**Debenture** is a written instrument acknowledging a debt under the common seal of the company. The word 'debenture' derives from the Latin word 'debere' meaning 'to borrow'. According to Section 2(30) of The Companies Act, 2013, a debenture includes Debenture Inventory, Bonds, and any other securities of a company whether constituting a charge on the assets or not.
**Key Characteristics of Debentures:**
**Bond vs Debenture:**
Understanding the fundamental differences is critical for exam success:
**1. Ownership and Capital Nature**
**2. Return/Income**
**3. Repayment of Principal**
**4. Voting Rights**
**5. Security**
**6. Convertibility**
**Exam Tip:** MCQ questions frequently ask to identify these distinctions. Remember that **interest on debentures is a profit and loss account charge**, while **dividend is an appropriation**.
Debentures are classified based on multiple criteria:
**Secured Debentures:**
**Unsecured Debentures:**
**Redeemable Debentures:**
**Irredeemable Debentures (Perpetual Debentures):**
**Convertible Debentures:**
**Non-Convertible Debentures:**
**Specific Coupon Rate Debentures:**
**Zero Coupon Rate Debentures:**
**Registered Debentures:**
**Bearer Debentures:**
When debentures are issued at **par** (face value = issue price), the entire nominal value is received.
**Procedure when entire amount received in one instalment:**
Journal Entries:
```
On receipt of application money:
Bank A/c Dr.
To Debenture Application & Allotment A/c
On allotment:
Debenture Application & Allotment A/c Dr.
To Debentures A/c (Liability account)
```
**Balance Sheet Treatment:** Debentures shown under Non-Current Liabilities as Long-term Borrowings.
**Procedure when received in two instalments (Application and Allotment):**
Journal Entries:
```
On application money receipt:
Bank A/c Dr.
To Debenture Application A/c
On allotment (transferring application money):
Debenture Application A/c Dr.
To Debentures A/c
For allotment money due:
Debenture Allotment A/c Dr.
To Debentures A/c
On receipt of allotment money:
Bank A/c Dr.
To Debenture Allotment A/c
```
**Illustration:** ABC Limited issued 10,000, 12% debentures of Rs. 100 each @ Rs. 30 on application, remainder on allotment. Public applied for 9,000 debentures (fully allotted). All money received.
Calculation:
Journal:
```
Bank A/c Dr. 2,70,000
To 12% Debenture Application A/c 2,70,000
12% Debenture Application A/c Dr. 2,70,000
To 12% Debentures A/c 2,70,000
12% Debenture Allotment A/c Dr. 6,30,000
To 12% Debentures A/c 6,30,000
Bank A/c Dr. 6,30,000
To 12% Debenture Allotment A/c 6,30,000
```
**Balance Sheet:**
When debentures are issued below nominal value, the difference is **discount on issue of debentures**.
**Key Accounting Rule:**
**Balance Sheet Classification:**
**Illustration:** TV Components Ltd. issued 10,000, 12% debentures of Rs. 100 each @ 5% discount:
Calculation:
Journal:
```
Bank A/c Dr. 4,00,000
To 12% Debenture Application A/c 4,00,000
12% Debenture Application A/c Dr. 4,00,000
To 12% Debentures A/c 4,00,000
12% Debenture Allotment A/c Dr. 5,50,000
Discount on Issue of Debentures A/c Dr. 50,000
To 12% Debentures A/c 6,00,000
Bank A/c Dr. 5,50,000
To 12% Debenture Allotment A/c 5,50,000
Statement of P&L A/c (or SPR) Dr. 50,000
To Discount on Issue of Debentures A/c 50,000
```
**Balance Sheet:**
**Exam Tip:** Remember the debenture account is always credited with **nominal/face value**, not issue price. Discount goes to separate account.
When debentures are issued above nominal value, the excess is **premium on issue of debentures**.
**Key Accounting Rule:**
**Journal Entry Format (at premium):**
```
Bank/Debenture Application A/c Dr. (Amount received)
To Debentures A/c (Nominal value)
To Securities Premium Reserve A/c (Premium portion)
```
**Illustration:** XYZ Industries Ltd. issued 2,000, 10% debentures of Rs. 100 each @ Rs. 10 premium:
Calculation:
Journal:
```
Bank A/c Dr. 1,00,000
To 10% Debenture Application A/c 1,00,000
10% Debenture Application A/c Dr. 1,00,000
To 10% Debentures A/c 1,00,000
10% Debenture Allotment A/c Dr. 1,20,000
To 10% Debentures A/c 1,00,000
To Securities Premium Reserve A/c 20,000
Bank A/c Dr. 1,20,000
To 10% Debenture Allotment A/c 1,20,000
```
**Balance Sheet:**
**More Complex Illustration:** A Limited issued 5,000, 10% debentures @ Rs. 10 premium:
Calculation:
Journal:
```
Bank A/c Dr. 1,25,000
To 10% Debenture Application A/c 1,25,000
10% Debenture Application A/c Dr. 1,25,000
To 10% Debentures A/c 1,25,000
10% Debenture Allotment A/c Dr. 2,25,000
To 10% Debentures A/c 1,75,000
To Securities Premium Reserve A/c 50,000
Bank A/c Dr. 2,25,000
To 10% Debenture Allotment A/c 2,25,000
10% Debenture First & Final Call A/c Dr. 2,00,000
To 10% Debentures A/c 2,00,000
Bank A/c Dr. 2,00,000
To 10% Debenture First & Final Call A/c 2,00,000
```
**Balance Sheet:**
**Definition:** Over subscription occurs when the number of debentures applied for exceeds the number offered to the public.
**Accounting Treatment:**
**Illustration:** X Limited issued 10,000, 12% debentures of Rs. 100 @ Rs. 40 application + Rs. 60 allotment.
Calculation:
Actually correct:
Journal:
```
Bank A/c Dr. 5,60,000
To 12% Debenture Application A/c 5,60,000
(Receipt of application money on 14,000 debentures)
12% Debenture Application A/c Dr. 5,60,000
To 12% Debentures A/c 4,00,000
To 12% Debenture Allotment A/c 40,000
To Bank A/c 1,20,000
(Transfer of application money: 10,000 × Rs. 40 to debentures;
excess from half-accepted to allotment; refund on 3,000 rejected)
12% Debenture Allotment A/c Dr. 6,00,000
To 12% Debentures A/c 6,00,000
(Allotment money due on 10,000 debentures @ Rs. 60)
Bank A/c Dr. 5,60,000
To 12% Debenture Allotment A/c 5,60,000
(Allotment money received: Rs. 6,00,000 − Rs. 40,000 already adjusted)
```
**Key Point for Exam:** The excess application money is first adjusted toward allotment, reducing the cash required. Only after full adjustment is additional cash called.
**Definition:** Sometimes a company purchases assets from vendors and issues debentures instead of paying cash. This is debenture issue for consideration other than cash.
**Characteristics:**
**Journal Entry Format:**
**At Par:**
```
Asset (Sundry Assets) A/c Dr. (Fair value)
To Vendors/Creditors A/c (Value given)
Vendors A/c Dr. (Value of debentures)
To Debentures A/c (Nominal value)
```
**At Premium:**
```
Asset A/c Dr. (Fair value)
To Vendors A/c (Value given)
Vendors A/c Dr. (Value received)
To Debentures A/c (Nominal value)
To Securities Premium Reserve A/c (Premium)
```
**At Discount:**
```
Asset A/c Dr. (Fair value)
To Vendors A/c
Vendors A/c Dr.
Discount on Issue of Debentures A/c Dr.
To Debentures A/c (Nominal value)
```
**Critical Principle:** The asset account is debited at the **fair value of asset acquired**, not the nominal value of debentures. The debenture account is credited at **nominal value**. Any difference between fair value and nominal value represents premium/discount.
**Illustration:** Company purchased machinery worth Rs. 50,000 and issued 500, 10% debentures of Rs. 100 each @ Rs. 110 premium to vendor.
Calculation:
Journal:
```
Machinery A/c Dr. 50,000
To Vendor's Account 50,000
Vendor's Account Dr. 55,000
To 10% Debentures A/c 50,000
To Securities Premium Reserve A/c 5,000
```
The vendor is owed Rs. 55,000 (debentures at Rs. 110 each), but the company acquired asset at Rs. 50,000. The Rs. 5,000 premium represents the benefit to the vendor — they're getting debentures worth more than asset value in market terms.
**Balance Sheet Treatment:**
**Definition:** A company issues additional debentures against the security of assets held, without actually receiving cash. These debentures are issued as collateral security against a loan.
**Key Features:**
**Accounting Treatment:**
**Journal Entries:**
**On issue of collateral debentures (memorandum entry):**
```
Debentures Issued as Collateral A/c Dr.
To Debentures A/c (Contingent Liability)
```
OR simply noted in Balance Sheet as Contingent Liability.
**When collateral debentures are exercised/applied:**
```
Debentures Applied A/c Dr.
To Debentures A/c (becomes actual liability)
```
**Alternative treatment:** Some companies record at time of issue:
```
No journal entry — only note as contingent liability
When exercised/applied:
Debentures A/c Dr.
To Bank/Loan Liability A/c
```
**Balance Sheet Treatment:**
**Illustration:** ABC Ltd. issued 5,000 debentures of Rs. 100 each as collateral security against a bank loan of Rs. 50,00,000.
Treatment:
If bank subsequently exercises half the collateral:
```
Debentures A/c Dr. 2,50,000
To Bank A/c (or Debenture Redemption) 2,50,000
```
**Exam Important:** Collateral debentures are **not current liabilities** until exercised. They remain contingent. This is frequently tested in Balance Sheet classification questions.
**Concept:** When debentures are issued at a discount, the discount represents a loss to the company. This can be accounted for through a Loss on Issue of Debentures account.
**Nature:**
**Alternative to Discount Account:**
**Journal Entry:**
```
Loss on Issue of Debentures A/c Dr.
To Debentures A/c (or to Discount on Issue A/c)
```
**Write-off Entry:**
```
Securities Premium Reserve A/c Dr. (if available)
Statement of P&L A/c Dr. (if SPR exhausted)
To Loss on Issue of Debentures A/c
```
**Balance Sheet Treatment:**
**Format Example:**
```
Non-Current Liabilities:
Debentures (12% Debentures Rs. 100 each) 10,00,000
Less: Loss on Issue of Debentures (50,000)
Net Debentures Liability 9,50,000
```
OR under Assets:
```
Other Non-Current Assets:
Loss on Issue of Debentures (to be amortized) 50,000
```
**Exam Tip:** Do not confuse Loss on Issue with Discount on Issue — they're the same concept but different account names. Use whichever term the question specifies.
**Meaning:** Redemption is the repayment of debentures at maturity or before maturity as per terms of issue.
**Types of Debentures and Redemption:**
**Key Principle:**
Discount or loss on issue of debentures should ideally be written off by the time debentures are redeemed. If any balance remains at redemption, it should be written off immediately.
**Definition:** All debentures are redeemed on a fixed date in one single payment.
**Procedure:**
1. On the redemption date, debit Debentures A/c and credit Bank A/c with total nominal value
2. If any discount/loss remains, write it off before or at redemption
**Journal Entries:**
**Before redemption (final write-off of discount, if any):**
```
Securities Premium Reserve A/c Dr. (or P&L A/c)
To Discount on Issue of Debentures A/c (Remaining balance)
```
**On redemption:**
```
Debentures A/c Dr. (Nominal value)
To Bank A/c (Cash paid)
```
**Illustration:** ABC Limited issued 10,000, 10% debentures of Rs. 100 each at 5% discount. After 5 years, debentures are redeemed in lump sum. Discount was already written off in year 1.
Journal:
```
10% Debentures A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Redemption of debentures in lump sum)
```
If discount remained:
```
Statement of P&L A/c Dr. 50,000
To Discount on Issue of Debentures A/c 50,000
(Write off remaining discount before redemption)
10% Debentures A/c Dr. 10,00,000
To Bank A/c 10,00,000
```
**Definition:** Company purchases its own debentures from the open market at current market prices and cancels them.
**Characteristics:**
**Procedure:**
1. Purchase debentures at market price
2. Cancel debentures by debiting Debentures A/c
3. Credit Bank A/c with actual purchase price
4. Record gain/loss on cancellation
**Journal Entries:**
**On purchase of debentures from market:**
```
Debentures A/c Dr. (Nominal value)
(Gain) / Loss on Redemption A/c Dr./Cr. (Difference)
To Bank A/c (Purchase price paid)
```
**Treatment of Gain/Loss:**
**Illustration:** ABC Limited purchased its own 2,000, 10% debentures of Rs. 100 each from market at Rs. 95 per debenture.
Calculation:
Journal:
```
10% Debentures A/c Dr. 2,00,000
To Bank A/c 1,90,000
To Gain on Redemption of Debentures A/c 10,000
(Purchase and cancellation of debentures)
```
**Balance Sheet Treatment:**
**Definition:** Convertible debentures are converted into equity shares as per terms of issue.
**Characteristics:**
**Procedure:**
1. Debit Debentures A/c with nominal value of debentures converted
2. Credit Equity Share Capital A/c with share capital issued
3. Any difference goes to Securities Premium Reserve (if converted at premium) or as loss (if at discount)
**Journal Entries:**
**At par (conversion ratio 1:1):**
```
Debentures A/c Dr. (Debenture nominal value)
To Equity Share Capital A/c (Share capital issued)
```
**At premium (shares issued above par):**
```
Debentures A/c Dr. (Debenture nominal value)
To Equity Share Capital A/c (Par value of shares)
To Securities Premium Reserve A/c (Premium on shares)
```
**At discount (shares issued below par) — rare:**
```
Debentures A/c Dr. (Debenture nominal value)
Loss on Conversion A/c Dr.
To Equity Share Capital A/c (Par value of shares)
```
**Illustration:** ABC Limited had convertible debentures of Rs. 5,00,000 nominal. Debentureholders converted them into equity shares at Rs. 110 per share (face value Rs. 100).
Calculation:
Q1. A debenture is best described as:
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?
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:
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:
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?
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:
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:
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:
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:
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:
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.
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.
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).
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