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Q2. On January 1, 2012, X Ltd. issued Rs 10,00,000 debentures. These were set to expire on December 31,...

Q2. On January 1, 2012, X Ltd. issued Rs 10,00,000 debentures. These were set to expire on December 31, 2014. The corporation formed a sinking fund for this reason. The investments were intended to earn interest at a rate of 5% per year. According to the sinking fund table, Rs 0.317208 invested annually at 5% yields Re.1 in three years. Before receiving interest on Sinking Fund Investments, the bank balance on December 31, 2014 was Rs 4,20,000. The investments were sold for Rs 6,60,000 on that date. Calculate the interest to the nearest rupee and make investments to the nearest Rs 100. Make any required journal entries. Display the Debentures Account, Debenture Redemption Fund Account, and Debenture Redemption fund investment account in the company's books.

Answer

Interest Calculation:

Investment required annually = Rs 10,00,000 * 0.317208 = Rs 3,17,208

Total investment over 3 years = Rs 3,17,208 * 3 = Rs 9,51,624

Interest earned = Rs 6,60,000 - Rs 9,51,624 = Rs 2,91,624

Rounded to nearest rupee = Rs 2,91,624

Journal Entries:

  1. When investments are made:
    Debenture Redemption Fund Investment A/c Dr. Rs 3,17,208
    To Bank A/c Rs 3,17,208
  2. When interest is received:
    Bank A/c Dr. Rs 2,91,624
    To Debenture Redemption Fund Investment A/c Rs 2,91,624
  3. When investments are sold:
    Bank A/c Dr. Rs 6,60,000
    To Debenture Redemption Fund Investment A/c Rs 6,60,000
  4. Transfer of balance to Debenture Redemption Fund:
    Debenture Redemption Fund A/c Dr. Rs 9,51,624
    To Debenture Redemption Fund Investment A/c Rs 9,51,624

Accounts Display:

  1. Debentures Account:
    Balance as on January 1, 2012: Rs 10,00,000
  2. Debenture Redemption Fund Account:
    Balance as on December 31, 2014: Rs 9,51,624
  3. Debenture Redemption Fund Investment Account:
    Balance as on December 31, 2014: Rs 6,60,000

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