Garvit Ltd. invited applications for issuing 3,000, 11% Debentures of ₹ 100 each at a discount of 6%. The full

Question

Q. Garvit Ltd. invited applications for issuing 3,000, 11% Debentures of ₹ 100 each at a discount of 6%. The full amount was payable on application. Applications were received for 3,600 debentures. Applications for 600 debentures were rejected and the application money was refunded. Debentures were allotted to the remaining applicants. Pass the necessary journal entries for the above transactions in the books of Garvit Ltd.

(OR)

On 1st April 2015, P Ltd. Issued 6,000 12% Debentures of ₹ 100 each at par redeemable at a premium of 7%. The Debentures were to be redeemed at the end of third year. Prepare Loss on issue of 12% Debentures Account.

CBSECBSE Class XII Board 2019Subjective· 3mImportance★★★★★

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Part (a)Concept understanding — Debenture Definition

Debentures: The Company's Way of Borrowing Money

Think of a debenture like this: you need ₹5,00,000 to expand your business. Instead of asking a bank for a loan, you go to the public and say, "Lend me money, and I'll pay you interest every year. After 5 years, I'll return your full amount." Each person who lends you money gets a certificate — that certificate is a debenture.

The Precise Meaning

A debenture is a written instrument issued by a company under its common seal, acknowledging a debt. It contains a promise to repay the borrowed amount at a specified date (maturity) and to pay interest at a fixed rate at regular intervals (usually half-yearly or yearly).

Note

A debenture holder is a creditor of the company, not an owner. They have no voting rights and no share in profits — only a fixed interest payment.

Why Debentures Matter

Companies issue debentures because:

They raise large funds without diluting ownership (unlike shares)
Interest paid on debentures is a tax-deductible expense (reduces taxable profit)
Debentures are safer for investors than shares (fixed return, priority in repayment)

For investors, debentures offer:

Fixed, predictable income
Higher safety than equity shares
Priority over shareholders if the company is liquidated

Accounting Treatment

When a company issues debentures, the journal entry is:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	[Amount received]
To Debentures A/c		[Face value]
To Securities Premium Reserve A/c (if issued at premium)		[Premium amount]
(Being debentures issued at premium)

Key points:

Debit Bank A/c with the actual amount received
Credit Debentures A/c with the face value (nominal value)
If issued at a premium (e.g., ₹100 debenture issued for ₹110), credit the extra ₹10 to Securities Premium Reserve A/c
If issued at a discount (e.g., ₹100 debenture issued for ₹95), debit the discount to Discount on Issue of Debentures A/c (a fictitious asset written off over the debenture's life)

Watch out

Never confuse debentures with shares. Debentures are liabilities (shown under "Non-Current Liabilities" in the Balance Sheet), while shares are equity (shown under "Shareholders' Funds").

Interest on Debentures

Interest is calculated as:

Interest = Face Value of Debentures × Rate of Interest × Time Period

For example, if a company issues ₹10,00,000 worth of 9% debentures, the annual interest is:

₹10,00,000 × 9% = ₹90,000 per year

The journal entry for interest payment:

Part (b)Concept understanding — Premium on Redemption

Let’s start with something you already know from everyday life. Suppose you borrow ₹1,000 from a friend and promise to pay it back after one year. But when the year ends, you don’t just return ₹1,000 — you also pay an extra ₹50 as a “thank you” for the favour. That extra ₹50 is like a premium — an amount above the face value.

Now replace your friend with a company, and the loan with a redeemable preference share or a debenture. When a company issues these, it promises to repay the holder at a future date. Sometimes, the company agrees to repay more than the face value — say, a ₹100 share is repaid at ₹110. That extra ₹10 is the premium on redemption.

Why does a company offer a premium on redemption?

It’s not generosity. A company offers a premium to make its shares or debentures more attractive to investors. If the market interest rate is high, investors won’t buy a low-coupon debenture unless they know they’ll get a bonus at redemption. The premium is the sweetener.

From the company’s side, this premium is a cost — an extra outflow of cash when the instrument is redeemed. And like any cost, it must be accounted for properly.

The accounting treatment — the core rule

The premium on redemption is not a loss that hits the Profit & Loss account directly. Instead, it is adjusted against the company’s reserves and surplus — specifically, the Securities Premium Reserve (if available) or the General Reserve / Retained Earnings.

Here’s the precise journal entry when the premium is paid at the time of redemption:

Journal Entry for Premium on Redemption Payable Date Particulars Dr. (₹) Cr. (₹) Securities Premium Reserve A/c \dots Dr. xxx General Reserve A/c \dots Dr. (if needed) xxx To Premium on Redemption of Debentures/Preference Shares A/c xxx (Being the premium payable on redemption provided for)

Then, when the actual payment is made:

| | Premium on Redemption of Debentures/Preference Shares A/c … Dr. | xxx | |

| | To Bank A/c | | xxx |

| | (Being the premium paid to debenture/shareholders) | | |

Which account is debited and which is credited — the logic

Debit the reserve account (Securities Premium Reserve first, then General Reserve, then any other free reserve). Why? Because the company is using its accumulated profits (reserves) to meet this extra cost — it’s not a business expense like salary or rent.
Credit a temporary liability account called “Premium on Redemption of … A/c”. This shows that the company owes this premium to the holders. Later, when paid, that liability is cleared by crediting Bank.

Watch out

Never debit the Profit & Loss Account for premium on redemption. The NCERT textbook is clear: premium on redemption is a capital loss (or a distribution of accumulated profits), not a revenue expense. Doing otherwise would understate the year’s profit.

Where does this appear in the financial statements?

In the Balance Sheet, before redemption, the “Premium on Redemption of … A/c” appears under Current Liabilities (or as a separate item under Non-Current Liabilities if the redemption is due after one year). After payment, it disappears. …

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Part (a)

Garvit Ltd. - 3,000, 11% Debentures of Rs 100 each at a 6% discount (application money Rs 94), full amount on application. Applications 3,600; 600 rejected & refunded; 3,000 allotted.

Particulars	Debit (Rs)	Credit (Rs)
Bank A/c Dr. (3,600 x 94)	3,38,400
To Debenture Application & Allotment A/c		3,38,400
Debenture Application & Allotment A/c Dr.	3,38,400
Discount on Issue of Debentures A/c Dr. (3,000 x 6)	18,000
To 11% Debentures A/c (3,000 x 100)		3,00,000

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Part (a): Garvit Ltd. - debentures issued at 6% discount; 11% Debentures A/c credited Rs 3,00,000, Discount Rs 18,000, refund Rs 56,400.

Part (b): P Ltd. - Loss on Issue of 12% Debentures = premium on redemption Rs 42,000, written off Rs 14,000 each year for 3 years.

Part (a)

Debentures are always credited at their face value (Rs 100). When issued at a discount, the cash received is less by the discount, and the shortfall is debited to a Discount on Issue of Debentures Account.

Working: Application money per debenture = 100 - 6% = Rs 94.

Received on 3,600 applications = 3,600 x 94 = Rs 3,38,400.
Refund on 600 rejected = 600 x 94 = Rs 56,400.
Allotted 3,000; discount = 3,000 x 6 = Rs 18,000; face value = 3,000 x 100 = Rs 3,00,000.

Journal Entries in the books of Garvit Ltd.

Particulars	Debit (Rs)	Credit (Rs)
Bank A/c Dr.	3,38,400
To Debenture Application & Allotment A/c		3,38,400
(Application money for 3,600 debentures @ Rs 94)
Debenture Application & Allotment A/c Dr.	3,38,400
Discount on Issue of Debentures A/c Dr.	18,000
To 11% Debentures A/c		3,00,000
To Bank A/c (refund)		56,400

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 118 on this concept.

CBSE 2026Set 67/3/11 markMCQ
$Q. Nigam Ltd. issued 40,000, 11% Debentures of ₹ 100 each at a certain rate of discount. The debentures were to be redeemed at 20% premium. Existing balance of Securities Premium before issue of these debentures was ₹ 13,00,000. After writing off 'Loss on issue of debentures', the balance in Securities Premium was ₹ 3,00,000. The above debentures were issued at a discount of : (A) 20% (B) 15% (C) 10% (D) 5%$
›Reveal solutionSolution
The debentures were issued at a discount of 5%.

When debentures are issued at a discount and/or are redeemable at a premium, the company incurs a capital loss. This loss is termed 'Loss on Issue of Debentures'. This account is a fictitious asset (or deferred revenue expenditure) and represents the total cost associated with issuing debentures below par and/or redeeming them above par. It is typically written off over the tenure of the debentures, usually against the Securities Premium Reserve or, if that is insufficient, against the Statement of Profit & Loss.

The 'Loss on Issue of Debentures' account comprises two main components:

Discount on Issue of Debentures: This is the difference between the face value of the debentures and the issue price when debentures are issued below par.

Premium on Redemption of Debentures: This is the additional amount payable over and above the face value when debentures are redeemed at a premium. This premium is a liability for the company and is recognised at the time of issue.

According to Section 52 of the Companies Act, 2013, the Securities Premium Reserve can be used for specific purposes, one of which is to write off the discount allowed on the issue of shares or debentures, or the premium payable on the redemption of any redeemable preference shares or debentures.

In this problem, we are given the opening and closing balances of the Securities Premium Reserve after writing off the 'Loss on Issue of Debentures'. This allows us to determine the total amount of 'Loss on Issue of Debentures' that was written off. Once we have this total loss and the premium on redemption, we can isolate the discount on issue and subsequently calculate the discount rate.

Derivation of the Answer

Calculate the total face value of debentures:

Number of Debentures $\times$ Face Value per Debenture

$40,000 \text{ debentures} \times ₹100/\text{debenture} = ₹40,00,000$

Calculate the Premium on Redemption:

The debentures are to be redeemed at a 20% premium. This premium is calculated on the face value.

Premium on Redemption = $20\%$ of $₹40,00,000 = ₹8,00,000$

Determine the 'Loss on Issue of Debentures' written off:

The Securities Premium balance decreased from ₹13,00,000 to ₹3,00,000 after writing off the 'Loss on Issue of Debentures'. The difference represents the amount of loss written off.

Loss on Issue of Debentures written off = Existing Securities Premium - Securities Premium after writing off loss

Loss on Issue of Debentures written off = $₹13,00,000 - ₹3,00,000 = ₹10,00,000$

Calculate the Discount on Issue of Debentures:

As established, the 'Loss on Issue of Debentures' comprises both the discount on issue and the premium on redemption.

Loss on Issue of Debentures = Discount on Issue + Premium on Redemption

$₹10,00,000 = \text{Discount on Issue} + ₹8,00,000$ …
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CBSE 2026Set 67/4/11 markMCQ
$Q. Amik Ltd. issued 70,000, 9% Debentures of ₹ 100 each at a premium of 5%, redeemable at a premium of 10%. 'Loss on Issue of Debentures Account' will be debited in the books of Amik Ltd. by : (A) ₹ 10,50,000 (B) ₹ 7,00,000 (C) ₹ 3,50,000 (D) ₹ 6,30,000$
›Reveal solutionSolution
The 'Loss on Issue of Debentures Account' will be debited by ₹ 7,00,000, representing the premium payable on redemption of debentures.

When a company issues debentures, it needs to account for all costs and potential losses associated with that issue at the time the debentures are issued. This practice aligns with the prudence principle (which dictates anticipating all future losses but not future profits) and the matching principle (which requires expenses to be recognized in the period they are incurred, even if the cash outflow happens later).

The 'Loss on Issue of Debentures Account' is a nominal account (or a deferred revenue expenditure) created to record the total loss arising from the issue of debentures. This loss typically comprises two main components:

Discount on Issue of Debentures: If debentures are issued at a price lower than their face value, the difference is a discount, which represents a loss to the company.

Premium Payable on Redemption of Debentures: If debentures are to be redeemed at a price higher than their face value, the excess amount (premium) is a definite future liability and a loss that is certain to occur. This loss must be recognized upfront at the time of issue.

In this question, Amik Ltd. issues debentures at a premium of 5%. This premium received on issue is a capital gain for the company and is credited to 'Securities Premium Reserve Account'. It is not a loss and therefore does not contribute to the 'Loss on Issue of Debentures Account'.

The only component contributing to the 'Loss on Issue of Debentures Account' in this scenario is the premium payable on redemption. This premium represents a future obligation that reduces the net proceeds from the debenture issue over their lifetime. Therefore, it is treated as a loss at the time of issue.

The journal entry to record this loss involves:

Debiting 'Loss on Issue of Debentures Account': To recognize the total loss (discount on issue + premium on redemption).

Crediting 'Premium on Redemption of Debentures Account': To record the liability for the premium that will be paid at the time of redemption.

Working Notes

Total Face Value of Debentures:

Number of Debentures $\times$ Face Value per Debenture

$70,000 \times ₹ 100 = ₹ 70,00,000$

Premium on Issue of Debentures:

$5\%$ of Face Value per Debenture $\times$ Number of Debentures

$5\%$ of $₹ 100 = ₹ 5$ per debenture

$₹ 5 \times 70,000 = ₹ 3,50,000$

(This amount is credited to Securities Premium Reserve Account and does not contribute to 'Loss on Issue of Debentures Account'.)

Premium on Redemption of Debentures:

$10\%$ of Face Value per Debenture $\times$ Number of Debentures

$10\%$ of $₹ 100 = ₹ 10$ per debenture

$₹ 10 \times 70,000 = ₹ 7,00,000$

(This amount represents a future loss and is debited to 'Loss on Issue of Debentures Account'.)

Amount to be Debited to Loss on Issue of Debentures Account:

This account is debited with the total loss incurred at the time of issue. Since there is no discount on issue (rather, a premium is received), the only loss component is the premium payable on redemption. …
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CBSE 2026Set 67/5/11 markMCQ
$Q. (a) Reserve capital is that portion of the ________ capital that can be called only in the event of winding up of the company. (A) called-up (B) uncalled (C) paid-up (D) subscribed$
(OR)
$(b) The debentures which do not carry a specific rate of interest are known as : (A) Irredeemable debentures (B) Bearer debentures (C) Specific coupon rate debentures (D) Zero coupon rate debentures$
›Reveal solutionSolution

Part (a): Reserve capital is a part of uncalled capital — option (B).

Part (b): Debentures with no specific interest rate are Zero coupon rate debentures — option (D).

Part (a)

Under Section 65 of the Companies Act, 2013, a company may by special resolution decide that a portion of its uncalled share capital shall not be called except on winding up. This ring-fenced portion is Reserve Capital — extra security for creditors. …
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CBSE 2026Set 67/5/11 markMCQ
$Q. On 1st April, 2024, DD Ltd. issued 2,000, 9% Debentures of ₹ 50 each at a premium of 5%, redeemable at a premium of ₹ 10 per debenture after five years. Interest on the debentures was to be paid on half-yearly basis on 30th September and 31st March. Interest on the debentures for the year ended 31st March, 2025 will be : (A) ₹ 4,500 (B) ₹ 9,000 (C) ₹ 9,450 (D) ₹ 4,725$
›Reveal solutionSolution

The interest on debentures for the year ended 31st March, 2025 is ₹9,000, calculated on the face value of the debentures at the stated coupon rate, irrespective of the issue price or redemption premium.

Concept First: Why Interest is Calculated on Face Value

The key principle here is that interest on debentures is always calculated on the face value (nominal value) of the debentures, not on the issue price (which may include a premium) or the redemption value. The 9% coupon rate is applied to the ₹50 face value per debenture.

The premium on issue (₹5 per debenture) and the premium on redemption (₹10 per debenture) are capital items. They affect the company's securities premium account and the loss on issue of debentures account, respectively — but they have no bearing on the interest calculation. Interest is a charge against profit, paid to debenture holders as compensation for the use of their funds, and that compensation is contractually fixed on the face value.

Watch out

Common Pitfall

Students often mistakenly calculate interest on the issue price (₹55) or the redemption price (₹60). This is incorrect. The coupon rate is always applied to the face value (₹50) unless the question explicitly states otherwise. The premium on issue is a capital receipt, not income for the debenture holder in the context of interest.

Solution: Calculating the Interest

Step 1: Determine the total face value of debentures issued.

Number of debentures = 2,000

Face value per debenture = ₹50

Total face value = 2,000 × ₹50 = ₹1,00,000

Step 2: Apply the annual interest rate.

Annual interest rate = 9%

Annual interest = 9% of ₹1,00,000 = ₹9,000

Step 3: Verify the half-yearly payment (for understanding, though the question asks for the annual amount).

Half-yearly interest = ₹9,000 ÷ 2 = ₹4,500

This would be paid on 30th September 2024 and 31st March 2025.

Since the question asks for the interest for the year ended 31st March, 2025, it covers the full financial year from 1st April 2024 to 31st March 2025. Both half-yearly payments fall within this period. …
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CBSE 2026Set MARCH1 mark
$Q. Who is called debenture holder?$
›Reveal solutionSolution
A debenture holder is a creditor (lender) of the company who owns its debentures.

A debenture is a written acknowledgement of a debt taken by a company, usually carrying a fixed rate of interest. The person who buys/holds such debentures is called a debenture holder.

Key points:

He is a creditor of the company, not a shareholder/owner.

He receives a fixed rate of interest whether or not the company earns profit.

He has the right to get his principal back on redemption. …
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CBSE 2026Set MARCH1 mark
$Q. What do you mean by Redemption of debentures?$
›Reveal solutionSolution

Redemption of debentures is the repayment/discharge of debentures to the holders as per the terms of issue.

A debenture is a loan raised by a company that carries a fixed rate of interest and a promise to repay. Redemption is the process by which the company returns the debenture money to the debenture holders.

…

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CBSE 2026Set ANNUAL1 mark
$Q. Fill in the blank: The rate of return on debentures is called __________. (Dividend/Interest)$
›Reveal solutionSolution

The rate of return on debentures is called interest.

Debentures represent borrowed capital (debt) of the company, not ownership. Therefore debenture-holders are creditors who receive a fixed, pre-agreed rate of return called interest, which is a charge against profit and payable irrespective of profits. 'Dividend' …

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CBSE 2026Set ANNUAL1 mark

Q. Write the difference between share and debenture on the basis of voting right.

›Reveal solution

On the basis of voting right: shareholders have it, debenture-holders do not.

Basis	Share	Debenture
Nature	Ownership capital	Borrowed capital (loan)
Voting right	An equity shareholder has the right to vote in the company's general meetings	A debenture-holder, being only a creditor, has no voting right in company affairs
…

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Debenture holders are the$
(a) Customers of the company
(b) Owners of the company
(c) Creditors of the company
(d) All of them
›Reveal solutionSolution

Debenture-holders are creditors of the company - option (c).

A debenture is part of a company's borrowed capital. The debenture-holders have lent money to the company and are therefore its creditors; they are entitled to interest at a fixed rate (whether or not the company earns a profit) …

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CBSE 2026Set ANNUAL1 mark
$Q. Fill in the blank: Debentures represents a ________ term loan taken by the company.$
›Reveal solutionSolution

Answer: Long (long-term loan).

A debenture is a written acknowledgement of a loan raised by a company, usually repayable after a long period. It forms part of the company's borrowed (long-term) capital. Henc …

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CBSE 2026Set ANNUAL1 mark
$Q. State whether True or False: Debentureholders are owners of the company.$
›Reveal solutionSolution

The statement is False.

A debenture is an acknowledgement of a loan given to the company, so debentureholders are creditors who get fixed interest. The owners of the com …

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CBSE 2026Set ANNUAL1 markMCQ
$Q. Under which major head are debentures shown on the liabilities side of the balance sheet of a company?$
(a) Current Liabilities
(b) Non-current Liabilities
(c) Share Capital
(d) Reserves and Surplus
(a) Current Liabilities
(b) Non-current Liabilities
(c) Share Capital
(d) Reserves and Surplus
›Reveal solutionSolution
Debentures are shown under the Non-current Liabilities major head.

Under Schedule III, Part I of the Companies Act, 2013, the Equity and Liabilities side of a company's balance sheet is grouped under three major heads:

Shareholders' Funds

Non-current Liabilities — includes Long-term Borrowings (debentures, term loans, etc.), Deferred Tax Liabilities, Long-term Provisions

Current Liabilities — includes Short-term borrowings, Trade payables, Other current liabilities, Short-term provisions …
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Particulars	Dr. (₹)	Cr. (₹)
Securities Premium Reserve A/c … Dr.	xxx
General Reserve A/c … Dr. (if needed)	xxx
To Premium on Redemption of Debentures/Preference Shares A/c		xxx
(Being the premium payable on redemption provided for)

Part (a)

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