FINAL

FINAL
Inter AUDIT
DT
Accounting
PRACTICE
100 IMPORTANT
QUESTIONS
Practice questions
QUESTIONS
CHAPTER 2
 Redemption of Debentures

Question 1

A company purchased its own 11% debentures in the open market for Rs. 50,00,000 (cum-
interest). The interest amount included in the purchase price is Rs. 1,50,000. The face value
of the debentures purchased is Rs. 52,00,000. The company cancelled the debentures so
purchased.
Pass Journal Entries in the books of the company for purchase and immediate cancellation of
debentures.

Answer

Journal Entries
Rs. Rs.
11% Own Debentures A/c Debenture Dr. 48,50,000
interest A/c Dr. 1,50,000
To Bank 50,00,000

[Being purchase of own 11% debentures cum interest

from the market]
11% Debentures A/c Dr. 52,00,000

To 11% Own Debentures A/c To 48,50,000

Capital Reserve 3,50,000

[Being the 11% own debentures purchased from open
market cancelled and profit thereon transferred to Capital
Reserve A/c]

Question 2

The summarised Balance Sheet of Dee Limited on 31st March, 2009 was as follows:

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 Balance Sheet as at 31st March, 2009

Liabilities Amount Assets Amount

Rs. Rs.
Share capital: Authorised Fixed assets (at cost less 8,00,000
capital depreciation)
50,000, Equity shares of Rs. 10 Debenture redemption fund
each 5,00,000 investment 2,00,000

Issued and subscribed capital Cash balance 2,50,000

25,000 Equity shares of Rs. 10 Other current assets 10,00,000
each fully paid up 2,50,000
Reserves and surplus:

General reserve 2,75,000

Profit and loss A/c 1,00,000

Debenture redemption reserve 2,50,000

Secured loans:

12% Convertible debentures 5,00,000

(5,000 Debentures of Rs. 100

each)

Other secured loans 2,50,000

Current liabilities and 6,00,000

provisions

Proposed dividend 25,000

22,50,000 22,50,000

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At the General Meeting it was resolved to:

1. Pay proposed dividend of 10% in cash.

2. Give existing shareholders the option to purchase one share of Rs. 10 each at Rs.
15 for every five shares held. This option was taken up by all the shareholders.

3. Redeem the debentures at a premium of 5% and also confer option to the

debenture holders to convert 50% of their holding into equity shares at a
predetermined price of Rs. 15 per share and balance payment to be made in cash.

Holders of 3,000 debentures opted to get their debentures redeemed in cash only while
the rest opted for getting the same converted into equity shares as per the terms of issue.
Debenture redemption fund investment realized Rs. 1,80,000 on sales.
You are required to redraft the Balance Sheet after giving effects to the right issue and
redemption of debentures. Also show the calculations in respect of number of equity shares
issued and cash payment.

Answer
(a) Balance Sheet of Dee Ltd.

as at 31st March, 2009

Particulars Notes No. Rs. ’000

EQUITY AND LIABILITIES

1 Shareholders' funds
3,70,000
(a) Share capital 1
6,40,000
(b) Reserves and Surplus 2

3 Non-current liabilities
3 2,50,000
Long-term borrowings
6,00,000
4 Current liabilities
Total 18,60,000

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 ASSETS

1 Non-current assets

Fixed assets
8,00,000
Tangible assets
2 Current assets
10,00,000
(a) Other current assets
60,000
(b) Cash and cash equivalents
18,60,000

Total

Notes to Accounts
Rs. ’000

1. Share Capital

Authorised Capital
50,000 Equity shares of Rs. 10 each 5,00,000

Issued and subscribed capital

37,000 Equity shares of Rs. 10 each fully paid up
Total 3,70,000

2. Reserves and Surplus

General reserve (W.N.2)
Securities premium (W.N.3) 4,80,000

Profit and loss A/c 60,000

1,00,000
Total
6,40,000
3. Long-term borrowings

Secured Loan
2,50,000

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 (b)

Calculation of number of equity shares issued:

I. Number of equity shares issued as right issue (25,000 shares ÷ 5) 5,000 shares

II. Debentureholders who opted for the scheme of conversion into

equity shares 2,000 debentureholders opted for the scheme

Total value (2,000 debentures × Rs. 100) Rs. 2,00,000

Premium on redemption @ 5% Rs. 10,000

Rs. 2,10,000
50% of their holding converted into equity shares
Rs. 1,05,000
Number of equity shares to be issued to debenture holders

𝑅𝑠. 1,05,000
=[ ]
𝑅𝑠. 15
7,000 shares
Total number of equity shares issued (5,000 + 7,000) shares
12,000 shares

(c) Cash payment to debenture holders:

Rs.
I. 3,000 Debenture holders preferred cash
Total cash paid to them 3,00,000
Premium on redemption @ 5% 15,000 3,15,000
II. 2,000 Debenture holders opted for the scheme
Total value 2,00,000
Add: Premium on redemption @ 5% 10,000
2,10,000
50% of their value converted into equity shares 1,05,000
Balance paid to debenture holders in cash 1,05,000
Total cash paid to debenture holders 4,20,000

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Working Notes:

Debenture Redemption Reserve Account

Particulars Rs. Particulars Rs.
To Premium on redemption of 25,000 By Balance b/d 2,50,000
debentures (15,000 + 10,000)
To Loss on sale of Debenture 20,000
Redemption Reserve
Investment
To General Reserve 2,05,000
2,50,000 2,50,000

General Reserve Account

Particulars Rs. Particulars Rs.

To Balance c/d 4,80,000 By Balance b/d 2,75,000
By Debenture redemption reserve
2,05,000
(W.N.1)
4,80,000 4,80,000

Calculation of Securities Premium

Number of equity shares of Rs. 10 issued at Rs. 15 per share 12,000 shares
Security premium per share Rs. 5
Total securities premium (12,000 shares x Rs. 5) Rs. 60,000

Cash Account

Particulars Amount Particulars Amount

(Rs. ) (Rs. )

To Balance b/d 2,50,000 By Proposed dividend 25,000

To Equity shareholders 75,000 By Debenture holders 4,20,000

(5,000×15) (Rs. 1,05,000+Rs. 3,15,000)

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To Sale of Debenture By Balance c/d 60,000
Redemption Reserve
Investment 1,80,000

5,05,000 5,05,000

Question 3

A Company had issued 20,000, 13% Convertible debentures of Rs.100 each on 1st April, 2007.

The debentures are due for redemption on 1st July, 2009. The terms of issue of debentures
provided that they were redeemable at a premium of 5% and also conferred option to the
debentureholders to convert 20% of their holding into equity shares (Nominal value Rs. 10)
at a price of Rs. 15 per share. Debentureholders holding 2,500 debentures did not exercise
the option. Calculate the number of equity shares to be allotted to the Debentureholders
exercising the option to the maximum.

Answer

Calculation of number of equity shares to be allotted

Number of
debentures

Total number of debentures 20,000

Less: Debenture holders not opted for conversion (2,500)

Debenture holders who opted for conversion 17,500

Option for conversion 20%

Number of debentures to be converted (20% of 17,500) 3,500

Redemption value of 3,500 debentures at a premium of 5% [3,500 x (100+5)] Rs. 3,67,500

Equity shares of Rs. 10 each issued on conversion
[Rs. 3, 67,500/ Rs. 15] 24,500 shares

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Question 4

Rama Limited issued 8% Debentures of Rs. 3,00,000 in earlier year on which interest is payable

half yearly on 31st March and 30th September. The company has power to purchase its own
debentures in the open market for cancellation thereof. The following purchases were made

during the financial year 2009-10 and cancellation made on 31st March, 2010:

a) On 1st April, Rs. 50,000 nominal value debentures purchased for Rs. 49,450, ex-
interest.

b) On 1st September, Rs. 30,000 nominal value debentures purchased for Rs.
30,250 cum interest.

Show the Journal Entries (without narrations) for the transactions held in the year 2009-10.

Answer

In the books of Rama Limited

Journal Entries
Dr. (Rs.) Cr.
(Rs.)

1st April, 2009 Own debentures A/c Dr. 49,450

To Bank A/c 49,450

(Being own 8% debentures of face value
Rs. 50,000 purchased ex- interest)

1st Sept. 2009 Own debentures A/c Dr. 29,250

Interest on own debentures A/c Dr. 1,000
5
[30,000 × 8% × ]
12
30,250
To Bank A/c
(Being own 8% debentures of nomnal value
Rs. 30,000 purchased cum interest)

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 30th Sept. 2009 Interest on debentures A/c Dr. 12,000

To Bank A/c 8,800

To Interest on own debentures A/c 3,200
(Being the interest @8% on total 8% debentures
booked as revenue and interest on
Rs. 80,000 own 8% debentures credited as
incnome and balance paid to debenture holders)

31st March, 2010 Interest on debentures A/c Dr. 12,000

To Bank A/c 8,800

To Interest on own debentures A/c 3,200
(Being interest @8% paid on 8% debentures to
the tune of Rs. 2,20,000 after adjustment of
interest on Rs. 80,000 own debentures for 6
month )

31st March, 2010 8% Debentures A/c Dr. 80,000

To Own debentures A/c 78,700

To Profit on cancellation of Debentures A/c 1,300
(Being cancellation of own 8% debentures
purchased during the year)

31st March, 2010 Interest on own debentures A/c Dr. To Profit 5,400
and Loss A/c (3,200+3,200- 1,000) 5,400
(Being total interest credited on own 8%
debentures credited to P/L A/c)

31st March, 2010 Profit and Loss A/c (1,000+12,000) Dr. 24,000

To Interest on debentures A/c 24,000

(Being total interest on 8% debentures
transferred to P/L A/c at the end of the year)

31st March, 2010 Profit on cancellation of debentures A/c Dr. 1,300

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 To Capital reserve A/c 1,300

(Being profit on cancellation of debentures

transferred to capital Reserve A/c)

Question 5

The following balances appeared in the books of Paradise Ltd on 1-4-2011:

i. 12 % Debentures Rs. 7,50,000

ii. Balance of Sinking Fund Rs. 6,00,000

iii. Sinking Fund Investment Rs. 6,00,000 represented by 10% Rs. 6,50,000
secured bonds of government of India

Annual contribution to the Sinking Fund was Rs. 1,20,000 made on 31st March each year.
On 31-3-2012,balance at bank was Rs. 3,00,000 before receipt of interest. The company
sold the investment at 90%, for redemption of debentures at a premium of 10% on the
above date.

You are required to prepare the following accounts for the year ended 31st march, 2012:

1) Debentures Account

2) Sinking Fund Account

3) Sinking Fund Investment Account

4) Bank Account

5) Debenture Holders Account

Answer

12% Debentures Account

Date Particulars Rs. Date Particulars Rs.

31st March, To Debenture 7,50,000 1st April, By Balance b/d 7,50,000

2012 holders A/c 2011

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 7,50,000 7,50,000

Sinking Fund Account

Date Particulars Rs. Date Particulars Rs.

31st March, To Sinking 15,000 1st April, By Balance b/d 6,00,000

2012 Fund 2011

Investment
A/c 10% Sec.
Bond (loss)

31st March, To General 31st March, By Profit and loss

2012 reserve A/c 7,70,000 2012 A/c (tfr for yr 11-12 1,20,000
(Bal.fig.)
By Interest on
sinking fund A/c
[Interest on
10% Govt. bond
(Rs. 6,50,000 x
10%)] 65,000

7,85,000 7,85,000

Sinking Fund Investment Account (10% Secured Bonds of Govt.)

Rs. Rs.

1st April, To Balance b/d 6,00,000 31st By Bank A/c 5,85,000

2011 March, (6,50,000 x 90% =

2012 5,85,000)
By Sinking Fund

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 A/c 15,000
6,00,000 6,00,000

Bank Account

Rs. Rs.

31st March, To Balance b/d 3,00,000 31st By 12%

2012 To Sinking Fund A/c March, Debenture 8,25,000

(Interest) 65,000 2012

To Sinking fund 31 March By Balance

Investment A/c 5,85,000 c/d 1,25,000
9,50,000 9,50,000

Debenture holders Account

Rs. Rs.

31st March, To Bank A/c 8,25,000 31st By 12% 7,50,000

2012 March, Debentures

2012
By Premium on
redemption of
75,000
debentures

8,25,000 8,25,000

Question 6

Himalayas Ltd. had Rs. 10,00,000/- 8 % Debentures of Rs. 100 each as on 31st March, 2011.
The company purchased in the open market following debentures for immediate cancellation:

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 On 01-07-2011 - 1000 debentures @ Rs. 97/ (cum interest)

On 29-02-2012 - 1800 debentures @ Rs. 99/ (ex interest)

Debenture interest due date is 30th September and 31st March.
Give Journal Entries in the books of the company for the year ended 31 t March, 2012.

Answer

In the books of Himalayas Ltd.

Journal Entries

Dr. Cr.

Rs. Rs.

1.07.2011 Own Debentures A/c Dr. 95,000

Debenture Interest Account A/c Dr. 2,000

[1,000×100×8%× (3/12)]
97,000
To Bank A/c

(Being 1,000 8% Debentures purchased @

Rs. 97 cum interest for immediate
cancellation)

1.07.2011 8% Debentures A/c Dr. 1,00,000

To Own Debentures A/c 95,000

To Capital reserve A/c (Profit on 5,000

cancellation of debentures)

(Being 1,000 8% debentures cancelled and profit

thereon transferred to capital reserve account)

30.09.2011 Debenture interest A/c [9,000 Dr. 36,000

× 100 × 8% × (1/2)]
36,000
To Debenture holders A/c

(Being interest accrued on 9000 8%

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 debentures for 6 months credited to debenture
holders.)

Debenture holders To Dr. 36,000

Bank A/c 36,000
(Being the interest on 8% debentures amount
paid)
29.02.2012 Dr. 1,78,200
Own Debentures A/c
Dr. 6,000
Debenture Interest Account A/c [1,800
1,84,200
× 100 × 8% × ( 5/12)]

To Bank A/c

(Purchase of 1,800 own 8% Debenture @

Rs. 99 ex interest for immediate cancellation
and accrued interest thereon paid to the selling
debenture holders)

29.02.2012 8% Debentures A/c Dr. 1,80,000

To Own Debentures A/c 1,78,200

To Capital reserve A/c (Profit on cancellation 1,800

on debentures)

(Being 1,800 own 8% debentures cancelled and

profit thereon transferred to capital reserve
account)

31.03.2012 Debentures Interest A/c Dr. 28,800

[ 7,200 × 100 × 8% × (1/2)]

28,800
To Debenture holders A/c

(Being the six monthly interest accrued on

the remaining 7,200 8% debentures credited to

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 debenture holders)

31.3.2012 Debenture holders A/c Dr. 28,800

To Bank A/c 28,800

(Being the interest on debentures paid)

31.03.2012 Profit and Loss A/c Dr. 72,800

To debentures Interest A/c 72,800

(Being interest on 8% debentures for the year

charged to profit and loss account at the
yearend)

Question 7

Venus Limited recently made a public issue in respect of which the following information is
available:

i. No. of partly convertible debentures issued 4,00,000; face value and issue price of
Rs. 100 per debenture.

ii. Convertible portion per debenture - 80%, date of conversion - on expiry of 7

months from the date of closing of issue.

iii. Date of closure of subscription list - 01.06.2013, date of allotment - 01.07.2013,

Rate of interest on debentures - 10% p.a. payable from the date of allotment.
Value of equity share for the purpose of conversion - Rs. 40 (Face value Rs. 10)

iv. Underwriting commission - 3%

v. No. of debentures applied for 3,00,000

vi. Interest payable on debentures - half yearly on 30th September and 31st March.

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Write relevant journal entries for all transactions arising out of the above during the year

ended on 31st March, 2014 (including cash and bank entries).

Answer

In the books of Venus Ltd.

Journal Entries

Date Particulars Debit (Rs.) Credit (Rs.)

01.06.13 Bank Account Dr. 3,00,00,000

To Debenture Application A/c 3,00,00,000

(Being Application money received on

3,00,000 debentures @ Rs.100 each)

01.07.13 Debenture Application Account Dr. 3,00,00,000

Underwriters Account Dr. 1,00,00,000
To 10% Debentures Account
4,00,00,000
(Being Allotment of 3,00,000 debentures
to applicants and 1,00,000 debentures
to underwriters)

Underwriting Commission Dr. 12,00,000

To Underwriters Account 12,00,000

(Being commission payable to

underwriters on 4,00,000 debentures of
Rs.100 each @ 3%)

Bank Account Dr. 88,00,000

To Underwriters Account 88,00,000

(Being amount received from

underwriters on settlement of account)

30.09.13 Debenture Interest Account To Dr. 10,00,000

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 Bank Account 10,00,000
(Being interest paid on debentures for 3
months from 01.07.2013 to 30.09.2013
on Rs.4,00,00,000 @ 10% p.a.)

31.12.13 10% Debentures Account Dr. 3,20,00,000

To Equity Share Capital Account To 80,00,000

Securities Premium Account 2,40,00,000
(Being conversion of 80% of debentures
into shares @ Rs.40 per share with face
value of Rs.10 each)

31.03.14 Debenture Interest Account To Dr. 12,00,000

Bank Account 12,00,000
(Being interest paid on debentures for
the half year)

Profit and Loss A/c Dr. 22,00,000

To Debenture Interest A/c 22,00,000

(Being debenture interest for the year

charged to Profit & Loss A/c)

Working note:-

Calculation of debenture interest for the half year ended 31st March, 2014
Rs.

On Rs. 80,00,000 for 6 Months @ 10% p.a. 4,00,000

On Rs. 3,20,00,000 for 3 Months @ 10% p.a. 8,00,000

Total 12,00,000

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