(i) Kati Ltd. issued 8,000, 9% debentures of ₹ 100 each at a discount of 10%. The full amount was payable on a

Question

Q. (i) Kati Ltd. issued 8,000, 9% debentures of ₹ 100 each at a discount of 10%. The full amount was payable on application. Applications were received for 9,000 debentures and allotment was made on pro-rata basis. Pass the necessary journal entries for the above transactions in the books of Kati Ltd.

(ii) Pivot Ltd. issued 40,000, 11% debentures of ₹ 100 each on 1st April, 2015. Half of the debentures were due for redemption on 31st March, 2019. The company decided to transfer the minimum required amount to Debenture Redemption Reserve on 31st March, 2018 and invested the necessary amount in Debenture Redemption Investments on 30th April, 2018. Pass the necessary journal entries for Redemption of Debentures.

(OR)

(i) Rama Ltd. took over the following assets and liabilities of Krishna Ltd. on 1st April, 2019 : | ₹ Land and Building | 50,00,000 Furniture | 10,00,000 Stock | 5,00,000 Creditors | 7,00,000 The purchase consideration of ₹ 60,00,000 was paid by issuing 12% debentures of ₹ 100 each at a premium of 20%. Pass the necessary journal entries for the above in the books of Rama Ltd.

(ii) On 1st April, 2018, Sakshi Ltd. issued 1,000, 11% Debentures of ₹ 100 each at a discount of 6%, redeemable at a premium of 5% after three years. Pass the necessary journal entries for the issue of debentures in the books of Sakshi Ltd.

(iii) On 1st April, 2016, Canara Bank issued 5,000, 9% debentures of ₹ 100 each at a premium of 6%, redeemable on 31st March, 2019, at a premium of 10%. The issue was fully subscribed. Pass the necessary journal entries for redemption of debentures in the books of Canara Bank.

CBSECBSE Class XII Board 2020Subjective· 6mImportance★★★★★

🔒 Locked · start free trial →

You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.

Start your 14-day free trial to unlock the full solution →

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 — Debenture Definition

Debentures: The Company's Way of Borrowing Money

The Precise Meaning

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:

Start your 14-day free trial to unlock the full solution →

Part (a)

(i) Kati Ltd. — 8,000, 9% Debentures of ₹100 at 10% discount; full amount on application; applied 9,000, pro-rata.

Issue price = ₹90. Received 9,000 × ₹90 = ₹8,10,000. Allotted 8,000; excess 1,000 × ₹90 = ₹90,000 refunded. Discount = 8,000 × ₹10 = ₹80,000.

Particulars	Dr (₹)	Cr (₹)
Bank A/c Dr.	8,10,000
To Debenture Application & Allotment A/c		8,10,000
Debenture Application & Allotment A/c Dr.	8,10,000
Discount on Issue of Debentures A/c Dr.	80,000
To 9% Debentures A/c		8,00,000
To Bank A/c (refund)		90,000

(ii) Pivot Ltd. — 40,000, 11% Debentures of ₹100; 20,000 redeemable 31.3.2019.

DRR = 25% × ₹20,00,000 = ₹5,00,000 (31.3.2018); DRI = 15% × ₹20,00,000 = ₹3,00,000 (30.4.2018).

Date	Particulars	Dr (₹)	Cr (₹)
31.3.2018	Surplus (Statement of P&L) A/c Dr.	5,00,000
	To Debenture Redemption Reserve A/c		5,00,000
30.4.2018	Debenture Redemption Investment A/c Dr.	3,00,000
	To Bank A/c		3,00,000
31.3.2019	Bank A/c Dr.	3,00,000
	To Debenture Redemption Investment A/c		3,00,000
31.3.2019	11% Debentures A/c Dr.	20,00,000
	To Debentureholders A/c		20,00,000
31.3.2019	Debentureholders A/c Dr.	20,00,000
	To Bank A/c		20,00,000
31.3.2019	Debenture Redemption Reserve A/c Dr.	5,00,000

Start your 14-day free trial to unlock the full solution →

Part (a): Kati Ltd. — 8,000 debentures allotted at ₹90 (discount ₹80,000, refund ₹90,000); Pivot Ltd. — DRR ₹5,00,000 + DRI ₹3,00,000, then 20,000 debentures redeemed at par (₹20,00,000).

Part (b): Rama Ltd. — Goodwill ₹2,00,000, 50,000 debentures at 20% premium (Sec. Premium ₹10,00,000); Sakshi Ltd. — loss on issue ₹11,000; Canara Bank (bank, no DRR) — redeem at 10% premium (₹5,50,000).

Part (a)

(i) Kati Ltd. — Issue at discount with pro-rata allotment

Issue price = ₹100 − 10% = ₹90. Applications 9,000 × ₹90 = ₹8,10,000. Debentures allotted 8,000; the 1,000 excess debentures' money (1,000 × ₹90 = ₹90,000) is refunded. Discount = 8,000 × ₹10 = ₹80,000; debentures are credited at face value ₹8,00,000.

Journal of Kati Ltd.

Particulars	Dr (₹)	Cr (₹)
Bank A/c Dr.	8,10,000
To Debenture Application & Allotment A/c		8,10,000
(Application money on 9,000 debentures @ ₹90)
Debenture Application & Allotment A/c Dr.	8,10,000
Discount on Issue of Debentures A/c Dr.	80,000
To 9% Debentures A/c		8,00,000
To Bank A/c		90,000
(8,000 debentures allotted at 10% discount; excess money refunded)

(ii) Pivot Ltd. — Redemption of debentures

Debentures to be redeemed = 20,000 × ₹100 = ₹20,00,000 (redeemable at par). Minimum DRR = 25% × ₹20,00,000 = ₹5,00,000 (created 31.3.2018). DRI = 15% × ₹20,00,000 = ₹3,00,000 invested on 30.4.2018 and realised at redemption.

Journal of Pivot Ltd.

Date	Particulars	Dr (₹)	Cr (₹)
31.3.2018	Surplus (Statement of P&L) A/c Dr.	5,00,000
	To Debenture Redemption Reserve A/c		5,00,000
	(Minimum DRR created)
30.4.2018	Debenture Redemption Investment A/c Dr.	3,00,000
	To Bank A/c		3,00,000
	(15% invested in specified securities)
31.3.2019	Bank A/c Dr.	3,00,000
	To Debenture Redemption Investment A/c		3,00,000
	(Investment realised)
31.3.2019	11% Debentures A/c Dr.	20,00,000
	To Debentureholders A/c		20,00,000
	(Amount due on redemption)
31.3.2019	Debentureholders A/c Dr.	20,00,000
	To Bank A/c		20,00,000
	(Payment made)
31.3.2019	Debenture Redemption Reserve A/c Dr.	5,00,000
	To General Reserve A/c		5,00,000

Start your 14-day free trial to unlock the full solution →

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 88 on this concept.

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. …
Start your 14-day free trial to see the full solution →
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. …
Start your 14-day free trial to see the full solution →
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' …

Start your 14-day free trial to see the full solution →

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
…

Start your 14-day free trial to see the full solution →

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) …

Start your 14-day free trial to see the full solution →
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 …

Start your 14-day free trial to see the full solution →
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 …

Start your 14-day free trial to see the full solution →
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 …
Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 markMCQ
$Q. What does company pay to debentureholders as return on debentures?$
(a) Interest
(b) Dividend
(c) Salary
(d) Goodwill
(a) Interest
(b) Dividend
(c) Salary
(d) Goodwill
›Reveal solutionSolution
A company pays Interest to debenture holders as the return on their debentures.

Debentures represent borrowed/loan capital of a company; a debenture holder is a creditor of the company, not a member/owner. In return for lending money to the company, a debenture holder is entitled to receive a FIXED rate of return mentioned on the debenture certificate (e.g. 9% Debentures, 12% Debentures), called Interest.

Key distinguishing features of interest on debentures:

It is a CHARGE against profit — the company is legally bound to pay it whether it earns a profit or incurs a loss.

It is paid at a fixed, predetermined rate.

It is a business expense, debited to the Statement of Profit and Loss, and reduces the company's taxable profit. …
Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 mark
$Q. Which type of debentures can not be converted into shares?$
›Reveal solutionSolution
Non-Convertible Debentures cannot be converted into shares.

On the basis of convertibility, debentures are classified into two types:

Convertible Debentures — these carry an option/right for the holder to convert them (fully or partly) into equity shares (or sometimes preference shares) of the company, after a specified period and on specified terms. …
Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 markMCQ
$Q. Interest on Debentures is a charge against$
(a) Share Capital
(b) General Reserve
(c) Dividend
(d) Profit
›Reveal solutionSolution
Interest on Debentures is a mandatory contractual expense (a "charge"), deducted while computing profit itself — it is payable even if the company makes a loss, unlike dividend.

Debentures represent borrowed funds — debenture holders are creditors of the company, not its owners/members. The company is therefore legally and contractually bound to pay interest on debentures at the stated rate, regardless of whether the company earns a profit or incurs a loss in a given year. This makes it a charge against profit — an expense debited to the Statement of Profit & Loss before arriving at the figure of net profit — exactly like rent, salaries, or depreciation.

This is fundamentally different from:

Dividend, which is a mere appropriation of profit — it can be paid only if the company has earned a profit, and the Board/shareholders can choose not to declare it even when profits exist. …
Start your 14-day free trial to see the full solution →
CBSE 2026Set ANNUAL1 markMCQ
$Q. Debentures which do not carry any specific rate of interest are known as$
(a) registered debentures
(b) zero-coupon rate debentures
(c) bearer debentures
(d) secured debentures
›Reveal solutionSolution
A "zero-coupon" debenture carries no stated interest rate at all — the investor's entire return comes from the gap between its (discounted) issue price and its redemption value.

Debentures can be classified on several bases, and "rate of interest" is one of them:

Specific Coupon Rate Debentures — carry a fixed, stated rate of interest (e.g., "9% Debentures"), paid periodically to the debenture holder.

Zero-Coupon Rate Debentures — carry no stated/specific rate of interest at all. They are typically issued at a substantial discount to their face value and are redeemed at face value (or a value close to it); the difference between the issue price and the redemption value itself constitutes the investor's effective return, functioning like implicit interest.

This is a different classification axis from:

Registered vs. Bearer Debentures (based on whether the company maintains a record of the holder's name), …
Start your 14-day free trial to see the full solution →

Part (a)

🎓Unlock everything free for 14 days

Unlock everything free for 14 days