Issue and redemption of debentures practical problems and solutions

Issue of Debentures Journal Entries

Practical Problem No. 1

A company issued 1,000 10% debentures of $100 each at par, payable $40 on application, and the balance on allotment. The public applied for 800 debentures. These applications were accepted. All money was received.

Give Journal entries.

Solution

Issue-and-redemption-of-debentures-journal-entries

Issue of Debentures for Consideration other than Cash

Practical Problem No. 2

X Ltd. acquired assets of $500,000 and took over the liabilities amounted to $50,000 at an agreed value of $400,000 of Y Ltd., issued 12% Debentures at a discount of 20% in full satisfaction of the purchase price. Show the journal entries.

Solution

Debentures-issued-other-than-cash-journal-entries

Issue of Debentures as Collateral Security

Practical Problem No. 3

John Ltd. secures an overdraft for $100,000 from the Bank by depositing Debentures worth $150,000 as collateral security. This will appear in the Balance Sheet as follows:

A). No entry need to be made in the books of accounts. However, a note is made in the Balance Sheet.

Issue-of-debentures-as-collateral-security

B). Debenture issued to serve as collateral security can be recorded in the books of accounts as follows:

For instance, take the above example and the journal entry is:

Journal-entries-for-issue-of-debentures-as-collateral-security

Balance Sheet

Balance-Sheet-of-debentures

Debenture-Suspense-Account-Journal-Entry

Discount on Debenture

Practical Problem No. 4

A Company issued $500,000 12% Debentures at 94%. The terms of the issue include the repayment of the debenture in five equal installments beginning with the end of the first year of issue.

Show the amount of discount that should be equitably written off in each of the five years.

Solution

Discount comes to $4,000 i.e. $100,000 x 4%

Discount-on-debentures

$800 to be written off against Profit and Loss Account i.e. equal annual installments. This is because each year has the benefit of the whole of the debentures.

Redemption of Debentures

Practical problem No. 5

10,000 7% Redeemable Preference Shares of $10 each fully paid are outstanding on 1st January 2019 in a Company. The Company decided to redeem these shares on 1st March 2019 at $13 per share. To provide for redemption, the Company decided to issue 5,000 Equity Shares of $10 each at $14 each payable in full on 20th February 2019. The Profit and Loss Account showing a credit balance of $100,000.

Giver Ledger Account.

Solution

7% Redeemable Preference Share Capital Account

Redeemable-Preference-Shares

Premium on Redemption Account

Premium-on-redemption-account

7% Redeemable Preference Shareholders Account

Redeemable-Preference-Shareholders-Account

Equity Share Capital Account

Equity-Share-Capital-Account

Share Premium Account

Share-Premium-Account

Capital Redemption Account

Capital-Redemption-Account

Profit and Loss Account

Profit-and-loss-account

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