Chapter issue-and-redemption-of-debentures: Issue and Redemption of Debentures Long Questions | accountancy Class 12 CBSE

Chapter issue-and-redemption-of-debentures: Issue and Redemption of Debentures Long Questions | accountancy Class 12 CBSE | ByteNotes.in

Long Answer

Medium difficulty • Structured explanation

Medium

Question 1

Long Form

Explain the various types of debentures classified on the basis of security, tenure, convertibility, coupon rate, and registration.

Based on security: Secured debentures carry a fixed charge (on specific assets) or floating charge (on all general assets) and protect lenders in default. Unsecured (naked) debentures have no such charge and are rarely issued.
Based on tenure: Redeemable debentures are repayable on expiry of a specified period — either in lump sum or instalments, at par or premium. Irredeemable (perpetual) debentures have no fixed repayment date and are repaid only on winding up or after a very long period.
Based on convertibility: Convertible debentures (fully or partly) can be converted into equity shares or other securities at the option of the company or holder. Non-convertible debentures cannot be converted and most debentures fall in this category.
Based on coupon rate: Specific coupon rate debentures carry a stated fixed or floating rate tagged to the bank rate. Zero coupon rate debentures carry no interest — issued at a deep discount, the implicit interest equals the difference between nominal value and issue price.
Based on registration: Registered debentures are transferable only by transfer deed with all holder details in a register. Bearer debentures are transferred by mere delivery; interest is paid to whoever presents the coupon.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 2

Long Form

Compare the accounting treatment for debentures issued as collateral security under the first method and the second method, with reference to balance sheet presentation.

Under the First Method, no journal entry is recorded because issuing debentures as collateral creates no new liability — the liability is the underlying loan. The balance sheet shows only the loan amount under Non-current Liabilities.
A note is appended below the loan item stating that the loan is secured by debentures issued as collateral security (e.g., 'Secured by issue of 10,000, 10% debentures of Rs. 100 each as Collateral Security').
Under the Second Method, a journal entry is passed: Debenture Suspense A/c Dr. / To Debentures A/c, for the full face value of debentures issued as collateral.
In the balance sheet notes, the debentures amount is shown but the Debenture Suspense balance is deducted, so the net shown is nil — the actual liability presented remains only the loan amount.
When the loan is repaid, a reverse entry cancels the collateral debentures: Debentures A/c Dr. / To Debenture Suspense A/c. Both methods result in the same net liability shown; only the detail of the disclosure differs.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 3

Long Form

Analyse all six situations of issue and redemption of debentures. State the accounts to be debited and credited at the time of allotment for each situation.

Situation 1 — Issued at par, redeemable at par: On allotment: Debenture Application and Allotment A/c Dr. / To Debentures A/c. No additional loss or premium entry is needed.
Situation 2 — Issued at discount, redeemable at par: Debenture Application and Allotment A/c Dr. + Discount on Issue of Debentures A/c Dr. / To Debentures A/c. Discount is a capital loss written off from Securities Premium Reserve / Statement of P&L.
Situation 3 — Issued at premium, redeemable at par: Debenture Application and Allotment A/c Dr. / To Debentures A/c + To Securities Premium Reserve A/c.
Situation 4 — Issued at par, redeemable at premium: Debenture Application and Allotment A/c Dr. + Loss on Issue of Debentures A/c Dr. (= premium on redemption) / To Debentures A/c + To Premium on Redemption of Debentures A/c.
Situations 5 and 6 — For discount-issued/premium-redeemable: Loss on Issue equals discount plus premium on redemption; for premium-issued/premium-redeemable: Loss on Issue equals only the premium on redemption while Securities Premium Reserve is credited separately for the premium on issue.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 4

Long Form

Differentiate between redemption of debentures out of capital and out of profits, including DRR and DRI requirements.

Redemption out of profits requires the company to appropriate profits before redemption into Debenture Redemption Reserve. This retains profits within the business as a reserve, protecting creditors by not allowing all profits to leave the company before the debt is paid.
Redemption out of capital means the company redeems debentures without earmarking any profits — it uses the funds received from the original debenture issue or other capital sources. Listed companies, banking companies, NBFCs, and housing finance companies are exempt from DRR and may redeem out of capital.
For 'other unlisted companies', DRR must be maintained at 10% of the value of outstanding debentures. DRR is created by debiting Surplus in Statement of Profit and Loss and crediting DRR. After full redemption, DRR is transferred to General Reserve.
Debenture Redemption Investment is mandatory for all companies: at least 15% of debentures maturing in the next financial year must be invested in specified securities (scheduled bank deposits, government securities, bonds) on or before April 30.
DRI must not be used for any purpose other than redemption. When debentures are redeemed, DRI is realised (Bank A/c Dr. / To DRI A/c) and the funds are used to pay debentureholders.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 5

Long Form

Explain the accounting treatment for debentures issued for consideration other than cash when the entire business of a vendor is taken over, covering goodwill and capital reserve scenarios.

When an entire business is taken over, the purchase consideration equals net assets (total assets minus liabilities taken over). The entry for purchase of business: Sundry Assets A/c Dr. / To Sundry Liabilities A/c + To Vendors + To Capital Reserve (if net assets exceed purchase consideration).
If purchase consideration exceeds net assets, the difference is goodwill: Sundry Assets A/c + Goodwill A/c Dr. / To Sundry Liabilities A/c + To Vendors.
After recording the business purchase, the vendor is paid by issuing debentures: Vendors A/c Dr. / To Debentures A/c (if at par) or To Debentures A/c + To Securities Premium Reserve A/c (if at premium) or Vendors A/c + Discount A/c Dr. / To Debentures A/c (if at discount).
The number of debentures issued is calculated by dividing the purchase consideration by the issue price per debenture — not the face value if issued at premium or discount.
Capital Reserve arises when the vendor accepts less than the net worth of the business; it represents a capital gain to the acquiring company and cannot be distributed as dividend — it strengthens the balance sheet and may be used for writing off capital losses.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 6

Long Form

Describe the method of redemption of debentures by purchase in the open market. Under what circumstances does profit or loss arise, and how are they treated?

Redemption by open market purchase means the company buys its own debentures from the secondary market for immediate cancellation. This method is advantageous as the company can time its redemption and potentially save by purchasing at a discount.
When debentures are purchased at a price below nominal value (discount): Debentures A/c Dr. (nominal value) / To Bank A/c (purchase price) + To Profit on Redemption of Debentures A/c (difference). The profit is then: Profit on Redemption A/c Dr. / To Capital Reserve.
When debentures are purchased above nominal value: Debentures A/c Dr. + Loss on Redemption of Debentures A/c Dr. / To Bank A/c. The loss is written off: Statement of Profit and Loss Dr. / To Loss on Redemption A/c.
Alternatively, own debentures may first be recorded as investments: Own Debentures A/c Dr. / To Bank A/c (at purchase price); then on cancellation: Debentures A/c Dr. (nominal value) / To Own Debentures A/c + To Profit on Redemption A/c.
The profit on cancellation is always a capital profit transferred to Capital Reserve — it cannot be distributed as dividend. This treatment ensures that the accounting reflects the permanent nature of the gain arising from settling a long-term liability at a discount.

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Long Answer

Hard difficulty • Structured explanation

Hard

Question 7

Long Form

Analyse the procedure and journal entries for redemption of debentures by conversion into equity shares, highlighting how the number of shares is determined.

Redemption by conversion is applicable only to convertible debentures. When debentureholders opt for conversion, the debenture liability is extinguished by issuing equity shares or new debentures in exchange — no cash outflow occurs.
The number of shares to be issued is computed based on the actual proceeds originally realised per debenture at the time of their issue, not the nominal value — if originally issued at discount, the actual amount received is the basis.
Journal entry: Debentures A/c Dr. (nominal value) / To Debentureholders A/c (actual amount due based on conversion terms). If conversion is at par for shares: Debentureholders A/c Dr. / To Equity Share Capital A/c.
If new shares are issued at a premium: Debentureholders A/c Dr. / To Equity Share Capital A/c (face value) + To Securities Premium Reserve A/c (premium). The total consideration is the amount of debentures being redeemed.
In cases where the conversion value of debentures differs from their original issue proceeds, adjustments may credit Statement of Profit and Loss or debit discount on issue. The key principle is that debentureholders should receive exactly what they are entitled to, and the company's accounts must faithfully reflect the settlement of the debt.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 8

Long Form

Explain the accounting treatment of interest on debentures from the point of accrual to payment, including TDS, with all journal entries.

Step 1 — When interest becomes due: Debenture Interest A/c Dr. (full interest at nominal rate) / To Income Tax Payable A/c (TDS amount at prescribed rate) + To Debentureholders A/c (net interest after TDS).
Step 2 — Payment of net interest to debentureholders: Debentureholders A/c Dr. / To Bank A/c (net interest actually remitted to them).
Step 3 — Payment of TDS to the government: Income Tax Payable A/c Dr. / To Bank A/c (TDS deposited with tax authorities).
Step 4 — Transfer to Statement of Profit and Loss: Statement of Profit and Loss Dr. / To Debenture Interest A/c (full gross interest transferred at year-end).
The debentureholder receives a TDS certificate and can adjust the deducted amount against their personal income tax liability. Interest is calculated on the nominal (face) value of debentures, not on the issue price, and the obligation exists whether or not the company earns a profit.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 9

Long Form

Analyse the key differences between a debenture and a share under six distinct heads, explaining why debenture is termed 'loan capital'.

Ownership vs. Debt: A share represents a unit of ownership — the shareholder is part-owner of the company. A debenture is purely a loan — the debentureholder is a creditor who has lent money and will be repaid with interest.
Return: Dividend on shares is variable, depends on profits, and is an appropriation of profits payable at the discretion of the board. Interest on debentures is fixed, specified at issuance, and is a charge on profits — payable even if there is no profit.
Repayment and Security: Share capital is normally permanent and not repaid during the company's life. Debentures are generally issued for a fixed period and repaid on maturity; they are typically secured by a fixed or floating charge on company assets, whereas shares carry no such security.
Voting Rights and Convertibility: Shareholders have voting rights and participate in company governance. Debentureholders normally have no voting rights. Shares cannot be converted into debentures; debentures can be converted into shares if terms so provide.
Debenture is termed 'loan capital' because it represents money borrowed by the company — it appears on the liabilities side of the balance sheet under Non-current Liabilities as long-term borrowings. Share capital, appearing under Equity and Liabilities as Shareholders' Funds, is owned capital that does not require repayment.
Risk and Priority: In the event of winding up, debentureholders (being creditors) are paid before shareholders; shareholders bear higher risk and are entitled to residual assets only. This debt nature of debentures — external obligation with interest and repayment obligations — is what makes it 'loan capital'.

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Long Answer

Medium difficulty • Structured explanation

Medium

Question 10

Long Form

Describe the complete procedure for issue of debentures for cash, covering journal entries for single instalment, two-instalment, and three-instalment collection.

Single instalment (application and allotment combined): On receipt — Bank A/c Dr. / To Debenture Application and Allotment A/c. On allotment — Debenture Application and Allotment A/c Dr. / To Debentures A/c.
Two instalments (application and allotment separate): On application — Bank A/c Dr. / To Debenture Application A/c. On allotment — Debenture Application A/c Dr. / To Debentures A/c (application portion); Debenture Allotment A/c Dr. / To Debentures A/c (allotment portion); Bank A/c Dr. / To Debenture Allotment A/c.
Three or more instalments (additional calls): Debenture First Call A/c Dr. / To Debentures A/c (on making call); Bank A/c Dr. / To Debenture First Call A/c (on receipt); similar entries for second call and final call.
In practice, the whole amount is usually collected on application or in two instalments (application and allotment). Investors apply on the basis of a prospectus issued by the company.
Debentures appear under Non-current Liabilities as Long-term Borrowings in the balance sheet at nominal value. Cash received appears under Current Assets as Cash and Cash Equivalents.

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Chapter issue-and-redemption-of-debentures: Issue and Redemption of Debentures | Long Questions

Explain the various types of debentures classified on the basis of security, tenure, convertibility, coupon rate, and registration.

Compare the accounting treatment for debentures issued as collateral security under the first method and the second method, with reference to balance sheet presentation.

Analyse all six situations of issue and redemption of debentures. State the accounts to be debited and credited at the time of allotment for each situation.

Differentiate between redemption of debentures out of capital and out of profits, including DRR and DRI requirements.

Explain the accounting treatment for debentures issued for consideration other than cash when the entire business of a vendor is taken over, covering goodwill and capital reserve scenarios.

Describe the method of redemption of debentures by purchase in the open market. Under what circumstances does profit or loss arise, and how are they treated?

Analyse the procedure and journal entries for redemption of debentures by conversion into equity shares, highlighting how the number of shares is determined.

Explain the accounting treatment of interest on debentures from the point of accrual to payment, including TDS, with all journal entries.

Analyse the key differences between a debenture and a share under six distinct heads, explaining why debenture is termed 'loan capital'.

Describe the complete procedure for issue of debentures for cash, covering journal entries for single instalment, two-instalment, and three-instalment collection.

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