Q.(a) On 1st April, 2024, Mobi Ltd. issued 3,000, 9% Debentures of ₹ 1,000 each at a premium of 5%. The total amount of interest due on debentures for the year ended 31st March, 2025 will be : (A) ₹ 2,70,000 (B) ₹ 1,50,000 (C) ₹ 27,000 (D) ₹ 15,000
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🔒 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).
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:
| Date | Particulars | L.F. | 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)
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:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) | …
Part (b)Concept understanding — Share Capital Classification
Let’s start with something you already know. Imagine you and two friends decide to start a small business — say, a food truck. You each put in some money. That money is the capital of the business. It’s the foundation. Now, what if one friend puts in ₹50,000, another puts in ₹30,000, and you put in ₹20,000? You all own the business, but not equally. Your share of the business is proportional to the money you put in. That’s the basic idea behind Share Capital in a company — except a company can have thousands of owners (shareholders), and their ownership is divided into tiny, equal units called shares.
What is Share Capital Classification?
In a company, Share Capital is the total money raised by issuing shares. But not all shares are the same, and not all capital is treated the same way. The NCERT Class 12 Accountancy textbook classifies share capital into two main types from the company’s point of view:
- Equity Share Capital – The basic ownership capital. Equity shareholders are the real owners. They get dividends only if the company makes a profit, and they bear the highest risk.
- Preference Share Capital – A hybrid between equity and debt. Preference shareholders get a fixed dividend before equity shareholders, and if the company is wound up, they get their money back before equity shareholders. But they usually have no voting rights.
Within each, the capital is further classified on the Balance Sheet (the company’s financial position statement) into:
- Authorised Capital – The maximum amount of share capital a company is allowed to issue, as per its Memorandum of Association. Think of it as the legal ceiling.
- Issued Capital – The part of authorised capital that the company has actually offered to the public.
- Subscribed Capital – The part of issued capital that investors have agreed to take (i.e., applied for and been allotted).
- Called-up Capital – The portion of the face value of shares that the company has asked shareholders to pay.
- Paid-up Capital – The portion of called-up capital that shareholders have actually paid. (If some haven’t paid, that’s called “calls in arrears”.)
For a Class 12 exam, you are mostly dealing with Equity Share Capital and Preference Share Capital as the two main categories. The sub-classifications (Authorised, Issued, etc.) appear in the Balance Sheet format.
Why Does This Classification Matter?
Because it determines who gets what, when, and how much.
- Dividend priority: Preference shareholders get their fixed dividend first. Equity shareholders get whatever is left (if anything).
- Risk: Equity shareholders bear the business risk; preference shareholders have a safer, fixed return.
- Control: Equity shareholders vote; preference shareholders usually don’t.
- Accounting: The money received from issuing shares is not revenue — it’s capital. It goes into the Share Capital account on the liabilities side of the Balance Sheet. The company does not debit it as income.
Accounting Treatment: The Journal Entries
When a company issues shares, the accounting depends on whether the shares are issued at par (face value), at a premium (above face value), or at a discount (below face value — but this is now prohibited for equity shares in India). Let’s take the simplest case: issue at par.
Scenario: A company issues 10,000 equity shares of ₹10 each at par. The full amount is received on application.
Journal Entry:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c (Dr.) | 1,00,000 | |||
| To Equity Share Capital A/c | 1,00,000 | |||
| (Being 10,000 equity shares of ₹10 each issued at par, fully paid) |
Explanation:
- Bank A/c is debited because the company receives cash (asset increases).
- Equity Share Capital A/c is credited because the company now owes this money to shareholders as capital (liability increases).
If shares are issued at a premium (say ₹12 per share, face value ₹10), the extra ₹2 goes to a separate account called Securities Premium Reserve A/c (credited). That reserve is not distributable as dividend — it’s a capital reserve.
Format: How Share Capital Appears in the Balance Sheet
As per the Companies Act, 2013, the Balance Sheet shows Share Capital under Equity and Liabilities. Here’s the relevant extract (simplified for Class 12):
Balance Sheet of XYZ Ltd. as at 31st March, 20XX (Extract)
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| EQUITY AND LIABILITIES | ||
| 1. Shareholders’ Funds |
Part (a)
Interest on debentures is always on face value, ignoring the premium: 9% × (3,000 × ₹1,000) = 9% × ₹30,00,000 = ₹2,70,000 for the full year. …
Part (a): Annual debenture interest = ₹2,70,000 — option (A).
Part (b): The reserved uncalled amount is Reserve Capital — option (D).
Part (a)
Debenture interest is computed on the nominal (face) value, unaffected by the issue premium.
- Total face value = 3,000 × ₹1,000 = ₹30,00,000
- Interest = 9% × ₹30,00,000 × 1 year = ₹2,70,000 …
Showing the 12 most recent of 170 on this concept.
- CBSE 2026Set 67/5/11 markMCQQ.(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. …
- CBSE 2026Set MARCH1 markQ.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. …
- CBSE 2026Set MARCH1 markMCQQ.Issued capital is a part of :(a) a) Reserve capital(b) b) Unissued capital(c) c) Authorised capital(d) d) Subscribed capital
›Reveal solutionSolution
Issued capital is a portion of the authorised (registered) capital, so the answer is (c) Authorised capital.
Share capital is classified as authorised -> issued -> subscribed -> called-up -> paid-up. Authorised capital is the maximum amount stated in the memorandum. The company need not issue all of it at once; the part it actually offers for public subscription is the issued capital, and the balance is unissued capital. So issued capital is always a part of the …
- CBSE 2026Set MARCH1 markQ.State any one type of shares.
›Reveal solutionSolution
One type of share is the Equity Share (the other being the Preference Share).
Under the Companies Act, a company can issue two broad classes of shares:
…
- CBSE 2026Set ANNUAL1 markQ.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' …
- CBSE 2026Set ANNUAL1 markQ.Write the types of preference shares. (any four)
›Reveal solutionSolution
Four types of preference shares are cumulative, non-cumulative, participating and non-participating.
Preference shares carry a preferential right to dividend and to repayment of capital, and are classified according to the rights attached:
- Cumulative vs Non-cumulative - whether unpaid dividends accumulate.
- Participating vs Non-participating - whether they share in surplus profits beyond the fixed rate.
- Convertible vs Non-convertible - whether they can be converted into equity shares. …
- CBSE 2026Set ANNUAL1 markQ.Write the difference between share and debenture on the basis of voting right.
›Reveal solutionSolution
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 … - CBSE 2026Set ANNUAL1 markMCQQ.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) …
- CBSE 2026Set ANNUAL1 markQ.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 …
- CBSE 2026Set ANNUAL1 markQ.State whether True or False: Shares are of two types.
›Reveal solutionSolution
The statement is True.
As per the Companies Act, 2013, a company's share capital is divided into two kinds of shares - equity shares and preference shares. So …
- CBSE 2026Set ANNUAL1 markQ.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 …
- CBSE 2026Set ANNUAL1 markMCQQ.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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