Chapter 6: Issue and Redemption of Debentures

Why This Chapter Matters

Companies don’t rely only on share capital. They also raise money through debt, and that’s where debentures come in.

This chapter covers:

• How companies borrow money
• How that borrowing is recorded
• How it is repaid

This is a high-weightage, practical-heavy chapter where concepts + journal entries both matter.

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1. Meaning of Debentures

A debenture is a written acknowledgement of debt issued by a company.

It is a document that shows the company has borrowed money and promises repayment with interest.

Key Understanding:

• Debenture holders = Creditors
• Company = Borrower
• Interest = Fixed obligation

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2. Features of Debentures

• It represents borrowed capital
• Interest is fixed and compulsory
• It must be paid even if there is no profit
• It is usually secured against assets
• It has a fixed repayment period

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3. Difference Between Shares and Debentures

This distinction is fundamental and frequently tested.

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4. Types of Debentures

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A. Based on Security

Secured Debentures

• Backed by assets
• Safer for investors

Unsecured Debentures

• No asset backing
• Higher risk

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B. Based on Tenure

Redeemable Debentures

• Repaid after specific period

Irredeemable Debentures

• Repaid only at winding up

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C. Based on Convertibility

Convertible Debentures

• Can be converted into shares

Non-Convertible Debentures

• Cannot be converted

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D. Based on Interest (Coupon Rate)

Fixed Rate

• Fixed interest

Floating Rate

• Linked to market rates

Zero Coupon

• No interest, issued at discount

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E. Based on Registration

Registered

• Ownership recorded

Bearer

• Transferable by delivery

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5. Issue of Debentures

Debentures can be issued:

• At par
• At premium
• At discount

They can also be issued:

• For cash
• For consideration other than cash
• As collateral security

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6. Issue of Debentures for Cash

Process is similar to shares:

• Application
• Allotment
• Calls (if any)

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Basic Entries:

On Application:

Bank A/c Dr.
→ Debenture Application A/c

On Allotment:

Debenture Application A/c Dr.
→ Debentures A/c

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7. Issue at Discount

When issued below face value.

Entry:

Discount on Issue of Debentures A/c Dr.
→ Debentures A/c

• Treated as capital loss
• Written off over time

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8. Issue at Premium

When issued above face value.

Entry:

Bank A/c Dr.
→ Debentures A/c
→ Securities Premium Reserve A/c

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9. Issue for Consideration Other Than Cash

When assets are purchased and payment is made through debentures.

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Entry:

Assets A/c Dr.
→ Vendor A/c

Vendor A/c Dr.
→ Debentures A/c

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10. Issue as Collateral Security

Debentures given as additional security for loans.

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Two Methods:

1. No Entry Method

• Only disclosed in balance sheet

2. Entry Method

Debenture Suspense A/c Dr.
→ Debentures A/c

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11. Over Subscription

When applications exceed debentures offered.

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Treatment:

• Excess money refunded
• Or adjusted in allotment

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12. Terms of Issue of Debentures

This is a very important concept.

Debentures can be:

1. Issued at par, redeemable at par
2. Issued at discount, redeemable at par
3. Issued at premium, redeemable at par
4. Issued at par, redeemable at premium
5. Issued at discount, redeemable at premium
6. Issued at premium, redeemable at premium

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Key Concept:

If redeemable at premium:

• Premium is a future liability
• Recorded at time of issue

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13. Interest on Debentures

Interest is:

• Fixed
• Compulsory
• Paid even without profit

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Entry:

Debenture Interest A/c Dr.
→ Debentureholders A/c
→ TDS Payable A/c

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Payment Entry:

Debentureholders A/c Dr.
→ Bank A/c

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Transfer to P&L:

Profit & Loss A/c Dr.
→ Debenture Interest A/c

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14. Tax Deducted at Source (TDS)

• Company deducts tax before paying interest
• Deposits it with government
• Adjusted by debenture holders

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15. Writing Off Discount / Loss

Discount or loss on issue is:

• Capital loss
• Written off from:
  • Securities Premium
  • Profit & Loss

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Entry:

Securities Premium A/c Dr.
Profit & Loss A/c Dr.
→ Discount/Loss on Issue A/c

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16. Redemption of Debentures

Redemption means repayment of debenture amount.

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Methods:

1. Lump sum payment
2. Instalments
3. Purchase in open market
4. Conversion into shares

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17. Key Concept of Redemption

• Liability ends
• Company repays principal
• Premium (if any) is also paid

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18. Common Mistakes Students Make

• Treating debentures as capital instead of liability
• Ignoring interest as compulsory expense
• Confusing premium on issue and redemption
• Skipping loss on issue
• Wrong journal entries
• Not understanding collateral security

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Final Understanding

This chapter is about how companies borrow and repay money.

If you understand:

• Nature of debentures
• Issue conditions
• Interest treatment
• Redemption logic

Then:

• Journal entries become straightforward
• Numericals become predictable