X. Ltd. issued 15,000, 10% debentures of Rs. 100 each. Give journal entries and present it in the balance shee

Numerical Questions · Q12

Q. X. Ltd. issued 15,000, 10% debentures of Rs. 100 each. Give journal entries and present it in the balance sheet in each of the following cases:

(i) The debentures are issued at a premium of 10%;

(ii) The debentures are issued at a discount of 5%;

(iii) The debentures are issued as a collateral security to bank against a loan of Rs. 12,00,000; and

(iv) The debentures are issued to a supplier of machinery costing Rs. 13,50,000.

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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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We will handle each case separately. The face value of each debenture is ₹100; 15,000 debentures means a total face value of ₹15,00,000.

(i) Issued at a premium of 10%

Issue price = ₹100 + 10% of ₹100 = ₹110 per debenture. Total amount received = 15,000 × ₹110 = ₹16,50,000.

Journal entry:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	16,50,000
To 10% Debentures A/c		15,00,000
To Securities Premium Reserve A/c		1,50,000
(Being 15,000, 10% debentures of ₹100 each issued at 10% premium)

Balance Sheet presentation (under 'Equity and Liabilities'):

Particulars	Note No.	Amount (₹)
1. Shareholders' Funds
(a) Share Capital		...
(b) Reserves and Surplus
Securities Premium Reserve		1,50,000
2. Non-Current Liabilities
(a) Long-term Borrowings
10% Debentures		15,00,000

(ii) Issued at a discount of 5%

Issue price = ₹100 − 5% of ₹100 = ₹95 per debenture. Total amount received = 15,000 × ₹95 = ₹14,25,000. Discount = ₹75,000.

Journal entry:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	14,25,000
Discount on Issue of Debentures A/c Dr.	75,000
To 10% Debentures A/c		15,00,000
(Being 15,000, 10% debentures of ₹100 each issued at 5% discount)

The discount is a fictitious asset and is shown under 'Other Current Assets' (or as a negative in the notes) until written off.

Balance Sheet presentation:

Particulars	Note No.	Amount (₹)
EQUITY AND LIABILITIES
1. Shareholders' Funds		...
2. Non-Current Liabilities
(a) Long-term Borrowings
10% Debentures		15,00,000
ASSETS
1. Non-Current Assets		...
2. Current Assets
(a) Other Current Assets
Discount on Issue of Debentures		75,000

(iii) Issued as collateral security to bank against a loan of ₹12,00,000

No cash is received. The debentures are issued as a security; the loan is recorded separately. The debentures are shown by way of a note or as a contingent liability.

Journal entry:

Particulars	Debit (₹)	Credit (₹)
Debenture Suspense A/c Dr.	15,00,000
To 10% Debentures A/c		15,00,000
(Being 15,000, 10% debentures of ₹100 each issued as collateral security against bank loan)

Balance Sheet presentation: The loan of ₹12,00,000 appears under 'Short-term Borrowings' (or 'Long-term Borrowings' depending on tenure). The debentures are shown as a note: "Debentures of ₹15,00,000 have been issued as collateral security."

(iv) Issued to a supplier of machinery costing ₹13,50,000 …

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For each case, the journal entries record the receipt of cash or asset (or the collateral arrangement) and the corresponding debenture liability, with any premium or discount adjusted through separate accounts. The Balance Sheet shows debentures under Non-Current Liabilities, with premium/discount shown as additions/deductions or as a note for collateral.

Let us understand the core concept first. A debenture is a written instrument acknowledging a debt; it is a liability for the company. When debentures are issued, the company receives cash (or another asset) and creates a liability. The accounting treatment depends on the terms of issue:

At par: Cash received = Face value of debentures.
At a premium: Cash received > Face value. The excess (premium) is credited to a separate account called "Securities Premium Reserve" (a reserve under Shareholders' Funds).
At a discount: Cash received < Face value. The shortfall (discount) is a loss; it is debited to "Discount on Issue of Debentures Account" (a fictitious asset, written off over the life of debentures).
As collateral security: The debentures are not issued for cash; they are given as a security for a loan. The loan is recorded separately, and the debenture liability is disclosed by way of a note in the Balance Sheet (no journal entry for the debentures themselves, only a memorandum entry).
To a supplier: The debentures are issued in exchange for an asset (machinery). The asset is recorded at its cost, and the debentures are issued at their face value; where the face value of the debentures issued exceeds the cost of the asset (as in case (iv) below), the difference is a discount on issue.

Now, let us solve each case step by step.

Case (i): Issued at a premium of 10%

Concept: The company receives more cash than the face value of debentures. The face value of 15,000 debentures × ₹100 = ₹15,00,000. Premium = 10% of ₹100 = ₹10 per debenture. Total cash received = Face value + Premium = ₹15,00,000 + ₹1,50,000 = ₹16,50,000.

Journal Entry:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	16,50,000
To Debentures Application & Allotment A/c		16,50,000
(Being application money received for 15,000 debentures at 10% premium)
Debentures Application & Allotment A/c Dr.	16,50,000
To 10% Debentures A/c		15,00,000
To Securities Premium Reserve A/c		1,50,000
(Being 15,000 debentures of ₹100 each issued at 10% premium)

Balance Sheet Presentation (Extract):

Particulars	Note No.	Amount (₹)
EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Reserves and Surplus
Securities Premium Reserve		1,50,000
2. Non-Current Liabilities
(a) Long-term Borrowings
10% Debentures		15,00,000
Total		16,50,000

Note

The Securities Premium Reserve is shown under Reserves and Surplus (Shareholders' Funds), not as a liability. The debentures are shown at face value under Non-Current Liabilities.

Case (ii): Issued at a discount of 5%

Concept: The company receives less cash than the face value. Discount = 5% of ₹100 = ₹5 per debenture. Total cash received = Face value – Discount = ₹15,00,000 – ₹75,000 = ₹14,25,000. The discount is a loss to be written off over the life of debentures.

Journal Entry:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	14,25,000
Discount on Issue of Debentures A/c Dr.	75,000
To Debentures Application & Allotment A/c		15,00,000
(Being application money received for 15,000 debentures at 5% discount)
Debentures Application & Allotment A/c Dr.	15,00,000
To 10% Debentures A/c		15,00,000
(Being 15,000 debentures of ₹100 each issued at 5% discount)

Balance Sheet Presentation (Extract):

Particulars	Note No.	Amount (₹)
EQUITY AND LIABILITIES
1. Non-Current Liabilities
(a) Long-term Borrowings
10% Debentures		15,00,000
Total		15,00,000
NOTE TO ACCOUNTS
Discount on Issue of Debentures (to be written off)		(75,000)

Watch out

The discount is not shown as a deduction from debentures in the Balance Sheet directly; it is shown as a separate item under "Other Current Assets" or as a deduction from Reserves (if written off). In practice, it is often shown as a "Miscellaneous Expenditure" to be amortised. The above presentation is a simplified version; the exact treatment depends on the accounting policy.

Case (iii): Issued as collateral security to bank against a loan of ₹12,00,000

Concept: The debentures are not issued for cash; they are given as a security for a loan. The loan is recorded as a liability. The debentures are not recorded as a liability in the books because they are merely a security; they will be returned when the loan is repaid. However, a note is required in the Balance Sheet to disclose the contingent liability.

Journal Entry (for the loan):

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	12,00,000
To Bank Loan A/c		12,00,000
(Being loan taken from bank against collateral security of debentures)

Memorandum Entry (for the debentures issued as collateral):

Particulars	Debit (₹)	Credit (₹)
Debentures Suspense A/c Dr.	15,00,000
To 10% Debentures A/c		15,00,000
(Being 15,000 debentures of ₹100 each issued as collateral security; entry reversed on repayment of loan)

Tip

Many textbooks do not pass a journal entry for the collateral debentures; they simply disclose the fact in a note. The above entry is a memorandum entry to keep track.

Balance Sheet Presentation (Extract):

Particulars	Note No.	Amount (₹)
EQUITY AND LIABILITIES
1. Non-Current Liabilities
(a) Long-term Borrowings

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Q.X. Ltd. issued 15,000, 10% debentures of Rs. 100 each. Give journal entries and present it in the balance sheet in each of the following cases:

Case (i): Issued at a premium of 10%

Case (ii): Issued at a discount of 5%

Case (iii): Issued as collateral security to bank against a loan of ₹12,00,000

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