Hassan Limited took a loan of Rs. 30,00,000 from a bank against primary security worth Rs. 40,00,000 and issued 4,000, 6% debentures of Rs. 100 each as a collateral security. The company again after one year took a loan of Rs. 50,00,000 from bank against Plant as primary security and deposited 6,000, 6% debentures of Rs. 100 each as collateral security. Record necessary journal entries and prepare balance sheet of the company.
Journal Entries in the books of Hassan Limited
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Bank A/c Dr. | 30,00,000 | |||
| To Bank Loan A/c | 30,00,000 | |||
| (Being loan taken from bank against primary security worth Rs. 40,00,000) | ||||
| Debentures Suspense A/c Dr. | 4,00,000 | |||
| To 6% Debentures A/c | 4,00,000 | |||
| (Being 4,000, 6% debentures of Rs. 100 each issued as collateral security) | ||||
| Bank A/c Dr. | 50,00,000 | |||
| To Bank Loan A/c | 50,00,000 | |||
| (Being loan taken from bank against Plant as primary security) | ||||
| Debentures Suspense A/c Dr. | 6,00,000 | |||
| To 6% Debentures A/c | 6,00,000 | |||
| (Being 6,000, 6% debentures of Rs. 100 each issued as collateral security) |
Balance Sheet (Extract)
I. Equity and Liabilities
| Particulars | Note No. | Amount (Rs.) |
|---|---|---|
| Non-Current Liabilities | ||
| Long-term Borrowings | 1 | 80,00,000 |
Notes to Accounts
| Particulars | Amount (Rs.) |
|---|---|
| 1. Long-term Borrowings | |
| Bank Loan (Rs. 30,00,000 + Rs. 50,00,000) | 80,00,000 |
| 6% Debentures | 10,00,000 |
| Less: Debentures Suspense A/c | (10,00,000) |
| — | |
| Total | 80,00,000 |
Explanation
When debentures are issued as collateral security, two methods can be used. In Method I, only a note is made in the Balance Sheet. In Method II (used here), journal entries are passed debiting Debentures Suspense Account and crediting Debentures Account. The Debentures Suspense Account appears as a deduction from Debentures in the Balance Sheet, showing that these debentures are held as security and not as an actual liability. The total debentures issued as collateral = 4,000 × Rs. 100 + 6,000 × Rs. 100 = Rs. 10,00,000.
Solution Steps
Step 1: Calculate first loan entry - Bank A/c debited with Rs. 30,00,000 and Bank Loan A/c credited with Rs. 30,00,000
Step 2: Calculate first collateral security - 4,000 debentures × Rs. 100 = Rs. 4,00,000; Debit Debentures Suspense A/c and Credit 6% Debentures A/c
Step 3: Calculate second loan entry - Bank A/c debited with Rs. 50,00,000 and Bank Loan A/c credited with Rs. 50,00,000
Step 4: Calculate second collateral security - 6,000 debentures × Rs. 100 = Rs. 6,00,000; Debit Debentures Suspense A/c and Credit 6% Debentures A/c
Step 5: Prepare Balance Sheet showing Bank Loan Rs. 80,00,000 and Debentures Rs. 10,00,000 less Debentures Suspense Rs. 10,00,000