Issue and Redemption of Debentures
Nature and issue
A debenture acknowledges a debt, carries fixed interest, and interest is a charge against profit. Issue may be at par, at premium or at discount; the loss on issue is written off against securities premium or against profit. Debentures may be issued as collateral security, where no entry is passed until default and sale.
Redemption methods
Lump sum at maturity; instalments by drawing lots; purchase in the open market (own debentures); or conversion into shares or new debentures. To protect holders, companies create a Debenture Redemption Reserve out of divisible profits and invest in specified securities as required by the rules applicable to your syllabus year.
Worked example
1,000 9% debentures of ₹100 issued at 95, redeemable at 105. Bank receives ₹95,000. The ₹5,000 discount and the ₹5,000 redemption premium are both losses at issue: Bank A/c Dr ₹95,000; Loss on Issue of Debentures A/c Dr ₹10,000; To 9% Debentures A/c ₹1,00,000; To Premium on Redemption of Debentures A/c ₹5,000. Interest each year is 9% of ₹1,00,000 = ₹9,000, paid on face value, not on the issue price.
Traps
Charging interest on the issue price of ₹95,000; omitting the premium on redemption; crediting own debentures to the Debenture Account instead of reducing the liability when they are held as an investment; and forgetting to write off the loss on issue.