XYZ Ltd. issued 6,000, 12% Debentures of Rs. 50 each on April 1, 2014. Interest on these debentures is payable

Numerical Questions · Q23

Q. XYZ Ltd. issued 6,000, 12% Debentures of Rs. 50 each on April 1, 2014. Interest on these debentures is payable annually on 31st March each year. The debentures are redeemable in four equal installments at the end of third, fourth, fifth and sixth year. You are required to pass journal entries at the time of issue and redemption of debentures in the books of the company under the following cases:

(i) Debentures are issued at par and redeemable at par.

(ii) Debentures are issued at a premium of 10% and redeemable at par.

(iii) Debentures are issued at a discount of 10% and redeemable at par.

(iv) Debentures are issued at par but redeemable at a premium of 10%.

(v) Debentures are issued at a premium of 10% and redeemable at premium of 10%.

(vi) Debentures are issued at a discount of 10% and redeemable at a premium of 10%.

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Concept understanding — Premium on Redemption

Let’s start with something you already know from everyday life. Suppose you borrow ₹1,000 from a friend and promise to pay it back after one year. But when the year ends, you don’t just return ₹1,000 — you also pay an extra ₹50 as a “thank you” for the favour. That extra ₹50 is like a premium — an amount above the face value.

Now replace your friend with a company, and the loan with a redeemable preference share or a debenture. When a company issues these, it promises to repay the holder at a future date. Sometimes, the company agrees to repay more than the face value — say, a ₹100 share is repaid at ₹110. That extra ₹10 is the premium on redemption.

Why does a company offer a premium on redemption?

It’s not generosity. A company offers a premium to make its shares or debentures more attractive to investors. If the market interest rate is high, investors won’t buy a low-coupon debenture unless they know they’ll get a bonus at redemption. The premium is the sweetener.

From the company’s side, this premium is a cost — an extra outflow of cash when the instrument is redeemed. And like any cost, it must be accounted for properly.

The accounting treatment — the core rule

The premium on redemption is not a loss that hits the Profit & Loss account directly. Instead, it is adjusted against the company’s reserves and surplus — specifically, the Securities Premium Reserve (if available) or the General Reserve / Retained Earnings.

Here’s the precise journal entry when the premium is paid at the time of redemption:

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

Then, when the actual payment is made:

| | Premium on Redemption of Debentures/Preference Shares A/c … Dr. | xxx | |

| | To Bank A/c | | xxx |

| | (Being the premium paid to debenture/shareholders) | | |

Which account is debited and which is credited — the logic

Debit the reserve account (Securities Premium Reserve first, then General Reserve, then any other free reserve). Why? Because the company is using its accumulated profits (reserves) to meet this extra cost — it’s not a business expense like salary or rent.
Credit a temporary liability account called “Premium on Redemption of … A/c”. This shows that the company owes this premium to the holders. Later, when paid, that liability is cleared by crediting Bank.

Watch out

Never debit the Profit & Loss Account for premium on redemption. The NCERT textbook is clear: premium on redemption is a capital loss (or a distribution of accumulated profits), not a revenue expense. Doing otherwise would understate the year’s profit.

Where does this appear in the financial statements?

In the Balance Sheet, before redemption, the “Premium on Redemption of … A/c” appears under Current Liabilities (or as a separate item under Non-Current Liabilities if the redemption is due after one year). After payment, it disappears. …

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We record the issue and redemption entries for each of the six cases. The total face value of debentures is 6,000 × ₹50 = ₹3,00,000. Redemption is in four equal installments of ₹75,000 each (1,500 debentures) at the end of the 3rd, 4th, 5th and 6th years. Interest is paid annually on 31 March, but the question asks only for issue and redemption entries, so interest entries are omitted.

Note

In every case the issue entry records the cash received and the debenture liability (any premium credited to the Securities Premium Reserve, any discount debited to Discount on Issue of Debentures). Each redemption installment is recorded in two steps — the amount due is transferred to the Debentureholders A/c and then paid through the bank. Where the debentures are redeemable at a premium, the premium is debited to the Premium on Redemption of Debentures A/c (the chapter's standard account name), which is written off against the Securities Premium Reserve or the Statement of Profit and Loss.

(i) Issued at par, redeemable at par

At issue (April 1, 2014):

Date	Particulars	Debit (₹)	Credit (₹)
2014 Apr 1	Bank A/c Dr.	3,00,000
	To 12% Debentures A/c		3,00,000
	(Being 6,000, 12% debentures of ₹50 each issued at par)

At each redemption installment (end of 3rd, 4th, 5th and 6th year):

Date	Particulars	Debit (₹)	Credit (₹)
(Year) Mar 31	12% Debentures A/c Dr.	75,000
	To Debentureholders A/c		75,000
	(Being 1,500 debentures redeemed at par)
	Debentureholders A/c Dr.	75,000
	To Bank A/c		75,000
	(Being payment made to debentureholders)

(ii) Issued at a premium of 10%, redeemable at par

Issue price = ₹50 + 10% = ₹55 each. Total cash received = 6,000 × ₹55 = ₹3,30,000. Premium on issue = ₹30,000, credited to Securities Premium Reserve.

At issue:

Date	Particulars	Debit (₹)	Credit (₹)
2014 Apr 1	Bank A/c Dr.	3,30,000
	To 12% Debentures A/c		3,00,000
	To Securities Premium Reserve A/c		30,000
	(Being debentures issued at a 10% premium)

Redemption — same as case (i): each installment records ₹75,000 due to debentureholders and then paid through the bank.

(iii) Issued at a discount of 10%, redeemable at par

Issue price = ₹50 − 10% = ₹45 each. Cash received = 6,000 × ₹45 = ₹2,70,000. Discount = ₹30,000.

At issue:

Date	Particulars	Debit (₹)	Credit (₹)
2014 Apr 1	Bank A/c Dr.	2,70,000
	Discount on Issue of Debentures A/c Dr.	30,000
	To 12% Debentures A/c		3,00,000
	(Being debentures issued at a 10% discount)

The discount is written off over the life of the debentures. Redemption entries are the same as case (i).

(iv) Issued at par, redeemable at a premium of 10%

Redemption premium = 10% of ₹3,00,000 = ₹30,000, i.e. ₹7,500 per installment (1,500 × ₹5), debited to the Premium on Redemption of Debentures A/c.

At issue: same as case (i) — Bank A/c Dr. ₹3,00,000; To 12% Debentures A/c ₹3,00,000.

At each redemption installment:

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For each case, the journal entries record the issue (receipt of cash and recognition of any premium/discount) and the annual redemption of 1,500 debentures (payment to debentureholders and writing off any premium/discount on redemption). The key difference across cases is the treatment of the premium/discount on issue and the premium on redemption.

Let us first understand the core concept. When a company issues debentures, it may receive more or less than the face value. If it receives more (issue at a premium), the excess is credited to a "Securities Premium Reserve" account. If it receives less (issue at a discount), the shortfall is debited to a "Discount on Issue of Debentures" account, which is a loss to be written off over the life of the debentures.

When debentures are redeemed, the company pays the debentureholders. If the redemption price is higher than the face value (redeemable at a premium), the extra amount is a loss for the company. This loss is debited to a "Premium on Redemption of Debentures" account. If the redemption price is at par, no such account is needed.

The question involves redemption in four equal installments. That means 6,000 debentures / 4 = 1,500 debentures are redeemed at the end of the 3rd, 4th, 5th, and 6th year. The journal entries for redemption will be repeated each year with the same amounts (since the number redeemed each time is the same).

Now, let us work through each case. The face value of each debenture is ₹50. Total face value = 6,000 x ₹50 = ₹3,00,000.

Case (i): Issued at par and redeemable at par.

Issue: Cash received = Face value = ₹3,00,000. No premium or discount.
Redemption: Payment = Face value = ₹3,00,000 (in four installments of ₹75,000 each). No premium on redemption.

Journal Entries

Date	Particulars	Debit (₹)	Credit (₹)
2014 Apr 1	Bank A/c Dr.	3,00,000
	To 12% Debentures A/c		3,00,000
	(Being 6,000, 12% debentures of ₹50 each issued at par)
2017 Mar 31	12% Debentures A/c Dr.	75,000
	To Debentureholders A/c		75,000
	(Being amount due on redemption of 1,500 debentures at par)
	Debentureholders A/c Dr.	75,000
	To Bank A/c		75,000
	(Being payment made to debentureholders)

Similar redemption entries will be passed on March 31, 2018, 2019, and 2020 for the remaining installments.

Case (ii): Issued at a premium of 10% and redeemable at par.

Issue price = ₹50 + 10% of ₹50 = ₹55. Total cash received = 6,000 x ₹55 = ₹3,30,000.
Premium on issue = ₹30,000 (credited to Securities Premium Reserve).
Redemption: At par, so no premium on redemption.

Journal Entries

Date	Particulars	Debit (₹)	Credit (₹)
2014 Apr 1	Bank A/c Dr.	3,30,000
	To 12% Debentures A/c		3,00,000
	To Securities Premium Reserve A/c		30,000
	(Being 6,000, 12% debentures of ₹50 each issued at a premium of 10%)
2017 Mar 31	12% Debentures A/c Dr.	75,000
	To Debentureholders A/c		75,000
	(Being amount due on redemption of 1,500 debentures at par)
	Debentureholders A/c Dr.	75,000
	To Bank A/c		75,000
	(Being payment made to debentureholders)

Case (iii): Issued at a discount of 10% and redeemable at par.

Issue price = ₹50 - 10% of ₹50 = ₹45. Total cash received = 6,000 x ₹45 = ₹2,70,000.
Discount on issue = ₹30,000 (debited to Discount on Issue of Debentures A/c). This discount is a loss and should be written off over the life of the debentures. Since the debentures are redeemed in installments, the discount can be written off in proportion to the amount outstanding. However, the question only asks for journal entries at the time of issue and redemption. The writing off of discount is typically done through the Profit & Loss A/c each year, but that is not explicitly asked here. We will show the issue entry and the redemption entry. The discount account will be written off over the years.

Journal Entries

Date	Particulars	Debit (₹)	Credit (₹)
2014 Apr 1	Bank A/c Dr.	2,70,000
	Discount on Issue of Debentures A/c Dr.	30,000
	To 12% Debentures A/c		3,00,000
	(Being 6,000, 12% debentures of ₹50 each issued at a discount of 10%)
2017 Mar 31	12% Debentures A/c Dr.	75,000
	To Debentureholders A/c		75,000
	(Being amount due on redemption of 1,500 debentures at par)
	Debentureholders A/c Dr.	75,000
	To Bank A/c		75,000
	(Being payment made to debentureholders)

Watch out

A common mistake is to forget that the Discount on Issue of Debentures is an asset (a fictitious asset) that needs to be written off. It is not directly adjusted at redemption. The redemption entry is the same as in case (i) because redemption is at par.

Case (iv): Issued at par but redeemable at a premium of 10%.

Issue: Cash received = Face value = ₹3,00,000. No premium or discount on issue.
Redemption price = ₹50 + 10% of ₹50 = ₹55 per debenture. Total redemption amount = 6,000 x ₹55 = ₹3,30,000. The extra ₹30,000 is the premium on redemption.
This premium on redemption is a loss for the company. It is debited to "Premium on Redemption of Debentures A/c". At the time of redemption, this account is credited and the debentureholders are paid. Alternatively, the entry can be: Debentureholders A/c Dr. (with the total amount due), and then Bank A/c Cr. The premium on redemption is often provided for by creating a "Debenture Redemption Reserve" or by using the Securities Premium Reserve if available. But the basic journal entry for redemption is as follows.

Journal Entries

Date	Particulars	Debit (₹)	Credit (₹)
2014 Apr 1	Bank A/c Dr.	3,00,000
	To 12% Debentures A/c		3,00,000
	(Being 6,000, 12% debentures of ₹50 each issued at par)
2017 Mar 31	12% Debentures A/c Dr.	75,000
	Premium on Redemption of Debentures A/c Dr.	7,500
	To Debentureholders A/c		82,500
	(Being amount due on redemption of 1,500 debentures at a premium of 10%)
	Debentureholders A/c Dr.	82,500
	To Bank A/c		82,500
	(Being payment made to debentureholders)

Working Note 1: Premium on redemption per installment = 1,500 debentures x ₹5 (premium per debenture) = ₹7,500.

Case (v): Issued at a premium of 10% and redeemable at a premium of 10%.

Issue: Cash received = ₹3,30,000 (as in case ii). Securities Premium Reserve = ₹30,000. …

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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)

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