Question:
24. On 1\textsuperscript{st April, 2022, Bellfont Ltd. issued 5,000, 7\% Debentures of ₹ 500 each at a premium of 5\%, redeemable at a premium of 10\% after five years. The company had a balance of ₹ 3,25,000 in ‘Securities Premium Account’ before the issue.}
Pass journal entries for the issue of debentures and for writing off ‘Loss on Issue of Debentures’ utilising Securities Premium Account at the end of the first year itself.
24. On 1\textsuperscript{st April, 2022, Bellfont Ltd. issued 5,000, 7\% Debentures of ₹ 500 each at a premium of 5\%, redeemable at a premium of 10\% after five years. The company had a balance of ₹ 3,25,000 in ‘Securities Premium Account’ before the issue.}
Pass journal entries for the issue of debentures and for writing off ‘Loss on Issue of Debentures’ utilising Securities Premium Account at the end of the first year itself.
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When a loss arises from the issue of debentures, it must be adjusted against available reserves, such as the Securities Premium Account, to avoid overstating liabilities.
Updated On: Jan 18, 2025
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Solution and Explanation
1. Calculation of Amounts:
- Nominal Value of Debentures Issued: \( 5,000 \times ₹ 500 = ₹ 25,00,000 \).
- Premium on Issue: \( ₹ 500 \times 5\% = ₹ 25 \) per debenture. Total = \( 5,000 \times ₹ 25 = ₹ 1,25,000 \).
- Premium on Redemption: \( ₹ 500 \times 10\% = ₹ 50 \) per debenture. Total = \( 5,000 \times ₹ 50 = ₹ 2,50,000 \).
- Loss on Issue of Debentures: This arises because the redemption premium is not covered by the premium on issue:
\[
\text{Loss on Issue of Debentures} = \text{Premium on Redemption} - \text{Premium on Issue} = ₹ 2,50,000.
\]
2. Entries to Record the Transactions:
- First, record the issue of debentures, including the premium on issue.
- Then, account for the loss on issue of debentures as an adjustment.
- Finally, write off the loss using the Securities Premium Account.
Journal Entries:
\begin{center}
\begin{tabular}{|l|c|c|}
\hline
Particulars & Dr Amount (₹) & Cr Amount (₹)
\hline Bank A/c Dr & 26,25,000 &
To 7\% Debentures A/c & & 25,00,000
To Securities Premium A/c & & 1,25,000
\hline Loss on Issue of Debentures A/c Dr & 2,50,000 &
To Premium on Redemption of Debentures A/c & & 2,50,000
\hline Securities Premium A/c Dr & 2,50,000 &
To Loss on Issue of Debentures A/c & & 2,50,000
\hline \end{tabular} \end{center} 3. Explanation: - Bank Account: Reflects the cash inflow of ₹ 26,25,000, which includes the nominal value and the premium on issue. - Debenture Account: Represents the liability created for the nominal value of debentures. - Securities Premium Account: Records the premium on issue of debentures. - Loss on Issue of Debentures Account: Represents the excess premium on redemption over the premium on issue. - Premium on Redemption of Debentures: Represents the liability to pay the premium on redemption after five years. - Adjustment of Loss: The loss on issue of debentures is written off using the Securities Premium Account, which had sufficient balance before the issue.
\hline Bank A/c Dr & 26,25,000 &
To 7\% Debentures A/c & & 25,00,000
To Securities Premium A/c & & 1,25,000
\hline Loss on Issue of Debentures A/c Dr & 2,50,000 &
To Premium on Redemption of Debentures A/c & & 2,50,000
\hline Securities Premium A/c Dr & 2,50,000 &
To Loss on Issue of Debentures A/c & & 2,50,000
\hline \end{tabular} \end{center} 3. Explanation: - Bank Account: Reflects the cash inflow of ₹ 26,25,000, which includes the nominal value and the premium on issue. - Debenture Account: Represents the liability created for the nominal value of debentures. - Securities Premium Account: Records the premium on issue of debentures. - Loss on Issue of Debentures Account: Represents the excess premium on redemption over the premium on issue. - Premium on Redemption of Debentures: Represents the liability to pay the premium on redemption after five years. - Adjustment of Loss: The loss on issue of debentures is written off using the Securities Premium Account, which had sufficient balance before the issue.
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