CA. Ravi Chugh Classes
caravi1234.blogspot.in REDEMPTION OF DEBENTURES
PreNote:‐
Students are required to refer the chapter‐"Issue of Debentures" of Debentures" ‐from CPT Study Module.
TOPICS A) Methods of Redemption of Redemption B) Sources of Redemption of Redemption C) Accounting for Debenture Interest D) Transfer of Premium/Discount of Premium/Discount on redemption, Gain/loss on cancellation E) Maintaining Maintaining Sinking Fund [Debenture Redemption Fund] F) Purchase of Own of Own Debenture from Open Market ‐Not for Immediate Cancellation G) Transfer of Interest of Interest on Own Debentures, Profit/loss on sale/cancellation of own of own debentures
n i . t o p s g o l b . 4 3 2 1 i v a r a c JOURNAL ENTRIES
A) Methods of Redemption of Redemption
1) Lumpsum/Annual Drawings
2) Purchase from Open Market (for Immediate Cancellation)
3) Conversion into Shares
a) 12% Debentures Dr. Face value redeemed To Debentureholders Amount due Amount due (Diff. trfd. to Premium/Discount on Premium/Discount on Redemption) b) Debentureholders Dr. Amount due Amount due To Bank Amount due Amount due
12% Debentures Dr. Face value cancelled Amount paid paid ‐ ‐ Ex.intt To Bank (Diff. trfd. to Gain/Loss on cancellation) Note:‐ If Que. If Que. Silent, we always assume Ex ‐interest price. price.
a) 12% Debentures Dr. Face value redeemed To Debentureholders Amount due Amount due (Diff. trfd. to Premium/Discount on Premium/Discount on Redemption) b) Debentureholders Dr. Amount due Amount due To Eq./Pref. Share Capital Face value (Diff. trfd. to Premium/Discount on Premium/Discount on Issue of Shares) of Shares)
B) Sources of Redemption of Redemption 1) Out of P of Profits
Profit & Loss Appr. A/c Dr. To General Reserve (with the amount of amount of face face value of debentures of debentures redeemed during redeemed during the year)
2) Out of Sinking of Sinking Fund (Debenture Redemption Fund)
Sinking Fund A/c Dr. To General Reserve (with the amount of amount of face face value of debentures of debentures redeemed during redeemed during the year)
of redemption of debentures of debentures by conversion by conversion into shares. Note:‐ No source is required in case of redemption
CA Scholars (Kingsway camp: 8826099990)
IFA (Rohini: 9899982600)
CA. Ravi Chugh Classes
caravi1234.blogspot.in
C) Accounting for Debenture Interest 1) On Due date
2) At the time of redemption/cancellation
Debenture Interest To Bank
Dr.
Debenture Interest To Bank
Dr.
(Face value Outstanding x Rate x Period)
(Face value redeemed/cancelled
n i . t o p s g o l b . 4 3 2 1 i v a r a c 3) Accrued Debenture Interest. a) Closing
x Rate x Proportionate Period)
Debenture Interest Dr. To Accrued Interest Accrued Interest Dr. To Debenture Interest
b) Opening
4) Transfer of Annual Debenture Interest
(Face value Outstanding
x Rate x Proportionate Period)
Profit & Loss A/c Dr. To Debenture Interest
D) Transfer of Premium/Discount on redemption, Gain/loss on cancellation When there is no Sinking Fund Sec. Premium / P&L A/c Dr. To Premium on Redemption
When there is Sinking Fund Sinking Fund A/c Dr. To Premium on Redemption
Discount on Redemption
Discount on Red. A/c Dr. To Capital Reserve
Discount on Red. A/c To Capital Reserve
Dr.
Gain on Cancellation ( Net of Loss on cancellation)
Gain on Cancellation A/c Dr. To Capital Reserve
Gain on Cancellation A/c To Capital Reserve
Dr.
Loss on Cancellation ( Net of Gain on cancellation)
Sec. Premium / P&L A/c Dr. To Loss on Cancellation
Sinking Fund A/c To Loss on Cancellation
Dr.
Premium on Redemption
E) Maintaining Sinking Fund [Debenture Redemption Fund]
1) Annual Appropriation to Sinking Fund
2) Purchase of S/Fund Investment
3) Interest received on Sinking Fund Investment. 4) Sale of Sinking Fund Investment
Profit & Loss Appr. A/c Dr. To Sinking Fund
Annual Appropriation
Amount paid (Ex.intt) a) Sinking Fund Investment Dr. Amount paid (Ex.intt) To Bank Note:‐ If Que. Silent, we always assume Ex ‐interest price. (Face value purchased x Rate b) Intt. on Sinking Fund Inv. Dr. To Bank x Proportionate Period)
Bank A/c
(Face value held x Rate x Period) Dr. To Intt. on Sinking Fund Inv.
Amt received (Ex.intt) Dr. Amt received (Ex.intt) To Sinking Fund Investment Note:‐ If Que. Silent, we always assume Ex ‐interest price. Purchase Cost ‐ Ex Intt. Sale b) Loss on sale of S.F.Invest. Dr. To Sinking Fund Investment (If Profit on sale, the above entry will be reversed)
a) Bank A/c
CA Scholars (Kingsway camp: 8826099990)
IFA (Rohini: 9899982600)
CA. Ravi Chugh Classes
caravi1234.blogspot.in c) Bank A/c
5) Transfer of Profit/loss on sale of Sinking Fund Investment
Dr. To Intt. on S/Fund Inv.
Profit on sale of S/F/Inv. Dr. To Sinking Fund
(Face value sold x Rate x Proportionate Period)
Dr. To Loss on sale of S/F/Inv.
Sinking Fund
n i . t o p s g o l b . 4 3 2 1 i v a r a c 6) Trfr. of intt. On S/F/Investment a) If Sinking Fund is Cumulative
b) If S/Fund is Non ‐ Cumulative
Intt. on Sinking Fund Inv. Dr. To Sinking Fund Intt. on Sinking Fund Inv. Dr. To Profit & Loss A/c Note:‐ If Que. Silent, we always assume Sinking Fund is cumulative.
7) Entry when Debenture redeemed
Sinking Fund A/c Dr. To General Reserve (with the amount of face value of debentures redeemed during the year)
8) Trfr. of balance of S/Fund A/c (last year)
Debit Balance Profit & Loss Appr. A/c Dr. To Sinking Fund
Credit Balance Sinking Fund A/c Dr. To Capital Reserve
F) Purchase of Own Debenture from Open Market ‐Not for Immediate Cancellation Amount paid (Ex.intt) 1) Purchase of Own Debentures a) 12% Own Debentures Dr. Amount paid (Ex.intt) To Bank Note:‐ If Que. Silent, we always assume Ex ‐interest price. (Face value purchased x Rate b) Intt. on Own Debentures Dr. To Bank x Proportionate Period) 2) Interest due on Own Debentures
(Face value held x Rate x Period) Debenture Interest Dr. To Intt. on Own Debentures
3) Sale of Own Debentures
Amt received (Ex.intt) Dr. Amt received (Ex.intt) To 12% Own Debentures Note:‐ If Que. Silent, we always assume Ex ‐interest price. Purchase Cost ‐ Ex Intt. Sale b) Loss on sale of Own Deb. Dr. To 12% Own Debentures (If Profit on sale, the above entry will be reversed) (Face value sold c) Bank A/c Dr. x Rate x Prop. period) To Intt. on Own Debentures (Interest received on sale of Own Debentures)
4) Cancellation of Own Debentures
a) 12% Debentures Dr. Face value cancelled To 12% Own Debentures Purchase Cost (Diff. trfd. to Gain/Loss on cancellation) (Face value cancelled b) Debenture Interest Dr. x Rate x Prop. period) To Intt. on Own Debentures
a) Bank A/c
CA Scholars (Kingsway camp: 8826099990)
IFA (Rohini: 9899982600)
CA. Ravi Chugh Classes
caravi1234.blogspot.in
G) Transfer of Interest on Own Debentures, Profit/loss on sale/cancellation of own debentures. When there is no Sinking Fund When there is Sinking Fund Profit on sale Profit on sale Dr. Profit on sale of own debentures To Profit & Loss A/c To Sinking Fund A/c Loss on sale of own debentures
Profit & Loss A/c To Loss on sale
Gain on Cancellation ( Net of Loss on cancellation)
Dr.
Dr.
Sinking Fund A/c To Loss on sale
Dr.
Gain on Cancellation A/c Dr. To Capital Reserve
Gain on Cancellation A/c To Capital Reserve
Dr.
Loss on Cancellation ( Net of Gain on cancellation)
Sec. Premium / P&L A/c Dr. To Loss on Cancellation
Sinking Fund A/c To Loss on Cancellation
Dr.
Interest on Own Debentures
Intt. on Own Debentures Dr. To Profit & Loss A/c
If Sinking Fund is Cumulative Intt. on Own Debentures Dr. To Sinking Fund A/c If Sinking Fund is Non ‐Cumulative Intt. on Own Debentures Dr. To Profit & Loss A/c Note: If Que. Silent, always assume Sinking Fund is cumulative.
n i . t o p s g o l b . 4 3 2 1 i v a r a c PRACTICAL QUESTIONS Issue of Debentures
Q.1 Pass Journal entries in year 1, in the case of the issue of Rs.100000, 11% debentures by ABC Co. Ltd. at 95% redeemable at the end of 10 years at: i) 102% ii) 98% (5 marks) [MAY ‐00] Ans:‐ Debenture Interest = Rs.11000 Hints:‐ Premium on redemption of debentures is to be Discount/loss on issue to be written off through P&L a/c = i) Rs.700, ii) Rs.500 recognised at the time of issue.
Methods of Redemption (When there is no Sinking Fund) Q.
A company issued 12% Rs. 60000 debentures on 1/4/00 at par. Interest is payable every year on 31st Mar.
Pass necessary Journal entries for 2 years if:‐ Q.2 Debentures are redeemable at par after 2 years at lumpsum. Q.3 Debentures are redeemable in 2 equal instalments by drawing lot at year end at 10% premium. Q.4 Debentures are redeemable by converting into equity shares issued at 25% premium as below: 31/3/01 Rs. 40000 redeemable at par 31/3/02 Rs. 20000 redeemable at 20% discount Q.5 Debentures are redeemable by purchase from open market for immediate cancellation as below: 31/5/00 Rs.40000 at Rs.98 (cum interest) 31/8/01 Rs.20000 at Rs.102 (ex interest) Ans:‐ Hints:‐
Q.6 Prepare the necessary ledger accounts for above Que.5.
Ans:‐
Hints:‐
CA Scholars (Kingsway camp: 8826099990)
IFA (Rohini: 9899982600)
CA. Ravi Chugh Classes
caravi1234.blogspot.in
Q.7 A Company purchased its own 11% debentures in the open market for Rs.5000000 (cum‐interest). The interest amount included in the purchase price is Rs.150000. The face value of the debentures purchased is Rs.5200000. The Company cancelled the debentures so purchased. Pass Journal entries in the books of the company for purchase and immediate cancellation of debentures. (4 marks) [NOV.‐07] Ans:‐ Gain on cancell.(Capital Reserve) = Rs.350000 Hints:‐
n i . t o p s g o l b . 4 3 2 1 i v a r a c Q.8 On 1st Jan., Rama Ltd., had outstanding in its books 500 6% Debentures of Rs.100 each. In accordance with the powers in the deed, the directors acquired in the open market Debentures for immediate cancellation as follows:‐ 1st Mar. Rs.5000 at Rs.98 (cum interest) 1st Aug. Rs.10000 at Rs.100.25 (cum interest) 15th Dec. Rs.2500 at Rs.98.50 (ex interest) Debenture interest is payable half yearly, on 30th June and 31st Dec. You are required to pass necessary Journal entries and prepare necessary ledger A/cs. Ans:‐ Debentures (closing) = Rs.32500. Debenture Interest = Rs.2494. Gain on cancell. = Rs.212
Q.9 A company had issued 20000, 13% convertible debentures of Rs.100 each on 1st Apr.2007. The debentures are due for redemption on 1 July,2009. The terms of issue of debentures provided that they were redeemable at a premium of 5% & 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/share. Debentureholders holding 2500 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the debentureholders exercising the option to the maximum. (2 marks) [MAY ‐10] Ans:‐ 24500 shares Hints:‐ Q.10 XYZ Ltd. had issued 30000, 15% convertible debentures of Rs.100 each on 1st Apr.2008. The debentures are due for redemption on 1 Mar.2011. The terms of issue of debentures provided that they were redeemable at a premium of 5% & 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/share. Debentureholders holding 2500 debentures did not exercise the option. Calculate the number of equity shares to be allotted to the debentureholders exercising the option to the maximum. (4 marks) [MAY ‐11] Ans:‐ 38500 shares Hints:‐ Sinking Fund
Q.11 A company issued 12% Rs. 60000 debentures on 1/1/01 at par. Interest is payable every year on 31st Dec.
Prepare necessary ledger A/cs for 3 years if:‐ i) Debentures are redeemable at 20% premium after 3 years on 31.12.03. ii) Annual appropriation to Sinking fund = Rs. 19500 iii) 6% Sinking Fund investment purchased as below:‐ 31/1/02 Rs.15000 at par 28/2/03 Rs.20000 at Rs.102 iv) On 31/12/03, all the Investments are sold for 98 (cum interest) & debentures are redeemed. Ans:‐ Sinking fund(P&L Appr.); Rs.13975. Deb. Intt.; Rs.7200,7200,7200 Hints:‐ Assume investments purchased are ‐ Ex ‐intt. Intt. on S.F. Investment; Rs. 825, 1900. Loss on sale of S.F. Investment; Rs.3200
Q.12 The following balances appeared in the books of a company as on 31st Dec.2005:‐ 6% Mortgage 10000 debentures of Rs.100 each Sinking Fund (for redemption of debentures) ; Rs.1042000 Sinking Fund Investments:‐ Rs.528000, 4% Government Loan purchased at par. Rs.560000, 3‐1/2% Government paper purchased for Rs.542000. The interest on debentures had been paid upto 31st Dec.,2005. On 28th Feb.2006 , the investments were sold at Rs.90 and Rs.87 respectively & the debentures were paid off at 101, together with accrued interest. You are required to pass necessary Journal entries and prepare necessary ledger A/cs. The Sinking Fund is non‐cumulative.
CA Scholars (Kingsway camp: 8826099990)
IFA (Rohini: 9899982600)
CA. Ravi Chugh Classes
caravi1234.blogspot.in
Ans:‐ Sinking fund(P&L Appr.); Rs.75600. Debenture Interest; Rs.10000
Hints:‐ Assume investments sold on 28/2/06 ‐ Ex ‐intt.
Intt. on S.F. Investment; 4% Govt. Loan Rs.3520, 3.5% Govt. Paper Rs.3267 Loss on sale; 4% Govt. Loan Rs.52800, 3.5% Govt. Paper Rs.54800
Q.13
Balance Sheet of Dee Ltd. as on 31st Mar.2009
n i . t o p s g o l b . 4 3 2 1 i v a r a c LIABILITIES Authorised Capital: ‐ 50000 equity shares of Rs.10 each
Issued and Paid ‐up Capital:‐ 25000 equity shares of Rs.10 each, fully paid up Reserves and surplus: General Reserve Profit and Loss a/c Debenture Redemption Reserve Secured Loans: 12% Convertible Debentures (of Rs.100 each) Other Secured loans Current liabilities and provisions: Creditors Proposed dividend
Amount ASSETS Rs. 500000 Fixed assets
(at cost less depreciation)
Debenture redemption fund investments 250000 Cash balance Other current assets 275000 100000 250000
Amount Rs. 800000
200000 250000 1000000
500000 250000
600000 25000
2250000
2250000
At the General meeting it was resolved to: a) Pay proposed dividend of 10% in cash. b) Given 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. c) Redeem the debentures at a premium of 5% and also confer option to the debentureholders to convert 50% of their holding into equity shares at a predetermined price of Rs.15 per share & balance payment to be made in cash. Holders of 3000 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 investments realised Rs.180000 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 no. of equity shares issued and cash payment. (16 marks) [NOV.‐09] Ans:‐ B/S (total)= Rs.1860000. Cash balance (closing); Rs.60000 Hints:‐ No. of equity shares issued on conversion = 7000 General Reserve (closing); Rs.580000. Loss on sale of D.R.F. Investment; 20000. Premium on redemption of debentures; 25000.
Purchase of own debentures ‐not for immediate cancellation
Q.14 Swati Associates Ltd. has issued 10000 12% Debentures of Rs.100 each on 1.1.2003. These debentures are redeemable after 3 years at a premium of Rs.5 per debenture. Interest is payable annually. i) On 1st Oct.2004, it buys 1500 debentures from the market at Rs.98 per debenture. These are sold away on 30 June 2005 at Rs.105 per debenture. ii) On 1st Jan.2005, it buys 1000 debentures at Rs.104 per debenture from the open market. These are cancelled on 1st Apr.2005. iii) On 1st Oct.2005, it buys 2000 debentures at Rs.106 per debenture from the open market. These debentures along with other debentures are redeemed on 31st Dec.2005.
You are required to pass necessary Journal entries and prepare necessary ledger A/cs for the year 2003, 2004 and 2005. Ans:‐ Debenture Interest; Rs.120000, 120000, 111000. Hints:‐ Other debentures to be redeemed at 5% prem. Intt. On Own Debentures; Rs.4500, 18000 Assume all prices are given Ex ‐interest. 12% Own Debentures; Loss on cancell. Rs.4000, 12000. Profit on sale Rs.10500
CA Scholars (Kingsway camp: 8826099990)
IFA (Rohini: 9899982600)
CA. Ravi Chugh Classes
caravi1234.blogspot.in
Q.15 Sencom Ltd. issued Rs.150000, 5% Debentures in earlier year on which interest is payable half yearly on 31st March & 30th Sept. 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 2005‐06 and the cancellation were made on 31st Mar.2006 : 1st April Rs.25000 nominal value purchased for Rs.24725 ex‐interest. 1st Sept. Rs.20000 nominal value purchased for Rs.20125 cum‐interest. You are required to pass necessary Journal entries upto the date of cancellation. Ans:‐ Debentures(closing); Rs.105000. Debenture Interest; Rs.7500 Hints:‐
n i . t o p s g o l b . 4 3 2 1 i v a r a c Intt. On Own Debentures; Rs.1833. Gain on cancell.(Capital Res.); Rs.567
Q.16 Rama Ltd. issued Rs.300000, 8% Debentures in earlier year on which interest is payable half yearly on 31st March & 30th Sept. 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 the cancellation were made on 31st Mar.2010 : 1st April Rs.50000 nominal value purchased for Rs.49450 ex‐interest. 1st Sept. Rs.30000 nominal value purchased for Rs.30250 cum‐interest. Show the Journal entries (without narrations) for the transactions held in the year 2009‐10 (5 marks) [NOV.‐10] Ans:‐ Debentures(closing); Rs.220000. Debenture Interest; Rs.24000 Hints:‐ Intt. On Own Debentures; Rs.5400. Gain on cancell.(Capital Res.); Rs.1300
Sinking Fund & Purchase of own debentures
Q.17 MM Ltd. had the following balances on 1st Jan.2005:‐ Rs. 11% Debentures A/c (2000 issue) 5000000 Debenture Redemption Fund A/c 4500000 13.5% Debentures in XX Ltd. A/c (Face value Rs.2000000) 1950000 Own Debentures A/c (Face value Rs.2000000) 1850000 As 31st Dec.2005, was the date for redemption of the 2000 debentures, the company started buying own debentures and made the following purchases in the open market:‐ 2000 debentures at Rs.98 (cum interest). 1st Feb.2005 2000 debentures at Rs.99 (ex interest). 1st June 2005 Half yearly interest is due on the debentures on 30th June and 31st Dec., in the case of both the companies. On 31st Dec.2005 , the debentures in XX Ltd. were sold for Rs.95 each ex‐interest. On that date, the outstanding debentures of MM Ltd. were redeemed by payment and by cancellation. The face value of a debenture was Rs. 100. You are required to prepare necessary ledger A/cs for the year 2005. Ans:‐ Sinking fund (P&L Appr.); Rs.27000. Debenture Interest; Rs.550000 Hints:‐ Assume debentures were redeemable at par. Intt. on Own Debentures; Rs.253000. Intt. on 13.5% XX Ltd. Debentures Rs.270000
Loss on sale; 13.5% XX Ltd. Debentures Rs.50000. Gain on cancell.(Capital Res.); Rs.157833
CA Scholars (Kingsway camp: 8826099990)
IFA (Rohini: 9899982600)