1 — Issue price per share
Face value per share = Rs. 100
Premium @ 10% = Rs. 10
Issue price per share = Rs. 100 + Rs. 10 = Rs. 110
Step 2 — Number of shares to be issued
Purchase consideration = Rs. 28,60,000
Number of shares = Rs. 28,60,000 ÷ Rs. 110 = 26,000 shares
Verification: 26,000 shares × Rs. 110 = Rs. 28,60,000 ✓
The journal entry in Manav Ltd.'s books would be:
Sundry Assets A/c Dr 28,60,000
To Varun Ltd. A/c 28,60,000
and then:
Varun Ltd. A/c Dr 28,60,000
To Equity Share Capital A/c 26,00,000
To Securities Premium A/c 2,60,000
✓Final answerManav Ltd. must issue 26,000 fully paid Equity Shares of Rs. 100 each (at a 10% premium) to Varun Ltd.
- CBSE 2024Set 67/2/11 markMCQQ.Maharaja Ltd. took over assets of ₹15,00,000 and liabilities of ₹2,00,000 of Dolphin Ltd. for an agreed purchase consideration of ₹12,60,000. It was agreed that the purchase consideration will be paid by issuing 11% Debentures of ₹100 each at 10% discount. The number of debentures issued will be : (A) 13,000 (B) 12,600 (C) 10,000 (D) 14,000
›Reveal solutionSolution
Maharaja Ltd. will issue 14,000 11% Debentures of ₹100 each at a 10% discount to settle the purchase consideration of ₹12,60,000.
When one company acquires the business of another, it takes over its assets and liabilities. The agreed price for this acquisition is called the Purchase Consideration (PC). This PC is the amount that the purchasing company (Maharaja Ltd.) agrees to pay to the vendor company (Dolphin Ltd.) for its business.
The accounting treatment involves two main steps:
- Recording the takeover of assets and liabilities: The purchasing company debits the individual assets taken over and credits the individual liabilities taken over. The vendor company's account is credited with the Purchase Consideration, as this amount becomes payable to them. Any difference between the net assets (Assets - Liabilities) and the Purchase Consideration is adjusted to either Goodwill (if PC is more than net assets) or Capital Reserve (if PC is less than net assets).
- Settlement of Purchase Consideration: The purchasing company then settles the amount due to the vendor. This can be done through various means, such as cash, shares, or debentures. When debentures are issued at a discount, the vendor's account is debited with the Purchase Consideration, the 'Discount on Issue of Debentures' account is debited (as it's a capital loss), and the 'Debentures Account' is credited with their face value.
In this problem, the Purchase Consideration is ₹12,60,000, and it is to be paid by issuing 11% Debentures of ₹100 each at a 10% discount. The key is to determine the issue price of each debenture, which is the actual amount realised per debenture after accounting for the discount.
Here are the journal entries to illustrate the accounting treatment:
Journal Entries in the books of Maharaja Ltd.
Date Particulars L.F. Debit (₹) Credit (₹) Assets A/c Dr. 15,00,000 To Liabilities A/c 2,00,000 To Dolphin Ltd. A/c (Vendor) 12,60,000 To Capital Reserve A/c 40,000 (Being assets and liabilities taken over and purchase consideration due, with the excess of net assets over PC credited to Capital Reserve) Dolphin Ltd. A/c (Vendor) Dr. 12,60,000 Discount on Issue of Debentures A/c Dr. 1,40,000 To 11% Debentures A/c 14,00,000 (Being purchase consideration settled by issuing 11% Debentures at 10% discount) TOTALS 29,00,000 29,00,000 Watch outA common mistake is to use the face value of the debenture (₹100) to calculate the number of debentures issued, instead of the issue price (face value minus discount). The purchase consideration is settled by the amount received or credited for each debenture, which is its issue price.
Working Notes
1. Calculation of Issue Price per Debenture
Face Value of one Debenture = ₹100
Discount on Issue = 10% of ₹100 = ₹10
Issue Price per Debenture = Face Value - Discount
Issue Price per Debenture = ₹100 - ₹10 = ₹90
2. Calculation of Number of Debentures Issued
Total Purchase Consideration = ₹12,60,000
Issue Price per Debenture = ₹90
Number of Debentures Issued = Total Purchase Consideration / Issue Price per Debenture
Number of Debentures Issued = ₹12,60,000 / ₹90
Number of Debentures Issued = 14,000 Debentures
TipAlways remember that the total amount of purchase consideration is divided by the net amount (issue price) per security (share or debenture) to determine the number of securities to be issued.
✓Final answerThe number of debentures issued by Maharaja Ltd. to Dolphin Ltd. is 14,000, which corresponds to option (D).
- CBSE 2023Set 67/1/11 markMCQQ.Akshita Ltd. issued fully paid shares of ₹ 5,00,000 in purchase consideration of net assets of ₹ 4,70,000. The balance of ₹ 30,000 will be ______ to ______ account. (A) debited, Goodwill (B) debited, Capital Reserve (C) credited, Capital Reserve (D) credited, General Reserve(OR)Maira Ltd. took over assets of ₹ 12,00,000 and liabilities of ₹ 4,00,000 of Subav Ltd. for an agreed purchase consideration of ₹ 9,00,000. The amount was payable by issue of 11% debentures of ₹ 100 each at 10% discount. The number of debentures issued will be : (A) 9,000 (B) 10,000 (C) 8,000 (D) 11,000
›Reveal solutionSolution
Part (a): the ₹30,000 excess is debited to Goodwill — (A). Part (b): 9,00,000 ÷ 90 = 10,000 debentures — (B).
Part (a)
When the purchase consideration paid is more than the net assets acquired, the surplus represents Goodwill — an intangible asset, so it is debited. (Had the price been less than net assets, the difference would be a Capital Reserve, credited.) Here 5,00,000 − 4,70,000 = ₹30,000 → debited to Goodwill.
✓Final answer(A) debited, Goodwill
Part (b)
The debentures are issued at a 10% discount, so each ₹100 debenture is issued for only ₹90.
Number of debentures = Purchase Consideration ÷ Issue Price = 9,00,000 ÷ 90 = 10,000
(Net assets = 12,00,000 − 4,00,000 = ₹8,00,000; the ₹1,00,000 excess of the ₹9,00,000 consideration is goodwill, but the count uses the ₹90 issue price, not ₹100.)
Watch outDivide by the issue price (₹90), not the face value (₹100) — dividing by ₹100 wrongly gives 9,000.
✓Final answer(B) 10,000
- CBSE 2023Set 67/3/11 markMCQQ.Sunbeam Ltd. issued 20,000, 11% debentures of ₹ 100 each at a premium of 10%, redeemable at a premium of 5%. The 'Loss on Issue of Debentures Account' will debited by : (A) ₹ 3,00,000 (B) ₹ 2,00,000 (C) ₹ 1,00,000 (D) ₹ 22,00,000(OR)Nargis Ltd. purchased assets of ₹ 8,00,000 and took over liabilities of ₹ 2,00,000 from Gauri Ltd. The payment was made by issue of 8% Debentures of ₹ 100 each at a premium of 20%. Number of debentures issued will be : (A) 50,000 (B) 5,000 (C) 6,000 (D) 6,00,000
›Reveal solutionSolution
Part (a): Loss on Issue of Debentures A/c debited by ₹1,00,000 — option (C).
Part (b): 5,000 debentures issued — option (B).
Part (a) — Sunbeam Ltd.
20,000 debentures of ₹100 each issued at a 10% premium and redeemable at a 5% premium.
When debentures are redeemable at a premium, the premium payable on redemption is a future liability recognised at issue by debiting the Loss on Issue of Debentures A/c. The premium received on issue is a gain credited to Securities Premium Reserve and does not create any loss. Since these debentures are issued at a premium (not a discount), the only item of loss is the premium on redemption.
Premium on redemption = 20,000 × ₹100 × 5% = ₹1,00,000.
✓Final answerLoss on Issue of Debentures A/c is debited by ₹1,00,000 — option (C).
Part (b) — Nargis Ltd.
Net Purchase Consideration = Assets − Liabilities = 8,00,000 − 2,00,000 = ₹6,00,000.
Issue price per debenture = Face value + premium = ₹100 + 20% of ₹100 = ₹120.
Number of debentures = Net consideration ÷ Issue price = 6,00,000 ÷ 120 = 5,000
(Check: 5,000 × ₹120 = ₹6,00,000.)
✓Final answerNumber of debentures issued = 5,000 — option (B).
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