Q.On May 01, 2019 Amrit Ltd. issued 10,000, 8% debentures of ₹100 each at a discount of 10% redeemable at a premium of 10%. The issue was subscribed and amount was duly received. The company had balance of ₹70,000 in securities premium reserve on that date. On January 01, 2020, it issued 1,00,000 equity shares of ₹10 each at a premium of ₹1 per share. Issue was also fully subscribed. Pass the necessary journal entries.
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Start your 14-day free trial to unlock the full solution →Amrit Ltd.'s ₹2,00,000 debenture loss (discount ₹1,00,000 + redemption premium ₹1,00,000) is written off only after the January 2020 equity share issue raises the Securities Premium Reserve from ₹70,000 to ₹1,70,000 — so ₹1,70,000 comes from the reserve and only ₹30,000 is charged to the Statement of Profit and Loss.
Concept
The rule that "Securities Premium Reserve is used first, and only the shortfall goes to the Statement of Profit and Loss" is applied using the reserve's balance AT THE TIME OF WRITE-OFF, not necessarily its balance at the date of the debenture issue. If the company raises fresh securities premium (here, through a share issue at a premium) before the write-off is actually passed, that fresh premium is available too, and it directly reduces the burden that would otherwise fall on revenue profits.
Working Note
- Face value of debentures = 10,000 × ₹100 = ₹10,00,000
- Discount on issue (10%) = ₹1,00,000; money received on debentures = ₹10,00,000 – ₹1,00,000 = ₹9,00,000
- Premium payable on redemption (10%) = ₹1,00,000
- Loss on issue of debentures = discount ₹1,00,000 + premium on redemption ₹1,00,000 = ₹2,00,000
- Share issue: 1,00,000 shares × ₹10 = ₹10,00,000 share capital; premium ₹1 × 1,00,000 = ₹1,00,000; total received = ₹11,00,000
- Securities Premium Reserve after the share issue = ₹70,000 + ₹1,00,000 = ₹1,70,000
- Loss written off: ₹1,70,000 from Securities Premium Reserve (full balance) + ₹30,000 from the Statement of Profit and Loss = ₹2,00,000
Solution
Journal Entries in the books of Amrit Ltd.
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| 2019 May 01 | Bank A/c Dr. | 9,00,000 | ||
| To Debenture Application and Allotment A/c | 9,00,000 | |||
| (Debenture application money received) | ||||
| May 01 | Debenture Application and Allotment A/c Dr. | 9,00,000 | ||
| Loss on Issue of Debentures A/c Dr. | 2,00,000 | |||
| To 8% Debentures A/c | 10,00,000 | |||
| To Premium on Redemption of Debentures A/c | 1,00,000 | |||
| (Debenture allotment; Application and Allotment amount transferred) | ||||
| 2020 Jan. 01 | Bank A/c Dr. | 11,00,000 | ||
| To Share Application and Allotment A/c | 11,00,000 | |||
| (Share application money received) | ||||
| Jan. 01 | Share Application and Allotment A/c Dr. | 11,00,000 | ||
| To Share Capital A/c | 10,00,000 | |||
| To Securities Premium Reserve A/c | 1,00,000 |
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