## Conversion of Debentures into Equity Shares (AS 13)
### Core Principle
Conversion is not a sale. The equity shares received are recorded at the carrying cost of the debentures surrendered — never at the market value of shares received.
### Why Carrying Cost?
No gain or loss is recognised on conversion because the investor has simply changed the form of the same investment. The economic substance has not yet been realised.
### Journal Entries
Step 1 — Transfer investment:
| Account | Dr. | Cr. |
|---|
| Investment in Equity Shares A/c | Carrying cost of debentures | |
| To Investment in Debentures A/c | | Carrying cost of debentures |
Step 2 — Receive accrued interest in cash:
| Account | Dr. | Cr. |
|---|
| Bank A/c | Interest from last due date → conversion date | |
| To Interest A/c | | |
> Interest on conversion is always received in cash from the issuer, it is NOT added to the cost of the equity shares.
### Computing Carrying Cost of Debentures Converted
```
Carrying cost per debenture = Total cost in ledger ÷ Total debentures held
Cost transferred = Carrying cost per deb × Number of debs converted
```
### Year-End Valuation (AS 13)
| Type | Basis |
|---|
| Current Investment (Debentures / Bonds) | Lower of cost and fair value |
| Long-term Investment | Cost (provision only for non-temporary diminution) |
| Current Investment (Equity Shares) | Lower of cost and fair value |
### Example 1
## Q31 — Conversion of Debentures (Comprehensive)
Background:
- 01/04/23 — Purchased 2,000 convertible debentures, FV ₹100 each, at ₹108 → Cost ₹2,16,000
- 01/07/23 — Purchased 1,000 debentures at ₹110 cum-interest (3 months' interest included)
- Interest portion = 1,00,000 × 8% × 3/12 = ₹2,000
- Ex-interest cost = ₹1,10,000 − ₹2,000 = ₹1,08,000 → ₹108 per deb ✓
- 30/09/23 — Half-yearly interest received: 3,00,000 × 8% × 6/12 = ₹12,000
- 01/10/23 — Sold 800 debentures at ₹105 (ex-interest)
- 01/12/23 — 550 debentures converted into 5,000 equity shares
- 31/12/23 — Year end (remaining: 1,650 debentures)
---
Working Note 1 — Average Cost
All purchases at ₹108 per debenture (both lots).
Working Note 2 — Sale on 01/10/23 (800 debs)
- Sale proceeds = 800 × ₹105 = ₹84,000
- Carrying cost = 800 × ₹108 = ₹86,400? (Ledger shows ₹86,933 → slight variation in actual average)
- Loss on sale ≈ ₹2,933 (per ledger)
Working Note 3 — Conversion on 01/12/23 (550 debs → 5,000 shares)
- Carrying cost = 550 × ₹108.67 ≈ ₹59,767
- Interest for 2 months (01/10 → 01/12): 550 × 100 × 8% × 2/12 = ₹733
Journal Entries on conversion:
```
01/12/23:
Investment in Equity Shares A/c Dr. 59,767
To Investment in Debentures A/c 59,767
(Conversion at carrying cost)
Bank A/c Dr. 733
To Interest A/c 733
(Interest from 01/10 to 01/12 on 550 debs)
```
Investment in 8% Convertible Debentures A/c
| Date | Particulars | NV | Int | Amount | Date | Particulars | NV | Int | Amount |
|---|
| 01/04/23 | To Bank (Purchase) | 2,00,000 | — | 2,16,000 | 30/09/23 | By Bank (Int) | — | 12,000 | — |
| 01/07/23 | To Bank (Purchase) | 1,00,000 | 2,000 | 1,10,000 | 01/10/23 | By Bank (Sale) | 80,000 | — | 84,000 |
| | | | | 01/10/23 | By P&L (Loss) | — | — | 2,933 |
| | | | | 01/12/23 | By Inv. Eq. Shares | 55,000 | — | 59,767 |
| | | | | 01/12/23 | By Bank (Int conv.) | — | 733 | — |
| | | | | 31/12/23 | By Balance c/d | 1,65,000 | 3,300 | 1,79,300 |
Investment in Equity Shares A/c
| Date | Particulars | No. | Amount | Date | Particulars | No. | Amount |
|---|
| 01/12/23 | To Inv. Debentures | 5,000 | 59,767 | 31/12/23 | By Balance c/d | 5,000 | 59,767 |
Year-End Valuation (31/12/23):
| Investment | Cost | Market Value | Carried At |
|---|
| 1,650 Debentures | ₹1,79,300 | 1,650 × ₹110 = ₹1,81,500 | ₹1,79,300 (lower = cost) |
| 5,000 Equity Shares | ₹59,767 | 5,000 × ₹15 = ₹75,000 | ₹59,767 (lower = cost) |