Rose Bond Limited purchased a business for Rs. 22,00,000. Purchase Price was paid by 6% debentures. Debentures of Rs. 20,00,000 were issued at a premium of 10% for the purpose. Record necessary journal entries.
Books of Rose Bond Limited Journal
| Date | Particulars | L.F. | Debit Amount (Rs.) | Credit Amount (Rs.) |
|---|---|---|---|---|
| Business Purchase A/c Dr. | 22,00,000 | |||
| To Vendor's A/c | 22,00,000 | |||
| (Being business purchased for a purchase price of Rs. 22,00,000) | ||||
| Vendor's A/c Dr. | 22,00,000 | |||
| To 6% Debentures A/c | 20,00,000 | |||
| To Securities Premium A/c | 2,00,000 | |||
| (Being purchase consideration paid by issuing 6% Debentures of Rs. 20,00,000 at a premium of 10%) |
Working Note: Calculation of Premium Amount: Face Value of Debentures issued = Rs. 20,00,000. Premium Rate = 10%. Premium Amount = 20,00,% = Rs. 2,00,000. Total Value of Issue = Face Value + Premium = 20,00,000 + 2,00,000 = Rs. 22,00,000. Since the total value of issue (Rs. 22,00,000) matches the Purchase Price (Rs. 22,00,000), the settlement is exact.
Explanation
The question involves the purchase of a business and the discharge of purchase consideration through the issue of debentures at a premium. Since the question does not provide a breakdown of the assets and liabilities taken over, the total amount is debited to the 'Business Purchase Account'. The vendor is credited with the full purchase price. In the second entry, the vendor is debited to clear their account. The credit side reflects the issue of debentures at face value and the premium amount is credited to 'Securities Premium Account'. The calculation confirms that the sum of the face value and premium exactly equals the purchase consideration.
Solution Steps
Step 1: Identify the Purchase Consideration. The question states the business was purchased for Rs. 22,00,000.
Step 2: Determine the mode of payment. The payment is made by issuing 6% debentures.
Step 3: Calculate the Premium Amount. Debentures issued = Rs. 20,00,000. Premium = 10% of 20,00,000 = Rs. 2,00,000.
Step 4: Verify the total value discharged. Face Value (20,00,000) + Premium (2,00,000) = Rs. 22,00,000. This matches the purchase price.
Step 5: Pass the Journal Entries. First, record the purchase of the business by debiting Business Purchase A/c and crediting Vendor's A/c. Second, record the payment by debiting Vendor's A/c and crediting Debentures A/c (for face value) and Securities Premium A/c (for premium).