(a) Raunak Cotton Ltd. purchased machinery of Rs. 6,80,000 from Heavy Machines Ltd. The Payment to Heavy Machines Ltd. was made by issuing 10,500 equity shares of Rs. 50 each at a premium of 20% and the balance through a cheque.
Pass necessary journal entries for the above transactions in the books of Raunak Cotton Ltd.
OR
(b) Neo Ltd. took over assets of Rs. 25,00,000 and liabilities of Rs. 12,00,000 of Madura Ltd. for a purchase consideration of Rs. 18,00,000. Neo Ltd. issued 11% debentures of Rs. 100 each at a discount of 10% in full satisfaction of the purchase consideration.
Pass necessary journal entries for the above transactions in the books of Neo Ltd.
(a) Raunak Cotton Ltd. purchased machinery of Rs. 6,80,000 from Heavy Machines Ltd. The Payment to Heavy Machines Ltd. was made by issuing 10,500 equity shares of Rs. 50 each at a premium of 20% and the balance through a cheque.
Pass necessary journal entries for the above transactions in the books of Raunak Cotton Ltd.
OR
(b) Neo Ltd. took over assets of Rs. 25,00,000 and liabilities of Rs. 12,00,000 of Madura Ltd. for a purchase consideration of Rs. 18,00,000. Neo Ltd. issued 11% debentures of Rs. 100 each at a discount of 10% in full satisfaction of the purchase consideration.
Pass necessary journal entries for the above transactions in the books of Neo Ltd.
Official answer
(a) In the books of Raunak Cotton Ltd.
| Particulars | Dr. (Rs.) | Cr. (Rs.) |
|---|---|---|
| Machinery A/c Dr. | 6,80,000 | |
| To Heavy Machines Ltd. | 6,80,000 | |
| (Being machinery purchased from Heavy Machines Ltd.) | ||
| Heavy Machines Ltd. A/c Dr. | 6,30,000 | |
| To Equity Share Capital A/c (10,500 × Rs. 50) | 5,25,000 | |
| To Securities Premium A/c (10,500 × Rs. 10) | 1,05,000 | |
| (Being 10,500 shares of Rs. 50 each issued at 20% premium in part payment) | ||
| Heavy Machines Ltd. A/c Dr. | 50,000 | |
| To Bank A/c | 50,000 | |
| (Being balance of purchase price paid by cheque) |
Working: Value of shares issued = 10,500 × Rs. 60 (Rs. 50 + 20% premium) = Rs. 6,30,000; Balance paid by cheque = Rs. 6,80,000 − Rs. 6,30,000 = Rs. 50,000.
(b) In the books of Neo Ltd.
| Particulars | Dr. (Rs.) | Cr. (Rs.) |
|---|---|---|
| Sundry Assets A/c Dr. | 25,00,000 | |
| Goodwill A/c Dr. | 5,00,000 | |
| To Sundry Liabilities A/c | 12,00,000 | |
| To Madura Ltd. | 18,00,000 | |
| (Being assets and liabilities of Madura Ltd. taken over; balancing figure debited to Goodwill) | ||
| Madura Ltd. A/c Dr. | 18,00,000 | |
| Discount on Issue of Debentures A/c Dr. | 2,00,000 | |
| To 11% Debentures A/c (20,000 × Rs. 100) | 20,00,000 | |
| (Being 20,000, 11% debentures of Rs. 100 each issued at 10% discount, i.e. Rs. 90 per debenture, in full satisfaction of purchase consideration) |
Working: Net assets taken over = Rs. 25,00,000 − Rs. 12,00,000 = Rs. 13,00,000; Goodwill = Purchase Consideration − Net Assets = Rs. 18,00,000 − Rs. 13,00,000 = Rs. 5,00,000. Number of debentures = Rs. 18,00,000 ÷ Rs. 90 = 20,000; Discount = Rs. 20,00,000 − Rs. 18,00,000 = Rs. 2,00,000.
Marking scheme
- 1.1.5 marks (part a): correct value of shares issued (Rs. 6,30,000), cheque balance (Rs. 50,000) and complete journal entries with narrations.
- 2.1.5 marks (part b): correct computation of goodwill (Rs. 5,00,000), number of debentures (20,000) and discount on issue (Rs. 2,00,000) with complete journal entries.
Hint
Compute the value of shares/debentures issued at their issue price, then find the balance payable in cash; goodwill (or capital reserve) is the difference between purchase consideration and net assets taken over.
Quick oral answer
When assets and liabilities of another business are taken over, the difference between purchase consideration and net assets acquired is recorded as Goodwill or Capital Reserve, and the vendor's account is settled by issuing shares or debentures at their agreed issue price.
Common mistakes
- 1.Recording the machinery purchase and share issue as a single combined entry instead of first crediting the vendor and then separately settling the vendor's account.
- 2.Calculating the number of debentures based on face value (Rs. 100) instead of the actual issue price (Rs. 90 after discount).
- 3.Treating the excess of purchase consideration over net assets as Capital Reserve instead of Goodwill (Capital Reserve arises only when net assets exceed purchase consideration).
Analysis and explanation
This is a classic 'business purchase settled other than in cash' problem, tested in either share or debenture form.
Concept: The vendor's account is first credited with the full amount owed, then settled partly/wholly by issuing securities at their issue price (face value ± premium/discount), with any residual paid in cash.
Key rule: If purchase consideration exceeds net assets taken over, the excess is Goodwill; if net assets exceed consideration, the excess is Capital Reserve — never the other way round.
Exam trap: Students often calculate the number of debentures using face value instead of the actual issue price after discount.
Real-world use: Issuing shares/debentures instead of cash lets an acquiring company preserve liquidity while still completing a business acquisition.
Interesting facts
When purchase consideration exceeds net assets taken over, the difference is recorded as Goodwill; when net assets exceed purchase consideration, the difference is credited to Capital Reserve — a classic business-combination rule tested almost every year.
Debentures can legally be issued at a discount, unlike shares (which cannot be issued at a discount under Section 53 of the Companies Act, 2013), making 'discount on issue of debentures' a feature unique to debt instruments.
Settling a purchase consideration through shares or debentures instead of cash is a common real-world way companies acquire running businesses without straining their cash reserves.
Question details
Q19 of 39 questions
- Board
- CBSE
- Class
- Class 12
- Subject
- Accountancy
- Year
- 2026
- Section
- Section Part A
- Marks
- 3
- Type
- Short Answer
- Chapter
- Accounting for Share Capital / Issue and Redemption of Debentures
- Topic
- Purchase Consideration Settled by Issue of Shares/Debentures
- Bloom's level
- apply
- Syllabus topic
- Unit 2: Accounting for Companies — Issue of Shares/Debentures for Consideration Other than Cash (Purchase of Assets/Business)
- Author
- CBSE
- Reviewed by
- Padhantu Academic Team
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Frequently asked questions
How do you calculate the number of shares or debentures to be issued for a purchase consideration?
Divide the amount to be settled through shares/debentures by the issue price (face value adjusted for premium or discount) — e.g., Rs. 6,30,000 ÷ Rs. 60 = 10,500 shares, or Rs. 18,00,000 ÷ Rs. 90 = 20,000 debentures.
Why is Goodwill debited instead of Capital Reserve in the Neo Ltd. entry?
Because the purchase consideration (Rs. 18,00,000) is more than the net assets taken over (Rs. 13,00,000); Capital Reserve would apply only if net assets exceeded the purchase consideration.
Can debentures be issued at a discount under the Companies Act, 2013?
Yes, unlike equity shares, debentures may be issued at a discount as they do not represent ownership capital; the discount is written off against Securities Premium or the Statement of Profit and Loss.