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Please Help in understanding this Journal Entry

sivaram (Asst Mgr-Taxation) (6918 Points)

18 January 2011

Dear Students

I dont know really the entries on Issue of Debentures

The Problem is given Below

15% Debentures in A Ltd 5 Lacs

12% Debentures in Bltd 5 Lacs

A Ltd absorbs Bltd

12% Debenture Holders of Bltd are to be paid 8% premium by 15% Debentures in ALtd issued at a discount of 10%

The Entry is given below in the Books of A Ltd

Discount on Issue of Debentures dr 60000

12%Debenture Holders Account Dr 540000

cr 15% Debentures Account 600000

can any one explain this journal entry as to how to go about it please give detailed explanation as i am weak in Basics

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s (-) (216 Points)
Replied 18 January 2011

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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