Issue and Redemption of Debentures

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Do it Yourself – I
1. Amrit Company Limited purchased assets of the value of ₹ 2,20,000 from another company and agreed to make the payment of purchase consideration by issuing 2,000, 10% debentures of ₹ 100 each at a premium of 10%. Record necessary journal entries.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Assets A/c
Dr.
2,20000
To Vendor A/c
2,20,000
(Being assets purchased from the vendor on credit)
Vendor A/c
Dr.
2,20,000
To 10% Debentures A/c
2,00,000
To Securitues Premium Reserve A/c
20,000
(Being 2,000 debentures each of ₹ 100 issued at a premium of 10%)
2. A company purchased assets of the value of ₹ 1,90,000 from another company and agreed to make the payment of purchase consideration by issuing 2,000, 10% debentures of ₹ 100 each at a discount of 5%. Record necessary journal entries.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Assets A/c
Dr.
1,90,000
To Vendor A/c
1,90,000
(Being assets purchased from the vendor on credit)
Vendor A/c
Dr.
1,90,000
Discount on Issue of Debentures A/c
Dr.
10,000
To 10% Debentures A/c
2,00,000
(Being 2,000 debentures each of ₹ 100 issued at a discount of 5%)
3. Rose Bond Limited purchased a business for ₹ 22,00,000. Purchase Price was paid by 6% debentures. Debentures of ₹ 20,00,000 were issued at a premium of 10% for the purpose. Record necessary journal entries.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Sundry Assets A/c
Dr.
22,00,000
To Vendor A/c
22,00,000
(Being assets purchased as part of business purchases)
Vendor A/c
Dr.
22,00,000
To 6% Debentures A/c
20,00,000
To Securities Premium Reserve A/c
2,00,000
(Being 2,000 debentures each of ₹ 100 issued at a premium of 10%)
4. Nikhil and Ashwin Limited bought business of Agarwal Limited consisting sundry assets of ₹ 3,60,000, sundry creditors ₹ 1,00,000 for a consideration of ₹ 3,07,200. It issued 14% debentures of ₹ 100 each fully paid at a discount of 4% in satisfaction of purchase consideration. Record necessary journal entries.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Sundry Assets A/c
Dr.
3,60,000
Goodwill A/c
Dr.
47,200
To Agarwal Ltd A/c
3,07,200
To Sundry Creditors A/c
1,00,000
(Being purchase of the business Agarwal Limited)
Agarwal Limited A/c
Dr.
3,07,200
Discount on Issue of Debentures A/c
Dr.
12,800
To 14% Debentures A/c
3,20,000
(Being 3,200 debentures each of ₹ 100 issued at a discount of 4%)

Do it Yourself – II
1. Raghuveer Limited issued Rs. 10,00,000, 8% debentures as follows to:
₹
1.
Sundry Subscribers for Cash at 90%
5,50,000
2.
Vendor of Machinery for ₹ 2,00,000 in satisfaction of his claim
2,00,000
3.
Bankers as Collateral Security for a bank loan worth ₹ 20,00,000 for which principal security is Business Premises worth ₹ 22,50,000
2,00,000
The issue (1) and (2) are redeemable at the end of 10 years at par. State how the debenture will be dealt with while preparing the balance sheet of a company.
Balance Sheet of Raghuveer Limited
as on ……….
Particulars
Note
No.
Amount
₹
I. Equity and Liabilities
1. Shareholders’ Funds
Reserves and Surplus
1
(50,000)
2. Non-Current Liabilities
Long-term borrowings
2
27,50,000
Total
27,50,000
II. Assets
(2) Non-current Assets
(a) Other Non-current Assets
(3) Current Assets
Cash and cash equivalents (bank)
3
27,50,000
Total
27,50,000
Note to Accounts:
Note
No.
Particulars
Amount
₹
1
Reserves and Surplus
Surplus, i.e., Balance in Statement of Profit and Loss
(50,000)
2
2. Long-term borrowings
6,000, 8% debentures of ₹ 100 each, issued to sundry subscribers at 10% discount
6,00,000
2,000, 8% debentures of ₹ 100 each issued to creditors
2,00,000
Bank Loan
20,00,000
2,000, 8% debentures of ₹ 100 each issued as collateral to bank
2,00,000
Debentures Suspense Account
2,00,000
–
3
3. Cash and Cash Equivalents
Cash at bank
27,50,000
Note:
* Relevant data only.
2. Hassan Limited took a loan of ₹ 30,00,000 from a bank against primary security worth ₹ 40,00,000 and issued 4,000, 6% debentures of ₹ 100 each as a collateral security. The company again after one year took a loan of ₹ 50,00,000 from bank against Plant as primary security and deposited 6,000, 6% debentures of ₹ 100 each as collateral security. Record necessary journal entries and prepare balance sheet of the company.
Jounal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Bank A/c
Dr.
30,00,000
To Bank Loan A/c
30,00,000
(Being loan taken from bank against primary security worth ₹ 40,00,000)
Debenture Suspense A/c
Dr.
4,00,000
To 6% Debentures A/c
4,00,000
(Being 4,000, 6% debentures of ₹ 100 each issued to the bank as a collateral security for the ₹ 30,00,000 loan taken)
Bank A/c
Dr.
50,00,000
To Bank Loan A/c
50,00,000
(Being a second loan taken from the bank against plant as primary security)
Debenture Suspense A/c
Dr.
6,00,000
To 6% Debentures A/c
6,00,000
(Being 6,000, 6% debentures of ₹ 100 each issued to the bank as a collateral security for the ₹ 50,00,000 loan taken)
Balance Sheet of Hassan Limited
as on ……….
Particulars
Note
No.
Amount
₹
I. Equity and Liabilities
Long-term Borrowings
1
80,00,000
Total
80,00,000
II. Assets
1. Non-Current Assets
2. Current Assets
Cash and Cash Equivalents (bank)
80,00,000
Total
80,00,000
Note to Accounts:
Note
No.
Particulars
Amount
₹
1
I. Long-term Borrowings:
Bank Loan I (borrowed against the collateral securities of 4,000, 6% debentures of ₹ 100 each
30,00,000
Bank Loan II (borrowed against the collateral securities of 6,000, 6% debentures of ₹ 100 each
50,00,000
6% Debentures
10,00,000
Debentures Suspense Account
10,00,000
80,00,000
Note:
*Only relevant data
3. Meghnath Limited took a loan of ₹ 1,20,000 from a bank and deposited 1,400, 8% debentures of ₹ 100 each as collateral security along with primary security worth ₹ 2 lakh. Company again took a loan of Rs. 80,000 after two months from a bank and deposited 1,000, 8% debentures of ₹ 100 each as collateral security. Record necessary journal entries and prepare balance sheet of the company.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Bank A/c
Dr.
1,20,000
To Bank Loan A/c
1,20,000
(Being bank loan taken against 1,400, 8% debentures of ₹ 100 each as collateral security along with primary security worth ₹ 2 lakhs)
Debentures Suspense A/c
Dr.
80,000
To Bank Loan A/c
80,000
(Being bank loan taken against 1,000, 8% debentures of ₹ 100 each as collateral security)
Balance Sheet of Meghnath Limited
as on ………..
Particulars
Note
No.
Amount
₹
I. Equity and Liabilities
1. Non-Current Liabilities
a. Long-term borrowings
1
2,00,000
Total
2,00,000
II. Assets
1. Non-Current Assets
2. Current Assets
Cash and Cash Equivalents (bank)
2,00,000
Total
2,00,000
Note to Accounts:
Note
No.
Particulars
Amount
₹
1
Long-term Borrowings:
Bank Loan I (against collateral securities of 1,400, 8% debentures of ₹ 100 each
1,20,000
Bank Loan II (against collateral securities of 1,000, 8% debentures of ₹ 100 each
80,000
8% debentures worth of ₹ 2,40,000
2,40,000
Debenture Suspense Account
(2,40,000)
2,00,000

Do it Yourself – III
1. Nena Limited issued 50,000, 10% debentures of ₹ 100 each on the basis of the following conditions:
a.
Debentures issued at par and redeemable at par.
b.
Debentures issued at discount @ 5% and redeemable at par.
c.
Debentures issued at premium @ 10% and redeemable at par.
d.
Debentures issued at par and redeemable at premium @ 10%.
e.
Debentures issued at discount of 5% and redeemable at a premium of10%.
f.
Debentures issued at premium of 6% and redeemable at a premium of 4%.
Record necessary journal entries in the above mentioned cases at the time of issue and redemption of debentures.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
a.
Bank A/c
Dr.
50,00,000
To 10% Debentures A/c
50,00,000
(Being 50,000 10% debentures each of ₹ 100 issued at par and redeemable at par)
10% Debenture A/c
Dr.
50,00,000
To Bank A/c
50,00,000
(Being 50,000 10% debentures each of ₹ 100 redeemed at par)
b
Bank A/c
Dr.
47,50,000
Discount on Issue of Debentures A/c
Dr.
2,50,000
To 10% Debentures A/c
50,00,000
(Being 50,000 10% debentures each of ₹ 100 issued @ 5% discount and redeemable at par)
10% Debentures A/c
Dr.
50,00,000
To Bank A/c
50,00,000
(Being 50,000 10% debentures each of ₹ 100 redeemed at par)
c
Bank A/c
Dr.
55,00,000
To 10% Debentures A/c
50,00,000
To Securities Premium Reserve A/c
5,00,00
(Being 50,000 10% debentures each of ₹ 100 issued @ 10% premium and redeemable at par)
10% Debentures A/c
Dr.
50,00,000
To Bank A/c
50,00,000
(Being 50,000 10% debentures each of ₹ 100 redeemed at par)
d
Bank A/c
Dr.
50,00,000
Loss on Issue of Debentures A/c
Dr.
5,00,000
To 10% Debentures A/c
50,00,000
To Premium on Redemption of Debentures A/c
5,00,000
(Being 50,000 10% debentures issued at par and redeemable @ 10% premium)
10% Debentures A/c
Dr.
50,00,000
Premium on Redemption of Debentures A/c
Dr.
5,00,000
To Bank A/c
55,00,000
(Being 50,00,000 10% debentures redeemed @ 10% premium)
e
Bank A/c
Dr.
47,50,000
Loss on Issue of Debentures A/c
Dr.
7,50,000
To 10% Debentures A/c
50,00,000
To Premium on Redemption of Debentures A/c
5,00,000
(Being 50,000 10% debentures issued @ 5% discount and redeemable @ 10% premium)
10% Debentures A/c
Dr.
50,00,000
Premium on Redemption of Debentures A/c
Dr.
5,00,000
To Bank A/c
55,00,000
(Being 50,000 10% debentures redeemed @ 10% premium)
f
Bank A/c
Dr.
53,00,000
Loss on Issue of Debentures A/c
Dr.
2,00,000
To 10% Debentures A/c
50,00,000
To Securities Premium Reserve A/c
3,00,000
To Premium on Redemption of Debentures A/c
2,00,000
(Being 50,000 10% debentures each of ₹ 100 issued @ 6% premium and redeemable @ 4% premium)
10% Debentures A/c
Dr.
50,00,000
Premium on Redemption of Debentures A/c
Dr.
2,00,000
To Bank A/c
52,00,000
(Being 50,000 10% debentures redeemed @ 4% premium)
2. Record necessary journal entries in each of the following cases:
a.
27,000, 7% debentures of ₹ 100 each issued at par, redeemable at par.
b.
25,000, 7% debentures of ₹ 100 each issued at par redeemable at 4% premium.
c.
20,000, 7% debentures of ₹ 100 each issued at 5% discount and redeemable at par.
d.
30,000, 7% debentures of ₹ 100 each issued at 5% discount and redeemable at 2½ % premium.
e.
35,000, 7% debentures of ₹ 100 each issued at 4% premium and redeemable at premium of 5%.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
a
Bank A/c
Dr.
27,00,000
To 7% Debentures A/c
27,00,000
(Being 27,000, 7% debentures of ₹ 100 each issued at par and redeemable at par)
7% Debentures A/c
Dr.
27,00,000
To Bank A/c
27,00,000
(Being 27,000, 7% debentures of ₹ 100 redeemed at par)
b
Bank A/c
Dr.
25,00,000
Loss on Issue of Debentures A/c
Dr.
1,00,000
To 7% Debentures A/c
25,00,000
To Premium on Redemption of Debentures A/c
1,00,000
(Being 25,000, 7% debentures of ₹ 100 issued at par and redeemable @ 4% premium)
7% Debentures A/c
Dr.
25,00,000
Premium on Redemption of Debentures A/c
Dr.
1,00,000
To Bank A/c
26,00,000
(Being 25,000, 7% debentures of ₹ 100 each redeemed @ 4% premium)
c
Bank A/c
Dr.
19,00,000
Discount on Issue of Debentures A/c
Dr.
1,00,000
To 7% Debentures A/c
20,00,000
(Being 20,000, 7% debentures of ₹ 100 each issued @ 5% discound and redeemable at par)
7% Debentures A/c
Dr.
20,00,000
To Bank A/c
20,00,000
(Being 20,000, 7% debentures of ₹ 100 each redeemed at par)
d
Bank A/c
Dr.
28,50,000
Loss on Issue of Debentures A/c
Dr.
2,25,000
To 7% Debentures A/c
30,00,000
To Premium on Redemption of Debentures A/c
75,000
(Being Being 30,000, 7% debentures of ₹ 100 each issued @ 5% discount and redeemable at 2½% premium))
7% Debentures A/c
Dr.
30,00,000
To Premium on Redemption of Debentures A/c
75,000
To Bank A/c
30,75,000
(Being 30,000, 7% debentures of ₹ 100 each redeemed @ 2½% premium)
e
Bank A/c
Dr.
36,40,000
Loss on Issue of Debentures A/c
Dr.
1,75,000
To 7% Debentures A/c
35,00,000
To Securities Premium Reserve A/c
1,40,000
To Premium on Redemption of Debentures A/c
1,75,000
(Being 35,000, 7% debentures of ₹ 100 each issued @ 4% premium and redeemable @ 5% premium)
7% Debentures A/c
Dr.
36,75,000
To Bank A/c
36,75,000
(Being 35,000, 7% debentures of ₹ 100 redeemed @ 5% premium)

Do it Yourself – IV
1. Diwakar enterprises Ltd. Issued 10,00,000, 6% debentures on April 1, 2016. Interest is paid on September 30, 2016 and March 31, 2017.
Record necessary journal entries assuming that income tax is deducted @10% of the amount of interest.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
2016
Apr 01
Bank A/c
Dr.
10,00,000
To 6% Debentures Application and Allotment A/c
10,00,000
(Being application money received on issue of 6% debentures)
Apr 01
6% Debentures Application and Allotment A/c
Dr.
10,00,000
To 6% Debentures A/c
10,00,000
(Being allotment of debentures)
Sep 30
Debenture Interest A/c
Dr.
30,000
To Debenture Holders A/c
27,000
To Income Tax Payable A/c
3,000
(Being interest due for 6 months and tax deducted at source)
Sep 30
Income Tax Payable A/c
Dr.
3,000
To Bank A/c
3,000
(Being tax deducted at source paid to the government)
Sep 30
Debenture Holders A/c
Dr.
27,000
To Bank A/c
27,000
(Being interest paid to the debenture holders)
2017
Mar 31
Debenture Interest A/c
Dr.
30,000
To Debenture Holders A/c
27,000
To Income Tax Payable A/c
3,000
(Being interest due for 6 months and tax deducted at source)
Mar 31
Income Tax Payable A/c
Dr.
3,000
To Bank A/c
3,000
(Being tax deducted at source paid to the government)
Mar 31
Debenture Holders A/c
Dr.
27,000
To Bank A/c
27,000
(Being interest paid to the debenture holders)
Mar 31
Statement of Profit and Loss A/c
Dr.
60,000
To Debentures Interest A/c
60,000
(Being debentures interest transferred to profit and loss account)
Note: As the debenture issue price for each debenture is not provided, it is assumed that ₹ 10,00,000 is the worth of the total debentures issued.
Working Notes:
Worth of debentures
= ₹ 10,00,000
Interest Rate
= 6%
Yearly interest
{= ₹~10,00,000 × \dfrac{6}{100}}
= ₹ 60,000
Interest for 6 months
{= ₹~60,000 × \dfrac{6}{12}}
= ₹ 30,000
Yearly tax
= 10% of ₹ 60,000
{= ₹~60,000 × \dfrac{10}{100}}
= ₹ 6,000
Tax for 6 months
{= ₹~6,000 × \dfrac{6}{12}}
= ₹ 3,000
2. Laser India Ltd. Issued 7,00,000, 8% debentures of ₹ 100 each at par. Interest is to be paid on these debentures half-yearly on September 30 and March 31, every year. Record necessary journal entries asuming that income tax is deducted @ 10% of the amount of interest.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Apr 01
Bank A/c
Dr.
7,00,00,000
To 8% Debentures Application and Allotment A/c
7,00,00,000
(Being application money received on issue of 8% debentures)
Apr 01
8% Debentures Application and Allotment A/c
Dr.
7,00,00,000
To 8% Debentures A/c
7,00,00,000
(Being allotment of debentures)
Sep 30
Debenture Interest A/c
Dr.
28,00,000
To Debenture Holders A/c
25,20,000
To Income Tax Payable A/c
2,80,000
(Being interest due for 6 months and tax deducted at source)
Sep 30
Income Tax Payable A/c
Dr.
2,80,000
To Bank A/c
2,80,000
(Being tax deducted at source paid to the government)
Sep 30
Debenture Holders A/c
Dr.
25,20,000
To Bank A/c
25,20,000
(Being interest paid to the debenture holders)
Mar 31
Debenture Interest A/c
Dr.
28,00,000
To Debenture Holders A/c
25,20,000
To Income Tax Payable A/c
2,80,000
(Being interest due for 6 months and tax deducted at source)
Mar 31
Income Tax Payable A/c
Dr.
2,80,000
To Bank A/c
2,80,000
(Being tax deducted at source paid to the government)
Mar 31
Debenture Holders A/c
Dr.
25,20,000
To Bank A/c
25,20,000
(Being interest paid to the debenture holders)
Mar 31
Statement of Profit and Loss A/c
Dr.
56,00,000
To Debentures Interest A/c
56,00,000
(Being debentures interest transferred to profit and loss account)
Working Notes:
Worth of debentures
= ₹ 7,00,000 × 100
= ₹ 7,00,00,000
Interest Rate
= 8%
Yearly interest
{= ₹~7,00,00,000 × \dfrac{8}{100}}
= ₹ 56,00,000
Interest for 6 months
{= ₹~56,00,000 × \dfrac{6}{12}}
= ₹ 28,00,000
Yearly tax
{= ₹~56,00,000 × \dfrac{10}{100}}
= ₹ 5,60,000
Tax for 6 months
{= ₹~5,60,000 × \dfrac{6}{12}}
= ₹ 2,80,000

Do it Yourself – V
1. X Ltd. issued 2,000, 10% debentures of ₹ 100 each at a discount of 8% on April 01, 2019 which are redeemable. It has balance in Securities Premium Reserve of ₹ 30,000. Calculate the amount to be written-off from securities Premium Reserve.
Discount on issue of debentures
{= 2,000 × ₹~100 × \dfrac{8}{100}}
= ₹ 16,000
∴ Discount to be written-off
= ₹ 16,000
As the amount available in the securities premium reserve is ₹ 30,000 which is more than the discount to be written-off i.e., ₹ 16,000, all the ₹ 16,000 will be written-off from the securities premium reserve.
2. Z Ltd. issued 15,00,000, 10% debentures of ₹ 50 each at premium of 10% payable as ₹ 20 on application and balance on allotment. Debentures are redeemable at par after 6 years All the amount due on allotment was called and duly received. Record necessary entries when premium money is included:
(i)
in application money
(ii)
in allotment money
(i) When premium money is included in application money
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Bank A/c
Dr.
3,00,00,000
To 10% Debentures Application A/c
3,00,00,000
(Being 15,00,000, 10% debentures issued at an application money of ₹ 20 each including ₹ 5 premium)
10% Debenture Application A/c
Dr.
3,00,00,000
To 10% Debentures A/c
2,25,00,000
To Securities Premium Reserve A/c
75,00,000
(Being application money transferred to 10% debentures account and securities premium reserve account)
10% Debenture Allotment A/c
Dr.
5,25,00,000
To 10% Debentures A/c
5,25,00,000
(Being money due on allotment)
Bank A/c
Dr.
5,25,00,000
To 10% Debenture Allotment A/c
5,25,00,000
(Being allotment money duly received)
(ii) When premium is included in allotment money
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Bank A/c
Dr.
3,00,00,000
To 10% Debenture Application A/c
3,00,00,000
(Being application money received for 15,00,000 10% debentures issued each at ₹ 100)
10% Debenture Application A/c
Dr.
3,00,00,000
To 10% Debentures A/c
3,00,00,000
(Being application money transferred to 10% debentures account)
10% Debenture Allotment A/c
Dr.
5,25,00,000
To 10% Debentures A/c
4,50,00,000
To Securities Premium Reserve A/c
75,00,000
(Being allotment money due including premium)
Bank A/c
Dr.
5,25,00,000
To 10% Debenture Allotment A/c
5,25,00,000
(Being allotment money duly received)
3. Z Ltd. issued 5,000, 10% debentures of ₹ 100 each at a discount of 10% on 1.4.2019. The debentures are to be redeemed every year by draw of lots – 1,000 debentures to be redeemed every year starting on 31.03.2021 31.03.2020. Record the necessary journal entries including the payment of interest and writing off the discount on issue of debentures. The interest is payable on September 30 and March 31. Z Ltd. closes its books of accounts on March 31 every year.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
2019
Apr 1
Bank A/c
Dr.
4,50,000
To Debentures Application and Allotment A/c
4,50,000
(Being 5,000 10% debentures each of ₹ 100 issued at a discount of 10%)
Debentures Application and Allotment A/c
Dr.
4,50,000
Discount on Issue of Debentures A/c
Dr.
50,000
To 10% Debentures A/c
5,00,000
(Being application and allotment money transferred to debentures account and discount adjusted)
Sep 30
Debentures Interest A/c
Dr.
25,000
To Debenture Holders A/c
25,000
(Being interest on debentures due for 6 months)
Debenture Holders A/c
Dr.
25,000
To Bank A/c
25,000
(Being interest on debentures paid out to the debenture holders)
2020
Mar 31
Debentures Interest A/c
Dr.
25,000
To Debenture Holders A/c
25,000
(Being interest on debentures due for 6 months)
Debenture Holders A/c
Dr.
25,000
To Bank A/c
25,000
(Being interest on debentures paid out to the debenture holders)
Profit and Loss A/c
Dr.
66,667
To Debenture Interest A/c
50,000
To Discount on Issue of Debentures A/c
16,667
(Being interest on debentures and discount on issue of debentures writen-off transferred to profit and loss account)
Sep 30
Debentures Interest A/c
Dr.
20,000
To Debenture Holders A/c
20,000
(Being interest on debentures due for 6 months)
Debenture Holders A/c
Dr.
20,000
To Bank A/c
20,000
(Being interest on debentures paid out to the debenture holders)
2021
Mar 31
Debentures Interest A/c
Dr.
20,000
To Debenture Holders A/c
20,000
(Being interest on debentures due for 6 months)
Debenture Holders A/c
Dr.
20,000
To Bank A/c
20,000
(Being interest on debentures paid out to the debenture holders)
Profit and Loss A/c
Dr.
53,333
To Debenture Interest A/c
40,000
To Discount on Issue of Debentures A/c
13,333
(Being interest on debentures and discount on issue of debentures writen-off transferred to profit and loss account)
Sep 30
Debentures Interest A/c
Dr.
15,000
To Debenture Holders A/c
15,000
(Being interest on debentures due for 6 months)
Debenture Holders A/c
Dr.
15,000
To Bank A/c
15,000
(Being interest on debentures paid out to the debenture holders)
2022
Mar 31
Debentures Interest A/c
Dr.
15,000
To Debenture Holders A/c
15,000
(Being interest on debentures due for 6 months)
Debenture Holders A/c
Dr.
15,000
To Bank A/c
15,000
(Being interest on debentures paid out to the debenture holders)
Profit and Loss A/c
Dr.
40,000
To Debenture Interest A/c
30,000
To Discount on Issue of Debentures A/c
10,000
(Being interest on debentures and discount on issue of debentures writen-off transferred to profit and loss account)
Sep 30
Debentures Interest A/c
Dr.
10,000
To Debenture Holders A/c
10,000
(Being interest on debentures due for 6 months)
Debenture Holders A/c
Dr.
10,000
To Bank A/c
10,000
(Being interest on debentures paid out to the debenture holders)
2023
Mar 31
Debentures Interest A/c
Dr.
10,000
To Debenture Holders A/c
10,000
(Being interest on debentures due for 6 months)
Debenture Holders A/c
Dr.
10,000
To Bank A/c
10,000
(Being interest on debentures paid out to the debenture holders)
Profit and Loss A/c
Dr.
26,667
To Debenture Interest A/c
20,000
To Discount on Issue of Debentures A/c
6,667
(Being interest on debentures and discount on issue of debentures writen-off transferred to profit and loss account)
Sep 30
Debentures Interest A/c
Dr.
5,000
To Debenture Holders A/c
5,000
(Being interest on debentures due for 6 months)
Debenture Holders A/c
Dr.
5,000
To Bank A/c
5,000
(Being interest on debentures paid out to the debenture holders)
2024
Mar 31
Debentures Interest A/c
Dr.
5,000
To Debenture Holders A/c
5,000
(Being interest on debentures due for 6 months)
Debenture Holders A/c
Dr.
5,000
To Bank A/c
5,000
(Being interest on debentures paid out to the debenture holders)
Profit and Loss A/c
Dr.
13,333
To Debenture Interest A/c
10,000
To Discount on Issue of Debentures A/c
3,333
(Being interest on debentures and discount on issue of debentures writen-off transferred to profit and loss account)
Note: Interest should be calculated only on the outstanding debentures each year. Note that as 1,000 debentures are redeemed each year, the outstanding debentures changes every year.
Working Notes
At par value of debentures
{= 5,000 × ₹~100}
= ₹ 5,00,000
Discount
{= ₹~5,00,000 × \dfrac{10}{100}}
= ₹ 50,000
Discount write-off each year
Year
Outstanding
Debentures
Ratio
Amount
to be
written-off
₹
Mar 31, 2020
5,00,000
5
{50,000 × \dfrac{5}{15}}
= 16,667
Mar 31, 2021
4,00,000
4
{50,000 × \dfrac{4}{15}}
= 13,333
Mar 31, 2022
3,00,000
3
{50,000 × \dfrac{3}{15}}
= 10,000
Mar 31, 2023
2,00,000
2
{50,000 × \dfrac{2}{15}}
= 6,667
Mar 31, 2024
1,00,000
1
{50,000 × \dfrac{1}{15}}
= 3,333
15
4. M Ltd. issued 10,000, 8% debentures of ₹ 100 each at a premium of 10% on 1.1.2019. It purchased sundry assets of the value of ₹ 2,50,000 and took over the liabilities of ₹ 60,000 and issued 8% debentures at a discount of 5% to the vendor. On the same date, it took loan from the Bank for ₹ 1,00,000 and issued 8% debentures as Collateral Security. Record the necessary journal entries in the books of M Ltd. and prepare the extract of balance sheet on 31.03.2020. Ignore interest.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
2019
Jan 1
Bank A/c
Dr.
11,00,000
To 8% Debenture Application and Allotment A/c
11,00,000
(Being 10,000 8% debentures each of ₹ 100 issued @ 10% premium)
8% Debenture Application and Allotment A/c
Dr.
11,00,000
To 8% Debentures A/c
10,00,000
To Securities Premium Reserve A/c
1,00,000
(Being application money transferred to debenture and securities premium reserve accounts)
Sundry Assets A/c
Dr.
2,50,000
To Sundry Liabilities A/c
60,000
To Vendors A/c
1,90,000
(Being vendor business purchased by purchasing assets and taking over liabilities and the amount due to the vendor)
Vendor A/c
Dr.
1,90,000
Discount on issue of Debentures A/c
Dr.
10,000
To 8% Debentures A/c
2,00,000
(Being 2,000 10% debentures issued @ 5% discount for full settlement of ₹ 1,90,000 due to the vendor)
Debentures Suspense A/c
Dr.
1,00,000
To 8% Debentures A/c
1,00,000
(Being debentures issued as a collateral security against the bank loan)
Securities Premium Reserve A/c
Dr.
10,000
To Discount on Issue of Debentures A/c
10,000
(Being discount on issue of debentures written-off)
Balance Sheet of M Ltd. as on ……..
Particulars
Note
No.
Amount
₹
I. Equity and Liabilities
1. Share Holders’ Funds Liabilities
a. Reserves and Surplus
1
90,000
2. Non-current Liabilities
b. Long-term Borrowings
2
13,60,000
Total
14,50,000
II. Cash and Cash Equivalents
Cash at Bank
3
14,50,000
Note to Accounts:
Note
No
Particulars
Amount
₹
1
Reserves and Surplus
Surplus i.e., Balance in Statement of Profit and Loss
90,000
2
Long-term Borrowings
10,000, 8% debentures of ₹ 100 each, issued to sundry subscribers @ 10% premium
10,00,000
2,000, 8% debentures of ₹ 100 each issued to creditors
2,00,000
Sundry Liabilities
60,000
Bank Loan
1,00,000
1,000 8% debentures of ₹ 100 each issued to bank as collateral
1,00,000
Debentures Suspense Account
1,00,000
13,60,000
3
Cash and Cash Equivalents
Cash at Bank
14,50,000
Working Notes:
Debentures issued to vendor
{= \dfrac{\text{Amount Due to Vendor}}{\text{Discount Price of each Debenture}}}
{= \dfrac{₹~1,90,000}{₹~95}}
= 2,000
5. On 1.4.2019, Fast Computers Ltd. issued 20,00,000, 6% debentures of ₹ 100 each at a discount of 4%, redeemable at a premium of 5% after three years. The amount was payable as follows:
On application ₹ 50 per debenture, Balance on allotment,
Record the necessary journal entries for issue of debentures.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
2019
Apr 1
Bank A/c
Dr.
10,00,00,000
To Debenture Application A/c
10,00,00,000
(Being application money @ ₹ 50 per share received for 20,00,000 shares)
Debenture Application A/c
Dr.
10,00,00,000
To 6% Debentures A/c
10,00,00,000
(Being application money transferred to 6% debentures account)
Debenture Allotment A/c
Dr.
9,20,00,000
Loss on issue of Debentures A/c
Dr.
1,80,00,000
To 6% Debentures A/c
10,00,00,000
To Premium on Redemption of Debentures A/c
1,00,00,000
(Being allotment money of ₹ 46 per debenture due on 20,00,000 debentures issued after 4% discount on issue and 5% premium on redemption)
Bank A/c
Dr.
9,20,00,000
To Debentures Allotment A/c
9,20,00,000
(Being allotment money received from debenture holders)
Working Notes:
Loss on issue of debentures
= 4% Discount on Issue
+ 5% Premium on Redemption
= 9% of ₹ 20,00,00,000
{= \dfrac{9}{100} × ₹~20,00,00,000}
= ₹ 1,80,00,000
6. D Ltd. purchased machinery worth ₹ 2,00,000 from E Ltd. on 1.4.2016. ₹ 50,000 were paid immediately and the balance was paid by issue of ₹ 1,60,000, 12% Debentures in D Ltd. Record the necessary journal entries for recording the transactions in the books of D Ltd.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
2016
Jan 1
Machinery A/c
Dr.
2,00,000
To Cash A/c
50,000
To E Ltd A/c
1,50,000
(Being machinery purchased from the vendor E Ltd.)
E Ltd A/c
Dr.
1,50,000
Discount on Issue of Debentures A/c
Dr.
10,000
To 12% Debentures A/c
1,60,000
(Being debentures issued to the vendor E Ltd. in settlement of account)
Working Notes:
Amount due to vendor
= ₹ 1,50,000
Worth of Debentures issued
= ₹ 1,60,000
Discount provided
= ₹ 1,60,000 – ₹ 1,50,000
= ₹ 10,000

Test your Understanding-I
State whether the following statements are True (T) or False (F):
1.
Debenture is a part of owned capital. (❌ False)
2.
The payment of interest on debentures is a charge on the profits of the company. True ✔
3.
The debentures cannot be issued at a discount of more than 10% of the face value. (❌ False)
4.
Redeemable debentures are those debentures, which are payable on the expiry of the specific period. True ✔
5.
Perpetual debentures are also known as irredeemable debentures. True ✔
6.
Debentures cannot be converted into shares. (❌ False)
7.
Debentures cannot be issued at a premium. (❌ False)
8.
A collateral security is a subsidiary security. True ✔
9.
Debentures cannot be issued at a premium and redeemable at par. (❌ False)
10.
Loss on issue of debentures account is a revenue loss. (❌ False)
11.
Premium on redemption of debentures account is shown under the ‘Securities Premium’ in the balance sheet. (❌ False)

Test your Understanding – II
Select the correct answer for the following multiple choice questions:
1.
Debentures which are transferable by mere delivery are:
(a)
Registered debentures,
(b)
First debentures,
(c)
Bearer debentures. ✔
2.
The following journal entry appears in the books of X Co. Ltd.
Bank A/c
Dr.
4,75,000
Loss on Issue of Debentures A/c
Dr.
75,000
To 12 % Debentures A/c
5,00,000
To Premium on Redemption of Debenture A/c
50,000
Debentures have been issued at a discount of:
(a)
15%
(b)
5% ✔
(c)
10%
3.
X Co. Ltd. purchased assets worth ₹ 28,80,000. It issued debentures of ₹ 100 each at a discount of 4 per cent in full satisfaction of the purchase consideration. The number of debentures issued to vendor is:
(a)
30,000, ✔
(b)
28,800,
(c)
32,000.
4.
Convertible debentures cannot be issued at a discount if:
(a)
They are to be immediately converted, ✔
(b)
They are not to be immediately converted,
(c)
None of the above.
5.
Discount on issue of debentures is shown under the following head in the Balance Sheet
(a)
Profit and loss account
(b)
Miscellaneous expenditure ✔
(c)
Debentures account
6.
When debentures are issued at par and are redeemable at a premium, the loss on such an issues debited to :
(a)
Statement of profit and loss,
(b)
Debentures applications and allotment account,
(c)
Loss on issue of debentures account. ✔
7.
Excess value of net assets over purchase consideration at the time of purchase of business is credited to :
(a)
General reserve,
(b)
Capital reserve, ✔
(c)
Vendors’ account.
8.
When all the debentures are redeemed, balance in the debentures redemption fund account is transferred to
(a)
Capital reserve
(b)
General reserve ✔
(c)
Profits and loss appropriation account
9.
The nominal and book values of debenture redemption fund investments account are respectively ₹ 1,00,000 and ₹ 96,000
The company sold investments of nominal value of ₹ 30,000 at a proce which was just sufficient to redeem debentures of ₹ 30,000 at 10% premium, the profit on sale of investment is
(a)
₹ 4,200 ✔
(b)
₹ 3,000
(c)
Nil
10.
Own debentures are those debentures of the company which:
(a)
The company allots to its own promoters,
(b)
The company allots to its Director,
(c)
The company purchases from the market and keeps them as investments. ✔
11.
Profit on cancellation of own debentures is transferred to :
(a)
Statement of profit and loss,
(b)
Debenture redemption reserve,
(c)
Capital reserve. ✔
12.
When debentures are redeemed out of profits, an equal amount is transferred to
(a)
General reserve
(b)
Debenture redemption reserve ✔
(c)
Capital reserve
13.
Profit on sale of debenture redemption fund investments in the first instance is credited to
(a)
Debenture redemption fund account ✔
(b)
Profit and loss appropriation account
(c)
General reserve account
14.
The balance of sinking fund investment account after the realisation of investments is transferred to
(a)
Profit and loss account
(b)
Debentures account
(c)
Sinking fund account ✔
15.
When debentures are issued at a discount and are redeemableat a premium, which of the following accounts is debeited at the time of issue
(a)
Debentures account
(b)
Premium on redemption of debentures account
(c)
Loss on issue of debentures account ✔

Test your Understanding – III
Identify the account to be debited in case of following transactions
1.
Issue of debentures to a vendor in consideration of business purchase.
2.
Issue of debentures at a discount.
3.
Issue of debentures issued at a discount redeemable at a premium.
4.
Purchase of own debentures by a company.
5.
Writing off discount on issue of debentures.
The following are the accounts to be debited.
1.
Vendor A/c
2.
Discount on Issue of Debentures A/c
3.
Loss on Issue of Debentures A/c
4.
Own Debentures A/c
5.
Statement of Profit and Loss A/c
Identify the account to be credited in case of following transactions
1.
Debentures issued at a discount and are redeemable at par.
2.
Issue of debentures at a premium.
3.
Issue of debentures at a discount redeemable at a premium.
4.
Issue of debentures at a premium redeemable at a premium.
5.
Writing off discount on issue of debentures.
The following are the accounts to be credited.
1.
On Issue
Debentures A/c
On Redemption
Bank A/c
2.
Securities Premium Reserve A/c
3.
Premium on Redemption of Debentures A/c
4.
Securities Premium Reserve A/c and Premium on Redemption of Debentures A/c
5.
Loss on Issue of Debenturs A/c

Do it Yourself – VI
1. G. Ltd., has ₹ 800 lakh, 10% debentures of ₹ 100 each due for redemption on March 31, 2017. Give journal entries for issue and redemption of debentures.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
2016
Apr 1
Bank A/c
Dr.
8,00,00,000
To 10% Debenture Application and Allotment A/c
8,00,00,000
(Being 800 lakh, 10% debentures of ₹ 100 each issued to share holders and application and allotment money received)
Apr 1
10% Debentures Application and Allotment A/c
Dr.
8,00,00,000
To 10% Debentures A/c
8,00,00,000
(Being debentures application and allotment money transferred to debentures account)
2017
Mar 31
10% Debentures A/c
Dr.
8,00,00,000
To Debentures Holders A/c
8,00,00,000
(Being debentures due for redemption by debenture holders)
Mar 31
Debenture Holders A/c
Dr.
8,00,00,000
To Bank A/c
5,00,00,000
(Being debentures redeemed by the debenture holders and amount due paid)
2. R. Ltd., issued 88,00,000, 8% debenture of ₹ 50 each at a premium of 5% on July 1, 2014 redeemable at par by conversion of debentures into shares of ₹ 20 each at a premium of ₹ 2 per share on June 30, 2017. Record necessary entries for redemption of debentures.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
8% Debentures A/c
Dr.
44,00,00,000
To Debenture Holders A/c
44,00,00,000
(Being 88,00,000 8% debentures each of ₹ 50 redeemed at par)
Debenture Holders A/c
Dr.
44,00,00,000
To Share Capital A/c
44,00,00,000
To Securities Premium Reserve A/c
4,40,00,000
(Being 2 crore shares issued @ ₹ 20 per share at a premium ₹ 2 by conversion of debentures)
Working Notes:
Worth of Debentures
= 88,00,000 × ₹ 50
= ₹ 44,00,00,000
No. of shares redeemed for
{= \dfrac{₹~44,00,00,000}{₹~22}}
= 2,00,00,000
3. C. Ltd. has outstanding 11,00,000, 10% debentures of ₹ 200 each, on April 1, 2017. The Board of Directors have decided to purchase 20% of own debentures for cancellation at ₹ 200 each. Record necessary entries for the same.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
2017
Apr 1
Own Debentures A/c
Dr.
44,00,00,000
To Bank A/c
44,00,00,000
(Being 20% of 11,00,000 own debentures i.e., 2,20,000 own debentures purchased @ ₹ 200 each for cancellation)
10% Debentures A/c
Dr.
44,00,00,000
To Own Debentures A/c
44,00,00,000
(Being own debentures cancelled)
Working Notes:
No. of debentures to be redeemed
= 20% of 11,00,000
{= \dfrac{20}{100} × 11,00,000}
= 2,20,000
Worth of debentures
= 2,20,000 × ₹ 200
= ₹ 44,00,00,000
4. Record necessary journal entries in the books of the Company in each of the following cases for redemption of 1,000, 12% Debentures of ₹ 10 each issued at par:
(a)
Debentures redeemed at par by conversion into 12% Preference Shares of ₹ 100 each.
(b)
Debentures redeemed at a premium of 10% by conversion into Equity Shares issued at par.
(c)
Debentures redeemed at a premium of 10% by conversion into Equity Shares issued at a premium of 25%.
Case a: Debentures redeemed at par by conversion into 12% Preference Shares of ₹ 100 each
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
12% Debentures A/c
Dr.
10,000
To Debenture Holders A/c
10,000
(Being 1,000 12% debentures redeemed at par)
Debenture Holders A/c
Dr.
10,000
To 12% Preference Share Capital A/c
10,000
(Being 100, 12% Preference shares each of ₹ 100 issued in conversion of 1,000 12% debentures each of ₹ 10)
Working Notes:
Worth of debentures redeemed
= 1,000 × ₹ 10
= ₹ 10,000
No. of Preference shares issued
{\dfrac{₹~10,000}{₹~100}}
= 100
(b) Debentures redeemed at a premium of 10% by conversion into Equity Shares issued at par.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
12% Debentures A/c
Dr.
10,000
Premium on Redemption of Debentures A/c
Dr.
1,000
To Debenture Holders A/c
11,000
(Being 1,000 12% debentures each of ₹ 10 redeemed at 10% premium)
Debenture Holders A/c
Dr.
11,000
To Equaity Share Capital A/c
11,000
(Being 110 equity shares issued at par in conversion of 1,000 debentures each of ₹ 10 at 10% premium)
(c) Debentures redeemed at a premium of 10% by conversion into Equity Shares issued at a premium of 25%.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
12% Debentures A/c
Dr.
10,000
Premium on Redemption of Debentures A/c
Dr.
1,000
To Debenture Holders A/c
11,000
(Being 1,000 12% debentures each of ₹ 10 redeemed at 10% premium)
Debenture Holders A/c
Dr.
11,000
To Equity Share Capital A/c
8,800
To Securities Premium Reserve A/c
2,200
(Being 880 equity shares each of ₹ 100 issued at 25% premium in conversion of 1,000 debentuers each of ₹ 10)
Note: As the face value of equity share is not given in this case, let’s assume that each equity share is ₹ 10
Working Notes:
Face value of each equity share
= ₹ 10
Premium on each equity share
= 25% of ₹ 10
{= \dfrac{25}{100} × ₹~10}
= ₹ 2.50
Amount paid for each equity share
= ₹ 10.00 + ₹ 2.50
= ₹ 12.50
No. equity shares issued
{= \dfrac{₹~11,000}{₹~12.50}}
= 880
Total Premium
= 880 × ₹ 2.50
= ₹ 2,200
5. On 31 March, 2017 Janta Ltd. converted its ₹ 88,00,000, 6% debentures into equity shares of ₹ 20 each at a premium of ₹ 2 per share. Record necessary journal entries in the books of the company for redemption of debentures.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
2017
Mar 31
6% Debentures A/c
Dr.
88,00,000
To Debenture Holders A/c
88,00,000
(Being amount due to debenture holders for conversion of ₹ 88,00,000 worth of debentures to equity shares)
Debenture Holders A/c
Dr.
88,00,000
To Equity Shares Capital A/c
80,00,000
To Securities Premium Reserve A/c
8,00,000
(Being 4,00,000 equity shares each of ₹ 20 issued at a premium of ₹ 2 per share in conversion of debentures)
Working Notes:
At par value of each equity share
= ₹ 20
Premium
= ₹ 2
Worth of each equity share
= ₹ 20 + ₹ 2
No. equity shares issued
{= \dfrac{₹~88,00,000}{₹~22}}
= 4,00,000
6. Anirudh Ltd. has 4,000, 8% debentures of ₹ 100 each due for redemption on March 31, 2017. The company has a debenture redemption reserve of ₹ 50,000 on that date. Assuming that no interest is due, record the necessary journal entries at the time of redemption of debentures.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
2017
Mar 31
Debenture Redemption Reserve A/c
Dr.
10,000
To Profit and Loss A/c
10,000
(Being surplus of debenture redemption reserve transferred to profit and loss account)
8% Debentures A/c
Dr.
4,00,000
To Debenture Holders A/c
4,00,000
(Being amount due for 4,000 debentures each of ₹ 100 on redemption)
Debenture Holders A/c
Dr.
4,00,000
To Bank A/c
4,00,000
(Being amount due on redemption of debentures paid to the debenture holders)
Debenture Redemption Reserve A/c
Dr.
40,000
To General Reserve A/c
40,000
(Being debenture redemption reserve amount transferred to general reserve account after redemption of debentures)
Working Notes:
Debenture Redemption Amount Due
= 4,000 × ₹ 100
= ₹ 4,00,000
10% Debenture Redemption Reserve
= 10% of 4,00,000
{= \dfrac{10}{100} × 4,00,000}
= ₹ 40,000
Debenture Redemption Reserve
(already reserved)
= ₹ 50,000
Transferred to Profit and Loss
= ₹ 50,000 – ₹ 40,000
= ₹ 10,000

Do it Yourself – VII
1. X Ltd. were to redeem 8,000, 10% debentures of ₹ 100 each on April 1, 2017 at a premium of 5%. The company has a surplus of ₹ 9,00,000 in the statement of profit and loss. The company closes its books on December 31 every year. What journal entries the company will be recording to redeem the above debentures ?
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
2016
Mar 31
Profit and Loss A/c
Dr.
80,000
To Debenture Redemption Reserve A/c
80,000
(Being profit transferred to debenture redemption reserve account for redemption of debentures)
2017
Apr 1
10% Debentures A/c
Dr.
8,00,000
Premium on Redemption of Debentures A/c
Dr.
40,000
To 10% Debenture Holders A/c
8,40,000
(Being debentures redeemed out of profit surplus)
Debenture Holders A/c
Dr.
8,40,000
To Bank A/c
8,40,000
(Being amount paid to debenture holders on redemption of debentures)
Debenture Redemption Reserve A/c
Dr.
80,000
To General Reserve A/c
80,000
(Being debenture redemption reserves transferred to general reserve on redemption of debentures)
2. G Ltd. issued 5,00,000, 12% debentures of ₹ 100 each on April 1, 2013 redeemable at par on July 1, 2017. The company received applications for 6,00,000 debentures and the allotment was made to all the applicants on pro-rata basis. The debentures were redeemed on due date. How much amount of Debenture Redemption Reserve is to be created before the redemption is carried out? Also record necessary journal entries regarding issue and redemption of debenture. Ignore tax deducted at source.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
2013
Apr 1
Bank A/c
Dr.
6,00,00,000
To 12% Debenture Application and Allotment A/c
6,00,00,000
(Being application money received on 6,00,000 debentures of ₹ 100 each)
Debenture Application and Allotment A/c
Dr.
6,00,00,000
To 12% Debentures A/c
5,00,00,000
To Bank A/c
1,00,00,000
(Being application money for 5,00,000 12% debentures transferred to the debentures account and the balance i.e., ₹ 1,00,00,000 refunded back)
2016
Mar 31
Profit and Loss A/c
Dr.
60,00,000
To Debenture Redemption Reserve A/c
60,00,000
(Being debenture redemption reserve is created)
2017
Jul 31
12% Debentures A/c
Dr.
5,00,00,000
To Debenture Holders A/c
5,00,00,000
(Being amount due on redemption of Debentures)
Debenture Holders A/c
Dr.
5,00,00,000
To Bank A/c
5,00,00,000
(Being amount paid to debenture holders on redemption)
Debenture Redemption Reserve A/c
Dr.
60,00,000
To General Reserve A/c
60,00,000
(Being deneture redemption reserve amount transfered to general reserve after the debentures are redeemed)

Short Answer Questions
1.What is meant by a Debenture?
A debenture is a written instrument acknowledging a debt under the common seal of the company. The debenture contains a contract for repayment of principal
●
after a specified period
●
or at intervals
●
or at the option of the company
and for payment of interest. The interest is paid at a fixed rate and is payable usually either half-yearly or yearly on fixed dates.
According to section 2(30) of The Companies Act, 2013, the debenture includes
●
Debenture Inventory
●
Bonds
●
and Any other securities of a company
whether constituting a charge on the assets of the company or not.
2. What does a Bearer Debenture mean?
Bearer debentures are the debentures which can be transferred through delivery. The company won’t maintain any record of the debentures i.e. the details of the debenture holders are not maintained in a register by the issuing company. When it comes to the payment of the interest on debentures, the interest is paid to the person who produces or bears the interest coupon that is attached to the debentures.
3. State the meaning of ‘Debentures issued as a collateral security’.
When a company obtains a loan or overdraft from a bank or any other financial institution, it has an option to issue its own debentures as the secondary collateral security to the lenders in addition to some other assets that are pledged as the primary security. The debentures thus issued are known as ‘Debentures issued as a collateral security’
4. What is meant by ‘Issue of debentures for consideration other than cash’?
Sometimes, the debentures are issued to vendors or suppliers of patents, copyrights and for transfer of intellectual property rights on preferential basis without receiving money in cash. The issue of debentures for such purpose is known as ‘Issue of debentures for consideration other than cash’
5. What is meant by Issue of debenture at discount and redeemable at premium?
A debenture issued a price less than the nominal or at par value of the debenture, such an issue of debentures is said to be ‘Issue of debenture at discount’
A debenture issued is redeemed a price more than the nominal or at par value of the debenture, such a redemption of debentures is said to be ‘Redemption of Debentures at premium’
When the debentures are issued satisfying the above two conditions i.e. their issue price is less than the nominal value of the debentures and they can be redeemed at a price higher than the nominal value of the debentures, such an issue of debentures is known as ‘Issue of Debentures at discount and redeemable at premium’
The difference between the redemption price and issue price is considered as ‘Loss on Issue of Debentures’
The accounting treatment will be as follows:
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Debenture Application and Allotment A/c
Dr.
—–
Loss on Issue of Debentures A/c
Dr.
—–
To Debentures A/c
—–
To Premium on Redemption of Debentures A/c
—–
Note that both the issue of debentures at discount and redemption of debentures at premium are loss for the company.
6. What is ‘Capital Reserve’?
The profits arising out of activities other than the day to day operations of the business i.e. other than from the sale of goods and servicecs of the company are collectively known as the Capital Reserve. The capital reserve is maintained by the companies to write-off any future contingencies that results in capital loss. They can also be utilized to issue bonus shares to the shareholders. The capital reserves can not be used for distributing dividends to the shareholders.
Few of the activities, the profits from which contribute to the capital reserves are as follows:
a.
Profits arising out of sales other than goods and services.
b.
Issue of shares/debentures at a premium price or re-issue of forfeited shares
c.
Profit on redemption of debentures at a discount.
7. What is meant by a ‘Irredeemable Debenture’?
The debentures that can not be redeemed during the life span of the company are called as Irredeemable debentures. These debentures can only be redeemed in the event of winding-up of the company. As a company is considered as an ongoing concern, these debentures are also referred to as perpetual debentures. However, no company in India issues such shares.
8. What is a ‘Convertible Debenture’?
The debentures that can be converted into equity shares or an other security are known as ‘Convertible Debenture’. The conversion can happen either
●
at the option of the company
●
or at the option of the debenture holders
●
or as specified in the document at the time of issue of the debentures
The convertible debentures are further classified into
a. Fully Convertible Debentures: These are debentures that can be fully converted to equity shares or any other security.
b. Partly Convertible Debentures: These are debentures that can only be partly converted into equity shares or any other security.
9. What is meant by ‘Mortgaged Debentures’?
The debentures that are secured against the asset(s) of the company are know as ‘Mortgaged Debentures’ or ‘Secured Debentures’. The debenture holders have the right to sell the mortgaged asset(s) of the company and realise the amount due by the company when the company fails to redeem the debentures on the maturity date or fails to pay the interest as specified.
These debentures are further classified as:
a. Fixed charge mortage debentures: These are the depentures that are secured against a specific assets i.e., the assets which are held by a company for use in operations not meant for sale.
b. Floating charge mortage debentures: These are the depentures that are secured against the general assets of the company. This excludedes the assets which are assigned to the secured creditors.
10. What is discount on issue of debentures?
When a debenture is issued at a price lower than its nominal or at par value, the discount provided is known as discount on issue of debentures. The discount on issue of debentures is a capital loss for the company.
The discount on issue of debentures can be written-off either by debiting it to or out of Securities Premium Reserve. If it is written of within 12 months of the balance sheet or the period of operating cycle, it is shown under ‘Other Current Assets’ in the balance sheet. Otherwise, it is shown under ‘Other Non-Current Assets’.
As per The Companies Act, 2013, there are no restrictions regarding the issue of debentures at a discount.
11. What is meant by ‘Premium on Redemption of Debentures’?
When the debentures are redeemed at price more than the nominal or at par value of the debentures, the difference bteween the redeemed and at par value of the debentures is known as ‘Premium on Redemption of Debentures’. The premium paid by the company upon redemption of debentures is a capital loss for the company. This loss needs to be written-off until the debentures are redeemed.
When preparing the balance sheet, the premium on redemption of debentures is shown on the liabilities side under the ‘Current Liabilities and Provisions’ section until the debentures are redeemed.
The accounting treatment is as follows:
1. At the time of Issue of Debentures
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Debenture Application and Allotment A/c
Dr.
—–
Loss on Issue of Debentures A/c
Dr.
—–
To Debentures A/c
—–
To Premium on Redemption of Debentures A/c
(Being debentures issued and redeemable at premium)
2. Writing off the loss on Issue of Debentures
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Profit and Loss A/c
Dr.
—–
To Loss on Issue of Debentures A/c
—–
(Being loss on issue of debentures at premium written-off)
3. At the time of Redemption of Debentures
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Debenture A/c
Dr.
—–
Premium on Redemption of Debentures A/c
Dr.
—–
To Debentures Holders A/c
—–
(Being money due to debenture holders upon redemption of debentures at a premium)
12. How debentures are different from shares? Give two points.
Basis
Debentures
Shares
1. Meaning
Debentures represents amount borrowed by the company and are part of loan.
Shares form part of capital of the company and collectively known as Shareholders’ capital.
2. Holders
Debenture Holders are creditors of the company.
Share holders are owners of the company.
3. Voting Rights
No voting rights
Have the right to vote.
13. What is meant by redemption of debentures?
Redemption of debentures refers to extinguishing or discharging the liability on account of debentures in accordance with the terms of issue. In simple terms, redemption of debentures means repayment of the amount of debentures by the company to the debenture holders. The debentures can be redeemed either at par or at a premium. They can also be redeemed at a discount but it is not in practice now.
Based on how the debentures are redeemed, they can be classified into the following modes:
1.
Payment in lump sum
2.
Paymnet in installments
3.
Purchase in the open market
4.
By conversion into shares or new debentures
14. Can the company purchase its own debentures?
Yes. A company can purchase its own debentures under the authority delegated to it by its Articles of Association.
A company can go for purchase of its own debentures for any of the following reasons:
a. For Immediate Cancellation: When a company wants to reduce the debenture liability, it can go for purchase of debentures for immediate cancellation. The company may exercise this option when the rate of interest on the debentures is more than the rate of interest in the market.
b. With the motive of Investment: The company might purchase the debentures with the motive of selling them at a higher price in the future, if it sees profit in doing so.
A company can purchase its own debentures either at premium price or a discounted price for cancellation. The accounting treatement in each of these cases is as follows:
a. When the debentures are purchased at a premium for cancellation:
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Own Debentures A/c
Dr.
—–
To Bank A/c
—–
(Being own debentures purchased in the open market for cancellation)
Debentures A/c
Dr.
—–
Loss on Redemption of Debentures A/c
Dr.
—–
To Own Debentures A/c
—–
(Being own debentures cancelled and the loss adjusted)
b. When the debentures are purchased at a discount for cancellation:
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Own Debentures A/c
Dr.
—–
To Bank A/c
—–
(Being own debentures purchased in the open market)
Debentures A/c
Dr.
—–
To Own Debentures A/c
To Profit on Redemption of Debentures A/c
—–
(Being own debentures cancelled and profit adjusted)
Profit on Redemption of Debentures A/c
Dr.
—–
To Capital Reserve A/c
—–
(Being profit on cancellation of debentures transferred to capital reserve)
15. What is meant by redemption of debentures by conversion?
A company provides the option to the debentures holders to redeem their debentures by conversion of these debentures into either shares or new class of debentures. This is known as Redemption of Debentures by Conversion. It may be noted that this is feasible only in case of convertible debentures. The new shares or debentures may be issued at par or at discount or at a premium.
When a debenture holder opts for conversion of debentures, then the total price of all the debentures held by him/her should be more than the issue price of shares or new class of debentures or any other securities.
16. How would you deal with ‘Premium on Redemption of Debentures?
When the debentures are redeemed at a price higher than the nominal or at par value of the debentures, the different between the redeemed price and nominal or at par price is termed as ‘Premium on Redemption of Debentures’. The premium on redemption of Debentures is a capital loss for the company. It should be written-off till the debentures are redeemed.
Premium on Redemption is a liability of a company and is payable in future. It is a provision and is shown under the head Non-current liabilities under sub-head ‘Long-term Borrowings’ until debentures are redeemed.
The accounting treatment of premium on redemption of debentures is as follows:
a. At the time of Issue of Debentures:
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Debenture Application and Allotment A/c
Dr.
—–
Loss on Issue of Debentures A/c
Dr.
—–
To Debentures A/c
—–
To Premium on Redemption of Debentures A/c
(Being debentures issued and redemable at premium)
b. At the time of writing-off the loss:
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Profit and Loss A/c
Dr.
—–
To Loss on Issue of Debentures A/c
—–
(Being loss on issue of debentures written-off)
c. At the time of Redemption of Debentures:
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Debentures A/c
Dr.
—–
Premium on Redemption of Debentures A/c
Dr.
—–
To Debenture Holders A/c
—–
(Being amount due to the debenture holders on redemption of debentures at premium)
17. What is meant by redemption of debentures by “Parchase in Open Market”?
At times, the companies that have issued debentures, purchases the debentures for cancellation. This act pf purchasing and cancelling the debentures is called as redemption of debentures by purchase in the open market.
Long Answer Questions
1. Explain the different types of debentures?
The following are the different types of debentures issued by a company. The classification is based on different criteria:
Types of Debentures/Bonds
Security
Tenure
Mode of Redemption
Coupon Rate
Registration
Secured/ Mortgage Debentures
UnSecured/ Naked Debentures
Redeemable Debentures
Perpetual/ Irredeemable Debentures
Convertible Debentures
Non-Convertible Debentures
Zero Coupon Rate/ Deep Discount Rate Debentures
Specific Rate Debentures
Registered Debentures
Unregistered/ Bearer Debentures
Fully Convertible Debentures
Partly Convertible Debentures

1. From the Point of view of Security:
a.
Secured Debentures: The debentures are known as secured debentures when a charge is created on the assets of the company for the purpose of payment in case of default. When this charge is created on a specific asset, it is known as fixed charge. In addition, the fixed charge is created against those assets which are held by a company for use in operations and not meant for sale. On the other hand, when the charge is created on the general assets of the company, it is called as the floating charge. The floating charge involves all assets excluding those assigned to the secured creditors.
b.
Unsecured Debentures: The debentures are known as unsecured debentures when they do not have any specific charge on the assets of the company. However, a floating charge may be created on these debentures by default. These kinds of debentures are nomally not issued.
2. From the Point of view of Tenure:
a.
Redeemable Debentures: When the debentures are payable on the expiry of the specific period of time they are known as Redeemable debentures. The redeemable debentures can be paid in lump sum or in instalments during the life time of the company. These debentures can be redeemed either at par or at premium.
b.
Irredeemable Debentures: The debentures for which the company does not give any undertaking for the repayment of money borrowed, such debentures are known as Irredeemable debentures. These are also called as Perpetual Debentures. These debentures are repaybale only in the event of winding-up of a company or on the expirty of a long period.
3. From the Point of view of Convertibility:
a.
Convertible Debentures: The debentures which can by converted into equity shares or into any other security either at the option of the company or the debentureholders are known as convertible debentures. These debentures can be further classified into
i.
Convertible
ii.
Partly Convertible
b.
Non-Convertible Debentures: The debentures which cannot be converted into shares or in any other securities are called non-convertible debentures. Companies mostly issue this category of debentures.
4. From Coupon Rate Point of view:
a.
Specific Coupon Rate Debentures: These debentures are issued with a specified rate of interest. The rate of interest is called as coupon rate. The coupon rate may be either fixed or floating. In the event that it is floating, the interest rate is usually tagged with bank rate.
b.
Zero Coupon Rate Debentures: These debentures do not carry a specific rate of interest. To compensate this, these debentures are issued at a substantial discount and the difference between the nominal value and the issue price is treated as the amount of interest related to the duration of the debentures.
5. From the view point of Registration:
a.
Registered Debentures: The debentures in respect of which all details including names, addresses and particulars of holding of the debenture holders are maintained in the register available with the company are called as Registered Debentures. This kind of debentures can be transferred from one party to another only after executing a regular transfer deed.
b.
Bearer Debentures: The debentures which can be transferred by way of delivery and the company does not keep any record of the debentures are called as Bearer Debentures. Interest on these debentures is paid to the party upon producing the interest coupon attached to the debentures.
2. Distinguish between a debenture and a share. Why debenture is known as loan capital? Explain.
The following are the differences between a debenture and a share on the basis of various paramters.
Basis
Debenture
Share
1. Nature of Ownership
Debenture Holders are creditors who have lent money to the business
Share Holders are owners of the company as the shares for the capital of the company.
2. Voting Rights
No voting rights
Have the right to vote
3. Mode of Returns
Entitled for returns in the form of interest.
Entitiled for returns in the form of dividends.
4. Rate of Return
Rate of interest is mostly fixed.
Rate of return of dividend is not fixed and varies with the performance of the business.
5. Allowable Deduction
Interest paid on debentures is a business expense and hence it can deducted from profits.
Dividend paid on shares is an appropriation of profits and hence it is not allowed as deduction.
6. Guaratee of Return
As the interest is charged against profit, interest is paid to the debenture holders even if there are no profits earned.
As the dividend is appropriation of profit, it is paid only if the company makes profits and not when the company makes losses.
7. Repayment of Amount
The debenture money is returned as per the terms of issue.
Share capital is returned only in the event of winding-up of the company.
8. Issue at Discount
There’re no restrictions regarding issue of debentures at discount.
The discount provided should be as prescribed by the Section 79 of the Companies Act.
9. Conversion
Convertible Debentures can be converted into share or other securities.
Can not be converted.
10. Associated Risk
Risk associated is minimal, especially when the debentures are secured against the assets.
Shares are not secured. So, they are always riskier.
11. Preference of Repayment at the time of liquidation
Debenture Holders are paid before the share holders.
Share holders are paid only after all the liabilities are discharged.
Reason why debenture is known as loan capital
The business issues debentures to procure long-term debts so that it can have enough funds for investing in the growth of the business or utilize it for achiving any other business goals. The company is under the obligation to pay the interest to the debenture holders in the same way it pays interest to the owner on the capital invested. This borrowed loan is used for the same purpose of investment/growth of the business as the capital is used. In addition, the debentures can be redeemed only after a long period of time and stays with the business just like the capital does. Due to these reasons the debentures are also known as loan capital.
3. Describe the meaning of ‘Debenture Issued as Collateral Securities’. What accounting treatment is given to the issue of debentures in the books of accounts?
Companies usually obtains loan or overdraft from a bank or any other financial institutions against a security. The company may pledge or mortgage some assets as a security against the loan. This security is called as primary security. In addition to primary security, the lending banks or other financial institutions may insist on additional assets as collateral security. This is also called as subsidiary or secondary or additional security. They insist on this so that the amount of loan can be realised in full with the help of the collateral security in case the amount from the sale of principal security falls short of the loan money. In such situation, the company may issue its own debentures to the lenders in addition to some other assets already pledged. Such an issue of debentures is known as ‘Debenture Issued as Collateral Securities’.
If the company fails to pay the loan along with interest, the lenders can sell the primary security and recover their money. In the event when the realisable value of the primary security falls short to cover the entire loan and interest, the lender has the right to invoke the benefit of collateral security wherein the debentures may either be presented for redemption or sold in the open market.
The debentures issued as collateral security is treated in the books of accounts in the following two ways:
1. First Method: In this case no entry is made in the books of accounts as there is no liability is created by such issue. In otherwords, the business is not receiving any additional money by issuing these debentures. However, on the liabilities side of the balance sheet, below the item of loan, a not to the effect that it has been secured by issue of debentures as a collateral security is appended as specified below:
Balance Sheet as on …….
Particulars
Note
No.
Amount
₹
I. Equity and Liabilities
1. Non-Current Liabilities
Long-Term Borrowings
1
—–
Total
—–
Note to Accounts:
Note
No.
Particulars
Amount
₹
1
1. Long-term Borrowings
Bank Loan
(Secured by issue of debentures as collateral security)
—–
—–
2. Second Method: The issue of debentures as a collateral security may be recorded by means of journal entry as follows:
i.
Isue of debentures as collateral security for bank loan.
Debenture Suspense A/c
Dr.
—–
To Debentures A/c
—–

ii.
For cancellation of the debentures as collateral security on repayment of bank loan
Debentures A/c
Dr.
—–
To Debenture Suspense A/c
—–

Balance Sheet as of ………..
Particulars
Note
No.
Amount
₹
I. Equity and Liabilities
1. Non-current Liabilities
Long-term borrowings
1
—–
Total
—–
Note to Accounts
Note
No.
Particulars
Amount
₹
1
I. Long-term borrowings
Bank Loan
…..
Debentures
—–
Debenture Suspense
—–
–
…..
4. Explain the different terms for the issue of debentures with reference to their redemption.
Debenture can be issued
●
at par
●
at premium
●
at discount
Similarly, they can also be redeemed
●
at par
●
at premium
While redeeming, the debentures can never be redeemed at discount. Considering this, the terms for the issue of debentures with reference to their redemption can be classified as follows:
i. Debentures issued at par and redeemable at par: In this case, the debentures are issued at par or face value and also redeemed at par or face value. The following will be the corresponding journal entries.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Bank A/c
Dr.
—–
To Debenture Application and Allotment A/c
—–
(Being debenture application and allotment money received)
Debenture Applicaiton and Allotment A/c
Dr.
—–
To Debentures A/c
—–
(Being debenture application and allotment money transferred to debentures account)
ii. Debentures issued at par and redeemable at premium: In this case, the debentures are issued at par or face value and redeemed at a premium price. Note that there is no loss at the time of issue but there will loss during redemption. The following will be the corresponding journal entries.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Bank A/c
Dr.
—–
To Debenture Application and Allotment A/c
—–
(Being application and allotment money received)
Debenture Application and Allotment A/c
Dr.
—–
Loss on Issue of Debentures A/c
Dr.
—–
To Debentures A/c
—–
To Premium on Redemption of Debentures A/c
(Being debenture application and allotment money transferred to debentures account and redeemable premium adjusted)
iii. Debentures issued at premium and redeemable at par: In this case, the debentures are issued at a premium price and redeemable at par or face value.Note that the issue of debentures at a premium price will be gain for the company. The following will be the corresponding journal entries.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Bank A/c
Dr.
—–
To Debenture Application and Allotment A/c
—–
(Being debenture application and allotment money received)
Debenture Application and Allotment A/c
Dr.
—–
To Debentures A/c
—–
To Securities Premium Reserve A/c
—–
(Being debenture application and allotment money transferred to debentures account and premium on issue of debentures adjusted)
iv. Debentures issued at premium and redeemable at premium: In this case, the debentures are issued at a premium price and redeemable at a premium price. Note that there is gain at the time of issue of debentures at a premium price but there will be loss when the debentures are redeemed.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Bank A/c
Dr.
—–
To Debenture Application and Allotment A/c
—–
(Being debenture application and allotment money received)
Debenture Application and Allotment A/c
Dr.
—–
Loss on Issue of Debentures A/c
Dr.
—–
To Debentures A/c
—–
To Securities Premium Reserve A/c
—–
To Premium on Redemption of Debentures A/c
(Being debenture application and allotment money transferred to debentures account and premium on issue of debentures and premium on redemption of debentures are adjusted)
v. Debentures issued at discount and redeemable at par: In this case, the debentures are issued at a discounted price and redeemable at par or face value. Note that there is loss at the time of issue of debentures at a discounted price.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Bank A/c
Dr.
—–
To Debenture Application and Allotment A/c
—–
(Being debenture application and allotment money received)
Debenture Application and Allotment A/c
Dr.
—–
Discount on Issue of Debentures A/c
Dr.
—–
To Debentures A/c
—–
(Being debenture application and allotment money transferred to debentures account and discount on issue of debentures adjusted)
vi. Debentures issued at discount and redeemable at premium: In this case, the debentures are issued at a discounted price and redeemable at a premium price. Note that there is loss at the time of issue of debentures at a discounted price and also there will be loss when the debentures are redeemed at a premium price.
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Bank A/c
Dr.
—–
To Debenture Application and Allotment A/c
—–
(Being debenture application and allotment money received)
Debenture Application A/c
Dr.
—–
Loss on Issue of Debentures A/c
Dr.
—–
To Debentures A/c
—–
To Premium on Redemption of Debentures A/c
—–
(Being debenture application and allotment money transferred to debentures account and discount on issue of debentures and premium on redemption of debentures adjusted)
5. Differentiate between redemption of debentures out of capital and out of profits.
a. Redemption of Debentures Out of Capital:
In this case, the debentures are redeemed out of capital. The profits are not used for redemption of debentures. In this case, the profits are not transferred to Debenture Redemption Reserves. In otherwords, DRR is not created and redemption of debentures is done directly out of capital.
The Debenture Redemption Reserve is mandatory as per the Section 117C of the Indian Companies Act of 1956. However, the following companies are exempted from creating a DRR and can redeem debentures out of capital.
i.
All India Financial Institutions registered by Reserve Bank of India
ii.
Banking Companies
iii.
NFBCs registered with Reserve Bank of India
iv.
Housing Finance companies registered to the National Housing bank
v.
Companies listed on stock exchange
vi.
Unlisted companies
b. Redemption of debentures Out of Profits:
In this case, the debentures are redeemed out of profits. The capital is not used for redemption of debentures. In this case, the profits are transferred to Debenture Redemption Reserve (DRR). In March 2014, the Ministry of Corporate Affairs (MCA) issued the Companies (Share Capital and Debenture) Rules as per which companies need to maintain a DRR equal to at least 50% of the total value of the debentures issued. However, in April 2014, this was changed to 25%. Later in 2019 it was changed to 10% and is effective till date.
As the profits are used for creating DRR in this method, this method is called as redemption of debentures out of profits. The accounting treatment is to transfer the profits from Statement of Profit and Loss account to the DRR account. This working is shown under the Notes to Accounts of Reserves and Surplus. The final balance after considering the DRR is displayed under the sub-head Reserves and Surplus under the main head of Shareholders’ Funds on the Equity and Liabilities side of the balance sheet. Finally when all the debentures are redeemed, the DRR account is closed by transferring the balance to the General Reserve account.
6. Explain the guidelines of SEBI for creating Debenture Redemption Reserve.
The following are the guidelines of SEBI for creating Debenture Redemption Reserve.
a.
No DRR is required for Debentures whose maturity date is below 18 months. However, if it is beyond 18 months than the DRR should be created.
b.
As per the Act,
i.
all India financial institutions registered by Reserve Bank of India
ii.
banking companies
iii.
NFBCs registered with Reserve bank of India
iv.
Housing Finance companies registered to the National Housing bank
v.
and the companies listed on stock exchange
vi.
and unlisted companies
are exempted from creating Debenture Redemption Reserve and may redeem debentures out of capital.
c.
Whereas for “other unlisted companies”, the adequacy of Debenture Redemption Reserve shall be 10% of the value of the outstanding debentures.
d.
DRR applies only for Non-Convertible Debentures. In case of partly convertible debentures, it should be created for the non-convertible part of Partly Convertible Debentures.
7. Describe the steps for creating Sinking Fund for redemption of debentures.
The following are the steps for creating Sinking Fund for redemption of debentures.
1.
Using the Sinking Fund table, calculate the amount of profit shat should be set aside each year.
2.
The amount of profit calculated in the previous step should be set aside at the end of each year and Sinking Fund/Debenture Redemption Fund (DRF) account is credited.
3.
At the end of the first year, investment for the equivalent amount are purchased and the Debenture Redemption Fund Investment(DRFI) account is debited.
4.
During the following years, collect the interest on investments made.
5.
Every subsequent year, purchase the investment equivalent to the fixed amount of profit set aside and the interest earned every year. This is not required in the last/final year when the debentures are to be redeemed.
6.
Collect the interest on investment in the last/final year.
7.
Encash the investments at the end of the year of redemption.
8.
The Debenture Redemption Fund Investment (DRFI) is then balanced. The balance reflects the profit/loss on sale of investments. This balance is then transferred to Sinking Fund/Debenture Redemption Fund (DRF) account.
9.
Payment is done to the debenture holders.
10.
The balance from the Debenture Redemption Fund (DRF) account is transferred to the General Reserve account.
8. Can a company purchase its own debentures in the open market? Explain.
Yes. A company can purchase its own debentures under the authority delegated to it by its Articles of Association.
A company can go for purchase of its own debentures for any of the following reasons:
a. For Immediate Cancellation: When a company wants to reduce the debenture liability, it can go for purchase of debentures for immediate cancellation. The company may exercise this option when the rate of interest on the debentures is more than the rate of interest in the market.
b. With the motive of Investment: The company might purchase the debentures with the motive of selling them at a higher price in the future, if it sees profit in doing so.
A company can purchase its own debentures either at premium price or a discounted price for cancellation. The accounting treatement in each of these cases is as follows:
a. When the debentures are purchased at a premium for cancellation:
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Own Debentures A/c
Dr.
—–
To Bank A/c
—–
(Being own debentures purchased in the open market for cancellation)
Debentures A/c
Dr.
—–
Loss on Redemption of Debentures A/c
Dr.
—–
To Own Debentures A/c
—–
(Being own debentures cancelled and the loss adjusted)
b. When the debentures are purchased at a discount for cancellation:
Journal Entries
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Own Debentures A/c
Dr.
—–
To Bank A/c
—–
(Being own debentures purchased in the open market)
Debentures A/c
Dr.
—–
To Own Debentures A/c
To Profit on Redemption of Debentures A/c
—–
(Being own debentures cancelled and profit adjusted)
Profit on Redemption of Debentures A/c
Dr.
—–
To Capital Reserve A/c
—–
(Being profit on cancellation of debentures transferred to capital reserve)
9. What is meant by conversion of debentures? Describe the method of such a conversion.
A company provides the option to the debentures holders to redeem their debentures by conversion of these debentures into either shares or new class of debentures. This is known as Redemption of Debentures by Conversion. It may be noted that this is feasible only in case of convertible debentures. The new shares or debentures may be issued at par or at discount or at a premium.
When a debenture holder opts for conversion of debentures, then the total price of all the debentures held by him/her should be more than the issue price of shares/new debentures.
The following is the accounting treatment of conversion of debentures:
1. Amount due to the debenture holders.
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Debentures A/c
Dr.
—–
To Debenture Holders A/c
—–
2. To discharge the liability to the debenture holders
Date
Particulars
L.F.
Debit
Amount
₹
Credit
Amount
₹
Debenture Holders A/c
Dr.
—–
To Shares/New Debentures A/c
—–