Issue and Redemption of Debentures: Class 12 NCERT Accountancy Guide

Understanding Debentures and Their Importance

Debentures are long-term debt instruments issued by companies to raise funds from the public. They are a form of loan where the company promises to pay interest and repay the principal on maturity.

For Class 12 NCERT Accountancy students, understanding debentures is crucial because they represent a major source of finance for companies and involve specific accounting treatments. Key features include:

• Fixed interest rate (coupon rate)
• Fixed maturity period
• Tradable securities

Companies issue debentures to meet capital requirements without diluting ownership, unlike equity shares. Investors get regular interest income, making debentures attractive.

This chapter helps students learn how to record transactions related to debentures in the books of accounts.

Issue of Debentures: Types and Accounting Treatment

Debentures can be issued in three ways based on the issue price:

1. At Par: Issue price equals face value. 2. At Premium: Issue price is higher than face value. 3. At Discount: Issue price is lower than face value.

Accounting Entries for Issue of Debentures for Cash

When debentures are issued for cash, the company receives money directly from investors. The main steps and entries are:

• Receipt of Application Money:

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

• Transfer of Application Money on Allotment:

`` Debenture Application A/c Dr. To Debentures A/c ``

• Receipt of Allotment Money:

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

• Transfer of Allotment Money to Debentures Account:

`` Debenture Allotment A/c Dr. To Debentures A/c ``

Treatment of Premium and Discount

• Premium on Issue: Credited to Securities Premium Reserve Account.
• Discount on Issue: Debited to Discount on Issue of Debentures Account and written off over time.

This ensures correct reflection of liabilities and reserves in financial statements.

Redemption of Debentures: Methods and Accounting

Redemption means repaying the debenture holders on maturity or earlier. Companies can redeem debentures through various methods:

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

Accounting for Redemption

• At Par: Debit Debentures Account and credit Bank Account.
• At Premium: Debit Debentures Account and Loss on Redemption Account; credit Bank Account.
• By Conversion: Debit Debentures Account; credit Share Capital Account.

Debenture Redemption Reserve (DRR)

Companies must create a DRR before redemption to protect creditors. DRR is transferred from profits and shown in reserves.

Example: If a company redeems ₹5,00,000 debentures at a 5% premium, journal entry:

``markdown Debentures A/c Dr. 5,00,000 Loss on Redemption A/c Dr. 25,000 To Bank A/c 5,25,000 ``

This ensures transparency and financial prudence.

Worked Example: Issue of Debentures at Premium

Consider Y Ltd. issuing 10,000 12% debentures of ₹100 each at a premium of 5%.

• Total face value = 10,000 × ₹100 = ₹10,00,000
• Premium = 5% of ₹100 = ₹5 per debenture
• Issue price = ₹105 per debenture
• Total amount received = 10,000 × ₹105 = ₹10,50,000

Journal Entries:

1. On receipt of application money:

``markdown Bank A/c Dr. 10,50,000 To 12% Debentures Application A/c 10,50,000 ``

2. On allotment:

``markdown 12% Debentures Application A/c Dr. 10,50,000 To 12% Debentures A/c 10,00,000 To Securities Premium Reserve A/c 50,000 ``

This example clarifies how premium is credited to Securities Premium Reserve and debentures are recorded at face value.

Common Exam Questions on Issue and Redemption of Debentures

Students often face questions on:

• Difference between issue at par, premium, and discount.
• Journal entries for issue and redemption.
• Treatment of premium and discount accounts.
• Purpose and accounting of Debenture Redemption Reserve.
• Calculation of interest on debentures.

Quick Comparison Table:

Understanding these differences helps in answering theory and practical questions effectively.