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Issue and Redemption of Debentures
CBSE · Class 12 · Accountancy
NCERT Solutions for Issue and Redemption of Debentures — CBSE Class 12 Accountancy.
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Questions for Practice
1What is meant by a Debenture?Show solution
A debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period and for payment of interest at a fixed rate.
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2What does a Bearer Debenture mean?Show solution
Bearer debentures are those debentures which can be transferred by way of delivery. The company does not keep a record of such debentures, and interest is paid to the person who produces the attached interest coupon.
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3State the meaning of 'Debentures issued as a collateral security'.Show solution
Debentures issued as collateral security means debentures issued as an additional or subsidiary security besides the primary security when a company borrows from a bank or other financial institution. If the primary security is insufficient, the lender may use the collateral security.
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4What is meant by 'Issue of debentures for consideration other than cash'?Show solution
Issue of debentures for consideration other than cash means that a company issues debentures instead of paying cash, usually to a vendor from whom it purchases assets or business. The debentures may be issued at par, at premium, or at discount.
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5What is meant by Issue of debenture at discount and redeemable at premium?Show solution
When debentures are issued at a discount and are redeemable at a premium, the company receives less than the nominal value at issue but repays more than the nominal value at redemption. The total difference is treated as loss on issue of debentures.
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6What is 'Capital Reserve'?Show solution
Capital Reserve is a reserve created from capital profits. It is not created from normal trading or revenue profits. In the chapter, excess of net assets over purchase consideration is credited to capital reserve.
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7What is meant by a 'Irredeemable Debenture'?Show solution
An irredeemable debenture is a debenture for which the company gives no undertaking to repay the borrowed money within a fixed period. It is also called a perpetual debenture and is repayable only on winding up or after a very long period.
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8What is a 'Convertible Debenture'?Show solution
A convertible debenture is one which can be converted into equity shares or any other security either at the option of the company or the debentureholders. It may be fully convertible or partly convertible.
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9What is meant by 'Mortgaged Debentures'?Show solution
Mortgaged debentures are debentures secured by a charge on the assets of the company. The chapter explains secured debentures as debentures where a fixed or floating charge is created; mortgaged debentures are a form of such secured debentures.
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10What is discount on issue of debentures?Show solution
Discount on issue of debentures is the amount by which the issue price is below the nominal value. For example, if a Rs. 100 debenture is issued at Rs. 95, the discount is Rs. 5.
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11What is meant by 'Premium on Redemption of Debentures'?Show solution
Premium on redemption of debentures is the extra amount payable over the nominal value when debentures are redeemed. It is a future liability and is shown under long-term borrowings until the debentures are redeemed.
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12How debentures are different from shares? Give two points.Show solution
Two differences are:
1. Ownership: A share represents ownership of the company, while a debenture is only an acknowledgment of debt.
2. Return: Return on shares is called dividend, while return on debentures is called interest. Dividend depends on profits, but interest is fixed and must be paid whether or not there is profit.
Also, shares are part of owned capital, whereas debentures are part of borrowed capital.
1. Ownership: A share represents ownership of the company, while a debenture is only an acknowledgment of debt.
2. Return: Return on shares is called dividend, while return on debentures is called interest. Dividend depends on profits, but interest is fixed and must be paid whether or not there is profit.
Also, shares are part of owned capital, whereas debentures are part of borrowed capital.
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13What is meant by redemption of debentures?Show solution
Redemption of debentures means discharging the liability on account of debentures according to the terms of issue, that is, repayment of the amount of debentures to the debentureholders.
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14Can the company purchase its own debentures?Show solution
Yes. The chapter states that a company can purchase its own debentures in the open market for immediate cancellation, which is a method of redemption.
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15What is meant by redemption of debentures by conversion?Show solution
Redemption by conversion means redeeming debentures by converting them into shares or new debentures. If the offer is beneficial, debentureholders may accept it.
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16How would you deal with 'Premium on Redemption of Debentures'?Show solution
Premium on Redemption of Debentures is a liability payable in future. It is a provision and is shown under the head Non-current liabilities, sub-head Long-term borrowings, until the debentures are redeemed. When debentures are issued at a discount and are redeemable at a premium, the premium on redemption is debited to Loss on Issue of Debentures A/c. If debentures are issued at a premium and redeemable at a premium, the premium on redemption is also included in Loss on Issue of Debentures A/c.
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17What is meant by redemption of debentures by "Purchase in Open Market"?Show solution
Redemption by purchase in open market means the company buys its own debentures from the market for immediate cancellation. If purchased at a discount, the difference is a profit on redemption; if purchased above face value, the excess is a loss.
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1Explain the different types of debentures?Show solution
Debentures may be classified as follows:
1. From the point of view of security
- Secured debentures: charge created on assets; may be fixed or floating.
- Unsecured debentures: no specific charge on assets.
2. From the point of view of tenure
- Redeemable debentures: repayable after a fixed period or in instalments.
- Irredeemable/Perpetual debentures: no fixed repayment undertaking; repayable on winding up or after a long period.
3. From the point of view of convertibility
- Convertible debentures: can be converted into shares or other securities.
- Non-convertible debentures: cannot be converted.
4. From coupon rate point of view
- Specific coupon rate debentures: carry a specified rate of interest.
- Zero coupon rate debentures: no specific rate; issued at a substantial discount.
5. From the view point of registration
- Registered debentures: transferred by deed and recorded in company register.
- Bearer debentures: transferred by delivery.
1. From the point of view of security
- Secured debentures: charge created on assets; may be fixed or floating.
- Unsecured debentures: no specific charge on assets.
2. From the point of view of tenure
- Redeemable debentures: repayable after a fixed period or in instalments.
- Irredeemable/Perpetual debentures: no fixed repayment undertaking; repayable on winding up or after a long period.
3. From the point of view of convertibility
- Convertible debentures: can be converted into shares or other securities.
- Non-convertible debentures: cannot be converted.
4. From coupon rate point of view
- Specific coupon rate debentures: carry a specified rate of interest.
- Zero coupon rate debentures: no specific rate; issued at a substantial discount.
5. From the view point of registration
- Registered debentures: transferred by deed and recorded in company register.
- Bearer debentures: transferred by delivery.
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2Distinguish between a debenture and a share. Why debenture is known as loan capital? Explain.Show solution
A share represents ownership in the company, while a debenture represents borrowed money. Therefore, a debenture is called loan capital because it is a form of borrowing that the company must repay.
Two points of distinction:
- A share gives ownership; a debenture is only an acknowledgment of debt.
- Return on shares is dividend, but return on debentures is interest, which is payable even if there is no profit.
Two points of distinction:
- A share gives ownership; a debenture is only an acknowledgment of debt.
- Return on shares is dividend, but return on debentures is interest, which is payable even if there is no profit.
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3Describe the meaning of 'Debenture Issued as Collateral Securities'. What accounting treatment is given to the issue of debentures in the books of accounts?Show solution
Debentures issued as collateral security means debentures issued as an additional security along with the primary security for a loan or overdraft. If the primary security does not cover the loan fully, the lender can fall back on the collateral security.
Accounting treatment:
- First method: No entry is made because no separate liability is created. In the balance sheet, a note is given below the loan showing that it is secured by issue of debentures as collateral security.
- Second method: A journal entry is passed:
- `Debenture Suspense A/c Dr. To Debentures A/c`
- In the balance sheet, Debenture Suspense is shown as a deduction from debentures under long-term borrowings.
- When the loan is repaid, the entry is reversed.
Accounting treatment:
- First method: No entry is made because no separate liability is created. In the balance sheet, a note is given below the loan showing that it is secured by issue of debentures as collateral security.
- Second method: A journal entry is passed:
- `Debenture Suspense A/c Dr. To Debentures A/c`
- In the balance sheet, Debenture Suspense is shown as a deduction from debentures under long-term borrowings.
- When the loan is repaid, the entry is reversed.
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4Explain the different terms for the issue of debentures with reference to their redemption.Show solution
The chapter gives six common terms for issue and redemption of debentures:
1. Issued at par and redeemable at par
2. Issued at discount and redeemable at par
3. Issued at premium and redeemable at par
4. Issued at par and redeemable at premium
5. Issued at discount and redeemable at premium
6. Issued at premium and redeemable at premium
Accordingly, the journal entry differs by whether discount, premium on issue, and premium on redemption are present.
1. Issued at par and redeemable at par
2. Issued at discount and redeemable at par
3. Issued at premium and redeemable at par
4. Issued at par and redeemable at premium
5. Issued at discount and redeemable at premium
6. Issued at premium and redeemable at premium
Accordingly, the journal entry differs by whether discount, premium on issue, and premium on redemption are present.
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5Differentiate between redemption of debentures out of capital and out of profits.Show solution
Redemption out of capital means the company redeems debentures from its capital resources. In such case, no special reserve from profits is created for redemption. The company mainly uses capital funds or borrowed funds for repayment.
Redemption out of profits means the company uses its profits for redemption. For this, it may create a Debenture Redemption Reserve (DRR) out of profits and also make required investments in Debenture Redemption Investment (DRI) as per law.
So, the main difference is whether redemption is met from capital or from profits/accumulated surplus.
Redemption out of profits means the company uses its profits for redemption. For this, it may create a Debenture Redemption Reserve (DRR) out of profits and also make required investments in Debenture Redemption Investment (DRI) as per law.
So, the main difference is whether redemption is met from capital or from profits/accumulated surplus.
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6Explain the guidelines of SEBI for creating Debenture Redemption Reserve.Show solution
According to the chapter, for other unlisted companies the adequacy of Debenture Redemption Reserve (DRR) shall be 10% of the value of outstanding debentures. The company must also invest or deposit, on or before April 30, at least 15% of the amount of debentures maturing during the year ending March 31 of the next year in specified modes such as bank deposits, government securities, approved securities, or notified bonds.
If debentures are redeemed in instalments, the investment is carried forward and adjusted year by year. If the investment is more or less than required, it is respectively reduced or increased to maintain the minimum requirement.
If debentures are redeemed in instalments, the investment is carried forward and adjusted year by year. If the investment is more or less than required, it is respectively reduced or increased to maintain the minimum requirement.
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7Describe the steps for creating Sinking Fund for redemption of debentures.Show solution
The steps for creating a Sinking Fund for redemption of debentures are generally:
1. Estimate the amount needed for redemption at maturity.
2. Decide on annual contribution from profits.
3. Invest the annual amount in safe securities.
4. Record yearly interest earned on the investments.
5. Use the fund and investments at the time of redemption to pay debentureholders.
6. Transfer any balance left in the fund to General Reserve after redemption.
Thus, the fund is built up gradually out of profits and used specifically for repayment of debentures.
1. Estimate the amount needed for redemption at maturity.
2. Decide on annual contribution from profits.
3. Invest the annual amount in safe securities.
4. Record yearly interest earned on the investments.
5. Use the fund and investments at the time of redemption to pay debentureholders.
6. Transfer any balance left in the fund to General Reserve after redemption.
Thus, the fund is built up gradually out of profits and used specifically for repayment of debentures.
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8Can a company purchase its own debentures in the open market? Explain.Show solution
Yes. The chapter states that a company may purchase its own debentures in the open market and cancel them. This is called redemption by purchase in the open market. If bought below face value, there is a profit; if bought above face value, there is a loss. The profit is transferred to Capital Reserve.
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9What is meant by conversion of debentures? Describe the method of such a conversion.
1G. Ltd. a listed company issued 75,00,000, 6% debentures of Rs. 50 each at par payable Rs. 15 on application and Rs. 35 on allotment, redeemable at par after 7 years from the date of issue of debentures. Record necessary entries in the books of Company.
2Y. Ltd. issued 2,000, 6% debentures of Rs. 100 each payable as follows: Rs. 25 on application; Rs. 50 on allotment and Rs. 25 on first and final call. Record necessary entries in the books of the company.
3A. Ltd. issued 10,000, 10% debentures of Rs. 100 each at a premium of 5% payable as follows:
Rs. 10 on Application;
Rs. 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.
Rs. 10 on Application;
Rs. 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.
4A. Ltd. issued 90,00,000, 9% debenture of Rs. 50 each at a of 8%, redeemable at par any time after 9 years Record necessary entries in the books of A. Ltd., for issue of debentures.
5A. Ltd. issued 4,000, 9% debentures of Rs. 100 each on the following terms:
Rs. 20 on Application;
Rs. 20 on Allotment;
Rs. 30 on First call; and
Rs. 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.
Rs. 20 on Application;
Rs. 20 on Allotment;
Rs. 30 on First call; and
Rs. 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.
6T. Ltd. offered 2,00,000, 8% debenture of Rs. 500 each on June 30, 2014 at a premium of 10% payable as Rs. 200 on application (including premium) and balance on allotment, redeemable at par after 8 years But application 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.
7X. Ltd. invited applications for the issue of 10,000, 14% debentures of Rs. 100 each payable as to Rs. 20 on application, Rs. 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 5000 debentures were allotted 40% of received application, 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.
8R. Ltd. offered 20,00,000, 10% debentures of Rs. 200 each at a discount of 7% redeemable at premium of 8% after 9 years Record necessary entries in the books of R. Ltd.
9M. Ltd. took over assets of Rs. 9,00,00,000 and liabilities of Rs. 70,00,000 of S.Ltd. and issued 8% debentures of Rs. 100 each. Record necessary entries in the books of M. Ltd.
10B. Ltd. purchased assets of the book value of Rs. 4,00,000 and took over the liability of Rs. 50,000 from Mohan Bros. It was agreed that the purchase consideration, settled at Rs. 3,80,000, be paid by issuing debentures of Rs. 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.
(Note: Goodwill Rs. 30,000)
Answer: No. of debentures issued: (a) 3,800 (b) 4,222 (c) 3,454
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.
(Note: Goodwill Rs. 30,000)
Answer: No. of debentures issued: (a) 3,800 (b) 4,222 (c) 3,454
11X. Ltd. purchased a Machinery from Y. Ltd. at an agreed purchase consideration of Rs. 4,40,000 to be satisfied by the issue of 12% debentures of Rs. 100 each at a premium of Rs. 10 per debenture. Journalise the transactions.
Answer: No. of debentures issued 4,000
Answer: No. of debentures issued 4,000
12X. Ltd. issued 15,000, 10% debentures of Rs. 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 Rs. 12,00,000; and
- (iv) The debentures are issued to a supplier of machinery costing Rs. 13,50,000.
- (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 Rs. 12,00,000; and
- (iv) The debentures are issued to a supplier of machinery costing Rs. 13,50,000.
13Journalise the following:
- (i) A debenture issued at Rs. 95, repayable at Rs. 100;
- (ii) A debenture issued at Rs. 95, repayable at Rs. 105; and
- (iii) A debenture issued at Rs. 100, repayable at Rs. 105;
The face value of debenture in each of the above cases is Rs. 100.
- (i) A debenture issued at Rs. 95, repayable at Rs. 100;
- (ii) A debenture issued at Rs. 95, repayable at Rs. 105; and
- (iii) A debenture issued at Rs. 100, repayable at Rs. 105;
The face value of debenture in each of the above cases is Rs. 100.
14A. Ltd. issued 50,00,000, 8% debentures of Rs. 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.
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.
15A listed company issues the following debentures:
- (i) 10,000, 12% debentures of Rs. 100 each at par but redeemable at premium of 5% after 5 years;
- (ii) 10,000, 12% debentures of Rs. 100 each at a discount of 10% but redeemable at par after 5 years;
- (iii) 5,000, 12% debentures of Rs. 1000 each at a premium of 5% but redeemable at par after 5 years;
- (iv) 1,000, 12% debentures of Rs. 100 each issued to a supplier of machinery costing Rs. 95,000. The debentures are repayable after 5 years; and
- (v) 300, 12% debentures of Rs. 100 each as a collateral security to a bank which has advanced a loan of Rs. 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.
- (i) 10,000, 12% debentures of Rs. 100 each at par but redeemable at premium of 5% after 5 years;
- (ii) 10,000, 12% debentures of Rs. 100 each at a discount of 10% but redeemable at par after 5 years;
- (iii) 5,000, 12% debentures of Rs. 1000 each at a premium of 5% but redeemable at par after 5 years;
- (iv) 1,000, 12% debentures of Rs. 100 each issued to a supplier of machinery costing Rs. 95,000. The debentures are repayable after 5 years; and
- (v) 300, 12% debentures of Rs. 100 each as a collateral security to a bank which has advanced a loan of Rs. 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.
16A listed company issued debentures of the face value of Rs. 5,00,000 at a discount of 6% on April 01, 2014. These debentures are redeemable by annual drawings of Rs. 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.
Give journal entries for issue of debentures, writing-off discount and regarding redemption of debentures.
17B. Ltd. a listed company issued debentures at 94% for Rs. 4,00,000 on April 01, 2011 repayable by five equal drawings of Rs. 80,000 each. The company prepares its final accounts on March 31 every year. Give Journal entries for issues and redemption of debentures.
18B. Ltd. issued 1,000, 12% debentures of Rs. 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%.
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%.
19Jay Kay Ltd. an 'other listed company' issued 60,000 12% debentures of Rs. 100 each at par redeemable at the end of 5 years at a premium of 20%. On this date, there existed a balance of Rs. 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 on the record necessary journal entries for :
(i) Issue of debentures
(ii) Writing off loss on issue of debentures.
(iii) Interest and debentures for 2015-16 assuring if is paid annually & tax deducted at service is 10%.
(iv) Regarding redemption of debentures.
(i) Issue of debentures
(ii) Writing off loss on issue of debentures.
(iii) Interest and debentures for 2015-16 assuring if is paid annually & tax deducted at service is 10%.
(iv) Regarding redemption of debentures.
20Madhur Ltd., has outstanding 9% debentures of Rs. 50,00,000 redeemable at par on January 01, 2020. Debenture Redemption Reserve of Rs. 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).
21MK Ltd. has outstanding Rs. 30,000 11% debentures of Rs. 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.
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.
22X Ltd. had outstanding 20,000 12% debentures of Rs. 100 each redeemable on June 30, 2019. Record necessary journal entries at the time of redemption.
23XYZ Ltd. Issued 6,000, 12% Debentures of ₹ 50 each on April 1, 2014. Interest on these debenture is payable annually 3151 March each year. The debentures are redeemable in four equal installments at end of third, fourth, fifth and sixth year. You are required to pan 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) Debenture 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) Debenture are issued at a discount of 10% and redeemable at a premium of 10%.
(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) Debenture 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) Debenture are issued at a discount of 10% and redeemable at a premium of 10%.
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