Journal Entries in the Books of A. Ltd.

Step 1 – Application Money Received

The company received applications for 4,800 debentures at ₹20 each.

• Money received = 4,800 × ₹20 = ₹96,000

Step 2 – Application Money Transferred, Adjusted and Refunded

The 800 applicants who applied for 800 debentures were allotted only 400 (a pro-rata allotment), so their surplus application money is adjusted against allotment, not refunded. Only the 400 fully-rejected applications are refunded.

• Transferred to 9% Debentures A/c (4,000 allotted × ₹20) = ₹80,000
• Excess application money on the pro-rata group adjusted to allotment ((800 − 400) × ₹20) = ₹8,000
• Refund to fully-rejected applicants (400 × ₹20) = ₹8,000

Step 3 – Allotment Money Due

Allotment due on 4,000 debentures @ ₹20 each = ₹80,000

Step 4 – Allotment Money Received

Allotment due is ₹80,000; ₹8,000 has already been adjusted from the excess application money, so only ₹72,000 is received in cash.

Step 5 – First Call Money Due

First call on 4,000 debentures @ ₹30 each = ₹1,20,000

Step 6 – First Call Money Received

| Date | Particulars | L.F. | Debit (₹) | Credit (₹) | …

Concept and Accounting Treatment

When a company issues debentures, it is borrowing money from the public. The accounting follows the same pattern as share capital — money is collected in stages (application, allotment, calls). The key rule: Application money is not income; it is a liability until the debentures are allotted. If applications exceed the issue, the company must either refund the excess or adjust it against future calls.

Here, the issue was for 4,000 debentures at ₹100 each, payable in four instalments. The public applied for 4,800 debentures — an oversubscription of 800. The company decided:

• 3,600 applications (for 3,600 debentures) accepted in full.
• 800 applications (for 800 debentures) allotted only 400 debentures — a 50% pro-rata allotment.
• 400 applications (for 400 debentures) rejected outright.

The excess application money from the pro-rata group (800 applicants paid for 800 debentures but got only 400) must be adjusted against allotment or refunded. Since the problem says "all money called and duly received," we assume the excess was adjusted against allotment money due.

Solution: Journal Entries in the Books of A. Ltd.

Step 1: Receipt of Application Money

The company received applications for 4,800 debentures at ₹20 each.

Working Note 1: Application money received = 4,800 debentures × ₹20 = ₹96,000.

Step 2: Transfer of Application Money to Debentures Account (for Allotted Debentures)

Out of 4,800 applications, 4,000 debentures were allotted (3,600 full + 400 pro-rata). Application money on these 4,000 debentures = 4,000 × ₹20 = ₹80,000.

Step 3: Refund of Application Money on Rejected Applications

400 applications were rejected. Money on these = 400 × ₹20 = ₹8,000.

Step 4: Adjustment of Excess Application Money on Pro-rata Allotment

The 800 applicants who applied for 800 debentures were allotted only 400. They paid ₹20 per debenture on 800 debentures = ₹16,000. But only 400 debentures were allotted, so application money due on allotted portion = 400 × ₹20 = ₹8,000. The excess = ₹16,000 - ₹8,000 = ₹8,000. This excess is adjusted against allotment money due from these applicants.

Allotment money due on 4,000 debentures = 4,000 × ₹20 = ₹80,000. But from the pro-rata group, ₹8,000 is already received as excess application money. So net allotment money to be called = ₹80,000 - ₹8,000 = ₹72,000.

Working Note 2: Excess application money = (800 - 400) × ₹20 = 400 × ₹20 = ₹8,000.

Step 5: Allotment Money Due and Received

Allotment money due on 4,000 debentures = ₹80,000. After adjustment of ₹8,000, net amount to be received = ₹72,000.