chapter 7s

CHAPTER 7

COMPANY ACCOUNTSISSUE AND REDEMPTION OF DEBENTURE

In the previous chapter you have studiedthe issue of share capital as a means ofraising long-term funds for financing thebusiness activities. Seldom equitysources of financing are sufficient tomeet the ever growing needs of thecorporate expansion and growth. Hence,corporates turn to debt financingthrough financial institutions,commercial banks or by issuing debtinstruments either through the route ofprivate placement or by offering thesame for public subscription. Owing taxshield provided by debt instruments,the debt financing not only helps inreducing the cost of capital but alsohelps in designing appropriate capitalstructure of the company. This chapterdeals with the accounting treatment ofdifferent aspects of debenture and bondespecially with issue, redemptionincluding conversion of debenture.

LEARNING OBJECTIVES

After studying this chapter, youwill be able to :

� State the meaning ofdebenture and bonds;

� Describe the methods for theissue of debenture for cashand for consideration otherthan cash;

� Explain the issue of debentureas a collateral security;

� Explain the sources andrecord transaction relating toredemption of debenture;

� Discuss the methods ofredemption of debenture;

� Record the Sinking FundInvestment transactions;

� Deal with cum-interest andex-interest, open marketoperations.

353353COMPANY ACCOUNTS — ISSUE AND REDEMPTION OF DEBENTURE

7.1 Concept of Debenture

According to section 2 (12) of The Companies Act, 1956 ‘Debenture’ includes“Debenture stock, bonds and any other securities of a company, whetherconstituting a charge on the assets of the company or not.”

Debenture is an instrument of debt owed by a company. As an acknowledge-ment of debt, such instruments are issued under the seal of a company andduly signed by authorised signatory. The debenture instrument specifiesnominal/par value, the rate of interest, periodicity of payment, the tenure ofthe debentures and terms of redemption.

Bond is similar to that of debenture, both in terms of contents and texture.Traditionally, bonds had been issued by the government, but these days bondsare also being issued by semi-government and non-government organisationsas an acknowledgment of debt. The significant difference between bonds anddebentures is with respect to the issue condition, i.e., bonds can be issuedwithout predetermined rate of interest as is in case of deep discount bonds. Adeep discount bond is issued without prefixed rate of interest which is implicityin-built in the terms of payment.

Charge is an incumbrance to meet the obligation under the Trust Deed, wherebythe company agrees to mortgage specific portion either by way of a first orsecond charge. Such charge implies right of lenders to secure their paymentfrom such asset(s) or from the liquidator in the event of winding up or from thecompany when the charge becomes void. Following are included in the categoryof charge :

(a) A charge for the purpose of securing any issue of debenture;

(b) Uncalled share capital of the company;

(c) Any immovable property wherever situated or any interest therein;

(d) Any book debts of the company excluding negotiable instrumentsgiven to secure the payment of any book debts of a company;

(e) A charge not lying to plegde on any movable property of the company;

(f) Floating charge on undertaking of any property of the companyincluding stock-in-trade;

(g) Calls made on shares but not paid;

(h) The ship or any share in the ship;

(i) Goodwill, patents or a license under patent, trademark, copyright orlicense under copy right.

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If a charge is created on a property outside India, an evidence thereofshould be posted or despatched with due diligence within 30 days after thedate on which charge is created.

7.2 Types of Debenture

Debenture can be classified from following stand points:

1. Security

2. Tenure

3. Mode of Redemption

4. Coupon Rate

7.2.1 Security point of view

Debenture can be secured or unsecured from the security point of view. Thesecured debenture may be fully secured or unsecured. The fully secureddebentureholder are given fixed charge on specific assets. Therefore , such acharge is commonly referred to as fixed and specific charge. However, in caseof partly secured debenture/bond, the assets are given by way of charge arespecific but their value is less than the amount owed by the company.

Fixed charge

When the charge is created against specific assets of the enterprise then sucha charge is called a fixed charge. This charge is created against those assetswhich are held by the company for use in operations and are not meant forsale. First charge/second charge/floating charge is from the point of view ofquality of charge and it relates to the rank order of payment to be made to thebeneficiaries of such charge. It, in effect, entails a protection to thedebentureholders.

Floating charge

A floating charge is a kind of security for which no specific asset is given, butall assets of the firm (excluding those given by way of specific charge to securedcreditors) are under charge for such creditors. This implies that before anythingis paid to unsecured creditors, creditors holding a floating charge will gettheir claims settled on a priority basis.

First charge and Second charge

The first charge implies the priority of repayment to those holders havingsuch charge on assets. The assets against which first charge is created are to


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356 ACCOUNTANCY

be first used in paying off the secured lenders only. Those who hold firstcharge against any specific assets will realise their dues from the net releasablevalue of such assets. The amount of surplus from such assets, if any, will beutilised for satisfying the claim of those creditors who have second charge. Incase, the dues of second charge holders are not fully paid off, the unpaidamount of such lenders is to be treated as unsecured and hence, to thatextent, they will be paid off along with unsecured creditors. In other words,the unpaid amount of partly secured creditors will rank alongwith unsecuredcreditors.

Example

Following are the relevant figures extracted from the Balance Sheet of DreamComputers Ltd. as at March 31, 2002.

Rs. (in lakhs)

12% ‘A’ Debenture 2,000 Fixed Assets(Secured by charge Gross Block 7,800over land and building Less Accumulated (2,300)of company) Deprecation

Net Block 5,50012% ‘B’ Debenture 2,000 Current Assets 2,800(Secured by secondsecond charge overland and building of company)

12% ‘C’ Debenture 3,000(with floating charge)Unsecured creditors 1,300

Total 8,300 Total 8,300

Notes to Balance Sheet

Land is valued at Rs. 1,500 lakhs (cost Rs. 600 lakhs)and buildings are valuedat Rs. 1,750 lakhs (book value Rs. 1,700 lakhs), included in gross block. Otherfixed assets were estimated to realise Rs. Rs. 3,000 lakhs and current assetsare valued at Rs. 2,600 lakhs.

You are required to estimate the deficiency of secured creditors who wouldrank as unsecured creditors. Also ascertain the amount of unsecuredcreditors.


Solution

Value of specific assetsRs. (in lakhs)

Realisable value of land 1,500

Realisable value of buildings 1,750

Total realisable value of land and buildings 3,250

Amount due to 12% ‘A’ debenture holding first charge (2,000)Surplus of assets 1,250Amount due to 12% ‘B’ debenture holding second charge (2,000)Deficiency to be ranked as unsecured creditors (750)

Before making any payment to unsecured creditors, the lenders holdingfloating charge i.e., 12% ‘C’ debentureholders will be paid the amount due outof the other assets realised.

Unsecured creditorsRs. (in lakhs)

As per Balance Sheet 1,300Add : Deficiency of partlysecured debenture 750

Total unsecured creditors 2,050

7.2.2 Tenure point of viewDebenture can be redeemable debenture or perpetual debenture from tenurepoint of view.Redeemable debenture are to be redeemed on the expiry of a fixed period oftime specified in the Debenture Trust Deed. The debentures can be redeemedin its entirety after the expiry of a tenure or before the expiry of entire tenurein installments by draw of lots. Under such draw of lots the repayment is inform of cash while conversion for a particular portion will be available to allthe debentureholders with equal rights.Perpetual debenture : are those debenture which are redeemable only on thehappening of a contingency, however remote, or on the expiration of a period,however long. The feature of perpetuity to a debenture/bond is derived fromthe fact that repayment thereof is not only after too long a period but also at agiven rate of interest, its present value tends to be zero.

7.3.3 Mode of Redemption point of viewDebenture can be convertible or non-convertible keeping in view the mode ofredemption.

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(1) Convertible Debenture(CD)Those debenture which are convertible into equity shares or other securitieseither at the option of debentureholders or at the option of the companyas the case may be. Convertible debenture are of two types.

(i) Fully Convertible Debenture (FCD) : Are those debenture where the fullamount is to be converted into equity shares of the company at agreedterms and conditions. Where the conversion is to be made at or after 18months from the date of allotment but before 36 months, the conversionis optional on the part of debentureholders as per SEBI Guidelines.

(ii) Partly Convertible Debenture (PCD) : Are those debenture where only aportion of the amount of debenture is convertible into shares or othersecurities at a specified time and remaining part of debenture is redeemableon agreed terms.

(2) Non-convertible Debenture (NCD)

The debenture which cannot be converted into shares or any othersecurities are called non-convertible debenture.

7.2.4 Coupon Rate point of view

Usually the debenture are issued with a specified rate of interest, which iscalled as coupon rate. The specified rate may either be fixed or floating. Thefloating interest rate is usually tagged with the bank rate and yield on treasurybond plus a reward for risk. Since the bank rate and yield on treasury securitieskeep on fluctuating over a period of time, any change is compensated in therisk premium. The rate of interest in such a case is quoted as “PLR + 50 basispoints”. In this case, if we assume a PLR of 9%, the rate of interest would be9.5%. The “+ basis points” is determined in relation to risk involved.

A zero coupon bond is one which does not carry a specified rate of interest. Inorder to compensate the investors, such bonds are then issued at a substantialdiscount. The difference between the face value and issue price is the totalamount of interest related to the duration of the bond. In order to calculate theperiodic charge of interest, the amount is calculated by using the followingformula :

B0 = n)(1

MV

i+

Where,B0 = Value of zero coupon bond.MV = Maturity value of zero coupon bond.n = Life of zero coupon bond.i = Required rate of return


In the above formula the value of (1+i)n is easily computed by dividing issue pricein the maturity value of the bond. To find out the interest rate applicable to suchbonds, we need to look for present value interest factor tables across the periodequal to ‘n’ and find out the value near the above computed value. The interestrate in that column will be the interest on bonds. Thus, if we know the interestrate, years to maturity and the issue price, then the maturity value can becomputed. In the same manner, if interest rate, years to maturity and maturityvalue are known, then the issue price can be computed. Present value interestfactor for i rate of interest and ‘n’ years is written as PVIF,i,n and are given inpresent value of Re. 1 table shown in the appendix.

B0 = MV × PVIF,i,n

Mv = ni,,PVIFB0

PVIFi,n = MVB0

Example

Susan Ltd. issues a zero coupon bond having 15 years maturity with face valueRs. 1,000. At what price the company should issue the bond, if the required rateof return is 12% p.a.?

B0 = MV × (PVIF,i,n)

= Rs. 1,000 × (PVIF 0.12.15)

= Rs. 1,000 × 0.183* = Rs. 183

It implies that the investor should be able to get a zero coupon bond forRs. 183 with a face value of Rs. 1,000.

(* For this value, see the PVIF tables as given in the appendix )

7.3 Trust Deed

This deed is required to be prepared before the issue of prospectus or letter ofoffer to the public for subscription of debenture. Debenture trust deed is adocument created by the company whereby trustees are appointed to protectthe interest of debentureholders before they are offered for public subscription.A company offering convertible/non-convertible debt instruments through anoffer document shall comply with the following important provisions :

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(i) No public or rights issue of debt instruments (including convertibleinstruments) in respect of their maturity or conversion period shall bemade unless credit rating from a credit rating agency has been obtainedand disclosed in the offer document. (10.1.1.)

(ii) All the credit ratings obtained during the three (3) years preceeding thepublic or rights issue of debt instruments (including convertibleinstruments) for any listed security of issuer company shall be disclosedfrom the offer document. (10.1.4)

(iii) A trust deed shall be executed by the issuer company in favour of thedebenture trustees within six months of the closure of the issue.

(iv) Trustees to the debenture issue shall be vested with the requisite powersfor protecting the interest of debenture holders including a right to appointa nominee director on the Board of the Company in consultation with theinstitutional debenture holders.

(v) The debenture trustees shall ensure the implementation of the conditionsregarding creation of security for debentures and debenture redemptionreserve.

7.3.1 Who can be Trustees

In case of issue of debenture with maturity of more than 18 months, the issuershall appoint a Debenture Trustee. Only the following are eligible to be debenturetrustee :

(a) A scheduled bank carrying on commercial activity ; or

(b) A public financial institution within the meaning of section 4A.(1) of thecompanies Act, 1956; or

(c) An Insurance Company; or

(d) Body Corporate.Section 4A.(1) of The Companies Act is reproduced on page 361 forexplaining point(b) above.

7.3.2 Who can not be a Trustee

No person can be appointed as a trustee if he :

(a) beneficially holds shares in the company;

(b) beneficially entitle to receive money which are to be paid to/the by thecompany to the debenture trustee;

(c) has entered into any guarantee in respect of principal debts,secured bydebenture or interest thereon.


4A.(1) Each of the financial institution specified in this sub-section shall be regarded,for the purposes of this Act, as a public financial institution, namely :

(i) The Industrial Credit and Investment Corporation of India Limited, a companyformed and registered under the Indian Companies Act, 1913 (7 of 1913);

(ii) the Industrial Finance Corporation of India, established under section 3 ofthe Industrial Finance Corporation Act, 1948 (15 of 1948);

(iii) the Industrial Development Bank of India, established under section 3 of theIndustrial Development Bank of India Act, 1964 (18 of 1964);

(iv) the Life Insurance Corporation of India, established under section 3 of theLife Insurance Corporation Act, 1956 (31 of 1956);

(v) the Unit Trust of India, established under section 3 of the Unit Trust of IndiaAct, 1963 (52 of 1963);

49 [vi) the Infrastructure Development Finance Company Limited, a company formedand registered under this Act;]

49a[(vii)]the securitisation company or the reconstruction company which has obtaineda certificate of registration under sub-section (4) of section 3 of the Securitisationand Reconstruction of Financial Assets and Enforcement of Security Interest(Second) Ordinance, 2002.]

(2) Subject to the provisions of sub-section (1), the Central Government may, bynotification in the Official Gazette, specify such other institution as it maythink fit to be a public financial institution :

Provided that no institution shall be so specified unless—

(i) it has been established or constituted by or under any Central Act, or

(ii) not less than fifty-one per cent of the paid-up share capital of such institutionis held or controlled by the Central Government.]

49. Inserted by the Companies (Amendment) Act, 1999, w.e.f. 31-10-1998.

49a. Inserted by the Securities and Reconstruction of Financial Assets and Enforcement of

Securities Interest(Second) Ordinance, 2002, w.e.f.21-6-2002

7.3.3 Functions and Duties of Trustees

It is to be noted that the duty of every debenture trustee is to :

(a) Call for periodic reports from the body corporate;

(b) Take possession of trust property in accordance with the provisions of thetrust deed;

(c) Enforce security in the interest of debentureholders;

(d) The charge created against the assets under debenture trust deed shouldbe completed within 30 days of the issue of allotment letter and despatchof debenture certificate.

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A debenture trustee who fails to comply with any conditions, contravenesany of the provisions of the Act, rules or regulations, the Companies Act orrules made thereunder, may disqualify him to act as trustee.

7.4 Accounting for Issue of Debenture for Cash

Debenture may be issued with or without a coupon rate.

7.4.1 Debenture issued with a Coupon Rate

The debenture issued with coupon rate may be categorised as under :

1. Debenture issued at a par and redeemable at par;

2. Debenture issued at a discount and redeemable at par;

3. Debenture issued at premium and redeemable at par;

4. Debenture issued at par and redeemable at premium;

5. Debenture issued at a discount and redeemable at premium.

Journal entries in each of the above cases are discussed below :

1. Debenture issued at par redeemable at par

When debenture are issued at par, the issue price is equal to par value, inthis regard the following entries are recorded :(a) For receipt of application money ;

Bank a/c Dr.Debenture application a/c

(b) For transfer of application money to debentures account :

Debenture application a/c Dr.x% Debenture a/c

(c) Call made consequent upon allotment :

Debenture allotment a/c Dr.x% Debenture a/c

Alternatively,

The following combined entries may also be recorded

(a) Debenture application a/c Dr.


(b) For receipt of allotment money :

Bank a/c Dr.Debenture allotment a/c


Illustration 1(Issue of Debenture)

Amol Ltd. Issued 40,00,000, 9% debenture of Rs. 50 each, payable on applicationas per term mentioned in the prospectus and redeemable at par any time after 3years from the date of issue. Record necessary entries for issue of debenture inthe books of Amol Ltd.

Solution

Books of Amol Ltd.Journal

Date Particulars L.F. Debit CreditAmount Amount

(Rs.) (Rs.)

Bank a/c Dr. 20,00,00,000Debenture application a/c 20,00,00,000

( Debenture application money received)

Debenture application a/c Dr. 20,00,00,0009% Debenture a/c 20,00,00,000

(Application money transferredto 9% debentures accountconsequent upon allotment)

Illustration 2(Issue of Debenture)

Country Crafts Ltd. Issued 20,00,000, 8% debenture of Rs. 100 each at parpayable as Rs. 40 on application and Rs 60 allotment, redeemable at par after5 years from the date of issue of debenture. Record necessary entries in thebooks of Country Crafts Ltd.

SolutionBooks of Country Crafts Ltd.

Journal


(Rs.) (Rs.)

(a) Bank a/c Dr. 8,00,00,000Debenture application a/c 8,00,00,000

(Debenture application money received)

(b)* Debenture application a/c Dr. 8,00,00,000Debenture allotment a/c Dr. 12,00,00,000

8% Debentures a/c 20,00,00,000(Debenture application and callmade consequent upon allotment moneytransferred to debenture account)

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(c) Bank a/c Dr. 12,00,00,000Debenture allotment a/c 12,00,00,000

(Call made on allotment received)

*Alternatively, for entry (b) above could also be recorded as follows :

(i) Debenture application a/c Dr. 8,00,00,0008% Debenture a/c 8,00,00,000

(Transfer of application money to 8%debenture account on consequentupon allotment)

(ii) Debenture allotment a/c Dr. 12,00,00,0008% Debenture a/c 12,00,00,000

(Call made consequent upon allotment)

2. Debenture Issued at Discount and Redeemable at par

When debenture are issued at discount, issue price will be less than par value.The difference between the two is considered as loss on issue on debenturesand is to be written-off over the life of debentures. The entries with regards toissue are given below .

(a) For receipt of application money


(b) At the time of making allotment

(i) Transfer of application money to debenture account


(ii) Call made consequent upon allotment

Debenture allotment a/c Dr.Discount on issue of debenture a/c Dr.

x% Debenture a/c

(c) For receipt of call made consequent upon allotment


Illustration 3 (Issue of Debenture at discount and redeemable at par)

Atul Ltd. issued 1,00,00,000, 8% debenture of Rs. 100 each at a discount of10% redeemable at par at the end of 10th year. Money was payable as follows:

Rs. 30 on application

Rs. 60 on allotment

Record necessary journal entries regarding issue of debenture.


Solution

Books of Atul Ltd.Journal


(Rs.) (Rs.)

Bank a/c Dr. 30,00,00,000

Debenture application a/c 30,00,00,000(Debenture application money received)


(Application money transferred to 8%debenture account consequent uponallotment)

Debenture allotment a/c Dr. 60,00,00,000Discount on issue of debenture a/c Dr. 10,00,00,000

8% Debenture a/c 70,00,00,000(Amount due on allotment)

Bank a/c Dr. 60,00,00,000Debenture allotment a/c 60,00,00,000

(Money received consequent uponallotment)

3. Debenture Issued at Premium and Redeemable at par

When debenture are issued at premium, the issue price is more than the parvalue. The premium is transferred to securities premium account. In this re-gard, the following journal entries are recorded :

(A) When premium amount is received at the time of application;(a) For receipt of application money




Debenture application a/c Dr.x% Debentures a/cSecurities Premium a/c

(ii) Call made on consequent upon allotment


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(B) When Premium amount is received at the time of allotment;

(a) For the receipt of application money

(i) Bank a/c Dr.Debenture application a/c




(ii) Call made consequent upon allotment

Debenture allotment a/c Dr.x% Debenture a/cSecurities premium a/c



Illustration 4(Issue of Debenture at premium and redeemable at par)

Koinal Chemicals Ltd. issued 15,00,000, 10% debenture of Rs. 50 each atpremium of 10%, payable as Rs. 20 on application and balance on allotment.Debenture are redeemable at par after 6 years. All the money due on allotmentwas called up and received. Record necessary entries when premium money isincluded :

(i) in application money

(ii) in allotment money


Solution

Books of Koinal Chemicals Ltd.Journal

(i) When premium money is received alongwith application money :Date Particulars L.F. Debit Credit

Amount Amount(Rs.) (Rs.)



Debentures application a/c Dr. 3,00,00,00010% Debenture a/c 2,25,00,000Securities premium a/c 75,00,000

( Application money transferred to 10%debenture and securities premiumaccount consequent upon allotment)

Debenture allotment a/c Dr. 5,25,00,00010% Debenture a/c 5,25,00,000

(Call made consequent upon allotment)


(Call made consequent upon allotment money received)

(ii) When premium money is called on allotment :




( Debenture application moneytransferred to 10% debentureaccount consequent upon allotment)

Debenture allotment a/c Dr. 5,25,00,00010% Debenture a/c 4,50,00,000Securities premium a/c 75,00,000

(Call made on allotment of debentureincluding premium)


(Money received consequent uponallotment )

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4. Debenture issued at par and redeemable at premium

In this case, the issue price is same as par value but the redemption value ismore than the par value, therefore redemption premium is recorded as a losson issue of debenture at the time of allotment of debenture. Following journalentries are recorded in this regard :

(a) For receipt of application money





(ii) Call made consequent upon allotment.

Debenture allotment a/c Dr.Loss on issue of debenture a/c Dr. [ Equal to Debenture

Redemption Premium]x% Debenture a/cDebenture redemption premium a/c

(c) For receipt of allotment money


Illustration 5(Issue of Debenture at par and redeemable at premium)

Modern Equipments Ltd. issued 2,00,000, 12% debenture of Rs. 1,000 payableas follows :

On application Rs. 300

On allotment Rs. 700

The debenture were fully subscribed and all the money was dulyreceived. As per terms of issue, the debenture are redeemable at Rs. 1,100 perdebenture. Record necessary entries regarding issue of debenture.


Solution

Books of Modern Equipments Ltd.Journal


(Rs.) (Rs.)

Bank a/c Dr. 6,00,00,000 Debenture application a/c 6,00,00,000

( Debenture application money received)

Debentures application a/c Dr. 6,00,00,00012 % Debenture a/c 6,00,00,000

(Application money transferred to 12%debenture account consequent toallotment)

Debenture allotment a/c Dr. 14,00,00,000Loss on issue of debenture a/c Dr. 2,00,00,000

12% Debenture a/c 14,00,00,000Debenture redemption premium a/c 2,00,00,000

(Call made on allotment of debentureat par and redeemable at premium)

Bank a/c Dr. 14,00,00,00012% Debenture allotment a/c 14,00,00,000

(Call made consequent uponallotment money received)

5. Debenture Issued at discount and redeemable at premium : In this situationthe issue price is less than par value but redemption value is more than parvalue. The difference between the redemption price and the issue price istreated as discount/loss on issue of debenture. Suppose, a 10% debentureof Rs. 1,000 is issued at a discount of Rs. 100 and redeemable at a premiumof Rs. 5 per debenture, the amount of loss will be equal to Rs. 900 –Rs. 1,005 = Rs. 105. This is to be treated as loss on issue. It is to be notedthat premium on redemption of debentures is also credited by Rs. 5.(a) For the receipt of application money





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(ii) Call made consequent upon allotment of debenture at discount and redeemableat premium

Debenture allotment a/c Dr.Discount/Loss on issue of debenture Dr. [Amount equal to the

discount on issue ofdebenture plus Premiumon redemption]

x% Debenture a/c

Debenture redemption Premium a/c

(c) For receipt of call made on allotment


Illustration 6 (Issue of debenture at discount and redeemable at premium)

Agrotech Ltd. issued 1,40,00,000, 9% debenture of Rs. 100 each at a discountof 6%, redeemable at a premium of 5% after 3 years payable as : Rs. 50 onapplication and Rs. 44 on allotment. Record necessary journal entries for issueof debentures.

Solution

Books of Agrotech Ltd.Journal


(Rs.) (Rs.)


(Debentures application money received)


( Application money transferred to 9% debenture account)

Debenture allotment a/c Dr. 61,60,00,000Discount on issue of 15,40,00,000debenture a/c Dr.

9% Debenture a/c 70,00,00,000Debenture redemption premium a/c 7,00,00,000

(Call made consequent uponallotment of debenture issued atdiscount and redeemable at premium)


( Allotment amount received)


Notes to the Solution

Discount/Loss on issue of debenture =

Amount of discount on issue + Premium payable on redemption

= 6% of Rs. 1,40,00,00,000 + 5% of Rs. 1,40,00,00,000

= Rs. 8,40,00,000 + Rs. 7,00,00,000

= Rs. 15,40,00,000

7.4.1.1 Debenture interest

Interest payable on coupon debenture is treated as a charge against the profitsof the company. Interest on debenture is paid periodically and is calculated atcoupon rate on the nominal value of debenture. The company will pay interestnet of tax to the debentureholders because the company is under obligation todeduct tax at source at the rates applicable under tax rules from time to time.The companies will deposit the tax so deducted with income tax authorities.Following accounting entries are to be recorded in this regard :1. For making interest due

Interest a/c Dr.Debentureholders’ a/c

2. For making payment of interest and deduction of tax at source (TDS)

Debentureholders a/c Dr.TDS Payable a/cBank a/c

3. For making payment of tax deducted at source

TDS payable a/c Dr.

Bank a/c

4. For transferring interest to profit and loss account

Profit and Loss a/c Dr.Interest a/c

7.4.2 Without Coupon Rate : A case of Deep Discount Bond

When debenture are issued without the specific pre-fix of interest rate andissue price is heavily discounted, the issue of debenture is said to have beenmade as a Deep Discount Bond. The difference between issue price and theredemption price is the total amount of notional discount representing theinterest amount to be spread over the duration of the bond. From the accountingpoint of view, this amount is recorded as “Deferred Interest Expense Account”at the time of issue of debenture and a proportionate amount is written off asinterest expense every year over the life of debenture.

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372 ACCOUNTANCY

Accounting entries in this regard are as follows :1. Receipt of application money


2. Application money and deferred interest expense transferred to debenture accountconsequent upon allotment .

Debenture application a/c Dr.Deferred interest expense a/c Dr.

x%Debenture a/c

7.4.2.1 Deferred Interest expense

Computation of Periodic Interest.

It is important to note that compounding and discounting are related in thesense that one equation can help to solve either the future value (FV) or thepresent value (PV).

PV form (based on discounting) : PV = ni) (1

nFV

+ = FVn

+ i 11

FV form (based on compounding) : FV = PV (1+i)n

There are four variables in the above equation – PV, FV, i and n. If we know thevalues of any three variables, then we can find the value of fourth variable. Incase of deep discount bonds, PV (issue price), FV (maturity value), n (numberof years) are known. Therefore, we can compute i (interest rate).

Suppose, a company issue a deep discount bond at a price of Rs 783.50 and itwill pay you Rs. 1,000 after five years. Here, we know that present value (PV)is Rs. 783.50, number of years (n) is 5 and future value (FV) is Rs. 1,000, butwe do not know the rate of interest. Thus, by using present and future valueconcept, we can calculate the value of i .

Timeline –783.50 Rs. 1,000

Using the equation :

FVn = PV (1 + i)n =

Rs. 1,000 = Rs. 783.50 (1 + i)n

0 1 2 3 4 5


Computing i,

FVn = PV (1 + i)n = PV (FVIF,i, n)

Rs. 1,000 = Rs. 783.50 (FVIF,i,5)

FVIF,i, 5 = Rs. 1,000/783.50 = 1.2763

In future value table, locate the above future value factor across the period row.The value is in the 5 % column, so the interest rate at which Rs. 783.50 grows toRs. 1,000 in five years is 5 %(see appendix for FV Table)

The notional rate is that rate at which if the issue price is compounded, itwill become equal to maturity value at the time of redemption of debenture.

We can also calculate notional rate of interest with the help of presentvalues tables. In this regard the following steps are used.

(i) Compute present value interest factor (PVIF) by dividing the issue pricewith the maturity value :

ValueMaturity Price Issue

PVIF =

(ii) Locate across the period row the PVIF which is nearest to the calculated

value, i.e.,

Value Maturity

Price Issue, on the lower side and name it as PVIF at lower

rate. In the same row, the PVIF in the next column is named as PVIF athigher rate.

(iii) By using following formula, we can interpolate the implicit/notional rateof interest

Notional rate of interest =

Rate)Lower Rate(Higher ratehigher atPVIF rateLower atPVIF

Value Calculated rateLower atPVIF rateLower −×

−−+

There are two methods of accounting for computing interest on deep discountbond. Since interest is not payable each year, therefore, interest may either betreated as deferred expense or accrued interest expense is recognised onlywhen retirement of bond on maturity or before put/call option takes place.When recognition of interest is postponed until retirement, the accrued interesttill date is shown by explanatory note in the balance sheet as could be seen inthe Exhibit no. 1, extracted from the Annual Reports and Accounts of GujaratAmbuja Limited.

374

374 ACCOUNTANCY

Disclosure of Deep Discount Bond in Balance Sheet

As at March 31, 2001 As at March 31, 2000Rs in Lakhs Rs in Lakhs

Unsecured Loans

15% Deep Discount Debenture 463.00 463.00(Debenture due for redemptionon March 1, 2002 at a value ofRs. 653.52 lakhs)

( Reports and Accounts of subsidiary companies of Gujarat Ambuja Cements Ltd., 2000-2001, p 6)

At at March 31, 2002 As at March 31,2001Rs. in Lakhs Rs. Lakhs

Unsecured Loans15 % Deep Discount Debenture(Debenture redeemed on May 7, 2001) - 463.00

(Reports and Accounts of Subsidiary Companies of Gujarat Ambuja Cements Ltd. 2001- 2002, p 6)

Exhibit 1

In the above case, debenture are continued to be shown at issue price and matching ofinterest accrued is deferred until redemption.

When interest is treated as deferred revenue expense and expressed as such every year, thefollowing entries are to be recorded :

1. On the date of issue

i For receipt of application money


ii For debenture application money transferred to debenture account consequent uponallotmentDebenture application Dr.

x% Debenture a/c2. At the end of every yeari. For Deferred interest expense charged to interest on debenture account

Interest on debenture Dr.Deferred interest expense a/c

ii. For interest on debenture transferred to profit and loss accountProfit and Loss a/c Dr.

Interest on debenture a/c3. In the last year(i.e., year of maturity)

i. For amount due to debenture holders on maturity.Debenture a/c Dr. (With issue price)Deferred interest a/c Dr. (Total deferred interest expense)

Debenture holders a/c (Face value of debentures)


ii For payment to debenture holders

Debenture holders a/c Dr.Bank a/c

Illustration 7(Treatment of interest)

Sitanshu Ltd. issued 10,000 zero coupon bond of face value of Rs. 1,000 eachmaturing after six years at an issue price of Rs. 506.65. Record necessaryjournal entries to record the issue of bond and treatment of interest in thebooks of Sitanshu Ltd.

Solution

Books of Sitanshu Ltd.Journal


Rs. Rs.

On the Bank a/c Dr 50,70,0001

date of Bond application a/c 50,70,000issue (Bond application money received)

Bond application a/c Dr 50,70,000Deferred interest expenses a/c Dr 49,30,0002

Bond a/c 1,00,00,000( Bond application account anddeferred interest expenses transferredto bond account consequent toallotment)

End of Interest on bond a/c Dr 6,07,9571st yr. Deferred interest expense a/c 6,07,957

(Deferred interest expenses chargedto interest on bond)

Profit and Loss a/c Dr 6,07,957Interest on bond a/c 6,07,957

( Interest on bond charged toprofit and loss account)

End of Interest on bond a/c Dr 6,80,912IInd yr. Deferred interest expenses a/c 6,80,912

(Deferred interest expenses chargedto interest on bond)

Profit and Loss a/c Dr. 6,80,912Interest on bond a/c 6,80,912

(Interest on bond chargedto profit and loss account)

376

376 ACCOUNTANCY

End ofIII rd yr. Interest on bond a/c Dr. 7,62,622

Deferred interest expenses a/c 7,62,622(Deferred interest expenses chargedto interest on bond)


(Interest on bond charged to profitand loss account)

End ofIV th yr. Interest on bond a/c Dr. 8,54,136



( Interest on bond charged to profitand loss account)

End ofVth yr. Interest on bond a/c Dr. 9,56,633




End ofVIth yr. Interest on bond a/c Dr. 10,71,428

Deferred interest expense a/c 10,71,428(Deferred interest expenses chargedto interest on bond)




1. 1 (10,000 × 506.65)2 (10,0000 × 493.35)

2. FVIF =Price Issue

Value Maturity

=50,70,000

01,00,00,00 = 1.9723%


Therefore, compounding factor is 1.12 annually

Value of PVIF is 1.9723% in the sixth year’s row in the column interest rate 12%. There-fore, interest rate of these bonds is 12%.

3. Now, we have to calculate the amount of interest accumulating and due every yearsuch that the issue price corresponds to maturity value. It is to be noted that companywill pay at the end of sixth year Rs. 1,000 per bond which is inclusive of both interestand principal for that year. Interest is paid @ 12 % p.a., therefore, future value at theend of sixth year (beginning of sixth and ending of sixth year) is 1 + 0.12 = 1.12, where1 is the principal and 0.12 is the interest. Therefore interest for sixth year is =Rs. 1,000 × 0.12/1.12 = 107.14285. Therefore, present value at the beginning ofsixth year was Rs. 1,000 – 107.14285 = Rs. 892.8572 . The present value at thebeginning of sixth year is also the future value at the end of fifth year and by followingthe same procedure, we can as certain the amount of interest for fifth, fourth, third,second and first year. The following are the results :

Year Future value Interest Present Value

Sixth 1000.0000 107.142853 892.8572Fifth 892.8572 95.6632674 797.19394Fourth 797.19394 85.4136355 711.78031Third 711.78031 76.2621756 635.51814Second 635.51814 68.0912287 567.442692First 567.42692 60.7957418 506.631179

4. Computing the interest payable on bonds

6th year =1.12

.12 1,000× = Rs. 107.142853

5th year =1.12

.12 892.8572× = Rs. 95.6632674

4th year =1.12

.12 797.19394× = Rs.85.4136355

3rd year =1.12

.12 711.78031 × = Rs.76.2621766

2nd year =1.12

.12 635.51814 × = Rs.68.0912287

1st year =1.12

.12 567.42692× = Rs.60.7957418

In this case we need to start from the last year for computing the interest. The maturityprice comprises of the amount due on debenture at the end of 5th year + interest on thisamount @12% p.a.

378

378 ACCOUNTANCY

Let the amount due = 1Interest accrued = 0.12Total amount during 6th year = 1.12We can use this relationship for ascertaining the amount due in the the 6th year

1.12

.12 1,000 ×= = 107.14285

Note : The table values are given upto 4 places of decimal. Therefore, the fractional valuegiven for 12% against 6 years in PV interest factor table(PVIF) is 0.507 by rounding off thevalue .5066 to get value for 10,000 bonds. The above values are to be multiplied by 10,000.

7.5 Issue of Debenture for Consideration other than Cash

Sometimes, debenture can be issued to the vendors or suppliers of patents,copyrights and transfer of intellectual property rights. On a preferential basis,without receiving the money in cash. Such issue of debentures is termed asissue for consideration other than cash. When debentures are issued to thevendors in satisfaction of the purchase consideration, the following entries aremade :

1. For acquiring the assets and liabilities

Assets a/c Dr. (Value of assetsacquired)

Liabilities a/c (Liabilities taken over )Vendor’s a/c (Purchase consideration)

2. For issue of debenture in satisfaction of purchase consideration

(a) Debenture issued at par

Vendor’s a/c (by name) Dr.x% Debenture a/c

Or

(b) Debenture issued at premium

Vendor’s a/c Dr.x% Debenture a/cSecurities Premium a/c

Or

(c) Debenture issued at discount

Vendor’s a/c Dr.Discount on issue of debenture a/c Dr.

x% Debenture a/c


Purchase Consideration : Purchase consideration is the amount paid by purchasingcompany in consideration for purchase of assets/business from another enterprise.Purchase consideration is arrived at by using a following formula :

Purchase Consideration = Value of assets – Liabilities assumed

For example, Country Craft Ltd. has acquired from Batra Crafts Ltd. assets worthRs. 10,00,000 and liabilities of Rs. 4,00,000 In this case, purchase considerationis Rs. 10,00000 – Rs. 400,000 = Rs. 6,00,000.

Illustration 8 (Purchase Consideration)

Alfa Polyester Ltd. took over assets of Rs. 1,00,00,000 and creditors ofRs. 10,00,000 from Marine Solution Ltd and issued 5% Debenture of Rs. 100each (i) at par (ii) at a discount of 10%, (iii) at a premium of 25%.

Record necessary journal entries in the books of Alfa Polyester Ltd.

Solution

Books of Alfa Polyester Ltd.Journal


(Rs.) (Rs.)

(i) When debenture are issued at par

(a) Assets a/c Dr. 1,00,00,000Sundry creditors 10,00,000Marine Solution Ltd 90,00,000

(For Purchase of assets)

(b) Marine Solution Ltd. Dr. 90,00,0005% Debenture a/c 90,00,000

(Issued 5% Debenture at par indischarge of purchase consideration)

(ii) When debenture are issuedat discount

(a) Assets a/c Dr. 1,00,00,000Sundry Creditors 10,00,0001Marine Solution Ltd 90,00,000

(For Purchase of assets)

(b) Marine Solution Ltd. Dr. 90,00,000 Discount on issue a/c Dr. 10,00,000

5% Debenture a/c 1,00,00,000(5% debenture issued at a discountof 10%)

380

380 ACCOUNTANCY

(iii) When debenture are issued atpremium :

(a) Assets a/c Dr. 1,00,00,000Sundry Creditors a/c 10,00,000Marine Solution Ltd. 90,00,000

(For purchase of assets)

(b) Marine Solution Ltd. Dr 90,00,0005% Debenture a/c 72,00,000Securities Premium a/c 18,00,000

(5% debenture issued at apremium of 25%)


1. No. of debenture debenture of price IssuePayableAmount

=

Issue Price of debenture = Face value of Debenture + Premium amount Or– Discount amount

debenture 1,00,000 9010-100

90,00,000 =

==

2. No. of debenture = debenture 72,000 Rs. 12525100

90,000 ==+

3. Securities Premium = Rs. 72,000 × Rs. 25 = Rs. 18,00,000

Illustration 9 (Purchase Consideration)

Sita Travels Ltd. purchased assets of Batra Travels Ltd. as under :Plant and Machinery of Rs. 10,00,000 at Rs. 8,00,000 Land and Buildings ofRs. 50,00,000 at Rs. 72,00,000 for purchase consideration of Rs. 80,00,000and paid Rs. 20,00,000 through bank, remaining by issue of 10% Debentureof Rs. 10 each at a premium of 20%. Record necessary entries in the books ofSita Travels Ltd.


Solution

Books of Sita Travels Ltd.Journal

Date Particulars L.F Debit CreditAmount Amount

(Rs.) (Rs.)

Plant and Machinery Dr. 8,00,000Land and Building Dr. 72,00,000

Batra Travels Ltd. 80,00,000(For purchase of business)

Batra Travels Ltd. Dr. 80,00,000Bank a/c 80,00,000

(Payment made to Batra Ltd. in cash)

Batra Travels . a/c Dr. 60,00,000

10% Debenture a/c (5,00,000 × 10) 50,00,000Securities Premium a/c (5,00,000 × 2) 10,00,000

(For payment of purchase consideration)

Notes to Solution

1. No. of Debenture Premium Value Face PayableAmount

+

=

Debenture 5,00,000 Rs. 2 10

60,00,000 Rs. =+

=

2. Securities Premium = Rs. 5,00,000 × 2 = Rs. 10,00,000

3. 10% Debenture = Rs. 5,00,000 × 10 = Rs. 50,00,000

7.6 Issue of Debenture as Collateral Security

It implies stand-by or additional security to obtain secured loan. When thelender is of the view that the primary security is not enough to cover the risk,he/she may ask for further security. To this end, the borrower may issuebond/debenture by way of additional security in favour of later, known ascollateral security. In this case, lender will simply be the custodian of thesedebenture/bond. He will not be entitled to any interest on these debenture/bond. However, if borrower fails to repay the loan along with interest in time,the lender is at liberty to recover his/her dues from the sale of primary security

382

382 ACCOUNTANCY

in the first instance. If the realisable value of primary security is insufficient toclear the dues, the lender has the right to invoke the benefit of collateral securitywhereby, the debenture may either be presented for redemption or sold in themarket. If the lender has any surplus from sale of security after meeting hisdues, he is under obligation to return the same to the borrower.

Accounting TreatmentFor pledging the debenture as a collateral security since no immediateliability is created by the company, therefore no journal entries are recorded.On the part of the company the liability arises only when the lender invokeshis right vested in the collateral security.

In other words, the following journal entry is recorded

Loan a/c Dr. (Principal and interest outstandingon loan)

Outstanding interest a/c Dr. (Outstanding interest for the periodintervening the date of default on theloan to the date of invoking securityby the lender.)

x% Debenture a/cIt is of paramount importance that collateral security creates a contingent

liability which has to be disclosed in the published accounts.

The disclosure of issue of debenture as collateral security in the balance sheetof the borrower is shown below :

Balance Sheet as at ......

Liabilities Amount Assets Amount(Rs.) (Rs.)

Loan(Secured by 10%Debenture of Rs. ......eachas Collateral security)

Illustration 10(Collateral Security)

Ramanuj Co. Ltd. has entered into an agreement with ICICI Ltd. to obtain aterm loan of Rs. 20 crores of for a period of 5 years @ 10.5% p.a. The loan issecured by a mortgage of factory land and building and machinery. Since landand building and machineries were old, the ICICI Ltd. asked for additionalsecurity. For this purpose, the borrower issued Rs. 15,00,000, 9% Debentureas collateral security. Record these transactions in the books the of companyand show the relevant items in the balance sheet.


Solution

Books Ramanuj Co. LtdJournal


(Rs.) (Rs.)

When Bank a/c Dr. 20,00,00,000loan Loan a/c 20,00,00,000is (Loan obtained from ICICI, securedtaken by factory land and building and

machinery and Rs. 15,00,000,9% debenture as collateral security )

End ofIst Yr. Interest a/c Dr. 2,10,00,000

Bank a/c 2,10,00,000(Interest paid on loan)

Profit and Loss a/c Dr. 2,10,00,000Interest a/c 2,10,00,000

(Interest paid on loan transferred toProfit and Loss a/c)

End ofIInd yr. Interest a/c Dr. 2,10,00,000

Bank a/c 2,10,00,000(Interest paid on Loan)


(Interest paid on loan transferred toProfit and Loss account)

End ofIIIrd yr. Interest a/c Dr. 2,10,00,000




End ofivth yr. Interest a/c Dr. 2,10,00,000




384

384 ACCOUNTANCY

End ofvth yr. Interest a/c Dr. 2,10,00,000



Interest paid on Loan transferred toProfit and Loss account)

Loan raised from ICICI will be reported in the Balance Sheet as below :

Liabilities ` Amounts Assets AmountRs. Rs.

Secured Loans :

Loan from ICICI 20,00,00,000

(Secured by Land and

Building and Machinery and

Rs. 15,00,000 9% Debenture.

Illustration 11(Collateral Security)

On April 1, 2000 Chinar Ltd. raised a loan of Rs. 25 crores @ 12% p.a. payablehalf-yearly on September 30 and March 31 repayable after 3 years and offeredits land and building at Guwahati as primary security. 12% Debenture of thecompany for Rs. 15 crores were also pledged as collateral security. The companystarted facing the financial distress towards the end of the year 2001 andcould not pay interest on loan w.e.f. October 1, 2001 onwards. The companywas not in a position to repay the loan on due date. The lender took over thepossession of land and building in Guwahati at Rs. 24 crores and invoked hisright vested in collateral security on 30th June 2003 after duly following legalprocess. Record journal entries to give effect to above transactions.


Solution

Books of Chinar Ltd.Journal

(Rs. in Crores)

Date Particulars L.F. Debit Credit(Amount) (Amount)

Rs. Rs.

2000April 1 Bank a/c Dr. 25

Loan a/c 25(Loan raised for Rs. 25 crores againstfixed charge on Land and Building and12% Debenture as collateral securityfor Rs. 15 crores)

2000Sept 30 Interest a/c Dr. 1.5

Bank a/c 1.5(Interest paid on loan)

2001Mar. 31 Interest a/c Dr. 1.5


2001Mar.31 Profit and Loss a/c Dr. 3

Interest a/c 3(Interest charged to Profit andLoss account)

2001Sept 30 Interest a/c Dr. 1.5


2002Mar. 31

Interest a/c Dr. 1.5Interest outstanding a/c 1.5

(Interest due but not paid)

Mar. 31 Profit and Loss account a/c Dr. 3Interest a/c 3

(Interest charged to Profit andLoss account)

2002Oct.30 Interest a/c Dr. 1.5

Interest outstanding a/c 1.5(Interest due but not paid)

386

386 ACCOUNTANCY

2003Mar. 31

Interest a/c Dr. 1.5Interest Outstanding a/c 1.5

(Interest due but not paid)

2003Mar. 31 Profit and Loss account a/c Dr. 3

Interest a/c 3(Interest charged to Profit andLoss account)

June30 Loan a/c Dr. 24Land and Building a/c 24

(Primary security taken over by thelender in partial settlement of amount due)

June30 Interest outstanding a/c Dr. 4.5Loan a/c 4.5

(Interest outstanding transferred toLoan account)

June30 Loan a/c Dr. 5.5Interest outstanding a/c Dr. 0.75

12% Debentures a/c 6.25(Invoking of Collateral Security for balance of outstanding loan and interest)

7.7 Writing off Discount/Loss on Issue of Debenture

Discount/loss on issue of debenture must be written off before such debentureare redeemed. Section 78 of The Companies Act, 1956 permits the utilizationof securities premium for writing off the discount/loss on issue of debenture.To the extent the discount not written off is shown in the Balance Sheet on itsassets side under the heading “Misc. Expenses”. This show that the amountnot yet written off is carried forward until fully written-off.

(i) The entry to write off the discount out of securities premium account is as follows

Securities premium a/c Dr.Discount/Loss on issue of debenture a/c

(ii) The company may decide to write off certain portion of unwritten off discount/loss on issue of debenture from out of the profits. The following entry is to berecorded :

Profit and Loss a/c Dr.Discount/Loss on issue of debenture a/c


7.7.1 Computation of Discount/Loss on Issue

The minimum amount to be written off every year, assuming no amount fromsecurities premium is available, is proportionate to the amount of debentureredeemed. It implies that unwritten off balance of discount/loss is proportionateto the amount of debenture outstanding. However companies can write off anyhigher amount which is permissible by the availability of profit.

Illustration 12(Loss on Issue of Debenture)

On April 1, 2000 Nikhil Jain and Co. Ltd. issued 100,00,000, 7% debentureof Rs. 100 each at a discount of 4% redeemable after 5 years at a premium of6%. Record necessary Journal entries for issue of debenture and writing offloss on issue debenture account. Also prepare loss on issue of debentureaccount.

Solution

Books of Nikhil Jain and Co. Ltd.Journal

(Rs. In Crores)


Rs. Rs.

2000

April 1 Bank a/c Dr. 96Loss on issue of debenture a/c Dr. 10

7% debenture a/c 100Debenture Redemption Premium a/c 6

(Debenture issued at discount redeemable at premium)

2001Mar. 31 Profit and Loss a/c Dr. 2

Loss on issue of debenture a/c 2(Loss on issue of debenture written-off)


Loss on issue of debenture a/c 2( Loss on issue of debenture written-off)



388

388 ACCOUNTANCY


Loss on issue on debenture a/c 2(Loss on issue of debenture written-off)



Loss on Issue of Debenture Account

Dr. (Rs. In Crores) Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount(Rs.) (Rs.)

2000 2001April 1 6% Debenture 6 Mar. 31 Profit and Loss 2April 1 Debenture

RedemptionPremium 4 Mar. 31 Balance c/f 8

10 10

2001 2002

April 1 Balance b/f 8 Mar. 31 Profit and Loss 2 Mar. 31 Balance c/f 6

8 8

2002 2003

April 1 Balance b/f 6 Mar. 31 Profit and Loss 2Balance c/f 4

6 6

2003 2004

April 1 Balance b/f 4 Mar. 31 Profit and Loss 2Mar. 31 Balance c/f 2

4 4

2004 2005April 1 Balance b/f 2 Mar. 31 Profit and Loss 2


1. As the debenture are redeemable on maturity, the amount of debenture outstanding atthe end of each year for the full tenure of debenture will be same i.e. Rs. 100 crores.Therefore the proportion of debenture at the end of each year will be same, i.e.1:1:1:1:1.

2. Loss on issue of debenture written-off annually

years No.of loss Total= crores 2 Rs.

5crores 10 Rs. ==


Illustration 13( Writing off Discount on issue)

J.M.D.Ltd. Issued 2 Lakh 5% Debenture of Rs. 100 each at a discount of 6%on April 1, 1999 redeemable as under :

80,000 debenture on March 31, 2001,

40,000 debenture on March 31, 2002, and

remaining debenture on March 31, 2003.

Ascertain out the amount of discount to be written off in each of the yearstill the debenture are paid. Also prepare discount on issue of debenture account.

Solution

Table showing the amount of discount to be written-off each year

Date Amount of Proportion Discountdebentures outstanding

(Rs.) Rs.

2000Mar. 31 2,00,00,000 20 12,00,000 × 20/60

= 4,00,0002001Mar. 31 2,00,00,000 20 12,00,000 × 20/60

= 4,00,0002002Mar. 31 1,20,00,000 12 12,00,000 × 12/60

= 2,40,0002003Mar. 31 80,00,000 8 12,00,000 × 8/60

= 1,60,000

Total discount = 2,00,00,000 × 6/100 = Rs.12,00,000

The proportionate outstanding method of writing off discount/loss on issue ofdebenture, satisfies the requirement of minimum amount

Discount on Issue of Debenture Account

Dr. Cr.

Date Particulars Amount Date Particulars Amount(Rs.) (Rs.)

1999 2000April 1 5% Debenture 12,00,000 Mar. 31 Profit and Loss 4,00,000

Balance c/f 8,00,000

12,00,000 12,00,000

390

390 ACCOUNTANCY

2000 2001April 1 Balance b/f 8,00,000 Mar. 31 Profit and Loss 4,00,000


8,00,000 8,00,000

2001 2002April 1 Balance b/f 4,00,000 Mar. 31 Profit and Loss 2,40,000


4,00,000 4,00,000

2002 2003

April 1 Balance b/f 1,60,000 Mar. 31 Profit and Loss 1,60,000

Illustration 14(Discount on issue written off)

Sangeetha Ltd. issued 60 Lakh 12% debenture of Rs. 100 each at a discount of5% on April 1, 1997. Debenture are repayable in five equal installments startingfrom the end of sixth year. The securities premium account showed a balance ofRs. 0.6 crores the above date. Compute the amount of discount to be written offand record the transaction in the books of Sangeetha Ltd.

Books of Sangeetha Ltd.Journal

(Rs. in Crores)


(Rs.) (Rs.)

1997April 1 Bank a/c Dr. 57

Debenture application a/c 57(Money received on debenture application)

Debenture application a/c Dr. 57Discount on issue of debenture Dr. 3

12% Debenture a/c 60(Debenture application moneytransferred to debenture accountconsequent upon allotment)

1998Mar. 31 Profit and Loss a/c Dr. 0.3

Discount on issue of debenture a/c 0.3(Discount written off)

Securities premium a/c Dr. 0.6Discount on issue of debenture a/c 0.6

(Discount written off)











Discount on issue of debentures a/c 0.3(Discount written off)









392

392 ACCOUNTANCY


Computation of Discount on Issue of Debenture to be Charged to Profit and Loss a/c

(Rs. in crores)

Date Amount of Proportion Discountdebenture

outstanding (Rs.) Rs.

1998

Mar. 31 60 5 0.3 Rs. 2.4 Rs. 405 =×

1999

Mar. 31 60 5 0.3 Rs. 2.4 Rs. 405 =×

2000

Mar. 31 60 5 0.3 Rs. 2.4 Rs. 405 =×

2001

Mar. 31 60 5 0.3 Rs. 2.4 Rs. 405 =×

2002

Mar. 31 60 5 0.3 Rs. 2.4 Rs. 405 =×

2003

Mar. 31 60 5 0.3 Rs. 2.4 Rs. 405 =×

2004

Mar. 31 48 4 0.24 Rs. 2.4 Rs. 404 =×

2005

Mar. 31 36 3 0.18 Rs. 2.4 Rs. 403 =×

2006

Mar. 31 24 2 0.12 Rs. 2.4 Rs. 402 =×

2007

Mar. 31 12 1 0.06 Rs. 2.4 Rs. 401 =×

40 2.4


7. 8 Redemption of Debenture

This section seeks to present the legal framework and the accounting treatmentof redemption of debenture/bonds. The term ‘redemption’ implies the dischargeof an obligation arising out of the contractual obligations created through theDebenture Trust Deed. The redemption of debenture can take place either outof profits or through conversion of convertible debenture into shares or byissuing new series of debenture/bond. In case of convertible debenture thereis no cash out flow but only issue of shares in discharge of the obligation,redemption of debenture out of profit implies payment in the form of cash tonon-convertible debenture holders. This section is divided into three subsections: sub-section 1 deals with redemption of non-convertible debentureout of profits, sub-section 2 deals with redemption of convertible debentureand sub-section 3 deals with redemption of debenture through open marketoperations.

7.8.1 Redemption of Non-convertible Debenture out of Profits

According to section 117 C(1) of the Companies Act, 1956, when debentureare to be redeemed out of profits, an adequate amount of profits is required tobe transferred to Debenture Redemption Reserve every year before theredemption begins. It is to be noted that the Companies Act 1956, vide section117C(1) does not spell out as to what is the adequate amount? For this onehas to refer to SEBI Guidlines in this behalf. SEBI Guideline No. 10.3.2 (c)(a)stipulates that an amount equal to 50% of the debenture issue should betransferred to Debenture Redemption Reserve before the redemption begins.Implication of these provisions is that whenever a redemption of debenture ismade, at least an amount equal to 50% of the debenture issue should stand tothe credit of the Debenture Redemption Reserve Account. Suppose a limitedcompany issued debenture of Rs. 5 crores with the condition to start redemptionin the third year. In such a case, before the debenture redemption begins in3rd year, the Debenture Redemption Reserve Account should have a balance atleast equal to 0.5 × Rs. 5 crores = Rs. 2.50 crores. This is applicable only incase of non-convertible debenture and non-convertible portion of partlyconvertible debenture.

7.8.1.1. Duration of Creation of Debenture Redemption Reserve

Debenture Redemption Reserve should be created before the redemption starts.If debenture are issued for project finance, the Debenture Redemption Reservemay be created upto the date of commercial production either in equalinstallments or higher amount if profits so permit [10.3.2. (b)]. However, in

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394 ACCOUNTANCY

case of convertible issues by new companies, the creation of DebentureRedemption Reserve shall commence from the year company earns profits forthe remaining life of debenture. [10.3.2. (d)]

7.8.1.2. Exceptions to the creation of Debenture Redemption Reserve

Following are the exceptions to the above rule :

1. Infrastructure companies [ a company wholly engaged in the business ofdeveloping, maintaining and operating infrastructure facilities [ 1.2.1. (XV)]are not required to create Debenture Redemption Reserve [10.3.2. (C) (C)]

2. A Company issuing debentures with a maturity period of not more than18 months (10.3.1)

A critical analysis of the provisions of Company law and Guidelines issued bySEBI derives one to infer that company law makes no exception with regard tocreation of Debenture Redemption Reserve, whereas SEBI makes aforesaidexceptions. Therefore, we are of the view that Debenture Redemption Reserveshould be created by all companies without exception in order to avoid penaltiesprescribed in the law because SEBI Guidelines are in addition to the provisionsof any other law for the time being inforce (Section 32, SEBI Act 1992). Forexample, Gamman India Limited, an infrastructure project company, regularlycreates Debenture Redemption Reserve [Refer P. 37, Annual Report 2001-02].Alternatively, adequacy of amount as stipulated by section 117C(1) could beinterpreted with reference to SEBI Guidelines.

Following accounting entries are to be recorded in this regard:

Accounting entry for creation of Debenture Redemption Reserve

Profit and Loss Appropriation a/c Dr.Debenture Redemption Reserve a/c

In the year of redemption, the debenture holders will be credited withthe amount due according to the terms of redemption.

(i) If the debenture are redeemable at par, the par value of debenture to beredeemed will be transferred to debenture holders account by recordingfollowing entries :

Debenture a/c Dr.

Debentureholders a/c

(ii) In case the debenture are redeemable at premium, the amount of premiumwill also be transferred to debenture holders account by recording followingentry :


x % Debenture a/c Dr.Debenture Redemption Premium a/c Dr.


For payment to debentureholders

Debentureholders a/c Dr.Bank a/c

Illustration 15(Issue and Redemption of Debenture)

Gunjan Ltd. issued 5,00,000, 12% debenture of Rs. 100 each on April 1, 2002redeemable at par on July1, 2003. The company received applications for6,00,000 debentures and the allotment was made to all the applicants onprorata basis. The debenture were redeemed on due date. How much amountof Debenture Redemption Reserve is to be created before the redemption iscarried out? Also record necessary journal entries regarding issue andredemption of debenture.

Solution

Books of Gunjan Ltd.Journal


2002 (Rs.) (Rs.)

April 1 Bank a/c Dr. 6,00,00,000Debenture application a/c 6,00,00,000

(For receiving application money)

April 1 Debentures application a/c Dr. 6,00,00,00012 % Debenture a/c 5,00,00,000Debenture allotment a/c 1,00,00,000

(Debenture application moneytransferred to debenture accountconsequent upon allotment of debenture)

2003

Mar. 31 Interest a/c Dr. 60,00,000Debentureholders a/c 60,00,000

(For interest due)

Mar. 31 Debentureholders a/c Dr. 60,00,000Bank a/c 60,00,000

(For payment of interest)

Mar. 31 Profit and Loss a/c Dr. 60,00,000Interest a/c 60,00,000

(For writing off interest)

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396 ACCOUNTANCY

Mar. 31 Profit and Loss a/c Dr. 2,50,00,000Debenture Redemption Reserve a/c 2,50,00,000

(Appropriation of profit to DRR as perSec.117C(1)of The Comanies Act, 1956)

June 30 Interest a/c Dr. 10,00,000Debentureholders a/c 10,00,000

(Interest due for two months)

July 1 12 % Debentures a/c Dr. 5,00,00,000Debentureholders a/c 5,00,00,000

(Payment on redemption of debenturesdue to debenture holders)

July 1 Debentureholders a/c Dr. 5,10,00,000Bank a/c 5,10,00,000

(Payment due to debenture holdersdischarged)

2004Mar 31 Profit and Loss a/c Dr. 10,00,000

Interest a/c 10,00,000(Transfer of interest)

Mar 31 Debenture Redemption Reserve a/c Dr. 2,50,00,000General Reserve a/c 2,50,00,000

(For transfer of DRR to general reserve)

Illustration 16(Redemption of Debenture)

Noida Toll Bridge Corporation Ltd. (An infrastructure Company) has outstanding200 lakhs 9% debenture of Rs. 100 each issued in 1997 due for redemption onJune 30, 2003. How much amount of Debenture Redemption Reserve shouldbe created before the redemption of debenture begin? Record necessary entriesregarding redemption of debenture. The company closes its books on March31, every year.

Solution

As per SEBI Guidelines, infrastructure companies are exempted from creating DebentureRedemption Reserve(DRR). However, The Companies Act, 1956 vide section 117C(1) requiresan adequate amount to be transferred to DRR. The minimum amount to be transferred toDebenture Redemption Reserve will be Rs. 1,00,00,00,000, which will be eventually betransferred on the eve of redemption.


Books of Noida Toll Bridge Corporation Ltd.Journal


2003 (Rs.) (Rs.)

June.30 9 % Debenture a/c Dr. 2,00,00,00,000Debentureholders a/c 2,00,00,00,000

(Amount due to debenture holders onredemption)

Debentureholders a/c Dr. 2,00,00,00,000Bank a/c 2,00,00,00,000

( Amount due to debenture holders paid)


Ganeshan Ltd. has 800 lakhs 10% debenture of Rs. 100 each due for redemptionon March 31, 2003. Assume that Debenture Redemption Reserve has a balanceof Rs. 3,40,00,00,000 on that date. Record necessary entries at the time ofredemption of debenture.

Solution

Books of Ganeshan Ltd.Journal


2003 (Rs.) (Rs.)

Mar.31 Profit and Loss Appropriation a/c Dr. 60,00,00,000Debenture Redemption Reserve 60,00,00,000

(For transfer of profits to as per SEBIguidelines)

Mar.31 10 % Debenture a/c Dr. 8,00,00,00,000Debentureholders a/c 8,00,00,00,000

( Amount becomes due to debentureholders on redemption )

Mar.31 Debentureholders a/c Dr. 8,00,00,00,000Bank a/c 8,00,00,00,000

(Amount due to debenture holders paid)

Mar.31 Debenture Redemption Reserve Dr. 4,00,00,00,000General Reserve 4,00,00,00,000

(Debenture RedemptionReserve transferred to General Reserve)

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398 ACCOUNTANCY


Since question is silent about payment of interest, it is assumed that there is nooutstanding interest on the date of redemption


Santanu Ltd. has 50,00,000, 8% debenture of Rs. 100 each due for redemptionin four equal annual instalments starting from March 31, 2003. DebentureRedemption Reserve has a balance of Rs. 18,00,00,000 on that date. Recordnecessary journal entries.

Solution

Books of Santanu Ltd.Journal


(Rs.) (Rs.)

2003

Mar 31 Interest a/c Dr. 4,00,00,000Bank a/c 4,00,00,000

(Interest due on debenture paid)

Mar 31 Profit and Loss a/c Dr. 4,00,00,000Interest a/c 4,00,00,000

Interest transferred to profit andloss account)

Mar. 31 Profit and Loss Appropriation a/c Dr. 7,00,00,000Debenture Redemption Reserve 7,00,00,000

(Transfer of profits to DebentureRedemption Reserve)

Mar. 31 8 % Debenture a/c Dr. 12,50,00,000Debentureholders a/c 12,50,00,000

(Payment due to Debentureholders onredemption)

Mar. 31 Debentureholders a/c Dr. 12,50,00,000Bank a/c 12,50,00,000

( Payment due to debentureholdersdischarged)

2004Mar. 31 Interest a/c Dr. 3,00,00,000

Bank a/c 3,00,00,000(Interest paid on debenture)



(Interest transferred to profit and lossaccount)

Mar. 31 8 % Debenture a/c Dr. 12,50,00,000Debenturesholders a/c 12,50,00,000




2005Mar 31 Interest a/c Dr. 2,00,00,000








2006Mar 31 Interest a/c Dr. 1,00,00,000





(Payment due to debentureholders on redemption)



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400 ACCOUNTANCY

Mar 31 Debenture Redemption Reserve a/c Dr. 25,00,00,000General Reserve A/c 25,00,00,000

DRR account closed by transferring it togeneral reserve)

Illustratration 19(Issue and Redemption of Debenture)

Nikhil Cosmetics Ltd. issued 12,00,000, 5 % debenture of Rs. 50 each on June 30,2001 redeemable at a premium of 6 % on July 1, 2005. The Board of Directors havedecided to transfer out of profits Rs. 2,00,00,000 to Debenture Redemption Reserveon March 31, 2003, Rs. 50,00,000 on April 1, 2004 and Rs. 50,00,000 on April 1,2005. Record necessary journal entries regarding issue and redemption of debenture.Ignore entries relating to writting off loss on issue of debenture and interest paidthereon.

SolutionBooks of Nikhil Cosmetics Ltd.

Journal


(Rs.) (Rs.)

2001 At the time of issue

June 30 Bank a/c Dr. 6,00,00,000Debenture application a/c 6,00,00,000

( Application money recived on issueof debenture.)

June 30 Debenture application a/c Dr. 6,00,00,000Loss on issue of debenture a/c Dr. 36,00,000

5 % Debenture a/c 6,00,00,000Debenture Redemption Premium a/c 36,00,000

( Application money transferred to5% debentures being redeemable atpremium, consequent to allotment ofdebentures.)

For creation of Debenture2003 Redemption ReserveApril 1 Profit and Loss Appropriation a/c Dr. 2,00,00,000

Debenture Redemption Reserve 2,00,00,000( Transferred profits to Debenture Rede-mption Reserve as per Board resolution)


2004April. 1 Profit and Loss Appropriation a/c Dr. 50,00,000

Debenture Redemption Reserve 50,00,000( Transferred profits to Debenture Rede-mption Reserve as per Board resolution)

2005April. 1 Profit and Loss Appropriation a/c Dr. 50,00,000

Debenture Redemption Reserve 50,00,000( Transferred profits to Debenture Rede-mption Reserve as per Board resolution)

At the time of redemptionJuly, 1 5 % Debentures a/c Dr. 6,00,00,000

Debentures RedemptionPremium a/c Dr. 36,00,000

Debentureholders a/c 6,36,00,000( Amount due to debenturesholderson redemption of debenture)

July, 1 Debentureholders a/c Dr. 6,36,00,000Bank a/c 6,36,00,000

( Amount due to debentureholdersbeing paid)

2006Mar. 31 Debenture Redemption Reserve Dr. 3,00,00,000

General Reserve a/c 3,00,00,000

Debenture Redemption Reservetransferred to General Reserve


KT Ltd. issued 1,00,000, 10 % debenture Rs. 100 each at (i) par; (ii) at premiumof 5% on June 30, 2001, redeemable on July 1, 2003. The Board of Directorsdecided to transfer Rs. 25,00,000 to Debenture Redemption Reserve on March31, 2002 and on March 31, 2003. Record necessary entires for the issue aswell as at the time of redemption of debenture. Ignore entries for payment ofinterest.

402

402 ACCOUNTANCY

Solution

(i) Debenture issued at ParBooks of KT Ltd.

Journal


(Rs.) (Rs.)

2001

June30 Bank a/c Dr. 1,00,00,000Debenture application a/c 1,00,00,000

(For receipt of application money)

June30 Debenture application a/c Dr. 1,00,00,00010 % Debentures a/c 1,00,00,000

( Debenture application moneytransferred to 10 % debenture consequent upon allotment )

2002Mar. 31 Profit and Loss Appropriation a/c Dr. 25,00,000

Debenture Redemption Reserve a/c 25,00,000(Debenture Redemption Reserve beingcreated out of profits)


Debenture Redemption Reserve 25,00,000(Debenture Redemption Reserve beingcreated out of profits)

July 1 10 % Debenture a/c Dr. 1,00,00,000

Debentureholders a/c 1,00,00,000(Redemption of debenture become due)



2004Mar 31 Debenture Redemption Reserve Dr. 50,00,000

General Reserve 50,00,000(Debenture Redemption Reserve amounttransferred to general reserve)


(ii) Debenture Issued at Premium


(Rs.) (Rs.)


June30 Bank a/c Dr. 1,05,00,000Debenture application a/c 1,05,00,000

(Debentures application money received)

June 30 Debenture application a/c Dr. 1,05,00,00010 % Debenture a/c 1,00,00,000Securities Premium 5,00,000

( Application transferred to 10 % debentures being issued atpremium, consequent upon allotment)

2002 For creating DebentureRedemption Reserve

Mar. 31 Profit and Loss Appropriation a/c Dr. 25,00,000Debenture Redemption Reserve 25,00,000

( Profits transferred to DebentureRedemption Reserve)


Debenture Redemption Reserve 25,00,000( Profits transferred to DebentureRedemption Reserve)

At the time of redemption

July 1 10 % Debenture a/c Dr. 1,00,00,000Debentureholders a/c 1,00,00,000

( Amount due to debenture holders onredemption)


( Amount due to debentureholdersbeing paid)


General Reserve 50,00,000(DRR closed by transferring it togeneral reserve)

404

404 ACCOUNTANCY

Illustration 21(Redemption of Debentures)

On April 1, 2001, following were the balances in the books of GKW Ltd. 9 %Debenture Rs. 60,00,000; Debenture Redemption Reserve Rs. 20,00,000. TheBoard of Directors decided to transfer Rs. 10,00,000 to Debenture RedemptionReserve on March 31, 2002. The redemption of debenture will commence onApril 1, 2003. Record necessasry journal entries for the above transactionsrelating to transfer of debenture redemption reserve on redemption ofdebentures. Ignore entries for interest on debentures.

Solution

Books of GKW Ltd.

Journal


(Rs.) (Rs.)

2002

Mar. 31 Profit and Loss Appropriation a/c Dr. 10,00,000Debenture Redemption Reserve a/c 10,00,000

( Profits transferred to DebentureRedemption Reserve)

2003

April 1 9 % Debenture a/c Dr. 60,00,000Debentureholder a/c 60,00,000

(Payment due to debentureholders on Redemption)

April 1 Debentureholders a/c Dr. 60,00,000Bank a/c 60,00,000

( Payment due to debentureholdrsdischarged)


General Reserve 30,00,000


Sita Enterprises Ltd.issued Rs. 4,00,00,000, 11 % Debenture divided intodebenture of Rs. 100 each on April 1, 2001, redeemable in four equal annualinstalments starting from April 1, 2003. The Board of Directors have decidedto create Debenture Redemption Reserve of Rs. 1,00,00,000 on Mar 31, 2002and 2003. Record necessasry journal entries at the time of issue and at thetime of redemption of debenture and creation of Debenture Redemption Reserve.


Solution

Books of Sita Enterprises Ltd.

Journal


(Rs.) (Rs.)


April 1 Bank a/c Dr. 4,00,00,000Debenture application a/c 4,00,00,000

( Application money received )

April 1 Debentures application a/c Dr. 4,00,00,00011 % Debenture a/c 4,00,00,000

( Debentures application moneytransferred to 11% debentureconsequent upon allotment )

2002 Creation of debenture redemption reserveApril 1 Profit and Loss Appropriation a/c Dr. 1,00,00,000

Debenture Redemption Reserve a/c 1,00,00,000(Debenture Redemption Reservecreated out of profits)

2003Mar 31 Profit and Loss Appropriation a/c Dr. 1,00,00,000

Debenture Redemption Reserve a/c 1,00,00,000(Debenture Redemption Reserve beingcreated out of profits)

At the time of redemption

April 1 11 % Debenture a/c Dr. 1,00,00,000Debentureholders a/c 1,00,00,000

(Redemption of debenture become due)

April 1 Debentureholders a/c Dr. 1,00,00,000Bank a/c 1,00,00,000


2004

April 1 11 % Debenture a/c Dr. 1,00,00,000Debenture holders a/c 1,00,00,000

( Debenture redemption due)



406

406 ACCOUNTANCY

2005April 1 11 % Debenture a/c Dr. 1,00,00,000

Debentureholders a/c 1,00,00,000(Redemption of debenture become due)



2006April 1 11 % Debenture a/c Dr. 1,00,00,000

Debentureholders a/c 1,00,00,000( Debenture redemption due)



2007Mar. 31 Debenture Redemption Reserve Dr. 2,00,00,000

General Reserve 2,00,00,000DRR closed by transferring it to generalreserve

7.9 Financing of Redemption of Debenture

The redemption of debentures require huge amount of cash whenever non-convertible debenture are to be paid off. To meet this requirment, the Boardof Directors may decide, at their own discretion, to invest money appropriatelyand judiciously in securities or bonds of the other business entities. In thissituation, funds allocated are invested periodically out side the business. Forthis purpose, an appropriate amount may be transfered to DebentureRedemption Sinking Fund. An appropriate amount will be calculated by referingto Sinking Fund Factor, depending upon the interest rate on investments andthe number of years for which investments are made. Sinking Fund Factor at‘r’ rate of interest for ‘n’ number of years will be the reciprocal of Future ValueFactor annuity for ‘n’ years (FVIFA). Sinking Fund Factor = 1/FVIFA,‘r’,‘n’.FVIFA table is given in the appendix. Debenture Redemption Sinking Fundaccount will be credited every year so as to ensure that sufficient amountaccumulates in this account before debenture redemption takes place. It is tobe noticed that Debenture Redemption Sinking Fund willl serve the purpose ofDebenture Redemption Reserve as required by the Law. Therefore, for thispurpose the amount transferred to Debenture Redemption Sinking Fund betreated same as Debenture Redemption Reserve. Therefore, the appropriatedamount is transferred to Debenture Redemption Reserve Account instead ofDebenture Redemption Sinking Fund to meet the statutory requirement.

The journal entries in this regard can be categorised into three groups:


1. Entries at the end of first year

Entries relating to issue of debenture, payment of interest and amortization ofdiscount/ loss on issue of debenture have already been discussed in the earliersections. The other related entries at the end of first year are as under:

a) For transfer of profits to Debenture Redemption Reserve

Profit and Loss Appropriation a/c Dr.Debenture Redemption Reserve a/c

b) For purchase of Debenture Redemption Sinking Fund Investments with the amountof Debenture Redemption Reserve set aside above.

Debenture Redemption Sinking Fund Investment a/c Dr.Bank a/c

2. Entries at the end of second and subsequent years

In the second and subsequent years the company will start receiving intereston previous years investments which will be transferred to DebentureRedemption Reserve. The company will purchase investments with the amountof Debenture Redemption Reserve kept aside and interest received onDebenture Redemption Sinking Fund Investments in the respective years. Thejournal entries are as under :

a) For receiving of interest on Debenture Redemption Sinking Fund Investments

Bank a/c Dr. Interest on Debenture Redemption Sinking Fund Investment a/c

b) For interest received transferred to Debenture Redemption Reserve

Interest on Debenture Redemption SinkingFund Investment a/c Dr.

Debenture Redemption Reserve

c) For transfer of profits to Debenture Redemption Reserve

Profit and Loss Appropriation a/c Dr.Debenture Redemption Reserve

d) For purchase of investments with the amount of Debenture Redemption Reserveand interest receivedDebenture Redemption SinkingFund Investment a/c Dr.

Bank a/c

3. Year of Redemption

The year in which the redemption of debenture is due, the entries for receiptof interest, its transfer to Debenture Redemption Reserve and setting asidethe profits for Debenture Redemption Reserve will be recorded as usual.But instead of purchase of investmtnts, all investments purchased in

408

408 ACCOUNTANCY

previous years will be sold out to provide liquidity for redemption ofdebenture. After all the debenture are redeemed on maturity, DebentureRedemption Reserve account will be closed by transferring its balance togeneral reserve account. In case of redemption of debentures by draw oflots, withdrawl from Debenture Redemption Reserve can be made afterredemption of 10 % of the debenture. Following entries are to be recorded :

(a) For receipt of interest on Debenture Redemption Sinking Fund Invstements

Bank a/c Dr.

Interest on Debenture Redemption Sinking Fund Investment a/c

(b) For transfer of Interest to Debenture Redemption Reserve

Interest on Debenture RedemptionSinking Fund Investment a/c Dr.

Debenture Redemption Reserve

(c) For transfer of profits to Debenture Redemption Reserve

Profit and Loss Appropriation a/c Dr.Debenture Redemption Reserve

(d)(i) For sale of Debenture Redemption Sinking Fund Investments, (it is to be noted thatgain or loss on sale of Debenture Redemption Sinking Fund Investments, if any,will be transferred to Debenture Redemption Reserve account.)

(ii) Investment sold at book value

Bank a/c Dr. (Sale price of Investment)Debenture Redemption Sinking Fund Investment a/c

(Investment sold at cost price)Or

(iii) Investment sold at less than book value

Bank a/c Dr.Debenture Redemption Reserve Dr (Loss on sale of investments)

Debenture Redemption Sinking Fund Investment a/cOr

(iv) Investment sold at more than book value

Bank a/c Dr.

Debenture Redemption Sinking Fund Investment a/cDebenture Redemption Reserve a/c(Gain on sale of Investment)

(e) On redemption of debenture at par, amount due to debentureholders

x % Debenture a/c Dr.Debentureholders a/c

Or

In case the debenture are redeemed at premium, following entry will be recorded:

x % Debenture a/c Dr.Debenture Redemption Premium a/c Dr.



(f) Amount due to debentureholders paid :

Debentureholders a/c Dr.Bank a/c

(g) After the debenture are redeemed, Debenture Redemption Reserve Account istransferred to General Reserve Account by recording the following entry :

Debenture Redemption Reserve Dr.General Reserve a/c

Illustration 23(Sinking Fund Investment for the redemption of debentures)

Anshu Detergents Ltd. issued 2,00,000, 10 % debenture of Rs. 10 each onJanuary 1, 2000 redeemable after 4 years. For this prpose, the companyestablished a Debenture Redemption Sinking Fund Investment. Theinvestments are expected to earn interest @ 4 % p.a. Sinking Fund FactorTable shows that Re. 0.2355 invested annually at @ 4 % will accumulate toRe. 1 at the end of 4th years.

On December 31, 2003, the investments realised Rs. 15,00,000. Thedebenture were paid off as per terms of issue of debenture.

Give jounal entries to record transaction relating to issue and investment ofreserve and redemption of debenture.

Solution

Books of Anshu Detergents Ltd.

Journal


(Rs.) (Rs.)

2000Jan 1 Bank a/c Dr. 20,00,000

Debenture application a/c 20,00,000( Debenture application money recived )

Jan 1 Debenture application a/c Dr. 20,00,000

10 % Debenture a/c 20,00,000( Application money transferred to 10 %debentures consequent upon allotment)

Dec. 31 Profit and Loss Appropriation a/c Dr. 4,71,0001

Debenture Redemption Reserve a/c 4,71,000( Profits transferred to DebentureRedemption Reserve )

410

410 ACCOUNTANCY

Dec. 31 Debenture Redemptiion SinkingFund Investments a/c Dr. 4,71,000

Bank a/c 4,71,000( Investments purchased)

2001Dec 31 Bank a/c Dr. 18,840

Interest on Debenture SinkingFund Investments a/c 18,840

( Interest received on investment)

Dec 31 Interest on Sinking FundInvestments a/c Dr. 18,840

Debenture Redemption Reserve 18,840( Interest transferred to Sinking Fund)

Dec. 31 Profit and Loss Appropriation a/c Dr. 4,71,000Debenture Redemption Reserve 4,71,000

( Profits transferred to DebentureRedemption Reserve )

Dec. 31 Debenture Sinking FundInvestments a/c Dr. 4,89,840

Bank a/c 4,89,840( Rs. 4,71,000 + 18,840 = 4,89,840,investments purchased )

2002Dec 31 Bank a/c Dr. 38,433.60

Interest on Debenture SinkingFund Investments a/c 38,433.60

( Interest received on investment)

Dec 31 Interest on Sinking FundInvestments a/c Dr. 38,433.60

Debenture Redemption Reserve 38,433.60( Interest transferred to Sinking Fund)

Dec. 31 Profit and Loss Appropriation a/c Dr. 4,71,0001

Debenture Redemption Reserve 4,71,000( Profits transferred to DebentureRedemption Reserve )

Dec. 31 Debenture Sinking FundInvestments a/c Dr. 5,09,433.60

Bank a/c 5,09,433.60(Rs. 4,71,000 + 38,433.60= 5,09,433.60investments purchased )

2003Dec 31 Bank a/c Dr. 58,810.94

Interest on Debenture SinkingFund Investments a/c 58,810.94

( 4 % of Rs. 4,71,000 + Rs. 4,89,840+ Rs. 5,09,433.60, interest received)


Dec 31 Interest on Sinking FundInvestments a/c Dr. 58,810.94

Debenture Redemption Reserve 58,810.94( Interest transferred to Sinking Fund)

Dec. 31 Profit and Loss Appropriation a/c Dr. 4,70,915.46Debenture Redemption Reserve 4,70,915.46

( Profits transferred to DebentureRedemption Reserve )

Dec. 31 Bank a/c Dr. 15,00,000Debenture Sinking FundInvestments a/c 14,70,273.60Debenture Redemption Reserve 29,726.40

( Investment sold at profit)

Dec. 31 10 % Debenture a/c Dr. 20,00,000Debentureholders a/c 20,00,000

( Payment to debentureholders due onredemption)

Dec 31 Debentureholders a/c Dr. 20,00,000Bank a/c 20,00,000

(Payment made to debenture holders)

Dec. 31 Debenture Redemption Reserve Dr. 20,29,726.40General Reserve 20,29,726.40

( After redemption, DebentureRedemption Reserve Account closed bytransferring to general reserve)


Annual amount to be transferred from profits to Debenture Redemption Reserve0.2355 × Rs. 20,00,000 = Rs. 4,71,0001

Illustration 24(Preparation of ledger account)

Shiwaliks Ltd. issued 10,00,000, 7 % debenture of Rs. 100 each on April 1,2001 redeemable after four years. It has been decided to create DebentureRedemption Reserve for this purpose. The Debenture Redemption Sinking FundTable shows that Re. 0.221926 invested in 8 % Goverment Securities will amountto Re. 1 in 4 years. On March 31, 2005 the balance at bank was Rs. 5,00,00,000.The debenture were redeemed according to the terms of offer document. Youare required to prepare ledger accounts till the debenture are redeemed.

412

412 ACCOUNTANCY

Book of Shiwaliks Ltd.8 % Debenture Account

Dr. Cr.

Date Particulars J.F. Amount Date Particulars J.F.Amount (Rs.) (Rs.)

2002 2001Mar.31 Balance c/f 10,00,00,000 Apr.1 Bank 10,00,00,000

2003 2002Mar.31 Balance c/f 10,00,00,000 Apr.1 Balance b/f 10,00,00,000

2004 2003Mar.31 Balance c/f 10,00,00,000 Apr.1 Bank 10,00,00,000

2005 2004Mar.31 Debentureholders 10,00,00,000 Apr.1 Balance b/f 10,00,00,000

Debentureholders Account

Dr. Cr.

Date Particulars J. Amount Date Particulars J. AmountF. (Rs.) F. (Rs.)

2005 2005Mar.31 Bank 10,00,00,000 Mar.31 8 %Debentures 10,00,00,000

Debenture Redemption Reserve AccountDr. Cr.

Date Particulars J. Amount Date Particulers J. AmountF. (Rs.) F. (Rs.)

2002 2002

Mar.31 Balance c/f 2,21,92,600 Mar.31 Profit and Loss 2,21,92,6001

Appropriation2003Mar.31 Balance c/f 4,61,60,608 Apr.1 Balance b/f 2,21,92,600

2003Mar.31 Interest on 17,75,408

DebentureRedemption SinkingFund InvestmentsProfit and Loss App. 2,21,92,600

4,61,60,608 4,61,60,608


2004 2003Mar. 31 Balance c/f 7,20,46,056.64 Apr. 1 Balance b/f 4,61,60,608.00

2004Mar. 31 Interest on 36,92,848.64

DebentureRedemption SinkingFund InvestmentsProfit and Loss App. 2,21,92,600.00

7,20,46,056.64 7,20,46,056.64

2005 2004Mar.31 General Reserve 10,00,02,341.17 Apr. 1 Balance b/f 720,46,056.64

2005Mar. 31 Interest on 57,63,684.53

DebentureRedemption SinkingFund InvestmentsProfit and Loss a/c. 2,21,92,600.00

10,00,02,341.17 10,00,02,341.17

Interest on Debenture Redemption Sinking Fund Investment Account

Dr. Cr.

Date Particulars J.F. Amount Date Particulers J.F. Amount(Rs.) (Rs.)

2003 2003Mar. 31 Debenture 17,75,408 Mar. 31 Bank 17,75,408

RedemptionReserve 2004

2004 Debenture 36,92,848.64 Mar. 31 Bank 36,92,848.64Mar. 31 Redemption

Reserve 20052005 Debenture 57,63,684.53 Mar. 31 Bank 57,63,684.53Mar. 31 Redemption

Reserve

Debenture Redemption Sinking Fund Investment Account

Dr. Cr.

Date Particulars J.F. Amount Date Particulers J.F. Amount(Rs.) (Rs.)

2002 2002Mar.31 Bank 2,21,92,600 Mar.31 Balance c/f 2,21,92,600

2003Apr.1 Balance b/f 2,21,92,600 Mar. 31 Balance c/f 4,61,60,608

2003Mar. 31 Bank 2,39,68,008

4,61,60,608 4,61,60,608

414

414 ACCOUNTANCY

2003

Apr.1 Balance b/f 4,61,60,608.00 Mar. 31 Balance c/f 7,20,46,056.64

2004Mar. 31 Bank 2,58,85,448.64

7,20,46,056.64 7,20,46,056.642005 2005Apr.1 Balance b/f 7,20,46,056.64 Mar. 31 Bank 2 7,20,46,056.64

Bank Account

Dr. Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount(Rs.) (Rs.)

2005 2005Mar.31 Balance b/f 5,00,00,000.00 Mar. 31 Debentureholders 10,00,00,000.00

Interest on Balance c/f 2,57,38,905.28DebentureRedemption SinkingFund Investment 36,92,848.64DebentureRedemption SinkingFund Investment 7,20,46,056.64

12,57,38,905.28 12,57,38,905.28

1 Amount to be appropriated = .221926 × Rs. 10,00,00,000 = Rs. 2,21,92,600.2 It is assumed that Debenture Redemption Sinking Fund Investemets are sold at no profit

no loss.

7.10 Redemption of Convertible Debenture

The debenture may be redeemed by converting them into equity shares as perthe terms of their issue. The Companies Act prohibits any non-convertibleportion of debenture to be redeemed by conversion. This implies that thedebenture will be redeemed by conversion only if they were issued as suchand no cash outflow will take place and hence, there is no requirment of creatingDebenture Redemption Reserve. Whenever debentures are redeemed byconversion, the debenture-holders have to apply for the same.

SEBI Guidelines require that no company shall issue fully convertible debenture(FCDs) having a conversion period of more than 36 months unless conversionis made optional with ‘Put’ and ‘ Call’ option. If conversion of the debenturetakes place at or after 18 months from the date of allotment, but before 36months, any conversion in part or whole shall be optional at the hands ofdebentureholders. The premium amount and time of conversion shall bedetermined and disclosed by the issuer company (10.8). In case the convertible


portion of any instrument such as partly convertible debenture (PCD), fullyconvertible debenture (FCD) etc., issued by a listed company, the value ofwhich exceeds Rs. 50 lakhs and whose conversion price was not fixed at thetime of issue, the holder of such instrument shall be given a compulsory optionof not converting into equity share capital [10.7.1.2 (1)]. Moreover, Conversionwill be done only in those cases where the instrument holders have sent theirpositive consent and not on the basis of non receipt of their negative reply.However, it will not be applicable in case where capital price is fixed withjustification (10.7.1.2).

Accounting Treatment

Following are the journal entries to be recorded for discharging obligation inrespect of convertible debenture :

(A) Redemption of debenture at par through conversion into shares :

(i) For amount due to debentureholders

x% Debenture a/c Dr.Debentureholders a/c

(ii) For discharging debentureholders by issue of equity shares at par :

Debentureholders a/c Dr.Equity share captial a/c

Or

(iii) For discharging Debentureholders by issue of equity share at premium :

Debentureholders a/c Dr.Equity share capital a/cSecurity premium a/c

Since shares are issued at premium, the number of shares to be issued will beequal to the amount of debenture to be redeemed divided by issue price.

(B) Redemption of debenture (at premium) through conversion into shares :

(i) For amount due to debentureholders

x% debenture a/c Dr.Debenture Redemption Premium Dr.


(ii) For discharging debentureholders by issue of shares at par :

Debentureholders a/c Dr.Equity share capital a/c

(iii) For discharging debentureholders by issuing share at premium :

Debentureholders a/c Dr.Equity share capital a/cSecurities premium a/c

416

416 ACCOUNTANCY

Illustration 25 (Debenture issued at par and converted into shares issued at par)

Swati Detergents Ltd. issued 90,00,000, 6% debenture of Rs. 100 eachredeemable after 4 years by converting them into equity shares of Rs. 10 each.Record journal entries for issue and redemption of debenture. Ignore entriesfor payment of interest.

Solution

Book of Swati Detergents Ltd.

Journal


(Rs.) (Rs.)

On the Bank a/c Dr. 90,00,00,000date of Debenture application a/c 90,00,00,000Issue ( Debenture application money received)

On thedate of Debenture application a/c Dr. 90,00,00,000Issue 6 % Debenture a/c 90,00,00,000

(Application money transferred to 6%debenture account consequent uponallotment)

On the 6 % Debenture a/c Dr. 90,00,00,000date of Debentureholders 90,00,00,000redem- ( For amount due to debentureholdersption on redemption)

On the Debentureholders a/c Dr. 90,00,00,000date of Equity share captial a/c 90,00,00,000redem- ( For amount due to debentureholdersption discharge by issue of equity shares)

Illustration 26(Debenture issued at par converted into shares issued at premium)

Rishi and Nishi Ltd. issued 88,00,000, 8 % debenture of Rs. 50 each at apremium of 5 % on July 1, 2000 redeemable at par by conversion of debentureinto shares of Rs. 20 each at a premium of Rs. 2 per share on June 30, 2003.Record necessary entries for redemption of debenture.


Solution

Books of Rishi and Nishi Ltd.Journal


(Rs.) (Rs.)

2000 Bank a/c Dr. 46,20,00,000July 1 Debenture application a/c 46,20,00,000

( Debenture application money received)2003July 1 Debentures application a/c Dr. 46,20,00,000

8 % Debenture a/c 44,00,00,000Securities premium a/c 2,20,00,000

(Transferr of Debenture Application to 8%Debentures consequent upon allotment)

2003July 1 8 % Debenture a/c Dr. 44,00,00,000

Debentureholders a/c 44,00,00,000( For amount due to debentureholders onredemption )

Debentureholders a/c Dr. 44,00,00,000Equity share captial a/c 40,00,00,000Securities premium a/c 4,00,00,000

( Payment due to debentureholdersdischarged by issuing shares at premium)

Notes to Solution

1. No of equity shares to be issued

debenture on Premium shares of Value Faceoldersdebentureh to PayableAmount

+

= 02,00,00,00 22 2) (20

0044,00,00,0 Rs. =

=+2. Equity share captial = 2,00,00,000 × Rs. 20 = Rs. 40,00,00,000

3. Securities Premium = 2,00,00,000 × Rs. 2 = Rs. 4,00,00,000

Illustration 27(Debenture redeemed at premium by converting into shares issuedat premium)

Abhey Taneja Constructions Ltd. have an outstanding balance of 45,00,0007 % debenture of Rs. 500 each redeemable at premium of 10 %. According tothe terms of redemption the company redeemed 20 % of the above debenture

418

418 ACCOUNTANCY

by converting them into shares of Rs. 50 each at a premium of 10 %. Recordjournal entries for the redemption in the books of AbheyTaneja Constructions.

Solution

Books of Abhey Taneja Constructions Ltd.

Journal


(Rs.) (Rs.)

7 % Debenture a/c Dr. 45,00,00,000Debenture Redemption Premium a/c Dr. 4,50,00,000

Debentureholders a/c 49,50,00,000( Payment due to debentureholders onredemption of debenture at premium)

Debentureholders a/c Dr. 49,50,00,000Share Captial a/c 45,00,00,000Securities Premium a/c 4,50,00,000

( Payment due to debentureholdersdischarged by issuing shares at premium)


1. No. of Shares = 5)(50 Rs.49,50,000

+ = 90,00,000

2. Share Captial = 90,00,000 × Rs. 50 = Rs. 45,00,00,000

3. Securities Premium = 90,00,000 × Rs. 5 = Rs. 4,50,00,000

C. Redemption of convertible debenture orriginally issued at a discount :

In case of redemption of debenture by conversion which were originallyissued at a discount, the actual proceeds received on issue of debenturewill become due to debentureholders. Their liability will then be dischargedthrough issue of shares. Because, if such debenture are converted intoshares with the nominal value of debenture, it amounts to issue of sharesat the same rate of discount at which debenture were originally issued.

This can be explained with the help of following example :

Zeal Ltd. issue 1,00,000, 9 % debenture of Rs. 100 each at a disocunt of6 % redeemable after 7 years by converting them into equity shares. At thetime of redemption of these debenture, the holders of debenture shall get equityshares worth Rs. 94,00,000, i.e, the actual proceeds received from such


debenturesholders on issue of debenture and not equity shares worth Rs.1,00,00,000 because it will amount to issue of equity shares at a discount,

Illustration 28(Redemption of debentures originally issued at discount)

On April 1, 2001, Ankits Hardware Ltd. issued 2,00,000, 9% debenture of Rs.100 each at a disocunt of 10 % redeemable after 5 years by converting theminto equity shares. Record necessary entires for the issue and redemption ofdebenture.

Solution

Books of Ankits Hardware Ltd.Journal


(Rs.) (Rs.)

2001Apr. 1 Bank a/c Dr. 18,00,00,000

Debenture application a/c 18,00,00,000(Debenture application money received)

Apr. 1 Debenture application a/c Dr. 18,00,00,000Discount on issue of debenture a/c Dr. 2,00,00,000

9 % Debenture a/c 20,00,00,000(Debenture issued at discounttransferred to 9% debenture accountconsequent upon allotment))

2006Apr. 1 9 % Debenture a/c Dr. 20,00,00,000

Discount on issue of debenture a/c 2,00,00,000Debentureholders a/c 18,00,00,000

( Payment to debentureholders due onredemption, equal to the amount ofactual proceeds recived on issue ofdebenture from them.)

Apr. 1 Debentureholders a/c Dr. 18,00,00,000Share Capital a/c 18,00,00,000

( Payment due to debentureholdersbeing paid)

420

420 ACCOUNTANCY

7.11 Redemption of Debenture throughOpen Market Operations

The Companies Act, 1956 permits the issuer company to purchase and holdor cancel the debenture through open market purchases, obvisouly atfavourable prices, provided the Articles of Association provide for this. Whencompany purchases its own debetures with no intention to cancel them, it istreated like any other investment and when such debenture are subsequentlysold in the market it will be similar to the sale of any other investment.

A Company may also purchase the debenture with an intention to cancelthem. It is assumed that the Company has sufficient amount in DebentureRedemption Reserve before initiating the purchase of debenture for cancellation.The debentures may either be purchased:

(a) On the date(s) when interest on these debenture is due, or

(b) On the date(s) between the two interest dates.

Therefore, the accounting treatment for purchase of debenture in the twosituations above will be different due to accrual and non-accrual of interest.

(A) When purchase of debenture is on due date

(i) When debenture are purchased for investment purpose, the following journalentry is recorded

Investment in own debenture a/c Dr.Bank a/c

(ii) When own debenture are subsequently sold in the market, following entry isrecorded

Bank a/c Dr.Investment in own debenture a/c

Or

When investment is sold at a price below its purchase price

Bank a/c Dr.Loss on sale of investment Dr.

Investment in own debenture a/c

Or

When investment is sold at a price below its purchase price

Bank a/cInvestment in own debenture a/cGain on sale of investments a/c

It is to be noted that gain or loss on sale of investment is transferred toprofit and loss account.


7.11.1 On Cancellation of Own Debenture

Debenture purchased from the open market will be cancelled only afterpassing the resolution by Board of Directors to this effect. The following journalentries are to be recorded for the cancellation of debenture :

When debenture are purchased at nominal value of debenture

x % Debenture a/c Dr.Investment in own debenture a/c

Or

When own debenture are purchased at price below nominal value of debenture

x % Debenture a/c Dr.Own debenture a/cProfit on cancellation a/c

Balance in profit on cancellation of debenture will be transferred to captialreserve or may be utilised to write off discount/loss on issue of debenture. Inthis regard the following journal entry is recorded :

Gain on cancellation a/c Dr.Captial Reserve

Or

Gain on cancellation a/c Dr.Discount/Loss a/c

Illustration 29(Own debenture purchased for cancellation)

LCM Ltd. purchased for cancellation its own 10,00,000, 9% Debenture of Rs.500 each at Rs. 480 each. Record necessary journal entries.

Solution

Books of LCM Ltd.Journal


(Rs.) (Rs.)

Own Debenture a/c Dr. 48,00,00,000Bank a/c 48,00,00,000

(Purchased its own debenture@ Rs. 480 each)

9 % Debenture a/c Dr. 50,00,00,000Own debenture a/c 48,00,00,000Gain on cancellation 2,00,00,000of debenture a/c

( Own debenture purchased beingcancelled)

422

422 ACCOUNTANCY

Gain on cancellation ofdebentures a/c Dr. 2,00,00,000

Captial Reserve 2,00,00,000( Profits on cancellation of debenturetransferred to captial reserve)

Illustration 30

Case India Ltd. has outstanding 11,00,000, 10% debentures of Rs. 200 each,on April 1, 2003. The Board of Directors have decided to purchase 20 % ofown debenture for cancellation at Rs.200 each. Record necessary entries forthe same.

Solution

Books of Case India Ltd.Journal


(Rs.) (Rs.)

Own Debenture a/c Dr. 4,40,00,000Bank a/c 4,40,00,000

(Purchased its own debenture@ Rs. 200 each)

10 % Debenture a/c Dr. 4,40,00,000Own debenture a/c 4,40,00,000

( Own debenture purchased arecancelled)

llustration 31(Purchase of own debenture as investment)

Sahil Electronics Ltd. has an outstanding balance of 40,00,000, 8% debentureof Rs. 100 each and sufficient funds in Debenture Redemption Reserve tomeet legal requirments. The Board of Directors decided to purchase 1,00,000debenture at a price of Rs. 96 for investments purpose. But after few monthsthey took decision to sell them @ Rs. 99 in the market. Record necessaryentries to show above transactions.


Solution

Sahil Electronics Ltd.

Journal


(Rs.) (Rs.)

Investments in owndebenture a/c Dr. 96,00,000

Bank a/c 96,00,000(For purchase of investments )

Bank a/c Dr. 99,00,000Gain on sale of investments a/c 3,00,000Investments a/c 96,00,000

(Investemetns in own debenture soldat profit)

Profit on sale of investments in owndebenture a/c Dr. 3,00,000

Profit and Loss a/c 3,00,000( Profit on sale of investmentstransferred to profit and loss account)

7.11.2 Purchase of Debenture on a day other than the due date of Interest

Ex-Interest and Cum-Interest Quotations

It is assumed that the debenture were purchased immediately after the date ofpayment of interest and therefore no interest has accrued on the date ofpurchase of debenture. However, in real life, it may not be possible becausethe comapny will be guided by the prices prevailing in the market to itsadvantage. In such a situation the company purchases debenture from themarket as and when it is beneficial to do so.The interest accrued from the dateof last payment of interest needs to be considered.

The problem of ex-interest(exclusive of interest) and cum-interest(cumulativeof interest) arises only when the debenture are purchased on the date(s) otherthan the date(s) on which interest is due.In such a situation, total cash to be paid on such debenture need to be bifurcatedinto the captial portion (real price) and the revenue portion (interest accuredfrom the date last it was paid upto the date of purchase) i.e. the interest for theexpired period. Therefore, it is very important to know whether the price quotedincludes the interest accured or not. If the interest accured is not included in

424

424 ACCOUNTANCY

the price quoted, it is known as ex-interest price which is the real price paid forthe debenture. If the interest accured is included in the price quoted, it is calledCum-interest price, which is the total cash paid for the purchase of debentures.Therefore, from the above the following relationships are derived:

1. Real price = Ex-interest price

2. Real price+interest accured = Cum-interest price

3. Total cash paid = Cum-interest price

4. Total cash paid = Real price + interest accured

Following accounting entries are to be recorded :1. For Purchase of own debenture with the actual price paid, i.e., Ex-interest or Cum-interest

Own Debenture a/c Dr. (Ex-interest price or realprice)

Interest on debenture a/c Dr. (Interest accrued)Bank a/c (Total cash paid)

2. Debenture purchased are now being cancelled

x % Debenture a/c Dr. (Nominal value of debenture)Own Debenture a/c (Real price)Gain on cancellation (Difference in nominal value

and real price)

Debenture purchased for immediate cancellation

When debenture are purchased for immediate cancellation, then, the in-terest on remaining debenture will be paid at the time when interest be-comes due.

Illustration 32(Debenture purchased for immediate cancelation)

Doorstep Delivery Ltd. has 1,00,000 9 % Debenture of Rs. 100 each outstandingon April 1, 2002. The interest is payable on March 31 and September 30 everyyear. On July 1, 2002 company purchased 8,000 Debentures at Rs. 97 (cum-interest) for immediate cancellation. Record journal entries for purchase ofdebenture and cancellation and payment of interest on September 30, 2002.


Solution

Doorstep Delivery Ltd.Journal


(Rs.) (Rs.)

2002July 1 Own debenture a/c Dr. 7,58,000

Interest on debentureDr. 18,000Bank a/c 7,76,000

(Own debenture purchased)

July 1 9% Debeture a/c Dr. 8,00,000Own debenture a/c 7,58,000Profit on cancellation a/c 42,000

(Own debenture purchased are nowcancelled)

Sept.30 Interest on debenture a/c Dr. 4,14,0001

Debentureholders a/c 4,14,000(Interest due on debenture)

Sept.30 Debentureholders a/c Dr. 4,14,000Bank a/c 4,14,000

(Interest due paid to debentureholders)

Sept.30 Profit and Loss a/c Dr. 4,32,000Interest on debenture a/c 4,32,000

(For transfer of half yearly interest)


1. Interest on Debenture = Rs. 92,00,000 × 126

100

9 ×

= Rs. 4,14,0001

7.11.3 Interest on Own Debenture

Where the company buys its debenture for cancellation at a later date, theinterest on debentures payable by the company will consist of :

(a) Interest on its own debenture held by the company for cancellationwill be credited to interest on own debenture and debited to debenturesinterest. At the end of year when the books of accounts are closed,interest on own debenture account as it is retained by the companyitself, is closed by transferring it to the credit side of profit and lossaccount. However, if the own debenture are retained as a part of sinking

426

426 ACCOUNTANCY

fund investments, interest on own debenture account is closed bycrediting to sinking fund account.

(b) Interest on debenture held by outsiders will be credited todebentureholders account and debiting it to profits and loss account.On payment of interest, debentureholders account is debited and bankaccount is credited.

Accounting Treatment

1. When interest becomes due on debenture :

Debenture Interest a/c Dr. (Total interest payable on

debenture by outsiders as wellas by company itself.)

Debentureholders a/c (With the amount of interestpayable on the debenture heldby outsiders)

Interest on own debenture (With the amount of interestpayable on debenturepurchased by company itself)

2. For payment of interest to debenturesholders

Debentureholders a/c Dr. (Amount of interest paid tooutsiders)

Bank a/c

3. For transfer of interest on own debenture to Profit and Loss account

Interest on own debenture a/c Dr.Profit and Loss a/c

Illustration 33(Interest on own debenture)

KM Ltd. has an authorised captial of Rs. 1,50,00,000 divided into equity sharesof Rs. 10 each and its balance sheet as at March 31, 2003 was as follows :

Liabilities Amount Assets AmountRs. Rs.

Share Captialissued and fully paid-up 50,00,000 Fixed Assets 60,00,000General Reserve 10,00,000 Current Assets 15,00,0008 % Debenture 20,00,000 Own Debenture 4,50,000Sundry creditors 10,00,000 (nominal value

Rs. 5,00,000)Cash at bank 10,50,000

Total 90,00,000 Total 90,00,000


The company decided the followings:

1. To redeem the 8 % debenture due for redemption on September 30,2003 and also to cancel its own debenture.

2. To pay interest to debentureholders being due on the date ofredemption.

Record necessary entries to give effect to the above transactions.

Solution

Books of KM Ltd.Journal


2003 (Rs.) (Rs.)

Sept 30 8% Debenture a/c Dr. 15,00,000Debentureholders a/c 15,00,000

(Amount due on redemption)

Sept 30 Interest on debenture a/c Dr. 1,60,000Debentureholders a/c 1,20,000Interest on own debenture a/c 40,000

(Interest due on debenture outstandingincluding own debentureholders asinvestments)

Debentureholders a/c Dr. 1,20,000Bank a/c 1,20,000

( Payment of interest to debentrureholders)

Interest on own debenture a/c Dr. 40,000Profit and Loss a/c 40,000

(transferred of interest on own debentureto profit and loss account)

Profit and Loss a/c Dr. 1,60,000Interest on debenture a/c 1,60,000

(Transfer of debenture interest to profitand loss account)

8 % Debenture a/c Dr. 5,00,000Own debenture a/c 4,50,000Profit on redemption of debenture a/c 50,000(cancellation of own debenture)

Profit on redemption of debenture a/c Dr. 50,000Capital Reserve 50,000

( profit on redemption of debenture istransferred to capital reserve)

428

428 ACCOUNTANCY

Debenture Purchased and cancelled at the end of the year :

In such a situation debenture interest will be debited with the amount ofdebenture interest due on debenture held by outsiders from the timesince last interest payment was made and interest due on own debenturefor the period these debenture are held by the company.

Illustration 34(Purchase and cancellation of own debenture)

Cripton India Ltd. has 1,00,000, 9% Debenture of Rs. 100 each outstandingon April 1, 2002. The company pays interest on Sept. 30 and March 31 everyyear. Company purchased 10,000 debenture at Rs 96. ( Ex-Interest) on May 1,2002. It further purchased 2,000 debenture at Rs. 98 ( cum-interest) on January1, 2003. All these debenture were cancelled on March 31, 2003. Record thejournal entries for purchase of debenture, payment of interest and cancellationof debenture.

Cripton India Ltd.Journal


(Rs.) (Rs.)

2002May 1 Own debenture a/c Dr. 9,60,000

Interest on debenture a/c Dr. 7,500Bank a/c 9,67,500


Sept.30 Interest on debenture a/c Dr. 4,42,500Debentureholders a/c 4,05,000Interest on own debenture a/c 37,500

(Interest due on debenture)

Sept.30 Debentureholders a/c Dr. 4,05,000Bank a/c 4,05,000

(Interest paid to debentureholders)

2003Jan.1 Own debenture a/c Dr. 1,91,500

interest on debenture a/c Dr. 4,500Bank a/c 1,96,000


Mar.31 Interest on Debenture a/c Dr. 4,.45,500Debentureholders a/c 3,96,000Interest on own debenture a/c 49,500

(Interest due on debenture)


Mar.31 Debentureholders a/cDr. 3,96,000Bank a/c 3,96,000

(Interest paid to debentureholders)

Mar.31 Interest on own debenture a/c Dr. 87,000Profit and Loss a/c 87,000

Interest on own debenture transferredto profit and loss account)

Mar.31 Profit and Loss a/c Dr. 87,000Interest on Debenture a/c 87,000

(Transfer of debenture interest)

Note to the Solution

1. May 1, 2002

(i) Interest accrued on debenture purchased

= 10,000 × Rs. 100 × 121

100

9 × = Rs. 7,500

2. Sept. 30, 2002

(i) Interest on debenture = Rs. 90,000 × 100 × 126

100

9 × = Rs. 4,05,000

held by outsiders

(ii) Interest on own debenture = 10,000 × Rs. 100 × 125

100

9 × = Rs. 37,500

3. Jan 1, 2003

Interest accrued on debenture purchased

= 2,000 × Rs. 100 × 123

100

9 × = Rs. 4,500

4. 31 March, 2003

(i) Interest on debenture = Rs. 88,00,000 × 126

100

9 × = Rs. 3,96,000

held by outsiders

(ii) Interest on own debenture = 10,00,000 × 126

100

9 × = Rs. 45,000

(iii) Interest on own debenture = Rs. 45,000 + Rs. 4,500 = Rs. 49,500.


On August 1, 2002 Zenith India Ltd. buys 100, 9 % debenture of Rs. 100 atRs. 95 each cum-interest, the dates of interest being March 31 and September30. Record necessary journal entries when debenture are purchased forcancellation

430

430 ACCOUNTANCY

Solution

Books of Zenith India Ltd.Journal


(Rs.) (Rs.)

Own Debenture a/c Dr. 9,200Interest on debenture a/c Dr. 3002

Bank a/c 9,5003

( Purchase of debenture account)

9 % Debentures Dr. 10,000Own debenture a/c 9,200Gain on cancellation of 800debenture a/c

( For purchase of debenture forcancellation)

Gain on cancellation a/c Dr. 800Captial Reserve a/c 800

( Gain transferred to Captial Reserve)


1. Interest is included in the quoted price.

2. Interest accrued on debenture purchased

= 300 Rs.124

100

9 10,000 Rs. =××

3. Cash paid for debenture = Rs. 100 × Rs. 95 = Rs. 9,500

( Rs. 9,500 includes the real price of (the capital portion) the debenture i.e.(9,500-300) Rs. 9,200 and Rs. 300 for the revenue portion, i.e., interest accrued.

4. Profit on redemption = Nominal value of debenture – Real priceof debenture

= 800 Rs. 9,200 Rs. 10,000 Rs. =−


Dhruv India Ltd. buys Rs. 400, 12 % debenture of Rs. 100 at Rs. 95 each, ex-interest on March 1, 2002, the dates of interest being June 30 and Dec. 31.Record necessary entries if debenture are purchased for cancellation.


Solution

Books of Dhruav India Ltd.

Journal


(Rs.) (Rs.)

Own debenture a/c Dr. 38,000Interest on debenture a/c 8002

Bank a/c 38,8004

( Own debenture purchased)

12% Debenture a/c Dr. 40,000Own debenture a/c 38,0003

Gain on cancellation ofdebenture a/c 2,000

(Debenture purchased, ex-interestbeing cancelled)

Gain on cancellation a/c Dr. 2,000Captial Reserve 2,000

(Gain transferred to captial reserve)


1. Interest for the expired period i.e. from January 1 to March 1 is excluded fromthe quoted price. The interest will also be paid in addition to purchase price ofdebenture.

2. Interest accrued on debenture purchased = 800 Rs. 122

10012

40,000 Rs. =××

3. Real price of debenture = Rs. 400 × Rs. 95 = Rs. 38,000

4. Total amount payable on purchase of debenture

= Real price + Interest accrued

=Rs. 38,000 + Rs. 800 = Rs. 38,800

5. Profit on redemption = Rs. 40,000 – Rs. 38,000 = Rs. 2,000

C) Bond with put or call option

A bond with a put option allows the bondholder to return the bond to theissuing organisation for a cash payment. Such bond are called putable bond.For example, IDBI has issued flexibonds with a put option. Whenever, interestrate rises in the market it is to the advantage of the bondholder to exercisehis/her put option to get money back and invest elsewhere to fetch higherreturns. In case of corporate bonds, call price is usually above the face valuein the initial year and decreases over a period of time. The call feature modifies

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432 ACCOUNTANCY

the maturity and thereby effects the yield on the security. The issuer pays apremium for the option of calling the bond before maturity because of theflexibility afforded to the issuer. The call option also provides advantage ofreaping the benefits arising out of favourable market condition which may notbe prevailing at the time of maturity. Besides, it activates the treasury functionof the issuer.

A bond with a call option allows the issuer to redeem the bond on or afterspecified period but before the full maturity period at a price called “exerciseprice”. This is also called “ Callable bond”. The borrower in this case is providedwith an option to prepay the loan. This variant of option is beneficial to theborrower if the market rate of interest declines as he/she can borrow a newloan/issue new bonds with low interest rate and use money to retire theexpensive loan. Thus, call option is seemingly to the advantage of borrower atthe cost of lender. Therefore, bonds with call option include penalties for earlyrepayment in the form of higher interest rate.

The accounting entries will be same as in case of debentures redemption ofdebenture as discussed in earlier sections.

Illustrition 37(Exercise of call option)

J.M.K India Ltd. issued 10,00,000, 7% debenture of Rs. 100 each at par to beredeemed at par after ten years. Debentures are callable after 4 years at anexercise price of Rs. 102. After five years the company invoked the call optionand the holders of 25,000 debenture responded to the call option. Recordnecessasry journal entries.

Solution

Books of J.M.K India Ltd.

Journal


(Rs.) (Rs.)

On the date of issue

Bank a/c Dr. 10,00,00,0007% Debenture application a/c 10,00,00,000

(Money received on application)

7% Debenture application a/c Dr. 10,00,00,0007% Debenture a/c 10,00,00,000

( Debenture applicationmoney transferred to 7% debentureaccount consequent upon allotment)


On the date when debenture are cancelled

7 % Debenture a/c Dr. 25,00,000Loss on Redemption a/c Dr. 50,000

Bank a/c 25,50,000( Debenture called under call option)

Profit and Loss a/c Dr. 50,000Loss on Redemption a/c 50,000

( Loss on Redemption of debenturetransferred to Profit and Loss account)

Illustration 38(Exercise of call option)

Charlie Ltd. has issued 4,00,000, 9% debenture of Rs. 100 each redeemableafter 8 years. Debentureholders are given the option to get their debentureredeemed at 105 per debenture any time after 3½ years. At the end of 4 years,debentureholders holding 20,000 debenture exercised their option get theirdebenture redeemed. Record necessary journal entries.

SolutionBooks of Charlie Ltd.

Journal


(Rs.) (Rs.)

On the date of issue


(Receipt of application money)

On the date of allotment

Debenture application a/c Dr. 4,00,00,0009 % Debenture a/c 4,00,00,000

(Debenture applicationmoney transferred to 7% Debentureconsequent upon allotment)

On the date of exercise of option

9 % Debenture a/c Dr. 20,00,000Loss on redemption a/c Dr. 1,00,000

Bank a/c 21,00,000( Debenture called under call option)

Profit and Loss a/c Dr. 1,00,000Loss on redemption a/c 1,00,000

( Loss on redemption of debenturetransferred to profit and loss account)

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434 ACCOUNTANCY

Terms Introduced in the Chapter

� Debenture � Bond� Charge � Coupon rate� Floating Charge � First Charge� Deep Discount Bond � Trust deed� Deferred interest expense � Future Value� Collateral Security � Redemption of debenture� Discount/loss on issue � Cum-interest� Redemption out of profits � Own debenture� Redemption of Convertible � Maturity Date

debenture � Principal� Purchase of debenture � Zero Coupon Bond

from open market � Debentures Sinking Fund� Ex-interest � Warrants� Call and put option � Fixed Charge� Draw by lots � Second Charge� Purchase Consideration � Present and Future Value

Summary

Debenture

Debenture is the acknowledgments of debt. It is a loan capital raised by the companyfrom general public. A person/holder of such a written acknowledgment is calleddebentureholder.

Bond

Bond is similar to debentures in terms of contents and texture. The only differenceis with respect of issue condition i.e. bonds can be issued without predeterminedrate of interest as is in case of deep discount bonds.

Charge

Charge is an incumbrance to meet the obligation under trust deed under whichcompany agrees to mortgage specific portion either by way of first or second charge.First charge implies the priority in repayment of loan. Those who hold first chargeagainst any specific assets will realize their dues from the net realizable value ofsuch assets. Any amount of surplus from assets given under first charge,will beutilized for settling the claims for second chargeholders.

Types of debenture

Debentures are of various types such as : secured and unsecured debentures;redeemable and perpetual debentures, convertible and non-convertible debentures,zero coupon rate and specific rate.


Issue of debenture

Debenture are said to be issued at par when the amount to be collected on them isequal to their nominal on face value. If the issue price is more than nominal or facevalue, it is said to be issued at a premium. If the issue price is less than thenominal or face value, it is said to be issued on discount. The amount received aspremium is credited to ‘securities premium account’ whereas amount of discountallowed is debited to “loss/discount on issue” and is written off over the years.

Debenture Trust Deed

Debenture Trust Deed is a document created by the company whereby the trusteesare appointed to protect the interest of debentureholders before any offer is madeto the public.

Notional rate of interest

Notional rate is a rate at which if the issue price is compounded will become equalto the maturity value at the time of redemption of deep discount bonds.

Issue of debenture other than cash

Sometimes debenture can be issued to vendor or suppliers of patents, copyrightsand for transfer of intellectual property rights on preferential basis without receivingmoney in cash.

Purchase Consideration

Purchase Consideration is the amount paid by purchasing company in considerationfor purchase of assets/business from another enterprise/vendor.

Collateral Security

Any security in addition to primary security is called collateral security.

Redemption of debenture

Means discharge of liability on account of debenture/bond by repayment made todebentureholders. Normally, the redemption takes place on the expiry of period forwhich they have been issued, depending upon the terms and conditions of issue.

Questions and Exercises

1. Objective type Questions

State whether the following statements are ‘True’ or ‘False’:

a) A Company cannot purchase its own debenture.

b) Interest on Debenture Redemption Sinking Fund Investments istransferred to Profits and Loss account.

c) Interest on debenture is payable only when company earns profits.

d) After debenture are redeemed balance of Debenture Redemption Reserveis transferred to Capital Reserve.

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436 ACCOUNTANCY

e) Zero Coupon Bonds are issued without a specified rate.

f) Deep Discount Bonds are issued at price nominally below the maturityvalue.

g) Debenture investment has nothing to do with terms of redemption.

h) Debenture secured by a charge on assets of the company entitle thedebenture holders to take possession of those assets even if their paymentis made as per terms.

i) Debenture secured by a floating charges on the assets of the companyentitle their holders to receive their payment in priority to first chargeholders from the sale of such assets.

j) Coupon rate is a specified interest rate payable on debenture.

k) Debentures trustees are appointed to protect the interest of companiesissuing debenture.

l) Any individual can be appointed as Debenture trustees.

m) Debenture cannot be issued without coupon rate.

n) Primary Security and Collateral Security is one and the same thing.

o) It is always advisable not to write off the discount/loss on issue ofdebentures.

p) Redemption of debenture imply the payment of interest in time.

q) Whenever debenture are redeemed out of profits, an equivalent amountwill be transferred to Debenture Redemption Reserve.

r) As per the provisions of the Companies Act, 1956, the company is underobligation to create Debenture Redemption Reserve equivalent to 50 %of the Debenture issue before the redemption of debentures takes place.

s) A company issuing debenture with maturity period of more than 18months require to create Debenture Redemption Reserve.

t) Debenture Redemption Reserve is to be created even if debentures areredeemed through conversion.

2. Short Answer Questions

(i) Explain the concept of Debenture.

ii. What do you mean by issue of debenture as collateral security.

iii What do you mean by ‘Trust-Deed’ in context of debenture.

iv. What are the functions and duties of trustees?

v. Who can be trustees of ‘Trust-Deed’?

vi. What do you mean by ‘issue of debenture for consideration other thancash’?

vii. What do you mean by ‘issue of debenture at par redeemable at premium’?

vii. Explain the term redemption of debenture?


viii. Explain in brief call and put option?

ix. Explain in brief treatment of interest on own debenture?

x. Explain in brief Ex-interest and Cum-interest.

3. Essay Type Questions

i. What do you mean by deferred interest expense? Explain the method ofcomputing notional interest.

ii. What is discount/loss on issue of debenture? Is it essential for thecompany to write off discount/loss on debenture? How will you computethe amount to be written off each year?

iii. Explain the different type of Debenture.

iv. What do you mean by financing the redemption of debenture?

v. Explain the meaning and entries for redemption of debenture byconversion.

v. Write a short note on purchase of debenture through open marketoperations.

Exercises

4. Goodwill India Ltd. Issued 75,00,000, 6 % Debenture of Rs. 50 each at parpayable Rs. 15 on application and Rs. 35 on allotment, redeemable at parafter 7 years from the date of issue of debenture. Record necessary entries inthe books of Company.

5. Samriti Ltd. issued 50,00,000, 8 % Debenture of Rs. 100 each, payable onapplication and redeemable at par any time after 6 years. Record necessaryentries for issue of debenture in the books of Samriti Ltd.

6. Anushree Ltd. issued 90,00,000, 9% Debenture of Rs. 50 each at a discountof 8 % redeemable at par any time after 9 years. Record necessary entries inthe books of Anushree Ltd.

7. Rohan Chemicals Ltd. of Mumbai issued 1,00,00,000, 10% Debenture ofRs. 100 each at premium of 10% on April 1, 2003 Payable Rs. 40 on applicationand Rs. 70 on allotment. Debenture are redeemable on March 31, 2010. Recordnecessary entries to record issue of debenture assuming that the issue isfully subscribed and all the money due is received.

8. Traditional products Ltd. offered 2,00,000, 8% Debenture of Rs. 500 each onJune 30, 2002 at a premium of 10 % payable as Rs. 200 on application(including premium) and balance on allotment, redeemable at pat after 8years. But application are received for 3,00,000 debenture and the allotmentis made on pro-rata basis. All the money due on application and allotment isreceived. Record necessary entries regarding issue of debenture.

9. Athire Cosmetics Ltd. issued 5,00,000, 9% Debenture of Rs. 1,000 each onApril 1, 2003 redeemable at a premium of 8% after 10 years. According to the

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438 ACCOUNTANCY

terms of prospectus Rs. 400 is payable on application and balance on allotmentof debenture. Record necessary entries regarding issue of debentures.

10. Richstech Ltd. offered 20,00,000, 10% Debenture of Rs. 200 each at a discountof 7 % redeemable at premium of 8% after 9 years. Record necessary entriesin the books of Richstech Ltd.

11. Madhu Agrotech Ltd. issued 40,000 zero coupon bond of the face value ofRs. 1,000 each maturating after 7 years at an issue price of Rs. 583. Recordnecessary entries regarding issue of debenture and treatment of interest inthe books of the above company.

12. Monga Ltd. took over assets of Rs. 9,00,00,000 and liabilities ofRs. 3,00,00,000 of Sita Ltd. and issued 8% Debenture of Rs. 100 each. Recordnecessary entries in the books of Monga Ltd.

13. JM travels Ltd. bought a machinery for Rs. 4,00,00,000 and assumed liabilitiesworth Rs. 70,00,000 from Good Luck Ltd. and issued 6 % Debenture ofRs. 1,000 each a premium of 10%. Record necessary entries in the books ofJM travels Ltd.

14. Garima Ltd. obtained a term loan from IDBI of 4,00,00,000 for a period of 6years @ 11 % p.a. The loan is secured by a mortgage of plant and machinerysince IDBI was not satisfied with security of plant and machinery, the companyissued 1,00,000 10% Debenture of Rs. 100 each as collateral security. Recordnecessary entries in the books of Garima Ltd. including payment of intereston loan taken from IDBI. How this loan from IDBI and issue of debenture ascollateral security will be reported in the books of company.

15. You are considering the purchase of 18 year Zero Coupon Bond with facevalue of Rs. 1,000. What would you be willing to pay if your required rate ofreturn is 11%?

16. Phoolwari Ltd. raised a loan of Rs. 40 cores on April 1, 1999 @ 10 % p.a.payable quarterly on June 30, September 30, December 31 and March 31,repayable after 4 years and mortgage factory land as primary security. Thecompany has given 11 % Debentures for Rs. 20 crores as collateral securities.As the company’s financial position was not good, it could not pay interest onloan with effect from July 1, 2002 onwards. The Company was also not in aposition to repay the loan on due date. The lender took over the possession offactory land at Rs. 35 crores and invoked his right vested in debentures of theCompany as collateral security on September 30, 2003. Record journal entriesto give effect to above transactions.

17. Ashwathi Ltd. issued 40,00,000 10 % Debenture of Rs. 50 each at a discountof 8 % on April 1, 2000, redeemable in four equal annual installments startingwith March 31, 2003. Securities premium account shows a balance of70,00,000. Compute the amount of discount/loss to be written off and alsorecord the journal entries in the books of Ashwathi Ltd.

18. Ankur Jewellery Ltd. issued 50,00,000 8 % Debenture of Rs. 100 at a discountof 6 % on April 1, 2000 redeemable at premium of 4 % by draw of lots asunder:


20,00,000 Debenture on March 31, 2002



Compute the amount of discount to be written off in each year till debentureare paid. Also prepare discount/loss on issue of debenture account.

19. Chummun Company Ltd. issued 10,0,00,000, 6 % Debenture of Rs. 100 eachat a discount of 6 % on April 1, 2001 redeemable at the end of fourth year.Record necessary journal entries to record the issue of debentures and writingoff discount on issue of debenture.

20. Nirbhai Chemicals Ltd. issued 20,00,000, 6% Debenture of Rs. 50 each at apremium of 8% on June 30, 2003 redeemable on June 30, 2004. The issuewas fully subscribed. Record necessary entries for issue and redemption ofdebentures. How much amount of debenture. Redemption Reserve is to becreated before redemption of debenture?

21. AFCONs India Ltd. (an infrastructure company) issued 50,00,000, 9%Debenture of Rs. 20 each on April 1, 2002 redeemable on April 1, 2008. Howmuch amount of Debenture Redemption. Reserve is required before theredemption of debenture? Also record journal entries for issue and redemptionof debenture.

22. Swati Textiles Corporation Ltd. has outstanding Rs. 5000,00,000, 9%Debenture divided into debenture of Rs. 100 each due for redemption onMarch 31, 2004. Record necessary journal entries regarding redemptionassuming that there is a balance of Rs. 30,000,000 is Debenture RedemptionReserve account on the date of redemption.

23. Pragati Enterprises Ltd. issued 3,500,000, 6½ % debenture of Rs. 100 eachon October 1, 2002 redeemable in give equal annual installments startingwith March 31, 2006. The Board decides to transfer to Debenture RedemptionReserve Rs. 50,00,000 and Rs. 40,000,000 on March 31, 2003 and 2004respectively and balance required to be transferred to Debentures RedemptionReserves on March 31,2005. Record necessary journal entries.

24. Kusum Steel Industries Ltd. issued 21,00,000, 7½% Debenture of Rs. 100each on March 31,2002 redeemable at a premium of 8% on June, 2009. TheBoard of Directors decided to transfer the required amount to DebentureRedemption Reserve in three equal annual installment starting with March31, 2007. Record necessary journal entries regarding issue and redemptionof debenture.

25. Akanksha Enterprises Ltd. issued 100,000,000, 6% Debenture of Rs. 10 eachon September 1,2001 redeemable at 9 premium of 7% as under :

On March 31, 2005 500,00,000 Debenture



The Board of Directors has also decided to transfer the required amount toDebenture Redemption Reserve in four equal annual installment starting withMarch 31, 2002. Record necessary journal entries.

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440 ACCOUNTANCY

26. Khandelwal’s Ltd. issued 75,00,000, 5% debenture of Rs. 50 each redeemableafter 3 years by converting them into shares of Rs. 20 each. Record necessaryjournal entries for issue and redemption of debenture.

27. Shivani Industries Ltd. issued 42,00,000, 7% debenture of Rs. 100 each at apremium of 10% on Oct 1,2002 redeemable by conversion of debenture intoshares of Rs. 10 each at a premium of 5% on June 30, 2006. Record Necessaryentries to record above transactions.

28. Rohan Constructions Ltd. have on outstanding balance of 60,00,000, 9%debenture of Rs. 200 each on March 31, 2003 redeemable at a premium of10%. As per terms of the redemption of debenture the Company has decidedto redeem its 50% debenture by converting them into shares of Rs. 100 eachat a premium of 20% on March 31, 2005. Record necessary entries regardingredemption.

29. Sonali Tele-enterprises Ltd. issued 12,00,000, 8% debenture of Rs. 1,000each at a discount of 8½ % on September 1, 2003 redeemable after 6 years byconversion into equity shares. Record necessary entries to record abovetransactions.

30. Suresh Ltd. purchased for cancellation its own 800,000, 7% debenture of200 each at Rs. 160 per debenture. Record necessary entries.

31. Gagan Ltd. has outstanding 42,00,000, 9% debenture of Rs. 100 each onSeptember 10, 2004. The Board of directors decided to purchase 1,00,000 ofits own debenture for cancellation @ Rs. 100 each. Record above transactionsis the books.

32. Gunjan constructions Ltd. issued 18,00,000, 7½ debenture of Rs. 500 each.The Board of directors decided to purchase 80,000 debenture at a price ofRs. 485 each for investment purpose. After few month, they have decided tosell off these debenture @ Rs. 510 each in the market. Record necessaryentries to show above transactions assuming sufficient balance in DebentureRedemption Reserve as per legal requirements.

33. Indu films Ltd. purchased 50,000, 9% debenture of Rs. 100 at Rs. 92 eachcum-interest, the dates of interest being June 30 and December. 31, onSeptember 1, 2003. Record necessary entries assuming that debenture arepurchased for cancellation.

34. Sunil and Sunita Ltd. buys 1,25,000 8½ % debenture of Rs. 50 each atRs. 44 each ex-interest, on June 30, 2004, interest payable on debenture onApril 1 every year. Record necessary entries assuming debentures purchasedare for cancellation.

35. Garrisons Ltd. issues 23,00,000, 7½ % debenture of Rs. 1,000 each at parredeemable at par after 7 years. Debenture are callable after 3 years at anexercise price of Rs. 1,040. At the end of fourth year the company called indebenture for redemption of the nominal value of Rs. 50,00,00,000. Recordnecessary entries to show the above transactions.


36. Williams Ltd. issued 20,00,00,000, 6½ % debenture of Rs. 20 each redeemableafter 10 years. Debentureholder are given the option to get debenture redeemedat Rs. 22 per debenture any time after 5 years. At the end of 6 yearsdebentureholders holding 1,00,00,000 debenture and at the end of 7 yearsholders of 50,00,000 debenture exercised their option to get their debentureredeemed. Record necessary journal entries.

37. Richa fashion Ltd. issued 20,00,000, 8% debenture of Rs. 100 each on April1,2002 redeemable after 4 years. It has been decided to create DebentureRedemption Reserve for the purpose of redemption of debenture. The SinkingFund Tables shows that Rs. 0.2155 invested in 10% securities will amount to Rs.1 in four years. On March 31, 2006 the balance at Bank was Rs. 7,00 00,000.The debenture were redeemed as per terms of the offer document.

You are required to record the necessary journal entries and also prepareledger accounts require to close the books till the redemption of debenture.

38. Goodway Paper Ltd. issued 500,000, 5 % debenture of Rs. 500 each on March31, 2003 redeemable after 3 years. For this purpose, the company establisheda Debenture Redemption Reserve. The investments are expected to realise 6%p.a. interest. Sinking Fund Tables show that Rs. 0.31411 invested annuallyat 6 % interest will amount to Rs. 1 in three years. On March 31, 2006,investments realised at a profit of 20% and the bank balance wasRs. 1,00,00,000 after receipt of interest. The debenture were paid off as perterms of redemption decided on issue of debenture.

Record necessary journal entries and prepare ledger accounts necessary toshow above transactions.

Answers

1. True : (b), (e), (f), (g), (j), (k), (m), (o), (r), (s), (t).

False : (a), (c), (d), (h), (i), (l), (n), (p), (q).

9. Loss on issue : Rs. 40,000,000

10. Loss on issue : Rs. 3,20,00,000

13. No. of 6% debenture to be issued = Rs. 30,000

14. Interest of Rs. 44,00,000 p.a. will be paid for 6 years till the redemption ofdebenture takes place.

16. Interest accrued till September 30, 2003 will be Rs. 5,00,00,000. Lenders willinvoke their rights in 11% debenture kept as collateral securities to the ex-tent of Rs. 10,00,00,000.

17. Discount/Loss written off :

March 31, 2001 Rs. 20,00,000

March 31, 2002 Rs. 20,00,000

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442 ACCOUNTANCY

March 31, 2003 Rs. 1,50,00,000

March 31, 2004 Rs. 10,00,000

March 31, 2005 Rs. 5,00,000

March 31, 2006 Rs. 500,000

18. Discount/Loss to be written off

March 31, 2001 Rs. 125,00,000

March 31, 2002 Rs. 125,00,000

March 31, 2003 Rs. 125,00,000

March 31, 2004 Rs. 75,00,000

March 31, 2005 Rs. 50,00,000

19. Discount to be written off :

March 31, 2002 Rs. 150,00,000

March 31, 2003 Rs. 150,00,000

March 31, 2004 Rs. 150,00,000

March 31, 2005 Rs. 150,00,000

20. No Debenture Redemption Reserve to be created

21. No Debenture Redemption Reserve to be created

22. Debenture Redemption Reserve of Rs. 2200,00,000 to be created before theredemption begins.

23. Balance Debenture Redemption Reserve of Rs. 1300,00,000 to be on March31, 2005

24. Debenture Redemption Reserve to be created RS. follows :

March 31, 2007 Rs. 35,00,000

March 31, 2008 Rs. 35,00,000

March 31, 2009 Rs. 35,00,000

27. No. of shares to be issued Rs. 4,40,00,000

28. No. of shares to be issued Rs. 55,00,000

29. Amount payable to debentureholders on redemption Rs. 10,98,00,000

30. Transfer to capital reserve Rs. 3,20,00,000

32. Profit on sale of own debenture Rs. 20,00,000.

33. Gain on cancellation of own debenture Rs. 1,15,000.

34. Interest on debenture Rs. 1,32,812.5,

Gain on cancellation Rs. 7,50,000.

35. Loss on redemption Rs. 2,00,00,000


36. Loss on redemption Rs. 3,00,000.

37. Sinking Fund :

March 31, 2004 Rs. 43,10,000

March 31, 2005 Rs. 90,51,000

March 31, 2006 Rs. 42,66,100

Sinking Fund Balance Rs. 20,00,27,100

38. Sinking Fund : Rs. 78,52,750

Interest on sinking fund Rs. 4,71,165investment March 31, 2005

Gain on sale Rs. 32,35,333

Sale value of debenture redemption Rs. 1,94,11,998investment fund

Balance transferred to Rs. 2,82,353,470General Reserve

APPE

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14%

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16%

18%

20%

24%

28%

32%

36%

11.0

100

1.0

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1.0

300

1.0

400

1.0

500

1.0

600

1.0

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1.0

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1.0

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1.1

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1.2

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1.2

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1.2

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1.3

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1.3

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21.0

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1.0

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1.0

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1.1

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1.1

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1.1

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1.1

664

1.1

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1.2

100

1.2

544

1.2

996

1.3

225

1.3

456

1.3

924

1.4

400

1.5

376

1.6

384

1.7

424

1.8

496

31.0

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1.0

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927

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1.1

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1.1

910

1.2

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1.2

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1.2

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1.3

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1.4

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1.5

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1.5

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1.6

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1.7

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41.0

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1.2

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1.3

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1.3

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1.4

116

1.4

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1.5

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1.6

890

1.7

490

1.8

106

1.9

388

2.0

736

2.3

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2.6

844

3.0

360

3.4

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51.0

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1.2

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1.2

763

1.3

382

1.4

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1.4

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1.5

386

1.6

105

1.7

623

1.9

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2.4

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1.1

262

1.1

941

1.2

653

1.3

401

1.4

185

1.5

007

1.5

869

1.6

771

1.7

716

1.9

738

2.1

950

2.3

131

2.4

364

2.6

996

2.9

860

3.6

352

4.3

980

5.2

899

6.3

275

71.0

721

1.1

487

1.2

299

1.3

159

1.4

071

1.5

036

1.6

058

1.7

138

1.8

280

1.9

487

2.2

107

2.5

023

2.6

600

2.8

262

3.1

855

3.5

832

4.5

077

5.6

295

6.9

826

8.6

054

81.0

829

1.1

717

1.2

668

1.3

686

1.4

775

1.5

938

1.7

182

1.8

509

1.9

926

2.1

436

2.4

760

2.8

526

3.0

590

3.2

784

3.7

589

4.2

998

5.5

895

7.2

058

9.2

170

11.7

03

91.0

937

1.1

951

1.3

048

1.4

233

1.5

513

1.6

895

1.8

385

1.9

990

2.1

719

2.3

579

2.7

731

3.2

519

3.5

179

3.8

030

4.4

355

5.1

598

6.9

310

9.2

234

12.1

66

15.9

16

10

1.1

046

1.2

190

1.3

439

1.4

802

1.6

289

1.7

908

1.9

672

2.1

589

2.3

674

2.5

937

3.1

058

3.7

072

4.0

456

4.4

114

5.2

338

6.1

917

8.5

944

11.8

05

16.0

59

21.6

46

11

1.1

157

1.2

434

1.3

842

1.5

395

1.7

103

1.8

983

2.1

049

2.3

316

2.5

804

2.8

531

3.4

785

4.2

262

4.6

524

5.1

173

6.1

759

7.4

301

10.6

57

15.1

11

21.1

98

29.4

39

12

1.1

268

1.2

682

1.4

258

1.6

010

1.7

959

2.0

122

2.2

522

2.5

182

2.8

127

3.1

384

3.8

960

4.8

179

5.3

502

5.9

360

7.2

876

8.9

161

13.2

14

19.3

42

27.9

82

40.0

37

13

1.1

381

1.2

936

1.4

685

1.6

651

1.8

856

2.1

329

2.4

098

2.7

196

3.0

658

3.4

523

4.3

635

5.4

924

6.1

528

6.8

858

8.5

994

10.6

99

16.3

86

24.7

58

36.9

37

54.4

51

14

1.1

495

1.3

195

1.5

126

1.7

317

1.9

799

2.2

609

2.5

785

2.9

372

3.3

417

3.7

975

4.8

871

6.2

613

7.0

757

7.9

875

10.1

47

12.8

39

20.3

19

31.6

91

48.7

56

74.0

53

15

1.1

610

1.3

459

1.5

580

1.8

009

2.0

789

2.3

966

2.7

590

3.1

722

3.6

425

4.1

772

5.4

736

7.1

379

8.1

371

9.2

655

11.9

73

15.4

07

25.1

95

40.5

64

64.3

58

100.7

1

16

1.1

726

1.3

728

1.6

047

1.8

730

2.1

829

2.5

404

2.9

522

3.4

259

3.9

703

4.5

950

6.1

304

8.1

372

9.3

576

10.7

48

14.1

29

18.4

88

31.2

42

51.9

23

84.9

53

136.9

617

1.1

843

1.4

002

1.6

528

1.9

479

2.2

920

2.6

928

3.1

588

3.7

000

4.3

276

5.0

545

6.8

660

9.2

765

10.7

61

12.4

67

16.6

72

22.1

86

38.7

40

66.4

61

112.1

3186.2

718

1.1

961

1.4

282

1.7

024

2.0

258

2.4

066

2.8

543

3.3

799

3.9

960

4.7

171

5.5

599

7.6

900

10.5

75

12.3

75

14.4

62

19.6

73

26.6

23

48.0

38

85.0

70

148.0

2253.3

319

1.2

081

1.4

568

1.7

535

2.1

068

2.5

270

3.0

256

3.6

165

4.3

157

5.1

417

6.1

159

8.6

128

12.0

55

14.2

31

16.7

76

23.2

14

31.9

48

59.5

67

108.8

9195.3

9344.5

320

1.2

202

1.4

859

1.8

061

2.1

911

2.6

533

3.2

071

3.8

697

4.6

610

5.6

044

6.7

275

9.6

463

13.7

43

16.3

66

19.4

60

27.3

93

38.3

37

73.8

64

139.3

7257.9

1468.5

7

21

1.2

324

1.5

157

1.8

603

2.2

788

2.7

860

3.3

996

4.1

406

5.0

338

6.1

088

7.4

002

10.8

03

15.6

67

18.8

21

22.5

74

32.3

23

46.0

05

91.5

91

178.4

0340.4

4637.2

622

1.2

447

1.5

460

1.9

161

2.3

699

2.9

253

3.6

035

4.4

304

5.4

365

6.6

586

8.1

403

12.1

00

17.8

61

21.6

44

26.1

86

38.1

42

55.2

06

113.5

7228.3

5449.3

9866.6

723

1.2

572

1.5

769

1.9

736

2.4

647

3.0

715

3.8

197

4.7

405

5.8

715

7.2

579

8.9

543

13.5

52

20.3

61

24.8

91

30.3

76

45.0

07

66.2

47

140.8

3292.3

0593.1

91178.6

24

1.2

697

1.6

084

2.0

328

2.5

633

3.2

251

4.0

489

5.0

724

6.3

412

7.9

111

9.8

497

15.1

78

23.2

12

28.6

25

35.2

36

53.1

08

79.4

96

174.6

3374.1

4783.0

21602.9

25

1.2

824

1.6

406

2.0

938

2.6

658

3.3

864

4.2

919

5.4

274

6.8

485

8.6

231

10.8

34

17.0

00

26.4

61

32.9

18

40.8

74

62.6

68

95.3

96

216.5

4478.9

01033.5

2180.0

26

1.2

953

1.6

734

2.1

566

2.7

725

3.5

557

4.5

494

5.8

074

7.3

964

9.3

992

11.9

18

19.0

40

30.1

66

37.8

56

47.4

14

73.9

48

114.4

7268.5

1612.9

91364.3

2964.9

27

1.3

082

1.7

069

2.2

213

2.8

834

3.7

335

4.8

223

6.2

139

7.9

881

10.2

45

13.1

10

21.3

24

34.3

89

43.5

35

55.0

00

87.2

59

137.3

7332.9

5784.6

31800.9

4032.2

28

1.3

213

1.7

410

2.2

879

2.9

987

3.9

201

5.1

117

6.6

488

8.6

271

11.1

67

14.4

21

23.8

83

39.2

04

50.0

65

63.8

00

102.9

6164.8

4412.8

61004.3

2377.2

5483.8

29

1.3

345

1.7

758

2.3

566

3.1

187

4.1

161

5.4

184

7.1

143

9.3

173

12.1

72

15.8

63

26.7

49

44.6

93

57.5

75

74.0

08

121.5

0197.8

1511.9

51285.5

3137.9

7458.0

30

1.3

478

1.8

114

2.4

273

3.2

434

4.3

219

5.7

435

7.6

123

10.0

62

13.2

67

17.4

49

29.9

59

50.9

50

66.2

11

85.8

49

143.3

7237.3

7634.8

11645.5

4142.0

10143.

40

1.4

889

2.2

080

3.2

620

4.8

010

7.0

400

10.2

85

14.9

74

21.7

24

31.4

09

45.2

59

93.0

50

188.8

8267.8

6378.7

2750.3

71469.7

5455.9

19426.

66520

.50

1.6

446

2.6

916

4.3

839

7.1

067

11.4

67

18.4

20

29.4

57

46.9

01

74.3

57

117.3

9289.0

0700.2

31083.6

1670.7

3927.3

9100.4

46890

..

.60

1.8

167

3.2

810

5.8

916

10.5

19

18.6

79

32.9

87

57.9

48

101.2

5176.0

3304.4

8897.5

92595.9

4383.9

73.7

01

20555.

56347

..

..

.FV

IF >

99,9

99.

Tab

le B

. Pre

sen

t Val

ue

of R

s.1:

nr)

(1

1 +

Per

iod

1%

3%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

24%

28%

1.9

901

.9709

.9524

.9434

.9346

.9259

.9174

.9091

.9009

.8929

.8850

.8772

.8696

.8621

.8547

.8475

.8403

.8333

.8065

.7813

2.9

803

.9426

.9070

.8900

.8734

.8573

.8417

.8264

.8116

.7972

.7831

.7695

.7561

.7432

.7305

.7182

.7062

.6944

.6504

.6104

3.9

706

.9151

.8638

.8396

.8163

.7938

.7722

.7513

.7312

.7118

.6930

.6750

.6575

.6407

.6244

.6086

.5934

.5787

.5245

.4768

4.9

610

.8885

.8227

.7921

.7629

.7350

.7084

.6830

.6587

.6355

.6133

.5921

.5718

.5523

.5336

.5158

.4987

.4823

.4230

.3725

5.9

515

.8626

.7835

.7473

.7130

.6806

.6499

.6209

.5934

.5674

.5428

.5194

.4972

.4761

.4561

.4371

.4190

.4019

.3411

.2910

6.9

420

.8375

.7462

.7050

.6663

.6302

.5963

.5645

.5346

.5066

.4803

.4556

.4323

.4104

.3898

.3704

.3521

.3349

.2751

.2274

7.9

327

.8131

.7107

.6651

.6627

.5835

.5470

.5132

.4187

.4523

.4251

.3996

.3759

.3538

.3332

.3139

.2959

.2791

.2218

.1776

8.9

235

.7894

.6768

.6274

.5820

.5403

.5019

.4665

.4339

.4039

.3762

.3506

.3269

.3050

.2848

.2660

.2487

.2326

.1789

.1388

9.9

143

.7664

.6446

.5919

.5439

.5002

.4604

.4241

.3909

.3606

.3329

.3075

.2843

.2630

.2434

.2255

.2090

.1938

.1443

.1084

10

.9053

.7441

.6139

.5584

.5083

.4632

.4224

.3855

.3522

.3220

.2946

.2697

.2472

.2267

.2080

.1911

.1756

.1615

.1164

.0847

11

.8963

.7224

.5847

.5268

.4751

.4289

.3875

.3505

.3173

.2875

.2607

.2366

.2149

.1954

.1778

.1619

.1476

.1346

.0938

.0662

12

.8874

.7014

.5568

.4970

.4440

.3971

.3555

.3186

.2858

.2567

.2307

.2076

.1869

.1685

.1520

.1372

.1240

.1122

.0757

0517

13

.8787

.6810

.5303

.4688

.4150

.3677

.3262

.2897

.2575

.2292

.2042

.1821

.1625

.1452

.1299

.1163

.1042

.0935

.0610

.0404

14

.8700

.6611

.5051

.4423

.3878

.3405

.2992

.2633

.2320

.2046

.1807

.1597

.1413

.1252

.1110

.0985

.0876

.0779

.0492

.0316

15

.8613

.6419

.4810

.4173

.3624

.3152

.2745

.2394

.2090

.1827

.1599

.1401

.1229

.1079

.0949

.0835

.0736

.0649

.0397

.0247

16

.8528

.6232

.4581

.3936

.3387

.2919

.2519

.2176

.1883

.1631

.1415

.1229

.1069

.0930

.0811

.0708

.0618

.0541

.0320

.0191

17

.8444

.6050

.4363

.3714

.3166

.2703

.2311

.1978

.1696

.1456

.1252

.1078

.0929

.0802

.0693

.0600

.0520

.0451

.0258

.0150

18

.8360

.5874

.4155

.3503

.2959

.2502

.2120

.1799

.1528

.1300

.1108

.0946

.0808

.0691

.0592

.0508

.0437

.0376

.0208

.0118

19

.8277

.5703

.3957

.3305

.2765

.2317

.1945

.1635

.1377

.1161

.0981

.0829

.0703

.0596

.0506

.0431

.0367

.0313

.0168

.0092

20

.8195

.5537

.3769

.3118

.2584

.2145

.1784

.1486

.1240

.1037

.0868

.0728

.611

.0514

.0433

.0365

.0308

.0261

.0135

.0072

25

.7798

.4776

.2953

.2330

.1842

.1460

.1160

.0923

.0736

.0588

.0471

.0378

.0304

.0245

.0197

.0160

.0129

.0105

.0046

.0021

30

.7419

.4120

.2314

.1741

.1314

.0994

.0754

.0573

.0437

.0334

.0256

.0196

.0151

.0116

.0090

.0070

.0054

.0042

.0016

.0006

40

.6717

.3066

.1420

.0972

.0668

.0460

.0318

.0221

.0154

.0107

.0075

.0053

.0037

.0026

.0019

.0013

.0010

.0007

.0002

.0001

50

.6080

.2281

.0872

.0543

.0339

.0213

.0134

.0085

.0054

.0035

.0022

.0014

.0009

.0006

.0004

.0003

.0002

.0001

..

60

.5504

.1697

.0535

.0303

.0173

.0099

.0057

.0033

.0019

.0011

.0007

.0004

.0002

.0001

.0001

..0

000

..

.

Tab

le C

. Fu

ture

val

ue

of a

n A

nn

uit

y of

Rs

1 f

or n

Per

iods

: (1

+ r

)1

Nu

mber

of

Pay.

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

12%

14%

15%

16%

18%

20%

24%

28%

32%

36%

11.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

1.0

000

22.0

100

2.0

200

2.0

300

2.0

400

2.0

500

2.0

600

2.0

700

2.0

800

2.0

900

2.1

000

2.1

200

2.1

400

2.1

500

2.1

600

2.1

800

2.2

000

2.2

400

2.2

800

2.3

200

2.3

600

33.0

301

3.0

604

3.0

909

3.1

216

3.1

525

3.1

836

3.2

149

3.2

464

3.2

781

3.3

100

3.3

744

3.4

396

3.4

725

3.5

056

3.5

724

3.6

400

3.7

776

3.9

184

4.0

624

4.2

096

44.0

604

4.1

216

4.1

836

4.2

465

4.3

101

4.3

746

4.4

399

4.5

061

4.5

731

4.6

410

4.7

793

4.9

211

4.9

934

5.0

665

5.2

154

5.3

680

5.6

842

6.0

156

6.3

624

6.7

251

55.1

010

5.2

040

5.3

091

5.4

163

5.5

256

5.6

371

5.7

507

5.8

666

5.9

847

6.1

051

6.3

528

6.6

101

6.7

424

6.8

771

7.1

542

7.4

416

8.0

484

8.6

999

9.3

983

10.1

46

66.1

520

6.3

081

6.4

684

6.6

330

6.8

019

6.9

753

7.1

533

7.3

359

7.5

233

7.7

156

8.1

52

8.5

355

8.7

537

8.9

775

9.4

420

9.9

299

10.9

80

12.1

35

13.4

05

14.7

98

77.2

135

7.4

343

7.6

625

7.8

983

8.1

420

8.3

938

8.6

540

8.9

228

9.2

004

9.4

872

10.0

89

10.7

30

11.0

66

11.4

13

12.1

41

12.9

15

14.6

15

16.5

33

18.6

95

21.1

26

88.2

857

8.5

830

8.8

923

9.2

142

9.5

491

9.8

975

10.2

59

10.6

36

11.0

28

11.4

35

12.2

99

13.2

32

13.7

26

14.2

40

15.3

27

16.4

99

19.1

22

22.1

63

25.6

78

29.7

31

99.3

685

9.7

546

10.1

59

10.5

82

11.0

26

11.4

91

11.9

78

12.4

87

13.0

21

13.5

79

14.7

75

16.0

85

16.7

85

17.5

18

19.0

85

20.7

98

24.7

12

29.3

69

34.8

95

41.4

35

10

10.4

62

10.9

49

11.4

63

12.0

06

12.5

77

13.1

80

13.8

16

14.4

86

15.1

92

15.9

37

17.5

48

19.3

37

20.3

03

21.3

21

23.5

21

25.9

58

31.6

43

38.5

92

47.0

61

57.3

51

11

11.5

66

12.1

68

12.8

07

13.4

86

14.2

06

14.9

71

15.7

83

16.6

45

17.5

60

18.5

31

20.6

54

23.0

44

24.3

49

25.7

32

28.7

55

32.1

50

40.2

37

50.3

98

63.1

21

78.9

98

12

12.6

82

13.4

12

14.1

92

15.0

25

15.9

17

16.8

69

17.8

88

18.9

77

20.1

40

21.3

84

24.1

33

27.2

70

29.0

01

30.8

50

34.9

31

39.5

80

50.8

94

65.5

10

84.3

20

108.4

313

13.8

09

14.6

80

15.6

17

16.6

26

17.7

13

18.8

82

20.1

40

21.4

95

22.9

53

24.5

22

28.0

29

32.0

88

34.3

51

36.7

86

42.2

18

48.4

96

64.1

09

84.8

52

112.3

0148.4

714

14.9

47

15.9

73

17.0

86

18.2

91

19.5

98

21.0

15

22.5

50

24.2

14

26.0

19

27.9

75

32.3

92

37.5

81

40.5

04

43.6

72

50.8

18

59.1

95

80.4

96

109.6

1149.2

3202.9

215

16.0

96

17.2

93

18.5

98

20.0

23

21.5

78

23.2

76

25.1

29

27.1

52

29.3

60

31.7

72

37.2

79

43.8

42

47.5

80

51.6

59

60.9

65

72.0

35

100.8

1141.3

0197.9

9276.9

7

16

17.2

57

18.6

39

20.1

56

21.8

24

23.6

57

25.6

72

27.8

88

30.3

24

33.0

03

35.9

49

42.7

53

50.9

80

55.7

17

60.9

25

72.9

39

87.4

42

126.0

1181.8

6262.3

5377.6

917

18.4

30

20.0

12

21.7

61

23.6

97

25.8

40

28.2

12

30.8

40

33.7

50

36.9

73

40.5

44

48.8

83

59.1

17

65.0

75

71.6

73

87.0

68

105.9

3157.2

5233.7

9347.3

0514.6

618

19.6

14

21.4

12

23.4

14

25.6

45

28.1

32

30.9

05

33.9

99

37.4

50

41.3

01

45.5

99

55.7

49

68.3

94

75.8

36

84.1

40

103.7

4128.1

1195.9

9300.2

5459.4

4700.9

319

20.8

10

22.8

40

25.1

16

27.6

71

30.5

39

33.7

60

37.3

79

41.4

46

46.0

18

51.1

59

63.4

39

78.9

69

88.2

11

98.6

03

123.4

1154.7

4244.0

3385.3

2607.4

7954.2

720

22.0

19

24.2

97

26.8

70

29.7

833.0

66

36.7

85

40.9

95

45.7

62

51.1

60

57.2

75

72.0

52

91.0

24

102.4

4115.3

7146.6

2186.6

8303.6

0494.2

1802.8

61298.8

21

23.2

39

25.7

83

28.6

76

31.9

69

35.7

19

39.9

92

44.8

65

50.4

22

56.7

64

64.0

02

81.6

98

104.7

6118.8

1134.8

4174.0

2225.0

237.4

6633.5

91060.7

1767.3

22

24.4

71

27.2

99

30.5

36

34.2

48

38.5

05

43.3

92

49.0

05

55.4

56

62.8

73

71.4

02

92.5

02

120.4

3137.6

3157.4

1206.3

4271.0

3469.0

5811.9

91401.2

2404.6

23

25.7

16

28.8

45

32.4

52

36.6

17

41.4

30

46.9

95

53.4

36

60.8

93

69.5

31

79.5

43

104.6

0138.2

9159.2

7183.6

0244.4

8326.2

3582.6

21040.3

1850.6

3271.3

24

26.9

73

30.4

21

34.4

26

39.0

82

44.5

02

50.8

15

58.1

76

66.7

64

76.7

89

88.4

97

118.1

5158.6

5184.1

6213.9

7289.4

9392.4

8723.4

61332.6

2443.8

4449.9

25

28.2

43

32.0

30

36.4

59

41.6

45

47.7

27

54.8

64

63.2

49

73.1

05

84.7

00

98.3

47

133.3

3181.8

7212.7

9249.2

1342.6

0471.9

8898.0

91706.8

3226.8

6052.9

26

29.5

25

33.6

70

38.5

53

44.3

11

51.1

13

59.1

56

68.6

76

79.9

54

93.3

23

109.1

8150.3

3208.3

3245.7

1290.0

8405.2

7567.3

71114.6

2185.7

4260.4

8233.0

27

30.8

20

35.3

44

40.7

09

47.0

84

54.6

69

63.7

05

74.4

83

87.3

50

102.7

2121.0

9169.3

7238.4

928.5

6337.5

0479.2

2681.8

51383.1

2798.7

5624.7

11197.9

28

32.1

29

37.0

51

42.9

30

49.9

67

58.4

02

68.5

28

80.6

97

95.3

38

112.9

6134.2

0190.6

9272.8

8327.1

0392.5

0566.4

8819.2

21716.0

3583.3

7425.6

15230.2

29

33.4

50

38.7

92

45.2

18

52.9

66

62.3

22

73.6

39

87.3

46

103.9

6124.1

3148.6

3214.5

8312.0

937.1

6456.3

0669.4

4984.0

62128.9

4587.6

9802.9

20714.1

30

34.7

84

40.5

68

47.5

75

56.0

84

66.4

38

79.0

58

94.4

60

113.2

8136.3

0164.4

9241.3

3356.7

8434.7

4530.3

1790.9

41181.8

2640.9

5873.2

1294.0

28172.2

40

48.8

86

60.4

02

75.4

01

95.0

25

120.7

9154.7

6199.6

3259.0

5337.8

8442.5

9767.0

91342.0

1779.0

2360.7

4163.2

7343.8

22728.

69337

..

50

64.4

63

84.5

79

112.7

9152.6

6209.3

4290.3

3406.5

2573.7

6815.0

81163.9

2400.0

4994.5

7217.7

10435.

21813.

45479.

..

..

60

81.6

69

114.0

5163.0

5237.9

9353.5

8533.1

2813.5

21253.2

1944.7

3034.8

7471.6

18535.

29219.

46057.

..

..

..

Tab

le D

. Pre

sen

t V

alu

e of

an

An

nu

ity

of R

s 1 f

or n

Per

iods

: (1

+ r

)1

Nu

mber

of P

ay.

1%

3%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

24%

10.9

901

0.9

709

0.9

524

0.9

434

0.9

346

0.9

259

0.9

174

0.9

091

0.9

009

0.8

929

0.8

850

0.8

72

0.8

696

0.8

621

0.8

547

0.8

475

0.8

403

0.8

333

0.8

065

21.9

704

1.9

135

1.8

594

1.8

334

1.8

080

1.7

833

1.7

591

1.7

355

1.7

125

1.6

901

1.6

681

1.6

467

1.6

257

1.6

052

1.5

852

1.5

656

1.5

465

1.5

278

1.4

568

32.9

410

2.8

286

2.7

232

2.6

730

2.6

243

2.5

771

2.5

313

2.4

869

2.4

437

2.4

018

2.3

612

2.3

216

2.2

832

2.2

459

2.2

096

2.1

743

2.1

399

2.1

065

1.9

813

43.9

020

3.7

171

3.5

460

3.4

651

3.3

872

3.3

121

3.2

397

3.1

699

3.1

024

3.0

373

2.9

745

2.9

137

2.8

550

2.7

982

2.7

432

2.6

901

2.6

386

2.5

887

2.4

043

54.8

534

4.5

797

4.3

295

4.2

124

4.1

002

3.9

927

3.8

897

3.7

908

3.6

959

3.6

048

3.5

172

3.4

331

3.3

522

3.2

743

3.1

993

3.1

272

3.0

576

2.9

906

2.7

454

65.7

955

5.4

172

5.0

757

4.9

173

4.7

665

4.6

229

4.4

859

4.3

553

4.2

305

4.1

114

3.9

976

3.8

887

3.7

845

3.6

847

3.5

892

3.4

976

3.4

098

3.3

255

3.0

205

76.7

282

6.2

303

5.7

864

5.5

824

5.3

893

5.2

064

5.0

330

4.8

684

4.7

122

4.5

638

4.4

226

4.2

883

4.1

604

4.0

386

3.9

224

3.8

115

3.7

057

3.6

046

3.2

423

87.6

517

7.0

197

6.4

632

6.2

098

5.9

713

5.7

466

5.5

348

5.3

349

5.1

461

4.9

676

4.7

988

4.6

389

4.4

873

4.3

436

4.2

072

4.0

706

3.9

544

3.8

372

3.4

212

98.5

660

7.7

861

7.1

078

6.8

017

6.5

152

6.2

469

5.9

952

5.7

590

5.5

370

5.3

282

5.1

317

4.9

464

4.7

16

4.6

065

4.4

506

4.3

030

4.1

633

4.0

310

3.5

655

10

9.4

713

8.5

302

7.7

217

7.3

601

7.0

236

6.7

101

6.4

17

6.1

446

5.8

992

5.6

502

5.4

262

5.2

16

5.0

188

4.8

332

4.6

586

4.4

941

4.3

389

4.1

925

3.6

819

11

10.3

676

9.2

526

8.3

064

7.8

869

7.4

987

7.1

390

6.8

052

6.4

951

6.2

065

5.9

377

5.6

869

5.4

527

5.2

337

5.0

286

4.8

364

4.6

560

4.4

865

4.3

271

3.7

57

12

11.2

551

9.9

540

8.8

633

8.3

838

7.9

427

7.5

361

7.1

607

6.8

137

6.4

924

6.1

944

5.9

176

5.6

603

5.4

206

5.1

971

4.9

884

4.7

932

4.6

105

4.4

392

3.8

514

13

12.1

337

10.6

350

9.3

936

8.8

527

8.3

577

7.9

038

7.4

869

7.1

034

6.7

499

6.4

235

6.1

218

5.8

424

5.5

831

5.3

423

5.1

183

4.9

095

4.7

147

4.5

327

3.9

124

14

13.0

037

11.2

961

9.8

986

9.2

950

8.7

455

8.2

442

7.7

862

7.3

667

6.9

819

6.6

282

6.3

025

6.0

021

5.7

245

5.4

675

5.2

293

5.0

081

4.8

023

4.6

106

3.9

616

15

13.8

651

11.9

397

10.3

797

9.7

122

9.1

079

8.5

595

8.0

607

7.6

061

7.1

909

6.8

109

6.4

624

6.1

422

5.8

474

5.5

755

5.3

242

5.0

916

4.8

759

4.6

755

4.0

013

16

14.7

179

12.5

611

10.8

378

10.1

059

9.4

466

8.8

514

8.3

126

7.8

237

7.3

792

6.9

740

6.6

039

6.2

651

5.9

542

5.6

685

5.4

053

5.1

624

4.9

377

4.7

296

4.0

333

17

15.5

623

13.1

661

11.2

741

10.4

773

9.7

632

9.1

216

8.5

436

8.0

216

7.5

488

7.2

497

6.7

291

6.4

674

6.0

472

5.1

280

5.4

746

5.2

223

4.9

897

4.7

746

4.0

591

18

16.3

983

13.7

535

11.6

896

10.8

276

10.0

591

9.3

719

8.7

556

8.2

014

7.7

016

7.1

196

6.8

399

6.3

729

6.1

280

5.7

487

5.5

339

5.2

732

5.0

333

4.8

122

4.0

799

19

17.2

260

14.3

238

12.0

853

11.1

581

10.3

356

9.6

036

8.9

501

8.3

649

7.8

393

7.3

658

6.9

380

6.5

504

6.1

982

5.8

775

5.5

845

5.3

162

5.0

700

4.8

435

4.0

967

20

18.0

456

14.8

775

12.4

622

11.4

699

10.5

940

9.8

181

9.1

285

8.5

136

7.9

633

7.4

694

7.0

248

6.6

231

6.2

593

5.9

288

5.6

278

5.3

527

5.1

009

4.8

696

4.1

103

25

22.0

232

17.4

131

14.0

939

12.7

834

11.6

536

10.6

748

9.8

226

9.0

770

8.4

217

7.8

431

7.3

300

6.8

729

6.4

641

6.0

971

5.7

662

5.4

669

5.1

951

4.9

476

4.1

474

30

25.8

077

19.6

004

15.3

725

13.7

668

12.4

090

11.2

578

10.2

737

9.4

269

8.6

838

8.0

552

7.4

957

7.0

027

6.5

660

6.1

772

5.8

294

5.5

168

5.2

347

4.9

78

4.1

601

40

32.8

347

23.1

148

17.1

51

15.0

463

13.3

317

11.9

246

10.7

574

9.7

791

8.9

511

8.2

438

7.6

344

7.1

050

6.6

418

6.2

335

5.8

713

5.5

482

5.2

582

4.9

9666

4.1

659

50

39.1

961

25.7

298

18.2

559

15.7

619

13.0

07

12.2

335

10.9

617

9.1

48

9.0

4177

8.3

045

7.6

752

7.1

327

6.6

605

6.2

463

5.8

801

5.5

541

5.2

623

4.9

995

4.1

666

60

44.9

550

27.6

756

18.9

293

16.1

614

14.0

392

12.3

766

11.0

40

9.9

672

9.0

892

8.3

240

7.6

873

7.1

401

6.6

651

6.2

492

5.8

819

5.5

553

5.2

630

4.9

999

4.1

667

chapter 7s

Documents