Issue and Redemption of Debentures
This section covers Issue and Redemption of Debentures. BSEB tests issue at par, premium and discount, interest, redemption methods, and the treatment of discount on issue and premium on redemption.
Core rules
- Debentures are long-term borrowings; interest is a charge against profit, payable whether or not the company earns profit.
- Issue at discount creates a capital loss. It is written off against securities premium or charged to Statement of Profit and Loss over the life of debentures.
- Redemption may be by lump sum, draw of lots, purchase in open market, conversion into shares or sinking fund. Where applicable, companies create Debenture Redemption Reserve and invest in specified securities before redemption.
- Interest accrues on the nominal value, not on issue proceeds. Premium on redemption is a liability provided at issue or over the period.
Worked example
10,000 12% debentures of ₹100 each are issued at ₹95. Issue proceeds = ₹9,50,000; discount = ₹50,000. Annual interest = 10,000 × ₹100 × 12% = ₹1,20,000. If debentures are redeemable after five years, the discount may be written off at ₹10,000 per year. At redemption, cash payable is ₹10,00,000 unless a premium is specified.
Traps
Do not treat debenture interest as an appropriation of profit. Do not show discount on issue as an asset after it is written off. Interest is computed on face value, not issue price. Do not confuse debenture holders (creditors) with shareholders (owners). If redemption is by purchase in the open market, cancel the debentures and account for the gain/loss.