CA NITIN GOEL INTRODUCTION TO COMPANY ACCOUNTS

Unit 1: INTRODUCTION TO COMPANY ACCOUNTS

“Failure is simply the opportunity to begin again, this time more intelligently,
There are those who dream and wish and there are those who dream and work.”

COMPANY - BASICS

DEFINITION : COMPANY

Companies A Company mean company which is formed and incorporated under the
Act, 2013 Companies Act, 2013 or an existing company formed and registered under
any of the previous company laws.
Hanay A Company is an Artificial Person created by law, having a Separate Entity,
with a Perpetual Succession and a Common Seal.

CHARACTERISTICS / FEATURES OF A COMPANY

Feature Explanation
Artificial • A Company comes into existence by the operation of law.
Person • By sanction of law, a Company is granted certain rights and obligations
(Incorporated as that of a person. Thus, company is an artificial person, incorporated
Association) under law.
Separate • A Company is a separate legal entity & artificial person known by its own
Legal Entity name
• A Company is distinct and separate from the members who constitute it.
• A Company can contract, sue & be sued in its incorporated name &
capacity.
Person, not • A Company is not a citizen either under — (a) the Constitution of India or
Citizen (b) the Citizenship Act
• The Constitution provides certain fundamental rights to its citizens. A
Company cannot enjoy the citizenship rights and duties as are enjoyed
by natural citizens
Perpetual • A Company is an artificial person and has a separate legal entity.
Succession • Hence, death, insolvency or change of its Members does not affect the
Company.
• The shares of Company being transferable, members may change during
the lifetime of the company. However, that does not change the status of
the Company.
• The Company goes on forever and continues to exist, till it is wound up
and dissolved.
Common Seal • Common Seal is the official signature of a Company. The Company's
name is engraved on the Seal.
• The Articles of Association may provide for the documents that require
the signature of the Company, i.e. the Common Seal. Where any

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document is affixed with the Common Seal, it amounts to being signed

by the Company.
• Now, use of common seal has been made optional. All such documents
which required affixing the common seal may now instead be signed by
two directors or one director and a company secretary of the company.
Ownership Vs • The Board of Directors is the elected representative body of the
Management Shareholders of the Company, and manages the affairs of the Company.
• Generally, every Shareholder / Member does not participate in the day-
to-day affairs of working and administration of the Company. Hence,
Ownership of Company is different from that of its Management.
Right of The right of the shareholders of a company to inspect its books of account,
Access with the exception of books open for inspection under the Statute, is
governed by the Articles of Association. The shareholders have a right to
seek information from the directors by participating in the meetings of the
company and through the periodic reports.
Limited The liability of every shareholder of a company is limited to the amount he
Liability has agreed to pay to the company on the shares allotted to him. If such
shares are fully paid-up, he is subject to no further liability.
Transferability The capital is contributed by the shareholders through the subscription of
of Shares shares. Such shares are transferable by its members except in case of a
private limited company, which may have certain restrictions on such
transferability.
Maintenance A limited company is required by law to keep a prescribed set of account
of Books books and any failure in this regard attracts penalties.
Periodic Audit A company has to get its accounts periodically audited through the
chartered accountants appointed for the purpose by the shareholders on
the recommendation of board of directors

TYPES OF COMPANIES

TYPE EXPLANATION
Government Any company in which not less than 51% of Paid-up Capital of a Company is
Company held by the Central Government, or State Government(s), or partly by Central
Government and partly by one or more state Governments and includes a
company which is a subsidiary company of such a government company.
Foreign Any company or body corporate incorporated outside India which –
Company a) has a place of business in India whether by itself or through an agent
physically or through electronic mode; and
b) conducts any business activity in India in any other manner.
Private A company which by its articles,—
company a) restricts the right to transfer its shares;
b) except in case of One Person Company, limits the number of its members
to 200.
This number does not include present and former employees who are also
members.
Moreover, ≥ 2 persons who own shares jointly are treated as single member.
c) prohibits any invitation to the public to subscribe for any securities of the
company.
Shares of a Private Company are not listed on Stock Exchange

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Public A company which is not a private company and has minimum paid capital as
Company may be prescribed; provided that a company which is a subsidiary of a
company, not being a private company, shall be deemed to be public company
for the purposes of this Act even where such subsidiary company continues
to be a private company in its articles.
A company which is a listed public company if it gets unlisted continues to be
a public company.
One Person A company which has only one person as a member
Company
Small A company, other than a public company, -
Company a) paid-up share capital of which does not exceed 4 crore rupees or such
higher amount as may be prescribed which shall not be more than 10 crore
rupees; or
b) turnover of which as per its last profit and loss account does not exceed
40 crore rupees or such higher amount as may be prescribed which shall
not be more than 100 crore rupees

Provided that nothing in this clause should apply to:

(A) a holding company or a subsidiary company
(B) a company registered under section 8
(C) a company or body corporate governed by any special Act
Listed A company which has any of its securities listed on any recognised stock
Company exchange.
Unlisted The company, whose shares are not listed on any recognised stock exchange
Company An unlisted company can be a public company or a private company.
Unlimited A company not having any limit on the liability of its members
Company
Company Company having the liability of its members limited by the memorandum to
limited by the amount, if any, unpaid on the shares respectively held by them.
Shares
Company A company having the liability of its members limited by the memorandum to
limited by such amount as the members may respectively undertake to contribute to
Guarantee the assets of the company in the event of its being wound up.
Holding In relation to one or more other companies, means a company of which such
Company companies are subsidiary companies.
Subsidiary A company in which the holding company:
company a) controls the composition of the Board of Directors; or
b) exercises or controls more than one-half of the total share capital either
at its own or together with one or more of its subsidiary companies
A company shall be deemed to be a subsidiary company of holding company
even if there is indirect control through the subsidiary company (ies).
The control over the composition of a subsidiary company’s Board of
Directors means exercise of some power to appoint or remove all or a
majority of the directors of the subsidiary company.

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MAINTENANCE OF BOOKS OF ACCOUNTS (Sec 128 of Companies Act, 2013)

Every company shall prepare and keep at its registered office books of account and other
relevant books and papers and financial statement for every financial year which give a true
and fair view of the state of the affairs of the company, including that of its branch office or
offices, if any, and explain the transactions effected both at the registered office and its
branches and such books shall be kept on accrual basis and according to the double entry
system of accounting.
Provided further that the company may keep such books of account or other relevant papers
in electronic mode in such manner as may be prescribed.

PREPARATION OF FINANCIAL STATEMENTS

Under Section 129 of the Companies Act, 2013, the financial statements shall give a true and
fair view of the state of affairs of the company or companies, comply with the notified
accounting standards and shall be in the form or forms as may be provided for different class
or classes of companies, as prescribed in Schedule III.
The Board of Directors of the company shall lay financial statements at every annual general
meeting of a company which include:-
a) Balance Sheet as at the end of the period, and
b) Profit and Loss Account for that period.
[Note: For a Company not carrying on business for profit, an Income and Expenditure
Account shall be laid at that AGM, instead of the P & L Account.]
c) Cash flow statement for the financial year
d) Statement of changes in equity, if applicable; and
e) Any explanatory note annexed to, or forming part of, any document referred above
Provided that the financial statement, with respect to One Person Company, small company
and dormant company, may not include the cash flow statement.
Requisites of Financial Statements It shall give a true and fair view of the state of affairs of
the company as at the end of the financial year.
Provisions Applicable
(1) Specific Act is Applicable
For instance any
a) Insurance company
b) Banking company or
c) Any company engaged in generation or supply of electricity or
d) Any other class of company for which a Form of balance sheet or Profit and loss
account has been prescribed under the Act governing such class of company
(2) In case of all other companies
Balance Sheet as per Form set out in Part I of Schedule III and Statement of Profit and Loss
as per Part II of Schedule III
Compliance with Accounting Standards
As per Section 129 of the Companies Act, it is mandatory to comply with accounting standards
notified by the Central Government from time to time.
Schedule III of the Companies Act, 2013
As per Section 129 of the Companies Act, 2013, Financial statements shall give a true and fair
view of the state of affairs of the company or companies and comply with the accounting
standards notified under Section133 and shall be in the form or forms as may be provided for
different class or classes of companies in Division I of Schedule III under the Act.

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PART I – BALANCE SHEET

Name of the Company…………………….
Balance Sheet as at ………………………
Figures as at the Figures as at the
Note
PARTICULARS end of current end of previous
No.
Reporting period reporting period
A. EQUITY AND LIABILITIES
1. Shareholder's funds
a Share capital
b Reserves and surplus
c Money received against share warrants

2. Share application money pending allotment

3. Non-Current Liabilities
a Long-term borrowings
b Deferred tax liabilities (Net)
c Other long term liabilities
d Long-term provisions

4. Current Liabilities
a Short-term borrowings
b Trade payables
c Other current liabilities
d Short-term provisions
TOTAL

B. ASSETS
1. Non-Current Assets
a PPE & Intangible Assets
i. Property, Plant & Equipment (PPE)
ii. Intangible assets
iii. Capital work-in-Progress
iv. Intangible assets under development

b Non-current investments
c Deferred tax assets (net)
d Long-term loans and advances
e Other non-current assets

2. Current Assets
a Current investments
b Inventories
c Trade receivables
d Cash and cash equivalents
e Short-term loans and advances
f Other current assets
TOTAL

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PART II – STATEMENT OF PROFIT AND LOSS

Name of the Company…………………….
Profit and loss statement for the year ended ………………………
Figures for Figures for
Note the current the previous
PARTICULARS
No. Reporting reporting
period period
I. Revenue from operations
II. Other income
III. Total Revenue (I + II)
IV. Expenses:
Cost of materials consumed
Purchases of Stock-in-Trade
Changes in inventories of finished goods, work-
in-progress and Stock-in-Trade
Employee benefits expense
Finance costs
Depreciation and amortization expense
Other expenses
Total Expenses
V. Profit before exceptional and extraordinary
items and tax (III-IV)
VI. Exceptional items
VII. Profit before extraordinary items and tax (V - VI)
VIII. Extraordinary Items
IX. Profit before tax (VII- VIII)
X Tax expense:
(1) Current tax
(2) Deferred tax
XI. Profit (Loss) for the period from continuing
operations (VII-VIII)
XII. Profit/(loss) from discontinuing operations
XIII. Tax expense of discontinuing operations
XIV. Profit/(loss) from Discontinuing operations (after
tax) (XII-XIII)
XV Profit (Loss) for the period (XI + XIV)
XVI. Earnings per equity share:
(1) Basic
(2) Diluted

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PRACTICE QUESTIONS
MULTIPLE CHOICE QUESTIONS

1) Which of the following statement is not a feature of a Company?

(a) Separate legal entity
(b) Perpetual Existence
(c) Members have unlimited liability

2) In a Government Company, the holding of the Central Government in paid-up capital should
not be less than
(a) 25%
(b) 50 %
(c) 51%

3) Which of the following statement is true in case of a Foreign Company?

(a) A Company incorporated in India and has place of business outside India.
(b) A Company incorporated outside India and has a place of business in India.
(c) A Company incorporated in India and has a place of business in India.

4) Which of the following statements is not a feature of a private company?

(a) Restricts the rights of members to transfer its shares.
(b) Does not restrict on the number of its members to any limit.
(c) Does not involve participation of public in general.

5) Under Schedule III of the Companies Act, assets and liabilities are to be disclosed based
on:
(a) Current/ non-current.
(b) Financial /non-financial.
(c) Owned /not-owned.
6) Schedule III of the Companies Act prescribes the format and content of
(a) Balance sheet and statement of profit and loss
(b) Auditors’ report.
(c) Directors’ report.

7) A company is required to maintain its books of accounts at

(a) its registered office.
(b) its largest branch office.
(c) Managing Director’s residence.

8) Cash flow statements are not required for

(a) Private company.
(b) One person company.
(c) Public company.

9) The presentation and disclosure requirements of a company are prescribed by

(a) Schedule III.
(b) Schedule II.
(c) Schedule I

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10) Following is an example of current assets

(a) Inventories.
(b) Property, Plant & Equipment.
(c) Intangible Assets.

11) Earnings per share (EPS) is to be disclosed in which of the following section of the financial
statements
(a) Balance Sheet.
(b) Statement of Profit and Loss.
(c) Cash Flow Statements.

12) Following is NOT an example of a company under Companies Act, 2013

(a) Small company.
(b) Private company.
(c) Large company.

ANSWERS MCQs
1. (c) 2. (c) 3. (b) 4. (b) 5. (a) 6. (a) 7. (a)
8. (b) 9.(a) 10.(a) 11.(b) 12. (c)

TRUE / FALSE

State with reasons whether the following statement is true or false:

1) Every public company is a listed company.
2) Shares of a private company are not listed on stock exchange.
3) It is not mandatory to incorporate a company under the companies act.
4) Company is an artificial, legal person created by law.
5) Death, insolvency or change of members affects the existence of a company.
6) If the shares are fully paid-up by the shareholder, he is subject to no further liability.
7) Public limited company has restrictions on transferability of shares.
8) Financial statements of company show the financial position of the business.
9) Schedule I gives proforma of Balance Sheet.
10) Schedule III prescribes the format of Directors’ Report
11) Financial statements need to be true and correct as per Companies Act.
12) According to the Companies Act, 2013, Statement of Profit & Loss of a company is
prepared as per Part II of Schedule III
13) According to the Companies Act, 2013, Balance Sheet of a company is prepared as per
Part II of Schedule III
14) Schedule I gives proforma of Balance Sheet.
15) “Listed company” means a company which has its securities only listed with National
stock exchange.

Solution
1) False: Listed companies are those which are listed on the stock exchange. Shares of
listed companies are open to general public. Every listed company is a public company
but every public company is not a listed company.
2) True: Only the shares of public company are listed on stock exchange. Every listed
company is a public company.

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3) False: It is mandatory to incorporate a company under the Companies Act. Without such
incorporation, a company cannot come into existence.
4) True: Company comes into existence through the operation of law. It is a separate entity
distinct from it’s members.
5) False: Company is a separate legal entity created by law. Death, insolvency or change of
member does not affect it’s existence.
6) True: Liability of shareholders is limited to the extent of the unpaid share capital. So, if
shares are fully paid-up, he is subject to no further liability.
7) False: Shares of public company are freely transferable. Transferability of shares is
restricted in a private limited company.
8) True: Financial statements give a true & fair view of the state of affairs of the company.
Financial statements include profit and loss account, balance sheet, etc.
9) False: Schedule III Part I explains proforma of Balance Sheet.
10) False: Schedule III Part I explains proforma of Balance Sheet and Profit and Loss.
11) False: As per Section 128, every company shall prepare financial statement for every
financial year which give a true and fair view of the state of the affairs of the company.
12) True: According to the Companies Act, 2013, Statement of Profit & Loss of a company is
prepared as per Part II of Schedule III
13) False: According to the Companies Act, 2013, Balance Sheet of a company is prepared as
per Part I of Schedule III
14) False: Schedule III Part I explains form of Balance Sheet.
15) False: As per Companies Act, 2013,"listed company" means a company which has any of
its securities listed on any recognised stock exchange.

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Unit 2: ISSUE, FORFEITURE & REISSUE OF SHARES

“Stop being afraid of what could go wrong and focus on what could go right”

SHARE

Meaning Total capital of the company is divided into a number of small indivisible units
of a fixed amount and each such unit is called a share.
“Share” is the basic unit which the Capital of a Company is divided.
Example: A company with a total Capital of ₹ 1 crore is divided into 1 Lakh units
of ₹ 100 each. Each unit of ₹ 100 is called a Share of the Company.

KINDS OF SHARES RECOGNISED IN THE COMPANIES ACT, 2013

The Share Capital of a Company limited by Shares can only be of two kinds-
1. Equity Share Capital – (a) with Voting rights, or (b) with differential rights as to dividend,
voting or otherwise in accordance with the prescribed Rules
2. Preference Share Capital, i.e. Priority for Dividend at Fixed Rate + Priority for repayment
of Capital.

DIFFERENT TYPES OF PREFERENCE SHARE CAPITAL

1. Cumulative and Non-Cumulative Preference Shares
Cumulative Preference Shares Non-Cumulative Preference shares
a) Dividend is at fixed rate/fixed amount, but Dividend is at a fixed rate/fixed amount,
keeps on accumulating until it is fully paid but does not accumulate for future years.
b) Dividend is payable even out of future If no dividend is declared in a year due to
profits, if current year’s profits are any reason, the right to receive such
insufficient for that purpose. dividend for that year expires
c) Arrears of fixed Cumulative dividend are There is no contingent liability
shown in the Balance sheet as a Contingent
Liability.
Note: Cumulative Preference shareholders will get voting rights if dividend remains in arrear
for not less than 2 years.

2. Redeemable and Irredeemable Preference Shares

Redeemable Preference Shares Irredeemable Preference Shares
a) These are issued on the condition that the These are Preference shares, which are
company will repay the same after a fixed redeemable only at the time of winding up
period or even at company’s discretion. of the company.
This repayment is called Redemption.
b) Companies can issue only this category of No Company limited by shares shall issue
preference shares. Also, the redemption • Irredeemable Preference Shares, or
period shall be a maximum of 20 years. • Preference Shares redeemable after
Exception: Infrastructure Projects the expiry of 20 years from the date of
issue

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3. Participating and Non-Participating Preference Shares

Participating Preference Shares Non-Participating Preference Shares
a) In addition to a fixed dividend, the holders Here, only a fixed rate of dividend is paid
of these Shares have the right to every year, without any additional rights
participate in the surplus profits, if any, in surplus profits.
after the Equity Shareholders have been
dividend at a stipulated rate.
b) In the event of winding-up of the Company, In case of winding-up of the Company, the
the holders have the right to receive a pre- holders of these Shares are not entitled to
determined proportion of surplus, after the any additional rights in the surplus on
Equity Shareholders have been paid off winding-up.
towards their Capital.

4. Convertible and Non-Convertible Preference Shares

Convertible Preference Shares Non-Convertible Preference Shares
a) These Shares give the right to the holder There is no right to the holder, to get his
to get them converted into Equity Shares holding converted into Equity Shares.
at their option, and according to the terms
and conditions of their issue.
Unless otherwise stated, Preference Share are –
(a) Cumulative, (b) Redeemable, (c) Non-Participating, and (d) Non-Convertible.

PREFERENCE SHARES AND EQUITY SHARES

BASIS PREFERENCE SHARES EQUITY SHARES

Definition Shares that carry a Preferential Shares that are not Preference Shares
Right as to payment of (a) Dividend, are called Equity Shares.
and (b) Repayment of Capital.
Return Fixed Rate Based on profits available for
distribution.
Dividend Priority over Equity Dividend, i.e. After Payment of Preference Dividend.
paid first.
Repayment Paid before repayment of Equity Paid after entire Preference Capital is
of Capital Capital. repaid.
Arrears of Generally accumulates unless No accumulation of Unpaid Dividend.
Dividend specifically said to be non- No Profits means no Dividend.
cumulative.
Redemption Redeemable as per terms of issue Not Redeemable till winding-up. Even
and provisions of Act. in winding-up, will be repaid after
Preference Shares.
Voting Generally restricted. Carries right Unrestricted, i.e. Holders can vote at
Rights to vote on all matters if dividend any matters at any Meeting, or the
remains unpaid for the prescribed Shares may be issued with varying
period. voting rights.
Control/ No right to take part in Equity Shareholders are the real
Management Management. owners, hence have a right to control
the Management of Company.

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DIFFERENT TYPES OF SHARE CAPITAL

ITEM EXPLANATION
• It is the amount of Share Capital which can be raised by the Company.
• The Authorised Share Capital is also known as the “Registered Capital” or
Authorised “Nominal Capital” and is given in the Memorandum of Association.
Share • Authorised Capital is shown in the Balance Sheet at Nominal Value (Face
Capital Value).
• Example: Authorised Capital=10,000 Shares of ₹ 100 each, Total=₹ 10,00,000
• It represents that part of Authorised Share Capital which has been given
or issued or offered to Shareholders.
• Issued Capital includes Shares issued for- (i) Cash, and (ii) Consideration
other than cash, to Promoters and Others.
Issued • Issued Share Capital is shown in the Balance Sheet at Nominal Value (Face
Share Value).
Capital • Example: Issued Capital= 9,000 Shares of ₹ 100, each, Total= ₹ 9,00,000 .
Note: The remaining portion of Authorised Capital, which is not issued for
cash or other consideration is called as Unissued Capital. It is not shown in
the Balance Sheet.
• Subscribed Capital is the part of Issued Capital which has been subscribed
(i.e. applied for) by the public/ Shareholders, and allotted by the Company.
Subscribed • Example: Out of 9,000 Shares issued; 8,500 Shares are subscribed by
Share public.
Capital Note: The remaining portion of Issued Capital, which is not subscribed, is not
shown in the Balance Sheet.
• Companies generally receive the Issue Price of Shares in installments, e.g.
Application stage, Allotment stage, First Call, Second Call, etc.
• The portion of the Face Value of Shares which a Company has demanded
Called up or called from Shareholders is known as “Called-Up Capital”.
Share • The Balance portion which the Company has decided to call / demand in
capital future is called as Uncalled Capital.
• Example: Out of ₹ 100 per Share, the Company has called up ₹ 70 per
Share. In such case, the Uncalled Capital is ₹ 30 per Share.
• It is that portion of called up capital which has been actually paid by
shareholders.
Paid-Up • The unpaid portion is called “Unpaid Calls” or “Calls in Arrears”.
Capital • So, Paid Up Capital = Called Up Capital Less Call in Arrears.
• Example: If out of ₹ 70 per Share Called up, only ₹ 60 has been paid by
some shareholders, remaining ₹ 10 per Share constitutes Calls in Arrears.
• Company may decide by passing a resolution, that a certain portion of its
Subscribed Uncalled Capital shall be called up only in the event of winding-
up / liquidation of the Company.
Reserve
• That portion is called Reserve Capital. It is not shown in the Balance Sheet.
Capital
• Reserve Capital is different from Capital reserve, Capital reserves (created
out of capital profits) are part of ‘Reserves and Surplus’ and refer to those
reserves which are not available for declaration of dividend.

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DISCLOSURE REQUIREMENTS – SHARE CAPITAL OF A COMPANY

Share Capital should be disclosed in a Company's Balance Sheet as under:

Particulars Amount
Authorised: …. …. Shares of ₹ ... each
Issued:… ... Shares of ₹ ... each
Subscribed: …...... Shares of ₹ .. each
(Various classes of capital should be distinguished while stating the above
particulars)
Called up & Paid Up: … … Shares of ₹ ... each
[ of the above Shares …. Shares are allotted as fully paid up for consideration
other than cash, Shares are allotted as fully paid up by way of Bonus Shares]
Less: Call unpaid:
Add: Forfeited Shares (amount originally paid up)

PROCEDURE FOR ISSUE OF ISSUE OF SHARES FOR CASH

(a)Public Company shall issue a Prospectus, i.e. invitation to general public, to subscribe for
Shares.
(b)Prospectus shall comply with the provisions of Companies Act, and SEBI Guidelines.
(c) Private Companies do not issue Prospectus. They depend upon "Private Placement" of Shares.

(a)On the basis of Prospectus, Applications are deposited in a Scheduled Bank by the interested
parties along with the amount payable at the time of application.
(b)Minimum Application Money is as specified in the Companies Act and as per SEBI Guidelines.
[Note: Companies Act is applicable for all Companies, while SEBI Guidelines is applicable only
for Listed Companies.]

(a)After the last date for filing applications (i.e. Closing Date), the Company decides about
Allotment of Shares in consultation with SEBI and Stock Exchange concerned.
(b)Allotment is the acceptance of a Company to give Shares to the Investor in response to an
offer for purchase of Shares made by him for a consideration. Allotment can be done only when
Minimum Subscription has been received by the Company.
(c)Successful Applicants become Shareholders of the Company and are required to pay the next
installment which is known as "Allotment Money". Unsuccessful Applicants get back their
money.

(a)In case of delay in refunding the excess money, the Company is liable to pay interest on the
amount of refund. The Company calls up the balance amount from the Shareholders, called
"Calls".
(b)Call refers to the demand for Share Money other than those by way of application and
allotment.
(c) The issue price of shares is generally received by the company in instalments and these are
known as:
First instalment: - Application Money Second Instalment: - Allotment Money
Third Instalment: - First Call Money Fourth Instalment: - Second Call Money and so on.
Last Instalment: - Final Call Money

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PROVISIONS RELATING TO MINIMUM SUBSCRIPTION

1. Meaning: Minimum Subscription is the minimum amount stated in the Prospectus, which
must be raised by the issue of Share Capital to start with.
2. If the Company does not receive the Minimum Subscription of 90% of the issue, the entire
subscription shall be refunded to the applicants within prescribed time period (15 days of
closure of issue in case of non-underwritten issue & 70 days in case of underwritten issue)
3. As per Section 39 of the Companies Act 2013, application money must be atleast 5% of the
face value of shares. However, as per SEBI Regulations, minimum application money shall
not be less than 25% of the issue price.
4. According to Section 24 of the Companies Act, 2013 matters related to issue and transfer
of securities will be administered by the SEBI and not by the Company Law Board.

ISSUE OF SHARES AT PREMIUM (SEC. 52)

1. Meaning: Premium refers to the excess of the Share Issue Price over its Face Value / Par
Value. A Company can issue Shares at a premium, i.e. at a price above its Face Value.
Example: If Share of Face Value ₹ 100 is issued at price of ₹ 120, there is premium of ₹ 20
2. Cash or Kind: Shares can be issued at a premium which may be received in Cash or in Kind.
Sec.52 of the Act uses the words "at a premium, whether for cash or otherwise".
3. Securities Premium Account: The aggregate amount / value of the premiums received
should be transferred to Securities Premium Account.
4. Application of Securities Premium: Securities Premium Account can be used only for —
(a) Issuing Fully Paid Bonus Shares to Members.
(b) Writing—off the Preliminary Expenses of the Company.
(c) Writing off the — (i) Expenses Incurred, or (ii) Commission Paid, or (iii) Discount
Allowed, on the Issue of Securities or Debentures of the Company.
(d) Providing for the premium payable on redemption of Redeemable Preference Shares
or Debentures of the Company.
(e) For the purchase of own shares or other securities.

Page 11B.5
 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

Note: Certain class of Companies as prescribed u/s 133 of Companies Act, 2013, whose
financial statements comply with Accounting Standards prescribed for them, can’t apply for
(b) and (d) above.
5. Accounting Treatment:
(a) The amount of Premium is generally called with the amount due on allotment,
sometimes with the Application Money and rarely with the Call Money.
(b) The Premium Amount is credited to the "Securities Premium Account". This Account is
shown on the Liabilities Side of the Company's Balance Sheet under the heading
"Reserves and Surplus".

PROVISIONS REGARDING THE ISSUE OF SHARES AT DISCOUNT (SEC. 53)

According to Section 53 of the Companies Act, 2013, a Company cannot issue shares at a
discount except in case of issue of sweat equity shares (issued to employees and directors).
Thus, any issue of shares at discount shall be void.

JOURNAL ENTRIES RELATING TO ISSUE OF SHARES

TRANSACTION JOURNAL ENTRY

Receipt of Bank A/c (Amount actually received) Dr.
1. Application To Share Application A/c (Amount actually received)
Money
Share Application A/c Dr.
Full/Under To Share Capital A/c [Shares allotted x Application Money]
2a. To Securities Premium A/c* (Share allotted x Premium / share)
Subscription
*(If Premium Amount is collected at the time of Application itself)
Share Application A/c Dr. (Amount received)
To Share Capital A/c [Shares allotted x Application Money]
To Securities Premium A/c* (Share allotted x Premium /share)
Over To Share Allotment A/c (Adjusted with Allotment)
2b.
subscription To Share Calls -in -Advance A/c (Adjusted with Calls)
To Bank A/c (Refund)
*(If Premium Amount is collected at the time of Application itself)
Share Allotment A/c Dr.
Allotment To Share Capital A/c [Shares allotted x Allotment money due]
3. To Securities Premium A/c* (Share allotted x Premium / share)
money due
*(If the Premium Amount is at the time of Allotment)

Receipt of Bank A/c (Amount received) Dr.

4. To Share Allotment A/c
Allotment
Call Money Share ... (First or Second or Final)... Call A/c Dr.
5. To Share Capital A/c [Shares allotted x Call Money due]
due
Receipt of Bank A/c (Amount received) Dr.
6. To Share ...... Call A/c
Call
Note: If question specifically asks preparation of Cash Book, then all the entries relating to
Cash/Bank Account are not passed in journal and to be shown in Cash Book only.

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 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

CALLS IN ARREARS

1. Meaning: Calls in Arrears is the money remaining unpaid by the shareholder on the calls
raised by the Company in respect of the shares held by him.
2. Disclosure: Calls in Arrears always have a Debit Balance and are shown as a deduction
from called up capital to arrive at paid up value of the Share Capital on Liabilities Side of
the Balance Sheet.
3. Interest: The Company can recover interest on the amount of calls in arrears from the date
it became due till the when the call is received at the rate of 10% p.a. (Table F).
4. Waiver of Interest: The Directors may also be empowered to waive the Interest on Calls in
Arrears, subject to certain conditions laid down in the Articles.

CALLS IN ADVANCE

1. Meaning: Calls in Advance is the surplus money received by Company from the allottees,
i.e. its Shareholders.
2. Calls in Advance: A Company, if permitted by its Articles, may accept from members either
whole or part of amount remaining unpaid on any shares held by him as Calls in Advance.
3. No Voting Rights: The Member shall not be entitled to any voting rights on Calls in Advance,
until the same becomes presently payable and duly appropriated. Shareholders are not
entitled for any dividend on calls in advance.
4. Disclosure: Calls in Advance will always have Credit Balance and will be shown under the
Liabilities Side (Other Current Liabilities). It is not added to the amount of Paid -Up Capital.
5. Interest: The Company is liable to pay interest on the amount of Calls in Advance from the
date of receipt till the when the Call is due for payment, at the rate of 12% p.a. (Table F)

JOURNAL ENTRIES
CALLS IN ARREARS
1. Transfer of non - Calls in Arrears A/c Dr.
receipt of Share To Share Allotment / Share ...... Call A/c
Allotment/ Call (This Journal Entry is optional. The amount may also be left in
Money the Share Allotment/Share …..Calls A/c)
2. Receipt of Calls in Bank A/c Dr.
Arrears To Calls in Arrears A/c
(If this account was opened)
3. Interest on Calls in Shareholders' A/c Dr.
Arrears To Interest on Calls in Arrears A/c
4. Receipt of Interest Bank A/c Dr.
on Calls in Arrears To Shareholders' A/c
CALLS IN ADVANCE
1. Receipt of Calls in Bank A/c Dr.
Advance To Calls in Advance A/c
2. Adjusting Calls in Calls in Advance A/c Dr.
Advance To Particular Call A/c
3. Interest on Calls in Interest on Calls in Advance A/c Dr.
Advance To Shareholders' A/c
4. Payment of Interest Shareholders' A/c Dr.
on Calls in Advance To Bank A/c

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 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

OVER SUBSCRIPTION & PRO RATA ALLOTMENT

Over subscription is the application money received for more than the number of shares
offered to the public by a company. It usually occurs in the case of good issues and depends
on many other factors like investors’ confidence in the company, general economic conditions,
pricing of the issue etc.
Under pro-rata allotment, the excess application money received is adjusted against the
amount due on allotment or calls. Surplus money after making adjustment against future
calls is returned to the applicants.
For example:
A company offers to the public 1,00,000 shares for subscription. The company receives
applications for 1,20,000 shares. If the shares are to be allotted on pro-rata basis, applicants
for 1,20,000 shares are to be allotted 1,00,000 shares, i.e., on the 1,20,000:1,00,000 or 6:5 ratio.
Any applicant who has applied for 6 shares will be allotted 5 shares.
JOURNAL ENTRIES
TRANSACTION JOURNAL ENTRY
Receipt of Bank A/c (Amount actually received) Dr.
1. Application To Share Application A/c (Amount actually received)
Money
Share Application A/c Dr. (Amount received)
To Share Capital A/c [Shares allotted x Application Money]
To Securities Premium A/c* (Share allotted x Premium /share)
2 Oversubscription To Share Allotment A/c (Adjusted with Allotment)
To Share Calls in Advance A/c (Adjusted with Calls)
To Bank A/c (Refund)
*(If Premium Amount is collected at time of Application itself)

FORFEITURE OF SHARES

1. Meaning: Forfeit = Taking away of property, on breach (non fulfilment) of a condition.

Forfeiture of Shares refers to the action taken by the Company, to cancel the Shares.
2. Situation: When Shareholders fail to pay Allotment or Call Money due, the Directors may
forfeit the Shares in the bonafide interests of Company & in accordance with the Articles
of Association. Proper Notice should be sent to defaulting Shareholder before forfeiture.
3. Effect: When Shares are forfeited, the title of such Shareholder is extinguished, but amount
paid by him till such forfeiture, is not refunded to him. The Shareholder has no further claim
on the Company. The amount received is transferred to "Shares Forfeited A/c".
4. Treatment: Till Forfeited Shares are re -issued, the amount is shown as an addition to Share
Capital, on the Liabilities Side of the Balance Sheet.
Note: - Forfeiture for non-payment of calls, premium, or the unpaid portion of the face value
of the shares is one of the many causes for which a share may be forfeited. But fully paid-up
shares may be forfeited for realization of debts of the shareholder if the Articles specially
provide it.

RE-ISSUE OF FORFEITED SHARES

Shares forfeited is reissued by the Company, subject to the following considerations -
1. Sale, not Allotment: Reissue of Forfeited Shares is not an allotment, it is only a Sale. So,
the Company need not file a Return of Allotment with the Registrar of Companies.

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CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

2. Auction Sale: After forfeiture, the Forfeited Shares vest in the Company in the Company,
for the purpose of sale. The Company is under an obligation to dispose it off, generally by
auction.
3. Price: Forfeited Shares can be reissued at any price, such that the total amount received
(from Original Allottee and Subsequent Purchaser) for these Shares is not less than the
amount in arrears on those Shares.
4. Loss on Reissue: Loss on Reissue shall be debited to "Forfeited Shares" A/c. Condition for
Reissue: Loss on Reissue of Forfeited Shares should not exceed the Forfeited Amount, i.e.
amount paid by Original Allottee, excluding premium, if any.)
5. Surplus: Surplus arising on Reissue of Forfeited Shares (i.e. Forfeited Amount > Loss on
Reissue), should be transferred to Capital Reserve A/c. In case only portion of Shares are
reissue, amount of profit attributable to such Re-issued Shares should only be transferred
to Capital Reserve A/c.
6. Reissue at Premium: When Forfeited Shares are reissued at a price higher than its Face
Value, the excess amount should be credited to Securities Premium A/c.

JOURNAL ENTRIES
TRANSACTION JOURNAL ENTRY
FORFEITURE OF SHARES
Share Capital A/c (to the extent called) Dr.
Forfeiture of To Shares Forfeited A/c (to the extent amount received)
1. Shares Issued To Calls in Arrears (to the extent amount called up & unpaid)
at Par (or alternatively Share Allotment A/c or Share ...... Call A/c)

Forfeiture of Share Capital A/c (to the extent called - excluding Premium) Dr.
Shares Issued To Shares Forfeited A/c (to the extent amount received)
2. at Premium - To Calls in Arrears (to the extent amount called up & unpaid)
premium fully (or alternatively Share Allotment A/c or Share ...... Call A/c)
collected
Share Capital A/c (to the extent called excluding Premium) Dr.
Forfeiture of
Securities Premium A/c (Premium amount on Shares forfeited) Dr.
Shares Issued
To Shares Forfeited A/c (to the extent amount received)
3. at Premium -
To Calls in Arrears (to the extent amount called up and unpaid
premium not
(or alternatively Share Allotment A/c or Share ...... Call A/c)
fully collected
Note: When Shares are originally issued at a Premium, and the Premium has been
collected in full, the Securities Premium A/c should not be reversed.

RE -ISSUE OF SHARES FORFEITED

Bank A/c (Shares Reissued x Reissue Price) Dr.
Re -issue of Shares Forfeited A/c (to the extent discount given) Dr.
1.
Forfeited Shares To Share Capital A/c (Shares Reissued x Paid up Value)

Transfer of Shares Forfeited A/c Dr.

Share Forfeited To Capital Reserve A/c
2. A/c Balance on
Reissued
Shares

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 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

SHARES ISSUED FOR CONSIDERATION OTHER THAN CASH

1. Meaning: A Company can issue shares for valuable Consideration other than Cash. Shares
may be issued to (a) Vendors towards payment of Purchase Consideration, (b) Promoters
towards reimbursement of Preliminary Expenses incurred by them for incorporation, (c)
Underwriters towards payment of Underwriting Commission, etc.
2. Disclosure: Shares issued for Consideration other than Cash shall be separately disclosed
in the Balance Sheet of Company, as required by Part I of Schedule III.
Within specified time of allotment, the company must produce before the Registrar a
written contract of sale of service in respect of which shares have been allotted.

JOURNAL ENTRIES
1. Recording Machinery / Assets A/c (in case of assets purchased) Dr.
Purchase of To Liabilities A/c
Machinery, Assets To Vendor's A/c
etc. (Difference if any to be tfd. to Goodwill/Capital Reserve A/c)
2. Allotment of Vendor's A/c Dr.
Shares to the To Share Capital (Nominal Value of Shares issued)
Vendor To Securities Premium (if issued at Premium)

A.
Example:
X Ltd. purchased Machinery from Y Ltd. ₹ 2,20,000. Shares Issued (Face Value ₹10 each)
a) At Par
b) At 10% Premium

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CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

B1.
Example:
X Ltd. purchased business of Y Ltd. which includes Assets ₹ 5,00,000 & Liabilities ₹ 1,40,000.
Shares Issued (Face Value ₹10 each)
a) At Par
b) At 20% Premium

B2.
Example:
X Ltd. purchased business of Y Ltd. for ₹ 3,90,000 which includes Assets ₹ 5,00,000 &
Liabilities ₹ 1,40,000.
Shares Issued (Face Value ₹10 each)
a) At Par
b) At 30% Premium

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 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

ASSIGNMENT QUESTIONS
Question 1 Pg no._____
A company invited applications for 20,000 equity shares of ₹50 each at 10 premium payable
on application ₹20, on Allotment ₹ 30 (including 10 premium), on first and final call ₹ 10.
Applications are received for 20,000 shares and all the applicants are allotted the number of
shares they have applied for and installment money was duly received by the company.
Case 1: Show Journal entries in the books of the company.
Case 2: Prepare cash book & journalise remaining transactions in the books of the company.

Question 2 (RTP Nov 2018) / (RTP Nov 2019) / (RTP Nov 2021) (Similar) Pg no._____
On 1st April, 2020, Pehal Ltd. issued 64,500 shares of ₹ 100 each payable as follows:
₹ 30 on application, ₹ 30 on allotment, ₹ 20 on 1st October, 2020; & ₹ 20 on 1st February, 2021.
By 20th May, 60,000 shares were applied for and all applications were accepted. Allotment
was made on 1st June. All sums due on allotment were received on 15th July; those on 1st call
were received on 20th October.
You are required to prepare the Journal entries to record the transactions when accounts
were closed on 31st March, 2021.

Question 3 (ICAI Study Material) / (RTP May 2018) / (RTP May 2021) (Similar) Pg no._____
Rashmi Limited issued at par 1,00,000 Equity shares of ₹ 10 each payable ₹ 2.50 on application;
₹ 3 on allotment; ₹ 2 on first call and balance on the final call. All the shares were fully
subscribed. Mr. Nair who held 10,000 shares paid full remaining amount on first call itself.
The final call which was made after 3 months from first call was fully paid except a
shareholder having 1,000 shares who paid his due amount after 2 months along with interest
on calls in arrears. Company also paid interest on calls in advance to Mr. Nair. Give journal
entries to record these transactions.

Question 4 (RTP May 2019) / (RTP Nov 2020) / (RTP Nov 2023) (Similar) Pg no._____
Konica Limited registered with an authorised equity capital of ₹ 2,00,000 divided into 2,000
shares of ₹ 100 each, issued for subscription of 1,000 shares payable at ₹ 25 per share on
application, ₹ 30 per share on allotment, ₹ 20 per share on first call and the balance as and
when required. Application money on 1,000 shares was duly received and allotment was made
to them. The allotment amount was received in full, but when the first call was made, one
shareholder failed to pay the amount on 100 shares held by him and another shareholder with
50 shares, paid the entire amount on his shares. The company did not make any other call.
Give the necessary journal entries in the books of the company to record these transactions.

Question 5 (ICAI Study Material) Pg no._____

Pant Ltd. invited applications for 50,000 equity shares at ₹50 each, which are payable as on
application ₹20, on allotment ₹10 and on first and final call ₹20. The company received
applications for 60,000 shares. The directors accepted application for 50,000 shares and
rejected the rest. Show Journal entries if company refunded the application money to rejected
applicants and allotment money was received for 45,000 shares.

Question 6 (ICAI Study Material) Pg no._____

A company had an authorised capital of ₹10,00,000 divided into 1,00,000 equity shares of ₹10
each. It decided to issue 60,000 shares for subscription and received applications for 70,000
shares. It allotted 60,000 shares and rejected remaining applications. Upto 31-3-2023, it has

Page 11B.12
 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

demanded or called ₹9 per share. All shareholders have duly paid the amount called, except
one shareholder, holding 5,000 shares who has paid only ₹7 per share. Prepare a balance
sheet assuming there are no other details.

Question 7 (ICAI Study Material) Pg no._____

JHP Limited is a company with an authorised share capital of ₹1,00,00,000 in equity shares of
₹10 each, of which 6,00,000 shares had been issued and fully paid on 30th June, 2022. The
company proposed to make a further issue of 1,00,000 of these ₹10 shares at a price of ₹14
each, the arrangements for payment being:
a) ₹ 2 per share payable on application, to be received by 1st July, 2022;
b) Allotment to be made on 10th July, 2022 and a further ₹ 5 per share (including the premium)
to be payable;
c) The final call for the balance to be made, and the money received by 30th April, 2023.
Applications were received for 3,55,000 shares and were dealt with as follows:
(i) Applicants for 5,000 shares received allotment in full;
(ii) Applicants for 30,000 shares received an allotment of one share for every two applied
for; no money was returned to these applicants, the surplus on application being used to
reduce the amount due on allotment;
(iii) Applicants for 3,20,000 shares received an allotment of one share for every four applied
for; the money due on allotment was retained by the company, the excess being returned
to applicants; and
(iv) the money due on final call was received on the due date.
You are required to record these transactions (including cash items) in the Journal of JHP
Limited.

Question 8 Pg no._____
Pass Journal Entries in the following situations (each situation is independent of the other) –
1. 300 Equity Shares of ₹ 10 each, originally issued at par, fully called -up, forfeited for non-
payment of Final Call of ₹ 4 each. These were re -issued as fully paid at ₹ 5 per Share.
2. 200 Equity Shares of ₹ 10 each, originally issued at par, ₹ 8 called up, forfeited for non-
payment of First Call of ₹ 2 each. 150 shares were reissued at ₹ 5 per Share, ₹ 8 called up.
3. 300 Equity Shares of ₹ 10 each, originally issued at 30% premium. ₹ 8 called -up, forfeited
for non-payment of First Call of ₹ 2 each. The Shareholder had already paid application and
allotment money incl. premium. Subsequently 100 Shares out of these Forfeited Shares
were re -issued at ₹ 6 per Share, as fully paid up.
4. 300 Equity Shares of ₹ 10 each, originally issued at 30% premium. ₹ 8 called up, forfeited
for non-payment of 1st Call of ₹ 3 each and ₹ 5 on allotment (including premium).
The Shareholder had paid application money ₹ 3 per Share. Later, 200 Shares out of these
Forfeited Shares were re -issued at ₹ 12 per share, fully paid -up.
5. 360 shares forfeited of ₹ 10 each, ₹ 8 called-up, issued at a premium of ₹ 2 per share to
Rakesh for non-payment of allotment money of ₹ 5 per share (including premium). Out of
these, 320 shares were re-issued to Rohit at ₹ 8 for ₹ 10 per share fully paid up.

Question 9 (RTP May 2022) Pg no._____

Delta Ltd. forfeited 600 shares of ₹ 10 each issued at a premium of 10% to W for nonpayment
of first and final call money of ₹ 3 (including ₹ 1 premium). At different intervals of time out
of these 400 shares were re-issued to Z, credited as fully paid for ₹ 9 per share and 100
shares were re-issued to X as ₹ 10 paid up for ₹ 11 per share.
Record the journal entries for forfeiture and reissue of shares.

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 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

Question 10 (ICAI Study Material) Pg no._____

Beautiful Co. Ltd issued 30,000 equity shares of ₹10 each payable as ₹3 per share on
Application, ₹5 per share (including ₹2 as premium) on Allotment and ₹4 per share on Call.
All the shares were subscribed. Money due on all shares was fully received except from Ram,
holding 500 shares, who failed to pay the Allotment and Call money and Shyam, holding 1,000
shares, who failed to pay the Call Money. All those 1,500 shares were forfeited. Of the shares
forfeited, 1,250 shares (including whole of Ram’s shares) were subsequently re-issued to
Jadu as fully paid up at a discount of ₹ 2 per share.
Pass the necessary entries in the Journal of the company to record the forfeiture and re-
issue of the share. Also prepare the Balance Sheet of the company.

Question 11 (ICAI Study Material) Pg no._____

Mr. Shami has applied for 1,000 shares of Company XYZ Ltd. paying application money @ ₹ 2
per share but has been allotted only 600 shares. The shares have a face value of ₹10 and a
premium of ₹ 2 per share, which are payable as: on Allotment- ₹ 5 (including premium) and
on final call ₹ 5.
Pass journal entry if Mr. Shami doesn't pay allotment money and final call and his shares are
forfeited.

Question 12 (ICAI Study Material) Pg no._____

X Co. Ltd. was incorporated with an authorized share capital of 90,000 equity shares of ₹ 10
each. The company purchased land and buildings from Y Co. Ltd for ₹ 4,00,000 payable in fully
paid-up shares of the company. The balance of the shares were issued to the public, which
were fully subscribed and paid for.
You are required to pass Journal Entries and to prepare the Balance Sheet.

Question 13 Pg no._____
Calculate the Dividend amount
Called up Capital ₹ 10,00,000 Calls in Arrears ₹ 10,000
Calls in Advance ₹ 50,000 Dividend rate 10%

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 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

PRACTICE QUESTIONS

MULTIPLE CHOICE QUESTIONS

1) The excess price received over the par value of shares, should be credited to __________.
(a) Calls-in-advance account
(b) Share capital account
(c) Securities premium account

2) The Securities Premium amount may be utilized by a company for __________.

(a) Writing off any loss on sale of fixed asset
(b) Writing off any loss of revenue nature
(c) Writing off the expenses/discount on the issue of debentures

3) When shares are forfeited, the share capital account is debited with ________ and the share
forfeiture account is credited with __________.
(a) Paid-up capital of shares forfeited; Called up capital of shares forfeited
(b) Called up capital of shares forfeited; Calls in arrear of shares forfeited
(c) Called up capital of shares forfeited; Amount received on shares forfeited

4) T Ltd. proposed to issue 6,000 equity shares of ₹100 each at a premium of 40%. The
minimum amount of application money to be collected per share as per the Companies
Act, 2013
(a) ₹5.00
(b) ₹6.00
(c) ₹7.00

5) Dividends are usually paid as a percentage of ______.

(a) Authorized share capital
(b) Net profit
(c) Paid-up capital

6) As per the SEBI guidelines, on issue of shares, the application money should not be less
than
(a) 2.5% of the nominal value of shares
(b) 2.5% of the issue price of shares
(c) 25.0% of the issue price of shares

7) G Ltd. acquired assets worth ₹7,50,000 from H Ltd. by issue of shares of ₹100 at a premium
of 25%. The number of shares to be issued by G Ltd. to settle purchase consideration = ?
(a) 6,000 shares
(b) 7,500 shares
(c) 9,375 shares

8) Securities Premium is presented as a part of

(a) Reserves & Surplus
(b) Share Capital
(c) Liabilities

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 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

9) Schedule III of Companies Act 2013 prescribes the format for

(a) Financial statements
(b) Directors’ Report
(c) Auditors' Report

10) Dividend on _____________ shares have to be paid before dividend on ___________shares.

(a) Equity, Preference
(b) Preference, Equity
(c) Convertible, Non-Cumulative

11) Preference shares are ______________ unless expressly stated otherwise.

(a) Non-participating
(b) Convertible
(c) Interest-bearing

ANSWERS MCQs
1. (c) 2. (c) 3. (c) 4. (a) 5. (c) 6. (c) 7. (a)
8. (a) 9.(a) 10.(b) 11.(a)

TRUE / FALSE

State with reasons whether the following statement is true or false:

1) Liability of a holder of shares is limited to the face value of shares acquired by them.
2) Authorised capital appears in the balance sheet at face value.
3) The rate of dividend on preference shares may vary from year to year.
4) A company may issue shares at a discount to the public in general.
5) Sweat equity shares are those which are issued to employees & directors at a discount.
6) As per Table F, rate of interest on calls in arrears is 12%.
7) As per Table F, rate of interest on calls in advance is 10%.
8) Non-participating preference shareholders enjoy voting rights. (Dec 2021)
9) Forfeited shares are available to the company for the purpose of resale.
10) Loss on reissue should exceed the forfeited amount.
11) When shares are forfeited, the share capital account is debited with called up capital of
shares forfeited and the share forfeiture account is credited with calls in arrear of shares
forfeited.
12) The amount of calls in arrear is deducted from paid up capital to arrive at Called up capital.
13) Dividends are usually paid as a percentage of Authorized share capital.
14) A company cannot issue redeemable preference shares for a period exceeding 10 years
15) Re-issue of forfeited shares is allotment of shares but not a sale. (May 2018)/(Jan 2021)
16) Since company has existence independent of its members, it continues to be in existence
despite the death, insolvency or change of members. (Nov 2019)
17) In the balance sheet of X Limited, preliminary expenses amounting to ₹ 5 lakhs and
securities premium account of ₹ 35 lakhs are appearing; The accountant can use the
balance in securities premium account to write off preliminary expenses. (Nov 2020)
18) A Company is not allowed to issue shares at a discount to the public in general.(July 2021)
19) A person holding preference shares of a company cannot hold equity shares of the same
company. (July 2021)
20) Interest on calls in arrears is payable by company to shareholders.

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CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

Solution
1) False: Liability of the holder of shares is limited to the issue price of shares acquired by
them.
2) True: Authorised capital is the amount of capital mentioned in ‘capital clause’ of the
‘Memorandum of Association’. Authorised capital is considered only as presentation and
not considered in total of balance sheet.
3) False: Rate of preference dividend is always fixed.
4) False: According to Section 53 of the Companies Act, 2013, a Company cannot issue shares
at a discount except in the case of issue of sweat equity shares (issued to employees and
directors). Thus any issue of shares at discount shall be void.
5) True: According to Section 53 of the Companies Act, 2013, a Company cannot issue shares
at a discount except in the case of issue of sweat equity shares (issued to employees and
directors).
6) False: As per table F, rate of interest on calls in arrears is 10%.
7) False: As per Table F, rate of interest on calls in advance is 12%.
8) False: A share on which only a fixed rate of dividend is paid every year, without any
accompanying additional rights in profits and in the surplus on winding-up, is called 'Non-
participating Preference Shares. Non-participating preference shareholders do not enjoy
voting rights.
9) True: Reissue of forfeited shares is not allotment of shares but only a sale.
10) False: Loss on re-issue should not exceed the forfeited amount.
11) False: When shares are forfeited, the share capital account is debited with called up
capital of shares forfeited, and the share forfeiture account is credited with amount
received towards nominal value on shares forfeited.
12) False: The amount of calls in arrear is deducted from Called up capital to arrive at Paid
up capital.
13) False: Dividends are usually paid as a percentage of Paid up share capital
14) False: A company cannot issue redeemable preference shares for a period exceeding 20
years
15) False: A forfeited share is merely a share available to the company for sale and remains
vested in the company for that purpose only. Reissue of forfeited shares is not allotment
of shares but only a sale as they have already been allotted earlier.
16) True: Company has existence independent of its members. The Company goes on forever
and continues to exist, till it is wound up and dissolved. As per Perpetual Existence
company has existence independent of its members, it continues to be in existence
despite the death, insolvency or change of members.
17) True: According to Section 52 of the Companies Act, 2013, Securities Premium Account
may be used by the company to write off preliminary expenses of the company. Thus, the
accountant can use the balance in securities premium account to write off the preliminary
expenses amounting ₹ 5 lakhs.
18) True: According to Section 53 of the Companies Act, 2013, a Company cannot issue shares
at a discount except in the case of issue of sweat equity shares (issued to employees and
directors).
19) False: Preference share holder can hold both Equity shares and Preference shares of the
company. Any person can hold both kinds of shares.
20) False: Interest on calls in arrears is payable by shareholders to company

Page 11B.17
 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

HOMEWORK QUESTIONS

Question 1 (ICAI Study Material) Pg no._____

A company invited applications for 10,000 equity shares of ₹50 each payable on application
₹15, on Allotment ₹ 20, on first and final call ₹15. Applications are received for 10,000 shares
and all the applicants are allotted the number of shares they have applied for and installment
money was duly received by the company. Show Journal entries in the books of the company.

Question 2 (ICAI Study Material) / (RTP May 2022) (Similar) Pg no._____

On 1st April, 2022, A Ltd. issued 43,000 shares of ₹ 100 each payable as follows:
₹ 20 on application; ₹ 30 on allotment;
₹ 25 on 1st October, 2022; and ₹ 25 on 1st February, 2023.
By 20th May, 40,000 shares were applied for & all applications were accepted. Allotment was
made on 1st June. All sums due on allotment were received on 15th July; those on 1st call were
received on 20th October. Journalize transactions when accounts were closed on 31st Mar,2023

Question 3 (ICAI Study Material) Pg no._____

On 1st October, 2023 Pioneer Equipment Limited received applications for 2,50,000 Equity
Shares of ₹ 100 each to be issued at a premium of 25 per cent payable as:
On Application ₹ 25 On Allotment ₹75 (including premium)
Balance Amount on Shares as and when required.
The shares were allotted by the Company on October 20, 2023 and the allotment money was
duly received on October 31, 2023. Record journal entries in the books of the company to
record the transactions in connection with the issue of shares.

Question 4 (ICAI Study Material) Pg no._____

The Delhi Artware Ltd. issued 50,000 equity shares of ₹ 100 each and 1,00,000 preference
shares of ₹ 100 each. The Share Capital was to be collected as under:
Equity Shares Preference Shares
On Application 25 20
On Allotment 20 30
First Call 30 20
Final Call 25 30
All these shares were subscribed. Final call was received on 42,000 equity shares and 88,000
preference shares. Prepare the cash book and journalise the remaining transactions in the
books of the company.

Question 5 (ICAI Study Material) Pg no._____

Shreyas Ltd. did not receive the first call on 10,000 equity shares @ ₹ 3 per share which was
due on 1.7.2022. This amount was received on 1.4.2023. Open Calls in arrears account and
journalise the entries in the books of the company on 1.7.2022 and 1.4.2023.

Question 6 (ICAI Study Material) Pg no._____

X Ltd. invited applications for 10 lakhs shares of ₹ 100 each payable as follows:
₹
On Application 20
On Allotment (on 1st May, 2022) 30
On First Call (on 1st Oct., 2022) 30
On Final Call (on 1st Feb., 2023) 20

Page 11B.18
 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

All the shares were applied for and allotted. A shareholder holding 20,000 shares paid the
whole of the amount due along with allotment. Journalise the transactions, assuming all sums
due were received. Interest was paid to the shareholder concerned on 1st February, 2023

Question 7 (ICAI Study Material) Pg no._____

A limited Company, with an authorized capital of ₹ 20,00,000 divided into shares of ₹ 100 each,
issued for subscription 10,000 shares payable at ₹ 25 per share on application, ₹ 30 per share
on allotment, ₹20 per share on first call three months after allotment and the balance as and
when required.
The subscription list closed on January 31, 2023 when application money on 10,000 shares
was duly received and allotment was made on March 1, 2023. All amounts due were received
within one month of the date they were called.
The allotment amount was received in full but, when the first call was made, one shareholder
failed to pay the amount on 1,000 shares held by him and another shareholder with 500 shares
paid the entire amount on his shares.
Give journal entries in the books of the Company to record these share capital transactions.

Question 8 (CA Foundation June 2022) (15 Marks) Pg no._____

A Limited issued 20,000 Equity shares of, 10 each at a premium of 10%, payable ₹ 2 on
application; ₹ 4 on allotment (including premium); ₹ 2 on first call and balance on the final
call. All the shares were fully subscribed. Mr. M who held 2000 shares paid full remaining
amount on first call itself. The final call which was made after 4 months from the first call
was fully paid except a shareholder having 200 shares and one another shareholder having
100 shares. They paid their due amount after 3 months and 4 months respectively along with
interest on calls in arrears, Company also paid interest on calls in advance to Mr. M. The
Company maintains Calls in Arrear and Calls in Advance A/c. Give journal entries to record
these transactions. Show workings of Interest calculation. (Ignore dates).

Question 9 (CA Foundation May 2018) (10 Marks)/(RTP May 2020)/(May 2023)(Sim.) Pg no._____
Piyush Limited is a company with an authorized share capital of ₹ 2,00,00,000 in equity shares
of ₹ 10 each, of which 15,00,000 shares had been issued and fully paid on 30th June, 2020. The
company proposed to make a further issue of 1,30,000 shares of ₹ 10 each at a price of ₹ 12
each, the arrangements for payment being:
(i) ₹ 2 per share payable on application, to be received by 1st July, 2020;
(ii) Allotment to be made on 10th July, 2020 and a further ₹ 5 per share (including the
premium) to be payable;
(iii) The final call for the balance to be made, and the money received by 30th April, 2021.
Applications were received for 4,20,000 shares and were dealt with as follows:
(1) Applicants for 20,000 shares received allotment in full;
(2) Applicants for 1,00,000 shares received an allotment of one share for every two applied
for; no money was returned to these applicants, the surplus on application being used to
reduce the amount due on allotment;
(3) Applicants for 3,00,000 shares received an allotment of one share for every five shares
applied for; the money due on allotment was retained by the company, the excess being
returned to applicants; and
(4) The money due on final call was received on the due date.
You are required to record these transactions (including cash items) in the journal of Piyush
limited.

Page 11B.19
 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

Question 10 (CA Foundation Jan 2021) (15 Marks) Pg no._____

A Limited is a company with' an authorised share capital of ₹ 1,00,00,000 in equity shares of
₹ 10 each, of which 6,00,000 shares had been issued and fully paid up on 31st March, 2020.
The company proposes to make a further issue of 1,35,000 of these ₹ 10 shares at a price of
₹ 14 each, the arrangement of payment being:
(i) ₹ 2 per share payable on application, to be received by 31st May, 2020;
(ii) Allotment to be made on 10th June, 2020 and a further ₹ 5 per share (including the
premium to be payable);
(iii) The final call for the balance to be made, and the money received by 31st December, 2020.
Applications were received for 5,60,000 shares and dealt with as follows:
(1) Applicants for 10,000 shares received allotment in full;
(2) Applicants for 50,000 shares received allotment of 1 share for every 2 applied for; no
money was returned to these applicants, the surplus on application being used to reduce
the amount due on allotment;
(3) Applicants for 5,00,000 shares 'received an allotment of 1 share for every 5 shares applied
for; the money due on allotment was retained by the company, the excess being returned
to the applicants; and
(4) The money due on final call was received on the due date.
You are required to record these transactions (including bank transactions) in the Journal
Book of A Limited.

Question 11 (ICAI Study Material) Pg no._____

A Ltd forfeited 30,000 equity shares of ₹10 fully called-up, held by Mr. X for non-payment of
final call @ ₹4 each. However, he paid application money @ ₹2 per share & allotment money
@ ₹4 per share. These shares were originally issued at par. Give Journal Entry for forfeiture.

Question 12 (ICAI Study Material) Pg no._____

X Ltd forfeited 20,000 equity shares of ₹ 10 each, ₹ 8 called-up, for non-payment of first call
money @ ₹ 2 each. Application money @ ₹ 2 per share and allotment money @ ₹ 4 per share
have already been received by the company. Give Journal Entry for the forfeiture (assume
that all money due is transferred to Calls-in-Arrears A/c.

Question 13 (ICAI Study Material) Pg no._____

X Ltd. forfeited 5,000 equity shares of ₹100 each fully called-up which were issued at a
premium of 20%. Amount payable on shares were: on application ₹20; on allotment ₹50
(including premium) on First and Final call ₹50. Only application money was paid by the
shareholders in respect of these shares. Pass Journal Entries for the forfeiture.

Question 14 (ICAI Study Material) Pg no._____

A Ltd forfeited 100 equity shares of ₹10 fully called upon. The shareholder failed to pay the
first call money of ₹4 per share and the second and final Call Money of ₹4 per share. Give
journal entry to show the effect of this transaction.

Question 15 (ICAI Study Mat.)/ (RTP May 2018)/(May 2019)/(Nov 2019)/(May 2021) (Sim.) Pg no._____
Mr. Long who was the holder of 2,000 preference shares of ₹ 100 each, on which ₹ 75 per
share has been called up could not pay his dues on Allotment and First call each at ₹ 25 per
share. The Directors forfeited the above shares and reissued 1,500 of such shares to Mr. Short
at ₹ 65 per share paid-up as ₹75 per share. Give journal entries to record the above forfeiture
and re-issue in the books of the company.

Page 11B.20
 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

Question 16 (RTP Nov 2018) Pg no._____

Mr. P who was the holder of 2,500 preference shares of ₹ 100 each, on which ₹ 70 per share
has been called up could not pay his dues on Allotment and First call each at ₹ 20 per share.
The Directors forfeited the above shares and reissued 2,000 of such shares to Mr. Q at ₹ 60
per share paid-up as ₹ 70 per share.
You are required to prepare the Journal Entries to record the above forfeiture and re-issue
in the books of the company.

Question 17 (CA Foundation Nov 2018) (10 Marks) / (RTP May 2023) Pg no._____
Give necessary journal entries for the forfeiture & reissue of shares:
(i) X Ltd. forfeited 300 shares of ₹ 10 each fully called up, held by Ramesh for non payment
of allotment money of ₹ 3 per share & final call of ₹ 4 per share. He paid the application
money of ₹ 3 per share. These shares were issued to Suresh for ₹ 8 per share.
(ii) X Ltd. forfeited 200 shares of ₹ 10 each (₹ 7 called up) on which Naresh had paid
application and allotment money of ₹ 5 per share. Out of these 150 shares were reissued
to Mahesh as fully paid for ₹ 6 per share.

Question 18 (RTP Nov 2021) Pg no._____

Mr. Samphat who was the holder of 12,000 preference shares of ₹ 100 each, on which ₹ 60
per share has been called up could not pay his dues on Allotment and First call each at ₹ 20
per share. The Directors forfeited the above shares and reissued 10,000 of such shares to Mr.
Sushil at ₹ 50 per share paid-up as ₹60 per share.
You are required to prepare journal entries to record the above forfeiture and re-issue in the
books of the company.

Question 19 (ICAI Study Material) Pg no._____

A holds 2,000 shares of ₹10 each on which he has paid ₹2 as application money. B holds 4,000
shares of ₹10 each on which he has paid ₹ 2 per share as application money and ₹ 3 per share
as allotment money. C holds 3,000 shares of ₹10 each and has paid ₹2 on application, ₹ 3 on
allotment and ₹3 for the first call. They all fail to pay their arrears on the second and final call
and the directors, therefore, forfeited their shares. The shares are re-issued subsequently
for ₹12 per share fully paid-up. Journalise the transactions relating to the forfeiture and re-
issue.

Question 20 (ICAI Study Material) Pg no._____

B Ltd. issued 20,000 equity shares of ₹100 each at a premium of ₹20 per share payable as
follows: on application ₹50; on allotment ₹50 (including premium); on final call ₹20.
Applications were received for 24,000 shares. Letters of regret were issued to applicants for
4,000 shares and shares were allotted to all the other applicants. Mr. A, the holder of 150
shares, failed to pay the allotment and call money, the shares were forfeited. Show the
Journal Entries and Cash Book in the books of B Ltd.

Question 21 (CA Foundation Nov 2019) (15 Marks) Pg no._____

B Limited issued 50,000 equity shares of ₹ 10 each payable as ₹ 3 per share on applications,
₹ 5 per share (including ₹ 2 as premium) on allotment and ₹ 4 per share on call. All these
shares were subscribed.
Money due on all shares was fully received except from X, holding 1000 shares who failed to
pay the allotment and call money and Y, holding 2000 shares, failed to pay the call money. All

Page 11B.21
 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

these 3,000 shares were forfeited. Out of forfeited shares, 2,500 shares (including whole of
X’s shares) were subsequently re-issued to Z as fully paid up at a discount of ₹ 2 per share.
Pass necessary journal entries in the books of B limited. Also prepare Balance Sheet and
notes to accounts of the company.

Question 22 (CA Foundation Dec 2021) (15 Marks) Pg no._____

Fashion Garments Ltd invited applications for issuing 10,000 Equity Shares of ₹ 10 each. The
amount was payable as follows:
(i) On Application ₹ 1 per share
(ii) On Allotment ₹ 2 per share
(iii) On First call ₹ 3 per share
(iv) On Second and final Call ₹ 4 per share
The issue was fully subscribed. Ram to whom 100 shares were allotted, failed to pay the
allotment money and his shares were forfeited immediately after the allotment. Shyam to
whom 150 shares were allotted, failed to pay the first call. His shares were also forfeited after
the first call. Afterwards the second and final call was made. Mohan to whom 50 shares were
allotted failed to pay the second and final call. His shares were also forfeited. Al the forfeited
shares were re-issued at ₹ 9 per share fully paid-up.
Pass necessary Journal entries in the books of Fashion Garments Ltd.

Question 23 (CA Foundation Dec 2022) (15 Marks) Pg no._____

PQR Limited issued 2,00,000 equity shares of, 10 each payable as ₹ 3 per share on application
& ₹ 5 per share (including ₹ 2 as premium) on allotment and ₹ 4 per share on call. All these
shares were subscribed. Money due on all shares was fully received except from Mr. J,
holding 5,000 shares who failed to pay ·the allotment and call money and Mr. K, holding 10,000
shares, who failed to pay the call money. All these 15,000 shares were forfeited. Out of the
forfeited shares, 10,000 shares (including whole of J's shares) were subsequently re-issued
to Mr. L as fully paid up at a discount of ₹ 1 per share.
Pass necessary journal entries in the books of PQR Limited. Also prepare Balance Sheet and
notes to accounts of the company.

Question 24 (CA Foundation Nov 2020) (10 Marks) Pg no._____

ABC Limited issued 20,000 equity shares of ₹ 10 each payable as:
₹ 2 per share on application
₹ 3 per share on allotment
₹ 4 per share on first call
₹ 1 per share on final call
All the shares were subscribed. Money due on all shares was fully received except for Mr.
Bird, holding 300 shares, who failed to pay first call and final call money. All these 300 shares
were forfeited. The forfeited shares of Mr. Bird were subsequently re-issued to Mr. John.as
fully paid up at a discount of ₹ 2 per share.
Pass the necessary Journal Entries to record the above transactions in the books of ABC
Limited.

Question 25 (CA Foundation May 2019) (10 Marks)/(RTP May 2020)/(RTP Nov 2022) Pg no._____
Bhagwati Ltd. invited applications for issuing 2,00,000 equity shares of ₹ 10 each. The
amounts were payable as follows:
On application - ₹ 3 per share
On allotment - ₹ 5 per share
On first and final call - ₹ 2 per share

Page 11B.22
 CA NITIN GOEL ISSUE, FORFEITURE & RE-ISSUE OF SHARES

Applications were received for 3,00,000 shares and pro-rata allotment was made to all the
applicants. Money overpaid on application was adjusted towards allotment money. B, who
was allotted 3,000 shares, failed to pay the first and final call money. His shares were
forfeited. Out of the forfeited shares, 2,500 shares were reissued as fully paid-up @ ₹ 6 per
share. Pass necessary Journal entries to record the above transactions in the books of
Bhagwati Ltd.

Question 26 (CA Foundation July 2021) (15 Marks) Pg no._____

X Limited invited applications for issuing 75,000 equity shares of ₹ 10 each at a premium of ₹
5 per share. The total amount was payable as follows: -
₹ 9 per share (including premium) on application and allotment
- Balance on the First and Final Call
Applications for 3,00,000 equity shares were received. Applications for 2,00,000 equity shares
were rejected and money refunded. Shares were allotted on pro-rata basis to the remaining
applicants. The first and final call was made. The amount was duly received except on 1,500
shares applied by Mr. Raj. His shares were forfeited. The forfeited shares were re-issued at
a discount of ₹ 4/- per share.
Pass necessary journal entries· for the above transactions in the books of X Limited.

Question 27 (MTP November 2021)/(June 2023) Pg no._____

Hemant applies for 2,000 shares of ₹ 10 each at a premium of ₹ 2.50 per share. He was allotted
1,000 shares. After having paid ₹ 3 per share on application, he did not pay the allotment
money of ₹ 4.50 per share (including premium) and on his subsequent failure to pay the first
call of ₹ 2 per share, his shares were forfeited. These shares were reissued at ₹ 8 per share,
his shares were forfeited.
At the time of re-issue of forfeited shares of Mr. Hament, final call money amount all other
shareholders were duly called up.
You are required to pass journal entries to record forfeiture and reissue of shares.

Question 28 (CA Foundation June 2023) (15 Marks) Pg no._____

BP Limited issued a prospectus inviting applications for 1,20,000 equity shares of ₹ 10 each at
a premium of ₹ 2 per share payable as follows:
On Application - ₹ 3 per share
On Allotment - ₹ 5 per share (including premium)
On First and Final Call - ₹ 4 per share
Applications were received for 3,60,000 equity shares. Applications for 80,000 shares were
rejected and the money refunded. Shares allotted to remaining applications as follows:
Category No. of shares Applied No. of shares Allotted
I 1,60,000 80,000
II 1,20,000 40,000
Excess money received with applications was adjusted towards sums due on Allotment and
the balance amount returned to the applicants. All calls were made duly received except the
final call by a shareholder belonging to Category I who has applied for 680 shares. His
shares were forfeited. The forfeited shares were reissued at ₹ 13 per share fully paid-up.
Pass necessary journal entries for the above transactions in the books of BP Ltd, Open call
in arrears account whenever required.

Page 11B.23
 CA NITIN GOEL ISSUE OF DEBENTURES

Unit 3: ISSUE OF DEBENTURES

“Efforts are never wasted even when they lead to disappointing results. Because
they always make us more experienced.

DEBENTURES – DEFINITION AND FEATURES

DEFINITION

(a) Debenture includes Debentures Stock, Bonds and any other instrument of a Company
evidencing a debt, whether constituting a charge on the assets of the Company or not.
(b) It is a document issued by a Company indicating its indebtedness.
(c) Debenture is one of the most commonly used debt instruments issued by the company
to raise funds for the business. The most common method of supplementing the capital
available to company is to issue debentures which may either be secured or unsecured.
(Purpose for raising of debenture by the company)

FEATURES

(a) Debt: Debenture is a document which evidences a loan made to a Company. 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.
(b) Interest: The Company pays a fixed rate of interest on Debentures, due on specific dates.
Such interest is payable, irrespective of whether the Company has earned profit or not.
(c) Maturity/Redemption: Generally, Debentures are issued for specified period of time,
after which they mature & have to be redeemed by the Company by paying the money.
Sometimes, they may be converted into Equity Shares, after the maturity period.
(d) Creation of Charge: Most Debentures are secured by way of a charge on the assets /
part of the assets of the Company. However, they may also be unsecured Debentures.
(e) Trading: Debentures may be bought or sold through the Stock Exchange, at a price
above or below the Face Value. Hence, Debentures may be traded, in the same manner
as Shares.
(f) No Voting Rights: Debenture Holders are mere lenders to the Company, who are
generally secured for payment. Hence they do not have any right as to voting in
meetings. The Company shall not issue any Debentures carrying voting rights at any
Company Meeting, whether generally or in respect of particular class of business.

DISTINGUISH – SHARES AND DEBENTURES

BASIS SHARES DEBENTURES

Shareholders are the Owners of the Debentureholders are the Creditors of
Holders
Company the Company.
There are two basic kinds of Shares Debentures can be classified in
Kinds
(a) Equity & (b) Preference Shares. different ways.

Page 11C.1
 CA NITIN GOEL ISSUE OF DEBENTURES

Shareholders generally enjoy voting Debentureholders do not have any

Voting
rights. voting rights.
Dividend is paid only out of the Interest on Debentures is paid even if
Return
profits of the Company. there are no profits.
Dividend on Equity Shares may vary Rate of Interest on Debentures is
Variation in
from year to year. [But, Dividend on Fixed.
return
Pref. Shares is paid at fixed rates.]
Dividend is an appropriation of Interest on debentures is a “charge” on
Nature of Profits of the Company. Hence, it is
the profits of the Company. Interest
Payment not deductible as an “expense” for payment gives tax savings to the
tax purposes. Company.
Shares are shown under “Share Debentures are shown under “Long
Capital” (under Shareholder Funds) term Borrowings” (under Non-Current
Disclosure
on the Liabilities Side of the Balance
Liabilities) on the Liabilities Side of the
Sheet. Balance Sheet.
Shares cannot be converted into Debentures may be converted into
Conversion debentures under any
Shares (partly or fully) as per the
circumstances. terms of issue.
Shares can be Forfeited for non- Debentures cannot be forfeited for
Forfeiture
payment of Allotment or Call Money non-payment of Call Money.
Charge on Shares do not carry any charge on Debentures generally have a charge
Assets Assets. on the Assets of the Company.
Upon winding-up, they are paid after
They are paid before Shareholders,
Priority of
Debentureholders are settled. since they are the Creditors of the
repayment
company.
Risk Higher Risk than Debentureholders. Lower Risk than Equity Shareholders.
Higher degree of control over Minimum / No control.
Control
Company

DIFFERENT KINDS / TYPES OF DEBENTURES

BASED ON PRIORITY

First Mortgage Debentures Second Mortgage Debentures

(a) They are ranked first and are to be paid They are issued subsequent to first
first in priority to other Debentures Debentures and rank next in matters of
which may be issued later or repayment, i.e. they can be redeemed only
subsequently by the Company. after First Debentures are repaid.
(b) These constitute first priority in These constitute second priority in
repayment. repayment.

BASED ON NEGOTIABILITY

Bearer or Unregistered Debentures Registered Debentures

(a) These are payable to Bearer. Interest is These are payable to Registered Holders,
paid through coupons attached to i.e. whose names appear on the Certificate
Certificate. On maturity, principal is and are entered as a Holder in Register of
paid to the Bearer. Debenture Holders of the Company.

Page 11C.2
 CA NITIN GOEL ISSUE OF DEBENTURES

(b) These are similar to Negotiable They are not easily transferable. They are
Instruments, and are freely transferable only as per condition endorsed
transferable, by mere delivery. in it, i.e. by way of execution of transfer deed
No transfer deed is required for and registration with the Company.
transfer of such debentures

BASED ON PERMANENCE / REDEEMABILITY

Redeemable Debentures Irredeemable / Perpetual Debentures

(a) They are issued for a specified period It is a Debenture which contains no clause
of time upon whose expiry, company to payment, or which contains a clause that
has the right to pay back the Holders it shall not be paid back.
and have its properties released from
charge.
(b) Payment / Redemption is made at the Payment / Redemption is only upon
end of the specified period. winding-up/liquidation of company.

BASED ON CONVERTIBILITY

Convertible Debentures Non Convertible Debentures

(a) They are issued with an option that they They do not have any option as to
can be converted into Shares (at par or convertibility.
premium), after a certain period.
(b) They can be fully convertible or partly They become fully payable on maturity, as
convertible. In Partly Convertible specified in the terms of issue.
debentures, the non-convertible
portion is redeemed at the expiry of
certain period.

BASED ON SECURITY

Secured Debentures Unsecured / Naked Debentures

(a) These are secured by a charge on the
These are issued without any security. They
assets / part of the assets of the
do not create any charge on the Company’s
Company. Assets.
(b) The Charge may either be Fixed or
Holders are like ordinary Unsecured
Floating. (See Note below.) Creditors and may sue the Company for
recovery.
(c) Holders of such Debentures have These types of debentures are very risky
lower risk. from the viewpoint of Investors.

Note:
A Fixed Charge is a mortgage on specific assets, e.g. Machinery, Land and Building, etc. These
assets cannot be sold without the consent of Debentureholders. The sale proceeds of these
assets are utilized first for repaying Debentureholders.
A Floating Charge generally covers all assets of the Company, including future assets, e.g.
Stock, Receivables, Debtors, etc.

Page 11C.3
 CA NITIN GOEL ISSUE OF DEBENTURES

JOURNAL ENTRIES IN RESPECT OF ISSUE OF DEBENTURES (For Cash )

Transaction Journal Entries

1. Receipt of Application Money Bank A/c Dr.
To Debenture Application A/c
2. Transfer of Application Money
(a) Issued at par, and redeemable (i) at par, Debenture Application A/c Dr.
or (ii) at discount To…% Debentures A/c
(b) Issued at Premium, and redeemable- (i) Debenture Application A/c Dr.
at par, or (ii) at discount To…% Debentures A/c
To Securities Premium A/c
(c) Issued at Discount, and redeemable- (i) Debenture Application A/c Dr.
at par, or (ii) at discount Discount on Issue of Deb A/c Dr.
To…% Debentures A/c

Page 11C.4
 CA NITIN GOEL ISSUE OF DEBENTURES

(d) Issued at par, and redeemable at Debenture Application A/c Dr.

premium. [Note: Here, Loss on Issue of Loss on Issue of Deb. A/c Dr.
Debentures= Premium payable on To…% Debentures A/c
Redemption only.] To Premium on Redemption of deb.
(e) Issued at Premium, redeemable at Debenture Application A/c Dr.
premium. [Note: Here, Loss on issue of Loss on Issue of Deb. A/c Dr.
Debentures= Premium payable on To…% Debentures A/c
Redemption only.] To Securities Premium A/c
To Premium on Redemption of deb.
(f) Issued at Discount, and redeemable at Debenture Application A/c Dr.
premium [Note: Here, Loss on Issue of Disc./Loss on Issue of Deb. A/c Dr.
Debentures= Discount on Issue + To…% Debentures A/c
Premium payable on Redemption only] To Premium on Redemption of deb.
Note: In the above scheme, it is assumed that entire money is collected at the time of
application itself. If the moneys are collected in installments, e.g. Application, Allotment, Calls,
etc. the Journal Entries are similar to that of Issue of Shares.
❖ In fact, the discount on issue of debentures is considered as incremental interest expense.
The true expense (net borrowing cost) for a particular accounting period is, therefore, the
total interest payment plus the discount amortised.
❖ Debenture Redemption Premium Account is a personal account which represents a liability
of the company in respect of premium payable on redemption.

ISSUE OF DEBENTURES FOR CONSIDERATION OTHER THAN 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) Assets purchased from Vendor / Sundry Assets A/c Dr.

business taken over, etc. To Sundry Liabilities A/c, (if any)
To Vendor A/c
(b) Assets purchased from Vendor, Vendor A/c Dr.
at par / premium / discount Discount on Issue of Deb. A/c (if any)
To…% Debentures A/c
To Securities Premium A/c (if any)
No. of Debentures = Purchase Consideration/Issue Price

1) When debentures are issued at par

No. of Debentures = Purchase Consideration
Par Value

2) When debentures are issued at premium

No. of Debentures = Purchase Consideration
Par Value + Premium

3) When debentures are issued at discount

No. of Debentures = Purchase Consideration
Par Value – Discount

Page 11C.5
 CA NITIN GOEL ISSUE OF DEBENTURES

ACCOUNTING TREATMENT OF ISSUE OF DEBENTURES AS COLLATERAL SECURITY

1. Meaning
(a) Collateral Security means secondary or supporting security for a loan, which can be
realized by the Lender, when the original loan is not paid on due date.
(b) Companies may Issue their Own Debentures as Collateral Security for Loan or
Overdraft facility taken from Bank / other Lenders.
(c) The holder of such debentures is entitled to interest only on the amount of loan but not
on the debentures.

2. Effect:
(a) If the Company repays the loan on the due date, the Debentures will be released, along
with the main security.
(b) If the Company is not able to repay the loan or the interest thereon, the Lender will
become the Debentureholders who can exercise all the rights of a debenture holder.

2. Accounting Treatment: There are two method of showing Debentures issued as Collateral
Security –
Situation Method I Method II
Journal Entry for Issue No Entry. It is only a Debenture Suspense A/c Dr.
of Debentures as Memorandum Method To…% Debentures A/c
Collateral Security
Disclosure in the The Issue of debentures and Debenture Suspense A/c will
Balance Sheet till Loan Loan Outstanding is shown as appear on the Assets Side under
is settled a Note under “Long Term ‘Non Current Assets’ and
Borrowings” Debentures A/c will appear on the
Liabilities Side under ‘Long Term
Borrowings’.
Treatment after The Note given as above will The Journal Entry given above
settlement of Loan be discontinued. will be reversed
Note: Method 1 is much more logical from the accounting point of view. Therefore, it is advised
to follow Method 1.

TREATMENT OF DISCOUNT / LOSS ON ISSUE OF DEBENTURES

1. Treatment: Discount / Loss on Issue of Debentures is capital loss and to be written-off
/amortized over the period between the date of issue and date of redemption.

2. Determination of write-off amount:

Situation Amount written off is computed as under-
Debentures redeemed Total Amount of Discount / Loss should be written off equally
at lumpsum at the end of over the life of Debentures, i.e. Straight Line Method is used.
a given period
Debentures redeemed Total Amount of Discount / Loss should be written off in the ratio
in different / unequal of benefit derived from Debenture Loan in any particular year,
instalments i.e. Sum of Year’s Digits Method is used in the case.
Debentures are Total Amount of Discount / Loss should be written off gradually
irredeemable over a long period.

Page 11C.6
 CA NITIN GOEL ISSUE OF DEBENTURES

3. Journal Entry:
Profit and Loss Account Dr.
To Discount / Loss on Issue of debentures A/C
Note: The unamortized amount is shown on the Assets Side of the Balance Sheet as Non-
Current /Current Asset depending upon the period for which it has to be written off.

Example:
12%, 5,000 debentures of ₹100 each issued on 01.01.2023 at 3% discount.
1) Redemption after 5 years in lumpsum
2) Redemption of ₹1,00,000 at the end of each year

ACCOUNTING TREATMENT FOR PAYMENT OF INTEREST ON DEBENTURES

1. Interest: Interest on debentures is a charge against the profits of the Company. Interest is
paid at specified dates, (e.g. on half-yearly or annual basis) on the Nominal Value of
Debentures.
2. Tax Deducted at Source: The Company will pay Interest to the Debentureholders after
deducting the amount of tax, as specified in the Income Tax Rules. The Company is under
an Obligation to deduct tax at source and deposit the deducted tax amount with the Income
Tax Authorities.
3. Journal Entries:
Transaction Journal Entry
(a) Interest due on Debentures after Interest on Debentures A/c Dr.
considering tax at source (TDS) To Debentureholders A/c
To TDS Payable A/c
(b) Payment of interest to Debentureholders A/c Dr.
Debentureholders To Bank A/c
(c) Remittance Tax Deducted at Source TDS Payable A/c Dr.
with Government To Bank A/c
(d) Transfer of Interest on Debentures to Profit & Loss A/c Dr.
P&L A/c To Interest on Debentures A/c

Page 11C.7
 CA NITIN GOEL ISSUE OF DEBENTURES

ASSIGNMENT QUESTIONS
Question 1 Pg no._____
C Ltd. is interested in issuing 10,000, 12% debentures of ₹100 each. You are required to pass
necessary journal entries in each of the following situations:
Application Money ₹ 40 & balance on Allotment.
a) Issued at par and redeemable at par
b) Issued at par and redeemable at premium of 5%
c) Issued at 10% discount and redeemable at par
d) Issued at discount of 5% and redeemable at premium of 10%
e) Issued at 5% premium and redeemable at par
f) Issued at premium of 10% and redeemable at premium of 20%.

Question 2 (ICAI Study Material) Pg no._____

Simmons Ltd. issued 1,00,000, 12% Debentures of ₹100 each at par payable in full on
application by 1st April, Application were received for 1,10,000 Debentures. Debentures were
allotted on 7th April. Excess money refunded on the same date. You are required to pass
necessary Journal Entries (including cash transactions) in the books of the company.

Question 3 Pg no._____
Sam Ltd. issued ₹ 70,000, 12% debentures of ₹ 100 each at a premium of 5% redeemable at
110% Show by means of journal entries how you would record the above issue.

Question 4 (RTP May 2019) Pg no._____

Suvidha Ltd. purchased machinery worth ₹ 1,98,000 from Hemant Ltd. The payment was made
by issue of 12% debentures of ₹100 each. Pass the necessary journal entries for the purchase
of machinery and issue of debentures when:
(i) Debentures are issued at par;
(ii) Debentures are issued at 10% discount; and
(iii) Debentures are issued at 10% premium

Question 5 Pg no._____
Mahesh Ltd. obtained loan from ICICI Bank of ₹ 5,00,000 on 31st March, 2023 by issuing and
securing 6,000, 12% debentures of ₹ 100 each as collateral security.
Pass journal entries & show balance sheet extract as per both approaches.

Question 6 (ICAI Study Material) / (RTP May 2018) / (RTP May 2023) (Similar) Pg no._____
X Company Limited issued 10,000 14% Debentures of nominal value of ₹50,00,000 as follows:
i. To sundry persons for cash at 90% of nominal value of ₹ 25,00,000.
ii. To a vendor for purchase of fixed assets worth ₹ 10,00,000 – ₹ 12,50,000 nominal value.
iii. To the banker as collateral security for a loan of ₹ 10,00,000 – ₹ 12,50,000 nominal value.
You are required to pass necessary journal entries.

Question 7 (ICAI Study Material) Pg no._____

A Limited issued 14% Debentures of the nominal value of ₹10 each as follows:
(a) To sundry persons 1,00,000 Debentures for cash at 10% discount.
(b) To a vendor for purchase of Inventory worth ₹1,00,000, 8,000 debentures at 25% premium.
(c) To the banker as collateral security for a loan of ₹1,00,000 – ₹1,50,000 nominal value.
Pass necessary Journal Entries.

Page 11C.8
 CA NITIN GOEL ISSUE OF DEBENTURES

Question 8 (ICAI Study Material) Pg no._____

HDC Ltd. issues 2,00,000, 12% Debentures of ₹10 each at ₹9.40 on 1st January,2022. Under the
terms of issue, 1/5th of the debentures are annually redeemable by drawings, the first
redemption occurring on 31st December, 2022. Calculate the amount of discount to be written-
off from 2022 to 2026.

Question 9 Pg no._____
X Ltd. issues 1,00,000, 9% Debentures of ₹10 each at ₹9.50 on 1st January,2020. Under the
terms of issue, 1/5th of the debentures are redeemable by drawings, the first redemption
occurring on 31st December, 2020. Accounting year is from April to March.
Calculate the amount of discount to be written-off for each year.

Question 10 (ICAI Study Material) Pg no._____

A company issued 12% debentures of the face value of ₹10,00,000 at 10% discount on 1-1-2023.
Debenture interest after deducting tax at source @ 10% was payable on 30th June and 31st of
December every year. All the debentures were to be redeemed after the expiry of five year
period at 5% premium. Pass journal entries for the accounting year 2023.

Question 11 (ICAI Study Material) Pg no._____

On 1st April 2022 Sheru Ltd. issued 1,00,000 12% debentures of ₹100 each at a discount of 5%,
redeemable on 31 March 2027. Issue was oversubscribed by 20,000 debentures, who were
refunded their money. Interest is paid annually on 31 March. You are required to prepare:
i) Journal Entries at the time of issue of debentures.
ii) Discount on issue of Debenture Account
iii) Interest account and Debenture holder Account assuming TDS is deducted @ 10%.

Question 12 Pg no._____
D Ltd. issued ₹ 15,00,000, 10% debentures on 1st October, 2020 and interest is payable on 30th
June and 31st December. Pass journal entries to record debenture interest for accounting
years ended on 31st March, 2021 and 31st March, 2022.

Page 11C.9
 CA NITIN GOEL ISSUE OF DEBENTURES

PRACTICE QUESTIONS

MULTIPLE CHOICE QUESTIONS

1) Premium on redemption of debentures account appearing in the balance sheet is _______.
(a) A nominal account - expenditure
(b) A nominal account - income
(c) A personal account ______.
2) Debenture interest
(a) Is payable before the payment of any dividend on shares
(b) Accumulates in case of losses or inadequate profits
(c) Is payable after the payment of preference dividend but before the payment of equity
dividend
3) F Ltd. purchased Machinery from G Company for book value of ₹4,00,000. The consideration
was paid by issue of 10% debentures of ₹ 100 each at a premium of 25%. The debenture
account was credited with ______.
(a) ₹ 4,00,000
(b) ₹ 5,00,000
(c) ₹ 3,20,000
4) Which of the following is not a characteristic of Bearer Debentures?
(a) They are treated as negotiable instruments
(b) Their transfer requires a deed of transfer
(c) They are transferable by mere delivery
5) When debentures are issued as collateral security, the final entry for recording the
collateral debentures in the books is __________.
(a) Credit Debentures A/c and debit Cash A/c.
(b) Debit Debenture suspense A/c and credit Cash A/c.
(c) Debit Debenture suspense A/c and credit Debentures A/c.
6) When debentures are redeemable at different dates, the total amount of discount on issue
of debentures should be written off
(a) Every year by applying the sum of the year’s digit method
(b) Every year by applying the straight line method
(c) To profit and loss account in full in the year of final or last redemption
7) Debentures are issued at discount when
(a) Market interest rate is higher than debenture interest rate
(b) Market interest rate is lower than debenture interest rate
(c) Market interest rate is equal to debenture interest rate
8) Interest payable on Debentures attract
(a) Tax deducted at source
(b) Goods and Service tax
(c) Fringe benefit tax

ANSWERS MCQs
1. (c) 2. (a) 3. (c) 4. (b) 5. (c) 6. (a) 7. (b) 8. (a)

Page 11C.10
 CA NITIN GOEL ISSUE OF DEBENTURES

TRUE / FALSE

State with reasons whether the following statement is true or false:

1) Debenture holder are the owners of the company.
2) Perpetual debentures are payable at the time of liquidation of the company. (June 2023)
3) Registered debentures are transferable by delivery.
4) When companies issue their own debentures as collateral security for a loan, the holder
of such debenture is entitled to interest only on the amount of loan & not on the debentures
5) Debentures suspense account appears on the liability side of balance sheet. (June 2022)
6) If a company incurs loss, then it does not pay interest to the debenture holders.
7) At the time of liquidation, debenture holders are paid off after the shareholders.
8) Convertible debentures can be converted into equity shares.
9) Redeemable debentures are not payable during the lifetime of the company.
10) Debentures can be issued for a consideration other than for cash, such as for purchasing
land, machinery etc.
11) Debenture interest is payable after the payment of preference dividend but before the
payment of equity dividend.
12) Interest on debentures is calculated on Issue Price of Debentures
13) When debentures are issued as collateral security against any loan then holder of such
debentures is entitled to Interest both on the amount of the loan and on the debentures
14) Debenture holders enjoy the voting rights in the company.
15) A fixed charge generally covers all the assets of company including future one. (Dec 2022)
Solution
1) False: Debenture holder are the creditors of the company.
2) True: Perpetual debentures, also known as irredeemable debentures are not repayable
during the life time of the company & are repayable at the time of liquidation of company
3) False: Registered debentures are not easily transferable by delivery. Bearer debentures
are transferrable by delivery.
4) True: In case the company cannot repay its loan & the interest thereon on the due date, the
lender becomes debenture holder & then only he is entitled to interest on debentures.
5) False: Deb. Suspense A/c appears on asset side of balance sheet under non-current asset
6) False: Even if the company incurs loss or earns profit, it has to pay interest on debentures.
Debentures being debts on company & debenture holders are not concerned with profit/
loss of company, interest is to be paid at the rate fixed on it at the time of issue of debenture.
7) False: At the time of liquidation, debenture holders are paid off before shareholders on
priority basis.
8) True: Convertible debentures can be converted into equity shares after a certain period of
time from the date of its issue.
9) False: These debentures are repayable as per the terms of issue, for example, after 8 years
from the date of issue.
10) True: Debentures can be issued for a consideration other than for cash, such as for
purchasing land, machinery etc.
11) False: Debenture interest is payable before the payment of any dividend on shares.
12) False: Interest on debentures is calculated on Face Value of Debentures
13) False: When debentures are issued as collateral security against any loan then holder of
such debentures is entitled to Interest only on the amount of the loan.
14) False: Debenture holders does not enjoy voting rights in company. He is only a creditor of
the company.
15) False: A fixed charge is a mortgage on specific assets. A floating charge generally covers
all the assets of the company including future one.

Page 11C.11
 CA NITIN GOEL ISSUE OF DEBENTURES

16)
HOMEWORK QUESTIONS
17)

Question 1 (ICAI Study Material) Pg no._____

Amol Ltd. issued 40,00,000, 9% debentures of ₹ 50 each, payable on application as per term
mentioned in the prospectus and redeemable at par any time after 3 years from the date of
issue. Record necessary entries for issue of debentures in the books of Amol Ltd.

Question 2 (ICAI Study Material) Pg no._____

Atul Ltd. issued 1,00,00,000, 8% debenture of ₹100 each at a discount of 10% redeemable at
par at the end of 10th year. Money was payable as follows:
₹ 30 on application
₹ 60 on allotment
Record necessary journal entries regarding issue of debenture.

Question 3 (ICAI Study Material) Pg no._____

Koinal Chemicals Ltd. issued 15,00,000, 10% debenture of ₹50 each at premium of 10%, payable
as ₹20 on application and balance on allotment. Debentures are redeemable at par after 6
years. All the money due on allotment was called up and received. Record necessary entries
when premium money is included in application money.

Question 4 (ICAI Study Material) Pg no._____

Modern Equipments Ltd. issued 4,00,000, 12% debentures of ₹ 100 payable as follows :
On application ₹ 30
On allotment ₹ 70
The debenture were fully subscribed and all the money was duly received. As per the terms
of issue, debentures are redeemable at ₹110 per debenture. Record necessary entries
regarding issue of debentures.

Question 5 (ICAI Study Material) Pg no._____

Agrotech Ltd. issued 150 lakh 9% debentures of ₹100 each at a discount of 6%, redeemable at
a premium of 5% after 3 years payable as: ₹50 on application and ₹ 44 on allotment.
Record necessary journal entries for issue of debentures.

Question 6 (ICAI Study Material) Pg no._____

Country Crafts Ltd. issued 1,00,000, 8% debentures of ₹ 100 each at premium of 5% payable
fully on application and redeemable at premium of ₹ 10.
Pass necessary journal entries at the time of issue.

Question 7 (ICAI Study Material) Pg no._____

Koinal Chemicals Ltd. issued 20,00,000, 10% debentures of ₹50 each at premium of 10%,
payable as ₹ 20 on application and balance on allotment. Debentures are redeemable at par
after 6 years. All the money due on allotment was called up and received. Record necessary
entries when premium money is included in allotment money.

Question 8 (ICAI Study Material) Pg no._____

Kapil Ltd. issued 50,000, 12% Debentures of ₹100 each at a premium of 10% payable in full on
application by 1st March, 2023. The issue was fully subscribed and debentures were allotted
on 9th March, 2023. Pass necessary Journal Entries (including cash transactions).

Page 11C.12
 CA NITIN GOEL ISSUE OF DEBENTURES

Question 9 (RTP Nov 2019) / (RTP May 2021) (Similar) Pg no._____

Pihu Ltd. issued 50,00,000, 9% debentures of ₹ 100 each at a discount of 10% redeemable at
par at the end of 10th year. Money was payable as follows:
₹ 40 on application & ₹ 50 on allotment
You are required to give necessary journal entries regarding issue of debenture

Question 10 (RTP Nov 2018) / (RTP Nov 2020) Pg no._____

A Ltd. issued 3,50,000, 12% Debentures of ₹100 each at par payable in full on application by 1st
April, Application were received for 3,85,000 Debentures. Debentures were allotted on 7th
April. Excess money refunded on the same date.
You are required to prepare necessary Journal Entries (including cash transactions) in the
books of the company.

Question 11 (ICAI Study Material) Pg no._____

X Ltd. issued 1,00,000 12% Debentures of ₹100 each at a discount of 10% payable in full on
application by 31st May, 2023. Applications were received for 1,20,000 debentures. Debentures
were allotted on 9th June, 2023. Excess money was refunded on the same date.
Pass necessary Journal Entries. Also show necessary ledger accounts.

Question 12 (ICAI Study Material) Pg no._____

X Ltd. obtains a loan from IDBI of ₹ 1,00,00,000, giving as collateral security of ₹ 1,50,00,000
(of ₹10 each), 14%, First Mortgage Debentures. Pass journal entries & show balance sheet
extract as per both approaches.

Question 13 (ICAI Study Material) Pg no._____

HDC Ltd issues 1,00,000, 12% Debentures of ₹100 each at ₹94 on 1st January,2022. Under the
terms of issue, the debentures are redeemable at the end of 5 years from the date of the
issue. Calculate the amount of discount to be written-off in each of the 5 years.

Question 14 (CA Foundation Nov 2018) (5 Marks)/(RTP May 2020)/(Nov 2022)(Similar) Pg no._____
Pure Ltd. issues 1,00,000 12% debentures of ₹ 10 each at ₹ 9.40 on 1st January,2021. Under the
terms of issue the debentures are redeemable at the end of 5 years from the date of issue.
Calculate the amount of discount to be written off in each of the 5 years.

Question 15 Pg no._____
X Ltd. issued 10,000 12% debentures of ₹ 100 each at a discount of 5%. These debentures are
redeemable at a premium of 10 % after 5 years.
You are required to show:
a) Journal entry on issue of the debentures; and
b) The loss on issue of debentures account over the period.

Question 16 Pg no._____
A company issued 12% debentures of the face value of ₹ 2,00,000 at 10% discount on 1st
January, 2020. Debenture Interest after deducting tax at source @ 10% was payable on 30th
June and 31st December every year. All the debentures were to be redeemed after the expiry
of 5 years period at 5% premium. Pass the necessary journal entries for the year 2020.

Page 11C.13
 CA NITIN GOEL ISSUE OF DEBENTURES

Question 17 (CA Foundation May 2019) (5 Marks) / (RTP Nov 2023) Pg no._____
On 1st January 2020·Ankit Ltd. issued 10% debentures of the face value of ₹ 20,00,000 at 10%
discount. Debenture interest after deducting tax at source @10% was payable on 30th June
and 31st December every year. All the debentures were to be redeemed after the expiry of
five year period at 5% premium.
Pass necessary journal entries for the accounting year 2020.

Question 18 (CA Foundation Nov 2020) (5 Marks) Pg no._____

Y Company Limited issue 10,000 12% Debentures of the nominal value of ₹ 60,00,000 as
follows:
(i) To a vendor for purchase of fixed assets worth ₹ 13,00,000 - ₹ 15,00,000 nominal value.
(ii) To sundry persons for cash at 90% of nominal value of ₹ 30,00,000.
(iii) To the banker as collateral security for a loan of ₹ 14,00,000 - ₹ 15,00,000 nominal value
You are required to pass necessary Journal Entries.

Question 19 (RTP May 2022) Pg no._____

On 1st April 2020, XY Ltd. took over assets of ₹4,50,000 and liabilities of 60,000 of Himalayan
Ltd. for the purchase consideration of ₹ 4,40,000. It paid the purchase consideration by issuing
8% debenture of ₹ 100 each at 10% premium on same date. XY Ltd. issued another 3000, 8%
debenture of ₹ 100 at discount of 10% redeemable at premium of 5 % after 5 years. According
to the terms of the issue ₹ 30 is payable on application and the balance on the allotment on
debentures. It has been decided to write off the entire loss on issue of discount in the current
year itself. You are required to pass the journal entries in the books of XY Ltd. for the financial
year 2020-21.

Question 20 (RTP Nov 2021) Pg no._____

Avantika Ltd. purchased machinery worth ₹9,90,000 from Avneet Ltd. The payment was made
by issue of 10% debentures of ₹100 each. Pass the necessary journal entries for the purchase
of machinery and issue of debentures when:
(i) Debentures are issued at par
(ii) Debentures are issued at 20 % discount and
(iii) Debentures are issued at 20% premium

Page 11C.14
 CA NITIN GOEL ACCOUNTING FOR BONUS ISSUE & RIGHT ISSUE

CH
11D
“Everything is easy when you are busy…!! Nothing is easy when you are lazy…!!
You are born to success…”

BONUS ISSUE
Means issue of additional shares to existing shareholders free of cost in proportion to their
existing holding.
Section 63(1) A company may issue fully paid-up bonus shares to its shareholders out of—
→ its free reserves;
→ the securities premium account; or
→ the capital redemption reserve account:
Bonus shares should not be issued out of revaluation reserves (i.e., reserves created by the
revaluation of assets).
Section 63(2) provides that no company shall capitalize 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 Board been authorised in the general meeting of 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 paidup shares, if any outstanding on the date of allotment, are made fully paidup.
The company which has once announced the decision of its Board recommending a bonus
issue, shall not subsequently withdraw the same.
Section 63(3) 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 can
utilize free reserves which are available for distribution of dividend, for the purpose of
converting partly paid shares into fully paid up.
A Securities Premium A/c and a Capital Redemption Reserve A/c 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 A/c and capital redemption reserve cannot be
applied towards payment of unpaid amount on any shares held by existing shareholders.
SEBI Regulations (Issue of Capital & Disclosure Requirements), 2018
Regulation 294- Restrictions on bonus issue
➢ 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.
➢ They shall be issued at the time of conversion of such instruments on the same terms or
proportion at which the bonus shares were issued.
➢ 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.
➢ The bonus share shall not be issued in lieu of dividend

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CA NITIN GOEL ACCOUNTING FOR BONUS ISSUE & RIGHT ISSUE

Bonus issue has following major effects:

▪ Share capital gets increased according to the bonus issue ratio.
▪ Effective Earnings per share, Book Value and other per share values stand reduced.
▪ Markets take the action usually as a favourable act.
▪ Market price gets adjusted on issue of bonus shares.
▪ Accumulated profits get reduced.

RIGHT ISSUE
It is an issue of rights to company's existing shareholders that entitles them to buy additional
shares directly from the company in proportion to their existing holdings, within a fixed time
period. In a rights offering, the subscription price at which each share may be purchased is
generally at a discount to the current market price.
❖ Rights are often transferable, allowing the holder to sell them in the open market.
❖ The difference between cum-right and ex-right value of the share is the value of the right.
In a situation where existing shareholder does not intend to subscribe to the rights issue of a
company, he may give up his right in favour of another person for a consideration. Such giving
up of rights is called renunciation of rights.
Advantages of Right Issue
➢ Right issue enables the existing shareholders to maintain their proportional holding in
the company and retain their financial and governance rights.
➢ It works as a deterrent to the management, which may like to issue shares to known
persons with a view to have a better control over the company’s affairs.
➢ Right issue is a natural hedge against the issue expenses normally incurred by the
company in relation to public issue.
➢ Right issue has an image enhancement effect, as public & shareholders view it positively
➢ The chance of success of a right issue is better than that of a general public issue and is
logistically much easier to handle.
Disadvantages of Right Issue
➢ The right issue invariably leads to dilution in market value of the share of the company.
➢ The attractive price of the right issue should be objectively assessed against its true
worth to ensure that you get a bargained deal.
Right issue has following major effects:
▪ Maintenance of existing shareholders’ proportional holding in company and retain their
financial and governance rights.
▪ Dilution in the value of share.
▪ Image enhancement
▪ Convenience in handling issue
Exceptions to the rights of existing equity shareholders
Section 62 recognises four situations under which the further shares are to be issued by a
company, but they need not be offered to the existing shareholders provided the company has
passed a special resolution and shares are offered accordingly.
Situation 1 To employees under a scheme of employees’ stock option subject to certain
specified conditions
Situation 2 To any person either for cash or for consideration other than cash, if price of such
shares is determined by valuation report of registered valuer subject to certain conditions.
Situation 3 Sometimes companies borrow money through debentures / loans and give their
creditor an option to buy equity shares of a company.
Situation 4 It is a special situation where the loan has been obtained from government, and
government in public interest, directs the debentures/loan to be converted into equity shares.

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 CA NITIN GOEL ACCOUNTING FOR BONUS ISSUE & RIGHT ISSUE

ASSIGNMENT QUESTIONS

TOPIC 1: BONUS ISSUE

A 2A
Question 1 (ICAI Study Material) Pg no._____
Following items appear in trial balance of Bharat Ltd (listed company) as on 31st March, 2023
40,000 Equity shares of ₹ 10 each 4,00,000
Capital Redemption Reserve 55,000
Securities Premium (collected in cash) 30,000
General Reserve 1,05,000
Surplus i.e. credit balance of Profit and Loss Account 50,000
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.

Question 2 (CA Inter July 2021) (5 Marks) Pg no._____

Following is the extract of the Balance Sheet of K Ltd (listed company) as at 31st March, 2023
Authorized capital: ₹
3,00,000 Equity shares of ₹ 10 each 30,00,000
30,00,000
Issued and Subscribed capital:
2,00,000 Equity shares of ₹ 10 each, ₹ 8 paid up 16,00,000
Reserves and surplus:
General Reserve 3,60,000
Capital Redemption Reserve 1,20,000
Securities premium (not realised in cash) 75,000
Profit and Loss Account 6,00,000
On 1st April, 2023, the Company has made final call @ ₹ 2 each on 2,00,000 equity shares. The
call money was received by 25th April, 2023. Thereafter, the company decided to capitalize 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.

Question 3 Pg no._____
Following is the extract from the Balance Sheet of M/s. Hello Ltd. as at 31st March, 2023:
₹
Authorised capital:
50,000, 10% Preference shares of ₹ 10 each 5,00,000
2,00,000 Equity shares of ₹ 10 each 20,00,000
Issued and subscribed capital:
40,000, 10% Preference shares of ₹ 10 each fully paid 4,00,000
1,80,000, Equity shares of ₹ 10 each, of which ₹ 7.50 paid up 13,50,000
Reserves and Surplus:
General reserve 2,40,000
Capital reserve 1,50,000
Securities premium 30,000
Profit and loss account 3,00,000

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 CA NITIN GOEL ACCOUNTING FOR BONUS ISSUE & RIGHT ISSUE

On 1st April, 2023, the company has made a final call @ ₹ 2.50 each on 1,80,000 equity shares.
The call money was received by 30th April, 2023. There after the company decided to capitalize
its reserves by issuing bonus shares at the rate of one share for every three shares held.
Capital reserve includes ₹ 90,000 being profit on sale of plant and machinery. Pass Journal
Entries in the books of company and prepare the extract of Balance Sheet after bonus issue.

Question 4 (ICAI Study Material) Pg no._____

The following notes pertain to Brite Ltd.'s Balance Sheet as on 31st March, 2023:
Note Particulars Amount
(In Lacs)
Note 1 Share Capital
Authorised:
20 crore shares of ₹ 10 each 20,000
Issued and Subscribed:
10 crore Equity Shares of ₹ 10 each 10,000
2 crore 11% Cumulative Preference Shares of ₹ 10 each 2,000
Total 12,000
Called and paid up:
10 crore Equity Shares of ₹ 10 each, ₹ 8 per share called and paid up 8,000
2 crore 11% Cum. Preference Shares of ₹ 10 each, fully called & paid up 2,000
10,000
Note 2 Reserves and Surplus:
Capital Redemption Reserve 1,485
Securities Premium (collected in cash) 2,000
General Reserve 1,040
Surplus i.e. credit balance of Profit & Loss Account 273
4,798
On 2nd April 2023, the company made the final call on equity shares @ ₹ 2 per share. The
entire money was received in the month of April, 2023.
On 1st June 2023, the company decided to issue to equity shareholders bonus shares at the
rate of 2 shares for every 5 shares held. Pass journal entries for all the above mentioned
transactions. Also prepare the notes on Share Capital and Reserves and Surplus relevant to
the Balance Sheet of the company immediately after the issue of bonus shares

Question 5 (ICAI Study Material) Pg no._____

Following is the extract of the Balance Sheet of Solid Ltd. as at 31st March, 2023:
Authorized capital :
10,000 12% Preference shares of ₹ 10 each 1,00,000
1,00,000 Equity shares of ₹ 10 each 10,00,000
11,00,000
Issued and Subscribed capital:
8,000 12% Preference shares of ₹ 10 each fully paid 80,000
90,000 Equity shares of ₹ 10 each, ₹ 8 paid up 7,20,000
Reserves and Surplus :
General reserve 1,60,000
Revaluation reserve 35,000
Securities premium (collected in cash) 20,000
Profit and Loss Account 2,05,000
Secured Loan:
12% Debentures @ ₹ 100 each 5,00,000

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 CA NITIN GOEL ACCOUNTING FOR BONUS ISSUE & RIGHT ISSUE

On 1st April, 2023 the Company has made final call @ ₹ 2 each on 90,000 equity shares. The
call money was received by 20th April, 2023. Thereafter the company decided to capitalize 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.

Question 6 Pg no._____
Following items appear in the Trial Balance of X Ltd. as at 31st March 2023:
₹
Authorised capital:
3,00,000 equity shares of ₹ 10 each 30,00,000
Issued and subscribed capital:
80,000 Equity Shares of ₹ 10 each, ₹ 7.50 paid up 6,00,000
1,20,000 Equity Shares of ₹ 10 each 12,00,000
Capital Redemption Reserve 2,60,000
Revaluation Reserve 20,000
Securities Premium Account 1,20,000
General Reserve 2,00,000
Profit & Loss Account 1,00,000
Capital Reserve (including ₹ 50,000 being profit on sale of machinery) 1,50,000

The company decided to convert the partly paid equity shares into fully paid shares by way of
bonus and to issue fully paid-up bonus shares to the holders of fully paid up shares in the
same ratio.
You are required to pass journal entries assuming that there should be minimum reduction
in free reserves.

TOPIC 2: RIGHT ISSUE

A 2A 7 (RTP May 2019) / (ICAI Study Material)
Question Pg no._____
A company offers new shares of ₹ 100 each at 25% premium to existing shareholders on one
for four bases. The cum-right market price of a share is ₹ 150.
Calculate the value of a right. What should be the ex-right market price of a share?

Question 8 Pg no._____
A Company having 70,000 shares of ₹ 10 each as its issued share capital and having market
value of ₹ 21 issues rights shares in the ratio of 1:10 at an issue price of ₹ 10.
Pass journal entry for issue of right shares

Question 9 (RTP May 2021) Pg no._____

Beta Ltd. having share capital of 20,000 equity shares of 10 each decides to issue rights share
at the ratio of 1 for every 8 shares held at par value.
Assuming all the share holders accepted the rights issue and all money was duly received,
pass journal entry in the books of the company.

Question 10 (ICAI Study Material) Pg no._____

Following notes pertain to the Balance Sheet of Mars Company Limited as at 31st March 2023:

Page 11D.5
CA NITIN GOEL ACCOUNTING FOR BONUS ISSUE & RIGHT ISSUE

₹
Authorised capital:
50,000 12% Preference shares of ₹ 10 each 5,00,000
5,00,000 equity shares of ₹ 10 each 50,00,000
55,00,000
Issued and subscribed capital:
50,000 12% Preference shares of ₹ 10 each 5,00,000
4,00,000 Equity Shares of ₹ 10 each, ₹ 8 paid up 32,00,000
Reserves & Surplus
General Reserve 1,60,000
Capital Redemption Reserve 2,40,000
Securities Premium Account (collected in cash) 2,75,000
Revaluation Reserve 1,00,000
Profit & Loss Account 16,00,000
On 1st April, 2023, the Company has made final call @ ₹ 2 each on 4,00,000 equity shares. The
call money was received by 25th April, 2023. Thereafter, on 1st May 2023 the company decided
to capitalise its reserves by way of bonus at the rate of one share for every four shares held,
it decided that there should be minimum reduction in free reserves.
On 1st June 2023, the Company issued Rights shares at the rate of two shares for every five
shares held on that date at issue price of ₹ 12 per share. All the rights shares were accepted
by the existing shareholders and the money was duly received by 20th June 2023.
Show necessary journal entries in the books of the company for bonus issue and rights issue.

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 CA NITIN GOEL ACCOUNTING FOR BONUS ISSUE & RIGHT ISSUE

PRACTICE QUESTIONS

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

2) Which of the following statements is true with regard to declaring and issuing of Bonus
Shares?
(a) Assets are transferred from the company to the shareholders.
(b) A Bonus issue results in decrease in reserves and surplus.
(c) A Bonus issue is same as declaration of dividends.

3) 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).

4) Bonus issue is also known as

(a) Scrip issue.
(b) Capitalisation issue.
(c) Both (a) and (b).

5) The bonus issue is not made unless

(a) Partly paid shares are made fully paid up.
(b) It is provided in its articles of association
(c) Both (a) and (b).

6) 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.

7) ABC Co. Ltd resolved to issue bonus shares. Which of the following is not a pre-requisite
for issuance of bonus shares?
(a) Authorization in Articles of Association.
(b) Timely Payment of statutory dues of employees such as PF, Gratuity etc.
(c) Sufficient balance in bank account of company.

8) In case of further issue of shares, the right to renounce the shares in favour of a third party
(a) Must include a right exercisable by the person concerned to renounce the shares;
(b) Should include a right exercisable by the person concerned to renounce the shares;
(c) Is deemed to include a right exercisable by the person concerned to renounce the
shares (subject to the provisions under the articles of the company).

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 CA NITIN GOEL ACCOUNTING FOR BONUS ISSUE & RIGHT ISSUE

9) A company’s share’s face value is ₹10, book value is ₹20, Right issue price is ₹30 and
Market price is ₹40, while recording the issue of right share, the securities premium will
be credited with
(a) ₹10
(b) ₹20
(c) ₹30

10) A. Right shares enable existing shareholders to maintain their proportional holding in the
company.
B. Right share issue does not cause dilution in the market value of the share.
Which of the option is correct?
(a) A-Correct; B Correct
(b) A – Incorrect; B Correct
(c) A - Correct; B – Incorrect

11) Ex-Rights price can be calculated by which of these formulas?

(a) (Cum rights value of the existing shares + Rights share issue proceeds)/ (existing
number of shares + No. of right shares).
(b) (Cum rights value of the existing shares + Rights share issue proceeds) X (existing
number of shares + No. of right shares).
(c) (Cum rights value of the existing shares - Rights share issue proceeds)/ (existing
number of shares – No. of right shares).

ANSWERS MCQs
1. (b) 2. (b) 3. (c) 4. (c) 5. (c) 6. (a) 7. (c) 8. (c) 9. (b) 10. (c) 11. (a)

TRUE / FALSE

State with reasons whether the following statement is true or false:

1) Earning per share gets increased after bonus issue.
2) Issued share capital including issue of rights shares and bonus shares may be more than
the Authorised capital.
3) Rights issue of shares results in decrease of market value of per share in comparison to
market price before rights issue.
4) Right shares are normally offered at a price more than the cum-right value of the share,
causing dilution in its value post-right issue.

Solution
1) False: Earnings per share gets decreased after bonus issue.
2) False: Issued share capital including issue of rights shares and bonus shares is always
less than or equal to Authorised capital.
3) True: Rights issue of shares results in decrease of market value of per share in comparison
to market price before rights issue.
4) False: Right shares are normally offered at a price less than the cum-right value of the
share, causing dilution in its value post-right issue.

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 CA NITIN GOEL ACCOUNTING FOR BONUS ISSUE & RIGHT ISSUE

HOMEWORK QUESTIONS

TOPIC 1: BONUS ISSUE

A 2A
Question 1 (ICAI Study Material) Pg no._____
Following items appear in the trial balance of Saral Ltd. as on 31st March, 2023:
4,500 Equity shares of ₹ 100 each 4,50,000
Securities Premium (collected in cash) 40,000
Capital Redemption Reserve 70,000
General Reserve 1,05,000
Profit and Loss Account (Cr. Balance) 45,000
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 of Saral Ltd.

Question 2 (RTP May 2023) Pg no._____

Following items appear in the Trial Balance of Satish Limited as on 31st March, 2023:
9,000 Equity shares of ₹ 100 each 9,00,000
Capital Reserves (including ₹ 80,000 being profit on sale of plant) 1,80,000
Securities Premium 80,000
Capital Redemption Reserve 60,000
General Reserve 2,10,000
Profit and Loss Account (Cr. Balance) 1,30,000
The company decided to issue bonus shares to equity shareholders 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 of Satish Ltd.

Question 3 (CA Inter Nov 2019) (5 Marks) Pg no._____

Following is the extract of Balance Sheet of Prem Ltd. as at 31st March, 2023:
₹
Authorized capital:
3,00,000 equity shares of ₹ 10 each 30,00,000
25,000,10% preference shares of ₹ 10 each 2,50,000
32,50,000
Issued and subscribed capital:
2,70,000 equity shares of ₹ 10 each fully paid up 27,00,000
24,000, 10% preference shares of ₹10 each fully paid up 2,40,000
29,40,000
Reserves and surplus:
General reserve 3,60,000
Capital redemption reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and loss account 6,00,000
11,55,000
On 1st April, 2023, the company decided to capitalize its reserves by way of bonus at the rate
of two shares for every five shares held.
Show necessary journal entries in the books of the company and prepare the extract of the
balance sheet after bonus issue.

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 CA NITIN GOEL ACCOUNTING FOR BONUS ISSUE & RIGHT ISSUE

Question 4 (ICAI Study Material) Pg no._____

Following is the extract of the Balance Sheet of Preet Ltd. as at 31st March, 2023
Authorised capital :
15,000 12% Preference shares of ₹ 10 each 1,50,000
1,50,000 Equity shares of ₹ 10 each 15,00,000
16,50,000
Issued and Subscribed capital:
12,000 12% Preference shares of ₹ 10 each fully paid 1,20,000
1,35,000 Equity shares of ₹ 10 each, ₹ 8 paid up 10,80,000
Reserves and Surplus :
General reserve 1,80,000
Capital Redemption reserve 60,000
Securities premium (collected in cash) 37,500
Profit and Loss Account 3,00,000
On 1st April, 2023, the Company has made final call @ ₹ 2 each on 1,35,000 equity shares. The
call money was received by 20th April, 2023. Thereafter, the company decided to capitalize 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, 2023 after bonus issue.

Question 5 (ICAI Study Material) / (RTP M18/N19/N20/M21/N21/N23) (Similar) Pg no._____

(Similar)
Following notes pertain to the Balance Sheet of Manoj Ltd. as at 31st March, 2023
Authorized capital:
30,000 12% Preference shares of ₹ 10 each 3,00,000
3,00,000 Equity shares of ₹ 10 each 30,00,000
33,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of ₹ 10 each fully paid 2,40,000
2,70,000 Equity shares of ₹ 10 each, ₹ 8 paid up 21,60,000
Reserves and Surplus :
General reserve 3,60,000
Capital Redemption reserve 1,20,000
Securities premium (collected in cash) 75,000
Profit and Loss Account 6,00,000
On 1st April, 2023, the Company has made final call @ ₹ 2 each on 2,70,000 equity shares. The
call money was received by 20th April, 2023. Thereafter, the company decided to capitalize 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 company and prepare the extract of the
balance sheet as on 30th April, 2023 after bonus issue.

Question 6 (RTP Nov 2018) / (RTP May 2019) Pg no._____

Following is the extract of the Balance Sheet of Xeta Ltd. as at 31st March, 2023
Authorized capital :
50,000 12% Preference shares of ₹ 10 each 5,00,000
4,00,000 Equity shares of ₹ 10 each 40,00,000
45,00,000
Issued and Subscribed capital:
24,000 12% Preference shares of ₹ 10 each fully paid 2,40,000
2,70,000 Equity shares of ₹ 10 each, ₹ 8 paid up 21,60,000

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 CA NITIN GOEL ACCOUNTING FOR BONUS ISSUE & RIGHT ISSUE

Reserves and Surplus :

General reserve 3,60,000
Securities premium 1,00,000
Profit and Loss Account 6,00,000
On 1st April, 2023, the Company has made final call @ ₹ 2 each on 2,70,000 equity shares. The
call money was received by 20th April, 2023. Thereafter, the company decided to capitalize 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, 2023 after bonus issue

Question 7 (CA Inter May 2018) (5 Marks) Pg no._____

Following are the balances appear in the trial balance of Arya Ltd. as at 31st March, 2023.
Amount
Issued and Subscribed Capital:
10,000; 10% Preference Shares of ₹ 10 each fully paid 1,00,000
1,00,000 Equity Shares of ₹ 10 each ₹ 8 paid up 8,00,000
Reserves and Surplus:
General Reserve 2,40,000
Securities Premium (collected in cash) 25,000
Profit and Loss Account 1,20,000
On 1st April, 2023 the company has made final call @ ₹ 2 each on 1,00,000 Equity Shares. The
call money was received by 15th April, 2023. Thereafter the company decided to issue bonus
shares to equity shareholders at the rate of 1 share for every 5 shares held and for this
purpose, it decided that there should be minimum reduction in free reserves.
Pass Journal entries.

Question 8 (CA Inter Jan 2021) (5 Marks) Pg no._____

Following items appear in the Trail Balance of Star Ltd. as on 31st March, 2023:
₹
80,000 equity shares of ₹ 10 each, ₹ 8 paid-up 6,40,000
Capital Reserve (including ₹ 45,000 being profit on sale of Machinery) 1,10,000
Revaluation Reserve 80,000
Capital redemption reserve 75,000
Securities premium 60,000
General reserve 2,10,000
Profit and loss account (Cr. Balance) 1,00,000
On 1st April, 2023, the Company has made final call on Equity shares @ ₹ 2 per share. The
entire money was received in the month of April, 2021. On 1st June, 2023, the Company decided
to issue to Equity shareholders bonus shares at the rate of 2 shares for every 5 shares held
and for this purpose, it was decided that there should be minimum reduction in free reserves.
Pass necessary journal entries in the Books of Star Ltd.

Question 9 (ICAI Study Material) / (RTP Nov 2022) (Similar) Pg no._____

Pass Journal Entries in the following circumstances:
(i) A Limited company with subscribed capital of ₹ 5,00,000 consisting of 50,000 Equity
shares of ₹ 10 each; called up capital ₹ 7.50 per share. A bonus of ₹ 1,25,000 declared out
of General Reserve to be applied in making the existing shares fully paid up.
(ii) A Limited company having fully paid up capital of ₹ 50,00,000 consisting of Equity shares
of ₹ 10 each, had General Reserve of ₹ 9,00,000. It was resolved to capitalize ₹ 5,00,000
out of General Reserve by issuing 50,000 fully paid bonus shares of ₹ 10 each, each
shareholder to get one such share for every ten shares held by him in the company.

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 CA NITIN GOEL ACCOUNTING FOR BONUS ISSUE & RIGHT ISSUE

Question 10 (CA Inter May 2023) (5 Marks) Pg no._____

Storek Limited has a subscribed capital of ₹ 21,00,000 in Equity Share Capital consisting of
1,50,000 shares of ₹ 10 each fully paid and 1,00,000 shares of ₹ 10 each, called up capital ₹ 6
per share. On 01.04.2023 the company decides to convert the partly paid-up shares into fully
paid-up shares by way of bonus issue and holders of fully paid-up shares are also allotted
fully paid-up bonus share in the same ratio.
The following figures appear in trial balance of Storek Limited as on 31.03.2023:
(₹ )
Capital Redemption Reserve 80,000
Capital Reserve 1,00,000
Securities Premium 2,20,000
General Reserve 12,50,000
Surplus (credit balance in Profit & Loss Account) 2,40,000
Securities Premium Account includes a premium of ₹ 75,000 for shares issued to vendors
pursuant to a scheme of absorption. It was decided that there should be minimum reduction
in free reserves. You are required to pass necessary Journal Entries.

Question 11 (RTP May 2022) Pg no._____

Mobile Limited has authorized share capital of 1,00,000 equity shares @ ₹ 10 each. The
company has already issued 60% of its capital for cash. Now the company wishes to issue
bonus shares in the ratio 1:5 to its existing shareholders. The following is the status of
Reserve and Surplus of the company:
₹
General Reserve ₹ 1,60,000
Plant Revaluation Reserve ₹ 25,000
Securities Premium Account (Realised in cash) ₹ 60,000
Capital Redemption Reserve ₹ 80,000
Answer the following questions:
a) What is the number of Bonus shares to be issued?
b) Can company issue Bonus out of General Reserve only?
c) Give Journal Entries & also give the extracts of balance sheet after such Bonus issue.
Is it possible for the company to issue partly paid-up bonus shares?

TOPIC 2: RIGHT ISSUE

A 2A 12
Question (RTP Nov 18/22/23) (Similar) / (RTP May 2020) / (ICAI Study Material) Pg no._____
A company has decided to increase its existing share capital by making rights issue to its
existing shareholders. The company is offering one new share for every two shares held by
the shareholder. The market value of the share is ₹ 240 and the company is offering one share
of ₹ 120 each. Calculate the value of right. What should be the ex-right market price of share?

Question 13 (RTP May 2018) / (RTP Nov 2020) / ( RTP May 2021) Pg no._____
Omega company offers new shares of ₹ 100 each at 25% premium to existing shareholders
on the basis one for five shares. The cum-right market price of a share is ₹ 200.
You are required to calculate the (i) Ex-right value of a share; (ii) Value of a right share?

Question 14 (RTP Nov 2019) / (RTP Nov 2021) Pg no._____

Omega company offers new shares of ₹ 100 each at 20% premium to existing shareholders
on the basis of one for four shares. The cum-right market price of a share is ₹ 190.
You are required to calculate the Value of a right share.

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 CA NITIN GOEL ACCOUNTING FOR BONUS ISSUE & RIGHT ISSUE

Question 15 (RTP May 2023) Pg no._____

A company having 100,000 shares of ₹ 10 each as its issued share capital, and having a market
value of ₹ 46, issues rights shares in the ratio of 1:10 at an issue price of ₹ 31.
Calculate value of right & pass necessary journal entry in the books of company.

Question 16 (ICAI Study Material) Pg no._____

A Ltd company having share capital of 25,000 equity shares of ₹ 10 each decides to issue
rights share at the ratio of 1 for every 4 shares held at par value.
Assuming all the shareholders accepted the rights issue and all money was duly received,
pass journal entries in the books of the company.

Question 17 (RTP May 2022) Pg no._____

a) A company offers new right shares of ₹ 100 each at 20% premium to existing
shareholders on one for four shares. The cum-right market price of a share is ₹ 140.
You are required to calculate (i) Ex-right value of a share; (ii) Value of a right.
b) A company having 1,00,000 shares of ₹ 10 each as its issued share capital, and having a
market value of ₹ 45 issues rights shares in the ratio of 1:5 at an issue price of ₹ 25.
Pass journal entry for issue of right shares.

Question 18 (CA Inter May 2022) (5 Marks) Pg no._____

Following is the extract of the Balance Sheet of Sujata Foods Limited as at 31st March,2023:
Particulars ₹
Authorised Capital
1,00,000 12% Preference shares of ₹ 10 each 10,00,000
5,00,000 Equity shares of ₹ 10 each 50,00,000
60,00,000
Issued and Subscribed capital
8,000 12% Preference shares of ₹ 10 each fully paid 80,000
90,000 Equity shares of ₹ 10 each, ₹ 8 paid up 7,20,000
Reserves and Surplus
General Reserve 1,20,000
Capital Redemption Reserve 75,000
Securities Premium (Collected in cash) 25,000
Profit and Loss Account 2,00,000
Revaluation Reserve 80,000
On 1st April 2023, the company has made final call @ ₹ 2 each on 90,000 equity shares. The
call money was received by 15th April,2023. Thereafter, the company decided to capitalize
its reserves by way of bonus at the rate of one share for every four shares held, it also
decided that there should be minimum reduction in free reserves.
On 1st June 2023, the Company issued right shares at the rate of two shares for every five
shares held on that date at issue price of ₹ 12 per share. All the right shares were accepted
by the existing shareholders and the money was duly received by 20th June,2023.
You are required to pass necessary journal entries in the books of the Sujata Foods Limited
for bonus issue and rights issue.

Page 11D.13
 CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

Unit 5: REDEMPTION OF PREFERENCE SHARES

”Make schedule, Don’t just stick it on your study table but work on it…”

1. Redemption of Preference Shares means repaying the Capital back to the Preference
Shareholders, at an agreed amount at an agreed date.
2. The process of discharging the liability / obligation towards Preference Share Capital is
called redemption. So, Redemption = Repayment of Capital during the lifetime of the
Company.
3. Date of redemption is called “Maturity Date” and is usually printed on the Preference Share
Certificate itself.

CONDITIONS TO BE FULFILLED FOR REDEMPTION OF PREFERENCE SHARES

(SECTION 55 OF COMPANIES ACT, 2013)

Authorized by The Articles of Association should contain a provision authorizing the

Articles Company to issue Redeemable Preference Shares (not exceeding 20
years from the date of issue)

Fully Paid Preference share Capital cannot be redeemed unless they are fully paid.
If the Company has partly paid-up Preference Shares which are to be
redeemed, they should be made fully paid before redeeming them.

Sourcing The Preference Shares can be redeemed only out of –

Redemption a) Fresh Issue: Proceeds of Fresh Issue of shares for purpose of
redemption, & / or
b) Divisible Profits: Profits otherwise available for distribution as
Dividend.
Capital If the Redemption is not sourced by Fresh Issue of Share Capital, then an
Redemption amount equal to the Nominal Value of shares redeemed, to the extent
Reserve not financed by fresh issue, should be transferred to Reserve called
Capital Redemption Reserve (CRR).
Amount to be transferred to CRR
Face Value of Preference Shares to be redeemed
Less Face Value of Fresh Issue of Share Capital

Utilization of The balance in CRR can be utilized only for the purpose of issuing Fully
CRR Paid Bonus Shares. It shall not be used for any other Purpose, e.g.
distribution of dividend, etc.

Sourcing Prescribed Companies & Provided for out of the profits of the
Premium on whose financial statements company before the shares are redeemed
Redemption comply with AS (u/s 133)
Other Companies Provided for out of the profits of the
company or out of the company’s securities
premium account, before such shares are
redeemed.

Page 11E.1
 CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

(i) Out of Undistributed Profits, and (b) Out of Fresh Issue of Capital.
Redemption of Preference Shares
Out of Capital Out of Profit
(i.e. Out of Fresh Issue of Shares) (i.e. Capitalization of Undistributed Profits)
(a) To raise finance for repaying the A company having surplus profits, can use
Preference Shareholders, Company can these surplus funds for redemption of
issue Equity Shares or Pref. Shares. Preference Shares. In such a case, transfer to
(b) Such fresh issue can be made either at CRR is necessary.
par, or at premium.

Note:
1. A company may redeem its Preference Share Capital out of Capital and Profits, i.e.
combination of above.
2. Redemption out of Capital means that the Company can issue either Equity Shares or
Preference Shares. So, Preference Shares cannot be redeemed by fresh issue of
Debentures
PURPOSE OF TRANSFER TO CRR
Retention of When Preference Shares are redeemed out of Profits, replacement /
Capital retention of Capital is ensured in an indirect manner, by transfer of profit
to CRR. The amount, which would otherwise have been distributed as
dividend, is now retained in the business, in the form of CRR, and this is
subsequently converted into Equity Share Capital, by issuing Bonus
Shares. Transfer to CRR creates non-distributed profits, and maintains
the Capital Base of the Company
Protection of The purpose of transfer to CRR is to ensure Capital Maintenance, and to
Outsiders protect the interests of Outsiders / Creditors of the Company. Transfer to
Interest CRR ensures that there is no reduction in “Shareholders’ Funds” or
Capital Base due to the redemption, and hence the interest of outsiders
is not affected.

ACCOUNTING ENTRIES FOR REDEMPTION OF PREFERENCE SHARES

Transaction Journal Entries

1. Calling unpaid portion of Redeemable Preference Share Final Call A/c Dr.
Preference Share Capital, if any To Redeemable Preference Share Capital A/c
2. Receipt of Final Call Amount Bank A/c Dr.
[Also see Note below] To Redeemable Preference share final call A/c
3. Fresh issue of Share Capital for Bank A/c Dr.
the purpose of redemption To Share Capital A/c (at Face value)
To Securities Premium A/c (if at premium)
4. Sale of Investments or Current Bank A/c Dr.
Assets for raising funds for Profit and loss A/c (if sold at a loss) Dr.
redemption To Investment/ Current Assets A/c
To Profit and loss A/c (if sold at profit)
5. Transfer of preference share Redeemable Preference Share Capital A/c Dr.
capital & premium on Premium on Redemption of Pref. Share Dr.
redemption (if any) to To Preference shareholders A/c
preference shareholders A/c

Page 11E.2
CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

6. Transferring divisible profit to General Reserve A/c Dr.

capital redemption reserve Profit and Loss A/c Dr.
account Other divisible profits A/c Dr.
To Capital Redemption Reserve A/c
(Nominal Value of PSC to be redeemed Less
Nominal value of any fresh issue of share capital)
7. Sourcing Premium payable on Profit and loss A/c Dr.
Redemption of Preference General Reserve A/c Dr.
share To Premium on Redemption of Preference
shares A/c
8. Making Payment to Preference Preference shareholders A/c Dr.
shareholders To Bank A/c

Note: Non-Payment of Final Call:

1. If final Call is made on partly paid-up Preference Shares (as per Entry 1 above), but some
Preference shareholders fail to pay the call amount due, those Preference Shares can be
forfeited.
2. Such Forfeited Shares are generally not re-issued, since redemption of these Shares is
due immediately or in the near future.

Conditions when company should issue new equity shares for redemption of pref. shares:
A company may prefer issue of new equity shares in the following situations:
(a) When the company realizes that the capital is needed permanently, and it makes more
sense to issue Equity Shares in place of Redeemable Preference Shares which carry a
fixed rate of dividend.
(b) When the balance of profit, which would otherwise be available for dividend, is insufficient.
(c) When the liquidity position of the company is not good enough.

Redemption of Preference shares by issue of fresh equity shares

Advantages:
(1) No cash outflow of money is required – now or later.
(2) New equity shares may be valued at a premium.
(3) Shareholders retain their equity interest.
Disadvantages:
(1) There will be dilution of future earnings;
(2) Share-holding in the company is changed.

Redemption of Preference shares by capitalization of undistributed divisible profits

Advantages:
(1) No change in the percentage of equity share-holding of the company;
(2) Surplus funds can be used.
Disadvantages:
(1) There may be a reduction in liquidity or assets may need to be sold such as investments.

Page 11E.3
CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

Example 1: Preference Share Capital ₹ 2,00,000. New Issue 15,000 shares of 10 each.

Example 2: Preference Share Capital ₹ 2,00,000. New Issue 15,000 shares of 10 each @ 10%
premium.

Example 3: Preference Share Capital ₹ 2,00,000. New Issue 30,000 shares of 10 each.

Example 4: Preference Share Capital ₹ 2,00,000. Premium on Redemption 10%.

New Issue 15,000 shares of 10 each @ 10 % premium.

Example 5: Preference Share Capital 2,500 shares of 100 each 80 paid up

New Issue 15,000 shares of 10 each.

Example 6: Preference Share Capital ₹ 4,00,000 Premium on Redemption 10%.

Free Reserves 2,60,000. Find equity shares to be issued FV= 10 each

Page 11E.4
CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

Example 7: Preference Share Capital ₹ 65,000 Premium on Redemption 10%.

Free Reserves 48,000. P&L balance to be maintained 15,000.
Find equity shares to be issued FV= 50 each issued at a premium of 13 each.

Example 8: Preference Share Capital ₹ 2,00,000 Premium on Redemption 10%.

Existing bank balance 20,000. Investment sold for 27,500.
Minimum Bank Balance to be maintained 15,000.
Find equity shares to be issued FV= 10 each issued at 25% premium.

Page 11E.5
 CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

ASSIGNMENT QUESTIONS

Question 1 (ICAI Study Material) Pg no._____

C Ltd. had 10,000, 10% Redeemable Preference Shares of ₹ 100 each, fully paid up. The
company decided to redeem these preference shares at par, by issue of sufficient number of
equity shares of ₹ 10 each at a premium of ₹ 2 per share as fully paid up.
You are required to pass necessary Journal Entries including cash transactions in the books
of the company.

Question 2 (ICAI Study Material) / (RTP May 2023) (Similar) Pg no._____

The Board of Directors of a Company decide to issue minimum number of equity shares of ₹
9 to redeem ₹ 5,00,000 preference shares. The maximum amount of divisible profits available
for redemption is ₹ 3,00,000.
Calculate the number of shares to be issued by the company to ensure that provisions of
Section 55 are not violated. Also determine number of shares if company decides to issue
shares in multiples of 50 only.

Question 3 (RTP Nov 2019) Pg no._____

The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December, 2021:
Share capital: 50,000 Equity shares of ₹10 each fully paid – ₹5,00,000; 2,000 10% Redeemable
preference shares of ₹100 each fully paid – ₹ 2,00,000. Reserve & Surplus: Capital reserve –
₹2,00,000; General reserve –₹ 2,00,000; Profit and Loss Account – ₹75,000.
On 1st January 2022, Board of Directors decided to redeem the preference shares at premium
of 5% by utilization of reserves.
Pass Journal Entries including cash transactions in the books of company.

Question 4 (RTP May 2019)/(May 2020)/(Nov 2023) (Similar) / (ICAI Study Material) Pg no._____
The capital structure of a company consists of 20,000 Equity Shares of ₹ 10 each fully paid up
and 1,000 8% Redeemable Preference Shares of ₹ 100 each fully paid up (issued on 1.4.2021).
Undistributed reserve and surplus stood as: General Reserve ₹ 80,000; Profit and Loss
Account ₹ 20,000; Investment Allowance Reserve out of which ₹ 5,000, (not free for
distribution as dividend) ₹ 10,000; Securities Premium ₹ 2,000, Cash at bank amounted to ₹
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
utilizing the undistributed reserve and surplus, subject to the conditions that a sum of ₹
20,000 shall be retained in general reserve and which should not be utilized.
Pass Journal Entries to give effect to the above arrangements.

Question 5 (ICAI Study Material) / (RTP May 2023) (Similar) Pg no._____

C Limited had 3,000, 12% Redeemable Preference Shares of ₹ 100 each, fully paid up. The
company had to redeem these shares at a premium of 10%. It was decided by the company to
issue the following:
a) 25,000 Equity Shares of ₹ 10 each at par,
b) 1,000 14% Debentures of ₹ 100 each.
The issue was fully subscribed and all amounts were received in full. The payment was duly
made. The company had sufficient profits. Show Journal Entries in the books of the company.

Page 11E.6
 CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

Question 6 Pg no._____
The balance sheet of A Ltd. as on 31.12.2021 is given below:
EQUITIES & LIABILITIES ₹
Shareholder’s Funds
5,000 Equity Shares (₹ 100 each fully paid-up) 5,00,000
9% Redeemable Preference Shares (₹ 10 each fully paid-up) 2,00,000
Profit & Loss Account 1,60,000
Current Liabilities 1,20,000
9,80,000
ASSETS ₹
Non-Current Assets
Property, Plant & Equipment 4,00,000
Investments 2,00,000
Current Assets
Bank balance 10,000
Other Current Assets 3,70,000
9,80,000
On 1.1.2022 the company:
(a) Redeemed preference shares at a premium of ₹ 2 per share.
(b) Realized investments at a value of ₹ 1,60,000.
(c) Issued at a premium of ₹ 40 per share, such number of equity shares of ₹ 100 each for
the purpose of redemption as to ensure that after the compliance with requirements
of the Companies Act, 2013, the credit balance in Profit & Loss A/c would be ₹ 25,000.
(d) Issued of bonus equity share at par at the rate of 1 share for every 20 shares held on
31st December, 2021.
You are required to show journal entries to record the above transactions.

Question 7 (ICAI Study Material) Pg no._____

X Ltd. gives you the following information as at 31st March, 2023:
Particulars ₹
EQUITY AND LIABILITIES
1. Shareholders’ funds
Share capital 2,90,000
Reserves and Surplus 48,000
2. Current liabilities
Trade Payables 56,500
TOTAL 3,94,500
ASSETS
Non Current Assets
Property, Plant & Equipment & Intangible Assets
Property, Plant & Equipment 3,45,000
Non Current Investments 18,500
2. Current Assets
Cash and cash equivalents (bank) 31,000
TOTAL 3,94,500

Page 11E.7
 CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

The share capital of the company consists of ₹ 50 each equity shares of ₹ 2,25,000 and ₹ 100
each Preference shares of ₹ 65,000 (issued on 1.4.2021). Reserves and Surplus comprises
Profit and Loss Account 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 ₹ 15,000.
b) to finance part of redemption from company funds, subject to, leaving a bank balance of ₹
12,000.
c) to issue minimum equity share of ₹ 50 each to raise the balance of funds required.
You are required to pass the necessary Journal Entries to record the above transactions.

Question 8 (ICAI Study Material) Pg no._____

The books of B Ltd. showed the following balance on 31st December, 2023:
30,000 Equity Shares of ₹ 10 each fully paid; 18,000 12% Redeemable Preference Shares of ₹
10 each fully paid; 4,000 10% Redeemable Preference Shares of ₹ 10 each, ₹ 8 paid up (all
shares issued on 1st April, 2022).
Undistributed Reserve and Surplus stood as: Profit and Loss Account ₹ 80,000; General
Reserve ₹ 1,20,000; Securities Premium Account ₹ 15,000 and Capital Reserve ₹ 21,000.
Preference shares are redeemed on 1st January, 2024 at a premium of ₹ 2 per share. The
whereabouts of the holders of 100 shares of ₹ 10 each fully paid are not known.
For redemption, 3,000 equity shares of ₹ 10 each are issued at 10% premium. At the same
time, a bonus issue of equity share was made at par, two shares being issued for every five
held on that date out of the Capital Redemption Reserve Account. However, equity shares,
issued for redemption are not eligible for bonus.
Show the necessary Journal Entries to record the transactions. (Ignore date column)

Question 9 Pg no._____
The following is the summarized balance sheet of XYZ Ltd.
EQUITIES & LIABILITIES ₹
50,000 Equity Shares (₹ 10 each) 5,00,000
1,000 Preference Shares (₹ 100 each) 1,00,000
Less: Calls-in-Arrear (50 X 20) (1,000) 99,000
Securities Premium Account 20,000
Profit & Loss Account 60,000
General Reserve 70,000
Non-Current Liabilities -
Current Liabilities 1,51,000
9,00,000
ASSETS ₹
Non-Current Assets 90,000
Current Assets 8,10,000
9,00,000
The redeemable preference shares were redeemed on the following basis:
(1) Further 4,500 equity shares were issued at a premium of 10%.
(2) Of the 50 preference shares, holders of 40 shares paid the call money before the date of
redemption. Balance 10 shares were forfeited for non-payment of calls before redemption.
The forfeited shares were re-issued as fully paid on receipt of ₹ 500 before redemption.
(3) Preference shares were redeemed at a premium of 10%. All payments were made except
to holders of 150 shares who cannot be traced. Show journal entries.

Page 11E.8
 CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

Question 10 (ICAI Study Material) Pg no._____

The Balance Sheet of XYZ Ltd. as at 31st December, 2021 inter alia includes the following:
50,000, 8% Preference Shares of ₹ 100 each, ₹ 70 paid up 35,00,000
1,00,000 Equity Shares of ₹ 100 each fully paid up 1,00,00,000
Securities Premium 5,00,000
Capital Redemption Reserve 20,00,000
General Reserve 50,00,000
Bank 15,00,000
Under the terms of their issue, the preference shares are redeemable on 31st March, 2022 at
5% premium. In order to finance the redemption, the company makes a rights issue of 50,000
equity shares of ₹ 100 each at ₹ 110 per share, ₹ 20 being payable on application, ₹ 35
(including premium) on allotment & the balance on 1st January, 2023. The issue was fully
subscribed & allotment made on 1st March, 2022. The money due on allotment were received
by 31st March, 2022.
The preference shares were redeemed after fulfilling the necessary conditions of Section 55
of the Companies Act, 2013.
You are asked to pass necessary Journal Entries (Ignore date column).

Question 11 (ICAI Study Material) Pg no._____

With the help of details in Question 10 above and further assuming that the Preference
Shareholders holding 2,000 shares fail to make the payment for the final call made under Sec
55, you are asked to pass the necessary Journal Entries assuming that the shares in default
are forfeited after giving proper notice. (Ignore date column).

Question 12 (CA Inter Nov 2022) (5 Marks) Pg no._____

Given below are extracts of Balance Sheet of Sea Chemicals Limited as on 31 March, 2022:
st

Particulars Amount in ₹
9% Redeemable Preference Share Capital 10,00,000
Calls in arears (Redeemable Preference Shares) 20,000
General Reserve 7,00,000
Securities Premium 80,000
It is provided that:
a. Preference Shares are of 100 each fully-called, due for immediate redemption at a
premium of 5%.
b. Calls-in-arrears are on account of final call on 1000 shares held by four members whose
whereabouts are not known.
c. Balance of General Reserve and Securities Premium to be fully utilized for the purposes
of redemption and the shortfall to be made good by issue of equity shares of ₹ 10 each at
par.
d. The redemption of preference shares was duly carried out.
You are required to pass the necessary journal entries (narration not required) to give effect
to the above redemption.

Page 11E.9
 CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

PRACTICE QUESTIONS

MULTIPLE CHOICE QUESTIONS

1) Securities premium cannot be used to _______.
(a) Issue bonus shares
(b) Redeem preference shares
(c) Write-off preliminary expenses

2) S Ltd. issued 2,000, 10% Preference shares of ₹ 100 each at par on 1.4.2021, 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

3) Which of the following cannot be used for the purpose of creation of capital redemption
reserve account?
(a) Profit and loss account (credit balance)
(b) General reserve account
(c) Unclaimed dividend account

4) According to Section 52 of the Companies Act, 2013, the amount in the Securities Premium
A/c cannot be used for the purpose of
(a) Issue of fully paid bonus shares
(b) Writing off losses of the company
(c) For purchase of own securities

5) Which of the following can be utilized for redemption of preference shares?

(a) The proceeds of fresh issue of equity shares
(b) The proceeds of issue of debentures
(c) The proceeds of issue of fixed deposit

6) Preference shares amounting to ₹ 2,00,000 (already issued on 1.4.2021) are redeemed at a

premium of 5%, by issue of shares amounting to ₹ 1,00,000 at a premium of 10%. The amount
to be transferred to capital redemption reserve = ?
(a) ₹ 1,05,000
(b) ₹ 1,00,000
(c) ₹ 2,00,000

ANSWERS MCQs
1. (b) 2. (a) 3. (c) 4. (b) 5. (a) 6. (b)

Page 11E.10
 CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

TRUE / FALSE

State with reasons whether the following statement is true or false:

1) When shares are redeemed by utilising distributable profit, an amount equal to the face
value of shares redeemed is transferred to Capital Reserve account by debiting the
distributable profit.
2) A company who prepares financial statements in compliance with Accounting Standards
under Section 133 of the Companies Act, 2013, it cannot utilize securities premium for the
purpose of providing for premium on the redemption of Redeemable Preference shares of
the Company.
3) The balance in forfeited shares account can be used for transfer to capital redemption
reserve account.
4) Capital redemption reserve cannot be used for writing off miscellaneous expenses and
losses

Solution
1) False: When shares are redeemed by utilising distributable profit, an amount equal to the
face value of shares redeemed is transferred to Capital Redemption Reserve account by
debiting the distributable profit.
2) True: A company who prepares financial statements in compliance with Accounting
Standards under Section 133 of the Companies Act, 2013, it cannot utilize securities
premium for the purpose of providing the premium on the redemption of redeemable
preference shares.
3) False: The balance in Forfeited shares account cannot be used for transfer to capital
redemption reserve account.
4) True: Capital redemption reserve cannot be used for writing off miscellaneous expenses
and losses.

Page 11E.11
 CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

HOMEWORK QUESTIONS

Question 1 (ICAI Study Material) Pg no._____

Hinduja Company Ltd. had 5,000, 8% Redeemable 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 of ₹ 10 each fully paid up at par. You are required to pass necessary
Journal Entries including cash transactions in the books of the company.

Question 2 (ICAI Study Material) Pg no._____

G India Ltd. had 9,000 10% redeemable Preference Shares of ₹ 10 each, fully paid up. The
company decided to redeem these preference shares at par by the issue of sufficient number
of equity shares of ₹ 9 each fully paid up. You are required to pass necessary Journal Entries
including cash transactions in the books of the company.

Question 3 (ICAI Study Material) Pg no._____

The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December, 2023.
Share capital: 40,000 Equity shares of ₹ 10 each fully paid - ₹ 4,00,000; 1,000 10% Redeemable
preference shares of ₹ 100 each fully paid – ₹ 1,00,000.
Reserve & Surplus: Capital reserve – ₹ 50,000; Securities premium – ₹ 50,000; General
reserve – ₹ 75,000; Profit and Loss Account – ₹ 35,000
On 1st January 2024, the Board of Directors decided to redeem the preference shares at par
by utilisation of reserve. You are required to pass necessary Journal Entries including cash
transactions in the books of the company.

Question 4 (RTP May 2018) / (RTP Nov 2020) (Similar) / (RTP May 2021) (Similar) Pg no._____
The following are the extracts from the Balance Sheet of ABC Ltd. as on 31st December, 2021:
Share capital: 50,000 Equity shares of ₹10 each fully paid – ₹5,00,000;
1,500 10% Redeemable preference shares of ₹100 each fully paid – ₹ 1,50,000.
Reserve & Surplus: Capital reserve – ₹1,00,000; General reserve –₹ 1,00,000; Profit and Loss
Account – ₹75,000.
On 1st January 2022, the Board of Directors decided to redeem the preference shares at
premium of 10% by utilization of reserves. You are required to prepare necessary Journal
Entries including cash transactions in the books of the company.

Question 5 (RTP Nov 2018) Pg no._____

The following are the extracts from Balance Sheet of Meera Ltd. as on 31st December, 2021.
Share capital: 60,000 Equity shares of ₹10 each fully paid – ₹ 6,00,000; 1,500 10% Redeemable
preference shares of ₹ 100 each fully paid – ₹1,50,000.
Reserve & Surplus: Capital reserve – ₹ 75,000; Securities premium – ₹ 75,000; General
reserve – ₹ 1,12,500; Profit & Loss A/c – ₹ 62,500.
On 1st January 2022, the Board of Directors decided to redeem the preference shares at
premium of 10% by utilisation of reserve. You are required to prepare necessary Journal
Entries including cash transactions in the books of the company.

Question 6 (CA Inter May 2018) (10 Marks) / (RTP Nov 2022) Pg no._____
Dheeraj Limited had 5,000, 10% Redeemable Preference Shares of ₹ 100 each, fully paid up.
The company had to redeem these shares at a premium of 10%.
It was decided by the company to issue the following:
(i) 40,000 Equity Shares of ₹ 10 each at par

Page 11E.12
 CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

(ii) 2,000 12% Debentures of ₹ 100 each.

The issue was fully subscribed and all accounts were received in full. The payment was duly
made. The company had sufficient profits. Show journal entries in the books of the company.

Question 7 Pg no._____
Extract of ledger balances of Kalpana Ltd. as on 31st March, 2022 includes the following:
₹
2,000, 12% Preference shares of ₹ 100 each, fully paid 2,00,000
Surplus 40,000
Securities Premium 12,000
Under the terms of issue, the preference shares are redeemable on 31st March, 2022 at a
premium of 10%. The directors desire to make a minimum fresh issue of equity shares of ₹ 10
each at a premium of 5% for redemption purpose.
You are required to ascertain the amount of fresh issue to be made and pass necessary
journal entries in the books of the company.

Question 8 (CA Inter Jan 2021) (12 Marks) / (RTP Nov 2021) (Similar) Pg no._____
The Capital structure of a company BK Ltd. consists of 30,000 Equity Shares of ₹ 10 each fully
paid up and 2,000 9% Redeemable Preference Shares of ₹ 100 each fully paid up as on
31.03.2022. The other particulars as at 31.03.2022 are as follows:
Amount (₹)
General Reserve 1,20,000
Profit & Loss Account 60,000
Investment Allowance Reserve (not free for distribution as dividend) 15,000
Cash at Bank 1,95,000
Preference Shares are to be redeemed at a premium of 10%. For the purpose of redemption,
the directors are empowered to make fresh issue of Equity Shares at per after utilizing the
undistributed reserve & surplus, subject to the conditions that a sum of ₹ 40,000 shall be
retained in General Reserve and which should not be utilized.
Company also sold investment of 4500 Equity Shares in G Ltd., costing ₹ 45,000 at ₹ 9 per
share. Pass Journal entries to give effect to the above arrangements and also show how the
relevant items will appear in the Balance Sheet as at 31.03.2022 of BK Ltd., after the
redemption is carried out.

Question 9 (CA Inter May 2019) (10 Marks) Pg no._____

The Summarized Balance Sheet of Clean Ltd. as on 31st March, 2022 is as follows:
Particulars ₹
EQUITY AND LIABILITIES
1. Shareholders’ funds
Share capital 5,80,000
Reserves and Surplus 96,000
2. Current liabilities
Trade Payables 1,13,000
TOTAL 7,89,000
ASSETS
1. Non Current Assets
Property, Plant & Equipment & Intangible Assets
Property, Plant & Equipment 6,90,000
Non Current Investments 37,000

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 CA NITIN GOEL REDEMPTION OF PREFERENCE SHARES

2. Current Assets
Cash and cash equivalents (bank) 62,000
TOTAL 7,89,000
The Share Capital of the company consists of ₹ 50 each Equity shares of ₹ 4,50,000 and ₹ 100
each 8% Redeemable Preference Shares of ₹ 1,30,000 (issued on 1.4.2019).
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 ₹ 30,000.
(b) to finance part of redemption from company funds, subject to, leaving a Bank balance of
₹ 24,000.
(c) to issue minimum equity share of ₹ 50 each at a premium of ₹ 10 per share to raise the
balance of funds required.
You are required to
(1) Pass Journal Entries to record the above transactions.
(2) Prepare Balance Sheet after completion of the above transactions.

Question 10 (CA Inter Nov 2020) (12 Marks) Pg no._____

The Books of Arpit Ltd. shows the following Balances as on 31st December, 2021:
Amount (₹)
6,00,000 Equity shares of ₹ 10 each fully paid up 60,00,000
30,000, 10% Preference shares of ₹ 100 each, ₹ 80 paid up 24,00,000
Securities Premium 6,00,000
Capital Redemption Reserve 18,00,000
General Reserve 35,00,000
Under the terms of issue, the Preference Shares are redeemable on 31st March, 2022 at a
premium of 10%. In order to finance the redemption, the Board of Directors decided to make
a fresh issue of 1,50,000 Equity shares of ₹ 10 each at a premium of 20%, ₹ 2 being payable on
application, ₹ 7 (including premium) on allotment and the balance on 1st January, 2023. The
issue was fully subscribed and allotment made on 1st March, 2022. The money due on
allotment was received by 20th March, 2022. The preference shares were redeemed after
fulfilling the necessary conditions of Section 55 of the Companies Act, 2013.
You are required to pass the necessary Journal Entries and also show how the relevant items
will appear in the Balance Sheet of the company after the redemption carried out on 31st
March, 2022 with comparative figures of 31st December,2021.

Question 11 (CA Inter Nov 2018) (5 Marks) Pg no._____

Explain the conditions when a company should issue new equity shares for redemption of the
preference shares. Also discuss the advantages and disadvantages of redemption of
preference shares by issue of equity shares.

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 CA NITIN GOEL REDEMPTION OF DEBENTURES

Unit 6: REDEMPTION OF DEBENTURES

“When you stop chasing wrong things, you give right things a chance to catch you…”

MEANING OF DEBENTURE
A debenture is an instrument issued by a company under its seal, acknowledging a debt and
containing provisions as regards repayment of the principal and interest.

LEGAL PROVISIONS
➢ Under Section 71 (1) of the Companies Act, 2013, a company may issue debentures with an
option to convert such debentures into shares, either wholly or partly at the time of
redemption.
➢ Provided that the issue of debentures with an option to convert such debentures into
shares, wholly or partly, should be approved by a special resolution passed at a duly
convened general meeting.
➢ Section 71 (2) further provides that no company can issue any debentures which carry any
voting rights.
➢ If a charge has been created on any asset or the entire assets of the company, the nature
of the charge & the asset(s) charged are described therein.
➢ Debentures are usually redeemable i.e. either redeemed in cash or convertible after a time
period. Redeemable debentures may be redeemed:
o after a fixed number of years; or
o any time after a certain number of years has elapsed since their issue; or
o on giving a specified notice; or
o by annual drawing.

DEBENTURE REDEMPTION RESERVE (DRR)

A company issuing debentures may be required to create a debenture redemption reserve
account out of the profits available for distribution of dividend and amounts credited to such
account cannot be utilised by the company except for redemption of debentures.
Such an arrangement would ensure that the company will have sufficient liquid funds for the
redemption of debentures at the time they fall due for payment.
In case of partly convertible debentures, DRR shall be created in respect of nonconvertible
portion of debenture issue.

ADEQUACY OF DEBENTURE REDEMPTION RESERVE (DRR)

As per Rule 18 (7) of the Companies (Share Capital and Debentures) Amendment Rules, 2019,
the company shall comply with the requirements with regard to Debenture Redemption
Reserve (DRR) and investment or deposit of sum in respect of debentures maturing during
the year ending on the 31st day of March of next year, in accordance with the conditions given
below—

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 CA NITIN GOEL REDEMPTION OF DEBENTURES

• the Debenture Redemption Reserve shall be created out of the profits of the company
available for payment of dividend;
• the limits with respect to adequacy of DRR and investment or deposits, as the case may be,
shall be as under:
S.No. Debentures Issued by Adequacy of DRR
1 All India Financial Institutions (AIFIs) regulated by No DRR is required
Reserve Bank of India and Banking Companies for
both public as well as privately placed debentures
2. Other Financial Institutions (FIs) within the meaning of DRR will be as applicable
clause (72) of section 2 of the Companies Act, 2013 to NBFCs registered with
RBI (as per (3) below)
3. For listed companies (other than AIFIs and Banking
Companies as specified in Sr. No. 1 above):
All listed NBFCs (registered with RBI under section No DRR is required
a. 45-IA of the RBI Act,) and listed HFCs (Housing
Finance Companies registered with National Housing
Bank) for both public as well as privately placed
debentures
Other listed companies for both public as well as No DRR is required
b. privately placed debentures
4. For unlisted companies (other than AIFIs and Banking
Companies as specified in Sr. No. 1 above
a. All unlisted NBFCs (registered with RBI u/s 45-IA of No DRR is required
the RBI (Amendment) Act, 1997) and unlisted HFCs
(Housing Finance Companies registered with National
Housing Bank) for privately placed debentures
b. Other unlisted companies DRR shall be 10% of the
value of the outstanding
debentures issued

INVESTMENT OF DEBENTURE REDEMPTION RESERVE (DRR) AMOUNT

Further, as per Rule 18 (7) of the Companies (Share Capital and Debentures) Amendment
Rules, 2019, following companies are required to make DRR Investment
➢ All listed NBFCs
➢ All listed HFCs
➢ All other listed companies (other than AIFIs, Banking Companies and Other FIs); and
➢ All unlisted companies which are not NBFCs and HFCs
shall on or before the 30th day of April in each year, in respect of debentures issued, deposit
or invest, as the case may be, a sum which should not be less than 15% of the amount of its
debentures maturing during the year ending on the 31st day of March of next year, in any one
or more of the following methods, namely:
(a) in deposits with any scheduled bank, free from charge or lien;
(b) in unencumbered securities of the Central Government or of any State Government;
(c) in unencumbered securities mentioned in clauses (a) to (d) and (ee) of Section 20 of
the Indian Trusts Act, 1882;
(d) in unencumbered bonds issued by any other company which is notified under clause
(f) of Section 20 of the Indian Trusts Act, 1882.
The amount deposited or invested, as the case may be, above should not be utilised for any
purpose other than for the redemption of debentures maturing during the year.

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 CA NITIN GOEL REDEMPTION OF DEBENTURES

ASSIGNMENT QUESTIONS

Question 1 (ICAI Study Material) Pg no._____

The following balances appeared in the books of Paradise Ltd (unlisted company other than
AIFI, Banking company, NBFC and HFC) on 1-4-2021:
(a) 12 % Debentures ₹ 7,50,000
(b) Balance of DRR ₹ 25,000
(c) DRR Investment 1,12,500 represented by 10% 1,125 secured bonds of government of India of
₹ 100 each.
Annual contribution to the DRR was made on 31st March each year. On 31-3-2022, balance
at bank was ₹ 7,50,000 before receipt of interest. The investments were realized at par
for redemption of debentures at a premium of 10% on the above date.
You are required to prepare the following accounts for the year ended 31st March, 2022:
(1) Debentures Account
(2) DRR Account
(3) DRR Investment Account
(4) Bank Account
(5) Debenture Holders Account

Question 2 (ICAI Study Material) Pg no._____

The following balances appeared in the books of a company (unlisted company other than
AIFI, Banking company, NBFC and HFC) as on December 31, 2021:
6% Mortgage 10,000 debentures of ₹ 100 each; Debenture Redemption Reserve (for
redemption of debentures) ₹ 50,000; Investments in deposits with scheduled bank free from
any charge or lien ₹ 1,50,000, at interest 4% p.a. receivable on 31st December every year.
Bank Balance with company is ₹ 9,00,000. The Interest on debentures had been paid up to
December 31, 2021. On February 28, 2022, the investments were realized at par and the
debentures were paid off at 101, together with accrued interest. Write up the ledger accounts
concerned.

Question 3 (ICAI Study Material) / (RTP Nov 2019 & 2021) (Similar) Pg no._____
Libra Limited (a listed company) recently made a public issue in respect of which the following
information is available:
(a) No. of partly convertible debentures issued 2,00,000; face value and issue price ₹ 100 per
debenture.
(b) Convertible portion per debenture 60%, date of conversion on expiry of 6 months from the
date of closing of issue.
(c) Date of closure of subscription lists 1.5.2021, date of allotment 1.6.2021, rate of interest on
debenture 15% payable from the date of allotment, value of equity share for the purpose
of conversion ₹ 60 (Face Value ₹ 10).
(d) No. of debentures applied for 2,00,000.
(e) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year
ended 31st March, 2022 (including cash and bank entries).

Question 4 (ICAI Study Material) Pg no._____

A company had issued 20,000, 13% debentures of ₹ 100 each on 1st April, 2021. The debentures
are due for redemption on 1st July, 2022. The terms of issue of debentures provided that they
were redeemable at a premium of 5% and also conferred option to the debentureholders to

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 CA NITIN GOEL REDEMPTION OF DEBENTURES

convert 20% of their holding into equity shares (Nominal value ₹ 10) at a price of ₹ 15 per
share. Debentureholders holding 2,500 debentures did not exercise the option.
Calculate no. of equity shares to be allotted to Debentureholders exercising the option to the
maximum.

Question 5 Pg no._____
The summarised Balance Sheet of Convertible Limited (unlisted company other than AIFI,
Banking company, NBFC and HFC) as on 30th June, 2021, stood as follows:
Liabilities ₹
Share Capital: 5,00,000 equity shares of ₹ 10 each fully paid 50,00,000
General Reserve 90,00,000
Profit & Loss A/c 10,00,000
Debenture Redemption Reserve 10,00,000
13.5% Convertible Debentures, 1,00,000 Debentures of ₹ 100 each 1,00,00,000
Other loans 65,00,000
Current Liabilities and Provisions 1,25,00,000
4,50,00,000
Assets:
Fixed Assets (at cost less depreciation) 1,60,00,000
Debenture Redemption Reserve Investments 15,00,000
Cash and bank Balances 75,00,000
Other Current Assets 2,00,00,000
4,50,00,000
The debentures are due for redemption on 1st July, 2021. The terms of issue of debentures
provided that they were redeemable at a premium 5% and also conferred option to the
debenture holders to convert 20% of their holding into equity shares at a predetermined price
of ₹ 15.75 per share and the payment in cash. Assuming that:
(a) except for 100 debenture holders holding totally 25,000 debentures, the rest of them
exercised the option for maximum conversion.
(b) the investments realize at par on sale; and
(c) all the transactions are put through, without any lag, on 1st July, 2021.
Pass necessary journal entries.

Question 6 (ICAI Study Material) / (RTP Nov 2020 & 2022) (Similar) Pg no._____
XYZ Ltd. has issued 1,000, 12% convertible debentures of ₹ 100 each redeemable after a period
of five years. According to the terms & conditions of the issue, these debentures were
redeemable at a premium of 5%. The debenture holders also had the option at the time of
redemption to convert 20% of their holdings into equity shares of ₹ 10 each at a price of ₹ 20
per share and balance in cash. Debenture holders amounting ₹ 20,000 opted to get their
debentures converted into equity shares as per terms of the issue.
You are required to calculate the number of shares issued and cash paid for redemption of ₹
20,000 debenture holders.

Question 7 (ICAI Study Material) Pg no._____

Case Ltd. (unlisted company other than AIFI, Banking company, NBFC and HFC) provides the
following information as at 31st March, 2022:
Particulars ₹
Equity & Liabilities
(1) Shareholder's Funds
(a) Share Capital

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CA NITIN GOEL REDEMPTION OF DEBENTURES

Authorized share capital:

45,000 equity shares of ₹ 10 each fully paid 4,50,000
Issued and subscribed share capital:
30,000 equity shares of ₹ 10 each fully paid 3,00,000
(b) Reserves and Surplus
Profit & Loss Account 1,62,000
Debenture Redemption Reserve 18,000
(2) Non-current liabilities
(a) Long term borrowings
12% Debentures 1,80,000
(3) Current Liabilities
(a) Trade payables 1,72,500
Total 8,32,500
Assets
(1) Non-current assets
(a) Property, Plant and Equipment (Freehold property) 1,72,500
(b) Non-current Investment: DRR Investment 27,000
(2) Current assets
(a) Inventories 2,02,500
(b) Trade receivables 1,12,500
(c) Cash and bank balances:
Cash at bank 2,73,000
Cash in hand 45,000
Total 8,32,500
At the Annual General Meeting on 1.4.2022, it was resolved:
a) To give existing shareholders the option to purchase one ₹ 10 share at ₹ 15 for every four
shares (held prior to bonus distribution). This option was taken up by all the shareholders.
b) To issue one bonus share for every five shares held.
c) To repay the debentures at a premium of 3%.
Give the necessary journal entries for these transactions.

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 CA NITIN GOEL REDEMPTION OF DEBENTURES

PRACTICE QUESTIONS

MULTIPLE CHOICE QUESTIONS

1) Which of the following statements is true?
(a) A debenture holder is an owner of the company.
(b) A debenture holder can get his money back only on the liquidation of the company.
(c) A debenture issued at a discount can be redeemed at a premium.

2) Which of the following statements is false?

(a) Debentures can be redeemed by payment in lump sum at the end of a specified period.
(b) Debentures cannot be redeemed during the life time of the company.
(c) Debentures can be redeemed by payments in annual instalments.

3) For debentures issued by unlisted companies (other than AIFIs, Banking companies, NBFCs
and HFCs), Debentures Redemption reserve will be considered adequate if it is:
(a) 25% of the value of debentures issued through public issue.
(b) 10% of the value of debentures issued through public issue.
(c) 5% of the value of debentures issued through public issue.

4) A company has issued 6% debentures for ₹ 10,00,000, interest being payable on 31st March
and 30th September. The company redeems ₹ 10,000 debentures at ₹ 96 (ex-interest) on
1st August 2021. The amount of Profit/loss on cancellation of debentures will be
(a) Profit of ₹ 600
(b) Profit of ₹ 400
(c) Loss of ₹ 400

ANSWERS MCQs
1. (c) 2. (b) 3. (b) 4. (b)

TRUE / FALSE

State with reasons whether the following statement is true or false:

a) Amounts credited to the debenture redemption reserve may be utilised by the company for
any purpose.
b) All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking
Companies for both public as well as privately placed debentures need not create any
Debenture Redemption Reserve (DRR).
c) Under payment in instalments method, the payment of entire debenture is made in one lot.
d) At redemption of debentures, DRR should be transferred to general reserve.

Solution
a) False: Amounts credited to the debenture redemption reserve should not be utilised by the
company for any purpose except for the purpose other than for redemption of debentures.
b) True: All India Financial Institutions (AIFIs) regulated by Reserve Bank of India and Banking
Companies for both public as well as privately placed debentures need not create any DRR.
c) False: Under payment in instalments method, the payment of specified portion of
debentures are made in instalments at specified intervals.
d) True: DRR is transferred to general reserve at the time of redemption of debentures.

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 CA NITIN GOEL REDEMPTION OF DEBENTURES

e)
HOMEWORK QUESTIONS

Question 1 (RTP May 2020) / (RTP May 2021) / (RTP Nov 2023) (Similar) Pg no._____
The following balances appeared in the books of Lakshya Ltd. as on 1-4-2021:
a) 10 % Debentures ₹ 37,50,000
b) Balance of DRR ₹ 1,25,000
c) DRR Investment 5,62,500 represented by 10% ₹ 5,625 Secured Bonds of the Government
of India of ₹ 100 each.
Annual contribution to the DRR was made on 31st March every year. On 31-3-2022, balance at
bank was ₹ 37,50,000 before receipt of interest. Interest on Debentures had already been
paid. The investment were realized at par for redemption of debentures at a premium of 10%
on the above date.
Lakshya Ltd. is an unlisted company (other than AIFI, Banking company, NBFC and HFC). You
are required to prepare Debenture Redemption Reserve Account, Debenture Redemption
Reserve Investment Account and Bank Account in the books of Lakshya Ltd. for the year
ended 31st March, 2022.

Question 2 Pg no._____
The following balances appeared in the books of a company (unlisted company other than
AIFI, Banking company, NBFC and HFC) as on December 31st, 2021,
6% Mortgage 25,000 Debentures of ₹ 100 each. Debenture Redemption Reserve (for
redemption of debentures) ₹ 1,50,000.
DRR Investments ₹ 3,75,000 at 4% interest receivable on 31st December every year.
Bank Balance with the company ₹ 30,00,000.
The interest on debentures had been paid up to December 31st, 2021. On February 28th, 2022,
the investments were sold at par and the debentures were paid off at ₹ 101 together with
accrued interest. Write up the ledger accounts concerned.

Question 3 (CA Inter Jan 2021) (8 Marks) Pg no._____

During the year 2021-2022, A Limited (a listed company) made a public issue in respect of
which the following information is available:
(i) No. of partly convertible debentures issued-1,00,000; face value and issue price ₹ 100 per
debenture. (Whole issue was underwritten by X Ltd.)
(ii) Convertible portion per debenture -60%, date of conversion -on expiry of 6 months from
the date of closing of issue.
(iii) Date of closure of subscription lists -1st May,2021, date of allotment – 1st June, 2021, rate
of interest on debenture -15% p.a. payable from the date of allotment, value of equity share
for the purpose of conversion – ₹ 60 (face value ₹ 10)
(iv) Underwriting Commission –2%
(v) No. of debentures applied for by public –80,000
(vi) Interest is payable on debentures half yearly on 30th September and 31st March each year.
Pass relevant journal entries for all transactions arising out of the above during the year
ended 31st March, 2022. (including cash and bank entries)

Question 4 (CA Inter July 2021) (10 Marks) Pg no._____

AB Limited (a listed company) recently made a public issue in respect of which the following
information is available:
(i) No. of partly convertible 8% debentures issued 3,00,000; face value and issue price ₹ 100
per debenture.

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 CA NITIN GOEL REDEMPTION OF DEBENTURES

(ii) Convertible portion per debenture- 60%, date of conversion- on expiry of 7 months from
the date of closing of issue.
(iii) Date of closure of subscription lists 1-5-2020, date of allotment 1-6-2020, rate of interest
on debenture 8% payable from the date of allotment, market value of equity share as on
date of conversion ₹ 60 (Face Value ₹ 10).
(iv) Underwriting Commission 1%
(v) No. of debentures applied for 2,50,000.
(vi) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year
ended 31st March, 2021 (including cash and bank entries).

Question 5 (CA Inter Dec 2021) (5 Marks) Pg no._____

A Company had issued 25,000, 12% Debentures of ₹ 100 each on 1st April, 2018. The Debentures
were due for redemption on 1st July, 2020. The terms of issue of Debentures provided that
they will be redeemable at a premium of 5% and also conferred option to convert 20% of their
holding into equity Shares (Nominal value ₹ 10 each) at a price of ₹ 20 per share. Debenture
holders holding 5,000 Debentures did not exercise the option. Calculate the number of Equity
shares to be allotted to the debenture holders exercising the option to the maximum.

Question 6 (CA Inter Nov 2019) (5 Marks) Pg no._____

A company had issued 40,000, 12% debentures of ₹100 each on 1st April, 2018. The debentures
are due for redemption on 1st March, 2022. The terms of issue of debentures provided that
they were redeemable at a premium of 5% and also conferred option to the debenture holders
to convert 20% of their holding into equity shares (nominal value ₹10) at a predetermined price
of ₹15 per share and the payment in cash. 50 debentures holders holding totally 5,000
debentures did not exercise the option. Calculate the number of equity shares to be allotted
to the debenture holders and the amount to be paid in cash on redemption.

Question 7 (ICAI Study Material) / (RTP May 2022) (Similar) Pg no._____

The Balance Sheet of BEE Co. Ltd. (unlisted company other than AIFI, Banking company, NBFC
and HFC) as at 31st March, 2023 is as under:
Particulars Note No ₹
I. Equity and liabilities
(1) Shareholder's Funds
(a) Share Capital 1 2,00,000
(b) Reserves and Surplus 2 1,20,000
(2) Non-current liabilities
(a) Long term borrowings 3 1,20,000
(3) Current Liabilities
(a) Trade payables 1,15,000
Total 5,55,000
II. Assets
(1) Non-current assets
(a) Property, Plant and Equipment 4 1,15,000
(2) Current assets
(a) Inventories 1,35,000
(b) Trade receivables 75,000
(c) Cash and bank balances 5 2,30,000
Total 5,55,000

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 CA NITIN GOEL REDEMPTION OF DEBENTURES

Notes to Accounts
Particulars ₹
1. Share Capital
Authorised share capital: 3,00,000
30,000 shares of ₹ 10 each fully paid
Issued and subscribed share capital
20,000 shares of ₹ 10 each fully paid 2,00,000
2. Reserve and Surplus
Profit & Loss Account 1,20,000
3. Long term borrowings
12% Debentures 1,20,000
4. Property, Plant and Equipment
Freehold property 1,15,000
5. Cash and bank balances
Cash at bank 2,00,000
Cash in hand 30,000 2,30,000
At the Annual General Meeting, it was resolved:
a) To give existing shareholders the option to purchase one ₹ 10 share at ₹ 15 for every four
shares (held prior to bonus distribution). This option was taken up by all the shareholders.
b) To issue one bonus share for every five shares held.
c) To repay the debentures at a premium of 3%.
Give the necessary journal entries for these transactions.

Question 8 Pg no._____
Mention the ways by which Redeemable Debentures may be redeemed under the Companies
Act, 2013.

Question 9 (CA Inter May 2023) (5 Marks) Pg no._____

On 1st April, 2018 Improvis Limited issued ₹ 75,000, 9% Debentures of ₹ 100 each at a premium
of 5%. The Debentures are redeemable at 10% premium on 31.03.2023, Investment as required
by law was made in Fixed Deposit of Bank on 30.04.2022 earning interest @8% p.a.
You are required to pass Journal Entries for the year 2022-2023 related to Investment and
Redemption of the Debentures.

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