Class 12 Accountancy - TELANGANA
Issue and Redemption of Debentures
The chapter 'Issue and Redemption of Debentures' in Class 12 Accountancy under the Telangana (TSBSE) syllabus explores how companies raise long-term borrowed capital by issuing debentures and the various methods of paying them back. Students learn critical accounting treatments for issuing debentures at par, premium, or discount, and considerations for collateral security and writing off discount on issue. Furthermore, the chapter covers redemption methods such as lump sum, draw of lots, purchase in the open market, and conversion, along with the creation of Debenture Redemption Reserve (DRR) as mandated by regulatory bodies to protect investors.
Start Learning FreeKey Concepts
Debenture
A written instrument acknowledging a debt issued by a company under its common seal, containing a contract for the repayment of principal at a specified date and payment of interest at a fixed rate.
Issue of Debentures as Collateral Security
When a company issues its own debentures as secondary or additional security to a lender for a loan taken, it can be recorded either by making a journal entry using the Debenture Suspense account or simply by disclosing it in notes to accounts.
Writing off Loss on Issue of Debentures
Any discount allowed or premium payable on the redemption of debentures is treated as a capital loss and must be written off against Capital Reserve, Securities Premium, or Statement of Profit and Loss within the tenure of the debentures.
Debenture Redemption Reserve (DRR)
A statutory reserve created out of divisible profits by companies before the redemption of debentures begins, ensuring adequate liquidity and protection for debentureholders, as per TSBSE and company law guidelines.
Redemption by Purchase in Open Market
When a company purchases its own debentures from the open market to cancel them, it reduces its long-term liabilities and may generate a profit on cancellation if bought below their face value.
Important Formulas
Board Exam Info
In the Telangana (TSBSE) Class 12 Accountancy board examination, this chapter typically carries significant weight, often contributing around 8 to 12 marks. Common question types include short-answer questions on journal entries for issuing debentures with terms of redemption, and long-answer numerical problems involving comprehensive journal entries for both the issue and subsequent redemption of debentures, including the creation of DRR.
Frequently Asked Questions
What is the difference between shares and debentures?
Shares represent ownership capital and shareholders are owners of the company who receive dividends. Debentures represent borrowed capital and debentureholders are creditors who receive a fixed rate of interest regardless of profits.
Is DRR mandatory for all companies issuing debentures?
No, DRR is not required for All India Financial Institutions regulated by RBI, banking companies, and for debentures issued by the government or public financial institutions, but it is generally required for NBFCs and manufacturing/other companies.
How do we pass journal entries when debentures are issued at a discount and redeemable at a premium?
At the time of issue, we debit 'Loss on Issue of Debentures Account' for the total of the discount on issue and the premium payable on redemption, while crediting 'Premium on Redemption of Debentures Account'.
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