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Issue and Redemption of Debentures – Class 12 Accountancy notes, important questions and MCQs

NCERT Class 12 Accountancy, chapter 6. Notes, key terms, important questions with answers and MCQs.

Chapter overview

A debenture is a written acknowledgement of a debt taken by a company, carrying a fixed rate of interest and usually secured on its assets. Debentures may be issued at par, premium or discount, and redeemed at par or premium. They may also be issued for consideration other than cash or as collateral security. Redemption is governed by Section 71 of the Companies Act, 2013 and related rules.

Types of debentures

Secured or unsecured; redeemable or irredeemable (perpetual); convertible or non-convertible; registered or bearer; zero coupon or specific coupon rate.
Debenture holders are creditors who receive fixed interest whether or not there is profit; shareholders are owners who receive dividends.

Issue of debentures

Debentures can be issued at par, at a premium (credited to securities premium) or at a discount.
Terms of redemption may be at par or at a premium; premium on redemption is a liability credited to the premium on redemption of debentures account.
Loss on issue of debentures (discount on issue plus premium on redemption) is written off first from securities premium and then from the statement of profit and loss over the life of the debentures.
Debentures issued as collateral security are additional security for a loan; they may be recorded or shown only as a note.

Interest and redemption

Interest on debentures is a charge against profit, payable after deducting tax at source (TDS).
Methods of redemption: payment in lump sum at maturity, payment in instalments, purchase in the open market, or conversion into shares.
Rules under the Companies Act may require some companies to create a debenture redemption reserve and invest a portion of the amount to protect debenture holders.

Key terms

Debenture: an instrument acknowledging a debt of a company, carrying fixed interest
Convertible debenture: a debenture that can be converted into shares after a specified period
Collateral security: additional security given against a loan, used only if the loan is not repaid
Loss on issue of debentures: discount on issue and premium on redemption, written off over the debentures' life
Redemption of debentures: repayment of the debenture amount by the company

Important questions with answers

Distinguish between shares and debentures.2 marks

Shares represent ownership; shareholders receive dividends from profits, have voting rights and are repaid last on winding up. Debentures represent a loan; debenture holders are creditors who receive fixed interest whether or not there is profit, usually have no voting rights and are repaid before shareholders. Shares cannot be issued at a discount except sweat equity, but debentures can.

What is meant by issuing debentures as collateral security?3 marks

Issuing debentures as collateral security means giving debentures to a lender as additional security for a loan, besides the primary security. If the company repays the loan, the debentures are returned; if it fails, the lender can sell or hold them and recover the dues. No interest is paid on such debentures.

Explain the accounting treatment for issue of debentures at a discount and redeemable at a premium, with the example of 1,000 debentures of ₹100 each issued at 5 per cent discount and redeemable at 10 per cent premium.5 marks

When debentures are issued at a discount and redeemable at a premium, the company receives less than the face value and will pay more than the face value at redemption. Both the discount and the premium on redemption are losses to the company and are recorded in the loss on issue of debentures account at the time of issue. In the example, the amount received is 1,000 × ₹95 = ₹95,000, debited to the bank account. The loss on issue is discount ₹5,000 plus premium on redemption ₹10,000 = ₹15,000, debited to the loss on issue of debentures account. Debentures are credited at face value, ₹1,00,000, and the premium on redemption of debentures account, a liability, is credited with ₹10,000. The loss on issue of ₹15,000 is written off first from the securities premium account, if available, and the balance from the statement of profit and loss over the life of the debentures. At redemption, the debenture account and the premium on redemption account are debited and the debenture holders are paid ₹1,10,000. Interest at the coupon rate is paid on the face value every year as a charge against profit.

Quick revision

Types: secured, redeemable, convertible, registered.
Issue at par, premium or discount; redeem at par or premium.
Loss on issue: securities premium first, then P&L.
Redemption: lump sum, instalments, open market, conversion.

Exam tips

Practise the issue entry with discount and premium on redemption until it is automatic.
Remember that interest on debentures is paid even in a year of loss.

Practice MCQs

Debenture holders are the company's
1. owners
2. employees
3. directors
4. creditors
Show answer
Answer: (d) creditors. They lend money to it.
Interest on debentures is
1. an appropriation of profit
2. paid only from profits
3. a charge against profit
4. optional
Show answer
Answer: (c) a charge against profit. It must be paid even in a loss year.
Debentures that can be changed into shares are
1. non-convertible
2. convertible
3. bearer
4. irredeemable
Show answer
Answer: (b) convertible. Conversion is after a specified time.
Debentures given as additional security for a loan are issued as
1. premium
2. bonus
3. collateral security
4. sweat equity
Show answer
Answer: (c) collateral security. They are used only if the loan is not repaid.
Loss on issue of debentures is first written off from
1. general reserve
2. cash
3. share capital
4. securities premium
Show answer
Answer: (d) securities premium. Then from the statement of profit and loss.
The section of the Companies Act, 2013 dealing with debentures is
1. Section 52
2. Section 135
3. Section 71
4. Section 48
Show answer
Answer: (c) Section 71. It covers issue and redemption.
1,000 debentures of ₹100 each are issued at 5 per cent discount and redeemable at 10 per cent premium. Loss on issue is
1. ₹5,000
2. ₹10,000
3. ₹15,000
4. ₹1,00,000
Show answer
Answer: (c) ₹15,000. Discount ₹5,000 + premium on redemption ₹10,000.
In the same case, the amount received in the bank is
1. ₹1,00,000
2. ₹1,10,000
3. ₹95,000
4. ₹85,000
Show answer
Answer: (c) ₹95,000. 1,000 × ₹95.

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Written by Kundali IQ from standard, well-established facts to help with revision. This is not an official NCERT publication; always read your textbook too.