Issue and Redemption of Debentures

Class 12 Accounts is a very crucial subject in the syllabus of commerce. Although it is one of the toughest subjects in commerce for many students, few are also of the opinion that it can be really scoring if prepared well. Students must always be thorough with their notes to score well. Issue and Redemption of Debentures is an important chapter in the Accountancy syllabus of class 12. Here in this blog, we shall discuss in brief this chapter. If you are preparing for your class 12 board exams, it would be of great help. Read on to know more about Issue and Redemption of Debentures class 12.

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What is a Debenture?

The chapter on the issue and redemption of debentures starts by talking about debentures. Section 2(30) of the Companies Act, 2013, defines debentures as, “Debenture includes debenture stock, bonds and any other instrument of the company evidencing a debt, whether constituting a charge on the assets of the company or not.”

In simple terms, one may define debentures as a document of the company’s indebtedness that contains a contract for the repayment of the principal sum at a specified date with interest at a fixed rate and is issued by the company.

What is a Rond Bond?

Next, in the chapter on the issue and redemption of debentures, we find out what is a Rond bond. It is an instrument of acknowledgement of debt. Although bonds are similar to debenture in terms of contents and texture, bonds can be issued without a predetermined rate of interest.

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Issue of Debentures

For Cash Debentures, like shares, issued for cash, debentures may be issued according to the chapter issue and redemption of debentures. 

• Issue of Debentures at Par: When the issue price and face value of the debentures are the same, debentures are said to be issued at par.
• Issue of Debentures at a Premium: When the issue price is more than the face value, debentures are said to be issued at a premium.
• Issue of Debentures at a Discount: When issued at a price below its nominal or face value, debentures are said to be issued at a discount.

Issue of Debentures for Consideration other than Cash

Issue of debentures against the purchase of assets or the purchase of a business is termed as an issue of debentures for consideration other than cash as per the chapter on issue and redemption of debentures. In this case, consideration for the issue of debentures is not cash but the assets or business. Debentures can be issued at par, premium or discount. Following journal entries will be passed in this case:

(i) On Purchase of Assets or Business
(a) When assets are purchased
Sundry Assets A/c Dr
To Vendor’s A/c Dr

(b) When business is purchased
Sundry Assets A/c Dr
To Sundry Liabilities A/c To
Vendor’s A/c *To Capital Reserve A/c

(ii) On Issue of Debentures
(a) When debentures are issued at par
Vendor’s A/c Dr
To X% Debentures A/c

(b) When debentures are issued at a premium
Vendor’s A/c Dr
To X% Debentures A/c To Securities Premium Reserve A/c

(c) When debentures are issued at a discount
Vendor’s A/c Dr
Discount on Issue of Debentures A/c Dr
To X% Debentures A/c

• The purchase consideration is the amount paid by the purchasing company for purchasing of assets/business from another enterprise.
• If the purchase consideration is greater than the value of the net assets acquired, the difference is debited to the goodwill account.
• If the amount of purchase consideration is lower than the value of net assets acquired, the difference is credited to the capital reserve account.
• Either of the two i.e. capital reserve or goodwill will come.

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Issue of Debentures as Collateral Security

According to the chapter on issue and redemption of debentures, when a company takes a loan, it may provide primary security on its assets. However, the lending institution may insist on some more assets as secondary or collateral security. In such a situation, the company may issue debentures to the lender as secondary or collateral security, such an issue of debentures is known as ‘debentures issued as collateral security’.

In case the company fails to repay the loan along with the interest and the primary security is not enough to repay the loan, the lender is free to use the debentures as collateral security. The lender may either present such debentures for redemption or sell them in the open market.

Debentures issued as collateral security can be dealt in two ways

• First Method: In this method for issue of debentures as collateral security, no journal entry is made.
• Second Method: In this method, debentures issued as collateral security may be recorded in the journal entry.

Given below is the journal entry that will be passed for issue of debentures as collateral security:

Debenture Suspense A/c Dr [This appears on assets side]
To X% Debentures A/c [This appears on liabilities side]
When the loan is cleared, the above entry is cancelled by passing a reverse entry.

Interest on Debentures

Moving forward in issue and redemption of debentures we find out the interest on debentures.It is calculated at a fixed rate on its face value and is usually payable half yearly. What must be noted here is that debenture interest is not an appropriation of profit but not a charge on profit. Hence, interest on debentures is to be paid even in cases where the company suffers a loss.

As per Income Tax Act 1961, “a company paying interest on debentures is required to deduct income tax at the prescribed rate from the gross amount of debenture interest before any payment is made to debenture holders, it is called Tax Deducted at Source (TDS).”

Given below is the entry for interest on debentures:

(i) When interest is due
Debentures Interest A/c Dr [With gross interest]
To Debenture holders’ A/c [With net interest]
To Income Tax Payable A/c [With income tax deducted]

(ii) When interest is paid
Debenture holders’ A/c Dr [With interest]
To Bank or Cash A/c

(iii) On payment of income tax to government Income Tax Payable A/c Dr
To Bank A/c

(iv) On transfer of interest on debentures to profit and loss account Statement of Profit and Loss Dr [With the amount of interest]
To Debenture Interest A/c

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So, this was all about Issue and Redemption of Debentures Class 12. We hope this blog helps you in preparing for your exams. If you are confused about which career stream to choose after the 12th, get in touch with our Leverage Edu experts. They will guide you every step of the way. Sign up for a free session today!