Issue and Redemption of Debentures

Class 12 Commerce . Accountancy . Company Accounts and Analysis of Financial Accounts . Issue and Redemption of Debentures

Chapter 2: Issue and Redemption of Debentures

Ch 2

Accountancy

Class 12 Commerce

Lecture 1

Meaning of Debentures

Reference video · Lecture 1Meaning of Debentures

Meaning and Features of Debentures

Definition

Debenture — A written instrument under a company’s common seal acknowledging its debt and setting out repayment terms and interest obligations.

Key features

Meaning: The word comes from the Latin *debere*, meaning “to borrow”; debentures are a form of long-term borrowed capital.
Repayment: Principal is repayable after a specified period, in instalments, or at the company’s option, according to the issue terms.
Interest: Interest is paid at a fixed rate, usually half-yearly or yearly on specified dates.
Legal definition: Under Section 2(30) of the Companies Act, 2013, debentures include debenture stock, bonds and other company securities, whether or not they create a charge on company assets.
Bonds: A bond is also an instrument acknowledging debt. Traditionally issued by governments, bonds are now also issued by semi-government and non-government organisations; “bond” and “debenture” are often used interchangeably.

Shares vs Debentures

Point	Shares	Debentures
Capital	Represent ownership; form part of owned capital.	Acknowledge debt; form part of borrowed capital.
Return	Return is dividend; its rate may vary with profits.	Return is interest at a prefixed rate.
Treatment of return	Dividend is an appropriation of profits and depends on profits.	Interest is a charge on profits and is payable even if the company has no profit.
Repayment	Normally not repaid during the company’s life.	Generally repayable after a specified period.
Voting rights	Shareholders have voting rights.	Debentureholders normally have no voting rights.
Security	Not secured by a charge on company assets.	Generally secured by a fixed or floating charge on assets.
Conversion	Shares cannot be converted into debentures.	May be converted into shares if the issue terms allow.

Types of Debentures

Classification by Security

Type	Meaning and key points
Secured	A charge on company assets supports payment if the company defaults. A fixed charge covers a specific asset used in operations and not held for sale; a floating charge covers general assets, excluding assets assigned to secured creditors.
Unsecured	No specific charge is created on company assets. A floating charge may arise on default; these debentures are not normally issued.

Classification by Tenure

Type	Meaning and key points
Redeemable	Repayable after a specified period, either in a lump sum or in instalments during the company’s life. Redemption may be at par or at a premium.
Irredeemable (perpetual)	No repayment undertaking is given for a specified period; repayment is on winding-up or after a long period, as applicable.

Classification by Convertibility

Type	Meaning and key points
Convertible	May convert into equity shares or another security at the option of the company or debentureholders. They may be fully or partly convertible.
Non-convertible	Cannot be converted into shares or other securities; most company debentures are of this type.

Classification by Registration

Type	Meaning and key points
Registered	The company records holders’ names, addresses and holdings in a register. Transfer requires a regular transfer deed.
Bearer	Transferred by delivery, with no holder record kept by the company. Interest is paid to the person presenting the attached interest coupon.

Classification of debentures and bonds by security, tenure, redemption, coupon rate and registration.

Quick recap

Debentures are written acknowledgements of company debt under the company’s common seal and form borrowed capital.
They provide for repayment under the issue terms and carry interest at a fixed rate; interest is a charge on profits, unlike dividends.
Shares represent ownership; debentures generally represent debt and are repayable.
Debentures are classified by security, tenure, convertibility and registration.
Registered debentures need a transfer deed; bearer debentures transfer by delivery.

Lecture 2

Issue of Debentures

Reference video · Lecture 2Issue of Debentures

Overview of Debenture Issue

Definition

Issue of debentures — A company invites investors to apply under its prospectus and collects the amount according to the stated payment terms.

Issue procedure and terms

The procedure for issuing debentures is the same as the procedure for issuing shares. Payment may be collected in one amount or in instalments; debentures may be issued at par, premium or discount, for consideration other than cash, or as collateral security.

Payment Stages

Instalments: Amounts may be payable on application, allotment and subsequent calls.
Usual practice: The full amount is commonly collected on application or in two instalments—application and allotment.

Issue of Debentures for Cash at Par

Definition

Issue at par — Debentures are issued at par when their issue price equals their face value.

Accounting Rules

Application received: Debit Bank; credit Debenture Application (or Application & Allotment) Account.
Application transferred: On allotment, debit Debenture Application and credit Debentures.
Amount due: Debit Allotment or the relevant Call Account; credit Debentures.
Amount received: Debit Bank and credit the relevant Allotment or Call Account.

Proceeds from an Issue at Par

$$\text{Issue proceeds}=\text{Number allotted}\times\text{Face value per debenture}$$

Use the number of debentures actually allotted.

Journal Entry Pattern: Cash Issue at Par

Event	Debit	Credit
Whole amount received in one instalment	Bank A/c	Debenture Application & Allotment A/c
Transfer application money on allotment	Debenture Application & Allotment A/c	Debentures A/c
Application received in instalments	Bank A/c	Debenture Application A/c
Transfer application money on allotment	Debenture Application A/c	Debentures A/c
Allotment / call becomes due	Debenture Allotment / Call A/c	Debentures A/c
Allotment / call money received	Bank A/c	Debenture Allotment / Call A/c

Recording an Issue at Par

Calculate each instalment using the number allotted.
$$\text{Instalment total}=\text{Number allotted}\times\text{Instalment per debenture}$$
Record cash received and transfer application money to Debentures when allotment is made.
$$\text{Application total}=\text{Number allotted}\times\text{Application per debenture}$$
Record each subsequent amount due and its receipt separately.
$$\text{Amount due}=\text{Number allotted}\times\text{Amount per debenture}$$

Worked example

Prepare the journal entries and relevant balance-sheet amounts for ABC Ltd.’s issue.

ABC Ltd. issues 10,000 12% debentures of Rs. 100 each; 9,000 are applied for and allotted. Rs. 30 is payable on application and the balance on allotment.
$$9{,}000\times \text{Rs. }30=\text{Rs. }2{,}70{,}000;\quad 9{,}000\times \text{Rs. }70=\text{Rs. }6{,}30{,}000$$
Record application money received and transfer it to Debentures on allotment.
$$\text{Bank Dr. }\text{Rs. }2{,}70{,}000;\quad \text{Debenture Application Dr. }\text{Rs. }2{,}70{,}000$$
Record allotment due and received; the total debenture liability and cash at bank are each Rs. 9,00,000.
$$\text{Allotment due} = \text{receipt}=\text{Rs. }6{,}30{,}000;\quad 9{,}000\times \text{Rs. }100=\text{Rs. }9{,}00{,}000$$

Answer: Journal: Bank Dr. Rs. 2,70,000 / To Debenture Application Rs. 2,70,000; Debenture Application Dr. Rs. 2,70,000 / To Debentures Rs. 2,70,000; Debenture Allotment Dr. Rs. 6,30,000 / To Debentures Rs. 6,30,000; Bank Dr. Rs. 6,30,000 / To Debenture Allotment Rs. 6,30,000. Balance sheet: Long-term borrowings—9,000 debentures, Rs. 9,00,000; cash at bank, Rs. 9,00,000.

Issue of Debentures at a Discount

Definition

Issue at a discount — Debentures are issued at a discount when their issue price is below their face value.

Accounting, Write-off and Presentation

Example: A Rs. 100 debenture issued for Rs. 95 has a discount of Rs. 5.
Amount due: Debit the cash instalment receivable and Discount on Issue of Debentures; credit Debentures for the full face value due.
Write-off: The discount may be written off against Securities Premium Reserve, if available, or charged to the Statement of Profit and Loss during the debentures’ life.
Balance sheet: The portion due to be written off within 12 months of the balance-sheet date or operating cycle is shown under Other Current Assets; the later portion is shown under Other Non-Current Assets.
Legal point: The Companies Act, 2013 does not restrict the issue of debentures at a discount.

Discount and Net Proceeds

$$\begin{aligned}\text{Discount per debenture}&=\text{Face value}-\text{Issue price}\\\text{Total discount}&=\text{Number issued}\times\text{Discount per debenture}\\\text{Net proceeds}&=\text{Total face value}-\text{Total discount}\end{aligned}$$

Debentures are credited at face value, not at the cash received.

Journal Entry Pattern: Issue at a Discount

Event	Debit	Credit
Application received	Bank A/c	Debenture Application A/c
Application transferred on allotment	Debenture Application A/c	Debentures A/c
Allotment due	Debenture Allotment A/c and Discount on Issue of Debentures A/c	Debentures A/c (full face value due)
Allotment received	Bank A/c	Debenture Allotment A/c
Discount written off	Securities Premium Reserve A/c or Statement of Profit and Loss A/c	Discount on Issue of Debentures A/c

Recording an Issue at a Discount

Calculate total face value, discount and cash proceeds.
$$\text{Cash proceeds}=\text{Total face value}-\text{Total discount}$$
Record application receipts and transfer application money to Debentures on allotment.
$$\text{Application cash}=\text{Number issued}\times\text{Application per debenture}$$
When the remaining face value is due, debit the cash instalment and discount; credit Debentures for the full amount due.
$$\text{Face value due}=\text{Allotment cash} + \text{Discount allocated to allotment}$$
Record the receipt, then write off the discount to the appropriate account.
$$\text{Discount written off} \rightarrow \text{Securities Premium Reserve or Statement of Profit and Loss}$$

Worked example

Prepare the journal entries and relevant balance-sheet items for TV Components Ltd.’s issue.

TV Components Ltd. issues 10,000 12% debentures of Rs. 100 each at a 5% discount. Rs. 40 is payable on application and Rs. 55 on allotment.
$$\text{Face value}=10{,}000\times\text{Rs. }100=\text{Rs. }10{,}00{,}000;\quad \text{discount}=10{,}000\times\text{Rs. }5=\text{Rs. }50{,}000$$
Application cash is Rs. 4,00,000; allotment cash is Rs. 5,50,000. On allotment, the remaining face value of Rs. 6,00,000 comprises cash of Rs. 5,50,000 and discount of Rs. 50,000.
$$10{,}000\times\text{Rs. }40=\text{Rs. }4{,}00{,}000;\quad 10{,}000\times\text{Rs. }55=\text{Rs. }5{,}50{,}000;\quad \text{Rs. }5{,}50{,}000+\text{Rs. }50{,}000=\text{Rs. }6{,}00{,}000$$
Total cash received is Rs. 9,50,000. The discount is written off to the Statement of Profit and Loss in this presentation; the debentures are presumed redeemable after 10 years.
$$\text{Bank}=\text{Rs. }4{,}00{,}000+\text{Rs. }5{,}50{,}000=\text{Rs. }9{,}50{,}000;\quad \text{Debentures}=\text{Rs. }10{,}00{,}000$$

Answer: Journal: Bank Dr. Rs. 4,00,000 / To Debenture Application Rs. 4,00,000; Debenture Application Dr. Rs. 4,00,000 / To Debentures Rs. 4,00,000; Debenture Allotment Dr. Rs. 5,50,000 and Discount on Issue of Debentures Dr. Rs. 50,000 / To Debentures Rs. 6,00,000; Bank Dr. Rs. 5,50,000 / To Debenture Allotment Rs. 5,50,000; Statement of Profit and Loss Dr. Rs. 50,000 / To Discount on Issue of Debentures Rs. 50,000. Balance sheet: Long-term borrowings—10,000 debentures, Rs. 10,00,000; cash at bank, Rs. 9,50,000; Statement of Profit and Loss deficit, Rs. 50,000.

Practice

A company issues 2,000 debentures of Rs. 100 each at par. Rs. 25 is payable on application and the balance on allotment. All amounts are received. Find the instalment totals and final bank and debenture balances.

Hint: Multiply the amount per debenture by the 2,000 debentures allotted.

Key step: Application is Rs. 50,000; allotment is Rs. 1,50,000.

Solution: Application: 2,000 × Rs. 25 = Rs. 50,000; allotment: 2,000 × Rs. 75 = Rs. 1,50,000. Entries: Bank Dr. Rs. 50,000 / To Debenture Application Rs. 50,000; Debenture Application Dr. Rs. 50,000 / To Debentures Rs. 50,000; Allotment Dr. Rs. 1,50,000 / To Debentures Rs. 1,50,000; Bank Dr. Rs. 1,50,000 / To Allotment Rs. 1,50,000. Final bank and debenture balances are each Rs. 2,00,000.

Practice

A company issues 500 debentures of Rs. 100 each at a 4% discount. Rs. 30 per debenture is payable on application and Rs. 66 on allotment. All amounts are received. Give the allotment-due entry and calculate total cash proceeds.

Hint: Discount is Rs. 4 per debenture; the allotment cash plus discount equals the remaining face value.

Key step: Allotment cash is Rs. 33,000; discount is Rs. 2,000; remaining face value is Rs. 35,000.

Solution: Allotment due: Debenture Allotment Dr. Rs. 33,000 and Discount on Issue of Debentures Dr. Rs. 2,000 / To Debentures Rs. 35,000. Total cash proceeds = (500 × Rs. 30) + (500 × Rs. 66) = Rs. 48,000.

Quick recap

Procedure: Debentures are issued through a process like shares; applications follow the prospectus.
Issue terms: Payment may be in one amount or instalments; issue may be at par, premium or discount.
At par: Face value equals issue price; credit Debentures for the amount due.
At discount: Debit the discount and credit Debentures at full face value; cash proceeds are lower.
Write-off: Discount may be charged to Securities Premium Reserve or Statement of Profit and Loss.
Presentation: Unwritten-off discount is classified as current or non-current according to when it is to be written off.

Lecture 3

Debentures issued at Premium

Reference video · Lecture 3Debentures issued at Premium

Meaning and Accounting Treatment

Issue proceeds and premium

$$\text{Total proceeds}=N\times(\text{nominal value} + \text{premium per debenture});\quad \text{Total premium}=N\times\text{premium per debenture}$$

Use these to split total receipts between debenture capital and premium.

Recording an issue at premium

Calculate the total nominal value, premium, and instalment amounts.
$$N\times\text{amount per debenture}$$
When application money is received, debit Bank and credit Debenture Application.
$$\text{Bank A/c Dr.}\quad\text{To Debenture Application A/c}$$
Transfer application money to Debentures A/c, if it is applied to nominal value.
$$\text{Debenture Application A/c Dr.}\quad\text{To Debentures A/c}$$
When an instalment is due, credit Debentures A/c for its nominal-value part and Securities Premium Reserve for its premium part.
$$\text{Instalment A/c Dr.}\quad\text{To Debentures A/c}\quad\text{To Securities Premium Reserve A/c}$$
On receipt of each instalment, debit Bank and credit the relevant instalment account.
$$\text{Bank A/c Dr.}\quad\text{To Instalment A/c}$$

Worked example

Record the journal entries and show the relevant balance sheet amounts.

A Limited issues 5,000 debentures of ₹100 each at a premium of ₹10 each. Application is ₹25, allotment is ₹45 (including premium), and the first and final call is ₹40. All amounts are received.
$$N=5{,}000$$
Find the total nominal value, premium, and proceeds.
$$\text{Nominal value}=5{,}000\times₹100=₹500{,}000;\quad \text{Premium}=5{,}000\times₹10=₹50{,}000;\quad \text{Proceeds}=₹550{,}000$$
Split the allotment: ₹35 per debenture is nominal value and ₹10 is premium.
$$₹45-₹10=₹35;\quad 5{,}000\times₹35=₹175{,}000;\quad 5{,}000\times₹10=₹50{,}000$$
Calculate receipts at each stage.
$$\text{Application}=5{,}000\times₹25=₹125{,}000;\quad \text{Allotment}=5{,}000\times₹45=₹225{,}000;\quad \text{Call}=5{,}000\times₹40=₹200{,}000$$

Answer: Total cash received is ₹550,000. Debentures are reported at nominal value, ₹500,000; premium reserve is ₹50,000.

A Limited — Journal entries (₹)

Particulars	Debit	Credit
Bank A/c Dr. \| To 10% Debenture Application A/c	125,000	125,000
10% Debenture Application A/c Dr. \| To 10% Debentures A/c	125,000	125,000
10% Debenture Allotment A/c Dr. \| To 10% Debentures A/c \| To Securities Premium Reserve A/c	225,000	175,000; 50,000
Bank A/c Dr. \| To 10% Debenture Allotment A/c	225,000	225,000
10% Debenture First and Final Call A/c Dr. \| To 10% Debentures A/c	200,000	200,000
Bank A/c Dr. \| To 10% Debenture First and Final Call A/c	200,000	200,000

A Limited — Balance sheet extract

Particulars	Amount (₹)
Equity and Liabilities — Reserves and Surplus: Securities Premium Reserve	50,000
Non-current liabilities — Long-term borrowings: 5,000 debentures of ₹100 each	500,000
Total	550,000
Assets — Current assets: Cash and cash equivalents	550,000

Practice

A company issues 2,000 debentures of ₹100 each at a premium of ₹10. Application is ₹50 and allotment is ₹60, including the premium. Find the amount due at each stage and the balance sheet amounts.

Hint: Separate the allotment into nominal value and premium.

Key step: Allotment nominal value per debenture is ₹60 − ₹10 = ₹50.

Solution: Application: ₹100,000; allotment: ₹120,000, comprising ₹100,000 debenture value and ₹20,000 premium. Balance sheet: debentures ₹200,000 under long-term borrowings; Securities Premium Reserve ₹20,000; total cash ₹220,000.

Practice

A company issues 1,000 debentures of ₹100 each at a premium of ₹5. Application is ₹40 and allotment is ₹65, including premium. Find the premium reserve and total proceeds.

Hint: The premium is part of the allotment amount; the remaining allotment amount is nominal value.

Key step: Total premium = 1,000 × ₹5; total issue proceeds = 1,000 × (₹100 + ₹5).

Solution: Securities Premium Reserve = ₹5,000. Total proceeds = ₹105,000, comprising ₹100,000 debenture value and ₹5,000 premium.

⚠ Common mistake

Do not add the premium to the debenture liability: credit it separately to Securities Premium Reserve, while debentures appear at nominal value.

Quick recap

A debenture is issued at a premium when its issue price exceeds its nominal value.
Credit premium due to Securities Premium Reserve.
Show debentures at nominal value under long-term borrowings.
Split each instalment due between nominal value and premium, as applicable.
Total cash received equals total nominal value plus total premium.

Lecture 4

Over Subscription

Reference video · Lecture 4Over Subscription

Over-Subscription of Debentures

Issue of Debentures for Consideration Other than Cash

Journal Entries: X Limited — Over-Subscription

Particulars	Debit (Rs.)	Credit (Rs.)
Bank A/c Dr. — To 12% Debenture Application A/c	5,60,000	5,60,000
12% Debenture Application A/c Dr. — To 12% Debentures A/c — To Debenture Allotment A/c — To Bank A/c	5,60,000	4,00,000; 40,000; 1,20,000
12% Debenture Allotment A/c Dr. — To 12% Debentures A/c	6,00,000	6,00,000
Bank A/c Dr. — To Debenture Allotment A/c	5,60,000	5,60,000

Journal Entries: Aashirward Company Limited — Issue at Par

Particulars	Debit (Rs.)	Credit (Rs.)
Sundry Assets A/c Dr. — To Vendor’s A/c	2,00,000	2,00,000
Vendor’s A/c Dr. — To 10% Debentures A/c	2,00,000	2,00,000

Practice

A company offered 900 debentures of Rs. 100 each, payable Rs. 20 on application and Rs. 80 on allotment. It received 1,200 applications: 800 were accepted in full, 200 applications received 100 debentures, and 200 applications were rejected. Find the application-money transfer, adjustment, refund, and net allotment receipt.

Hint: Compare applications received with debentures allotted, then calculate the application money on each group.

Key step: Application received = Rs. 24,000; transferred = 900 × Rs. 20 = Rs. 18,000; adjustment = Rs. 2,000; refund = Rs. 4,000.

Solution: Allotment due = 900 × Rs. 80 = Rs. 72,000. Net allotment received = Rs. 72,000 − Rs. 2,000 = Rs. 70,000. Application entry: Bank Dr. Rs. 24,000; To Application Rs. 24,000. Transfer entry: Application Dr. Rs. 24,000; To Debentures Rs. 18,000; To Allotment Rs. 2,000; To Bank Rs. 4,000.

Practice

A company purchases assets for Rs. 2,20,000 and settles the amount by issuing 2,000 debentures of Rs. 100 each at a premium of 10%. State the journal entry for the issue.

Hint: Calculate nominal value and premium separately.

Key step: Nominal value = Rs. 2,00,000; premium = 10% × Rs. 2,00,000 = Rs. 20,000.

Solution: Vendor’s A/c Dr. Rs. 2,20,000; To Debentures A/c Rs. 2,00,000; To Securities Premium Reserve A/c Rs. 20,000.

Quick recap

Over-subscription means applications exceed the number of debentures offered.
Allot no more than the offer; refund application money for wholly rejected applications.
Excess application money may be adjusted against allotment or calls due.
For a non-cash asset purchase, debit assets and credit the vendor before settlement.
On settlement, credit debentures at nominal value and record any premium or discount separately.

Lecture 5

Illustration 7 based on Journal entries

Reference video · Lecture 5Illustration 7 based on Journal entries

Purchasing Assets by Issuing Debentures

Definition

Purchase consideration — The agreed amount payable to the vendor for assets or a business purchased.

Basic entries

Purchase: Debit Sundry Assets A/c and credit Vendors A/c with the purchase consideration.
Settlement: Debit Vendors A/c; credit Debentures A/c at face value, recording any premium or discount separately.
Balance: The total debits and credits in each journal entry must be equal.

Issue value of debentures

$$\text{Issue value} = \text{Face value} + \text{Premium} - \text{Discount}$$

Premium or discount is calculated on the debentures’ total face value.

Issue at par, discount or premium

Point	At par	At discount	At premium
Issue value	Equals face value	Below face value	Above face value
Additional account	None	Debit Discount on Issue of Debentures A/c	Credit Securities Premium Reserve A/c
Settlement entry	Vendors Dr.; Debentures Cr.	Vendors Dr. and Discount Dr.; Debentures Cr.	Vendors Dr.; Debentures and Securities Premium Reserve Cr.

Recording an asset purchase settled by debentures

Record the assets acquired and the amount payable to Vendors.
$$\text{Sundry Assets Dr.} = \text{Vendors Cr.}$$
Calculate the debentures’ total face value and the premium or discount.
$$\text{Face value} = \text{Number of debentures} \times \text{Face value per debenture}$$
Settle the Vendors balance; include premium as a credit or discount as a debit.
$$\text{Vendors Dr.} = \text{Debentures Cr.} + \text{Premium Cr.} - \text{Discount Dr.}$$

Worked example

Rai Company purchased assets valued at Rs. 2,20,000 and issued 2,000 10% debentures of Rs. 100 each at a 10% premium. Record the entries.

Find the total face value of 2,000 debentures of Rs. 100 each.
$$2{,}000 \times 100 = \text{Rs. }2{,}00{,}000$$
Calculate the 10% premium; the issue value equals the purchase consideration.
$$10\% \times 2{,}00{,}000 = \text{Rs. }20{,}000;\quad 2{,}00{,}000 + 20{,}000 = \text{Rs. }2{,}20{,}000$$
Record the asset purchase and then settle Vendors with debentures and premium.
$$\text{Purchase consideration} = \text{Rs. }2{,}20{,}000$$

Answer: Purchase: Sundry Assets A/c Dr. Rs. 2,20,000; To Vendors A/c Rs. 2,20,000. Settlement: Vendors A/c Dr. Rs. 2,20,000; To 10% Debentures A/c Rs. 2,00,000; To Securities Premium Reserve A/c Rs. 20,000.

Rai Company: Journal entries

Particulars	Debit (Rs.)	Credit (Rs.)
Sundry Assets A/c Dr.	2,20,000
To Vendors A/c		2,20,000
Vendors A/c Dr.	2,20,000
To 10% Debentures A/c		2,00,000
To Securities Premium Reserve A/c		20,000

National Packaging Company: Issue at 5% discount

Particulars	Debit (Rs.)	Credit (Rs.)
Sundry Assets A/c Dr.	1,90,000
To Vendors A/c		1,90,000
Vendors A/c Dr.	1,90,000
Discount on Issue of Debentures A/c Dr.	10,000
To 10% Debentures A/c		2,00,000

G.S. Rai Company: Issue at par, discount or premium

Case / Particulars	Debit (Rs.)	Credit (Rs.)
Purchase: Sundry Assets A/c Dr.	99,000
To Vendors A/c		99,000
At par: Vendors A/c Dr.	99,000
To 11% Debentures A/c (990 debentures)		99,000
At 10% discount: Vendors A/c Dr.	99,000
Discount on Issue of Debentures A/c Dr.	11,000
To 11% Debentures A/c (1,100 debentures)		1,10,000
At 10% premium: Vendors A/c Dr.	99,000
To 11% Debentures A/c (900 debentures)		90,000
To Securities Premium Reserve A/c		9,000

⚠ Common mistake

Do not treat purchase consideration as the debentures’ face value when they are issued at a discount or premium. Calculate the face value needed to give the agreed consideration at the issue price.

Purchase of a Business and Assumption of Liabilities

Definition

Net assets — The value of assets taken over less the liabilities assumed.

Purchase consideration for net assets

$$\text{Purchase consideration} = \text{Assets taken over} - \text{Liabilities taken over}$$

When a business is purchased and its liabilities are taken over, consideration is based on net assets.

Journal entry for purchase of a business

Particulars	Debit	Credit
Sundry Assets A/c Dr.	Value of assets taken over
To Sundry Liabilities A/c		Value of liabilities taken over
To Vendors A/c		Purchase consideration

Practice

National Packaging Company purchased assets valued at Rs. 1,90,000 and issued 2,000 debentures of Rs. 100 each at a 5% discount. Record the entries.

Hint: Find the discount on the total face value.

Key step: Face value = Rs. 2,00,000; discount = Rs. 10,000; issue value = Rs. 1,90,000.

Solution: Sundry Assets A/c Dr. Rs. 1,90,000; To Vendors A/c Rs. 1,90,000. Vendors A/c Dr. Rs. 1,90,000 and Discount on Issue of Debentures A/c Dr. Rs. 10,000; To 10% Debentures A/c Rs. 2,00,000.

Practice

G.S. Rai Company purchased assets valued at Rs. 99,000, settling the consideration with Rs. 100 debentures at par, at a 10% discount, or at a 10% premium. State the debenture amount and settlement entry for each case.

Hint: Find the face value whose issue value equals Rs. 99,000 in each case.

Key step: At par: Rs. 99,000; at 10% discount: Rs. 1,10,000 face value; at 10% premium: Rs. 90,000 face value.

Solution: At par: 990 debentures; Vendors Dr. Rs. 99,000; To 11% Debentures Rs. 99,000. At 10% discount: 1,100 debentures; Vendors Dr. Rs. 99,000 and Discount Dr. Rs. 11,000; To 11% Debentures Rs. 1,10,000. At 10% premium: 900 debentures; Vendors Dr. Rs. 99,000; To 11% Debentures Rs. 90,000 and Securities Premium Reserve Rs. 9,000.

Quick recap

For an asset purchase, debit Sundry Assets and credit Vendors with the purchase consideration.
On settlement, debit Vendors; credit debentures at face value and record discount or premium separately.
At a discount, debit Discount on Issue of Debentures; at a premium, credit Securities Premium Reserve.
For Rs. 99,000 consideration, Rs. 100 debentures require 990 at par, 1,100 at a 10% discount, or 900 at a 10% premium.
For a business purchase with liabilities assumed, consideration equals assets taken over less liabilities taken over.
The business purchase entry debits assets and credits liabilities assumed and Vendors.

Lecture 6

Illustration 10 based on Journal entries

Reference video · Lecture 6Illustration 10 based on Journal entries

Taking Over a Business and Settling the Purchase Consideration

Blue Prints Ltd. — Purchase of business

Particulars	Debit (Rs.)	Credit (Rs.)
Building A/c Dr.	1,50,000
Plant & Machinery A/c Dr.	1,40,000
Furniture A/c Dr.	10,000
Goodwill A/c Dr.	35,000
To Liabilities of XYZ Co.		20,000
To XYZ Co.		3,15,000
XYZ Co. Dr.	3,15,000
To 12% Debentures A/c		3,00,000
To Securities Premium Reserve A/c		15,000

Number of debentures issued

$$\text{Number of debentures} = \frac{\text{Purchase consideration}}{\text{Issue price per debenture}}$$

Use the issue price per debenture, not its face value, in the denominator.

Other whole-business takeover entries

Case	Purchase entry	Settlement entry
Romi Ltd.: assets Rs. 20,00,000; creditors Rs. 2,00,000; consideration Rs. 18,00,000	Sundry Assets A/c Dr. Rs. 20,00,000; To Kapil Enterprises Rs. 18,00,000; To Sundry Creditors A/c Rs. 2,00,000	Kapil Enterprises Dr. Rs. 18,00,000; To 8% Debentures A/c Rs. 18,00,000. Issue 18,000 debentures of Rs. 100 each at par.
A Ltd.: assets Rs. 3,00,000; liabilities Rs. 10,000; consideration Rs. 2,70,000	Sundry Assets A/c Dr. Rs. 3,00,000; To Sundry Liabilities A/c Rs. 10,000; To B & Co. Ltd. Rs. 2,70,000; To Capital Reserve Rs. 20,000	B & Co. Ltd. Dr. Rs. 2,70,000; To 15% Debentures A/c Rs. 2,25,000; To Securities Premium Reserve A/c Rs. 45,000. Issue 2,250 debentures of Rs. 100 at 20% premium.

Debentures Issued to Settle an Asset Purchase

Issue price per debenture

$$\begin{aligned}\text{At par: } & I=F \\ \text{At } d\%\text{ discount: } & I=F\left(1-\frac{d}{100}\right) \\ \text{At } p\%\text{ premium: } & I=F\left(1+\frac{p}{100}\right)\end{aligned}$$

The percentage discount or premium is calculated on face value.

Record an asset purchase settled by debentures

Record the asset purchase: debit the asset and credit the supplier.
$$\text{Asset A/c Dr.} \quad \text{To Supplier A/c}$$
Calculate the debenture issue price and divide the amount due to the supplier by that price.
$$\text{Number issued} = \frac{\text{Amount due}}{\text{Issue price per debenture}}$$
Debit the supplier; credit Debentures A/c at face value and record discount or premium separately.
$$\text{Supplier A/c Dr.} + \text{Discount A/c Dr.} = \text{Debentures A/c Cr.} + \text{Premium Reserve A/c Cr.}$$

Worked example

Record the machinery purchase and debenture issue at 10% discount.

Suvidha Ltd. owes Suppliers Ltd. Rs. 1,98,000 for machinery and issues Rs. 100 debentures at 10% discount. Find the number and face value of debentures.
$$\text{Issue price}=100-10=\text{Rs. }90$$
Divide the amount due by the issue price to find the number issued.
$$\frac{1,98,000}{90}=2,200\text{ debentures}$$
The debentures’ aggregate face value is 2,200 × Rs. 100.
$$2,200\times 100=\text{Rs. }2,20,000$$
The discount is the difference between face value and amount due.
$$2,20,000-1,98,000=\text{Rs. }22,000$$

Answer: Machinery A/c Dr. Rs. 1,98,000; To Suppliers Ltd. Rs. 1,98,000. Then Suppliers Ltd. Dr. Rs. 1,98,000 and Discount on Issue of Debentures A/c Dr. Rs. 22,000; To 12% Debentures A/c Rs. 2,20,000.

Suvidha Ltd. — Journal entries for machinery purchase

Case	Particulars	Debit (Rs.)	Credit (Rs.)
Purchase	Machinery A/c Dr. / To Suppliers Ltd.	1,98,000	1,98,000
Issue at par	Suppliers Ltd. Dr. / To 12% Debentures A/c	1,98,000	1,98,000
Issue at 10% discount	Suppliers Ltd. Dr.; Discount on Issue of Debentures A/c Dr. / To 12% Debentures A/c	1,98,000; 22,000	2,20,000
Issue at 10% premium	Suppliers Ltd. Dr. / To 12% Debentures A/c; To Securities Premium Reserve A/c	1,98,000	1,80,000; 18,000

Suvidha Ltd. — Debenture calculations

At par: Rs. 1,98,000 ÷ Rs. 100 = 1,980 debentures.
At 10% discount: issue price Rs. 90; Rs. 1,98,000 ÷ Rs. 90 = 2,200 debentures, face value Rs. 2,20,000.
At 10% premium: issue price Rs. 110; Rs. 1,98,000 ÷ Rs. 110 = 1,800 debentures, face value Rs. 1,80,000.

⚠ Common mistake

Do not use face value to calculate the number of debentures when they are issued at a discount or premium; divide the amount due by the issue price per debenture.

Practice

Romi Ltd. takes over assets of Rs. 20,00,000 and creditors of Rs. 2,00,000. It issues Rs. 100 debentures at par for the purchase consideration. Find the consideration and number issued, and state the entries.

Hint: Net assets equal the purchase consideration in this case.

Key step: Net assets = Rs. 20,00,000 − Rs. 2,00,000 = Rs. 18,00,000.

Solution: Purchase consideration = Rs. 18,00,000; number issued = Rs. 18,00,000 ÷ Rs. 100 = 18,000. Entry 1: Sundry Assets A/c Dr. Rs. 20,00,000; To Kapil Enterprises Rs. 18,00,000; To Sundry Creditors A/c Rs. 2,00,000. Entry 2: Kapil Enterprises Dr. Rs. 18,00,000; To 8% Debentures A/c Rs. 18,00,000.

Practice

A Ltd. takes over assets of Rs. 3,00,000 and liabilities of Rs. 10,000 for Rs. 2,70,000, settled by Rs. 100 debentures at 20% premium. Find the capital reserve and debentures issued.

Hint: Compare net assets with consideration, then use the premium issue price.

Key step: Net assets = Rs. 2,90,000, so capital reserve = Rs. 20,000; issue price = Rs. 120.

Solution: Number issued = Rs. 2,70,000 ÷ Rs. 120 = 2,250; face value = Rs. 2,25,000 and premium = Rs. 45,000. Purchase entry: Sundry Assets A/c Dr. Rs. 3,00,000; To Sundry Liabilities A/c Rs. 10,000; To B & Co. Ltd. Rs. 2,70,000; To Capital Reserve Rs. 20,000. Settlement: B & Co. Ltd. Dr. Rs. 2,70,000; To 15% Debentures A/c Rs. 2,25,000; To Securities Premium Reserve A/c Rs. 45,000.

Quick recap

Net assets taken over = assets − liabilities assumed.
Excess purchase consideration over net assets is debited to Goodwill; an excess of net assets is credited to Capital Reserve.
When debentures settle a vendor’s account, debit the vendor and credit debentures at face value.
At discount, debit Discount on Issue of Debentures; at premium, credit Securities Premium Reserve.
Calculate the number issued using amount due ÷ issue price per debenture.

Lecture 7

Issue of Debentures as a Collateral Security

Reference video · Lecture 7Issue of Debentures as a Collateral Security

Meaning and Purpose

Accounting Treatment

Method 1: No Journal Entry

Method 2: Journal Entry

Journal Entries

Transaction	Debit	Credit
Issue of 10,000 debentures of ₹100 each as collateral security	Debenture Suspense Account ₹10,00,000	Debentures Account ₹10,00,000
Cancellation after repayment of the loan	Debentures Account ₹10,00,000	Debenture Suspense Account ₹10,00,000

Worked example

A company issues 10,000 debentures of ₹100 each as collateral security for a bank loan of ₹10,00,000. Record the issue and cancellation under Method 2.

Calculate the face value of the collateral debentures.
$$10{,}000 \times ₹100 = ₹10{,}00{,}000$$
Record the issue using Debenture Suspense Account.
$$\text{Dr Debenture Suspense Account } ₹10{,}00{,}000;\quad \text{Cr Debentures Account } ₹10{,}00{,}000$$
When the bank loan is repaid, cancel the entry by reversing it.
$$\text{Dr Debentures Account } ₹10{,}00{,}000;\quad \text{Cr Debenture Suspense Account } ₹10{,}00{,}000$$

Answer: Issue: Dr Debenture Suspense Account ₹10,00,000; Cr Debentures Account ₹10,00,000. On repayment: Dr Debentures Account ₹10,00,000; Cr Debenture Suspense Account ₹10,00,000.

⚠ Common mistake

Do not treat collateral debentures as a cash issue. Under Method 2, the debit is to Debenture Suspense Account, not Bank Account; on repayment, reverse the original entry.

Quick recap

Collateral security is additional security given over and above the primary security for a loan.
If the borrower defaults, the lender first realises the primary security and may then use or sell the collateral debentures.
Method 1: make no journal entry and disclose the loan’s collateral security in the balance sheet.
Method 2: debit Debenture Suspense Account and credit Debentures Account when the debentures are issued.
On repayment of the loan under Method 2, reverse the original entry.

Lecture 8

Illustration 14 based on Issue of Debentures

Reference video · Lecture 8Illustration 14 based on Issue of Debentures

Debentures Issued as Collateral Security

Quick recap

Collateral debentures are additional security for a loan, not a separate cash receipt.
First method: no journal entry; disclose the security against the loan.
Second method: debit Debenture Suspense and credit Debentures at face value.
Under the second method, deduct Debenture Suspense from the debentures in the balance-sheet note.
The loan shown remains the amount borrowed.

Lecture 9

Terms of Issue of Debentures

Reference video · Lecture 9Terms of Issue of Debentures

Meaning and terms of issue

Journal entries for the six issue and redemption combinations

Accounting treatment of redemption premium

⚠ Common mistake

Do not debit Discount on Issue separately when debentures are issued at a discount and redeemable at a premium: both the issue discount and redemption premium are debited to Loss on Issue of Debentures.

Quick recap

Issue proceeds equal nominal value less discount or plus issue premium.
Debentures A/c is credited at nominal value on allotment.
Issue premium is credited to Securities Premium Reserve.
Redemption premium is credited to Premium on Redemption of Debentures and debited to Loss on Issue.
For discount issue with premium redemption, Loss on Issue includes both amounts.
Premium on Redemption is a long-term liability until the debentures are redeemed.

Lecture 10

Illustration 15 based on Journal entries

Reference video · Lecture 10Illustration 15 based on Journal entries

Recording Debenture Issue at Different Prices

⚠ Common mistake

Do not treat issue premium and redemption premium as the same item: issue premium is credited to Securities Premium Reserve, while redemption premium is a future liability. When both apply, include both in the transfer entry.

Quick recap

At par, cash received equals the face value of the debentures.
Issue premium is credited to Securities Premium Reserve A/c.
Issue discount is debited to Discount on Issue of Debentures A/c.
Redemption premium is credited to Premium on Redemption of Debentures A/c.
Discount on issue and premium on redemption both contribute to loss on issue.
Check every journal entry by ensuring total debits equal total credits.

Lecture 11

Illustration 16 based on Issue of Debentures

Reference video · Lecture 11Illustration 16 based on Issue of Debentures

Issue terms and accounting treatment

Definition

Issue and redemption terms — The issue price is the amount received per debenture; the redemption amount is what the company repays at maturity.

Key rules

At par: Issue price equals face value.
At discount: Cash received is below face value; the discount is a loss on issue.
At premium: Cash received exceeds face value; credit the excess to Securities Premium Reserve.
Redeemable at premium: The extra amount payable is a liability and contributes to the loss on issue.

Issue proceeds, loss on issue and redemption amount

$$\begin{aligned}\text{Face value} &= N\times F\\\text{Issue proceeds} &= \text{Face value}-\text{issue discount}+\text{issue premium}\\\text{Loss on issue} &= \text{issue discount}+\text{premium on redemption}\\\text{Redemption amount} &= \text{face value}+\text{premium on redemption}\end{aligned}$$

Calculate these amounts before recording the issue entries.

Writing off loss on issue

Write off the loss against available Securities Premium Reserve first; charge any uncovered amount to Statement of Profit and Loss.

Prepare the debenture issue entries

Calculate total face value, issue discount or premium, and any redemption premium.
$$\text{Face value}=N\times F$$
Record cash received by debiting Bank and crediting Debenture Application and Allotment.
On transfer, credit Debentures with face value; record issue premium and redemption premium separately.
Debit Loss on Issue for issue discount and any redemption premium.
Write off the loss using Securities Premium Reserve first, then Statement of Profit and Loss if needed.

Worked example

Calculate proceeds and loss for 150 debentures of Rs. 1,000 each issued at 5% discount and redeemable at 10% premium, with Securities Premium Reserve of Rs. 20,000.

Find the face value of 150 debentures of Rs. 1,000 each.
$$150\times 1{,}000=\text{Rs. }1{,}50{,}000$$
Calculate the issue discount and redemption premium.
$$\text{Discount}=1{,}50{,}000\times 5\%=\text{Rs. }7{,}500;\quad \text{redemption premium}=1{,}50{,}000\times 10\%=\text{Rs. }15{,}000$$
Calculate cash proceeds and total loss on issue.
$$\text{Proceeds}=1{,}50{,}000-7{,}500=\text{Rs. }1{,}42{,}500;\quad \text{loss}=7{,}500+15{,}000=\text{Rs. }22{,}500$$
Use the Rs. 20,000 reserve first; charge the remaining loss to Statement of Profit and Loss.
$$22{,}500-20{,}000=\text{Rs. }2{,}500$$

Answer: Proceeds = Rs. 1,42,500; loss on issue = Rs. 22,500. Write off Rs. 20,000 against Securities Premium Reserve and Rs. 2,500 against Statement of Profit and Loss.

Journal entries in Illustration 16

Case (a): 120 debentures of Rs. 1,000 each; 5% discount, redeemable at par; Securities Premium Reserve = Rs. 10,000

Particulars	Debit (Rs.)	Credit (Rs.)
Bank A/c Dr. \| To Debenture Application and Allotment A/c	1,14,000	1,14,000
Debenture Application and Allotment A/c Dr. \| Loss on Issue of Debentures A/c Dr. \| To 8% Debentures A/c	1,14,000 \| 6,000	1,20,000
Securities Premium Reserve A/c Dr. \| To Loss on Issue of Debentures A/c	6,000	6,000

Case (b): 150 debentures of Rs. 1,000 each; 5% discount, redeemable at 10% premium; Securities Premium Reserve = Rs. 20,000

Particulars	Debit (Rs.)	Credit (Rs.)
Bank A/c Dr. \| To Debenture Application and Allotment A/c	1,42,500	1,42,500
Debenture Application and Allotment A/c Dr. \| Loss on Issue of Debentures A/c Dr. \| To 7% Debentures A/c \| To Premium on Redemption of Debentures A/c	1,42,500 \| 22,500	1,50,000 \| 15,000
Securities Premium Reserve A/c Dr. \| Statement of Profit and Loss A/c Dr. \| To Loss on Issue of Debentures A/c	20,000 \| 2,500	22,500

Case (c): 80 debentures of Rs. 1,000 each, issued at 5% premium

Particulars	Debit (Rs.)	Credit (Rs.)
Bank A/c Dr. \| To Debenture Application and Allotment A/c	84,000	84,000
Debenture Application and Allotment A/c Dr. \| To 9% Debentures A/c \| To Securities Premium Reserve A/c	84,000	80,000 \| 4,000

Debentures issued as collateral security

Definition

Collateral security — Debentures issued as collateral security provide additional security for a loan; they do not provide separate cash proceeds.

Worked example

Pass the entry for 400, 8% debentures of Rs. 100 each issued as collateral security against a loan of Rs. 40,000.

Calculate the nominal value of 400 debentures of Rs. 100 each.
$$400\times 100=\text{Rs. }40{,}000$$
Record the debentures given as security for the Rs. 40,000 loan.
$$\text{Debenture Suspense A/c Dr. }\text{ Rs. }40{,}000$$

Answer: Debenture Suspense A/c Dr. Rs. 40,000; To 8% Debentures A/c Rs. 40,000.

⚠ Common mistake

In case (a), the issue loss is Rs. 6,000, so only Rs. 6,000 is written off—not Rs. 8,000. In case (b), use 7% Debentures, as stated in the question; an 8% label in the printed journal is a typo.

Practice

A company issues 1,000 debentures of Rs. 100 each at par and redeemable at par. Find the proceeds and issue entry.

Hint: At par, proceeds equal the total face value.

Key step: Calculate $1{,}000\times 100$.

Solution: Face value and proceeds = Rs. 1,00,000. Entry: Bank A/c Dr. Rs. 1,00,000; To Debenture Application and Allotment A/c Rs. 1,00,000. On transfer: Debenture Application and Allotment A/c Dr. Rs. 1,00,000; To Debentures A/c Rs. 1,00,000.

Practice

A company issues 2,000 debentures of Rs. 100 each at 10% premium, redeemable at par. Calculate proceeds and the issue credits.

Hint: Add 10% of face value to the face value.

Key step: Calculate face value and its 10% premium.

Solution: Face value = Rs. 2,00,000; premium = Rs. 20,000; proceeds = Rs. 2,20,000. Entry: Bank A/c Dr. Rs. 2,20,000; To Debentures A/c Rs. 2,00,000; To Securities Premium Reserve A/c Rs. 20,000.

Practice

A company issues 500 debentures of Rs. 100 each at 5% discount and redeems them at 4% premium. Find proceeds and loss on issue.

Hint: Loss on issue includes both the issue discount and redemption premium.

Key step: Calculate each percentage on total face value, then add the amounts for the loss.

Solution: Face value = Rs. 50,000; issue discount = Rs. 2,500; proceeds = Rs. 47,500; redemption premium = Rs. 2,000; loss on issue = Rs. 4,500.

Quick recap

Issue proceeds = face value less issue discount plus issue premium.
Loss on issue = issue discount plus any premium payable on redemption.
Issue premium is credited to Securities Premium Reserve; redemption premium is recorded as a liability.
Write off loss against Securities Premium Reserve first, then Statement of Profit and Loss.
Case (a): the Rs. 6,000 discount is fully covered by the Rs. 10,000 reserve.
Collateral debentures are recorded by debiting Debenture Suspense A/c and crediting Debentures A/c.

Lecture 12

Interest on Debentures

Reference video · Lecture 12Interest on Debentures

Meaning and key features

Calculation and accounting treatment

Half-yearly interest and TDS

$$\text{Half-yearly interest}=\text{Nominal value}\times\frac{\text{Annual interest rate}}{2};\quad \text{TDS}=\text{Interest due}\times\text{TDS rate};\quad \text{Net payment}=\text{Interest due}-\text{TDS}$$

Calculate interest on nominal value, not on issue price. For a half-yearly payment:

Journal entries for debenture interest

Event	Debit	Credit
Interest becomes due	Debenture Interest A/c	Income Tax Payable A/c (TDS); Debentureholders A/c (net interest)
Net interest paid	Debentureholders A/c	Bank A/c
TDS paid to government	Income Tax Payable A/c	Bank A/c
Interest transferred to profit and loss	Statement of Profit and Loss A/c	Debenture Interest A/c

Recording interest and TDS

Find interest for the payment period using nominal value and the annual rate.
$$\text{Interest}=\text{Nominal value}\times\text{rate}\times\frac{\text{period in months}}{12}$$
Calculate TDS on the interest due; the remainder is payable to debentureholders.
$$\text{Net interest}=\text{Interest due}-\text{TDS}$$
Credit TDS payable and debentureholders when interest becomes due.
Record separate bank payments for the net interest and TDS.
At the end of the accounting period, transfer total debenture interest to the Statement of Profit and Loss.

Worked example

Prepare the journal entries for the issue and interest for the year ending 31 March 2017, assuming TDS is 10% and interest is paid half-yearly.

A Ltd. issues 2,000 debentures of ₹100 each at a 10% discount, redeemable at a 10% premium. Find issue figures and half-yearly interest at 10%.
$$2{,}000\times ₹100=₹2{,}00{,}000\text{ nominal value}$$
Calculate cash received and the loss on issue (discount plus redemption premium).
$$\text{Cash}=₹2{,}00{,}000-₹20{,}000=₹1{,}80{,}000;\quad \text{Loss}=₹20{,}000+₹20{,}000=₹40{,}000$$
Calculate each half-year’s interest, TDS at 10%, and net payment.
$$\text{Interest}=₹2{,}00{,}000\times10\%\times\frac{6}{12}=₹10{,}000;\quad \text{TDS}=₹1{,}000;\quad \text{Net}=₹9{,}000$$
For two half-years, transfer total interest of ₹20,000 to the Statement of Profit and Loss.
$$2\times ₹10{,}000=₹20{,}000$$

Answer: Journal entries are set out in the table below. Total interest expense for the year is ₹20,000; total TDS and net interest payments are ₹2,000 and ₹18,000 respectively.

A Ltd. — journal entries (₹)

Date / transaction	Debit account(s)	Debit (₹)	Credit account(s)	Credit (₹)
1 Apr 2016 — money received	Bank A/c	1,80,000	Debenture Application and Allotment A/c	1,80,000
1 Apr 2016 — issue at discount, redeemable at premium	Debenture Application and Allotment A/c; Loss on Issue of Debentures A/c	1,80,000; 40,000	10% Debentures A/c; Premium on Redemption of Debentures A/c	2,00,000; 20,000
30 Sep 2016 — interest due; TDS deducted	Debenture Interest A/c	10,000	Debentureholders A/c; Income Tax Payable A/c	9,000; 1,000
30 Sep 2016 — TDS paid	Income Tax Payable A/c	1,000	Bank A/c	1,000
30 Sep 2016 — net interest paid	Debentureholders A/c	9,000	Bank A/c	9,000
31 Mar 2017 — interest due; TDS deducted	Debenture Interest A/c	10,000	Debentureholders A/c; Income Tax Payable A/c	9,000; 1,000
31 Mar 2017 — net interest paid	Debentureholders A/c	9,000	Bank A/c	9,000
31 Mar 2017 — TDS paid	Income Tax Payable A/c	1,000	Bank A/c	1,000
31 Mar 2017 — interest transferred to profit and loss	Statement of Profit and Loss A/c	20,000	Debenture Interest A/c	20,000

⚠ Common mistake

Do not calculate interest on the discounted issue price: interest is calculated on nominal value. Also, credit Income Tax Payable for TDS; only the net amount is credited to Debentureholders.

Practice

A company has ₹10,00,000 of 6% debentures. Interest is paid half-yearly and TDS is 10%. Find the interest, TDS and net payment for each half-year.

Hint: Use six months’ interest on the ₹10,00,000 nominal value.

Key step: Half-yearly interest = ₹10,00,000 × 6% × 6/12 = ₹30,000.

Solution: TDS = ₹3,000; net payment = ₹27,000. Entry when due: Debenture Interest A/c Dr. ₹30,000; To Debentureholders A/c ₹27,000; To Income Tax Payable A/c ₹3,000. Repeat for each half-year.

Practice

A company issues 7,00,000 debentures of ₹100 each, carrying 8% interest. Interest is paid half-yearly; TDS is 10%. Calculate the half-yearly interest, TDS and net payment.

Hint: First find nominal value: number of debentures × ₹100.

Key step: Nominal value = 7,00,000 × ₹100 = ₹7,00,00,000; half-yearly interest = ₹7,00,00,000 × 8% × 6/12.

Solution: Interest due = ₹28,00,000; TDS = ₹2,80,000; net payment = ₹25,20,000. When due: Debenture Interest A/c Dr. ₹28,00,000; To Debentureholders A/c ₹25,20,000; To Income Tax Payable A/c ₹2,80,000.

Quick recap

Debenture interest is fixed, periodic, and calculated on nominal value.
Interest is a charge against profit and is payable whether or not profit is earned.
TDS is deducted from interest due and credited to Income Tax Payable.
Debentureholders receive interest net of TDS; the company deposits TDS with the government.
Transfer the period’s total Debenture Interest to the Statement of Profit and Loss.

Lecture 13

Writing off Discount/Loss on Issue of Debentures

Reference video · Lecture 13Writing off Discount/Loss on Issue of Debentures

Meaning and Treatment of Discount or Loss

Loss on Issue and Amount Written Off

$$\text{Total loss} = (\text{Face value} \times \text{discount rate}) + (\text{Face value} \times \text{redemption premium rate})$$

Use the reserve up to its available balance; charge any balance to profit and loss.

Journal Entry for Writing Off the Loss

Account	Debit	Credit
Securities Premium Reserve A/c (up to available balance)	Dr.
Statement of Profit and Loss A/c (remaining loss, if any)	Dr.
To Discount/Loss on Issue of Debentures A/c		Total loss written off

Worked example

Rohit Ltd. issues 50,000 debentures of Rs. 100 each at 9% discount, redeemable at a 7% premium. Securities Premium Reserve is Rs. 5,00,000. Calculate the loss and its write-off.

Find the face value of 50,000 debentures of Rs. 100 each.
$$50{,}000 \times 100 = \text{Rs. }50{,}00{,}000$$
Calculate the issue discount and redemption premium.
$$\text{Discount} = 50{,}00{,}000 \times 9\% = \text{Rs. }4{,}50{,}000;\quad \text{redemption premium} = 50{,}00{,}000 \times 7\% = \text{Rs. }3{,}50{,}000$$
Add both amounts to obtain the loss on issue.
$$\text{Total loss} = 4{,}50{,}000 + 3{,}50{,}000 = \text{Rs. }8{,}00{,}000$$
Use the Rs. 5,00,000 reserve first; charge the balance to profit and loss.
$$\text{P\&L charge} = 8{,}00{,}000 - 5{,}00{,}000 = \text{Rs. }3{,}00{,}000$$

Answer: Write off Rs. 5,00,000 from Securities Premium Reserve and Rs. 3,00,000 from the Statement of Profit and Loss.

Rohit Ltd.: Issue and Write-Off Entries (July 1, 2019)

Particulars	Debit (Rs.)	Credit (Rs.)
Bank A/c Dr. — application money received	45,50,000
To Debenture Application and Allotment A/c		45,50,000
Debenture Application and Allotment A/c Dr.	45,50,000
Loss on Issue of Debentures A/c Dr.	8,00,000
To 8% Debentures A/c		50,00,000
To Premium on Redemption of Debentures A/c		3,50,000
Securities Premium Reserve A/c Dr.	5,00,000
Statement of Profit and Loss A/c Dr.	3,00,000
To Loss on Issue of Debentures A/c		8,00,000

Application of the Rule

Available reserve: If the loss is less than the reserve, write off the full loss from Securities Premium Reserve.
Later share premium: If a share issue creates additional Securities Premium Reserve before the loss is written off, that balance may also be used. In Amrit Ltd., the reserve rose from Rs. 70,000 to Rs. 1,70,000; against a Rs. 2,00,000 loss, Rs. 30,000 remained chargeable to profit and loss.
Timing: The loss is written off in the issue year; a later reserve balance matters only if it exists when the write-off is made.

⚠ Common mistake

Do not charge the entire loss to profit and loss before using an available Securities Premium Reserve; debit profit and loss only for the shortfall.

Practice

X Ltd. issues 2,000 debentures of Rs. 100 each at an 8% discount. Its Securities Premium Reserve is Rs. 30,000. How much should be written off from the reserve?

Hint: Calculate the discount loss and compare it with the reserve balance.

Key step: The discount loss is $2{,}000 \times 100 \times 8\% = \text{Rs. }16{,}000$.

Solution: Write off Rs. 16,000 from Securities Premium Reserve; no profit-and-loss charge is needed.

Practice

A company issues 10,000 debentures of Rs. 100 each at a 10% discount, redeemable at a 10% premium. Securities Premium Reserve is Rs. 70,000. Find the amount charged to the Statement of Profit and Loss.

Hint: Add the discount and redemption premium, then subtract the available reserve.

Key step: Total loss is $1{,}00{,}000 + 1{,}00{,}000 = \text{Rs. }2{,}00{,}000$.

Solution: Charge Rs. 1,30,000 to the Statement of Profit and Loss after using Rs. 70,000 from Securities Premium Reserve.

Quick recap

Discount on issue and premium on redemption are capital-loss components.
Write off the loss in the year the debentures are issued.
Use the available Securities Premium Reserve first, as permitted under Section 52(2).
Charge any loss exceeding the reserve to the Statement of Profit and Loss.
For a discounted issue redeemable at a premium, add both amounts to find the total loss.

Lecture 14

Redemption of Debentures

Reference video · Lecture 14Redemption of Debentures

Definition

Redemption of debentures — Redemption is the repayment of debenture amounts and discharge of the related liability according to the terms of issue.

Methods of Redemption

Four methods: lump-sum payment, instalments, open-market purchase, and conversion into shares or new debentures.

Methods of Redemption

Method	How it works
Lump sum	The company pays the debentureholders the amount due at maturity in one payment.
Instalments	The liability is repaid in portions on specified dates; the debentures selected for each payment are identified by drawing lots.
Open-market purchase	The company buys its own debentures in the market and cancels them.
Conversion	Debentures are exchanged for shares or a new class of debentures, if the holders accept the offer.

Conversion: key points

Eligibility: This method applies only to convertible debentures.
Issue terms: Replacement shares or debentures may be issued at par, at a discount, or at a premium.
Calculation basis: Use the actual proceeds from the original debenture issue to determine the number of replacement shares; for debentures issued at a discount, use the amount actually received.

Timing and Sources of Redemption

Factors to consider

Timing: Redemption is usually on the due date. Earlier redemption is possible when the company’s articles provide for it.
Source: Redemption may be made out of capital or out of profits.
Debenture Redemption Reserve (DRR): Under the rules described in this lecture, specified exempt entities need not create a DRR; other unlisted companies require a DRR equal to 10% of outstanding debentures.

DRR exemptions stated in the lecture

Category	Treatment
All-India financial institutions registered with the RBI; banking companies; RBI-registered NBFCs; NHB-registered housing finance companies; stock-exchange-listed companies	Exempt from creating a DRR, as stated in the lecture.
Other unlisted companies	DRR adequacy is 10% of the value of outstanding debentures.

Debenture Redemption Investment

Definition

Debenture Redemption Investment — The company must invest or deposit a prescribed amount to provide funds for debentures maturing in the following financial year.

Minimum redemption investment

$$\text{Minimum investment} = 0.15 \times \text{debentures maturing in the relevant year}$$

Invest or deposit the amount on or before April 30; it must be at least 15% of the debentures maturing in the year ending the following March 31.

Permitted investments or deposits

Bank deposit: Deposit with a scheduled bank, free from any charge or lien.
Government securities: Securities of the Central Government or any State Government.
Trust Act securities: Securities specified under Section 20, sub-clauses (a) to (d) and (ee), of the Indian Trusts Act, 1982.
Notified company bonds: Bonds issued by a company notified under Section 20, sub-clause (f), of that Act.
Restriction: These funds may be used only to redeem debentures maturing in the relevant year.

Managing investment for instalment redemptions

Calculate 15% of the debentures due for redemption in the coming year.
By April 30, invest enough to bring the balance up to that required amount.
Carry the investment forward when redemptions are spread over several years; do not automatically realise it each year.
After a redemption, realise any amount above the next year's required 15% balance; invest more if the balance is short.
For a final lump-sum redemption, invest 15% of the debentures due and realise the investment when redemption occurs.

Worked example

How does Kays Ltd. manage the 15% redemption investment for its instalment redemptions?

Kays Ltd. has 10,000 debentures of Rs. 100 each, redeemed as follows: 2,000 in 2017, 3,000 in 2018, 3,000 in 2019, and 2,000 in 2020. Find the investment movements at 15%.
For the first instalment, invest 15% of Rs. 2,00,000 by April 30, 2016.
$$0.15 \times (2{,}000 \times 100) = \text{Rs. }30{,}000$$
For the 2018 instalment, raise the carried balance from Rs. 30,000 to Rs. 45,000 by investing an additional Rs. 15,000 by April 30, 2017.
$$0.15 \times (3{,}000 \times 100) = \text{Rs. }45{,}000;\quad 45{,}000 - 30{,}000 = 15{,}000$$
The balance of Rs. 45,000 meets the requirement for the 2019 instalment. After that redemption, realise Rs. 15,000 and carry Rs. 30,000 for the 2020 instalment.
$$0.15 \times (2{,}000 \times 100) = \text{Rs. }30{,}000;\quad 45{,}000 - 15{,}000 = 30{,}000$$
The carried Rs. 30,000 meets the 2020 requirement and is realised at the final redemption.
$$0.15 \times (2{,}000 \times 100) = \text{Rs. }30{,}000$$

Answer: Invest Rs. 30,000 initially; add Rs. 15,000 for the 2018 instalment; retain Rs. 45,000 for 2019, then realise Rs. 15,000 and carry Rs. 30,000 for 2020, when it is realised.

Kays Ltd.: investment balance

Redemption date	Debentures redeemed	Required investment (15%)	Investment movement
Jan. 31, 2017	2,000 (Rs. 2,00,000)	Rs. 30,000	Invest Rs. 30,000 by Apr. 30, 2016.
Jan. 31, 2018	3,000 (Rs. 3,00,000)	Rs. 45,000	Add Rs. 15,000 by Apr. 30, 2017; balance becomes Rs. 45,000.
Jan. 31, 2019	3,000 (Rs. 3,00,000)	Rs. 45,000	Carry Rs. 45,000; after redemption, realise Rs. 15,000 and retain Rs. 30,000.
Jan. 31, 2020	2,000 (Rs. 2,00,000)	Rs. 30,000	Carry the Rs. 30,000 balance and realise it at final redemption.

Practice

A company has Rs. 8,00,000 of debentures maturing in the relevant year. What is the minimum 15% investment?

Hint: Multiply the amount maturing by 15%.

Key step: 0.15 × Rs. 8,00,000

Solution: 0.15 × Rs. 8,00,000 = Rs. 1,20,000. The company must invest or deposit at least Rs. 1,20,000 by April 30.

Practice

1,000 debentures of Rs. 100 each were issued at a 5% discount and later converted into shares of Rs. 20 each. Using the lecture’s proceeds basis, how many shares are issued?

Hint: Find the amount actually received on issue, then divide by the value of each share.

Key step: Actual proceeds = 1,000 × Rs. 100 × 95%; divide the proceeds by Rs. 20.

Solution: Proceeds = Rs. 95,000; shares issued = Rs. 95,000 ÷ Rs. 20 = 4,750 shares.

⚠ Common mistake

Do not treat the required investment as 15% of all outstanding debentures automatically; calculate it on the debentures maturing in the relevant year, and carry forward the investment balance for instalment redemptions as required.

Quick recap

Redemption is repayment of debentures under their issue terms.
The four methods are lump sum, instalments, open-market purchase, and conversion.
Early redemption is allowed when provided for in the company’s articles.
Redemption may be funded out of capital or profits; DRR requirements depend on the company category.
The stated investment requirement is at least 15% of debentures maturing in the relevant year, by April 30.
For instalment redemptions, carry forward the investment and adjust it to meet the next year's required balance.

Lecture 15

Redemption by Payment in Lump Sum

Reference video · Lecture 15Redemption by Payment in Lump Sum

Lump-Sum Redemption at Par or Premium

Definition

Lump-sum redemption — The company repays all debentures together in one payment on the due date.

Key points

Amount due: Face value plus any premium payable on redemption.
Due entry: Debit Debentures A/c and, if applicable, Premium on Redemption of Debentures A/c; credit Debentureholders A/c.
Payment entry: Debit Debentureholders A/c and credit Bank A/c for the amount paid.
Issue price and interest rate: Neither changes the face value used to calculate redemption.
Out of capital: Illustration 21, case 1, specifies redemption out of capital; its entries record redemption and payment, with no reserve entry shown.

Amount payable on redemption

$$\text{Amount payable}=\text{Face value}+\text{Redemption premium}$$

Calculate any premium on the nominal (face) value.

Journal-entry method

Calculate the total face value.
$$\text{Face value}=\text{Number of debentures}\times\text{Face value per debenture}$$
Calculate redemption premium, if any, on face value.
$$\text{Premium}=\text{Face value}\times\text{Premium rate}$$
Record the amount due to debentureholders.
Record payment by bank.

Standard journal entries

Situation	Debit	Credit
Amount due at par	Debentures A/c	Debentureholders A/c
Payment at par	Debentureholders A/c	Bank A/c
Amount due at premium	Debentures A/c; Premium on Redemption of Debentures A/c	Debentureholders A/c
Payment at premium	Debentureholders A/c	Bank A/c

Worked example

Give the redemption entries for the four cases in Illustration 21.

Case 1: 5,000 debentures of ₹100 each are redeemable at par out of capital.
$$\text{Amount due}=5{,}000\times ₹100=₹5{,}00{,}000$$
Case 2: 1,000 debentures of ₹100 each are redeemable at a 10% premium.
$$\text{Premium}=₹1{,}00{,}000\times10\%=₹10{,}000;\quad\text{amount due}=₹1{,}10{,}000$$
Case 3: Face value ₹1,00,000; issued at 5% premium but redeemable at par.
$$\text{Amount due}=₹1{,}00{,}000$$
Case 4: Face value ₹1,00,000; issued at 5% discount and redeemable at a 5% premium.
$$\text{Premium}=₹1{,}00{,}000\times5\%=₹5{,}000;\quad\text{amount due}=₹1{,}05{,}000$$

Answer: The entries for all four cases are set out in the following journal table.

Illustration 21: Journal entries

Case	Particulars	Debit (₹)	Credit (₹)
1: Out of capital; at par	9% Debentures A/c Dr. → To Debentureholders A/c	5,00,000	5,00,000
1: Payment	Debentureholders A/c Dr. → To Bank A/c	5,00,000	5,00,000
2: At 10% premium	12% Debentures A/c Dr. ₹1,00,000; Premium on Redemption of Debentures A/c Dr. ₹10,000 → To Debentureholders A/c	1,10,000	1,10,000
2: Payment	Debentureholders A/c Dr. → To Bank A/c	1,10,000	1,10,000
3: Issued at 5% premium; redeemable at par	12% Debentures A/c Dr. → To Debentureholders A/c	1,00,000	1,00,000
3: Payment	Debentureholders A/c Dr. → To Bank A/c	1,00,000	1,00,000
4: Issued at 5% discount; redeemable at 5% premium	12% Debentures A/c Dr. ₹1,00,000; Premium on Redemption of Debentures A/c Dr. ₹5,000 → To Debentureholders A/c	1,05,000	1,05,000
4: Payment	Debentureholders A/c Dr. → To Bank A/c	1,05,000	1,05,000

⚠ Common mistake

Do not calculate redemption premium on issue price. Calculate it on face value; the issue discount or premium does not change the redemption amount.

Issue at Discount and Redemption at Premium

Definition

Loss on issue of debentures — When debentures are issued at a discount and are redeemable at a premium, the loss includes both the issue discount and the redemption premium.

Key points

Issue proceeds: Face value less discount on issue.
Loss on issue: Issue discount plus premium payable on redemption.
Redemption: Debentureholders receive face value plus redemption premium.
DRI: Record the required Debenture Redemption Investment when invested, and record its encashment when realised for redemption.
DRR in this illustration: The other unlisted company creates DRR at 10% of outstanding debentures; the listed-company entries shown do not include DRR creation.
After redemption: In the other unlisted-company example, transfer the DRR to General Reserve.

Issue and redemption calculations

$$\begin{aligned}\text{Issue proceeds}&=\text{Face value}-\text{Issue discount},\\\text{Loss on issue}&=\text{Issue discount}+\text{Redemption premium},\\\text{Redemption amount}&=\text{Face value}+\text{Redemption premium}\end{aligned}$$

Calculate issue discount and redemption premium on nominal value.

Entries for issue and lump-sum redemption

Record application money received in Bank A/c and transfer it to Debenture Application and Allotment A/c.
On allotment, debit the application account and Loss on Issue of Debentures A/c; credit Debentures A/c and Premium on Redemption of Debentures A/c.
Record the required DRI investment and its later encashment.
At redemption, transfer face value plus premium to Debentureholders A/c, then record payment through Bank A/c.
For the other unlisted company in this example, create DRR as shown and transfer it to General Reserve after redemption.

Worked example

Summarise the issue and redemption entries for the listed and other unlisted company cases in Illustration 22.

XYZ Ltd. issues 200 debentures of ₹100 each at 10% discount, redeemable at 10% premium.
$$\text{Face value}=200\times ₹100=₹20{,}000$$
Calculate proceeds, redemption premium, loss on issue and redemption amount.
$$\text{Proceeds}=₹20{,}000-₹2{,}000=₹18{,}000;\quad\text{premium}=₹2{,}000;\quad\text{loss}=₹2{,}000+₹2{,}000=₹4{,}000;\quad\text{redemption amount}=₹22{,}000$$
The stipulated DRI investment is ₹3,000; the unlisted-company example also creates DRR of 10% of face value.
$$\text{DRI}=₹3{,}000;\quad\text{DRR}=₹20{,}000\times10\%=₹2{,}000$$
The solution's dates conflict with the issue date and four-year term stated in the question; the discrepancy is detailed below.

Answer: The journal entries are shown in the following tables. The dates printed in the solution are preserved, and the source's date inconsistency is flagged.

Illustration 22: Listed company journal entries (dates as printed in the solution)

Date	Particulars	Debit (₹)	Credit (₹)
1 Apr 2016	Bank A/c Dr. → To Debenture Application and Allotment A/c	18,000	18,000
1 Apr 2016	Debenture Application and Allotment A/c Dr. ₹18,000; Loss on Issue of Debentures A/c Dr. ₹4,000 → To 15% Debentures A/c ₹20,000; To Premium on Redemption of Debentures A/c ₹2,000	22,000	22,000
30 Apr (year printed as 2016)	Debenture Redemption Investment A/c Dr. → To Bank A/c	3,000	3,000
31 Mar 2020	Bank A/c Dr. → To Debenture Redemption Investment A/c (DRI encashed)	3,000	3,000
31 Mar 2020	15% Debentures A/c Dr. ₹20,000; Premium on Redemption of Debentures A/c Dr. ₹2,000 → To Debentureholders A/c	22,000	22,000
31 Mar 2020	Debentureholders A/c Dr. → To Bank A/c	22,000	22,000

Illustration 22: Other unlisted company—additional entries

Date as printed	Particulars	Debit (₹)	Credit (₹)
31 Mar 2019	Surplus (Balance in Statement of Profit and Loss) A/c Dr. → To Debenture Redemption Reserve A/c (10% of ₹20,000)	2,000	2,000
After redemption, 31 Mar 2020	Debenture Redemption Reserve A/c Dr. → To General Reserve A/c	2,000	2,000

Date discrepancy in Illustration 22

Question states: Issue on 1 April 2013 and redemption at the end of the fourth year, which gives a due date of 31 March 2017.
Printed solution states: Issue entries dated 1 April 2016, DRI investment dated 30 April (shown in the solution in 2016), and redemption entries dated 31 March 2020.
Use with care: The stated issue date and four-year term do not agree with the journal-entry dates; do not silently treat them as matching.

Practice

A company has 2,000 debentures of ₹100 each, redeemable at par. State the amount due and the two redemption entries.

Hint: Calculate total face value; redemption is at par.

Key step: 2,000 × ₹100 = ₹2,00,000.

Solution: Amount due = ₹2,00,000. Entries: Debentures A/c Dr. ₹2,00,000 → To Debentureholders A/c ₹2,00,000; then Debentureholders A/c Dr. ₹2,00,000 → To Bank A/c ₹2,00,000.

Practice

Debentures of face value ₹80,000 were issued at a 5% premium and are redeemable at a 5% premium. Find the redemption amount and state the entries.

Hint: Issue premium is not part of the redemption calculation.

Key step: Redemption premium = ₹80,000 × 5% = ₹4,000.

Solution: Amount due = ₹80,000 + ₹4,000 = ₹84,000. Entries: Debentures A/c Dr. ₹80,000 and Premium on Redemption of Debentures A/c Dr. ₹4,000 → To Debentureholders A/c ₹84,000; then Debentureholders A/c Dr. ₹84,000 → To Bank A/c ₹84,000.

Quick recap

Lump-sum redemption repays all debentures together on the due date.
At par, amount due equals face value; at premium, add premium calculated on face value.
Transfer the amount due to Debentureholders A/c, then record payment through Bank A/c.
Illustration 21, case 1, is specifically redeemable out of capital.
For issue at discount and redemption at premium, loss on issue equals issue discount plus redemption premium.
The Illustration 22 example records DRI in both company cases; its other unlisted case also records DRR creation and transfer.
Illustration 22's stated 2013 issue and four-year term conflict with the solution's 2016 issue and 2020 redemption dates.

Lecture 16

Redemption by Payment in Instalments

Reference video · Lecture 16Redemption by Payment in Instalments

Meaning and accounting treatment

Definition

Redemption by instalments — Repayment of debentures in specified portions over several dates, rather than in one lump sum.

Key points

Selection: The debentures due for redemption in a particular instalment are usually chosen by draw of lots.
Liability: On the due date, transfer the face value of the debentures being redeemed to Debentureholders A/c.
Payment: Pay the amount due to debentureholders through Bank A/c; include any redemption premium and interest payable.
Outstanding balance: Calculate later interest only on the debentures still outstanding.

Basic redemption entries

Transaction	Debit	Credit
Face value due for redemption	Debentures A/c	Debentureholders A/c
Redemption premium, if applicable	Premium on Redemption of Debentures A/c	Debentureholders A/c
Payment to holders	Debentureholders A/c	Bank A/c

Illustration: JK Ltd.

Given information

Issue: 6,000 debentures of ₹50 each, issued on 1 April 2014 at 5% premium; interest is 12% annually, payable on 31 March.
Redemption: Four equal instalments at the end of years 3–6; the question states a 10% redemption premium.
Investment: The illustration records ₹11,250 invested in specified securities for redemption.

Instalment, interest and redemption premium

$$\text{Instalment face value} = \frac{\text{Total face value}}{\text{Number of instalments}}, \qquad \text{Interest} = \text{Face value outstanding} \times \text{Interest rate}, \qquad \text{Redemption premium} = \text{Instalment face value} \times \text{Premium rate}$$

Use the face value outstanding to calculate interest; calculate redemption premium on the face value being redeemed.

Worked example

Prepare the main issue and redemption entries for JK Ltd., including interest due and paid.

Calculate the issue proceeds and the face value of each instalment.
$$6{,}000\times ₹50=₹3{,}00{,}000;\quad ₹3{,}00{,}000\times 1.05=₹3{,}15{,}000;\quad ₹3{,}00{,}000\div4=₹75{,}000$$
Calculate the premium and total principal payable for each instalment.
$$₹75{,}000\times10\%=₹7{,}500;\quad ₹75{,}000+₹7{,}500=₹82{,}500$$
Work out the annual interest on the remaining debentures.
$$2015,\ 2016,\ 2017:\ ₹3{,}00{,}000\times12\%=₹36{,}000\text{ each};\quad 2018:\ ₹2{,}25{,}000\times12\%=₹27{,}000;\quad 2019:\ ₹1{,}50{,}000\times12\%=₹18{,}000;\quad 2020:\ ₹75{,}000\times12\%=₹9{,}000$$
Add each year's interest to the principal and premium due that year to get the cash payment.
$$2017:\ ₹36{,}000+₹82{,}500=₹1{,}18{,}500;\quad 2018:\ ₹27{,}000+₹82{,}500=₹1{,}09{,}500;\quad 2019:\ ₹18{,}000+₹82{,}500=₹1{,}00{,}500;\quad 2020:\ ₹9{,}000+₹82{,}500=₹91{,}500$$

Answer: Journal entries (₹):

Journal entries in the books of JK Ltd.

Date	Particulars	Debit (₹)	Credit (₹)
1 Apr 2014	Bank A/c Dr. \| To Debenture Application and Allotment A/c	3,15,000	3,15,000
1 Apr 2014	Debenture Application and Allotment A/c Dr. \| To 12% Debentures A/c \| To Securities Premium Reserve	3,15,000	3,00,000; 15,000
31 Mar 2015 and 31 Mar 2016 (each year)	Debenture Interest A/c Dr. \| To Debentureholders A/c; then Debentureholders A/c Dr. \| To Bank A/c	36,000; 36,000	36,000; 36,000
30 Apr 2016	Debenture Redemption Investment A/c Dr. \| To Bank A/c	11,250	11,250
31 Mar 2017	Debenture Interest A/c Dr. \| To Debentureholders A/c	36,000	36,000
31 Mar 2017	12% Debentures A/c Dr. \| Premium on Redemption of Debentures A/c Dr. \| To Debentureholders A/c	75,000; 7,500	82,500
31 Mar 2017	Debentureholders A/c Dr. \| To Bank A/c (interest and redemption amount paid)	1,18,500	1,18,500
31 Mar 2018	Debenture Interest A/c Dr. \| To Debentureholders A/c	27,000	27,000
31 Mar 2018	12% Debentures A/c Dr. \| Premium on Redemption of Debentures A/c Dr. \| To Debentureholders A/c	75,000; 7,500	82,500
31 Mar 2018	Debentureholders A/c Dr. \| To Bank A/c (interest and redemption amount paid)	1,09,500	1,09,500
31 Mar 2019	Debenture Interest A/c Dr. \| To Debentureholders A/c	18,000	18,000
31 Mar 2019	12% Debentures A/c Dr. \| Premium on Redemption of Debentures A/c Dr. \| To Debentureholders A/c	75,000; 7,500	82,500
31 Mar 2019	Debentureholders A/c Dr. \| To Bank A/c (interest and redemption amount paid)	1,00,500	1,00,500
31 Mar 2020	Bank A/c Dr. \| To Debenture Redemption Investment A/c (investment realised)	11,250	11,250
31 Mar 2020	Debenture Interest A/c Dr. \| To Debentureholders A/c	9,000	9,000
31 Mar 2020	12% Debentures A/c Dr. \| Premium on Redemption of Debentures A/c Dr. \| To Debentureholders A/c	75,000; 7,500	82,500
31 Mar 2020	Debentureholders A/c Dr. \| To Bank A/c (interest and redemption amount paid)	91,500	91,500

⚠ Common mistake

Do not omit a redemption premium stated in the question. For each ₹75,000 instalment here, the liability to holders is ₹82,500 before adding that year’s interest.

Practice

A company has 4,000 debentures of ₹100 each, redeemable in four equal annual instalments. Find the face value of each instalment.

Hint: Divide the total face value by the number of instalments.

Key step: Total face value = 4,000 × ₹100 = ₹4,00,000; divide by 4.

Solution: Each instalment is ₹4,00,000 ÷ 4 = ₹1,00,000 face value.

Practice

A 10% debenture issue has ₹2,00,000 outstanding before redemption. One-quarter is redeemed at a 5% premium. Find the interest for the year and the redemption amount payable, excluding interest.

Hint: Calculate interest on the opening outstanding amount; calculate premium on the instalment’s face value.

Key step: Instalment face value = ₹2,00,000 ÷ 4 = ₹50,000; premium = 5% of ₹50,000.

Solution: Interest = ₹2,00,000 × 10% = ₹20,000. Redemption amount = ₹50,000 + ₹2,500 premium = ₹52,500.

Quick recap

Debentures due in each instalment are commonly selected by draw of lots.
Transfer the face value due from Debentures A/c to Debentureholders A/c.
Record any redemption premium as an additional amount payable to debentureholders.
Pay interest on the debentures outstanding for the relevant period.
JK Ltd. redeems 1,500 debentures, or ₹75,000 face value, at each of four dates.
In the JK Ltd. example, each instalment’s redemption amount is ₹82,500 before interest.

Lecture 17

Illustration 24 based on Issue of Debentures

Reference video · Lecture 17Illustration 24 based on Issue of Debentures

Issue terms and key calculations

Issue, redemption and interest calculations

$$\begin{aligned}\text{Issue proceeds}&=\text{Face value}\times(1+\text{issue premium rate})\\\text{Installment redemption amount}&=\text{Installment face value}\times(1+\text{redemption premium rate})\\\text{Annual interest}&=\text{Outstanding face value}\times12\%\end{aligned}$$

Interest each year is calculated on the face value outstanding during that year, before that year's installment is redeemed.

Interest and redemption by year

Year ending	Face value outstanding for interest	Interest at 12%	Face value redeemed
31 March 2015	₹3,00,000	₹36,000	—
31 March 2016	₹3,00,000	₹36,000	—
31 March 2017	₹3,00,000	₹36,000	₹75,000
31 March 2018	₹2,25,000	₹27,000	₹75,000
31 March 2019	₹1,50,000	₹18,000	₹75,000
31 March 2020	₹75,000	₹9,000	₹75,000

Journal entries in the books of XYZ Ltd.

Journal-entry method

Record receipt of the issue proceeds, then transfer application money to debentures and the related premium accounts.
$$₹3{,}15{,}000=₹3{,}00{,}000+₹15{,}000$$
At issue, recognise the redemption premium payable and the corresponding loss on issue.
$$₹3{,}00{,}000\times10\%=₹30{,}000$$
Each year, record interest due and its payment; calculate interest on the year's outstanding face value.
$$\text{Interest}=\text{Outstanding face value}\times12\%$$
On each installment date, transfer the face value and redemption premium payable to Debentureholders, then record payment.
$$₹75{,}000+₹7{,}500=₹82{,}500$$
Record the specified-securities investment and its realisation separately at the amounts given.
$$₹11{,}250$$

Journal entries

Date	Journal entry	Debit (₹)	Credit (₹)
1 April 2014	Bank A/c Dr.; To Debenture Application and Allotment A/c	3,15,000	3,15,000
1 April 2014	Debenture Application and Allotment A/c Dr. 3,15,000; Loss on Issue of Debentures A/c Dr. 30,000; To 12% Debentures A/c 3,00,000; To Securities Premium Reserve A/c 15,000; To Premium on Redemption of Debentures A/c 30,000	3,45,000	3,45,000
31 March 2015	Debenture Interest A/c Dr.; To Debentureholders A/c	36,000	36,000
31 March 2015	Debentureholders A/c Dr.; To Bank A/c	36,000	36,000
1 April 2015	Statement of Profit and Loss A/c Dr.; To Loss on Issue of Debentures A/c	30,000	30,000
31 March 2016	Debenture Interest A/c Dr.; To Debentureholders A/c	36,000	36,000
31 March 2016	Debentureholders A/c Dr.; To Bank A/c	36,000	36,000
31 March 2017	Debenture Interest A/c Dr.; To Debentureholders A/c	36,000	36,000
31 March 2017	12% Debentures A/c Dr. 75,000; Premium on Redemption of Debentures A/c Dr. 7,500; To Debentureholders A/c	82,500	82,500
31 March 2017	Debentureholders A/c Dr.; To Bank A/c	1,18,500	1,18,500
30 April 2017	Debenture Redemption Investment A/c Dr.; To Bank A/c	11,250	11,250
31 March 2018	Debenture Interest A/c Dr.; To Debentureholders A/c	27,000	27,000
31 March 2018	12% Debentures A/c Dr. 75,000; Premium on Redemption of Debentures A/c Dr. 7,500; To Debentureholders A/c	82,500	82,500
31 March 2018	Debentureholders A/c Dr.; To Bank A/c	1,09,500	1,09,500
31 March 2019	Debenture Interest A/c Dr.; To Debentureholders A/c	18,000	18,000
31 March 2019	12% Debentures A/c Dr. 75,000; Premium on Redemption of Debentures A/c Dr. 7,500; To Debentureholders A/c	82,500	82,500
31 March 2019	Debentureholders A/c Dr.; To Bank A/c	1,00,500	1,00,500
31 March 2020	Bank A/c Dr.; To Debenture Redemption Investment A/c	11,250	11,250
31 March 2020	Debenture Interest A/c Dr.; To Debentureholders A/c	9,000	9,000
31 March 2020	12% Debentures A/c Dr. 75,000; Premium on Redemption of Debentures A/c Dr. 7,500; To Debentureholders A/c	82,500	82,500
31 March 2020	Debentureholders A/c Dr.; To Bank A/c	91,500	91,500

Worked example

What is the total amount paid to debentureholders on 31 March 2018?

On 31 March 2018, 4,500 debentures are outstanding before the year's redemption; 1,500 are redeemed.
$$4{,}500\times₹50=₹2{,}25{,}000$$
Calculate interest on the outstanding face value.
$$₹2{,}25{,}000\times12\%=₹27{,}000$$
Calculate the installment payable, including the 10% redemption premium.
$$1{,}500\times₹50\times110\%=₹82{,}500$$
Add interest and redemption payment to find the total bank payment.
$$₹27{,}000+₹82{,}500=₹1{,}09{,}500$$

Answer: ₹1,09,500.

⚠ Common mistake

Credit Debentureholders A/c—not Debentures A/c—when interest becomes due. Also, the 31 March 2017 payment is ₹1,18,500 (₹36,000 interest + ₹82,500 redemption), not ₹1,18,000.

Practice

Calculate the amount received on issuing 6,000 debentures of ₹50 each at a 5% premium.

Hint: Find total face value, then add 5% of it.

Key step: $6{,}000\times₹50=₹3{,}00{,}000$; 5% premium is ₹15,000.

Solution: Issue proceeds are ₹3,15,000.

Practice

Find the interest due on 31 March 2019, when 3,000 debentures remain outstanding.

Hint: Multiply outstanding face value by 12%.

Key step: $3{,}000\times₹50\times12\%=₹18{,}000$.

Solution: Interest due is ₹18,000. Entry: Debenture Interest A/c Dr. ₹18,000; To Debentureholders A/c ₹18,000.

Quick recap

Issue proceeds are ₹3,15,000, including ₹15,000 securities premium.
The ₹30,000 redemption premium is recognised as a liability and a loss on issue.
Each of the four installments redeems 1,500 debentures for ₹82,500.
Annual interest falls from ₹36,000 to ₹9,000 as the outstanding face value declines.
Add the year's interest to the redemption installment to calculate each payment to debentureholders.
Record the ₹11,250 specified-securities investment and its ₹11,250 realisation separately; no calculation basis is given.

Lecture 18

Illustration 25 based on Issue of Debentures

Reference video · Lecture 18Illustration 25 based on Issue of Debentures

Key Details and Calculations for ABC Ltd.

Definition

Issue at a discount and redemption at a premium — The company receives less than the debentures’ face value on issue but repays more than face value on redemption.

Facts of the illustration

Company status: ABC Ltd. is an other unlisted company; it invests in specified securities for debenture redemption.
Issue: 6,000 debentures of ₹50 each issued on 1 April 2014; total face value is ₹3,00,000.
Issue price: Issued at a 5% discount, so cash received is ₹2,85,000.
Interest: 12% per year, payable annually on 31 March.
Redemption: Four equal instalments at the ends of years 3, 4, 5 and 6: 1,500 debentures per instalment.
Redemption premium: 10% of face value; total premium is ₹30,000.
Loss on issue: Discount of ₹15,000 plus redemption premium of ₹30,000 equals ₹45,000.

Issue, instalment and interest calculations

$$\begin{aligned} \text{Face value issued} &= 6{,}000\times ₹50=₹3{,}00{,}000 \\ \text{Cash received} &= ₹3{,}00{,}000\times(1-5\%)=₹2{,}85{,}000 \\ \text{Loss on issue} &= ₹3{,}00{,}000\times5\% + ₹3{,}00{,}000\times10\%=₹45{,}000 \\ \text{Debentures per instalment} &= \frac{6{,}000}{4}=1{,}500 \\ \text{Face value per instalment} &=1{,}500\times ₹50=₹75{,}000 \\ \text{Premium per instalment} &=₹75{,}000\times10\%=₹7{,}500 \\ \text{Redemption payable per instalment} &=₹75{,}000+₹7{,}500=₹82{,}500 \\ \text{Annual interest} &=\text{debentures outstanding}\times₹50\times12\% \end{aligned}$$

Use face value to calculate interest and the amount redeemed; add the redemption premium to the instalment’s face value.

Calculate each year’s interest and total payment

Start with all debentures outstanding and calculate interest at 12% on face value.
$$6{,}000\times₹50\times12\%=₹36{,}000$$
Reduce the outstanding number by 1,500 after each annual redemption; calculate the next year’s interest on the balance.
$$4{,}500,\ 3{,}000,\ 1{,}500\text{ debentures remain in successive years}$$
For each redemption year, add the instalment payment of ₹82,500 to that year’s interest.
$$\text{Total payment}=₹82{,}500+\text{annual interest}$$

Worked example

For ABC Ltd., calculate the issue proceeds, loss on issue and amount payable for one redemption instalment.

Find the face value, issue proceeds and total loss on issue.
$$6{,}000\times₹50=₹3{,}00{,}000;\quad ₹3{,}00{,}000\times95\%=₹2{,}85{,}000;\quad ₹15{,}000+₹30{,}000=₹45{,}000$$
Find the number and face value of debentures in one redemption instalment.
$$6{,}000\div4=1{,}500;\quad 1{,}500\times₹50=₹75{,}000$$
Add the 10% redemption premium to that instalment’s face value.
$$₹75{,}000\times10\%=₹7{,}500;\quad ₹75{,}000+₹7{,}500=₹82{,}500$$

Answer: Issue proceeds = ₹2,85,000; loss on issue = ₹45,000; redemption payable per instalment = ₹82,500.

Journal Entries

Books of ABC Ltd. — Journal (₹)

Date	Particulars	Debit	Credit
1 Apr 2014	Bank A/c Dr. To Debenture Application and Allotment A/c	2,85,000	2,85,000
1 Apr 2014	Debenture Application and Allotment A/c Dr. Loss on Issue of Debentures A/c Dr. To 12% Debentures A/c To Premium on Redemption of Debentures A/c	2,85,000 45,000	3,00,000 30,000
31 Mar 2015	Statement of Profit and Loss A/c Dr. To Loss on Issue of Debentures A/c	45,000	45,000
31 Mar 2015	Debenture Interest A/c Dr. To Debentureholders A/c	36,000	36,000
31 Mar 2015	Debentureholders A/c Dr. To Bank A/c	36,000	36,000
31 Mar 2016	Debenture Interest A/c Dr. To Debentureholders A/c	36,000	36,000
31 Mar 2016	Debentureholders A/c Dr. To Bank A/c	36,000	36,000
31 Mar 2016	Surplus, i.e. Statement of Profit and Loss A/c Dr. To Debenture Redemption Reserve (DRR) A/c	30,000	30,000
30 Apr 2016	Debenture Redemption Investment (DRI) A/c Dr. To Bank A/c	11,250	11,250
31 Mar 2017	Debenture Interest A/c Dr. To Debentureholders A/c	36,000	36,000
31 Mar 2017	Debentures A/c Dr. Premium on Redemption of Debentures A/c Dr. To Debentureholders A/c	75,000 7,500	82,500
31 Mar 2017	Debentureholders A/c Dr. To Bank A/c	118,500	118,500
31 Mar 2017	Debenture Redemption Reserve A/c Dr. To General Reserve A/c	7,500	7,500
31 Mar 2018	Debenture Interest A/c Dr. To Debentureholders A/c	27,000	27,000
31 Mar 2018	Debentures A/c Dr. Premium on Redemption of Debentures A/c Dr. To Debentureholders A/c	75,000 7,500	82,500
31 Mar 2018	Debentureholders A/c Dr. To Bank A/c	109,500	109,500
31 Mar 2018	Debenture Redemption Reserve A/c Dr. To General Reserve A/c	7,500	7,500
31 Mar 2019	Debenture Interest A/c Dr. To Debentureholders A/c	18,000	18,000
31 Mar 2019	Debentures A/c Dr. Premium on Redemption of Debentures A/c Dr. To Debentureholders A/c	75,000 7,500	82,500
31 Mar 2019	Debentureholders A/c Dr. To Bank A/c	100,500	100,500
31 Mar 2019	Debenture Redemption Reserve A/c Dr. To General Reserve A/c	7,500	7,500
31 Mar 2020	Debenture Interest A/c Dr. To Debentureholders A/c	9,000	9,000
31 Mar 2020	Debentures A/c Dr. Premium on Redemption of Debentures A/c Dr. To Debentureholders A/c	75,000 7,500	82,500
31 Mar 2020	Debentureholders A/c Dr. To Bank A/c	91,500	91,500
31 Mar 2020	Bank A/c Dr. To Debenture Redemption Investment A/c	11,250	11,250
31 Mar 2020	Debenture Redemption Reserve A/c Dr. To General Reserve A/c	7,500	7,500

Reserve, investment and annual amounts

DRR: The illustration creates a reserve equal to 10% of ₹3,00,000, or ₹30,000, on 31 March 2016.
DRI: Invest 15% of the debentures due for redemption: ₹75,000 × 15% = ₹11,250 on 30 April 2016; realise the investment on 31 March 2020.
Interest: Outstanding debentures fall after each redemption; annual interest for 2017–2020 is ₹36,000, ₹27,000, ₹18,000 and ₹9,000.
Total paid to holders: Redemption payment plus annual interest gives ₹1,18,500, ₹1,09,500, ₹1,00,500 and ₹91,500 for 2017–2020.
DRR transfer: Transfer ₹7,500, or one-fourth of the reserve, to General Reserve after each instalment is redeemed.

⚠ Common mistake

Do not keep calculating interest on all 6,000 debentures after instalments are redeemed. The 2018 total payment is ₹1,09,500, not ₹1,09,000; each redemption instalment is 1,500 × ₹50 = ₹75,000 face value, not 6,000 × ₹25.

Practice

How much interest is due on 4,500 debentures of ₹50 each at 12%?

Hint: Calculate interest on the outstanding face value.

Key step: Outstanding face value = 4,500 × ₹50 = ₹2,25,000.

Solution: Interest = ₹2,25,000 × 12% = ₹27,000.

Practice

At the end of a year, 1,500 debentures of ₹50 each are redeemed at a 10% premium. Find the redemption amount and total payment if that year’s interest is ₹18,000.

Hint: Add the premium to the instalment face value, then add interest.

Key step: Redemption amount = ₹75,000 + ₹7,500 = ₹82,500.

Solution: Total payment = ₹82,500 + ₹18,000 = ₹1,00,500.

Quick recap

ABC Ltd. is an other unlisted company investing in specified securities for redemption.
Face value issued is ₹3,00,000; after a 5% discount, cash proceeds are ₹2,85,000.
Loss on issue is ₹15,000 discount plus ₹30,000 redemption premium, totalling ₹45,000.
Each of four instalments comprises 1,500 debentures: ₹75,000 face value plus ₹7,500 premium.
Interest is 12% of the debentures still outstanding; redemption-year interest is ₹36,000, ₹27,000, ₹18,000 and ₹9,000.
The illustration creates DRR of ₹30,000, invests ₹11,250 in DRI and transfers ₹7,500 of DRR to General Reserve after each redemption.

Lecture 19

Illustration 26 based on Issue of Debentures

Reference video · Lecture 19Illustration 26 based on Issue of Debentures

Issue at a Discount and Instalment Redemption

14% Debentures Account

Date	Debit side: particulars	₹	Credit side: particulars	₹
31 Mar 2013	Balance c/d	3,00,000	1 Apr 2012: Debenture Application A/c	2,85,000
			1 Apr 2012: Discount on Issue of Debentures A/c	15,000
31 Mar 2014	Balance c/d	3,00,000	1 Apr 2013: Balance b/d	3,00,000
31 Mar 2015	Debentureholders A/c	1,00,000	1 Apr 2014: Balance b/d	3,00,000
31 Mar 2015	Balance c/d	2,00,000
31 Mar 2016	Debentureholders A/c	1,00,000	1 Apr 2015: Balance b/d	2,00,000
31 Mar 2016	Balance c/d	1,00,000
31 Mar 2017	Debentureholders A/c	1,00,000	1 Apr 2016: Balance b/d	1,00,000

Debenture Interest Account

Year ended 31 March	Debit side: Debentureholders A/c (₹)	Credit side: Statement of Profit and Loss (₹)
2013	42,000	42,000
2014	42,000	42,000
2015	42,000	42,000
2016	28,000	28,000
2017	14,000	14,000

Discount on Issue of Debentures Account

Date	Debit side: particulars	₹	Credit side: particulars	₹
1 Apr 2012	14% Debentures A/c	15,000	31 Mar 2013: Statement of Profit and Loss	15,000

⚠ Common mistake

Do not calculate every year’s interest on the original ₹3,00,000 after instalment redemption begins. Reduce the interest base by each ₹1,00,000 repayment.

Practice

Find the annual interest for each year if ₹3,00,000 of 14% debentures is redeemed in three equal instalments on 31 March 2015, 2016 and 2017.

Hint: Use the outstanding face value for each year.

Key step: Outstanding balances are ₹3,00,000, ₹2,00,000 and ₹1,00,000 as the instalments are paid.

Solution: Interest is ₹42,000 in each of 2013, 2014 and 2015; ₹28,000 in 2016; and ₹14,000 in 2017.

Practice

A company issues 2,000 debentures of ₹100 each at a 4% discount. Calculate the issue discount and cash proceeds.

Hint: Discount = face value × discount rate; proceeds = face value − discount.

Key step: Total face value = 2,000 × ₹100 = ₹2,00,000.

Solution: Discount = ₹2,00,000 × 4% = ₹8,000. Cash proceeds = ₹2,00,000 − ₹8,000 = ₹1,92,000.

★ Remember

Issue discount = face value − cash proceeds.
Interest is calculated on the debentures outstanding during the year.
Each redemption instalment reduces the debenture liability and future interest.

Quick recap

Face value issued is ₹3,00,000; 5% discount is ₹15,000; cash proceeds are ₹2,85,000.
The debenture liability is reduced by ₹1,00,000 at each of the three redemption dates.
Annual interest is ₹42,000 on ₹3,00,000, ₹28,000 on ₹2,00,000 and ₹14,000 on ₹1,00,000.
Interest expense is transferred to the Statement of Profit and Loss.
In the illustration, the ₹15,000 issue discount is written off in the year ended 31 March 2013.

Lecture 20

Illustration 27 based on Journal entries

Reference video · Lecture 20Illustration 27 based on Journal entries

Redemption schedule and Debenture Redemption Investment

Required DRI balance

$$\text{Required DRI} = 15\% \times \text{principal due for redemption}$$

Use this to find the target investment for the next redemption date.

DRI target and adjustment

Date	Next redemption principal	Required DRI	Adjustment
1 April 2016	₹3,00,000	₹45,000	Invest ₹45,000
1 April 2017	₹6,00,000	₹90,000	Existing ₹45,000; invest ₹45,000
31 March 2018	₹5,00,000	₹75,000	Realise excess DRI of ₹15,000
1 April 2019	₹6,00,000	₹90,000	Existing ₹75,000; invest ₹15,000
31 March 2020	Final redemption	₹90,000 held	Realise the DRI

Recording redemption and DRI adjustments

Calculate the principal due on each redemption date and the 15% DRI target for the next year.
Compare the target with the DRI already held; record any additional investment or realisation.
Record the debentures becoming due: debit 7% Debentures and credit Debentureholders.
Record payment: debit Debentureholders and credit Bank.
When DRI is realised, debit Bank and credit Debenture Redemption Investment.

Worked example

What additional DRI should Vishwas Ltd. purchase on 1 April 2017?

At 1 April 2017, ₹45,000 of DRI is already held. The next redemption is ₹6,00,000.
$$15\% \times ₹6,00,000 = ₹90,000$$
Find the additional investment needed to reach the target.
$$₹90,000 - ₹45,000 = ₹45,000$$
Record the additional investment.
$$\text{Debenture Redemption Investment Dr. } ₹45,000;\quad \text{To Bank } ₹45,000$$

Answer: ₹45,000; this brings the total DRI balance to ₹90,000.

Journal entries

Ledger accounts

Debenture Redemption Investment Account

Date	Particulars	Debit (₹)	Credit (₹)	Balance (₹)
1 Apr 2016	Investment purchased	45,000	—	45,000 Dr.
1 Apr 2017	Additional investment	45,000	—	90,000 Dr.
31 Mar 2018	Investment realised	—	15,000	75,000 Dr.
1 Apr 2019	Additional investment	15,000	—	90,000 Dr.
31 Mar 2020	Investment realised	—	90,000	Nil

Debentureholders Account

Date	Amount credited when due (₹)	Amount debited when paid (₹)	Closing balance
31 Mar 2017	3,00,000	3,00,000	Nil
31 Mar 2018	6,00,000	6,00,000	Nil
31 Mar 2019	5,00,000	5,00,000	Nil
31 Mar 2020	6,00,000	6,00,000	Nil

⚠ Common mistake

Do not treat each required DRI target as a fresh purchase: carry forward existing DRI and record only the increase or excess realisation. The final redemption is ₹6,00,000, so the 2020 DRI target is ₹90,000.

Practice

On 1 April 2019, Vishwas Ltd. already holds ₹75,000 of DRI. How much more must it invest for the final ₹6,00,000 redemption?

Hint: Find 15% of the due principal, then subtract the existing balance.

Key step: ₹90,000 − ₹75,000 = ₹15,000.

Solution: Additional investment = ₹15,000. Entry: Debenture Redemption Investment Dr. ₹15,000; To Bank ₹15,000.

Practice

Pass the entries for redemption of 5,000 debentures of ₹100 each on 31 March 2019.

Hint: First record the amount due, then record its payment.

Key step: 5,000 × ₹100 = ₹5,00,000.

Solution: 7% Debentures Dr. ₹5,00,000; To Debentureholders ₹5,00,000. Then Debentureholders Dr. ₹5,00,000; To Bank ₹5,00,000.

Quick recap

The 20,000 debentures of ₹100 each represent ₹20,00,000 of principal.
The required DRI balance is 15% of the next year's redemption principal.
Carry forward existing DRI and invest only the shortfall or realise the excess.
When debentures become due, debit 7% Debentures and credit Debentureholders.
When payment is made, debit Debentureholders and credit Bank.
The debenture balance falls to nil after the final ₹6,00,000 redemption in 2020.

Lecture 21

Redemption by Purchase in Open Market

Reference video · Lecture 21Redemption by Purchase in Open Market

Meaning and advantages

Definition

Redemption by purchase in the open market — The purchase of a company’s own debentures from the market for immediate cancellation is called redemption by purchase in the open market.

Journal entries for immediate cancellation

Situation	Journal entry
Purchased below face value (discount)	Debentures A/c Dr. $F$; To Bank A/c $P$; To Profit on Redemption of Debentures A/c $(F-P)$
Transfer of discount-purchase profit	Profit on Redemption of Debentures A/c Dr. $(F-P)$; To Capital Reserve $(F-P)$
Purchased above face value (premium)	Debentures A/c Dr. $F$; Loss on Redemption of Debentures A/c Dr. $(P-F)$; To Bank A/c $P$
Transfer of premium-purchase loss	Statement of Profit and Loss A/c Dr. $(P-F)$; To Loss on Redemption of Debentures A/c $(P-F)$

Purchase price and profit or loss on redemption

$$\text{Purchase price } P=F\times\frac{\text{market price per }100}{100};\quad \text{Profit}=F-P\ (P<F);\quad \text{Loss}=P-F\ (P>F)$$

Here, $F$ is face value and $P$ is the amount paid.

Recording the purchase and cancellation

Calculate the cash paid using the market price per $100$ of face value.
$$P=F\times\frac{\text{market price}}{100}$$
Compare the cash paid with face value: the difference is a profit if below face value, or a loss if above it.
Record the debentures cancelled, the bank payment, and the profit or loss; then transfer the profit to Capital Reserve or the loss to Statement of Profit and Loss.

Worked example

X Ltd. purchases its own debentures of face value ₹20,000 at ₹92 per ₹100 for immediate cancellation. Record the entries.

Find the cash paid for debentures of face value $₹20{,}000$ purchased at $₹92$ per $₹100$.
$$P=₹20{,}000\times\frac{92}{100}=₹18{,}400$$
Calculate the profit, since the purchase price is below face value.
$$\text{Profit}=₹20{,}000-₹18{,}400=₹1{,}600$$
Record the purchase for immediate cancellation.
$$\begin{array}{lr} \text{Debentures A/c Dr.} & ₹20{,}000 \\ \text{To Bank A/c} & ₹18{,}400 \\ \text{To Profit on Redemption of Debentures A/c} & ₹1{,}600 \end{array}$$
Transfer the profit to Capital Reserve.
$$\begin{array}{lr} \text{Profit on Redemption of Debentures A/c Dr.} & ₹1{,}600 \\ \text{To Capital Reserve} & ₹1{,}600 \end{array}$$

Answer: Bank payment = ₹18,400; profit on redemption = ₹1,600, transferred to Capital Reserve.

⚠ Common mistake

Do not calculate the purchase payment as face value times the market price directly: divide the quoted price by $100$. Also, transfer a discount-purchase profit to Capital Reserve; a premium-purchase loss goes to Statement of Profit and Loss.

Practice

A company cancels its own debentures with a face value of ₹50,000 bought at ₹96 per ₹100. Find the bank payment and profit, and state the transfer entry.

Hint: Calculate the purchase price first, then subtract it from face value.

Key step: Purchase price = ₹50,000 × 96/100 = ₹48,000; profit = ₹2,000.

Solution: Debentures A/c Dr. ₹50,000; To Bank A/c ₹48,000; To Profit on Redemption of Debentures A/c ₹2,000. Then debit Profit on Redemption ₹2,000 and credit Capital Reserve ₹2,000.

Practice

A company cancels its own debentures of face value ₹30,000 purchased at ₹105 per ₹100. Find the bank payment and loss, and state the transfer entry.

Hint: The payment exceeds face value, so the difference is a loss.

Key step: Purchase price = ₹30,000 × 105/100 = ₹31,500; loss = ₹1,500.

Solution: Debentures A/c Dr. ₹30,000 and Loss on Redemption of Debentures A/c Dr. ₹1,500; To Bank A/c ₹31,500. Then debit Statement of Profit and Loss ₹1,500 and credit Loss on Redemption of Debentures ₹1,500.

Quick recap

Open-market redemption means buying the company’s own debentures for immediate cancellation.
The company can choose when to redeem, such as when it has surplus funds.
Purchase below face value creates a profit: debit Debentures, credit Bank and Profit on Redemption.
Transfer profit on redemption to Capital Reserve.
Purchase above face value creates a loss: debit Debentures and Loss on Redemption, credit Bank.
Transfer loss on redemption to Statement of Profit and Loss.

Lecture 22

Illustration 29 based on Journal entries

Reference video · Lecture 22Illustration 29 based on Journal entries

Illustration 29: Redemption by Purchase and by Draw of Lots

Profit on redemption

$$\text{Profit on redemption} = \text{Face value cancelled} - (\text{Purchase price} + \text{Expenses})$$

Use the total purchase cost, including any expenses.

Working and journal-entry approach

Find the number of debentures purchased from their total face value.
$$20,000 \div 100 = 200$$
Calculate total purchase cost, including expenses, then find the profit.
$$200 \times 98.50 + 100 = 19,800;\quad 20,000 - 19,800 = 200$$
Record the purchase cancellation, redeem the balance by draw of lots, and transfer the profit to Capital Reserve.
$$25,000 - 20,000 = 5,000$$
After redemption, transfer the DRR balance to General Reserve as shown.

Worked example

Prepare the key journal entries for Illustration 29.

The company redeems Rs. 25,000 face value and purchases Rs. 20,000 face value, or 200 debentures.
$$250 \times 100 = 25,000;\quad 20,000 \div 100 = 200$$
The purchase price is Rs. 19,700; adding Rs. 100 expenses gives total cost of Rs. 19,800.
$$200 \times 98.50 + 100 = 19,800$$
The profit is Rs. 200, and the remaining Rs. 5,000 is redeemed at par.
$$20,000 - 19,800 = 200;\quad 25,000 - 20,000 = 5,000$$

Answer: The entries are shown in the journal table below.

Journal entries — Illustration 29

Particulars	Debit (Rs.)	Credit (Rs.)
Balance in Statement of Profit and Loss A/c Dr. \| To Debenture Redemption Reserve A/c	6,250	6,250
Debenture Redemption Investment A/c Dr. \| To Bank A/c	3,750	3,750
Bank A/c Dr. \| To Debenture Redemption Investment A/c (DRI encashed)	3,750	3,750
12% Debentures A/c Dr. \| To Bank A/c \| To Profit on Redemption of Debentures A/c (purchase cancellation)	20,000	19,800; 200
Profit on Redemption of Debentures A/c Dr. \| To Capital Reserve A/c	200	200
12% Debentures A/c Dr. \| To Bank A/c (redemption by draw of lots)	5,000	5,000
Debenture Redemption Reserve A/c Dr. \| To General Reserve A/c	6,250	6,250

⚠ Common mistake

Do not calculate profit using only the market price: include expenses. Here, Rs. 20,000 − (Rs. 19,700 + Rs. 100) = Rs. 200.

Illustration 30: Issue at Discount and Redemption by Purchase

Profit on redemption

$$\text{Profit on redemption} = \text{Face value cancelled} - \text{Purchase price}$$

Apply this separately to each purchase for cancellation.

Working and journal-entry approach

Record the issue proceeds and discount on issue on 1 April 2013.
$$1,000 \times 1,000 = 10,00,000;\quad 10,00,000 - 9,60,000 = 40,000$$
Write off the discount to Statement of Profit and Loss as shown on 31 March 2014.
For each purchase on 31 March 2015, debit Debentures at face value and credit Bank at the price paid.
Credit each difference to Profit on Redemption, then transfer the combined profit to Capital Reserve.
$$4,000 + 12,000 = 16,000$$

Worked example

Prepare the key journal entries for Illustration 30 and show the treatment of the profit.

The total face value issued is Rs. 10,00,000; proceeds at Rs. 960 each are Rs. 9,60,000, so the issue discount is Rs. 40,000.
$$1,000 \times 1,000 = 10,00,000;\quad 1,000 \times 960 = 9,60,000;\quad 10,00,000 - 9,60,000 = 40,000$$
For Rs. 80,000 face value, 80 debentures are purchased at Rs. 950 each; the profit is Rs. 4,000.
$$80 \times 950 = 76,000;\quad 80,000 - 76,000 = 4,000$$
For Rs. 1,20,000 face value, 120 debentures are purchased at Rs. 900 each; the profit is Rs. 12,000.
$$120 \times 900 = 1,08,000;\quad 1,20,000 - 1,08,000 = 12,000$$
The total profit on cancellation is transferred to Capital Reserve.
$$4,000 + 12,000 = 16,000$$

Answer: The entries are shown in the journal table below; the total Rs. 16,000 profit is transferred to Capital Reserve.

Journal entries — Illustration 30

Date	Particulars	Debit (Rs.)	Credit (Rs.)
1 Apr 2013	Bank A/c Dr. \| To 6% Debentures Application and Allotment A/c	9,60,000	9,60,000
1 Apr 2013	6% Debentures Application and Allotment A/c Dr. \| Discount on Issue of Debentures A/c Dr. \| To 6% Debentures A/c	9,60,000; 40,000	10,00,000
31 Mar 2014	Statement of Profit and Loss A/c Dr. \| To Discount on Issue of Debentures A/c (discount written off)	40,000	40,000
31 Mar 2015	6% Debentures A/c Dr. \| To Bank A/c \| To Profit on Redemption of Debentures A/c (80 debentures purchased at Rs. 950 each)	80,000	76,000; 4,000
31 Mar 2015	6% Debentures A/c Dr. \| To Bank A/c \| To Profit on Redemption of Debentures A/c (120 debentures purchased at Rs. 900 each)	1,20,000	1,08,000; 12,000
31 Mar 2015	Profit on Redemption of Debentures A/c Dr. \| To Capital Reserve A/c	16,000	16,000

⚠ Common mistake

The second purchase is Rs. 1,20,000 face value, equal to 120 debentures at Rs. 1,000 each—not 30. The Rs. 900 price is per debenture.

Practice

A company cancels debentures with a face value of Rs. 50,000 after purchasing them for Rs. 48,400 and paying Rs. 200 expenses. Find the profit and give the cancellation entry.

Hint: Add expenses to the purchase price before comparing it with face value.

Key step: Total cost = Rs. 48,400 + Rs. 200 = Rs. 48,600.

Solution: Profit = Rs. 50,000 − Rs. 48,600 = Rs. 1,400. Entry: Debentures A/c Dr. Rs. 50,000; To Bank A/c Rs. 48,600; To Profit on Redemption A/c Rs. 1,400.

Practice

A company issues 500 debentures of Rs. 1,000 each at Rs. 980 and cancels debentures with face value Rs. 1,00,000 bought at Rs. 950 each. Find the issue discount and redemption profit.

Hint: Calculate the issue discount and cancellation profit separately.

Key step: Issue proceeds = 500 × Rs. 980; cancellation price = 100 × Rs. 950.

Solution: Issue discount = Rs. 5,00,000 − Rs. 4,90,000 = Rs. 10,000. Redemption profit = Rs. 1,00,000 − Rs. 95,000 = Rs. 5,000; transfer it to Capital Reserve.

Quick recap

Include purchase expenses when calculating the cost of debentures bought for cancellation.
Debit Debentures at face value; credit Bank for the purchase price and the difference to Profit on Redemption.
Transfer profit on redemption to Capital Reserve.
In Illustration 29, the remaining Rs. 5,000 face value is redeemed at par by draw of lots.
Illustration 30 requires redemption of 200 debentures each year from 31 March 2015, by purchase or draw of lots at the company’s option.
The two Illustration 30 purchases total 200 debentures and produce Rs. 16,000 profit, transferred to Capital Reserve.

Lecture 23

Redemption by Conversion

Reference video · Lecture 23Redemption by Conversion

Redemption by Conversion

Definition

Redemption by conversion — A company redeems debentures by issuing new shares or debentures to debentureholders instead of repaying them in cash.

Key points

Acceptance: Conversion takes place when debentureholders accept the company’s offer.
Issue price: New shares or debentures may be issued at par, at a discount or at a premium.
Share premium: Credit Share Capital with the shares’ face value and Securities Premium with any excess.
Settlement: First record the amount due to Debentureholders A/c; then debit that account when the new securities are issued.

Share issue on conversion

$$\text{Issue price per share} = \text{Face value} + \text{Premium};\quad \text{Number of shares} = \frac{\text{Amount converted}}{\text{Issue price per share}}$$

Use the total issue price per share to find the number of shares; split the credit between share capital and premium.

Recording conversion into shares

Calculate the face value of debentures becoming due.
$$\text{Debentures due} = \text{Number of debentures} \times \text{Face value per debenture}$$
Calculate shares issued using their issue price, then split the amount between Share Capital and Securities Premium, if applicable.
$$\text{Share Capital} = \text{Number of shares} \times \text{Share face value}$$
Record the amount due and then discharge Debentureholders A/c by issuing the new securities.
$$\text{Debentureholders A/c Dr.} \quad \text{To Share Capital A/c} \quad \text{To Securities Premium A/c}$$

Worked example

Arjun Plastics Ltd. redeems 1,000, 15% debentures of Rs. 100 each by converting them into Rs. 10 equity shares issued at a premium of Rs. 2.50 per share. It also redeems 500 debentures using Rs. 50,000 out of profit. Give the journal entries.

For the 1,000 debentures of Rs. 100 each, calculate the amount converted.
$$1{,}000 \times Rs.\,100 = Rs.\,1{,}00{,}000$$
Each Rs. 10 share is issued at a premium of Rs. 2.50; calculate the shares and their capital and premium amounts.
$$\text{Issue price} = Rs.\,10 + Rs.\,2.50 = Rs.\,12.50;\quad \text{Shares} = \frac{Rs.\,1{,}00{,}000}{Rs.\,12.50} = 8{,}000$$
Record the conversion; 500 other debentures of Rs. 100 each are settled through the bank as shown.
$$8{,}000 \times Rs.\,10 = Rs.\,80{,}000;\quad 8{,}000 \times Rs.\,2.50 = Rs.\,20{,}000;\quad 500 \times Rs.\,100 = Rs.\,50{,}000$$

Answer: Journal entries (Rs.): (1) 15% Debentures A/c Dr. 1,00,000; To Debentureholders A/c 1,00,000. (2) Debentureholders A/c Dr. 1,00,000; To Equity Share Capital A/c 80,000; To Securities Premium Reserve A/c 20,000. (3) Debentures A/c Dr. 50,000; To Debentureholders A/c 50,000. (4) Debentureholders A/c Dr. 50,000; To Bank A/c 50,000.

Arjun Plastics Ltd. — journal entries

Particulars	Debit (Rs.)	Credit (Rs.)
15% Debentures A/c Dr. \| To Debentureholders A/c	1,00,000	1,00,000
Debentureholders A/c Dr. \| To Equity Share Capital A/c \| To Securities Premium Reserve A/c	1,00,000	80,000 \| 20,000
Debentures A/c Dr. \| To Debentureholders A/c	50,000	50,000
Debentureholders A/c Dr. \| To Bank A/c	50,000	50,000

⚠ Common mistake

Do not divide the converted amount by the share face value alone: Rs. 1,00,000 at Rs. 12.50 per share gives 8,000 shares, not 10,000.

Conversion of Debentures Issued at a Discount

Definition

Conversion of discounted debentures — When debentures issued at a discount are redeemed by conversion, record the amount due and the related discount adjustment in the redemption entry.

Key points

Issue terms: 10,000 debentures of Rs. 100 each were issued on April 1, 2013, at Rs. 92 each.
Redemption schedule: From March 31, 2016, 2,000 debentures were redeemable each year, either by conversion into equity shares or by draw of lots at par, at the company’s option.
Conversion chosen: On March 31, 2016, 2,000 debentures were converted into Rs. 20 equity shares.
Entry allocation: The supplied entry credits Debentureholders A/c Rs. 1,84,000, Statement of Profit & Loss Rs. 7,600 and Discount on Issue of Debentures A/c Rs. 8,400.

Check the conversion entry

The credits in the supplied entry must equal the face value debited: $Rs.\,1{,}84{,}000 + Rs.\,7{,}600 + Rs.\,8{,}400 = Rs.\,2{,}00{,}000$.

Shares issued at conversion

$$\text{Shares issued} = \frac{Rs.\,1{,}84{,}000}{Rs.\,20} = 9{,}200$$

The shares are issued for the amount due to debentureholders.

Recording the discounted-debenture conversion

Record the debentures becoming due, with the discount adjustment shown in the given entry.
$$Rs.\,2{,}00{,}000 = Rs.\,1{,}84{,}000 + Rs.\,7{,}600 + Rs.\,8{,}400$$
Discharge Debentureholders A/c by issuing equity shares.
$$\text{Debentureholders A/c Dr. } Rs.\,1{,}84{,}000 \quad \text{To Equity Share Capital A/c } Rs.\,1{,}84{,}000$$

Worked example

On March 31, 2016, a company converts 2,000 of its 9% debentures of Rs. 100 each into Rs. 20 equity shares. The debentures were issued at Rs. 92 each. Record the journal entries using the given allocation.

Calculate the face value and the original issue proceeds for the 2,000 debentures converted.
$$2{,}000 \times Rs.\,100 = Rs.\,2{,}00{,}000;\quad 2{,}000 \times Rs.\,92 = Rs.\,1{,}84{,}000$$
Apply the supplied entry allocation and check that it balances.
$$Rs.\,1{,}84{,}000 + Rs.\,7{,}600 + Rs.\,8{,}400 = Rs.\,2{,}00{,}000$$
Calculate the number of Rs. 20 shares issued for Rs. 1,84,000.
$$\frac{Rs.\,1{,}84{,}000}{Rs.\,20} = 9{,}200\text{ shares}$$

Answer: Journal entries (Rs.): (1) 9% Debentures A/c Dr. 2,00,000; To Debentureholders A/c 1,84,000; To Statement of Profit & Loss 7,600; To Discount on Issue of Debentures A/c 8,400. (2) Debentureholders A/c Dr. 1,84,000; To Equity Share Capital A/c 1,84,000. The conversion issues 9,200 shares.

Conversion journal entries

Particulars	Debit (Rs.)	Credit (Rs.)
9% Debentures A/c Dr. \| To Debentureholders A/c \| To Statement of Profit & Loss \| To Discount on Issue of Debentures A/c	2,00,000	1,84,000 \| 7,600 \| 8,400
Debentureholders A/c Dr. \| To Equity Share Capital A/c	1,84,000	1,84,000

⚠ Common mistake

Use Rs. 7,600—not Rs. 9,600—for Statement of Profit & Loss in this entry: Rs. 9,600 would make the credits exceed the Rs. 2,00,000 debit.

Purchase of Own Debentures for Cancellation

Definition

Own debentures purchased for cancellation — A company may buy its own debentures and cancel them, removing the corresponding liability from its books.

Key points

Purchase: Debit Own Debentures A/c and credit Bank A/c with the purchase cost.
Cancellation: Debit Debentures A/c at face value; credit Own Debentures A/c at cost.
Gain: When the purchase cost is below face value, credit Profit on Cancellation of Debentures A/c; transfer the gain to Capital Reserve.

Profit on cancellation

$$\text{Profit on cancellation} = \text{Face value cancelled} - \text{Purchase cost}$$

A purchase below face value gives a profit on cancellation.

Recording purchase and cancellation

Calculate the total face value and purchase cost.
$$\text{Face value} = \text{Number} \times \text{Face value per debenture}$$
Record the purchase of own debentures.
$$\text{Own Debentures A/c Dr.} \quad \text{To Bank A/c}$$
Cancel the liability and calculate the difference between face value and cost.
$$\text{Debentures A/c Dr.} \quad \text{To Own Debentures A/c} \quad \text{To Profit on Cancellation A/c}$$
Transfer any profit on cancellation to Capital Reserve.
$$\text{Profit on Cancellation A/c Dr.} \quad \text{To Capital Reserve A/c}$$

Worked example

LCM Ltd. purchased for cancellation 10,00,000 of its 9% debentures of Rs. 500 each at Rs. 480 each. Record the journal entries.

Calculate face value and purchase cost for 10,00,000 debentures.
$$10{,}00{,}000 \times Rs.\,500 = Rs.\,50{,}00{,}00{,}000;\quad 10{,}00{,}000 \times Rs.\,480 = Rs.\,48{,}00{,}00{,}000$$
Find the gain on cancellation.
$$Rs.\,50{,}00{,}00{,}000 - Rs.\,48{,}00{,}00{,}000 = Rs.\,2{,}00{,}00{,}000$$
Record the purchase, cancellation and transfer of the gain to Capital Reserve.
$$\text{Profit transferred} = Rs.\,2{,}00{,}00{,}000$$

Answer: Journal entries (Rs.): (1) Own Debentures A/c Dr. 48,00,00,000; To Bank A/c 48,00,00,000. (2) 9% Debentures A/c Dr. 50,00,00,000; To Own Debentures A/c 48,00,00,000; To Profit on Cancellation of Debentures A/c 2,00,00,000. (3) Profit on Cancellation of Debentures A/c Dr. 2,00,00,000; To Capital Reserve A/c 2,00,00,000.

LCM Ltd. — journal entries

Particulars	Debit (Rs.)	Credit (Rs.)
Own Debentures A/c Dr. \| To Bank A/c	48,00,00,000	48,00,00,000
9% Debentures A/c Dr. \| To Own Debentures A/c \| To Profit on Cancellation of Debentures A/c	50,00,00,000	48,00,00,000 \| 2,00,00,000
Profit on Cancellation of Debentures A/c Dr. \| To Capital Reserve A/c	2,00,00,000	2,00,00,000

Practice

A company converts Rs. 2,40,000 of debentures into Rs. 10 equity shares issued at a premium of Rs. 2 per share. Find the number of shares and record the conversion entry.

Hint: Use the total issue price per share and divide the converted amount by it.

Key step: Issue price is Rs. 12 per share, so the company issues 20,000 shares.

Solution: Shares issued: Rs. 2,40,000 ÷ Rs. 12 = 20,000. Entry: Debentureholders A/c Dr. Rs. 2,40,000; To Equity Share Capital A/c Rs. 2,00,000; To Securities Premium A/c Rs. 40,000.

Practice

A company cancels 4,000 of its Rs. 100 debentures bought at Rs. 96 each. Find the profit on cancellation and give the entries for cancellation and transfer of profit.

Hint: Compare total face value with total purchase cost.

Key step: Face value is Rs. 4,00,000; cost is Rs. 3,84,000; profit is Rs. 16,000.

Solution: Profit: (4,000 × Rs. 100) − (4,000 × Rs. 96) = Rs. 16,000. Entries: Debentures A/c Dr. Rs. 4,00,000; To Own Debentures A/c Rs. 3,84,000; To Profit on Cancellation of Debentures A/c Rs. 16,000. Profit on Cancellation of Debentures A/c Dr. Rs. 16,000; To Capital Reserve A/c Rs. 16,000.

Quick recap

Redemption by conversion settles debentures using new shares or debentures instead of cash.
For shares issued at a premium, credit Share Capital at face value and Securities Premium for the excess.
Arjun Plastics converts Rs. 1,00,000 into 8,000 shares at Rs. 12.50 each.
The 2013 debenture issue provided for 2,000 debentures to be redeemed yearly from March 31, 2016, by conversion or draw of lots at par, at the company’s option.
The supplied discounted-debenture entry credits Rs. 7,600 to Statement of Profit & Loss and Rs. 8,400 to Discount on Issue of Debentures.
Own debentures purchased below face value create a cancellation gain, transferred to Capital Reserve.

Lecture 24

Summary

Reference video · Lecture 24Summary

Debentures and Bonds

Charge on Assets

Types of Debentures

Issue of Debentures

Issue premium or discount

$$\text{Premium} = \text{Issue price} - \text{Face value};\quad \text{Discount} = \text{Face value} - \text{Issue price}$$

Worked example

A debenture with a face value of $100$ is issued for $95$. Find the discount.

Compare the issue price with the face value.
$$95 < 100$$
Subtract the issue price from the face value to find the discount.
$$\text{Discount} = 100 - 95 = 5$$

Answer: The debenture is issued at a discount of $5$.

Issue for Consideration Other than Cash

Collateral Security

Redemption of Debentures

Additional Chapter Terms

Practice

A debenture has a face value of $1{,}000$ and is issued for $1{,}080$. How is the difference treated?

Hint: Compare the issue price with the face value.

Key step: $1{,}080 - 1{,}000 = 80$.

Solution: It is issued at a premium of $80$, credited to Securities Premium Account.

Practice

An asset under first charge is realised for $500{,}000$. First-charge holders are owed $420{,}000$. What amount may be available to second-charge holders?

Hint: Settle the first charge before the second charge.

Key step: $500{,}000 - 420{,}000 = 80{,}000$ surplus.

Solution: Up to $80{,}000$ may be available for the second-charge claim, subject to the amount owed.

Quick recap

A debenture is a written acknowledgement of debt; its holder is a lender to the company.
First-charge claims rank ahead of second-charge claims on the charged asset.
Issue price equal to, above or below face value means par, premium or discount, respectively.
Premium is credited to Securities Premium Account; discount is recorded as a loss and written off over time.
Debentures may be issued to vendors or suppliers on a preferential basis for patents, copyrights or intellectual property rights.
Collateral security is additional to primary security; redemption repays debenture holders, normally at the end of the issue period.

Formula sheet

Proceeds from an Issue at Par

$$\text{Issue proceeds}=\text{Number allotted}\times\text{Face value per debenture}$$

Discount and Net Proceeds

Issue proceeds and premium

$$\text{Total proceeds}=N\times(\text{nominal value} + \text{premium per debenture});\quad \text{Total premium}=N\times\text{premium per debenture}$$

Issue value of debentures

$$\text{Issue value} = \text{Face value} + \text{Premium} - \text{Discount}$$

Purchase consideration for net assets

$$\text{Purchase consideration} = \text{Assets taken over} - \text{Liabilities taken over}$$

Number of debentures issued

$$\text{Number of debentures} = \frac{\text{Purchase consideration}}{\text{Issue price per debenture}}$$

Issue price per debenture

$$\begin{aligned}\text{At par: } & I=F \\ \text{At } d\%\text{ discount: } & I=F\left(1-\frac{d}{100}\right) \\ \text{At } p\%\text{ premium: } & I=F\left(1+\frac{p}{100}\right)\end{aligned}$$

Issue proceeds, loss on issue and redemption amount

Half-yearly interest and TDS

Loss on Issue and Amount Written Off

$$\text{Total loss} = (\text{Face value} \times \text{discount rate}) + (\text{Face value} \times \text{redemption premium rate})$$

Minimum redemption investment

$$\text{Minimum investment} = 0.15 \times \text{debentures maturing in the relevant year}$$

Amount payable on redemption

$$\text{Amount payable}=\text{Face value}+\text{Redemption premium}$$

Issue and redemption calculations

Instalment, interest and redemption premium

Issue, redemption and interest calculations

Issue, instalment and interest calculations

Required DRI balance

$$\text{Required DRI} = 15\% \times \text{principal due for redemption}$$

Purchase price and profit or loss on redemption

$$\text{Purchase price } P=F\times\frac{\text{market price per }100}{100};\quad \text{Profit}=F-P\ (P<F);\quad \text{Loss}=P-F\ (P>F)$$

Profit on redemption

$$\text{Profit on redemption} = \text{Face value cancelled} - (\text{Purchase price} + \text{Expenses})$$

Profit on redemption

$$\text{Profit on redemption} = \text{Face value cancelled} - \text{Purchase price}$$

Share issue on conversion

$$\text{Issue price per share} = \text{Face value} + \text{Premium};\quad \text{Number of shares} = \frac{\text{Amount converted}}{\text{Issue price per share}}$$

Shares issued at conversion

$$\text{Shares issued} = \frac{Rs.\,1{,}84{,}000}{Rs.\,20} = 9{,}200$$

Profit on cancellation

$$\text{Profit on cancellation} = \text{Face value cancelled} - \text{Purchase cost}$$

Issue premium or discount

$$\text{Premium} = \text{Issue price} - \text{Face value};\quad \text{Discount} = \text{Face value} - \text{Issue price}$$

Accountancy — ALL CHAPTERS

Accounting for Share Capital

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Issue and Redemption of Debentures

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Financial Statements of a Company

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Analysis of Financial Statements

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Accounting Ratios

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Cash Flow Statement

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Overview Of Computerised Accounting System

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Spreadsheet

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Use Of Spreadsheet In Business Applications

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Graphs And Charts For Business Data

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Accounting for Partnership: Basic Concepts

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Reconstitution of a Partnership Firm –Admission of a Partner

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Reconstitution of a Partnership Firm –Retirement/Death of a Partner

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Dissolution of Partnership Firm

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