Issue and Redemption of Debentures: Class 12 Accountancy Guide

Understanding the Issue of Debentures

The issue of debentures is a method companies use to raise long-term capital without giving away ownership. In Class 12 NCERT Accountancy, this process involves several important steps:

• Board and Shareholder Approval: Before issuing debentures, the company must get approval from its Board of Directors and shareholders in a general meeting.
• Terms of Issue: These include the rate of interest, face value (usually Rs. 100), redemption period, and security offered.
• Invitation to Investors: The company issues a prospectus or letter of offer inviting applications.
• Receiving Application Money: Investors send application money, which is recorded in the 'Debenture Application Account.'
• Allotment and Calls: After scrutiny, debentures are allotted, and allotment money and further calls (if any) are collected.

The issue price of debentures can be:

Each type requires specific accounting treatments, which we will explore next.

Accounting Entries for Debenture Issue

Recording the issue of debentures correctly is crucial for Class 12 Accountancy exams. Here are the key accounting entries:

1. On Receipt of Application Money:

``plaintext Bank A/c Dr. To Debenture Application A/c ``

2. On Allotment of Debentures:

``plaintext Debenture Application A/c Dr. To 12% Debentures A/c ``

3. On Receipt of Allotment Money:

``plaintext Bank A/c Dr. To Debenture Allotment A/c ``

4. On Transfer of Allotment Money:

``plaintext Debenture Allotment A/c Dr. To 12% Debentures A/c ``

Example:

Y Ltd. issues 9,000 12% debentures of Rs. 100 each. Application money received is Rs. 30 per debenture.

• Bank A/c Dr. Rs. 2,70,000 To Debenture Application A/c Rs. 2,70,000
• Debenture Application A/c Dr. Rs. 2,70,000 To 12% Debentures A/c Rs. 2,70,000

This ensures the money received and debentures issued are properly recorded.

Issue at Premium or Discount

• At Premium: Credit Securities Premium Reserve A/c
• At Discount: Debit Discount on Issue of Debentures A/c

These accounts reflect additional gains or losses on issue.

Creating and Using Debenture Redemption Reserve (DRR)

The Companies Act requires companies to create a Debenture Redemption Reserve (DRR) before redeeming debentures. This reserve ensures funds are available to repay debenture holders.

• Purpose: Protects creditors by earmarking profits for redemption.
• Creation: A portion of profits is transferred to DRR from the Profit & Loss Appropriation Account.
• Amount: Usually a fixed percentage of the debenture value.

Accounting Entry for DRR Creation:

``plaintext Profit & Loss Appropriation A/c Dr. To Debenture Redemption Reserve A/c ``

Usage:

• DRR is used to redeem debentures either fully or partially.
• After redemption, any balance in DRR can be transferred to the General Reserve.

This step is vital for Class 12 students to understand the legal and financial safeguards in debenture redemption.

Methods of Redemption of Debentures

Redemption means repaying the debenture holders the principal amount after the expiry of the tenure. Companies can redeem debentures in various ways:

• Redemption at Par: Paying the face value.
• Redemption at Premium: Paying more than the face value.
• Redemption by Conversion: Converting debentures into shares.
• Redemption by Purchase in the Open Market: Buying back debentures before maturity.

Example of Redemption at Premium:

If a company redeems debentures of Rs. 1,00,000 at 10% premium:

• Debentures A/c Dr. Rs. 1,00,000
• Loss on Redemption of Debentures A/c Dr. Rs. 10,000
• To Bank A/c Rs. 1,10,000

This entry shows the extra amount paid as premium.

Key Points:

• Redemption must comply with Companies Act provisions.
• DRR must be created before redemption.
• Proper accounting entries must be passed to record redemption.

Issue of Debentures for Consideration Other Than Cash

Sometimes, companies issue debentures not for cash but in exchange for assets or to settle liabilities. This is common when acquiring fixed assets or taking over liabilities.

Accounting Treatment:

• When issued at par:

``plaintext Asset A/c Dr. To 12% Debentures A/c ``

• When issued at discount:

``plaintext Asset A/c Dr. Discount on Issue of Debentures A/c Dr. To 12% Debentures A/c ``

• When issued at premium:

``plaintext Asset A/c Dr. To 12% Debentures A/c To Securities Premium Reserve A/c ``

Example:

A company purchases machinery worth Rs. 2,00,000 by issuing 12% debentures at 10% premium.

• Machinery A/c Dr. Rs. 2,00,000
• To 12% Debentures A/c Rs. 1,80,000
• To Securities Premium Reserve A/c Rs. 20,000

This method helps companies acquire assets without immediate cash outflow.

Comparison of Issue Price Types and Their Accounting Impact

Understanding the difference between issue at par, premium, and discount is essential for Class 12 NCERT students. The following table summarizes key points:

Formula for Premium or Discount Amount:

$$\text{Premium or Discount} = \text{Issue Price} - \text{Face Value}$$

Knowing these differences helps in preparing accurate journal entries and financial statements.