COMPANY ACCOUNTS DEBENTURE ISSUE AND REDEMPTION

DEBENTURE— ISSUE AND REDEMPTION

A debenture may be defined as an acknowledgment (mostly under seal of the company) of a debt or loan raised by the company. Just as the share capital of a company is divided in a large number of a parts, each part being called a share, the loan may be divided into a number of parts called Debentures. They enable a company to raise a loan easily by enabling investors to buy as many debentures as they want.

Debenture is a creditorship security. Company has to pay interest to debenture holders at the agreed rate. It is usual to prefix “Debentures” with annual rate of interest.

Distinction between Debentures and Shares.

	Debentures	Shares
i) Security	It is a creditorship Security	It is an ownership security
ii) Return	A debenture holder is certain of return	No certainty of dividend payment.
	on his investment and of interest payments.
iii) Order of	They are paid first	They are finally paid.
repayment
on winding up.
iv) Issue at a discount	No legal conditions	Legal conditions have to be
		satisfied.
v) Mortgage	There can be mortgage Debentures	There cannot be mortgage shares.
vi) Convertibility	Can be converted into shares at the	Cannot be converted
	option of the debenture holder.	into debentures.

CLASSES OF DEBENTURES

Convertible Debentures

Redeemable	Mortgaged	Registered	First	Convertible
Irredeemable	Naked	Bearer	Second	Non-convertible

Issue of Debentures :

The company issues the prospectus inviting applications along with a sum of money called Application money.After scrutiny, the Board of Directors make allotment.

Entries :

1) When applications are received :
	Bank A/c	Dr.
	To Debenture Application A/c
2)	Debenture Application A/c	Dr.
	To Debenture A/c
3) Rejection to applications:
	Debenture Application A/c	Dr.
	To Debenture Allotment A/c
4) Surplus allotment money:
	Debenture Application A/c	Dr.
	To Debenture Allotment A/c
5) Amount due on allotment of debentures:
	Debenture Allotment A/c	Dr.
	To Debentures A/c

Like shares debentures may be issued at par, at a premium or at a discount. But the law does not lay down any maximum limit for discount on issue of debentures. The sanction of the CLB is also not needed. If a company issues debentures on the condition that they would be redeemed at a premium, this additional liability should be recorded in a separate account called “Premium on Redemption of Debentures A/c” and should be shown along with the liability “Debentures” on the liabilities side of the Balance Sheet.

Entries:

i) When debentures are issued at par and are also redeemed at par:

Bank A/c                                                                     Dr.

To Debenture A/c

ii) When debentures are issued at a discount, but redeemable at par;

Bank A/c                                                                     Dr.

Discount of Issue of Debentures A/c                                 Dr.

To Debenture A/c

iii) When debentures are issued at a premium and redeemable at par:

Bank A/c                                                                     Dr.

To Debenture A/c

To Premium on Issue of Debentures A/c

iv) When debentures are issued at par and redeemable at a premium :

Bank A/c                                                                     Dr.

Loss of Issue of Debentures A/c                                       Dr.

To Debenture A/c

To Premium on Redemption of debentures A/c

v) When debentures are issued at a discount and redeemable at a premium:

Bank A/c	Dr.
Discount on Issue of Debentures A/c	Dr.
Loss on issue of Debentures A/c	Dr.
To Debentures A/c
To Premium on Issue of Debentures A/c

vi)  Expenses, Discount, and loss on Issue of debentures are transferred to an account called Cost of Issue of debentures A/c and shown as “Miscellaneous Expenditure” in the Balance Sheet.

vii)  Premium on Issue of debentures is transferred to Capital Reserve A/c.

Redemption of Debentures:

Debentures are invariably redeemable. Debentures may be redeemed

(i)       In one lot,

(ii)       In instalments or drawing by lots,

(iii)      By purchase of debentures in the open market. Cancellation of debentures may take place in one of two ways :–

(i)       Immediate cancellation i.e. immediately after purchase in the open market, and

(ii)      Cancellation after holding them for some time as "own debentures". After cancellation the debentures cannot be resold as they stand redeemed.

	Entries:
1) When the debentures are redeemed at par:
i)	Debentures A/c	Dr.
ii)	To Sundry Debentureholders A/c
	Sundry debenturesholders A/c	Dr.
	To Bank A/c
2) When the debentures are redeemed at a premium :		Dr.
i)	Debentures A/c
	Premium on Redemption A/c	Dr.
ii)	To Sundry Debentureholders A/c
	Sundry Debentureholders A/c	Dr.
	To Bank A/c
	When the debentures are redeemed by cancelling them immediately after their purchase in
	the open market, redemption will be recorded as follows –
1) When purchase prices is equal to the face value of debentures :
	Debentures A/c	Dr.
	To Bank A/c
2) When purchase price is higher than the face value of debentures:		Dr.
i)	Debentures A/c
	Loss on Redemption of Debentures A/c	Dr.
ii)	To bank A/c
	Share Premium A/c	Dr.
	or
	Profit & Loss A/c	Dr.
	To Loss on Redemption of Debentures A/c

3) When purchase price is lower than the face value of the debentures:

i)	Debenture A/c	Dr.
	To Bank A/c
	To Profit on Redemption of Debentures A/c
ii)	Profit on Redemption of Debentures A/c	Dr.
	To Capital Reserve A/c

A company may buy its own debentures, hold them as investments for some time and then redeem them by cancellation. Entries will be as follows:

When own debentures are purchased as investments:

Own Debentures A/c Dr. To Bank A/c

When "own debentures" held as investments are cancelled:

1) When purchase price is equal to the face value of debentures:

	Debentures A/c	Dr.
	To Own Debentures A/c
2) When purchase price is higher than the face value of debentures:		Dr.
i)	Debentures A/c
	Loss of Redemption of own debentures A/c	Dr.
ii)	To Own Debentures A/c
	Share premium A/c	Dr.
	or
	Profit & Loss A/c	Dr.
	To Loss on Cancellation of Own Debentures A/c
3) When purchase price is lower than the face value of debentures:
i)	Debentures A/c	Dr.
	To Own Debentures A/c
	To profit on cancellation of own debentures A/c
ii)	Profit on Cancellation of Own Debenture A/c	Dr.
	To Capital Reserve A/c

Sinking Fund method:

Under this method the amount is invested in first class securities which when allowed to accumulate with compound interest produce the amount required to redeem the debentures on the due date. This method of providing for funds is known as Sinking fund method. Accounting entries for making the provision for the redemption of debentures are as follows:

First year on 31st December (date of closing) :

1.	Profit & Loss Appropriation A/c			Dr.
	To Sinking Fund A/c
	(for setting aside the amount which is calculated after
	consulting the sinking fund tables).
2.	Sinking Fund Investment A/c			Dr.
	To Bank A/c
	(for investing the amount set aside )

For second and subsequent years :
1.	Bank A/c				Dr.
	To Interest on Sinking Fund Investment A/c
	(for receiving interest on the investment made in the
	past years)
2.	Interest on Sinking Fund Investment A/c				Dr.
	To Sinking Fund A/c
	( for transferring interest to Sinking Fund)

For Last Year

1.                   Bank A/c Dr.

To Interest on Sinking Fund Investment A/c

(for receiving interest on the investment made in the past years)

2.         Profit and Loss Appropriation A/c Dr.

To Sinking Fund A/c

(for setting aside the amount)

3. Interest on Sinking Fund Investment A/c Dr. To Sinking Fund A/c

(for transferring Interest Account to Sinking Fund)

It may be noted that in the final year the amount appropriated from the profits of the company and the amount received as interest on sinking fund investment are not invested as the amount would be needed on the following day for the redemption of debenture.

Concept of Cum and Ex-interest

The word "Cum" means "inclusive" and "Ex" means exclusive. When debentures are quoted on "cum-interest" basis it means that the quotation in addition to covering the cost also includes accrued interest upto the date of purchase/sale.

In case of Ex-interest quotation only cost element is covered.

Redemption of Debentures by purchase in open market purchase for immediate cancellation. The company at its will can purchase own debentures for market and cancel them. The Accounting Entries will be :

i) For purchase of debentures (Quoted price × No. of debenture purchased) – Accrued interest.

Debenture Redemption A/c	Dr.	(Cost)
Debenture Interest A/c	Dr.	(Accrued Interest)
To Bank A/c Total payment.

b) When debentures are purchased (Ex-interest)
Debenture redemption A/c	Dr.
(Quoted price × No. of Debentures purchased)
Debenture Interest A/c	Dr.
(Accrued Interest)
To Bank (Total payment)
c) Sale of Sinking Fund Investment
Bank A/c	Dr.
To S.F. Investment A/c
Note: Profit/Loss on sale will be adjusted in Sinking Fund A/c.
d) For cancellation :
Debentures A/c	Dr.
(Face value of Debenture Redeemed)
To Debenture Redemption A/c

Any balance in Debenture Redemption A/c will be adjusted against Sinking Fund A/c.

Purchase of Debentures in open market as Investment

Sometimes a company purchases its debentures and hold them as investment. The accounting entries are stated as follows:

1. When debentures are purchased

1. At cum Interest

Own Debenture Investment A/c                                       Dr.

(Quoted price – Accrued debentures purchased)

Debenture Interest A/c                                                   Dr. (Accrued Interest)

To Bank A/c

b. At Exinterest:

Own Debenture Investment A/c Dr. (Quoted price Accrued debentures purchased) Debenture Interest A/c Dr. (Accrued interest)

To Bank

c. For sale of Sinking Fund Investment

Bank A/c                                                                     Dr.

To Sinking Fund Investment A/c

Any Profit & Loss will be adjusted in Sinking Fund A/c

4. For Cancellation:

Debentures A/c Dr.[Face value] To Own Debenture investment A/c [Cost}

To Profit/Loss on Cancellation will be charged to Sinking Fund A/c

Illustration 8 :

You are required to set out the Journal Entries relating to the issue of the following Debentures in the books of X Ltd :

(a)       8%, 120 Rs. 1,000 Debentures are issued at 5% discount and are repayable at par.

(b)       Another 7%, 150 Rs. 1000 Debentures are issued at 5% discount and repayable at 10% premium.

(c)        Further 80, 9% Rs. 1,000 Debentures are issued at 5% premium.

(d)       In addition another 400, 8% Rs. 100 Debentures are issued at collateral security against a loan of Rs. 40,000.

Solution :

JOURNAL

						Dr.(Rs.)		Cr.(Rs.)
	(i)	Bank Account			Dr.	1,14,000
		Debenture Discount A/c.			Dr.	6,000
		To 8% Debentures A/c.						1,20,000
		(Issue of 8%, 120 Rs. 1,000 Debentures of 5% discount
		and repayable at par as per Board’s resolution
		dated...)
(ii)		Bank Account			Dr.	1,42,500
		Loss on issue			Dr.	22,500
		To 7% Debentures						1,50,000
		To Premium on Redemption						15,000
		(Issue of 7%, 150 Rs. 1,000 Debentures at a Discount
		of 5% and repayable at 10% premium as per Boards’
		Resolution dated ..... )
(iii)		Bank Account			Dr.	84,000
		To 9% Debenture						80,000
		To Debentures Premium						4,000
		(Issue of 9%, 80 Rs. 1,000 Debentures at 5% premium
		as per Boards’ Resolution dated .... )
(iv)		Debenture Suspense (or) (8% Collateral Debentures)			Dr.	40,000
		To 8% Debentures						40,000
		(Issue of 400, 8% Debentures of Rs. 100 each as

collateral security to against Rs. 40,000/- loan as per agreement and Board’s Resolution dated.... )

Notes :

1.        Discount Account may also be termed as Loss on Issue Account. But loss on issue is better used in second case as it indicates loss due to discount and also loss arising as a result of the term to pay premium on redemption.

2.        Collateral Debenture will be shown in Asset side or by way of deductions from Debentures. In the alternative, no entry may be passed and a note to that effect in the Balance Sheet will serve the purpose.

Illustration 9 :

The Summarised Balance Sheet of Nipa Ltd. on March 31, 1997 was as follows :

Liabilities	Amount
Share capital:
6% Redeemable preference
shares of Rs. 10 each	2,00,000
Equity shares of Rs. 10 each	4,00,000
Profit & loss A/c	2,50,000
5% Debentures	3,00,000
Bank Loan	50,000
Sundry Creditors	89,000
	12,89,000

Assets                                 Amount

Fixed assets at cost less : depreciation 4,12,000

Goodwill	2,00,000
Stock	4,50,000
Sundry Debtors	2,15,000
Discount on Debentures	12,000

12,89,000

Wanting to redeem the Preference Shares and the Debentures the company offered to the Redeemable Preference Shareholders and the Debenture holders the option to convert their holding into Equity Shares to be issued at a premium of Rs. 2.50 per share. Half of the Preference Shareholders and one-third of the Debenture holders agreed to do this. The company issued 30000 Equity Share at Rs. 12.50 to the public for cash and with the funds available paid off the bank loan and redeemed the remaining redeemable Preference Shares and Debentures.

Journalise the transaction and show how the balance sheet will appear after the transactions have been completed.

Solution :

Date		Particulars		LF	Dr. (Rs.)	Cr.(Rs.)
31st March, 1997
i)	6% Redeemable Preference Share Capital A/c			Dr.	1,00,000
	To Equity Share Capital (8000×Rs.10)					80,000
	To Share Premium A/c (8000×Rs. 2.50)					20,000
	(Being 50% of Redeemable Preference Shares
	converted into Equity Shares @ 10 each with
	Premium, Rs. 2.50 each.)

ii)	5% Debentures A/c						Dr.	1,00,000
	To Equity Share Capital A/c (8000×Rs.10)							80,000
	To Share Premium A/c (8000×Rs.2.50)							20,000
	(Being 1/3rd Debenture converted into Equity Share
	@ Rs. 10 each with Premium of Rs. 2.50 each.)
iii)	Bank A/c (30,000 × Rs. 12.50)						Dr.	3,75,000
	To Equity Share Capital A/c (30,000×Rs. 2.50)							3,00,000
	To Share Premium A/c (30,000×Rs. 2.50)							75,000
	(Being 30,000 Equity Shares @ Rs. 10 with Premium
	Rs. 2.50 each issued for Cash as per Board Resolution
	No.	.........	Dt.	...........	.)
iv)	6% Redeemable Preference Share Capital A/c						Dr.	1,00,000
	5% Debentures A/c						Dr.	2,00,000
	To Preference Share Holders A/c							1,00,000
	To Debenture Holders A/c							2,00,000
	(Being the balance amount of Redeemable Preference
	Share and Debentures redeemable.)
v)	Preference Share Holders A/c						Dr.	1,00,000
	Debenture Holders A/c						Dr.	2,00,000
	Bank Loan A/c						Dr.	50,000
	To Bank A/c							3,50,000
	(Being the amount paid to Share Holders and
	Debenture Holders in full and Bank Loan repaid.)
vi)	Share Premium A/c						Dr.	12,000
	To Discount on debenture A/c							12,000
	(Being the amount of discount on debenture is written
	off after utilising the amount of Share Premium A/c.)

NIPALimited.

Balance Sheet as at 31.03.1997

	Liabilities	Rs.	Assets	Rs.
	Share Capital :		Goodwill	2,00,00
	Equity Shares @ Rs. each	8,60,000	Fixed Assets at cost
	Reserve & Surplus :		Less : Depreciation	4,12,000
	Profit & Loss A/c	2,50,000	Current Assets :
	Share Premium A/c	1,03,000	Stock	4,50,000
	Current Liabilities & Provisions :		Sundry Debtors	2,15,000
	Sundry Creditors	89,000	Cash at Bank	25,000
		13,02,000		13,02,00

Illustration 10 :

The following balances appeared in the books of Royco Ltd. on 1.4.2001 :

(a)        Debenture Redemption Fund Rs. 60,000 represented by investments of an equal amount (nominal value Rs. 75,000).

(b)        The 12% debentures stood at Rs. 90,000.

The company sold required amount of investments at 90% for redemption of Rs. 30,000 Debentures at a premium of 20% on the above date.

Show the :

(i)       12% Debenture Account;

(ii)       Debenture Redemption Fund Account;

(iii)      Debenture Redemption Fund Investments Accounts;

(iv)       Debenture-holders account

Solution :

In the books of the Royco. Ltd.

Dr.		12% Debentures A/c			Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
1/4/01	To Deb. holders A/c	30,000	1/4/01	By Balance b/d	90,000
31/3/02	To Balance c/d	60,000
		90,000			90,000

Dr.		Debenture Redemption Fund A/c			Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
31/3/02  To Premium on redemption			1/4/01	By Balance b/d	60,000
	of debenture A/c	6,000	1/4/01	By Debenture Redemption
,,	To General Reserve	30,000		Fund investment A/c	4,000
,,	To Balance c/d	28,000
		64,000			64,000

Dr.		Debenture Redemption Fund Investment A/c			Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
1/4/2001 To Balance b/d		60,000	1/4/01	By Bank A/c	36,000
,,	To Debenture		31/3/02 By Balance c/d		28,000
	Redemption Fund A/c	4,000
		64,000			64,000
1/4/02	To Balance b/d	28,000

Dr.		Debentureholders’ A/c			Cr.
Date	Particulars	Rs.	Date	Particulars	Rs.
1/4/01	To Bank	36,000	31/3/02 By 12% Debentures A/c		30,000
			,,	By Premium on Redm.
				of Debenture A/c	6,000
		36,000			36,000

Notes :

1.       Debentures of Rs. 30000 is to be redeemed at a premium of 20%. Therefore, the amount payable to the debentureholders is Rs. 30000 x 120% = Rs. 36000 . To get Rs. 36000 investments worth Rs. 40000 is to be sold at 90% = Rs. 40000

2.  Sale proceeds from investments	36,000
Less: Cost of investment sold (60,000 / 75,000) × 40,000	32,000
Profit on sale of investments	4,000

Illustration 11 :

You are requested to pass the Journal Entries to the issue of the following debentures in the books of Damodar Valley Corporation.

(i)       2000, 5% Debentures of Rs. 100 each at a premium of Rs. 10 per debenture, redeemable at par.

(ii)      1000, 8% debentures Rs. 150 each at a discount of Rs. 20 per debenture.

(iii)      2000, 12 % Debentures of Rs. 200 each at par, redeemable at a premium of 10%.

(iv)       1500, 11% Debentures of Rs. 250 each at a discount of 10% redeemable at a premium of 10%.

Solution :

In the books of DVC

Journal Entries

		Particulars			Rs.	Rs.
1.	Bank A/c			Dr.	2,20,000
	To 5% Debentures A/c					2,00,000
	To Premium on issue of Debentures A/c					20,000
	(Being issue of 2000 debentures of Rs. 100 each at
	premium, redeemable at per)
2.	Bank A/c			Dr.	1,30,000
	Discount on issue of Debentures A/c			Dr.	20,000
	To 8% Debenture A/c					1,50,000
	(Being issue of 1000 debentures of Rs.150 each at a
	discount but redeemable at per)

3.	Bank A/c			Dr.	4,00,000
	Loss on issue of Debentures A/c			Dr.	40,000
	To 12% Debenture A/c				4,00,000
	To Premium of redemption of debentures A/c				40,000
	(Being issue of 2000, 12% debentures of Rs. 200 each
	redeemable at a premium of Rs. 10%)
4.	Bank A/c			Dr.	3,37,500
	Loss on issue of Debentures A/c			Dr.	75,000
	To 11% Debenture A/c				3,75,000
	To Premium on redemption of debentures A/c				37,500
	(Being issue of 2000 12% Debentures at a discount
	5% and repayable at a premium of 10% as per board
	resolution No. ...........Dated.........)

Illustration 12 :

ABC Limited issued 4000 10% debentures of Rs.100 each at par in January1988 redeemable at par on December 1997. Interest was payable on debentures on 30th June and 31st December in each year. For redemption, the company has set up Sinking Fund by appropriating a sum of Rs .32,000 and the amount was invested. As per the terms of the Issue the company is empowered to purchase its own debentures in the market and to keep them available for reissue. On December 1996 the following balances were extracted from the company’s book :

Sinking Fund Investments in Govt. Securities at cost

(a)	Sinking Fund Investments in Govt. Securities at cost	Rs. 3,27,520
(b)	10% debenture Stock	4,00,000
(c)	Sinking Fund Account	3,72,000

The transactions during the year ended 31st December ’97 included the following —

January 1 : Government securities at par value of Rs.32,000 were purchased for Rs. 31,680.

February 1 :       120 own debentures were purchased cum-interest at a cost of Rs. 11,760.

September 1 : Government securities worth Rs. 12,000 were disposed of at Rs.11,800 ex-interest.

September 1 : 120 own debentures were purchased ex-interest for Rs.11,800 with the proceeds of investment sold.

December 22 :   The balance of the Sinking fund investment sold cum-interest at 99% .

The debenture stock was redeemed and cancelled in accordance with thee terms of issue.

Appropriate for the year from the Profit & Loss Account to Sinking Fund to the extent of amount actually required for redemption.

You are required to prepare the following accounts in the books of the company for the year ended 31st December, 1997 (workings should form part of your Answer) :

4.10   Sinking Fund Account.

4.11   Sinking Fund Investment Account.

Solution :

ABC Limited

10% Sinking Fund Investment Account (Government Securities)

Date	Particulars	Nominal	Interest	Cost	Date	Particulars	Nominal	Interest	Cost
1997					1997
Jan.1	To Bal b/d	327520	—	327520	Jun30	By Bank	—	17,976	—
Jan.1	To Bank	32000	—	31680	Sept.1	By Bank	12000	200	11800
Dec.31	Sinking Fund A/c		34838		Sept.1	By Sinking
	(Transfer)					Fund A/c(Loss)			200
					Dec.22	By Bank	347520	16662	327383
					Dec. 31	By Sinking
					F. A/c (loss)				19817
		359520	34838	359200			359520	34838	359200

10% Sinking Fund Investment Account (Own Debentures)

Date	Particulars	Nominal	Interest	Cost	Date	Particulars	Nominal	Interest	Cost
1997					1997
Feb.1	To Bank	12000	100	11660	Jun30	By Debenture
						Interest A/c	—	600	—
Sept.1	To Bank	12000	200	11800	Dec.31	By Deb. Int A/c	—	1200	—
Dec.31	Sinking Fund A/c	—	1500	540	Dec.31	By 10% Debenture
	(Transfer)					Stock A/c	24000		24000
		24000	1800	24000			24000	1800	24000

Sinking Fund Account

Date	Particulars	Amount	Date	Particulars	Amount
1997			1997
Sept.1	To Sinking Fund Inv. A/c	200	Jan. 1	By Balance b/d	3,72,000
	(Gross on sale of Govt. Sec.)
Dec. 31	To Sinking Fund Inv. A/c	19,817	Dec.31	By Sinking Fund Inv. A/c	34,838
	(Loss on sale of Govt. Sec.)			(Int. on Govt. Securities)
			Dec.31	By Sinking Fund Inv. A/c —
				(Own Debentures)
				— Interest	1,500
Dec. 31 To General Reserve		4,00,000		— Profit on cancellation	540
			Dec. 31	By  Profit & Loss A/c- (Apprn.
				for redemption)	11,139
		4,20,017			4,20,017

10% Debenture Stock Account

Date	Particulars	Amount Date	Particulars	Amount
1997			1997
Dec. 31	To Sinking Fund Inv. A/c	24,000	Jan.1 By Balance b/d	4,00,000
	(Own debenture cancellation)
Dec. 31	To Bank	3,76,000
		4,00,000		4,00,000

Working Notes —

1.   Interest  : 3,47,520 x 10/100 x 175/365 = 16,661,90 (= 16662 say)

2.        It is assumed in respect of Government Securities

(a)        Rate of interest is 10%

(b)        Interest is payable on 30th June and 31st December every year

(c)        Face value of Securities as on 31st December, 1996 is taken at Rs. 3,27,520.