Q.Pass necessary journal entries for the following transactions relating to the issue of debentures :
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Start your 14-day free trial to unlock the full solution →Journal entries for three debenture issues: (a) at premium, redeemable at par;
(b) at par, redeemable at premium;
(c) at discount, redeemable at premium — each recording Bank, Debentures, Premium on Redemption, and Loss on Issue accounts as per the terms.
Concept: Accounting Treatment for Issue of Debentures
When a company issues debentures, four key values determine the entries:
- Face Value (Nominal Value) — the amount credited to Debentures Account (the liability).
- Issue Price — what the company actually receives; debited to Bank.
- Redemption Price — what the company will pay back at maturity.
- Loss on Issue — any shortfall between redemption price and issue price, written off as a capital loss.
The accounting follows these rules:
- Bank A/c Dr. — with the net cash received (issue price).
- Loss on Issue of Debentures A/c Dr. — with (Redemption Price − Issue Price), if positive. This is a capital loss, shown on the assets side of the Balance Sheet under 'Miscellaneous Expenditure' and written off over the debenture term.
- To Debentures A/c — credited with face value (the liability).
- To Securities Premium A/c — credited if issued at premium (the excess of issue price over face value); this is a capital reserve.
- To Premium on Redemption of Debentures A/c — credited if redeemable at premium (the excess of redemption price over face value); this is a liability, shown under 'Current Liabilities' or as a provision.
The golden rule: Debit what comes in (Bank), Credit the liability (Debentures), and adjust for any premium received or loss incurred.
Solution: Journal Entries
(a) Gagan Limited
Given:
- Face Value: ₹10,00,000 (10,000 debentures @ ₹100 each)
- Issue Price: ₹100 + 5% = ₹105 per debenture = ₹10,50,000
- Redemption Price: ₹100 per debenture = ₹10,00,000 (at par)
Working Note 1: Loss on Issue
Loss on Issue = Redemption Price − Issue Price = ₹10,00,000 − ₹10,50,000 = Nil (in fact, a gain; no loss).
Since issue price exceeds redemption price, there is no loss. The premium received (₹50,000) is a capital receipt.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 10,50,000 | |||
| To 9% Debentures A/c | 10,00,000 | |||
| To Securities Premium A/c | 50,000 | |||
| (Issue of 10,000, 9% Debentures of ₹100 each at a premium of 5%, redeemable at par) |
(b) KS Limited
Given:
- Face Value: ₹10,00,000
- Issue Price: ₹100 per debenture = ₹10,00,000 (at par)
- Redemption Price: ₹100 + 10% = ₹110 per debenture = ₹11,00,000
Working Note 2: Loss on Issue
Loss on Issue = Redemption Price − Issue Price = ₹11,00,000 − ₹10,00,000 = ₹1,00,000
This loss arises because the company will pay back more than it received. The premium on redemption (₹1,00,000) is a liability created now.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 10,00,000 | |||
| Loss on Issue of Debentures A/c Dr. | 1,00,000 | |||
| To 10% Debentures A/c | 10,00,000 | |||
| To Premium on Redemption of Debentures A/c | 1,00,000 | |||
| (Issue of 10,000, 10% Debentures of ₹100 each at par, redeemable at 10% premium) |
A common mistake is to ignore the Loss on Issue when debentures are issued at par but redeemable at premium. The ₹1,00,000 shortfall must be debited immediately — it represents a future outflow already committed.
(c) QR Limited
Given:
- Face Value: ₹10,00,000
- Issue Price: ₹100 − 10% = ₹90 per debenture = ₹9,00,000
- Redemption Price: ₹100 + 5% = ₹105 per debenture = ₹10,50,000
Working Note 3: Loss on Issue …
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