CU-BCOM-SEM-IV-Corporate Accounting-Second Draft

Note: 1. Securities premium has not been utilized for the purpose of premium payable on redemption of preference shares assuming that the company referred in the question is governed by Section 133 of the Companies Act, 2013 and comply with the Accounting Standards prescribed for them. 2. Amount received (excluding premium) on fresh issue of shares till the date of redemption should be considered for calculation of proceeds of fresh issue of shares. Thus, proceeds of fresh issue of shares are Rs.10,50,000 (Rs.3,00,000 application money plus Rs. 7,50,000 received on allotment towards share capital) and balance Rs. 19,50,000 to taken from general reserve account. 5.3 SUMMARY  A company limited by shares may, if authorised by its articles, issue preference shares, which are, or at the option of the company liable to be redeemed. They have to be redeemed within 20 years of the date of issue.  Methods of redemption of fully paid-up preference shares is as follows:  by Fresh issue of shares.  (ii) by Capitalisation of undistributed profits. 101 CU IDOL SELF LEARNING MATERIAL (SLM)

 (iii) Combination of (i) and (ii),  Minimum Proceeds of Fresh Issue of shares : Nominal value of preference shares to be redeemed – Maximum amount of reserve and surplus available for redemption  premium, if any, payable on redemption of any preference shares issued on or before the commencement of Companies Act 2013 by any such company shall be provided for out of the profits of the company or out of the company's securities premium account, before such shares are redeemed.  A company can redeem the preference shares partly from the proceeds from new issue and partly out of profits. In order to fill in the ‘gap’ between the face value of shares redeemed and the proceeds of new issue, a transfer should be made from distributable profits (Profit & Loss Account, General Reserve and other Free Reserves) to Capital Redemption Reserve Account. 5.4 KEYWORDS  CRR:Capital redemption reserve account is a type of reserve maintained by a company limited by shares and as the name suggests this reserve deals with shares which are redeemable  Capitalization of profits; It is the use of a company’s retained earnings (RE) to pay a bonus to shareholders or additional shares.  General Reserve:General reserve is referred to as the reserve fund that is created by keeping aside a part of profit earned by the business during the course of an accounting period for fulfilling various business needs like meeting contingencies, offsetting future losses, enhancing the working capital 5.5 LEARNING ACTIVITY 1. When capital of preference shareholders are paid back it is redemption of preference shares, same way can Equity shareholders be paid back? ___________________________________________________________________________ ___________________________________________________________________________ 2.What are the differences between a preference shareholder and a debenture holder? ___________________________________________________________________________ ___________________________________________________________________________ 5.6 UNIT END QUESTIONS A.Descriptive Questions 102 CU IDOL SELF LEARNING MATERIAL (SLM)

Short Questions 1.Explain how to compute minimum proceeds of Fresh Issue to redeem preference shares 2.Explain the purpose of CRR creation when preference shares are redeemed out of undistributed profits 3.Explain the advantages of redemption of preference shares out of profits 4. Explain the disadvantages of redemption of preference shares out of profits 5. The Board of Directors of ABC Company LTD decided to issue minimum number of equity shares of Rs 12 to redeem Rs 6,00,000 preference shares. The maximum amount of divisible profits available for redemption is Rs 2, 00,000. Calculate the number of shares to be issued by the company to ensure that the provisions of Section 55 are not violated. Also determine the number of shares if the company decides to issue shares in multiples of Rs 50 only. Long Questions 1. A company having free reserves of Rs. 30,000 want to redeem rupees one lakh preference shares. Calculate the face value of fresh issue of shares of Rs. 10 each to be made at a premium of 10%. 2. Bhalla and Co. Ltd. has an authorised equity capital of Rs. 20 lakhs divided into shares of Rs. 10 each. The paid-up capital was Rs. 12,50,000. Besides this, the company had 9% preference shares of Rs. 10 each for Rs. 2,50,000. Balance on other accounts were - Securities Premium Rs. 18,000; Profit and Loss Account Rs. 72,000 and General Reserve Rs. 3,40,000. Included in Sundry Assets were investments of the face value of Rs. 30,000 carried in the books at a cost of Rs. 34,000. The company decided to redeem the preference shares at 10% premium, partly by the issue of equity shares of the face value of Rs. 1,20,000 at a premium of 10%. Investments were sold at 105% of their face value. All preference shareholders were paid off except 3 holding 2500 shares. Give the necessary journal entries bearing in mind that the Directors wanted a minimum reduction in free reserves, while effecting the above transactions. Working should form part of your answer. 3. The capital structure of a company consists of 20,000 Equity Shares of Rs. 10 each fully paid up and 1,000 8% Redeemable Preference Shares of Rs. 100 each fully paid up (issued on 1.4.20X1).Undistributed reserve and surplus stood as: General Reserve Rs. 80,000; Profit and Loss Account Rs. 20,000; Investment Allowance Reserve out of which Rs. 5,000, (not free for distribution as dividend) Rs. 10,000; Securities Premium Rs. 2,000, Cash at bank amounted to Rs. 98,000. Preference shares are to be redeemed at a Premium of 10% and for the purpose of redemption, the directors are empowered to make fresh issue of Equity Shares at par after utilising the undistributed reserve and surplus, subject to the conditions that a sum of Rs. 20,000 shall be retained in general reserve and which should not be utilised. 103 CU IDOL SELF LEARNING MATERIAL (SLM)

Pass Journal Entries to give effect to the above arrangements and also show how the relevant items will appear in the Balance Sheet of the company after the redemption carried out. 4. In order to redeem its preference shares, the company issued 5,000 equity shares of Rs. 10 each at a premium of 10% and sold all of its investment for Rs. 70,800. Preference shares were redeemed at a premium of 10%. Show the necessary journal entries in the books of the company and prepare the balance sheet of the company immediately after redemption of preference shares. 5. The Summarized Balance Sheet of Clean Ltd. as on 31st March 2019 is as follows: The Share Capital of the company consists of Rs. 50 each Equity shares of Rs. 4,50,000 and Rs. 100 each 8% Redeemable Preference Shares of Rs. 1,30,000 (issued on 1.4.2017). Reserves and Surplus comprises statement of profit and loss only. In order to facilitate the redemption of preference shares at a premium of 10%, the Company decided: (a) to sell all the investments for Rs. 30,000. (b) to finance part of redemption from company funds, subject to, leaving a Bank balance of Rs. 24,000. (c) to issue minimum equity share of Rs. 50 each at a premium of Rs. 10 per share to raise the balance of funds required. You are required to (1) Pass Journal Entries to record the above transactions. 104 CU IDOL SELF LEARNING MATERIAL (SLM)

(2) Prepare Balance Sheet after completion of the above transactions. B.Multiple choice Questions 1.Which of the following cannot be used for the purpose of creation of capital redemption reserve account? a. Profit & Loss A/c (credit balance) b. General Reserve A/c c. Dividend Equalization Reserve A/c d. Unclaimed Dividends A/c 2.N Ltd. had 9,000 8% preference shares of ₹ 100 each, fully paid up. The company decided to redeem these preference shares at par by the issue of sufficient number of equity shares. How much equity shares are required to be issued if new equity shares are to be issued at ₹ 10 each ‘? a. 90,000 equity shares b. 1,00,000 equity shares c. 75,000 equity shares d. 93,333 equity shares 3.S Ltd. issued 2,000, 10% Preference shares of ₹ 100 each at par, which are redeemable at a premium of 10%. For the purpose of redemption, the company issued 1,500 Equity Shares of ₹ 100 each at a premium of 20 % per share. At the time of redemption of Preference Shares, the amount to be transferred by the company to the Capital Redemption Reserve Account. a. ₹ 50,000 b. ₹ 40,000 c. ₹ 2,00,000 d. ₹ 2,20,000 4. During the year2005-2006, T Ltd. issued 20,000,12% Preference shares of ₹ 10 each at a premium of 5%, which are redeemable after 4 years at par. During the year 2010 – 2011, as the company did not have sufficient cash resources to redeem the preference shares, it issued 10,000,14% debentures of ₹ 10 each at a premium of 10%. At the time of redemption of 12% preference shares, the amount to be transferred to capital redemption reserve = ? 105 CU IDOL SELF LEARNING MATERIAL (SLM)

a. ₹ 90,000 b. ₹ 1,00,000 c. ₹ 2,00,000 d. ₹ 1,10,000 5.The balance sheet of A Ltd. has 20,000 9% preference shares of ₹ 10 each. The company redeemed preference shares at a premium of ₹ 2 per share. For redemption it realized investments at a value of ₹ 1,60,000 (Book value ₹ 2,00,000). At the time of redemption balance in profit & loss account was ₹ 1,60,000. Issued at a premium of ₹ 40 per share, such a number of equity shares of ₹ 100 each for the purpose of redemption as to ensure that after the compliance with the requirements of the Companies Act, 2013, the credit balance in profit and loss account would be ₹ 25,000. No. of equity shares to be issued are & balance transferred to capital redemption account a. 1,200 equity shares & ₹ 80,000 b. 800 equity shares & ₹ 1,20,000 c. 1,450 equity shares & ₹ 55,000 d. 1,050 equity shares & ₹ 95,000 Answers 1-d,2-a,3-a,4-c,5-c 5.7 REFERENCES Reference books  Advanced Accountancy – M.C. Shukla and T.S. Grewal, Sultan Chand, Publications, New Delhi  S. P. Jain & Advanced Accounting, Volume I; Kalyani Publishers, Daryaganj, New Delhi –  K. L. Narang Ashok Sehgal & Advanced Accounting (Financial Accounting); Taxmann’s, New Delhi.  Deepak Sehgal Advanced Accounting – S.P. Iyengar, Chand & Sons, New Delhi 106 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 6 BONUS SHARES STRUCTURE 6.0 Learning Objectives 6.1 Introduction 6.2 Provisions of the companies act 2013(Source) 6.3 Sebi Regulations 6.4 Summary 6.5 Keywords 6.6 Learning Activity 6.7 Unit end questions 6.8 References 6.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the meaning of Bonus issue as given by Companies Act 2013  Familiarize with the conditions and source for Bonus issue  Describe the SEBI guidelines relating to bonus Issue 6.1 INTRODUCTION A bonus share may be defined as issue of shares at no cost to current shareholders in a company, based upon the number of shares that the shareholder already owns. In other words, no new funds are raised with a bonus issue. While the issue of bonus shares increases the total number of shares issued and owned, it does not increase the net worth of the company. Although the total number of issued shares increases, the ratio of number of shares held by each shareholder remains constant. Bonus issue is also known as ‘capitalisation of profits. Capitalisation of profits refers to the process of converting profits or reserves into paid up capital. A company may capitalise its profits or reserves which otherwise are available for distribution as dividends among the members by issuing fully paid bonus shares to the members. If the subscribed and paid-up capital exceeds the authorized share capital as a result of bonus issue, a resolution shall be passed by the company at its general body meeting for increasing the authorized capital. A return of bonus issue along with a copy of resolution authorizing the issue of bonus shares is also required to be filed with the Registrar of Companies. 107 CU IDOL SELF LEARNING MATERIAL (SLM)

Illustration 1 Alpha Company announced bonus issue to its shareholders in the ratio of 2:3 i.e.. 2 shares for every 3 shares held. Shareholder X has 6,000 shares before announcement of bonus issue. How much shares would he have after bonus issue? Solution Company announced bonus issue in ratio of 2:3 Shareholder X will be entitled to have 4,000 bonus shares (6,000 shares / 3 x 2) Total number of shares X has after bonus issue 10,000 (6,000 + 4,000) Circumstances for issue of bonus shares 1.Bonus issues are given to shareholders when companies are short of cash and shareholders expect a regular income. Shareholders may sell the bonus shares and meet their liquidity needs. 2.Bonus shares may also be issued to restructure company reserves. 3.Issuing bonus shares does not involve cash flow. It increases the company’s share capital but not its net assets 4. Companies issue bonus shares to encourage retail participation and increase their equity base. When price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company. Increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared. Note: Issue of bonus shares in lieu of dividend is not permissible(section 63(3)) 6.2 PROVISIONS OF THE COMPANIES ACT, 2013 (SOURCE) Section 63 of the Companies Act, 2013 deals with the issue of bonus shares. According to Sub-section (1) of Section 63, a company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of (i) its free reserves∗; (ii) the securities premium account; or 108 CU IDOL SELF LEARNING MATERIAL (SLM)

(iii) the capital redemption reserve account: Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets. Sub-section (2) of Section 63 provides that no company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares under sub-section (1), unless— (a) it is authorised by its articles; (b) it has, on the recommendation of the Board, been authorised in the general meeting of the company; (c) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it; (d) it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus; (e) the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid- up. (f) it complies with such conditions as may be prescribed. The company which has once announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the same. Sub-section (3) of the Section also provides that the bonus shares shall not be issued in lieu of dividend. As per Para 39 (i) of Table F under Schedule I to the Companies Act, 2013, a company in general meeting may, upon the recommendation of the Board, resolve— (i) (a) that it is desirable to capitalise any part of the amount for the time being standing to the credit of any of the company’s reserve accounts, or to the credit of the profit and loss account, or otherwise available for distribution; and (b) that such sum be accordingly set free for distribution in the specified manner amongst the members who would have been entitled thereto, if distributed by way of dividend and in the same proportions. (ii) The sum aforesaid shall not be paid in cash but shall be applied, subject to the provision contained in clause (iii), either in or towards— (a) paying up any amounts for the time being unpaid on any shares held by such members respectively; (b) paying up in full, unissued shares of the company to be allotted and distributed, credited as fully paid-up, to and amongst such members in the proportions aforesaid; partly in the way specified in (a) and partly in that specified in (b) above; 109 CU IDOL SELF LEARNING MATERIAL (SLM)

A securities premium account and a capital redemption reserve account may only be applied in the paying up of unissued shares to be issued to members of the company as fully paid bonus shares. In other words, securities premium account and capital redemption reserve cannot be applied towards payment of unpaid amount on any shares held by existing shareholders. NOTE: As per Section 63(2) of the Companies Act, 2013, bonus shares cannot be issued unless party paid-up shares are made fully paid-up. Para 39(ii) of Table F under Schedule I to the Companies Act, 2013 allows use of free reserves for paying up amounts unpaid on shares held by existing shareholders. On a combined reading of both the provisions, it can be said that free reserves may be used for paying up amounts unpaid on shares held by existing shareholders (though securities premium account and capital redemption reserve cannot be used). 6.3 SEBI REGULATIONS A listed company, while issuing bonus shares to its members, has to comply with the following requirements under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018: Regulation 293- Conditions for Bonus Issue Subject to the provisions of the Companies Act, 2013 or any other applicable law, a listed issuer shall be eligible to issue bonus shares to its members if: (a) it is authorised by its articles of association for issue of bonus shares, capitalisation of reserves, etc.: Provided that if there is no such provision in the articles of association, the issuer shall pass a resolution at its general body meeting making provisions in the articles of associations for capitalisation of reserve; (b) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it; (c) It has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity and bonus; (d) any outstanding partly paid shares on the date of the allotment of the bonus shares, are made fully paid-up; e) any of its promoters or directors is not a fugitive economic offender. Regulation 294 - Restrictions on a bonus issue. (1) An issuer shall make a bonus issue of equity shares only if it has made reservation of equity shares of the same class in favour of the holders of outstanding compulsorily convertible debt instruments if any, in proportion to the convertible part thereof. 110 CU IDOL SELF LEARNING MATERIAL (SLM)

(2) The equity shares so reserved for the holders of fully or partly compulsorily convertible debt instruments, shall be issued to the holder of such convertible debt instruments or warrants at the time of conversion of such convertible debt instruments, optionally convertible instruments, warrants, as the case may be, on the same terms or same proportion at which the bonus shares were issued. (3) A bonus issue shall be made only out of free reserves, securities premium account or capital redemption reserve account and built out of the genuine profits or securities premium collected in cash and reserves created by revaluation of fixed assets shall not be capitalised for this purpose. (4) Without prejudice to the provisions of sub-regulation (3), bonus shares shall not be issued in lieu of dividends. (5) If an issuer has issued Superior Voting Right (SR) equity shares to its promoters or founders, any bonus issue on the SR equity shares shall carry the same ratio of voting rights compared to ordinary shares and the SR equity shares issued in a bonus issue shall also be converted to equity shares having voting rights same as that of ordinary equity shares along with existing SR equity shares.] Regulation 295 - Completion of a bonus issue. (1) An issuer, announcing a bonus issue after approval by its board of directors and not requiring shareholders’ approval for capitalisation of profits or reserves for making the bonus issue, shall implement the bonus issue within fifteen days from the date of approval of the issue by its board of directors: Provided that where the issuer is required to seek shareholders’ approval for capitalisation of profits or reserves for making the bonus issue, the bonus issue shall be implemented within two months from the date of the meeting of its board of directors wherein the decision to announce the bonus issue was taken subject to shareholders’ approval. Explanation: For the purpose of a bonus issue to be considered as ‘implemented’ the date of commencement of trading shall be considered. (2) A bonus issue, once announced, shall not be withdrawn. 6.4 SUMMARY  Bonus issue means an issue of additional shares to existing shareholders free of cost in proportion to their existing holding.  A company may issue fully paid-up bonus shares to its shareholders out of— (i) its free reserves; (ii) securities premium account; or 111 CU IDOL SELF LEARNING MATERIAL (SLM)

(iii) capital redemption reserve account: Bonus shares should not be issued out of revaluation reserves (i.e., reserves created by the revaluation of assets).  Bonus issue means an issue of additional shares free of cost to existing shareholders.  Bonus Issue is also known as a \"scrip issue\" or \"capitalization issue\" or “capitalization of profits”. 6.5 KEYWORDS  Revaluation Reserve: Revaluation reserve is created out of changes in the value of specific categories of assets. Any increase in the value of an asset from the value recorded in books will increase the reserve and vice versa  Capitalization of profits is the use of a corporation's retained earnings (RE) to pay a bonus to shareholders in the form of dividends or additional shares  CRR: Capital redemption reserve 6.6 LEARNING ACTIVITY 1.Is bonus Issue a substitute for Dividend? ___________________________________________________________________________ _______________________________________________________________________ 2.Are Holders of convertible debentures , Entitled to bonus Issue upon conversion? ___________________________________________________________________________ ______________________________________________________________________ 6.7 UNIT END QUESTIONS A.Descriptive Questions Short Questions 1. What is meant by Bonus issue? 2. Explain provisions related to bonus issue as per the Companies Act, 2013. 3.What are the sources available for a company to Issue bonus shares? 4.Explain SEBI Regulations on Restrictions on bonus issue. 5.Explain the Conditions stipulated as per SEBI regulations for Bonus Issue Long Questions 1.Explain the SEBI regulations relating to Bonus Issue 2. Explain in detail provisions related to bonus issue as per the Companies Act, 2013 112 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Explain Conditions for issue of fully paid-up bonus shares [SEC 63(2)] of Companies Act, 2013 4. A listed company proposing to issue bonus shares shall comply with Guidelines issued by SEBI Explain 5.Discuss the provisions of Section 63 of the Companies Act, 2013 B.Multiple choice Questions 1. Which of the following cannot be used for issue of bonus shares as per the Companies Act? a. Securities premium account b. Revaluation reserve c. Capital redemption reserve d. None of these 2. Which of the following statement is true in case of bonus issue? a. Convertible debenture holders will get bonus shares in same proportion as to the existing shareholders. b. Bonus shares may be issued to convertible debenture holders at the time of conversion of such debentures into shares. c. Both (a) and (b). d. None of these 3. Bonus issue is also known as a. Scrip issue. b. Capitalisation issue. c. Both (a) and (b). d. Right shares 4. Bonus issue has the following effect a. Market price gets adjusted on issue of bonus shares. b. Effective Earnings per share, Book Value and other per share values stand increased. c. Markets generally take the action as an unfavourable act d. All of these 113 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Earnings per share ______ after a bonus issue a. Increases. b. Decreases. c. Remains constant d. Cannot be determined Answers 1-b, 2-c, 3-c, 4-a, 5-b 6.8 REFERENCES Reference books  T. P. Ghosh, A. Banerjee Principles and Practice of Accounting, Galgotia Publishing Company, New Delhi-5. & K.M. Bansal  P. C. Tulsian Financial Accounting, Sultan Chand & Company, New Delhi.  R. Narayanaswamy Financial Accounting – A Managerial Prospective; PHI Learning Pvt. Ltd.  Ashish K. Bhattacharyya Essentials of Financial Accounting; PHI Learning Pvt. Ltd. 114 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT7ACCOUNTING TREATMENT STRUCTURE 7.0 Learning Objectives 7.1 Introduction 7.2 Illustrations 7.3 Effects of bonus issue 7.4 Difference between Bonus Issue and rights Issue 7.5 Summary 7.6 Keywords 7.7 Learning Activity 7.8 Unit End Questions 7.9 References 7.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the Accounting treatment of bonus Issue  Describe the Effects of bonus Issue  Analyse and solve problems relating to Bonus issue 7.1 INTRODUCTION A bonus share is a free share issued without any consideration to an existing shareholder in the ratio of number of shares held by that shareholder. Issue of Bonus share — • decreases the Reserve & Surplus; • Increases the issued capital but does not bring any change in cash flow and net worth. Way to capitalize profits or reserves: (a) by paying up amounts unpaid on existing partly paid shares so as to make them fully paid up shares, or (b) by issuing fully paid bonus shares to the existing members. Sources for fully paid-up bonus shares [Sec 63] As per Sec 63(1), a company may issue fully paid-up bonus shares to its members out of- • Its Free Reserves 115 CU IDOL SELF LEARNING MATERIAL (SLM)

• Its Securities Premium Account; or • Its Capital Redemption Reserve Account In the previous chapter Provisions of companies Act 2013 has been discussed regarding Issue of bonus shares and SEBI guidelines relating to the same. In this chapter we shall discuss the Journal entries relating to Bonus issue Accounting entries (A) (1) Upon the sanction of an issue of bonus shares Capital Redemption Reserve Account Dr. Securities Premium Account Dr. General Reserve Account Dr. Profit & Loss Account Dr. To Bonus to Shareholders Account. (2) Upon issue of bonus shares Bonus to Shareholders Account Dr. To Share Capital Account. (B) (1) Upon the sanction of bonus by converting partly paid shares into fully paid shares General Reserve Account Dr. Profit & Loss Account Dr. To Bonus to Shareholders Account (2) On making the final call due Share Final Call Account Dr. To Share Capital Account. (3) On adjustment of final call Bonus to Shareholders Account Dr. To Share Final Call Account 7.2 ILLUSTRATIONS Illustration 1 Following items appear in the trial balance of Bharat Ltd. (a listed company) as on 31st March, 20X1: 116 CU IDOL SELF LEARNING MATERIAL (SLM)

The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 4 shares held and for this purpose, it decided that there should be the minimum reduction in free reserves. Pass necessary journal entries. Solution Journal Entries in the books of Bharat Ltd. Working Note Number of Bonus shares to be issued- (40,000 shares / 4) X 1 = 10,000 shares Value of Bonus shares- 10,000 shares of Rs 10 each = Rs 1,00,000 Illustration 2 Pass Journal Entries in the following circumstances: (i) A Limited company with subscribed capital of Rs 5,00,000 consisting of 50,000 Equity shares of Rs 10 each; called up capital Rs 7.50 per share. A bonus of Rs 1,25,000 declared out of General Reserve to be applied in making the existing shares fully paid up. 117 CU IDOL SELF LEARNING MATERIAL (SLM)

(ii) A Limited company having fully paid up capital of Rs 50,00,000 consisting of Equity shares of Rs 10 each, had General Reserve of Rs 9,00,000. It was resolved to capitalize Rs 5,00,000 out of General Reserve by issuing 50,000 fully paid bonus shares of Rs 10 each, each shareholder to get one such share for every ten shares held by him in the company. Solution Illustration 3 Following notes pertain to the Balance Sheet of Solid Ltd. as at 31st March, 20X1: On 1st April, 20X1 the Company has made final call @ Rs 2 each on 90,000 equity shares. The call money was received by 20th April, 20X1. Thereafter the company decided to capitalise its reserves by way of bonus at the rate of one share for every four shares held. Show necessary entries in the books of the company and prepare the extract of the Balance Sheet immediately after bonus issue assuming that the company has passed necessary resolution at its general body meeting for increasing the authorised capital. 118 CU IDOL SELF LEARNING MATERIAL (SLM)

Solution 119 CU IDOL SELF LEARNING MATERIAL (SLM)

120 CU IDOL SELF LEARNING MATERIAL (SLM)

The authorised capital has been increased by sufficient number of shares. (11,25,000 – 10,00,000)0 Working Note Number of Bonus shares to be issued (90,000 shares / 4 ) X 1 = 22,500 shares Note: It has to be ensured that the authorized capital after bonus issue should not be less than the issued share capital (including bonus issue) in all the practical problems. The authorized capital may either be increased by the amount of bonus issue or the value of additional shares [value of bonus shares issued less unused authorized capital (excess of authorized capital in comparison to the issued shares before bonus issue)]. Illustration 4 Following notes pertain to the Balance Sheet of Preet Ltd. as at 31st March, 20X1 On 1st April, 20X1, the Company has made final call @ Rs 2 each on 1,35,000 equity shares. The call money was received by 20th April, 20X1. Thereafter, the company decided to capitalise its reserves by way of bonus at the rate of one share for every four shares held. Show necessary journal entries in the books of the company and prepare the extract of the balance sheet as on 30th April, 20X1 after bonus issue. Solution 121 CU IDOL SELF LEARNING MATERIAL (SLM)

Working Notes: 122 1. Number of Bonus shares to be issued- (1,35,000 shares / 4) X 1 = 33,750 shares CU IDOL SELF LEARNING MATERIAL (SLM)

2. The authorised capital should be increased as per details given below: Rs Existing issued Equity share capital 13,50,000 Add: Issue of bonus shares to equity shareholders 3,37,500 16,87,500 7.3 EFFECTS OF BONUS ISSUE Bonus issue has following major effects :  Increased in share capital  Reduction in EPS and other per share values  Favourable act considered by market  Adjustment in market price  Reduction in accumulated profits 7.4 DIFFERENCE BETWEEN BONUS ISSUE AND RIGHTS ISSUE Rights Issue Introduction: When a company needs additional capital and keeps the voting rights of the existing shareholders proportionately balanced, the company issues Rights shares. The issue is called so as it gives the existing shareholders a pre-emptive right to buy new shares at a price that is lesser than market price. The Rights issue is an invitation to the existing shareholders to buy new shares in proportion to their existing shareholding. Provisions of section 62(1)(a) of the Companies Act, 2013 govern any company, public or private, which is desirous of raising its subscribed share capital by issue of further shares. 123 CU IDOL SELF LEARNING MATERIAL (SLM)

Whenever a company intends to issue new shares, the voting and governance rights of the existing shareholders may be diluted, if they are not allowed to preserve them. It may happen because new shareholders may subscribe to the issued share capital. Companies Act, 2013 allows existing shareholders to preserve their position by offering those newly issued shares at the first instance to them. The existing shareholders are given a right to subscribe these shares, if they like. However, if they do not desire to subscribe these shares, they are even given the right to renounce it in favor of someone else (unless the articles of the company prohibits such a right to renounce). Basis Of Right Shares Bonus Shares Comparison Meaning Right shares are issued to the Bonus shares are issued free of existing shareholders, and they cost to the shareholders in a have option to agree or deny the certain ratio, other than a offer. dividend. Prices Less than the current market price Free of cost Purpose To raise quick and additional To bring share price down and as funds an alternative to cash dividend. Subscription Minimum subscription is Not required mandatory(there are exceptions) Effect on Market May or may not decrease unless Always reduce based on issued Share Price the shareholders sell off the ratio. shares. Creation & These are additional shares created These shares are created from the Renunciation by the company and can be company's profits, reserves & renounced partially or fully. surplus and such renunciation option is not available. 124 CU IDOL SELF LEARNING MATERIAL (SLM)

7.5 SUMMARY  Bonus Issue means an offer of free additional shares to existing shareholders. A company may decide to distribute further shares as an alternative to increase the dividend payout.  Bonus Issue is also known as a \"scrip issue\" or \"capitalization issue\". Bonus issue has following major effects :  Share capital gets increased according to the bonus issue ratio  Liquidity in the stock increases.  Effective Earnings per share, Book Value and other per share values stand reduced.  Market price gets adjusted on issue of bonus shares.  Accumulated profits get reduced. a company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of (i) its free reserves; (ii) the securities premium account; or (iii) the capital redemption reserve account: Provided that no issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets. Once bonus issue gets approved by the board, subsequently it cannot be withdrawn.  A right issue is an offer of equity shares in a further issue of shares by a company to its existing shareholders, to enable them in maintaining their financial and governance interest in the company, if they so desire. 7.6 KEYWORDS  EPS: Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares of its common stock  SEBI: Securities and Exchange board of India  Scrip Issue: Bonus Issue 7.7 LEARNING ACTIVITY 1. In case of shares which are listed and traded in stock exchange what happens to the share prices immediately after announcement of Bonus Issue? ___________________________________________________________________________ _______________________________________________________________________ 2. Why do companies Issue Bonus shares? 125 CU IDOL SELF LEARNING MATERIAL (SLM)

___________________________________________________________________________ _______________________________________________________________________ 7.8 UNIT END QUESTIONS A.Descriptive Questions Short Questions 1. Explain the effects of Bonus Issue of shares. 2.Explain the term Capitalisation Issue 3.Discuss the source for Issue of Bonus shares 4.What happens to the net worth of the company due to Issue of Bonus shares 5.Explain the effect of Bonus issue on the Assets of the company. 6.Explain what is meant by rights issue? Long Questions 1. Following items appear in the Trial Balance of M Ltd. as at 31st March, 2015: The company decided to issue bonus shares to its shareholders at the rate of one share for every four shares held. 2. MG Limited was registered on 1st January 2017 with an authorised capital of Rs3,00,000 divided into 30000 equity shares of Rs10 each. During the next 12 months to 31st November 2017 following events occurred which related to the share capital of the company. On 1st January 2017 the company offered for subscription of 10,000 equity shares at a price of rupees 19 each, to be paid as follows: At the date of issue including premium Rs10 On allotment Rs4 On first and final call Rs5 On 30th June 2017 the company made right issue on 1 for 2 basis at Rs 22.50 per share, payable in full on 10th July 2017. Only 80% of the issue was subscribed for by the shareholders with a payment being made on the due date. On 30th November 2017 Company decided to make a bonus issue of shares at par by utilising the entire balance of securities premium account. Prepare the equity share capital account and the securities premium account of the company for the year ended 31st December 2017. A shareholder who had subscribed initially for 140 shares had subsequently taken up 80% of the right issue and then received the bonus shares to 126 CU IDOL SELF LEARNING MATERIAL (SLM)

which he was entitled. Calculate the ultimate number of shares owned by him and the total price paid by him for those shares. 3. Following items appear in the Trial Balance of Saral Ltd. as on 31st March 2014: The company decided to issue to equity shareholders bonus shares at the rate of 1 share for every 3 shares held. Company decided that there should be the minimum reduction in free reserves. Pass necessary Journal Entries in the books Saral Ltd. 4. The summarised Balance Sheet of A Ltd. as at 31.3.2015 is as follows: The company wanted to issue bonus shares to its shareholders at the rate of one share for every two shares held. Necessary resolutions were passed; requisite legal requirements were complied with: (a) You are required to give effect to the proposal by passing journal entries in the books of A Ltd. (b) Show the amended Balance Sheet. 5. Following notes pertain to the Balance Sheet of Manoj Ltd. as at 31st March, 20X1 127 CU IDOL SELF LEARNING MATERIAL (SLM)

On 1st April, 20X1, the Company has made final call @ Rs 2 each on 2,70,000 equity shares. The call money was received by 20th April, 20X1. Thereafter, the company decided to capitalise its reserves by way of bonus at the rate of one share for every four shares held. Show necessary journal entries in the books of the company and prepare the extract of the balance sheet as on 30th April, 20X1 after bonus issue 6.Distinguish between bonus issue and rights issue. B.Multiple choice Questions 1. Which of the following can be utilized for the issue of bonus shares? a. Balance of profits & loss account b. Capital Reserve c. Dividend Equalization Fund d. Development Rebate Reserve e. Profit Prior to Incorporation 2. Select the correct answer from the options given below a. 1, 3, and 5 only b. 2 and 4 only c. 1 and 3 only d. 1, 2, 3, and 5 only 3.Bonus issue can be made on 128 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Partly paid-up shares b. Fully paid-up shares. c. Either (A) or (B) d. Both (A) and (B) 4.Which of the following condition of Section 63 is required to be complied with by the company before making the bonus issue? a. Bonus issue is authorized by its articles b. Company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it. c. Company has not defaulted in payment of statutory dues of the employees like PF contribution, gratuity, and bonus. d. All of these 5.Which of the following is a correct journal entry for the issue of bonus shares? a. Debit the equity share capital account and credit the securities premium account. b. Debit the bonus to shareholders account and credit the general reserve account c. Debit the general reserve account and credit the equity share capital account. d. Debit the capital reserve account and credit the equity share capital account. 6.Following was the Balance Sheet of BCC Ltd. as of 31st December 2019: Equity Shares of ₹10 each ₹ 8,00,000 Securities Premium ₹ 2,80,000 General Reserve ₹ 1,40,000 Profit & Loss Account ₹ 2,40,000 Sundry Creditors ₹ 1,80,000 The company issued 3 bonus shares for every 4 fully paid-up shares. Securities premium account will be utilized first and then General Reserve. To issue bonus shares Profit & Loss A/c will be debited by a. ₹ 2,40,000 129 CU IDOL SELF LEARNING MATERIAL (SLM)

b. ₹ 1,80,000 c. ₹ 2,00,000 d. ₹ 2,20,000 Answers 1-c, 2-b, 3-d, 4-c, 5-b 7.9 REFERENCES Reference books  R. Narayanaswamy Financial Accounting – A Managerial Prospective; PHI Learning Pvt. Ltd.  Ashish K. Bhattacharyya Essentials of Financial Accounting; PHI Learning Pvt. Ltd. 130 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 8 ISSUE OF DEBENTURES STRUCTURE 8.0 Learning Objectives 8.1 Introduction 8.2 Features of Debentures 8.3 Types of Debentures 8.4 Summary 8.5 Keywords 8.6 Learning Activity 8.7 Unit End Questions 8.8 References 8.0 LEARNING OBJECTIVES After studying this unit, students will be able to  Explain the meaning of the term Debentures and its features  Describe Mandatory requirement for Issue of Debentures  Explain the types of debentures  Outline about appointment of Debenture trustees 8.1 INTRODUCTION Meaning of Debentures Besides raising capital by the issue of shares, a company may supplement its capital by borrowings. Such borrowings may take the form of both short-term and long-term borrowings. Short-term borrowings by way of promissory notes, bills of exchange, bank overdrafts, cash credits, public deposits, etc., are needed by a company to provide for its working capital while long-term borrowings by way of loan on mortgage of property, term loans from financial institutions, public deposits for a long period, issue of debentures, etc., are needed by a company for financing expenditure of a capital nature. Loan capital of a company refers to the long-term borrowings of which issue of debentures is the most important and common method adopted by companies. Debentures are part of loan capital, and the company is liable to pay interest thereon whether it earns profit or not. 131 CU IDOL SELF LEARNING MATERIAL (SLM)

A debenture is a bond issued by a company under its seal, acknowledging a debt and containing provisions as regards repayment of the principal and interest. If a charge* has been created on any or on the entire assets of the company, the nature of the charge and the assets charged are described therein. Since the charge is not valid unless registered with the Registrar, and the certificate registering the charge is printed on the bond. It is also customary to create a trusteeship in favour of one or more persons in the case of mortgage debentures. The trustees of debenture holders have all powers of a mortgage of a property and can act in whatever way they think necessary to safeguard the interest of debenture holders. Section 2 (30) of the Companies Act, 2013 denes debentures as “Debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. Thus, It is clear from definition that debenture may be Secured Debenture or Unsecured Debenture. Mandatory Requirements Debentures cannot be issued with voting rights. On issue of debenture, a Company shall create a Debenture Redemption Reserve (DRR) out of the profits of the company available for payment of dividend and the amount credited to such account shall not be utilised by the company except for the redemption of debentures. A company is required to pay interest and redeem the debentures in accordance with the terms and conditions of their issue If there is any default in repayment of amount in the event of maturity or default in payment of the interest thereon then the Tribunal will be approached by the Debenture-holders or Debenture Trustee to take appropriate measures Appointment of Debentures Trustee A Company cannot issue debentures to more than 500 people without appointing a debenture trustee, whose duty would be to protect the interest of Debenture Holders and redress their grievances. The company shall appoint the debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than sixty days after the allotment of the debentures, execute a debenture trust deed to protect the interest thereon. Charge/Mortgage in favour of Debenture Trustee The security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on:- (i) any specific movable property of the company or its holding company or subsidiaries or associate companies or otherwise. (ii) any specific immovable property wherever situate, or any interest therein. However, in case of a non-banking financial company, the charge or mortgage under sub-clause (i) may be created on any movable property. Further that in case of any issue of debentures by a Government company which is fully secured by the guarantee given by the Central 132 CU IDOL SELF LEARNING MATERIAL (SLM)

Government or one or more State Government or by both, the requirement for creation of charge shall not apply. In case of any loan taken by a subsidiary company from any bank or financial institution the charge or mortgage may also be created on the properties or assets of the holding company. 8.2 FEATURES OF DEBENTURES FEATURES OF DEBENTURES 1. It is a document which evidences a loan made to a company. 2. It is a fixed interest-bearing security where interest falls due on specific dates. 3. Interest is payable at a predetermined fixed rate, regardless of the level of profit. 4. The original sum is repaid at a specified future date, or it is converted into shares or other debentures. 5. It may or may not create a charge on the assets of a company as security. 6. It can generally be bought or sold through the stock exchange at a price above or below its face value. DISTINCTION BETWEEN DEBENTURES AND SHARES 133 CU IDOL SELF LEARNING MATERIAL (SLM)

8.3 TYPES OF DEBENTURES The following are the types of debentures issued by a company. They can be classified on the basis of: (1) Security; (2) Convertibility; (3) Permanence; (4) Negotiability; and (5) Priority 1. Security (a) Secured Debentures : These debentures are secured by a charge upon some or all assets of the company. There are two types of charges: (i) Fixed charge; and (ii) Floating charge. A - fixed charge is a mortgage on specific assets. These assets cannot be sold without the consent of the debenture holders. The sale proceeds of these assets are utilized first for repaying debenture holders. A floating charge generally covers all the assets of the company including future one. (b) Unsecured or “Naked” Debentures : These debentures are not secured by any charge upon any assets. A company merely promises to pay interest on due dates and to repay the amount due on maturity date. These types of debentures are very risky from the viewpoint of investors. 2. Convertibility (a) Convertible Debentures: These are debentures which will be converted into equity shares (either at par or premium or discount) after a certain period of time from the date of its issue. These debentures may be fully or partly convertible. In future, these debenture holders get a chance to become the shareholders of the company. (b) Non-Convertible Debentures : These are debentures which cannot be converted into shares in future. As per the terms of issue, these debentures are repaid. 3. Permanence (a) Redeemable Debentures : These debentures are repayable as per the terms of issue, for example, after 8 years from the date of issue. (b) Irredeemable Debentures : These debentures are not repayable during the lifetime of the company. These are also called perpetual debentures. These are repaid only at the time of liquidation. 4. Negotiability (a) Registered Debentures : These debentures are payable to a registered holder whose name, address and particulars of holding is recorded in the Register of Debenture holders. They are not easily transferable. The provisions of the Companies Act, 2013 are to be complied with for effecting transfer of these debentures. Debenture interest is paid either to the order of registered holder as expressed in the warrant issued by the company or the bearer of the interest coupons. (b) Bearer Debentures : These debentures are transferable by delivery. These are negotiable instruments payable to the bearer. No kind of record is kept by the 134 CU IDOL SELF LEARNING MATERIAL (SLM)

company in respect of the holders of such debentures. Therefore, the interest on it is paid to the holder irrespective of any identity. No transfer deed is required for transfer of such debentures. 5. Priority (a) First Mortgage Debentures : These debentures are payable first out of the property charged. (b) Second Mortgage Debentures: These debentures are payable after satisfying the - first mortgage debentures. 8.4 SUMMARY  Debenture is one of the most commonly used debt instrument issued by the company to raise funds for the business.  A debenture is a bond issued by a company under its seal, acknowledging a debt and containing provisions as regards repayment of the principal and interest. Money payable on debentures may be paid either in full with application or in instalments.  Debenture holders are the creditors of the company whereas shareholders are the owners of the company.  Debenture holders have no voting rights and consequently do not pose any threat to the existing control of the company. Shareholders have voting rights and consequently control the totalaffairs of the company.  Debentures can be classified on the basis of: (1) Security; (2) Convertibility; (3) Permanence (4) Negotiability; and (5) Priority 8.5 KEYWORDS  DRR : Debenture redemption reserve  Charge:Refers to creation of interest or a right on a property or asset of a company or any of its undertaking as a security against loan provided to the company in respect of such interest.  Perpetual debentures: These debentures are not repayable during the lifetime of the company and repaid only at the time of liquidation  Negotiability: Transferability  Naked debentures: Unsecured debentures 8.6 LEARNING ACTIVITY 1.When companies have bank loan as a source for raising debt, what is the need for debentures? 135 CU IDOL SELF LEARNING MATERIAL (SLM)

___________________________________________________________________________ _______________________________________________________________________ 2.Learn why companies issuing debenture are required to create DRR? ___________________________________________________________________________ _______________________________________________________________________ 8.7 UNIT END QUESTIONS A.Descriptive Questions Short Questions 1.Define the term Debenture as per Companies Act 2013. 2.Explain the features of debentures. 3. List any 5 differences between a share and a debenture. 4.Explain what convertible debentures are. 5.Discuss the Mandatory requirements for Issue of debentures. Long Questions 1.Distinguish between shares and debentures 2.Define the term debenture and explain its types 3.What are Debentures and explain the role of Debenture trustee in Issue of debentures 4. Explain the purpose for raising of debentures by the company. Also give the main features of debentures 5.Explain debenture types on the basis of Negotiability, Security, and priority. B.Multiple choice Questions 1.Perpetual debentures are called as __________ a. Naked debentures b. Irredeemable debentures c. Non-convertible debentures d. Secured debentures 2.Unsecured debentures are also called as ___________ 136 a. Naked debentures CU IDOL SELF LEARNING MATERIAL (SLM)

b. Irredeemable debentures c. Non-convertible debentures d. Secured debentures 3._______ is a charge on specific Assets. a. Fixed charge b. Floating charge c. Secured charge d. Registered charge 4.Debentures which can be transferred by mere delivery are called as ________ a. Naked debentures b. Irredeemable debentures c. Non-convertible debentures d. Bearer debentures 5.Debentures are generally shown in the balance sheet as ___________ a. Noncurrent liabilities b. Current liabilities c. Short term borrowing d. Other Long-term liabilities Answers 1-b, 2-a,3-a,4-d,5-a 8.8 REFERENCES Textbooks/Reference books  Advanced Accountancy – M.C. Shukla and T.S. Grewal, Sultan Chand, Publications, New Delhi 137 CU IDOL SELF LEARNING MATERIAL (SLM)

 R. Narayanaswamy Financial Accounting – A Managerial Prospective; PHI Learning Pvt. Ltd.  Ashish K. Bhattacharyya Essentials of Financial Accounting; PHI Learning Pvt. Ltd. 138 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 9 ACCOUNTING TREATMENT FOR ISSUE OF DEBENTURES STRUCTURE 9.0 Learning Objectives 9.1 Introduction 9.2 SEBI Guidelines for Issue of Debentures 9.3 Accounting Entries 9.4 Issue of Debentures in consideration other than cash 9.5 Treatment of Loss on Issue of Debentures 9.6 Issue of Debentures as Collateral Security 9.7 Problems on Issue of Debentures 9.8 Summary 9.9 Keywords 9.10 Learning Activity 9.11 Unit End Questions 9.12 References 9.0 LEARNING OBJECTIVES After studying this Unit Students will be able to:  Explain the concept and Accounting entries relating to Issue of Debentures  Discuss SEBI guidelines for Issue of Debentures  Explain about Issue of debentures for consideration other than cash  Describe about Issue of Debentures as collateral Security 9.1 INTRODUCTION Issue of Debentures The procedure for issuing debentures by a company is very much similar to that of an issue of shares. Applications for debentures are invited from the public through the prospectus and the applicants are asked to pay the application money along with the applications. The company may ask for payment of the whole of the amount along with the application itself or in instalments. 139 CU IDOL SELF LEARNING MATERIAL (SLM)

Issue of Debentures for Cash When debentures are issued for cash, the amount to be collected on them may be payable in a lump sum or in instalments. Where payable in instalments, debenture application account is opened on receipt of applications. Then there are debenture allotment account and debenture calls account. Issue of Debentures at Par Debentures are said to be issued at par when the debenture-holder is required to pay an amount equal to the nominal or face value of the debentures e.g., the issue of Rs. 1,000 debenture for Rs. 1,000. 140 CU IDOL SELF LEARNING MATERIAL (SLM)

Note: –All cash transactions are generally passed through the Cash Book.  –It is customary to prefix the rate of interest payable on debentures with the debenture account.  –The company cannot allot more debentures than issued. The excess application money may be retained by the company against the allotment money due. But the excess application money received on debentures rejected has to be refunded to the applicants. Issue of Debentures at a Premium If the debentures are issued at a price higher than the nominal value of the debentures, the debentures are said to be issued at a premium. The excess of issue price over the nominal value is regarded as the premium amount. In such a case, the Debentures Account should be credited only with the nominal value of the debentures and the premium should be credited to “Securities Premium Reserves”. 141 CU IDOL SELF LEARNING MATERIAL (SLM)

Issue of Debentures at a Discount If the debentures are issued at a price lower than the nominal value of the debentures, the debentures are said to be issued at a discount. The difference between the nominal value and the issue price is regarded as the discount. Such discount being a capital loss must be shown specifically as a deduction of general Reserve on the liabilities side of the balance sheet under the heading ‘Reserves and Surplus’. If there are no Reserves, the discussion on issue of debentures is to be shown as a negative item under the heading ‘Reserves and Surplus’. Such discount on issue of debentures may either be written off against revenue profits or capital profits of the company. When debentures are issued at a discount, the Debentures Account should be credited with the nominal value of the debentures and the discount allowed on issue of debentures, being a capital loss, should be debited to “Discount on Issue of Debentures Account”. Accounting for issue of debentures payable in instalments 142 The accounting entries would be as follows: (a) When cash is received Bank Account Dr. To Debentures Application Account (Being money received on…. debentures @Rs. ….each) (b) When excess money is refunded or adjusted for future calls Debentures Application Account Dr. To Bank Account (Amount refunded) To Debenture Allotment A/c (Amount adjusted for allotment) (Being excess money…debentures adjusted as per Board’s Resolution No….dated…..) CU IDOL SELF LEARNING MATERIAL (SLM)

(c) When the debentures are allotted Debentures Application Account Dr. To % Debentures Account (Being the allotment of…debentures of Rs. ….each as per Board’s Resolution No….dated….) (d) On Allotment money being called Debenture Allotment A/c Dr. To % Debentures Account ( Being Allotment Money Called) (e) On Allotment money being received Bank A/c Dr. To Debenture Allotment A/c (Being Allotment money received) (f) On Debenture Call money being called Debenture Calls A/c Dr. To % Debentures A/c ( Being Call money made due) (g) On Debenture Call money being called Bank A/c Dr. To Debenture Calls A/c (Being Call money received) 9.2 SEBI GUIDELINES FOR ISSUE OF DEBENTURES The SEBI guidelines for issue of debentures shall be applicable for issue of convertible and non- convertible debentures by public sector companies as well as public limited company. Debt instruments are required to be rated by a Credit Rating Agency and the same shall be disclosed in the offer document. If such issue is equal to or greater than 100 crores, two ratings from two different credit rating agencies will be obtained. The credit rating agencies in India are such as: CRISIL – Credit Rating Information Services of India Ltd. 143 CU IDOL SELF LEARNING MATERIAL (SLM)

ICRA – Investment Information and Credit Rating Agency. CARE- Credit Analysis and Research Ltd. Debt- equity ratio in issue of debentures must not exceed 2:1. However, this condition will be relaxed for capital intensive projects. The debentures may be issued for the following purposes:  To start new undertakings.  Expansion or diversification.  Modernization.  Amalgamation or merger which may be approved by financial institutions.  To acquire assets.  Restructuring of capital.  To increase resources of long- term finance. The issue of debentures should not exceed more than 20% of the gross current assets including loans and advances. The any redemption of debentures shall not commence before the 7 years since the commencement of the company. The payments should be made in one instalment for any small investors having value such as Rs. 5,000. The non- convertible debentures can be converted into equity with the consent of SEBI. A premium of 5% on the face value is allowed in case of time of non- convertible debentures only and redemption. The secured debentures shall be permitted for public subscription. The face value of debentures shall be Rs. 100 and it shall be listed in one or more stock exchanges in the country. It is necessary to appoint debenture trustees for debenture with maturity of more than 18 months and the name should be stated in the offer document. A debenture redemption reserve is a provision which states that the Indian corporation issuing debentures must create a debenture redemption service to protect the interest of the investors against the possibility of default by a company. If no reserve is created by a company within 12 months of issuing the debenture, the company shall be required to pay 2% interest in penalty to the debenture holders. SEBI allows listing of debt instruments before equity providing that the rating of instrument is not below minimum rating of ‘A’ or equivalent. 144 CU IDOL SELF LEARNING MATERIAL (SLM)

The issue of Fully convertible debentures (FCDs) having the conversion period more than 36 months shall not be allowed unless conversion is made optional with having the right to buy or sell the stock at a certain price or the obligation to buy or sell the stock at a certain price. 9.3 ACCOUNTING ENTRIES (ISSUE OF DEBENTURES CONSIDERING TERMS OF REDEMPTION) Accounting entries for issue of redeemable debentures the issue of redeemable debentures can be categorized into the following: 1. Debentures issued at a par and redeemable at par or at a discount; 2. Debentures issued at a discount and redeemable at par or at discount; 3. Debentures issued at premium and redeemable at par or at discount; 4. Debentures issued at par and redeemable at premium; 5. Debentures issued at a discount and redeemable at premium. 6. Debentures issued at premium and redeemable at premium. Note: Redemption at a discount may be a rare circumstance in practical life Journal entries in each of the above cases are discussed below: 1. Debentures issued at par redeemable at par: When debenture are issued at par, the issue price is equal to par value, in this regard the following entries are recorded: (a) For receipt of application money : Bank A/c Dr. To Debenture Application A/c (b) For transfer of application money to debentures account : Debenture Application A/c Dr. To …% Debenture A/c 2. Debentures issued at Discount and Redeemable at par or at discount : When debentures are issued at discount, issue price will be less than par value. The difference between the two is considered as loss on issue on debentures and is to be written-off over the life of debentures. The entries with regards to issue are given below : (a) For receipt of application money Bank A/c Dr. To Debenture Application A/c (b) At the time of making allotment 145 CU IDOL SELF LEARNING MATERIAL (SLM)

(i) Debenture Application A/c Dr. Discount on issue of debentures A/c Dr. To …% Debentures A/c 3. Debentures Issued at Premium and Redeemable at par or at discount When debenture are issued at premium, the issue price is more than the par value. The premium is transferred to securities premium account. In this regard, the following journal entries are recorded: When premium amount is received at the time of application; (a) For receipt of application money Bank A/c Dr. To Debenture Application A/c (b) For transfer of application of money at the time of allotment Debenture application A/c Dr. To …% Debentures A/c To Securities Premium A/c When debentures are issued at par or premium value but redeemed at discount, then it means that the company will gain by paying less. This gain will not be recognised in the books at the time of issue of debentures as per the conservatism concept. 4. Debentures issued at par and redeemable at a premium Where debentures are to be redeemed at premium, an extra entry is to be made at the time of issue and allotment of debentures. This extra entry is to be passed for providing premium payable on redemption. Debenture Redemption Premium Account is a personal account which represents a liability of the company in respect of premium payable on redemption. In this case, the issue price is same as par value, but the redemption value is more than the par value, therefore, redemption premium is recorded as a loss on issue of debentures at the time of allotment of debentures. Following journal entries are recorded in this regard: (a) For receipt of application money Bank A/c Dr. To Debenture application A/c (b) At the time of making allotment (i) Transfer of application money to debenture account Debenture Application A/c Dr. To …% Debenture A/c 146 CU IDOL SELF LEARNING MATERIAL (SLM)

(ii) Call made consequent upon allotment Debenture Allotment A/c Dr. Loss on issue of debenture A/c Dr. [Equal to Debenture Redemption Premium] To …% Debenture A/c To Debenture redemption premium A/c Students can note that instead of passing the separate entries, a compound entry can be passed: Bank A/c Dr. Loss on issue of debenture A/c Dr. To …% Debenture A/c To Debenture redemption premium A/c 5. Debentures Issued at discount and redeemable at premium In this situation the issue price is less than par value, but redemption value is more than par value. The difference between the redemption price and the issue price is treated as discount/loss on issue of debentures. Suppose a 10% debentures of Rs. 1,000 is issued at a discount of Rs. 100 and redeemable at a premium of Rs.5 per debenture, the amount of loss will be equal to Rs. 1,005 – Rs. 900 = Rs. 105. This is to be treated as loss on issue. It is to be noted that premium on redemption of debentures is also credited by Rs.5. (a) For the receipt of application money Bank A/c Dr. To Debenture Application A/c (b) At the time of making allotment (i) Transfer of application money to debenture account Debenture Application A/c Dr. To % Debentures A/c (ii) Call made consequent upon allotment of debentures at discount and redeemable at Premium Debenture Allotment A/c Dr. Discount/Loss on issue of debenture A/c Dr. [Amount equal to the discount on issue of debenture plus Premium on redemption] To …% Debenture A/c (c) For receipt of call made on allotment 147 CU IDOL SELF LEARNING MATERIAL (SLM)

Bank A/c Dr. To Debenture Allotment A/c Students can note that instead of passing the separate entries, a compound entry can be passed: Bank A/c Dr. Discount/Loss on issue of debentures A/c Dr. To …% Debentures A/c To Debenture redemption premium A/c Debentures Issued at premium and redeemable at premium In this situation, the issue price is more than par value and also redemption value is more than par value. The premium received at the time of issue of debentures is credited to Securities premium account and premium paid at the time of redemption is a loss to be provided at the time of issue of debentures. Suppose a 10% debenture of Rs.1,000 is issued at a premium of Rs.100 and redeemable at a premium of Rs.50 per debenture. In the given case Rs.100 is to be credited to Securities premium account and Rs.50 will be the loss to be provided at the time of issue of debentures. It is to be noted that premium on redemption of debentures is also credited by Rs. 50. (a) For the receipt of application money Bank A/c Dr. To Debenture Application A/c (b) At the time of making allotment (i) Transfer of application money to debenture account Debenture Application A/c Dr. To % Debentures A/c (ii) Call made consequent upon allotment of debenture at premium and Redeemable at premium Debenture Allotment A/c Dr. Loss on issue of debenture A/c Dr. [Amount equal to the premium on redemption] To …% Debenture A/c To Securities Premium A/c [Amount equal to premium on issue] To Premium on Redemption of [Amount equal to premium on 148 CU IDOL SELF LEARNING MATERIAL (SLM)

Debentures A/c redemption] Students can note that instead of passing the separate entries, a compound entry can be passed: Bank A/c Dr. Loss on issue of Debentures A/c Dr. To …% Debentures A/c To Securities Premium A/c To Premium on redemption of debentures A/c 9.4 ISSUE OF DEBENTURES IN CONSIDERATION OTHER THAN FOR CASH Just like shares, debentures can also be issued for consideration other than for cash, such as for purchase of land, machinery, etc. In this case, the following entries are passed: (a) Sundry Assets Account Dr. [Assets taken over] To Sundry Liabilities Account [Liabilities assumed] To Vendors Account [Purchase consideration] (Being the assets and liabilities taken over) (b) Vendors Account Dr. To Debentures Account (Being the issue of….debentures to satisfy purchase consideration) Further it should be noted that these debentures can be issued at par, premium and at discount. In each case the second entry for issue of debentures would be done accordingly. Number of debentures to beissued is calculated as follows:- 149 CU IDOL SELF LEARNING MATERIAL (SLM)

9.5 TREATMENT OF DISCOUNT/LOSS ON ISSUE OF DEBENTURES The discount on issue of debentures is amortized over a period between the issuance date and redemption date. It should be written-off in the following manner depending upon the terms of redemption: (a) If the debentures are redeemable after a certain period of time, say at the end of 5 years, the total amount of discount should be written-off equally throughout the life of the debentures (applying the straight line method). The main advantage of this method is that it spreads the burden of discount equally over the years. (b) If the debentures are redeemable at different dates, the total amount of discount should be written-off in the ratio of benefit derived from debenture loan in any particular year (applying the sum of the year’s digit method). This method is suitable when debentures are redeemed by unequal instalments. The accounting entries would be as follows : Profit and Loss Account Dr. To Discount on Issue of Debentures Account (Being the amount of discount on issue of debentures written-off) Loss on issue of debentures is also a capital loss and should be written off in a similar manner as discount on debentures issued. In the balance sheet both the items (Discount and Loss) are shown as Non-current/ current assets depending upon the period for which it has to be written off. 9.6 ISSUE OF DEBENTURES AS COLLATERAL SECURITY Collateral security means secondary or supporting security for a loan, which can be realised by the lender in the event of the original loan not being repaid on the due date. Under this 150 CU IDOL SELF LEARNING MATERIAL (SLM)