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CBSE • Class XII • Accountancy • Ch 6

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Issue and Redemption of Debentures

In CBSE Class 12 Accountancy, "Issue and Redemption of Debentures" provides an exhaustive master resource on long-term corporate debt financing. This comprehensive chapter covers the definition and characteristics of Debentures under Section 2(30) of the Companies Act 2013, types of debentures, accounting for issue of debentures at Par, Premium, and Discount, issue of debentures as Collateral Security (Method 1 without entry vs Method 2 with Debenture Suspense Account), the six fundamental scenarios of issue considering redemption terms (especially Issue at Discount/Par redeemable at Premium), accounting for Loss on Issue of Debentures and writing it off under AS-16, and interest on debentures with Tax Deducted at Source (TDS) aligned with the 2026–27 CBSE curriculum.

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How Do Mega Corporations Borrow Billions from the Public Without Giving Up 1% of Ownership or Voting Control?

When an infrastructure company builds a ₹20,000 crore high-speed railway corridor, issuing new equity shares would dilute the existing owners' control and give strangers voting power at annual general meetings. Taking a short-term bank loan would risk repayment failure. Instead, the company issues Debentures—formal, long-term legal debt instruments issued under the company's common seal, promising to pay a fixed rate of interest (coupon) semi-annually and return the principal capital after 10 or 15 years. But what happens if a company promises to repay ₹110 for every ₹100 borrowed (Redemption at Premium)? The law requires that future premium to be recorded as an immediate financial loss on the day of issue! How does debenture accounting work under corporate law? This chapter masters debt financing.

Why This Chapter Matters

Debentures represent a vital component of Class 12 corporate accounting and competitive commerce entrance exams. The "Issue with Terms of Redemption" cases test the application of the Prudence (Conservatism) principle in corporate finance. Mastering collateral security accounting, writing off discount/loss on issue from the Securities Premium Account, and calculating TDS on debenture interest provides students with essential corporate financial literacy.

Before You Begin (Prerequisites)

Share capital accounting concepts from Chapter 5.
Prudence principle (anticipating future losses) from Class 11.
Basic interest calculations on principal loans.

What You Will Learn (Core Objectives)

Define a Debenture under Section 2(30) of the Companies Act 2013 and differentiate Shares from Debentures.
Classify Debentures: Secured vs Unsecured, Redeemable vs Irredeemable, Convertible vs Non-convertible.
Record Journal entries for issue of debentures at Par, at Premium, and at Discount.
Account for Debentures issued as Collateral Security under both Method 1 (Footnote disclosure) and Method 2 (Debenture Suspense Account).
Master the 6 Cases of Issue with Terms of Redemption (specifically recording "Loss on Issue of Debentures" and "Premium on Redemption of Debentures").
Apply Section 52(2) and AS-16 rules to write off Discount / Loss on Issue of Debentures from Securities Premium and Statement of P&L.
Account for Debenture Interest and Tax Deducted at Source (TDS).

Chapter Roadmap & Progression

1 1. Nature of Debentures & Shares vs...

2 2. Issue of Debentures as Collatera...

3 3. The 6 Cases of Issue with Terms...

4 4. Writing Off Loss on Issue of Deb...

Complete Concept Guide (100% Curriculum Coverage)

1. Nature of Debentures & Shares vs. Debentures Matrix

Understand

Under Section 2(30) of the Companies Act, 2013, a Debenture includes debenture stock, bonds, or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

Basis of Distinction	Shares (Owned Capital)	Debentures (Borrowed Debt Capital)
Status of Holder	Shareholder is an Owner of the company.	Debenture holder is a Creditor / Lender of the company.
Return on Investment	Dividend (Fluctuating, paid only out of divisible profits).	Interest (Fixed coupon rate, e.g., 9% Debentures; paid whether profit or loss!).
Nature of Return	An Appropriation of profits.	A Charge against profits (deducted in P&L before tax).
Voting Rights	Full voting rights in company general meetings.	Zero voting rights under any circumstances.
Repayment Priority	Repaid last upon liquidation (residual equity).	Repaid with senior priority over shareholders.
Discount on Issue	Companies Act 2013 Section 53 forbids issue of shares at a discount (except sweat equity).	Debentures can legally be issued at a discount without legal prohibition!

2. Issue of Debentures as Collateral Security

Understand & Accounting Methods

Collateral Security refers to secondary, subsidiary security deposited with a lender (like a bank) in addition to primary mortgage security. If the company defaults, the bank can sell the primary asset; if a deficit remains, the bank can claim debenture holder status.

Two Accounting Presentation Methods:

First Method (No Journal Entry Passed): No formal entry is recorded in the books. In the Balance Sheet, under Long-Term Borrowings, a disclosure footnote is attached: "Secured by issue of ₹10,00,000 9% Debentures as collateral security."
Second Method (Entry Passed via Debenture Suspense Account):
```
Debenture Suspense A/c .......................... Dr. [Nominal Value]
    To [Coupon]% Debentures A/c ............................ [Nominal Value]
```
Balance Sheet Presentation: In Notes to Accounts under Long-Term Borrowings, Debentures are listed, and `Debenture Suspense A/c` is deducted as an offset, resulting in net zero addition!

3. The 6 Cases of Issue with Terms of Redemption

The Master Exam Cases

Under the Prudence Principle, if a company promises to redeem debentures at a premium in the future, that liability is known today and must be recorded on the day of issue:

Case	Terms of Issue	Terms of Redemption	Compound Allotment Journal Entry
1	At Par (₹100)	At Par (₹100)	`Bank A/c Dr. 100` → `To Debentures A/c 100`
2	At Discount (₹95)	At Par (₹100)	`Bank Dr. 95`, `Discount on Issue Dr. 5` → `To Debentures 100`
3	At Premium (₹105)	At Par (₹100)	`Bank Dr. 105` → `To Debentures 100`, `To Securities Premium 5`
4	At Par (₹100)	At Premium (₹105)	`Bank A/c ............................. Dr. 100 Loss on Issue of Debentures A/c ...... Dr. 5 To Debentures A/c .......................... 100 To Premium on Redemption A/c .............. 5`
5	At Discount (₹95)	At Premium (₹105)	`Bank A/c ............................. Dr. 95 Loss on Issue of Debentures A/c ...... Dr. 10 (5+5) To Debentures A/c .......................... 100 To Premium on Redemption A/c .............. 5`
6	At Premium (₹105)	At Premium (₹110)	`Bank Dr. 105`, `Loss on Issue Dr. 10` → `To Debentures 100`, `To Sec Prem 5`, `To Prem on Red 10`

4. Writing Off Loss on Issue of Debentures & Interest (TDS)

Understand

Writing Off Discount / Loss on Issue:

Under circular guidelines of ICAI, any Discount or Loss on Issue of Debentures must be completely written off in the very year of issue, utilizing available balances in the following priority order:

First out of Securities Premium Account (authorized under Section 52(2)c).
Remaining balance charged to Statement of Profit and Loss (Finance Costs).

Securities Premium A/c ......................... Dr. [Available Balance]
Statement of Profit and Loss ................... Dr. [Remaining Shortfall]
    To Loss on Issue of Debentures A/c ..................... [Total Loss Written Off]

Key Economic Identities, Formulas & Business Principles

Combined Loss on Issue Formula

$$\text{Total Loss on Issue} = \text{Discount on Issue} + \text{Premium on Redemption}$$

Debited when debentures are issued at discount and redeemable at premium.

Net Debenture Interest

$$\text{Interest Paid} = \text{Nominal Value} \times \text{Coupon Rate} \times (1 - \text{TDS Rate})$$

Calculation of net interest after tax deduction at source.

Issue of Debentures with Terms of Redemption Topology

Chapter Summary & 10 Key Takeaways

Takeaway 1

A Debenture is an instrument evidencing corporate debt under the company's common seal.

Takeaway 2

Debenture holders are external creditors receiving fixed interest; they possess zero voting rights.

Takeaway 3

Unlike shares (which cannot be issued at a discount under Section 53), debentures can legally be issued at a discount.

Takeaway 4

When debentures are issued as Collateral Security, they serve as secondary backup security for loans.

Takeaway 5

Under Method 2 of collateral security, `Debenture Suspense A/c` is debited and `Debentures A/c` is credited.

Takeaway 6

When debentures are redeemable at a premium, `Loss on Issue of Debentures A/c` is debited on the day of issue.

Takeaway 7

`Premium on Redemption of Debentures` is credited on the day of issue and shown as a Non-Current Liability.

Takeaway 8

Discount or Loss on Issue of Debentures must be completely written off in the year of issue itself.

Takeaway 9

Loss on issue is written off first from Securities Premium Account, then from Statement of Profit and Loss.

Takeaway 10

Interest on debentures is a charge against profit; Tax Deducted at Source (TDS) is credited to TDS Payable.

Check Your Understanding (Diagnostic Practice Questions)

Diagnostic questions testing core conceptual clarity. Answers are hidden initially — solve each problem first, then click to reveal the step-by-step verified solution.

A company issued 5,000 9% Debentures of ₹100 each at a discount of 5%, redeemable at a premium of 10% after 5 years. Pass the Journal entry for the allotment of debentures.

Reveal Answer & Explanation

Answer: Calculation:
• Nominal Value $= 5,000 \times ₹100 = ₹5,00,000$.
• Cash Received at 5% discount $= 5,000 \times ₹95 = ₹4,75,000$.
• Discount on Issue $= 5,000 \times ₹5 = ₹25,000$.
• Premium on Redemption (10%) $= 5,000 \times ₹10 = ₹50,000$.
• Total Loss on Issue $= ₹25,000 (\text{Discount}) + ₹50,000 (\text{Prem on Red}) = ₹75,000$.

Journal Entry:
Bank A/c ........................................... Dr. 4,75,000
Loss on Issue of Debentures A/c .................... Dr. 75,000
To 9% Debentures A/c ....................................... 5,00,000
To Premium on Redemption of Debentures A/c ................. 50,000
(Being 5,000 debentures issued at 5% discount redeemable at 10% premium).
Debit Bank 475k; Debit Loss on Issue 75k (25k disc + 50k prem); Credit Debentures 500k; Credit Prem on Red 50k.

How is "Discount or Loss on Issue of Debentures" written off? In what priority order must available balances be utilized?

Reveal Answer & Explanation

Answer:

Under circular guidelines of ICAI and Section 52(2)(c) of the Companies Act 2013, Discount or Loss on Issue of Debentures must be completely written off in the very year in which the debentures are issued.
Priority Order:
1. First: It must be written off against the available balance in the Securities Premium Account.
2. Second: Any remaining un-written-off balance is charged to the Statement of Profit and Loss (under Finance Costs).

Must be written off in year of issue; First from Securities Premium, then from Statement of P&L.

What does it mean when debentures are issued as "Collateral Security"? Explain the two alternative methods of recording it.

Reveal Answer & Explanation

Answer:

Collateral Security means secondary, supplementary security deposited with a lender (like a bank) in addition to primary mortgage security against a term loan.
Two Methods:
1. First Method (No entry): No journal entry is passed in books. In the Balance Sheet under Long-Term Borrowings, a descriptive note is disclosed: "Bank loan secured by pledge of ₹X Debentures as collateral security."
2. Second Method (Entry passed): The entry Debenture Suspense A/c Dr. to [Coupon]% Debentures A/c is passed. On the Balance Sheet, Debenture Suspense is deducted from Debentures, yielding zero net addition.

Secondary security for loans; Method 1 uses footnote disclosure; Method 2 uses Debenture Suspense A/c.

Where is "Premium on Redemption of Debentures" shown in the Balance Sheet of a company?

Reveal Answer & Explanation

Answer:

Premium on Redemption of Debentures represents a future capital obligation. It is shown on the Equity and Liabilities side of the Balance Sheet under the major head Non-Current Liabilities and sub-head Other Long-Term Liabilities (or under Current Liabilities if the debentures are due for redemption within the next 12 months).

Shown under Non-Current Liabilities → Other Long-Term Liabilities on the Balance Sheet.

Differentiate between Shares and Debentures on the basis of: (a) Status of holder, (b) Rate of return, (c) Voting rights, (d) Legality of issue at a discount.

Reveal Answer & Explanation

Answer: • (a) Status: Shareholder is an owner; Debenture holder is a creditor.
• (b) Return: Shares receive dividends (fluctuating, appropriation of profit); Debentures receive fixed interest (charge against profit).
• (c) Voting Rights: Shares have voting rights; Debentures have zero voting rights.
• (d) Issue at Discount: Section 53 of Companies Act 2013 prohibits issue of shares at discount; Debentures can legally be issued at discount without legal barrier.
Shares = owners, dividends, voting, no discount; Debentures = creditors, fixed interest, no voting, discount allowed.

Pass the Journal entry for annual interest of ₹60,000 on 10% Debentures, where Tax Deducted at Source (TDS) is 10%.

Reveal Answer & Explanation

Answer: Calculation:
• Gross Interest $= ₹60,000$.
• TDS @ 10% $= ₹6,000$. Net Interest payable to debenture holders $= ₹54,000$.

Journal Entries:
1. Debenture Interest A/c .......................... Dr. 60,000
    To Debentureholders' A/c ................................... 54,000
    To TDS Payable A/c ......................................... 6,000

2. Debentureholders' A/c ........................... Dr. 54,000
TDS Payable A/c ................................... Dr. 6,000
    To Bank A/c ................................................ 60,000
Debit Interest 60k; Credit Debentureholders 54k; Credit TDS Payable 6k.

A company issues 1,000 8% Debentures of ₹100 each at par, redeemable at par. Pass the Journal entry.

Reveal Answer & Explanation

Answer: Journal Entry:
Bank A/c ........................................... Dr. 1,00,000
To 8% Debentures A/c ....................................... 1,00,000
(Being 1,000 8% debentures of ₹100 each issued at par, redeemable at par).
Case 1: Standard issue at par, redeemable at par; Debit Bank, Credit Debentures.

Why is "Loss on Issue of Debentures" debited on the day of issue rather than waiting until the day of redemption 5 years later?

Reveal Answer & Explanation

Answer:

Under the Prudence (Conservatism) Principle of GAAP, a business must anticipate and record all known future liabilities and losses immediately, even if settlement occurs years later. By committing in the debenture prospectus to redeem at a premium, the firm incurs an irrevocable legal debt liability on the issue date itself, requiring immediate recognition of the loss.

Prudence principle mandates immediate recognition of known future contractual liabilities.

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