Chapter – 1. Issue and Redemption of Debentures

1.1 Introduction & Types of Debentures)

1) Define a ‘Debenture’ and state its main features. [NCERT]

Ans: The word ‘Debenture’ has been derived from a Latin word ‘Debere’ which means to borrow. A written instrument issued under company seal acknowledging debt, specifying principal repayment terms and fixed interest rate.

Main Features:

1. Certificate of debt issued by company.

2. Carries fixed rate of interest payable periodically.

3. Commitment to repay principal after specified period.

2) Under which main head and sub-head are debentures shown in the Balance Sheet of a company? [MP 2020, 2023]

Ans: Main Head: Non-Current Liabilities, Sub-head: Long-term Borrowings

(If maturing within 12 months: Current Liabilities -> Current Maturities of Long-Term Debt)

3) Distinguish between Shares and Debentures. [NCERT / MP 2018, 2022]

S.No.	Basis of Difference	Shares	Debentures
1	Status of Holders	Owners of company.	Creditors of company.
2	Return / Reward	Variable dividend.	Fixed rate of interest.
3	Voting Rights	Full voting rights in general meetings.	No voting rights.
4	Priority of Repayment	Repaid after all external liabilities are settled.	Repaid prior to shareholders.
5	Charge on Profits	Appropriation of profit (paid only on profit).	Charge against profit (mandatory payment).

4) Explain the various types of debentures. [NCERT / MP 2019, 2024]

(i) From Security Point of View:

(a) Naked or Simple Debentures: which do not carry any security in respect of repayment of interest or the principal. The general solvency of the company is the only security for the holders of simple debentures.
(b) Mortgaged/secured Debentures: which are secured by a charge on the asset or properties of the company. The debenture holders have the right to recover their principal amount as well as unpaid interest out of the assets mortgaged by the company.

(ii) From Permanence Point of View
(a) Redeemable Debentures Redeemable debentures provide for the payment of principal amount on the expiry of certain period. Redeemable debentures can be reissued even after they have been redeemed until they have been cancelled.
(b) Irredeemable Debentures Irredeemable Debentures are retained as a part of the permanent capital structure during the life time of the company. Such debt becomes due for payment only when the company goes into liquidation or when the payment of interest is not made regularly. The company has the option of cancelling its liability to the debenture holders at any time by giving due notice to them.

(iii) From Priority Point of View :

(a) First Debentures: First Debentures are those debentures which are paid first before any payment is made to another type of debentures.
(b) Second Debentures: Second Debentures are those debentures which are paid after making the payment of first debentures.

(iv) From Recording Point of View :

(a) Bearer Debentures: Bearer Debentures are transferable per bearer without endorsement and they are just like bearer cheques or government currency notes. They are treated as negotiable instrument and transferable by mere delivery..
(b) Registered Debentures: Registered debentures are made out in the name of a particular person who is registered by the company as a holder and are transferable in the same way as shares.
The payment of interest and repayment of capital is made to those whose name are registered

(v) From Conversion Point of View:

Quick assessment

1. Debenture holders are the ______ of a company. (A) Owners (B) Creditors (C) Customers (D) Directors

2. Fill in the Blank: Debentures transferable by mere delivery are called ______ debentures

3. Short Q: Under which main head are debentures disclosed in the Balance Sheet?

(a) Convertible Debentures: Convertible debenture holders are given an option to convert them into equity or preference shares at a stated rate of exchange after a certain period.
(b) Non-Convertible Debentures: Non-convertible debentures are not convertible into equity or preference shares afterwards.

1.2 Issue of Debentures & Terms – Merged Version

5) What is meant by Issue of Debentures at Premium and at Discount? [NCERT / MP 2019, 2022]

Ø Issue at Premium: Issue price higher than nominal value; excess amount credited to Securities Premium Account.

Ø Issue at Discount: Issue price lower than nominal value; shortfall debited to Discount on Issue of Debentures Account as capital loss.

6) Define Over-subscription of debentures. [NCERT]

Ans: Applications received exceeding total debentures offered to public.

7) Explain the difference between ‘Issue of Debentures at Par’ and ‘Issue of Debentures at Premium’. [NCERT / MP 2020, 2023]

S.No.	Basis of Difference	Issue at Par	Issue at Premium
1	Meaning	Issue price equal to face value.	Issue price higher than face value.
2	Issue Price vs. Nominal Value	Issue Price = Nominal Value.	Issue Price > Nominal Value.
3	Extra Amount Received	No extra amount received.	Extra amount received represents capital gain.
4	Accounting Reserve	No reserve created.	Premium credited to Securities Premium Account.

8) Explain accounting conditions for issue relative to redemption terms. [NCERT / MP 2018, 2024]

1. Issued at Par, Redeemable at Par: No loss or gain; repayment equal to face value.

2. Issued at Discount, Redeemable at Par: Discount treated as capital loss at issue.

3. Issued at Premium, Redeemable at Par: Premium credited as Securities Premium.

4. Issued at Par, Redeemable at Premium: Redemption premium debited to Loss on Issue of Debentures Account and credited to Premium on Redemption Account.

Quick assessment

1. Discount on issue of debentures is a: (A) Revenue loss (B) Capital loss (C) Capital gain (D) Current liability

2. Excess amount received over the nominal value on issue of debentures is credited to ______ Account.

3. What is meant by over-subscription of debentures?

Issued at Discount, Redeemable at Premium: Discount plus redemption premium combined and debited to Loss on Issue of Debentures Account.

1.3 Special Modes of Issue

9) What is meant by issue of debentures for consideration other than cash and as collateral security? [NCERT / MP 2019, 2021]

Ø Consideration Other Than Cash: Debentures issued to vendors against purchase of assets or business without cash payout.

Ø Collateral Security: Secondary security pledged with lender in addition to primary security against loan.

10) Explain the disclosure methods of debentures issued as collateral security in Balance Sheet. [NCERT / MP 2018, 2023]

1. Method 1 (No Entry): Note appended under Long-term Borrowings; no accounting entry passed.

2. Method 2 (With Entry): Entry passed by debiting Debenture Suspense Account and crediting Debentures Account. Debenture Suspense deducted from Debentures under Long-term Borrowings.

11)

Quick assessment

When debentures are issued as collateral security, which account is debited under the second method?

(A) Bank Account (B) Debenture Account (C) Debenture Suspense Account (D) Loan Account

2. Debentures issued to vendors against purchase of machinery are issued for consideration other than ______.

When does a lender enforce collateral security debentures?

Distinguish between Primary Security and Collateral Security. [NCERT / MP 2020, 2024]

S.No.	Basis of Difference	Primary Security	Collateral Security
1	Meaning	Main asset pledged against loan.	Subsidiary security offered over primary security.
2	Order of Claim	Realized first by lender to recover debt.	Realized only if primary security fails to cover debt.
3	Ownership	Direct asset mortgage.	Issued as debentures to creditor.
4	Right to Interest	No interest concept applicable.	Interest payable only upon enforcement after default.

1.4 Interest & Writing Off Loss

12) What is meant by ‘Interest on Debentures’ and TDS? [NCERT / MP 2020, 2023]

1. Debenture Interest: Fixed periodic return paid to debenture holders; mandatory charge against profit regardless of profit or loss.

2. Tax Deducted at Source (TDS): Statutory deduction of income tax by company at prescribed rate before paying net interest to debenture holders.

13) Where is ‘Discount or Loss on Issue of Debentures’ disclosed before writing off? [NCERT]

Answer:

1. After 12 months: Non-Current Assets Other Non-Current Assets.

2. Within 12 months: Current Assets Other Current Assets.

14) Explain rules for writing off Discount or Loss on Issue of Debentures. [NCERT / MP 2018, 2022, 2024]

Answer:

1. Timing: Written off in year of allotment/issue.

2. Priority: First written off from Securities Premium Account; remaining balance from Statement of Profit and Loss.

15) Distinguish between Charge against Profit and Appropriation of Profit. [NCERT / MP 2019, 2021]

S.No.	Basis of Difference	Charge Against Profit	Appropriation of Profit
1	Obligation	Mandatory payment required by law.	Voluntary distribution based on profit availability.
2	Effect of Loss	Payable even if company suffers loss.	Paid only out of available net profits.
3	Example	Interest on Debentures.	Dividend on Shares.
4	Accounting Treatment	Debited to Statement of Profit and Loss.	Debited to Profit and Loss Appropriation Account.

Quick Assessment

Interest on debentures is a: (A) Appropriation of profit (B) Charge against profit (C) Capital expenditure (D) Reserve

Fill in the Blank: Loss on issue of debentures is written off first from ______ Account.
Short Q: Under which Accounting Standard / statutory rule must loss on issue of debentures be written off?

1.5 Redemption Concepts & Sources

16) What is meant by ‘Redemption of Debentures’, DRR, and DRI? [NCERT / MP 2019, 2020, 2022]

1. Redemption: Repayment of principal amount due to debenture holders to discharge liability.

2. Debenture Redemption Reserve (DRR): Mandatory reserve created out of profits to protect debenture holders’ interests.

3. Debenture Redemption Investment (DRI): Minimum 15% investment of current year’s maturing debentures deposited in specified government securities by April 30.

17) Explain the main sources for redemption of debentures. [NCERT / MP 2018, 2023]

1. Out of Capital: Payment without creating DRR; restricted to exempted entities.

2. Out of Profits: Transfer of required amount from Statement of Profit & Loss to DRR before redemption.

3. Out of Fresh Issue: Raising fresh capital by issuing new shares or debentures to repay existing debentures.

18)

Quick Assessment 5.8

Minimum percentage of nominal value of maturing debentures required for DRI is:

(A) 10% (B) 15% (C) 25% (D) 100%

Fill in the Blank: DRI investment must be deposited on or before ______ of the current financial year.
Short Q: Where does DRR appear in the Balance Sheet?

Distinguish between DRR and DRI. [NCERT / MP 2021, 2024]

S.No.	Basis of Difference	Debenture Redemption Reserve (DRR)	Debenture Redemption Investment (DRI)
1	Nature	Reserve created out of company profits.	Investment made in specified securities.
2	Purpose	Retains earnings to safeguard redemption funds.	Ensures liquid cash availability at maturity.
3	Statutory Rate	Percentage based on nominal value of debentures.	Minimum 15% of debentures maturing in current year.
4	Balance Sheet Position	Reserves & Surplus (Liabilities side).	Current/Non-Current Investments (Assets side).

1.6 Methods of Redemption

19) Explain the four methods of redemption of debentures. [NCERT / MP 2019, 2020, 2022, 2023]

1. Lump Sum Method: Entire principal amount repaid in single payment at maturity.

2. Instalment Method (Draw of Lots): Principal repaid in periodic parts; debentures selected annually by drawing lots.

3. Open Market Purchase: Direct purchase of own debentures from stock market for immediate cancellation or investment.

4. Conversion: Exchanging debentures for equity shares, preference shares, or new debentures at predetermined ratio.

20) Distinguish between Redemption in Lump Sum and Redemption in Instalments. [NCERT / MP 2018, 2024]

S.No.	Basis of Difference	Redemption in Lump Sum	Redemption in Instalments
1	Payment Mode	Entire debt cleared in one single payment at maturity.	Debt cleared gradually in periodic annual parts.
2	Selection Process	No selection needed; all holders paid simultaneously.	Holders selected each year using draw of lots.
3	Fund Outflow	Requires huge cash outflow at one time.	Spreads cash requirements over multiple years.
4	DRI Requirement	15% DRI deposited once before maturity year.	15% DRI deposited annually based on current year’s maturing amount.

Quick Assessment 5.8

Selection of debentures for redemption in annual instalments is done by:

(A) Direct purchase (B) Draw of lots (C) Conversion (D) Pro-rata allotment

Fill in the Blank: When a company cancels its own debentures bought from open market, the profit on cancellation is transferred to ______ Reserve.
Short Q: Name the redemption method where no cash outflow takes place.

Points to remember:

1. Discount or Loss on issue of Debentures should be written off by a company by using write of the entire discount or loss in the same year itself as finance cost (As per AS-16)

2. if the debenture carry a charge on the asset of the company than such charge must be furnished to the registrar within 21 days

3. premium on debenture is a capital receipt and is credited to security premium reserve account

4. debenture can not be forfeited

5. in payment of debenture in premium than number of debentures will be less and in discount it is more

6. purchase consideration = agreed value of assets – liabilities assumed

7. no interest is payable on debentures issued as collateral security

8. debenture discount = capital loss, debenture premium = capital profit

12TH ACCOUNTANCY ISSUE AND REDEMPTION OF DEBENTURES

Points to remember: