Part 2 Chapter 2 Issue and Redemption of Debentures Class 12 NCERT

Key Terms You Must Know

Debenture

A written acknowledgement of debt issued by a company under its seal or authority. Debentureholders are creditors, not owners, so they usually receive fixed interest.

Issue at par

Debentures are issued at their face value, such as ₹100 received for a ₹100 debenture.

Issue at premium

Debentures are issued above face value. The excess is credited to Securities Premium Reserve because it is a capital profit.

Issue at discount

Debentures are issued below face value. The shortfall is a capital loss and is debited to Loss on Issue of Debentures or Discount on Issue of Debentures, as required.

Premium on redemption

An extra amount payable to debentureholders at the time of repayment. It is a liability created at the time of issue if redemption premium is known.

Debenture Redemption Reserve

A reserve created out of profits for redemption of debentures when applicable. In exams, follow the rate or instruction given in the question and latest CBSE directions.

Concept Overview: Why Debenture Accounting Is Different

A debenture transaction has two sides: the company receives money now, but promises to repay a fixed amount later. Therefore, while recording the issue, you must compare three figures: cash received, nominal value credited to Debentures Account, and amount payable on redemption. If cash received is less than the total amount ultimately payable, the difference is a capital loss. If debentures are issued at premium, the premium received is not revenue; it is transferred to Securities Premium Reserve. Interest on debentures is an expense and is recorded separately from redemption. A common CBSE trap is mixing the issue stage with the redemption stage. First record issue, then interest if given, then reserve or investment requirements if applicable, and finally redemption.

Step-by-Step Method for Debenture Questions

1. Read issue terms carefully — Identify face value, number of debentures, issue price, redemption price, interest rate, and date. Write these amounts before attempting journal entries.
2. Calculate cash received — Cash received equals number of debentures multiplied by issue price. This is debited to Bank Account when money is received.
3. Record the debenture liability — Credit Debentures Account with nominal value, not issue price. If issued at premium, credit Securities Premium Reserve. If issued at discount or redeemable at premium, debit Loss on Issue of Debentures.
4. Record interest separately — Interest is calculated on nominal value unless the question states otherwise. Pass entries for interest due and payment; include tax deduction only if the question asks.
5. Handle redemption requirements — If DRR or Debenture Redemption Investment is required, create them before redemption as per the question. For redemption, transfer debentures to debentureholders and then pay through Bank.

Worked Examples with Journal Logic

• Example 1: X Ltd issued 1,000 10% debentures of ₹100 each at ₹95, redeemable at ₹105.
  Step 1: Nominal value = 1,000 × ₹100 = ₹1,00,000.
  Step 2: Bank received = 1,000 × ₹95 = ₹95,000.
  Step 3: Amount payable on redemption = 1,000 × ₹105 = ₹1,05,000, including redemption premium of ₹5,000.
  Step 4: Total loss on issue = amount payable ₹1,05,000 − cash received ₹95,000 = ₹10,000. This includes issue discount ₹5,000 and redemption premium ₹5,000.
  Journal entry: Bank A/c Dr ₹95,000; Loss on Issue of Debentures A/c Dr ₹10,000; To 10% Debentures A/c ₹1,00,000; To Premium on Redemption of Debentures A/c ₹5,000.

• Example 2: A company redeems 2,000 debentures of ₹100 each at a premium of 10% by bank payment.
  Step 1: Nominal value of debentures = 2,000 × ₹100 = ₹2,00,000.
  Step 2: Premium on redemption = 10% of ₹2,00,000 = ₹20,000.
  Step 3: Amount payable to debentureholders = ₹2,20,000.
  Step 4: Transfer liability to debentureholders: Debentures A/c Dr ₹2,00,000 and Premium on Redemption of Debentures A/c Dr ₹20,000; To Debentureholders A/c ₹2,20,000.
  Step 5: Payment entry: Debentureholders A/c Dr ₹2,20,000; To Bank A/c ₹2,20,000.

Debentures Compared with Shares

Common Mistakes and Board Exam Tips

• Do not credit Debentures Account with the issue price. Always credit it with nominal value unless the question is about a different face value structure.
• Premium on issue and premium on redemption are opposite in nature. Securities Premium Reserve is credited on issue; Premium on Redemption of Debentures is a liability.
• Interest is calculated on face value, not on the amount actually received, unless the question clearly states another basis.
• If debentures are issued as collateral security, no cash may be received for those debentures separately. Use the method required by the question: either disclose by note or pass the memorandum entry.
• When DRR or Debenture Redemption Investment appears, do not invent a percentage. Use the rate and applicability stated in the question or current CBSE instruction.

How to Present Journal Entries Neatly

In board answers, write the date, particulars, debit amount and credit amount clearly. Add short narrations such as Being debentures issued at discount and redeemable at premium. For long questions, first show working notes for nominal value, bank amount, premium, discount and total loss. This reduces calculation errors and helps the examiner follow your logic even if the journal format is lengthy.

Practice Questions with Solutions

• Q: R Ltd issued 500 9% debentures of ₹100 each at par. Pass the journal entry for issue.
  A: Step 1: Calculate nominal value = 500 × ₹100 = ₹50,000.
  Step 2: Since issue is at par, bank received = ₹50,000 and there is no premium or discount.
  Step 3: Debit Bank because cash is received and credit 9% Debentures because liability is created.
  Final answer: Bank A/c Dr ₹50,000 To 9% Debentures A/c ₹50,000.

• Q: M Ltd issued 800 debentures of ₹100 each at ₹110. Find the securities premium and pass the issue entry.
  A: Step 1: Nominal value = 800 × ₹100 = ₹80,000.
  Step 2: Bank received = 800 × ₹110 = ₹88,000.
  Step 3: Securities premium = ₹88,000 − ₹80,000 = ₹8,000.
  Final answer: Bank A/c Dr ₹88,000 To Debentures A/c ₹80,000 To Securities Premium Reserve A/c ₹8,000.

• Q: P Ltd issued 1,200 debentures of ₹100 each at ₹90, redeemable at par. Calculate loss on issue and give the entry.
  A: Step 1: Nominal value = 1,200 × ₹100 = ₹1,20,000.
  Step 2: Bank received = 1,200 × ₹90 = ₹1,08,000.
  Step 3: Since redemption is at par, loss is only issue discount = ₹1,20,000 − ₹1,08,000 = ₹12,000.
  Final answer: Bank A/c Dr ₹1,08,000; Loss on Issue of Debentures A/c Dr ₹12,000; To Debentures A/c ₹1,20,000.

• Q: S Ltd has 1,000 12% debentures of ₹100 each outstanding for a full year. Calculate annual interest and pass the entry for interest due.
  A: Step 1: Nominal value = 1,000 × ₹100 = ₹1,00,000.
  Step 2: Interest = ₹1,00,000 × 12/100 = ₹12,000.
  Step 3: Debit Debenture Interest because it is an expense and credit Debentureholders because amount is payable.
  Final answer: Debenture Interest A/c Dr ₹12,000 To Debentureholders A/c ₹12,000.

Frequently Asked Questions