Issue and Redemption of Debentures Class 12 Notes: CBSE Accountancy Chapter 2

• Debentures are acknowledgements of debt, raised by a company from the public. 

• They are similar to bonds but can be issued without a pre-determined interest rate. 

• Charges are obligations under trust deeds on assets, which are mortgaged either by the first or second charge. 

• Debentures come in various types, including secured and unsecured, redeemable and perpetual, convertible and non-convertible, zero coupon rate and specific rate, registered and bearer debentures.

• They are issued at par when the amount collected is equal to their nominal or face value, or at a premium if the issue price is more than the nominal or face value. If the issue price is less than the nominal or face value, it is issued at a discount. 

• Debentures can be issued for consideration other than cash, such as patents, copyrights, or intellectual property rights transfer. 

• Purchase consideration is the amount paid by the purchasing company in consideration for the purchase of assets or business. 

• Collateral security is any additional security. Debenture redemption discharges liability by repayment to debenture holders, usually at the expiry of the issued period.

What are Debentures?

A debenture is a document bearing the company's common seal that acknowledges a debt. It comes from the Latin verb "Debere," which means "to borrow."

Difference between Shares and Debentures

Types of Debentures

• From the point of view of Security

Secured Debentures: These are debentures on which a charge is placed against the company's assets to be paid in the event of default.

Unsecured Debentures: They are not specifically charged against the company's assets.

• From the point of view of Tenure

Redeemable Debentures: These are debentures that, depending on the duration of the period, may be repaid in full or in instalments throughout the company's existence.

Irredeemable Debentures: These debentures must be repaid when a company is wound up or when a significant period passes.

• From the point of view of Convertibility

Convertible Debentures: Debentures that, at the discretion of the firm or the holders of the debentures, are convertible into equity shares or any other security are referred to as convertible debentures.

Non-Convertible Debentures: Debentures that are not convertible into shares or any other kind of securities are referred to as non-convertible debentures.

• From a Coupon Rate Point of View

Specific Coupon Rate Debentures: Debentures with a particular rate of coupon—also known as coupon rate debentures—are issued with a specified interest rate.

Zero Coupon Rate Debentures: No set interest rate is associated with these debentures. These debentures are offered at significant discounts to compensate the investors, and the amount of interest associated with the length of the issuance is determined by taking the difference between the nominal value and the issue price.

•  From the point of view of Registration

Registered Debentures: Debentures that are registered are those for which the corporation maintains a register containing all relevant information, such as the names, addresses, and holding details of the debenture holders.

Bearer Debentures: These are debentures that are transferable through delivery and for which the issuing business maintains no record.

Issue of Debentures

The process for debentures is similar to shares, with investors applying based on a prospectus. Companies can request payment in full or in instalments and can be issued at par, premium, or discount.

Issue of Debentures for Cash

Debentures are said to be issued at par when their issue price is equal to the face value.

(a) If the whole amount is received in one instalment: 

(i) On receipt of the application money

(ii) On Allotment of debentures

(b) If the debenture amount is received in two instalments: 

(i) On receipt of application money 

(ii) For adjustment of applications money on allotment 

(iii) For allotment money due 

(iv) On receipt of allotment money

(c) If debenture money is received in more than two instalments Additional entries:

(i) On making the first call

(ii) On the receipt of the first call

Note: Similar entries may be made for the second call and final call. However, normally the whole amount is collected on application or in two instalments, i.e., on application and allotment.

Issue of Debentures at a Discount

Debentures issued at a discount below their nominal value can be written off either by debiting it to or out of the Securities Premium Reserve. The discount should be written off within 12 months of the balance sheet date or operating cycle, and the remaining portion is listed under Other Non-Current Assets.

Debentures issued at Premium

A debenture is issued at a premium when the price charged exceeds its nominal value, credited to the Securities Premium Reserve account and displayed on the balance sheet.

 Issue of Debentures for Consideration other than Cash

A company may issue debentures for consideration other than cash, which may be issued at par, premium, or discount, and the entries made in such situations are similar to those of shares issued for consideration other than cash.

Issue of Debentures as a Collateral Security

A collateral security is a subsidiary or secondary security a company uses when obtaining a loan or overdraft from a financial institution. It can be pledged or mortgaged against the loan, or additional assets can be issued as collateral security. If the company fails to repay the loan, the lender can receive money from the sale of the primary security, or invoke collateral security, which can be presented for redemption or sold in the open market.

Terms of Issue of Debentures

A company issues debentures, which can be redeemed at par or premium, and can discharge liability by repayment to holders. Common redemption situations depend on the terms and conditions.

(i) Issued at par and redeemable at par.

(ii) Issued at a discount and redeemable at par.

(iii) Issued at a premium and redeemable at par. 

(iv) Issued at par and redeemable at a premium. 

(v) Issued at a discount and redeemable at a premium. 

(vi) Issued at a premium and redeemable at a premium.

Notes:

1. When debentures are redeemable at a premium, the premium payable on redemption is debited to ‘Loss on Issue of Debentures A/c’. It may be noted that when debentures are issued at a discount and are redeemable at a premium, the amount of issue discount is also debited to ‘Loss on Issue of Debentures’. It may be noted that when the debentures are issued at a discount and are redeemable at par, the amount debited to ‘Discount on Issue of Debentures A/c’ as usual. 

2. redemption premium is a liability of a company payable in future. It is a provision and is shown under the head Non-current liabilities under the subhead ‘Long-term Borrowings’ until debentures are redeemed.

Interest on Debentures

A company issues debentures, which are repaid at a fixed percentage (half yearly) until repaid. The interest is calculated at the nominal value of the debentures and is charged against the company's profit. If the interest exceeds the limit, it is deducted at the source (TDS) and deposited with tax authorities.

Accounting Treatment

The following journal entries are recorded in the books of a company in connection with the interest in debentures:

2. 

3. 

4. 

Writing off Discount/Loss on Issue of Debentures

Discount or loss on debentures issued is a capital loss, written off in the year. If capital profit is insufficient, it should be written off against revenue profits.

Redemption of Debentures

Redemption of debentures refers to extinguishing or discharging the liability on account of debentures by the terms of issue. In other words, redemption of debentures means repayment of the amount of debentures by the company. There are four ways by which the debentures can be redeemed. These are : 

1. Payment in lump sum 

2. Payment in instalments

3. Purchase in the open market 

4. By conversion into shares or new debentures

1. Time of redemption of debentures:- Generally, debentures are redeemed on the due date but a company may redeem its debentures before the maturity date if its articles provide for such. 

2. Sources of Redemption of debentures:- A company may source its redemption of debentures either out of capital or out of profits.

Redemption by Payment in Lump Sum

When the company pays the whole amount in a lump sum, the following journal entries are recorded in the books of the company:

1. If debentures are to be redeemed at par 

(a) 

(b) 

2. If debentures are to be redeemed at a premium 

Redemption by Payment in Instalments

When, as per terms of the issue, the debentures are to be redeemed in instalments beginning from a particular year, the actual debentures to be redeemed are selected usually by draw of lots. At the time of redemption, the following journal entries will be recorded.

(a) 

(b)

Redemption by Purchase in the Open Market

Redeemal by purchase in the open market allows a company to purchase debentures for immediate cancellation, allowing them to be redeemed at their convenience and a discounted market price.

5 Important Topics of Class 12 Accountancy Chapter 2 You Shouldn’t Miss!

Importance of Class 12 Accountancy Chapter 2 Issue and Redemption of Debentures

• This revision note will help students to consolidate and summarise key concepts from the chapter.

• They provide a quick review before exams, saving time and focusing on important topics.

• They facilitate better retention of information by condensing essential details into concise formats.

• Essential for exam preparation to highlight important points, formulas, and concepts.

• Assist in applying theoretical knowledge to practical problems or scenarios.

• Ideal for last-minute revision sessions to refresh memory and reinforce learning.

Tips for Learning the Class 12 Chapter 2 Issue and Redemption of Debentures Class 12 Notes

• Begin by grasping the concept of debentures as a form of long-term borrowing by companies.

• Familiarise yourself with the legal requirements and accounting treatments involved in issuing and redeeming debentures.

• Learn and practice formulas for calculating interest on debentures, redemption of debentures, and other related accounting entries.

• Work through practical scenarios involving the issuance and redemption of debentures to understand their impact on a company's financial statements.

• Analyse various scenarios such as different interest rates, redemption methods, and debenture terms to understand their financial implications.

• Review and solve previous year's exam questions to familiarise yourself with the types of problems and scenarios that are typically tested.

Conclusion

The study of the Issue and Redemption of Debentures is essential for understanding how companies raise funds through long-term borrowing. Redemption of Debentures Class 12 Notes has equipped students with knowledge about the issuance process, accounting treatments, and the legal framework surrounding debentures. By grasping these concepts covered in the Redemption of Debentures Notes PDF, students are better prepared to analyse financial statements, evaluate company strategies, and navigate the complexities of corporate finance.

Chapter-wise Revision Notes Links for 12 Accountancy Part II

Chapter-wise Revision Notes Links for 12 Accountancy Part I 

Important Study Materials For Class 12 Accountancy