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Class 12 Accountancy Chapter 7 Issue and Redemption of Debentures — Formulas & Key Points
Debentures are long-term debt instruments issued by companies to raise capital. Class 12 Accountancy Chapter 7 covers the complete lifecycle of debentures—from their issue to final redemption—with detailed journal entries, calculations, and accounting treatments. This formula sheet brings together all key formulas, definitions, and step-by-step solutions used by CBSE students to master debenture accounting. Whether you're preparing for board exams or strengthening concepts, understanding debenture mechanics is essential for scoring well in financial accounting.
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Key takeaways
- ✓Debentures can be issued at par, premium, or discount; each scenario requires distinct journal entries for application, allotment, and calls.
- ✓Debenture Redemption Reserve (DRR) must be created at 25% of nominal value for listed companies before redemption; no DRR needed for unlisted infrastructure/NBFC debentures.
- ✓Four methods of redemption: lump sum payment, annual draw of lots, purchase from open market, and conversion into shares or new debentures.
- ✓Interest on debentures is a charge against profit, debited to Statement of Profit & Loss; discount/loss on issue is written off over debenture life.
- ✓When debentures are issued as collateral security, either pass a memorandum entry or show them on liabilities side with a corresponding contra entry under current assets.
- ✓Own Debentures Account is opened when company purchases its own debentures for cancellation; shown under Investments till redemption date.
- ✓Premium on Redemption of Debentures must be provided at issue time and transferred to Debentures account or shown separately under Non-current Liabilities.
What Are Debentures? Definition & Characteristics
Debentures are unsecured long-term debt instruments issued by companies to borrow money from the public. They carry a fixed rate of interest (coupon rate) and have a maturity date on which the principal is repaid. Unlike equity shares, debentures do not grant ownership rights. Key features include transferability, marketability, and fixed income. NCERT Chapter 7 emphasizes that debentures can be issued at par (face value), at a premium, or at a discount, each requiring different accounting treatment.
Issue of Debentures: Journal Entries & Formulas
When debentures are issued, the accounting depends on whether they're issued at par, premium, or discount. At par: Dr. Bank A/c = Cr. Debentures A/c. At premium: Dr. Bank A/c = Cr. Debentures A/c + Cr. Securities Premium A/c. At discount: Dr. Bank A/c + Dr. Discount on Debentures A/c = Cr. Debentures A/c. The discount or premium amount equals (Face Value − Issue Price). These entries ensure proper recording of capital raised and any adjustment to the nominal value.
Interest on Debentures: Calculation & Accounting
Debenture interest is calculated using the formula: Annual Interest = Face Value × Rate of Interest ÷ 100. Interest is usually paid half-yearly or annually. Journal entry: Dr. Debenture Interest A/c = Cr. Bank A/c or Cr. Interest Payable A/c. Interest is recorded in the P&L Statement as an expense. When calculating interest for a part-year or when debentures are issued mid-year, use the formula: Interest = Face Value × Rate ÷ 100 × (Number of Days ÷ 365).
Amortization of Premium & Discount on Debentures
Discount on debentures is amortized over the period until redemption to fairly distribute the loss over accounting periods. Formula: Annual Amortization = Total Discount ÷ Number of Years. Similarly, securities premium (if issued at premium) may be amortized. Dr. Debenture Interest A/c or P&L A/c = Cr. Discount on Debentures A/c. By redemption date, the discount is completely written off, ensuring the debenture liability appears at face value on the balance sheet. This aligns with matching principle and fair valuation.
Redemption of Debentures: Complete Accounting Treatment
Redemption is the repayment of debentures on maturity. Journal entry: Dr. Debentures A/c = Cr. Bank A/c. If debentures are redeemed at a price different from face value, the difference is a gain or loss. If redeemed at premium: Dr. Debentures A/c + Dr. Loss on Redemption A/c = Cr. Bank A/c. If at discount: Dr. Debentures A/c = Cr. Bank A/c + Cr. Gain on Redemption A/c. Any unamortized discount or premium must be written off at redemption. This ensures complete closure of the debenture account.
Sinking Fund for Debenture Redemption
A sinking fund is a reserve created to accumulate funds gradually for debenture redemption. Annual Sinking Fund Contribution = Total Debentures ÷ Number of Years to Redemption. Journal entry: Dr. Sinking Fund A/c = Cr. Bank A/c. The sinking fund earns investment income. When recording investment income: Dr. Bank A/c or Investment A/c = Cr. Sinking Fund Income A/c. At redemption, the sinking fund balance is transferred back. This method ensures liquidity and financial discipline for large redemptions.
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Presentation of Debentures in Financial Statements
Debentures appear on the balance sheet as a long-term liability under 'Borrowings' or 'Long-term Debt.' The amount shown is the face value minus any unamortized discount (or plus unamortized premium). Debenture interest appears in the P&L Statement as an expense under 'Finance Costs.' Any gain or loss on redemption is shown separately in P&L. Notes to accounts should disclose the rate of interest, redemption date, and outstanding quantity. Proper presentation ensures financial transparency and compliance with accounting standards.
Partial Redemption & Selective Redemption of Debentures
Companies may redeem only a portion of debentures before full maturity. Journal entry for partial redemption: Dr. Debentures A/c (amount redeemed) = Cr. Bank A/c. The remaining debentures continue as a liability. If debentures are selectively redeemed (by lottery or choice), the accounting treatment remains the same. Any related discount or premium must be proportionally amortized or written off. The balance sheet then reflects reduced debenture liability and updated unamortized discount/premium.
Common Formulas Summary Table for Quick Revision
Key formulas: (1) Debenture Face Value = Issue Price + Premium or − Discount. (2) Annual Interest = FV × Rate ÷ 100. (3) Annual Discount Amortization = Total Discount ÷ Years. (4) Sinking Fund Contribution = Total Debentures ÷ Redemption Years. (5) Gain/Loss on Redemption = Redemption Price − Face Value. (6) Balance Sheet Debenture Value = FV − Unamortized Discount (or + Premium). These formulas form the backbone of all debenture problems in Class 12 Accountancy exams and are critical for scoring full marks.
Frequently asked questions
What is the difference between debentures issued at par, premium, and discount?+
Debentures at par are issued at face value with no adjustment. At premium: issue price > face value, creating securities premium. At discount: issue price < face value, creating debenture discount. Each affects journal entries and balance sheet presentation differently.
How is debenture interest calculated and recorded?+
Debenture interest = Face Value × Rate of Interest ÷ 100. Recorded as an expense in P&L Statement. Journal entry: Dr. Debenture Interest A/c = Cr. Bank A/c. Interest is separate from and additional to principal repayment at redemption.
What does amortization of discount on debentures mean?+
Amortization spreads the discount loss evenly over the debenture period. Annual amount = Total Discount ÷ Number of Years. Reduces the discount gradually via P&L, ensuring fair value presentation at redemption when discount becomes zero.
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What is a sinking fund and why is it created?+
A sinking fund is a reserve accumulated gradually to ensure funds are available for debenture redemption. Created by making regular contributions over the debenture period. It ensures financial stability and guarantees timely repayment without liquidity pressure.
How is gain or loss on redemption calculated?+
Gain/Loss = Redemption Price − Face Value. If redemption price > face value, it's a loss. If redemption price < face value, it's a gain. Recorded separately in P&L Statement as a one-time adjustment at redemption.
Where do debentures appear on the balance sheet?+
Debentures appear under 'Long-term Borrowings' or 'Long-term Liabilities.' Shown at face value minus unamortized discount (or plus premium). Debenture interest payable may appear as a current liability if due within 12 months.
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