TV Components Ltd., issued 10,000, 12% debentures of ₹100 each at a discount of 5% payable as follows:
| Particulars | Amount (₹) |
|---|---|
| On application | 40 |
| On allotment | 55 |
Show the journal entries including those for cash, assuming that all the instalments were duly collected. Also show the relevant portion of the balance sheet.
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Start your 14-day free trial to unlock the full solution →TV Components Ltd. issues 10,000, 12% debentures of ₹100 each at a 5% discount; the Debentures account is still credited at the full ₹10,00,000 face value, with the ₹50,000 shortfall booked as Discount on Issue of Debentures rather than reducing the liability.
Concept
When a debenture is issued below its face value, the difference is a discount — a capital loss to the company that is not netted against the Debentures account. Instead, the full face value is always credited to the Debentures account, and the discount is debited to a separate "Discount on Issue of Debentures" account at the time the shortfall becomes apparent (typically on allotment, since that is when the total issue price is fixed against the face value). Until written off, this discount behaves like a fictitious asset: the portion expected to be written off within the next 12 months (or operating cycle) is shown under Other Current Assets, and the remainder under Other Non-Current Assets. The Companies Act, 2013 places no restriction on issuing debentures at a discount.
Working Note
- Total face value = 10,000 × ₹100 = ₹10,00,000
- Discount @ 5% of face value = ₹50,000
- Application money received = 10,000 × ₹40 = ₹4,00,000
- Allotment money due (cash) = 10,000 × ₹55 = ₹5,50,000
- Amount credited to Debentures A/c on allotment = ₹5,50,000 (cash due) + ₹50,000 (discount) = ₹6,00,000, so that Debentures A/c totals ₹4,00,000 + ₹6,00,000 = ₹10,00,000, the full face value
- Net cash actually collected = ₹4,00,000 + ₹5,50,000 = ₹9,50,000
Solution
Books of TV Components Ltd. — Journal
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 4,00,000 | |||
| To 12% Debenture Application A/c | 4,00,000 | |||
| (Receipt of application money @ ₹40 per debenture) | ||||
| 12% Debenture Application A/c Dr. | 4,00,000 | |||
| To 12% Debenture A/c | 4,00,000 | |||
| (Transfer of application money to debenture account) | ||||
| 12% Debenture Allotment A/c Dr. | 5,50,000 | |||
| Discount on Issue of Debentures A/c Dr. | 50,000 | |||
| To 12% Debenture A/c | 6,00,000 | |||
| (Allotment money due on debentures, including discount) | ||||
| Bank A/c Dr. | 5,50,000 | |||
| To 12% Debenture Allotment A/c | 5,50,000 | |||
| (Receipt of allotment money on debentures) |
The Discount on Issue of Debentures is not written off in a single entry at issue — it is carried as a fictitious asset (split between current and non-current) and written off over the debentures' life against Securities Premium Reserve or the Statement of Profit and Loss. …
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