UNIT-II -ISSUE OF EQUITY SHARES pdf.pptx

UNIT-II
ISSUE OF EQUITY SHARES

Introduction
• Business is carried out in different form. Sole proprietorship concerns and partnership firms are the basic
forms of business organizations. Yet, the fact that both face the limitations of funds and liabilities have led to
the emergence of joint stock companies in many a nation. Industrial revolutions and international trade have
also played a major role in the shaping and growth of such companies. In India, while the east India
Company was the first company to be set up under British rule, now joint stock companies are formed and
governed by the provision of the companies Act.

Q. What you mean by company? Define company? And its features
(2 MARKS)
• Under the companies Act, 1956
a Company means “A Company
formed and registered under that
Act or under any previous
Companies Act. Company refers
to an association of merchants
coming together to discus matter
and partaking food together
simply put, the term convey that
it is an association of number of
persons coming together for a
common purpose.
Distinction features of a company:
 Voluntary Association
 Independent Existence
 Artificial Person
 Compulsory Incorporation
 Common Seal
 Perpetual Succession
 Limited Liability
 Transferability of shares
 Separation of Ownership and Management
 Large Membership
 Ability to raise large amount of Capital

SHARE
What is a share and define share? List out the various kinds of shares which can be issued by company.
(2/5 MARKS)
Meaning
The capital can be divided into different
units with definite value called shares. In other
words, shares are the denominations of the
share capital. Funds generated through issue of
shares are known as share capital
Definition
A “share” has been defined by the Indian
Companies Act, under sec.2 (46) as “A share
is the share in the Capital of the Company”.

KINDS OR TYPES OF SHARES (2 MARK)
A.Equity Shares
• Equity shares means that part of the
share capital which is not a
Preference share capital. It means all
such shares which are not Preference
shares. Equity shares are also called
as Ordinary Shares. it means that if
the shareholders is not entitled to a
fixed dividend in preference to
others or if there is not prior right for
the capital to be repaid, the share
capital will be treated as equity share
capital.
A.Preference Shares
• Preference shares are those shares
which fulfill both the following two
conditions:
• They carry preferential share right
in
respect of dividend at a fixed rate,
• They also carry preferential right in
regard to payment of capital on
winding up of the company

STOCK
• What do you mean by stock? Difference between share and stock.(2/5 MARKS)
Meaning(2 MARK)
• As per section 94(1) of the companies act 1956,
 When all the shares of a company have been fully paid up, they may be converted into stock if so authorized
by the articles of association.
 It is another type of unit of capital of a company.
 Conversions of shares into stock are made because it is a convenient methods of denoting capital of a
company.

Difference between shares and stocks(5 MARK)
1. Stocks are fully paid up whereas shares may be fully paid up or partly paid up.
2. Shares may be issued when a company is incorporated but stock cannot be issued under such circumstances.
Only fully paid shares can be converted into a stock
3. Stock is convenient method of transferring because it can be issued or transferred in fractional parts whereas
shares cannot be divided below the face value of each share.
4. Stocks are not numbered whereas shares are serially numbered.
5. Shares are of equal nominal value but stocks may be divided into unequal amounts.
6. Shares are always registered and transferable by mere delivered but stock may be registered or unrelieved and
unregistered stock can be transferred by mere delivery.

SHARE CAPITAL
• Explain the various types or kinds of share capital. (2/5/10 MARKS)
Meaning
• The capital of the company is divided into shares. This is why it is known as share capital. A company is
large-sized business structure. So it requires very large amount of capital. As it cannot be supplied by
sole proprietor or limited number of person, so the entire share capital is divided into shares

Types or kinds of share capital
Authorized Capital
• This is the Maximum Capital
which the company can raise
in its life time. This is
mentioned in the
Memorandum of the
Association of the Company.
This is also called as
Registered Capital or Nominal
Capital.
Issued Capital
• Part of the Authorized Capital
which is issued to the public
for Subscription is called as
Issued Capital.
Subscribed Capital
• The issued Capital may not be
fully subscribed by the public
Subscribed Capital is that part
of issued Capital which has
been taken off by the public
i.e. the capital for which
applications are received from
the public.

Types or kinds of share capital
Called – up Capital The Company may not need to receive the entire amount of capital .at
once. It may call up only part of the subscribed capital as and when needed
in installments. Called – up Capital is the part of subscribed capital which
the company has actually called upon the shareholders to pay. Called – up
Capital includes the amount paid by the shareholder from time to time on
application, on allotment, on various calls such as First Call, Second Call,
Final Call etc. The remaining part of subscribe capital not yet called up is
known as Uncalled Capital. The Uncalled Capital may be converted, by
passing a special resolution, into Reserve Capital; Reserve Capital can be
called up only in case of winding up of the company, to meet the liabilities
arising then.
Paid-up Capital The Called-up Capital may not be fully paid. Some Shareholders may pay
only part of the amount required to be paid or may not pay at all. Paid-up
Capital is the part of called-up capital which is actually paid by the
shareholders. The remaining part indicates the default in payment of calls
by some shareholders, known as Calls in Arrears. Thus, Paid-up Capital is
Called-up Capital – Calls in Arrears.

TERMS OF ISSUE OF EQUITIES SHARES
A limited company may issue the shares on following different terms.
I. Issue of Shares for Consideration other than cash or for cash or on capitalization of
reserves.
II. Issue of Shares at par i.e. at face value or at nominal value.
III. Issue of Shares at a Premium i.e. at more than face value.
• Issue of Shares at a Discount i.e. at less than the face value
• ISSUE OF SHARES AT A PAR:
• If a company issues its shares at the original value it is called issue of share at par.

ISSUE OF SHARES AT A PREMIUM
When the shares are issued at a price higher than the nominal value of the shares then it is called as shares
issued at a premium. The amount of premium is decided by the board of Directors as per the guide lines
issued by SEBI. Such share premium collected by the company is credited to a separate A/c called as
“Securities Premium A/c”. Although Securities Premium is a profit to the company, it is not a revenue profit;
it is treated as capital profit, which can be utilized only for the following purposes as per sec. 78 of the
Companies Act –
• (a) Issue of fully paid bonus shares to the existing shareholders.
• (b) Writing off the preliminary expenses of the company.
• (c) Writing off the expenses of issue or the commission paid or discount allowed on any issue of
Shares / debentures.
• (d) Providing the premium payable on redemption of preference shares or debentures. The company
Can utilize the security Premium for any other purpose only on obtaining the sanction of the court.

ISSUE OF SHARES AT A DISCOUNT
• The Companies Act, permits issue of shares at a discount subject to the following conditions. (sec. 79)
–
(a) The issue must be of a class of shares already issued.
(b) Not less than 1 year has at the date of issue elapsed since the date
on which the company became entitled to commence business.
(c) The issue at a discount is authorized by a resolution passed by the
company in the general meeting & sanctioned by the company law
board
(d) The maximum rate of discount must not exceed 10% or such rate as
the company law board may permit.
(e) The shares to be issued at a discount must be issued within two
months of the sanction by the company law board or within such
extended time as the company law board may allow

What are the Conditions to be issue of shares at a discount?(5
MARKS)
Conditions for issue of shares at a discount
• According to sec 79 of the companies act, 1956 allows a company to issue shares at a discount subject to the
following conditions
 The issue of shares at a discount must be authorized by an ordinary resolution passed by the company is
general meeting and sanctioned by the company law board.
 The resolution specifies the maximum rate at which shares are to be issued. The rate of discount must not
10% of the nominal value. However, the rate of discount can be more than 10% of the nominal value of
share if the government is convinced that a higher is necessary.
 At least one must have elapsed(passed) since the company was entitled to commence business.
 The shares are of a class which, have already been issued.
 The shares are issued within 2 months of the date on which the issue is sanctioned by the company law
board or within such extended time as the board may allow.

the over subscription and under subscription. (2/2
Explain
MARKS)
Over Subscription
If the number of shares applied
for is more than the number of
shares offered to the public then
that is called as over Subscription.
Under Subscription
If the number of shares applied
for is less than the number of
shares offered to the public then
it is called as Under Subscription

What is full Allotment, selective partial allotment and pro-rate
allotment? (2/5 MARKS)
Full or Allotment of Shares (2 MARKS)
After the last date of the receipt of applications is over, the Directors, Provide with the allotment work.
However, a company cannot allot the shares unless the minimum subscription amount mentioned in the
prospectus is collected within a stipulated period. The Directors pass resolution in the board meeting for
allotment of shares indicating clearly the class & no. of shares allotted with the distinctive numbers. Then
Letters of Allotment are sent to the concerned applicants. Letters of Regret are sent to those who are not
allotted any shares & application money is refunded to them.

Selective Partial Allotment (2 MARKS)
In partial allotment the company rejects some application
totally, refunds their application money & allots the shares to
the remaining applicants.
Pro-rata Allotment (2 MARKS)
When a company makes a pro-rata allotment, it allots shares
to all applicants but allots lesser shares then applied for E.g. If
a person has applied for three hundred shares he may get two
hundred shares

What is Calls in Shares, Calls–in–Arrears and Calls–in–Advance?
(5 MARKS)
Calls in Shares (2 MARKS)
The remaining amount of shares may be
collected in installments as laid down in
the prospectus. Such installments are
called calls on Shares. They may be
termed as “Allotment amount, First
Call, Second Call, etc.”
Calls–in–Arrears(2 MARKS)
Some shareholders may not pay the
money due from them. The outstanding
amounts are transferred to an account
called up as “Calls-in-Arrears” account.
The Balance of calls-in-arrears account
is deducted from the Called-up capital
in the Balance Sheet.
Particular Debit Credit
Calls in arrears A/C Dr.
To share allotment A/C
To share first call A/C
To share second and final call A/C
XXX
XXX
XXX
XXX

Calls–in–Advance (2 MARKS)
Bank A/C Dr.
To call in advance A/C
XXX
XXX
Calls in advance A/C Dr.
To share call A/C
XXX
XXX
According to sec.92 of the
Companies Act, a Company may if so
authorized by its articles, accept from a
shareholder either the whole or part of the
amount remaining unpaid on any shares
held by them, as Calls in advance. No
dividend is paid on such calls in advance.
However, interest has to be paid on such
calls in advance.

What to do you mean forfeiture of shares? What are the Conditions
to be issue forfeiture of shares? (2/5 MARK)
FORFEITURE OF SHARES
Meaning
•Forfeiture of shares
means cancellation of shares. If a
shareholder fails to pay the allotment
or call money when demanded, the
directors have the power of forfeiture
the shares issued to the shareholders.
When shares are forfeited the
shareholders name is removed from
the register of members and the
amount already paid by him on the
shares becomes the property of the
company.

Conditions for forfeiture of shares
 When shares are allotted to an applicant, it becomes a contract between
the shareholder & the company.
 The shareholder is bound to contribute to the capital and the premium if
any of the company to the extent of the shares he has agreed to take.
 When the Directors make the calls. If the fails to pay the calls then his
shares may be forfeiture by the directors if authorized by the Articles of
Association of the company.
 The Forfeiture can be only for non-payment of calls on shares and not for
any other reasons.
 When the directors forfeiture the shares the person looses his membership
in the company as well as the amount already paid by him towards the
share capital and premium.
 His name is removed from the register of members. The directors must
observe strictly all the legal formalities required by the
Articles of Association before forfeiting the shares.

Explain the accounting treatment of forfeitures of shares. (5/10
MARK)
• Accounting treatment:
•Since a company can issue shares either
at par or at a premium or at a discount. It is
sure that share forfeited by the company
may belong to any of the above three
categories. Accounting treatment in the above
three cases has been explained below
• Forfeitures of shares issued at par:
• When the shares issued at par are forfeited,
the balance in share forfeited account should
be shown on the liability side of the balance
sheet by adding it to the share capital, until the
forfeited shares are reissued
Shares capital A/C
Dr.
To share call A/C
To forfeited share A/C
XXX
XXX
XXX
XXX

Forfeiture of shares issued at a premium
Sometime shares issued at a
premium to shareholder have to be
cancelled for non-payment of
allotment or call money. In such a
case, if share premium has been
received by the company, it should
remain in securities premium
account. The securities premium
account should but be debited at the
time of forfeitures. But if the
premium has been credited to
premium account to premium
account, but the premium has not
been received, the premium
account should be debited with the
amount not received s and hen
shares are forfeited.
When the premium has been credited,
but the amount has not been received
Shares capital A/C
Dr
Securities
premium A/c
Dr.
To share
allotment A/C
To share call
A/C
To forfeited
share A/C
XXX
XXX
XXX
XXX
XXX
When the premium has been received
but forfeiture is due nonpayment of
subsequent calls
Share capital A/C
Dr.
To share call
XXX
XXX
XXX

Forfeiture of share issued at a discount:
Shares capital A/C Dr.
To discount on issue of shares A/C
To share call A/C
To forfeited share A/C
XXX
XXX
XXX
XXX
XXX
If the Forfeited shares are issued at a
discount, the proportion amount of
discount allowed on such shares should be
cancelled if the discount of shares has
already been debited.

SURRENDER OF SHARES (2 MARK)
A shareholder who is not able to pay the call money may surrender its shares to the company. The company
cancels such surrender shares. Surrender is a voluntary act on the part of the shareholder, whereas Forfeiture
is a compulsory act on part of the company. The effect of both surrender & Forfeiture is the same, i.e.
cancellation of the shares. The company can accept surrender of shares if permitted by its Articles of
Association. The accounting treatment in respect of surrender of shares is same as that of Forfeiture of Shares.

RIGHTS ISSUE OF SHARES (2 MARK
Under Sec.94 of Companies Act, A company can issue additional shares at any time by passing an ordinary
resolution at its General Meeting. However, under Sec. 81 of that, such additional shares must be 1st offered to the
existing equity shareholders in the proportion of the shares already held by them. Such additional shares are called
“Rights Shares”. Following legal provisions are pertinent in this regard.
 The issue should be within the limits of the authorized capital, if not so, then the authorized capital must be
increased first suitably.
 The issue is to be made after two years from the formation of the company or after one year from the first
allotment of shares.
 The shares should be offered to the equity shareholders in proportion to the capital paid-up on their shares.
 The offer should be made by a written notice specifying the no. of shares offered & the time limit for acceptance
which should be at least 15 days from the date of offer.
 Unless prohibited by the Articles, the offer should include & specify the power of the shareholder to renounce
(sale) the right shares to others.
 The shares not taken up by the shareholders can be sold by the Board of Directors in a manner most beneficial to
the company.
 Such right offer need not be made to the existing shareholders, if
I. A special resolution to that effect is passed by the shareholder in the General Meeting or
II. An ordinary resolution to that effect is passed and approved from the Central Govt. is obtained for issue of shares
to persons other than the existing shareholders.

RE-ISSUE OF FORFEITED SHARES (2/5 MARK)
The Directors may reissue the Forfeited shares at par, at premium or at a reissued at a discount; the
maximum discount is restricted to the amount Forfeited on these shares the original discount.
 When all forfeited shares are reissued (complete reissue)
 When all forfeited shares are not reissued (partial reissue)
When all forfeited shares are reissued (COMPLETE REISSUE)(2 MARK)
After forfeiting the shares the company may choose to reissue these shares to any person. After reissue of
all forfeited shares, if there is no balance in shares forfeited account, then will be no capital profit and will
be transferred to capital reserve account

When all forfeited shares are not reissued (PARTIAL
REISSUE)(2MARK
After forfeiture, only a part of such shares is issued, it is desirable to spread the amount of share forfeited account on
all such forfeited shares and of the amounting relation get that part of forfeited share which has been reissued,
discount on reissue of shares should be deducted from such amount and the balance is transferred to capital reserve.
The amount relating to that past of shares forfeited account which has not been reissued should be shown on the
liabilities side of balance sheet as share forfeited account.

Particulars Debit Credit
Receipt of Application Money
Bank A/c Dr
To Share Application A/c
(Application money received on
….shares of Rs…each)
XXX
XXX
Transferring the Application Money
Share Application A/c Dr
To Share Capital A/c
(Application money transferred to share
capital A/c
XXX
XXX
Rejection of Excess Applications and
Money Returned
Share Application A/c Dr
To Bank A/c
(Application money on … shares
refunded to the applicants)
XXX
XXX
SPECIMEN JOURNAL ENTRIES FOR ISSUE OF SHARE AT PAR, AT
PREMIUM, OR AT DISCOUNT.
Excess application money adjusted towards
sums due on allotment.
Shares Application A/c Dr
To Share Allotment A/c
(Excess application money adjusted
towards sums due on allotment)
X
For allotment money receivable:
ISSUE OF SHARE AT PAR:
Share Allotment A/c Dr
(Share allotment money due on …. shares
@Rs ... per share)
X
ISSUE OF SHARE AT PREMIUM:
X

SPECIMEN JOURNAL ENTRIES FOR ISSUE OF SHARE AT
PAR, AT PREMIUM, OR AT DISCOUNT.
ISSUE OF SHARE AT DISCOUNT:
Share Discount A/c Dr
(Share allotment money due on ….
shares @Rs ... per share)
XXX
XXX
XXX
Allotment Money becoming due
(Share allotment money due on ….
shares @Rs ... per share)
XXX
XXX
Allotment Money received
Bank A/c Dr
To Share Allotment A/c.
(Receipt of the amount due on
XXX
XXX
First Call Money is Due
Share First Call A/c Dr
To Share Capital A/c.
(Share first Call money due on …. share
@ Rs … per share).
XX
Received of first call money
Bank A/c Dr
To Share First call A/c
(Share first call money due on … shares
@ Rs ... per share received)
XX
Final Call Money is Due
Share Final Call A/c Dr
To Share Capital A/c.
(share final Call money due on …. share
@ Rs … per share).
XX
Received of final call money
Bank A/c Dr
To Share Final call A/c
XX

ISSUE OF PREFERENCE SHARES
• Shares in a company which give their holders an entitlement to a fixed dividend but which do not usually
carry voting rights. The important difference between preference and ordinary shares are: The dividend on
ordinary shares is uncertain and variable (high when the company does well, poor or non-existent when it
does badly). Preference shareholders get a fixed dividend which, if not paid, usually accrues until it can be.
Each ordinary share usually carries a vote. Preference shares do not usually carry a vote unless dividends fall
into arrears. In the event of a winding up, preference shares are usually repayable at par value, and rank
above the claims of ordinary shareholders (but behind bank and trade creditors).Preference shares may be
issued with the right of conversion into ordinary shares. These are called convertibles.

MEANING OF PREFERENCE SHARES
Q. What you mean by Preference Shares? (2 marks)
• Preference shares are those, which enjoy the following two preferential rights:
• 1. Dividend at a fixed rate or a fixed amount on these shares before any dividend on equity shares.
2. Return of preference share capital before the return of equity share capital at the time of winding up of the
company
• Preference shares also have a right to participate or in part in excess profits left after been paid to equity
• shares, or has a right to participate in the premium at the time of redemption. But these shares do not carry
voting rights.

KINDS OR TYPES OF PREFERENCE SHARES
Q. What is Preference Share? Explain the various kinds of Preference Shares. (5/10 marks)
Following are the major types of preference shares:
Cumulative Preference Shares
• When unpaid dividends on
preference shares are treated as
arrears and are carried forward to
subsequent years, then such
preference shares are known as
cumulative preference shares. It
means unpaid dividend on such
shares is accumulated till it is paid
off in full
Non-cumulative Preference Shares
• Non-cumulative preference shares
are those type of preference
shares, which have right to get
fixed rate of dividend out of the
profits of current year only. They
do not carry the right to receive
arrears of dividend. If a company
fails to pay dividend in a particular
year then that need not to be paid
out of future profits
Redeemable Preference Shares
• Those preference shares, which can
be redeemed or repaid after the
expiry of a fixed period or after
giving the prescribed notice as
desired by the company, are known
as redeemable preference shares.
Terms of redemption are
announced at the time of issue of
such shares.

Non-redeemable
Preference Shares
• Those preference shares, which
can not be redeemed during the
life time of the company, are
known as non-redeemable
preference shares. The amount
of such shares is paid at the time
of liquidation of the company
Participating Preference Shares
• Those preference shares,
which have right to
participate in any surplus
profit of the company after
paying the equity
shareholders, in addition to
the fixed rate of their
dividend, are called
participating preference
shares.
Non-participating Preference
Shares
• Preference shares, which
have no right to participate
on the surplus profit or in any
surplus on liquidation of the
company, are called non-
participating preference
shares.

Convertible Preference Shares
• Those preference shares, which can
be converted into equity shares at
the option of the holders after a
fixed period according to the terms
and conditions of their issue, are
known as convertible preference
shares.
Non-convertible Preference Shares
• Preference shares, which are not
convertible into equity shares, are
called non-convertible preference
shares

ADVANTAGES OF PREFERENCE SHARES
Q. Explain the Advantages and Disadvantages of Preference Shares. (5/10
marks)
The advantages of Preference shares are as follows:
(A) Advantages from Company point of view:
Fixed Return
• The dividend payable on
preference shares is fixed
that is usually lower than
that payable on equity
shares. Thus they help the
company in maximizing the
profits available for
dividend to equity
shareholders.
I.No Voting Right
• Preference shareholders
have no voting right on
matters not directly
affecting their right hence
promoters or management
can retain control over the
affairs of the company.
I.Flexibility in Capital
Structure
• The company can maintain
flexibility in its capital
structure by issuing
redeemable preference
shares as they can be
redeemed under terms of
issue.

ADVANTAGES OF PREFERENCE SHARES
Q. Explain the Advantages and Disadvantages of Preference Shares. (5/10
marks)
The advantages of Preference shares are as follows:
(A) Advantages from Company point of view:
No Burden on Finance
• Issue of preference shares
does not prove a burden on
the finance of the company
because dividends are paid
only if profits are available
otherwise no dividend
No Charge on Assets
• No-payment of dividend on
preference shares does not
create a charge on the
assets of the company as is
in the case of debentures
Widens Capital Market
• The issue of preference
shares widens the scope of
capital market as they
provide the safety to the
investors as well as a fixed
rate of return. If company
does not issue preference
shares, it will not be able to
attract the capital from such
moderate type of investors

(B) Advantages from Investors point of view:
Investors in preference shares have the following advantages
I.Regular Fixed Income
• Investors in cumulative
preference shares get a fixed
rate of dividend on
preference share regularly
even if there is no profit.
Arrears of dividend, if any, is
paid in the year's) of profits.
Preferential Rights
• Preference shares carry
preferential right as regard to
payment of dividend and
preferential as regards
repayment of capital in case
of winding up of company.
Thus they enjoy the
minimum risk.
Voting Right for Safety of
Interest
• Preference shareholders are
given voting rights in matters
directly affecting their
interest. It means, their
interest is safeguarded.

(B) Advantages from Investors point of view:
Investors in preference shares have the following advantages
Lesser Capital Losses
• As the preference shareholders enjoy the
preferential right of repayment of their
capital in case of winding up of company,
it saves them from capital losses.
I.Fair Security
• Preference share are fair securities for
the shareholders during depression
periods when the profits of the company
are down.

DISADVANTAGES OF PREFERENCE
Higher Rate of Dividend
Company is to pay higher
dividend on these shares
than the prevailing rate of
interest on debentures of
bonds. Thus, it usually
increases the cost of capital
for the company.
Financial Burden
Most of the preference
shares are issued
cumulative which means
that all the arrears of
preference dividend must
be paid before anything can
be paid to equity
shareholders. The company
is under an obligation to
pay dividend on such
shares. It thus, reduces the
profits for equity
shareholders.
Dilution of Claim over Assets
The issue of preference
shares involves dilution of
equity shareholders claim
over the assets of the
company because
preference shareholders
have the preferential right
on the assets of the
company in case of winding
up.

DISADVANTAGES OF PREFERENCE
Adverse effect on credit-worthiness
The credit worthiness of the company is
seriously affected by the issue of
preference shares. The creditors may
anticipate that the continuance of
dividend on preference shares and
suspension of dividend on equity capital
may depreive them of the chance of
getting back their principal in full in the
event of dissolution of the company,
because preference capital has the
preference right over the assets of the
company.
Tax disadvantage
The taxable income is not reduced by the
amount of preference dividend while in
case of debentures or bonds, the interest
paid to them is deductible in full.

Demerits for Investors
No Voting Right The preference shareholders do not enjoy any
voting right except in matters directed affecting
their interest.
Fixed Income The dividend on preference shares other than
participating preference shares is fixed even if the
company earns higher profits.
No claim over surplus The preferential shareholders have no claim over
the surplus. They can only ask for the return of
their capital investment in the company.
No Guarantee of
Assets
Company provides no security to the preference
capital as is made in the case of debentures. Thus
their interests are not protected by the assets of
the company

REDEMPTION OF PREFERENCE SHARES
MEANING OF REDEMPTION OF PREFERENCE SHARES
What you mean by Redeemable Preference Shares? (2 marks)
Any company can issue two types & shares-viz. Equity Shares and Preference Shares. An Equity Share is defined as
a share which is not a Preference Share. Sec 85 of the Companies Act, 1956 defines Preference Share Capital as that
part of the Share Capital of a Company, limited by shares, which carries a preferential rights as to payment of fixed
rate of dividend and repayment of capital before any payment is made to the Equity shareholders.
To redeem means to repay. Redemption is the process of repaying an obligation as per predetermined terms and
conditions. All the Preference Shares issued after 15th June 1988 have to be redeemable Preference Shares. The
Preference Shares issued prior to that date were required to be redeemed within Ten years from the 15th June 1988.
At present, any Preference Share issued by any company is required to be redeemable within maximum period of ten
years from date of issue.
The dividend at specified rate is payable only if the company earn profits as Sec.205 of Companies Act. Thus
dividend is not payable in event of losses suffered by company.
This class of shares provide funds to the company period which it needs funds and therefore repay the same.

LEGAL PROVISIONS
Explain the various Provisions Regarding Redeemable Preference Shares. (5/10 mark)
PURPOSE OF ISSUING PREFERENCE SHARES:
A company may face difficulty in raising finance in dull primary market.
A company may raise finance required for the medium term project or additional capital required, by issue of
redeemable Preference Shares, at the option of the company.
The purpose of issue of Preference Shares is to be providing funds in following situation.
There is uncertainly of earning adequate profits for some period.
To funds are required for specific period not more than ten years.

LEGAL PROVISIONS
• A company limited by shares if so authorized by its articles, may issue Preference Shares. However, the
redemption can be effect only if the following conditions are fulfilled.
A. Only full paid Preference shares can be redeemed.
Thus partly paid up OR partly called up shares cannot be redeemed. In case shares which are partly called up; final call
should be made. After receiving final call money the shares are fully paid up, then Preference Shares can be redeemed. If
there are shares on which calls are in arrears either call should be received or these shares must be forfeited and then only the
remaining shares can be redeemed.
A. The Preference shares can redeemed either out of
Proceeds of fresh issue of shares.
AND/OR
Divisible Profits.
A. The redemption may be in full of a single point of five or in parts of per terms of issue. The redemption may be
1. Payment by cheque
2. Conversion into Equity or Preference Share
3. Conversion into Debentures.
A. In case redemption out of accumulated Divisible Profit, it is necessary to transfer amount equal to
face value of Preference Share redeemed to the Capital Redemption Reserve Account.
After the commencement of the Companies (Amendment) Act 1988, as company can not issue any Preference Share which
are irredeemable or is redeemable after the expiry of a period of Ten years from the date of its issue.

ITEMS APPEAR IN CAPITAL PROFIT AND REVENUE PROFIT
Revenue profit Capital profit
General Reserve.
Revenue Reserve
Dividend Equalization Reserve.
Profit on sale of fixed assets & investment
Workmen's Compensation Fund
Workmen's accident fund
Insurance fund
Debenture Redemption Fund
Debenture Redemption Account
Profit and Loss A/c
Securities Premium Account
Profits Prior to Incorporation.
Share Forfeited Account.
Capital Resolve
Revaluation Reserve
Capital Redemption Reserve
Investment Allowance Reserve
Depreciation Reserve
Development Rebate Reserve
Q. What are the Capital Profit and Revenue Profit? Or what are the items will appear in
Capital and
Revenue Profit? (5 mark)

SPECIMEN JOURNAL ENTRIES FOR REDEMPTION OF
PREFERENCE SHARES
If the shares to be redeemed are to be made fully paid up:
Preference share final call A/c Dr
To preference shares capital
XXX
XXX
Bank a/c Dr.
To preference share final call a/c
XXX
XXX
When equity shares are issued for the purpose of redemption (at par, at premium & at
discount )
Bank A/c Dr
Discount on issue of shares A/c Dr
To equity share capital A/c
To securities premium A/c
XXX
XXX
XXX
XXX
When accumulated profits are utilized for the purpose:
Profit & loss A/c (or) general reserve A/c Dr
To capital redemption reserve A/c
XXX
XXX

To provide for premium on redemption
Security premium A/c Dr (or)
Profit and loss a/c Dr.(or)
General reserve A/c Dr.
To premium on
redemption a/c
XXX
XXX
XXX
XXX
If liquid assets are not available, either current assts may be sold (or) bank overdraft may be arranged. They entry is :
Bank A/c Dr.
Profit and loss A/c Dr (loss)
To current assets A/c
To profit and loss A/c
(profit)
XXX
XXX
XXX
XXX
For the total amount payable:
Redeemable preference share capital A/c Dr.
Premium on redemption A/c Dr.
To redeemable preference shareholder A/c
XXX
XXX
XXX
On payment of amount due:
Redeemable preference shareholder A/c Dr.
To Bank A/c
XXX
XXX
For declaration of bonus:
Capital redemption reserce a/c Dr.
General reserve A/c Dr.
Profit and loss A/c Dr.
To bonus to shareholders A/c
XXX
XXX
XXX
XXX
For issue of bonus shares
Bonus to shareholders A/c Dr.
To equity share capital A/c
XXX
XXX

DEBENTURE DEFINITION
. What do you mean debenture? Define debenture. Explain the features of debenture (2/5 Marks)
The word debenture is derived from 'debera' a Latin word which means to owe a debt. It is only a a written
document issued by a company as an evidence of its debt.
The company Act defines debenture as, "Debenture
includes debenture stock, bonds or any other securities of a
company. whether constituting a charge on the assets of the
company or not".
It may also define as. "An instrument in writing
acknowledging a debt ;under the seal of the company, usually
secured by a fixed or floating charge on the assets of the
company, bearing a fixed rate of interest and, repayable during
the existence of the company".

FEATURES OF ISSUE OF DEBENTURE
• Finance raised by the issue of Debentures has the following special features
 Debenture constitutes the loan capital of the company.
 Debenture holders are the creditors of the company, or Debentures is paid at a fixed rate and on a
periodical basis, i.e., six month, yearly etc.
 If redeemable. debenture capital has to be refunded after a prescribed period.
 debenture carry no voting rights except under special circumstances.
 For any default in the matter of payment of interest or repayment of capital, debenture holders, can take
legal action against the company.
 In case the company has created any mortgage or charge on its assets to secure the issue of debenture,
the debenture holder have the rights to claim the payment of their dues from out of these assets.
 If it is in their interest to do so. Debenture holders can even apply for winding up of the company.

KINDS (OR) TYPES (OR) CLASSIFICATION OF ISSUE OF
DEBENTURES
On the basis of transferability:
Debenture may be bearer or registered debenture from this point of view:
Registered Debentures
Registered Debentures arc made out in the name of
a Particular person who are registered as debenture
holders, with their full details, in the books of the
company. The payment of interest and repayment
of capital transferable in the same way as shares.
Bearer Debentures
Bearer debentures are freely transferable
without endorsement and they are just like bearer
cheque or. government currency notes. They are
treated as negotiable instruments and transferable
by mere
delivery. The principle amount and investment
when due are payable to the holder of these
debenture,

DEBENTURES
On the basis of security
Secured (or) Mortgage: Debentures These
are debenture which are secured by a fixed or
floating charge on the assets of the company.
repayment of principal and interest on such
debenture is secured. When specific assets are
named as security it become fixed charge.
Simple (or) unsecured Debentures:These
Debenture carry no security with regard to
repayment of principal and interest. They are
also called naked Debenture". The general
solvency of the company is the only security
for these Debentures. On. Winding up of the
company, the holders of these Debentures will
be treated like other unsecured credito'.

DEBENTURES
On the basis of permanence (Redeemability)
Redeemable debenture
Debentures, the principal amount of which is
repayable after a specified period of time are called
redeemable Debentures.
Irredeemable Debentures
Debentures which are not repayable during the life
time of the company are called irredeemable
debentures they are also called perpetual debenture.

DEBENTURES
On the basis of convertibility
Convertible Debentures:
A convertible debenture can be converted into shares
of the same company at the option of the holder
convertible Debentures may be fully convertible (or)
Partly convertible.
On the basis of priority:
First mortgage Debentures:
These Debentures are payable first out of the property
charged.
Second mortgage Debentures:
These Debentures are payable after satisfying the first
mortgaged Debentures.

CONSIDERATIONS FOR THE ISSUE OF DEBENTURE
What is issue of Debentures? What are the considerations for the issue of debenture? What is collateral
security? (2/5/10 Marks) Issue of Debentures:
Debentures may be issued at Par, at a Premium or at a Discount. They may be issued for cash or for
consideration other than cash (purchase of assets). It may also be issued to creditors as collateral security. the
amount of debenture may be collected in lump-sum or installments.
The entire of issue of Debentures are made on the same pattern as for the issue of shares. The following are
the entries to be given in the books of company, when Debentures are issued at Par, at Premium or a a
Discount and the amount collected in lump sum.

Consideration for the issue of debenture
Issue of Debentures at Par:
• When Debentures arc issued at Par the company has to collect the face value of Debentures.
Issue of debenture at a Premium:
•Debentures are rarely issued at a Premium. The debenture which are issued at a Premium are issued at
a higher price than their nominal value i.e., if a Debentures with a nominal value of .100 issued at a Premium
of 10% the company receives 110. There is no restriction in companies Act 1956 regarding the utilization
of debenture Premium.
• It can be used to write off:
 Discount on issue of shares (or) Debentures;
 Premium on redemption of shares (or) Debentures;
 Capital losses and
 Intangible assets such as goodwill etc., any balance left in the debenture Premium account should be
transferred to capital reserve account.
Issue of Debentures at a Discount:
•When Debentures are issued at a price less than their face value, it is said that they are issued at a
Discount. The companies Act does not prescribed any maximum limit for Discount on Debenture when Debentures
are issued at a Discount, the amount of the Discount is debited to a separate account called "Discount on issue of
debenture account". Usually Discount on issue of debenture is adjusted with Debentures allotment account.

Issue of debenture for cash
Here the issue price is receivable in the form of cash. It may be received immediately in one installment or if
may be received in two or more stages like application, allotment and calls.
•
1) If full amount received in one lump sum:
BankA/c Dr
To % Debentures A/c XXX
XXX
2) If cash is receivable in two or more stages:
For receiving Debentures application money.
BankA/c Dr.
To Debenture application A/c
XXX XXX
At the time of allotment, for the application money on the
allotted Debentures:
Debentures application A/c Dr.
XXX

Issue of debenture for cash
For excess Debentures application money:
Debenture application A/c Dr.
To Bank A/c
To Debentures allotment A/c XXX XXX
XXX
For allotment amount receivable:
Debentures allotment A/c Dr.
XXX
For receiving allotment money:
Bank A/c Dr.
To Debentures allotment A/c XXX
XXX
For call amount receivable:
Debenture call A/c Dr.
XXX
For receiving the call amount:
Bank A/c Dr.
To Debenture call A/c XXX
XXX

Issue of Debentures for consideration other than cash
• Debentures may be issued for purchase of assets or purchase of the business of vendor In the latter case it
is called 'purchase consideration'.
When assets are acquired:
Sundry assets A/c Dr.
To Vendors A/c
XXX
XXX
When assets & liabilities are acquired:
Sundry assets A/c Dr.
Goodwill A/c Dr.
To Sundry liabilities A/c
To Vendor A/c
XXX
XXX XXX
XXX
When Debentures are issued to the vendor:
Vendors A/c Dr.
XXX

ADVANTAGES AND DISADVANTAGES OF DEBENTURES
Good number of willing buyers
Debentures can be issued
to raise large sums of
capital from those
investors who regard a
fixed and regular income
and safety of capital as the
main test of a good
investment. The number of
such cautions and risk-
fearing investors being
quite large, selling of
Debentures does not pose
much of a problem.
Not affected by company's
fortunes
Debenture holders are
paid interest at a fixed rate
and at periodical intervals.
Be this profit or loss the
company has to find funds
to pay interest to its
debenture holders on the
due date. Debenture
holders thus enjoy
complete security against
any financial setbacks
suffered by the company.
Repayment is secure
Mostly, Debentures carry a
charge (mortgage on the
assets of the company). In
case of default by the
company, the debenture
holder can recover their
dues from the proceeds of
such mortgaged assets.

Reliable source of long term financial
A company can issue long-
term debenture, with
maturity dates falling in the
distant future. Thus,
between the raising of the
debenture capital and its
repayment, the company has
enough time to make the
most profitability use of the
funds at its disposal.
Benefits of redemption
Generally. Debentures are
made redeemable after a
specified period. This works
to the company advantages
in two ways. First, as a
source of finance, the
company can draw a
debenture whenever it
needs funds to meet its short
term or long term
requirement. Secondly, the
funds raised by the issue of
Debentures can be easily
repaid when the company
docs not need them any
more.
Trading on the equity made possible
Rising of funds by the issue
of debenture enables the
company to trade on the
equity. Interest on debenture
is paid at a fixed rate. But
once it has been paid the
entire remaining profits will
become available for
distribution as dividend
among equity shareholder.

Negligible cost
Raising funds by the issue
of debenture is less
costly. An important
reason for this is that
debenture as generally
regarded as safe
investment and it is,
therefore, not very
difficult to sell them
Tax relief
While determining the
tax liability of a company
under the income tax law,
interest paid on
debenture allowed as a
deduction.
No window- dressing necessary
While issuing debenture
the company does not
need to make any high
claims about its future
performance, those
investing in debenture
known well that whether
the company makes profit
(or) loss, they need have
no fear about the
payment of interest or
repayment of capital.

Disadvantages of debentures
Burdensome in times of
depression
• From the point of view of
trading on the equity book
time is an ideal time for
raising by the issue of
debentures with the growth
in its earning, the company
will have no difficulty in
paying interest on debenture
and in providing for their
repayment.
Loss of prestige
• A company which is Known
for depending too heavily on
debenture finance may have
difficult in selling debenture
particularly those belonging
to the subsequent issues. May
be, it will have to offer a
higher rate of interest or
other out of turn benefits to
attracts investors into buying
its debenture.
Absence of voting rights
• Debenture holders are
entitled to attend the
meeting of shareholders or to
vote there in. In some special
circumstances, when their
own interests are
substantially involved, they
may be given the right to not
only attend such meeting but
also vote on resolutions
affecting them

Disadvantages of debentures
Stable earning a must
• Only company with
reasonably adequate
and regular earnings
can raise funds by the
issue of Debentures,
because debenture
creates a fixed liability
in respect of
payment of interest as also
because these have to
be redeemed after a
time stability of
earnings is a must.
Mortgage of fixed assets
• Debenture are preferred
solely for the reason of
safety of capital. But what is
it that leads investors to
regard them as safe
investment? It is because in
the matter of repayment of
capital. Debentures enjoy
priority over all classes of
shares.
Too much of debenture
finance counter-productive:
• debenture finance is cited
as a factor that enables
the company to trade
on the equity. But too
much of such finance may
have an altogether
opposite effect.

COLLATERAL SECURITY
Explain Collateral security and its way. (2/5marks)
Company may issue Debentures as collateral security against loans taken from banks or other financial
installment (or) Debentures may be issued as secondary security or subsidiary security in addition to the main
security for a bank loan (or) mortgage loan. Such an issue is termed as "Issue of Debentures as collateral
Security

Debenture issuued as collateral security can be treated in either of
the following ways
 First method:
•Under this method, no entries are made in the companies' books and only a note giving details
of debenture offered as securities is appended to the loan account in the ledger on the liability side of
the balance sheet details of debenture offered as a security is given as a note below the item 'loan'.
 Second method:
• Under this method, the company passes the following journal entry at the time of issuing debenture as
collateral security
All the time of issuing the debenture:
Debenture suspense A/c Dr.
To % Debenture A/c
XXX
XXX
When the loan is repaid and the
debenture are returned by the lender,
the following entry is passed:
% Debenture A/c Dr.
To Debenture Suspense A/c
XXX
XXX

REDEMPTION OF DEBENTURES - MEANING
What you mean by redemption of Debentures? (2 Marks)
Redemption of Debentures - Meaning:
Redemption of debenture is the process of extinguishing or discharging the liability on account of debenture in
accordance with the terms of redemption stated in the debenture trust deed. Discharge of debenture liabilities is
usually by paying cash to the debenture holder. But this can take other forms such as conversion or rollover. In
the case of conversion debenture or converted into preference share or equity shares, rollover refers to the issue
of new debenture in exchange for the old ones.

VARIOUS METHODS OF REDEMPTION OF DEBENTURES
. Explain the various methods of redemption of debentures (5/10 marks)

SINKING FUND METHOD
• Sinking fund method:
•The sinking fund is defined as "a fund created for redemption of a liability or replacement of an
asset” since redemption of debenture is a known liability for the company a sinking fund can be created out
of profit every year. After creating a sinking fund, it is usually invested in government or outside
securities. For sinking fund investments, the company will get annual interest and it should be reinvested.
On the date of redemption of debentures payments are made out of sale proceeds of sinking fund
investments. It is also called debenture redemption fund

At the end of the first year, for making annual transfer to sinking fund:
P & L Appropriation A/c Dr.
T0 Sinking fund A/c
XXX
XXX
For making investment:
Sinking fund investment A/c Dr.
To Bank A/c
XXX
XXX
For receiving interest to sinking fund A/c:
Bank A/c Dr.
To interest on Sinking fund investment A/c
XXX
XXX
For transferring interest to sinking fund A/c:
Interest on sinking fund investment A/c Dr.
sinking fund A/c
XXX
XXX
For annual transfer to sinking fund:
T0 Sinking fund A/c
XXX
XXX

For making investment:
To Bank A/c
XXX
XXX
For receiving interest to sinking fund A/c:
Bank A/c Dr.
To interest on Sinking fund investment A/c
XXX
XXX
For transferring interest to sinking fund A/c:
Interest on sinking fund investment A/c Dr.
sinking fund A/c
XXX
XXX
For annual transfer to sinking fund:
T0 Sinking fund A/c
XXX
XXX
For making investment, including the interest received:
To Bank A/c
XXX
XXX

For sale of investment:
Bank A/c Dr.
Sinking fund A/c Dr.
To sinking fund investment A/c
XXX
XXX
XXX
For redemption of Debentures:
% Debenture A/c Dr.
To Bank A/c
XXX
XXX
For closing the Sinking fund:
sinking fund A/c Dr.
to General reserve A/c
XXX
XXX

INSURANCE POLICY METHOD
• Insurance policy method:
• Under this method a fixed amount of Premium is paid every year to an insurance company. At the end of
a specified period, the insurance companies pay the amount for redemption of Debentures. Under this method
of annual allocation is used for paying the premium on insurance
policy. Particulars Debit Credit
For the amount of Premium paid:
Debenture redemption policy A/c Dr.
To Bank A/c XXX
XXX
At the end of the accounting year: P & L Appropriation A/c Dr.
To Debenture redemption Policy A/c
XXX
XXX
In the last year, on realizing the policy:
Bank A/c Dr.
To Debenture redemption policy A/c XXX
XXX

INSURANCE POLICY METHOD
For any profit on realization of policy.
Debenture redemption policy A/c Dr.
To Debenture redemption Fund A/c XXX
XXX
For redemption of the Debentures:
Debentures A/c Dr.
To Bank A/c XXX
XXX
For closing the debenture redemption fund:
Debenture redemption fund A/c Dr.
To General Reserve XXX
XXX

CONDITIONS OF REDEMPTION OF DEBENTURES
• What are the important aspect are to be conditions in relation to redemption of debentures? (5/10
marks)
 Time of redemption
 Generally debentures are redeemed at the expiry of their period by making the payment of the amount
promised for. But sometime company may reserve the rights in the articles of association to redeem the
debentures even before the date of redemption either by installments or by purchasing them in the open
market. Payment of debenture by installment is nothing but redemption of debenture by drawing a lot.
Sometimes company does not want to serve a notice to the debenture holder and wants redeem the debenture
before the date of redemption. This is possible by purchasing out own debenture in the open market. Thus
Debenture can be redeemed either at the expiry of the period of debenture or before the expiry of the period
by drawing lot or by purchasing in the open market before the expiry of the period of debenture.

CONDITIONS OF REDEMPTION OF DEBENTURES
 Amount payable on redemption:
•The amount to be paid on redemption of debenture depends on the circumstances of each case. if
the Debentures are redeemed on expiry of the period or only during a lot these amount to be paid can be
either Premium or at Par as promised by the company. If the Debentures are redeemed by purchasing them
in the open market, then the amount to be paid depends on the market quotation, i.e., either at Par (or) at
Premium Generally, the companies purchase their own debenture from the market when the Debentures
are quoted belong face value to take the advantages of depressed prices.
 Sources of funds:
• The major sources where from the debenture can be redeemed may be
 out of profit,
 out of capital,
 out of provisions made for redemption and
• Converting them in to shares or new Debentures

• Explain the different methods of Debentures. What is ex-interest and cum-interest? (10/5 Marks)
• Methods of redemption of Debentures:
• Methods of redemption may be broadly divided into two categories.
 Redemption without provision:
•The debenture trust deed or the debenture issue terms. May not provide for creating sinking fund for
redemption of the debenture. The board of director also may not think it necessary to create such a fund. In such cases,
redemption of debenture is carried out without any provision for such redemption.
 Redemption on specified due date:
• On specified due date. Debentures are repaid as per the terms of the issue at Par or at Premium.
 Redemption out of profit:
•When Debentures are redeemed out of profit, profits of the company are utilized for the purpose of
redemption with holding the same for di dend. In such a case the follow ing journal entries will be passed
For repayment of Debentures:
% debenture A/c Dr
To bank a/c .
XXX
XXX
For transfer of profits:
P& L -appropriation A/c Dr.
To Debenture Redemption Reserve A/c
XXX
XXX
For closing Debentures Redemption Reserve, when all the debenture are redeemed:
Debenture redemption reserve A/c Dr.
To general Reserve A/c
XXX
XXX

Redemption out of capital
If debenture are redeemed out of capital no amount of divisible profit is kept aside for redeeming debenture
profit are not utilized for redemption of debenture and may go to the shareholders by way of dividend.
Redemption out of capital reduces the liquid resources available to the company. Therefore, a company may
adopt this method only when it has sufficient surplus funds.
Debentures A/c Dr.
To Bank A/c
XXX
XXX

 Redemption in installments:
•when Debentures are issued, the terms of issue may provide for the repayment of the debts. The
following different method can be adopted for redemption in installments.
 Drawing by lot:
A company may agree to repay every year a predetermined amount of debenture by conducting a lot, using the distinctive
numbers of the Debentures. The Debentures whose numbers are taken out in the lot will have to be repaid by the company by
giving the Particular debenture holder intimation about the repayment, the redemption may be at Par at Premium, as per the
term of the Debentures issue agreement.
For Debentures repayable:
Debenture A/c Dr.
Premium on redemption A/c Dr.
To Debenture holder A/c
XXX
XXX
XXX
For payment of cash:
Debenture holders A/c Dr.
To Bank A/c
XXX
XXX
If redemption is out of profit:
To Debenture Redemption Reserve A/c
XXX
XXX

Open market buying
 Open market buying:
•If a company is authorized by the terms of issue it can purchase its own debenture from the open
market. Debenture thus purchased can either be cancelled or treated as investments by the company. This
method redemption of debenture is usually adopted when the market price of debenture falls below the
normal value.

CUM-INTEREST AND EX-INTEREST
When a company buys and sells its own Debentures in the open market, the prices quoted may include or
exclude interest accrued till than date on the debenture. If the quoted price includes interest on the debenture
from the previous interest date till the date of sales, the price is known as 'cum-interest'. If the price quoted does
not include the interest from the previous interest date till the date of sale the price is known as 'ex-interest
price'. When purchase and sale transaction of own debenture are recorded in books, the nature of quotation
given whether the price quoted is 'cum-interest' or 'ex-interest' should be carefully observed.
When own Debentures are purchased in the market and immediately cancelled:
% Debentures A/c Dr.
Debentures interest A/c Dr.
To Bank A/c
To Profit on cancellation A/c
XXX
XXX
XXX
XXX

When own Debentures are purchased in the market and
retained as investment
When own debenture are purchased:
Own Debentures A/c Dr.
Debentures interest A/c
Dr. To Bank A/c
XXX
XXX
XXX
On the date of interest payment:
Debenture interest A/c Dr.
To Interest on own Debentures A/c
To Bank A/c
XXX
XXX
XXX
When own Debentures are resold:
Bank A/c Dr.
To Own Debentures A/c
To Interest on own Debentures A/c
XXX
XXX
XXX

When own Debentures are cancelled:
% Debenture A/c Dr.
To own debenture A/c
To Profit on cancellation of debenture A/c
XXX
XXX
XXX

Redemption by conversion
• Redemption of debenture by conversion is possible when the debenture were originally issued,
'convertible Debentures'. They may be Partly convertible debenture or fully convertible Debentures

Conversion on the date of redemption
• Sometime the debenture holders of a company are given the option to convert their debenture into the shares
or new debenture within a stipulated period. Such option is exercised by the debenture holders only when
they are very sure about the progress of the company. The new shares or Debentures can be issued either at
Par (or) at a Premium (or) at a Discount. The following entry will be made:
% Debenture A/c
Dr. Premium on redemption of debenture A/c
Dr. To Debenture holder A/c
XXX
XXX
XXX
For conversion into shares:
Denture holders A/c Dr.
To Security Premium A/c
XXX
XXX
XXX

 Conversion on the before redemption due date:
• Sometimes, option may be given to the debenture holders to convert their debenture into shares earlier than the
due date for redemption. In such cases there is no problem if the debenture were originally issued at Par or
Premium
 Redemption of debenture out of provision:
•Redemption of debenture is a very important obligation of a company. If a specified future date is fixed
for redemption of debenture. it is essential to see that sufficient cash is available on that date for such redemption.
The normal course liquid cash may not be available for the redemption. 'Making provision" is the best way
ensuring that necessary cash is available on the date of redemption.

What are the different conditions of issue and redemption
of Debentures? (5 Marks)
• Different conditions of issue and redemption of
Debentures:
Issued Redeemed
1 Debentures issued at Par at Par
2 Debentures issued at Discount at Par
3 Debentures issued at Premium at Par
4 Debentures issued at Par at Premium
5 Debentures issued at Discount at Premium
6 Debentures issued at Premium at Premium

DIFFERENT BETWEEN DEBENTURES AND SHARES
SHARES DEBENTURES
Amount collected through shares constitute the capital of
the company
Amount collected through Debentures constitute
"borrowed fund of the company"
A shareholder is a member of the company A Debentures holder is only a creditors
A shareholder gets a shares in the profits called dieted A Debentures holder receives interest at a fixed rate.
A shareholder is entitled to vote at meeting A Debentures holder is not entitled to vote
In the event of winding up of the company the shareholder
gets their dues after paying all the liabilities of the company
In the event of winding up of the company the
debenture holder are paid first.
Dividend on equity share is paid at a variable rate. which is
vastly affected by the profit of the company
Debenture interest is paid at a predetermined fixed
rate. It is paid whether there is any profit (or) not.
Divided are appropriation of profits and there are not
deductible in determining taxable profit of the company
Interests on Debentures arc the charges against
profit and they are deductible as an expense in
determining taxable profit of the company.
There are only two kinds of shares, equity shares and
preference shares
These are different kinds of Debentures such as
secured, unsecured redeemable, irredeemable etc.,
In the balance sheet shares arc shown under share capital In the company balance sheet debenture shown
under secured loans.
Shares cannot be converted into debenture in any
circumstances
Debenture can be converted into share as per the
terms of issues of Debentures.

UNIT-II -ISSUE OF EQUITY SHARES pdf.pptx

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