A Ltd ("A" for short) absorbs B Ltd ("B" for short). So, all the liabilities of B will be transferred to A.
Now, the question is: How will A discharge this liability? They agree @ "8% premium by 15% Debentures in A issued at a discount of 10%"
So, there will be 2 procedures. viz.
1) Transfer of Debentures by B Ltd to A at 8% Premium
Liability of B taken over by A is Rs. 5,00,000/-, but because now onwards, it will be responsibility of A to pay and not B, They agree that Redemption of Deb of B will take place at 8% premium, which means at for every liability of Rs. 100/- taken from B by A, Rs. 8/- extra (premium) will be paid by A to B. Hence, in fact, A will record the Liability Assumed towards Debentures at Rs. 5,00,000 X 108 / 100 = 5,40,000.
2) Issue of New Debentures by A at 10% Discount
But, for this liability of 5,40,000, New 15% Debentures are issued by A at 10% Discount. This means that though the Debentures are issued at discount, the same will be redeemed at the Face Value. Thus, for every liability of Rs. 90 (100-10), the redemption will be at Rs. 100. So, A records the same at 5,40,000 X 100 / 90 = 6,00,000. Thus, the liability to be settled in future at the time of Redemption of these New Debentures will be Rs. 6,00,000.
A also writes Rs. 60,000 (6,00,000 - 5,40,000) as "Discount on Issue of Debentures" under Misc. Exp. in Balance Sheet. This Misc. Exp will be written off in the same way we write off the Debentures issued at discount normally.
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