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COCEDUCATION.COM MARATHON CA/CMA Santosh kumar
1. ELECTRICITY COMPANY
Main Features of electricity Act, 2003:-
(a) The activities like generation , transmission and distribution of power have been separately identified.
(b) The act de-liscenses power generation completely.
(c) 10% of power supplied by suppliers and distributors to the consumers has to be generated using
renewable and non-conventional sources of energy.
(d) Setting of State Electricity Regulatory Commission (SERC) and Central Electricity Regulation
Commission (CERC) made mandatory.
(e) Appellate Tribunal to hear appeals against the decision of the CERC & SERC.
(f) Provision for Private Licenses in transmission and entry in distribution through independent network.
(g) Metering of all electricity supplied made obligatory.
(h) Provision relating to theft of electricity made more stricter.
Topics to be covered in Revision:-

1. Computation of security deposits
2. Accounting of security deposits
3. Accounting of SLD charges.
4. Accounting for Depreciation
5. Computation of return on equity (ROE)
6. Computation of return on debt.
7. Final account of Electricity Company (As per Sec 129)
1. Computation of security deposits:-
Amount of security deposits = Load X load factor of the category in which consumer false X (Billing
cycle+45 days) X Current tariff
Revision question
1. Calculate Amount of security deposit to be charged from Consumers and make Entries?
Load = 40 kWh
Load factor = 2.5
Billing cycle = 30 days
Current tariff = ₹6
Solution: - Amount of security deposit = 40 x 2.5 x (30+45) x 6 = ₹45,000
Entries:-
Bank A/c Dr. ₹45,000

To security deposit A/c ₹45,000
Note: - Security deposit are shown under the head of Non-current liability (Sub head other non-current liability) in
the balance sheet.
2. Accounting of security deposit:-

Revision question 2. 1st January, 2022 BSES collected security deposits of ₹20,00,000 from new customers.
Interest payable @12% p.a. During the period ended on 31st January, 2022 Total electricity sold to
consumer’s ₹28,00,000. Make entries
Solution: - 1st January, 2022 Bank A/c Dr. ₹20,00,000

To Security deposits A/c ₹20,00,000
31st January, 2022 Interest on security deposits A/c Dr. ₹20,000

To Interest accrued on security deposit A/c ₹20,000
( ₹20,00,000 x12/100 x 1/12 )
1 COCEDUCATION.COM ENQUIRY- 9999631597, 7303445575, 8448322142

31st January, 2022 Interest accrued on security deposit A/c Dr. ₹20,000
Bank A/c Dr. ₹27,80,000
To sales A/ c ₹28,00,000
Revision question 3. BSES collected security deposits of ₹10,00,000 from its customers. Interest payable
@12% p.a. Make entries for the year 2022.
Solution: -
1st January 2022 Bank A/c Dr. ₹10,00,000
To security deposit A/c ₹10,00,000
31st December 2022 Interest on security Deposits A/c Dr. ₹1,20,000 (₹10,00,000x12%)
To Interest Accrued on security deposit A/c ₹1,20,000
(Being interest due)
31st December 2022 Interest accrued on security deposit A/c Dr.₹1,20,000

To sales A/c ₹1,20,000
(Being accrued interest adjusted from electricity bill)
3. Accounting of services line cum Development (SLD) charges:-

• It is Non-refundable charges
• There are mainly two methods of its Accounting treatment:-
(a) SLD charges are treated as capital reserve as Non- refundable and shown under the head of “Reserve and Surplus”
(b) SLD is accounted for as reduction in the cost of Non-current Assets and Depreciation is Charged on such
reduced cost.
Revision question 4. BSES acquired Non-Current Assets of ₹40,00,000.

Company charged of ₹5,00,000 of SLD charge from its consumers.
Make Entries for 1st year, if rate of depreciation is 10%.
Solution: - Method 1:- (a) Non-Current Assets A/c Dr ₹40,00,000

To Bank A/c ₹40,00,000
(Being assets purchased)
(b) Bank A/c Dr ₹5,00,000

To capital reserve A/c ₹5,00,000
(c) Depreciation A/c Dr. ₹4,00,000

To Non-current assets A/c ₹4,00,000
Method 2:- (a). Non-current Asset A/c Dr.₹40,00,000
To Bank A/c ₹40,00,000
(b). Bank A/c Dr. ₹5,00,000

To Non-current assets A/c ₹5,00,000
(c).Depreciation A/c Dr.₹ 3,50,000

To Non- current assets A/c ₹3,50,000
(₹40,00,000- ₹5,00,000) x10%
4. Accounting for Depreciation:-

1. As per regulation, 2009 it has been stated in the tariff policy that the depreciation rates for the assets shall be
specified by the Central Electricity Regulatory Commission(CERC) and these rates of depreciation shall be
applicable for tariff as well as accounting.
2. As per Regulation 2009, purpose of depreciation (most imp.)

(a) Cash flow for repayment of Loan.
(b) Refinancing equity.

(c) True and fare presentation of Accounts.
Computation of Depreciation for the purpose of tariff As per Regulation 21:-

1. Depreciation will be charged on historical cost of asset.
2. Freehold land will be excluded from capital cost while calculating depreciable value of assets.
3. Depreciation shall be calculated annually based on (SLM) straight line method over useful life of
the asset and at the rates prescribed in appendix III of Regulation 21.
4. Residual life of the asset shall be considered 10 years.
5. Salvage value of the asset will be considered 10%.
6. Depreciation shall be allowed up to maximum of 90% of his historical cost of asset.
7. On repayment of entire loan, the remaining depreciable value shall be spread over the balance
useful life of the asset.
8. Depreciation shall be charged from 1st year of operation. In case of the operation of the asset is
only for the part of year, then depreciation will be charged only for that part of use.
Appendix III: - (Depreciation scheduled):-
Assets % of Depreciation
by SLM
1.Freehold Land 0%
2.Leasehold Land 3.34%
3. (a)Building and civil engineering works 3.34%
(except kutcha road)
(b)Temporary erection such as wooden structure 100%
4. IT equipment 15%
5.Self Propelled vehicles 9.50%
6. Portable air conditioning plant 9.50%
7. (a) Apparatus other than motor let on hire 9.50%
(b) Motor let on hire 6.33%
8.Communication equipment 6.33%
9.Office furniture , furnishing Equipment, fittings. 6.33%
10. Any other assets e.g. Plant and machinery in generating 5.28%
station, Cooling tower, Circulating water system, Hydro
dams, Transformer, Batteries, meters, street lightning etc.
Revision question 5. Calculate weighted average rate of depreciation:-

Freehold land = ₹5,00,000
Leasehold land = ₹2,00,000
Building = ₹7,00,000
Wooden structure = ₹1,00,000
IT Equipment = ₹1,50,000
Sale propelled vehicle = ₹2,50,000
Office furniture = ₹50,000
Office equipment = ₹1,50,000

Solution:-
Assets Amount(₹) x Rate Depreciation Amount (₹)
Freehold land ₹5,00,000 x 0% 00
Leasehold land ₹2,00,000 x3.34% ₹6,680
Building ₹7,00,000 x3.34% ₹23,280
Wooden structure ₹1,00,000 x100% ₹1,00,000
IT Equipment ₹1,50,000 x15% ₹22,500
Sale propelled vehicle ₹2,50,000 x9.50% ₹23,750
Office furniture ₹50,000 x 6.33% ₹3,165
Office equipment ₹1,50000 x6.33% ₹9,495
₹21,00,000 ₹1,88,970
• Weighted average rate of depreciation = ₹1,88,970/ ₹21,00,000-₹5,00,000 x 100%

= ₹₹1,88,970 / ₹16,00,000 x100%
= 11.81%.
Revision question 6. Calculate depreciation as per 2009 regulations from the following
information of an Electricity generation project.
i. Date of commercial operation i.e. 1.9.2010.

ii. The details of actual expenditure incurred up to the date of commercial operation i.e 1.9.2010
and projected expenditure to be incurred from the date of commercial operation up to 31.3.2014
for the assets under Transmission system. The details of apportioned approved cost as on the
date of commercial operation and projected expenditure to be incurred for the above mentioned
assets is summarized below:
Apportioned Actual Cost Incurred Proposed Expenditure Proposed Total
approved cost as on the date of from the date of Expenditure Expenditure
commercial operation commercial operation for 2011-12 completion cost
to 31.3.2011
4,20,000 4,00,000 1,00,000 20,000 5,20,000
iii.
Average Rate of Depreciation Calculated as per rates 5.3 5.2 5.2 5.2
Specified in Appendix-III
Additional capital expenditure of 20,000 lakh has been considered out of 1,00,000 lakh for the year
2010-11 and no further additional capital expenditure has been considered as capital cost has been
restricted to apportioned approved cost in the absence of revised capital expenditure.
Solution: Computation of depreciation (1.9.00 to 31.3.11)

10-11 11-12 12-13
Opening capital cost/Gross Block 4,00,000 4,20,000 4,20,00
(A) 20,000 Nill Nill
Additional capital cost 4,20,000 4,20,00 4,20,000
Closing capital cost/Gross Block (B) 4,10,000 4,20,000 4,20,000
𝑨+𝑩
Average capital cost ( )
𝟐 Nill Nill Nill
Cost of freehold land 4,10,00 4,20,000 4,20,000
Average Capital cost excluding
freehold land 5.3% 5.2% 5.2%
Average rate of depreciation
7 months 12 months 12 months

Number of months 𝟒, 𝟏𝟎, 𝟎𝟎𝟎 × 𝟓. 𝟑 𝟕 𝟒, 𝟐𝟎, 𝟎𝟎𝟎 × 𝟓. 𝟐 𝟏𝟐

× × 21,840
𝟏𝟎𝟎 𝟏𝟐 𝟏𝟎𝟎 𝟏𝟐
Depreciation = 12,676 = 21,840
Revision question 7. Calculation depreciation as per regulation 2009

(i) Date of commercial operation (1.8.18)
(ii) Approved capital cost ₹7,40,000
(iii) Capital cost incurred till 1.8.18 ₹500,000
(iv) Additional capital cost incurred
18 – 19 = 1,80,000
19 – 20 = 2,00,000
20 – 21 = 1,00,000
(v) Cost of freehold land included in total capital cost incurred till 1.8.18: ₹ 2,00,000
(vi) Average weighted rate of depreciation:
18 – 19 = 5.8%
19 – 20 = 5.9%
20 – 21 = 6.1%
Solution:
18 - 19 19 - 20 20 - 21
opening capital cost (A) 5,00,000 6,80000 7,40,000
Additional capital cost 1,80,000 60,000 --
Closing Capital cost (B) 6,80,000 7,40,000 7,40,000
𝐴+𝐵 5,90,000 710000 740000
2 -2,00,000 -2,00,000 -2,00,000
- cost of freehold land
Average capital cost excluding freehold land
3,90,000 5,10,000 5,40,000
Average rate of depreciation
5.8% 5.9% 6.1%
Months of depreciation
Total depreciation 8 months 12 months 12 months
15,080 30,090 32,940
Revision question 8. (If rate of depreciation not given in question) Calculate depreciation upto
2013-14 as per 2009 regulations from the following information of XYZ Power generation Project :
Date of commercial operation/Work Completed Date 1-april-1996

Beginning of Current year 1-Apr-2011
Useful life 35 years
(Figures in ₹ Crores)
1. Capital Cost at beginning of the year 2011-12 222.00
2. Additional Capitalisation during the year: 2012-13 10.56
2013-14 29.44
3. Value of Freehold Land 12.00
4. Depreciation recovered up to 2009-10 48.60
5. Depreciation recovered in 2010-11 5.40
Note: Capital Cost and Accumulated Depreciation at the beginning of the year are as per tariff order FY
2011-12.

Solution:
11 - 12 12 - 13 13 - 14
Opening capital cost (A) 222 222 232.56
Additional capital cost Nill 10.56 22.44
Closing Capital cost (B) 222 232.56 262.00
𝑨+𝑩 222 227.28 247.28
𝟐 -12 -12.00 - 12.00
- cost of freehold land
Average capital cost excluding freehold land (C) 210 215.28 235.28
189 193.752 211.752
Depreciation value (90% of C) (D)
54 60.75 67.75
Depreciation already charged till end of last year (E)
Remaining depreciation value (D – E)(F) 135 133.002 144.002

Remaining depreciation life (G) 20 years 19 years 18 years
𝐹
Depreciation for current year ( ) 6.75 7 8
𝐺
Depreciation till the end of current year 54 +6.75 = 67.75 75.75
60.75
Revision question 9. From the following information Calculate Depreciation and Advance against
Depreciation as per Regulation 21 of the Central Electricity Regulatory Commission (Terms and Conditions of
Tariff) Regulations, 2004.
• Date of Commercial Operation of COD = 1st April 2010
• Approved opening Capital cost as on 1st April 2010 = 1,50,000
• Weighted Average Rate of Depreciation: 3.5%
• Details of allowed Additional Capital Expenditure. Repayment of Loan and Weighted Average Rate
of Interest on Loan is as follows:
1st year 2nd year 3rd year 4th year
Additional Capital Expenditure (Allowed) 10,000 3,000 2,000 2,000
Repayment of Loan 8,000 10,000 10,000 11,000
Weighted Average Rate of Interest on Loan 7.4 7.5 7.6 7.5
Solution: Computation of depreciation

1 year 2 year 3 year 4 year
Opening capital cost (a) 1,50,000 1,60,000 1,63,000 1,65,000
Additional capital cost 10,000 3,000 2,000 2,000
Closing Capital 1,60,000 1,63,000 1,65,000 1,67,000
𝐴+𝐵 1,55,000 1,61,500 1,64,000 1,66,000
Average capital cost ( 2 )
- cost of freehold land Nill Nill Nill Nill
Average capital cost excluding freehold land (c)
1,55,000 1,61,500 1,64,000 1,66,000
Average rate of depreciation (d) 3.5% 3.5% 3.5% 3.5%
Annual depreciation (c x d) 5425 5652.5 5740 5810
AAD 2575 4347.5 4260 5190
Total depreciation 8000 10000 10000 11000

Computation of AAD
1 2 3 4
(i) Repayment of loan 8,000 10,000 10,000 11,000
(ii) Annual depreciation 5,425 5,652.5 5,740 5,810
(iii) Difference (i-ii) 2,575 4,347.50 4,260 5,190
(iv) Cumulative Repayment of loan (till date) 8,000 18,000 28,000 39,000
(v) Cumulative depreciation (till date) 5,425 11,077.7 16,817.5 22,627.5
(vi) Difference (iv –v) 2,575 6,922.5 11,182.50 16,372.5
AAD (lower of (iii) and (vi) 2575 4347.5 4260 5190
REVISION OF COMPUTATION OF INTEREST ON LOAN AND RETURN ON EQUITY

(Always remember- Debt – equity: 70: 30 for electricity company)
Revision question 10. Date of commercial operation: 1.4.2010

Approved capital cost as on 1.4.2010: 1,50,000
1 2 3 4
Additional capital expenditure(allowed) 20,000 10,000 30,000 40,000
Repayment of loan 12,000 18,000 25,000 30,000
Weighted average rate of interest on loan 7.4% 17.5% 8% 10%
Solution: Computation of interest on loan

1 2 3 4
Opening loan (70%of opening capital cost) 105,000 107,000 96,000 92,000
Additional loan(70% of Additional capital expenditure) 14,000 7,000 21,000 28,000
Repayment of loan during the year 12,000 18,000 25,000 30,000
Closing loan (A +B – C) 1,07,000 96,000 92,000 90,000
𝑨+𝑫 1,06,000 1,01,500 94,000 91,000
Average loan ( )
𝟐 7.4% 7.5% 8% 10%
Rate of interest
Interest on loan
7,844 7,612.5 7,520 9,100
Computation of Return on equity:

1 2 3 4
Opening equity (30%of opening capital cost) 45,000 51,000 54,000 63,000
Additional equity (30%of Additional capital expenditure) 6,000 3,000 9,000 12,000
Closing equity 51,000 54,000 63,000 75,000

𝑨+𝑩 48,000 52,500 58,500 69,000
Average equity ( )
𝟐 6,720 7,350 8,190 9,660
Return on equity @ 14%

Revision question 11. The trial balance of MM Electric Supply Ltd. For the year ended 31st March, 2022 is as
below:
Particulars Amount Amount
(₹ in ‘000) (₹ in ‘000)
Share Capital:
Equity Shares of ₹10 each 50,000
14% Preference Shares of ₹100 each 15,000
Patents and trade mark 2,504
15% Debentures 24,700
16% term loan 15,300
Land (additions during the year 20,50) 12,450
Building (additions during the year 50,80) 35,134
Plant & Machinery 57,058
Mains 4,524
Meters 3,150
Electrical Instruments 1,530
Office Furniture 2,450
Capital Reserve 4,020
Contingency Reserves 12,030
General Reserve 1,000
Transformers 16,440
Opening Balance of Profit & Loss Account 350
Profit for the year 2021-22 subject to adjustments 5,000
Stock in hand 12,050
Sundry Debtors 6,246
Contingency Reserve Investments:
SBI Bonds-2029 10,010
Other Investments 2,000
Cash & Bank 3,254
Public lamps 3,040
Depreciation Fund 25,816
Sundry Creditors 6,524
Provision for repairs 12,100
1,71,840 1,71,840
During 2021-22, 1,00,000, 14% Preference Shares were redeemed at a premium of 10% out of proceeds of
fresh issue of equity shares of necessary amounts at a premium of 10%. Required prepare for the above period
general balance sheet as on 31st March, 2022 as per the schedule III:
Adjustments:
1. Transfer to Contingency Reserve ₹ 1,70,000 & to General Reserve ₹ 2,00,000
2. Loss on Contingency Reserve Investment ₹ 10,000
3. Make a Provision for debts considered doubtful of ₹ 1,014,000
Solution:- Balance Sheet as at 31st March, 2022

Particulars Note No. (` in ’000)
I. EQUITYANDLIABILITIES
(1) Shareholders’ Funds
(a) Share Capital 1 65,000
(b) Reserves and Surplus 2 21,376
(2) Non-Current Liabilities
(a) Long-term Borrowings 3 40,000
(3) Current Liabilities
(a) Trade Payables 6,524
(b) Short-Term Provisions 4 12,100
Total
II. ASSETS
(1) Non-Current Assets 1,45,000

(a) property, plant & equipments
(i) Tangible Assets 5 1,09,960

(ii) Intangible Assets 2,504
(b) Non-Current Investments 6 12,000
(2) Current Assets
(a) Inventories 12,050
(b) Trade Receivables 7 5,232
(c) Cash and Cash Equivalents 3,254
1,45,000
Total
Notes to Accounts:
1. Share Capital
Authorised Capital
50,00,000 shares of 10 each 50,000
2,50,000 14% Pref. Shares of 100 each 25,000
75,000
Issued & Subscribed Capital

50,00,000 shares of 10 each 50,000
2,50,000 14% Pref. Shares of 100 each 25,000
Less: 1,00,000 14% Pref. Shares of 100 each (10,000)
65,000
2. Reserves and Surplus

Capital Reserve
Contingency Reserve (12,030 + 170 –10 4,020
General Reserve (1,000 + 200) 12,190
Profit & Loss Account 1,200
Opening Balance 350
Add: Profit for the period 5,000
Less: Transfer to General Reserve (200)
Less: Transfer to Contingency Reserve (170)
Less: Provision for Doubtful Debts (1,014) 3,966
Total 21,376
3. Long-term Borrowings
15% Debentures 24,700
16% Term Loan 15,300
40,000
4. Short-term Provisions
Provision for repairs 12,100
12,100
5. Tangible Assets
Land (10,400 + 20,50) 12,450
Building (30,054 + 50,80) 35,134
Plant & Machinery 57,058
Mains 4,524
Meters 3,150
Electrical Instruments 1,530
Office Furniture 2,450
Transformers 16,440
Public lamps 3,040
Less: Depreciation Fund (25,816)
Total 1,09,960

6. Non-Current Investments
SBI Bond-2029 (10,010 – 10) 10,000
Other Investments 2,000
12,000
7. Trade Receivables
Sundry Debtors 6,246
Less : Provision for Doubtful Debts (1,014)
5,232
All the best dear… believe me…you are going to well perform in your Exam

2. ACCOUNTING OF SHARES (ISSUE, FORFEITURE AND RE-ISSUE OF SHARES)
MEANING OF SHARES: According to section 2(84) of the companies act 2013, share means a share
in the share capital of a company and includes stock.
SHARE CAPITAL:-
The capital of the company is called share capital. Total share capital of company is divided into
number of small indivisible units of a fixed amount and each unit is called share.
The fixed value of share printed on the share certificates called Nominal/ Par/ Face value of share.
The liability of holder of shares (called shareholders) is limited to issue price of share acquired by
them.
According to SEBI guidelines, a company is free to price its issue if it has three years track record of
consistent profitability and in case of New Company, if it has been promoted by company with a five
years tracks record of consistent profitability.
Note: The issue price need not be equal to market price of the share.
These days the shares are generally priced on the basis of book building process.
Book building is a process through which company determines it's share prices. Under this method company
determines a price band of its shares and based on bids received from potential investors at various prices within the
price band finally fixes its issue price.
Share capital of company divided into following categories:-
1. Authorized share capital (section 2(8) :- This capital also called Registered Capital or Nominal Capital.
This is maximum capital requirement of company and mentioned in ‘capital clause’ of the ‘Memorandum
of Association’ registered with Registrar of Company. This is maximum limit which a company can raise by
issue of share capital during its life time.
2. Issued Share Capital(section 2(50) :- It is that part of Authorized Capital which company uses to
raise fund since it is not necessary that all Authorized Capital should be issued. The remaining
portion of the authorized capital which is not issued is called un-issued capital.
3. Subscribed Share Capital (section 2(86) :- That part of issued share capital which has been
subscribed by the public is called subscribed share capital. Subscribed share capital may be more,
less or equal to issued share capital. At least 90% of the issued share capital must be subscribed by
the public before the allotment of shares.
4. Called-up Share Capital (section 2(15) :- Companies generally receive the issue price of share in
installments. Called-up Capital is that portion of issue price of share which a company has demanded
and called from shareholder. The portion of issue price which is not called or demanded by company is
termed as uncalled capital.
5. Paid-up Share Capital (section 2(64) :- Paid-up capital is that portion of Called-up Capital which
is paid by shareholder. The portion of called up capital which is not paid by shareholders are
called unpaid calls or Installment in Arrears or Calls in Arrears. To calculate paid-up share capital,
Calls in Arrear is deducted from Called- up Capital in the balance sheet. Called-up Capital and
Paid-up capital are shown together at liabilities side of balance sheet. Dividend are paid on Paid -
up Capital
6. Reserve Share capital :- According to section 65 of Company Act 2013, a company may decide by
passing special resolution that some portion of subscribed uncalled capital shall not be called up

except in the event of winding- up of Company. Portion of uncalled capital which a company has
decided to call only in case of liquidation of company is called Reserve Liability / Reserve Capital.
7. Capital Reserves:- Capital Reserves are created out of Capital Profits. These are not free for
distribution as dividend. This Reserve can be used to write off capital losses such as discount on
issue of shares, underwriting commission etc. This Reserve can also be used to issue Bonus Shares
if they have been realized in cash. Capital reserves are part of Reserves and surplus and shown
under the head ‘Reserves and surplus’ in the balance sheet.
TYPES OF SHARES: These are two type of shares:
1. Preference Shares:-Those shareholder which have preferential right in following matter:

a. They get assured preferential dividend at fixed rate during the life of company.
b. They are having preferential right to be paid first in case of winding up of
company, from other shareholders.
According to section 43 of companies Act 2013, person holding preference shares are called
preference shareholders. However, Holder of preference share does not have voting rights.
The company Act 2013, prohibits the issue of preference share which is irredeemable. According to
Company Act, preference shares which are redeemable within 20 years can only be issued.
Types of Preference Shares.: These are following type:-
a. Cumulative Preference Shares:

o A cumulative preference share is one that carries the right to a fixed amount of dividend
every year. If current year profit is insufficient, it is paid from future profit. So dividend is
accumulated unless it is paid in full and such shares are called Cumulative Preference
Share.
o The arrears of dividend are shown in balance Sheet as ‘Contingent Liabilities’.
o In India ‘Preference shares’ are always cumulative unless otherwise stated.
o If dividends are in arrears for a period not less than two year, holders of such shares will
be entitled to take part and vote on every resolution in general body meeting of
shareholders.
b. Non-Cumulative Preference Shares:
o These are those shares which do not carry right to get divided accumulated if profit of
current year are insufficient.
o If dividend remains arrears for a period not less than two years or an aggregate
periods of not less than three years comprised in six years ending with the expiring of
financial year, holder of such shares will be entitled to take part and vote on every
resolution at any meeting of shareholders.
c. Participating Preference shares :--These shareholders have following rights:

o Right to get fixed percentage of dividend.
o Right to participate on stipulated profit after equity shareholders have been paid at
stipulated rate.
o In case of winding up of company, these shareholder also get right to receive pre-
determined portion of surplus after equity shareholders have been paid off.
d. Non participating preference Share:- These shareholders only get fixed percentage of
dividend every year. They do not have right to participate in profit and surplus in case of
winding-up of company.
e. Redeemable Preference Shares.: These are shares that company may issue on the condition that
company will repay after the fixed period or even earlier at company discretion. It is governed by
section 55 of the companies Act 2013.

f. Non-Redeemable Preference shares:- Those shares which are not redeemable are called non
redeemable preference shares.
According to section 55, no company limited by shares shall issue irredeemable preference share or
preference shares redeemable after expiry of 20 years from the date of issue.
g. Convertible Preference Shares:- These shareholder have right to convert their shares into
equity shares at their option according to terms and conditions of their issue.
h. Non-Convertible preference Shares :These shareholders do not have right to convert their shares
into equity shares.
Note: Unless mentioned otherwise Preference Shares are Non-Cumulative, Non Participating, Non- Convertible
and Redeemable in nature.
2. Equity Shares[section 43(a)] :- They don’t have preferential right in matter of dividend or
repayment of capital. On Equity shares dividend is recommended by Board of Directors and dividend
may vary from year to year.
These shareholders carry voting right in general meeting of shareholders.
Company (Amendment) Act 2000, permit issue of equity share capital with differential right as to
dividend, voting or otherwise.
ISSUE OF SHARES FOR CASH :-

• To Issue shares, private companies raise funds from private placement of shares.
• Public companies for raising funds issue prospectus and invite general public to subscribe for
its shares.
First installment along with application is called application money. As per section 39 of the
Companies act 2013, application money cannot be less than 5% of face value of shares.
As per SEBI Guidelines, the minimum application money to be paid by an applicant along with the
application shall not be less than 25% of the issue price.
IMP. NOTE -- Matters related to issue and transfer of securities will be administered by the SEBI
and not by the Company Law Board (CLB)
SEBI Guidelines require the shares issued are made fully paid-up within 12 months of the date of
allotment if the size of the issue is up to 500 crores.
Minimum Subscriptions :- A public limited company cannot make any allotment of shares unless
the amount of minimum subscription stated in prospectus has been subscribed. Amount of minimum
subscription to be disclosed in prosecutes by Board o f Director taking into account following
1. Preliminary expenses of company
2. Commission payable on issue of shares.
3. cost of fixed assets purchased or to be purchased
4. Working capital requirement of company.
5. Any other expenditure for day to day operation of business.
▪ According to guidelines of Securities Exchange Board of India(SEBI) a company must receive a

minimum 90% subscription against whole issue before making any allotment of shares or
debenture to public.
▪ If company is not able to receive minimum subscription of 90% of the issue, the entire
subscription shall be refunded to applicants within 15 days from closures of issue.

▪ In case of delayed refund interest for the delayed period as per section 73 of companies Act shall
be payable @ 4% to 15%(having regard to the length of the period in delay) on the amount of
refund.
▪ The companies Act 2013 requires that the period of at least one month must be between two
calls.
▪ The company has right to reject or accept an application fully or partially.
Subscriptions of Shares:- When ever company issues shares it is not necessary that all shares
issued by company are also subscribed by public. There are three situation of subscription by
public
1. Full subscription
2. Under subscription
3. over subscription
Full subscription:- In this situation number of shares offered for subscription and the number of
shares actually subscribed by public are same.
Under Subscription:- In this situation number of shares offered for subscriptions is more than
number of shares subscribed by public.
Over subscriptions :- In this situation number of shares offered for subscription is less than
number of shares subscribed by public.
Shares issued at Discount(Section 53):- As per new section 53 of the co. act 2013, no shares can be
issued at discount( except ESOP and Sweat equity shares)
Shares Issued at Premium( section 52):- It is that situation where company issue share more than
its have clue nominal value / face value. This extra amount is called share premium.
Treatment of security Premium:- Amount of security premium is credited to separate account

called security premium account. It is not part of capital. It is shown on liabilities side of balance
sheet under the sub-head reserve and surplus (Heading shareholder ‘fund).
According to section 52 of company Act 2013, security premium may be used by company for the
following purpose
a) For issuing Bonus shares
b) To write off preliminary expenses of company
c) To write off expenses, commission, and discount allowed on any securities and
debenture of company.
d) To pay premium on redemption of preference share or debenture of company.
Over Subscription and pro- rata Allotment:- When shares are over subscribed, it is not possible for
company to satisfy all the applicants. Allotment of shares is done at the discretion of company. Allotment
basis can be any one of the following:-
(a)Company may allot full shares to some and reject others.
(b) Allotment of shares on Pro-rata basis.
Pro-rata Allotment:- Means allotment of shares in proportion of shares applied for. Applicants are
informed about allotment procedure through an advertisement in leading newspapers.
Calls –in Arrears: Sometimes share holders fail to pay the amount due on allotment or calls.
The total unpaid amount on one or more installments is known as call-in-arrear or unpaid calls.
Generally Articles of Association empower the directors to charge interest at stipulated rate on
call-in-arrear.
However, according to Table F of articles of association, Interest at the rate of 10% per annum is
charged on unpaid calls for the period started from the due date and end on when actual payment is
made.

Call-in Advance:- Sometime, shareholders pay in advance for calls which have not been made.
This amount may be with application money, allotment money, first call etc. Calls in advance is
shown as a separate item on the liability side of the balance sheet under the head ‘other current
liability’. As per table F of articles of association, INTEREST on calls in advance is paid @ 12% p.a.
Difference between interest on calls in arrear and interest on calls in advance:

Interest on Calls in Arrears Interest on Calls in Advance
It is payable by shareholders to company on the calls It is payable by the Company to Shareholders on
due but remaining unpaid. the call money received in advance but not yet due.
As per Table F maximum prescribed rate is 10%. As per Table F maximum prescribed rate is 12%.
Period considered : From the date call money was due Period considered: From the date money was
to the date money is finally received. received to the day call was finally made due.
Directors have a right to waive off such interest in Shareholders are not entitled for any dividend on
individual cases at their own discretion. calls in advance.
It is a nominal account in nature and is credited to It is a nominal account in nature with interest being
statement of profit and loss as an income. an expense for the company.
Forfeiture of shares:- The Article of a company usually authorize the directors to forfeit shares of a
member on account of non-payment of a call or interest thereon after serving him a prior notice as
prescribed by the articles.
Revision question 1. COC ltd issued 25,000 shares of Rs 10 each payable as follow:
On application Rs 2
On allotment Rs 4
On first call Rs 3
On final call Rs 1
Public applied for 30,000 shares (Mr A for 18,000 and Mr B for 12,000 shares) and allotment was made pro-
rata to both applicants. Money dues on various calls were received except Mr A who failed to pay both calls
money. His shares were forfeited and reissued at Rs 9 as fully paid up. Make entries.
Solution: Working notes 1.
Applicants Applied alloted
A 18,000 15,000
B 12,000 10,000
Total 30,000 25,000
Working notes 2.
A B Total
1. Total application money received
A- (18,000 X2) 36,000 24,000 60,000
B- (12,000 X 2)
Less: amount transfer to share capital 30,000 20,000 50,000
Excess amount for allotments 6,000 4,000 10,000
2. amount due on allotments @ Rs 4 60,000 40,000 1,00,000
Less: excess amount received adjusted -6,000 -4,000 -10,000
Amount received on allotments 54,000 36,000 90,000
3. amount due on first call @ Rs 3 45,000 30,000 75,000
Less : calls in arrear: -45,000 nil -45,000
Amount received on first call Nil 30,000 30,000
4. amount due on final call @ Rs 1 15,000 10,000 25,000
Less: calls in arrear -15,000 nil -15,000
Amount received on final call Nil 10,000 10,000

Journal entries in the book of COC ltd

No. Particulars Debit Credit
1. Bank account Dr 60,000
To share application account 60,000
( being application money received)
2. Share application account Dr 60,000
To share capital account 50,000
To share allotment account 10,000
(being application money adjusted)
3. Share allotment account Dr 1,00,000
To share capital account 1,00,000
(being allotment money due)
( being allotment money received)
5. Share first call account Dr 75,000
(being first call money due)
Calls in arrear a/c Dr 45,000
To share first call account 75,000
7. Share final call account Dr 25,000
(being final call money due)
To share final call account 25,000
9. Share capital account Dr 1,50,000
To calls in arrear a/c 60,000
To share forfeiture a/c 90,000
( being shares of Mr A forfeited)
10. Bank account Dr 1,35,000

Share forfeiture account Dr
(being forfeited shares re-issued @ 9 as fully paid)
11. Share forfeiture account Dr 75,000
To capital reserve account 75,000
(surplus amount in share forfeiture transferred to
capital reserve)
Revision question 2.
Applied Allotted
50,000 40,000
Application = Rs 2
Allotment = Rs 3
Final call = Rs 5
Ram to whom 2,000 shares were allotted failed to pay allotment and final call money. Calculate
(a) Calls in arrear on allotment

(b) Calls in arrear on final call.

(c) Amount forfeited.
Solution:
Alloted shares = 2,000
𝟐𝟎𝟎𝟎
Applied shares = 𝟒 𝑿 𝟓 = 2,500 Shares
1. Application money receive ( 2,500 X 2) 5,000

Less: amount transferred to share capital ( 2000X2) -4,000
Excess amount received for allotments 1,000
2. amount due on allotments 6,000

Excess amount adjusted -1,000
Calls in arrear on allotment 5,000
Revision question 3.
Applied Allotted
60,000 50,000
Application = Rs 3
Allotment = Rs 4
Final call = Rs 3
Mohan who had applied for 6,000 shares were allotted failed to pay allotment and final call
money. Calculate
(a) Calls in arrear on allotment
(b) Calls in arrear on final call.
(c) Amount forfeited.
Solution:
Applied shares = 6,000
𝟔𝟎𝟎𝟎
Alloted shares = 𝑿 𝟓 = 5,000 Shares
𝟔
1. Application money receive ( 6,000 X 3) 18,000

Excess amount received for allotments 3,000
2. amount due on allotments (5,000 X4) 20,000

Excess amount adjusted -3,000
Calls in arrear on allotment 17,000
Revision question 4. Maruti ltd issued 40,000 shares of Rs 10 each at a premium of 20% payable as
follow:
Application Rs 3(including premium Re 1)
Allotment Rs 4( including premium Re 1)
First call Rs 3
Final call Rs 2
Public applied for 50,000 shares and allotment was made on pro-rata basis to all applicants. Mr Raju to
whom 4,000 shares were allotted failed to pay allotment and first call money. Subsequently his shares were
forfeited.

Mr Kaju to whom 6,000 shares were allotted failed to pay both calls money. His shares were also forfeited
after the final call. Out of forfeited shares 7,000 shares were re-issued at Rs 8 as fully paid. It includes all the
shares of Mr Kaju. Make entries.
Solution:
Applied Allotted
50,000 40,000
Amount
1. Total application money received (50,000 X 3) 1,50,000
Less: amount transfer to share capital (40,000X2) 80,000
Less: amount transfer to security premium (40,000X1) 40,000
Excess amount for allotments 30,000

2. amount due on allotments (40,000X 4) 1,60,000
Less: excess amount received adjusted -30,000
Less: calls in arrear ( Raju) -13,000
Amount received on allotments 1,17,000
3. amount due on first call (40,000 X 3) 1,20,000
Less : calls in arrear:
Raju (4,000 X3)= 12,000
Kaju (6,000 X3)= 18,000 -30,000
Amount received on first call 90,000

4. amount due on final call (40,000-4,000) X 2 72,000
Less: calls in arrear (Kaju) -12,000
Amount received on final call 60,000
Working notes 3. Details of Raju
Allotted shares: 4,000 shares

Applied shares = 5,000 shares
1. Application money received from Raju (5,000 X 3) 15,000

Less: amount transfer to security premium (4,000X1) -4,000
Excess amount received for allotments from Raju 3,000
2. amount due on allotment from Raju (4,000 X4) 16,000

Less : Excess amount adjusted -3,000
Calls in arrear on allotment from Raju 13,000
Journal entries in the book of COC ltd

To share application account 1,50,000
( being application money received)
2. Share application account Dr 1,50,000


To security premium 40,000
(being application money adjusted)
3. Share allotment account Dr 1,60,000
To security premium account 40,000
(being allotment money due)
To share allotment account 1,30,000
5. Share first call account Dr 1,20000
(being first call money due)
To share first call account 1,20,000
7. Share capital account Dr 32,000
Security premium account Dr 4,000
To share forfeiture account 11,000
To calls in arrear account 25,000
(being shares of Raju forfeited)
8. Share final call account Dr 72,000
(being final call money due)
To share final call account 72,000
10. Share capital account Dr 60,000
To calls in arrear a/c 30,000
To share forfeiture a/c 30,000
( being shares of Mr Kaju forfeited)

Share forfeiture account Dr 14,000
(being forfeited shares re-issued @ 9 as fully paid)
12. Share forfeiture account Dr 18,750
To capital reserve account 18,750
(surplus amount in share forfeiture transferred to
capital reserve)
Working notes on amount transferred to capital reserve:

Raju Kaju
Shares forfeited 4,000 6,000
Amount forfeited Rs 11,000 Rs 30,000
Total 10,000 shares
Re-issued shares 1,000 shares 6,000 shares
Amount forfeited on re-issued shares 𝟏𝟏, 𝟎𝟎𝟎
𝑿 𝟏, 𝟎𝟎𝟎
𝟒, 𝟎𝟎𝟎
= Rs 2,750 Rs 30,000

Total amount forfeited on re-issued shares 32,750

Less: amount used on re-issue -14,000
Amount transferred to capital reserve 18,750
Important notes:
1. If security premium money has not been received from defaulting applicant, then it is
debited at the time of forfeiture.
2. If premium money has been received from defaulting applicant, then it is not debited at
the time of forfeiture.
3. Amount received for security premium is never forfeited. It remains in security premium account.
Revision question 5. Umesh Ltd. issued 2,00,000 equity shares of Rs. 10 each at a premium of Re. 1 per
share (to be adjusted on allotment) payable as follows (i) Rs.2 on application; (ii) Rs. 3 on allotment and (iii)
Rs. 4 on first call. Subscription list was closed on 1 January 2004 by which date applications for 4,50,000
shares had been received. Allotment was made as under :
List A : Applicants for 50,000 shares were allotted in full.

List B : Applicants for 1,00,000 shares were allotted 50,000 shares on pro-rata basis
List C : Applicants for 3,00,000 shares were allotted 1,00,000 shares on pro-rata basis. Excess application
money was adjusted towards allotment and calls authorised by articles of association.
All the shareholders paid the amounts due on allotment and call except Aashima who was allotted 4,000
shares under List B and Swati who was allotted 2,000 shares under List C. These shares were duly forfeited.
Of these, 5,000 shares (including 4,000 shares of Aashima) were reissued @ Rs. 7 per share. Journalize the
transactions including the cash and show the balance sheet with relevant information only.
Solution: Working notes 1.
Applied Allotted
List A 50,000 50,000
List B 1,00,000 50,000
List C 3,00,000 1,00,000
TOTAL 4,50,000 2,00,000
Working notes 2.
List A List B List C Total
1. Total application money received 1,00,000 2,00,000 6,00,000 9,00,000

Less: amount transfer to share -1,00,000 -1,00,000 -2,00,000 -4,00,000
capital
Excess amount for allotments Nil 1,00,000 4,00,000 5,00,000
2. amount due on allotments @ Rs 4 1,50,000 1,50,000 3,00,000 6,00,000
Less: excess amount received -nil -1,00,000 3,00,000 -4,00,000
adjusted
Less : Calls in arrear: -4,000 Nil -4,000
Ashima (B)
Swati (C)
Amount received on allotments 1,50,000 46,000 NIL 1,96,000
3. amount due on first call 2,0,000 2,00,000 4,00,000 8,00,000
Less : excess amount adjusted -nil Nil -1,00,000 -1,00,000
Less : calls in arrear:
Ashima -16,000 -6,000 -22,000
Swati
Amount received on first call 2,00,000 1,84,000 2,94,000 6,78,000

Working notes 3. Workings related to Ashima (List B):

1. Application money received from Ashima (8,000 X 2) 16,000

Excess amount received for allotments from Ashima 8,000
2. amount due on allotment from Ashima (4,000 X3) 12,000

Calls in arrear on allotment from Ashima 4,000
Working notes 4. Workings related to Swati (List C):

1. Application money received from Swati (6,000 X 2) 12,000

Less: amount adjusted on allotment -6,000
Excess amount received for first call 2,000
2. amount due on first call from Swati (2,000 X4) 8,000

Calls in arrear on allotment from Swati 6,000
Some more points for revision: (Dummy notes)
Rs Rs
1. Share Capital:
Equity share capital
Authorised share capital
1,00,000 Equity shares of Rs 10 each
Issued share capital

60,000 Equity shares of Rs 10 each
Subscribed share capital:

60,000 Equity shares of Rs10 each
Called up and Paid up share capital:

60,000 Equity shares of Rs 10 each Rs 9 called up
Less: Calls unpaid on 5,000 shares @ Rs 2 per share
2. Cash and cash equivalents:

Balances with banks

3. Issue of debentures
Introduction:--A debenture is a bond issued by a company under its seal, acknowledging a debt and
containing provisions as regards repayment of the principal and interest.
Section 2 (30) of the Companies Act, 2013 defines debentures as “Debenture” includes debenture stock,
bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the
assets of the company or not.
FEATURES OF DEBENTURES:
(a) It is a document which evidences a loan made to a company.
(b) It is a fixed interest-bearing security where interest falls due on specific dates.
(c) Interest is payable at a predetermined fixed rate, regardless of the level of profit.
(d) The original sum is repaid at a specified future date or it is converted into shares or other debentures.
(e) It may or may not create a charge on the assets of a company as security.
(f) It can generally be bought or sold through the stock exchange at a price above or below its face value.
Distinction between shares and debentures

Debentures Shares
1. Debenture holders are the creditors of the company. 1. Shareholders are the owners of the company.
2. Debenture holders have no voting rights and 2. Shareholders have voting rights and consequently
consequently do not pose any threat to the existing control the total affairs of the company.
control of the company.
3. Debenture interest is paid at a predetermined fixed 3. Dividend on equity shares is paid at a variable
rate. It is payable, whether there is any profit or not. rate which is vastly affected by the profits of the
Debentures rank ahead of all types of shares for company (however, dividend on preference shares is
payment of the interest due on them. paid at a fixed rate).
4. Interest on debentures are the charges against 4. Dividends are appropriation of profits and these
profits and they are deductible as an expense in are not deductible in determining taxable profit of
determining taxable profit of the company. the company.
5. There are different kinds of debentures, such as 5. There are only two kinds of shares–Equity Shares
Secured/ Unsecured; Redeemable/ Irredeemable; and Preference Shares.
Registered / Bearer; Convertible/ Non-convertible, etc.
6. In the Company’s Balance Sheet, Debentures are 6. In the Company’s Balance Sheet, shares are
shown under “Long Term Borrowings”. shown under “Shareholder’s Fund” detailed in
‘Share Capital’ of Notes to Accounts.
7. Debentures can be converted into other debentures 7. equity Shares cannot be converted into other
or shares as per the terms of issue of debentures. shares in any circumstances.
8. Debentures cannot be forfeited for non- payment of 8. Shares can be forfeited for non-payment of
call moneys. allotment and call moneys.
9. At maturity, debenture holders get back their money 9. Equity shareholders cannot get back their money
as per the terms and conditions of redemption. before the liquidation of the company (however,
preference shareholders can get back their money
before liquidation).
10. At the time of liquidation, debenture holders are 10. At the time of liquidation shareholders are paid
paid-off before the shareholders. at last, after paying debenture holders, Trade
payable, etc.

TYPES OF DEBENTURES:
The following are the types of debentures issued by a company. They can be classified on the basis of:
(1) Security; (2) Convertibility; (3) Permanence; (4) Negotiability; and (5) Priority.
(i) Security:
(a) Secured Debentures: These debentures are secured by a charge upon some or all assets of the company.
There are two types of charges: (i) Fixed charge; and (ii) Floating charge. A fixed charge is a mortgage on specific
assets. These assets cannot be sold without the consent of the debenture holders. The sale proceeds of these
assets are utilized first for repaying debenture holders. A floating charge generally covers all the assets of the
company including future one.
(b) Unsecured or “Naked” Debentures: These debentures are not secured by any charge upon any assets. A
company merely promises to pay interest on due dates and to repay the amount due on maturity date. These
types of debentures are very risky from the view point of investors.
(ii) Convertibility:
(a) Convertible Debentures: These are debentures which will be converted into equity shares (either at par or
premium or discount) after a certain period of time from the date of its issue. These debentures may be fully or
partly convertible. In future, these debenture holders get a chance to become the shareholders of the company.
(b) Non-Convertible Debentures: These are debentures which cannot be converted into shares in future. As per
the terms of issue, these debentures are repaid.
(iii) Permanence:
(a) Redeemable Debentures: These debentures are repayable as per the terms of issue, for example, after 8
years from the date of issue.
(b) Irredeemable Debentures: These debentures are not repayable during the life time of the company. These
are also called perpetual debentures. These are repaid only at the time of liquidation.
(iv) Negotiability:
(a) Registered Debentures: These debentures are payable to a registered holder whose name, address and
particulars of holding is recorded in the Register of Debenture holders. They are not easily transferable. The
provisions of the Companies Act, 2013 are to be complied with for effecting transfer of these debentures.
Debenture interest is paid either to the order of registered holder as expressed in the warrant issued by the
company or the bearer of the interest coupons.
(b) Bearer Debentures: These debentures are transferable by delivery. These are negotiable instruments
payable to the bearer. No kind of record is kept by the company in respect of the holders of such debentures.
Therefore, the interest on it is paid to the holder irrespective of any identity. No transfer deed is required for
transfer of such debentures.
(v) Priority:
(a) First Mortgage Debentures: These debentures are payable first out of the property charged.
(b) Second Mortgage Debentures: These debentures are payable after satisfying the first mortgage debentures.

Revision of Issue of debentures for consideration other than cash
Practice question 1. Blue Prints Limited Purchases building worth Rs. 1,50,000, plant and machinery worth Rs.
1,40,000 and furniture for Rs. 10,000 from Wadhwa and Company and took over liabilities of Rs. 20,000 for a
purchase consideration Rs. 3,15,000. Blue Prints Limited paid the purchase consideration by issuing 12%
debentures of Rs. 100 each at a premium of 5%. Pass the necessary journal entries.
Solution:
No. Debit Credit
1. Building account Dr 1,50,000
Plant & machinery account Dr 1,40,000
Furniture account Dr 10,000
Goodwill account (bal fig) Dr 35,000 20,000
3,15,000
To liabilities account
To Wadhwa and company a/c
2. Wadhwa & company account Dr 3,15,000
To 12% debentures account 3,00,000
To security premium account `5,000
𝟑,𝟏𝟓,𝟎𝟎𝟎
Working notes : No of debentures issued = = 𝟑𝟎𝟎𝟎 𝒅𝒆𝒃𝒆𝒏𝒕𝒖𝒓𝒆𝒔
𝟏𝟎𝟓
Practice question 2. Assume in the previous question purchase consideration was Rs 2,70,000 and payment
was made by issue of 12% debentures of Rs 100 each at a discount of 10%.
Solution:
No. Debit Credit
1. Building account Dr 1,50,000
Plant & machinery account Dr 1,40,000
Furniture account Dr 10,000
To liabilities account 20,000
To Wadhwa and company a/c 2,70000
To capital reserve(bal fig) 10,000
2. Wadhwa & company account Dr 2,70,000
Discount on issue account Dr 30,000
𝟐,𝟕𝟎,𝟎𝟎𝟎
Working notes : No of debentures issued = = 𝟑𝟎𝟎𝟎 𝒅𝒆𝒃𝒆𝒏𝒕𝒖𝒓𝒆𝒔
𝟗𝟎
Debentures issued as a collateral security:-A collateral security may be defined as additional

security in addition to some principal security. When a limited company obtains a loan from bank or any
other financial institutions, it may pledge some assets as a security against the said loan. But the lending
institution may insist on some more assets as collateral security so that the amount of loan can be realized
in full with the help of collateral security. In such case company may issue its debentures as collateral
security. The collateral security will not be used or realized as long as company fulfils its obligation regarding
payment of interest when due and repayment of loan on the maturity date. In case of default in payment of
interest or repayment of loan, If the amount realized from sale of principal security falls short of the loan
money, then loan of lending institution converted into debentures of the company and lending institution
claims all the right of being a debenture holder. Debentures issued as collateral security will be realized by
the lender only in case the loan is not repaid on the due date.
Let’s revise accounting treatment of issue of debentures as collateral security:

Practice question 3. X Ltd. obtains a loan from IDBI of Rs 1,00,00,000, giving as collateral security of Rs
1,50,00,000 (of Rs 10 each), 14%, First Mortgage Debentures.
Solution: Method 1: In the Notes to Accounts of Balance Sheet of X Ltd., it is shown as follows:
Notes to Accounts of X Limited as at…(includes)
Long Term Borrowings:
Loan from IDBI 1,00,00,000

(Collaterally secured by issue of ₹1,50,00,000 14% First Mortgage Debentures)
Under this method, no entry is made in the books of account of the company at the time of making issue of such
debentures. In the ‘Notes to Accounts’ of Balance Sheet, the fact of the debentures being issued and outstanding is
shown by a note under the liability secured.
Method 2: Under this method, the following entry is made to record the issue of such debentures:
Debentures Suspense Account Dr.

To % Debentures Account
(Being the issue of…debentures collaterally as per Board’s Resolution No…..dated)
Note: The Debentures Suspense Account will appear on the assets side of the Balance Sheet under
Other Non- Current Assets and Debentures on the liabilities side of the Balance Sheet. When the
loan is repaid, the entry is reversed in order to cancel it.
Date Particulars ` `
Debentures Suspense A/c Dr. 1,50,00,000
To 14% First Mortgage Debentures A/c 1,50,00,000
(Being the issue of 15,00,000 debentures @ ₹10 collaterally as per
Board’s Resolution No…dated…)
Balance Sheet of X Limited as at….(Extracts)

Particulars Notes `
No.
EQUITY AND LIABILITIES
1. Non-Current Liabilities
Long Term Borrowings 1 2,50,00,000
Total 2,50,00,000
ASSETS
2. Non-current Assets
Other non-current asset 2 1,50,00,000
3. Current Assets
Cash and cash equivalent 1,00,00,000
Total 2,50,00,000

Notes to accounts
` `
1. Long Term Borrowings:
Secured Loan
IDBI Loan 1,00,00,000
14% First Mortgage Debentures 1,50,00,000 2,50,00,000
2. Other non-current asset
Debenture Suspense Account
(issue of ₹15,00,000 14% First Debentures as collateral 1,50,00,000
security as per contra)
Let’s revise Issue of debentures for cash:
Practice question 4. Give journal entries for the following:

(a) Issue of Rs. 1,00,000 – 9% Debentures at par and redeemable at par.
Solution :
Debit Credit
At the time of issue Bank account Dr 1,00,000
At the time of redemption 9% debentures account Dr 1,00,000
To debenture holders account 1,00,000
Debenture holders account Dr 1,00,000
To bank account 1,00,000
(b) Issue of Rs, 1,00,000 – 9% debentures at premium of 5% but redeemable at par.

Solution :
Debit Credit
(c) Issue of Rs. 1,00,000 – 9% Debentures at a discount of 10%, repayable at par.

Solution :
Debit Credit
At the time of issue Bank account Dr 90,000
Discount on issue account Dr 10,000

(d) Issue of Rs. 1,00,000 – 9% Debentures at par but repayable at a premium of 5%.
Solution :
Debit Credit
Loss on issue account Dr 5,000
To premium on redemption a/c 5,000
Premium on redemption Dr 5,000
(e) Issue of Rs. 1,00,000 – 9% Debentures at discount of 5% but redeemable at premium of 5%.
Solution :
Debit Credit
At the time of issue Bank account Dr 95,000
(f) Issue of ₹1,00,000 – 9% Debentures at premium of 5% but redeemable at premium of 5%.

Solution :
Debit Credit
Revision of accounting for interest on debentures:
Practice question 5. A company issued 12% debentures of the face value of ₹10,00,000 at 10% discount on 1-1-
2022. Debenture interest after deducting tax at source @ 10% was payable on 30th June and 31st of December
every year. All the debentures were to be redeemed after the expiry of five year period at 5% premium. Pass
journal entries for the accounting year 2022.

Solution : journal entries
1-1-2022 Bank A/c Dr. 9,00,000

Discount/Loss on Issue of Debentures A/c Dr. 1,50,000
10,00,000
To 12% Debentures A/c Dr.
50,000
To Premium on Redemption of Debentures A/c
(For issue of debentures at discount redeemable at premium)
30-6-2022 Debenture Interest A/c Dr. 60,000
To Debenture holders A/c 54,000
To Tax Deducted at Source A/c 6,000
(For interest payable)
Debenture holders A/c Dr. 54,000
Tax Deducted at Source A/c Dr 6,000
To Bank A/c 60,000
31-12-2022 (For payment of interest and TDS)
Debenture Interest A/c Dr 60,000

To Debenture holders A/c 54,000
To Tax Deducted at Source A/c 6,000
(For interest payable)
Debenture holders A/c Dr 54,000

Tax Deducted at Source A/c Dr 6,000
To Bank A/c 60,000
(For payment of interest and tax)
Profit and Loss A/c Dr 1,20,000

To Debenture Interest A/c 1,20,000
(For transfer of debenture interest to profit and loss account at
the end of the year)
Profit and Loss A/c Dr 30,000

To Discount/Loss on issue of debenture A/c 30,000
(For proportionate debenture discount and premium on
redemption written off, i.e., 1,50,000 x 1/5)
Revision of writing off discount/ loss on issue of debentures:
Practice question 6. A company issued 9% Debentures of the face value of Rs. 2,00,000 at a discount of 6%.
The debentures were repayable as follow
Year end amount repaid
2 40,000
4 1,20,000
5 40,000
Note : must revise question number 13 of my book ( based on considering months for
calculation of ratio)

4.REDEMPTION OF DEBENTURES
(1) methods of redemption of debentures:

• By payment in lumpsum
• By payment in installments by draw of lots.
• By purchase in open market
• By conversion- it means conversion of debentures into equity shares or preference shares.
• Rollover- Rollover means the issue of new debentures in the place of old ones. Rollover must be
with the written consent of the debenture holder. If he does not given written consent, his claim must be
settled in cash. Also whenever the debenture liability is rolled over company must obtain fresh credit
rating. Fresh trust must be executed at the time of rollover. Also fresh security must be created in respect
of rolled over debentures.
(2) sources of redemption of debentures:
(a) out of capital.
(b) out of profits.
(c) by conversion/ rollover.
(3) As per rule 18(1) of the companies (share capital and debentures) Rule 2014, a company
shall not issue debentures unless it complies the following conditions:
(a) Date of redemption of secured debentures shall not exceed 10 years from the date of issue. But
following companies may issue secured debentures for a period exceeding 10 years but not
exceeding 30 years.
(i) Companies engaged in infrastructure project.
(ii) Infrastructure finance companies.
(iii) Infrastructure debt fund NBFC.
(iv) Companies permitted by Ministry or department of Central Govt or RBI or
National Housing Bank (NHB)
(b) Such debentures shall be secured by creation of charge on the asset of the company or its
subsidiary or its holding or its associate companies.
(c) The company shall appoint a debenture trustee before the issue of the prospectus and will
execute debenture trust deed to protect the interest of debentures not later than 60 days from
date of allotment of debentures.
(d) The security for debentures by way of charge shall be created in favour of debenture trustee
on any movable property or immovable property.
(4) Debenture redemption reserve (DRR)

As per rule 18(7) of the companies (Share capital and debentures) amendment Rule, 2019, the
companies shall comply with the requirements with regard to DRR and investment given as
follow:
(a) DRR shall be created out of profits available for dividend.
(b) limits with respect to DRR and DRI shall be as under:

DRR DRI
(i) Debentures issued by AIFI regulated by RBI and XXXX XXXX
banking company
(ii) for other financial institution As applicable to As applicable
listed NBFC to listed NBFC
(iii) For listed companies:
Listed NBFC XX 15%
Listed HFC XX 15%
Other listed companies XX 15%
(iv) for unlisted companies
Unlisted NBFC XX XX
Unlisted HFC XX XX
Other unlisted company 10% of value of 15%
outstanding
debentures
(c) Every other unlisted company is required to transfer 10% of face value of outstanding debentures out of
profit available for dividend in DRR A/c.
Profit and loss account Dr
General reserve account Dr
Dividend equalisation reserve a/c Dr
To Debenture redemption reserve a/c
(d) Every specified company shall invest an amount at least 15% of the face value of debentures, that shall be
redeemed by the company by 31st March of the next year and amount should be invested on or before 30 th
April of current year.
Debenture redemption investment a/c Dr
To bank account
Revision question 1. ( redemption in lumpsum) A Ltd (other Unlisted company) had issued 12% debentures
of Rs 50,00,000 on 1st January 2021. These debentures were redeemable at premium of 10% on 31 st March
2023. Make entries for issue and redemption assuming that investments were sold at 20% profits.
Solution:
Date Debit Credit
1st Jan 21 Bank account Dr 50,00,000
To 12% debenture application and allotment 50,00,000
st
1 Jan 21 12% debenture application and allotment A/c Dr 50,00,000
31-3-21 Profit & loss a/c Dr 5,00,000
To DRR A/c 5,00,000
31-3-21 DRI Account Dr 7,50,000
To Bank account 7,50,000
31-3-23 12% debentures account Dr 50,00,000
Premium on redemption a/c Dr 5,00,000 55,00,000
To debenture holder account
31-3-23 Debenture holder account 55,00,000
31-3-23 Bank account Dr 9,00,000
To debenture redemption investment 7,50,000
To profit & loss account 1,50,000
31-3-23 DRR A/c Dr 5,00,000
To General reserve a/c 5,00,000
31-3-23 Profit and loss account Dr 5,00,000
To Premium on redemption a/c 5,00,000

Revision question 2. ( Redemption in Installments) A Ltd (other Unlisted company) had issued 12%
debentures of Rs 50,00,000 on 1st January 2021. Out of this, Rs 10,00,000 debentures were redeemable at
premium of 10% on 31st March 2023. Make entries for issue and redemption assuming that investments were
sold at 15%% loss.
Answer:
Date Debit Credit
1st Jan 21 Bank account Dr 50,00,000
To 12% debenture application and allotment 50,00,000
1st Jan 21 12% debenture application and allotment A/c Dr 50,00,000
31-3-21 Profit & loss a/c Dr 5,00,000
To DRR A/c 5,00,000
31-3-21 DRI Account Dr 1,50,000
To Bank account 1,50,000
31-3-23 12% debentures account Dr 10,00,000
Premium on redemption a/c Dr 1,00,000
To debenture holder account 11,00,000
31-3-23 Debenture holder account 11,00,000
31-3-23 Bank account Dr 1,27,500
Profit & loss account Dr 22,500
To debenture redemption investment 1,50,000
31-3-23 DRR A/c Dr 1,00,000

To General reserve a/c 1,00,000
31-3-23 Profit and loss account Dr 1,00,000
To Premium on redemption a/c 1,00,000
Revision question 3. The following balances appeared in the books of a company (unlisted company
other than AIFI, Banking company, NBFC and HFC) as on December 31, 2020: 6% Mortgage 10,000
debentures of ₹ 100 each; Debenture Redemption Reserve (for redemption of debentures) ₹60,000;
Investments in deposits with a scheduled bank, free from any charge or lien ₹1,50,000 at interest
4% p.a. receivable on 31st December every year. Bank balance with the company is ₹9,00,000.The
Interest on debentures had been paid up to December 31, 2020.
On February 28, 2021, the investments were realised at par and the debentures were paid off at ₹101,
together with accrued interest. Write up the concerned ledger accounts. Ignore taxation.
Answer: 6% Debentures account
Date Particulars Amount Date Particulars Amount
28.2.21 To debenture holders 10,00,000 1.1.21 By balance b/d 10,00,000
10,00,000 10,00,000
DRR Account
28.2.21 To general reserve(bal fig) 1,00,000 1.1.21 By balance b/d 60,000
1.1.21 By profit & loss 40,000
1,00,000 1,00,000
DRI Account
1.1.21 To balance b/d 1,50,000 28.2.21 By bank 1,50,000
10,00,000 10,00,000

Bank account
1.1.21 To balance b/d 9,00,000 28.2.21 By Debenture holder 10,10,000
28.2.21 To DRI A/c 1,50,000 28.2.21 By premium on red 10,000
28.2.21 To interest on DRI 1,000 28.2.21 By balance c/d 31,000
10,51,000 10,51,000
Debenture holder’s account

28.2.21 To bank a/c 10,10,000 1.1.21 By debentures 10,00,000
1.1.21 By premium on 10,000
redemption
10,10,000 10,10,000
Interest on debentures account

28.2.21 To bank a/c 10,000 28-2-21 By p/l account 10,000
10,000 10,000
Premium on redemption account
28.2.21 To debenture holder 10,000 28-2- By p/l account 10,000
21
10,000 10,000
Interest on DRI account
28.2.21 To profit & loss account 1,000 28-2-21 By bank account 1,000
1,000 1,000
Revision question 4. COC Ltd ( an unlisted company) had following balances on 1.4.2020:
12% debentures = Rs 20,00,000 ( 40% convertible into equity shares at par)
DRR= Rs 50,000
DRI =Rs 58,000
Date of redemption and conversion is 31-3-2022.
Prepare debentures account, DRR Account, DRI Account for 2 years ended on date of redemption.

Redemption of debentures on conversion:

Revision question 5. Mahindra Ltd. (unlisted other company) gave notice of its intention to redeem its outstanding ₹
4,00,000, 6% debenture stock at ₹102 per cent, and offered the holders the following options to apply the redemption
money to subscribe for: (a) 5% cum-pref. shares of ₹20 each at ₹22.50 per share; (b) 5% debenture stock at 96 per cent;
(c) to have their holdings redeemed for cash. Holders of ₹1,71,000 stock accepted the proposal (a). Holders of
₹1,44,000 stock accepted the proposal (b). The remaining stockholders accepted the proposal (c). Pass the journal
entries to record the above transactions.
Solution: Minimum DRR required = (850 debenture X 100) X 10% = Rs 8,500
Minimum DRI required = 85,000 x 15% = Rs 12,750
Journal entries in the book of Mahindra Ltd

1. 6% debentures account Dr 4,00,000
Premium on redemption account Dr 8,000
2 Debenture holders account Dr (1710x102) 1,74,420
(option 1) To 5% preference share capital a/c 1,55,040
To security premium reserve a/c 19,380
Note: No. of shares issued = 174,420/22.50
3. Debenture holders account Dr 1,46,880
(option 2) Discount on issue account Dr 6,120
To 5% debentures 1,53,000
Note: no. of debentures issued = 1,46,880/96= 1530
deb
4. Profit & loss account Dr 8,500
(option 3) To DRR Account 8,500
5. DRI Account Dr 12,750
To bank account 12,750
6. Debentures holder Dr (850 X 102) 86,700
To bank account 86,700
7. DRR Account Dr 8,500
To general reserve a/c 8,500
To DRI Account 12,750

OPEN MARKET OPERATION

Revision Question 6:
Balance sheet of X Ltd
Equity + liabilities Amount Assets Amount
Share capital 20,00,000 Bank 27,00,000
20% debentures 10,00,000 Other assets 28,00,000
Profit & loss a/c 25,00,000
55,00,000 55,00,000
X Ltd purchased its own 20% debentures of Rs 5,00,000 for Rs 4,20,000 from open market and such
debentures were cancelled immediately. Make entries.
Answer:
1. 20% Debentures account Dr 5,00,000 i. investment in own debentures a/c Dr 4,20,000
To bank account 4,20,000 To bank account 4,20,000
To profit on conciliation 80,000 ii. 20% debentures account Dr 5,00,000
To investment in own debentures 4,20,000
To profit on cancellation 80,000
Revision Question 7. On 1st April 2021, COC Bank had 50,000, 12% debentures of Rs 100 each. Company
purchased its own 12% debentures (interest payable on 30 September and 31 March) on following dates:
1 August 2021 ₹6,00,000 @ ₹94 ex-interest
31 December 2021 ₹4,00,000 @ ₹95 cum interest
these debentures were cancelled immediately. Make journal entries only related to purchase and cancellation
and interest for the year ended on 31st March 2022.
Solution: ( Firstly prepare diagram)
Working notes 1. on 1st August 2021:

Amount paid for debentures ( 60,000 X 94) = 5,64,000
𝟏𝟐 𝟒
Interest on debentures ( 6,00,000X 𝟏𝟎𝟎 X 𝟏𝟐 ) = 24,000
Total amount paid including interest 5,88,000
1 Investment in own debenture a/c Dr 5,64,000
Interest on debenture a/c Dr 24,000
2 12% debentures account Dr 6,00,000
To investment in own debenture a/c 5,64,000
To profit on cancellation a/c 36,000
Note : 1. Ex-interest quotation means quoted price does not include element of interest.
2. Investment in own debentures will always be recorded at price paid for debentures only.

Working notes 2. on 30th September 2021:

𝟏𝟐 𝟔
Interest on debentures = ( 50,00,000- 6,00,000) X 𝟏𝟎𝟎 X 𝟏𝟐 ) = Rs 2,64,000
3 Interest on debentures account Dr 2,64,000
4. Debenture holder a/c Dr 2,64,000
Working notes 3. on 31st December 2021:

Total amount paid including interest (4000X95) =3,80,000
𝟏𝟐 𝟑
Interest on debentures( ( 4,00,000X X )= 12,000
𝟏𝟎𝟎 𝟏𝟐
Amount paid for debentures 3,68,000
5 Investment in own debenture a/c Dr 3,68,000

Interest on debenture a/c Dr 12,000
6 12% debentures account Dr 4,00,000
To investment in own debenture a/c 3,68,000
To profit on cancellation a/c 32,000
Working notes 4. on 31st March 2022:

𝟏𝟐 𝟔
Interest on debentures = ( 44,00,000- 4,00,000) X X ) = Rs 2,40,000
𝟏𝟎𝟎 𝟏𝟐
7 Interest on debentures account Dr 2,40,000
8. Debenture holder a/c Dr 2,40,000
9. Profit & loss account Dr
To interest on debentures
10. Profit on cancellation a/c Dr 32,000
To profit & loss account( as per Ind AS) 32,000
OR
To capital reserve ( as per Notified AS)
• Always check requirements of creating DRR and DRI as per respective type of company.
• If debentures are redeemed in instalments (or through open market) transfer DRR to general
reserve and sell DRI proportionately on date of redemption ( if date not mentioned in question)
Accounting for interest on own debentures:

SINKING FUND METHOD: Under this method the amount is invested in first class securities
with secured and fixed return. Accumulation of interest becomes compounded resulting to produce
the amount required to redeem the debentures on the due date. This method of providing for funds is also
called debenture redemption fund method.
Accounting entries for making the provision for the redemption of debentures are as follows:
First year:
i. Profit and Loss Appropriation A/c Dr.
To Sinking Fund A/c
(Setting aside the required amount based on sinking fund table)
2. Sinking Fund Investment A/c Dr.
To Bank A/c
(Investment of amount set aside )
ii. Second and subsequent years:

(a) Bank A/c Dr.
To Sinking fund interest A/c
(Interest on sinking fund investment received.)
(b) Sinking fund interest A/c Dr.

To Sinking fund A/c
(Transfer of interest account to sinking fund.)
(c) Profit and loss appropriation A/c Dr.
To Sinking fund A/c
(d) Sinking fund investment A/c Dr.
To Bank A/c
(Investment of amount set aside and the amount of interest received.)
Last year:
(a) Bank A/c Dr.
To Sinking fund interest A/c
(Interest on sinking fund investment received.)
(b) Sinking fund interest A/c Dr.

To Sinking fund A/c
(Transfer of interest account to sinking fund.)
(c) Profit and loss appropriation A/c Dr.
To Sinking fund A/c
At the time of sale of investments and redemption:
(a) Bank A/c Dr

To Sinking fund investment A/c
(Amount received from sale of investment)
(b) Sinking fund A/c Dr

To Sinking fund investment A/c

(Loss on sale)
OR
Sinking fund investment A/c Dr

To Sinking fund A/c
(Profit on sale)
(c) Sinking fund A/c

To General reserve A/c
(Transfer of balance of sinking fund account)
(d) Debentures A/c Dr

To Bank A/c
(Redemption of debentures)
Revision question 8. Prakash Enterprises Ltd. issued Rs. 10,00,000, 10% Debentures on January 1,2021. These
were to be redeemed on 31 December 2023. For this purpose, the company established a Sinking Fund.
Investments were expected to earn 5% interest per annum. Sinking Fund Tables show that 0.317208 invested
annually at 5% amount to Re. 1 in three years. On 31 December 2023,the bank balance was Rs. 4,20,000 before
receipt of interest on sinking fund investments. On that date the investments were sold for Rs. 6,56,000. Interest
is payable annually. Calculate the interest to the nearest of a rupee and investments are made in multiples of Rs.
100. Ignore tax on debenture interest
Show the 10% Debentures Account, Sinking Fund Account, Sinking Fund Investments Account and Bank Account in
the books of the company. Also give complete journal entries.
Solution: 10% debentures account
Date Particulars amount date Particulars Amount

31-12-21 To balance c/d 10,00,000 1-1-21 By bank account 10,00,000
10,00,000 10,00,000
31-12-22 To balance c/d 10,00,000 1-1-22 By balance b/d 10,00,000
10,00,000 10,00,000
31-12-23 To bank account 10,00,000 1-1-23 By balance b/d 10,00,000
10,00,000 10,00,000
Sinking fund account

Date Particulars amount Date Particulars amount
31-12-21 To balance c/d 3,17,208 31-12-21 By P/L App 3,17,208
3,17,208 3,17,208
1-1-22 By balance b/d 3,17,208
31-12-22 By P/L App 3,17,208
31-12-22 By interest on SFI 15,860
31-12-22 To balance c/d 6,50,276
6,50,276 6,50,276
1-1-23 By balance b/d 6,50,276
31-12-23 By P/L App 3,17,208
31-12-23 To capital reserve 5,700 31-12-23 By interest on SFI 32,515
31-12-23 To general reserve 9,99,999 31-12-23 By Sinking fund
(bal fig) Investment 5,700
10,05,599 10,05,599

Sinking fund investment account

31-12-21 To bank a/c 3,17,200 31-12-21 By balance c/d 3,17,200
3,17,200 3,17,200
1-1-22 To balance b/d 3,17,200
31-12-22 To bank a/c 3,33,100 31-12-22 By balance c/d 6,50,300
6,50,300 6,50,300
1-1-23 To balance b/d 6,50,300
To sinking fund(profit 5,700 31-12-23 By bank a/c 6,56,000
on sale)
6,56,000 6,56,000
Interest on Sinking fund investment account

--- ----- ---- -----
31-12-22 To sinking fund 15,860 31-12-22 By bank account 15,860

15,860 15,860
31-12-23 To sinking fund 32,515 31-12-23 By bank account 32,515
32,515 32,515
Bank account
31-12-23 To balance b/d 4,20,000 31-12-23 By debentures 10,00,000
To interest on SFI 32,515
To SF Investment 6,56,000 31-12-23 By balance c/d 1,08,515
11,08,515 11,08,515
INSURANCE POLICY METHOD
Revision question 9. On 01.01.2015, Hello Ltd. issued 500, 15% Debentures of Rs 300 each at a discount of
10%, redeemable at a premium of 10% after 4 years. It was decided to take out an Insurance Policy to
provide the necessary funds for the redemption of the debentures. The annual premium for the policy,
payable on 1st January every year, was Rs 40,000. The sum assured of the policy was Rs 1,65,000. Give the
necessary journal entries. [Ignore Debenture Interest] (ICMAI Study material)
Solution:
Date Particulars L.F. Dr. (`) Cr. (`)

01.01.15 Bank A/c Dr. 1,35,000
Discount on Issue of Debentures A/c Dr. 15,000
Loss on Issue of Debentures A/c Dr. 15,000
To 15% Debenture A/c 1,50,000
To Premium on Redemption of Deb. A/c 15,000
(Being the issue of debentures at a discount of 10% and redeemable at
10% premium)
Dec. 31 Debentures Redemption Fund Policy A/c Dr. 40,000
To Bank A/c 40,000
(Being the payment of annual premium)
Profit & Loss Appropriation A/c Dr. 40,000

To Debenture Redemption Fund A/c 40,000
(Being the transfer to profit to DRF A/c)

Dec. 31 Profit & Loss A/c Dr. 15,000

To Discount on Issue of Debentures A/c 15,000
(Being the discount on issue of debentures w/off)
01.01.18 Debenture Redemption Fund Policy A/c Dr. 40,000
J an. 1, 16 To Bank A/c (Being the payment of annual premium) 40,000
Dec. 31 Profit & Loss Appropriation A/c Dr. 40,000
To Bank A/c 40,000
Dec. 31 Profit & Loss Application A/c Dr. 40,000
To Bank A/c 40,000
Dec. 31 Profit & Loss Appropriation A/c Dr. 40,000
(Being the transfer of profit to DRF A/c)
Bank A/c Dr. 1,65,000

To Debenture Redemption Fund Policy A/c 1,65,000
(Being the receipt of policy amount on maturity)
Debenture Redemption Fund Policy A/c Dr. 5,000

5,000
To Debenture Redemption Fund A/c
(Being the transfer to profit on the policy to DRF A/c)
15% Debentures A/c Dr. 1,50,000
Premium on Redemption of Debentures A/c Dr. 15,000
1,65,000
To Debenture holders A/c (Being the amount due on redemption)
Debenture holders’ A/c Dr. 1,65,000
To Bank A/c 1,65,000
(Being the payment made to Debentures holders)
Debenture Redemption Fund A/c Dr. 15,000
15,000
To Loss on Issue of Debentures A/c
(Being the loss on Issue of debentures written against the
balance in DRF A/c)
Debenture Redemption Fund A/c Dr. 1,50,000
1,50,000
To Debenture Redemption Reserve A/c
(Being the transfer of nominal value of debentures redeemed to
Debenture Redemption Reserve A/c)

5.Underwriting of securities
Underwriting Commission It may be paid in cash or in fully paid-up shares or debentures or a combination
of all these. It is paid on the issue price of the shares or debentures so underwritten. As per the provision
of Section 40 of the Companies Act, 2013, commission is payable if the following conditions are satisfied:
(i) The payment of the commission is authorized by the articles;
(ii) The commission paid or agreed to be paid does not exceed in the case of shares, 5% of the price at which
the shares are issued or the amount or rate authorized by the articles, whichever is less, and in the case of
debentures, 2.5% of the issue price or rate authorized by the articles, whichever is less;
(iii) commission is not payable on shares and debentures which are not offered to public for subscription. It
means no underwriting commission is payable on the shares taken up by the promoters, employees, directors,
business associates, etc.
Sub-Underwriters: In order to spread the risk of under-subscription, the principal underwriters may
enter into subsidiary agreements with sub-underwriters. Such agreements are made between the
underwriters alone, with the company not being a party thereto. As per agreement, the company pays
commission at a prescribed rate to the principal underwriters, who in turn, disburse commission to the
sub- underwriters. Sometimes an additional commission is paid to the principal underwriters to encourage
sub-underwriting. This is known as over-riding commission. The payment of an over-riding commission
enables the company to deal with one or two underwriters instead of a number of them.
Underwriting agreement. Underwriting agreement may take any of the two forms:
(a) Pure/conditional underwriting. Under this type of contract underwriters undertake to subscribe for
shares to a certain limit only when the offer made to the public is not fully subscribed for by them.
(b) Firm underwriting. Under this type of agreement, the underwriter agrees to take up a specified number
of shares irrespective of the number of shares subscribed for by the public. Unless it has otherwise agreed,
the Underwriters’ liability is determined without considering the number of shares taken up ‘firm’ by him.
Marked and Unmarked Applications:
‘Marked’ applications are those applications which bear the stamp of an underwriter. If the issue is not
fully subscribed, ‘marked’ applications shall be applied in reduction of underwriter’s liability.
The ‘unmarked’ applications are those applications which bear no stamp of an underwriter. These
applications are received by the company directly from the public. The distinction between marked and
unmarked applications becomes immaterial when the whole issue is subscribed by only one underwriter.
When there are more than one underwriter, the unmarked applications are divided amongst Underwriters
in the ratio of their gross liability. When the issue is fully subscribed, the distinction between marked and
unmarked applications becomes immaterial.
Practice question 1. Sam Limited invited applications from public for 1,00,000 equity shares of Rs10 each at a
premium of Rs. 5 per share. The entire issue was underwritten by the underwriters A, B, C and D to the extent
of 30%, 30% 20% and 20% respectively with the provision of firm underwriting of 3,000, 2,000, 1,000 and 1,000
shares respectively. The underwriters were entitled to the maximum commission permitted by law. The
company received applications for 70,000 shares from public out of which applications for 19,000, 10,000,
21,000 and 8,000 shares were marked in favour of A, B, C and D respectively. Calculate the liability of each
one of the underwriters. Also ascertain the underwriting commission payable to the different underwriters.

Solution : computation of Net liability of underwriters
Underwriters A B C D
Gross liability 30,000 30,000 20,000 20,000
Less : marked application -19,000 -10,000 -21,000 -8,000
Less : unmarked application (3:3:2:2) - 3,600 - 3,600 -2,400 -2,400
Less: firm underwritting
-3,000 -2,000 -1,000 -1,000
4,400 14,400 -4,400 8,600
Surplus of C transferred to A,B and D -1,650 -1,650 +4,400 -1,100
in 3:3:2
Net liability 2,750 12,750 Nil 7,500

Underwritting commission 30,000 X 15 X 30,000 X 15 X 20,000 X 15 X 20,000 X
5% 5% 5% 15 X 5%
= 22,500 = 22,500 = 15,000 = 15,000
computation of total liability of underwriters

Underwriters A B C D
Net liability 2,750 12,750 Nil 7,500
Add: firm underwriting 3,000 2,000 1,000 1,000
Total liability 5,750 14,750 1,000 8,500
Journal entries in the book of Sam limited

1. Bank account Dr (70,000 X 15) 10,50,000
To equity share application and allotment a/c 10,50,000
(being application money received from public)
2. Equity share application and allotment a/c 10,50,000
To equity share capital account 7,00,000
To Security premium account 3,50,000
(being application amount transferred)
3. A account Dr (5,750 X 15) 86,250
B account Dr (14,750 X 15) 2,21,250
C account Dr (1,000 X 15) 15,000
D account Dr (8,500 X 15) 1,27,500
To equity share capital account 3,00,000
To Security premium account 1,50,000
(being amount due from underwriters)
To A account 86,250
To B account 2,21,250
To C account 15,000
To D account 1,27,500
(amount received from underwriters )
5. Underwriting commission account Dr 75,000
To A account 22,500
To B account 22,500
To C account 15,000
To D account 15,000
(being underwritting commission due)
6. A account 22,500
B account 22,500
C account 15,000
D account 15,000
To Bank account 75,000
(being underwriting commission paid)

Important points for revision :

1. The unmarked applications can be divided between the underwriters in the following two
ways.
Method 1: Under this method, all unmarked applications are divided between the underwriters in the
ratio of gross liability of individual underwriter.
Method 2. Under this method, all unmarked applications are divided between the underwriters in the
ratio of gross liability less marked applications.
2. Always check the value (face value/issue price) given in questions on which % of commission is to be
applied.
3. in case of partly called up/paid up shares- computation of commission.

6. ACCOUNTING OF RIGHT ISSUE (section 62)

INTRODUCTION:
Right issue of shares means the existing shareholders have a right to subscribe to any fresh issue of shares by the
company in proportion to their existing holding for shares. They have an implicit right to renounce this right in favour of
anyone else, or even reject it completely. In other words, the existing shareholders have right of first refusal.
Provisions of section 62(1)(a) of the Companies Act, 2013 govern any company (public or private) which is desirous
of raising its subscribed share capital by issue of further shares.
A company desirous of issuing new shares has to offer, as per Section 62(1) (a) of Companies Act 2013, the
shares to existing equity shareholders through a letter of offer subject to the following conditions, namely:
➢ The offer shall be made by notice specifying the number of shares offered and limiting a time not being less
than 15 days and not exceeding 30 days from the date of the offer within which the offer, if not accepted,
shall be deemed to have been declined;
➢ Unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right
exercisable by the person concerned to renounce the shares offered to him in favour of any other person; and
the notice shall contain a statement of this right;
➢ After the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the
person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may
dispose of them in such manner which is not disadvantageous to the shareholders and the company.
Exceptions to the rights of existing equity shareholders (important for exam)
Section 62 recognises 4 situations under which the further shares are to be issued by a company, but they need
not be offered to the existing shareholders. The shares can be offered, without being offered to the existing shareholders,
provided the company has passed a special resolution and shares are offered accordingly.
Situation 1: To employees under a scheme of employees’ stock option subject to certain specified conditions.
Situation 2: To any persons, either for cash or for a consideration other than cash, if the price of such
shares is determined by the valuation report of a registered valuer subject to specified conditions.
Situation 3: Sometimes companies borrow money through debentures / loans and give their creditor an
option to buy equity shares of a company.
Situation 4: It is a special situation where the loan has been obtained from the government, and government in
public interest, directs the debentures/loan to be converted into equity shares.
Difference between book Value and market value of a Share:
Book value of a share = Net worth (as per books)/ Number of shares.
if there are 10,000 shares with net worth of ₹ 1,25,000. The book value of one share is (₹ 125,000 / 10,000
shares) ₹ 12.50 per share. However, the market value may differ from the book value of shares.
The market value of a company's shares represents the present value of future cash flows expected to be earned
from the share in the form of dividends and capital gains from expected future share price appreciation.
Difference between Cum-right Market Price and Ex-right Market Price of the shares
• The market price, which exists before the rights issue, is termed as Cum-right Market Price of
the share.
• The market price of the shares after further issue of shares (right issue) is termed as Ex-right
Market Price of the shares.
Ex-right value of the shares = [Cum-right value of the existing shares + (Rights shares X Issue Price)] /
(Existing Number of shares + Number of right shares).
1. Note : Value of right = Cum-right value of share – Ex-right value of share.

It is the maximum price at which right can be renounced .
Right of Renunciation : Right of renunciation refers to the right of the shareholder to surrender his right to
buy the securities and transfer such right to any other person. Shareholders that have received right shares have
three choices of what to do with the rights.
i. They can act on the rights and buy more shares as per the particulars of the rights issue;

ii. They can sell them in the market; or

iii. They can pass on taking advantage of their rights (i.e., reject the right offer).
The renunciation of the right is valuable and can be monetised by the existing shareholders in well-functioning capital
market. The monetised value available to the existing shareholders due to right issue is known as ‘value of right’.
• If a shareholder decides to renounce all or any of the right shares in favour of his nominee, the value of
right is restricted to the sale price of the renouncement of a right in favour of the nominee.
• In case the right issue offer is availed by an existing shareholder, the value of right is determined as given below:
Value of right = Cum-right value of share – Ex-right value of share

Question 1. COC Education ltd is planning to raise funds by making right issue of equity shares for expansion. The
existing equity share capital of the company is ₹50,00,000 (₹10 each).
The market price of its share is ₹42. The company offers to its shareholders the right to buy 2 shares of ₹10
each at premium of 10% for every 5 shares held. You are required to calculate:
(a) Cum right value of equity share.
(b) Theoretical Ex-right value of share,
(c) The value of right,
(d) % increase in share capital.
Answer:
(a) Cum right value of equity share = Rs 42
(5X42) + (2X11)
(b) Theoretical Ex-right value of share = = Rs 33.14
5+2
(c) The value of right = 42- 33.14 = Rs 8.86

2
(d) % increase in share capital = 𝑋 100 = 40%
5
ACCOUNTING FOR RIGHT ISSUE: The accounting treatment of rights share is the same as
that of issue of ordinary shares and the following journal entry will be made:
Bank A/c Dr.
To Equity Shares Capital A/c
In case rights shares are being offered at a premium, the premium amount is credited to the securities
premium account.
Question 2. A Company having 70,000 shares of ₹ 10 each as its issued share capital and having market value of
₹ 21 issues rights shares in the ratio of 1:10 at an issue price of ₹ 10. Pass journal entry for issue of right shares.
ADVANTAGES AND DISADVANTAGES OF RIGHT ISSUE:

Advantages of right issue:
1. Right issue enables the existing shareholders to maintain their proportional holding in the company and retain
their financial and governance rights..
2. In well-functioning capital markets, the new issue necessarily leads to dilution in the value of share. However, the
existing shareholders are not affected by it because getting new shares at a discounted value from their cum-right
value will compensate decrease in the value of shares.
3. Right issue is a natural hedge against the issue expenses normally incurred by the company in relation to public
issue.
4. Right issue has an image enhancement effect, as public and shareholders view it positively.
5. The chance of success of a right issue is better than that of a general public issue and is logistically much easier to
handle.
Dis-advantages of right issue:
1. The right issue invariably leads to dilution in the market value of the share of the company.

2. The attractive price of the right issue should be objectively assessed against its true worth to ensure
that you get a bargained deal.
Question 3. Multiple Choice Question:
Question i. In case of further issue of shares, the right to renounce the shares in favour of a third party.
(a) Must include a right exercisable by the person concerned to renounce the shares;
(b) Should include a right exercisable by the person concerned to renounce the shares;
(c) Is deemed to include a right exercisable by the person concerned to renounce the shares (subject to the
provisions under the articles of the company).
Question ii. A company’s share’s face value is ₹ 10, book value is ₹ 20, Right issue price is ₹ 30 and Market
price is ₹ 40, while recording the issue of right share, the securities premium will be credited with
(a) ₹ 10.
(b) ₹ 20.
(c) ₹ 30.
Question iii.
A. Right shares enable existing shareholders to maintain their proportional holding in the company.
B. Right share issue does not cause dilution in the market value of the Share.
Which of the option is correct?
(a) A-Correct; B Correct

(b) A – Incorrect; B Correct
(c) A - Correct; B – Incorrect
Question iv. Right shares are normally offered at a price __ _the cum-right value of the share, causing
dilution in its value post-right issue
(a) More than.

(b) Less than.
(c) Equal
Question v. Rights issue of shares results in _ ____ of market value of per share in comparison to
market price before rights issue.
(a) Increase.
(b) Decrease.
(c) No change.
Question vi. Ex-Rights price can be calculated by which of these formulas?
(a) (Cum rights value of the existing shares + Rights share issue proceeds)/(existing number of shares + No.
of right shares).
(b) (Cum rights value of the existing shares + Rights share issue proceeds)X (existing number of shares +
No. of right shares).
(c) (Cum rights value of the existing shares - Rights share issue proceeds)/(existing number of shares –
No. of right shares).
Question vii. Issued share capital including issue of rights shares and bonus shares should be ____
Authorised capital.
(a) More than.

(b) Less than.
(c) Less than or equal to.

7. AS-3 (REVISED): CASH FLOW STATEMENT

Introduction:
The Standard deals with the provision of information about the historical changes in cash and cash
equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the
period from operating, investing and financing activities.
This statement provides relevant information in assessing a company’s liquidity, quality of earnings and
solvency.
Benefits:
i. Cash flow statement provides information about the changes in cash and cash equivalents of an enterprise.
ii. Identifies cash generated from trading operations.
iii. The operating cash surplus which can be applied for investment in fixed assets.
iv. Portion of cash from operations is used to pay dividend and tax and the other portion is ploughed back.
v. Very useful tool of planning.
CLASSIFICATION OF CASH FLOW ACTIVITIES:
• Operating activities are the principal revenue-producing activities of the enterprise. It provides useful
information about financing through working capital. Net impact of operating activities on flow of
cash is reported as “cash flow from operating activities”. The amount of cash flows from operating
activities is a key indicator of the extent to which the operations of the enterprise have generated
sufficient cash flows to:
a. maintain the operating capability of the enterprise.
b. pay dividends, repay loans; and
c. make new investments without recourse to external sources of financing.
• Investing activities are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents.
• Financing activities are activities that result in changes in the size and composition of the owners’ capital
(including preference share capital in the case of a company) and borrowings of the enterprise.
Methods of preparing Cash Flow Statement:

1. Direct Method.
2. Indirect Method.
Format of CASH FLOW STATEMENT BY INDIRECT METHOD:

Cash flow from operating activities:
Net profit before tax and extra-ordinary items xxxx
Add: non-cash expenses/non-operating expenses xxxx
Less: non-cash income/non-operating incomes xxxx
xxxx
Add: decrease in current assets xxxx
Add: increase in current liability xxxx
Less: increase in current assets xxxx
Less: decrease in current liability xxxx
Cash generated from operation xxx
Income tax paid (xxx)
Cash receipts/cash paid from extra-ordinary items (cash lost xxx
by fire, insurance claim received etc)
Total (A) XXX
Cash flow from Investing activities:

Purchase of fixed assets/ investments (xxxx)

sale of fixed assets/ investments xxxx
income received on investments xxxx
Total (B) xxxx
Cash flow from Financing activities:
Issue of shares/debentures/loans(short term/long term) xxxx
Redemption of shares/debentures/loans(short term/long term) (xxx)
Payment of dividend/interest (xxx)
Total (C) xxxx
Net cash flow during the year(A+B+C) XXX
Add: opening cash and cash equivalents xxxx
Closing cash and cash equivalents Xxxx
(i) Meaning of cash and cash equivalents: cash + bank + bank draft+ cheque in hand + cash in
transit +highly liquid investments/ marketable investments held for 3 months or less +/- foreign
exchange loss/gain.
(ii) bank overdraft is not considered as part of cash and cash equivalents. It is shown under the
head ‘Cash flow from Financing activities’.
Format of CASH FLOW STATEMENT BY DIRECT METHOD:

Cash sales xxxx
Sale of scraps xxxx
Collection from debtors xxxx
Cash purchases xxxx
Payment to creditors xxxx
Operation Expenses paid xxxx
Cash generated from operation xxxx
Income tax paid xxx
Cash receipts/cash paid from extra-ordinary items (cash lost (xxx)
by fire, insurance claim received etc)
Total (A) XXX
Purchase of fixed assets/ investments (xxxx)
sale of fixed assets/ investments xxxx
income received on investments xxxx
Total (B) xxxx
Issue of shares/debentures/loans(short term/long term) xxxx
Redemption of shares/debentures/loans(short term/long term) (xxx)
Payment of dividend/interest (xxx)
Total (C) xxxx
Net cash flow during the year(A+B+C) XXX
Add: opening cash and cash equivalents xxxx
Closing cash and cash equivalents Xxxx

Revision question 1. Prepare cash flow statement by both methods with the following
informations:
Trading account and profit & loss account for the first year of COC Education pvt ltd
Particulars Amount Particulars Amount
To purchases 2,60,000 By sales 12,80,000
To wages 20,000
To gross profits 10,00,000
12,80,000 12,80,000
To salary 70,000 By gross profits 10,00,000
To advertisement 50,000
To freights 10,000
To depreciation on machinery 40,000
To interest on debentures 1,20,000
To provision for tax 50,000
To net profit 6,60,000
10,00,000 10,00,000
To dividend on equity shares 2,00,000 By net profits 6,60,000
To general reserves 50,000
To balance of profit transferred 4,10,000
to balance sheet
6,60,000 6,60,000
Balance sheet as on 31st March 2023( end of first year)
Equity and liabilities Amount Assets Amount
Equity share capital 20,00,000 Cash 24,50,000
12% debentures 10,00,000 Machinery 4,00,000
Provision for depreciation 40,000 Building 7,00,000
Provision for tax 50,000
General reserve 50,000
Profit and loss account 4,10,000
35,50,000 35,50,000
Answer: CASH FLOW STATEMENT BY DIRECT METHOD:

Cash sales 12,80,000
Cash purchases (2,60,000)
Wages paid (20,000)
Salary paid (70,000)
Advertisement paid (50,000)
Freight paid (10,000) 8,70,000
Total (A) 8,70,000
Purchase of machine (4,00,000)
Purchase of building (3,00,000) (7,00,000)

Total (B) (7,00,000)

Issue of shares 20,00,000
Issue of debentures 10,00,000
Payment of interest on debentures (1,20,000)
Dividend paid (2,00,000)
Total (C) 26,80,000
Net cash flow during the year(A+B+C) 24,50,000
Add: opening cash and cash equivalents nil
Closing cash and cash equivalents 24,50,000
CASH FLOW STATEMENT BY INDIRECT METHOD:

Net profit as per balance sheet 4,10,000
Depreciation on furniture 40,000
Provision for tax 50,000
General reserve 50,000
Interest on debentures 1,20,000
Dividend on equity 2,00,000 8,70,000
Total (A) 8,70,000
Purchase of building (3,00,000) (7,00,000)
Total (B) (7,00,000)

Issue of shares 20,00,000
Payment of interest on debentures (1,20,000)
Dividend paid (2,00,000) 26,80,000
Total (C) 26,80,000
Net cash flow during the year(A+B+C) 24,50,000
Add: opening cash and cash equivalents nil

Revision question 2. From the following details of COC EDUCATION Ltd. Prepare Cash Flow Statement
by indirect method:
31.3.2022 31.3.2021
Share Capital 10,00,000 8,00,000
General Reserve 2,00,000 1,50,000
Profit and Loss Account 1,00,000 60,000
Debentures 4,00,000
Provision for taxation 1,00,000 70,000
Dividend Payable --- 1,00,000
Sundry Creditors 7,00,000 8,20,000
25,00,000 20,00,000
Plant and Machinery 7,00,000 5,00,000
Land/Building 6,00,000 4,00,000
Investments 1,00,000
Sundry Debtors 5,00,000 7,00,000
Stock 4,00,000 2,00,000
Cash on hand/bank 2,00,000 2,00,000
25,00,000 20,00,000
Solution:
Profit before tax and extra ordinary items 1,90,000
Add: non-cash expenses/non-operating expenses NIL
Less: non-cash income/non-operating incomes NIL
1,90,000
Decrease in creditors -1,20,000
Decrease in Debtors +2,00,000
increase in stock -2,00,000
Cash generated from operation 70,000
Income tax paid (70,000)
Total (A) nil

Purchase of building (2,00,000)
Purchase of investments (1,00,000) (5,00,000)
Total (B) (5,00,000)
Issue of equity shares 2,00,000
Dividend paid (1,00,000) 5,00,000
Total (C) 5,00,000
Net cash flow during the year(A+B+C) nil
Add: opening cash and cash equivalents 2,00,000

Working notes: computation of profits before tax and extra-ordinary items:

Profit as per balance sheet 40,000
Transfer to general reserve 50,000
Dividend nil
Provision for tax 1,00,000
Profit before tax and extra-ordinary items Rs 1,90,000.
Revision of important adjustments:
(1) adjustments related to tax adjustments:

Case 1.
31-3-23 31-3-22
provision for tax 7,00,000 5,20,000
Adj i. taxes paid during the year Rs 5,00,000.
Answer: provision for tax account

To bank account 5,00,000 By balance b/d 5,20,000
To balance c/d 7,00,000 By p/l account (bal -----
fig)
5,20,000 5,20,000
Case 2.
31-3-23 31-3-22
Income tax payable( or provision for tax) 6,00,000 5,20,000
Income tax reserve 50,000 nil
Solution : income tax payable account

To income tax reserve 50,000 By p/l account (bal -------
To balance c/d 6,00,000 fig)
11,20,00 11,20,00
0 0
Income tax reserve account
By balance b/d Nil
To balance c/d 50,000 By income tax payable 50,000
a/c
50,000 50,000
Case 3.
31-3-23 31-3-22
provision for tax 30,000 2,00,000
Adj 1. Net loss during the year Rs 50 lakhs.

Answer: Provision for tax account

To balance c/d 30,000 By p/l account (bal -----
fig)
2,00,000 2,00,000
Case 4.
31-3-23 31-3-22
Advance tax 2,60,000 3,50,000
Solution :
Provision for tax account

To advance tax 3,50,000 By balance b/d 8,20,000
To bank account 4,70,000 By p/l account (bal fig) -----
(8,20,000- 3,50,000) 7,00,000
To balance c/d
2,00,000 2,00,000
Advance tax account

To balance b/d 3,50,000 By provision for tax 3,50,000
To bank account 2,60,000 By balance c/d 2,60,000
2,00,000 2,00,000
Case 5.
31-3-23 31-3-22
Advance tax 4,70,000 5,30,000
Adj 1. Tax liability of previous year settled at Rs 9,25,000.
Solution: Provision for tax account

To advance tax 5,30,000 By balance b/d 9,80,000
To bank account 3,95,000 By p/l account (bal fig) 7,45,000
To balance c/d 8,00,000
17,25,000 17,25,000
Advance tax account

To balance b/d 5,30,000 By provision for 5,30,000
To bank account 4,70,000 tax 4,70,000
By balance c/d
10,00,000 10,00,000

2. adjustments related to dividends:
Case 1.
31-3-23 31-3-22
Dividend payable nil 2,40,000
Solution: dividend payable account

To balance c/d nil By p/l account (bal nil
fig)
2,00,000 2,00,000
Case 2.
31-3-23 31-3-22
Dividend payable nil 2,40,000
Adjustment 1. Dividend declared/proposed during the year Rs 5,00,000.
Adjustment 2. Interim dividend paid during the year Rs 3,00,000.
Solution : dividend payable account

To balance c/d nil By p/l account (bal nil
fig)
2,00,000 2,00,000
Interim dividend account

To bank account 3,00,000 By balance b/d Nil
To balance c/d nil By p/l account (bal ……..
fig)
2,00,000 2,00,000
Case 3.
31-3-23 31-3-22
Dividend payable Nil 8,00,000
Unclaimed dividend 40,000 nil
Answer: : dividend payable account

To unclaimed dividend 40,000 By p/l account (bal nil
To balance c/d nil fig)
2,00,000 2,00,000

Unclaimed dividend account

By balance b/d Nil
To balance c/d 40,000 By dividend payable 40,000
2,00,000 2,00,000
Case 4 ( exceptional case)
31-3-23 31-3-22
Dividend payable 4,00,000 2,40,000
Adj. dividend paid during the year Rs 3,50,000.
3. adjustments related to fixed assets:

Case 1.
Items 2023 2022 remark

Machinery 2,00,000 1,70,000
Furniture 5,00,000 6,00,000
Building 5,00,000 4,80,000
Land 6,00,000 6,40,000
Land and building 8,00,000 7,20,000
Goodwill, intangible assets 7,70,000 9,00,000
Intangible assets 6,00,000 5,20,000
Case 2.
31-3-23 31-3-22
Machinery 5,00,000 7,80,000
Adj 1. During the year a part of machine costing Rs 1,60,000 ( book value Rs 90,000) sold for Rs 82,000.
Adj. 2. During the year a machine purchased for Rs 1,00,000.
Solution : Machinery account

To balance b/d 7,80,000 By bank account 82,000
To bank a/c 1,00,000 By profit & loss a/c(loss on sale) 8,000
By ……………………….. 2,90,000
By balance c/d 5,00,000
8,80,000 8,80,000

Case 3.
31-3-21 31-3-22
Machinery 7,00,000 8,80,000
Adj 1. During the year a part of machine whose book value on 1.4.21 was Rs 80,000( depreciation till date of
sale Rs 9,000) sold for Rs 62,000.
Adj. 2. A part of machine whose book value was Rs 40,000 fully scraped.
Adj 3. Total depreciation charged on remaining machine was Rs 1,30,000.
Solution: Machinery account

To balance b/d 7,00,000 By depreciation a/c 9,000
By bank a/c 62,000
By profit & loss a/c 9,000
To bank a/c ( bal fig) 4,30,000 By profit & loss a/c 40,000
By depreciation a/c 1,30,000
Case 4. Assume in previous question, if in adjustment number 3, it is given that:

Total depreciation charged on machine during the year was Rs 1,30,000.

To balance b/d 7,00,000 By depreciation a/c 9,000
By bank a/c 62,000
To bank a/c ( bal fig) 4,21,000 By profit & loss a/c 40,000
By depreciation a/c 1,21,000
IMPORTANT NOTE:
(1) If provision for depreciation account is not maintained, fixed assets are shown in the balance sheet
at its depreciated value/book value/ written down value.
(2) If provision for depreciation account is maintained, fixed assets are shown in the balance sheet at
its cost price and total depreciation charged till date is shown under the head ‘ provision for
depreciation/ accumulated depreciation’.
Case 5.
31-3-21 31-3-22
Machinery 6,00,000 8,00,000
Less: provision for depreciation (2,40,000) (3,40,000)
Case 6.
31-3-21 31-3-22
Machinery 7,00,000 9,00,000

Adj 1. Machine costing Rs 2,00,000 (depreciation charged Rs 60,000) sold for Rs 1,30,000.

To balance b/d 7,00,000 By Machine disposal 2,00,000
To bank a/c( bal fig) 4,00,000 account 9,00,000
By balance c/d
11,00,000 11,00,000
Provision for depreciation account

To Machine disposal account 60,000 By balance b/d 3,60,000
To balance c/d 5,00,000 By profit & loss a/c (bal fig) 2,00,000
5,60,000 5,60,000
Machine disposal account

To Machine account 2,00,000 By provision for dep a/c 60,000
By bank account 1,30,000
2,00,000 2,00,000
Case 6.
31-3-22 31-3-21
Machinery 6,20,000 8,00,000
Adj 1. During the year a part of machine costing Rs 80,000 was sold for Rs 10,000.
Adj 2. Total depreciation charged during the year Rs 75,000.

To balance b/d 6,20,000 By Machine disposal account 80,000
To bank a/c( bal fig) 2,60,000 By balance c/d 8,00,000
8,80,000 8,80,000
Provision for depreciation account

To Machine disposal account 25,000 By balance b/d 1,30,000
To balance c/d 1,80,000 By profit & loss a/c (bal fig) 75,000
2,05,000 2,05,000
Machinery disposal account
To Machine account 80,000 By provision for dep a/c 25,000
By bank account 10,000
80,000 80,000

Revision question 3. From the Following Balance Sheet of Grow More Ltd., Prepare Cash Flow Statement
for the year ended 31st March,2022.
Particulars 31st 31st March,2021

March,2022
Equity and Liabilities :
1 Shareholder’s Funds;
A Share Capital 10,00,000 8,00,000
B Reserve and Surplus 1 3,00,000 2,10,000
2 Non-current liabilities
Long Term borrowings 2 2,00,000 ---
3 Current liabilities
A Trade payables 7,00,000 8,20,000
B Other Current liabilities 3 --- 1,00,000
C Short term provisions 1,00,000 70,000
(Provision for tax)
Total 23,00,000 20,00,000
Assets
1 Non-Current assets;
A Property, Plant and Equipment 4 13,00,000 9,00,000
B Non-Current Investment 1,00,000 ---
2 Current assets
A Inventories 4,00,000 2,00,000
B Trade receivables 5,00,000 7,00,000
C Cash and Cash Equivalents --- 2,00,000
Total 23,00,000 20,00,000
Notes to Account:
No. Particulars 31st March,2022 31st March,2021
1 Reserve and Surplus
Revenue Reserve 2,00,000 1,50,000
Profit and Loss Account 1,00,000 60,000
Total 3,00,000 2,10,000
2 Long term borrowings
10% Debentures 2,00,000 ---
3 Other Current liabilities

Dividend payable --- 1,00,000
4 Property, Plant and Equipment

Plant and Machinery 7,00,000 5,00,000
Land and building 6,00,000 4,00,000
Total 13,00,000 9,00,000
i. Depreciation @ 25% was charged on the opening value of Plant and Machinery.
ii. At the year end, one old machine costing ₹ 50,000 (WDV ₹20,000) was sold for ₹ 35,000.
Purchase was also made at the year end.
iii. ₹ 50,000 was paid towards Income tax during the year.
iv. Construction of the building got completed on 31.03.2022 and hence no depreciation will be charged
on the same. Prepare Cash flow Statement.
v. 10% Debentures were issued on 1st April 2021.

Some more important adjustments discussed in regular classes:
Equity and liabilities 31-3-22 31-3-21

Equity share capital 8,00,000 2,00,000
Preference shares capital 1,00,000 3,00,000
12% Debentures 5,00,000 3,00,000
General reserve 2,50,000 2,00,000
Capital reserve 10,000 ----
Creditors 2,30,000 2,00,000
Assets :
Land and Building 7,50,000 6,00,000
Equipment 2,50,000 2,00,000
Furniture 20,000 60,000
Stock 3,00,000 2,16,000
Debtors 1,20,000 1,00,000
Investments 2,00,000 1,80,000
Goodwill 4,30,000 4,00,000
Adjustments :
1. Land and Building worth 1,50,000
Equipment worth 50,000
Debtors worth 40,000
Creditors worth 30,000
Were purchased by issue of equity shares of ₹ 3,00,000 shares.
2. Debenture holders of Rs 2,00,000 accepted preference shares in settlement of their claims on 1st April 2021.
3. Furniture of the book value of 30,000 sold for 22,000. Loss on sale adjusted from general reserve.
4. Debentures were redeemed at 5% premium on 31st March 2022.
5. Company decided to value inventory at cost, whereas previously the practice was to value inventory at cost less 10%.
The inventory on 31.3.2022 was correctly valued.
6. Part of the investments (Cost ₹ 50,000) was sold for ₹ 70,000.
7. Dividend received on investments Rs 15,000 including Pre-acquisition dividend received ₹ 5,000.
8. The provision for depreciation against machinery last year was ₹27,000 and this year ₹30,000.
9. During the year a part of machine costing Rs 30,000(book value ₹22,000) was sold for ₹7,000.
10. The company sold some investment at a profit of ₹ 10,000 which was credited of capital Reserve.
Revision question 4. Intelligent Ltd., a non-financial company has the following entries in its Bank Account. It
has sought your advice on the treatment of the same for preparing Cash Flow Statement.
(i) Loans and Advances given to the following and Interest earned on them:
(1) to Suppliers (2) to employees. (3) to its Subsidiaries Companies.
(iv) TDS on Interest Income earned on Investment made
(v) TDS on Interest earned on Investments made
(vi) Insurance Claim received received for loss of fixed asset by fire.
Discuss in the Context of AS-3 Cash Flow Statement.

Revision question 5. Garden Ltd. acquired fixed assets viz. plant and machinery for ₹ 20 lakhs. During the same
year it sold its furniture and fixtures for ₹ 5 lakhs. Can the company disclose, net cash outflow towards purchase of fixed
assets in the cash flow statement as per AS-3?
Answer: As per AS - 3 (Revised) 'Cash Flow statements', an organisation should report separately major classes of gross
cash receipts and gross cash payments arising from operating, investing and financing activities except to the extent that
cash flows described in AS 3 are reported on a net basis. Acquisition and disposal of fixed assets is not prescribed in the
content of the said standard. So, the Garden Ltd. cannot disclose net cash flow in respect of acquisition of plant and
machinery and disposal of furniture and fixtures.
Note : must revise all pattern of questions solved in my regular classes.
ALL THE BEST MY DEAR STUDENT….. YOU ARE GOING TO PERFORM BEST IN YOUR EXAM.
Your santosh sir….

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Topics to be covered in Revision:-

1. Computation of security deposits:-

Bank A/c Dr. ₹45,000

2. Accounting of security deposit:-

Solution: - 1st January, 2022 Bank A/c Dr. ₹20,00,000

31st January, 2022 Interest on security deposits A/c Dr. ₹20,000

1 COCEDUCATION.COM ENQUIRY- 9999631597, 7303445575, 8448322142

31st December 2022 Interest accrued on security deposit A/c Dr.₹1,20,000

3. Accounting of services line cum Development (SLD) charges:-

Revision question 4. BSES acquired Non-Current Assets of ₹40,00,000.

Solution: - Method 1:- (a) Non-Current Assets A/c Dr ₹40,00,000

(b) Bank A/c Dr ₹5,00,000

(c) Depreciation A/c Dr. ₹4,00,000

(b). Bank A/c Dr. ₹5,00,000

(c).Depreciation A/c Dr.₹ 3,50,000

4. Accounting for Depreciation:-

2. As per Regulation 2009, purpose of depreciation (most imp.)

2 COCEDUCATION.COM ENQUIRY- 9999631597, 7303445575, 8448322142

(c) True and fare presentation of Accounts.

Computation of Depreciation for the purpose of tariff As per Regulation 21:-

Appendix III: - (Depreciation scheduled):-

Revision question 5. Calculate weighted average rate of depreciation:-

3 COCEDUCATION.COM ENQUIRY- 9999631597, 7303445575, 8448322142

• Weighted average rate of depreciation = ₹1,88,970/ ₹21,00,000-₹5,00,000 x 100%

i. Date of commercial operation i.e. 1.9.2010.

Solution: Computation of depreciation (1.9.00 to 31.3.11)

4 COCEDUCATION.COM ENQUIRY- 9999631597, 7303445575, 8448322142

Number of months 𝟒, 𝟏𝟎, 𝟎𝟎𝟎 × 𝟓. 𝟑 𝟕 𝟒, 𝟐𝟎, 𝟎𝟎𝟎 × 𝟓. 𝟐 𝟏𝟐

Revision question 7. Calculation depreciation as per regulation 2009

Date of commercial operation/Work Completed Date 1-april-1996

5 COCEDUCATION.COM ENQUIRY- 9999631597, 7303445575, 8448322142

Remaining depreciation value (D – E)(F) 135 133.002 144.002

Solution: Computation of depreciation

6 COCEDUCATION.COM ENQUIRY- 9999631597, 7303445575, 8448322142

AAD (lower of (iii) and (vi) 2575 4347.5 4260 5190

REVISION OF COMPUTATION OF INTEREST ON LOAN AND RETURN ON EQUITY

Revision question 10. Date of commercial operation: 1.4.2010

Solution: Computation of interest on loan

Computation of Return on equity:

Closing equity 51,000 54,000 63,000 75,000

7 COCEDUCATION.COM ENQUIRY- 9999631597, 7303445575, 8448322142

Solution:- Balance Sheet as at 31st March, 2022

8 COCEDUCATION.COM ENQUIRY- 9999631597, 7303445575, 8448322142

(a) property, plant & equipments

(i) Tangible Assets 5 1,09,960