Issue and Redemption of Debentures: Types, Terms, Issue for Cash/Consideration and Accounting Treatment (Basics) Questions

Question 1

Define a debenture.

Accepted Answer

A debenture is a written acknowledgement of debt issued by a company, usually carrying a fixed rate of interest.

Question 2

Who is a debentureholder?

Accepted Answer

A debentureholder is a creditor who lends money to the company by purchasing its debentures.

Question 3

What is redemption of debentures?

Accepted Answer

Redemption of debentures means repayment of the debenture amount to debentureholders on maturity or as per agreed terms.

Question 4

What is discount on issue of debentures?

Accepted Answer

Discount on issue of debentures is the difference when debentures are issued at a price lower than their face value.

Question 5

What is premium on redemption of debentures?

Accepted Answer

Premium on redemption is the excess amount payable over face value when debentures are redeemed at a value higher than face value.

Question 6

State one type of debenture.

Accepted Answer

Secured debenture is one type of debenture.

Question 7

Differentiate between debenture and share (any three points).

Accepted Answer

Debenture vs share:

| Basis | **Debenture** | **Share** |
|---|---|---|
| Nature | **loan** (liability) | **capital** (owner’s fund) |
| Return | **interest** (expense) | **dividend** (appropriation) |
| Status | creditor | owner |

Hence, debentureholders are creditors while shareholders are owners.

Question 8

Explain types of debentures (any three) with brief meaning.

Accepted Answer

Any three types:

- **Secured debentures**: backed by charge on assets.
- **Redeemable debentures**: repayable after a specified period.
- **Convertible debentures**: can be converted into shares as per terms.

(Other types like unsecured/bearer/registered can also be written.)

Question 9

Explain issue of debentures at par, at premium and at discount with examples.

Accepted Answer

If face value is ₹100:

- **At par**: issue at ₹100.
- **At premium**: issue above face value, e.g., ₹105.
- **At discount**: issue below face value, e.g., ₹95.

Premium/discount is based on difference between face value and issue price.

Question 10

Pass journal entries for issue of debentures at discount (issued for cash).

Accepted Answer

On issue at discount:

**Bank A/c Dr** (issue price)  
**Loss on Issue of Debentures A/c Dr** (discount)  
  To **Debentures A/c** (face value)

This records receipt of cash and discount as loss on issue.

Question 11

Pass journal entry for debenture interest when it becomes due.

Accepted Answer

When interest becomes due:

**Debenture Interest A/c Dr**  
  To **Debentureholders A/c**

(Interest is a **charge** against profit.)

Question 12

Pass journal entry for redemption of debentures at par (lump sum) on due date.

Accepted Answer

On redemption at par (amount due):

**Debentures A/c Dr**  
  To **Debentureholders A/c**

On payment:
**Debentureholders A/c Dr**  
  To **Bank A/c**

(Being debentures redeemed and paid at par.)

Question 13

Explain premium on redemption and show the issue entry when debentures are issued at par but redeemable at premium.

Accepted Answer

### Meaning
**Premium on redemption** is the extra amount payable over face value at the time of redemption.

### Issue entry (issued at par, redeemable at premium)
**Bank A/c Dr** (face value received)  
**Loss on Issue of Debentures A/c Dr** (premium payable)  
  To **Debentures A/c** (face value)  
  To **Premium on Redemption of Debentures A/c**

| Item | **Why** |
|---|---|
| Loss on issue | premium is a future obligation |
| Premium on redemption A/c | liability to be paid on redemption |

### Conclusion
Premium payable increases the cost of borrowing and is treated as part of loss on issue.

Question 14

Explain issue of debentures for consideration other than cash (vendor) with an example entry.

Accepted Answer

When a company purchases assets/business and pays the vendor using debentures, it is **issue for consideration other than cash**.

### Example entry
If Plant is purchased from Vendor for ₹5,00,000 settled by 10% debentures:

**Vendor A/c Dr**  
  To **10% Debentures A/c**

If issued at discount or premium, adjust through **Loss on Issue** or **Securities Premium** as per terms.

| Mode | Effect |
|---|---|
| Cash issue | Bank increases |
| Vendor issue | Vendor liability settles |

### Conclusion
Vendor issue is a non-cash settlement of purchase consideration using debenture liability.

Question 15

Explain loss on issue of debentures and show a small working table for its computation.

Accepted Answer

**Loss on issue of debentures** represents the cost of raising debenture finance when debentures are issued at discount and/or redeemable at premium.

### Components
- **Discount on issue**
- **Premium on redemption** (if payable)

| Particulars | Amount |
|---|---:|
| Discount on issue | xxx |
| Premium on redemption | xxx |
| **Total loss on issue** | xxx |

### Conclusion
The loss is generally written off over the life of debentures as per policy/syllabus requirements.

Basis	Debenture	Share
Nature	loan (liability)	capital (owner’s fund)
Return	interest (expense)	dividend (appropriation)
Status	creditor	owner

Issue and Redemption of Debentures: Types, Terms, Issue for Cash/Consideration and Accounting Treatment (Basics)

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