NCERT Solutions for Class 12 Accountancy Accountancy Part II Chapter 2: Issue and Redemption of Debentures

Chapter at a glance

Questions for Practice – Short Answer Questions

Question SA – Q1

What is meant by a Debenture?

Answer

A debenture is a written instrument issued by a company under its common seal acknowledging a debt, containing the terms of repayment of the principal and the payment of interest at a fixed rate. Sec. 2(30) of the Companies Act, 2013 says “debenture” includes debenture stock, bonds or any other instrument evidencing a debt, whether or not constituting a charge on the assets of the company. A debentureholder is a creditor of the company.

A debenture is a written acknowledgement of a debt by a company, carrying fixed interest and repayable on agreed terms; its holder is a creditor.

Question SA – Q2

What does a Bearer Debenture mean?

Answer

A bearer debenture is one whose holder’s name is not recorded in the company’s register of debentureholders. It is transferable by mere delivery; interest is paid to whoever presents the interest coupons attached to it.

A bearer debenture is transferable by mere delivery; whoever holds it gets the interest and principal, as no name is registered.

Question SA – Q3

State the meaning of ‘Debentures issued as a collateral security’.

Answer

When a company takes a loan from a bank or financial institution, it may issue its own debentures to the lender as additional (secondary) security, besides the primary security. These are debentures issued as collateral security. The lender can enforce them only if the company fails to repay the loan; when the loan is repaid, the debentures are returned and cancelled. No interest is paid on them.

They are debentures given to a lender as additional security for a loan; the lender can realise them only if the loan is not repaid.

Question SA – Q4

What is meant by ‘Issue of debentures for consideration other than cash’?

Answer

When a company purchases assets or a business from a vendor and pays the purchase consideration by issuing its debentures instead of cash, it is an issue of debentures for consideration other than cash. Entries: Sundry Assets Dr → To Vendor; Vendor Dr → To Debentures A/c (with Securities Premium or Discount, as the case may be).

It is the issue of debentures to a vendor in payment for assets or a business purchased, instead of paying cash.

Question SA – Q5

What is meant by Issue of debenture at discount and redeemable at premium?

Answer

The debenture is issued at a price below its face value and is to be repaid at a price above its face value. The company bears a loss equal to discount + premium. E.g. a ₹ 100 debenture issued at ₹ 95 and redeemable at ₹ 105:

Bank A/c Dr 95; Loss on Issue of Debentures A/c Dr 10 → To Debentures A/c 100, To Premium on Redemption of Debentures A/c 5.

The debenture is issued below face value and repaid above it; the discount plus redemption premium is debited to Loss on Issue of Debentures.

Question SA – Q6

What is ‘Capital Reserve’?

Answer

Capital reserve is a reserve created out of capital profits (not from normal trading), e.g. profit on reissue of forfeited shares, profit on sale of fixed assets, profit on redemption/cancellation of own debentures, or the excess of net assets over purchase consideration on purchase of a business. It is shown under Reserves and Surplus and is generally not available for dividend.

Capital reserve is a reserve created from capital profits (e.g. excess of net assets over purchase price, profit on cancellation of own debentures), not used for dividends.

Question SA – Q7

What is meant by a ‘Irredeemable Debenture’?

Answer

An irredeemable (perpetual) debenture is one which is not repayable during the life of the company; it is repaid only on winding up, or at the company’s option after a long period. Interest is paid regularly.

An irredeemable debenture is not repayable during the company’s life, only on winding up; interest is paid regularly.

Question SA – Q8

What is a ‘Convertible Debenture’?

Answer

A convertible debenture gives its holder the right to convert it, wholly (fully convertible) or partly (partly convertible), into equity shares of the company at a specified rate after a specified period.

A convertible debenture can be converted, fully or partly, into equity shares after a time at a fixed rate.

Question SA – Q9

What is meant by ‘Mortgaged Debentures’?

Answer

Mortgaged (secured) debentures are debentures secured by a charge (mortgage) on the assets of the company – fixed charge on specific assets or floating charge on assets in general. If the company defaults, the holders can recover their dues by selling the charged assets.

Mortgaged debentures are secured by a charge on the company’s assets, which can be sold to repay the holders on default.

Question SA – Q10

What is discount on issue of debentures?

Answer

When debentures are issued at a price less than their face value, the difference is discount on issue of debentures (e.g. ₹ 100 debenture issued at ₹ 95 → discount ₹ 5). It is a capital loss, written off in the year of issue from Securities Premium Reserve and/or Statement of Profit and Loss; any unwritten-off amount is shown under other current/non-current assets.

Discount on issue is the excess of face value over issue price; it is a capital loss written off from securities premium or profit and loss.

Question SA – Q11

What is meant by ‘Premium on Redemption of Debentures’?

Answer

When debentures are repaid at an amount more than their face value, the excess is premium on redemption (e.g. ₹ 100 debenture redeemed at ₹ 105 → premium ₹ 5). It is a liability of the company, credited at the time of issue to Premium on Redemption of Debentures A/c (with Loss on Issue debited) and shown under long-term borrowings until paid.

Premium on redemption is the extra amount over face value payable on repayment; it is a liability recorded at the time of issue.

Question SA – Q12

How debentures are different from shares? Give two points.

Answer

1. Status: a debentureholder is a creditor of the company; a shareholder is an owner.
2. Return: debentures carry fixed interest, payable even if there is a loss; shares get dividend only out of profits, as declared.
3. (Also) Debentures are repaid before shares on winding up and are usually secured; shareholders have voting rights, debentureholders do not.

Debentureholders are creditors who get fixed interest even without profit; shareholders are owners who get dividends only from profits.

Question SA – Q13

What is meant by redemption of debentures?

Answer

Redemption of debentures means discharge of the liability on debentures by repaying the amount to the debentureholders, as per the terms of issue – in a lump sum on maturity, in instalments, by purchase in the open market or by conversion into shares/new debentures.

Redemption is repayment (discharge) of the liability on debentures to their holders.

Question SA – Q14

Can the company purchase its own debentures?

Answer

Yes. If authorised by its articles, a company can purchase its own debentures in the open market, especially when they are quoted below their redemption value. It may cancel them immediately (redemption) or hold them as an investment (“Own Debentures”) to be cancelled later. Profit on cancellation is a capital profit (transferred to capital reserve).

Yes – a company may buy its own debentures in the open market and cancel them or hold them as investment.

Question SA – Q15

What is meant by redemption of debentures by conversion?

Answer

When debentureholders are given new shares or new debentures in exchange for their existing debentures, instead of cash, it is redemption by conversion. It applies mainly to convertible debentures. Entry: Debentures A/c Dr → To Debentureholders; Debentureholders Dr → To Equity Share Capital (and Securities Premium, if any).

It is redemption by issuing shares or new debentures in exchange for old debentures, instead of paying cash.

Question SA – Q16

How would you deal with ‘Premium on Redemption of Debentures’?

Answer

1. At issue – credited to Premium on Redemption of Debentures A/c, with Loss on Issue of Debentures A/c debited: Bank Dr; Loss on Issue Dr → To Debentures; To Premium on Redemption.
2. Till redemption – shown as a liability under long-term borrowings.
3. Loss written off – from Securities Premium Reserve or Statement of Profit and Loss in the year of issue.
4. On redemption – Debentures A/c Dr; Premium on Redemption A/c Dr → To Debentureholders A/c.

It is provided as a liability at issue (debiting loss on issue), the loss is written off, and the premium is paid to debentureholders on redemption.

Question SA – Q17

What is meant by redemption of debentures by “Purchase in Open Market”?

Answer

When a company, if authorised by its articles, buys its own debentures from the stock exchange (often at a price below face value when they are quoted at a discount) and cancels them, it is redemption by purchase in the open market. Profit on cancellation (face value – purchase price) is transferred to Capital Reserve.

It is redemption by buying the company’s own debentures on the stock exchange and cancelling them; any profit goes to capital reserve.

Questions for Practice – Long Answer Questions

Question LA – Q1

Explain the different types of debentures?

Answer

1. On the basis of security

1. Secured (mortgage) debentures – secured by a charge on assets.
   2. Unsecured (naked) debentures – no charge on assets.

2. On the basis of tenure

1. Redeemable – repayable after a fixed period.
   2. Irredeemable (perpetual) – repayable only on winding up.

3. On the basis of convertibility

1. Convertible – fully or partly convertible into equity shares.
   2. Non-convertible – not convertible.

4. On the basis of coupon rate

1. Specific coupon rate – a fixed interest rate.
   2. Zero coupon rate – no interest; issued at a deep discount and redeemed at face value.

5. On the basis of registration

1. Registered – names are recorded in the register; transferable only by a transfer deed.
   2. Bearer – transferable by delivery.

6. On the basis of priority

1. First mortgage debentures – first claim on the charged asset.
   2. Second mortgage debentures – claim after first mortgage holders are paid.

Secured/unsecured, redeemable/irredeemable, convertible/non-convertible, specific/zero coupon, registered/bearer and first/second mortgage debentures.

Question LA – Q2

Distinguish between a debenture and a share. Why debenture is known as loan capital? Explain.

Answer

Why loan capital: Debentures represent borrowed funds raised by the company from the public. The company must pay fixed interest and repay the principal on maturity, whether or not it earns profits. Debentureholders are creditors, not owners. Hence debentures are called loan capital (borrowed capital), shown under long-term borrowings.

Shares are owned capital with dividends and voting rights; debentures are borrowed money with fixed interest and repayment, so they are called loan capital.

Question LA – Q3

Describe the meaning of ‘Debenture Issued as Collateral Securities’. What accounting treatment is given to the issue of debentures in the books of accounts?

Answer

Meaning: debentures given by a company to a lender (bank) as additional security for a loan, over and above the primary security. The lender can sell them only on default; on repayment of the loan they are returned and cancelled. No interest is payable on them.

Treatment

Method 1 – No entry. The fact is shown in the note to “Long-term borrowings”: e.g. “Bank loan ₹ 12,00,000 (secured by issue of 15,000, 10 % debentures of ₹ 100 each as collateral security)”.

Method 2 – Debenture Suspense Account.

• On issue: Debenture Suspense A/c Dr → To Debentures A/c.
• In the balance sheet, Debentures are shown with “Less: Debenture Suspense” (net nil) under long-term borrowings, along with the loan.
• On repayment of the loan: Debentures A/c Dr → To Debenture Suspense A/c (entry reversed).

They are debentures given as extra security for a loan; either no entry is made (only a note) or Debenture Suspense A/c is debited and Debentures credited, reversed on repayment.

Question LA – Q4

Explain the different terms for the issue of debentures with reference to their redemption.

Answer

On redemption: Debentures A/c Dr (+ Premium on Redemption A/c Dr) → To Debentureholders A/c; Debentureholders A/c Dr → To Bank A/c.

Six terms: par–par, discount–par, premium–par, par–premium, discount–premium and premium–premium; discount and redemption premium are capital losses, while issue premium goes to securities premium.

Question LA – Q5

Differentiate between redemption of debentures out of capital and out of profits.

Answer

Out of capital, no profits are set aside; out of profits, an amount is transferred from profits to DRR, reducing divisible profits.

Question LA – Q6

Explain the guidelines of SEBI for creating Debenture Redemption Reserve.

Answer

As per Section 71(4) of the Companies Act, 2013 read with Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014 (as amended) and SEBI guidelines:

1. DRR is created out of profits available for dividend.
2. Exempt: All India Financial Institutions, banks, listed companies (including listed NBFCs and HFCs) and certain unlisted NBFCs/HFCs need not create DRR.
3. Other unlisted companies: DRR must be at least 10 % of the value of outstanding debentures.
4. Investment (DRI): every company required to create DRR, and every listed company, must invest or deposit, on or before April 30 each year, at least 15 % of the debentures maturing during the year ending next March 31. Approved forms: deposit with a scheduled bank (free of charge or lien), Central/State Government securities, other trustee securities, or bonds under the Indian Trusts Act.
5. The investment can be used only for redemption of those debentures; it may not fall below 15 % of debentures maturing in the year.
6. DRR can be used only for redemption; after all debentures are redeemed, it is transferred to General Reserve.

Listed companies, banks and AIFIs are exempt; other unlisted companies keep DRR of 10 % of outstanding debentures; at least 15 % of debentures maturing in the year must be invested by April 30; DRR goes to General Reserve after redemption.

Question LA – Q7

Describe the steps for creating Sinking Fund for redemption of debentures.

Answer

A Sinking Fund (Debenture Redemption Fund) accumulates the amount needed for redemption by setting aside profits each year and investing them outside the business.

1. Calculate the annual instalment using sinking fund tables (amount needed, period and rate of interest).
2. Set aside the instalment from profits each year: Statement of Profit and Loss (Surplus) Dr → To Sinking Fund A/c.
3. Invest the same amount in securities: Sinking Fund Investment A/c Dr → To Bank A/c.
4. Interest on investments received is credited to the fund and reinvested:
   • Bank Dr → To Interest on Sinking Fund Investment A/c;
   • Interest on Sinking Fund Investment A/c Dr → To Sinking Fund A/c;
   • Sinking Fund Investment A/c Dr → To Bank A/c. (Interest is not reinvested in the last year.)
5. In the last year, sell the investments: Bank Dr → To Sinking Fund Investment A/c. Profit or loss on sale is transferred to the Sinking Fund A/c.
6. Redeem the debentures: Debentures Dr → To Debentureholders; Debentureholders Dr → To Bank.
7. Transfer the balance of the Sinking Fund to General Reserve: Sinking Fund A/c Dr → To General Reserve A/c.

Set aside the yearly instalment from profits to a Sinking Fund, invest it with interest reinvested, sell the investments at maturity, redeem the debentures and transfer the fund balance to General Reserve.

Question LA – Q8

Can a company purchase its own debentures in the open market? Explain.

Answer

Yes, if authorised by its articles of association. A company does so when debentures are available in the market below their face (redemption) value, to save on the redemption amount, or when it has surplus funds.

Treatment

1. Immediate cancellation

• Debentures A/c Dr (face value) → To Bank A/c (cost), To Profit on Redemption of Debentures A/c (difference).
  • Profit on Redemption A/c Dr → To Capital Reserve A/c.
  • A loss, if any, is debited to the Statement of P&L.

2. Held as investment: Own Debentures A/c Dr → To Bank A/c; cancelled later as in (1). Interest on own debentures is not paid to itself.
3. Purchases are made ex-interest or cum-interest; for cum-interest purchases, the accrued interest is separated from the price.

Yes, if the articles permit; the company may cancel them at once (profit to capital reserve) or hold them as investment to cancel later.

Question LA – Q9

What is meant by conversion of debentures? Describe the method of such a conversion.

Answer

Conversion means redemption of debentures by issuing equity shares, preference shares or new debentures in place of the old debentures, at the option of the holder or as per the terms of issue (convertible debentures).

Method

1. Find the amount due to debentureholders (face value + premium on redemption, if any): Debentures A/c Dr (+ Premium on Redemption Dr) → To Debentureholders A/c.
2. Number of new securities = Amount due ÷ Issue price of the new share/debenture.
3. Issue the new securities: Debentureholders A/c Dr → To Equity Share Capital / New Debentures A/c, To Securities Premium Reserve A/c (if issued at premium).
4. Any fraction is paid in cash.
5. Shares cannot be issued at a discount, so when debentures originally issued at a discount are converted, the number of shares is based on the amount actually received on those debentures.

Conversion is redemption by issuing shares or new debentures: find the amount due, divide by the issue price of the new security and issue them (with any premium), paying fractions in cash.

Questions for Practice – Numerical Questions

Question Num – Q1

G. Ltd. a listed company issued 75,00,000, 6% debentures of ₹ 50 each at par payable ₹ 15 on application and ₹ 35 on allotment, redeemable at par after 7 years from the date of issue of debentures. Record necessary entries in the books of Company.

Answer

(Being a listed company, no DRR is required; 15 % of the debentures maturing must be invested in DRI by April 30 of the year of redemption.)

6 % Debentures ₹ 37,50,00,000 issued at par (₹ 11,25,00,000 on application + ₹ 26,25,00,000 on allotment).

Question Num – Q2

Y. Ltd. issued 2,000, 6% debentures of ₹ 100 each payable as follows: ₹ 25 on application; ₹ 50 on allotment and ₹ 25 on first and final call. Record necessary entries in the books of the company.

Answer

6 % Debentures ₹ 2,00,000 fully called and received.

Question Num – Q3

A. Ltd. issued 10,000, 10% debentures of ₹ 100 each at a premium of 5% payable as follows: ₹ 10 on Application; ₹ 20 along with premium on allotment and balance on first and final call. The debentures were fully subscribed and all money was duly received. Record necessary Journal entries. Also show how the amount will appear in the balance sheet.

Answer

Balance Sheet (extract)

10 % Debentures ₹ 10,00,000 under long-term borrowings; securities premium ₹ 50,000; bank ₹ 10,50,000.

Question Num – Q4

A. Ltd. issued 90,00,000, 9% debentures of ₹ 50 each at a [discount] of 8%, redeemable at par any time after 9 years. Record necessary entries in the books of A. Ltd., for issue of debentures.

Answer

(The word is missing in the book; it is read as discount of 8 %. Issue price = ₹ 46.)

(If issued at a premium of 8 %: Bank ₹ 48,60,00,000 → Debentures ₹ 45,00,00,000 + Securities Premium Reserve ₹ 3,60,00,000.)

Debentures ₹ 45 crore issued for ₹ 41.4 crore; discount ₹ 3.6 crore written off.

Question Num – Q5

A. Ltd. issued 4,000, 9% debentures of ₹ 100 each on the following terms: ₹ 20 on Application; ₹ 20 on Allotment; ₹ 30 on First call; and ₹ 30 on Final call. The public applied for 4,800 debentures. Applications for 3,600 debentures were accepted in full. Applications for 800 Debentures were allotted 400 debentures and applications for 400 Debentures were rejected. All money called and duly received. Record necessary journal entries.

Answer

Excess on partially allotted applications = 400 × 20 = ₹ 8,000 (adjusted to allotment); refund 400 × 20 = ₹ 8,000.

Refund ₹ 8,000; ₹ 8,000 adjusted to allotment; 9 % Debentures ₹ 4,00,000.

Question Num – Q6

T. Ltd. offered 2,00,000, 8% debentures of ₹ 500 each on June 30, 2014 at a premium of 10% payable as ₹ 200 on application (including premium) and balance on allotment, redeemable at par after 8 years. But applications are received for 3,00,000 debentures and the allotment is made on pro-rata basis. All the money due on application and allotment was received. Record necessary entries regarding issue of debentures.

Answer

Issue price ₹ 550: application ₹ 200 (₹ 150 + premium ₹ 50), allotment ₹ 350. Excess application = 1,00,000 × 200 = ₹ 2,00,00,000, adjusted against allotment.

8 % Debentures ₹ 10 crore and securities premium ₹ 1 crore; ₹ 2 crore excess application adjusted; ₹ 5 crore received on allotment.

Question Num – Q7

X. Ltd. invited applications for the issue of 10,000, 14% debentures of ₹ 100 each payable as to ₹ 20 on application, ₹ 60 on allotment and the balance on call. The company receives applications for 13,500 debentures, out of which applications for 8,000 debentures are allotted in full, applications for 5,000 debentures were allotted 40% of received applications, and the remaining applications were rejected. The surplus money on partially allotted applications is utilised towards allotment. All the sums due are duly received. Record necessary journal entries regarding issue of debentures.

Answer

Partially allotted: 5,000 applied, 2,000 allotted; excess 3,000 × 20 = ₹ 60,000 to allotment. Rejected 500 × 20 = ₹ 10,000 refunded.

Refund ₹ 10,000; ₹ 60,000 adjusted to allotment; 14 % Debentures ₹ 10,00,000.

Question Num – Q8

R. Ltd. offered 20,00,000, 10% debentures of ₹ 200 each at a discount of 7% redeemable at premium of 8% after 9 years. Record necessary entries in the books of R. Ltd.

Answer

Issue price = 200 – 14 = ₹ 186; premium on redemption = ₹ 16; loss per debenture = ₹ 30.

Debentures ₹ 40 crore; premium on redemption ₹ 3.2 crore; loss on issue ₹ 6 crore written off.

Question Num – Q9

M. Ltd. took over assets of ₹ 9,00,00,000 and liabilities of ₹ 70,00,000 of S. Ltd. and issued 8% debentures of ₹ 100 each. Record necessary entries in the books of M. Ltd.

Answer

Purchase consideration (= net assets) = 9,00,00,000 – 70,00,000 = ₹ 8,30,00,000; debentures issued at par = 8,30,000.

8,30,000 debentures of ₹ 100 each (₹ 8.3 crore) issued to S. Ltd.

Question Num – Q10

B. Ltd. purchased assets of the book value of ₹ 4,00,000 and took over the liability of ₹ 50,000 from Mohan Bros. It was agreed that the purchase consideration, settled at ₹ 3,80,000, be paid by issuing debentures of ₹ 100 each. What journal entries will be made in the following three cases, if debentures are issued: (a) at par; (b) at 10% discount; (c) at premium of 10%? It was agreed that any fraction of debentures be paid in cash.

Answer

Goodwill = 3,80,000 – (4,00,000 – 50,000) = ₹ 30,000.

Goodwill ₹ 30,000; debentures issued: (a) 3,800, (b) 4,222 plus ₹ 20 cash, (c) 3,454 plus ₹ 60 cash.

Question Num – Q11

X. Ltd. purchased a Machinery from Y. Ltd. at an agreed purchase consideration of ₹ 4,40,000 to be satisfied by the issue of 12% debentures of ₹ 100 each at a premium of ₹ 10 per debenture. Journalise the transactions.

Answer

Number = 4,40,000 ÷ 110 = 4,000 debentures.

4,000 debentures issued: 12 % Debentures ₹ 4,00,000 and securities premium ₹ 40,000.

Question Num – Q12

X. Ltd. issued 15,000, 10% debentures of ₹ 100 each. Give journal entries and present it in the balance sheet in each of the following cases: (i) The debentures are issued at a premium of 10%; (ii) The debentures are issued at a discount of 5%; (iii) The debentures are issued as a collateral security to bank against a loan of ₹ 12,00,000; and (iv) The debentures are issued to a supplier of machinery costing ₹ 13,50,000.

Answer

Balance sheet presentation (Notes)

1. Debentures ₹ 15,00,000 with premium ₹ 1,50,000; (ii) discount ₹ 75,000; (iii) Debenture Suspense ₹ 15,00,000 against a loan of ₹ 12,00,000; (iv) discount ₹ 1,50,000 on debentures given for machinery worth ₹ 13,50,000.

Question Num – Q13

Journalise the following: (i) A debenture issued at ₹ 95, repayable at ₹ 100; (ii) A debenture issued at ₹ 95, repayable at ₹ 105; and (iii) A debenture issued at ₹ 100, repayable at ₹ 105. The face value of debenture in each of the above cases is ₹ 100.

Answer

1. Discount ₹ 5; (ii) loss ₹ 10 with premium on redemption ₹ 5; (iii) loss ₹ 5 with premium on redemption ₹ 5.

Question Num – Q14

A. Ltd. issued 50,00,000, 8% debentures of ₹ 100 at a discount of 6% on April 01, 2018, redeemable at premium of 4% by draw of lots as under: 20,00,000 debentures on March, 2020; 10,00,000 debentures on March, 2021; 20,00,000 debentures on March, 2022. Record journal entries for issue of debentures. Prepare discount/loss on issue of debenture account.

Answer

Loss per debenture = 6 + 4 = ₹ 10 → ₹ 5,00,00,000. As per the chapter, it is written off in the year of issue (no securities premium exists).

Loss on Issue of Debentures Account

(Under the older method of writing off over the life in the ratio of debentures outstanding, 50 : 50 : 30 : 20, the yearly write-offs would be ₹ 1,66,66,667, ₹ 1,66,66,667, ₹ 1,00,00,000 and ₹ 66,66,666.)

Loss on issue ₹ 5 crore (discount ₹ 3 crore + premium on redemption ₹ 2 crore), written off to the Statement of Profit and Loss in 2018-19.

Question Num – Q15

A listed company issues the following debentures: (i) 10,000, 12% debentures of ₹ 100 each at par but redeemable at premium of 5% after 5 years; (ii) 10,000, 12% debentures of ₹ 100 each at a discount of 10% but redeemable at par after 5 years; (iii) 5,000, 12% debentures of ₹ 1000 each at a premium of 5% but redeemable at par after 5 years; (iv) 1,000, 12% debentures of ₹ 100 each issued to a supplier of machinery costing ₹ 95,000. The debentures are repayable after 5 years; and (v) 300, 12% debentures of ₹ 100 each as a collateral security to a bank which has advanced a loan of ₹ 25,000 to the company for a period of 5 years. Pass the journal entries to record the: (a) issue of debentures; and (b) repayment of debentures after the given period.

Answer

(Listed company – no DRR; 15 % of the amount maturing is invested in DRI by April 30 of the year of redemption and encashed on redemption.)

(a) Issue

(b) Repayment after 5 years

Issue entries as above (loss ₹ 50,000 and discounts ₹ 1,05,000 written off from securities premium of ₹ 2,50,000); on redemption the debentures (plus ₹ 50,000 premium in case (i)) are paid, and the collateral debentures are cancelled against Debenture Suspense when the loan is repaid.

Question Num – Q16

A listed company issued debentures of the face value of ₹ 5,00,000 at a discount of 6% on April 01, 2014. These debentures are redeemable by annual drawings of ₹ 1,00,000 made on March 31 each year starting from March 31, 2016. Give journal entries for issue of debentures, writing-off discount and regarding redemption of debentures.

Answer

The same three steps (invest ₹ 15,000 in DRI by April 30, encash it on March 31, and redeem ₹ 1,00,000) are repeated in 2016-17, 2017-18, 2018-19 and 2019-20. All debentures are redeemed by March 31, 2020.

Discount ₹ 30,000 written off in 2014-15; ₹ 1,00,000 redeemed every March 31 from 2016 to 2020, with ₹ 15,000 invested in DRI each April 30 and encashed on redemption.

Question Num – Q17

B. Ltd. a listed company issued debentures at 94% for ₹ 4,00,000 on April 01, 2011 repayable by five equal drawings of ₹ 80,000 each. The company prepares its final accounts on March 31 every year. Give Journal entries for issues and redemption of debentures.

Answer

(Drawings are taken as annual, on March 31 from 2012 to 2016.)

The DRI investment of ₹ 12,000 (each April 30), its encashment and the redemption of ₹ 80,000 (each March 31) are repeated in 2012-13, 2013-14, 2014-15 and 2015-16.

Issued for ₹ 3,76,000 with discount ₹ 24,000 written off in 2011-12; ₹ 80,000 redeemed every March 31 for five years, with ₹ 12,000 kept in DRI each year.

Question Num – Q18

B. Ltd. issued 1,000, 12% debentures of ₹ 100 each on April 01, 2014 at a discount of 5% redeemable at a premium of 10%. Give journal entries relating to the issue of debentures and debentures interest for the period ending March 31, 2015 assuming that interest is paid half-yearly on September 30 and March 31 and tax deducted at source is 10%.

Answer

Half-yearly interest = 1,00,000 × 12 % × 6/12 = ₹ 6,000; TDS ₹ 600; net ₹ 5,400.

Loss on issue ₹ 15,000 (premium on redemption ₹ 10,000); interest ₹ 6,000 each half-year (₹ 5,400 paid, ₹ 600 TDS); ₹ 12,000 interest and the ₹ 15,000 loss charged to the Statement of Profit and Loss.

Question Num – Q19

Jay Kay Ltd. an ‘other listed company’ issued 60,000 12% debentures of ₹ 100 each at par redeemable at the end of 5 years at a premium of 20%. On this date, there existed a balance of ₹ 5,00,000 in securities premium reserve account. The company created the required amount of debenture redemption reserve in 3 equal instalments on March 31, 2017, 2018 and 2019. It invested in specified securities (DRI) the required amount on April 01 of the financial year. Debentures were duly redeemed. Record necessary journal entries for: (i) Issue of debentures (ii) Writing off loss on issue of debentures. (iii) Interest on debentures for 2015-16 assuming it is paid annually and tax deducted at source is 10%. (iv) Regarding redemption of debentures.

Answer

(Taken as issued on April 1, 2015 and redeemed on March 31, 2020. Under the current rules a listed company need not create DRR, so the “required amount” is nil. Only the DRI of 15 % is made.)

(Under the pre-2019 rule of 25 % DRR for listed companies, ₹ 15,00,000 would have been transferred from the Statement of P&L to DRR in three instalments of ₹ 5,00,000 on March 31 of 2017, 2018 and 2019, and transferred to General Reserve after redemption.)

Loss on issue ₹ 12,00,000 written off (₹ 5,00,000 from securities premium, ₹ 7,00,000 from P&L); interest for 2015-16 ₹ 7,20,000 (TDS ₹ 72,000); DRI ₹ 9,00,000; ₹ 72,00,000 paid on redemption; no DRR for a listed company under current rules.

Question Num – Q20

Madhur Ltd., has outstanding 9% debentures of ₹ 50,00,000 redeemable at par on January 01, 2020. Debenture Redemption Reserve of ₹ 2,00,000 on March 31, 2018 and balance of required amount of DRR was created on March 31, 2019. The company invested in specified securities (DRI) the required amount on April 01, 2019. Debentures were redeemed on the due date. Record necessary journal entries in the books of the company and also prepare the ledger accounts (ignore interest).

Answer

Madhur Ltd. creates DRR, so it is treated as an “other unlisted company”. Required DRR = 10 % of ₹ 50,00,000 = ₹ 5,00,000, of which ₹ 3,00,000 is the balance. DRI = 15 % = ₹ 7,50,000.

Debenture Redemption Reserve Account

Debenture Redemption Investment Account

9 % Debentures Account

Debentureholders Account

DRR ₹ 5,00,000 (₹ 2,00,000 + ₹ 3,00,000), DRI ₹ 7,50,000; debentures of ₹ 50,00,000 redeemed on 1 January 2020 and DRR transferred to General Reserve.

Question Num – Q21

MK Ltd. has outstanding 30,000, 11% debentures of ₹ 100 each redeemable at 10% premium as follows: March 31, 2018 – 10,000 debentures; March 31, 2019 – 12,000 debentures; March 31, 2020 – Remaining debentures. Pass necessary journal entries in the books of the company.

Answer

(Treated as a listed company – no DRR; DRI of 15 % of the amount maturing in each year, by April 30.)

Payments on redemption: ₹ 11,00,000 (2018), ₹ 13,20,000 (2019) and ₹ 8,80,000 (2020), including the 10 % premium; DRI of ₹ 1,50,000, ₹ 1,80,000 and ₹ 1,20,000.

Question Num – Q22

X Ltd. had outstanding 20,000 12% debentures of ₹ 100 each redeemable on June 30, 2019. Record necessary journal entries at the time of redemption.

Answer

(Listed company assumed – no DRR; DRI 15 % of ₹ 20,00,000 = ₹ 3,00,000 invested by April 30, 2019.)

(If X Ltd. is an “other unlisted company”, it will already hold DRR of ₹ 2,00,000 (10 %), which is transferred after redemption: Debenture Redemption Reserve A/c Dr → To General Reserve A/c ₹ 2,00,000.)

DRI ₹ 3,00,000 invested and encashed; ₹ 20,00,000 paid to debentureholders on 30 June 2019 (DRR, if any, transferred to General Reserve).

Question Num – Q23

XYZ Ltd. issued 6,000, 12% Debentures of ₹ 50 each on April 1, 2014. Interest on these debentures is payable annually on 31st March each year. The debentures are redeemable in four equal instalments at end of third, fourth, fifth and sixth year. You are required to pass journal entries at the time of issue and redemption of debentures in the books of the company under following cases: (i) Debentures are issued at par and redeemable at par. (ii) Debentures are issued at a premium of 10% and redeemable at par. (iii) Debentures are issued at a discount of 10% and redeemable at par. (iv) Debentures are issued at par but redeemable at a premium of 10%. (v) Debentures are issued at a premium of 10% and redeemable at premium of 10%. (vi) Debentures are issued at a discount of 10% and redeemable at a premium of 10%.

Answer

Face value = 6,000 × 50 = ₹ 3,00,000; each instalment = 1,500 debentures = ₹ 75,000, redeemed on March 31 of 2017, 2018, 2019 and 2020.

Issue entries (April 1, 2014)

Write-off on March 31, 2015

3. Statement of P&L Dr ₹ 30,000 → To Discount on Issue.
   4. Statement of P&L Dr ₹ 30,000 → To Loss on Issue.
   5. Securities Premium Reserve Dr ₹ 30,000 → To Loss on Issue.
   6. Statement of P&L Dr ₹ 60,000 → To Loss on Issue.

Redemption entries (each of March 31, 2017, 2018, 2019, 2020)

(In each case, ₹ 11,250 – 15 % of ₹ 75,000 – is invested in DRI by April 30 before each redemption year and encashed at redemption. An “other unlisted company” would also transfer 10 % of outstanding debentures to DRR.)

Issue entries for the six cases are as above (loss/discount ₹ 30,000 or ₹ 60,000 written off in 2014-15); ₹ 75,000 is redeemed each year in cases (i)–(iii) and ₹ 82,500 (including the 10 % premium) in cases (iv)–(vi).

Topic checklist

• ☒ Meaning and types of debentures; debentures vs shares (SA 1–3, 7–9, 12; LA 1, 2)
• ☒ Issue at par, premium, discount; over-subscription (Num 1–8)
• ☒ Issue for consideration other than cash (Num 9–11)
• ☒ Collateral security (Num 12, 15; LA 3)
• ☒ Terms of issue and redemption, loss on issue (Num 13–15, 23; LA 4)
• ☒ Interest and TDS (Num 18, 19)
• ☒ Redemption – lump sum, instalments, DRR and DRI (Num 16–23; LA 5–6)
• ☒ Sinking fund, open market purchase, conversion (LA 7–9; SA 14–17)

Total questions answered: 49 of 49