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Do It Yourself · Q4

Q.M Ltd. issued 10,000, 8% debentures of ₹100 each at a premium of 10% on 1.1.2019. It purchased sundry assets of the value of ₹2,50,000 and took over the liabilities of ₹60,000 and issued 8% debentures at a discount of 5% to the vendor. On the same date, it took loan from the Bank for ₹1,00,000 and issued 8% debentures as Collateral Security. Record the necessary journal entries in the books of M Ltd. and prepare the extract of balance sheet on 31.03.2020. Ignore interest.

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Three independent transactions: (1) cash issue of 10,000 debentures at a 10% premium; (2) purchase of a business (net assets ₹1,90,000) settled by issuing 2,000 debentures at a 5% discount to the vendor; and (3) a ₹1,00,000 bank loan with debentures issued as collateral security (recorded by note only).

Concept

When debentures are issued for consideration other than cash, the number issued = purchase consideration ÷ issue price per debenture. Net assets taken over = assets less liabilities; where the consideration equals net assets there is no goodwill or capital reserve. Debentures issued as collateral security may be recorded either by a note only (Method 1) or by a Debenture Suspense A/c entry (Method 2) — either way they do not add to the debenture liability shown as a borrowing.

Working Note 1 — Cash issue at premium

  • 10,000 debentures × ₹100 = ₹10,00,000 face; premium at 10% = ₹1,00,000; cash received = ₹11,00,000.

Working Note 2 — Debentures issued to the vendor

  • Net assets taken over = ₹2,50,000 – ₹60,000 = ₹1,90,000 (= purchase consideration).
  • Issue price at 5% discount = ₹95 per debenture.
  • Number of debentures = ₹1,90,000 ÷ ₹95 = 2,000 debentures.
  • Face value = ₹2,00,000; discount on issue = 2,000 × ₹5 = ₹10,000.

Solution — Journal (in the books of M Ltd.)

DateParticularsL.F.Debit (₹)Credit (₹)
2019 Jan 1Bank A/c Dr.11,00,000
   To 8% Debentures A/c10,00,000
   To Securities Premium Reserve A/c1,00,000
(Issue of 10,000 debentures of ₹100 each at 10% premium)
2019 Jan 1Sundry Assets A/c Dr.2,50,000
   To Sundry Liabilities A/c60,000
   To Vendor A/c1,90,000
(Assets and liabilities taken over from the vendor)
2019 Jan 1Vendor A/c Dr.1,90,000
Discount on Issue of Debentures A/c Dr.10,000
   To 8% Debentures A/c2,00,000
(2,000 debentures issued to vendor at 5% discount, ₹1,90,000 ÷ ₹95)
2019 Jan 1Bank A/c Dr.1,00,000
   To Bank Loan A/c1,00,000
(Loan taken from bank, 8% debentures issued as collateral security — note only)

Working Note 3 — Collateral security

The debentures issued as collateral security are recorded by a note only (Method 1) — no journal entry is passed and they are not added to the debentures shown as a borrowing. (Under Method 2 the entry would be: Debenture Suspense A/c Dr / To 8% Debentures A/c for the collateral face value; it is then disclosed and deducted in the notes so the net debenture liability is unchanged.)

Extract of Balance Sheet of M Ltd. as at 31.03.2020

ParticularsNoteAmount (₹)
I. EQUITY AND LIABILITIES
(1) Shareholders' Funds — Reserves and Surplus11,00,000
(2) Non-Current Liabilities — Long-term Borrowings213,00,000
II. ASSETS
Other Non-Current Assets310,000

Note 1 — Reserves and Surplus …

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