Page 1

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

4 Issue and Redemption of Debentures

Debentures

➢ Company can raise the capital either by issue of shares or by issue of debentures and they are
called as debenture holders.
➢ Debentures are known as liability of the company. They are shown under liability side of balance
sheet (Old balance sheet) under the head long term borrowing. Debentures are shown on equity
& liability side of balance sheet (New balance sheet) under the head long term borrowing under
non-current liability.
➢ As debentures are liability to the company so company has to pay interest on face value of
debenture to debenture holders. Debenture interest is charge against profit, so it is debited to
Profit & loss A/c.
➢ A debenture may be defined as a certificate issued by a company under its seal acknowledging a
debt due by to its holder.
 Page 2

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

CLASSIFICATION OF DEBENTURES:

A company may issue various kinds of debentures with different rights as given below:

Unsecured
From the Point Debentures
of View of First Debentures
Security Mortgage
Debentures
Second
Debentures
Redeemable
Debentures
From the Point
of View of
Redemption Irredemable
Debentures
CLASSIFICATION
OF DEBENTURES
Convertible
Debentures
From the Point
of View of
Convertibility Non-Convertible
Debentures

Registered
Debentures
From the Point
of View of
Transferability
Bearer
Debentures

From the Point of View of Security:

(i) Unsecured Debentures:

➢ These are debentures which do not carry any charge on the assets of the company.

(ii) Mortgage Debentures:

➢ Debentures which are secured by a mortgage or charge on the whole or a part of
the assets of the company are known as mortgage debentures.
➢ Mortgage debentures may, therefore, be further classified as follows:
a) First Debentures:
• These debentures have priority over other debentures as regards
payment out of the proceeds of the property mortgaged.
 Page 3

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

b) Second Debentures:
• These debentures are repaid after the claims of the first debentures
have been met.

From the Point of View of Redemption:

i) Redeemable Debentures:
➢ Redeemable debentures provides for the payment of the principal amount on
expiry of a certain period.

ii) Irredeemable Debentures:

➢ In the case of irredeemable or perpetual debentures, the company does not give any
undertaking of repaying the money borrowed by issuing debentures, after a fixed
time or within a fixed period during the continuance of business by the company.
Company may repay debentures at any time it may choose.

From the Point of View of Convertibility:

i) Convertible Debentures:
➢ These are debentures which are wholly or partly convertible into shares of the
company as per the terms of their issue.
ii) Non-Convertible Debentures:
➢ Debentures not convertible into shares of the company are termed as non-
convertible debentures.

From the Point of view of Transferability:

i) Registered Debentures:
➢ Registered documents are made out in the names of specific persons, who are
registered as a debenture holders in the books of the company.
ii) Bearer Debentures:
➢ The names of the holders of such debentures are not required to be registered in the
register of debenture holders.

REDEMPTION OF DEBENTURES:

➢ Therefore, for secured debentures, the date of Redemption of debenture shall not exceed 10 years
from the date of issue. A company engaged in the setting up of infrastructure projects may issue
secured debentures up to redemption period of thirty years.
 Page 4

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

Issue of Debentures:

Debentures can be issued at:

i) At par
ii) At discount
iii) At premium

Issue of Debenture for Cash:

 Page 5

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

Debentures Issued for Consideration other than Cash:

➢ Normally assets are purchased from vendors & consideration is paid in the form of cash. But when
consideration is paid by the issue of debentures to vendors, it is known as “issue of debentures for
consideration other than cash”.

In such a case, the accounting entries will be as follows:

Particulars Journal entry

For acquisition of assets Sundry Assets A/c ------Dr With the value of assets with
To Vendors the purchase price.
On allotment of debentures Vendors A/c ----------Dr With the value of debentures.
To debentures A/c

Accounting Treatment of Debentures as Collateral Security:

➢ A company may borrow money from a bank or other person and may give debentures of the
company as an additional security besides giving any other property of the company by way of
security.

There are two methods of treatment of such debentures:

Case I: No accounting entry:

In this method, such debentures are not recorded in the books of accounts. But they are to be
mentioned by way of a note to the balance sheet under the specific loan account.

Case II: When there is accounting entry:

If it is desired that such an issue of debentures as collateral security is to be recorded in the books of
account, the accounting entries will be as follows:

a) On issue of debentures as collateral security

Debentures suspense A/c---------Dr. (With the nominal value of the debentures issued)
 Page 6

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

To Debentures A/c

In this case, Debentures Suspense Account will appear on the asset side of the balance sheet under
the heading Miscellaneous Expenditure. Debentures Account will appear as a liability on the
liabilities side of the Balance Sheet.

b) On repayment of the loan and release of debentures

Debentures A/c------------Dr. (With the nominal value of the debentures released)

To Debentures Suspense A/c
 Page 7

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

Issue of Debentures with Terms of Redemption:

Issue Redemption Journal entry

At At

Par Par Bank-----Dr

To Debentures Account
Discount Par Bank-----Dr
Discount on Issue of Debenture A/c Dr
To Debentures Account
Premium Par Bank A/c -------Dr
To Debentures Account
To Securities Premium A/c
Par Premium Bank A/c -------Dr.
Loss on issue of Debentures A/c----Dr.
To Debentures Account
To Premium on Redemption of
Debentures A/c
Discount Premium Bank A/c ------Dr
Loss on issue of Debentures Account Dr.
To Debenture Account
To Premium on Redemption of
Debentures A/c
 Page 8

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

Redemption of debenture

a) Lumsum Redemption of debentures when profit is held in business itself:

Particulars Journal entry

Every year, on Profit & loss appropriation A/c Dr

transfer of out of To debenture redemption reserve
profit to DRR

On debentures Debentures A/c Dr

becoming due for Premium Redemption of Debentures
payment Account Dr
To Debenture holders A/c
On redemption Debenture holders A/c Dr
To Bank
On transfer of Debenture Redemption Reserve Dr.
Profit to General Profit and Loss Appropriation A/c Dr.
Reserve To General Reserve

Remember this :

✓ Debenture redemption reserve is created for redemption only when profit is

held in business itself.
✓ As per SEBI guidelines, Debenture redemption reserve should have at least
50% of the amount of debenture redeemed before the commencement of
redemption.
 Page 9

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

b) Redemption of debentures when profit is invested in readily marketable

securities:

Particulars Journal entry

In first year (at end):
On transfer of profits Profit and Loss Appropriation A/c Dr.
to Debenture To Debenture Redemption Fund A/c
Redemption Fund
Account –
On Investment of the Debenture Redemption Fund
amount of the profit Investments A/c ------ Dr
set aside in readily To Bank
marketable securities
Every year after first year :

On receipt of interest Bank Dr

on Debenture To Interest on Debenture Redemption
Fund Investment A/c
On Transfer of the Interest on Debenture Redemption Fund
interest to Debenture Investments A/c -----Dr
Redemption Fund To Debenture Redemption Fund A/c
On Transfer of Profits Profit and Loss Appropriation A/c Dr.
to Debenture To Debenture Redemption Fund A/c
Redemption Fund
Account
On investment of Debenture Redemption Fund
annual profit and Investments A/c -----Dr
interest received on To Bank
investment –
 Page 10

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

In the last year when the debentures become due for redemption (at the end)

On receipt of interest on Bank ………………… Dr

Debenture Redemption To Interest on Debenture Redemption
Fund Investment Fund Investments A/c

On transfer of the interest Interest on Debenture Redemption Fund

Investments A/c Dr.
To Debenture Redemption Fund A/c
On transfer of profits to Profits and Loss Appropriation A/c Dr.
Debenture Redemption To Debenture Redemption Fund A/c
Fund A/c –
On realization of Bank Dr
Investments made so as to To Debenture Redemption Fund
provide cash for the Investments A/c
redemption
On transfer of profit on saleDebenture Redemption Fund
of investment to Debenture Investments A/c Dr.
Redemption Fund Account – To Debenture Redemption Fund
Account.
On transfer of Debentures to Debenture A/c Dr
Debentureholders Account To Debentureholders A/c
for payment to be made –
If debentures Premium on Redemption of
are redeemable at premium Debentures A/c Dr
To Debentureholders A/c

On Payment – Debentureholders a/c Dr

To Bank

On transfer of Loss of Debenture Redemption Fund A/c Dr.

issue of Debentures
To Loss of Issue of Debentures A/c
Account to Debenture
Redemption Fund
Account

On transfer of Debenture Redemption Fund A/c Dr.

Debenture Redemption
To General Reserve A/c
Fund Account balance
to General Reserve
 Page 11

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1
 Page 12

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

Redemption of debentures by fresh issue of shaeres:

If no provision is made out of profit for redemption then debentures can be redeemed by fresh
issue of shares:
Particulars Journal entry
On issue of fresh shares Bank Dr With the amount raised by
To Share Capital A/c fresh issue.
To Debentures A/c
On Redemption, wen Debentures A/c Dr With the nominal value of the
money becomes due To Debentureholders A/c debentures
On payment of money Debentureholders A/c Dr With the amount paid.
To Bank

Remember it:

✓ Determination of number of shares to be issued for redemption of

debentures:
i) If shares are issued at face value :

Number of shares = (amount to be redeemed) / (face value per share)

ii) If shares are issued at discount :

Numbers of shares = (amount to be redeemed) / (face value –

discount)

iii) If shares are issued at premium :

Number of shares issued = (amount to be redeemed at face value) /
(face value per share)

Redemption of Debentures by sale of assets:

If no provision is made out of profit for redemption then debentures can be redeemed by sale of
assets.
Particulars Journal entry

On sale of assets Bank Dr. With the amount

To Asset a/c realized by sale
 Page 13

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

On Redemption, wen Debentures A/c Dr With the nominal value

money becomes due To Debenture holder’s A/c of the debentures

On payment of money Debenture holders A/c Dr With the amount paid.

To Bank

Concept of Ex-Interest & Cum-Interest

Cum interest value = market value + interest ex-interest value = market value

Profit/ loss on redemption = market value – face value of debenture

In case of cum-interest: market value = cum interest value – interest

In case of ex-interest: market value = ex-interest value

In both cases: amount to be paid by company = market value + interest

 Page 14

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

Purchase of own debentures for cancellation purpose:

It can be dealt in two ways:
a. When there is no sinking fund
b. When there is sinking fund
a) Purchase of own debenture for cancellation (when there is no sinking fund) :

Particulars Journal entry

On purchase and Debentures A/c Dr
cancellation of To Bank
debentures To Profit on Redemption of Debentures A/c
Or
Debentures A/c Dr
Loss on Redemption of Debentures A/c Dr.
To Bank A/c

On transfer of profit Profit on Redemption of Debentures A/c Dr.

To Capital Reserve A/c
On transfer of loss Profit and Loss A/c Dr Or.
Capital Reserve A/c Dr. Or
Securities Premium A/c Dr.
To Loss on Redemption of Debenture A/c
 Page 15

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

b) Purchase of own debenture for cancellation (if there is sinking fund ) :

Particulars Journal entry

On sale of sinking fund Bank a/c Dr
investment To debenture redemption
fund investment a/c
If there is profit on sale ( Debenture redemption Fund investment
on transfer of profit) a/c Dr
To debenture redemption Fund (
sinking fund) a/c
On purchase and Debentures A/c Dr
cancellation of To Bank
debentures To Profit on Redemption
of Debentures A/c

Or

Debentures A/c Dr
Loss on Redemption of
Debentures A/c Dr.
To Bank A/c
On transfer of profit Profit on Redemption of
Debentures A/c Dr.
To debenture redemption
Fund ( sinking fund)
A/c
On transfer of loss Debenture redemption fund
(sinking fund ) a/c Dr
To Loss on Redemption
of Debenture A/c
On transfer of nominal Debenture redemption fund
value (sinking fund) a/c Dr
To general reserve
 Page 16

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

Remember this :

Particulars When there is no sinking When there is sinking

fund fund

Transfer of profit Transferred to capital Transferred to sinking

reserve fund

Transfer of loss Written off against p & l a/c Written off against
or capital reserve or sinking fund
security premium

Sale of sinking fund No Yes

investment

Transfer of nominal No yes

value to general
Purchase of own debenture as investment :
reserve

a) Purchase of own debenture as investment ( when there is no sinking fund ) :

Particulars Journal entry Remarks

On purchase of own Own debenture a/c Dr

debentures To bank a/c
On interest becoming Debenture Interest A/c Dr
due on debentures To Debentureholders A/c
To Interest Own
Debentures A/c
On payment of interest Debentureholders A/c Dr
on debentures To Bank

On transfer of Profit and Loss A/cDr

Debenture interest to To Debenture Interest A/c
Profit and Loss A/c
On transfer of interest Interest on Own
on Own Debentures to Debentures a/c Dr
Profit and Loss A/c. To Profit and Loss A/c
On cancellation of own Debentures A/c Dr
 Page 17

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

debentures To own debenture a/c

To Profit on Redemption
of Debentures A/c
On transfer of profit Profit on Redemption of
Debentures A/c Dr.
To Capital Reserve A/c

b) Purchase of own debenture as investment ( when there is sinking fund ) :

Particulars Journal entry Remarks

On sale of sinking fund Bank a/c Dr With the amount realized on
investment To debenture redemption sale
fund investment a/c
If there is profit on sale Debenture redemption With the amount of profit
(on transfer of profit) Fund investment a/c Dr
To debenture redemption
Fund ( sinking fund) a/c
On purchase of own Own debenture a/c Dr with the price paid
debentures To bank a/c
On interest becoming Debenture Interest A/c Dr With the total amount of
due on debentures To Debentureholders A/c interest on all the
To Interest Own debentures
Debentures A/c With the amount of interest
payable on debentures held by
outsiders.
With the amount of interest
on debentures held by the
company.
On payment of interest Debentureholders A/c Dr With the amount of interest
on debentures To Bank paid to outsiders

On transfer of Profit and Loss A/cDr With the total amount of

Debenture interest to To Debenture Interest A/c interest on all the
Profit and Loss A/c debentures.
On transfer of interest Interest on Own With the amount of interest
on Own Debentures to Debentures a/c Dr on debentures held by the
Profit and Loss A/c. To Profit and Loss A/c company.
 Page 18

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

On cancellation of own Debentures A/c Dr With the nominal value of

debentures To own debenture a/c debentures cancelled
To Profit on Redemption with value of own debenture
of Debentures A/c with the profit, if any.
On transfer of profit Profit on Redemption of With the profit on redemption
Debentures A/c Dr.
To sinking fund A/c

Conversion of debentures into shares:

At the time of conversion, new shares can be issued at par or at a premium or at a discount. The
accounting entry for all these cases will be as follows :
Particulars Journal entry Remarks
If shares are issued at par Debentures A/c Dr With the nominal value of
To Share Capital Account the debentures converted
With the nominal amount
of shares issued.
If shares are issued at a Debentures A/c Dr With the nominal value of
premium To Share Capital Account the debentures converted
To Securities Premium With the nominal amount
Account of shares issued.
With the difference.
If shares are issued at a Debentures A/c. Dr With the nominal value of
discount Discount on Issue of the debentures converted
Shares A/c Dr. With the discount on issue
To Share Capital of shares with the total.
Account
 Page 19

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

QUESTION 1 :

Aman Ltd., made the following issues of debentures :

i) 6,000, 9% Debentures of Rs. 100 each for cash at 10% discount.

ii) To bank for a loan of Rs. 7,00,000 as collateral security, 10,000 debentures of Rs. 100
each.
iii) Aman Ltd. also purchased building and machinery worth Rs. 5,40,000 and Rs. 4,60,000
respectively from Baman Ltd. The purchase consideration was settled at Rs. 9,50,000 to
be satisfied by issue of 9,500, 15% debentures of Rs. 100 each. Journalise the above
transactions in the books of Aman Ltd.

Solution :

Particulars Entry Dr Cr
 Page 20

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

QUESTION 2:

ABC Company Ltd., proposes to issue 10,000, 14% debentures of Rs. 100 each to its shareholders on right
basis. They give you the following terms of issue and ask you to pass the journal entries in every case
separately.

i) The debentures were issued at premium of 10% and redeemable at par.

ii) The debentures were issued at discount of 5% and redeemable at premium of 10%.
iii) The debentures were issued at par but redeemable at premium of 10%.
iv) The debentures were issued at premium of 5% but repayable at premium of 10%.
v) The debentures were issued at discount of 5% but redeemable at par.

Solution :

Particulars Entry Dr Cr
 Page 21

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1
 Page 22

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

QUESTION 3:

S.S. Ltd., had Rs. 1,50,000, 12% debentures outstanding on 1st April, 2008. The Debenture Redemption
Fund Account of the Company stood at Rs. 78,000 on the same date represented by investment in
securities of Rs. 100 each. The directors of the company decided to sell Rs. 50,000 worth of securities at
Rs. 102 and to redeem Rs. 50,000 debentures at a premium of 5%.

You are required to show the journal entries in the books of the company relating to the sale of
securities and the redemption of debentures.\
Solution :

Particulars Entry Dr Cr
 Page 23

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

QUESTION 4:

On 31st December, 2002, Brightlight Industries Ltd. showed in their accounts debenture redemption fund
of Rs. 1,50,000 which was represented by Rs. 1,51,000, 5% municipal bonds purchased for Rs. 1,50,000.

On 28th February, 2003, the company had a balance of Rs. 28,000 at their bank and they paid into
the bank account, the proceeds of sale of foregoing investments for Rs. 1,50,500, On 1 st March,
2003, the debentures of the value of Rs. 1,50,000 were paid.

You are required to prepare debenture redemption fund account and debenture redemption find
investments account in the books of the company. Calculations are to be made to the

Solution :

Particulars Entry Dr Cr
 Page 24

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

Ledgers
 Page 25

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

QUESTION 5 :

Favourite Ltd. had 2,000, 12% Debentures of Rs. 100 each as on 1st April, 2007. As per the terms of issue,
the company purchased the following debentures in the open market for immediate cancellation :

1st May - 400 Debentures at Rs. 98 cum-interest

1st January - 800 Debentures at Rs. 100.25 cum-interest

1st March - 200 Debentures at Rs. 98.50 ex-interest.

Assuming that debenture interest was payable half-yearly on 30th September and 31st
March and the Income-tax was deductible at the rate of 10% at source. Show the journal entries
in the books of the company and prepare the necessary ledger accounts. The company closes its
books on 31st March.

Solution :

Particulars Entry Dr Cr
 Page 26

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1
 Page 27

INSPIRE Academy ( 888888 1719) Chapter 4 :Issue and Redemption of Debentures 4.1

QUESTION 6 :

On 1st April, 2007, Green Ltd. issued 2500 12% Debentures of Rs. 100 each at Rs. 95. Holders of these
debentures have an option to convert their holdings into 14% Preference Shares of Rs. 100 each at a
Premium of Rs. 25 per share at any time within three years.

On 31st March, 2008, holders of 500 Debentures notified their intention to exercise the option.
Show the journal entries relating to the issue and conversion of debentures in the books of the
company. Also show how the items affected would appear in the company’s balance sheet.
Solution :