Issue and Redemption of Debentures Class 12: Complete Guide

What Are Debentures? Definition and Features

Debentures are a form of long-term borrowing used by companies to raise capital. They are essentially certificates of debt that a company issues to investors, promising to pay interest and repay the principal amount on a specified date.

Key features of debentures:

• Fixed interest: Debenture holders receive a fixed rate of interest.
• No ownership: Unlike shares, debenture holders are creditors, not owners.
• Repayment: The principal is repaid on maturity or as per agreed terms.
• Security: Debentures may be secured (backed by assets) or unsecured.

Understanding these basics is essential for Class 12 students studying the NCERT Accountancy syllabus.

Issue of Debentures: Types and Accounting Treatment

Companies can issue debentures in different ways depending on the price and terms:

• At Par: Issue price equals face value.
• At Premium: Issue price is above face value.
• At Discount: Issue price is below face value.

Accounting Entries for Issue of Debentures

Worked Example:

A company issues 1,000 debentures of ₹100 each at a 10% premium. Journal entry:

• Bank A/c Dr ₹1,10,000
• To Debentures A/c ₹1,00,000
• To Securities Premium A/c ₹10,000

This section helps Class 12 students understand how to record debenture issues in their books.

Methods of Redemption of Debentures Explained

Redemption of debentures means repaying the principal amount to debenture holders. Companies can redeem debentures in several ways:

• Lump Sum Redemption: Full amount paid on maturity.
• Redemption by Instalments: Amount paid in parts over time.
• Redemption by Conversion: Debentures converted into shares.
• Redemption by Purchase in Market: Company buys back debentures from the open market.

Each method has specific accounting treatments and implications for the company’s financial statements. For example, redemption by conversion involves issuing shares instead of cash.

Understanding these methods is critical for Class 12 NCERT Accountancy exams.

Accounting Entries for Redemption of Debentures

The accounting for redemption depends on the method used:

• Lump Sum Redemption:

• Debentures A/c Dr
• To Bank A/c

• Redemption by Instalments:

• Debentures A/c Dr
• To Bank A/c (for instalment amount)

• Redemption by Conversion:

• Debentures A/c Dr
• To Share Capital A/c (face value of shares issued)

• Redemption Premium: If premium is paid on redemption,

• Premium on Redemption of Debentures A/c Dr
• To Bank A/c

Formula for Premium on Redemption:

$$\text{Premium} = \text{Face Value} \times \text{Premium %}$$

Worked Example:

A company redeems ₹50,000 debentures at a 5% premium. Journal entry:

• Debentures A/c Dr ₹50,000
• Premium on Redemption of Debentures A/c Dr ₹2,500
• To Bank A/c ₹52,500

This section is vital for mastering exam questions.

Difference Between Debentures and Shares

Understanding the distinction between debentures and shares is important for Class 12 students:

This comparison helps clarify concepts for exams and practical understanding.

Important Formulas Related to Debentures

Here are some key formulas Class 12 students should remember for the issue and redemption of debentures:

• Interest on Debentures:

$$\text{Interest} = \text{Face Value} \times \text{Rate of Interest} \times \frac{\text{Time}}{100}$$

• Amount to be Paid on Redemption at Premium:

$$\text{Redemption Amount} = \text{Face Value} + \text{Premium}$$

• Discount on Issue of Debentures:

$$\text{Discount} = \text{Face Value} - \text{Issue Price}$$

• Securities Premium:

$$\text{Premium} = \text{Issue Price} - \text{Face Value}$$

Practice these formulas with NCERT examples to score well in exams.