NEB ACCOUNTS CHAPTER 01 SHARE AND DEBENTURE QUESTIONS and SOLUTIONS: DEEP DIVE 2083

Table of Contents: Master Guide

Share Capital & Debentures by FEEN Ltd.

• Section 1: Fundamentals of Share & Capital
• Section 2: Issue of Shares & The Installment Process
• Section 3: Over-Subscription & Pro-Rata Allotment
• Section 4: Medium Level Pro-Rata Question | Solution
• Section 5: Advanced Problem | Calls in Arrears + Calls in Advance
• Section 6: Issue of Shares for Other Than Cash

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• Section 7: Introduction & Issue of Debentures
• Section 8: Issue of Debentures for Consideration Other Than Cash
• Section 9: Issue of Debentures from Redemption Point of View

Section 1: Fundamentals of Share & Capital

What is a Share?

The total capital of a company is divided into smaller, equal units. Each of these individual units is called a Share. It represents a unit of ownership in a company. For example, if a company has a total capital of Rs. 10,00,000 divided into 10,000 units of Rs. 100 each, then each unit of Rs. 100 is considered one share.

Types of Shares

Companies generally issue two main types of shares to the public:

• Equity Shares: These are ordinary shares. Equity shareholders are the real owners of the company. They carry voting rights and assume the highest risk, as their dividend depends entirely on the company's remaining profits.
• Preference Shares: These shares carry preferential rights regarding the payment of dividends and the repayment of capital in the event the company winds up.

Difference Between Share and Debenture

Basis of Difference	Share	Debenture
Nature	It is a part of the owned capital. Shareholders are owners.	It is a part of borrowed capital. Debenture holders are creditors.
Return	The return on a share is called a Dividend.	The return on a debenture is called Interest.
Rate of Return	The dividend rate fluctuates based on the company's profits (for equity shares).	The interest rate is fixed and must be paid even if the company suffers a loss.
Voting Rights	Shareholders (Equity) have voting rights and control management.	Debenture holders do not have any voting rights.

Difference Between Equity Share and Preference Share

Basis of Difference	Equity Share	Preference Share
Dividend Priority	Dividend is paid only after paying the preference shareholders.	Dividend is paid before any dividend is paid to equity shareholders.
Rate of Dividend	Fluctuates depending upon the availability of profit.	Fixed rate of dividend decided at the time of issue.
Repayment of Capital	Capital is repaid last during the winding up of the company.	Capital is repaid before equity shareholders during winding up.

💡 Tips & Tricks

Always remember the rule of risk and reward: Equity Shareholders take the maximum risk by getting paid last, but they get the maximum reward (voting power and unlimited dividend potential if the company booms). Preference Shareholders and Debenture holders play it safe with fixed returns!

Types of Share Capital

Share capital is categorized into several stages to reflect how a company raises funds. Let's break them down easily:

• 1. Authorized Capital: The maximum amount of capital a company is legally permitted to issue, as stated in its Memorandum of Association.
  Example: A company is registered to issue a maximum of 1,00,000 shares of Rs. 100 each. (Total Rs. 1,00,00,000).
• 2. Issued Capital: The portion of the Authorized Capital that is actually offered to the public for subscription.
  Example: Out of the 1,00,000 shares, the company decides to issue only 60,000 shares to the public right now.
• 3. Subscribed Capital: The part of the Issued Capital that the public actually applies for and agrees to buy.
  Example: The public applies for 55,000 shares out of the 60,000 offered.
• 4. Called-up Capital: The portion of the Subscribed Capital that the company has requested the shareholders to pay.
  Example: The company asks for Rs. 60 out of the Rs. 100 face value on those 55,000 shares.
• 5. Paid-up Capital: The actual amount received by the company from the shareholders out of the Called-up Capital.
  Example: Some shareholders couldn't pay, so the company only received Rs. 50 on average instead of the full Rs. 60 called up.

📝 Note for Students

Reserve Capital is a special type of uncalled capital that a company decides it will ONLY call up in the event of the company winding up (liquidating). It acts as a safety net for creditors!

Section 2: Issue of Shares & The Installment Process

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Terms of Issue: Par, Premium, and Discount

When a company issues shares to the public, it can price them in three different ways based on the "Face Value" (the original registered value of the share):

• Issue at PAR: When shares are issued at a price exactly equal to their face value. For example, a share of Rs. 100 face value is issued to the public for exactly Rs. 100[cite: 106].
• Issue at PREMIUM: When shares are issued at a price higher than their face value. The extra amount is the "Premium." For example, a share of Rs. 10 face value is issued for Rs. 12 (Premium = Rs. 2)[cite: 135, 161].
• Issue at DISCOUNT: When shares are issued at a price lower than their face value. For example, a share of Rs. 100 face value is issued for Rs. 90 (Discount = Rs. 10)[cite: 189, 207].

Stages of Share Collection (Installments)

Companies usually don't ask for the full share money at once. They break it down into easy installments:

Stage	Explanation
1. Application	The initial money paid by the public when they apply to buy the company's shares. It shows their serious intent[cite: 122].
2. Allotment	The second installment. This is demanded by the company when they officially "allot" or give the shares to the applicants[cite: 124].
3. First Call	The third installment. The company "calls" for more of the remaining balance from the shareholders.
4. Second & Final Call	The last installment to collect the final remaining balance of the share's face value[cite: 204].

Calls in Arrears vs. Calls in Advance

• Calls in Arrears: Sometimes, a shareholder fails to pay the allotment or call money by the due date[cite: 334]. The amount that remains unpaid is called "Calls in Arrears." This is a loss for the company and is debited in the journal entry.
• Calls in Advance: Occasionally, a good shareholder might pay the future call money early, along with their current installment[cite: 385]. This pre-paid amount is "Calls in Advance." It is a liability for the company until the actual call is made, so it is credited.

💡 Tips & Tricks

Think of Calls in Arrears as "Pending Dues" (Debit) and Calls in Advance as "Pre-Paid Balances" (Credit). Always adjust Calls in Advance when that specific call is finally made!

What is Lump-Sum Basis?

Instead of collecting money in multiple installments, a company might decide to collect the entire face value of the share at once, right at the time of the application[cite: 105]. This single, full payment is called the Lump-Sum Basis.

Solved Example: Lump-Sum Basis

Question: ABC Co. Ltd. issued 10,000 shares of Rs. 100 each at par for public subscription[cite: 106]. All the shares were applied for and the allotment was made accordingly[cite: 107, 129]. Pass the necessary journal entries.

Solution: Journal Entries in the books of ABC Co. Ltd.

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1	Bank a/c (10,000 × 100) ... Dr.     To Share application a/c (Being amount received on lump-sum basis on 10,000 shares) [cite: 115, 119, 123]		10,00,000	10,00,000
2	Share application a/c (10,000 × 100) ... Dr.     To Share capital a/c (Being amount transferred to share capital) [cite: 126, 130, 133]		10,00,000	10,00,000

Section 3: Over-Subscription & Pro-Rata Allotment

What is Pro-Rata Allotment?

When a popular company issues shares, the public often applies for more shares than the company actually has to offer. This situation is called Over-Subscription.

Since the company cannot give everyone all the shares they asked for, it has three choices:

• 1. Rejection: Return the money to some applicants and give them nothing.
• 2. Full Allotment: Give some lucky applicants exactly what they asked for.
• 3. Pro-Rata Allotment: Give applicants a proportionate (partial) number of shares. For example, if you apply for 5 shares, you might only get 4. The "excess" money you paid during application isn't refunded; instead, it is pushed forward and adjusted against your upcoming Allotment installment!

💡 Tips & Tricks

Whenever you see a Pro-Rata question where a shareholder fails to pay the allotment money, you MUST calculate their exact "Excess Application Money" first. They already paid some extra cash during the application phase, so their actual "Calls in Arrears" will be lower than expected!

Case Study: FEEN Ltd. Pro-Rata Allotment

The Case:
Focus Edge Education Network (FEEN) Ltd. issued 10,000 equity shares of Rs. 100 each at a premium of Rs. 10 per share. The amount was payable as follows:

• On Application: Rs. 30
• On Allotment: Rs. 50 (Including Rs. 10 Premium)
• On First & Final Call: Rs. 30

The public crazily applied for 15,000 shares (Over-subscription!). The directors made allotments as follows:

• Category A: Applicants for 2,000 shares were completely rejected (Money refunded).
• Category B: Applicants for 13,000 shares were allotted the remaining 10,000 shares on a pro-rata basis. Excess application money was adjusted towards allotment.

The Twist: A shareholder named Mr. Ram, who had applied for 1,300 shares in Category B, failed to pay the allotment and the call money. Pass the necessary journal entries with proper working notes.

Working Notes (The Secret to Solving Pro-Rata!)

Before touching the Journal Entries, we must decode Mr. Ram's situation. Follow the arrows!

Step-by-Step Calculation for Mr. Ram:

Step 1: Find the Pro-Rata Ratio
➤ Total Applied in Category B = 13,000 shares.
➤ Total Allotted in Category B = 10,000 shares.
➤ Ratio = 13 : 10 (For every 13 applied, 10 are given).

Step 2: How many shares did Mr. Ram actually get?
➤ He applied for 1,300 shares.
➤ Shares Allotted = (Applied × Total Allotted) ÷ Total Applied
➤ Shares Allotted = (1,300 × 10,000) ÷ 13,000 = 1,000 shares.

Step 3: Calculate his Excess Application Money
➤ He applied for 1,300 but got 1,000. He has 300 "rejected/excess" shares.
➤ Excess Money Paid = 300 shares × Rs. 30 (App Rate) = Rs. 9,000.
➤ This Rs. 9,000 is safely kept by FEEN Ltd. to be used for his Allotment phase.

Step 4: Calculate his ACTUAL Calls in Arrears on Allotment
➤ Total Allotment Due for Ram = 1,000 shares × Rs. 50 = Rs. 50,000.
➤ Less: Excess money already paid (from Step 3) = - Rs. 9,000.
➤ Net Calls in Arrears on Allotment = Rs. 50,000 - Rs. 9,000 = Rs. 41,000.

Step 5: Overall Company Bank Calculation for Allotment
➤ Total Allotment Due (10,000 shares × 50) = Rs. 5,00,000
➤ Less: Total Excess App Money Transferred (3,000 shares × 30) = - Rs. 90,000
➤ Less: Mr. Ram's Net Arrears (from Step 4) = - Rs. 41,000
➤ Amount Received in Bank = Rs. 3,69,000.

Solution: Journal Entries in the books of FEEN Ltd.

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1	Bank a/c (15,000 × 30) ... Dr.     To Share Application a/c (Being application money received on 15,000 shares)		4,50,000	4,50,000
2	Share Application a/c ... Dr.     To Share Capital a/c (10,000 × 30)     To Share Allotment a/c (3,000 × 30) [Pro-rata excess]     To Bank a/c (2,000 × 30) [Rejected refund] (Being app money transferred to capital, excess adjusted, and rest refunded)		4,50,000	3,00,000 90,000 60,000
3	Share Allotment a/c (10,000 × 50) ... Dr.     To Share Capital a/c (10,000 × 40)     To Share Premium a/c (10,000 × 10) (Being allotment money due with premium)		5,00,000	4,00,000 1,00,000
4	Bank a/c (See Working Step 5) ... Dr. Calls in Arrears a/c (See Working Step 4) ... Dr.     To Share Allotment a/c (Being allotment money received except for 1,000 shares of Ram)		3,69,000 41,000	4,10,000
5	Share First & Final Call a/c (10,000 × 30) ... Dr.     To Share Capital a/c (Being first and final call money due)		3,00,000	3,00,000
6	Bank a/c (3,00,000 - 30,000) ... Dr. Calls in Arrears a/c (1,000 shares × 30) ... Dr.     To Share First & Final Call a/c (Being call money received except for Ram's 1,000 shares)		2,70,000 30,000	3,00,000

Section 4: Medium Level Pro-Rata Question | Solution

💡 Tips | Tricks

In medium-level questions, you will often see a mix of Rejection | Pro-Rata in the same problem. Always split your working notes into two clear parts: what goes back to the bank (Refund) | what goes forward to Allotment (Pro-Rata Excess).

Case Study: FEEN Ltd. (Aloknagar Gate No. 2)

The Question:
Focus Edge Education Network (FEEN) Ltd., operating from Aloknagar Gate No. 2, issued 20,000 equity shares of Rs. 10 each at PAR. The amount was payable as follows:

• On Application: Rs. 3
• On Allotment: Rs. 4
• On First | Final Call: Rs. 3

Applications were received for 30,000 shares. The Managing Director (MD) decided on the following allotment strategy:

• Category I: Applicants for 5,000 shares were sent letters of regret, | their money was fully refunded.
• Category II: Applicants for the remaining 25,000 shares were allotted the 20,000 shares on a pro-rata basis.

A student named Hari, who had applied for 2,500 shares in Category II, could not pay the allotment | call money. Pass the necessary journal entries.

Working Notes

Step-by-Step Calculation for Hari:

Step 1: Find the Category II Pro-Rata Ratio
➔ Applied = 25,000 shares. Allotted = 20,000 shares.
➔ Ratio = 25 : 20 (Or simply, 5 : 4).

Step 2: Hari's Allotted Shares
➔ He applied for 2,500 shares.
➔ Shares Allotted = (2,500 x 20,000) / 25,000 = 2,000 shares.

Step 3: Hari's Excess Application Money
➔ Excess Shares = 2,500 (Applied) - 2,000 (Allotted) = 500 shares.
➔ Excess Money = 500 shares x Rs. 3 = Rs. 1,500.

Step 4: Hari's ACTUAL Calls in Arrears on Allotment
➔ Allotment Due = 2,000 shares x Rs. 4 = Rs. 8,000.
➔ Less: Excess money already paid = - Rs. 1,500.
➔ Net Calls in Arrears = Rs. 6,500.

Step 5: Total Bank Calculation for Allotment
➔ Total Allotment Due (20,000 shares x Rs. 4) = Rs. 80,000
➔ Less: Total Excess App Money (5,000 shares x Rs. 3) = - Rs. 15,000
➔ Less: Hari's Net Arrears = - Rs. 6,500
➔ Amount Received in Bank = Rs. 58,500.

Solution: Journal Entries

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1	Bank a/c (30,000 x 3) ... Dr. To Share Application a/c (Being app money received on 30,000 shares)		90,000	90,000
2	Share Application a/c ... Dr. To Share Capital a/c (20,000 x 3) To Share Allotment a/c (5,000 x 3) [Excess] To Bank a/c (5,000 x 3) [Refunded] (Being app money transferred, adjusted, | refunded)		90,000	60,000 15,000 15,000
3	Share Allotment a/c (20,000 x 4) ... Dr. To Share Capital a/c (Being allotment money due)		80,000	80,000
4	Bank a/c (See Step 5) ... Dr. Calls in Arrears a/c (See Step 4) ... Dr. To Share Allotment a/c (Being allotment money received except for 2,000 shares)		58,500 6,500	65,000
5	Share First | Final Call a/c (20,000 x 3) ... Dr. To Share Capital a/c (Being call money due)		60,000	60,000
6	Bank a/c (60,000 - 6,000) ... Dr. Calls in Arrears a/c (2,000 shares x 3) ... Dr. To Share First | Final Call a/c (Being call money received except for Hari's shares)		54,000 6,000	60,000

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Section 5: Advanced Problem | Calls in Arrears + Calls in Advance

💡 Tips | Tricks

When a question has BOTH Calls in Arrears (someone didn't pay) | Calls in Advance (someone paid early) on the same stage, handle them one by one in your Working Notes. Arrears will DECREASE your bank receipt, while Advance will INCREASE your bank receipt for that specific stage!

Case Study: Complex Issue by FEEN Ltd.

The Question:
Focus Edge Education Network (FEEN) Ltd. issued 50,000 equity shares of Rs. 10 each at a premium of Rs. 2 per share. The amount was payable as follows:

• On Application: Rs. 3
• On Allotment: Rs. 5 (Including Rs. 2 Premium)
• On First Call: Rs. 2
• On Final Call: Rs. 2

All shares were subscribed | allotments were made. However, the following issues occurred during collection:

• Student A, holding 1,000 shares, failed to pay the Allotment, First Call, | Final Call money.
• Student B, holding 2,000 shares, paid the entire remaining balance (First Call | Final Call) in advance along with the Allotment money.

Pass the necessary journal entries in the books of the company.

Working Notes | Step-by-Step Breakdown

Stage 1: Calculation for Allotment (The Tricky Part)

1. Total Allotment Due
➔ 50,000 shares x Rs. 5 = Rs. 2,50,000.

2. Calls in Arrears (Student A)
➔ 1,000 shares x Rs. 5 = - Rs. 5,000 (Subtract this, as it was not received).

3. Calls in Advance (Student B)
➔ B paid First Call (Rs. 2) | Final Call (Rs. 2) early.
➔ 2,000 shares x Rs. 4 total early payment = + Rs. 8,000 (Add this to the bank).

4. Net Amount Received in Bank for Allotment
➔ 2,50,000 (Due) - 5,000 (Arrears) + 8,000 (Advance) = Rs. 2,53,000.

Stage 2: Calculation for First Call

1. Total First Call Due
➔ 50,000 shares x Rs. 2 = Rs. 1,00,000.

2. Calls in Arrears (Student A again)
➔ 1,000 shares x Rs. 2 = - Rs. 2,000.

3. Adjustment of Calls in Advance (Student B)
➔ B already paid this! We must deduct it from the bank receipt now.
➔ 2,000 shares x Rs. 2 = - Rs. 4,000.

4. Net Amount Received in Bank for First Call
➔ 1,00,000 (Due) - 2,000 (Arrears) - 4,000 (Advance Adj) = Rs. 94,000.

Solution: Journal Entries

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1	Bank a/c (50,000 x 3) ... Dr. To Share Application a/c (Being app money received)		1,50,000	1,50,000
2	Share Application a/c ... Dr. To Share Capital a/c (Being app money transferred to share capital)		1,50,000	1,50,000
3	Share Allotment a/c (50,000 x 5) ... Dr. To Share Capital a/c (50,000 x 3) To Share Premium a/c (50,000 x 2) (Being allotment money due with premium)		2,50,000	1,50,000 1,00,000
4	Bank a/c (See Working Note Stage 1) ... Dr. Calls in Arrears a/c (Student A: 1,000 x 5) ... Dr. To Share Allotment a/c To Calls in Advance a/c (Student B: 2,000 x 4) (Being allotment received with arrears | advance)		2,53,000 5,000	2,50,000 8,000
5	Share First Call a/c (50,000 x 2) ... Dr. To Share Capital a/c (Being first call money due)		1,00,000	1,00,000
6	Bank a/c (See Working Note Stage 2) ... Dr. Calls in Arrears a/c (Student A: 1,000 x 2) ... Dr. Calls in Advance a/c (Student B Adj: 2,000 x 2) ... Dr. To Share First Call a/c (Being first call received, arrears recorded, | advance adjusted)		94,000 2,000 4,000	1,00,000
7	Share Final Call a/c (50,000 x 2) ... Dr. To Share Capital a/c (Being final call money due)		1,00,000	1,00,000
8	Bank a/c ... Dr. Calls in Arrears a/c (Student A: 1,000 x 2) ... Dr. Calls in Advance a/c (Student B Adj: 2,000 x 2) ... Dr. To Share Final Call a/c (Being final call received, arrears recorded, | advance adjusted)		94,000 2,000 4,000	1,00,000

Mastering these concepts is key for the CA Cap 2 exams. Keep practicing!

Section 6: Issue of Shares for Other Than Cash

What Does "Other Than Cash" Mean?

Sometimes, a company does not need cash but needs assets (like Land, Building, or Machinery) or wants to purchase an entire running business. Instead of paying the vendor in cash, the company issues its own shares to settle the purchase price. This is known as issuing shares for consideration other than cash.

When purchasing a running business, the company takes over both the Assets | the Liabilities. The net value is called Net Assets (Total Assets - Total Liabilities). The actual amount agreed to be paid to the seller is called the Purchase Consideration.

💡 Tips | Tricks: The Golden Formulas

1. Finding Goodwill or Capital Reserve:

• If Purchase Consideration > Net Assets ➔ The extra amount paid is a loss, recorded as Goodwill (Debit).
• If Purchase Consideration < Net Assets ➔ The less amount paid is a profit, recorded as Capital Reserve (Credit).

2. Number of Shares to be Issued:

Number of Shares = Purchase Consideration / Issue Price per Share

(Note: Issue Price = Face Value + Premium OR Face Value - Discount)

Case Study: Business Acquisition by FEEN Ltd.

The Question:
The Managing Director (MD) of Focus Edge Education Network (FEEN) Ltd., located at Aloknagar Gate No. 2, decided to acquire a local training center. FEEN Ltd. took over the following assets | liabilities from the vendor:

• Building: Rs. 500,000
• Computers | Equipment: Rs. 200,000
• Sundry Debtors: Rs. 100,000
• Sundry Creditors: Rs. 50,000

The agreed Purchase Consideration was Rs. 800,000. FEEN Ltd. paid this amount by issuing equity shares of Rs. 100 each at a Premium of 25%.

Pass the necessary journal entries in the books of FEEN Ltd. | show the working notes.

Working Notes | Step-by-Step Breakdown

Calculation for the Acquisition:

Step 1: Calculate Net Assets Taken Over
➔ Total Assets = 500,000 + 200,000 + 100,000 = Rs. 800,000.
➔ Total Liabilities = Rs. 50,000.
➔ Net Assets = Total Assets - Total Liabilities = Rs. 750,000.

Step 2: Determine Goodwill or Capital Reserve
➔ Purchase Consideration = Rs. 800,000.
➔ Net Assets = Rs. 750,000.
➔ Since FEEN Ltd. is paying MORE than the net value received (800,000 > 750,000), the difference is Goodwill.
➔ Goodwill = 800,000 - 750,000 = Rs. 50,000 (Debit).

Step 3: Calculate the Number of Shares to Issue
➔ Amount Payable to Vendor = Rs. 800,000.
➔ Issue Price per Share = Rs. 100 (Face Value) + Rs. 25 (Premium) = Rs. 125.
➔ Number of Shares = 800,000 / 125 = 6,400 Shares.

Solution: Journal Entries in the books of FEEN Ltd.

Date	Particulars	L.F.	Debit (Rs.)	Credit (Rs.)
1	Building a/c ... Dr. Computers | Equipment a/c ... Dr. Sundry Debtors a/c ... Dr. Goodwill a/c (Balancing Figure) ... Dr. To Sundry Creditors a/c To Vendor a/c (Being assets | liabilities taken over | purchase consideration fixed)		5,00,000 2,00,000 1,00,000 50,000	50,000 8,00,000
2	Vendor a/c ... Dr. To Equity Share Capital a/c (6,400 shares x 100) To Securities Premium a/c (6,400 shares x 25) (Being 6,400 equity shares issued at a premium of 25% to discharge the purchase consideration)		8,00,000	6,40,000 1,60,000

If you have any questions about these corporate accounting journal entries, contact directly via WhatsApp: 9851402725 | 9810333725 | 9840260248.

Section 7: Introduction & Issue of Debentures

What is a Debenture?

A debenture is a formal written acknowledgment of a debt given by a company under its common seal. It contains a contract for the repayment of the principal sum at a specified date and for the payment of interest at a fixed rate (e.g., 10% Debentures means the interest rate is 10% p.a.). Unlike shareholders, debenture holders are creditors of the company.

💡 Tips | Tricks

The journal entries for issuing debentures are almost identical to issuing shares! Just replace the word "Share Capital" with "X% Debentures" and "Share Application" with "Debenture Application".

Case Study: Basic Issue by FEEN Ltd.

The Question:
Focus Edge Education Network (FEEN) Ltd. issued 2,000, 10% Debentures of Rs. 100 each at a discount of Rs. 5 per debenture. The amount is payable as follows:

• On Application: Rs. 25
• On Allotment: Rs. 40 (After discount)
• On First & Final Call: Rs. 30

All debentures were applied for and the money was duly received. Pass the journal entries.

Working Notes

Step 1: Check the total value
➔ Application (25) + Allotment (40) + Call (30) = Rs. 95 received.
➔ Discount = Rs. 5. Total = Rs. 100 (Face Value).

Step 2: Calculate Allotment Stage (Where discount is recorded)
➔ Total Allotment Due (Gross) = 2,000 x 45 = Rs. 90,000.
➔ Discount on Issue = 2,000 x 5 = Rs. 10,000 (Debit).
➔ Amount to receive = 2,000 x 40 = Rs. 80,000.

Date	Particulars	Debit (Rs.)	Credit (Rs.)
1	Bank a/c (2,000 x 25) ... Dr. To 10% Debenture Application a/c	50,000	50,000
2	10% Debenture Application a/c ... Dr. To 10% Debentures a/c	50,000	50,000
3	10% Debenture Allotment a/c (2,000 x 40) ... Dr. Discount on Issue of Debentures a/c (2,000 x 5) ... Dr. To 10% Debentures a/c (2,000 x 45)	80,000 10,000	90,000
4	Bank a/c ... Dr. To 10% Debenture Allotment a/c	80,000	80,000
5	10% Debenture First & Final Call a/c (2,000 x 30) ... Dr. To 10% Debentures a/c	60,000	60,000
6	Bank a/c ... Dr. To 10% Debenture First & Final Call a/c	60,000	60,000

Section 8: Issue of Debentures for Consideration Other Than Cash

Just like shares, a company can issue debentures to vendors to pay for the purchase of assets or an entire business. The formula to calculate the number of debentures remains exactly the same!

Case Study: Asset Purchase

The Question:
FEEN Ltd. purchased a new smart-board and machinery from Tech Solutions for Rs. 2,88,000. FEEN Ltd. agreed to pay the purchase consideration by issuing 12% Debentures of Rs. 100 each at a discount of 4%. Pass the journal entries.

Working Notes

Step 1: Find the Issue Price
➔ Face Value = Rs. 100.
➔ Discount = 4% of 100 = Rs. 4.
➔ Issue Price = 100 - 4 = Rs. 96.

Step 2: Calculate Number of Debentures to Issue
➔ Formula: Purchase Consideration / Issue Price
➔ 2,88,000 / 96 = 3,000 Debentures.

Step 3: Calculate the total discount amount
➔ Total Discount = 3,000 Debentures x Rs. 4 = Rs. 12,000.

Date	Particulars	Debit (Rs.)	Credit (Rs.)
1	Machinery a/c ... Dr. To Tech Solutions (Vendor) a/c (Being machinery purchased)	2,88,000	2,88,000
2	Tech Solutions a/c ... Dr. Discount on Issue of Debentures a/c ... Dr. To 12% Debentures a/c (3,000 x 100) (Being 3,000 debentures issued at a 4% discount to the vendor)	2,88,000 12,000	3,00,000

Section 9: Issue of Debentures from Redemption Point of View

The Principle of Prudence

Redemption means repaying the debenture amount after a certain period. The Principle of Prudence (Conservatism) in accounting states that we must record all anticipated future losses today. Therefore, if a company promises to redeem (repay) the debentures at a Premium (paying back more than face value), this extra payment is a future loss. It MUST be recorded on the very day the debentures are issued!

💡 Tips | Tricks: The Redemption Rule

Whenever redemption is at a PREMIUM, you must instantly add two things to your Issue entry:

• Debit: Loss on Issue of Debenture a/c
• Credit: Premium on Redemption of Debenture a/c

If redemption is at Par or Discount, you ignore the redemption condition during the issue entry!

Case Study: Complex Redemption Conditions

The Question:
Pass the journal entries for the issue of debentures in the following two separate cases for FEEN Ltd.:

• Case A: Issued 1,000, 9% Debentures of Rs. 100 each at PAR, redeemable at a 10% PREMIUM.
• Case B: Issued 2,000, 8% Debentures of Rs. 100 each at a 5% DISCOUNT, redeemable at a 5% PREMIUM.

Working Notes | Logic Breakdown

For Case A:

➔ Issue: At Par (100). Money received in bank = 1,000 x 100 = Rs. 1,00,000.
➔ Redemption: At 10% Premium. Extra money to pay later = 1,000 x 10 = Rs. 10,000.
➔ Action: Create "Loss on Issue" (Dr) and "Premium on Redemption" (Cr) for Rs. 10,000.

For Case B (The Double Loss):

➔ Issue: At 5% Discount (95). Money received = 2,000 x 95 = Rs. 1,90,000. Issue Discount = Rs. 10,000.
➔ Redemption: At 5% Premium. Extra money to pay later = 2,000 x 5 = Rs. 10,000.
➔ Action: You have an Issue Discount (10k) AND a Redemption Loss (10k). You can debit them separately, or combine them into a single "Loss on Issue" of Rs. 20,000. We will show them separately for perfect clarity!

Solution: Journal Entries

Case	Particulars	Debit (Rs.)	Credit (Rs.)
Case A	Bank a/c (1,000 x 100) ... Dr. Loss on Issue of Debentures a/c ... Dr. To 9% Debentures a/c To Premium on Redemption of Deb. a/c (Being debentures issued at par and redeemable at 10% premium)	1,00,000 10,000	1,00,000 10,000
Case B	Bank a/c (2,000 x 95) ... Dr. Discount on Issue of Debentures a/c ... Dr. Loss on Issue of Debentures a/c (Redemption premium) ... Dr. To 8% Debentures a/c (2,000 x 100) To Premium on Redemption of Deb. a/c (Being debentures issued at a discount and redeemable at a premium)	1,90,000 10,000 10,000	2,00,000 10,000

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