Revision: Accountancy II : Financial Statement Analysis >> Issue and Redemption of Debentures Accountancy Commerce (English Medium) Class 12 CBSE

• According to section 2(30) of the Companies Act, 2013, " Debenture includes debenture stock, bonds and any other securities of a Company, whether constituting a charge on the assets of the Company or not." 
• “A Debenture is a document given by a company as evidence of a debt to the holder, usually arising out of a loan and most commonly secured by a charge." -Topham
• According to Evelyn Thomas, "a debenture is a document under the company's seal which provides for the payment of a principal sum and interest thereon at regular intervals, which is usually secured by a fixed or floating change on the company's property or undertaking and which acknowledges a loan to the company".

According to Companies Act, sec. 2(12), “Debenture includes stock, bonds and any other securities of a company whether constituting a charge on the company’s assets or not”.

\[\text{Number of Debentures Issued}=\frac{\text{Purchase Consideration}}{\text{Issue Price of Debenture}}\]

• Debenture: A written promise by a company to repay a loan with interest.
• Legal View: Includes all debt instruments, as per the Companies Act, 2013.
• Key Features: Fixed interest, secured by assets, issued under seal, max 10-year term (30 for infrastructure).
• Debentureholders: They are lenders, not owners of the company.
• Bond vs Debenture: Bonds may have no fixed interest; debentures always do.

• Debentures are classified based on Security, Redemption, Registration, and Convertibility.
• Secured Debentures are backed by company assets (fixed or floating charge), while Unsecured Debentures have no security and involve more risk.
• Redeemable Debentures are repayable after a fixed period or in instalments, whereas Irredeemable Debentures are repaid only at the time of the company's liquidation.
• Registered Debentures are recorded in the company's register and require a transfer deed, while Bearer Debentures are freely transferable and paid against attached coupons.
• Convertible Debentures can be exchanged into shares (partly or fully), while Non-convertible Debentures cannot be converted into equity or other securities.

A. When amount is received in Lump Sum as Application Money

1. On receipt of application money:

Bank A/c                  ...Dr.

    To Debentures Application and Allotment A/c

(Being application money received for debentures)

2. On allotment – i.e., acceptance of applications:

Debentures Application and Allotment A/c   ...Dr.

     To ...% Debentures A/c

(Being application money adjusted on allotted debentures)

3. On refund of money on totally rejected applications:

Debentures Application and Allotment A/c        ...Dr. 

       To Bank A/c

(Being excess application money refunded for rejected applications)

B. When amount is received in More Than One instalment:

1. On receipt of application money:

Bank A/c         ...Dr.

    To Debentures Application A/c

(Being application money received on debentures)

2. On acceptance of applications or On Allotment of Debentures:

Debentures Application A/c      ...Dr.

     To ...% Debentures A/c

(Being application money adjusted on allotted debentures)

3. On adjustment of surplus application money (partially allotted):

Debentures Application A/c       ...Dr.

     To Debentures Allotment A/c

(Being surplus application money adjusted towards allotment)

4. On refund of excess application money (rejected applications):

Debentures Application A/c      ...Dr.

   To Bank A/c

  (Being refunded of application money on rejected applications)

5. On allotment money becoming due:

Debentures Allotment A/c       ...Dr.

   To ...% Debentures A/c

(Being allotment money due on debentures)

6. On receipt of allotment money:

Bank A/c      ...Dr.

      To Debentures Allotment A/c

(Being allotment money received)

7. On making a call (e.g., First Call) due:

Debentures Call A/c      ...Dr.

     To ...% Debentures A/c  

(Being call money due on debentures)

8. On receipt of call money:

Bank A/c      ...Dr.

      To Debentures Call A/c

(Being call money received)

Note: Repeat call entries for Second Call, Third Call, etc., using separate accounts as needed.

Securities Premium A/c           ...Dr.

Capital Reserve A/c                 ...Dr.

Statement of Profit & Loss      ...Dr.

      To Discount/Loss on Issue of Debentures A/c

A. Issue of Debentures to Promoters

1. When recording incorporation cost or preliminary expenses:

Incorporation Cost A/c or Preliminary Expenses A/c      ...Dr.

      To Promoters’ A/c

(Being cost of company incorporation payable to promoters)

2. When debentures are issued to promoters:

Promoters’ A/c       ...Dr.

     To...% Debentures A/c

(Being debentures issued to promoters)

B. Issue of Debentures to Underwriters

1. When underwriting commission becomes due:

Underwriting Commission A/c     ...Dr.

     To Underwriter’s A/c 

  (Being underwriting commission due)

2. When debentures are issued to settle the dues:

Underwriter’s A/c       ...Dr.

       To ...% Debentures A/c  

(Being debentures issued to underwriters)

C. Issue of Debentures to Vendors

1. On Purchase of Business or Assets:

(i) When Purchase Consideration = Net Assets:

Sundry Assets A/c       ...Dr.

        To Sundry Liabilities A/c 

        To Vendor’s A/c

(Being assets and liabilities taken over and balance payable to vendor)

(ii) When Purchase Consideration > Net Assets - (Excess debited to Goodwill A/c)

Sundry Assets A/c                 ...Dr.

Goodwill A/c                        ...Dr.

       To Sundry Liabilities A/c 

       To Vendor’s A/c

(Being the excess purchase price over net assets treated as goodwill)

(iii) When Purchase Consideration < Net Assets - (Excess credited to Capital Reserve A/c)

Sundry Assets A/c      ...Dr.

      To Sundry Liabilities A/c  

      To Capital Reserve A/c

      To Vendor’s A/c   

(Being purchase consideration less than net assets; balance credited to capital reserve)

2. On Issue of Debentures to Vendors:

(i) When Debentures are issued at Par:

Vendor’s A/c     ...Dr.

      To ...% Debentures A/c  

(Being debentures issued at par to vendor)

(ii) When Debentures are issued at Premium:

Vendor’s A/c        ...Dr.

      To ...% Debentures A/c

      To Securities Premium A/c

(Being debentures issued at premium)

(iii) When Debentures are issued at Discount:

Vendor's A/c                                           ...Dr.

Discount on Issue of Debentures A/c     ...Dr.

      To ...% Debentures A/c 

(Being debentures issued at discount)

A. First Method: Entry for Debentures is Not Passed

1. If the loan is taken from a bank :

Bank A/c      ...Dr.

      To Bank Loan A/c 

(Being loan taken from bank)

B. Second Method: Entry for Debentures is Passed

1. On Taking the Loan:

Bank A/c     ...Dr.  

         To Bank Loan A/c  

(Being loan taken from bank)

2. On Issuing Debentures as Collateral:

Debentures Suspense A/c      ...Dr.

      To ...% Debentures A/c

(Being debentures issued as collateral security for a loan)

C. On Repayment of the Loan (for both methods)

1. Reverse of Loan Entry:

Bank Loan A/c       ...Dr.  

        To Bank A/c  

(Being repayment of a bank loan)

2. Reverse of Debentures Entry:

... % Debentures A/c     ...Dr.  

      To Debentures Suspense A/c  

(Being the cancellation of debentures issued as collateral)

A. When Application Money is received in Lump sum:

1. Bank A/c        ...Dr.

      To Debentures Application and Allotment A/c

2. Debentures Application and Allotment A/c      ...Dr.

       To ...% Debentures A/c

B. When Application Money is received in parts (Instalments):

1. Bank A/c       ...Dr.

       To Debentures Application A/c

2. Debentures Application A/c       ...Dr.

        To ...% Debentures A/c

A. When Application Money is Received in Lump Sum

1. On receipt of application money:

Bank A/c       ...Dr.

       To Debentures Application and Allotment A/c

( Being application money received)

(ii) On allotment of debentures and accounting for discount:

Debentures Application and Allotment A/c     ...Dr.

Discount on Issue of Debentures A/c               ...Dr.

      To ...% Debentures A/c

(Being debentures allotted and discount recorded)

B. When Application Money is Received in Instalments

(i) On receipt of application money:

Bank A/c      ...Dr.

      To Debentures Application A/c

(Being application money received)

(ii) On allotment and transfer of application money:

Debentures Application A/c      ...Dr.

       To ...% Debentures A/c

(Being application money adjusted on allotment)

(iii) On recording discount and allotment due:

Debentures Allotment A/c                       ...Dr.

Discount on Issue of Debentures A/c      ...Dr.

      To ...% Debentures A/c

(Being debentures allotted at discount and allotment due)

(iv) On receipt of allotment money:

Bank A/c      ...Dr.

      To Debentures Allotment A/c

(Being allotment money received)

Note: If the question doesn’t specify when the discount is allowed, it is assumed to be allowed on allotment.

C. Writing Off Discount on Issue of Debentures:

As Discount on Issue of Debentures is a capital loss, it is written off in the year incurred using the following order of preference:

Securities Premium A/c           ...Dr.

Capital Reserve A/c                 ...Dr.

Statement of Profit and Loss    ...Dr.

      To Discount on Issue of Debentures A/c

(Being discount on issue of debentures written off)

These accounts are used in sequence depending on availability. If none exist, the entire amount is charged to Statement of Profit and Loss.

A. When Application Money is payable in a Lump Sum

1. Bank A/c        ...Dr.

       To Debentures Application and Allotment A/c

2. Debentures Application and Allotment A/c      ...Dr.

       To ...% Debentures A/c

       To Securities Premium A/c

Note: Securities Premium Account is credited on allotment of debentures.

B. When Application Money is payable in parts (Instalments)

1. Bank A/c                                ...Dr.

    To Debentures Application A/c

2. Debentures Allotment A/c     ...Dr.

     To ...% Debentures A/c

     To Securities Premium A/c

3. Debentures Allotment A/с      ...Dr.

      To ...% Debentures A/c

      To Securities Premium A/с

4. Bank A/c                                 ...Dr.

       To Debentures Allotment A/c

Note: If the question does not specify when the premium is due, it is presumed to be due on the allotment money being demanded.

A. When Application Money is received in a Lump sum:

1. Bank A/c            ...Dr.

      To Debentures Application and Allotment A/c

2. Debentures Application and Allotment A/c     ...Dr.

Loss on Issue of debentures A/c                          ...Dr.

     To ...% Debentures A/c

     To Premium on Redemption of Debentures A/c

Note: Like the Discount on Issue of Debentures, the premium payable on Redemption of Debentures is provided on allotment.

B. When Application Money is received in parts (Instalments):

1. Bank A/c                                  ...Dr.

        To Debentures Application A/c

2. Debentures Application A/c      ...Dr.

        To ...% Debentures A/c

3. Debentures Allotment A/c          ...Dr.

Loss on Issue of Debentures A/c    ...Dr.

        To ...% Debentures A/c

        To Premium on Redemption of Debentures A/c

4. Bank А/с                                     ...Dr.

        To Debentures Allotment A/c

Note: Like the Discount on Issue of Debentures, the premium payable on Redemption of Debentures is accounted for when allotment money is demanded.

A. When Application Money is Received in Lump Sum

1. On Receipt of Application Money

Bank A/c             ...Dr.  

      To Debentures Application and Allotment A/c

(Being application money received)

2. On Allotment of Debentures:

Debentures Application and Allotment A/c       ...Dr.

Discount on Issue of Debentures A/c                 ...Dr.

Loss on Issue of Debentures A/c                        ...Dr.

    To ...% Debentures A/c

    To Premium on Redemption of Debentures A/c

B. When Application Money is Received in Parts (Instalments)

1. On Receipt of Application Money:

Bank A/c                        ...Dr.

         To Debentures Application A/c

(Being application money received)

2. On Allotment of Debentures:

Debentures Application A/c     ...Dr.

          To ...% Debentures A/c

(Being application money transferred on allotment)

3. On Recording Discount, Loss and Premium:

Debentures Allotment A/c                        ...Dr.

Discount on Issue of Debentures A/c       ...Dr.

Loss on Issue of Debentures A/c              ...Dr.

       To ...% Debentures A/c

      To Premium on Redemption of Debentures A/c

4. On Receipt of Allotment Money:

Bank A/c                          ...Dr.

       To Debentures Allotment A/c

(Being allotment money received)

C. Alternative Entry (Combining Discount & Loss Accounts)

Instead of two separate accounts (Discount on Issue and Loss on Issue), a single Loss on Issue of Debentures A/c may be used:

Debentures Application and Allotment A/c    ...Dr.

Loss on Issue of Debentures A/c                    ...Dr.

      To ...% Debentures A/c

       To Premium on Redemption of Debentures A/c

A. When Application Money is received in a Lump sum:

1. Bank A/c       ...Dr.

        To Debentures Application and Allotment A/c

2. Debentures Application and Allotment A/c     ...Dr.

Loss on Issue of Debentures A/c                         ...Dr.

      To ...% Debentures A/c

      To Securities Premium A/c

      To Premium on Redemption of Debentures A/c

B. When Application Money is received in parts (Instalments):

1. Bank A/c            ...Dr.

     To Debentures Application A/c

2. Debentures Application A/с     ...Dr.

        To ...% Debentures A/c

3. Debentures Allotment A/c       ...Dr.

Loss on Issue of Debentures A/c     ...Dr.

      To ...% Debentures A/c

      To Securities Premium A/c

      To Premium on Redemption of Debentures A/c

4. Bank A/c            ...Dr.

       To Debentures Allotment A/c

1. When Interest is Due: 

Debentures' Interest or Interest on Debentures A/c      ...Dr.

      To Debentureholders' A/c

      To TDS Payable A/c

(Being interest due on debentures and TDS deducted)

2. On payment to Debentureholders:

Debentureholders' A/c            ...Dr.

      To Bank A/c

(Being payment of interest to debentureholders)

3. On deposit of TDS in the Government Account:

TDS Payable A/c         ...Dr.

      To Bank A/c

(Being TDS deposited to the government)

4. On transfer of Interest to Statement of Profit & Loss at the end of the year:

Statement of Profit & Loss (Finance cost)        ...Dr.

      To Debentures' Interest or Interest on Debentures A/c

(Being interest charged to Profit & Loss Account)

Securities Premium A/c                    ...Dr.

Capital Reserve A/c                          ...Dr.

Statement of Profit & Loss A/c (Finance Cost)      ...Dr.

       To Discount or Loss on Issue of Debentures A/c

(Being the discount or loss on issue of debentures written off)

• Redemption of debentures means repaying the amount due to debentureholders.
• Debentures are usually redeemed on the due date, but may be redeemed earlier if permitted.
• Redemption can be done through full payment, in instalments by draw of lots, or by conversion.
• The amount paid on redemption may be the face value or face value plus premium.
• Redemption must follow the terms stated in the prospectus and the debenture certificate.

A. If Reddemed at Par:

1. On debentures becoming due:

...% Debentures A/c      ...Dr.

  To Debentureholders A/c

2. On payment:

Debentureholders A/c     ...Dr.

     To Bank A/c

B. If Redeemed at Premium:

1. On debentures becoming due:

...% Debentures A/c                                          ...Dr.

Premium on Redemption of Debentures A/c     ...Dr.

           To Debentureholders A/c

2. On payment:

Debentureholders A/c     ...Dr.

         To Bank A/c

A. On 31st March of the previous year : 

On transfer of profits by an unlisted Company@ 10% of the face value of debentures outstanding : 

Surplus, i.e., Balance in Statement of Profit & Loss     ...Dr.

Dividend Equalisation Reserve A/c                               ...Dr.

General Reserve                                                             ...Dr. 

        To Debenture Redemption Reserve

B. At the beginning of the financial year (Upto 30th April): 

On making Investment by all unlisted as well as listed Companies @15% of the face value of debentures to be redeemed : 

Debenture Redemption Investment A/c       ...Dr.

         To Bank A/c

C. At the time of redemption: On Encashing Investment

Bank A/c                  ...Dr.

    To Debenture Redemption Investment A/c

D. On redemption of debentures :

1.On Debentures becoming due:

Debentures A/c         ...Dr.

        To Debentureholder A/c

2. On Payment:

Debentureholder A/c    ...Dr.

       To Bank A/c

E. On transfer of amount of DRR to General Reserve:

Debenture Redemption Reserve (DRR) A/c      ...Dr.

         To General Reserve A/c

1. When debentures are due for redemption:

Debentures A/c          ...Dr.

      To Debentureholders A/c

2. When payment is made to debentureholders:

Debentureholders A/c          ...Dr.

      To Bank A/c

A. When debentures are purchased at a discount for immediate cancellation:

1. On purchase of own debentures:

Debentures A/c        ...Dr.

      To Bank A/c

      To Profit on Redemption of Debentures A/c

2. On transfer of profit on redemption:

Profit on Redemption of Debentures A/c        ...Dr.

      To Capital Reserve A/c

B. When debentures are purchased at a premium (i.e., above nominal value)

1. In purchase of own debentures:

Debentures A/c              ...Dr.

Loss on Redemption of Debentures A/c

          To Bank A/c

2. On transfer of loss on redemption:

Statement of Profit & Loss A/c    ...Dr.

       To Loss on Redemption of Debentures A/c