Q.(a) X Ltd. invited applications for issuing 15,000 8% Debentures of ₹ 100 each. The amount was payable as follows : On Application – ₹ 20 per Debenture On Allotment – Balance Applications for 30,000 Debentures were received. Applications for 5,000 Debentures were rejected and the application money was refunded to the applicants. Prorata allotment was made to the remaining applicants. Excess money received with applications was adjusted towards sums due on allotment. The remaining allotment money was duly received. Pass necessary journal entries for the above transactions in the books of X Ltd.
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🔒 Start your 14-day free trial to unlock the full solution →Part (a)Concept understanding — Share Capital Accounting
Let’s begin with something you already know from everyday life.
Imagine you and two friends decide to start a small business — say, a tiffin service. You each put in some money to buy utensils, a stove, and ingredients. That money you all contributed is the capital of the business. The business doesn’t own that money; it owes it back to you, the owners. In accounting, we call you the shareholders, and the money you put in is share capital.
Now scale that up to a company. A company needs huge amounts of money to build factories, buy machinery, or develop software. It raises this money by selling shares — small units of ownership. When you buy a share, you become a part-owner of that company. The total money collected from all shareholders is the company’s share capital.
Why does share capital matter in accounting?
Because the company is a separate legal person. It does not own the money — the shareholders do. So the company must record exactly how much it has collected from whom, and in what form. This affects the balance sheet (where share capital appears under Equity and Liabilities) and the cash flow (money coming in from shareholders is a financing activity).
The precise meaning (NCERT Class 12)
Share Capital is the money raised by a company by issuing shares to the public or to promoters. It is shown under the head Shareholders’ Funds in the Balance Sheet.
There are two main types of shares:
- Equity shares – ordinary shares; owners get dividends only if the company makes profit.
- Preference shares – owners get a fixed dividend before equity shareholders, but usually have no voting rights.
Accounting treatment — the journal entries
When a company issues shares, it follows a standard sequence. Let’s say a company issues 10,000 equity shares of ₹10 each at par (i.e., at face value). The money is received in two instalments: ₹4 on application, ₹6 on allotment.
Step 1: Application money received
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Bank A/c Dr. | 40,000 | ||
| To Share Application A/c | 40,000 | ||
| (Being application money received on 10,000 shares @ ₹4 each) |
Step 2: Transfer application money to Share Capital
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Share Application A/c Dr. | 40,000 | ||
| To Share Capital A/c | 40,000 | ||
| (Being application money transferred to Share Capital) |
Step 3: Allotment money due
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Share Allotment A/c Dr. | 60,000 | ||
| To Share Capital A/c | 60,000 | ||
| (Being allotment money due on 10,000 shares @ ₹6 each) |
Step 4: Allotment money received
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Bank A/c Dr. | 60,000 | ||
| To Share Allotment A/c | 60,000 | ||
| (Being allotment money received) |
If shares are issued at a premium (e.g., ₹10 face value, issued at ₹12), the extra ₹2 goes to a separate account called Securities Premium Reserve A/c. It is not part of share capital.
The Balance Sheet format (as per NCERT)
Under Equity and Liabilities, share capital appears like this:
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| 1. Shareholders’ Funds | ||
| (a) Share Capital | 1 | 1,00,000 |
| (b) Reserves and Surplus | 2 | 20,000 |
| 2. Non-Current Liabilities | ... | ... |
| 3. Current Liabilities | ... | ... |
And Note 1 (Share Capital) is typically shown as:
| Particulars | Amount (₹) |
|---|---|
| Authorised Capital | |
| 1,00,000 Equity Shares of ₹10 each | 10,00,000 |
| Issued Capital | |
| 80,000 Equity Shares of ₹10 each | 8,00,000 |
| Subscribed and Paid-up Capital | |
| 80,000 Equity Shares of ₹10 each fully paid | 8,00,000 |
Part (b)Concept understanding — Premium on Redemption
Let’s start with something you already know from everyday life. Suppose you borrow ₹1,000 from a friend and promise to pay it back after one year. But when the year ends, you don’t just return ₹1,000 — you also pay an extra ₹50 as a “thank you” for the favour. That extra ₹50 is like a premium — an amount above the face value.
Now replace your friend with a company, and the loan with a redeemable preference share or a debenture. When a company issues these, it promises to repay the holder at a future date. Sometimes, the company agrees to repay more than the face value — say, a ₹100 share is repaid at ₹110. That extra ₹10 is the premium on redemption.
Why does a company offer a premium on redemption?
It’s not generosity. A company offers a premium to make its shares or debentures more attractive to investors. If the market interest rate is high, investors won’t buy a low-coupon debenture unless they know they’ll get a bonus at redemption. The premium is the sweetener.
From the company’s side, this premium is a cost — an extra outflow of cash when the instrument is redeemed. And like any cost, it must be accounted for properly.
The accounting treatment — the core rule
The premium on redemption is not a loss that hits the Profit & Loss account directly. Instead, it is adjusted against the company’s reserves and surplus — specifically, the Securities Premium Reserve (if available) or the General Reserve / Retained Earnings.
Here’s the precise journal entry when the premium is paid at the time of redemption:
Journal Entry for Premium on Redemption Payable
| Date | Particulars | Dr. (₹) | Cr. (₹) |
|---|---|---|---|
| Securities Premium Reserve A/c … Dr. | xxx | ||
| General Reserve A/c … Dr. (if needed) | xxx | ||
| To Premium on Redemption of Debentures/Preference Shares A/c | xxx | ||
| (Being the premium payable on redemption provided for) |
Then, when the actual payment is made:
| | Premium on Redemption of Debentures/Preference Shares A/c … Dr. | xxx | |
| | To Bank A/c | | xxx |
| | (Being the premium paid to debenture/shareholders) | | |
Which account is debited and which is credited — the logic
- Debit the reserve account (Securities Premium Reserve first, then General Reserve, then any other free reserve). Why? Because the company is using its accumulated profits (reserves) to meet this extra cost — it’s not a business expense like salary or rent.
- Credit a temporary liability account called “Premium on Redemption of … A/c”. This shows that the company owes this premium to the holders. Later, when paid, that liability is cleared by crediting Bank.
Never debit the Profit & Loss Account for premium on redemption. The NCERT textbook is clear: premium on redemption is a capital loss (or a distribution of accumulated profits), not a revenue expense. Doing otherwise would understate the year’s profit.
Where does this appear in the financial statements?
In the Balance Sheet, before redemption, the “Premium on Redemption of … A/c” appears under Current Liabilities (or as a separate item under Non-Current Liabilities if the redemption is due after one year). After payment, it disappears. …
Part (a)
X Ltd. — Pro-rata allotment of 15,000, 8% Debentures (App ₹20, Allotment ₹80; 30,000 applied, 5,000 rejected, 25,000 allotted 15,000 in 3:5)
| Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Bank A/c ... Dr. | 6,00,000 | ||
| To Debenture Application A/c | 6,00,000 | ||
| Debenture Application A/c ... Dr. | 6,00,000 | ||
| To Bank A/c (refund 5,000) | 1,00,000 | ||
| To 8% Debentures A/c (15,000 × 20) | 3,00,000 | ||
| To Debenture Allotment A/c (excess) | 2,00,000 | ||
| Debenture Allotment A/c ... Dr. | 12,00,000 | ||
| To 8% Debentures A/c | 12,00,000 | ||
| Bank A/c ... Dr. | 10,00,000 | ||
| To Debenture Allotment A/c | 10,00,000 |
(a) X Ltd. allots 15,000 debentures pro-rata (3:5) from 25,000 accepted applications; refunds ₹1,00,000, adjusts ₹2,00,000 excess, collects ₹10,00,000 allotment.
(b)(i) Y Ltd. — Loss on Issue ₹50,000 (redemption premium). (b)(ii) Z Ltd. — Loss on Issue ₹67,500 (discount ₹45,000 + redemption premium ₹22,500).
Part (a)
On over-subscription, rejected applications are refunded and the balance are allotted pro-rata; the excess application money is adjusted against allotment due.
Working: Applications 30,000 × 20 = ₹6,00,000. Rejected 5,000 × 20 = ₹1,00,000 refunded. Accepted 25,000 for 15,000 ⇒ ratio 3:5. Application due on allotted = 15,000 × 20 = ₹3,00,000; excess adjusted = 5,00,000 − 3,00,000 = ₹2,00,000. Allotment due 15,000 × 80 = ₹12,00,000; cash on allotment = 12,00,000 − 2,00,000 = ₹10,00,000.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c ... Dr. | 6,00,000 | |
| To Debenture Application A/c | 6,00,000 | |
| Debenture Application A/c ... Dr. | 6,00,000 | |
| To Bank A/c (refund) | 1,00,000 | |
| To 8% Debentures A/c | 3,00,000 | |
| To Debenture Allotment A/c (excess) | 2,00,000 | |
| Debenture Allotment A/c ... Dr. | 12,00,000 | |
| To 8% Debentures A/c | 12,00,000 | |
| Bank A/c ... Dr. | 10,00,000 |
Showing the 12 most recent of 81 on this concept.
- CBSE 2026Set 67/3/11 markMCQQ.(a) Paramount Ltd. forfeited 2,000 equity shares of ₹ 100 each, ₹ 80 called up, issued at a premium of 10%, for non-payment of first call of ₹ 20 per share. On forfeiture of these shares, Equity Share Capital Account will be ________ by ________. (A) debited, ₹ 1,60,000 (B) credited, ₹ 1,60,000 (C) debited, ₹ 2,00,000 (D) credited, ₹ 2,00,000(OR)(b) Rudali Ltd. invited applications for issuing 2,00,000 equity shares of ₹ 10 each at a premium of ₹ 2 per share. ₹ 5 per share (including premium) was payable on application. Applications for 2,60,000 shares were received. An applicant for 5,000 shares paid his entire share money along with application. The amount received on application was : (A) ₹ 10,00,000 (B) ₹ 12,00,000 (C) ₹ 12,35,000 (D) ₹ 13,35,000
›Reveal solutionSolution
Part (a): Equity Share Capital A/c is debited by ₹1,60,000 — option (A).
Part (b): Amount received on application = ₹13,35,000 — option (D).
Part (a)
Forfeiture reverses Share Capital only to the extent called up, at the called-up value per share.
- Called-up per share = ₹80; shares forfeited = 2,000
- Equity Share Capital A/c debit = 2,000 × ₹80 = ₹1,60,000 …
- CBSE 2026Set 67/3/11 markMCQQ.(a) On 1st April, 2024, Mobi Ltd. issued 3,000, 9% Debentures of ₹ 1,000 each at a premium of 5%. The total amount of interest due on debentures for the year ended 31st March, 2025 will be : (A) ₹ 2,70,000 (B) ₹ 1,50,000 (C) ₹ 27,000 (D) ₹ 15,000(OR)(b) A company may reserve a portion of its uncalled capital to be called only in the event of winding up of the company. Such uncalled amount is called : (A) Uncalled capital (B) Paid-up capital (C) Called-up capital (D) Reserve capital
›Reveal solutionSolution
Part (a): Annual debenture interest = ₹2,70,000 — option (A).
Part (b): The reserved uncalled amount is Reserve Capital — option (D).
Part (a)
Debenture interest is computed on the nominal (face) value, unaffected by the issue premium.
- Total face value = 3,000 × ₹1,000 = ₹30,00,000
- Interest = 9% × ₹30,00,000 × 1 year = ₹2,70,000 …
- CBSE 2026Set 67/3/11 markMCQQ.Nigam Ltd. issued 40,000, 11% Debentures of ₹ 100 each at a certain rate of discount. The debentures were to be redeemed at 20% premium. Existing balance of Securities Premium before issue of these debentures was ₹ 13,00,000. After writing off 'Loss on issue of debentures', the balance in Securities Premium was ₹ 3,00,000. The above debentures were issued at a discount of : (A) 20% (B) 15% (C) 10% (D) 5%
›Reveal solutionSolution
The debentures were issued at a discount of 5%.
When debentures are issued at a discount and/or are redeemable at a premium, the company incurs a capital loss. This loss is termed 'Loss on Issue of Debentures'. This account is a fictitious asset (or deferred revenue expenditure) and represents the total cost associated with issuing debentures below par and/or redeeming them above par. It is typically written off over the tenure of the debentures, usually against the Securities Premium Reserve or, if that is insufficient, against the Statement of Profit & Loss.
The 'Loss on Issue of Debentures' account comprises two main components:
- Discount on Issue of Debentures: This is the difference between the face value of the debentures and the issue price when debentures are issued below par.
- Premium on Redemption of Debentures: This is the additional amount payable over and above the face value when debentures are redeemed at a premium. This premium is a liability for the company and is recognised at the time of issue.
According to Section 52 of the Companies Act, 2013, the Securities Premium Reserve can be used for specific purposes, one of which is to write off the discount allowed on the issue of shares or debentures, or the premium payable on the redemption of any redeemable preference shares or debentures.
In this problem, we are given the opening and closing balances of the Securities Premium Reserve after writing off the 'Loss on Issue of Debentures'. This allows us to determine the total amount of 'Loss on Issue of Debentures' that was written off. Once we have this total loss and the premium on redemption, we can isolate the discount on issue and subsequently calculate the discount rate.
Derivation of the Answer
-
Calculate the total face value of debentures:
Number of Debentures × Face Value per Debenture
40,000 debentures×₹100/debenture=₹40,00,000
-
Calculate the Premium on Redemption:
The debentures are to be redeemed at a 20% premium. This premium is calculated on the face value.
Premium on Redemption = 20% of ₹40,00,000=₹8,00,000
-
Determine the 'Loss on Issue of Debentures' written off:
The Securities Premium balance decreased from ₹13,00,000 to ₹3,00,000 after writing off the 'Loss on Issue of Debentures'. The difference represents the amount of loss written off.
Loss on Issue of Debentures written off = Existing Securities Premium - Securities Premium after writing off loss
Loss on Issue of Debentures written off = ₹13,00,000−₹3,00,000=₹10,00,000
-
Calculate the Discount on Issue of Debentures:
As established, the 'Loss on Issue of Debentures' comprises both the discount on issue and the premium on redemption.
Loss on Issue of Debentures = Discount on Issue + Premium on Redemption
₹10,00,000=Discount on Issue+₹8,00,000 …
- CBSE 2026Set 67/3/11 markMCQQ.Deep Ltd. issued 6,000, 9% Debentures of ₹ 500 each at ₹ 490 per debenture. 9% Debentures Account will be credited by : (A) ₹ 2,70,000 (B) ₹ 6,00,000 (C) ₹ 29,40,000 (D) ₹ 30,00,000
›Reveal solutionSolution
The 9% Debentures Account is credited by ₹30,00,000 (face value of 6,000 debentures @ ₹500 each), irrespective of the issue price of ₹490.
Concept: Accounting Treatment for Issue of Debentures at a Discount
When a company issues debentures, the Debentures Account (a liability) is always credited with the face value (nominal value) of the debentures, not the issue price. This is because the company's liability to debenture-holders is to repay the face value at maturity, regardless of what they paid at the time of issue.
The accounting entries follow the fundamental rule:
- Debit what comes in (Bank receives cash at issue price)
- Credit the liability at face value (Debentures Account)
- Any difference between face value and issue price is treated separately:
- Discount on Issue of Debentures (when issue price < face value) is debited as a capital loss
- Premium on Issue of Debentures (when issue price > face value) is credited
In this case, Deep Ltd. issued debentures at a discount of ₹10 per debenture (₹500 − ₹490).
Solution
Working Note 1: Calculation of Face Value
Number of debentures issued = 6,000
Face value per debenture = ₹500
Total Face Value = 6,000 × ₹500 = ₹30,00,000
Working Note 2: Calculation of Issue Price
Issue price per debenture = ₹490
Total Cash Received = 6,000 × ₹490 = ₹29,40,000
Working Note 3: Discount on Issue
Discount per debenture = ₹500 − ₹490 = ₹10
Total Discount = 6,000 × ₹10 = ₹60,000
Journal Entry
Date Particulars L.F. Debit (₹) Credit (₹) Bank A/c 29,40,000 - CBSE 2026Set 67/4/11 markMCQQ.(a) 6,000 shares of ₹ 25 each were forfeited for non-payment of final call money of ₹ 5 per share. The maximum discount that the company can allow on reissue of these shares will be : (A) ₹ 30,000 (B) ₹ 90,000 (C) ₹ 1,20,000 (D) ₹ 1,50,000(OR)(b) 5,000 shares of ₹ 20 each were forfeited for non-payment of second and final call of ₹ 4 per share. The minimum amount that the company must collect at the time of reissue of these shares will be : (A) ₹ 20,000 (B) ₹ 80,000 (C) ₹ 1,00,000 (D) ₹ 1,20,000
›Reveal solutionSolution
Part (a): Maximum discount on reissue = Rs.1,20,000 -> (C). Part (b): Minimum amount to collect on reissue = Rs.20,000 -> (A).
Part (a)
Maximum discount on reissue cannot exceed the amount forfeited. Amount received before forfeiture = 25 - 5 = Rs.20 per share -> 20 x 6,000 = Rs.1,20,000. …
- CBSE 2026Set 67/4/11 markMCQQ.Amik Ltd. issued 70,000, 9% Debentures of ₹ 100 each at a premium of 5%, redeemable at a premium of 10%. 'Loss on Issue of Debentures Account' will be debited in the books of Amik Ltd. by : (A) ₹ 10,50,000 (B) ₹ 7,00,000 (C) ₹ 3,50,000 (D) ₹ 6,30,000
›Reveal solutionSolution
The 'Loss on Issue of Debentures Account' will be debited by ₹ 7,00,000, representing the premium payable on redemption of debentures.
When a company issues debentures, it needs to account for all costs and potential losses associated with that issue at the time the debentures are issued. This practice aligns with the prudence principle (which dictates anticipating all future losses but not future profits) and the matching principle (which requires expenses to be recognized in the period they are incurred, even if the cash outflow happens later).
The 'Loss on Issue of Debentures Account' is a nominal account (or a deferred revenue expenditure) created to record the total loss arising from the issue of debentures. This loss typically comprises two main components:
- Discount on Issue of Debentures: If debentures are issued at a price lower than their face value, the difference is a discount, which represents a loss to the company.
- Premium Payable on Redemption of Debentures: If debentures are to be redeemed at a price higher than their face value, the excess amount (premium) is a definite future liability and a loss that is certain to occur. This loss must be recognized upfront at the time of issue.
In this question, Amik Ltd. issues debentures at a premium of 5%. This premium received on issue is a capital gain for the company and is credited to 'Securities Premium Reserve Account'. It is not a loss and therefore does not contribute to the 'Loss on Issue of Debentures Account'.
The only component contributing to the 'Loss on Issue of Debentures Account' in this scenario is the premium payable on redemption. This premium represents a future obligation that reduces the net proceeds from the debenture issue over their lifetime. Therefore, it is treated as a loss at the time of issue.
The journal entry to record this loss involves:
- Debiting 'Loss on Issue of Debentures Account': To recognize the total loss (discount on issue + premium on redemption).
- Crediting 'Premium on Redemption of Debentures Account': To record the liability for the premium that will be paid at the time of redemption.
Working Notes
-
Total Face Value of Debentures:
Number of Debentures × Face Value per Debenture
70,000×₹100=₹70,00,000
-
Premium on Issue of Debentures:
5% of Face Value per Debenture × Number of Debentures
5% of ₹100=₹5 per debenture
₹5×70,000=₹3,50,000
(This amount is credited to Securities Premium Reserve Account and does not contribute to 'Loss on Issue of Debentures Account'.)
-
Premium on Redemption of Debentures:
10% of Face Value per Debenture × Number of Debentures
10% of ₹100=₹10 per debenture
₹10×70,000=₹7,00,000
(This amount represents a future loss and is debited to 'Loss on Issue of Debentures Account'.)
-
Amount to be Debited to Loss on Issue of Debentures Account:
This account is debited with the total loss incurred at the time of issue. Since there is no discount on issue (rather, a premium is received), the only loss component is the premium payable on redemption. …
- CBSE 2026Set 67/5/11 markMCQQ.(a) Merak Ltd. forfeited 6,000 equity shares of ₹ 10 each for non-payment of final call of ₹ 3 per share. The minimum amount per share at which these shares can be reissued will be : (A) ₹ 3 (B) ₹ 7 (C) ₹ 10 (D) ₹ 6(OR)(b) Nori Ltd. issued 20,000, 11% debentures of ₹ 100 each at a premium of 10%, redeemable at a premium of 5%. Loss on issue of debentures account will be debited by : (A) ₹ 20,00,000 (B) ₹ 1,00,000 (C) ₹ 3,00,000 (D) ₹ 2,00,000
›Reveal solutionSolution
Part (a): Minimum reissue price = ₹3 — option (A).
Part (b): Loss on Issue of Debentures = ₹1,00,000 — option (B).
Part (a)
On forfeiture, the amount already received is credited to the Share Forfeiture Account, and on reissue the discount allowed cannot exceed this balance.
- Face value = ₹10; final call unpaid = ₹3
- Amount forfeited per share = ₹10 − ₹3 = ₹7 (maximum permissible discount) …
- CBSE 2026Set 67/5/11 markMCQQ.On 1st April, 2024, DD Ltd. issued 2,000, 9% Debentures of ₹ 50 each at a premium of 5%, redeemable at a premium of ₹ 10 per debenture after five years. Interest on the debentures was to be paid on half-yearly basis on 30th September and 31st March. Interest on the debentures for the year ended 31st March, 2025 will be : (A) ₹ 4,500 (B) ₹ 9,000 (C) ₹ 9,450 (D) ₹ 4,725
›Reveal solutionSolution
The interest on debentures for the year ended 31st March, 2025 is ₹9,000, calculated on the face value of the debentures at the stated coupon rate, irrespective of the issue price or redemption premium.
Concept First: Why Interest is Calculated on Face Value
The key principle here is that interest on debentures is always calculated on the face value (nominal value) of the debentures, not on the issue price (which may include a premium) or the redemption value. The 9% coupon rate is applied to the ₹50 face value per debenture.
The premium on issue (₹5 per debenture) and the premium on redemption (₹10 per debenture) are capital items. They affect the company's securities premium account and the loss on issue of debentures account, respectively — but they have no bearing on the interest calculation. Interest is a charge against profit, paid to debenture holders as compensation for the use of their funds, and that compensation is contractually fixed on the face value.
Watch outCommon Pitfall
Students often mistakenly calculate interest on the issue price (₹55) or the redemption price (₹60). This is incorrect. The coupon rate is always applied to the face value (₹50) unless the question explicitly states otherwise. The premium on issue is a capital receipt, not income for the debenture holder in the context of interest.
Solution: Calculating the Interest
Step 1: Determine the total face value of debentures issued.
Number of debentures = 2,000
Face value per debenture = ₹50
Total face value = 2,000 × ₹50 = ₹1,00,000
Step 2: Apply the annual interest rate.
Annual interest rate = 9%
Annual interest = 9% of ₹1,00,000 = ₹9,000
Step 3: Verify the half-yearly payment (for understanding, though the question asks for the annual amount).
Half-yearly interest = ₹9,000 ÷ 2 = ₹4,500
This would be paid on 30th September 2024 and 31st March 2025.
Since the question asks for the interest for the year ended 31st March, 2025, it covers the full financial year from 1st April 2024 to 31st March 2025. Both half-yearly payments fall within this period. …
- CBSE 2026Set MARCH1 markQ.What do you mean by Redemption of debentures?
›Reveal solutionSolution
Redemption of debentures is the repayment/discharge of debentures to the holders as per the terms of issue.
A debenture is a loan raised by a company that carries a fixed rate of interest and a promise to repay. Redemption is the process by which the company returns the debenture money to the debenture holders.
…
- CBSE 2026Set ANNUAL1 markMCQQ.Purchase of own equity shares by a company is called A) Buy-back of share B) Repayment C) Redemption D) Capitalisation
›Reveal solutionSolution
A company purchasing its own equity shares is doing a buy-back - option (A).
'Buy-back' means a company repurchasing its own equity shares from its shareholders, usually to return surplus cash, improve earnings per share, or support the share price. It is distinct from:
- Redemption (option C) - applies to preference shares and debentures that are repaid on maturity. …
- CBSE 2026Set ANNUAL1 markMCQQ.Loss on issue of Debentures is written off _______.(a) during the lifetime of the Debentures(b) in the year of the issue of debentures(c) within two years of the issue of debentures(d) when debentures are redeemed(a) during the lifetime of the Debentures(b) in the year of the issue of debentures(c) within two years of the issue of debentures(d) when debentures are redeemed
›Reveal solutionSolution
Loss on issue of Debentures is written off during the lifetime of the Debentures (Option A).
'Loss on Issue of Debentures' typically arises when debentures are issued at a discount and/or are redeemable at a premium. This loss is in the nature of a capital loss, and the benefit of raising funds through the debentures is enjoyed by the company over the entire period the debentures are outstanding (i.e., till redemption). Following the matching principle, this loss is therefore written off gradually, usually in proportion to the balance of debentures outstanding, over the life of the debentur …
- CBSE 2025Set 67/4/11 markMCQQ.Diksha Ltd. invited applications for issuing 1,00,000 equity shares of ₹ 10 each at a premium of 10%. The whole amount was payable on application. Applications were received for 3,00,000 equity shares. The company decided to allot the shares on pro-rata basis to all the applicants. The amount refunded by the company was : (A) ₹ 22,00,000 (B) ₹ 33,00,000 (C) ₹ 11,00,000 (D) ₹ 20,00,000
›Reveal solutionSolution
The amount refunded by Diksha Ltd. is ₹ 22,00,000 (Option A). This is the application money returned to applicants whose shares were not allotted under the pro-rata arrangement.
Concept and Accounting Treatment
When a company receives excess applications for shares, it can either reject the excess or allot shares on a pro-rata (proportionate) basis. Here, Diksha Ltd. received applications for 3,00,000 shares against an issue of 1,00,000 shares — three times the number offered. The company decided to allot shares pro-rata to all applicants.
The key accounting principle: Application money received in excess of the amount due on allotted shares must be refunded. The company cannot retain money for shares it does not issue. The refund is a liability until paid, and is recorded by crediting the Bank Account (when refunded) and debiting the Share Application Account.
Since the entire amount (face value + premium) is payable on application, each applicant paid ₹ 11 per share (₹ 10 face value + ₹ 1 premium). For every 3 shares applied, only 1 share is allotted. So for each group of 3 shares applied (₹ 33 paid), the company keeps ₹ 11 (for the 1 allotted share) and refunds ₹ 22 (for the 2 unallotted shares).
Watch outCommon Pitfall
Students often forget that the premium is also collected on application and must be refunded proportionately. The refund is not just on face value — it includes the entire application money for unallotted shares.
Solution
Step 1: Determine the Pro-rata Ratio
Shares applied: 3,00,000
Shares allotted: 1,00,000
Ratio: For every 3 shares applied, 1 share is allotted.
Step 2: Calculate Application Money Received
Particulars Amount (₹) Number of shares applied 3,00,000 Application money per share (₹ 10 + ₹ 1 premium) ₹ 11 Total application money received ₹ 33,00,000 Step 3: Calculate Application Money Retained
Particulars Amount (₹) Number of shares allotted 1,00,000 Application money per share (₹ 10 + ₹ 1 premium) ₹ 11 Application money retained for allotted shares ₹ 11,00,000 Step 4: Calculate Refund Amount
Particulars Amount (₹) Total application money received ₹ 33,00,000 Less: Application money retained (₹ 11,00,000) Amount refunded ₹ 22,00,000 TipShortcut
Since only 1 out of every 3 shares applied is allotted, 2/3 of the application money is refunded. 2/3 × ₹ 33,00,000 = ₹ 22,00,000. This works because the application money per share is uniform.
Journal Entry for Refund …
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