XYZ Ltd. issued 200, 15% debentures of ₹100 each on April 01, 2013 at discount of 10% redeemable at premium of 10% out of profits. Give journal entries at the time of issue and redemption of debentures if debentures are to be redeemed in lump sum at the end of 4th year. The compa

Question

XYZ Ltd. issued 200, 15% debentures of ₹100 each on April 01, 2013 at discount of 10% redeemable at premium of 10% out of profits. Give journal entries at the time of issue and redemption of debentures if debentures are to be redeemed in lump sum at the end of 4th year. The company has invested the requisite amount as stipulated in the Act for the redemption of debentures. Pass the necessary journal entries if (a) XYZ Ltd. is a listed company (b) XYZ is "other unlisted" company.

Accepted Answer

> [!TLDR]
> The redemption figures are identical for a listed and an unlisted company; the only real difference is that the unlisted company must also create a Debenture Redemption Reserve, which the listed company is exempt from.

### Concept

When debentures are to be redeemed in one lump sum on a fixed date, the issuing company must (i) account for the discount on issue and the premium payable on redemption together, usually as a combined "Loss on Issue of Debentures", and (ii) set aside a Debenture Redemption Investment (DRI) of at least 15% of the face value of the debentures due for redemption, encashed just before the redemption date. Whether the company must also maintain a Debenture Redemption Reserve (DRR) of 10% of the debentures outstanding depends on whether it is listed (exempt) or an "other unlisted" company (not exempt).

> [!NOTE]
> This restructuring uses relative period labels ("Year of issue", "End of Year 4") for the journal dates rather than absolute calendar years, because the printed calendar years in the original solution do not align with the issue year given in the question. This does not affect any of the amounts or the accounting treatment, only the date labels.

### Working Note

| Item | Calculation | Amount (₹) |
|---|---|---|
| Face value | 200 × ₹100 | 20,000 |
| Cash received on issue | 200 × ₹90 (10% discount) | 18,000 |
| Discount on issue | 10% of 20,000 | 2,000 |
| Premium on redemption | 10% of 20,000 | 2,000 |
| Loss on Issue of Debentures | Discount + Premium | 4,000 |
| DRI (both cases) | 15% of 20,000 | 3,000 |
| DRR (unlisted only) | 10% of 20,000 | 2,000 |

### Solution

**(a) XYZ Ltd. is a listed company**

| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|------|-------------|-----|-----------|------------|
| Year of issue | Bank A/c Dr. | | 18,000 | |
| | To Debenture Application and Allotment A/c | | | 18,000 |
| | *(Application money received on debentures)* | | | |
| Year of issue | Debenture Application and

Particulars	Dr. (₹)	Cr. (₹)
Securities Premium Reserve A/c … Dr.	xxx
General Reserve A/c … Dr. (if needed)	xxx
To Premium on Redemption of Debentures/Preference Shares A/c		xxx
(Being the premium payable on redemption provided for)

Concept understanding — Premium on Redemption

Why does a company offer a premium on redemption?

The accounting treatment — the core rule

Which account is debited and which is credited — the logic

Where does this appear in the financial statements?

Concept

Working Note

Solution

Item	Calculation	Amount (₹)
Face value	200 × ₹100	20,000
Cash received on issue	200 × ₹90 (10% discount)	18,000
Discount on issue	10% of 20,000	2,000
Premium on redemption	10% of 20,000	2,000
Loss on Issue of Debentures	Discount + Premium	4,000
DRI (both cases)	15% of 20,000	3,000
DRR (unlisted only)	10% of 20,000	2,000

Date	Particulars	Debit (₹)	Credit (₹)
Year of issue	Bank A/c Dr.	18,000
	To Debenture Application and Allotment A/c		18,000
	(Application money received on debentures)
Year of issue	Debenture Application and Allotment A/c Dr.	18,000
	Loss on Issue of Debentures A/c Dr.	4,000
	To 15% Debentures A/c		20,000
	To Premium on Redemption of Debentures A/c		2,000
	(Debentures issued at 10% discount, redeemable at 10% premium)
April 30, Year 1	Debenture Redemption Investment A/c Dr.	3,000
	To Bank A/c		3,000
	(Required amount invested in DRI, 15% of ₹20,000)
End of Year 4	Bank A/c Dr.	3,000
	To Debenture Redemption Investment A/c		3,000
	(DRI encashed at the time of redemption)
End of Year 4	15% Debentures A/c Dr.	20,000
	Premium on Redemption of Debentures A/c Dr.	2,000
	To Debentureholders A/c		22,000
	(Amount due on redemption)
End of Year 4	Debentureholders A/c Dr.	22,000

Concept

Working Note

Solution

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