Discussion On Accountancy For 2017 Examination CA. (Dr.) G.S. Grewal

Syllabus for Examination, 2017 CA. (Dr.) G.S. Grewal

Three Column Cash Book (in Class XI). Deleted Three Column Cash Book (in Class XI). Purchase of Own Debentures for Investment Purposes (in Class XII). Added Redemption of Debentures by Conversion CA. (Dr.) G.S. Grewal

Important Clarifications in Syllabus Partnership Accounts 1. Interest on Partner’s Loan is a charge against profits. Dissolution does not include Piecemeal Distribution, Sale to a Company and Insolvency. 3. The realised value of each asset must be given at the time of dissolution. 4. In case Realisation Expenses are borne by a partner, payment thereof should be clearly stated. CA. (Dr.) G.S. Grewal

Important Clarifications in Syllabus Accounting Ratios Unless specified, Investments are to be taken as Trade Investments. Cash Flow Statement 1. Only Indirect Method in Syllabus. 2. Bank Overdraft and Cash Credit are to be treated as Short term Borrowings. 3. Unless specified, Current Investments are to be taken as Marketable Securities. CA. (Dr.) G.S. Grewal

Debentures CA. (Dr.) G.S. Grewal

Definition of Debentures “Debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on assets of the company or not. Section 2(30) of the Companies Act, 2013 CA. (Dr.) G.S. Grewal

Debenture Redemption Reserve (DRR) DRR is dealt in Companies Act, 2013 at two places: Section 71(4) of the Companies Act, 2013. It prescribes that: - a company shall create DRR; - out of profits available for payment of dividend; and - the amount credited to DRR will not be used for purposes other than redemption of debentures. Rule 18(7)(b) of Companies (Share Capital and Debentures) Rules, 2014 prescribes the amount to be transferred to DRR. CA. (Dr.) G.S. Grewal

Debenture Redemption Reserve (DRR) Rule 18(7)(b) of the Companies (Share Capital and Debentures) Rules, 2014 has prescribed: - that a company shall transfer an amount at least equal to 25% of the nominal (face) value of total redeemable debentures. Rule 18(7)(c) of the Companies (Share Capital and Debentures) Rules, 2014 has prescribed: - that a company shall invest an amount not less than15% of the nominal (face) value of the debentures to be redeemed (maturing) during the year ending (i.e.,by) 31st March of the next year in specified securities on or before 30th April of the year. CA. (Dr.) G.S. Grewal

Amount to be transferred to DRR If Question is silent If Redemption is out of Profit If amount of DRR given Create DRR of amount equal to 25% of the Nominal (Face) Value of total Redeemable Debentures Create DRR of amount equal to 100% of the Nominal (Face) Value of total Redeemable Debentures Create DRR of amount as stated in the question CA. (Dr.) G.S. Grewal

When Companies shall not create DRR DRR is not created on Convertible Debentures or Convertible part of partly Convertible Debentures. Besides some categories of Companies are exempt from creating DRR. These companies are: All India Financial Institutions, regulated by Reserve Bank of India; Other Financial Institutions (Like LIC) Banking Companies; and National Housing Bank. CA. (Dr.) G.S. Grewal

Redemption of Debentures Debentures can be redeemed At the time of Maturity; or By purchase from Open Market for Immediate Cancellation; or By Draw of Lots CA. (Dr.) G.S. Grewal

Redemption of Debentures by Issue of Shares When the debentures are issued at discount and are to be converted into Shares, it should be kept in mind that: discount on issue of debentures should be taken as completely written off. (Circular Acad./43) It means debentures will be converted into shares at their nominal (face) value plus premium payable at the time of redemption. CA. (Dr.) G.S. Grewal

Redemption of Debentures On Maturity At Par At Premium Cash Conversion Into Shares Into Debentures At Par At Premium At Discount CA. (Dr.) G.S. Grewal

Redemption of Debentures By Purchase from Open Market Redeemable At Par Redeemable At Premium Cash / Bank CA. (Dr.) G.S. Grewal

Redemption of Debentures By Draw of Lots Redeemable At Par Redeemable At Premium Cash / Bank CA. (Dr.) G.S. Grewal

Journal Entries for Redemption Redeemable At Par (Conversion Method) Amount being Due …% Debentures A/c …Dr. To Debenture-holders A/c (Being the amount due to debenture-holders on redemption of debentures ) CA. (Dr.) G.S. Grewal

Journal Entries for Redemption On Conversion into Shares Issued at Par / Premium Debenture-holders A/c …Dr. To Share Capital A/c [Nominal Value] To Securities Premium Reserve A/c [Premium Amt.] (Being the amount due to debenture-holders settled by conversion into … Equity Shares of Rs. … each at a premium of Rs. …) CA. (Dr.) G.S. Grewal

Journal Entries for Redemption On Conversion into Debentures Issued at Par / Premium Debenture-holders A/c …Dr. To …% Debentures A/c [Nominal Value] To Securities Premium Reserve A/c [Premium Amt.] (Being the amount due to debenture-holders settled by conversion into …% Debentures of Rs. … each at a premium of Rs. …) CA. (Dr.) G.S. Grewal

To Debenture-holders A/c (Being the amount due to debenture-holders) Conversion of Debentures Redeemable at Premium into Shares Issued at Par / Premium …% Debentures A/c …Dr. Premium on Redemption Of Debentures A/c …Dr. To Debenture-holders A/c (Being the amount due to debenture-holders) CA. (Dr.) G.S. Grewal

Debenture-holders A/c …Dr. To Share Capital A/c [Nominal Value] Conversion of Debentures Redeemable at Premium into Shares Issued at Par / Premium Debenture-holders A/c …Dr. To Share Capital A/c [Nominal Value] To Securities Premium Reserve A/c [Premium Amt.] (Being the amount due to debenture-holders settled by conversion into Shares of Rs. … each at a premium of Rs. …) CA. (Dr.) G.S. Grewal

Pass the journal entries for the above. Example on Conversion of Debentures Redeemable at Premium into Shares Issued at Premium Office Systems Ltd. was to redeem 1,000, 8% Debentures of Rs. 100 each at a premium of Rs. 10 per debenture on 1st October, 2016 by converting them into 10,000 Equity Shares of Rs. 10 each at a premium of Rs. 1 each. Pass the journal entries for the above. CA. (Dr.) G.S. Grewal

Solution: JOURNAL ENTRIES Date Particulars LF Debit (Rs.) Credit (Rs.) 2016 Oct. 1 8% Debentures A/c Dr. Premium on Red. of Debentures A/c Dr. To Debentureholders A/c (Being the amount due on redemption of 1,000, 8% Debentures of Rs. 100 each at a premium of Rs. 10) 1,00,000 10,000 1,10,000 CA. (Dr.) G.S. Grewal

Solution: Date Particulars LF Debit (Rs.) Credit (Rs.) 2016 Oct. 1 Debentureholders A/c Dr. To Share Capital A/c To Securities Premium Reserve A/c (Being the amount due on redemption of 1,000, 8% Debentures converted into 10,000 Equity Shares of Rs. 10 each at a premium of Re. 1 per share) 1,10,000 1,00,000 10,000 CA. (Dr.) G.S. Grewal

To Debenture-holders A/c (Being the amount due to debenture-holders) Conversion of Debentures Redeemable at Premium into Debentures Issued at Par / Premium …% Debentures A/c …Dr. Premium on Redemption Of Debentures A/c …Dr. To Debenture-holders A/c (Being the amount due to debenture-holders) CA. (Dr.) G.S. Grewal

Debenture-holders A/c …Dr. To …% Debentures A/c [Nominal Value] Conversion of Debentures Redeemable at Premium into Debentures Issued at Par / Premium Debenture-holders A/c …Dr. To …% Debentures A/c [Nominal Value] To Securities Premium Reserve A/c [Premium Amt.] (Being the amount due to debenture-holders settled by conversion into …% Debentures of Rs. … each at a premium of Rs. …) CA. (Dr.) G.S. Grewal

Pass the journal entries for the above. Example on Conversion of Debentures Redeemable at Premium into Debentures (New) at Premium Ultimate Systems Ltd. was to redeem 10,000, 8% Debentures of Rs. 50 each at a premium of Rs. 5 per debenture on 1st December, 2016 by converting them into 5,000, 9% Debentures of Rs. 100 each at a premium of Rs. 10 each. Pass the journal entries for the above. CA. (Dr.) G.S. Grewal

Solution: JOURNAL ENTRIES Date Particulars LF Debit (Rs.) Credit (Rs.) 2016 Dec 1 8% Debentures A/c Dr. Premium on Red. of Debentures A/c Dr. To Debentureholders A/c (Being the amount due on redemption of 10,000, 8% Debentures of Rs. 50 each at a premium of Rs. 50) 5,00,000 50,000 5,50,000 CA. (Dr.) G.S. Grewal

Debentureholders A/c Dr. To 9% Debentures A/c To Securities Premium Date Particulars LF Debit (Rs.) Credit (Rs.) 2016 Dec 1 Debentureholders A/c Dr. To 9% Debentures A/c To Securities Premium Reserve A/c (Being the amount due on redemption of 10,000, 8% Debentures converted into 5,000, 9% Debentures of Rs. 100 each at a premium of Rs. 10 per Debenture) 5,50,000 5,00,000 50,000 CA. (Dr.) G.S. Grewal

Pass journal entry for the above. Example on Debentures Redeemable at Premium, Conversion into Debentures (New) Issued at Discount Premium Energy Ltd. was to redeem 10,000, 8% Debentures of Rs. 50 each at a premium of Rs. 4 per debenture on 1st December, 2016 by converting them into 9% Debentures of Rs. 100 each issued at a discount of Rs. 10 each. Pass journal entry for the above. CA. (Dr.) G.S. Grewal

Date Particulars LF Debit (Rs.) Credit (Rs.) 2016 Dec 1 8% Debentures A/c Dr. Premium on Redemtion Of Debentures A/c Dr. Discount on Issue of Debentures A/c Dr. To 9% Debentures A/c (Being the 8% Debentures redeemed at premium of Rs. 4, by issuing 10,000, 9% Debentures of Rs. 100 each at a discount of Rs. 10 per Debenture) 5,00,000 40,000 60,000 6,00,000 CA. (Dr.) G.S. Grewal

Pass journal entry for the above. Example on Debentures Redeemable at Premium, Conversion into Debentures (New) Issued at Premium Quality Products Ltd. was to redeem 5,000, 9% Debentures of Rs. 100 each at a premium of Rs. 10 per debenture on 1st December, 2016 by converting them into 10% Debentures of Rs. 50 each issued at a premium of Rs. 5 each. Pass journal entry for the above. CA. (Dr.) G.S. Grewal

Date Particulars LF Debit (Rs.) Credit (Rs.) 9% Debentures A/c Dr. 2016 Dec 1 9% Debentures A/c Dr. Premium on Redemption of Debentures A/c Dr. To 10% Debentures A/c To Securities Premium Reserve A/c (Being the 5,000, 9% Debentures of Rs. 100 each redeemable at premium of Rs. 10 redeemed by converting into 10,000, 10% Debentures of Rs. 50 each at a premium of Rs. 5) 5,00,000 50,000 CA. (Dr.) G.S. Grewal

Journal Entries for Redemption By Purchase from Open Market for Immediate cancellation On Purchase …% Own Debentures A/c …Dr. To Bank A/c (Being the …number … own debentures purchased for immediate cancellation) CA. (Dr.) G.S. Grewal

On Cancellation of Own Debentures Redeemable at Par …% Debentures A/c …Dr. Loss on cancellation of Own Debentures A/c …Dr. [Amount of Loss] To Own Debentures A/c [Amt. of purchase] To Gain (Profit) on Cancellation of Own Debentures A/c [Diff. Between Nominal (Face) Value and Purchase Cost] (Being the Own Debentures purchased now cancelled resulting in loss / gain) CA. (Dr.) G.S. Grewal

On Cancellation of Own Debentures Redeemable at Premium …% Debentures A/c …Dr. Premium on Redemption of Debentures A/c …Dr. Loss on Cancellation of Own Debentures A/c …Dr. [Amt. of Loss] To Own Debentures A/c [Amt. of purchase] To Gain (Profit) on Cancellation of Own Debentures A/c (Being the Own Debentures purchased now cancelled, gain (profit) of Rs. …. recorded) CA. (Dr.) G.S. Grewal

Journal Entries for Redemption Transfer of Gain (Profit) Gain (Profit) on Cancellation of Own Debentures A/c …Dr. To Capital Reserve A/c (Being the gain (profit) on cancellation transferred to Capital Reserve) CA. (Dr.) G.S. Grewal

Journal Entries for Redemption Transfer of Loss Statement of Profit and Loss A/c …Dr. To Loss on Cancellation of Own Debentures A/c (Being the gain (profit) on cancellation transferred to Capital Reserve) CA. (Dr.) G.S. Grewal

Pass the journal entries for the above. Example on Cancellation of Own Debentures which were Redeemable at Premium Good Systems Ltd. purchased 1,000, Own 8% Debentures of Rs. 50 each at Rs. 52 per debenture for immediate cancellation. The debentures were redeemable at a premium of Rs. 5 per debenture on 1st December, 2016. Pass the journal entries for the above. CA. (Dr.) G.S. Grewal

Solution: JOURNAL ENTRIES Date Particulars LF Debit (Rs.) Credit (Rs.) 2016 Dec 1 Own Debentures A/c Dr. To Bank A/c (Being own 1,000, 8% Debentures purchased for immediate cancellation from open market @ Rs. 52 per debenture) 52,000 CA. (Dr.) G.S. Grewal

(Being the Own 1,000, 8% Debentures cancelled) 50,000 5,000 52,000 Date Particulars LF Debit (Rs.) Credit (Rs.) 2016 Dec 1 8% Debentures A/c Dr. Premium on Redemption Of Debentures A/c Dr. To Own Debentures A/c To Gain (Profit) on Cancellation of Own Debentures A/c (Being the Own 1,000, 8% Debentures cancelled) 50,000 5,000 52,000 3,000 CA. (Dr.) G.S. Grewal

Date Particulars LF Debit (Rs.) Credit (Rs.) 2016 Dec 1 Gain (Profit) on Cancellation of Own Debentures A/c Dr. To Capital Reserve A/c (Being the gain on cancellation of 1,000, 8% Own Debentures transferred to Capital Reserve) 3,000 CA. (Dr.) G.S. Grewal

Pass the journal entries for the above. Example on Cancellation of Own Debentures which were Redeemable at Premium Woodworth Ltd. purchased 1,000, Own 9% Debentures of Rs. 50 each at Rs. 57 per debenture for immediate cancellation. The debentures were redeemable at a premium of Rs. 5 per debenture on 1st December, 2016. Pass the journal entries for the above. CA. (Dr.) G.S. Grewal

Solution: JOURNAL ENTRIES Date Particulars LF Debit (Rs.) Credit (Rs.) 2016 Dec 1 Own Debentures A/c Dr. To Bank A/c (Being own 1,000, 9% Debentures purchased for immediate cancellation from open market @ Rs. 57 per debenture) 57,000 CA. (Dr.) G.S. Grewal

of Own Debentures A/c Dr. To Own Debentures A/c Date Particulars LF Debit (Rs.) Credit (Rs.) 2016 Dec 1 8% Debentures A/c Dr. Premium on Rdemption Of Debentures A/c Dr. Loss on Cancellation of Own Debentures A/c Dr. To Own Debentures A/c (Being the Own 1,000, 8% Debentures cancelled at a loss of Rs. 2,000) 50,000 5,000 2,000 57,000 CA. (Dr.) G.S. Grewal

To Loss on Cancellation of Own Debentures A/c Date Particulars LF Debit (Rs.) Credit (Rs.) 2016 Dec 1 Statement of Profit and Loss Dr. To Loss on Cancellation of Own Debentures A/c (Being the loss on cancellation of 1,000, 9% Own Debentures transferred) 3,000 CA. (Dr.) G.S. Grewal

Employees Stock Option Plan (ESOP) CA. (Dr.) G.S. Grewal

Employees Stock Option Plan (ESOP) What is Employees Stock Option Plan (ESOP)? Employees Stock Option Plan is a plan drawn to issue securities (Shares etc.) to employees (including whole time directors) at a discount i.e., at a price which is lower than its market value. The Companies Act, 2013 (Section 53) prohibits issue of shares at a discount. But, through Section 54, it permits issue of ESOPs at a discount. CA. (Dr.) G.S. Grewal

Important Terms in ESOP Meaning Grant Date Date on which agreement is entered into between the Enterprise and Employees for grant of ESOPs. Vesting Period Period between the Grant Date and the date on which all the specified conditions of Employees Stock Option Plan (ESOP) should be satisfied. Vesting Date Date on which conditions of granting ESOPs are met. Exercise It means exercising the right to subscribe the options granted to him / her. Exercise Period Period after vesting date given to an employee to exercise the options given under the Plan. Exercise Price Price payable by the employee for exercising the right for option granted. CA. (Dr.) G.S. Grewal

Accounting in the Books of Account The difference between Market Value and Issue Price is cost to the company. It is an expense for the company. The entry passed is: Employees Compensation Expense A/c Dr. To Shares Options Outstanding A/c Employees Compensation Expense A/c is shown under ‘Employees Benefit Expenses’ in the Statement of Profit and Loss. Shares Options Outstanding Account is shown as Reserves and Surplus under Shareholders’ Funds. CA. (Dr.) G.S. Grewal

When the Vesting Period has Elapsed When all Options are Exercised by the Employees Bank A/c Dr. To Share Capital A/c To Securities Premium Reserve A/c (Being the shares allotted against ESOP) (Amount Received) (Nominal Value Per Share X No. of Shares) (Amount of Securities Premium Received) (Difference between Issue Price and Nominal (Face Value) Shares Options Outstanding A/c Dr. (Being the amount of Shares Options Outstanding A/c transferred to Securities Premium Reserve) (Amount credited to Shares Options Outstanding A/c) CA. (Dr.) G.S. Grewal

When the Vesting Period has Elapsed When all Option is Exercised by the Employees Alternate Entries Bank A/c Dr. Shares Options Outstanding A/c Dr. To Share Capital A/c To Securities Premium Reserve A/c (Being the shares allotted against ESOP) (Amount Received) (Amount Credited to Shares Options Outstanding A/c) (Nominal Value Per Share X No. of Shares) (Amount Received in Excess of Nominal Value + Amount Credited to Shares Options Outstanding A/c) CA. (Dr.) G.S. Grewal

When the Vesting Period has Elapsed When All Options are not Exercised Bank A/c Dr. To Share Capital A/c To Securities Premium Reserve A/c (Being the shares allotted against ESOP) (Amount Received) (Nominal Value Per Share X No. of Shares) (Amount of premium Received i.e., difference between Issue Price – Nominal Value of shares) CA. (Dr.) G.S. Grewal

When the Vesting Period has Elapsed When All Options are not Exercised Shares Options Outstanding A/c Dr. To Securities Premium Reserve A/c To General Reserve A/c (Being the amount credited to Shares Options Outstanding Account and relating to Options not exercised transferred to General Reserve) (Amount credited to Shares Options Outstanding Account) (Amount credited to Shares Options Outstanding Account and relating to Options Exercised) (Amount credited to Shares Options Outstanding Account and relating to Options not Exercised) CA. (Dr.) G.S. Grewal

When the Vesting Period has Elapsed When All Options are not Exercised (Alternate Entries) Bank A/c Dr. Shares Options Outstanding A/c Dr. To Share Capital A/c To Securities Premium Reserve A/c To General Reserve A/c (Being the shares allotted against ESOP) (Amount Received) (Amount Credited to Shares Options Outstanding A/c) (Nominal Value Per Share X No. of Shares) (Amount Credited to Shares Options Outstanding A/c relating to Options Exercised + amount received as premium) (Amount Credited to Shares Options Outstanding A/c relating to Options not Exercised) CA. (Dr.) G.S. Grewal

Illustration Keys Hotels Ltd. granted option to subscribe 3 shares of Rs. 10 each at a price of Rs. 60 per share to each of its 100 employees on completion of service for 30 months. Fair (Market) price of each share as on the grant date was Rs. 90. The employees were to exercise the option within three months of the Vesting Date. All the employees exercised the option by the exercise date. Pass the necessary journal entries. CA. (Dr.) G.S. Grewal

Solution Date Particulars Debit (Rs.) Credit (Rs.) Year 1 Employees Compensation Exp. A/c Dr. To Shares Options Outstanding A/c (Being the amount equal to one year expense for the difference between Fair (Market) Value and Issue Price recognised as expense) 3,600 Year 2 Year 3 Employees Compensation Exp. A/c Dr. (Being the remaining amount of difference between Fair (Market) Value and Issue Price recognised as expense) 1,800 CA. (Dr.) G.S. Grewal

Solution Date Particulars Debit (Rs.) Credit (Rs.) Year 4 Bank A/c (3 X 100 X Rs. 60) Dr. Shares Options Outstanding A/c Dr. To Share Capital A/c (3 X 100 x Rs. 10) To Securities Premium Res. A/c 3 x (100 x Rs. 50) + 3 X (100 x Rs. 30) (Being 3 shares each allotted to 100 employees, related amount transferred from Shares Options Outstanding Account to Securities Premium Account . 18,000 9,000 3,000 24,000 CA. (Dr.) G.S. Grewal

Illustration Keys Hotels Ltd. granted option to subscribe 3 shares of Rs. 10 each at a price of Rs. 60 per share to each of its 100 employees on completion of service for 30 months. Fair (Market) price of each share as on the grant date was Rs. 90. The employees were to exercise the option within three months of the Vesting Date. All the employees except 20 employees exercised the option by the exercise date. Pass the necessary journal entries. CA. (Dr.) G.S. Grewal

Solution Date Particulars Debit (Rs.) Credit (Rs.) Year 1 Employees Compensation Exp. A/c Dr. To Shares Options Outstanding A/c (Being the amount equal to one year expense for the difference between Fair (Market) Value and Issue Price recognised as expense) 3,600 Year 2 Year 3 Employees Compensation Exp. A/c Dr. (Being the remaining amount of difference between Fair (Market) Value and Issue Price recognised as expense) 1,800 CA. (Dr.) G.S. Grewal

Solution Date Particulars Debit (Rs.) Credit (Rs.) Year 4 Bank A/c (3 X 80 X Rs. 60) Dr. Shares Options Outstanding A/c Dr. To Share Capital A/c (3 X 80 x Rs. 10) To Securities Premium Res. A/c 3 x (80 x Rs. 50) + 3 X (80 x Rs. 30) To General Reserve A/c (20 x 3 x Rs. 30) (Being 3 shares each allotted to 80 employees exercising options, related amount transferred from Shares Options Outstanding Account to Securities Premium Account . Balance amount i.e., amount relating to 20 employees who did not exercise option transferred to General Reserve) 14,400 9,000 2,400 19,200 1,800 CA. (Dr.) G.S. Grewal

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