Issue and Redemption of Debentures
What the exam tests
Issue and Redemption of Debentures tests debentures as loan capital, issue at par, premium or discount, interest, and redemption by lump sum, draw of lots, open-market purchase or conversion. Debenture interest is a charge against profit, not an appropriation. Issue at premium credits Securities Premium; issue at discount or premium on redemption may create a loss on issue, written off over the debenture life or charged to Securities Premium where permitted. Redemption may require a Debenture Redemption Reserve where applicable.
Worked example
A company issues 1,000 12% debentures of Rs. 100 each at a 10% premium. Bank receives Rs. 1,10,000: Debentures Cr Rs. 1,00,000 and Securities Premium Cr Rs. 10,000. Annual interest is Rs. 12,000. If the debentures are redeemed at a 5% premium, payment is Rs. 1,05,000. Entry: Debentures Dr Rs. 1,00,000; Loss on Redemption Dr Rs. 5,000; To Debentureholders Rs. 1,05,000. The Rs. 5,000 is a loss on issue/redemption, not part of debenture capital.
Traps
Do not treat debenture interest as profit appropriation. Do not record the full redemption premium as debenture capital. Remember interest accrues up to the redemption date. Own debentures purchased in the open market need cancellation entries. Distinguish premium on issue, which is a capital receipt, from premium on redemption, which is a loss.