Issue of Debentures – With Redemption Conditions

Introduction

Debentures are long-term debt instruments. The accounting for issue is similar to shares, EXCEPT for one major difference: We must provide for the Future Liability of Premium on Redemption at the time of issue itself (Prudence Concept).

The 6 Cases of Issue & Redemption

The journal entry depends on two factors:

1. Issue Price: Par, Premium, or Discount.
2. Redemption Value: Par or Premium. (Redemption at Discount is rare in practice).

Case 1: Issued at Par, Redeemable at Par

• Issued at ₹100, Repay ₹100.

Bank A/c ...Dr                 (Amount)
    To Debentures A/c              (Amount)

Case 2: Issued at Discount, Redeemable at Par

• Issued at ₹95, Repay ₹100.

Bank A/c ...Dr                 (95)
Discount on Issue A/c ...Dr    (5)
    To Debentures A/c              (100)

Case 3: Issued at Premium, Redeemable at Par

• Issued at ₹105, Repay ₹100.

Bank A/c ...Dr                 (105)
    To Debentures A/c              (100)
    To Securities Premium A/c      (5)

Case 4: Issued at Par, Redeemable at Premium (Important)

• Issued at ₹100, Repay ₹110.
• The ₹10 extra to be paid in future is a Loss.

Bank A/c ...Dr                                 (100)
Loss on Issue of Shares/Debentures A/c ...Dr   (10)
    To Debentures A/c                              (100)
    To Premium on Redemption of Deb A/c            (10)

Case 5: Issued at Discount, Redeemable at Premium (Double Loss)

• Issued at ₹95, Repay ₹110.
• Loss 1: Discount (₹5).
• Loss 2: Future Premium (₹10).
• Total Loss on Issue: ₹15.

Bank A/c ...Dr                                 (95)
Loss on Issue of Debentures A/c ...Dr          (15)
    To Debentures A/c                              (100)
    To Premium on Redemption of Deb A/c            (10)

Case 6: Issued at Premium, Redeemable at Premium

• Issued at ₹105, Repay ₹110.

Bank A/c ...Dr                                 (105)
Loss on Issue of Debentures A/c ...Dr          (10)
    To Debentures A/c                              (100)
    To Securities Premium A/c                      (5)
    To Premium on Redemption of Deb A/c            (10)

Writing off "Loss on Issue of Debentures"

The loss (Discount + Premium on Redemption) is a capital loss.

• Source for writing off:
  1. Securities Premium (First Priority).
  2. Statement of Profit & Loss.
• Entry:

Securities Premium A/c ...Dr       (Amount)
Statement of P&L ...Dr             (Balance)
    To Loss on Issue of Debentures A/c (Total Loss)

Exam Notes: Writing the Answer

Key Logic: Always look at the Redemption Value.

• If Red Value > Face Value -> You must Open "Loss on Issue" (Dr) and "Premium on Redemption" (Cr).
• If Red Value = Face Value -> Ignore future. Just record current issue terms.

Summary

• Principle: Prudence (Provide for future losses now).
• New Accounts: "Premium on Redemption" is a Liability. "Loss on Issue" is a Fictitious Asset (written off).
• Discount: Often merged with "Loss on Issue" account.

Quiz Time! 🎯

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