A limited has agreed to pay purchase price of building ₹ 2,20,000, half the payment was made in cash and remaining half by issue of 9% debentures of ₹ 100 each at a premium of 10%. How much debentures will be issued for paying purchase amount?

Question

Accepted Answer

The correct option is 1:
The problem requires calculating the number of debentures issued for a portion of the building's purchase price. The total purchase consideration for the building is ₹ 2,20,000. Since half the payment was made in cash, the remaining half, ₹ 1,10,000 (₹ 2,20,000 / 2), is the consideration to be paid by issuing debentures. The debentures have a face value of ₹ 100 and are issued at a 10% premium. This means the premium per debenture is ₹ 10 (10% of ₹ 100), which increases the issue price of each debenture to ₹ 110 (₹ 100 + ₹ 10 premium). The number of debentures issued is correctly calculated by dividing the amount payable by the issue price per debenture: ₹ 1,10,000 / ₹ 110. This results in exactly 1,000 debentures. This calculation is a standard requirement for accounting students to record the issue of securities for consideration other than cash.

The incorrect option is 2:
The incorrect option is 1100. This figure incorrectly equates the number of debentures to the amount of the non-cash consideration divided by the face value (₹ 1,10,000 / ₹ 100). This mistake fails to correctly incorporate the premium on issue. The issue of debentures at a premium means the effective price received by the company for each debenture is greater than its face value. Since the company receives ₹ 110 for each debenture, fewer debentures are needed to discharge the liability of ₹ 1,10,000 than if they were issued at par. Accounting principles strictly require that the number of securities issued must be calculated using the issue price, not just the face value, to accurately reflect the consideration received.

The incorrect option is 3:
The incorrect option is 2000. This result is typically derived by assuming the entire purchase price of ₹ 2,20,000 was paid through debentures issued at the calculated issue price of ₹ 110 (₹ 2,20,000 / ₹ 110). However, the question clearly specifies that half the amount, ₹ 1,10,000, was paid in cash, which is a critical piece of information that reduces the total liability discharged by debentures to the remaining ₹ 1,10,000. A careful analysis of the transaction terms is necessary to isolate the non-cash consideration before any calculation is performed. Ignoring the cash payment portion leads to a gross overestimation of the required number of debentures.

The incorrect option is 4:
The incorrect option is 2200. This figure is arrived at by performing two significant errors: dividing the *full* purchase price (₹ 2,20,000) by the debenture *face value* (₹ 100). The first error is ignoring the cash payment, and the second is ignoring the 10% premium, which should increase the price per debenture to ₹ 110. Both of these mistakes compound to give an inflated and inaccurate result. For correct accounting treatment, the calculation must be based on the *actual amount* payable in securities (₹ 1,10,000) and the *issue price* of the security (₹ 110).