NCERT Solutions for Class 12 Accountancy Chapter 6: Issue and Redemption of Debentures (NCERT 2026–27)

These Class 12 Accountancy Chapter 6 solutions cover Issue and Redemption of Debentures from Accountancy: Company Accounts and Analysis of Financial Statements for the 2026–27 session. The chapter explains what a debenture is, how it differs from a share, the types of debentures, and the complete accounting for issue of debentures (at par, premium and discount; for consideration other than cash; and as collateral security), the six terms of issue with reference to redemption, interest on debentures, and the methods of redemption (lump sum, instalments, purchase in the open market and conversion). Below you will find every end-of-chapter Question for Practice reproduced verbatim and solved in full — all 17 short-answer, 9 long-answer and 23 numerical questions — with step-by-step journal entries, working notes and verified figures, plus extra practice, MCQs, Assertion–Reason and FAQs.

Class: 12 Subject: Accountancy Book: Company Accounts & Analysis of Financial Statements Chapter: 6 Topic: Issue and Redemption of Debentures Session: 2026–27
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Class 12 Accountancy Chapter 6 – Overview

A debenture is a written instrument acknowledging a debt under the common seal of the company; it carries a fixed rate of interest and represents borrowed (loan) capital, unlike a share which represents ownership. Debentures may be secured/unsecured, redeemable/perpetual, convertible/non-convertible, registered/bearer, and specific-coupon or zero-coupon. They can be issued at par, at a premium or at a discount, for cash, for consideration other than cash (against assets or a business taken over), or as a collateral security for a loan. When debentures are redeemable at a premium, the premium payable is treated as a capital loss and debited to Loss on Issue of Debentures; any discount/loss is written off first against Securities Premium Reserve and then against the Statement of Profit and Loss. Redemption (discharge of the liability) may be done in a lump sum, in instalments by draw of lots, by purchase in the open market for cancellation, or by conversion into shares or new debentures — with Debenture Redemption Reserve (DRR) and Debenture Redemption Investment (DRI) created as required by the Companies Act, 2013.

Key Terms, Concepts & Accounting Formats

Debenture: a written acknowledgement of debt under the common seal of the company, carrying a fixed rate of interest and repayable after a specified period — a part of borrowed capital.

Share vs Debenture: a share is owned capital (return = dividend, an appropriation of profit; voting rights; not normally repaid), a debenture is borrowed capital (return = interest, a charge on profit payable even in loss; no voting rights; repaid on maturity; usually secured).

Issue at par / premium / discount: issue price equal to, more than, or less than face value. Premium is credited to Securities Premium Reserve; discount is debited to Discount on Issue of Debentures A/c.

Loss on Issue of Debentures: when debentures are redeemable at a premium, the premium payable on redemption (plus any discount on issue) is debited to Loss on Issue of Debentures A/c, and Premium on Redemption of Debentures A/c (a liability) is credited.

Consideration other than cash: debentures issued to a vendor for assets/business taken over. If purchase consideration > net assets, the excess is Goodwill; if < net assets, the excess is Capital Reserve.

Collateral security: debentures issued as additional security for a loan — either shown only as a note (First Method, no entry) or recorded via Debenture Suspense A/c (Second Method).

DRR & DRI: “other unlisted” companies create a Debenture Redemption Reserve of 10% of outstanding debentures out of profits, and invest at least 15% of debentures maturing in the next year in Debenture Redemption Investment. Listed companies, banks and certain financial institutions are exempt from DRR.

No. of debentures issued for consideration other than cash = Purchase Consideration ÷ Issue Price per Debenture.

Writing off discount/loss = Securities Premium Reserve (to the extent of its balance) Dr. + Statement of Profit and Loss (balance) Dr. → To Discount/Loss on Issue of Debentures A/c.

Interest on debentures = Face value × rate × time; TDS deducted at source; Debenture Interest A/c is transferred to the Statement of Profit and Loss (it is a charge against profit).

DRI (where required) ≥ 15% of the face value of debentures maturing during the year ending 31 March of the next year, invested on or before 30 April.

Short Answer Questions — Full Solutions

All questions below are reproduced verbatim from the NCERT textbook’s Questions for Practice. Answers are original and exam-ready.

1. What is meant by a Debenture?

ANSWERA debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of the principal after a specified period (or in instalments, or at the company’s option) and for payment of interest at a fixed rate, usually half-yearly or yearly. It is part of the company’s borrowed (loan) capital. Under section 2(30) of the Companies Act, 2013, ‘debenture’ includes debenture inventory, bonds and any other securities of a company, whether or not they create a charge on its assets.

2. What does a Bearer Debenture mean?

ANSWERBearer debentures are debentures that can be transferred merely by delivery; the company does not maintain any record of the holders. Interest on such debentures is paid to the person who produces the interest coupon attached to the debenture. They are the opposite of registered debentures, which can be transferred only through a regular transfer deed.

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

ANSWERCollateral security is additional or secondary security given by a company over and above the primary security when it takes a loan or overdraft from a bank or financial institution. When a company issues its own debentures to the lender as such additional security, it is called ‘debentures issued as collateral security’. If the loan is repaid normally, these debentures are returned and cancelled; if the company defaults and the primary security is insufficient, the lender can present these debentures for redemption or sell them.

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

ANSWERWhen a company purchases assets or takes over a business and, instead of paying in cash, allots debentures to the vendor towards the purchase consideration, it is called issue of debentures for consideration other than cash. Such debentures may be issued at par, at a premium or at a discount, and the entries are similar to those for shares issued for consideration other than cash.

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

ANSWERIt means the company receives less than the face value when issuing the debenture (discount on issue) but agrees to repay more than the face value on maturity (premium on redemption). Both are capital losses: at the time of issue, Loss on Issue of Debentures A/c is debited with the total of discount on issue plus premium on redemption, Debentures A/c is credited with the face value, and Premium on Redemption of Debentures A/c is credited with the premium payable on redemption.

6. What is ‘Capital Reserve’?

ANSWERCapital reserve is a reserve created out of capital profits — profits not earned in the normal course of business and not freely available for distribution as dividend. In this chapter it arises, for example, when the net assets taken over from a vendor exceed the purchase consideration, or when own debentures are purchased from the open market and cancelled at a price below their face value (profit on cancellation/redemption is transferred to Capital Reserve).

7. What is meant by a ‘Irredeemable Debenture’?

ANSWERIrredeemable debentures, also called perpetual debentures, are debentures for which the company gives no undertaking to repay the borrowed money within a specified period. They are repayable only on the winding-up of the company or on the expiry of a very long period.

8. What is a ‘Convertible Debenture’?

ANSWERA convertible debenture is one that can be converted into equity shares or another security, either at the option of the company or of the debentureholders, as per the terms of issue. Such debentures may be fully convertible or partly convertible.

9. What is meant by ‘Mortgaged Debentures’?

ANSWERMortgaged (secured) debentures are debentures on which a charge — fixed or floating — is created on the assets of the company for the payment of the debt in case of default. A fixed charge is on a specific asset; a floating charge is on the general assets of the company.

10. What is discount on issue of debentures?

ANSWERWhen a debenture is issued at a price below its nominal (face) value, the difference is the discount on issue of debentures — for example, issuing a Rs. 100 debenture at Rs. 95 gives a discount of Rs. 5. It is a capital loss, debited to Discount on Issue of Debentures A/c, and is written off against Securities Premium Reserve (if available) and the Statement of Profit and Loss.

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

ANSWERPremium on redemption of debentures is the excess amount, over and above the face value, that a company agrees to pay to debentureholders at the time of redemption. It is a liability of the company payable in future and is shown under Non-current Liabilities (sub-head ‘Long-term Borrowings’) until the debentures are redeemed. At issue it is credited to Premium on Redemption of Debentures A/c.

12. How debentures are different from shares? Give two points.

ANSWER(i) Ownership vs debt: a share represents ownership and is part of owned capital, whereas a debenture is only an acknowledgement of debt and is part of borrowed capital. (ii) Return: a share earns a dividend (an appropriation of profit, variable and paid only out of profits), whereas a debenture earns interest at a prefixed rate (a charge against profit, payable even if there is no profit).

13. What is meant by redemption of debentures?

ANSWERRedemption of debentures means extinguishing or discharging the liability on account of debentures in accordance with the terms of issue — that is, repaying the amount of debentures to the debentureholders. It may be done by payment in lump sum, by payment in instalments, by purchase in the open market, or by conversion into shares or new debentures.

14. Can the company purchase its own debentures?

ANSWERYes. A company can purchase its own debentures from the open market for the purpose of immediate cancellation; this is one method of redemption. The advantage is that the company can redeem at its convenience when it has surplus funds, and can buy when debentures are available at a discount. Any profit on such cancellation is transferred to Capital Reserve.

15. What is meant by redemption of debentures by conversion?

ANSWERRedemption by conversion means discharging the debenture liability by converting the debentures into shares or new debentures, instead of repaying cash. This applies only to convertible debentures, and the debentureholders accept the offer if it is beneficial to them. Only the actual proceeds of the debentures are used to determine the number of shares/new debentures to be issued, which may be issued at par, at a discount or at a premium.

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

ANSWERWhen debentures are issued but are redeemable at a premium, the premium payable on redemption is provided for at the time of issue: Loss on Issue of Debentures A/c is debited and Premium on Redemption of Debentures A/c is credited. This premium account is a liability shown under Non-current Liabilities until redemption. At the time of redemption, Premium on Redemption of Debentures A/c is debited along with Debentures A/c, and the total is credited to Debentureholders A/c.

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

ANSWERWhen a company buys its own debentures from the open market for the purpose of immediate cancellation, this act of purchasing and cancelling constitutes redemption by purchase in the open market. If purchased below face value, the difference is profit on redemption (transferred to Capital Reserve); if purchased above face value, the excess is loss on redemption (written off through the Statement of Profit and Loss).

Long Answer Questions — Full Solutions

1. Explain the different types of debentures?

ANSWER Debentures can be classified in five ways: (i) By security: Secured (mortgaged) debentures carry a fixed or floating charge on the company’s assets; unsecured (naked) debentures have no specific charge. (ii) By tenure: Redeemable debentures are repaid on the expiry of a specified period (in lump sum or instalments); irredeemable (perpetual) debentures are repaid only on winding-up or after a very long period. (iii) By convertibility: Convertible debentures (fully or partly) can be converted into shares or other securities; non-convertible debentures cannot. (iv) By coupon rate: Specific coupon rate debentures carry a fixed or floating rate of interest; zero coupon (deep discount) debentures carry no stated rate and are issued at a large discount, the difference being treated as interest. (v) By registration: Registered debentures are recorded in the company’s register and transferred by deed; bearer debentures are transferable by mere delivery.

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

ANSWER The main points of distinction are: Ownership: a share is part of owned capital and represents ownership; a debenture is part of borrowed capital and is only an acknowledgement of debt. Return: shares earn a dividend (variable, an appropriation of profit, paid only if profits exist); debentures earn interest at a fixed rate (a charge on profit, paid even in loss). Repayment: share capital is normally not returned during the life of the company; debentures are repaid on the expiry of the specified period. Voting rights: shareholders have voting rights; debentureholders normally do not. Security: shares are not secured by any charge; debentures are generally secured by a fixed or floating charge. Why loan capital: a debenture is simply borrowed money that the company must repay after a fixed period along with fixed interest; the debentureholder is a creditor, not an owner. Because it is a loan to the company carrying an obligation to repay, it is called loan capital (long-term debt).

3. 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: when a company takes a loan and, in addition to the primary security, issues its own debentures to the lender as extra (collateral) security, it is called debentures issued as collateral security. The lender can use them only if the company defaults and the primary security falls short. First Method (no entry): since no liability is created at issue, no journal entry is passed. A note is appended below the loan on the liabilities side stating that it is secured by the issue of debentures as collateral security. Second Method (entry passed): Debenture Suspense A/c Dr. → To Debentures A/c (with the nominal value of debentures issued). In the Notes to Accounts under long-term borrowings, the debentures are shown and Debenture Suspense is deducted from them, so the net effect is nil. When the loan is repaid, a reverse entry cancels the debentures.

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

ANSWER Depending on the issue price and the redemption value, six combinations arise: (i) Issued at par, redeemable at par — Bank Dr.; Debenture Application & Allotment Dr.; To Debentures A/c. (ii) Issued at discount, redeemable at par — Discount on Issue of Debentures A/c is debited along with the application/allotment account. (iii) Issued at premium, redeemable at par — Securities Premium Reserve A/c is credited. (iv) Issued at par, redeemable at premium — Loss on Issue of Debentures A/c Dr. (with premium on redemption); To Debentures A/c and To Premium on Redemption of Debentures A/c. (v) Issued at discount, redeemable at premium — Loss on Issue of Debentures A/c Dr. (with discount on issue + premium on redemption); To Debentures A/c and To Premium on Redemption of Debentures A/c. (vi) Issued at premium, redeemable at premium — Loss on Issue A/c Dr. (premium on redemption); To Debentures, To Securities Premium Reserve (issue premium) and To Premium on Redemption of Debentures A/c.

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

ANSWER Redemption out of capital: the company repays debentures out of its capital/cash without setting aside an equivalent amount of profits as a reserve (no Debenture Redemption Reserve is created out of divisible profits). This reduces the funds otherwise available to creditors. Listed companies, banks and certain financial institutions are exempt from creating DRR and may redeem out of capital. Redemption out of profits: the company transfers an adequate amount of divisible profits to a Debenture Redemption Reserve before redemption, so that an equivalent sum is retained in the business and not distributed as dividend. For ‘other unlisted companies’, DRR must be at least 10% of the value of outstanding debentures. After redemption, the DRR is transferred to General Reserve. This protects the interests of creditors and debentureholders.

6. Explain the guidelines of SEBI for creating Debenture Redemption Reserve.

ANSWER As per the rules under the Companies Act, 2013, all-India financial institutions registered with the RBI, banking companies, NBFCs registered with the RBI, housing finance companies registered with the National Housing Bank, listed companies and unlisted companies that are otherwise exempted need not create a Debenture Redemption Reserve and may redeem debentures out of capital. For “other unlisted companies”, the adequacy of the Debenture Redemption Reserve must be 10% of the value of the outstanding debentures, created out of profits available for dividend. In addition, companies are required to invest or deposit, on or before 30 April, a sum of at least 15% of the amount of debentures maturing during the year ending 31 March of the next year — in scheduled bank deposits, Central/State Government securities or other specified securities (Debenture Redemption Investment). This amount may be used only for redeeming the debentures maturing during that year.

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

ANSWER A sinking fund (debenture redemption fund) is created so that enough cash is available to redeem debentures on maturity. The steps are: 1. Decide the total amount required for redemption and the number of years available, and use sinking-fund tables to find the fixed annual amount to be set aside. 2. Each year, transfer the fixed amount from profits to the Debenture Redemption (Sinking) Fund: Surplus/Statement of Profit and Loss Dr. → To Debenture Redemption Fund. 3. Invest an equal amount outside the business in specified securities: Debenture Redemption Fund Investment A/c Dr. → To Bank A/c. 4. Reinvest the interest earned on these investments along with the next annual appropriation, so the fund grows year by year. 5. In the last year, sell the investments and use the proceeds (plus the final appropriation) to redeem the debentures; finally transfer the Sinking Fund balance to General Reserve.

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

ANSWER Yes, a company can purchase its own debentures in the open market for the purpose of immediate cancellation, which is one of the recognised methods of redemption. The advantages are: (i) the company can redeem debentures at its convenience whenever it has surplus funds; and (ii) it can buy them when they are quoting at a discount, thereby saving money. If debentures are bought below face value, the gain is credited to Profit on Redemption of Debentures A/c and then transferred to Capital Reserve. If bought above face value, the excess is debited to Loss on Redemption of Debentures A/c and written off through the Statement of Profit and Loss.

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

ANSWER Meaning: conversion of debentures means redeeming debentures by converting them into shares or a new class of debentures instead of paying cash. It applies only to convertible debentures and takes place if the debentureholders accept the offer as beneficial. Method: only the actual proceeds received on the debentures are used to find the number of new shares/debentures (if originally issued at a discount, the amount actually realised is taken as the base). The new shares/debentures may be issued at par, at a premium or at a discount. Entries: Debentures A/c Dr. (and Premium on Redemption Dr., if any) → To Debentureholders A/c; then Debentureholders A/c Dr. → To Share Capital / New Debentures A/c (and To Securities Premium Reserve A/c, if issued at a premium).

Numerical Questions — Full Solutions

Each numerical is reproduced verbatim and solved with journal entries (in cs-tbl) and working notes. Amounts are in Rs.

1. G. 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.

SOLUTION Total face value = 75,00,000 × Rs. 50 = Rs. 37,50,00,000. Application Rs. 15 × 75,00,000 = Rs. 11,25,00,000; Allotment Rs. 35 × 75,00,000 = Rs. 26,25,00,000.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
Bank A/c  Dr.
To 6% Debenture Application A/c
(Application money received on 75,00,000 debentures)		11,25,00,00011,25,00,000
6% Debenture Application A/c  Dr.
To 6% Debentures A/c
(Application money transferred to Debentures A/c)		11,25,00,00011,25,00,000
6% Debenture Allotment A/c  Dr.
To 6% Debentures A/c
(Allotment money due @ Rs. 35 per debenture)		26,25,00,00026,25,00,000
Bank A/c  Dr.
To 6% Debenture Allotment A/c
(Allotment money received)		26,25,00,00026,25,00,000

2. Y. 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.

SOLUTIONTotal = 2,000 × Rs. 100 = Rs. 2,00,000. Application Rs. 50,000; Allotment Rs. 1,00,000; First & Final Call Rs. 50,000.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
Bank A/c  Dr.
To 6% Debenture Application A/c		50,00050,000
6% Debenture Application A/c  Dr.
To 6% Debentures A/c		50,00050,000
6% Debenture Allotment A/c  Dr.
To 6% Debentures A/c		1,00,0001,00,000
Bank A/c  Dr.
To 6% Debenture Allotment A/c		1,00,0001,00,000
6% Debenture First & Final Call A/c  Dr.
To 6% Debentures A/c		50,00050,000
Bank A/c  Dr.
To 6% Debenture First & Final Call A/c		50,00050,000

3. A. 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.

SOLUTIONFace value = Rs. 10,00,000; Premium 5% = Rs. 50,000 (Rs. 5 per debenture, on allotment). Application Rs. 10 = Rs. 1,00,000; Allotment Rs. 20 + Rs. 5 premium = Rs. 2,50,000; First & Final Call balance Rs. 70 = Rs. 7,00,000.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
Bank A/c  Dr.
To 10% Debenture Application A/c		1,00,0001,00,000
10% Debenture Application A/c  Dr.
To 10% Debentures A/c		1,00,0001,00,000
10% Debenture Allotment A/c  Dr.
To 10% Debentures A/c
To Securities Premium Reserve A/c
(Allotment incl. premium of Rs. 50,000)		2,50,0002,00,000
50,000
Bank A/c  Dr.
To 10% Debenture Allotment A/c		2,50,0002,50,000
10% Debenture First & Final Call A/c  Dr.
To 10% Debentures A/c		7,00,0007,00,000
Bank A/c  Dr.
To 10% Debenture First & Final Call A/c		7,00,0007,00,000
BALANCE SHEET (Extract)Equity & Liabilities: Shareholders’ Funds — Securities Premium Reserve Rs. 50,000; Non-current Liabilities — Long-term Borrowings (10,000, 10% Debentures of Rs. 100 each) Rs. 10,00,000. Assets: Cash and cash equivalents Rs. 10,50,000.

4. A. 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.

SOLUTIONFace value = 90,00,000 × Rs. 50 = Rs. 45,00,00,000. Discount 8% = Rs. 3,60,00,000. Amount received = Rs. 41,40,00,000.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
Bank A/c  Dr.
To Debenture Application & Allotment A/c		41,40,00,00041,40,00,000
Debenture Application & Allotment A/c  Dr.
Discount on Issue of Debentures A/c  Dr.
To 9% Debentures A/c
(Issue at 8% discount)		41,40,00,000
3,60,00,000		45,00,00,000

5. A. 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.

SOLUTIONApplication received on 4,800 × Rs. 20 = Rs. 96,000. Allotted 4,000 debentures (3,600 in full + 400). Excess on 800-applicants (allotted 400): excess 400 × Rs. 20 = Rs. 8,000 adjusted on allotment. Rejected 400 × Rs. 20 = Rs. 8,000 refunded. Allotment due 4,000 × Rs. 20 = Rs. 80,000; less adjusted Rs. 8,000 = Rs. 72,000 received.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
Bank A/c  Dr.
To 9% Debenture Application A/c
(Application on 4,800 debentures)		96,00096,000
9% Debenture Application A/c  Dr.
To 9% Debentures A/c
To 9% Debenture Allotment A/c
To Bank A/c
(App. transferred; excess to allotment; rejected refunded)		96,00080,000
8,000
8,000
9% Debenture Allotment A/c  Dr.
To 9% Debentures A/c		80,00080,000
Bank A/c  Dr.
To 9% Debenture Allotment A/c
(Allotment Rs. 80,000 less Rs. 8,000 adjusted)		72,00072,000
9% Debenture First Call A/c  Dr.
To 9% Debentures A/c		1,20,0001,20,000
Bank A/c  Dr.
To 9% Debenture First Call A/c		1,20,0001,20,000
9% Debenture Final Call A/c  Dr.
To 9% Debentures A/c		1,20,0001,20,000
Bank A/c  Dr.
To 9% Debenture Final Call A/c		1,20,0001,20,000

6. T. 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.

SOLUTIONFace value Rs. 500 + premium Rs. 50 = Rs. 550 per debenture. Application Rs. 200 (incl. Rs. 50 premium, so Rs. 150 towards face value); balance on allotment Rs. 350. Applications 3,00,000 received × Rs. 200 = Rs. 6,00,00,000. Allotted 2,00,000 × Rs. 200 = Rs. 4,00,00,000; excess 1,00,000 × Rs. 200 = Rs. 2,00,00,000 adjusted on allotment. Allotment due 2,00,000 × Rs. 350 = Rs. 7,00,00,000; less adjusted Rs. 2,00,00,000 = Rs. 5,00,00,000 received. Securities Premium = 2,00,000 × Rs. 50 = Rs. 1,00,00,000.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
Bank A/c  Dr.
To 8% Debenture Application A/c
(Application on 3,00,000 debentures @ Rs. 200)		6,00,00,0006,00,00,000
8% Debenture Application A/c  Dr.
To 8% Debentures A/c
To Securities Premium Reserve A/c
To 8% Debenture Allotment A/c
(App. adjusted: face Rs. 3,00,00,000 + premium Rs. 1,00,00,000 + excess Rs. 2,00,00,000)		6,00,00,0003,00,00,000
1,00,00,000
2,00,00,000
8% Debenture Allotment A/c  Dr.
To 8% Debentures A/c
(Allotment due on 2,00,000 @ Rs. 350)		7,00,00,0007,00,00,000
Bank A/c  Dr.
To 8% Debenture Allotment A/c
(Rs. 7,00,00,000 less Rs. 2,00,00,000 adjusted)		5,00,00,0005,00,00,000

7. X. 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 alloted 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.

SOLUTIONAllotted = 8,000 in full + 40% of 5,000 = 2,000 = 10,000 debentures. Rejected = 13,500 − 8,000 − 5,000 = 500 (refund 500 × Rs. 20 = Rs. 10,000). Excess on partial applicants: applied 5,000, allotted 2,000, so 3,000 × Rs. 20 = Rs. 60,000 adjusted on allotment. Application received 13,500 × Rs. 20 = Rs. 2,70,000. Allotment due 10,000 × Rs. 60 = Rs. 6,00,000; less Rs. 60,000 adjusted = Rs. 5,40,000 received. Call = Rs. 20 × 10,000 = Rs. 2,00,000.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
Bank A/c  Dr.
To 14% Debenture Application A/c
(Application on 13,500 debentures)		2,70,0002,70,000
14% Debenture Application A/c  Dr.
To 14% Debentures A/c
To 14% Debenture Allotment A/c
To Bank A/c
(App. transferred Rs. 2,00,000; excess Rs. 60,000 to allotment; Rs. 10,000 refunded)		2,70,0002,00,000
60,000
10,000
14% Debenture Allotment A/c  Dr.
To 14% Debentures A/c		6,00,0006,00,000
Bank A/c  Dr.
To 14% Debenture Allotment A/c
(Rs. 6,00,000 less Rs. 60,000)		5,40,0005,40,000
14% Debenture Call A/c  Dr.
To 14% Debentures A/c		2,00,0002,00,000
Bank A/c  Dr.
To 14% Debenture Call A/c		2,00,0002,00,000

8. R. 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.

SOLUTIONFace value = 20,00,000 × Rs. 200 = Rs. 40,00,00,000. Discount 7% = Rs. 2,80,00,000; received Rs. 37,20,00,000. Premium on redemption 8% = Rs. 3,20,00,000. Loss on issue = discount + premium = Rs. 2,80,00,000 + Rs. 3,20,00,000 = Rs. 6,00,00,000.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
Bank A/c  Dr.
To Debenture Application & Allotment A/c		37,20,00,00037,20,00,000
Debenture Application & Allotment A/c  Dr.
Loss on Issue of Debentures A/c  Dr.
To 10% Debentures A/c
To Premium on Redemption of Debentures A/c
(Issue at 7% discount, redeemable at 8% premium)		37,20,00,000
6,00,00,000		40,00,00,000
3,20,00,000

9. M. 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.

SOLUTIONNet assets = Rs. 9,00,00,000 − Rs. 70,00,000 = Rs. 8,30,00,000 = purchase consideration. Debentures issued at par = Rs. 8,30,00,000 ÷ Rs. 100 = 8,30,000 debentures.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
Sundry Assets A/c  Dr.
To Sundry Liabilities A/c
To S. Ltd.
(Assets and liabilities taken over)		9,00,00,00070,00,000
8,30,00,000
S. Ltd.  Dr.
To 8% Debentures A/c
(Issue of 8,30,000, 8% debentures at par)		8,30,00,0008,30,00,000

10. B. 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)

SOLUTIONNet assets taken over = Rs. 4,00,000 − Rs. 50,000 = Rs. 3,50,000; PC Rs. 3,80,000, so Goodwill = Rs. 30,000. No. of debentures — (a) at par: 3,80,000/100 = 3,800; (b) at 10% discount (issue price Rs. 90): 3,80,000/90 = 4,222.2 → 4,222 debentures (Rs. 3,79,980), fraction Rs. 20 in cash; (c) at 10% premium (issue price Rs. 110): 3,80,000/110 = 3,454.5 → 3,454 debentures (Rs. 3,79,940), fraction Rs. 60 in cash. Answer matches book: 3,800 / 4,222 / 3,454.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
Sundry Assets A/c  Dr.
Goodwill A/c  Dr.
To Sundry Liabilities A/c
To Mohan Bros.
(Common to all three cases)		4,00,000
30,000		50,000
3,80,000
(a) At par: Mohan Bros.  Dr.
To Debentures A/c (3,800)		3,80,0003,80,000
(b) At 10% discount: Mohan Bros.  Dr.
Discount on Issue of Debentures A/c  Dr.
To Debentures A/c (4,222 × Rs. 100)
To Bank A/c (fraction)		3,80,000
42,220		4,22,200
20
(c) At 10% premium: Mohan Bros.  Dr.
To Debentures A/c (3,454 × Rs. 100)
To Securities Premium Reserve A/c
To Bank A/c (fraction)		3,80,0003,45,400
34,540
60

11. X. 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.

SOLUTIONIssue price = Rs. 110. No. of debentures = 4,40,000 ÷ 110 = 4,000. Securities Premium = 4,000 × Rs. 10 = Rs. 40,000.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
Machinery A/c  Dr.
To Y. Ltd.		4,40,0004,40,000
Y. Ltd.  Dr.
To 12% Debentures A/c
To Securities Premium Reserve A/c
(Issue of 4,000, 12% debentures at 10% premium)		4,40,0004,00,000
40,000

12. X. 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.

SOLUTIONFace value = Rs. 15,00,000. (i) Premium 10% = Rs. 1,50,000, received Rs. 16,50,000. (ii) Discount 5% = Rs. 75,000, received Rs. 14,25,000. (iii) Collateral — Second Method shown. (iv) Machinery Rs. 13,50,000 settled by debentures at par.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
(i) Bank A/c  Dr.
To Debenture Application & Allotment A/c		16,50,00016,50,000
Debenture Application & Allotment A/c  Dr.
To 10% Debentures A/c
To Securities Premium Reserve A/c		16,50,00015,00,000
1,50,000
(ii) Bank A/c  Dr.
To Debenture Application & Allotment A/c		14,25,00014,25,000
Debenture Application & Allotment A/c  Dr.
Discount on Issue of Debentures A/c  Dr.
To 10% Debentures A/c		14,25,000
75,000		15,00,000
(iii) Debenture Suspense A/c  Dr.
To 10% Debentures A/c
(Collateral security for loan of Rs. 12,00,000)		15,00,00015,00,000
(iv) Machinery A/c  Dr.
To Vendor A/c		13,50,00013,50,000
Vendor A/c  Dr.
To 10% Debentures A/c (13,500 debentures)		13,50,00013,50,000
Balance Sheet note: For (iii), under Long-term Borrowings show “Bank Loan Rs. 12,00,000 (secured by 15,000, 10% debentures of Rs. 100 each as collateral security); 10% Debentures Rs. 15,00,000 less Debenture Suspense Rs. 15,00,000 = nil.”

13. Journalise 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.

SOLUTION(i) Discount Rs. 5, redeemable at par. (ii) Discount Rs. 5 + premium on redemption Rs. 5; loss on issue Rs. 10. (iii) At par, premium on redemption Rs. 5; loss on issue Rs. 5.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
(i) Bank A/c  Dr.
Discount on Issue of Debentures A/c  Dr.
To Debentures A/c		95
5		100
(ii) Bank A/c  Dr.
Loss on Issue of Debentures A/c  Dr.
To Debentures A/c
To Premium on Redemption of Debentures A/c		95
10		100
5
(iii) Bank A/c  Dr.
Loss on Issue of Debentures A/c  Dr.
To Debentures A/c
To Premium on Redemption of Debentures A/c		100
5		100
5

14. A. 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.

SOLUTIONFace value = 50,00,000 × Rs. 100 = Rs. 50,00,00,000. Discount 6% = Rs. 3,00,00,000; received Rs. 47,00,00,000. Premium on redemption 4% = Rs. 2,00,00,000. Loss on issue = discount + premium = Rs. 3,00,00,000 + Rs. 2,00,00,000 = Rs. 5,00,00,000 (written off from Statement of P&L in the year of issue).
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
Bank A/c  Dr.
To Debenture Application & Allotment A/c		47,00,00,00047,00,00,000
Debenture Application & Allotment A/c  Dr.
Loss on Issue of Debentures A/c  Dr.
To 8% Debentures A/c
To Premium on Redemption of Debentures A/c		47,00,00,000
5,00,00,000		50,00,00,000
2,00,00,000
Statement of Profit and Loss  Dr.
To Loss on Issue of Debentures A/c
(Loss written off in 2018–19)		5,00,00,0005,00,00,000
LOSS ON ISSUE OF DEBENTURES ACCOUNTDr. side: 2018 Apr 01 To 8% Debentures & Premium on Redemption A/c Rs. 5,00,00,000. Cr. side: 2019 Mar 31 By Statement of Profit and Loss Rs. 5,00,00,000. Account closes (balance nil).

15. A 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.

SOLUTION (a) ISSUE
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
(i) Bank A/c  Dr.
Loss on Issue of Debentures A/c  Dr.
To 12% Debentures A/c
To Premium on Redemption of Debentures A/c
(Premium on redemption Rs. 50,000)		10,00,000
50,000		10,00,000
50,000
(ii) Bank A/c  Dr.
Discount on Issue of Debentures A/c  Dr.
To 12% Debentures A/c
(Discount 10% = Rs. 1,00,000)		9,00,000
1,00,000		10,00,000
(iii) Bank A/c  Dr.
To 12% Debentures A/c
To Securities Premium Reserve A/c
(5,000 × Rs. 1,000; premium Rs. 2,50,000)		52,50,00050,00,000
2,50,000
(iv) Machinery A/c  Dr. (Rs. 95,000); Discount on Issue of Debentures A/c  Dr. (Rs. 5,000)
To Vendor A/c  then  Vendor A/c Dr. 95,000 + Discount 5,000 To 12% Debentures A/c		1,00,0001,00,000
(v) Debenture Suspense A/c  Dr.
To 12% Debentures A/c
(Collateral for loan of Rs. 25,000)		30,00030,000
SOLUTION (b) REPAYMENT after 5 yearsOnly the genuine borrowings (i), (ii) and (iii) are repaid; the collateral (v) is cancelled by reverse entry (12% Debentures A/c Dr. Rs. 30,000 To Debenture Suspense A/c) and (iv) is a normal redemption.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
(i) 12% Debentures A/c  Dr.
Premium on Redemption of Debentures A/c  Dr.
To Debentureholders A/c  then  Debentureholders A/c Dr. To Bank A/c Rs. 10,50,000		10,00,000
50,000		10,50,000
(ii) 12% Debentures A/c  Dr. → To Debentureholders; Debentureholders A/c Dr. → To Bank A/c10,00,00010,00,000
(iii) 12% Debentures A/c  Dr. → To Debentureholders; Debentureholders A/c Dr. → To Bank A/c50,00,00050,00,000
(iv) 12% Debentures A/c  Dr. → To Debentureholders; Debentureholders A/c Dr. → To Bank A/c1,00,0001,00,000
(v) 12% Debentures A/c  Dr.
To Debenture Suspense A/c
(Collateral cancelled on repayment of loan)		30,00030,000

16. A 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.

SOLUTIONDiscount 6% on Rs. 5,00,000 = Rs. 30,000; received Rs. 4,70,000. Redemption Rs. 1,00,000 each year on 31 March 2016 to 2020 (5 instalments). As a listed company, DRR is not required. Discount written off from Statement of P&L (year of issue, or spread over the life).
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
2014 Apr 01 — Bank A/c  Dr.
To Debenture Application & Allotment A/c		4,70,0004,70,000
Debenture Application & Allotment A/c  Dr.
Discount on Issue of Debentures A/c  Dr.
To Debentures A/c		4,70,000
30,000		5,00,000
2015 Mar 31 — Statement of Profit and Loss  Dr.
To Discount on Issue of Debentures A/c
(Discount written off)		30,00030,000
2016–2020 (each 31 Mar) — Debentures A/c  Dr.
To Debentureholders A/c
then Debentureholders A/c Dr. To Bank A/c
(Rs. 1,00,000 redeemed by draw of lots each year)		1,00,0001,00,000

17. B. 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.

SOLUTIONFace value Rs. 4,00,000; issued at 94%, i.e., discount 6% = Rs. 24,000; received Rs. 3,76,000. Repayable in 5 equal annual drawings of Rs. 80,000 (31 March 2012 to 2016). Listed company — no DRR.
ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
2011 Apr 01 — Bank A/c  Dr.
To Debenture Application & Allotment A/c		3,76,0003,76,000
Debenture Application & Allotment A/c  Dr.
Discount on Issue of Debentures A/c  Dr.
To Debentures A/c		3,76,000
24,000		4,00,000
2012 Mar 31 — Statement of Profit and Loss  Dr.
To Discount on Issue of Debentures A/c		24,00024,000
2012–2016 (each 31 Mar) — Debentures A/c  Dr. → To Debentureholders; Debentureholders A/c Dr. → To Bank A/c
(Rs. 80,000 redeemed each year by draw of lots)		80,00080,000

18. B. 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%.

SOLUTIONFace Rs. 1,00,000; discount 5% = Rs. 5,000; received Rs. 95,000. Premium on redemption 10% = Rs. 10,000. Loss on issue = Rs. 5,000 + Rs. 10,000 = Rs. 15,000. Half-yearly interest = Rs. 1,00,000 × 12% × ½ = Rs. 6,000; TDS 10% = Rs. 600; net Rs. 5,400 each half year.
Date / ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
Apr 01 — Bank A/c  Dr.
To Debenture Application & Allotment A/c		95,00095,000
Apr 01 — Debenture Application & Allotment A/c  Dr.
Loss on Issue of Debentures A/c  Dr.
To 12% Debentures A/c
To Premium on Redemption of Debentures A/c		95,000
15,000		1,00,000
10,000
Sep 30 — Debenture Interest A/c  Dr.
To Debentureholders A/c
To TDS Payable A/c		6,0005,400
600
Sep 30 — Debentureholders A/c Dr. 5,400 To Bank; TDS Payable A/c Dr. 600 To Bank6,0006,000
Mar 31 — Debenture Interest A/c  Dr.
To Debentureholders A/c (5,400)
To TDS Payable A/c (600)		6,0006,000
Mar 31 — Debentureholders A/c Dr. 5,400 To Bank; TDS Payable A/c Dr. 600 To Bank6,0006,000
Mar 31 — Statement of Profit and Loss  Dr.
To Debenture Interest A/c
(Total interest Rs. 12,000 transferred)		12,00012,000

19. Jay 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 assuming it is paid annually & tax deducted at source is 10%. (iv) Regarding redemption of debentures.

SOLUTIONFace = 60,000 × Rs. 100 = Rs. 60,00,000. Premium on redemption 20% = Rs. 12,00,000 = Loss on issue. Written off: Rs. 5,00,000 from Securities Premium Reserve + Rs. 7,00,000 from Statement of P&L. As a listed company DRR is not mandatory; if required (treated as exempt/listed, DRR nil; DRI 15% of Rs. 60,00,000 = Rs. 9,00,000). Annual interest = Rs. 60,00,000 × 12% = Rs. 7,20,000; TDS 10% = Rs. 72,000; net Rs. 6,48,000. Redemption amount = face Rs. 60,00,000 + premium Rs. 12,00,000 = Rs. 72,00,000.
Date / ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
(i) Bank A/c  Dr. → To Deb. Application & Allotment; then Deb. Application & Allotment A/c Dr. + Loss on Issue A/c Dr. 12,00,000 → To 12% Debentures 60,00,000 + To Premium on Redemption 12,00,00060,00,00060,00,000
(ii) Securities Premium Reserve A/c  Dr. 5,00,000
Statement of Profit and Loss  Dr. 7,00,000
To Loss on Issue of Debentures A/c		12,00,00012,00,000
(iii) 2016 Mar 31 — Debenture Interest A/c  Dr.
To Debentureholders A/c (6,48,000)
To TDS Payable A/c (72,000)
then Debentureholders Dr. 6,48,000 To Bank; TDS Payable Dr. 72,000 To Bank; SoPL Dr. 7,20,000 To Debenture Interest A/c		7,20,0007,20,000
(iv) 12% Debentures A/c  Dr. 60,00,000
Premium on Redemption of Debentures A/c  Dr. 12,00,000
To Debentureholders A/c then Debentureholders A/c Dr. 72,00,000 To Bank A/c		72,00,00072,00,000

20. Madhur 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).

SOLUTIONRequired DRR = 10% of Rs. 50,00,000 = Rs. 5,00,000. Already Rs. 2,00,000 on 31 Mar 2018, so balance Rs. 3,00,000 created on 31 Mar 2019. DRI = 15% of Rs. 50,00,000 = Rs. 7,50,000 invested on 01 Apr 2019. On 01 Jan 2020 redeem at par Rs. 50,00,000.
Date / ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
2018 Mar 31 — Surplus (Statement of P&L)  Dr.
To Debenture Redemption Reserve A/c		2,00,0002,00,000
2019 Mar 31 — Surplus (Statement of P&L)  Dr.
To Debenture Redemption Reserve A/c
(Balance to make DRR Rs. 5,00,000)		3,00,0003,00,000
2019 Apr 01 — Debenture Redemption Investment A/c  Dr.
To Bank A/c
(15% of Rs. 50,00,000)		7,50,0007,50,000
2020 Jan 01 — Bank A/c  Dr.
To Debenture Redemption Investment A/c
(DRI realised)		7,50,0007,50,000
2020 Jan 01 — 9% Debentures A/c  Dr.
To Debentureholders A/c
then Debentureholders A/c Dr. 50,00,000 To Bank A/c		50,00,00050,00,000
2020 Jan 01 — Debenture Redemption Reserve A/c  Dr.
To General Reserve A/c
(DRR transferred after redemption)		5,00,0005,00,000

21. MK 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.

SOLUTIONTotal 30,000 debentures × Rs. 100 = Rs. 30,00,000, redeemable at 10% premium (Rs. 10 per debenture). 2018: 10,000 (face Rs. 10,00,000 + premium Rs. 1,00,000 = Rs. 11,00,000); 2019: 12,000 (face Rs. 12,00,000 + premium Rs. 1,20,000 = Rs. 13,20,000); 2020: remaining 8,000 (face Rs. 8,00,000 + premium Rs. 80,000 = Rs. 8,80,000).
Date / ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
2018 Mar 31 — 11% Debentures A/c  Dr. 10,00,000
Premium on Redemption of Debentures A/c  Dr. 1,00,000
To Debentureholders A/c then Debentureholders A/c Dr. 11,00,000 To Bank A/c		11,00,00011,00,000
2019 Mar 31 — 11% Debentures A/c  Dr. 12,00,000
Premium on Redemption of Debentures A/c  Dr. 1,20,000
To Debentureholders A/c then Debentureholders A/c Dr. 13,20,000 To Bank A/c		13,20,00013,20,000
2020 Mar 31 — 11% Debentures A/c  Dr. 8,00,000
Premium on Redemption of Debentures A/c  Dr. 80,000
To Debentureholders A/c then Debentureholders A/c Dr. 8,80,000 To Bank A/c		8,80,0008,80,000

22. X 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.

SOLUTIONFace value = 20,000 × Rs. 100 = Rs. 20,00,000, redeemable at par.
Date / ParticularsL.F.Dr. (Rs.)Cr. (Rs.)
2019 Jun 30 — 12% Debentures A/c  Dr.
To Debentureholders A/c		20,00,00020,00,000
2019 Jun 30 — Debentureholders A/c  Dr.
To Bank A/c		20,00,00020,00,000

23. XYZ Ltd. Issued 6,000, 12% Debentures of Rs. 50 each on April 1, 2014. Interest on these debenture is payable annually 31st March each year. The debentures are redeemable in four equal installments 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) 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%.

SOLUTIONFace value = 6,000 × Rs. 50 = Rs. 3,00,000. Premium 10% = Rs. 30,000; Discount 10% = Rs. 30,000; Premium on redemption 10% = Rs. 30,000. Redemption in 4 equal instalments of 1,500 debentures (Rs. 75,000 face) at the end of years 3–6. Only the issue entries differ across cases; the redemption pattern (Rs. 75,000 each year, plus premium where redeemable at premium) is the same.
Case — Issue Entry (April 1, 2014)Dr. (Rs.)Cr. (Rs.)
(i) Par/Par: Bank A/c Dr. → To Deb. App. & Allotment; Deb. App. & Allotment A/c Dr. To 12% Debentures A/c3,00,0003,00,000
(ii) Premium 10%/Par: Bank Dr. 3,30,000; Deb. App. & Allotment A/c Dr. 3,30,000 To 12% Debentures 3,00,000 + To Securities Premium Reserve 30,0003,30,0003,00,000
30,000
(iii) Discount 10%/Par: Bank Dr. 2,70,000; Deb. App. & Allotment A/c Dr. 2,70,000 + Discount on Issue A/c Dr. 30,000 To 12% Debentures 3,00,0003,00,0003,00,000
(iv) Par/Premium 10%: Bank Dr. 3,00,000; Deb. App. & Allotment A/c Dr. 3,00,000 + Loss on Issue A/c Dr. 30,000 To 12% Debentures 3,00,000 + To Premium on Redemption 30,0003,30,0003,30,000
(v) Premium 10%/Premium 10%: Bank Dr. 3,30,000; Deb. App. & Allotment A/c Dr. 3,30,000 + Loss on Issue A/c Dr. 30,000 To 12% Debentures 3,00,000 + To Securities Premium Reserve 30,000 + To Premium on Redemption 30,0003,60,0003,60,000
(vi) Discount 10%/Premium 10%: Bank Dr. 2,70,000; Deb. App. & Allotment A/c Dr. 2,70,000 + Loss on Issue A/c Dr. 60,000 To 12% Debentures 3,00,000 + To Premium on Redemption 30,0003,30,0003,30,000
REDEMPTION (each year, end of 3rd–6th year)Redeemable at par: 12% Debentures A/c Dr. Rs. 75,000 To Debentureholders A/c; Debentureholders A/c Dr. Rs. 75,000 To Bank A/c. Redeemable at premium (cases iv, v, vi): 12% Debentures A/c Dr. Rs. 75,000 + Premium on Redemption of Debentures A/c Dr. Rs. 7,500 To Debentureholders A/c Rs. 82,500; Debentureholders A/c Dr. Rs. 82,500 To Bank A/c. (Annual interest Rs. 36,000 on the outstanding balance is also recorded each year and falls each year as debentures are redeemed.)

Extra Practice Questions

Short Answer Type Questions

Q1. Why is interest on debentures called a charge against profit?

ANSWERInterest on debentures must be paid at a fixed rate whether or not the company earns a profit, because debentureholders are creditors. Since it has to be paid before arriving at the divisible profit, it is a charge against profit, unlike dividend which is an appropriation of profit.

Q2. Give the journal entry to write off discount on issue of debentures when sufficient Securities Premium Reserve exists.

ANSWERSecurities Premium Reserve A/c  Dr. (to the extent of balance available) → To Discount/Loss on Issue of Debentures A/c. Any uncovered amount is debited to the Statement of Profit and Loss.

Q3. Where is ‘Premium on Redemption of Debentures’ shown in the balance sheet?

ANSWERIt is a liability shown under Non-current Liabilities (sub-head ‘Long-term Borrowings’) until the debentures are redeemed, because it is the extra amount the company must pay on redemption.

Q4. What is a zero coupon rate debenture?

ANSWERA zero coupon (deep discount) debenture carries no stated rate of interest. It is issued at a substantial discount, and the difference between its face value and issue price is treated as interest spread over the life of the debenture.

Q5. To which account is profit on cancellation of own debentures transferred?

ANSWERProfit arising when own debentures are purchased from the open market below face value and cancelled is a capital profit and is transferred to Capital Reserve.

Long Answer Type Questions

Q1. Pass journal entries for the issue of Rs. 1,00,000, 9% debentures of Rs. 100 each: (a) at par redeemable at par; (b) at 5% discount redeemable at par; (c) at par redeemable at 5% premium.

ANSWER(a) Bank A/c Dr. 1,00,000 To Deb. App. & Allotment; Deb. App. & Allotment A/c Dr. 1,00,000 To 9% Debentures A/c. (b) Bank A/c Dr. 95,000; Deb. App. & Allotment A/c Dr. 95,000 + Discount on Issue A/c Dr. 5,000 To 9% Debentures A/c 1,00,000. (c) Bank A/c Dr. 1,00,000; Deb. App. & Allotment A/c Dr. 1,00,000 + Loss on Issue A/c Dr. 5,000 To 9% Debentures A/c 1,00,000 + To Premium on Redemption A/c 5,000.

Q2. Explain the four methods of redemption of debentures.

ANSWER1. Lump sum: the entire amount is paid on the maturity date. 2. Instalments: a fixed number of debentures are redeemed each year, the actual ones being selected by draw of lots. 3. Purchase in open market: the company buys its own debentures from the market and cancels them, gaining (Capital Reserve) or losing depending on price. 4. Conversion: convertible debentures are converted into shares or new debentures at par, premium or discount, using only the actual proceeds to fix the number of new securities.

Q3. A company issued 10,000, 8% debentures of Rs. 100 each at a 10% discount, redeemable at a 10% premium. It has Rs. 70,000 in Securities Premium Reserve. Pass the issue entry and write off the loss.

ANSWERFace Rs. 10,00,000; discount Rs. 1,00,000; received Rs. 9,00,000; premium on redemption Rs. 1,00,000; Loss on issue = Rs. 2,00,000. Bank A/c Dr. 9,00,000 To Deb. App. & Allotment; Deb. App. & Allotment A/c Dr. 9,00,000 + Loss on Issue A/c Dr. 2,00,000 To 8% Debentures A/c 10,00,000 + To Premium on Redemption A/c 1,00,000. Write off: Securities Premium Reserve A/c Dr. 70,000 + Statement of Profit and Loss Dr. 1,30,000 To Loss on Issue of Debentures A/c 2,00,000.

MCQs & Assertion–Reason

1. A debenture represents:

(a) ownership of the company    (b) borrowed capital / a debt    (c) reserve    (d) profit

2. Debentures which are transferable by mere delivery are:

(a) registered debentures    (b) first debentures    (c) bearer debentures    (d) secured debentures

3. The premium received on issue of debentures is credited to:

(a) Debentures A/c    (b) Securities Premium Reserve A/c    (c) Capital Reserve A/c    (d) Statement of Profit and Loss

4. When debentures are issued at par but redeemable at a premium, the premium on redemption is debited to:

(a) Securities Premium Reserve    (b) Debentures A/c    (c) Loss on Issue of Debentures A/c    (d) Bank A/c

5. Interest on debentures is:

(a) an appropriation of profit    (b) a charge against profit    (c) paid only if profit exists    (d) optional

6. X Co. purchased assets worth Rs. 28,80,000 and issued debentures of Rs. 100 each at a 4% discount in full satisfaction. The number of debentures issued is:

(a) 30,000    (b) 28,800    (c) 32,000    (d) 27,600

7. Profit on cancellation of own debentures is transferred to:

(a) Statement of Profit and Loss    (b) Debenture Redemption Reserve    (c) Capital Reserve    (d) General Reserve

8. The entry “Debenture Suspense A/c Dr. To Debentures A/c” is passed for debentures issued:

(a) for cash    (b) to a vendor    (c) as collateral security (second method)    (d) at a premium

9. For an ‘other unlisted company’, the Debenture Redemption Reserve must be at least:

(a) 5% of outstanding debentures    (b) 10% of outstanding debentures    (c) 15% of outstanding debentures    (d) 25% of outstanding debentures

10. Excess of net assets taken over above the purchase consideration is credited to:

(a) Goodwill A/c    (b) Capital Reserve A/c    (c) General Reserve A/c    (d) Vendor’s A/c

Answer key: 1-(b), 2-(c), 3-(b), 4-(c), 5-(b), 6-(a), 7-(c), 8-(c), 9-(b), 10-(b).
Q6: Issue price = Rs. 96; 28,80,000 ÷ 96 = 30,000 debentures.

For each Assertion–Reason question, choose: (A) Both true and the Reason correctly explains the Assertion; (B) Both true but the Reason is not the correct explanation; (C) Assertion true, Reason false; (D) Assertion false, Reason true.

A-R 1. Assertion: Interest on debentures must be paid even if the company has no profit.

Reason: Interest on debentures is a charge against profit, not an appropriation.

A-R 2. Assertion: A debenture confers voting rights on its holder.

Reason: A debentureholder is a creditor of the company, not an owner.

A-R 3. Assertion: When debentures are issued at a discount and redeemable at a premium, the total of discount and premium is debited to Loss on Issue of Debentures.

Reason: Both the discount on issue and the premium payable on redemption are capital losses to the company.

A-R 4. Assertion: No journal entry is passed under the first method when debentures are issued as collateral security.

Reason: No liability is created by issuing debentures merely as collateral security.

A-R 5. Assertion: Profit on cancellation of own debentures purchased below face value is transferred to the Statement of Profit and Loss.

Reason: Such profit is a capital profit.

Answer key: 1-(A), 2-(D), 3-(A), 4-(A), 5-(D).
A-R 5: the assertion is false (it is transferred to Capital Reserve), though the reason is true.

Exam Tips & Common Mistakes

How to score full marks in this chapter

Memorise the six terms-of-issue combinations and which account (Discount on Issue, Loss on Issue, Securities Premium Reserve, Premium on Redemption) is debited or credited in each. For numericals, always start with a working note computing the issue price, discount/premium and total loss before passing entries. For consideration-other-than-cash, first find net assets, then decide Goodwill or Capital Reserve, then compute the number of debentures = Purchase Consideration ÷ Issue Price. For redemption, remember DRR = 10% (other unlisted companies only) and DRI = 15% of debentures maturing next year, invested by 30 April, and transfer DRR to General Reserve after redemption. Show interest as a charge transferred to the Statement of Profit and Loss, with TDS where given.

Common mistakes to avoid

  • Crediting premium on issue to Capital Reserve instead of Securities Premium Reserve.
  • Forgetting to add the discount on issue to the premium on redemption when computing Loss on Issue (discount + premium redeemable case).
  • Treating premium on redemption as an asset — it is a liability until redemption.
  • Creating DRR for a listed company or for banks/financial institutions, which are exempt.
  • Computing the number of debentures on face value instead of on the issue price in consideration-other-than-cash questions.
  • Mixing up Goodwill (PC > net assets) and Capital Reserve (net assets > PC).
  • Omitting the entry to transfer Debenture Interest to the Statement of Profit and Loss, or ignoring TDS.

Frequently Asked Questions

What is Chapter 6 of Class 12 Accountancy about?

Chapter 6, Issue and Redemption of Debentures, covers the meaning and types of debentures, the difference between shares and debentures, the accounting for issue of debentures at par, premium and discount, for consideration other than cash and as collateral security, the six terms of issue with reference to redemption, interest on debentures, and the four methods of redemption (lump sum, instalments, purchase in the open market and conversion), including DRR and DRI.

How many questions are there in Class 12 Accountancy Chapter 6 exercises?

The end-of-chapter Questions for Practice contain 17 short-answer questions, 9 long-answer questions and 23 numerical questions. All of them are reproduced verbatim and solved step by step with journal entries and working notes on this page.

When is Loss on Issue of Debentures debited instead of Discount on Issue?

Discount on Issue of Debentures is used when debentures are issued at a discount but redeemable at par. Loss on Issue of Debentures is used whenever the debentures are redeemable at a premium — the premium payable on redemption (plus any discount on issue) is debited to Loss on Issue, with Premium on Redemption of Debentures A/c credited as a liability.

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