Nano Ltd. purchased assets of Dow Ltd. for ₹ 3,00,000. It also agreed to take over the liabilities of Dow Ltd.

Question

Q. Nano Ltd. purchased assets of Dow Ltd. for ₹ 3,00,000. It also agreed to take over the liabilities of Dow Ltd. amounting to ₹ 50,000 for a purchase consideration of ₹ 2,75,000. The payment to Dow Ltd. was made by issue of 8% Debentures of ₹ 50 each at a premium of 10%. Pass necessary journal entries for the above transactions in the books of Nano Ltd.

(OR)

On 1st April, 2014, a limited company issued ₹ 4,00,000, 9% debentures at 93%, repayable by draw of lots in two equal instalments starting from 31st March, 2017. Prepare Discount on Issue of Debentures Account from 1st April, 2014 to 31st March, 2016.

CBSECBSE Class XII Board 2019Subjective· 3mImportance★★★★★

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Part (a)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

Note

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]

Watch out

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)

Part (b)Concept understanding — Debenture Definition

Debentures: The Company's Way of Borrowing Money

Think of a debenture like this: you need ₹5,00,000 to expand your business. Instead of asking a bank for a loan, you go to the public and say, "Lend me money, and I'll pay you interest every year. After 5 years, I'll return your full amount." Each person who lends you money gets a certificate — that certificate is a debenture.

The Precise Meaning

A debenture is a written instrument issued by a company under its common seal, acknowledging a debt. It contains a promise to repay the borrowed amount at a specified date (maturity) and to pay interest at a fixed rate at regular intervals (usually half-yearly or yearly).

Note

A debenture holder is a creditor of the company, not an owner. They have no voting rights and no share in profits — only a fixed interest payment.

Why Debentures Matter

Companies issue debentures because:

They raise large funds without diluting ownership (unlike shares)
Interest paid on debentures is a tax-deductible expense (reduces taxable profit)
Debentures are safer for investors than shares (fixed return, priority in repayment)

For investors, debentures offer:

Fixed, predictable income
Higher safety than equity shares
Priority over shareholders if the company is liquidated

Accounting Treatment

When a company issues debentures, the journal entry is:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	[Amount received]
To Debentures A/c		[Face value]
To Securities Premium Reserve A/c (if issued at premium)		[Premium amount]
(Being debentures issued at premium)

Key points:

Debit Bank A/c with the actual amount received
Credit Debentures A/c with the face value (nominal value)
If issued at a premium (e.g., ₹100 debenture issued for ₹110), credit the extra ₹10 to Securities Premium Reserve A/c
If issued at a discount (e.g., ₹100 debenture issued for ₹95), debit the discount to Discount on Issue of Debentures A/c (a fictitious asset written off over the debenture's life)

Watch out

Never confuse debentures with shares. Debentures are liabilities (shown under "Non-Current Liabilities" in the Balance Sheet), while shares are equity (shown under "Shareholders' Funds").

Interest on Debentures

Interest is calculated as:

Interest = Face Value of Debentures × Rate of Interest × Time Period

For example, if a company issues ₹10,00,000 worth of 9% debentures, the annual interest is:

₹10,00,000 × 9% = ₹90,000 per year

The journal entry for interest payment:

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Part (a)

Journal Entries — books of Nano Ltd.

Net assets = Assets 3,00,000 − Liabilities 50,000 = ₹2,50,000; Purchase consideration ₹2,75,000 ⇒ Goodwill ₹25,000.

Debentures of ₹50 at 10% premium = ₹55 each ⇒ 2,75,000 ÷ 55 = 5,000 debentures (face ₹2,50,000 + premium ₹25,000).

Particulars	Dr (₹)	Cr (₹)
Sundry Assets A/c Dr.	3,00,000
Goodwill A/c Dr.	25,000
To Sundry Liabilities A/c		50,000
To Dow Ltd. A/c		2,75,000
Dow Ltd. A/c Dr.	2,75,000
To 8% Debentures A/c		2,50,000

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Part (a): Goodwill ₹25,000; 5,000 8% debentures of ₹50 issued at 10% premium (₹2,50,000 face + ₹25,000 premium) to Dow Ltd.

Part (b): total discount ₹28,000 written off 8,000/8,000/8,000/4,000 over four years; balance on 31 Mar 2016 = ₹12,000.

Part (a)

When a company buys a business, the difference between the purchase consideration and the net assets taken over is goodwill (if paid more) or capital reserve (if paid less).

Working notes

Net assets = 3,00,000 − 50,000 = ₹2,50,000.
Goodwill = 2,75,000 − 2,50,000 = ₹25,000.
Issue price per debenture = 50 + 10% of 50 = ₹55; number = 2,75,000 ÷ 55 = 5,000 debentures.
8% Debentures A/c (face) = 5,000 × 50 = ₹2,50,000; Securities Premium Reserve = 5,000 × 5 = ₹25,000.

Journal Entries — books of Nano Ltd.

Particulars	Dr (₹)	Cr (₹)
Sundry Assets A/c Dr.	3,00,000
Goodwill A/c Dr.	25,000
To Sundry Liabilities A/c		50,000
To Dow Ltd. A/c		2,75,000
(Assets and liabilities of Dow Ltd. taken over)
Dow Ltd. A/c Dr.	2,75,000
To 8% Debentures A/c		2,50,000
To Securities Premium Reserve A/c		25,000

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 105 on this concept.

CBSE 2026Set 67/3/11 markMCQ
$Q. Mogra Ltd. purchased assets of ₹ 14,40,000 from DK Ltd. It issued 9% Debentures of ₹ 100 each at a discount of 4% in full satisfaction of the purchase consideration. The number of debentures issued to DK Ltd. were : (A) 14,400 (B) 15,000 (C) 3,60,000 (D) 1,500$
›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 out

Common 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

Tip

Shortcut

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. …

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CBSE 2026Set 67/4/11 markMCQ

Q. 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 solution

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:

\text{Issue Price per Debenture} = \text{Face Value} - \text{Discount} = 100 - 10 = ₹90

\text{Number of Debentures} = \frac{\text{Purchase Consideration}}{\text{Issue Price per Debenture}} = \frac{3{,}96{,}000}{90}

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

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CBSE 2026Set 67/5/11 markMCQ
$Q. (a) Reserve capital is that portion of the ________ capital that can be called only in the event of winding up of the company. (A) called-up (B) uncalled (C) paid-up (D) subscribed$
(OR)
$(b) The debentures which do not carry a specific rate of interest are known as : (A) Irredeemable debentures (B) Bearer debentures (C) Specific coupon rate debentures (D) Zero coupon rate debentures$
›Reveal solutionSolution

Part (a): Reserve capital is a part of uncalled capital — option (B).

Part (b): Debentures with no specific interest rate are Zero coupon rate debentures — option (D).

Part (a)

Under Section 65 of the Companies Act, 2013, a company may by special resolution decide that a portion of its uncalled share capital shall not be called except on winding up. This ring-fenced portion is Reserve Capital — extra security for creditors. …
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CBSE 2026Set 67/5/11 markMCQ
$Q. Universal Ltd. took over machinery of ₹ 3,30,000, furniture of ₹ 1,60,000 and liabilities of ₹ 80,000 from Amol Ltd. for a purchase consideration of ₹ 4,50,000. The payment to Amol Ltd. was made by issue of 10% Debentures of ₹ 50 each at a discount of 10%. The number of debentures issued to Amol Ltd. was : (A) 1,000 (B) 4,500 (C) 45,000 (D) 10,000$
›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 out

Common 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

Tip

Shortcut

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
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CBSE 2026Set MARCH1 mark
$Q. Who is called debenture holder?$
›Reveal solutionSolution
A debenture holder is a creditor (lender) of the company who owns its debentures.

A debenture is a written acknowledgement of a debt taken by a company, usually carrying a fixed rate of interest. The person who buys/holds such debentures is called a debenture holder.

Key points:

He is a creditor of the company, not a shareholder/owner.

He receives a fixed rate of interest whether or not the company earns profit.

He has the right to get his principal back on redemption. …
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CBSE 2026Set ANNUAL1 markMCQ
$Q. Read the following and give answers (Q. No. xi to xiv): "Vishakha Limited had purchased a plant of ₹ 2,97,000 from Snehlata Limited. It was agreed that purchase consideration is to be paid by issuing 8% debentures of ₹ 1,000 each at discount of 10%." How many numbers of 8% debentures will be issued in above question? A) 330 B) 297 C) 270 D) 275$
›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.

…

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CBSE 2026Set ANNUAL1 markMCQ
$Q. (Based on the passage: "Vishakha Limited had purchased a plant of ₹ 2,97,000 from Snehlata Limited. It was agreed that purchase consideration is to be paid by issuing 8% debentures of ₹ 1,000 each at discount of 10%.") Which account will be credited on purchase of the plant? A) Snehlata Ltd.'s A/c B) Vishakha Ltd.'s A/c C) Plant A/c D) 8% Debenture A/c$
›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)

…

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CBSE 2026Set ANNUAL1 mark
$Q. Fill in the blank: The rate of return on debentures is called __________. (Dividend/Interest)$
›Reveal solutionSolution

The rate of return on debentures is called interest.

Debentures represent borrowed capital (debt) of the company, not ownership. Therefore debenture-holders are creditors who receive a fixed, pre-agreed rate of return called interest, which is a charge against profit and payable irrespective of profits. 'Dividend' …

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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

CBSE 2026Set ANNUAL1 mark

Q. Write the difference between share and debenture on the basis of voting right.

›Reveal solution

On the basis of voting right: shareholders have it, debenture-holders do not.

Basis	Share	Debenture
Nature	Ownership capital	Borrowed capital (loan)
Voting right	An equity shareholder has the right to vote in the company's general meetings	A debenture-holder, being only a creditor, has no voting right in company affairs
…

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Debenture holders are the$
(a) Customers of the company
(b) Owners of the company
(c) Creditors of the company
(d) All of them
›Reveal solutionSolution

Debenture-holders are creditors of the company - option (c).

A debenture is part of a company's borrowed capital. The debenture-holders have lent money to the company and are therefore its creditors; they are entitled to interest at a fixed rate (whether or not the company earns a profit) …

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CBSE 2026Set ANNUAL1 mark
$Q. Fill in the blank: Debentures represents a ________ term loan taken by the company.$
›Reveal solutionSolution

Answer: Long (long-term loan).

A debenture is a written acknowledgement of a loan raised by a company, usually repayable after a long period. It forms part of the company's borrowed (long-term) capital. Henc …

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CBSE 2026Set ANNUAL1 mark
$Q. State whether True or False: Debentureholders are owners of the company.$
›Reveal solutionSolution

The statement is False.

A debenture is an acknowledgement of a loan given to the company, so debentureholders are creditors who get fixed interest. The owners of the com …

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Particulars	Debit (₹)	Credit (₹)
Machinery A/c Dr.	3,30,000
Furniture A/c Dr.	1,60,000
To Liabilities A/c		80,000

Part (a)

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