Debentures
- A long term loan to a company that carries a fixed rate of
interest payable even if the firm did not make a profit
- Interest on debenture is an expense in the profit or loss account
Example 1
The share capital of Willovale ltd on 31 Dec 2004 was as follows
Authorised capital
2 000 000 $1 ordinary shares
1 500 000 9% $1 preference shares
Issued capital
1 500 000 $1 ordinary shares
1 000 000 9% $1 preference shares
The following information is also available for the year ended 31
Dec 2004
Profit or Loss 31 Dec 2003
550 000
Net profit for the year
750 000
General reserves
200 000
10% Debentures
500 000
Interim ordinary dividend
100 000
Interim preference dividend
45 000
The company directors are recommended that:
i.
ii.
iii.
$110 000 be transferred to general reserve
A final dividend of $0.10 in the dollar be paid to ordinary
shareholders
The final preference dividend be paid
Required:
a) Profit or Loss appropriation account
b) Balance sheet extract at 31 Dec 2004 showing the details of
shareholder’s funds
- Authorised capital is the maximum amount of capital a
company can raise as stated in the memorandum of
association.
- It can also be called registered capital
Willovale LTD
The profit or loss appropriation account for the year to 31 Dec
$
Net profit for the year
Less: Transfer to general reserve
Dividends – Preference- Interim
Final
Ordinary – Interim
Proposal
Retained profit for the year
Retained profit for the previous year
c) Extract of the balance sheet
Financed By
Capital
Authorised Capital
$
750 000
110 000
45 000
45 000
100 000
150 000
450 000
300 000
550 000
850 000
2 000 000 $1 Ordinary Shares
1 500 000 9% $1 Preference shares
2 000 000
1 500 000
3 500 000
Issued Capital
1 500 000 $1 Ordinary Shares
1 000 000 9% $1 Preference shares
Reserves
General Reserves (200 000 + 110 000)
Retained profit
1 500 000
1 000 000
2 500 000
310 000
850 000
Add 10 % debentures
1 160 000
3 660 000
500 000
4 160 000
Example 2
Mabhebhi Ltd had the following details from its books for the year
ended 31 Dec 2010
Authorised capital
1 600 000 ordinary shares of $0.50 each
300 000 8% preference shares of $1 each
Issued capital
1 200 000 ordinary shares of $0.50 each fully paid
200 000 8% preference shares of $1 each fully paid
10% Debentures
200 000
Reserves on 1 Jan 2010
General Reserves
40 000
Profit or Loss account
14 000
Net profit for the year was $170 000 before interest
An interim dividend of $0.02 was paid to ordinary shareholders and a
half of preference share dividend has also been paid
The directors recommended that:
1. $25 000 to be transferred to general reserves
2. The final preference dividend be paid
3. A final dividend of 5% be paid on ordinary shares
Prepare
a) Profit or Loss appropriation account
b) Balance sheet extract at 31 Dec 2010 showing the details of
shareholder’s funds
Solutions
Mabhebhi Ltd
The profit or loss appropriation for the year ended 31 Dec 2010
Net profit before interest
Less interest (200 000 x 10%)
Net profit on other interest
Less Transaction to general revenue
Dividends: Interim
Final
Ordinary: Interim
Proposed
Returned profit for the year
Retained profit for last year
Retained profit
170 000
(20 000)
150 000
25 000
8 000
8 000
24 000
30 000
(95 000)
55 000
15 000
70 000