On 1st October, 2021 Pihu Ltd. issued ₹ 15,00,000, 9% Debentures of ₹ 20 each at a discount of ₹ 6 per debentu

Question

Q. On 1st October, 2021 Pihu Ltd. issued ₹ 15,00,000, 9% Debentures of ₹ 20 each at a discount of ₹ 6 per debenture. The company had a balance of ₹ 1,00,000 in 'Securities Premium Reserve Account' on the same date. On 31st March, 2022 the company decided to write off discount on issue of debentures according to the provisions of Companies Act, 2013. Pass necessary journal entries for issue of debentures and writing off discount on issue of debentures. On 1st April, 2021, Soma Ltd. purchased land from Mona Ltd. Soma Ltd. issued a cheque of ₹ 10,00,000 and accepted a bill of exchange payable after 6 months for ₹ 5,00,000 in favour of Mona Ltd. The balance amount was paid by issuing 5,000, 10% Debentures of ₹ 100 each at par. Pass the necessary journal entries in the books of Soma Ltd. for the above transactions.

CBSECBSE Class XII Board 2023Subjective· 6mImportance★★★★★

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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)

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Part 1: Pihu Ltd. — Issue of Debentures and Writing off Discount

Step 1: Calculate the number of debentures issued

Face value per debenture = ₹20

Discount per debenture = ₹6

Issue price per debenture = ₹20 − ₹6 = ₹14

Number of debentures = ₹15,00,000 ÷ ₹20 = 75,000 debentures

Total discount = 75,000 × ₹6 = ₹4,50,000

Step 2: Journal entry for issue of debentures

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2021 Oct 1	Bank A/c (75,000 × ₹14)		10,50,000
	Discount on Issue of Debentures A/c (75,000 × ₹6)		4,50,000
		To 9% Debentures A/c (75,000 × ₹20)		15,00,000
		(Being 75,000, 9% debentures of ₹20 each issued at a discount of ₹6 per debenture)

Step 3: Writing off discount on 31st March, 2022

As per Companies Act, 2013, discount on issue of debentures is a capital loss and must be written off against the Securities Premium Reserve first, and if insufficient, against the Statement of Profit and Loss.

Available Securities Premium Reserve = ₹1,00,000

Discount to be written off = ₹4,50,000

Since the debentures were issued on 1st October 2021, the discount relates to the period from issue date to maturity. However, the question states the company decided to write off discount on 31st March 2022 according to the Act. The Act requires writing off discount over the life of debentures, but here the company writes it off in one go on 31st March 2022.

Note

The question does not specify the maturity period of debentures. Assuming the company writes off the entire discount on 31st March 2022 (as per the decision), the entry is:

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2022 Mar 31	Securities Premium Reserve A/c		1,00,000
	Statement of Profit & Loss A/c (balancing figure)		3,50,000
		To Discount on Issue of Debentures A/c		4,50,000

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Pihu Ltd. issues 75,000 debentures at a discount of ₹6 each, creating a Discount on Issue of Debentures of ₹4,50,000, which is written off against Securities Premium Reserve (₹1,00,000) and then against Surplus (₹3,50,000). Soma Ltd. purchases land for ₹20,00,000, paying ₹10,00,000 by cheque, accepting a bill for ₹5,00,000, and issuing 5,000 debentures of ₹100 each at par for the balance ₹5,00,000.

Part 1: Pihu Ltd. – Issue of Debentures and Writing off Discount

Concept and Treatment

When debentures are issued at a discount, the discount is not an expense of one year — it is a capital loss that must be written off over the life of the debentures. The Companies Act, 2013 requires that the discount on issue of debentures be written off against the Securities Premium Reserve first, and if that is insufficient, against the Statement of Profit and Loss (i.e., Surplus, i.e., Retained Earnings).

Why this treatment? The discount represents the cost of raising long-term finance. It is not a revenue expense; it is a capital loss that reduces the company's reserves. The Act ensures that this loss is charged against reserves (which are accumulated profits) rather than against current year's profit alone, so that the true financial position is reflected.

Journal entries needed:

To record receipt of application money and allotment of debentures at a discount.
To record the discount on issue as a separate asset (to be written off).
To write off the discount against Securities Premium Reserve.
To write off the remaining discount against Surplus (Statement of Profit and Loss).

Calculations

Number of debentures issued:

Face value per debenture = ₹20

Total face value issued = ₹15,00,000

Number of debentures = ₹15,00,000 / ₹20 = 75,000 debentures

Issue price per debenture:

Face value = ₹20

Discount = ₹6

Issue price = ₹20 – ₹6 = ₹14

Total amount received:

75,000 debentures × ₹14 = ₹10,50,000

Total discount on issue:

75,000 debentures × ₹6 = ₹4,50,000

Writing off the discount:

Securities Premium Reserve balance = ₹1,00,000

Discount to be written off = ₹4,50,000

First, write off against Securities Premium Reserve: ₹1,00,000

Remaining discount = ₹4,50,000 – ₹1,00,000 = ₹3,50,000

This remaining amount is written off against Surplus (Statement of Profit and Loss).

Journal Entries in the Books of Pihu Ltd.

Date	Particulars	L.F.	Debit (₹)	Credit (₹)
2021 Oct 1	Bank A/c (75,000 × ₹14)	Dr.	10,50,000
	Discount on Issue of Debentures A/c (75,000 × ₹6)	Dr.	4,50,000
	To 9% Debentures A/c (75,000 × ₹20)			15,00,000
	(Being issue of 75,000, 9% debentures of ₹20 each at a discount of ₹6 per debenture)
2022 Mar 31	Securities Premium Reserve A/c	Dr.	1,00,000
	Statement of Profit and Loss A/c (Surplus)	Dr.	3,50,000
	To Discount on Issue of Debentures A/c			4,50,000
	(Being discount on issue of debentures written off as per Section 52 of Companies Act, 2013 – first against Securities Premium Reserve, then against Surplus)

Watch out

Common Mistake

Students often write off the entire discount against the Securities Premium Reserve even when the balance is insufficient. The Act requires that the discount be written off first against Securities Premium Reserve, and only the remaining amount against Surplus. Also, do not confuse 'Discount on Issue of Debentures' with 'Loss on Issue of Debentures' – the latter arises when debentures are issued at a discount and also have a redemption premium.

Tip

Shortcut

The total discount is always: (Face value – Issue price) × Number of debentures. Here, (₹20 – ₹14) × 75,000 = ₹4,50,000. The write-off sequence is always: Securities Premium first, then Surplus.

Part 2: Soma Ltd. – Purchase of Land from Mona Ltd.

Concept and Treatment

When a company purchases an asset and pays partly by cheque, partly by accepting a bill of exchange, and partly by issuing debentures, the accounting treatment is:

Land A/c is debited with the total cost of the asset (the purchase consideration).
Bank A/c is credited for the cheque payment.
Bills Payable A/c is credited for the acceptance (the bill of exchange).
10% Debentures A/c is credited for the face value of debentures issued at par. …

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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 17 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
$Q. Universal Ltd. took over machinery of ₹ 3,30,000, furniture of ₹ 1,60,000 and liabilities of ₹ 80,000 from Amol Ltd. for a purchase consideration of ₹ 4,50,000. The payment to Amol Ltd. was made by issue of 10% Debentures of ₹ 50 each at a discount of 10%. The number of debentures issued to Amol Ltd. was : (A) 1,000 (B) 4,500 (C) 45,000 (D) 10,000$
›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 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 markMCQ
$Q. Sweekar Ltd. purchased assets worth ₹ 16,20,000 from Rajashree Ltd. By issuing 8% Debentures of ₹ 150 per debenture at a premium of 20%. What is the total number of debentures issued by the company to settle this purchase consideration ?$
(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 …

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CBSE 2025Set 67/6/11 markMCQ
$Q. Shyamla Ltd. purchased machinery of ₹ 9,50,000 from Rohini Ltd. The payment was made by issue of 9% debentures of ₹ 100 each at a discount of 5% redeemable at a premium of 10% after four years. The number of debentures issued in favour of Rohini Ltd. will be : (A) 10,000 (B) 9,500 (C) 9,050 (D) 8,636$
›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:
$\text{Issue Price per Debenture} = \text{Face Value} - \text{Discount} = ₹100 - 5\% \text{ of } ₹100 = ₹100 - ₹5 = ₹95$
The number of debentures to be issued is determined by dividing the purchase consideration by the issue price per debenture:
$\text{Number of Debentures} = \frac{\text{Purchase Consideration}}{\text{Issue Price per Debenture}} = \frac{₹9,50,000}{₹95}$
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 out

A 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
$\text{Number of Debentures} = \frac{₹9,50,000}{₹95} = 10,000 \text{ debentures}$
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: …
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CBSE 2025Set ANNUAL1 markMCQ
$Q. A company purchased machinery for Rs. 1,15,000 and in consideration issued shares at 15% premium. The face value of shares issued will be ________. (A) Rs. 97,750 (B) Rs. 1,00,000 (C) Rs. 1,15,000 (D) Rs. 1,32,250$
›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 …

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CBSE 2025Set ANNUAL1 mark
$Q. Manav Ltd. purchased Sundry Assets from Varun Ltd. for Rs. 28,60,000. The amount was paid by issuing fully paid Equity shares of Rs. 100 each at a premium of 10%. How many Equity shares are issued to Varun Ltd.?$
›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 …

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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 2024Set 67/2/11 markMCQ

Q. 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 solution

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.

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

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CBSE 2023Set 67/1/11 markMCQ
$Q. Akshita Ltd. issued fully paid shares of ₹ 5,00,000 in purchase consideration of net assets of ₹ 4,70,000. The balance of ₹ 30,000 will be ______ to ______ account. (A) debited, Goodwill (B) debited, Capital Reserve (C) credited, Capital Reserve (D) credited, General Reserve$
(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. …
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CBSE 2023Set 67/3/11 markMCQ
$Q. Sunbeam Ltd. issued 20,000, 11% debentures of ₹ 100 each at a premium of 10%, redeemable at a premium of 5%. The 'Loss on Issue of Debentures Account' will debited by : (A) ₹ 3,00,000 (B) ₹ 2,00,000 (C) ₹ 1,00,000 (D) ₹ 22,00,000$
(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. …
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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 1: Pihu Ltd. – Issue of Debentures and Writing off Discount

Concept and Treatment

Calculations

Journal Entries in the Books of Pihu Ltd.

Part 2: Soma Ltd. – Purchase of Land from Mona Ltd.

Concept and Treatment

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