Q.M Ltd. issued 10,000, 8% Debentures of ₹ 100 each at 6% discount. The amount was payable as ₹ 60 on application and the balance on allotment. All money was duly received. Pass necessary journal entries in the books of M Ltd.
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🔒 Start your 14-day free trial to unlock the full solution →Part (a)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).
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:
| Date | Particulars | L.F. | 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)
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:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) | …
Part (b)Concept understanding — Forfeiture Conditions
Forfeiture of Shares – The First Meeting
Think of a situation where you book a seat for a concert, pay a deposit, but then don't show up on the day. The organiser keeps your deposit because you broke the promise. That's the everyday intuition behind forfeiture of shares.
A company invites people to buy its shares. You agree to buy, say, 100 shares at ₹10 each. You pay the application money (₹2) and allotment money (₹3). But when the company later asks for the final call (₹5), you don't pay. The company has already spent money on your behalf — printing share certificates, maintaining records, planning for your capital. You've broken your promise. So the company forfeits (cancels) your shares and keeps the money you've already paid.
What Exactly Is Forfeiture?
Forfeiture is the cancellation of partly-paid shares by a company because the shareholder failed to pay the call money due. The company keeps the amount already received and the shareholder loses all rights in those shares.
The NCERT Class 12 Accountancy textbook (Part II, Chapter 1) defines forfeiture as: "Forfeiture of shares refers to the cancellation of the shares of a shareholder who fails to pay the amount due on allotment or on any of the calls."
The key point: forfeiture happens only when shares are partly paid. If a shareholder has paid the full amount, the company cannot forfeit — it can only sell the shares in the market to recover any dues.
Why Does Forfeiture Matter?
For the company, forfeiture serves two purposes:
- Discipline – It forces shareholders to honour their payment commitments.
- Recovery – The company can later reissue the forfeited shares to someone else, often at a discount, and recover the unpaid amount.
For the shareholder, forfeiture means losing the money already paid. That's why companies follow a strict legal procedure — a board resolution, a notice to the defaulter, and a 14-day grace period — before forfeiting.
Accounting Treatment – The Core Logic
When shares are forfeited, the company has received some money but the shares are no longer with the original holder. The accounting question is: What do we do with the money already received?
The answer: The money received (application, allotment, and any calls paid) becomes the company's gain — but it's not profit yet. It's kept in a special account called Share Forfeiture Account.
Here's the journal entry:
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| Share Capital A/c (called-up amount per share × number of shares forfeited) | Dr | ||
| To Share Forfeiture A/c (amount already received per share × number of shares) | |||
| To Calls-in-Arrears A/c (amount not received per share × number of shares) | |||
| (Being forfeiture of X shares for non-payment of call money) |
Let's break this down with a concrete example from NCERT.
Example (NCERT-style)
A company issued 1,000 shares of ₹10 each, payable as:
- Application: ₹2
- Allotment: ₹3
- First Call: ₹3
- Final Call: ₹2
Mr. X, who held 100 shares, paid application and allotment but failed to pay the first call and final call. The company forfeited his shares.
Step 1: Calculate the amounts
- Called-up amount per share = ₹10 (all calls made)
- Amount received per share = ₹2 (application) + ₹3 (allotment) = ₹5
- Amount not received per share = ₹3 (first call) + ₹2 (final call) = ₹5
Step 2: Journal entry
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Share Capital A/c (100 shares × ₹10) | 1,000 | |
| To Share Forfeiture A/c (100 shares × ₹5) | 500 | |
| To Calls-in-Arrears A/c (100 shares × ₹5) | 500 | |
| (Being forfeiture of 100 shares of Mr. X) |
What does this entry do?
- Share Capital A/c is debited – because the shares are cancelled, the company's share capital reduces by the called-up amount.
- Share Forfeiture A/c is credited – with the amount already received. This is a liability (or a reserve) because the company may later reissue these shares.
- Calls-in-Arrears A/c is credited – because the unpaid amount is no longer due from Mr. X. The Calls-in-Arrears account is cleared.
The Share Forfeiture Account – A Temporary Home
The Share Forfeiture Account is not a profit account. It's a temporary account that holds the money received from the defaulting shareholder. This money will be used later when the forfeited shares are reissued.
The amount in Share Forfeiture Account is not distributed as dividend until the shares are reissued. It remains a reserve until then.
Reissue of Forfeited Shares …
Part (a)
10,000 8% Debentures of ₹100 each at 6% discount -> issue price ₹94 (₹60 application + ₹34 allotment). Total nominal ₹10,00,000; discount ₹60,000.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c Dr. | 6,00,000 | |
| To Debenture Application A/c | 6,00,000 | |
| (Application money on 10,000 debentures @ ₹60) | ||
| Debenture Application A/c Dr. | 6,00,000 | |
| To 8% Debentures A/c | 6,00,000 | |
| (Application money transferred) | ||
| Debenture Allotment A/c Dr. | 3,40,000 | |
| Discount on Issue of Debentures A/c Dr. | 60,000 | |
| To 8% Debentures A/c | 4,00,000 | |
| (Allotment due with 6% discount) | ||
| Bank A/c Dr. | 3,40,000 | |
| To Debenture Allotment A/c | 3,40,000 |
Part (a): journal entries for 10,000 8% Debentures issued at 6% discount - ₹60,000 discount, ₹9,40,000 received. Part (b): forfeiture of 4,000 shares and re-issue of 2,000, with ₹4,000 to Capital Reserve.
Part (a)
Debentures issued at a discount. Issue price = ₹100 - 6% = ₹94, collected as ₹60 on application and ₹34 on allotment. The debenture account is always credited at nominal (face) value; the ₹6 per debenture shortfall is booked as Discount on Issue of Debentures (a capital loss) at the allotment stage.
Workings: Application = 10,000 x ₹60 = ₹6,00,000; Allotment = 10,000 x ₹34 = ₹3,40,000; Discount = 10,000 x ₹6 = ₹60,000; Nominal = ₹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 8% Debentures A/c | 6,00,000 | |
| Debenture Allotment A/c Dr. | 3,40,000 | |
| Discount on Issue of Debentures A/c Dr. | 60,000 | |
| To 8% Debentures A/c | 4,00,000 | |
| Bank A/c Dr. | 3,40,000 | |
| To Debenture Allotment A/c | 3,40,000 |
Showing the 12 most recent of 152 on this concept.
- CBSE 2026Set 67/5/11 markMCQQ.(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. …
- CBSE 2026Set 67/5/11 markMCQQ.At the time of forfeiture of shares, ‘Share Capital Account’ is debited with : (A) Paid-up amount on forfeited shares (B) Called-up amount on forfeited shares (C) Face value of shares forfeited (D) Unpaid amount on forfeited shares
›Reveal solutionSolution
At the time of forfeiture, Share Capital Account is debited with the called-up amount on the forfeited shares — option (B).
The Concept: Why the Called-Up Amount?
When a company forfeits shares, it cancels the shareholder’s membership. The accounting entry must reverse the original credit that was made to Share Capital Account when the shares were issued.
Think about what happened when the shares were first allotted. The company made this entry:
Date Particulars L.F. Debit (₹) Credit (₹) Bank A/c (amount received) Dr. Share Forfeiture A/c (amount not received) Dr. To Share Capital A/c (called-up amount) Cr. The Share Capital Account was credited with the called-up amount — not the face value, not the paid-up amount, and certainly not the unpaid amount. It was credited with the amount the company had called from shareholders, because that is the legal liability the shareholder accepted.
Now, when shares are forfeited, we must reverse that credit. The rule is simple: whatever was credited to Share Capital at allotment must be debited back at forfeiture. That amount is the called-up value per share multiplied by the number of shares forfeited.
Watch outA common mistake is to debit Share Capital with the paid-up amount (the amount actually received). But that would leave the unpaid calls still sitting in the Share Capital Account — incorrect. The called-up amount is the full amount the company demanded; the unpaid portion is already in Share Forfeiture Account (or Calls-in-Arrears Account) and is removed separately.
The Journal Entry at Forfeiture
The standard entry is:
Date Particulars L.F. Debit (₹) Credit (₹) Share Capital A/c (called-up amount) Dr. To Share Forfeiture A/c (amount already received) To Calls-in-Arrears A/c (amount not yet received) (Being forfeiture of shares for non-payment of calls) Notice: Share Capital is debited with the called-up amount. The credit goes partly to Share Forfeiture Account (the money already collected) and partly to Calls-in-Arrears Account (the money still owed but now cancelled).
TipIf the company has not maintained a separate Calls-in-Arrears Account, the unpaid amount is directly credited to the respective call account (e.g., First Call A/c, Final Call A/c). The principle remains the same — Share Capital is debited with the called-up amount.
Why Not the Other Options? …
- CBSE 2026Set MARCH1 markMCQQ.When shares are forfeited then amount called up on forfeited shares is _____.(a) debited to share forfeiture account(b) credited to share forfeiture account(c) credited to share capital account(d) debited to share capital account
›Reveal solutionSolution
On forfeiture, the called-up amount on forfeited shares is debited to Share Capital A/c, so the answer is (d).
When shares are forfeited for non-payment of calls, the forfeiture entry is:
Account Dr / Cr Share Capital A/c (amount called up on forfeited shares) Dr To Share Forfeiture A/c (amount already received) Cr - CBSE 2026Set MARCH1 markQ.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. …
- CBSE 2026Set ANNUAL1 markMCQQ.Rashmi Limited forfeited 1500 equity shares of ₹ 10 each issued at 10% premium, on which first call of ₹ 2 per share was not received and final call ₹ 1 per share was not made. How much amount will be credited in Share Forfeiture A/c? A) ₹ 15,000 B) ₹ 13,500 C) ₹ 3,000 D) ₹ 10,500
›Reveal solutionSolution
The Share Forfeiture Account is credited with ₹10,500 - option (D).
Face value ₹10 per share, issued at 10% premium (premium ₹1). A typical call pattern totalling face value is: Application + Allotment (including premium) + First call ₹2 + Final call ₹1.
Per share received towards SHARE CAPITAL before forfeiture:
Item Amount per share (₹) Face value 10 Less: First call (not received) (2) Less: Final call (not made / not called) (1) Capital actually received per share 7 … - CBSE 2026Set ANNUAL1 markQ.Fill in the blank: The balance of __________ account is capital gain for the company. (Share forfeiture/General Reserve)
›Reveal solutionSolution
The balance of the Share Forfeiture Account is a capital gain for the company.
When shares are forfeited, the amount already received on them is credited to the Share Forfeiture Account. Any balance remaining after the shares are re-issued represents a capital profit (gain) retained by the company and is transferred to the Capital Reserve. A General Reserve, by contr …
- CBSE 2026Set ANNUAL1 markQ.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' …
- CBSE 2026Set ANNUAL1 markQ.When shares are issued at premium and the premium is realised, which accounts will be debited at the time of their forfeiture?
›Reveal solutionSolution
When the premium has been realised, forfeiture debits only the Share Capital Account.
The treatment of the premium on forfeiture depends on whether it was received:
- If the premium was ALREADY received, it stays in the Securities Premium Account and is not cancelled. Only the Share Capital Account is debited (with the called-up value), the Share Forfeiture Account is credited with the amount received, and any unpaid calls are credited to Calls-in-Arrears. …
- CBSE 2026Set ANNUAL1 markQ.Where is the balance of the Share Forfeiture Account shown till the share is re-issued?
›Reveal solutionSolution
The Share Forfeiture balance is added to Subscribed capital under Share Capital until the shares are re-issued.
Until the forfeited shares are re-issued, the amount standing in the Share Forfeiture Account is disclosed in the Notes to Accounts on Share Capital and added to the Subscribed and Paid-up Capital. It thus appears on the Equity and Liabilities side of the Balance Sheet under Shareholders' Funds -> Share Capital. Once the shares are re-issued, this balance (net of any …
- CBSE 2026Set ANNUAL1 markQ.Write the difference between share and debenture on the basis of voting right.
›Reveal solutionSolution
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 … - CBSE 2026Set ANNUAL1 markMCQQ.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) …
- CBSE 2026Set ANNUAL1 markQ.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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