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Do It Yourself · Q1

Q.Nena Limited issued 50,000, 10% debentures of ₹100 each on the basis of the following conditions:
a. Debentures issued at par and redeemable at par.
b. Debentures issued at discount @ 5% and redeemable at par.
c. Debentures issued at premium @ 10% and redeemable at par.
d. Debentures issued at par and redeemable at premium @ 10%.
e. Debentures issued at discount of 5% and redeemable at a premium of 10%.
f. Debentures issued at premium of 6% and redeemable at a premium of 4%.
Record necessary journal entries in the above mentioned cases at the time of issue and redemption of debentures.

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For each of the six terms of issue, the issue entries record the cash, the debenture liability at face value (₹50,00,000), and any premium/discount/loss; the redemption entries repay the holders (at par or at a premium as agreed) after creating the statutory Debenture Redemption Reserve.

Concept

Debentures may be issued at par, at a discount, or at a premium, and be redeemable at par or at a premium — giving six combinations. The Debentures A/c is always credited at face value. Any premium on issue goes to Securities Premium Reserve; any discount on issue and/or premium payable on redemption is a capital loss debited to Discount/Loss on Issue of Debentures A/c, with Premium on Redemption of Debentures A/c credited as a liability. Every issue entry must balance.

Working Note (common to all cases)

  • Number of debentures = 50,000; face value = 50,000 × ₹100 = ₹50,00,000.
  • Discount on issue @ 5% = ₹2,50,000; premium on issue @ 10% = ₹5,00,000; premium on issue @ 6% = ₹3,00,000.
  • Premium on redemption @ 10% = ₹5,00,000; @ 4% = ₹2,00,000.
  • Statutory redemption requirement: before redemption the company must create a Debenture Redemption Reserve (DRR) of 10% of face value = ₹5,00,000 out of profits, and invest a Debenture Redemption Investment (DRI) of 15% of the debentures to be redeemed = ₹7,50,000 before 30 April of the year of redemption. These are the same in every case (they depend on face value, not the terms) and are shown once below.

Pre-redemption entries (common to all six cases)

DateParticularsL.F.Debit (₹)Credit (₹)
Surplus (Statement of Profit & Loss) A/c Dr.5,00,000
To Debenture Redemption Reserve A/c5,00,000
(DRR created @ 10% of ₹50,00,000 face value)
Debenture Redemption Investment A/c Dr.7,50,000
To Bank A/c7,50,000
(DRI made @ 15% of ₹50,00,000 before 30 April)

On maturity the DRI is realised (Bank A/c Dr. / To Debenture Redemption Investment A/c) and, after redemption, the DRR is transferred to General Reserve (Debenture Redemption Reserve A/c Dr. / To General Reserve A/c).

Solution

Case (a) — Issued at par, redeemable at par

DateParticularsL.F.Debit (₹)Credit (₹)
Bank A/c Dr.50,00,000
To Debenture Application & Allotment A/c50,00,000
(Application money received on 50,000 debentures at par)
Debenture Application & Allotment A/c Dr.50,00,000
To 10% Debentures A/c50,00,000
(Allotment of 50,000, 10% debentures of ₹100 each at par)
10% Debentures A/c Dr.50,00,000
To Debentureholders A/c50,00,000
(Amount due on redemption at par)
Debentureholders A/c Dr.50,00,000
To Bank A/c50,00,000
(Redemption money paid)

Case (b) — Issued at 5% discount, redeemable at par

DateParticularsL.F.Debit (₹)Credit (₹)
Bank A/c Dr.47,50,000
To Debenture Application & Allotment A/c47,50,000
(Application money received at 5% discount)
Debenture Application & Allotment A/c Dr.47,50,000
Discount on Issue of Debentures A/c Dr.2,50,000
To 10% Debentures A/c50,00,000
(Allotment at 5% discount)
10% Debentures A/c Dr.50,00,000
To Debentureholders A/c50,00,000
(Amount due on redemption at par)
Debentureholders A/c Dr.50,00,000
To Bank A/c50,00,000
(Redemption money paid)

Case (c) — Issued at 10% premium, redeemable at par

DateParticularsL.F.Debit (₹)Credit (₹)
Bank A/c Dr.55,00,000
To Debenture Application & Allotment A/c55,00,000
(Application money received at 10% premium)
Debenture Application & Allotment A/c Dr.55,00,000
To 10% Debentures A/c50,00,000
To Securities Premium Reserve A/c5,00,000
(Allotment at 10% premium)
10% Debentures A/c Dr.50,00,000
To Debentureholders A/c50,00,000
(Amount due on redemption at par)
Debentureholders A/c Dr.50,00,000
To Bank A/c50,00,000
(Redemption money paid)

Case (d) — Issued at par, redeemable at 10% premium

DateParticularsL.F.Debit (₹)Credit (₹)
Bank A/c Dr.50,00,000
To Debenture Application & Allotment A/c50,00,000
(Application money received at par)
Debenture Application & Allotment A/c Dr.50,00,000
Loss on Issue of Debentures A/c Dr.5,00,000
To 10% Debentures A/c50,00,000
To Premium on Redemption of Debentures A/c5,00,000
(Allotment at par, redeemable at 10% premium)
10% Debentures A/c Dr.50,00,000
Premium on Redemption of Debentures A/c Dr.5,00,000
To Debentureholders A/c55,00,000
(Amount due on redemption at 10% premium)
Debentureholders A/c Dr.55,00,000
To Bank A/c55,00,000
(Redemption money paid)

Case (e) — Issued at 5% discount, redeemable at 10% premium

DateParticularsL.F.Debit (₹)Credit (₹)
Bank A/c Dr.47,50,000
To Debenture Application & Allotment A/c47,50,000
(Application money received at 5% discount)
Debenture Application & Allotment A/c Dr.47,50,000
Loss on Issue of Debentures A/c Dr.7,50,000
To 10% Debentures A/c50,00,000
To Premium on Redemption of Debentures A/c5,00,000
(Allotment at 5% discount, redeemable at 10% premium; loss = ₹2,50,000 + ₹5,00,000)
10% Debentures A/c Dr.50,00,000
Premium on Redemption of Debentures A/c Dr.5,00,000
To Debentureholders A/c55,00,000
(Amount due on redemption at 10% premium)
Debentureholders A/c Dr.55,00,000
To Bank A/c55,00,000
(Redemption money paid)

Case (f) — Issued at 6% premium, redeemable at 4% premium

DateParticularsL.F.Debit (₹)Credit (₹)
Bank A/c Dr.53,00,000
To Debenture Application & Allotment A/c53,00,000
(Application money received at 6% premium)
Debenture Application & Allotment A/c Dr.53,00,000
Loss on Issue of Debentures A/c Dr.2,00,000
To 10% Debentures A/c50,00,000
To Securities Premium Reserve A/c3,00,000
To Premium on Redemption of Debentures A/c2,00,000
(Allotment at 6% premium, redeemable at 4% premium)
10% Debentures A/c Dr.50,00,000
Premium on Redemption of Debentures A/c Dr.2,00,000
To Debentureholders A/c52,00,000
(Amount due on redemption at 4% premium)
Debentureholders A/c Dr.52,00,000
To Bank A/c52,00,000
(Redemption money paid)
Watch out

The premium payable on redemption is provided at the time of issue (credited to Premium on Redemption of Debentures A/c) and the corresponding loss is written off against Securities Premium Reserve or the Statement of Profit & Loss — never transferred to Capital Reserve.

✓Final answer

In all six cases the 10% Debentures A/c is credited at ₹50,00,000; issue premium (cases c, f) goes to Securities Premium Reserve, and discount/redemption-premium (cases b, d, e, f) is a capital loss with Premium on Redemption of Debentures A/c credited. Redemption repays ₹50,00,000 at par (a, b, c) or ₹55,00,000 / ₹52,00,000 at a premium (d, e / f), after creating a DRR of ₹5,00,000 (10%) and a DRI of ₹7,50,000 (15%).

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