Page 152 - DCOM201_ACCOUNTING_FOR_COMPANIES_I

Unit 6: Debentures: Concept, Types, Issue

Solution: Notes
Journal Entries
Date Particulars L.F. ( ) ( )
Buildings Account Dr. 25,00,000
To Sundry Liabilities Account 4,00,000
To GK & Sons 20,00,000
To Capital Reserve Account 1,00,000
(Being purchase Sundry Liabilities and Buildings of GK & Sons)
G.K. & Sons Dr. 20,00,029
To 10% Debentures Account 18,18,100
To Debenture Premium Account 1,81,810
To Cash Account 119
(Being debentures issued at 10% premium to G.K. & Sons for
purchase consideration)

Working Note:
Purchase Consideration
No. of debentures Issued to G.K. & Sons =
Issue price of debentures
20,00,000
= = 18,181.818
100 10
As the fractional debentures cannot be issued to the vendor, AK Limited can issue only 18,181
debentures. And for fractional debenture of 0.818, payment will be made in cash. The amount
payable for fractional debenture will be computed on market price and not on paid up value.
The reason is that the vendor can always dispose his debentures in the market.
Therefore, the fractional value of debentures will be = 0.818 145 = 118.61 or 116 Now, the
real purchase consideration will be:
Nominal value of debentures ( )

18,181 100 18,18,100
10% Debenture Premium 1,81,810
Cash for fractional debentures 119
20,00,029

6.8 Issue of Debentures as a Collateral Security for a Bank Loan

A collateral security means a subsidiary or secondary security. When a company takes a loan or
overdraft from a bank, it may give its own debenture to the bank as collateral security against
the loan or overdraft, in addition to principal security. Generally, a company delivers its own
debentures as collateral security to bank only in that case, when principal security is not sufficient
for the loan. Collateral security is not utilised or realised by the bank until the company makes
its payment (interest and repayment of loan). It means that this collateral security can be used by
the bank in the case of default regarding the repayment of the loan. The bank, may either keep
the debentures and become a debenture-holder or sell them and realise money. But upon the
repayment of the loan, the bank must return these debentures and the company should then
cancel them. This type of issue by the company is called issue of debenture as collateral security.

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