CourseMat Issue and Redemption of Debentures (Along With Solution)

Corporate Accounting Procedures
Issue and Redemption

of Debentures
F.Y. B.COM
Monsoon Semester
COMPILED BY: Vaibhav Kadia

AU/2016 B.COM./MON.SEM/CAP/ (ISSUE AND REDEMPTION OF
DEBENTURES) /VDK/2016-17
Learning Objective:
Understand the meaning and different types of debentures.

To know different ways in which debentures are issued and their respective effect in
companys book.
Explain the different methods of redemption of debentures and workout problems
relating that.
Along with explaining the accounting entries related to debentures also depart
knowledge regarding provisions and process related to its issue.
Session Plan:
Session Topic to be Discussed
No.
Pedagogy
Introduction of debenture
Definition
Types
Differentiation between shares and debentures
Provisions as per Section 71
Lecture , Class discussion
Issue of debenture
For cash(at par, at premium, at discount)
As collateral security
For Consideration
Interest on debenture
Lecture , Class discussion,

Practical illustrations
Redemption of debentures
Issue at par and redeemable at par
Issue at a discount and redeemable at par
Issue at premium and redemption at par
Issue at par and redeemable at premium
Issue at discount and redemption at premium
Issued at a premium and redeemable at premium

Methods of redeeming debentures

Conversion to equity shares
Sinking fund method

AU/B.COM/MON.SEM./CAP/ (ISSUE AND REDEMPTION OF DEBENTURES)/2016-17
Page 1
Introduction:
Meaning of Debentures
Companies require money from time to time. This requirement is met by the company partly
by raising share capital and partly by depending on public borrowings like debentures which
help the companies in borrowing money from a large section of the general public.
The word debenture has been derived from a Latin word debere which means to borrow.
A debenture can be defined as a certificate issued by a company under its common seal
acknowledging a debt due by it to its holder. The company repays the money borrowed after
a specified period and the fixed interest amount annually or half-yearly as per the terms of
issue of debentures, to its holders. Such investors are known as debenture holders.
Types of Debentures:
A company may issue various kinds of debentures with different rights as given below:
From the Point of view of Security

(a) Secured Debentures (Mortgage Debentures):
Debentures which are secured by a mortgage or charge on the whole or a part of the assets of
the company are known as mortgage debentures. Sometimes on the same security, money is
borrowed by the company by issuing debentures in two or more instalments. In such case
debentures are further classified in to First and Second debentures on the basis of order in
which they have been issued.
In case secured debentures are issued to public, it becomes essential for the company to make
Trust Deed and appoint Trustees who will hold the property given by way of security in
trust for the benefit of all debenture holders. Secured debentures are shown under the heading
Secured Loans in the balance sheet.
(b) Unsecured Debentures (Naked Debentures):
These are debentures which do not carry any charge on the assets of the company. The
holders of such debentures are not given any security hence such debentures are risky for
them.
From the Point of view of Tenure

(a) Redeemable Debentures:
Redeemable debentures provide for the payment of the principal amount on the expiry of a
certain period. Such debentures can be reissued even after they have been redeemed until
they have been cancelled. The period of redemption is stated in Debenture or Trust Deed.
(b) Irredeemable Debentures (Perpetual Debentures):
In case of irredeemable debentures, the company does not give any undertaking for the
repayment of money borrowed by issuing such debentures after a fixed time or within a fixed
period during the continuance of business by the company. Company may repay the
debentures at any time it may choose to do so, but the investors cannot compel the company.
Page 2
From the Point of view of Convertibility

(a) Convertible Debentures:
These are debentures which are wholly or partly convertible into shares of the company as
per the terms of their issue.
(b) Non-Convertible Debentures:
Debentures not convertible into shares of the company are termed as non-convertible
debentures. Most debentures issued by companies fell in this category.
From the Point of View of Transferability

(a)Registered Debentures:
Registered debentures are made out in the name of specific person, who are registered as a
debenture holders in the books of the company. They are transferable in the same way as
shares.
(b)Bearer Debentures:
Bearer debentures are treated as negotiable instruments and are transferable by delivery
alone. The names of such debenture holders need not be registered. Thus bearer debentures
are like currency notes, who posses it is its owner/holder.
Distinction between Debentures and Shares:

Basis for comparison
What is it?
Holder
Status of Holders
Form of Return
Security of Payments
Voting Rights
Conversion
Repayment during
liquidation
Quantum
Debentures
Debenture is the debt of the
company.
The holder of debenture is
known as debenture holder
Creditors
Debenture holders get the
interest.
Yes
The holders of debenture do not
have voting rights.
Debentures can be converted
into shares.
Debentures get priority over
shares, and so they are repaid
before shares.
Shares
Share is the capital of the
company.
The holder of shares is
known as shareholder
Owners
Shareholders
get
the
dividend.
No
The holders of shares have
voting rights.
Shares
can
never
be
converted in to debentures
Shares are repaid after the
payment of all the liabilities.
Interest on debentures is a Dividend on shares is an

charge
against
profit. appropriation
of
profit.
Page 3
Trust Deed
When the debentures are issued No trust deed is executed in

to the public, trust deed must be case
of
shares.
executed.
Provisions relating to Debentures (As per Section 71-Companies Act,

2013):
1. A company may issue debentures with an option to convert such debentures into
shares, either wholly or partly at the time of redemption, provided that the issue of
debentures with an option to convert such debentures into shares, wholly or partly,
shall be approved by a special resolution passed by the shareholders in a duly
convened general meeting of the company.
2. Company shall not issue any debentures carrying any voting rights.
3. Company can issue secured or unsecured debentures. Secured debentures may be
issued by a company subject to such terms and conditions as may be prescribed.
4. Where debentures are issued by a company under this section, the company shall
create a debenture redemption reserve account out of the profits of the company
available for payment of dividend and the amount credited to such account shall not
be utilised by the company except for the redemption of debentures.
5. No company shall issue a prospectus or make an offer or invitation to the public or to
its members exceeding five hundred for the subscription of its debentures, unless the
company has, before such issue or offer, appointed one or more debenture trustees.
6. A debenture trustee shall take steps to protect the interests of the debenture-holders
and redress their grievances in accordance with such rules as may be prescribed.
7. Any provision contained in a trust deed for securing the issue of debentures, or in any
contract with the debenture-holders secured by a trust deed, shall be void in so far as
it would have the effect of exempting a trustee thereof from, or indemnifying him
against, any liability for breach of trust, where he fails to show the degree of care and
due diligence required of him as a trustee, having regard to the provisions of the trust
deed conferring on him any power, authority or discretion; provided that the liability
of the debenture trustee shall be subject to such exemptions as may be agreed upon by
a majority of debenture-holders holding not less than three-fourths in value of the
total debentures at a meeting held for the purpose.
8.
A company shall pay interest and redeem the debentures in accordance with the terms
and conditions of their issue.
9. Where at any time the debenture trustee comes to a conclusion that the assets of the
company are insufficient or are likely to become insufficient to discharge the principal
amount as and when it become due, the debenture trustee may file a petition before
Page 4
the tribunal and the tribunal may, after hearing the company and any other person
interested in the matter, by order, impose such restrictions on the incurring of any
further liabilities by the company as the tribunal may consider necessary in the
interests of the debenture-holders.
10. Where a company fails to redeem the debentures on the date of their maturity or fails
to pay interest on the debentures when its due, the tribunal may, on the application of
any or all of the debentures-holders, or debenture trustee and, after hearing the parties
concerned, direct, by order, the company to redeem the debentures forthwith on
payment of principal and interest due thereon.
11. If any default is made in complying with the order of the tribunal under this section,
every officer of the company who is in default shall be punishable with imprisonment
for a term which may extend to three years or with fine which shall not be less than
two lakh rupees but which may extend to five lakh rupees, or with both.
12. A contract with the company to take up and pay for any debentures of the company
may be enforced by a decree for specific performance.
13. The central government may prescribe the procedure, for securing the issue of
debentures, the form of debenture trust deed, the procedure for the debenture-holders
to inspect the trust deed and to obtain copies thereof, quantum of debenture
redemption reserve required to be created and such other matters.
The company shall not issue secured debentures, unless it complies with the
following conditions (as per Rule 18 of Companies Rules, 2014)
An issue of secured debentures may be made, provided the date of its redemption shall not
exceed ten years from the date of issue. Provided that a company engaged in the setting up of
infrastructure projects may issue secured debentures for a period exceeding ten years but not
exceeding thirty years.
Such an issue of debentures shall be secured by the creation of a charge, on the properties or
assets of the company, having a value which is sufficient for the due repayment of the
amount of debentures and interest thereon;
the company shall appoint a debenture trustee before the issue of prospectus or letter of offer
for subscription of its debentures and not later than sixty days after the allotment of the
debentures, execute a debenture trust deed to protect the interest of the debenture holders; and
the security for the debentures by way of a charge or mortgage shall be created in favour of
the debenture trustee on- any specific movable property of the company (not being in the nature of pledge); or
Page 5
- any specific immovable property wherever situate, or any interest therein.
Issue of Debentures for Cash:

1. Issue At Par
Bank A/c
To __% Debentures A/c
Dr.
SUM.1 Arijit Singh Ltd. issued 20,000 12% debentures of Rs.150 each. The public applied
for 18,500 debentures which were fully allotted, and all the money was duly received.
Bank A/c
To 12% Debentures A/c
Dr.
27,75,000
27,75,000
2. Issue at Premium
Bank A/c
To Securities Premium A/c
Dr.
SUM.2 Shreya Ghoshal Ltd. issued 10,000, 9% debentures of Rs.80 each, at a premium of
Rs.20 each.
Bank A/c
Dr.
10,00,000
8,00,000
2,00,000
3. Issue at Discount
Bank A/c
Discount on Issue of Debentures A/c
Dr.
Dr.
SUM.3 Atif Aslam Ltd. issued 6,000, 10% debentures of Rs.160 each at a discount of 5%.
Bank A/c
Dr.
Dr.
9,12,000
48,000
9,60,000
SUM.4 Papon Ltd. issued 6550 12% debentures of Rs. 100 each at a discount of 15%
redeemable at par.
Bank A/c
Dr. 5,56,750
Discount on Issue of Debentures A/c Dr.
98,250
6,55,000
Page 6
SUM.5 Amaal Malik Ltd. issued 35000 7% debentures of Rs. 120 each at par and redeemable
at par.
Bank A/c
Dr.
42,00,000
42,00,000
SUM.6 Palak Muchhal Ltd. issued 3000 4% debentures of Rs. 70 each at a premium of 30%.
Bank A/c
Dr.
2,73,000
2,10,000
63,000
Issue of Debentures for consideration other than cash:

Sometimes a company purchases assets like land, machinery etc. from vendors and instead of
making payment in cash issues debentures for consideration. Such issue of debentures is
called debentures issued for consideration other than cash. The entries made in such a
situation are as follows:
a) Sundry assets A/c
Dr.
(Assets taken over)
To Vendors A/c
(Purchase consideration)
(Being the assets and liabilities taken over)
b) Vendors A/c
Dr.
(Being the issue of debentures to satisfy purchase consideration)
SUM.7 Ayushmann Khurrana Ltd. acquired assets worth Rs.4,00,000 from Yuug Enterprise
and agreed to discharge purchase price by issue of 15% debenture of Rs.100 each. Find the
number of debentures issued and pass required journal entries under the following conditions:
Purchase price is Rs.4,80,000 and debentures are issued at par
No. of debentures issued = 4,80,000/100 = 4,800 Debentures
Asset A/c
Dr.
Goodwill A/c
Dr.
To Yuug Enterprise A/c
4,00,000
80,000
5,80,000
Yuug Enterprise A/c

Dr.
5,80,000
5,80,000
Purchase price is Rs.3,50,000 and debentures are issued at par

Page 7
Asset A/c
Dr.
4,00,000
To Yuug enterprise A/c
3,50,000
To Capital reserve A/c

Yuug Enterprise A/c
50,000
Dr.
4,50,000
4,50,000
Purchase price is Rs 4,40,000 and debentures are issued at 10% premium

Asset A/c
Dr.
Goodwill A/c
Dr.
4,00,000
40,000
4,40,000
Yuug Enterprise A/c

Dr.
4,40,000
4,00,000
40,000
Purchase price is Rs.3,80,000 and debentures are issued at 5% discount
Asset A/c
Dr.
3,80,000
To Capital reserve A/c

Yuug Enterprise A/c
4,00,000
20,000
Dr.
3,80,000
20,000
4,00,000
Page 8
SUM.8 Shaan Ltd. acquired assets worth Rs.8,50,000 from FY Enterprise for the purchase
consideration of Rs. 7,80,000. Shaan Ltd. paid the purchase consideration by issuing 4%
debentures of Rs.100 each at 30% premium. Pass necessary journal entries.
Asset A/c
To FY Enterprise A/c
To Capital Reserve A/c
Dr.
8,50,000
7,80,000
70,000
FY Enterprise A/c
Dr.
7,80,000
6,00,000
1,80,000
SUM.9 Anusha Mani Ltd. took over assets worth Rs.2,00,000 at an agreed value of Rs.
2,40,000 from Brinda Ltd. Anusha Mani Ltd. issued 9% debentures of 100 Rs. at a discount
of 20% in full satisfaction of the purchase price. Pass necessary journal entries in the books
of Anusha Mani Ltd.
Asset A/c
Goodwill A/c
To Brinda Ltd A/c
Dr.
Dr.
2,00,000
40,000
2,40,000
Brinda Ltd A/c

Dr.
2,40,000
60,000
3,00,000
Issue of Debentures as Collateral Security:

A company can borrow money from a bank or any other person or avail an overdraft from a
bank by giving debentures of the company as an additional security besides other property of
the company. The debentures so issued are known as debentures issued as collateral
security. The lender demands for collateral security just to be on the safer side if the amount
from the sale of principal security shall fall short of the loan money. These debentures are
given to the lender with the understanding that incase the company pays the loan they will be
returned back to company but incase it fails to repay then the lender will become a debenture
holder and will have all the rights.
There are two ways of dealing with such debenture in the accounts of the company:
First Method
No entry is made in the books of the company. A note is given in the Balance Sheet regarding
depositing of the debentures as a collateral security.
For example, Radio Mirchi Ltd has issued 9%, 1,000 debentures of Rs.50 each for a loan of
Rs. 30,000 taken from a bank.
Page 9
Particulars
Amt
Amt
Liabilities:
Secured Loans:
Bank loan (collaterally secured by an issue of Rs 30,000
50,000 debentures)
Second Method
The transaction may be recorded in the books of the company by the following entry:
Debenture Suspense A/c
Dr.
SUM.10
a) Issue of 35,000, 6% debentures of Rs.50 each as collateral security for bank loan of
Rs.17,50,000.
Dr.
17,50,000
17,50,000
b) For cancellation of 6% debentures as collateral security on repayment of bank loan.

Debenture Suspense account will appear as a deduction from the debentures on the liability
side of the Balance Sheet. When loan is repaid, the above entry will be cancelled by a reverse
entry:
6% Debentures A/c
Dr.
To Debenture Suspense A/c
17,50,000
17,50,000
SUM.11 Mika Singh Ltd. took a loan of Rs. 65,00,000 from Canara Bank and issued 65,000
13% debentures of Rs. 100 each as a collateral security. Pass necessary journal entries:
Dr.
65,00,000
65,00,000
When loan is repaid, the above entry will be cancelled by a reverse entry:
13% Debentures A/c
Dr.
65,00,000
To Debenture Suspense A/c
65,00,000
Conversion of Debentures into equity shares:
Page 10
The terms of issue may give an option to debenture holder to get their existing debentures
converted in to shares or new debentures. Even if the terms do not provide, the company can
also give such an option to its debenture holders. In case, the debenture holders exercise their
option, the journal entry will be as follow:
__% Debenture A/c
To debentureholder A/c
Dr.
Debentureholder A/c
To Equity share capital A/c
Dr.
SUM.12 Sonu Nigam Ltd. issued 2,000 14% Debentures of Rs.130 each issued at par and
redeemable at par were converted into Equity shares of Rs.10 each issued at par.
14% Debenture A/c
Dr.
2,60,000
2,60,000
Debentureholder A/c
Dr.
2,60,000
2,60,000
SUM.13 Kishore Kumar Ltd. issued 700 6% Debentures of Rs.150 each issued at par and
redeemable at par were converted into Equity shares of Rs.10 each issued at a discount of
5%.
6% Debenture A/c
Dr.
1,05,000
1,05,000
Debentureholder A/c
Share Discount A/c
Dr.
Dr.
1,05,000
5,250
1,10,250
SUM.14 Rs. 85,500 4% Debentures of Rs.95 each issued at par and redeemable at par were
converted into Equity shares of Rs.10 but only Rs. 9.50 was paid up.
Debenture A/c
Dr.
Debentureholder A/c
Dr.
To Equity Share capital A/c
85,500
85,500
85,500
85,500
Interest on Debentures:
Page 11
When a company issues debentures, it is under an obligation to pay interest thereon at fixed
percentage (half yearly) periodically until debentures are repaid. Interest payable is calculated
at the nominal value of debentures and is customary to prefix the rate of interest payable on
debentures with the Debentures Account. For example: 10% Debentures Account. Interest
on debenture is a charge against the profit of the company and must be paid whether the
company has earned any profit or loss.
According to Income Tax Act 1961, a company must deduct income tax at a prescribed rate
from the interest payable on debentures if it exceeds the prescribed limit. It is called Tax
Deducted at Source (TDS) and is to be deposited with the tax authorities.
Accounting Treatment
1. When interest is due
Debenture Interest A/c
Dr.
To Income Tax payable A/c
To Debenture holders A/c
(Amount of interest due on debenture and tax deducted at source)
2. For payment of interest to debenture holders

Debentureholders A/c
Dr.
To Bank A/c
(Amount of interest paid to debenture holders)
3. On transfer of Debenture Interest Account to profit and loss account

Profit and Loss A/c
Dr.
To Debenture Interest A/c
(Debenture interest transferred to profit and loss A/c)
4. On payment of tax deducted at source to Government

Income Tax Payable A/c
Dr.
To Bank A/c
(Payment of tax deducted at source on interest on debentures)
Page 12
SUM.15 Ankit Tiwari Ltd. issued 5,000 7% debentures of Rs. 160 each. Tax rate is 30%.
Interest is paid annually. Pass necessary journal entries.
1. Debenture Interest A/c
Dr.
56,000
16,800
39,200
2. Debenture holders A/c

To Bank A/c
Dr.
39,200
39,200
3. Profit and Loss A/c

Dr.
56,000
56,000
4. Income Tax Payable A/c

To Bank A/c
Dr.
16,800
16,800
SUM.16 Sunidhi Chauhan Ltd. issued 11,000 4% debentures of Rs. 100 each. Tax rate is
20%. Interest is paid annually. Pass necessary journal entries.
Journal Entries
Sr. No. Particulars
1
Debenture Interest A/c

Dr. Amt(Rs.)
Dr.
Cr.
Amt(Rs.)
44,000
8,800
35,200
Debenture holders A/c

To Bank A/c
Dr.
Profit and Loss A/c

Dr.
Income Tax Payable A/c

To Bank A/c
Dr.
35,200
35,200
44,000
44,000
8,800
8,800
Redemption of Debentures-Terms of Issue of Debentures

Page 13
Redemption at PAR
Bank A/c
Dr
To __% Debenture A/c
Redemption at PREMIUM
Bank A/c
Dr.
Loss on Issue of Debentures A/c
Dr.
To __%Debentures A/c
Issue at DISCOUNT
Bank A/c
Dr.
Discount on Issue
Debentures A/c
Dr.
To Debentures A/c
Bank A/c
Dr.
of Deb Disc A/c
Dr.
Dr.
To Premium on Redemption
of Debentures A/c
Issue at PREMIUM
Bank A/c
Dr.
Bank A/c
Dr.
To Debentures A/c
To Securities Premium Dr.
A/c
To Premium on Redemption of
Debentures A/c
Issue at PAR

Bank A/c
Dr.
(Allotment of debentures)
__% Debenture A/c
Dr.
(Redemption of debentures)
Debenture holder A/c
Dr.
To Bank A/c
(Debenture holders are paid)
SUM.17 Salim Merchant Ltd issued 6,000 11% debentures of Rs. 140 each and redeemable
at par.
Bank A/c
Dr.
8,40,000
8,40,000
11% Debenture A/c
Dr.
8,40,000
8,40,000
Debentureholder A/c
To Bank A/c
Dr.
8,40,000
8,40,000
Page 14

Bank A/c
To Debentures A/c
(Allotment of debentures at a discount)
Dr.
Dr.
__% Debenture A/c

Dr.

To Bank A/c
Dr.
SUM.18 Javed Ali Ltd. issued 7,000 12% debentures of Rs. 110 each at discount of 5%
repayable at par.
Bank A/c
Dr.
7,31,500
Dr.
38,500
7,70,000
12% Debenture A/c

Dr.
7,70,000
7,70,000
Debentureholder A/c
To Bank A/c
Dr.
7,70,000
7,70,000

Bank A/c
Dr.
To Debentures A/c
(Allotment of debentures at a premium)
__% Debenture A/c
Dr.
Debentureholder A/c
To Bank A/c
Dr.
Page 15
SUM.19 Tulsi Kumar Ltd. issued 15,000 9% debentures of Rs. 120 each at a premium of 5%
but redeemable at par.
Bank A/c
Dr.
18,90,000
18,00,000
90,000
9% Debenture A/c
Dr.
18,00,000
18,00,000
Debentureholder A/c
To Bank A/c
Dr.
18,00,000
18,00,000

Bank A/c
Dr.
Loss on Issue of Debentures A/c Dr. (with premium on redemption)
To __%Debentures A/c
(with nominal value of debenture)
To Premium on Redemption of Debenture A/c(with premium amount)
(Allotment of debentures at par and redeemed at a premium)
__% Debenture A/c
Dr.
Premium on Redemption of Debenture A/c Dr.
Debentureholder A/c
To Bank A/c
Dr.
SUM.20 Aditi Singh Ltd. issue 9,000 12% debentures of Rs. 200 each at par repayable at a
premium of 10%.
Bank A/c
Dr.
18,00,000
Dr.
1,80,000
18,00,000
To Premium on Redemption of Debenture A/c
1,80,000
12% Debenture A/c
Dr.
18,00,000
1,80,000
19,80,000
Debentureholder A/c
To Bank A/c
19,80,000
19,80,000
Dr.
Page 16

Bank A/c
Dr.
Deb Disc A/c
Dr.
Dr.
To Premium on Redemption of Debentures A/c
(Allotment of debentures at a discount and redeemable at premium)
__% Debenture A/c
Dr.
Debentureholder A/c
To Bank A/c
Dr.
SUM.21 Alka Ltd issued 30,000 10% debentures of Rs.

redeemable at premium of 10%.
Bank A/c
Dr.
Debenture Disc A/c
Dr.
Dr.
110 each at discount of 5% but

31,35,000
1,65,000
3,30,000
33,00,000
3,30,000
10% Debenture A/c

Dr.
33,00,000
3,30,000
36,30,000
Debentureholder A/c
To Bank A/c
36,30,000
36,30,000
Dr.
Page 17

Bank A/c
Dr.
Dr. (with premium on redemption)
(with nominal value of debenture)
(with premium on issue)
To Premium on Redemption of Debentures A/c (with premium on redemption)
__% Debenture A/c
Dr.
Debentureholder A/c
To Bank A/c
Dr.
SUM.22 Benny Ltd. Issued 15,000 7% debentures of Rs. 50 each at premium of 10% and
redeemable at premium of 5%.
Bank A/c
Dr.
8,25,000
Dr.
37,500
7,50,000
75,000
37,500
7% Debenture A/c
Dr.
7,50,000
37,500
7,87,500
Debentureholder A/c
To Bank A/c
7,87,500
7,87,500
Dr.
Page 18
SUM.23 Divya Kumar Ltd. issued 5,000 7% debentures

but redeemable at premium of 12%.
Bank A/c
Dr.
Debenture Disc A/c
Dr.
Dr.
of Rs. 180 each at discount of 6%

8,46,000
54,000
1,08,000
9,00,000
1,08,000
7% Debenture A/c
Dr.
9,00,000
1,08,000
10,08,000
Debentureholder A/c
To Bank A/c
10,08,000
10,08,000
Dr.
SUM.24 Kavita Seth Ltd. issued 3,000 9% debentures of Rs. 190 each and redeemable at par.
Bank A/c
Dr.
5,70,000
5,70,000
9% Debenture A/c
Dr.
5,70,000
5,70,000

To Bank A/c
Dr.
5,70,000
5,70,000
SUM.25 Honey Singh Ltd. issued 9,000 4% debentures of Rs. 120 each at par repayable at a
premium of 4%.
Bank A/c
Dr.
10,80,000
Dr.
43,200
10,80,000
To Premium on Redemption of Debenture A/c
43,200
4% Debenture A/c
Premium on Redemption of Debenture A/c
Dr.
Dr.
10,80,000
43,200
11,23,200
Debentureholder A/c
To Bank A/c
Dr.
11,23,200
11,23,200
Page 19
SUM.26 Shahid Mallya Ltd. issued Rs 3,000 9% debentures of Rs. 50 each at premium of
4% and redeemable at premium of 6%.
Bank A/c
Dr.
1,56,000
Dr.
9,000
1,50,000
6,000
9,000
9% Debenture A/c
Premium on Redemption of Debenture A/c
Dr.
Dr.
1,50,000
9,000
1,59,000
Debentureholder A/c
To Bank A/c
Dr.
1,59,000
1,59,000
SUM.27 Ltd. issued Rs.8,500 11% debentures of Rs. 90 each at premium of 5% but
redeemable at par.
Bank A/c
Dr.
8,03,250
7,65,000
38,250
11% Debenture A/c
Dr.
7,65,000
7,65,000

To Bank A/c
Dr.
7,65,000
7,65,000
SUM.28 Mithoon Ltd. issued 5,750 8% debentures of Rs. 10 each at discount of 2%

repayable at par.
Bank A/c
Dr.
56,350
Dr.
1,150
57,500
8% Debenture A/c
Dr.
57,500
57,500

To Bank A/c
Dr.
57,500
57,500
Page 20
Redemption through Sinking Fund Method / Debenture Redemption

Fund Method
Journal Entries
At the end of First Year
(a) For setting aside the fixed amount of profit for redemption
Profit & Loss Appropriation A/c
Dr.
To Debenture Redemption Fund A/c
(b) For investing the amount set aside for redemption
Debenture Redemption Fund Investment A/c
To Bank A/c
Dr.
At the end of second year and subsequent years other than last year
(a) For receipt of interest on Debenture Redemption Fund Investments

Bank A/c
Dr.
To Interest on Debenture Redemption Fund Investment A/c
(b) For transfer of Interest on Debenture Redemption Fund Investment to Debenture
Redemption Fund Account
Interest on Debenture Redemption Fund Investment A/c Dr.
(c) For setting aside the fixed amount of profit for redemption
Dr.
(d) For investments of the amount set aside for redemption and the interest earned on
DRFI
Dr.
To Bank A/c
Page 21
At the end of last year
(a) For receipt of interest

Bank A/c
Dr.
To Interest on Debenture Redemption Fund Investment A/c
(b) For transfer of interest on Debenture Redemption Fund Investment to Debenture
Redemption Fund Investment A/c
Interest on Debenture Redemption Fund Investment A/c Dr.
(c) For setting aside the fixed amount of profit for redemption
Dr.
(d) For encashment of Debenture Redemption Fund Investments
Bank A/c
Dr.
To Debenture Redemption Fund Investment A/c
(e) For the transfer of profit/loss on realisation of Debenture Redemption Fund
Investments
In case of Profit
Dr.
In case of Loss
Debenture Redemption Fund A/c
Dr.
To Debenture Redemption Fund Investment A/c
(f) For amount due to debentureholders on redemption
Debenture A/c
Premium on Redemption of Debentures (if at premium)
To Debentureholders A/c
Dr.
Dr.
(g) For payment to debentureholders

Debentureholders A/c
To Bank A/c
Dr.
(h) For transfer of Debenture Redemption Fund Account balance to General Reserve
Debenture Redemption Fund A/c
Dr.
To General Reserve A/c
To Capital Reserve A/c (profit on sale of investment)
Page 22
SUM.29 On 31st March, 2016 the following balances stood in the books of Shankar
Mahadevan Ltd.:
Particulars
Rs.
7.5% Debentures
80,00,000
9% Gujarat Govt. Bonds (Purchased at par)
32,00,000
10% AMC Bonds (face value Rs. 30,40,000)
28,80,000
Interest received on sinking fund investments (DRFI)
5,92,000
Sinking Fund (DRF)
60,80,000
Discount on issue of debentures
4,00,000
On 31st march, the investments were sold as under:

Gujarat Govt. Bonds at Rs. 95
AMC Bonds at Rs. 103.
On 1st April, 2016 the debentures of Rs. 48,00,000 were redeemed at a premium of 5%. On
the same day Central Govt. Bonds of Rs. 16,00,000 were purchased at a premium of 2%. The
amount of Rs.8,00,000 is transferred every year to the Sinking Fund.
You are required to
Pass necessary journal entries.
Prepare Sinking fund A/c., Sinking Fund Investment A/c. and
Debentureholder A/c.
Journal Entries
Sr
No.
Particulars
Bank A/c
Debit Rs.
Dr.
61,71,200
To DRFI A/c
2
DRFI A/c
61,71,200
Dr.
91,200
To DRF A/c
3
DRF A/c
91,200
Dr.
2,40,000
To Debenture discount A/c

4
Debenture A/c
Dr.
DRF A/c (premium amt)
Dr.
2,40,000
48,00,000
2,40,000
5
Debentureholder A/c
To Bank A/c
Credit
Rs.
50,40,000
Dr.
50,40,000
50,40,000
Page 23
P & L Appropriation A/c
Dr.
8,00,000
To DRF A/c
7
8,00,000
DRFI A/c
Dr.
16,32,000
To Bank A/c
8
16,32,000
DRF A/c
Dr.
48,00,000
91,200
47,08,800
Interest on DRFI A/c
Dr.
5,92,000
TO DRF A/c
DEBENTURE A/C
Particulars
Amount
To
debentureholder 48,00,000
a/c
To bal c/f
32,00,000
5,92,000
Particulars
By bal b/f
80,00,000
80,00,000
DEB REDEMPTION FUND INVST A/C (DRFI)

Particulars
Amount
Particulars
To bal b/f
32,00,000
By Bank a/c (sale)
28,80,000
To DRF a/c (profit)
91,200
To
Bank
a/c 16,32,000
(purchase)
By Bank a/c (sale)

By bal c/f
78,03,200
DEBENTURE REDEMPTION FUND A/C (DRF)

Particulars
Amount
Particulars
To
Deb.
Red. 2,40,000
By bal b/f
Premium a/c
To debenture discount 2,40,000
By Bank a/c (interest)
a/c
To general reserve a/c 47,08,800
By DRFI a/c (profit)
To capital reserve a/c
91,200
By P & L Appr. A/c
To bal c/f (missing)
22,83,200
75,63,200
Amount
80,00,000
Amount
30,40,000
31,31,200
16,32,000
78,03,200
Amount
60,80,000
5,92,000
91,200
8,00,000
75,63,200
Page 24
DEBENTURE DISCOUNT A/C

Particulars
Amount
To bal b/f
4,00,000
Particulars
By DRF a/c
By bal c/f
Amount
2,40,000
1,60,000
4,00,000
DEBENTURE HOLDER A/C

Particulars
Amount
To Bank a/c
50,40,000
4,00,000
Particulars
Amount
By 7.5% Debentures 48,00,000
a/c
By Deb. Red. Premium 2,40,000
a/c
50,40,000
50,40,000
SUM.30 On 31st March, 2016 the following balances stood in the books of Sonu Nigam Ltd.:
PARTICULARS
Rs.
12.5% Debentures
50,00,000
9% Central Govt. Bonds (Purchased at par)
25,00,000
10% AMC Bonds (face value Rs. 25,00,000)
27,60,000
Interest received on sinking fund investments
475000
Sinking Fund (DRF)
52,60,000
On 31st march the investments were sold as under:

Central Govt. Bonds at Rs. 110
AMC Bonds at Rs. 104.
On 1st April, 2016 all the debentures were redeemed at Rs.105 per debenture.
You are required to
Pass necessary journal entries.
Prepare Sinking fund A/c., Sinking Fund Investment A/c. and
Debentureholder A/c.
Page 25
Journal Entries
Sr
No.
Particulars
Bank A/c
Debit Rs.
Dr.
53,50,000
To Sinking fund Invst A/c

2
Sinking fund Invst A/c
53,50,000
Dr.
90,000
To Sinking fund A/c

3
90,000
Debenture A/c
Dr.
50,00,000
Sinking fund A/c (premium)
Dr.
1,87,500
To Debentureholder A/c
4
Debentureholder A/c
51,87,500
Dr.
51,87,500
To Cash/Bank A/c
5
51,87,500
Sinking fund A/c
Dr.
56,37,500
90,000
55,47,500
Interest on Sinking fund Invst A/c
Dr.
475000
To Sinking fund A/c
12.5% DEBENTURE A/C

Particulars
Amount
To
a/c
Particulars
By bal b/f
50,00,000
Particulars
To bal b/f
90,000
53,50,000
475000
Amount
50,00,000
50,00,000
SINKING FUND INVST A/C (DRFI)

Amount
Particulars
25,00,000
By Bank a/c
27,60,000
To Sinking fund a/c
Credit
Rs.
By Bank a/c
Amount
27,50,000
26,00,000
53,50,000
Page 26
SINKING FUND A/C

Particulars
To
Deb.
Red.
Premium a/c
To general reserve a/c
To Capital Reserve a/c
(DRF)
Amount
1,87,500
55,47,500
90,000
Particulars
By bal b/f
By interest a/c
475000
By Sinking fund Invst 90,000
a/c
58,25,000

Particulars
Amount
To Bank a/c
51,87,500
Amount
52,60,000
58,25,000
Particulars
Amount
By debentures a/c
50,00,000
By Deb. Red. Premium 1,87,500
a/c
51,87,500
51,87,500
SUM.31 The following balances appeared in the books of Arman Malik Ltd. as on April 01,
2016
(Rs.)
14 % Debentures
6,50,000
Debenture Redemption Fund
4,40,000
Debenture Redemption Fund Investments
4,40,000
The Debenture Redemption Fund Investments were represented by Rs. 5,60,000, 9% Govt.
Securities(Face value). The annual instalment added to the fund was Rs.55,200. On 31st
March 2016, the bank balance before the receipt of interest on investments was Rs.60,000.
On the date, all the investments were sold at 76% and the debentures were duly redeemed.
Prepare Debentures Account, Debenture Redemption Fund Account and Debenture
Redemption Fund Investment Account for 2016-17. The company closes its books on March
31, every year.
14 % DEBENTURE A/C
Particulars
Amount
To
a/c
6,50,000
Particulars
By bal b/f
Amount
6,50,000
6,50,000
Page 27

Particulars
Amount
Particulars
To bal b/f
4,40,000
By Bank a/c
Amount
4,25,600
By Sinking fund a/c 14,400

(loss)
4,40,000
SINKING FUND A/C

Particulars
To Sinking fund Invst
a/c
4,40,000
(DRF)
Amount
14,400
Particulars
By bal b/f
Amount
4,40,000
4,80,800
By P & L Appr. a/c
55,200
4,95,200
4,95,200
SUM.32 Arijit Singh Ltd. had Rs.8,00,000 15% debentures outstanding as on 31st March
2016 redeemable on 1st April, 2016. On that day, the sinking fund (DRF) was Rs. 7,49,000
represented by Rs.1,00,000 own debentures purchased at the average price of Rs.99 and
Rs.6,60,000 9% stock. The annual instalment was Rs.28,400. On 1st April, 2016 all the
investments were sold at Rs.98 and the debentures were redeemed.
You are required to
Prepare Sinking fund A/c, Sinking Fund Investment A/c, 15 % Debenture A/c
and Debenture holder A/c
15 % DEBENTURE A/C
Particulars
Amount
To Debentureholder 7,00,000
a/c
To Bank a/c
1,00,000
8,00,000
Particulars
By bal b/f
Amount
8,00,000
8,00,000
Page 28

Particulars
Amount
Particulars
To bal b/f
99,000
By Bank a/c
6,50,000
To sinking fund a/c
1,000
By Sinking fund a/c

By 15% Debentures a/c
7,50,000
SINKING FUND A/C

Particulars
To Sinking fund Invst
a/c (loss)
(DRF)
Amount
8,48,600
3,200
To Capital Reserve a/c 1,000
7,00,000
3200
1,00,000
7,50,000
Particulars
By bal b/f
Amount
7,49,000
74,400
By Bank a/c (interest)

(59,400 + 15,000)
By Sinking fund Invst 1,000
a/c (profit)
By P & L Appr. a/c
28,400
8,52,800

Particulars
Amount
To Bank a/c
7,00,000
Amount
6,46,800
8,52,800
Particulars
By debentures a/c
Amount
7,00,000
7,00,000
References:
Hanif& Mukherjee, Amitabhah and Mohammed, Modern Accountancy
Volume 1, Tata McGraw Hill Education Private Limited
Dr. P. C. Tulsian, Financial Accounting, S. Chand & Company Ltd.
S. N. Maheshwari, Corporate Accounting, Fifth Edition, Vikas Publishing
House
S. Kr. Paul, Corporate Accounting, New Central Book Agency
Page 29
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CourseMat Issue and Redemption of Debentures (Along With Solution)

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Corporate Accounting Procedures

Issue and Redemption

COMPILED BY: Vaibhav Kadia

Understand the meaning and different types of debentures.

Lecture , Class discussion

Lecture , Class discussion,

Lecture , Class discussion,

Methods of redeeming debentures

Lecture , Class discussion,

AU/B.COM/MON.SEM./CAP/ (ISSUE AND REDEMPTION OF DEBENTURES)/2016-17

From the Point of view of Security

From the Point of view of Tenure

From the Point of view of Convertibility

From the Point of View of Transferability

Distinction between Debentures and Shares:

Interest on debentures is a Dividend on shares is an

AU/B.COM/MON.SEM./CAP/ (ISSUE AND REDEMPTION OF DEBENTURES)/2016-17

When the debentures are issued No trust deed is executed in

Provisions relating to Debentures (As per Section 71-Companies Act,

AU/B.COM/MON.SEM./CAP/ (ISSUE AND REDEMPTION OF DEBENTURES)/2016-17

- any specific immovable property wherever situate, or any interest therein.

Issue of Debentures for Cash:

Issue of Debentures for consideration other than cash:

Yuug Enterprise A/c

Purchase price is Rs.3,50,000 and debentures are issued at par

No. of debentures issued = 3,50,000/100 = 3,500 Debentures

To Yuug enterprise A/c

To Capital reserve A/c

To 15% Debentures A/c

Purchase price is Rs 4,40,000 and debentures are issued at 10% premium

Yuug Enterprise A/c

Purchase price is Rs.3,80,000 and debentures are issued at 5% discount

No. of debentures issued = 3,80,000/95 = 4,000 Debentures

To Yuug Enterprise A/c

To Capital reserve A/c

Discount on Issue of Debentures A/c Dr.

To 15% Debentures A/c

AU/B.COM/MON.SEM./CAP/ (ISSUE AND REDEMPTION OF DEBENTURES)/2016-17

Brinda Ltd A/c

Issue of Debentures as Collateral Security:

b) For cancellation of 6% debentures as collateral security on repayment of bank loan.

Conversion of Debentures into equity shares:

AU/B.COM/MON.SEM./CAP/ (ISSUE AND REDEMPTION OF DEBENTURES)/2016-17

2. For payment of interest to debenture holders

3. On transfer of Debenture Interest Account to profit and loss account

4. On payment of tax deducted at source to Government

AU/B.COM/MON.SEM./CAP/ (ISSUE AND REDEMPTION OF DEBENTURES)/2016-17

2. Debenture holders A/c

3. Profit and Loss A/c

4. Income Tax Payable A/c

Debenture Interest A/c

Debenture holders A/c

Profit and Loss A/c

Income Tax Payable A/c

Redemption of Debentures-Terms of Issue of Debentures

Issue at par and redeemable at par

AU/B.COM/MON.SEM./CAP/ (ISSUE AND REDEMPTION OF DEBENTURES)/2016-17

Issue at par and redeemable at par

AU/B.COM/MON.SEM./CAP/ (ISSUE AND REDEMPTION OF DEBENTURES)/2016-17

Issue at a discount and redeemable at par

__% Debenture A/c

Debenture holder A/c

12% Debenture A/c

Issue at premium and redemption at par