Issue and Redemption of Debentures

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Summary

Summary of Debentures

Definition: A debenture is a written instrument acknowledging a debt under the common seal of the company, containing a contract for repayment of principal and payment of interest at a fixed rate.
Difference from Shares: Funds raised through debentures are considered long-term debt, while shares represent ownership in the company.
Types of Debentures:
- Secured and Unsecured
- Redeemable and Perpetual
- Convertible and Non-convertible
- Zero Coupon Rate and Specific Rate
- Registered and Bearer
Issue Conditions:
- At Par: Amount collected equals nominal value.
- At Premium: Issue price exceeds nominal value.
- At Discount: Issue price is less than nominal value.
Journal Entries:
- For issue at par, discount, or premium.
- For debentures issued for consideration other than cash.
Redemption: Discharge of liability by repayment to debenture holders, can occur at expiry or under specific terms.
Collateral Security: Additional security provided alongside primary security.
Accounting Treatment: Includes recording journal entries for issue and redemption, and showing debenture items in the balance sheet.
Sinking Fund: A fund established for the purpose of redeeming debentures.

Learning Objectives

After studying this chapter you will be able to:

State the meaning of debenture and explain the difference between debentures and shares.
Describe various types of debentures.
Record the journal entries for the issue of debentures at par, at a discount, and at a premium.
Explain the concept of debentures issued for consideration other than cash and the accounting thereof.
Explain the concept of issue of debentures as collateral security and the accounting thereof.
Record the journal entries for the issue of debentures with various terms of issue and terms of redemption.
Show the items relating to the issue of debentures in the company's balance sheet.
Describe the methods of writing off discount/loss on the issue of debentures.
Explain the methods of redemption of debentures and the accounting thereof.
Explain the concept of sinking fund, its use for redemption of debentures, and the accounting thereof.

Detailed Notes

Notes on Debentures

1. Meaning of Debentures

Definition: A debenture is a written instrument acknowledging a debt under the common seal of the company. It includes a contract for repayment of principal and payment of interest at a fixed rate.
Origin: Derived from the Latin word 'debere' meaning to borrow.
Legal Reference: According to section 2(30) of The Companies Act, 2013, 'Debenture' includes Debenture Inventory, Bonds, and any other securities of a company.

2. Types of Debentures

Based on Security:
- Secured Debentures
- Unsecured Debentures
Based on Tenure:
- Redeemable Debentures
- Perpetual Debentures
Based on Mode of Redemption:
- Convertible Debentures (Fully and Partly convertible)
- Non-convertible Debentures
Based on Coupon Rate:
- Zero Coupon Rate Debentures
- Specific Rate Debentures
Based on Registration:
- Registered Debentures
- Bearer Debentures

3. Issue of Debentures

At Par: When the amount collected equals the nominal value.
At Premium: When the issue price is more than the nominal value (e.g., Rs. 100 debentures issued for Rs. 110).
At Discount: When the issue price is less than the nominal value.
Consideration Other than Cash: Debentures can be issued to vendors or suppliers without cash payment.
Collateral Security: Additional security provided along with primary security.

4. Redemption of Debentures

Definition: Discharge of liability on account of debentures by repayment to debenture holders.
Methods: Redemption can occur at par, at a premium, or through conversion into shares.

5. Accounting Treatment

Journal Entries: Various entries are recorded for the issue and redemption of debentures, including interest payments and tax deductions.
Balance Sheet Presentation: Debentures are shown under long-term borrowings in the liabilities section.

6. Important Terms

Debenture Holder: A person holding a debenture.
Bond: Similar to a debenture but may not have a predetermined interest rate.
Charge: An encumbrance on assets to secure repayment.
Sinking Fund: A fund established to accumulate money for the redemption of debentures.

7. Example Journal Entries

Issue of Debentures:
- Bank A/c Dr.
- To Debenture Application A/c
Redemption of Debentures:
- Debentureholders A/c Dr.
- To Bank A/c

8. Balance Sheet Extract Example

Particulars	Amount (Rs.)
Long-term borrowings	10,00,000
Cash at bank	9,00,000

9. Interest on Debentures

Obligation: Companies must pay interest at a fixed percentage, regardless of profit.
Tax Deducted at Source (TDS): Applicable on interest exceeding a prescribed limit.

Exam Tips & Common Mistakes

Common Mistakes and Exam Tips

Common Pitfalls

Misunderstanding Debenture Types: Students often confuse different types of debentures (secured vs. unsecured, convertible vs. non-convertible). Ensure you understand the definitions and characteristics of each type.
Journal Entry Errors: Incorrectly recording journal entries for debentures issued at par, discount, or premium is a frequent mistake. Pay close attention to the amounts and accounts involved.
Redemption Conditions: Failing to recognize the terms of redemption can lead to errors in accounting for debentures. Always check if they are redeemable at par or at a premium.
Interest Payment Miscalculations: Students sometimes miscalculate the interest due on debentures. Remember that interest is typically paid at fixed intervals, and ensure you account for the correct rate.
Ignoring Collateral Security: When debentures are issued as collateral security, students may overlook the implications for the balance sheet and journal entries. Understand how collateral affects financial statements.

Tips for Success

Review Journal Entries: Practice recording journal entries for various scenarios involving debentures, including different terms of issue and redemption.
Understand Definitions: Familiarize yourself with key terms such as debenture, bond, charge, and redemption to avoid confusion during exams.
Practice Calculations: Regularly practice calculating interest payments and redemption amounts to build confidence.
Use Examples: Refer to examples in your study materials to understand how to apply concepts in practical scenarios.
Clarify Doubts: If you're unsure about any aspect of debentures, seek clarification from your instructor or peers before the exam.

Practice & Assessment

Multiple Choice Questions

It is debited to the Debenture Redemption Reserve.

It is credited to the Securities Premium Account.

It is debited to the Premium on Redemption of Debentures Account.

It is credited to the Profit and Loss Account.

Correct Answer: C

Solution:

The premium on redemption of debentures is debited to the Premium on Redemption of Debentures Account as it represents a liability to pay more than the face value at the time of redemption.

A debenture that is registered in the name of the holder.

A debenture that is not registered in the name of the holder and is transferable by mere delivery.

A debenture that can be converted into equity shares.

A debenture that is secured by a charge on the company's assets.

Correct Answer: B

Solution:

Bearer debentures are not registered in the name of the holder and are transferable by mere delivery, making them similar to cash in terms of transferability.

Secured Debenture

Convertible Debenture

Perpetual Debenture

Floating Debenture

Correct Answer: D

Solution:

Floating Debenture is not a recognized type of debenture. The recognized types include secured, convertible, and perpetual debentures.

It is credited with the premium amount.

It is debited with the premium amount.

There is no impact on the Securities Premium Account.

It is debited with the redemption amount.

Correct Answer: A

Solution:

When debentures are issued at a premium, the premium amount is credited to the Securities Premium Account. Since the redemption is at par, there is no impact on this account during redemption.

Rs. 5,000

Rs. 10,000

Rs. 15,000

Rs. 20,000

Correct Answer: A

Solution:

The premium on redemption is 5% of the nominal value of the debentures. Therefore, the premium per debenture is Rs. 5. For 1,000 debentures, the total premium payable is 1,000 x Rs. 5 = Rs. 5,000.

Rs. 40,000

Rs. 80,000

Rs. 30,000

Rs. 50,000

Correct Answer: A

Solution:

The discount on issue is 5% of Rs. 100 = Rs. 5 per debenture. For 8,000 debentures, this amounts to Rs. 40,000.

Loss on Issue of Debenture A/c

Securities Premium Account

Debenture Application A/c

Bank A/c

Correct Answer: B

Solution:

The amount received as premium is credited to the 'Securities Premium Account'.

The issue price is more than the nominal value.

The issue price is equal to the nominal value.

The issue price is less than the nominal value.

The issue price is irrelevant.

Correct Answer: C

Solution:

Debentures are said to be issued at a discount when the issue price is less than the nominal or face value.

There is no impact on the profit and loss account.

The premium is debited to the profit and loss account.

The premium is credited to the profit and loss account.

The entire amount is adjusted in the balance sheet.

Correct Answer: B

Solution:

The premium on redemption of debentures is considered a loss and is debited to the profit and loss account.

Net loss of Rs. 20

Net gain of Rs. 20

Net loss of Rs. 10

Net gain of Rs. 10

Correct Answer: A

Solution:

The debenture is issued at Rs. 90 (10% discount on Rs. 100) and redeemed at Rs. 110 (10% premium on Rs. 100). The net loss per debenture is Rs. 110 - Rs. 90 = Rs. 20.

Convertible Debenture

Zero Coupon Debenture

Perpetual Debenture

Bearer Debenture

Correct Answer: B

Solution:

Zero Coupon Debentures are issued at a discount and do not pay periodic interest. They are redeemed at face value.

Debit Premium on Redemption of Debentures A/c

Credit Premium on Redemption of Debentures A/c

Debit Loss on Issue of Debentures A/c

Credit Loss on Issue of Debentures A/c

Correct Answer: A

Solution:

The premium on redemption is recorded by debiting the Premium on Redemption of Debentures Account.

A primary security for a loan.

A security issued at a discount.

Any security in addition to primary security.

A security that cannot be redeemed.

Correct Answer: C

Solution:

Collateral security is any security in addition to the primary security.

Redemption at a premium increases the company's liabilities.

Redemption at a discount decreases the company's liabilities.

Redemption at par has no effect on the company's equity.

Redemption at a premium decreases the company's assets.

Correct Answer: C

Solution:

Redemption at par means the company pays back the face value of the debentures, which does not affect the equity directly, as it is a repayment of liability.

As a current liability

As a non-current liability

As an asset

As equity

Correct Answer: B

Solution:

Debentures are shown as a non-current liability in the company's balance sheet.

A written instrument acknowledging a debt under the common seal of the company.

A type of equity share issued by a company.

A short-term loan taken by a company.

A document representing ownership in a company.

Correct Answer: A

Solution:

A debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company.

The primary security against which debentures are issued.

A secondary security provided in addition to the primary security.

A security that cannot be converted into shares.

A security that is issued at par and redeemed at a premium.

Correct Answer: B

Solution:

Collateral security refers to any additional security provided along with the primary security to secure the debenture holders.

Rs. 100,000

Rs. 50,000

Rs. 150,000

Rs. 200,000

Correct Answer: A

Solution:

The premium on issue is 10% of Rs. 100 = Rs. 10 per debenture. For 10,000 debentures, this amounts to Rs. 100,000. This amount is credited to the Securities Premium Account.

Debit Debenture Interest A/c; Credit Debentureholders A/c

Debit Bank A/c; Credit Debenture Interest A/c

Debit Debentureholders A/c; Credit Bank A/c

Debit Debenture Interest A/c; Credit Bank A/c

Correct Answer: A

Solution:

When interest is due, the entry is to debit the Debenture Interest Account and credit the Debentureholders Account.

A debenture that is registered in the company's books.

A debenture that is not registered in the company's books and is transferable by delivery.

A debenture that can be converted into shares.

A debenture that is issued at a discount.

Correct Answer: B

Solution:

A Bearer Debenture is not registered in the company's books and is transferable by mere delivery.

Net gain of Rs. 10

Net loss of Rs. 5

Net gain of Rs. 5

No gain or loss

Correct Answer: D

Solution:

The premium on issue is 5% of Rs. 100 = Rs. 5 gain per debenture. The discount on redemption is 5% of Rs. 100 = Rs. 5 loss per debenture. Net gain or loss = Rs. 5 - Rs. 5 = Rs. 0.

Convertible debenture

Zero coupon rate debenture

Bearer debenture

Registered debenture

Correct Answer: B

Solution:

Zero coupon rate debentures do not have a fixed interest rate.

To raise short-term funds

To raise long-term funds

To increase equity capital

To reduce company liabilities

Correct Answer: B

Solution:

Debentures are issued to raise long-term funds, as the funds raised by the issue of shares are seldom adequate to meet the long-term financial needs of a company.

They are always issued at a premium.

They do not carry any interest.

They are a primary security for the loan.

They are recorded in the books only when the primary security is insufficient.

Correct Answer: D

Solution:

Debentures issued as collateral security are recorded in the books only when the primary security is insufficient to cover the loan.

As a loss on issue

Credited to Securities Premium Account

Debited to Loss on Issue of Debentures Account

Recorded as a liability

Correct Answer: B

Solution:

The amount received as premium is credited to the 'Securities Premium Account'.

Credited to 'securities premium account'

Debited to 'loss/discount on issue' and written-off over the years

Recorded as a liability

Recorded as an asset

Correct Answer: B

Solution:

The amount of discount allowed is debited to 'loss/discount on issue' and is written-off over the years.

Rs. 80,000

Rs. 40,000

Rs. 120,000

Rs. 60,000

Correct Answer: B

Solution:

The amount received on allotment is Rs. 20 per debenture. Therefore, the total amount received on allotment is 4,000 debentures * Rs. 20 = Rs. 80,000.

Rs. 30,000

Rs. 15,000

Rs. 60,000

Rs. 45,000

Correct Answer: A

Solution:

The debentures are redeemable at a premium of 10% of the face value. Face value of each debenture is Rs. 50, so the premium per debenture is 10% of Rs. 50 = Rs. 5. Total premium = 6,000 debentures * Rs. 5 = Rs. 30,000.

It is credited to the Securities Premium Account.

It is debited to the Loss on Issue of Debentures Account.

It is credited to the Debenture Redemption Reserve.

It is debited to the Profit and Loss Account.

Correct Answer: A

Solution:

When debentures are issued at a premium, the premium amount is credited to the Securities Premium Account.

To provide a cushion for the payment of interest on debentures.

To ensure that funds are available for the redemption of debentures at maturity.

To increase the company's equity capital.

To enhance the company's credit rating.

Correct Answer: B

Solution:

A Debenture Redemption Reserve is created to ensure that the company has sufficient funds available to redeem debentures at maturity, thereby protecting the interests of debenture holders.

Rs. 6,30,000

Rs. 9,00,000

Rs. 2,70,000

Rs. 4,50,000

Correct Answer: A

Solution:

The total amount received from the debenture allotment is calculated as 9,000 debentures multiplied by Rs. 70 each, which equals Rs. 6,30,000.

Rs. 8,55,000

Rs. 9,00,000

Rs. 8,45,000

Rs. 8,50,000

Correct Answer: A

Solution:

The debentures are issued at a discount of 5%, so the issue price is Rs. 95 per debenture. Total amount received = 9,000 debentures * Rs. 95 = Rs. 8,55,000.

They are a part of owned capital.

They are a charge on the profits of the company.

They cannot be issued at a discount.

They are always issued at a premium.

Correct Answer: B

Solution:

The payment of interest on debentures is a charge on the profits of the company.

To pay interest on debentures.

To provide collateral security.

To accumulate funds for the redemption of debentures.

To issue new debentures.

Correct Answer: C

Solution:

A sinking fund is used to accumulate funds for the redemption of debentures.

Bonds are issued by the government, debentures by companies.

Bonds have a fixed interest rate, debentures do not.

Bonds are secured by collateral, debentures may not be.

Bonds can be issued at a discount, debentures cannot.

Correct Answer: C

Solution:

The primary difference is that bonds are typically secured by collateral, while debentures may not be secured and rely on the creditworthiness of the issuer.

A share in the company's profits

A written instrument acknowledging a debt

An equity share

A short-term loan

Correct Answer: B

Solution:

According to the Companies Act, 2013, a debenture is a written instrument acknowledging a debt under the common seal of the company.

Rs. 4,00,000

Rs. 3,50,000

Rs. 50,000

No additional amount required

Correct Answer: B

Solution:

The total amount required in the Debenture Redemption Reserve is equal to the face value of the debentures, which is Rs. 4,00,000. Since Rs. 50,000 is already available, an additional Rs. 3,50,000 needs to be transferred.

The company incurs a loss on issue of debentures

The company gains a profit on redemption

No impact as both are equal

The company incurs a gain on issue of debentures

Correct Answer: A

Solution:

Issuing debentures at a discount results in a loss on issue of debentures, as the company receives less than the face value.

Net effect is the sum of discount and premium.

Net effect is the difference between premium and discount.

Net effect is only the premium amount.

Net effect is only the discount amount.

Correct Answer: A

Solution:

The net effect on the profit and loss account is the sum of the discount on issue and the premium on redemption, as both are expenses for the company.

Increase in liabilities and decrease in equity

Increase in liabilities and increase in equity

No change in liabilities, decrease in equity

No change in equity, increase in liabilities

Correct Answer: A

Solution:

Issuing debentures at par does not affect equity initially, but redeeming them at a premium increases liabilities due to the premium payable, which reduces retained earnings or reserves, thus decreasing equity.

Convertible debentures

Perpetual debentures

Bearer debentures

Equity debentures

Correct Answer: D

Solution:

Equity debentures do not exist as debentures are debt instruments, whereas equity refers to ownership.

The issue price is more than the nominal value.

The issue price is less than the nominal value.

The debentures are issued at their face value.

The debentures are issued with a premium.

Correct Answer: B

Solution:

Debentures are issued at a discount when the issue price is less than the nominal or face value.

Rs. 20,000

Rs. 30,000

Rs. 40,000

Rs. 50,000

Correct Answer: C

Solution:

The discount on issue is 5% of Rs. 100 = Rs. 5 per debenture, and the premium on redemption is also Rs. 5 per debenture. Total loss = (Discount + Premium) x 4,000 = (5 + 5) x 4,000 = Rs. 40,000.

Rs. 5,00,000

Rs. 5,50,000

Rs. 4,50,000

Rs. 6,00,000

Correct Answer: B

Solution:

The redemption amount per debenture is Rs. 100 + 10% of Rs. 100 = Rs. 110. Total redemption amount = 5,000 debentures * Rs. 110 = Rs. 5,50,000.

Rs. 90,000

Rs. 9,00,000

Rs. 9,000

Rs. 1,00,000

Correct Answer: A

Solution:

The premium on redemption is calculated as 10% of the face value of the debentures. Therefore, the premium amount = 9,000 debentures * Rs. 100 * 10% = Rs. 90,000.

To pay interest on debentures

To ensure funds are available for the redemption of debentures

To issue more debentures

To provide collateral security

Correct Answer: B

Solution:

A Debenture Redemption Reserve is created to ensure that funds are available for the redemption of debentures when they mature.

Rs. 2,85,000

Rs. 3,00,000

Rs. 2,70,000

Rs. 3,15,000

Correct Answer: A

Solution:

The debentures were issued at a discount of 5%, so the amount received is 95% of the face value: 6,000 * 50 * 0.95 = Rs. 2,85,000.

Redemption of debentures means issuing more debentures.

Redemption of debentures means discharge of liability by repayment to debenture holders.

Redemption of debentures increases the company's equity.

Redemption of debentures is not recorded in the company's books.

Correct Answer: B

Solution:

Redemption of debentures means discharge of liability on account of debenture/bond by repayment made to debenture holders.

Rs. 40,000

Rs. 50,000

Rs. 60,000

Rs. 70,000

Correct Answer: B

Solution:

The premium on redemption is 5% of Rs. 100 = Rs. 5 per debenture. Therefore, the total premium payable on redemption is 8,000 debentures x Rs. 5 = Rs. 40,000.

Rs. 50,000

Rs. 100,000

Rs. 150,000

Rs. 200,000

Correct Answer: C

Solution:

The loss on issue of debentures includes the discount on issue and the premium on redemption. Discount on issue = 10,000 debentures * Rs. 100 * 5% = Rs. 50,000. Premium on redemption = 10,000 debentures * Rs. 100 * 10% = Rs. 100,000. Total loss = Rs. 50,000 + Rs. 100,000 = Rs. 150,000.

Written off over the life of the debentures.

Charged to the Securities Premium Account.

Recorded as a capital loss.

Ignored in the financial statements.

Correct Answer: A

Solution:

The loss on issue of debentures, which includes both the discount on issue and the premium on redemption, should be written off over the life of the debentures as per accounting standards.

The issue price is less than the nominal or face value.

The issue price is equal to the nominal or face value.

The issue price is more than the nominal or face value.

The debentures are issued without any interest rate.

Correct Answer: C

Solution:

Debentures are said to be issued at a premium when the issue price is more than the nominal or face value.

Rs. 50,000

Rs. 100,000

Rs. 150,000

Rs. 200,000

Correct Answer: A

Solution:

The premium on issue is 5% of Rs. 100, which is Rs. 5 per debenture. For 10,000 debentures, the total premium credited to the Securities Premium Account is Rs. 50,000.

It is shown as a liability in the balance sheet.

It is written off against the securities premium account.

It is added to the debenture interest expense.

It is treated as a revenue income.

Correct Answer: B

Solution:

Premium on redemption of debentures is typically written off against the securities premium account, if available, or against the profit and loss account.

Discount: Rs. 50,000; Premium: Rs. 25,000

Discount: Rs. 45,000; Premium: Rs. 30,000

Discount: Rs. 50,000; Premium: Rs. 30,000

Discount: Rs. 45,000; Premium: Rs. 25,000

Correct Answer: A

Solution:

The discount on issue is 10% of Rs. 100, which is Rs. 10 per debenture. For 5,000 debentures, the total discount is Rs. 50,000. The premium on redemption is 5% of Rs. 100, which is Rs. 5 per debenture. For 5,000 debentures, the total premium is Rs. 25,000.

A primary security for the loan.

A security in addition to primary security.

A security that replaces the primary security.

A security that is not related to the loan.

Correct Answer: B

Solution:

Collateral security is any security in addition to the primary security.

True or False

Correct Answer: False

Solution:

Debentures can be converted into shares, as seen in scenarios where debentures are redeemed by conversion into preference or equity shares.

Correct Answer: False

Solution:

The interest on debentures can be paid either half-yearly or yearly on fixed dates, as stated in the excerpts.

Correct Answer: True

Solution:

The excerpts state that the payment of interest on debentures is indeed a charge on the profits of the company.

Correct Answer: True

Solution:

The excerpts state that debentures can be issued to vendors or suppliers of patents, copyrights, and for the transfer of intellectual property rights without receiving money in cash.

Correct Answer: False

Solution:

Debentures can be issued at a premium and redeemed at par, as the terms of issue and redemption can vary.

Correct Answer: True

Solution:

Interest on debentures is typically paid annually, as shown in the journal entries for debenture interest.

Correct Answer: False

Solution:

While debentures are often redeemed at the expiry of the period for which they have been issued, they can also be redeemed earlier depending on the terms and conditions of the issue.

Correct Answer: False

Solution:

Debentures are a form of loan capital and not part of the company's owned capital. They represent a debt obligation.

Correct Answer: False

Solution:

Unlike debentures, bonds can be issued without a pre-determined rate of interest, as seen in the case of deep discount bonds.

Correct Answer: False

Solution:

Debentures represent borrowed capital and are not part of the owned capital of a company, as they are a form of long-term debt.

Correct Answer: False

Solution:

Debentures can be converted into shares, as indicated by the possibility of redeeming debentures by conversion into equity shares.

Correct Answer: False

Solution:

A debenture holder is a creditor of the company, not an owner. They hold a debt instrument rather than equity.

Correct Answer: True

Solution:

Debentures are a form of long-term debt that companies use to raise capital.

Correct Answer: True

Solution:

A debenture is a written instrument that acknowledges a debt under the common seal of the company, as defined in the Companies Act, 2013.

Correct Answer: False

Solution:

Debentures can be issued at a premium when the issue price is more than the nominal or face value.

Correct Answer: True

Solution:

Interest on debentures is typically paid at a fixed rate, either half-yearly or yearly, as per the definition of debentures provided in the excerpts.

Correct Answer: True

Solution:

According to the excerpts, debentures can be issued at a discount and redeemed at a premium, which is one of the possible scenarios for debenture issuance and redemption.

Correct Answer: True

Solution:

Debentures can indeed be issued at a discount and redeemed at a premium, as mentioned in the excerpts.

Correct Answer: False

Solution:

Debenture holders are creditors of the company, not part owners, as debentures are acknowledgements of debt.

Correct Answer: True

Solution:

Interest on debentures is indeed a charge on the profits of the company, as it is an obligation to pay.

Correct Answer: True

Solution:

Interest on debentures must be paid regardless of whether the company makes a profit or not, making it a charge on profits.

Correct Answer: False

Solution:

Debentures are a form of loan capital and represent a debt owed by the company, not owned capital.

Correct Answer: True

Solution:

Debentures are indeed considered long-term debt instruments, as they are used by companies to raise long-term funds, as mentioned in the excerpts.

Correct Answer: False

Solution:

A collateral security is not a primary security; it is an additional security provided to secure a loan or obligation, as described in the excerpts.

Correct Answer: True

Solution:

Perpetual debentures are indeed referred to as irredeemable debentures as per the excerpts.

Correct Answer: False

Solution:

Debentures can be issued at par, at a discount, or at a premium as indicated in the excerpts.

Correct Answer: True

Solution:

Debentures can be issued as collateral security, which is an additional security provided to lenders.

Correct Answer: False

Solution:

Interest on debentures is a charge on the profits of the company, meaning it must be paid regardless of the company's profit situation.

Correct Answer: True

Solution:

The excerpts mention that debentures can be issued to vendors or suppliers for consideration other than cash, such as intellectual property rights.

Correct Answer: True

Solution:

Interest on debentures is usually paid either half-yearly or yearly on fixed dates.

Correct Answer: True

Solution:

Redemption of debentures refers to the repayment of the principal amount to debenture holders, thereby discharging the company's liability.

Correct Answer: False

Solution:

Redemption of debentures can occur at the expiry of the period for which they have been issued, but it can also depend on the terms and conditions of the issue, allowing for flexibility in redemption timing.

Correct Answer: False

Solution:

Debentures can be issued at a premium, as indicated by the possibility of issuing debentures at a premium and redeeming at par or at a premium.

Correct Answer: False

Solution:

Redemption of debentures can occur at various times, not just at the end of their term, depending on the terms and conditions of issue.

Correct Answer: False

Solution:

A collateral security is any security in addition to the primary security, not the primary security itself.

Correct Answer: True

Solution:

Debentures can indeed be issued at a premium and redeemed at par, as per the terms set by the issuing company.

Correct Answer: True

Solution:

Collateral security is provided in addition to the primary security, hence it is considered a subsidiary security.

Correct Answer: False

Solution:

Debentures can be issued for consideration other than cash, such as to vendors or suppliers of patents and copyrights.

Correct Answer: False

Solution:

Perpetual debentures are also known as irredeemable debentures, meaning they do not have a fixed maturity date.

Correct Answer: True

Solution:

Perpetual debentures do not have a fixed maturity date and are therefore considered irredeemable.

Correct Answer: True

Solution:

According to the provided excerpts, a debenture is indeed a written instrument acknowledging a debt under the common seal of the company.

Correct Answer: False

Solution:

Debentures can be issued at par, at a discount, or at a premium, depending on the terms set by the issuing company.

Correct Answer: False

Solution:

Redemption of debentures can occur at the end of their term or at intervals, depending on the terms and conditions of the issue.

Correct Answer: True

Solution:

The excerpts state that a bond is similar to a debenture in terms of contents and texture, with differences in issue conditions.

Correct Answer: True

Solution:

Debentures can be issued for consideration other than cash, such as to vendors or suppliers for assets.

Correct Answer: True

Solution:

A debenture is a written acknowledgment of debt, and the holder is considered a creditor of the company, not an owner.

Correct Answer: True

Solution:

Debentures are a means for companies to raise long-term funds, as they represent a written acknowledgment of debt.

Issue and Redemption of Debentures

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Summary

Summary of Debentures

Learning Objectives

Learning Objectives

Detailed Notes

Notes on Debentures

1. Meaning of Debentures

2. Types of Debentures

3. Issue of Debentures

4. Redemption of Debentures

5. Accounting Treatment

6. Important Terms

7. Example Journal Entries

8. Balance Sheet Extract Example

9. Interest on Debentures

Exam Tips & Common Mistakes

Common Mistakes and Exam Tips

Common Pitfalls

Tips for Success

Practice & Assessment

Multiple Choice Questions

Q1.What is the accounting treatment for the premium on redemption of debentures?

Correct Answer: C

Q2.Which of the following best describes a 'Bearer Debenture'?

Correct Answer: B

Q3.Which of the following is NOT a type of debenture?

Correct Answer: D

Q4.If a company issues debentures at a premium of 10% and redeems them at par, what is the impact on the Securities Premium Account?

Correct Answer: A

Q5.A company issued 8% debentures of Rs. 100 each at par and decided to redeem them at a premium of 5% after 5 years. If the company issued 1,000 debentures, what is the total premium payable on redemption?

Correct Answer: A

Q6.A company issues 12% debentures of Rs. 100 each at a discount of 5% and redeems them at par. If the company issued 8,000 debentures, what is the total discount on issue?

Correct Answer: A

Q7.Which account is credited when debentures are issued at a premium?

Correct Answer: B

Q8.Which of the following is true about the issue of debentures at a discount?

Correct Answer: C

Q9.If a company issues debentures at par and redeems them at a premium of 5%, what is the impact on the company's profit and loss account?

Correct Answer: B

Q10.A company issues debentures at a discount of 10% and redeems them at a premium of 10%. If the face value of the debenture is Rs. 100, what is the net loss or gain per debenture for the company?

Correct Answer: A

Q11.Which of the following is a type of debenture that does not pay interest periodically but is issued at a discount and redeemed at face value?

Correct Answer: B

Q12.If a company issues debentures at a discount and redeems them at a premium, how is the premium on redemption recorded?

Correct Answer: A

Q13.What is a collateral security?

Correct Answer: C

Q14.Which of the following statements is true about the redemption of debentures?

Correct Answer: C

Q15.How are debentures shown in a company's balance sheet?

Correct Answer: B

Q16.What is the meaning of a debenture?

Correct Answer: A

Q17.In the context of debentures, what does the term 'collateral security' refer to?

Correct Answer: B

Q18.XYZ Ltd. issued 10,000 debentures of Rs. 100 each at a premium of 10% and redeemable at par. What is the total amount credited to the Securities Premium Account?

Correct Answer: A

Q19.What is the journal entry when debenture interest is due but not yet paid?

Correct Answer: A

Q20.What is the meaning of a 'Bearer Debenture'?

Correct Answer: B

Q21.If a company issues debentures at a premium of 5% and redeems them at a discount of 5%, what is the net gain or loss per debenture of Rs. 100?

Correct Answer: D

Q22.Which type of debenture does not have a fixed interest rate?

Correct Answer: B

Q23.What is the primary purpose of issuing debentures by a company?

Correct Answer: B

Q24.Which of the following statements is TRUE about debentures issued as collateral security?

Correct Answer: D

Q25.If a company issues debentures at a premium of 10% and redeems them at par, how is the premium recorded?

Correct Answer: B

Q26.A company issues debentures at a discount of 10% and redeems them at par. How is the discount on issue recorded?

Correct Answer: B

Q27.A company issued 4,000, 9% debentures of Rs. 100 each on the following terms: Rs. 20 on Application, Rs. 20 on Allotment, Rs. 30 on First call, and Rs. 30 on Final call. What is the total amount received on allotment?

Correct Answer: B

Q28.ABC Ltd. issued 6,000, 12% Debentures of Rs. 50 each at a discount of 5% on April 1, 2014. The debentures are redeemable at a premium of 10% in four equal installments at the end of the third, fourth, fifth, and sixth year. What is the total premium amount to be paid at the time of redemption?

Correct Answer: A

Q29.If a company issues debentures at a premium and redeems them at par, what happens to the premium amount?