Meghnath Limited took a loan of Rs. 1,20,000 from a bank and deposited 1,400, 8% debentures of Rs. 100 each as collateral security along with primary security worth Rs. 2 lakh. Company again took a loan of Rs. 80,000 after two months from a bank and deposited 1,000, 8% 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 Meghnath Limited:
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| Bank A/c Dr. | 1,20,000 | |||
| To Bank Loan A/c | 1,20,000 | |||
| (Being loan taken from bank against primary security of Rs. 2,00,000) | ||||
| Debentures Suspense A/c Dr. | 1,40,000 | |||
| To 8% Debentures A/c | 1,40,000 | |||
| (Being 1,400, 8% debentures of Rs. 100 each issued as collateral security) | ||||
| Bank A/c Dr. | 80,000 | |||
| To Bank Loan A/c | 80,000 | |||
| (Being additional loan taken from bank) | ||||
| Debentures Suspense A/c Dr. | 1,00,000 | |||
| To 8% Debentures A/c | 1,00,000 | |||
| (Being 1,000, 8% debentures of Rs. 100 each issued as collateral security) |
Balance Sheet (Extract)
| Particulars | Note No. | Amount (Rs.) |
|---|---|---|
| I. Equity and Liabilities | ||
| Non-current Liabilities | ||
| Long-term Borrowings | 1 | 2,00,000 |
Notes to Accounts:
| Particulars | Amount (Rs.) | Amount (Rs.) |
|---|---|---|
| 1. Long-term Borrowings: | ||
| Bank Loan | 2,00,000 | |
| 8% Debentures (Issued as Collateral Security) | 2,40,000 | |
| Less: Debentures Suspense Account | 2,40,000 | — |
| 2,00,000 |
Explanation
When debentures are issued as collateral security, two approaches are used. In Method I (adopted here), entries are passed recording both the loan and the debentures issued as collateral. The Debentures Suspense Account is debited and Debentures Account is credited. In the Balance Sheet, both the Debentures and Debentures Suspense Account are shown under Long-term Borrowings, which net off each other, leaving only the Bank Loan as the actual liability. Total Bank Loan = Rs. 1,20,000 + Rs. 80,000 = Rs. 2,00,000. Total Debentures issued as collateral = Rs. 1,40,000 + Rs. 1,00,000 = Rs. 2,40,000.
Solution Steps
Step 1: Calculate first loan amount = Rs. 1,20,000 and debentures issued = 1,400 × Rs. 100 = Rs. 1,40,000
Step 2: Pass journal entry for first loan - Bank A/c debited, Bank Loan A/c credited
Step 3: Pass journal entry for debentures issued as collateral - Debentures Suspense A/c debited, 8% Debentures A/c credited
Step 4: Calculate second loan amount = Rs. 80,000 and debentures issued = 1,000 × Rs. 100 = Rs. 1,00,000
Step 5: Pass journal entries for second loan and debentures similar to first transaction
Step 6: Prepare Balance Sheet extract showing Bank Loan Rs. 2,00,000 under Long-term Borrowings with Notes showing Debentures and Debentures Suspense netting off