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Illustrations · Illustration 7

Q.Rai Company purchased assets of the book value of ₹2,20,000 from another company and agreed to make the payment of purchase consideration by issuing 2,000, 10% debentures of ₹100 each at a premium of 10%. Record necessary journal entries.

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✓ Free question

Rai Company issues 2,000, 10% debentures of ₹100 each at a 10% premium to settle a vendor's claim of ₹2,20,000 — the face value of ₹2,00,000 goes to the Debentures account and the ₹20,000 premium goes to Securities Premium Reserve.

Concept

When debentures are issued at a premium as purchase consideration, the vendor's account is still debited for the full purchase consideration, but the credit is split: the face value of the debentures issued goes to the Debentures account, and the excess (the premium) goes to Securities Premium Reserve A/c, since the company owes the vendor no more once the market value of what it hands over equals what it owes.

Working Note

Number of debentures issued = 2,000 (given). Face value credited to Debentures A/c = 2,000 × ₹100 = ₹2,00,000. Premium credited to Securities Premium Reserve A/c = 2,000 × ₹10 (10% of ₹100) = ₹20,000. Total credit = ₹2,20,000, which equals the vendor's claim.

Solution

Books of Rai Company Limited

Journal

DateParticularsL.F.Debit (₹)Credit (₹)
Sundry Assets A/c Dr.2,20,000
To Vendors A/c2,20,000
(Assets purchased from vendors)
Vendors A/c Dr.2,20,000
To 10% Debentures A/c2,00,000
To Securities Premium Reserve A/c20,000
(Allotment of 2,000 debentures of ₹100 each at a premium of 10% as purchase consideration)
✓Final answer

Sundry Assets A/c Dr. ₹2,20,000 To Vendors A/c ₹2,20,000; then Vendors A/c Dr. ₹2,20,000 To 10% Debentures A/c ₹2,00,000, To Securities Premium Reserve A/c ₹20,000.

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