Issue and Redemption of Debentures: Practical Problems and Solutions

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on November 16, 2021

Issue of Debentures Journal Entries

Practical Problem 1

A company issued 1,000 10% debentures of $100 each at par, with $40 payable on application and the balance on allotment. The public applied for 800 debentures and the applications were accepted. All money was received.

Required: Show the journal entries.

Solution

Journal Entries Solution 1

Issue of Debentures for Non-cash Considerations

Practical Problem 2

X Ltd. acquired assets of $500,000 and took over the liabilities of Y Ltd., amounting to $50,000, at an agreed value of $400,000. It issued 12% debentures at a discount of 20% in full satisfaction of the purchase price.

Required: Show the journal entries.

Solution

Journal Entries Solution 2

Issue of Debentures as Collateral Security

Practical Problem 3

John Ltd. secured an overdraft for $100,000 from the bank by depositing debentures worth $150,000 as collateral security. This will appear in the balance sheet as follows:

A) No entry needs to be made in the books of accounts. However, a note is made in the balance sheet.
Balance Sheet Note Solution 3
B) Debentures that are issued to serve as collateral security can be recorded in the books of accounts. For instance, for the above example, the journal entry is:
Journal Entries Solution 3

Balance Sheet

Balance Sheet of Debentures Solution 3
Debenture Suspense Account Journal Entry Solution 3

Discount on Debentures

Practical Problem 4

A company issued $500,000 12% debentures at 94%. The terms of the issue include the repayment of the debentures in five equal installments, beginning with the end of the first year of issue.

Required: Show the amount of discount that should be equitably written off for each of the five years.

Solution

At the outset, it is worth noting that the discount comes to $4,000 (i.e., $100,000 x 0.4).

Discount On Debentures Solution 4
Also, $800 is to be written off against the profit and loss account (i.e., equal annual installments). This is because each year has the benefit of the whole of the debentures.

Redemption of Debentures

Practical Problem 5

10,000 7% redeemable preference shares of $10 each, fully paid, are outstanding on 1 January 2019 in a company. The company decides to redeem these shares on 1 March 2019 at $13 per share.

To provide for redemption, the company issued 5,000 equity shares of $10 each at $14 each, payable in full on 20 February 2019. The profit and loss account shows a credit balance of $100,000.

Required: Show the ledger account.

Solution

7% Redeemable Preference Share Capital Account

Redeemable Preference Shares

Premium on Redemption Account

Premium on Redemption Account

7% Redeemable Preference Shareholders Account

Redeemable Preference Shareholders Account

Equity Share Capital Account

Equity Share Capital Account

Share Premium Account

Share Premium Account

Capital Redemption Account

Capital Redemption Account

Profit and Loss Account

Profit and Loss Account

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.

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