Question

Explain the different terms for the issue of debentures with reference to their redemption.

Answer 1

Debentures can be issued at par, at premium and at discount in the same way they can be redeem at par and at premium. Debentures can never be redeemed at discount. The following are the six situation under which debentures can be issued to their redemption.

(i) Issue at Par and Redeemable at Par - When the debentures are issued and are redeemed at their face value, then the following Journal entry is passed.

$$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Bank A/c}Dr& & & \\ & \text{To Debenture Application A/c}& & & \\ & \text{(Debentures application money}& & & \\ & \text{received)}& & & \\ & \underset{–}{}& & & \\ & \text{Debenture Application A/c}Dr& & & \\ & \text{To Debentures A/c}& & & \\ & \text{(Debentures application money}& & & \\ & \text{transferred to debentrues account)}& & & \end{array}$$

(ii) Issue at Premium and Redeemable at Par - When the debentures are issued at premium and redeemable at par, then the following Journal entry is passed. As premium is a gain for a company so it is credited in the Journal entry.

$$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Bank A/c}Dr& & & \\ & \text{To Debenture Application A/c}& & & \\ & \text{(Debentures application money}& & & \\ & \text{received)}& & & \\ & \underset{–}{}& & & \\ & \text{Debenture Application A/c}Dr& & & \\ & \text{To Debentures A/c}& & & \\ & \text{To Securities Premium A/c}& & & \\ & \text{(Debentures issues at premium}& & & \\ & \text{and redeemable at par)}& & & \end{array}$$
(iii) Issue at Discount and Redeemable at Par - When the debentures are issued at discount and redeemable at par, then the following Journal entry is passed. As discount is a loss for a company so it is debited in the journal entry.
$$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Bank A/c}Dr& & & \\ & \text{To Debenture Application A/c}& & & \\ & \text{(Debentures application money}& & & \\ & \text{received)}& & & \\ & \underset{–}{}& & & \\ & \text{Debenture Application A/c}Dr& & & \\ & \text{Discount on Issue of Debentures A/c}Dr& & & \\ & \text{To Debentures A/c}& & & \\ & \text{(Debentures issued at discount}& & & \\ & \text{and redeemable at par)}& & & \end{array}$$


(iv) Issue at Par and Redeemable at Premium - When debentures are issued at par and redeemable at premium, then the following Journal entry is passed. In such case, the company did not suffer any loss at the time of issue but there will be loss at the time of redemption.
$$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Bank A/c}Dr& & & \\ & \text{To Debenture Application A/c}& & & \\ & \text{(Debentures application money}& & & \\ & \text{received)}& & & \\ & \underset{–}{}& & & \\ & \text{Debenture Application A/c}Dr& & & \\ & \text{Loss on Issue of Debentures A/c}Dr& & & \\ & \text{To Debentures A/c}& & & \\ & \text{To Premium on Redemption of Debentures A/c}& & & \\ & \text{(Debentures issued at par}& & & \\ & \text{and redeemable at premium)}& & & \end{array}$$

(v) Issued at Premium and Redemption at Premium - When the debentures are issued and redeemable at premium, then the following Journal entry is passed.

$$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Bank A/c}Dr& & & \\ & \text{To Debenture Application A/c}& & & \\ & \text{(Debentures application money}& & & \\ & \text{received)}& & & \\ & \underset{–}{}& & & \\ & \text{Debenture Application A/c}Dr& & & \\ & \text{Loss on Issue of Debenture A/c}Dr& & & \\ & \text{To Debentures A/c}& & & \\ & \text{To Securities Premium A/c}& & & \\ & \text{To Premium on Redemption of}& & & \\ & \text{Debenture A/c}& & & \\ & \text{(Debentures issues at premium}& & & \\ & \text{and redeemable at premium)}& & & \end{array}$$

(vi) Issue at Discount and Redemption at Premium - When the debentures are issued.at discount and redeemable at premium, the following Journal entry is passed.

$$\begin{array}{ccccc}\text{Date}& \text{Particulars}& \text{LF}& \text{Amt.(Dr)}& \text{Amt.(Cr)}\\ & \text{Bank A/c}Dr& & & \\ & \text{To Debenture Application A/c}& & & \\ & \text{(Debentures application money}& & & \\ & \text{received)}& & & \\ & \underset{–}{}& & & \\ & \text{Debenture Application A/c}Dr& & & \\ & \text{Loss on Issue of Debenture A/c}Dr& & & \\ & \text{To Debentures A/c}& & & \\ & \text{To Premium on Redemption of}& & & \\ & \text{Debenture A/c}& & & \\ & \text{(Debentures issues at discount}& & & \\ & \text{and redeemable at premium)}& & & \end{array}$$