X. Ltd. invited applications for the issue of 10,000, 14% debentures of Rs. 100 each payable as to Rs. 20 on a

Numerical Questions · Q7

Q. X. Ltd. invited applications for the issue of 10,000, 14% debentures of Rs. 100 each payable as to Rs. 20 on application, Rs. 60 on allotment and the balance on call. The company receives applications for 13,500 debentures, out of which applications for 8,000 debentures are allotted in full, applications for 5,000 debentures were allotted 40% of received application, and the remaining applications were rejected. The surplus money on partially allotted applications is utilised towards allotment. All the sums due are duly received. Record necessary journal entries regarding issue of debentures.

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Concept understanding — Share Capital Accounting

Let’s begin with something you already know from everyday life.

Imagine you and two friends decide to start a small business — say, a tiffin service. You each put in some money to buy utensils, a stove, and ingredients. That money you all contributed is the capital of the business. The business doesn’t own that money; it owes it back to you, the owners. In accounting, we call you the shareholders, and the money you put in is share capital.

Now scale that up to a company. A company needs huge amounts of money to build factories, buy machinery, or develop software. It raises this money by selling shares — small units of ownership. When you buy a share, you become a part-owner of that company. The total money collected from all shareholders is the company’s share capital.

Why does share capital matter in accounting?

Because the company is a separate legal person. It does not own the money — the shareholders do. So the company must record exactly how much it has collected from whom, and in what form. This affects the balance sheet (where share capital appears under Equity and Liabilities) and the cash flow (money coming in from shareholders is a financing activity).

The precise meaning (NCERT Class 12)

Share Capital is the money raised by a company by issuing shares to the public or to promoters. It is shown under the head Shareholders’ Funds in the Balance Sheet.

There are two main types of shares:

Equity shares – ordinary shares; owners get dividends only if the company makes profit.
Preference shares – owners get a fixed dividend before equity shareholders, but usually have no voting rights.

Accounting treatment — the journal entries

When a company issues shares, it follows a standard sequence. Let’s say a company issues 10,000 equity shares of ₹10 each at par (i.e., at face value). The money is received in two instalments: ₹4 on application, ₹6 on allotment.

Step 1: Application money received

Date	Particulars	Debit (₹)	Credit (₹)
	Bank A/c Dr.	40,000
	To Share Application A/c		40,000
(Being application money received on 10,000 shares @ ₹4 each)

Step 2: Transfer application money to Share Capital

Date	Particulars	Debit (₹)	Credit (₹)
	Share Application A/c Dr.	40,000
	To Share Capital A/c		40,000
(Being application money transferred to Share Capital)

Step 3: Allotment money due

Date	Particulars	Debit (₹)	Credit (₹)
	Share Allotment A/c Dr.	60,000
	To Share Capital A/c		60,000
(Being allotment money due on 10,000 shares @ ₹6 each)

Step 4: Allotment money received

Date	Particulars	Debit (₹)	Credit (₹)
	Bank A/c Dr.	60,000
	To Share Allotment A/c		60,000
(Being allotment money received)

Note

If shares are issued at a premium (e.g., ₹10 face value, issued at ₹12), the extra ₹2 goes to a separate account called Securities Premium Reserve A/c. It is not part of share capital.

The Balance Sheet format (as per NCERT)

Under Equity and Liabilities, share capital appears like this:

Particulars	Note No.	Amount (₹)
1. Shareholders’ Funds
(a) Share Capital	1	1,00,000
(b) Reserves and Surplus	2	20,000
2. Non-Current Liabilities	...	...
3. Current Liabilities	...	...

And Note 1 (Share Capital) is typically shown as:

Particulars	Amount (₹)
Authorised Capital
1,00,000 Equity Shares of ₹10 each	10,00,000
Issued Capital
80,000 Equity Shares of ₹10 each	8,00,000
Subscribed and Paid-up Capital
80,000 Equity Shares of ₹10 each fully paid	8,00,000

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We first determine the allotment pattern and the treatment of excess application money.

Step 1 – Allotment pattern

Applications for 8,000 debentures → allotted in full (8,000).
Applications for 5,000 debentures → allotted 40% = 2,000 debentures.
Remaining applications = 13,500 − (8,000 + 5,000) = 500 → rejected.

Total allotted = 8,000 + 2,000 = 10,000 debentures (as per issue).

Step 2 – Money received on application

Application money = ₹20 per debenture.

On 8,000 (full allotment): 8,000 × ₹20 = ₹1,60,000
On 5,000 (partial allotment): 5,000 × ₹20 = ₹1,00,000
On 500 (rejected): 500 × ₹20 = ₹10,000

Total application money received = ₹2,70,000.

Step 3 – Application money adjusted

For fully allotted (8,000): ₹1,60,000 is retained.
For partially allotted (2,000 out of 5,000 applied): Application money on 2,000 = ₹40,000 is retained. The surplus on the remaining 3,000 applications = 3,000 × ₹20 = ₹60,000 is to be adjusted towards allotment.
For rejected (500): ₹10,000 is refunded.

Step 4 – Allotment money due and adjusted

Allotment money = ₹60 per debenture on 10,000 debentures = ₹6,00,000.

From the surplus of partially allotted applicants: ₹60,000 is adjusted. So net allotment money to be called = ₹6,00,000 − ₹60,000 = ₹5,40,000.

Step 5 – Call money

Balance per debenture = ₹100 − (₹20 + ₹60) = ₹20.

On 10,000 debentures = ₹2,00,000.

Journal Entries

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	2,70,000
To Debenture Application A/c		2,70,000
(Being application money received on 13,500 debentures @ ₹20 each)
Debenture Application A/c Dr.	2,70,000
To 14% Debentures A/c (10,000 × ₹20)		2,00,000
To Debenture Allotment A/c (surplus adjusted)		60,000
To Bank A/c (refund to rejected)		10,000
(Being application money transferred: ₹2,00,000 to debentures, ₹60,000 adjusted towards allotment, ₹10,000 refunded)

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The company issued 10,000 debentures at par, received excess applications, applied pro-rata allotment (full to 8,000, 40% to 5,000, rejected 500), adjusted surplus application money towards allotment, and received all calls. Journal entries record application, allotment, call, and refund/rejection.

Concept and Accounting Treatment

When a company issues debentures, it follows the same basic procedure as for shares under the Companies Act. The key principle is that debentures are a liability (unlike shares which are equity), so the "Debentures Account" is credited with the face value when the amount becomes due. The application, allotment, and call accounts are temporary accounts that track the stage-wise collection of money from debentureholders.

The tricky part here is pro-rata allotment. When applications exceed the number of debentures offered, the company cannot simply accept all. It must decide a fair method to allot the limited debentures among applicants. The standard approach is:

Full allotment to some applicants (here, 8,000 debentures).
Partial allotment to others (here, 40% of the 5,000 applied, i.e., 2,000 debentures).
Rejection of the remaining applications (here, 500 debentures).

The surplus application money from partially allotted applicants is adjusted towards the allotment due from them. This avoids the need to refund and recollect the same money. Any excess after adjusting allotment is refunded.

Watch out

Common Pitfall

Students often forget that the surplus application money is first adjusted against allotment, and only the remaining excess (if any) is refunded. Also, the "Debentures Account" is credited only when the final call is made, not at the application stage.

Step 1: Determine the Allotment Pattern

Total applications received: 13,500 debentures

Debentures issued: 10,000

Category A: 8,000 applications → allotted in full (8,000 debentures)
Category B: 5,000 applications → allotted 40% = 2,000 debentures
Category C: Remaining 13,500 - (8,000 + 5,000) = 500 applications → rejected

Total allotted: 8,000 + 2,000 = 10,000 debentures

Step 2: Calculate Money Received and Adjustments

Application money: ₹20 per debenture

Received on 13,500 applications: 13,500 × ₹20 = ₹2,70,000
Application money on allotted debentures (10,000): 10,000 × ₹20 = ₹2,00,000
Application money on rejected applications (500): 500 × ₹20 = ₹10,000 (to be refunded)
Surplus application money on partially allotted (Category B): 5,000 applied × ₹20 = ₹1,00,000 received, but only 2,000 debentures × ₹20 = ₹40,000 is required. Surplus = ₹60,000.

Allotment money: ₹60 per debenture

Total due on 10,000 debentures: 10,000 × ₹60 = ₹6,00,000
From Category A (full): 8,000 × ₹60 = ₹4,80,000
From Category B (partial): 2,000 × ₹60 = ₹1,20,000
Surplus from Category B application (₹60,000) is adjusted against this ₹1,20,000, so net cash to collect from Category B = ₹60,000
From Category C: Nil (rejected)

Call money: Balance = ₹100 - (₹20 + ₹60) = ₹20 per debenture

Due on 10,000 debentures: 10,000 × ₹20 = ₹2,00,000

Step 3: Journal Entries

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	2,70,000
To Debenture Application A/c		2,70,000
(Being application money received on 13,500 debentures @ ₹20 each)

Debenture Application A/c Dr.	2,70,000
To 14% Debentures A/c		2,00,000
To Debenture Allotment A/c		60,000
To Bank A/c		10,000
(Being application money transferred: ₹2,00,000 for 10,000 debentures allotted, ₹60,000 surplus adjusted towards allotment, and ₹10,000 refunded for rejected applications)

Debenture Allotment A/c Dr.	6,00,000
To 14% Debentures A/c		6,00,000
(Being allotment money due on 10,000 debentures @ ₹60 each)

Bank A/c Dr.	5,40,000
To Debenture Allotment A/c		5,40,000
(Being allotment money received: ₹6,00,000 due less ₹60,000 already adjusted from application surplus)

Debenture Call A/c Dr.	2,00,000
To 14% Debentures A/c		2,00,000
(Being final call money due on 10,000 debentures @ ₹20 each)

Bank A/c Dr.	2,00,000
To Debenture Call A/c		2,00,000
(Being call money received on 10,000 debentures)

Tip

Shortcut

Instead of making separate entries for allotment and call, you can combine them into one entry when the amounts are due simultaneously. But for clarity, the stepwise method is safer in exams.

Step 4: Ledger Accounts (T-accounts)

Bank Account

Particulars	Amount (₹)	Particulars	Amount (₹)
To Debenture Application A/c	2,70,000	By Debenture Application A/c (refund)	10,000
To Debenture Allotment A/c	5,40,000	By Balance c/d	10,00,000
To Debenture Call A/c	2,00,000
Total	10,10,000	Total	10,10,000

Debenture Application Account

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Concept and Accounting Treatment

Step 1: Determine the Allotment Pattern

Step 2: Calculate Money Received and Adjustments

Step 3: Journal Entries

Step 4: Ledger Accounts (T-accounts)

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