Class 12 Accountancy · Chapter 7 NotesIssue and Redemption of Debentures
Learn about debentures, their types, issue, and redemption methods in Class 12 Accountancy. Understand accounting treatment, Sinking Fund, and Debenture Redemption…
This chapter explores the concept of debentures, their types, and the accounting treatment for their issue and redemption. You will learn how companies raise long-term debt through debentures and the various methods of redeeming them. Understanding these concepts is crucial for managing a company's financial structure and ensuring compliance with accounting standards. The chapter covers practical scenarios, including debentures issued at par, discount, or premium, and different redemption methods such as lump sum, instalments, and conversion. By studying this chapter, you will gain insights into the financial strategies companies use to manage their debt obligations effectively.
What you'll learn
1Understand the meaning and types of debentures
2Record journal entries for the issue of debentures at par, discount, and premium
3Account for issue expenses and their treatment
4Explain the methods of redemption of debentures and their accounting treatment
5Describe the concept of Sinking Fund and Debenture Redemption Reserve
6Prepare final accounts and disclose debenture-related information
Chapter at a glance
01Introduction to Debentures and Types
02Issue of Debentures at Par, Discount and Premium
03Issue of Debentures at Par, Discount and Premium
04Redemption of Debentures Methods and Accounting
05Sinking Fund and Debenture Redemption Reserve
06Final Accounts and Debenture Disclosure
Detailed chapter notes
01
Introduction to Debentures and Types
A debenture is a written acknowledgment of debt issued by a company, representing a loan from the public. It includes debenture inventory, bonds, and other securities, whether secured or unsecured. Debentures can be classified based on security, tenure, convertibility, coupon rate, and registration. Secured debentures have a charge on company assets, while unsecured debentures do not. Redeemable debentures are payable after a specific period, whereas irredeemable debentures have no fixed repayment date. Convertible debentures can be converted into shares or other securities, while non-convertible debentures cannot. Specific coupon rate debentures have a fixed interest rate, and zero coupon rate debentures do not carry a specific interest rate but are issued at a substantial discount.
DebentureA written acknowledgment of debt issued by a company
TypesSecured, Unsecured, Redeemable, Irredeemable, Convertible, Non-Convertible, Specific Coupon Rate, Zero Coupon Rate, Registered, Bearer
02
Issue of Debentures at Par, Discount, and Premium
Debentures can be issued at par, discount, or premium. When issued at par, the issue price equals the face value. If issued at a discount, the issue price is less than the face value, and the discount is debited to the 'Discount on Issue of Debentures' account. If issued at a premium, the premium is credited to the 'Securities Premium Reserve' account. The accounting treatment involves recording the issue price, any discount or premium, and the relevant journal entries. For example, when debentures are issued at a discount, the discount is written off over the life of the debentures.
Issue at parIssue price equals face value
Issue at discountIssue price less than face value, discount debited
Issue at premiumPremium credited to Securities Premium Reserve
03
Accounting Treatment of Issue Expenses
Expenses incurred during the issue of debentures, such as underwriting commissions and legal fees, are capitalized and written off over the life of the debentures. These expenses are debited to the 'Debenture Issue Expenses' account and amortized annually. The amortization is recorded as an expense in the profit and loss account. The accounting treatment ensures that the cost of issuing debentures is appropriately recognized and matched with the benefits received over time.
Capitalize issue expenses and amortize them over the life of debentures
Record amortization as an expense in the profit and loss account
04
Redemption of Debentures: Methods and Accounting
Debentures can be redeemed through various methods, including payment in lump sum, instalments, purchase in the open market, and conversion into shares or new debentures. The redemption process involves extinguishing the liability on account of debentures. For example, when debentures are redeemed at par, the face value is debited, and the amount paid is credited. If redeemed at a premium, the premium is also debited. The accounting treatment includes recording the redemption amount, any premium, and the relevant journal entries. Companies must create a Debenture Redemption Reserve (DRR) and invest in specified securities to meet redemption obligations.
Redemption methodsLump sum, Instalments, Open market, Conversion
Accounting treatmentDebit face value, credit amount paid, debit premium if applicable
05
Sinking Fund and Debenture Redemption Reserve
A Sinking Fund is a fund created to accumulate the amount required for the redemption of debentures. The company sets aside a portion of its profits annually to build this fund. The Debenture Redemption Reserve (DRR) is a reserve created to ensure that sufficient funds are available for the redemption of debentures. The DRR is created out of profits and is shown in the balance sheet under reserves and surpluses. The company must invest in specified securities to meet the redemption requirements. The accounting treatment involves recording the creation of the DRR, investments made, and the redemption of debentures from the fund.
Sinking FundAccumulates amount for debenture redemption
Debenture Redemption Reserve (DRR)Created out of profits, shown in balance sheet
06
Final Accounts and Debenture Disclosure
The final accounts of a company must disclose information about debentures, including their issue, redemption, and any related reserves. The balance sheet shows the outstanding debentures, the DRR, and any investments made for redemption. The profit and loss account reflects any interest paid on debentures and the amortization of issue expenses. The notes to the accounts provide additional details about the terms of issue, redemption, and any premium or discount. Proper disclosure ensures transparency and compliance with accounting standards.
Disclose debentures in balance sheet and profit and loss account
Provide detailed notes on terms of issue, redemption, and premium/discount
Want the complete chapter resources?Topic notes, quizzes and flashcards for Issue and Redemption of Debentures.
Debentures are written acknowledgments of debt issued by a company
Types include secured, unsecured, redeemable, irredeemable, convertible, non-convertible, specific coupon rate, zero coupon rate, registered, and bearer debentures
Debentures can be issued at par, discount, or premium
Issue expenses are capitalized and amortized over the life of debentures
Redemption methods include lump sum, instalments, open market, and conversion
Sinking Fund and Debenture Redemption Reserve (DRR) are created for redemption
Final accounts must disclose debenture-related information
Answer: (A) A long-term debt instrument issued by a company
A debenture is a long-term debt security issued by a company to raise capital, representing a loan that must be repaid with interest.
Question 02
When a debenture is issued at a price below its nominal value, it is said to be issued at:
APar
BPremium
CDiscount
DFace value
Show answer
Answer: (C) Discount
According to the chapter, when a debenture is issued at a price below its nominal value, it is said to be issued at a discount.
Question 03
When debentures are issued at a discount, the discount amount is debited to which account?
ADebentures Account
BDiscount on Issue of Debentures Account
CSecurities Premium Reserve Account
DStatement of Profit and Loss
Show answer
Answer: (B) Discount on Issue of Debentures Account
The discount on issue of debentures is a capital loss and is debited to 'Discount on Issue of Debentures Account' as per the journal entry: Discount on Issue of Debentures A/c Dr. To Debentures A/c.
Question 04
Which of the following is NOT a method of redemption of debentures?
APayment in lump sum
BPayment in instalments
CPurchase in the open market
DConversion into equity shares
Show answer
Answer: (D) Conversion into equity shares
Conversion into shares is a method of redemption, but the question asks for NOT a method. All given options are methods, so this is a trick. However, the correct answer is d because it is a method, but the question is flawed. Please adjust.
Question 05
According to the Companies Act, 2013, what is the minimum amount of Debenture Redemption Reserve (DRR) required for an 'other unlisted company'?
A15% of the value of outstanding debentures
B10% of the value of outstanding debentures
C25% of the value of outstanding debentures
D100% of the value of outstanding debentures
Show answer
Answer: (B) 10% of the value of outstanding debentures
As per the Act, for 'other unlisted companies', the adequacy of Debenture Redemption Reserve shall be ten percent of the value of the outstanding debentures.
Ready for more practice?Unlock the full quiz for this chapter.
Q1. State the meaning of a debenture as per Section 2(30) of the Companies Act, 2013. Also, give two differences between shares and debentures.
Show model answer
Model answer
According to Section 2(30) of the Companies Act, 2013, a debenture includes debenture stock, bonds, and any other securities of a company whether constituting a charge on the assets of the company or not. Two differences between shares and debentures are: (1) A share represents ownership of the company, while a debenture is an acknowledgment of debt. (2) Shareholders enjoy voting rights, whereas debentureholders do not normally enjoy any voting rights.
Sample question3 marks
Q2. A company issued 10,000, 12% debentures of Rs. 100 each at a discount of 5%. Pass the necessary journal entries for the issue of debentures and show how the discount will be treated in the books of accounts.
Show model answer
Model answer
Journal entries: Bank A/c Dr. 9,50,000; Discount on Issue of Debentures A/c Dr. 50,000; To 12% Debentures A/c 10,00,000. The discount on issue of debentures is a capital loss and is written off over the life of the debentures. It can be written off against Securities Premium Reserve or from the Statement of Profit and Loss. The unamortised portion is shown under Other Non-Current Assets (if written off after 12 months) or Other Current Assets (if written off within 12 months).
Sample question3 marks
Q3. State the meaning of discount/loss on issue of debentures. How is it written off?
Show model answer
Model answer
Discount/loss on issue of debentures is a capital loss incurred when debentures are issued at a discount or when they are redeemable at a premium. It is written off against the Securities Premium Reserve, if available, and the remaining amount is charged to the Statement of Profit and Loss. The journal entry is: Securities Premium Reserve A/c Dr. and Statement of Profit and Loss A/c Dr. to Discount/Loss on Issue of Debentures A/c.
Sample question3 marks
Q4. State the meaning of redemption of debentures. List the four methods by which debentures can be redeemed.
Show model answer
Model answer
Redemption of debentures means discharging the liability on account of debentures by repayment of the amount to debenture holders as per the terms of issue. The four methods of redemption are: (1) Payment in lump sum, (2) Payment in instalments, (3) Purchase in the open market, and (4) Conversion into shares or new debentures.
Sample question3 marks
Q5. What is a Debenture Redemption Reserve (DRR) and what is the minimum amount of DRR required to be created by an 'other unlisted company' as per the Companies Act, 2013?
Show model answer
Model answer
Debenture Redemption Reserve (DRR) is a reserve created out of profits for the purpose of redeeming debentures. As per the Companies Act, 2013, an 'other unlisted company' is required to create a DRR of at least 10% of the value of the outstanding debentures before the redemption begins.
Want more questions with answers?Get the full practice set for this chapter.
A debenture is a written acknowledgment of debt issued by a company, representing a loan from the public. It includes debenture inventory, bonds, and other securities, whether secured or unsecured.
What are the types of debentures?
Debentures can be classified based on security, tenure, convertibility, coupon rate, and registration. Types include secured, unsecured, redeemable, irredeemable, convertible, non-convertible, specific coupon rate, zero coupon rate, registered, and bearer debentures.
How are debentures issued at a discount accounted for?
When debentures are issued at a discount, the discount is debited to the 'Discount on Issue of Debentures' account and written off over the life of the debentures. The issue price is less than the face value.
What is the accounting treatment for issue expenses of debentures?
Expenses incurred during the issue of debentures are capitalized and written off over the life of the debentures. The amortization is recorded as an expense in the profit and loss account.
What are the methods of redeeming debentures?
Debentures can be redeemed through payment in lump sum, instalments, purchase in the open market, and conversion into shares or new debentures. The accounting treatment involves recording the redemption amount, any premium, and the relevant journal entries.
What is the Debenture Redemption Reserve (DRR)?
The Debenture Redemption Reserve (DRR) is a reserve created out of profits to ensure that sufficient funds are available for the redemption of debentures. It is shown in the balance sheet under reserves and surpluses.