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Issue and Redemption of Debentures

NCERT Class 12 · Accountancy Based on NCERT Class 12 Accountancy textbook · Free CBSE study kit

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Chapter Notes

Overview
This chapter explains how companies raise long-term debt by issuing debentures, which are written instruments acknowledging a loan. The key idea is that debentures are borrowed capital, not ownership, and their accounting involves recording their issue (at par, discount, or premium), interest payments, and eventual redemption. A student must understand the journal entries for various issue and redemption scenarios, the treatment of discount/loss on issue, and how to present debentures in the balance sheet.
Key Concepts (22)
Debenture
A written instrument acknowledging a debt under the common seal of the company, containing a contract for repayment of principal after a specified period and for payment of interest at a fixed rate.
e.g. A company issues a 10% debenture of Rs. 100 to raise funds; the holder gets Rs. 10 interest yearly and gets Rs. 100 back after 10 years.
Bond
An instrument of acknowledgement of debt, traditionally issued by the government, but now also by semi-government and non-governmental organisations; the terms 'debentures' and 'bonds' are used interchangeably.
e.g. Government bonds are considered risk-free, while corporate bonds carry higher risk.
Secured Debentures
Debentures where a charge (fixed or floating) is created on the assets of the company for payment in case of default.
e.g. A company issues debentures with a fixed charge on its factory building.
Unsecured Debentures
Debentures that do not have a specific charge on the assets of the company; a floating charge may be created by default.
e.g. These are rarely issued because they carry higher risk for investors.
Redeemable Debentures
Debentures that are payable on the expiry of a specific period, either in lump sum or in instalments during the life of the company.
e.g. A 10-year debenture that must be repaid at the end of 10 years.
Irredeemable Debentures
Debentures for which the company does not give any undertaking for repayment; repayable only on winding-up or after a very long period.
e.g. Also called perpetual debentures, these are rarely issued in practice.
Convertible Debentures
Debentures that can be converted into equity shares or other securities at the option of the company or the debentureholder.
e.g. A partly convertible debenture allows conversion of 50% of its value into shares after 3 years.
Non-Convertible Debentures
Debentures that cannot be converted into shares or any other securities.
e.g. Most debentures issued by companies are non-convertible.
Specific Coupon Rate Debentures
Debentures issued with a specified rate of interest (coupon rate), which may be fixed or floating (tagged to bank rate).
e.g. A 12% debenture where the interest rate is fixed at 12% per annum.
Zero Coupon Rate Debentures
Debentures that do not carry a specific rate of interest; issued at a substantial discount, and the difference between nominal value and issue price is treated as interest.
e.g. A Rs. 100 debenture issued at Rs. 80 with no interest; the Rs. 20 difference is the return to the investor.
Registered Debentures
Debentures for which all details of holders are entered in a register kept by the company; transferable only by executing a regular transfer deed.
e.g. The company maintains a record of who owns each debenture.
Bearer Debentures
Debentures that can be transferred by delivery; the company does not keep any record of holders; interest is paid to the person producing the interest coupon.
e.g. These are like currency notes — whoever holds them is the owner.
Issue of Debentures at Par
When the issue price of a debenture is equal to its face value.
e.g. A Rs. 100 debenture issued for Rs. 100.
Issue of Debentures at a Discount
When a debenture is issued at a price below its nominal value.
e.g. A Rs. 100 debenture issued for Rs. 95, with Rs. 5 being the discount.
Issue of Debentures at a Premium
When a debenture is issued at a price above its nominal value.
e.g. A Rs. 100 debenture issued for Rs. 110, with Rs. 10 being the premium.
Collateral Security
A subsidiary or secondary security provided in addition to the primary security when a company obtains a loan; debentures may be issued as collateral security.
e.g. A company takes a bank loan of Rs. 10,00,000 and issues Rs. 12,00,000 worth of debentures as additional security.
Debenture Suspense Account
An account used to record the nominal value of debentures issued as collateral security when the second method of accounting is followed.
e.g. Debenture Suspense A/c Dr. 12,00,000 To 10% Debentures A/c 12,00,000.
Loss on Issue of Debentures Account
An account debited with the total of discount on issue and premium on redemption when debentures are issued at a discount and/or redeemable at a premium.
e.g. When Rs. 1,00,000 debentures are issued at 5% discount and redeemable at 5% premium, Loss on Issue is debited with Rs. 10,000.
Premium on Redemption of Debentures Account
A liability account credited with the premium payable at the time of redemption; shown under Non-current liabilities until redemption.
e.g. When debentures are redeemable at a premium of 5%, Premium on Redemption A/c is credited with 5% of face value.
Securities Premium Reserve
A reserve account credited with the premium received on issue of debentures or shares; shown under Reserves and Surplus on the liabilities side of the balance sheet.
e.g. When debentures are issued at a premium of Rs. 10 each, Securities Premium Reserve is credited with Rs. 10 per debenture.
Over Subscription
When the number of debentures applied for is more than the number offered to the public.
e.g. Company offers 10,000 debentures but receives applications for 14,000.
Tax Deducted at Source (TDS)
Income tax deducted by the company from interest payable on debentures at a prescribed rate before paying the debentureholder.
e.g. If interest is Rs. 10,000 and TDS rate is 10%, the company deducts Rs. 1,000 and pays Rs. 9,000 to the debentureholder.
Formulas & Equations (3)
Number of debentures issued = Purchase Consideration / Issue Price per Debenture
Reads as: Number of debentures issued equals purchase consideration divided by issue price per debenture
Variables: Purchase Consideration = total amount payable to vendor (in Rs.); Issue Price per Debenture = face value + premium (if any) or face value - discount (if any) (in Rs.)
Use when: When debentures are issued for consideration other than cash, to calculate how many debentures to allot
⚠ Students use face value instead of issue price, especially when there is a premium or discount.
Interest on Debentures = Nominal Value × Rate of Interest × Time Period
Reads as: Interest on debentures equals nominal value multiplied by rate of interest multiplied by time period
Variables: Nominal Value = face value of debentures (Rs.); Rate of Interest = annual coupon rate (%); Time Period = fraction of year (e.g., 6/12 for half-year)
Use when: Calculating the amount of interest due on debentures for a given period
⚠ Students calculate interest on the issue price instead of the nominal (face) value.
Loss on Issue of Debentures = Discount on Issue + Premium on Redemption
Reads as: Loss on issue of debentures equals discount on issue plus premium on redemption
Variables: Discount on Issue = face value - issue price (Rs.); Premium on Redemption = redemption price - face value (Rs.)
Use when: When debentures are issued at a discount and/or redeemable at a premium, to find the total loss to be written off
⚠ Students forget to include both components when both discount and premium on redemption exist.
How It Works
Issue of Debentures for Cash (Single Instalment)
  1. Step 1: Receive application money — Bank A/c Dr. To Debenture Application & Allotment A/c
  2. Step 2: Allot debentures — Debenture Application & Allotment A/c Dr. To Debentures A/c
💡 When the whole amount is received in one go, only one receipt entry and one allotment entry are needed.
Issue of Debentures for Cash (Two Instalments)
  1. Step 1: Receive application money — Bank A/c Dr. To Debenture Application A/c
  2. Step 2: Transfer application money on allotment — Debenture Application A/c Dr. To Debentures A/c
  3. Step 3: Make allotment money due — Debenture Allotment A/c Dr. To Debentures A/c
  4. Step 4: Receive allotment money — Bank A/c Dr. To Debenture Allotment A/c
💡 The application money is first credited to a separate application account, then transferred to debentures account on allotment.
Issue of Debentures at a Discount
  1. Step 1: Receive application money — Bank A/c Dr. To Debenture Application & Allotment A/c
  2. Step 2: Allot debentures and record discount — Debenture Application & Allotment A/c Dr., Discount on Issue of Debentures A/c Dr. To Debentures A/c
  3. Step 3: Write off discount — Securities Premium Reserve A/c or Statement of Profit and Loss Dr. To Discount on Issue of Debentures A/c
💡 Discount on issue is a loss and must be written off during the life of debentures; it can be written off against Securities Premium Reserve if available.
Issue of Debentures at a Premium
  1. Step 1: Receive application money — Bank A/c Dr. To Debenture Application & Allotment A/c
  2. Step 2: Allot debentures and record premium — Debenture Application & Allotment A/c Dr. To Debentures A/c, To Securities Premium Reserve A/c
💡 The premium amount is credited to Securities Premium Reserve and shown under Reserves and Surplus in the balance sheet.
Issue of Debentures for Consideration Other Than Cash
  1. Step 1: Record purchase of assets — Sundry Assets A/c Dr. To Vendor's A/c
  2. Step 2: Issue debentures to vendor — Vendor's A/c Dr. To Debentures A/c (and to Securities Premium Reserve A/c if at premium, or Discount on Issue A/c if at discount)
💡 The number of debentures issued is calculated by dividing the purchase consideration by the issue price per debenture.
Issue of Debentures as Collateral Security (First Method)
  1. Step 1: No journal entry is made for the issue of debentures.
  2. Step 2: In the balance sheet, below the loan item, a note is appended stating that the loan is secured by the issue of debentures as collateral security.
💡 This method is simpler; no liability is created in the books, only a disclosure in the notes to accounts.
Issue of Debentures as Collateral Security (Second Method)
  1. Step 1: Record the issue — Debenture Suspense A/c Dr. To Debentures A/c
  2. Step 2: Show Debenture Suspense as a deduction from Debentures in the notes to accounts of long-term borrowings.
  3. Step 3: On repayment of loan, reverse the entry — Debentures A/c Dr. To Debenture Suspense A/c
💡 Debenture Suspense account is a contra account to Debentures; it is not an expense or income.
Accounting for Interest on Debentures
  1. Step 1: When interest is due — Debenture Interest A/c Dr. To Income Tax Payable A/c, To Debentureholders A/c
  2. Step 2: Pay interest to debentureholders — Debentureholders A/c Dr. To Bank A/c
  3. Step 3: Transfer interest to Profit and Loss — Statement of Profit and Loss Dr. To Debenture Interest A/c
  4. Step 4: Pay TDS to government — Income Tax Payable A/c Dr. To Bank A/c
💡 Interest on debentures is a charge against profit, not an appropriation; TDS must be deducted if interest exceeds the prescribed limit.
Writing off Discount/Loss on Issue of Debentures
  1. Step 1: Determine the total loss (discount on issue + premium on redemption, if any).
  2. Step 2: Write off the loss against Securities Premium Reserve (if available) or debit it to Statement of Profit and Loss over the life of debentures.
💡 Discount on issue to be written off within 12 months is shown under Other Current Assets; the rest under Other Non-Current Assets.
Exam Traps — Don't Make These Mistakes
⚠ Confusing Issue Price with Face Value in Number of Debentures Calculation
✗ Number of debentures = Purchase Consideration / Face Value
→ When debentures are issued at a premium or discount, the issue price (face value ± premium/discount) is the actual amount per debenture received or given, not the face value.
✓ Number of debentures = Purchase Consideration / Issue Price per Debenture (e.g., if face value is Rs. 100 and issued at 10% premium, issue price = Rs. 110)
⚠ Forgetting to Record Premium on Redemption as a Liability
✗ Only debit Loss on Issue of Debentures and credit Debentures A/c, ignoring Premium on Redemption of Debentures A/c
→ Premium on redemption is a future liability that must be credited to a separate account; it is not part of the debenture's face value.
✓ Debit Loss on Issue of Debentures A/c (with premium amount), credit Premium on Redemption of Debentures A/c (with premium amount)
⚠ Treating Interest on Debentures as an Appropriation of Profit
✗ Debenture Interest is transferred to Profit and Loss Appropriation A/c
→ Interest on debentures is a charge against profit, not an appropriation. It is paid even if there is no profit, and is transferred to the Statement of Profit and Loss (not Appropriation).
✓ Statement of Profit and Loss Dr. To Debenture Interest A/c
⚠ Ignoring TDS When Recording Interest Payment
✗ Debenture Interest A/c Dr. To Bank A/c (for the full interest amount)
→ The company must deduct tax at source (TDS) from interest payable; the full interest is not paid to debentureholders. TDS is a separate liability.
✓ Debenture Interest A/c Dr. To Income Tax Payable A/c (TDS amount), To Debentureholders A/c (net amount)
⚠ Mistaking Debenture Suspense as an Expense
✗ Debenture Suspense A/c is an expense and is debited to Profit and Loss
→ Debenture Suspense is a contra account to Debentures; it represents the nominal value of debentures issued as collateral security and is shown as a deduction from debentures in the balance sheet.
✓ Debenture Suspense A/c is shown as a deduction from Debentures in the notes to accounts of long-term borrowings.
⚠ Writing Off Discount on Issue Directly to Profit and Loss Without Considering Securities Premium Reserve
✗ Discount on Issue of Debentures A/c Dr. To Statement of Profit and Loss A/c
→ The discount/loss on issue should first be written off against Securities Premium Reserve if available; only the remaining amount is charged to Statement of Profit and Loss.
✓ Securities Premium Reserve A/c Dr. (if available) and/or Statement of Profit and Loss Dr. To Discount on Issue of Debentures A/c
Compare & Contrast
Nature of Capital
Share
Debenture
A share represents ownership of the company (owned capital), while a debenture is an acknowledgement of debt (borrowed capital).
Return
Share
Debenture
Return on shares is dividend (variable, appropriation of profit), while return on debentures is interest (fixed, charge on profit, payable even if no profit).
Voting Rights
Share
Debenture
Shareholders enjoy voting rights, while debentureholders do not normally have any voting rights.
Repayment
Share
Debenture
Share capital is normally not returned during the life of the company, while debentures are generally issued for a specified period and repayable on expiry.
Convertibility
Convertible Debentures
Non-Convertible Debentures
Convertible debentures can be converted into equity shares or other securities at the option of the company or holder, while non-convertible debentures cannot be converted.
Tenure
Redeemable Debentures
Irredeemable Debentures
Redeemable debentures are payable on expiry of a specific period, while irredeemable (perpetual) debentures are repayable only on winding-up or after a very long period.
Exam Focus
Marks pattern: 1-2 MCQs (1 mark each), 1-2 Short Answer questions (3 marks each), 1 Long Answer question (5-6 marks) — typically 8-12 marks total
Most asked: Journal entries for issue of debentures at par, discount, and premium · Issue of debentures for consideration other than cash (including calculation of number of debentures) · Issue of debentures as collateral security (both methods) · Loss on issue of debentures (discount + premium on redemption) · Writing off discount/loss on issue of debentures · Interest on debentures including TDS · Balance sheet presentation of debentures and related items
Don't skip: Journal entries for issue of debentures with different terms of issue and redemption (e.g., issued at discount, redeemable at premium); Issue of debentures as collateral security with balance sheet presentation; Calculation and journal entries for loss on issue of debentures
One-Line Revision (read aloud before the exam)
  1. A debenture is a written instrument acknowledging a debt under the common seal of the company.
  2. Debentures are borrowed capital, while shares are owned capital.
  3. Interest on debentures is a charge on profit, payable even if there is no profit.
  4. Debentures can be issued at par, at a discount, or at a premium.
  5. When debentures are issued at a discount, the discount is debited to Discount on Issue of Debentures A/c.
  6. When debentures are issued at a premium, the premium is credited to Securities Premium Reserve A/c.
  7. Debentures issued for consideration other than cash are recorded by debiting Vendor's A/c and crediting Debentures A/c.
  8. When debentures are issued as collateral security, either no entry is made (first method) or Debenture Suspense A/c is debited (second method).
  9. Loss on Issue of Debentures includes discount on issue plus premium on redemption.
  10. Premium on Redemption of Debentures is a liability shown under Non-current liabilities.
  11. Interest on debentures is paid after deducting TDS (Tax Deducted at Source).
  12. Discount on issue of debentures is written off against Securities Premium Reserve or Statement of Profit and Loss.
  13. Debentures can be redeemable at par or at a premium.
  14. Convertible debentures can be converted into shares; non-convertible debentures cannot.
  15. Bearer debentures are transferable by delivery; registered debentures require a transfer deed.
  16. Over subscription occurs when applications exceed the number of debentures offered.

MCQs — 10 Questions with Answers

Q1. A debenture is best described as:

  • A. A written acknowledgement of debt with fixed interest and specified repayment date ✓
  • B. An ownership certificate in the company with voting rights
  • C. A share in the company's profits distributed as dividend
  • D. An unsecured loan with variable interest based on company performance

Answer: A — By definition per Companies Act 2013 Section 2(30), a debenture is a debt instrument with fixed interest and repayment terms; it is not ownership (B), not a share (C), and is usually secured with fixed interest (D is incorrect).

Q2. Which of the following is a correct distinction between shares and debentures?

  • A. Both are part of owned capital; both carry voting rights
  • B. Shares represent ownership; debentures represent a creditor claim with fixed interest ✓
  • C. Debentures are repaid during company lifetime; shares are perpetual loans
  • D. Both carry fixed interest; both are repaid at maturity

Answer: B — Shares represent ownership and voting rights; debentures are debt with fixed interest (not ownership). Shares are normally not repaid; debentures are repaid at maturity. Interest on shares (dividend) is variable; on debentures is fixed.

Q3. A company issued 1,000 debentures of ₹100 each at a premium of 10%. The journal entry to record the issue (assuming cash received) would be:

  • A. Bank Dr ₹1,10,000 / Debenture A/c Cr ₹1,00,000; Debenture Premium A/c Cr ₹10,000 ✓
  • B. Bank Dr ₹1,00,000 / Debenture A/c Cr ₹1,10,000
  • C. Debenture A/c Dr ₹1,10,000 / Bank Cr ₹1,10,000
  • D. Bank Dr ₹1,10,000 / Debenture A/c Cr ₹1,10,000

Answer: A — When debentures are issued at premium, bank receives the actual cash (₹1,10,000), debenture account is credited at face value (₹1,00,000), and debenture premium account is credited with the excess (₹10,000).

Q4. Irredeemable debentures are also known as:

  • A. Convertible debentures
  • B. Perpetual debentures ✓
  • C. Secured debentures
  • D. Bearer debentures

Answer: B — Irredeemable debentures have no fixed repayment date and are repayable only on company winding-up or after an extremely long period, hence called perpetual.

Q5. Which of the following is NOT a type of debenture classification?

  • A. Secured vs Unsecured (based on asset security)
  • B. Redeemable vs Irredeemable (based on tenure)
  • C. Convertible vs Non-convertible (based on conversion into shares)
  • D. Cumulative vs Non-cumulative (based on interest accumulation) ✓

Answer: D — Cumulative vs non-cumulative classification applies to preference shares (cumulative/non-cumulative dividends), not to debentures. The debentures textbook chapter covers security, tenure, convertibility, coupon rate, and registration types.

Q6. A company issued 500 debentures of ₹100 each at a discount of 5%. The discount (loss on issue) is to be written off over 5 years. The annual write-off amount would be:

  • A. ₹500 ✓
  • B. ₹2,500
  • C. ₹2,000
  • D. ₹100

Answer: A — Total discount = 500 × ₹100 × 5% = ₹2,500. Written off over 5 years = ₹2,500 ÷ 5 = ₹500 per annum.

Q7. When debentures are redeemed by purchase in open market at a price lower than face value, the gain on redemption is credited to:

  • A. P&L Account
  • B. Debenture Redemption Account
  • C. Capital Reserve ✓
  • D. Debenture A/c

Answer: C — Gains on debenture redemption (when purchased below face value) are credited to Capital Reserve as per accounting convention, not to P&L which is for revenue transactions.

Q8. A convertible debenture is one which:

  • A. Can be converted into shares at the option of the company or debentureholder ✓
  • B. Can be transferred from one person to another
  • C. Carries a fixed or floating charge on company assets
  • D. Is issued without any specified rate of interest

Answer: A — Convertible debentures have the special feature of conversion into equity shares (fully or partly) at option of company or holder. Option B is about transferability; C is security feature; D is zero-coupon feature.

Q9. Zero-coupon debentures differ from specific-coupon debentures in that they are:

  • A. Issued at face value with no interest payment; all returns at maturity
  • B. Issued at substantial discount; the discount itself represents the interest earned over tenure ✓
  • C. Perpetual debentures with interest paid only on winding-up
  • D. Convertible into shares with interest paid in shares instead of cash

Answer: B — Zero-coupon debentures carry no stated interest rate but compensate investors by issuing at deep discount; the spread between face value and issue price is the interest benefit earned.

Q10. A company redeemed 1,000 debentures of ₹100 each by purchasing them in open market at ₹95 each. The journal entry would include:

  • A. Debenture A/c Dr ₹1,00,000 / Bank Cr ₹95,000; Gain on Redemption Cr ₹5,000 ✓
  • B. Debenture A/c Dr ₹95,000 / Bank Cr ₹95,000
  • C. Bank Dr ₹5,000; Debenture A/c Dr ₹1,00,000 / Bank Cr ₹95,000
  • D. Loss on Redemption Dr ₹5,000 / Debenture A/c Cr ₹1,00,000; Bank Cr ₹95,000

Answer: A — Debenture account is debited at face value (₹1,00,000) to close it; bank is credited for actual cash paid (₹95,000); the gain of ₹5,000 (₹1,00,000 − ₹95,000) is credited to Capital Reserve, not P&L.

Flashcards

What is a debenture?

A written acknowledgement of debt by a company under common seal, promising repayment of principal after a specified period and fixed interest at predetermined intervals.

How do debentures differ from shares in terms of ownership?

A share represents ownership of the company; a debenture represents only a creditor claim and is part of borrowed capital, not owned capital.

What is the difference between the return on shares and debentures?

Return on shares is called dividend (variable based on profit); return on debentures is called interest (fixed rate, paid even if no profit).

Define redeemable debentures.

Debentures payable on expiry of a specified period either in lump sum or instalments, at par or premium, during the company's lifetime.

What are irredeemable debentures also called?

Perpetual debentures, which have no fixed repayment date and are repayable only on company winding-up or after a very long period.

Distinguish between secured and unsecured debentures.

Secured debentures create a fixed or floating charge on company assets for repayment; unsecured debentures have no specific asset charge (rarely issued).

What are convertible debentures?

Debentures that can be converted into equity shares or other securities at the option of the company or debentureholder, either fully or partly.

What are zero-coupon debentures?

Debentures issued without a specified interest rate, sold at substantial discount; the difference between face value and issue price represents interest earned.

At what prices can debentures be issued?

Debentures can be issued at par (face value), at premium (above face value), or at discount (below face value).

Name three methods of redemption of debentures.

Lump sum repayment on maturity, purchase in open market at varying prices, conversion to shares, and sinking fund accumulation method.

Important Board Questions

What is a debenture? State any two points of distinction between shares and debentures. [2 marks]

Define debenture as debt acknowledgement with fixed interest. Choose any two from: ownership vs debt claim, dividend vs interest (fixed), repayment vs no repayment, voting rights present/absent, asset security present/absent.

A company issued 5,000 debentures of ₹50 each at a premium of 20%. Pass the journal entry for the issue of debentures. Also, calculate the amount received from the issue. [5 marks]

Face value = 5,000 × ₹50 = ₹2,50,000; Premium = 20% of ₹2,50,000 = ₹50,000; Total cash received = ₹3,00,000. Journal: Bank Dr ₹3,00,000 / Debenture A/c Cr ₹2,50,000; Debenture Premium A/c Cr ₹50,000.

Explain the different methods of redemption of debentures with their accounting treatment. A company has decided to redeem 2,000 debentures of ₹100 each. Show the journal entries under (i) lump sum redemption and (ii) redemption by purchase in open market at ₹98 each. [6 marks]

State three methods: lump sum (full payment on maturity), open market purchase (at varying prices creating gain/loss), conversion to shares, sinking fund. For (i): Debenture A/c Dr ₹2,00,000 / Bank Cr ₹2,00,000. For (ii): Debenture A/c Dr ₹2,00,000 / Bank Cr ₹1,96,000 (₹2,00,000 − ₹4,000 gain); Capital Reserve Cr ₹4,000 (gain on redemption credited to capital reserve, not P&L).

Assertion-Reason Questions for Issue and Redemption of Debentures

Q1. Assertion (A):

A share is a part of owned capital while a debenture is a part of borrowed capital.

Reason (R):

Shareholders are owners of the company and enjoy voting rights, whereas debentureholders are creditors and do not enjoy voting rights.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both the assertion and reason are true. The reason correctly explains why shares represent ownership (and thus owned capital) while debentures represent debt (borrowed capital)—the difference in ownership status directly determines voting rights. This is the fundamental distinction between the two instruments.

Q2. Assertion (A):

Interest on debentures must be paid even if the company incurs a loss.

Reason (R):

Interest on debentures is treated as an appropriation of profits, similar to dividend payment.

Answer: C — A is true but R is false — The assertion is true—interest is a mandatory charge against profits regardless of profitability. However, the reason is false. Interest is NOT an appropriation of profits; it is a charge on profits (expense in the P&L), whereas dividend is an appropriation of profits. The reason confuses the treatment of interest with dividend.

Q3. Assertion (A):

Convertible debentures can be converted into equity shares at the option of the debentureholder or the company.

Reason (R):

Convertible debentures offer investors the flexibility to become part-owners of the company instead of remaining as creditors.

Answer: B — Both A and R are true, but R is NOT the correct explanation of A — Both the assertion and reason are true, but the reason does NOT correctly explain the assertion. The reason describes an advantage or motivation for conversion but is not the defining characteristic of convertibility. The assertion defines convertibility as a right; the reason explains a benefit of exercising that right—these are different concepts.

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Case-Based Questions (CBQ) for Issue and Redemption of Debentures

Case Study:

Rudra Infrastructures Ltd. issued 1,000, 10% debentures of ₹500 each on 1st April 2025 at a discount of 6%, redeemable at a premium of 5% after 5 years. The company received the full application money on the same date. It follows the accounting treatment prescribed by NCERT for issue of debentures at discount and redeemable at premium.

Q1. What is the total amount of 'Loss on Issue of Debentures' that will be recorded on the date of issue?

  • A. ₹30,000
  • B. ₹55,000 ✓
  • C. ₹25,000
  • D. ₹50,000

Answer: B

Q2. Which journal entry correctly records the receipt of application money on the date of issue?

  • A. Debit Bank A/c ₹4,70,000; Credit Debentures A/c ₹4,70,000
  • B. Debit Bank A/c ₹5,00,000; Credit Debentures A/c ₹5,00,000
  • C. Debit Bank A/c ₹4,70,000; Credit Debenture Application & Allotment A/c ₹4,70,000 ✓
  • D. Debit Bank A/c ₹4,70,000; Credit 10% Debentures A/c ₹4,70,000

Answer: C

Q3. What will be the amount of 'Premium on Redemption of Debentures' shown as a liability in the Balance Sheet immediately after issue?

  • A. ₹30,000
  • B. ₹25,000 ✓
  • C. ₹55,000
  • D. ₹50,000

Answer: B

Q4. If the company decides to write off 'Loss on Issue of Debentures' over the tenure of 5 years, what amount will be charged to the Statement of Profit & Loss at the end of each year?

  • A. ₹11,000 ✓
  • B. ₹10,000
  • C. ₹6,000
  • D. ₹5,000

Answer: A

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Previous Year Questions (PYQ) for Issue and Redemption of Debentures

Real CBSE board exam questions from past papers — free to attempt.

CBSE 2026 · Set 67/3/1 · 1 mark

On 1st April, 2024, Mobi Ltd. issued 3,000, 9% Debentures of ₹1,000 each at a premium of 5%. The total amount of interest due on debentures for the year ended 31st March, 2025 will be:

  • ₹2,70,000
  • ₹1,50,000
  • ₹27,000
  • ₹15,000

CBSE 2026 · Set 67/3/1 · 1 mark

Nigam Ltd. issued 40,000, 11% Debentures of ₹100 each at a certain rate of discount. The debentures were to be redeemed at 20% premium. Existing balance of Securities Premium before issue of these debentures was ₹13,00,000. Premium was ₹3,00,000. The above debentures were issued at a discount of:

  • 20%
  • 15%
  • 10%
  • 5%

CBSE 2026 · Set 67/3/1 · 1 mark

Deep Ltd. issued 6,000, 9% Debentures of ₹500 each at ₹490 per debenture. 9% Debentures Account will be credited by:

  • ₹2,70,000
  • ₹6,00,000
  • ₹29,40,000
  • ₹30,00,000

CBSE 2026 · Set 67/3/1 · 1 mark

Mogra Ltd. purchased assets of ₹14,40,000 from DK Ltd. It issued 9% Debentures of ₹100 each at a discount of 4% in full satisfaction of the purchase consideration. The number of debentures issued to DK Ltd. were:

  • 14,400
  • 15,000
  • 3,60,000
  • 1,500

CBSE 2026 · Set 67/3/1 · 3 marks

Oasis Ltd. purchased building worth ₹12,00,000, machinery worth ₹1,90,000 and furniture worth ₹3,00,000 from Nitara Ltd. and took over its liabilities of ₹90,000 for a purchase consideration of ₹15,30,000. Oasis Ltd. paid the purchase consideration by issuing 11% Debentures of ₹100 each at a discount of 10%. Pass necessary journal entries in the books of Oasis Ltd. for the above transactions.

CBSE 2026 · Set 67/3/1 · 4 marks

Pass necessary journal entries for issue of debentures for the following transactions: (i) AB Ltd. issued 30,000, 10% Debentures of ₹100 each at a premium of 5%, redeemable at a premium of 10%. (ii) CD Ltd. issued 40,000, 8% Debentures of ₹100 each at par, redeemable at a premium of 10%.

CBSE 2026 · Set 67/3/2 · 1 mark

Nigam Ltd. issued 40,000, 11% Debentures of 100 each at a certain rate of discount. The debentures were to be redeemed at 20% premium. Existing balance of Securities Premium before issue of these debentures was 13,00,000. Deduction from Securities Premium Account after issue of these debentures was 3,00,000. The above debentures were issued at a discount of:

  • 20%
  • 15%
  • 10%
  • 5%

CBSE 2026 · Set 67/3/2 · 1 mark

Delta Ltd. issued 5,000, 10% Debentures of 500 each at 450 per debenture. 10% Debentures Account will be credited by:

  • 5,00,000
  • 25,00,000
  • 2,25,000
  • 4,50,000

CBSE 2026 · Set 67/3/2 · 1 mark

Sana Ltd. purchased assets of 19,00,000 from MN Ltd. Sana Ltd. issued 10% Debentures of 100 each at a discount of 5% in full satisfaction of the purchase consideration. The number of debentures issued to MN Ltd. was:

  • 3,80,000
  • 20,000
  • 19,000
  • 10,000

CBSE 2026 · Set 67/3/2 · 3 marks

Oasis Ltd. purchased building worth 12,00,000, machinery worth 1,90,000 and furniture worth 3,00,000 from Nitara Ltd. and took over its liabilities of 90,000 for a purchase consideration of 15,30,000. Oasis Ltd. paid the purchase consideration by issuing 11% Debentures of 100 each at a discount of 10%. Pass necessary journal entries in the books of Oasis Ltd. for the above transactions.

CBSE 2026 · Set 67/3/2 · 4 marks

Pass necessary journal entries for issue of debentures for the following transactions: (i) AB Ltd. issued 30,000, 10% Debentures of 100 each at a premium of 5%, redeemable at a premium of 10%. (ii) CD Ltd. issued 40,000, 8% Debentures of 100 each at par, redeemable at a premium of 10%.

CBSE 2026 · Set 67/3/3 · 1 mark

Misha Ltd. purchased assets of ₹18,80,000 from Vibo Ltd. Misha Ltd. issued 11% Debentures of ₹100 each at a discount of 6% in full satisfaction of the purchase consideration. The number of debentures issued to Vibo Ltd. was:

  • 20,000
  • 11,000
  • 10,000
  • 18,000

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Class 12 Accountancy Previous Year Questions, Chapter-wise

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