Amrit Company Limited purchased assets of the value of Rs. 2,20,000 from another company and agreed to make the payment of purchase consideration by issuing 2,000, 10% debentures of Rs. 100 each at a premium of 10%. Record necessary journal entries.
Journal Entries in the Books of Amrit Company Limited
| Date | Particulars | L.F. | Debit Amount (Rs.) | Credit Amount (Rs.) |
|---|---|---|---|---|
| Sundry Assets A/c Dr. To Vendors A/c (Being assets purchased from another company) | 2,20,000 | 2,20,000 | ||
| Vendors A/c Dr. To 10% Debentures A/c To Securities Premium Reserve A/c (Being 2,000, 10% Debentures of Rs. 100 each issued at a premium of 10% as purchase consideration) | 2,20,000 | 2,00,000 20,000 |
Explanation
This question is about issuing debentures for consideration other than cash. The textbook provides an identical illustration (Illustration 7) with Rai Company. When debentures are issued at a premium to pay for purchased assets, two entries are required: first, recording the asset purchase by debiting Sundry Assets and crediting Vendors; second, discharging the vendor's liability by debiting Vendors and crediting both Debentures (at face value) and Securities Premium Reserve (for the premium amount).
Solution Steps
Step 1: Calculate the issue price of debentures Face Value per debenture = Rs. 100 Premium = 10% of Rs. 100 = Rs. 10 Issue Price per debenture = Rs. 100 + Rs. 10 = Rs. 110
Step 2: Verify total consideration Number of Debentures = 2,000 Total Value = 2,000 × Rs. 110 = Rs. 2,20,000 This matches the asset value of Rs. 2,20,000.
Step 3: Calculate face value and premium amounts Total Face Value = 2,000 × Rs. 100 = Rs. 2,00,000 Total Premium = 2,000 × Rs. 10 = Rs. 20,000
Step 4: Pass journal entries Entry 1: Record purchase of assets Entry 2: Record issue of debentures at premium to vendors