Question 5 of 85advanced🔧 ApplyNumerical4 marks

Raghuveer Limited issued Rs. 10,00,000, 8% debentures as follows to: Rs. 1. Sundry Subscribers for Cash at 90% 5,50,000 2. Vendor of Machinery for Rs. 2,00,000 2,00,000 in satisfaction of his claim 3. Bankers as Collateral Security for a bank loan 2,50,000 worth Rs. 20,00,000 for which principal security is Business Premises worth Rs. 22,50,000. The issue (1) and (2) are redeemable at the end of 10 years at par. State how the debenture will be dealt with while preparing the balance sheet of a company.

Correct Answer

Extract of Balance Sheet of Raghuveer Limited

I. Non-Current Liabilities:

1. Long-term Borrowings: (a) 8% Debentures (Redeemable at par after 10 years)

  • Issued for Cash (Face Value) 5,50,000
  • Issued to Vendor for Machinery 2,00,000 Total 7,50,000

(b) Bank Loan 20,00,000 (Secured by Business Premises as principal security worth Rs. 22,50,000 and Debentures of Rs. 2,50,000 as collateral security)

Note 1: Debentures issued as Collateral Security: The company has issued Rs. 2,50,000, 8% debentures as collateral security for bank loan of Rs. 20,00,000. These are secured by Business Premises worth Rs. 22,50,000 as principal security.

II. Non-Current Assets:

1. Other Non-Current Assets:

  • Discount on Issue of Debentures 55,000 (10% of Rs. 5,50,000, to be written off over 10 years)

  • Debentures Suspense Account 2,50,000 (Issued as collateral security against bank loan)

Alternative Presentation for Collateral Debentures: Under Non-Current Liabilities:

  • Debentures issued as Collateral Security 2,50,000

Under Non-Current Assets:

  • Debentures Suspense Account 2,50,000
Exercise: Do it Yourself | Q: 1 | (Page 23)
For More Understanding

Explanation

This question tests the student's understanding of different types of debenture issues and their presentation in the Balance Sheet. There are three distinct scenarios: (1) Debentures issued at discount for cash - shown at face value under Non-current Liabilities with discount shown separately under Non-current Assets; (2) Debentures issued to vendor at par - shown at face value under Non-current Liabilities; (3) Debentures issued as collateral security - can be shown either by way of note or by creating Debentures Suspense Account on the assets side to offset the liability. The discount on issue (Rs. 55,000 = 10% of Rs. 5,50,000) is a loss to be amortized over the redemption period of 10 years.

Solution Steps

  1. Step 1: Calculate Discount on Issue of Debentures for Cash = Rs. 5,50,000×10000 \times 10% = Rs. 55,000

  2. Step 2: Identify Debentures issued for Cash = Rs. 5,50,000 (Face Value, redeemable at par after 10 years)

  3. Step 3: Identify Debentures issued to Vendor = Rs. 2,00,000 (Issued at par, redeemable at par after 10 years)

  4. Step 4: Identify Debentures issued as Collateral Security = Rs. 2,50,000 (Against Bank Loan of Rs. 20,00,000)

  5. Step 5: Present under Non-Current Liabilities: 8% Debentures Rs. 7,50,000 (5,50,000 + 2,00,000)

  6. Step 6: Present Bank Loan Rs. 20,00,000 with note on collateral security OR show Debentures as Collateral Rs. 2,50,000 with Debentures Suspense Account Rs. 2,50,000

  7. Step 7: Present Discount on Issue Rs. 55,000 under Non-Current Assets (to be written off over 10 years)

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