Financial Accounting Unit 14

Unit 14 Company Accounts

Structure:
14.1 Introduction
Objectives
14.2 Forfeiture of Shares
14.3 Reissue of Shares
14.4 Issue of Bonus Shares
14.5 Rights Issue
14.6 Share Split
14.7 Buy Back of Shares
14.8 Redemption of Preference Shares
14.9 Debentures
14.10 Summary
14.11 Glossary
14.12 Terminal Questions
14.13 Answers

14.1 Introduction
In the previous unit, you have learnt about the shares and their issue by a
company. You have learnt that a company may call share money in
installments. In certain cases, shareholders fail to pay the called up amount
in full i.e., they do not pay in one or more installments after the allotment of
the shares to them. In such a case either the company can go to the court
and file a suit against the defaulting shareholders for recovery of the due
amount or can cancel the membership of the defaulting shareholders.
In case the membership is cancelled, the amount paid by the defaulting
members towards share capital stands forfeited, is called ‘Forfeiture of
Shares.’ The company has an option of selling such forfeited shares and the
sale of forfeited shares is called ‘reissue of shares’.
Though share capital is the main source of finance of a company there are
other sources of finance which are easily accessible and less expensive.
Once such source of finance is issue of debentures and holder of such
instruments are called debenture holders. The amount so raised is loan for
the company.

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Financial Accounting Unit 14

Objectives:
After studying this unit, you should be able to
 state the meaning of forfeiture & reissue of shares:
 explain the situations in which shares can be forfeited;
 explain accounting treatment for forfeiture of shares issued at par, at
discount and at premium;
 discuss accounting treatment of reissue of shares in different situations
 state the meaning and types of debentures;
 explain the procedure of issue & redemption of debentures and its
accounting treatment

14.2 Forfeiture of Shares

If a shareholder fails to pay the allotment money or a call or a part thereof by
the due date fixed for payment, the Board of Director, if Articles of
Association of the company empower it to do so, may proceed to forfeit the
shares on which allotment money or call money has become in arrears.
 Forfeiture of shares brings about compulsory termination of membership
and the shareholder’s name is removed from the register of members
and the amount already paid by him on shares is forfeited to the
company.
 It is a capital gain and is credited to Forfeited shares account.
 A forfeited share may be reissued even at a loss which does not exceed
the gain on forfeiture of share reissued.
 The result of forfeiture of shares is cancellation of membership of the
shareholders and reduction of share capital.
Procedure of forfeiture of shares
The authority to forfeit shares is given to the Board of Directors in Articles of
Association of the company. The Board of Directors has to give at least
fourteen days’ notice to the defaulting members calling upon them to pay
outstanding amount with or without interest as the case may be before the
specified date.
The notice must also state that if the shareholders fail to remit the amount
mentioned therein within the stipulated period, their shares will be forfeited.
If they still fail to pay the amount within the specified period of time, the
Board of Directors of the company may decide to forfeit such shares by

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Financial Accounting Unit 14

passing a resolution. The decision regarding the forfeiture of shares should

be communicated to the concerned allottees and they in turn are asked to
return the allotment letters and share certificates of the forfeited shares to
the company.
Fig 14.1 depicts the procedure of forfeiture of shares
Procedure of forfeiture of Shares

Surrender of shares
Surrender of shares is a voluntary act of shareholder of giving up the shares
to the company. When a shareholder finds that he is unable to pay the calls
made on him, he may voluntarily surrender shares to the company. As such
the company is saved from the formalities of serving a notice and waiting till
the period of the notice is over. The effect of surrender of shares is the
same as that of forfeiture.
Accounting treatment
The shares of a company can be issued at par, at discount and at premium.
Accounting treatment for forfeiture of shares in these three situations is as
under:
1. Forfeiture of shares issued at Par
When shares issued at par are forfeited the accounting treatment will be:

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The journal entry is:

Share capital A/c(Amount called up) Dr
To share forfeited A/c (Amount paid)
To unpaid calls A/c (Amount called but not paid)
Illustration 1
X, a shareholder, holding 100 shares of Rs 10 each has paid application
money of Rs 2 per share and allotment money of Rs 3 per share, but has
failed to pay the first call of Rs 2 per share and second call of Rs 3 per
share. His shares were forfeited. Make the journal entry to record the
forfeiture of shares.
Journal entry
Share Capital A/c (100 × Rs 10) Dr Rs.1000
To Share forfeited A/c (100 × Rs 5) Rs.500
To Share First Call A/c (100 × Rs 2) Rs.200
To Share Second and Final Call A/c (100 × Rs 3) Rs.300
(Forfeiture of 100 shares)
2. Forfeiture of shares issued at premium
In case shares are issued at premium and thereafter forfeited there can be
two situations:
a. Premium on shares has been received prior to the forfeiture.
b. Amount of premium on shares has not been received and it still stands
credited to the Securities Premium A/c.
a. Premium money has been received prior to the forfeiture
If the amount of premium on shares forfeited has been received by the
company prior to the forfeiture, Share Premium A/c will not get affected. In
this case the journal entry of forfeiture of shares will be similar to the entry
made as if the shares had been issued at par.
The journal entry will be :
Share Capital A/c … Dr
To Share forfeited A/c
To Unpaid Calls A/c./Calls in arrears A/c
(Forfeiture of share issued at premium)

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b. Premium on shares has not been received and stands credited to

Securities Premium A/c as due but not paid.
When a share is forfeited on which the amount of premium has been made
due but has not been received, either wholly or partially, the Securities
Premium A/c will be cancelled. At the time of making due, Securities
Premium A/c will be credited. The journal entry will be as follows:
Share Capital A/c Dr
Securities Premium A/c Dr
To Share Forfeited A/c
To Unpaid call A/c.
(Forfeiture of shares originally issued at premium due to non-payment of
dues).
3. Forfeiture of shares issued at discount
Discount on issue of shares is a loss to the company. When shares issued
at a discount are forfeited for nonpayment of dues, the discount allowed on
such shares is written back. At the time of issue of shares, Discount on
issue of Shares A/c is debited and when forfeited, this account is credited to
cancel the discount allowed on such shares. In this case the following
Journal entry is made:
Share Capital A/c Dr.
To Share Forfeited A/c
To Discount on Issue of Shares A/c
To Unpaid call A/c
(Forfeiture of shares originally issued at discount for non-payment of dues).
Self Assessment Questions
Fill in the blanks:
1. If a shareholder fails to pay the due amount on shares, the board of
directors may decide to _____________ shares.
2. The Board of Directors has to give at least ___________days’ notice to
the defaulting members.

14.3 Reissue of Shares

Forfeited shares can be reissued. They can be reissued even at a price
lower than the paid up value of the reissued shares at the time of reissue.
But the loss on reissue of a share cannot be more than the gain on forfeiture
of that share credited to Forfeited shares account at the time of forfeiture.

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Once the Board of directors has forfeited the shares, the defaulting
shareholder is asked to return the share certificate which is cancelled there
after. The board of directors passes a resolution allotting the forfeited shares
to the new purchaser/purchasers of such shares.
In case of reissue of shares neither a prospectus is issued nor is any offer
otherwise made to the general public. Though the amount of such shares
may be called in more than one installment, usually the entire amount is
called in one installment i.e. lump sum. The board of directors of the
company while reissuing the shares decides the price of reissue. These
shares can be reissued at par, at premium or at discount.
Generally, these shares are reissued at a discount i.e. at a price which is
less than its nominal value. The amount of discount allowed at the time of
reissue in no case should be more than the amount forfeited on such
shares. There is no limit of the price at which it can be reissued if price
charged is more than the price of issue at the time of their forfeiture. But
then there is a limit below which price cannot be charged or we can say that
there is a minimum price below which the company cannot reissue its
forfeited shares.
The maximum permissible discount at the time of reissue of forfeited shares
is ascertained in different situations in the following manner:
A. Shares originally issued at par: When the shares are originally issued
at par, the maximum permissible discount for reissue of shares is equal
to the amount forfeited on such shares.
B. Shares originally issued at premium: In case of shares originally
issued at premium, there can be two situations: (a) premium has not
been received on the forfeited shares, and (b) premium has been
received on such shares. The amount forfeited is the amount that has
been received including the amount of premium if it has been received
and the maximum discount that can be allowed on reissue of such
shares is the amount so forfeited.
C. Shares originally issued at discount: In this case the actual amount
received becomes the forfeited amount. But the maximum permissible
discount on reissue of shares will be equal to the amount forfeited plus
the amount of discount initially allowed on these shares at the time of
their original issue.
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Reissue of forfeited shares at a discount:

When the shares forfeited are reissued at discount, Bank account is debited
by the amount received and Share capital account is credited by the paid up
amount. The amount of discount allowed is debited to Share Forfeited
Account. This is for adjusting the amount of discount so allowed from the
amount forfeited at the time of forfeiture.
The journal entry for the above will be:
Bank A/c (the amount received on reissue) Dr.
Share Forfeited A/c (the amount allowed as discount) Dr.
To Share Capital A/c (paid up amount)
As stated earlier, the amount of discount allowed on reissue of shares at the
most can be equal to the forfeited amount on such shares. In such a case,
the share forfeited account after reissue will show a zero balance. But in
case, this amount of discount is less than the amount forfeited, the
remaining forfeited amount will be profit for the company. This profit is a
capital gain to the company and is transferred to Capital Reserve account.
Journal entry for the same will be:
Share Forfeited A/c Dr
To Capital Reserve A/c
(Transfer of surplus share forfeited amount to capital reserve A/c)
If all the forfeited shares are reissued, the Share Forfeited A/c will show a
zero balance because whole of the amount of this account after adjusting
the amount of discount allowed on reissue will be transferred to capital
reserve account. But in case, only a part of the forfeited shares are reissued
and others remain cancelled, the amount forfeited on forfeited shares not
reissued will remain in the Shares Forfeited Account. Any balance in the
share forfeited account will be carried forward and will be used for meeting
the discount loss on the issue of the remaining shares. For adjustment of
forfeited amount on share reissued will be calculated as:

TotalForfeitedAmount
Amount to be adjusted x Number of shares reissued
TotalNo. of Shares forfeited

Capital Reserve
Capital reserve is that which is not available for paying dividends through
the profit and loss account. It is generally created out of capital profits, such

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as profits prior to incorporation, profit on sale of fixed asset above the

original cost or on revaluation, Profit on reissue of forfeited shares etc.
Share Premium is also a capital profit, but it is shown separately in the
balance sheet and kept intact.
Capital profits, unless they are to be kept intact, are used to write off the
capital loss and are not available for distribution among the shareholders as
dividend. However, many capital profits such as profit on sale of fixed
assets realized in cash, share premium, capital redemption reserve etc., can
be utilized for issue of fully paid bonus shares. Realized profit on sale of
fixed assets is available for dividend if it is permitted by the Articles of
Association and if the profit remains on a fair revaluation of all assets and
liabilities.
Self Assessment Questions
Fill in the blank:
3. When the shares are originally issued at par, the maximum permissible
discount for reissue of shares is equal to the amount ___________ on
such shares.
4. State true or false:
o Share forfeited account can show a zero balance.
o Discount allowed on reissue of forfeited shares will be debited to
discount on issue of shares account.
o Balance amount of share forfeited account after adjusting discount
allowed on reissue of these share remains in the same account

14.4 Issue of Bonus Shares

Bonus shares are the shares allotted to existing equity shareholders without
any consideration being received from them, in cash or in kind. They are
issued to capitalize profits for the company only if Articles of Association
permit such an issue. They do not result in inflow of funds to the company
but results in conversion of reserves into issued, subscribed and paid-up
capital.
The Companies Act, 1956 does not contain any specific provision regarding
the issue of bonus shares. However, it permits the use of share premium
account in paying up unissued shares of the company to be issued to
members as fully paid bonus shares. Similarly it permits utilization of the

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amount of capital redemption reserve in paying up unissued shares of the

company to be issued to its members as fully paid bonus shares.
On issue of bonus shares, reserves used for such an issue are debited and
Bonus to Equity shareholders account is credited with the amount for which
bonus shares are issued. Then, Bonus to Equity shareholders account is
debited and Equity Share Capital Account is credited with the amount of the
issue.

14.5 Rights Issue

When a company which already issued shares wants to make a further
issue of shares, it is under a legal obligation to first offer the fresh issue to
the existing shareholders unless the company has resolved otherwise by a
special resolution. The right of the existing shareholder to buy shares from
the company in this manner is transferable. If the market price of the shares
is higher than the amount at which the company has offered new shares,
the right to buy shares from the company will carry a price. The value of
rights issue can be expressed as

No. of New Shares

Value of rights = X (Cum right price – New issue price)
TotalShares

Suppose a company offers to its equity shareholders the right to buy one
equity share of Rs.100 each at Rs.125 for every four equity shares of
Rs.100 each held when the market value of one equity share is Rs.180.
Then the value of the right will be:
Rs.
Market value of 4 equity shares Rs.200 x 4 = 800
Add: Issue price of 1 new equity share = 125
Total price of 5 shares = 925
Value of one share = 925/5 = 185
The value of right = 200 – 185 = 15

By applying the formula we will get the value of rights as:

Value of Rights = 1 x (200– 125) = Rs. 15

5

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14.6 Alteration of Share Capital or Share Split

A company if authorized by its Articles of Association may in a General
Meeting decide to subdivide (split) or consolidate the shares into those of a
smaller or higher denomination than that fixed by the memorandum of
association. However, the company must continue to maintain the same
proportion between the paid up and unpaid amount, as it was in the case of
the original shares.
Usually companies subdivide shares to increase the number of shares
floating in the capital market. Subdivision also enhances liquidity when
shares are traded at such a high price that investors find it difficult to
participate in trade. In practice, subdivision will make the shares more
attractive, and this might enhance the price marginally. Companies may
convert fully paid shares into stock and stock into shares. Stock is the
consolidation of the share capital into one unit divisible into many parts.

14.7 Buy Back of Shares

Companies reacquire their own shares for various reasons such as (1) when
it has large surplus of cash but does not have any plans for large capital
expenditure (2)when the management worry about a hostile takeover
(3)when the managers believe that the company’s stock is undervalued.
Section 77A of the Companies Act, 1956, introduced in 1999, permits
companies to buy back their own shares and other specified securities out
of their free reserves, securities premium account and the proceeds of any
share or other specified securities. No buy back of any kind of shares or
other specified securities shall be made out of the proceeds of an earlier
issue of the same kind of shares or same kind of other specified securities.
No company can purchase its own shares or other specified securities
unless:
1. The buyback is authorized by the articles of association.
2. A special resolution has been passed in a general meeting of the
company authorizing the buy back.
3. The buyback is 25% or less than 25% of the total paid up capital and
free reserves of the company.
4. The buyback of equity shares in any financial year should not exceed
25% of its total paid up equity capital in that financial year.

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5. The ratio of the debt owed by the company is not more than twice the
capital and its free reserves after such buy back, unless the Central
Government prescribes a higher ratio.
6. All the shares or other specified securities for buy back are fully paid up.
Let us assume that X Ltd. has 10,000 shares of Rs.10 each and a balance
of Rs.50,000 in the share premium account. The company decides to buy
back 200 shares at Rs.25. The entry for this transaction is as follows:
Equity share capital Dr. 2000
Share premium Dr. 3000
To cash 5000
Treasury Stock
Treasury stock is a company’s own share capital that was issued and
reacquired by the company as an investment. It is considered as cash
management activity. It may be either preference shares or equity shares
and may be held for any period of time. Dividends are not paid on treasury
stocks and they do not carry any voting rights.

14.8 Redemption of Preference Shares

A company limited by shares, if so authorized by its Articles of Association,
may issue, redeemable preference shares. These shares can be redeemed
only out of profits of the company that would otherwise be available for
dividend, or out of proceeds of fresh issue of shares made for the purpose
of redemption.
Preference shares cannot be redeemed unless they are fully paid. The
premium, if any payable on redemption must be provided for out of the
profits of the company or out of the share premium account before the
shares are redeemed. Where the preference shares are redeemed other
than from the proceeds of a fresh issue, a sum equal to the nominal amount
of the shares redeemed should be transferred from profit to the capital
redemption reserve account. The capital redemption reserve account can
be utilized of the issue of bonus shares. The objective of such transfer is to
ensure that the security for creditors is not reduced. If preference shares
are redeemed by converting into some other types of shares, no amount is
required to be transferred to the capital redemption reserve account.

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14.9 Debentures
A Debenture is a unit of loan amount. When a company intends to raise the
loan amount from the public it issues debentures. A person holding
debenture or debentures is called a debenture holder. A debenture is a
document issued under the seal of the company. It is an acknowledgment of
the loan received by the company equal to the nominal value of the
debenture. It bears the date of redemption and rate and mode of payment of
interest. A debenture holder is the creditor of the company.

As per section 2(12) of Companies Act 1956, “Debenture includes debenture

stock, bond and any other securities of the company whether constituting a
charge on the company’s assets or not”.

Types of Debentures
Debenture can be classified as under:
1. From security point of view
(i) Secured or Mortgage debentures: These are the debentures that are
secured by a charge on the assets of the company. These are also called
mortgage debentures. The holders of secured debentures have the right to
recover their principal amount with the unpaid amount of interest on such
debentures out of the assets mortgaged by the company. In India,
debentures must be secured. Secured debentures can be of two types:
a) First mortgage debentures: The holders of such debentures have a
first claim on the assets charged.
b) Second mortgage debentures: The holders of such debentures have a
second claim on the assets charged.
(ii) Naked or Simple debentures: Debentures which do not carry any
security with regard to the principal amount or unpaid interest are called
unsecured debentures. These are called simple debentures.
2. On the basis of redemption
(i) Redeemable debentures: These are the debentures which are issued
for a fixed period. The principal amount of such debentures is paid off to the
debenture holders on the expiry of such period. These can be redeemed by
annual drawings or by purchasing from the open market.
(ii) Irredeemable debentures: These are the debentures which are not
redeemed in the life time of the company. Such debentures are paid back
only when the company goes into liquidation.
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3. On the basis of Records

(i) Registered debentures: These are the debentures that are registered
with the company. The amount of such debentures is payable only to those
debenture holders whose name appears in the register of the company.
(ii) Bearer debentures: These are the debentures which are not recorded
in a register of the company. Such debentures are transferrable merely by
delivery. Holder of these debentures is entitled to get the interest.
4. On the basis of convertibility
(i) Convertible debentures: These are the debentures that can be
converted into shares of the company on the expiry of predecided period.
The term and conditions of conversion are generally announced at the time
of issue of debentures.
(ii) Non-convertible debentures: The debenture holders of such
debentures cannot convert their debentures into shares of the company.
5. On the basis of priority
i) First debentures: These debentures are redeemed before other
debentures.
ii) Second debentures: These debentures are redeemed after the
redemption of first debentures.
Issue of debentures
Issuing debentures means issue of a certificate by the company under its
seal which is an acknowledgment of debt taken by the company. The
procedure of issue of debentures by a company is similar to that of the issue
of shares. A Prospectus is issued, applications are invited, and letters of
allotment are issued. On rejection of applications, application money is
refunded. In case of partial allotment, excess application money may be
adjusted towards subsequent calls.
Issue of Debenture takes various forms which are as under:
1. Debentures issued for cash
2. Debentures issued for consideration other than cash
3. Debentures issued as collateral security.
Further, debentures may be issued
(i) At par (ii) at premium, and (iii) at discount

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1. Journal entries for Debentures issued for cash at par:

(i) Application money is received

Bank A/c Dr
To Debentures Application A/c
(Application money received for Debentures)

(ii) Transfer of debentures application money to debentures a/con their

allotment
Debentures Application A/c Dr
To Debentures A/c
(Application money transferred to debenture account on allotment)

(iii) Money due on allotment

Debentures Allotment A/c Dr
To Debentures A/c
(Allotment money made due)

(iv) Money due on allotment is received

Bank A/c Dr
To Debentures Allotment A/c
(Receipt of Debenture allotment money)

(v) First and Final call is made

Debentures First and Final call A/c Dr
To Debentures A/c
(First and Final call money made due on _________ debentures)
(vi) Debentures First and Final call money is received
Bank A/c Dr
To Debentures First and Final call A/c
(Receipt of Amount due on call)

Note: Two calls i.e. first call and second call may be made. Journal entries
will be made on the lines made for first and final call.

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Over subscription
Company if receives applications for number of debentures that exceed the
number of debentures offered for subscription, it is called over subscription.
There can be following treatment of the excess application money received:
a) The total amount of excess number of applications is refunded in case
the applications are totally rejected.
b) The amount of excess application money is totally adjusted towards
amount due on allotment and calls
_ In case partial allotment is made,
_ The excess amount is adjusted towards sums due on allotment and
rest of the amount is refunded.
Journal entries
For refund of money, if the applications are rejected

Debentures Application A/c Dr

To Bank A/c
(Refund of money on rejected applications)

For adjustment of excess application money adjusted towards sum due on

Allotment

Debentures Application A/c Dr

To Debentures Allotment A/c
(Excess application money adjusted)
Issue of debentures at premium and at discount
Debentures are said to be issued at premium when these are issued at a
value which is more than their nominal value. The premium amount is
credited to the Securities Premium A/c as per section 78 of the Companies
Act, 1956.
Journal entries:

Debentures Allotment A/c Dr

To Debentures Account
To Securities Premium A/c
(Amount due on allotment alongwith premium of Rs ....)

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Issue of Debentures at Discount

When debentures are issued at less than their nominal value they are said
to be issued at discount. Companies Act, 1956 has not laid down any
conditions for the issue of debentures at a discount. However, there should
be provision for issue of such debentures in the Articles of Association of the
Company.
Journal entry for issue of debentures at discount (at the time of
allotment)
Debentures Allotment A/c Dr
Discount on Issue of debentures A/c Dr
To Debentures A/c
(Allotment money due. The amount of discount is @ Rs .... per
debenture)

Issue of Debentures for consideration other than cash

When a company purchases some assets and issues debentures as a
payment for the purchase, to the vendors it is known as issue of debentures
for consideration other than cash. Debentures can be issued to vendors at
par, at premium and at discount
Accounting Treatment:
1. Purchase of Assets
Sundry Assets A/c (individually)Dr
To Vendors A/c
(Purchase of assets)
2. Allotment of Debentures
(i) At par
Vendors' A/c Dr
To Debentures A/c
(issue of debentures at par to vendors)
(ii) At discount
Vendors' A/c Dr
Debentures Discount A/c Dr
To Debentures A/c
(Issue of debentures to vendors at a discount of Rs ... per
debenture)

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(iii) At premium
Vendors’ A/c Dr
To Debentures A/c
To Securities Premium A/c
(issue of debentures to vendors at a premium of Rs .... per
debenture)

Issue of Debentures with conditions stipulated to their Redemption

Journal entries
(i) Issued at par redeemable at par

Bank A/c Dr
To Debentures Account
(Issue of debentures of Rs .... at par)

(ii) Issued at discount and redeemable at par

Bank A/c Dr
Discount on issue of Debentures A/c Dr
To Debentures A/c
(Issue of debentures of Rs ... at a discount of Rs ....)

(iii) Issued at premium redeemable at par

Bank A/c Dr
To Debentures A/c
To Securities Premium A/c
(Issue of ... debentures of Rs .... at a premium of Rs ....)

(iv) Issue at par, redeemable at premium

Bank A/c Dr
Loss on Issue of Debentures A/c Dr
To Debentures A/c
To Premium on Redemption of Debenture A/c
(Issue of ... debentures of Rs ... a redeemable at a premium of
Rs ...)

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(v) Issued at discount and redeemable at premium

Bank A/c Dr
Discount on Issue of Debentures A/c Dr
Loss on Issue of Debentures A/c Dr
To Debentures A/c
To Premium on Redemption of Debenture A/c
(Issue of ... debentures of Rs ... at a discount of Rs ... redeemable at
a premium of Rs ....)

Issue of debentures as collateral security

Collateral security means security given in addition to the principal security.
It is a subsidiary or secondary security. Whenever a company takes loan
from bank or any financial institution it may issue its debentures as
secondary security which is in addition to the principal security. Such an
issue of debentures is known as ‘issue of debentures as collateral security’.
The lender will have a right over such debentures only when company fails
to pay the loan amount and the principal security is exhausted. In case the
need to exercise this right does not arise debentures will be returned back to
the company. No interest is paid on the debentures issued as collateral
security because company pays interest on loan.
In the accounting books of the company, issue of debentures as collateral
security can be credited in two ways.
(i) No journal entry is made but a note of this fact is given on the liability side
of the balance sheet under the heading Secured Loans and Advances
(ii) A journal entry is made on the issue of debentures as a collateral
security, Debentures suspense A/c is debited because no cash is received
for such issue.
Journal entry is:
Debenture Suspense A/c Dr
To Debentures A/c
(.....Debentures of Rs .... each issued as collateral security to .....)
Discount on issue of debentures and loss on issue of debentures
When the company issues debentures on discount the total amount of
discount is not charged to Profit and Loss Account in the accounting year in

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which this discount is allowed. A portion of it is debited and rest is written off
over a period of time. Generally it is written off prior to the redemption of
these debentures. The balance amount unwritten is treated as a capital loss
and is shown on the asset side of the balance sheet under the head
“Miscellaneous Expenditure”.
Loss on Issue of Debentures
You have learnt that a company may issue debentures with the stipulation
that the repayment of the debentures on maturity will be made at premium.
The amount of the premium payable is debited to Loss on Issue of
Debentures A/c at the time of issue of debentures. This amount will also be
written off in the same manner as is done in case of writing off Discounton
Issue of Debentures.
(i) All Debentures are redeemed after fixed period
Journal Entry
Amount of Loss on Issue of Debentures written off each year
Profit and Loss A/c Dr
To Loss on Issue of Debentures A/c
(Loss on Issue of Debentures written off)

Same journal entry will be made each year till the whole amount of the Loss
on issue of Debentures is written off.
Calculation of the amount to be written off
Total Amount of Loss on Issue of Debentures/No. of years
(ii) Debentures are redeemed in Installments
The amount of Loss on Issue of Debentures to be written off each year is
calculated in the manner it is calculated in case of Discount on Issue of
Debentures and accounting treatment is also the same.
Redemption of Debentures:
The debentures issued by companies are usually redeemable debentures.
The redemption methods are.
1. Redemption of Debentures on a Fixed Date: In this method, payment
to debenture holder is made at the expiry of the stated period. A "Sinking
Fund" is created by debiting the "Profit & Loss Appropriation Account". The

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amount so credited is invested in the gilt edged securities. These securities

are sold at the date of redemption of debentures. The sinking fund or
debenture fund account is then transferred to the General Reserve.
2. Redemption of Debentures on annual installments: In this method,
payment is made in installments in the form of drawings. As such the
revenue account is debited with the annual drawings and the Redemption
Fund Account are credited.
Sinking Fund: A sinking fund is a form of specific reserve set aside for the
redemption of a long term debt. The main purpose of creating a sinking fund
is to have a certain sum of money accumulated for a future date by setting
aside a certain sum of money every year. It is a kind of specific reserve.
Whatever the object or the method of creating such a reserve may be, every
year certain sum of money is invested in such a way that with compound
interests, the exact amount to wipe off the liability or replace the wasting
asset or to meet the loss will be available. The amount to be invested every
year can be known from the compound interest annuity tables.
Alternatively, an endowment policy may be taken out which matures on the
date when the amount required will be paid by the insurance company. The
advantage of this method is that a definite amount will be available, while in
the case of investment of fund in securities, the exact amount may not be
available on account of fall in the value of securities.
Debenture Redemption Reserve: According to Companies (Amendment)
Act 2000 it shall now be mandatory for the companies to create a debenture
redemption reserve for the redemption of debentures. The company shall
have to credit adequate amount from out of its profit every year till such
debentures are redeemed.
The debenture reserve shall be used by the company only for the
redemption of debentures and in accordance with the terms and conditions
of the issue of debentures.
Interest on Debentures
If you have seen an advertisement in newspaper regarding issue of
debentures by a company, you must have noticed that ‘Debenture’ is always
prefixed by a certain percentage say 9% Debentures or 12% Debentures.

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Financial Accounting Unit 14

Have you ever thought what meaning this prefix carries? It is the rate of
interest per annum that will be paid to the debenture holders. Companies
generally pay interest on its debentures after every six months.
Journal entries that are made in the books of the company are as
follows;
(i) Payment of Interest on Debentures
Debenture Interest A/c Dr
To Bank A/c
(Interest on ....% Debentures paid for six months ending ...@ ....% pa)

(ii) Transfer of Debenture Interest to Profit and Loss A/c

Profit and Loss A/c Dr
To Debenture Interest A/c
(Debenture Interest transferred to Profit and Loss A/c)

Self Assessment Questions

Fill in the blanks:
5. A 10% debenture of nominal value of Rs.100 has been issued at Rs.90
is said to be issued at ________________
6. 100, 8% debentures of Rs.100 each has been issued to vendors for
plant purchased the debentures are said to be issued ____________

14.10 Summary
The important concepts discussed in the unit are:
 Forfeiture of shares means cancellation of membership of a shareholder
due to non-payment of calls made by the company.
 Reissue of shares means sale of shares which were issued earlier but
had been forfeited for non-payment of called up amount.
 A Debenture is a unit of loan amount issued to the lenders of the
company.
 Debentures can be issued for cash at par, for consideration other than
cash, as collateral security.
 Debentures can be issued with conditions stipulated to their redemption
as
(a) Issued at par, redeemable at par.

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Financial Accounting Unit 14

(b) Issued at discount, redeemable at par.

(c) Issued at premium, redeemable at par.
(d) Issued at par, redeemable at premium.
(e) Issued at discount, redeemable at premium.
 Issue of debentures as collateral security means issuing debentures to
the lending agency that has given loan as additional/secondary security.

14.11 Glossary
1) Forfeiture: If the Articles of Association permits, a company may
proceed to forfeit the shares on which allotment money or call money
has become in arrears.
2) Reissue: Forfeited shares can be reissued even at a price lower than
the paid up value of the reissued shares at the time of reissue.
3) Bonus Shares: Bonus shares are the shares allotted to existing equity
shareholders without any consideration being received from them, in
cash or in kind. They are issued to capitalize profits for the company.
4) Debenture: A debenture is acknowledgment of the loan received by the
company equal to the nominal value of the debenture. It bears the date
of redemption and rate and mode of payment of interest.

14.12 Terminal Questions

1. State the meaning of forfeiture of shares. When can shares be forfeited?
2. What is the maximum permissible discount at the time of reissue of
forfeited shares when the forfeited shares originally issued are (a) at
par(b) at premium (c) at discount?
3. Explain the conditions to be satisfied for issue of bonus shares?
4. What do you mean by debenture? State in brief the various types of
Debentures.
5. What is meant by debentures issued as collateral security? How is it
treated in the books of accounts of the company?

14.13 Answers
Self Assessment Questions
1. Forfeit
2. 14 days
3. Forfeited
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4. (1) True (2) True (3) False

5. Discount
6. Consideration other than cash

Terminal Questions
1. Refer 14.2
2. Refer 14.2
3. Refer 14.4
4. Refer 14.2
5. Refer 14.9
6. Refer 14.9

References:
 M.C. Shukla (2010). Advanced Accountancy. S. Chand and Company.
 M.A. Arulanandam & K.S. Raman (2006) Advanced Accountancy, Sixth
revised edition, Himalaya Publishing House.
 Asish K Bhattacharyya (2007), Essentials of Financial Accounting,
Prentice-Hall of India Pvt. Ltd, New Delhi.
 Institute of Chartered Accountants of India ( ICAI) website (www.icai.org)

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