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Q.

XYZ Industries Ltd., issued 2,000, 10% debentures of ₹100 each, at a premium of ₹10 per debenture payable as follows:

ParticularsAmount (₹)
On application50
On allotment60

The debentures were fully subscribed and all money was duly received. Record the journal entries in the books of a company. Show how the amounts will appear in the balance sheet.

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✓ Free question

XYZ Industries Ltd. issues 2,000, 10% debentures of ₹100 each at a ₹10 premium; the Debentures account is credited only at the ₹2,00,000 face value, while the ₹20,000 excess is credited to Securities Premium Reserve.

Concept

A debenture is issued at a premium when the issue price exceeds its face value. The premium is a capital receipt belonging to the shareholders, so it is credited to a separate Securities Premium Reserve Account, shown under "Reserves and Surplus" on the liabilities side of the balance sheet. The premium becomes due whenever the instalment that carries it (usually allotment) is recorded: that instalment account is debited with the full amount due, the Debentures account is credited only with the face-value portion, and Securities Premium Reserve is credited with the premium portion. The Debentures account itself is never credited with more than the face value, regardless of the issue price.

Working Note

  • Total face value = 2,000 × ₹100 = ₹2,00,000
  • Total premium = 2,000 × ₹10 = ₹20,000
  • Application money = 2,000 × ₹50 = ₹1,00,000
  • Allotment money due = 2,000 × ₹60 = ₹1,20,000, made up of ₹50 face value + ₹10 premium per debenture, i.e. ₹1,00,000 (face value) + ₹20,000 (premium)

Solution

Books of XYZ Industries Limited — Journal

DateParticularsL.F.Debit (₹)Credit (₹)
Bank A/c Dr.1,00,000
To 10% Debenture Application A/c1,00,000
(Application money ₹50 per debenture received)
10% Debenture Application A/c Dr.1,00,000
To 10% Debentures A/c1,00,000
(Transfer of application money to debenture account)
10% Debenture Allotment A/c Dr.1,20,000
To 10% Debentures A/c1,00,000
To Securities Premium Reserve A/c20,000
(Allotment money due on debentures, including the premium)
Bank A/c Dr.1,20,000
To 10% Debenture Allotment A/c1,20,000
(Allotment money received)

Balance Sheet of XYZ Industries Limited as at ... (extract)

ParticularsNote No.Amount (₹)
I. Equity and Liabilities
1. Shareholders' Funds — Reserve and Surplus120,000
2. Non-current Liabilities — Long-term borrowings22,00,000
Total2,20,000
II. Assets
Current Assets — Cash and cash equivalents2,20,000

Notes to Accounts

ParticularsAmount (₹)
1. Reserve and Surplus — Securities Premium Reserve20,000
2. Long-term borrowings — 2,000, 10% debentures of ₹100 each2,00,000
3. Cash and cash equivalents — Cash at bank2,20,000
Watch out

Never credit the Debentures Account with the issue price (face value + premium). It must always show only the face value; the premium is a separate credit to Securities Premium Reserve.

✓Final answer

Debentures A/c is credited with ₹2,00,000; Securities Premium Reserve is credited with ₹20,000; cash at bank of ₹2,20,000 is received in full.

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