Q.X Co. Ltd. purchased assets worth ₹28,80,000. It issued debentures of ₹100 each at a discount of 4 per cent in full satisfaction of the purchase consideration. The number of debentures issued to vendor is:
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 (₹) |
|---|---|---|---|---|
| Debenture Interest A/c Dr. | [Gross interest] | |||
| To Bank A/c | [Net interest paid] | |||
| To TDS Payable A/c | [Tax deducted at source] | |||
| (Being interest paid on debentures after deducting TDS) |
At the end of the year, Debenture Interest A/c is closed by transferring to the Statement of Profit and Loss (as a finance cost).
Format in the Balance Sheet
As per NCERT Class 12 Accountancy, debentures appear under:
EQUITY AND LIABILITIES
- Shareholders' Funds
- Non-Current Liabilities
- Long-term borrowings
- Debentures
- Long-term borrowings
- Current Liabilities
Debentures are always shown at their face value in the Balance Sheet, regardless of whether they were issued at a premium or discount. The premium or discount is shown separately.
The Big Picture
Debentures are the company's IOU — a formal promise to repay borrowed money with interest. They give the company funds without giving away control, and they give investors a safe, fixed-income investment. In accounting, they are treated as long-term liabilities, with interest treated as an expense in the Profit and Loss statement.
The correct option is (a) 30,000. Since the debentures are issued at a 4% discount, each ₹100 debenture is issued for ₹96, so the number issued = ₹28,80,000 ÷ ₹96 = 30,000 debentures.
(a) 30,000.
At a 4% discount each ₹100 debenture is issued at ₹96, so ₹28,80,000 ÷ ₹96 = 30,000 debentures.
When debentures are issued to a vendor to settle a purchase consideration, the number of debentures is found by dividing the purchase consideration by the issue price per debenture — not by the face value. The issue price is the value the vendor accepts each debenture at, which here is reduced by the discount.
The face value is ₹100 and the discount is 4%, i.e. ₹4 per debenture, so the issue price is ₹100 − ₹4 = ₹96. The number of debentures = purchase consideration ÷ issue price = ₹28,80,000 ÷ ₹96 = 30,000. Option (b) 28,800 wrongly divides by the ₹100 face value instead of the ₹96 issue price, and option (c) 32,000 would correspond to an issue price of ₹90 (a 10% discount), which is not the case here.
(a) 30,000.
- JKBOSE Class 12 Annual Regular Examination (Commerce) 2024Set ANNUAL1 markMCQQ.Debentures are shown in Balance Sheet of a company under the head of : (A) Share Capital (B) Debenture Capital (C) Non-current Liabilities (D) Current Liabilities
›Reveal solutionSolution
Debentures are long-term borrowings of a company and are shown under Non-current Liabilities in the Balance Sheet, under the sub-head 'Long-term Borrowings'.
As per the format prescribed by Schedule III of the Companies Act, 2013, a company's Balance Sheet classifies liabilities into Shareholders' Funds, Non-current Liabilities, and Current Liabilities.
Debentures represent money borrowed by the company from the public/debenture holders, generally for a period longer than twelve months. Since they constitute a loan fund (not part of the owners' share capital) and are normally repayable after more than a year, they are shown under Non-current Liabilities, specifically under the sub-head "Long-term Borrowings" in the Notes to Accounts. (Only the portion of debentures due for redemption within the next twelve months would be reclassified and shown under Current Liabilities as "Current maturities of long-term debt".)
✓Final answer(C) Non-current Liabilities
- JKBOSE Class 12 Annual Regular Examination (Commerce) 2023Set ANNUAL1 markQ.Name the debenture that are repaid at the end of specified time or by instalments during the life time of a company.
›Reveal solutionSolution
Debentures repaid at the end of a specified period, or in instalments, during the company's lifetime are called Redeemable Debentures.
Explanation
Debentures are classified on the basis of redemption into:
- Redeemable Debentures — the company undertakes to repay the principal amount, either as a lump sum on a fixed maturity date or in instalments over the debenture's tenure, during the company's lifetime.
- Irredeemable (Perpetual) Debentures — have no fixed date of repayment; they are repaid only on the winding up of the company (or after a very long period, or upon the happening of a contingency).
The description in the question ("repaid at the end of specified time or by instalments during the life time of a company") exactly matches Redeemable Debentures.
✓Final answerRedeemable Debentures.
- JKBOSE Class 12 Annual Regular Examination (Commerce) 2023Set ANNUAL1 markQ.What is meant by Marked Debenture ?
›Reveal solutionSolution
A Marked Debenture is another name for a Registered Debenture — one on which the holder's name and address are recorded in the company's Register of Debenture Holders.
Explanation
Debentures are classified on the basis of recording of holders' names into:
-
Registered (Marked) Debentures — the holder's name, address, and particulars of holding are entered in the company's Register of Debenture Holders. Such debentures are not freely transferable by mere delivery; a transfer requires a proper instrument of transfer (regular transfer deed) in favour of the new holder, who is then registered in the company's records. Interest/principal is paid to the person whose name is so registered.
-
Bearer (Unregistered) Debentures — no name is recorded; they are transferable by mere delivery, like a negotiable instrument, and interest/principal is paid to whoever holds/presents the debenture.
✓Final answerA Marked (Registered) Debenture is one whose holder's name and address are recorded in the company's Register of Debenture Holders; it is transferable only through a regular transfer deed, not by mere delivery.
-
- JKBOSE Class 12 Annual Regular Examination (Commerce) 2020Set ANNUAL1 markQ.Define First Debentures.
›Reveal solutionSolution
First Debentures carry priority of repayment over other debentures of the same company.
A company can issue different classes/series of debentures at different times, and they need not all rank equally for repayment. First Debentures are those debentures which are given priority in redemption — i.e., they are to be redeemed (repaid) before any other debentures issued by the company. This priority is fixed by the terms and conditions mentioned at the time of issue of the debentures.
This is conceptually similar to how debentures themselves may be classified as 'First Mortgage Debentures' (carrying a charge ranking ahead of a 'Second Mortgage Debenture') on the company's assets — First Debentures get the first claim to repayment of principal (and sometimes interest) ahead of subsequent debenture issues.
✓Final answerFirst Debentures are debentures that are, by the terms of their issue, redeemed/repaid before any other debentures of the company — i.e., they have priority of repayment.
- JKBOSE Class 12 Annual Regular Examination (Commerce) 2019Set ANNUAL1 markQ.Debentures are the ............... of the company. (Fill in the blank)
›Reveal solutionSolution
Debentures represent the borrowed funds (debt capital) of a company, not ownership capital.
A debenture is a certificate of acknowledgement of debt, issued by a company under its common seal, containing a promise to repay the principal amount at a specified future date and to pay interest at a fixed rate in the meantime. Because a debenture holder is a creditor of the company (not an owner, unlike a shareholder), the funds raised through debentures form part of the company's borrowed funds / loan capital / debt, shown under 'Non-Current Liabilities' or 'Current Liabilities' (depending on the redemption period) in the company's Balance Sheet, rather than under Shareholders' Funds.
Key distinguishing features that follow from this: interest on debentures is a charge against profit (payable even in a year of loss), debenture holders have no voting rights in the company, and debentures, if secured, carry a charge on the company's assets, with priority over shareholders in repayment on winding up.
✓Final answerDebentures are the borrowed funds (debt) of the company — they represent money the company owes to its debenture holders, who are its creditors, not its owners.
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