Ch 7Issue and Redemption of Debentures — Class 12 Accountancy, concept-first.

A company raises part of its capital by issuing shares. But share capital alone is rarely enough to meet a company's long-term financial needs.

The word debenture comes from the Latin debere, meaning "to borrow." A debenture is a written instrument under the company's common seal that acknowledges a debt.

A share represents ownership in a company. A shareholder is a part-owner of the company, and the money they contribute becomes part of the owned capital (equity).

Debentures can be issued in different forms depending on the needs of the company and the preferences of investors.

The classification of debentures from the point of view of security is about what happens if the company fails to pay interest or repay the principal.

The tenure of a debenture — how long the company keeps the borrowed money — determines whether the company is obligated to repay it on a fixed date or can keep it indefinitely.

The classification of debentures from the point of view of convertibility is about what happens to the debenture at the time of redemption.

The coupon rate is the stated interest rate on a debenture. It determines how much periodic interest the company pays to debenture holders.

The textbook distinguishes debentures based on how ownership is recorded and transferred. This classification is crucial because it determines the legal process for selling the debenture and who the c…

The issue of debentures follows the same procedure as the issue of shares. A company invites the public through a prospectus, and investors apply for debentures.

When a company issues debentures for cash, the accounting treatment depends on whether the entire amount is collected in one instalment, two instalments, or more.

When a debenture is issued at a price lower than its face value (nominal value), it is called an issue at a discount.

When a debenture is issued at a price higher than its face value, the excess is called the premium. For instance, if a ₹100 debenture is issued for ₹110, the extra ₹10 is the premium.

When an issue of debentures receives applications for more debentures than the company offered, it is called over subscription.

When a company buys assets (or a whole business) and pays the seller by issuing debentures instead of cash, those debentures are said to be issued for consideration other than cash.

When a company borrows money from a bank or financial institution, it usually pledges some assets as the primary security — the main guarantee that the loan will be repaid.

When a company issues debentures, the terms of issue specify not only the price at which debentures are sold to investors but also the price at which the company will redeem (repay) them at maturity.

A company that issues debentures is legally bound to pay interest on them at a fixed rate, usually half-yearly, until the debentures are redeemed.

Interest on debentures is not a distribution of profit — it is a charge against profit. That means the company must pay it regardless of whether it has earned a profit or incurred a loss.

When a company issues debentures at a discount, or at a discount coupled with a premium on redemption, the resulting loss is a capital loss.

Redemption of debentures means the company repaying the amount it had borrowed from debentureholders. When a company redeems debentures, it extinguishes or discharges the liability that was created at…

When a company redeems all its debentures at once on the due date, it is called redemption by payment in lump sum. The entire amount payable to debentureholders is paid in a single instalment.

When debentures are redeemed in instalments rather than all at once, the company pays off a portion of the total debentures each year, starting from a specified year.

When a company buys back its own debentures from the stock market (or any open market) and immediately cancels them, this is called redemption by purchase in the open market.

When a company does not have enough cash to redeem its debentures, or when it wants to offer an attractive alternative to debenture holders, it can redeem them by converting them into something else.

The key terms introduced in this chapter, with a short meaning for each.

- Nature of debentures: A debenture is a written debt instrument issued by a company under its common seal, acknowledging a loan and promising to repay the principal at a fixed date along with periodi…