Explain the different terms for the issue of debentures with reference to their redemption.

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Q. Explain the different terms for the issue of debentures with reference to their redemption.

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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).

Note

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:

Particulars	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)

Watch out

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:

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Issue of Debentures with Reference to Redemption

When debentures are issued, the terms of redemption determine how and when the company will repay the principal amount to debenture holders. The key terms are:

1. Redeemable at Par – The debentures are redeemed at their face value (e.g., ₹100 debenture redeemed for ₹100). No gain or loss arises for the company.

2. Redeemable at Premium – The debentures are redeemed at a price higher than face value (e.g., ₹100 debenture redeemed for ₹110). The extra ₹10 is a loss for the company, debited to the Loss on Issue of Debentures Account (or Premium on Redemption).

3. Redeemable at Discount – The debentures are redeemed at a price lower than face value (e.g., ₹100 debenture redeemed for ₹95). The discount is a gain for the company, credited to the Capital Reserve (rare in practice).

Note

The issue price (whether at par, premium, or discount) is independent of the redemption terms. For example, debentures issued at a discount may still be redeemed at par or premium.

Comparison Table

Term	Redemption Price	Effect on Company	Accounting Treatment
Redeemable at Par	Face value (₹100)	No gain/loss	No separate entry
Redeemable at Premium	> Face value (₹110)	Loss (extra ₹10)	Dr. Loss on Issue of Debentures A/c
Redeemable at Discount	< Face value (₹95)	Gain (₹5 saving)	Cr. Capital Reserve A/c

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Debentures can be issued at par, at a discount, or at a premium, and can be redeemed at par or at a premium. Combining the two gives six situations. Any discount on issue and any premium on redemption is a capital loss recognised at the time of issue (Loss on Issue of Debentures A/c), while a premium on issue is a capital gain (Securities Premium Reserve).

The terms of issue with reference to redemption

The issue price of a debenture may differ from its face (nominal) value, and the amount repaid on redemption may also differ from the face value. The six combinations and their issue entries are set out below (face value = FV).

No.	Terms	Journal entry on issue
1	Issued at par, redeemable at par	Bank A/c Dr. (FV) / To Debentures A/c (FV)
2	Issued at discount, redeemable at par	Bank A/c Dr. (cash) + Discount on Issue A/c Dr. (discount) / To Debentures A/c (FV)
3	Issued at premium, redeemable at par	Bank A/c Dr. (cash) / To Debentures A/c (FV) + To Securities Premium Reserve A/c (premium)
4	Issued at par, redeemable at premium	Bank A/c Dr. (FV) + Loss on Issue A/c Dr. (redemption premium) / To Debentures A/c (FV) + To Premium on Redemption A/c (redemption premium)
5	Issued at discount, redeemable at premium	Bank A/c Dr. (cash) + Loss on Issue A/c Dr. (discount + redemption premium) / To Debentures A/c (FV) + To Premium on Redemption A/c (redemption premium)
6	Issued at premium, redeemable at premium	Bank A/c Dr. (cash) + Loss on Issue A/c Dr. (redemption premium) / To Debentures A/c (FV) + To Securities Premium Reserve A/c (issue premium) + To Premium on Redemption A/c (redemption premium)

Key points

Discount on issue (issue price < FV) is a capital loss. It is written off over the life of the debentures, out of the Securities Premium Reserve or the Statement of Profit & Loss.
Premium on issue (issue price > FV) is a capital gain credited to the Securities Premium Reserve, which can only be used for the purposes allowed by the Companies Act (e.g. writing off such losses, issuing bonus shares). …

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Q.Explain the different terms for the issue of debentures with reference to their redemption.

The terms of issue with reference to redemption

Key points

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