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CBSE Class 12 Accountancy Chapter 7 Issue and Redemption of Debentures Worksheet with Answers
Debentures are a crucial financial instrument in corporate accounting, and mastering their issue and redemption is essential for CBSE Class 12 Accountancy students. Chapter 7 covers the accounting treatment of debentures from issuance through redemption, including journal entries, balance sheet presentation, and interest calculations. This comprehensive worksheet with answers helps you practice real exam-style questions, understand debenture terminology, and build confidence for your board exams. Whether you're preparing for term-end assessments or final exams, these problems align with NCERT guidelines and test your ability to handle complex debenture scenarios.
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Key takeaways
- ✓Complete practice coverage of Issue of Debentures at par, premium and discount with detailed journal entries
- ✓Methods of redemption including lump sum, annual draw of lots, and purchase from open market are tested through varied questions
- ✓Debenture Redemption Reserve (DRR) creation rules as per Companies Act 2013 are reinforced through numerical problems
- ✓Writing off discount/loss on issue of debentures over the debenture period is practiced through worked examples
- ✓Case-study questions simulate real corporate scenarios involving complex debenture transactions
- ✓Answer key provides step-by-step explanations matching CBSE marking scheme expectations
- ✓Suggested completion time is 90 minutes with difficulty level marked as Moderate to Difficult for board exam readiness
What Are Debentures? Definition and Key Characteristics
Debentures are long-term debt instruments issued by companies to raise capital. Unlike equity shares, debentures are liabilities and carry a fixed rate of interest. As per NCERT Class 12 Accountancy, debentures may be secured (backed by company assets) or unsecured. They are recorded as liabilities on the balance sheet and interest paid on debentures is a tax-deductible expense. Debentures can be redeemed at par, at a premium, or at a discount, depending on the company's financial plan.
Issue of Debentures: Journal Entries and Accounting Treatment
When a company issues debentures, the accounting entry depends on whether they are issued at par, premium, or discount. If issued at par, Debit Bank, Credit Debentures A/c. If issued at premium, the premium is credited to Debenture Premium Reserve. If issued at discount, the discount is debited to Debenture Discount A/c (an asset account, shown on the balance sheet). NCERT Chapter 7 emphasizes recording the actual cash received and separately accounting for any variance from face value.
Understanding Debenture Discount and Premium
Debenture discount arises when debentures are issued below face value. This discount is typically amortized over the life of the debenture using the effective interest method or straight-line method. Debenture premium, conversely, occurs when debentures are issued above face value. The premium is credited to Debenture Premium Reserve, a capital reserve shown under reserves and surplus. Both adjustments affect the profit and loss account annually, making accurate calculation vital for financial reporting.
Interest on Debentures: Calculation and Journal Entries
Interest on debentures is calculated based on the face value and the stated interest rate, regardless of the issue price. For example, ₹100,000 of 8% debentures always generate ₹8,000 annual interest. Interest is debited to Interest on Debentures A/c (P&L) and credited to Debenture Interest Payable A/c (liability). NCERT Class 12 Chapter 7 requires students to record interest accrual and payment separately, and to handle interest on debentures issued partway through a financial year using pro-rata calculation.
Redemption of Debentures at Par, Premium, and Discount
Redemption is the repayment of debentures at maturity. If redeemed at par, the carrying amount equals face value, making the entry straightforward: Debit Debentures A/c, Credit Bank. If redeemed at premium, the premium paid is charged to the P&L as a loss. If redeemed at discount, the company gains (profit on redemption). NCERT emphasizes distinguishing between redemption at par, premium, and discount, as each affects profitability differently and requires separate accounting treatment.
Sinking Fund Method for Debenture Redemption
Some companies use a sinking fund to accumulate funds for debenture redemption. Under this method, equal periodic amounts are invested in external securities. Interest earned on sinking fund investments is credited back to the fund. At redemption, the sinking fund balance is used to pay off debentures. NCERT Chapter 7 includes problems on sinking fund calculations, requiring students to record fund contributions, investment gains, and final redemption in accordance with AS 26 (Accounting Standard on Financial Instruments).
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Balance Sheet Presentation of Debentures and Related Accounts
Debentures are shown under Non-Current Liabilities on the balance sheet at their carrying amount (net of unamortized discount). Debenture Premium Reserve appears under Reserves and Surplus as part of capital reserves. Unamortized debenture discount is deducted from the debenture value as a contra-liability. NCERT Class 12 Chapter 7 requires clear disclosure of debenture terms, redemption dates, and interest rates in the notes to financial statements, ensuring stakeholders understand the company's debt structure and obligations.
Partial Redemption and Early Redemption of Debentures
Companies sometimes redeem debentures before maturity or in installments. Partial redemption requires proportional allocation of unamortized discount and premium. Early redemption may trigger losses or gains depending on the redemption price versus carrying value. NCERT problems test students' ability to handle partial redemption scenarios using pro-rata methods. These questions are common in CBSE board exams and require careful tracking of remaining debenture balances and adjusted discount/premium amortization.
Common Worksheet Problem Types and Exam Strategy
CBSE Class 12 Accountancy worksheets on debentures typically include: journal entry problems (issuance, interest, redemption), balance sheet preparation, debenture premium/discount amortization, interest calculations with pro-rata adjustments, and sinking fund problems. Students should practice all variants to build speed and accuracy. Work through this worksheet systematically, verify carrying amounts, ensure debit-credit balance, and cross-check interest calculations. Mastering these problems directly correlates with strong board exam performance in Accountancy.
Frequently asked questions
What is the difference between debentures issued at par, premium, and discount?+
Par: face value = issue price. Premium: issue price > face value (credit to premium reserve). Discount: issue price < face value (debit to discount account, amortized over debenture life).
How is interest on debentures calculated and recorded?+
Interest = Face Value × Rate ÷ 100. Always calculated on face value, not issue price. Debit Interest on Debentures A/c, Credit Debenture Interest Payable. Recorded annually or semi-annually per terms.
Does CBSETUTOR.ai offer free trial or demo lessons for debenture topics?+
Yes, CBSETUTOR.ai provides free trial access to explore AI-powered lessons, practice worksheets, and video solutions for Chapter 7 debentures. Sign up today to experience personalized CBSE learning at no cost.
What is the sinking fund method and why is it used?+
Sinking fund accumulates periodic investments to ensure funds are available for debenture redemption. Companies use it to manage cash flow, reduce financial risk, and demonstrate prudent financial planning to creditors and investors.
How should debentures be presented on the balance sheet?+
Debentures appear under Non-Current Liabilities at carrying amount (face value minus unamortized discount). Debenture Premium Reserve shown under Reserves & Surplus. Full details (rate, redemption date, terms) disclosed in notes.
Does CBSETUTOR.ai support Hindi-medium Class 12 Accountancy students?+
Yes, CBSETUTOR.ai offers comprehensive Hindi-medium support for Class 12 Accountancy including debentures, with bilingual explanations, Hindi worksheets, and 24/7 doubt resolution in both English and Hindi.
What happens if debentures are redeemed before maturity?+
Early redemption may create a gain or loss depending on redemption price vs. carrying amount. Unamortized discount/premium is adjusted proportionally. Any gain/loss is recorded in the P&L account as per NCERT guidelines.
Are these worksheet answers aligned with NCERT 2024-25 syllabus?+
Yes, all worksheet problems and answers strictly follow NCERT Class 12 Accountancy Chapter 7 (2024-25 edition), ensuring 100% relevance to board exams and CBSE assessment standards.
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