Issue and Redemption of Debentures

A. Issue at Par, Premium, and Discount

This refers to the relationship between the Face Value and the Issue Price.

• Issue at Par: Issue Price = Face Value.
  Example: ₹100 debenture sold for ₹100.
• Issue at Premium: Issue Price > Face Value.
  Example: ₹100 debenture sold for ₹110. The extra ₹10 goes to the "Securities Premium Account".
• Issue at Discount: Issue Price < Face Value.
  Example: ₹100 debenture sold for ₹95. The ₹5 is "Discount on Issue".

B. Issue for Consideration Other Than Cash

Companies may issue debentures to vendors in exchange for assets like machinery or land instead of cash.

• Example: Buying a machine worth ₹5,00,000 and issuing ₹5,00,000 in debentures to the seller.

C. Issue as Collateral Security

A "backup plan" where debentures are issued to a lender (like a bank) as secondary security for a loan.

• Example: Taking a ₹10 Lakh loan and issuing ₹12 Lakh worth of debentures as collateral.

D. Writing off Discount/Loss on Issue

The discount given is a loss that must be cleared using company profits or Securities Premium over the life of the debenture.

Methods of Redemption

• Redemption by Payment: Simple repayment via cash or bank on maturity.
• Redemption by Conversion: Converting debentures into equity shares.
• Purchase in Open Market: Buying back own debentures from the stock market (often cheaper if trading at a discount).
• Redemption by Own Debentures: Refinancing by issuing new debentures to pay old ones.
• Sinking Fund Method (DRR): Setting aside a fixed amount of profit every year into a separate fund to ensure liquidity at maturity.

Problem 1: Issue at Premium

Question: XYZ Ltd. issued 2,000, 10% Debentures of ₹100 each at a premium of 10%. Pass the journal entries.

1. When money is received:
Bank A/c Dr. ₹2,20,000
  To Debenture Application & Allotment A/c ₹2,20,000
(Being application money received: 2,000 × ₹110)

2. When debentures are allotted:
Debenture Application & Allotment A/c Dr. ₹2,20,000
  To 10% Debentures A/c ₹2,00,000
  To Securities Premium A/c ₹20,000
(Being debentures issued at 10% premium)
        

Problem 2: Writing off Discount

Question: A company issued debentures at a discount of ₹5 per debenture. Total debentures = 1,000. The company has a Securities Premium of ₹2,000. How much discount is written off using the premium?

Total Discount = 1,000 × ₹5 = ₹5,000.
Available Securities Premium = ₹2,000.

Step 1: Use the entire Securities Premium (₹2,000) to write off the discount.
Step 2: The remaining ₹3,000 (₹5,000 - ₹2,000) will be written off from the Statement of Profit & Loss.
        

In the modern financial world, companies use Electronic Debentures (Dematerialized form). Platforms like the NSE (National Stock Exchange) allow instant trading. Additionally, Fintech platforms now enable "Fractional Investing," making debt markets accessible to small retail investors.

1. When debentures are issued at a premium, the premium is credited to:
   a) Profit & Loss A/c
   b) Securities Premium A/c
   c) Debenture Account
   d) General Reserve
   Answer: (b)
2. Issue of debentures as collateral security means:
   a) They are a primary loan
   b) They are a secondary guarantee for a loan
   c) They are issued at a discount
   d) They are converted into shares
   Answer: (b)
3. Redemption of debentures means:
   a) Issuing new debentures
   b) Repayment of debenture amount
   c) Buying shares
   d) Increasing debt
   Answer: (b)
4. If a company buys its own debentures from the open market, it is called:
   a) Conversion
   b) Sinking Fund method
   c) Purchase in open market
   d) Issue at par
   Answer: (c)
5. Discount on issue of debentures is a:
   a) Gain
   b) Liability
   c) Capital Reserve
   d) Loss (to be written off)
   Answer: (d)
6. Conversion of debentures into shares is a method of:
   a) Issue
   b) Redemption
   c) Collateral
   d) Writing off
   Answer: (b)
7. Sinking Fund is also known as:
   a) Debenture Redemption Fund
   b) Profit Reserve
   c) Capital Fund
   d) Premium Account
   Answer: (a)
8. When debentures are issued for consideration other than cash, they are given for:
   a) Only Cash
   b) Assets or Business
   c) Only Shares
   d) Nothing
   Answer: (b)
9. Debentures are usually issued at:
   a) Only Par
   b) Only Premium
   c) Par, Premium, or Discount
   d) Only Discount
   Answer: (c)
10. The interest paid on debentures is a:
    a) Appropriation of profit
    b) Charge against profit
    c) Capital receipt
    d) None of the above
    Answer: (b)

1. Distinguish between Issue of Shares and Issue of Debentures.
   Answer: Shares represent ownership and dividends are an appropriation of profit. Debentures represent debt, and interest is a mandatory charge against profit.
2. Explain 'Collateral Security' with an example.
   Answer: It is a secondary security provided to a lender. Example: A company takes a bank loan and issues debentures to the bank to act as a backup.
3. What is the purpose of a Sinking Fund?
   Answer: To ensure that the company has sufficient liquid cash to repay large amounts of debt at maturity without hurting daily operations.
4. How does 'Issue at Premium' affect the Balance Sheet?
   Answer: It increases the total reserves and surplus under the 'Equity and Liabilities' side through the Securities Premium Account.
5. Explain 'Redemption by Conversion'.
   Answer: It is a process where debenture holders are offered equity shares of the company instead of receiving cash repayment.
6. Why would a company prefer to buy its own debentures from the open market?
   Answer: To save money if the market price is lower than the face value, and to reduce its debt burden.
7. What is 'Writing off Discount on Issue'?
   Answer: It is the accounting process of clearing the loss incurred during the issue of debentures by using profits or premium reserves.
8. Describe 'Issue for Consideration other than Cash'.
   Answer: When a company acquires assets (like land or machinery) and pays for them by issuing debentures instead of cash.
9. What is the difference between Redemption by Payment and Redemption by Conversion?
   Answer: Payment involves a cash outflow; Conversion involves an issuance of equity, meaning no cash leaves the company.
10. Can a company issue debentures at a discount? If yes, why?
    Answer: Yes, companies issue them at a discount to make them more attractive to investors, especially if the company's credit risk is perceived to be higher.

• Debenture: An IOU/Debt instrument.
• Issue Modes: Par (Equal), Premium (Extra), Discount (Less).
• Redemption: Paying back the debt via cash, shares, market purchase, or sinking funds.
• Accounting: Discounts are losses and must be written off.

Mnemonics:

To remember modes of Issue: "P.P.D.C" (Par, Premium, Discount, Collateral/Consideration)

To remember modes of Redemption: "P.C.O.O.S" (Payment, Conversion, Open Market, Own Debentures, Sinking Fund)