Q.What is meant by issue of debenture at discount and redeemable at premium?

Issue of Debenture at Discount and Redeemable at Premium

When a company issues debentures at a price lower than their face value, it is called an issue at discount. The discount is the difference between the face value and the issue price. This discount is treated as a capital loss and is written off over the life of the debentures.

When a company repays debentures at a price higher than their face value, it is called redemption at premium. The premium payable on redemption is an additional liability for the company and is provided for in advance, typically through a Debenture Redemption Reserve or by creating a Loss on Issue of Debentures account.

Combined Scenario

A common scenario is: Issue at discount, redeemable at premium. Here, the company receives less money at issue but must pay more at redemption. The total loss (discount + premium) is accounted for at the time of issue itself.

Journal Entry at the Time of Issue

Let’s start with the core idea. A debenture is a written promise to repay a fixed sum (face value) on a future date, with periodic interest. When a company issues debentures, it may not always get the full face value from investors. If it sells them for less than face value, that’s an issue at discount. The discount is an expense for the company — it’s the cost of raising funds cheaply. Later, when the company repays the debentures, it might have to pay more than the face value. That’s redemption at premium — an extra cost for the company, but a gain for the debenture holder.

Why do companies do this? Issuing at discount makes the debentures attractive to investors (lower entry price). Redeeming at premium also sweetens the deal — investors know they’ll get extra money at maturity. From an accounting perspective, both the discount and the premium are treated as capital losses or gains that must be written off over the debenture’s life, typically against the Securities Premium Reserve or Profit & Loss.

Now, the accounting treatment:

• Issue at discount: The company receives less cash than the face value. The discount is recorded as a separate asset (Discount on Issue of Debentures A/c) and amortised over the debenture’s tenure. The journal entry is:

  • Bank A/c (actual cash received) Dr.
  • Discount on Issue of Debentures A/c (the discount amount) Dr.
  • To Debentures A/c (face value) Cr.

• Redemption at premium: When repaying, the company pays more than face value. The extra amount is a liability (Premium on Redemption of Debentures A/c) created at the time of issue. The entry at issue is:

  • Debentures A/c (face value) Dr.
  • Premium on Redemption of Debentures A/c (premium amount) Dr.
  • To Debentureholders A/c (total amount payable) Cr.

At redemption, the company pays the total amount and closes both accounts.

Let’s illustrate with a simple example. Suppose a company issues 1,000 debentures of ₹100 each at a discount of 10%, redeemable at a premium of 5%.

Working Notes:

1. Face value of debentures: 1,000 × ₹100 = ₹1,00,000
2. Issue price (at 10% discount): ₹100 – 10% of ₹100 = ₹90 per debenture. Total cash received = 1,000 × ₹90 = ₹90,000
3. Discount on issue: ₹1,00,000 – ₹90,000 = ₹10,000
4. Redemption premium (5% on face value): 5% of ₹1,00,000 = ₹5,000 …