Issue and Redemption of Debentures: Class 12 NCERT Accountancy Guide

Understanding Issue and Redemption of Debentures in Class 12 Accountancy

Debentures are debt instruments issued by companies to raise long-term funds. In Class 12 NCERT Accountancy, the Issue and Redemption of Debentures chapter explains how companies issue debentures and repay them later.

Issue of Debentures means allotting debentures to investors in exchange for money or other considerations. The issue price can be:

• At par: Face value equals issue price
• At premium: Issue price is above face value
• At discount: Issue price is below face value

Redemption of Debentures refers to repaying the principal amount to debenture holders on maturity or earlier as per terms. Redemption can be done:

• At par
• At premium
• By conversion into shares

This topic is vital for Class 12 students to understand company financing and prepare for board exams effectively.

Methods of Issuing Debentures: Cash and Non-Cash Considerations

Companies can issue debentures in two main ways:

1. Issue for Cash: Investors pay money, and debentures are allotted. 2. Issue for Consideration Other Than Cash: Debentures are issued in exchange for assets, services, or business acquisition.

Issue of Debentures for Non-Cash Consideration

This method helps companies acquire assets without immediate cash outflow. For example, a company may issue debentures to vendors for machinery or services rendered.

Accounting Treatment:

• Debit the asset or expense account for the value of assets or services received.
• Credit the debentures account at face value plus any premium or less any discount.
• If issued at premium, credit the Securities Premium Reserve Account.
• If issued at discount, debit the Discount on Issue of Debentures Account.

#### Example:

This records machinery purchase by issuing debentures.

Accounting Entries for Issue of Debentures at Par, Premium, and Discount

The accounting treatment varies based on the issue price:

| At Premium | Bank A/c (or Vendor A/c) | 10% Debentures A/c (Face Value)

Worked Example:

Y Ltd. issues 1,000 debentures of Rs. 100 each at 10% premium for cash.

• Bank A/c Dr. = 1,10,000
• To 10% Debentures A/c = 1,00,000
• To Securities Premium Reserve A/c = 10,000

This entry shows receipt of Rs. 1,10,000 including premium.

Understanding these entries is essential for Class 12 students to record transactions correctly.

Debenture Redemption: Methods and Accounting Treatment

Redemption means paying back the debenture holders. Companies can redeem debentures:

• At par: Pay face value
• At premium: Pay face value plus premium
• By conversion: Convert debentures into shares
• By purchase in the open market

Redemption Methods

1. Lump Sum Redemption: Entire amount paid at once on maturity. 2. Redemption by Instalments: Partial amounts paid periodically. 3. Conversion into Shares: Debentures converted into equity shares.

Accounting Treatment

• Create a Debenture Redemption Reserve (DRR) before redemption.
• Transfer required amount from profit to DRR.
• On redemption, debit Debentures Account and credit Bank Account.
• If redeemed at premium, debit Loss on Redemption of Debentures Account.

Example:

A company redeems 1,000 debentures of Rs. 100 at 5% premium.

• Debentures A/c Dr. 1,00,000
• Loss on Redemption A/c Dr. 5,000
• To Bank A/c 1,05,000

This shows payment of Rs. 1,05,000 to debenture holders.

Debenture Redemption Reserve (DRR): Importance and Rules

The Companies Act mandates creating a Debenture Redemption Reserve (DRR) to protect debenture holders before redemption.

Key Points about DRR:

• It is created from profits before debenture redemption.
• Helps ensure company’s ability to repay debentures.
• Usually, a minimum percentage of debenture value must be transferred to DRR.
• DRR is shown under Reserves and Surplus in the balance sheet.
• After full redemption, the DRR balance can be transferred to General Reserve.

Accounting Entry for DRR Creation:

``markdown Profit & Loss A/c Dr. To Debenture Redemption Reserve A/c (Being transfer to DRR from profit) ``

Importance for Class 12 Students:

Understanding DRR helps students grasp legal compliance and prudent financial management in companies.

Summary Table: Issue vs Redemption of Debentures

Here is a quick comparison to clarify the differences between issue and redemption of debentures:

This table helps Class 12 students revise the core concepts quickly.