Questions
6–8 questions in board exams
Difficulty
Medium-Hard
Importance
Key for Class 12 boards
Overview
Debentures represent a formal debt obligation for a company to repay a specific sum at a future date with fixed interest. This topic is crucial for Class 12 Accountancy as it tests your ability to handle journal entries for complex financial instruments, including issues at varying prices and redemption conditions. Mastering the link between the terms of issue and the terms of redemption is essential for solving high-weightage numerical problems.
Issue of Debentures
Debentures can be issued for cash or for consideration other than cash at par, premium, or discount. The primary challenge involves recording the discount on issue as a capital loss and adjusting for premium on redemption at the time of initial issuance.
- Issue at Par: Bank Dr. to Debentures Application & Allotment
- Issue at Discount: Loss on Issue is debited to the statement of P&L
- Issue at Premium: Premium on issue is credited to Securities Premium Account
- Terms of Redemption: If redeemable at premium, include 'Loss on Issue of Debentures' at inception
- Collateral Security: Debentures issued as security involve no journal entry unless default occurs
Interest on Debentures
Interest on debentures is a charge against profits and must be paid regardless of the company's financial status. It is calculated on the face value of the debentures irrespective of the issue price.
- Interest is calculated at a fixed percentage on the nominal value
- TDS (Tax Deducted at Source) must be deducted before paying net interest
- Interest is usually paid half-yearly or annually
- Entry: Debenture Interest Dr. to Debentureholders to TDS Payable
Redemption of Debentures
Redemption is the repayment of the principal amount to debentureholders. This can occur through lump sum payment, drawing lots, or open market purchase, and must adhere to SEBI guidelines and Companies Act requirements.
- DRR (Debenture Redemption Reserve): 10% of the value of debentures issued
- Investment: Invest 15% of the amount of debentures maturing during the year
- Redemption out of Profits: Requires transfer to DRR
- Redemption out of Capital: No DRR required for NBFCs and HFCs
- Own Debentures: Cancellation of debentures results in Capital Reserve gain
Formula Sheet
Interest Expense = Face Value × Coupon Rate
DRR Requirement = 10% of Face Value of Outstanding Debentures
Debenture Redemption Investment = 15% of Debentures maturing in the year
Gain/Loss on Redemption = Face Value - Purchase Price of Own Debentures
Exam Tip
Always balance the Loss on Issue of Debentures account by checking if it includes both the discount on issue and the premium payable on redemption.
Common Mistakes
- Failing to account for the 'Loss on Issue of Debentures' when the terms of redemption specify a premium.
- Calculating interest on the issue price instead of the face/nominal value of the debenture.
- Forgetting to invest the mandatory 15% in specified securities before the start of the redemption year.
More Revision Notes
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