Issue and Redemption of Debentures
Issue and Redemption of Debentures tests the liability side of the balance sheet and the accounting for discount, premium and redemption. Debentures are long-term borrowings; interest is a finance cost.
Issue
Debentures may be issued at par, at discount or at premium, for cash or for consideration other than cash, and may be issued as collateral security. Discount on issue is a loss and is written off. If debentures are redeemable at premium, the premium payable is also a loss at the time of issue: total loss on issue = discount on issue + premium on redemption. The credit for premium on redemption is a liability.
Redemption
Redemption may be by lump sum, in instalments, by purchase in the open market, or by conversion. Companies create a Debenture Redemption Reserve (DRR) out of profits and, where required, a Debenture Redemption Investment (DRI) before redemption. DRR is not created for convertible debentures. On redemption, Debentures and Premium on Redemption are debited and debentureholders credited.
Worked example
10,000 9% debentures of ₹100 each issued at 5% discount, redeemable at 5% premium. Issue proceeds = ₹9,50,000; discount = ₹50,000; premium on redemption = ₹50,000; total loss = ₹1,00,000. Entry: Bank Dr ₹9,50,000; Discount on Issue Dr ₹50,000; To 9% Debentures ₹10,00,000. Loss on Issue Dr ₹50,000; To Premium on Redemption ₹50,000. At redemption: 9% Debentures Dr ₹10,00,000; Premium on Redemption Dr ₹50,000; To Debentureholders ₹10,50,000.
Traps
Do not treat premium on redemption as income at issue. Do not omit accrued interest. Debentures issued as collateral are not recorded as a liability until default; disclose them in notes. Own debentures purchased and cancelled reduce the liability; any gain is capital profit.