Issue and Redemption of Debentures

A debenture is a written instrument acknowledging a debt, issued under the common seal of a company, that carries a fixed rate of interest and is repayable on a specified date. In this chapter you will learn how debentures differ from shares, their main types (secured and unsecured, redeemable and irredeemable, convertible and non-convertible, registered and bearer, specific coupon rate and zero coupon rate), and how to record their issue at par, at a premium or at a discount, including oversubscription, issue for consideration other than cash, and issue as collateral security against a loan. You will then study the six combinations of terms of issue and redemption, such as issue at a discount and redemption at a premium, and record the loss on issue of debentures, which is written off first from Securities Premium and then from the Statement of Profit and Loss. The chapter also covers interest on debentures with deduction of tax at source, and the basic methods of redemption, in a lump sum or in instalments, at par or at a premium.

Detailed Worksheet: Issue and Redemption of Debentures Section A - Definitions (10 marks) 1. Define a debenture. Distinguish between a share and a debenture on any two bases. (2 marks) 2. Distinguish between secured and unsecured debentures, and between convertible and non-convertible debentures. (2 marks) 3. What is meant by issue of debentures as collateral security? Why does the company not receive any cash in this case? (2 marks) 4. What is loss on issue of debentures? How is it written off as per the current accounting treatment? (2 marks) 5. What are zero coupon bonds? How does an investor earn a return on them? (2 marks) Section B - Calculations and Applications (15 marks) 6. Zenith Ltd issued 10,000, 9% debentures of Rs 100 each at a discount of 5%, redeemable at a premium of 10% after five years. Pass the journal entry for issue (in a single entry, assuming the full amount is received in one instalment) and calculate the loss on issue of debentures. (3 marks) 7. A company issued 5,000, 10% debentures of Rs 100 each at a premium of 6%, redeemable at par. The amount was payable Rs 40 on application and the balance (including premium) on allotment. Pass the journal entries for receipt of application and allotment money. (3 marks) 8. Interest on 9% debentures of Rs 10,00,000 is payable annually on 31 March. Tax is deducted at source at 10%. Calculate the gross interest, TDS and net interest paid, and pass the journal entries for interest due, payment and transfer to the Statement of Profit and Loss. (3 marks) 9. Ravi Ltd purchased assets worth Rs 4,40,000 from Kiran Enterprises and paid the vendor by issuing 9% debentures of Rs 100 each at a premium of 10%. Calculate the number of debentures issued and pass the journal entries for purchase and issue. (3 marks) 10. A company took a bank loan of Rs 6,00,000 and issued 7,000, 10% debentures of Rs 100 each as collateral security. Pass the journal entry for issue as collateral, and show how the loan and debentures are presented in the Balance Sheet. (3 marks) Section C - Diagrams (10 marks) 11. Draw a chart showing the classification of debentures on the basis of security, tenure, convertibility, coupon rate and registration, with one feature of each type. (4 marks) 12. Draw a chart showing the six combinations of issue and redemption terms (at par, premium or discount and redemption at par or premium) and the journal entry for the case of issue at a discount and redemption at a premium. (3 marks) 13. Draw a flowchart showing the steps to write off loss on issue of debentures: Securities Premium first, then Statement of Profit and Loss, and the presentation of any unwritten balance. (3 marks) Section D - Analysis and Higher-order Thinking (15 marks) 14. Bharat Ltd issued 20,000, 8% debentures of Rs 100 each at a discount of 4%, redeemable at a premium of 5% after four years. The company has a Securities Premium balance of Rs 50,000. Calculate the total loss on issue, show how it will be written off, and pass the journal entries for issue and write off, assuming the loss is fully written off in the year of issue. (5 marks) 15. A company needs Rs 50 lakh for expansion. Its directors are choosing between equity shares and 10% debentures. The company earns 18% before interest and tax on capital employed. Analyse the effect of each option on the earnings of existing shareholders and their control, and explain why debentures may be preferred despite the fixed interest burden. (5 marks) 16. Applications were received for 15,000, 10% debentures against 10,000 offered at Rs 100 each payable in full on application. Applicants for 3,000 debentures were refused and the rest were allotted pro rata, with excess money refunded. Pass the journal entries and explain how the treatment differs from oversubscription of shares where excess money is adjusted towards allotment. (5 marks) Instructions: Time allowed 2 hours. Attempt all sections. Write journal entries as prose lines with narrations and show the calculation of loss on issue wherever required.