Summary

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 periodic interest. It is a liability for the company and an investment for the holder.

Issue at par, premium, and discount: Debentures can be issued at par (face value), at a premium (above face value), or at a discount (below face value). The premium collected is credited to the Securities Premium Reserve account (a capital reserve), while a discount on issue is a capital loss and is written off over the life of the debentures.

Journal entries for issue: The basic entry is:

• Bank A/c Dr (amount received)
• Discount on Issue of Debentures A/c Dr (if any)
• To Debentures A/c (face value)
• To Securities Premium Reserve A/c (if any) Interest on debentures is paid periodically and is a charge against profit; it is recorded as an expense.

Issue for consideration other than cash: When debentures are issued to vendors for purchase of assets or to underwriters for their commission, the entry debits the asset/expense account and credits Debentures A/c (and Securities Premium Reserve, if applicable).

Issue as collateral security: Debentures may be issued as collateral security for a loan. In such a case, no entry is passed in the books of the issuing company; only a note is made in the balance sheet. If the loan is repaid, the debentures are returned.

Redemption methods: Debentures can be redeemed:

• At par (face value)
• At premium (above face value) — the premium on redemption is a loss and is debited to the Profit and Loss account or a specific reserve.
• By lump sum payment at maturity
• By instalments (drawing by lots) — each year a portion is redeemed.
• By purchase in the open market — the company buys its own debentures and cancels them.

Debenture Redemption Reserve (DRR): As per law, an unlisted company (other than the exempt categories such as banking companies, NBFCs and listed companies) must create a Debenture Redemption Reserve out of profits before redemption. The amount required is at least 10% of the value of the outstanding debentures. DRR is a reserve that can be used only for redemption purposes.

Debenture Redemption Investment (DRI): For debentures of more than 18 months tenure, the company must invest 15% of the amount due for redemption in specified securities (like government bonds) before the redemption date. This investment is held in a separate bank account and is released only at redemption.

Journal entries for redemption: The key entries are:

• For creating DRR: Profit and Loss Appropriation A/c Dr → To Debenture Redemption Reserve A/c
• For DRI: Debenture Redemption Investment A/c Dr → To Bank A/c
• On redemption: Debentures A/c Dr → To Debentureholders A/c (for principal); Premium on Redemption A/c Dr (if any) → To Debentureholders A/c
• Payment: Debentureholders A/c Dr → To Bank A/c
• Transfer of DRR to General Reserve after redemption: Debenture Redemption Reserve A/c Dr → To General Reserve A/c …