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CS Executive · Corporate Accounting and Financial Management · Accounting for Debentures

Tulsi Ltd has ₹8,00,000 of 12% debentures issued at par, convertible into equity shares of ₹10 each issued at ₹16 per share. Debenture interest for the year is paid in cash up to the date of conversion. Which entry correctly records the conversion of the debentures?

The debenture liability of ₹8,00,000 is debited. At ₹16 per share, 50,000 shares are issued, so equity share capital is credited ₹5,00,000 and Securities Premium ₹3,00,000. The premium arises on shares issued, so it is not capital reserve.

  1. ADebit Debentures ₹8,00,000; credit Equity Share Capital ₹5,00,000 and Securities Premium ₹3,00,000Correct
  2. BDebit Debentures ₹8,00,000; credit Equity Share Capital ₹8,00,000
  3. CDebit Debentures ₹8,00,000; credit Equity Share Capital ₹5,00,000 and Capital Reserve ₹3,00,000
  4. DDebit Debentures ₹8,00,000; credit Equity Share Capital ₹3,00,000 and Securities Premium ₹5,00,000

Explanation

Shares = 8,00,000 / 16 = 50,000. Capital = 50,000 x 10 = ₹5,00,000. Premium = 50,000 x 6 = ₹3,00,000. Total ₹8,00,000 equals the debenture liability. Crediting capital reserve is wrong because the excess is a premium on shares, which goes to Securities Premium.

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