Debentures: Issue, Redemption, and Accounting - Class XII

Yield to maturity (YTM) is the total anticipated return on a bond if it is held until it matures. It accounts for all coupon payments and the difference between the purchase price and the face value.

Preference shares can be redeemed out of the proceeds of a fresh issue of shares or debentures made for the purpose of redemption. Fixed deposits and sale of investments are not standard sources for redemption under the Companies Act.

According to the Companies Act, the Securities Premium account can be used for specific purposes, including writing off the expenses or commission paid or discount allowed on any issue of securities or debentures.

When debentures are issued at par but redeemable at a premium, the premium payable on redemption is treated as a loss on issue. This loss is debited to the Loss on Issue of Debentures Account.

Debentures are debt instruments and represent a loan to the company. They cannot be issued in lieu of dividends, as dividends are distributions of profit to shareholders.

Debentures can be issued for cash or for consideration other than cash (like purchasing assets). They can also be issued as collateral security for loans.

When debentures are issued as collateral security, the primary entry is recording the loan taken. The issuance of debentures is often recorded via a memorandum entry or by debiting Debenture Suspense Account, but the actual cash transaction is the loan itself.

The standard journal entry for issuing debentures as collateral security is to debit Debenture Suspense Account and credit the Debentures Account.

The amount payable is 28,80,000. Debentures are issued at 4% discount, so the issue price per debenture is 100 - 4 = 96. Number of debentures = 28,80,000 / 96 = 30,000.

The loss on issue includes both the discount on issue (5%) and the premium on redemption (5%), totaling 10%. The entry debits Bank for 95,000, Loss on Issue for 10,000, and credits Debentures for 100,000 and Premium on Redemption for 5,000.

Total price is 100,000. Cash paid is 37,000. Balance to be paid in debentures is 63,000. Issue price per debenture is 100 - 10% = 90. Number of debentures = 63,000 / 90 = 700.

Companies are legally permitted to issue debentures at a discount.

When debentures are issued, the Debentures Account is credited to reflect the liability created.

When loan is taken from Bank or Financial Institution, debentures may be issued as collateral security. Any cash is not received against these debenture. On default of repayment of loan, loan may be converted into debentures by Bank/Financial Institution.

Loss on issue of debentures, until written off, is shown as a miscellaneous expenditure on the assets side of the balance sheet.

Debentures can be issued for consideration other than cash and as collateral security for loans.

A debenture holder is a creditor of the company and is entitled to receive interest at a fixed rate, regardless of the company's profit.

As per the Companies Act, the underwriting commission for debentures is capped at 2.5%.

The maximum underwriting commission for debentures is 2.5% (or 2 1/2%).

The carrying amount of a debenture is its face value, adjusted for any unamortized discount or premium. At the time of issue, the carrying amount is the issue price, but over time, it amortizes back to the face value.

Bearer debentures are transferable by mere delivery. They do not require a deed of transfer, which is a characteristic of registered debentures.

Income tax deducted at source (TDS) from interest paid on debentures represents an amount the company is obligated to pay to the government on behalf of the debenture holder. Since this is an obligation to be settled in the future, it is classified as a current liability of the company.

Debentures are debt instruments, not equity, so holders are creditors, not owners. Interest is a fixed charge payable regardless of profits. A debenture can be issued at a discount and redeemed at a premium, which is a standard accounting practice for long-term debt.

When debentures are issued as collateral security, the standard accounting treatment is to debit the Debentures Suspense Account and credit the Debentures Account to reflect the potential liability without affecting the cash flow of the loan itself.

Debentures represent a debt obligation and cannot be forfeited for non-payment of call money, unlike shares. Shares can be forfeited because they represent ownership, but debentures are contractual debts.

Discount on the issue of debentures is a capital loss because it relates to the cost of raising long-term capital. It is typically amortized over the life of the debentures to match the expense with the period of benefit.

The total loss on redemption is 20% of 40,000 * 10 = 80,000. Since the debentures are redeemed after 5 years, the annual loss to be written off is 80,000 / 5 = 16,000.

The issue price per debenture is 100 + 20 = 120. The number of debentures issued is the total consideration divided by the issue price: 2,880,000 / 120 = 24,000.

Debentures can be secured by a charge on the assets of the company. Therefore, the statement that they cannot be secured is false.

Debentures can be issued for cash or for consideration other than cash (such as purchasing assets). Both options A and B are correct, making D the right choice.

According to the Companies Act, companies are generally prohibited from issuing debentures with voting rights. Voting rights are reserved for equity shareholders.

The debentures are issued for 1,00,000. The bank received 96,000. The difference of 4,000 represents the discount. 4,000 / 1,00,000 = 4%.

Dividends are a distribution of profits to shareholders. Debentures are debt, and interest is paid to debenture holders. Debentures cannot be issued in lieu of dividends.

Securities premium (or debenture premium) has specific legal uses under the Companies Act. Paying dividends out of this premium is prohibited.

When debentures are issued as a collateral security there are two treatments in the accounting books. 

One of the methods is where no journal entry is made in the account books at the time of issue of such debentures. Hence, only the entry of loan is to be passed.

Hence, C is the correct option.

Total loss on redemption is 20% of 20,000 * 10 = 40,000. The debentures are redeemed after 5 years, so the annual loss to be written off is 40,000 / 5 = 8,000.

Debentures can be issued for cash, for consideration other than cash (like assets), or as collateral security for a loan. All these methods are valid.

Collateral security means security provided to the lender over and above the prime or principal security. Collateral security is to be realized only when the principal security fails to pay the amount of loan.
Debentures Suspense A/c                          Dr.
To Debentures A/c

Bearer debentures are negotiable instruments (A true), transferable by mere delivery (C true), with interest paid to the holder (D true). Their defining feature is that no deed is needed for transfer - simple delivery suffices. Option B is false - their transfer does NOT require a deed.

If debentures are non-convertible, they are paid at the time of redemption. Debentures which are non-convertible and redeemable after a period of more than 18 months must be secured by creating a charge against the property of the company.

Interest accrued but not due on debentures is a liability that the company must pay within the next 12 months, classifying it as a current liability in the balance sheet.

The purchase consideration is 4,00,000. Debentures of 100 are issued at a 20% discount, so the issue price is 80. Number of debentures = 4,00,000 / 80 = 5,000. The debentures account is credited with the face value: 5,000 * 100 = 5,00,000.

Loss on issue of debentures is an expense account. According to the rules of accounting, all expenses and losses are classified as nominal accounts.

In the balance sheet, debentures are long-term borrowings and are traditionally shown under the head of Secured Loans (or Long-term Borrowings in modern formats).

According to the Companies Act, the underwriting commission for debentures is capped at 2.5% of the issue price.

Sometimes a company purchases assets from vendors and instead of making payment in cash issues debentures for consideration thereof, such issue of debenture is called as issued for consideration other than cash. e.g. Purchase of assets from the company by issuing debentures as consideration,  debentures issued in lieu of dividends.

A collateral security may be defined as a subsidiary or secondary or additional security besides the primary security when a company obtains a loan or overdraft  from a bank or any other financial institutions. The final journal entry for recording this transaction is:

Sometimes a company purchases assets from vendors and instead of making payment in cash issues debentures for consideration thereof, such issue of dentures is called as issue for consideration other than cash. Debenture can be issued for cash and collateral security.

The amount payable is 20,000 - 6,500 = 13,500. The debentures are issued at a 10% premium, so the issue price is 110. Number of debentures = 13,500 / 110 = 122.72. Since you cannot issue a fraction of a debenture, the question likely implies 123 debentures (rounding up).

3,000 debentures * 8 shares per debenture = 24,000 shares. 24,000 shares * 10 face value = 2,40,000 credited to share capital.

The debentures are 1,00,000. The bank received 95,000. The difference of 5,000 is the discount. 5,000 / 1,00,000 = 5%.

When debentures are issued as collateral security, the Debenture Suspense Account is debited to record the issuance of the debentures as a contingent liability.

The purchase consideration is Rs. 28,80,000. The issue price per debenture is Rs. 100 minus 4% discount (Rs. 4), which equals Rs. 96. Dividing 28,80,000 by 96 gives 30,000 debentures.

The total face value of debentures is Rs. 5,00,000. The bank received Rs. 4,75,000. The difference of Rs. 25,000 represents the discount on issue. Discount percentage = (25,000 / 5,00,000) * 100 = 5%.

When debentures are issued as collateral security, the standard accounting entry is to debit Debenture Suspense A/c and credit Debentures A/c with the face value of the debentures issued.

It is standard practice to disclose the existence of debentures issued as collateral security in the notes to the balance sheet, and interest is generally not paid on collateral debentures unless the loan defaults. Since the options provided do not describe an 'uncommon' event, 'None of the above' is the correct choice.

The loss on redemption is the premium payable on redemption, which is 20% of Rs. 100 = Rs. 20 per debenture. For 10,000 debentures, the total loss is Rs. 2,00,000. Over 10 years, the annual write-off is 2,00,000 / 10 = Rs. 20,000.

The loss on issue includes the discount on issue (7.5% of 100 = 7.5) and the premium on redemption (5% of 100 = 5). Total loss per debenture = 7.5 + 5 = 12.5. For 3,000 debentures, total loss = 3,000 * 12.5 = 37,500.