Question

Yogacara Ltd. (pharmaceutical company) appointed marketing expert, Mr Kartikay as the CEO of the company, with a target to penetrate their roots in the rural regions. Mr Kartika discussed the ways and means to achieve the target of the company with financial, production and marketing departmental heads and asked the finance manager to prepare the budget. After reviewing the suggestions given by all the departmental heads, the finance manager proposed the requirement of an additional fund of ₹52,50,000. Yogacara Ltd. is a zero-debt company. To avail of the benefits of financial leverage, the finance manager proposed to include debt in the capital structure. After deliberations, on April 1, 2020, the board of directors decided to issue 6% Debentures of ₹100 each to the public at a premium of 5%, redeemable after 5 years at ₹110 per share.

You are required to answer the following questions:

1. Calculate the number of debentures to be issued to raise additional funds.
2. Pass Journal entry for the allotment of debentures.
3. Pass Journal entry to write off the loss on issue of debentures
4. Calculate the amount of annual fixed obligation associated with debentures.
5. Prepare Loss on Issue of Debentures Account.

Answer 1

i. Number of Debentures to be issued = `(52,50,000)/105`

= 50,000

ii. 

In the Books of Yogadatra Ltd.
Journal
Date	Particulars	L.F.	Dr. Amount (₹)	Cr. Amount (₹)
2020 April 1	Debenture Application & Allotment A/c                                                                          Dr.		52,50,000
	Loss on Issue of Debentures A/c              Dr.		5,00,000
	To 6% Debentures A/c			50,00,000
	To Securities Premium Reserve A/c			2,50,000
	To Premium on Redemption of Debentures A/c (Being allotment of debentures made)			5,00,000

iii.

Journal
Date	Particulars	L.F.	Dr. Amount (₹)	Cr. Amount (₹)
2021 March 31	Securities Premium Reserve A/c Dr.		2,50,000
	Statement of Profit & Loss Dr.		2,50,000
	To Loss on Issue of Debentures A/c (Being Loss on Issue of Debentures A/c written off)			5,00,000

iv.

Interest on 6% debentures = `(50,00,000) xx 6/100`

= ₹3,00,000

v.

Loss on Issue of Debentures A/c
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
1.4.20	To Premium on Redemption of Debentures A/c	5,00,000	31.3.21	By Securities Premium Reserve A/c	2,50,000
				By Statement of Profit & Loss A/c	2,50,000
		5,00,000			5,00,000