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.

Hint:

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.

Answer 1

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.