Key Takeaways:
- Understand the methods and accounting treatment for the issue and redemption of debentures.
- Learn the chronological journal entries and provisions under the Companies Act, including Debenture Redemption Reserve (DRR).
- Apply practical knowledge with step-by-step examples suited for exam preparation.
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Issue of Debentures
a. At Par
When debentures are issued at par, the issue price equals the face value. For instance, if a company issues 1,000 debentures of ₹100 each at par, it receives ₹100,000.
| Journal Entry | Amount (₹) |
|---|---|
| Bank A/c Dr. To Debentures A/c | 100,000 |
This entry records the receipt of money and the liability created.
b. At Premium
Issuing debentures at a premium means the issue price is higher than face value. For example, 1,000 debentures of ₹100 each issued at ₹110.
| Journal Entry | Amount (₹) |
|---|---|
| Bank A/c Dr. To Debentures A/c To Securities Premium A/c | 110,000 100,000 10,000 |
The premium amount is credited to Securities Premium, reflecting additional capital.
c. At Discount
Here, debentures are issued below face value. For instance, 1,000 debentures of ₹100 each at ₹95.
| Journal Entry | Amount (₹) |
|---|---|
| Bank A/c Dr. Discount on Issue of Debentures A/c Dr. To Debentures A/c | 95,000 5,000 100,000 |
The discount is a capital loss, shown as a miscellaneous expenditure and written off over debenture tenure.
d. As Collateral Security
Sometimes, debentures are issued as additional security for loans. No cash inflow occurs; the main entry is a memorandum.
| Journal Entry | Amount (₹) |
|---|---|
| No actual entry; only a memorandum entry is required. | - |
Methods of Redemption of Debentures
a. Lump Sum Payment
The company redeems all debentures at once on a fixed date. It's the simplest method. For 1,000 debentures of ₹100 each, the company pays ₹100,000 on maturity.
| Journal Entry on Redemption Date | Amount (₹) |
|---|---|
| Debentures A/c Dr. To Bank A/c | 100,000 |
b. By Installments
Debentures are redeemed in parts at regular intervals. This reduces the liability gradually.
| Journal Entry (for each installment) | Amount (₹) |
|---|---|
| Debentures A/c Dr. To Bank A/c | (Installment amount) |
c. Purchase in Open Market
The company buys back its own debentures from the market, often at a price different from face value.
| Journal Entry (if purchased at less than face value) | Amount (₹) |
|---|---|
| Debentures A/c Dr. To Bank A/c To Profit on Redemption of Debentures A/c | (Face Value) (Purchase Price) (Saving) |
If purchased above face value, the excess is debited to Loss on Redemption of Debentures.
d. Conversion into Shares
Debentures may be converted into equity shares as per agreed terms. This strengthens the capital base and reduces debt.
| Journal Entry | Amount (₹) |
|---|---|
| Debentures A/c Dr. To Equity Share Capital A/c To Securities Premium A/c (if applicable) | (Face Value) (Share Capital Issued) (Premium, if any) |
e. Sinking Fund Method
The company sets aside a fixed amount every year into a sinking fund, which is invested. The proceeds redeem the debentures at maturity.
| Journal Entries (Yearly) | |
|---|---|
| Profit & Loss Appropriation A/c Dr. To Sinking Fund A/c | (Annual Transfer) |
| Sinking Fund Investment A/c Dr. To Bank A/c | (Investment) |
On redemption, investments are sold and used to pay debenture holders.
Accounting Treatment: Redemption Out of Profits vs Fresh Issue
| Basis | Redemption Out of Profits | Redemption Out of Fresh Issue |
|---|---|---|
| Source | Profits accumulated by the company | Funds raised by issuing new shares or debentures |
| DRR Creation | Mandatory | Not required if 100% via fresh issue |
| Impact on Equity | Reduces reserves | Increases share capital |
Example: Redemption Out of Profits
Suppose a company has 1,000 debentures of ₹100 each to be redeemed out of profits.
- Transfer to Debenture Redemption Reserve (DRR):
Profit & Loss Appropriation A/c Dr.
To DRR A/c (₹100,000) - On Redemption:
Debentures A/c Dr.
To Bank A/c (₹100,000)
Example: Redemption Out of Fresh Issue
Company issues new shares to redeem debentures.
- Bank A/c Dr.
To Share Capital A/c (₹100,000) - Debentures A/c Dr.
To Bank A/c (₹100,000)
Debenture Redemption Reserve (DRR)
a. Provisions Under Companies Act
The Companies Act requires creation of a DRR for non-convertible debentures redeemed out of profits. The company must transfer at least 25% of the value of debentures to DRR before redemption. For listed companies issuing debentures via public offer, DRR provisions have been relaxed, but for private placements and unlisted entities, compliance is mandatory.
The DRR ensures protection for debenture holders, maintaining financial discipline and transparency.
Remember, DRR is not required for fully convertible debentures or for debentures issued by NBFCs and certain other regulated entities, subject to notification.
Understanding the issue and redemption of debentures is vital for a strong foundation in company accounts. Focus on the chronological steps, legal requirements, and practical examples to excel.