Chapter 7: Issue and redemption of debentures

Important Questions

1. Distinguish between share and debenture?

2. Write the characteristic features of debenture?

3. XYZ Ltd. Issues Rs. 22,500, 12% debentures of Rs. 100 each payable Rs. 30 on application and remaining amount on allotment. The public applied for Rs. 20, 250 debentures which were fully allotted and all the relevant allotment money was duly received. Give journal entries in the books of ABC Ltd.

4. What do you mean by redemption of debentures?

5. What is debenture redemption reserve?

Sample Questions

1. CT Ltd. Issued 32,500, 10% debentures of Rs. 100 each, at a premium of Rs. 10 per debenture payable as follows:

1. The debentures were fully subscribed and all the money was duly received. Record the necessary entries in the books of the company. Show the amount will appear in balance sheet.

2. PK Ltd. Issued Rs. 26,650, 12% debentures of Rs. 100 each payable Rs. 40 on application, and Rs. 60 on allotment. The public applied for Rs. 37,310 debentures. Applications of 23,985 debentures were accepted in full, applications for 5,330 debentures were allotted 2,665 debentures and the remaining application were rejected. All the money was duly received. Journalise the transactions.

3. Varsha Ltd. Issued 1500, 15% debentures of Rs. 100 each on January 2014 at discount of 10% redeemable at premium of 10% out of profits. Give the journal entries at the time of issue and redemption of debentures if debentures are to be redeemed in lump sum at the end of 4th year. The directors decided to transfer the minimum amount to debenture Redemption Reserve on 31st December, 2014.

4. Suchita Ltd. Purchased machinery worth Rs. 8,41,500 from suppliers Ltd. The payment was made by issue of 12% debentures of 100 each. Pass the necessary journal entries for the purchase of machinery and issue of debentures when:-

1. Debentures are issued at par
2. Debentures are issued at 10% discount
3. Debentures are issued at 10% premium

5. Z Ltd. issued 5,000, 10% debentures of Rs. 100 each at a discount of 10% on 1.4.2019. The debentures are to be redeemed every year by draw of lots – 1,000 debentures to be redeemed every year starting on 31.03.2021. Record the necessary journal entries including the payment of interest and writing off the discount on issue of debentures. The interest is payable on September 30 and March 31. Z Ltd. closes its books of accounts on March 31 every year

MCQ

1. Sources of finance of the redemption of debentures are -

(a) Redemption out of profits
(b) Redemption out of capital
(c) The proceeds from fresh issue of shares/debentures
(d) All of the above

2. If redemption of debentures is made by conversion method, the amount to be transferred to “debenture redemption reserve account” will be equal to what percent of converted amount?

(a) 30

(b) 40

(c) 60

(d) Not required

3. X Co. Ltd. purchased assets worth Rs. 28,80,000. It issued debentures of Rs. 100 each at a discount of 4 per cent in full satisfaction of the purchase consideration. The number of debentures issued to vendor is:

(a) 30,000

(b) 28,800

(c) 32,000

4. Lions ltd. purchased a building for Rs. 5,00,000 payable as 15% in cash and balance by allotment of 9% debentures of Rs. 100 each at a premium of 25% each. Number of debentures issued will be -

(a) 5250

(b) 2000

(c) 3400

(d) 4400

5. If debentures of Rs. 4,50,000 are issued for the consideration of net assets of Rs. 5,00,000 balance Rs. 50,000 will be credited to

(a) Profit & Loss A/C

(b) Goodwill A/C

(c) General Reserve A/C

(d) Capital Reserve A/C