Issue and Redemption of Debentures for Class 12: The Complete CBSE Guide (2026-27)

A debenture is a written acknowledgment of debt under the company's seal, bearing a fixed rate of interest and a promise to repay principal on maturity. Unlike equity shareholders, debenture holders are creditors, not owners—they have no voting rights but enjoy priority during liquidation. The NCERT Class 12 Accountancy textbook (Part II, Chapter 2) frames issue and redemption of debentures class 12 as critical because it teaches students how companies manage long-term borrowing, comply with statutory reserves (DRR), and navigate redemption mechanics that blend finance and law. In the CBSE marking scheme, this chapter usually fetches 12 marks in a 6-mark and a 6-mark question format, or occasionally one 8-mark integrated case. The 2023 board paper (Set 2) asked for journal entries for issue at discount redeemable at premium, plus a separate DRR calculation—students who skipped this chapter lost 14 marks outright. Debentures differ from shares in three key ways: (1) interest is tax-deductible and obligatory even in loss years, (2) principal must be repaid per the terms, and (3) no dilution of control occurs. Understanding these distinctions clarifies why certain accounts (Interest on Debentures, Debentureholders, Loss on Issue) appear and behave as they do in ledger postings.

When studying issue and redemption of debentures class 12 notes, students must master three issue scenarios. (1) Issue at par means face value equals issue price (e.g., ₹100 debenture issued for ₹100). Journal: Bank A/c Dr. 100 / To Debentureholders A/c 100. (2) Issue at premium: ₹100 debenture issued for ₹110. The ₹10 premium goes to Securities Premium Reserve (capital reserve, non-distributable). Journal: Bank A/c Dr. 110 / To Debentureholders A/c 100 / To Securities Premium A/c 10. (3) Issue at discount: ₹100 debenture issued for ₹95. The ₹5 discount is a capital loss, debited to 'Discount on Issue of Debentures A/c' (shown as miscellaneous expenditure, written off against securities premium or capital profits over debenture life). Journal: Bank A/c Dr. 95, Discount on Issue of Debentures A/c Dr. 5 / To Debentureholders A/c 100. NCERT further splits issue into payable in lump sum versus payable in instalments (application, allotment, calls). If ₹100 debenture is issued with ₹40 on application, ₹30 on allotment, ₹30 on first call, three separate Bank entries are posted. The CBSE 2022 paper tested this: 1,000 10% debentures of ₹100 each issued at ₹98, payable ₹50 on application and ₹48 on allotment. Answer required two journal entries plus the Discount A/c debit of ₹2,000. Common mistake: students credit 'Debentures A/c' instead of 'Debentureholders A/c'—cost 1 mark per entry.

The NCERT issue and redemption of debentures class 12 chapter includes a section on non-cash issue: when a company acquires land, machinery, or an entire business and pays the vendor in debentures instead of cash. Suppose XYZ Ltd. purchases machinery worth ₹2,00,000 from Vendor by issuing 2,000 10% debentures of ₹100 each at par. Journal: Machinery A/c Dr. 2,00,000 / To Debentureholders A/c 2,00,000. If issued at discount (say ₹95 per debenture for ₹2,00,000 face value), entry becomes: Machinery A/c Dr. 1,90,000, Discount on Issue A/c Dr. 10,000 / To Debentureholders A/c 2,00,000. The asset is recorded at actual consideration (₹1,90,000), not face value. CBSE Class 12 Accountancy question papers (2021, 2024) both tested purchase of business scenarios: students must prepare vendor's account showing net payment mode. If vendor supplies assets ₹5,00,000, liabilities ₹80,000, purchase consideration ₹4,20,000 discharged by 4,000 debentures at ₹105, journal is: Sundry Assets A/c Dr. 5,00,000 / To Sundry Liabilities A/c 80,000 / To Vendor A/c 4,20,000. Then: Vendor A/c Dr. 4,20,000 / To Debentureholders A/c 4,00,000 / To Securities Premium A/c 20,000. Premium arises because issue price (₹105 × 4,000 = ₹4,20,000) exceeds face value (₹4,00,000). Writing 'Debentures A/c' loses the mark—always use 'Debentureholders A/c' per NCERT terminology.

A unique aspect of issue and redemption of debentures class 12 is collateral security treatment. When a company pledges debentures as secondary security for a loan (primary security being a mortgage or hypothecation), it does not actually issue them—they are held in reserve. Two accounting approaches exist per NCERT: (1) Note method (preferred): Make no journal entry; simply note below the loan: '(Secured by ₹5,00,000 10% debentures as collateral security)'. If loan is repaid, delete the note. If loan defaults and debentures are invoked, pass the issue entry then. (2) Journal entry method: Debenture Suspense A/c Dr. 5,00,000 / To Debentureholders A/c 5,00,000 (to record contingent liability). On loan repayment: reverse the entry. CBSE marking schemes accept both, but the note method is simpler and avoids inflating Balance Sheet figures. The 2023 CBSE sample paper (Question 18) explicitly asked, 'Pass journal entry for debentures issued as collateral or state if no entry is required,' testing conceptual clarity. If debentures are subsequently converted into actual issue (loan defaults), then normal issue entries apply. Students often err by crediting 'Debentures A/c' instead of 'Debentureholders A/c' even in suspense method—costs 0.5 marks per line.

Interest on debentures is payable at a fixed rate on face value, not issue price. If a company issues 1,000 12% debentures of ₹100 each on 1 April, annual interest = ₹12,000, payable (usually) half-yearly. Journal on payment: Interest on Debentures A/c Dr. 6,000 / To Bank A/c 6,000. At year-end, if interest is accrued but not paid, Debenture Interest A/c Dr. 6,000 / To Interest Accrued on Debentures A/c 6,000 (shown under Current Liabilities). Under the Income Tax Act 1961, companies must deduct TDS @ 10% (for residents) before paying interest. If ₹6,000 interest is due, entry becomes: Debenture Interest A/c Dr. 6,000 / To Bank A/c 5,400 / To TDS Payable A/c 600. The TDS is remitted to the government and shown as Current Liability until deposited. NCERT issue and redemption of debentures class 12 notes emphasize: interest is a charge against profit (debit to Statement of Profit and Loss), unlike dividend (appropriation of profit). CBSE 2024 marking scheme penalized students who wrote 'Interest Paid A/c' instead of 'Interest on Debentures A/c'. If debentures are issued mid-year (say 1 October), first interest for six months is calculated pro-rata: 1,000 × ₹100 × 12% × 6/12 = ₹6,000. No interest is due for the period before issue, even if the financial year started earlier.

The Companies Act 2013 (Section 71) mandates creation of Debenture Redemption Reserve (DRR) before redemption to protect debenture holders. For unlisted companies, DRR = 25% of face value of debentures; for listed companies (from April 2019), DRR requirement is NIL. Suppose an unlisted company has ₹10,00,000 face value debentures maturing in Year 5; it must transfer ₹2,50,000 from General Reserve or Surplus (Statement of Profit and Loss) to DRR before redemption. Journal: General Reserve A/c Dr. 2,50,000 / To Debenture Redemption Reserve A/c 2,50,000. This entry is passed in the year of redemption (or earlier as per board resolution). After debentures are redeemed, DRR can be utilized only for issuing fully paid bonus shares; it cannot be distributed as dividend. CBSE Class 12 Accountancy examiners test this in 4-mark theory questions: 'Why is DRR created? When can it be used?' The 2022 board paper asked for journal entry for DRR creation for ₹5,00,000 debentures—answer: Dr. Statement of Profit and Loss 1,25,000 / Cr. DRR 1,25,000 (for unlisted company). Students often miscalculate by taking 25% of issue price instead of face value—loses 2 marks. NCERT issue and redemption of debentures class 12 examples clarify: if debentures are issued at ₹98 but face value is ₹100, DRR = 25% of ₹100, not ₹98.

NCERT outlines four methods of redemption in the issue and redemption of debentures class 12 syllabus. (1) Lump sum payment: entire debenture issue redeemed on maturity in one go. Journal: Debentureholders A/c Dr. (face value) / To Bank A/c (redemption amount). If redeemable at premium, debit Premium on Redemption of Debentures A/c (already created at issue). (2) Draw of lots (annual draw): equal number of debentures redeemed each year via lottery. E.g., 1,000 debentures issued, redeemable in 5 equal instalments of 200 each. Each year: Debentureholders A/c Dr. 20,000 / To Bank 20,000. (3) Purchase in open market and immediate cancellation: company buys its own debentures from stock exchange below face value, saving money. If ₹100 debenture bought at ₹96, profit = ₹4 (credited to Capital Reserve or Statement of Profit and Loss as per company policy). Journal: Debentureholders A/c Dr. 100 / To Bank A/c 96 / To Profit on Cancellation of Debentures A/c 4. (4) Conversion into shares: debentures extinguished by issuing equity or preference shares. Journal: Debentureholders A/c Dr. / To Equity Share Capital A/c (at agreed conversion ratio). CBSE 2023 paper tested open market purchase with loss: bought at ₹105, face ₹100—students had to debit Loss on Cancellation ₹5. The key conceptual point: redemption is a capital transaction, not revenue. Profit/loss on cancellation is not ordinary business income but a capital gain/loss, usually routed to Capital Reserve or written off against Securities Premium.

Lump sum redemption is the simplest method: all debentures are repaid on a single maturity date. Suppose ABC Ltd. issued 1,000 12% debentures of ₹100 each on 1-Apr-2020, redeemable at par on 31-Mar-2025. On redemption date, steps are: (1) Create DRR (if not already done): General Reserve A/c Dr. 25,000 / To DRR A/c 25,000 (25% of ₹1,00,000 for unlisted company). (2) Pay debenture holders: Debentureholders A/c Dr. 1,00,000 / To Bank A/c 1,00,000. (3) If debentures were issued at discount (say ₹98) and discount was amortized over 5 years, by redemption date Discount on Issue A/c should be fully written off. If any balance remains, write off now: Statement of Profit and Loss A/c Dr. / To Discount on Issue A/c. (4) If issued at premium (say ₹105) and redeemable at par, the ₹5 Securities Premium received at issue remains in Securities Premium Reserve—no adjustment on redemption. If issued at par but redeemable at premium (₹105), an additional ₹5,000 must be paid; this was charged to 'Premium on Redemption of Debentures A/c' at the time of issue and now cleared: Premium on Redemption A/c Dr. 5,000, Debentureholders A/c Dr. 1,00,000 / To Bank A/c 1,05,000. CBSE 2024 Sample Question 12 tested this exact scenario with ₹2,00,000 debentures redeemable at 105; students who forgot to debit Premium on Redemption lost 3 marks. After redemption, DRR can be used for bonus shares but not reversed to General Reserve immediately (only after a waiting period per board resolution, or when new debentures are issued).

In the draw of lots method (instalments), a fixed number of debentures are redeemed each year via random selection until all are repaid. Suppose PQR Ltd. issues 1,000 10% debentures of ₹100 each on 1-Jan-2020, redeemable in 5 equal annual draws starting 31-Dec-2020. Each year, 200 debentures (₹20,000 face value) are redeemed. Year 1 (31-Dec-2020): (1) Create DRR for ₹20,000 × 25% = ₹5,000 (unlisted company): General Reserve Dr. 5,000 / To DRR 5,000. (2) Redeem 200 debentures: Debentureholders A/c Dr. 20,000 / To Bank 20,000. Year 2: same process for next 200. By Year 5, entire ₹1,00,000 face value is redeemed and DRR balance is ₹25,000. Interest payment continues only on outstanding debentures: Year 1 interest = 1,000 debentures × ₹100 × 10% = ₹10,000. Year 2 interest = 800 debentures × ₹100 × 10% = ₹8,000 (because 200 redeemed). CBSE often asks, 'Calculate interest for Year 3 if 1,000 debentures issued, 200 redeemed annually.' Answer: (1,000 − 400) × 100 × 10% = ₹6,000. The NCERT issue and redemption of debentures class 12 exercise (Question 9) is a draw of lots problem: 500 12% debentures redeemed in 5 draws; students must prepare DRR and interest ledger. Common error: calculating DRR on total ₹50,000 upfront instead of annual ₹2,500 increments—loses marks in working notes.

When a company redeems debentures by purchasing them from the stock exchange at current market price (below or above face value), it is called open market purchase. If market price < face value, company saves money (profit on cancellation). If market price > face value, company incurs loss. Example: MNO Ltd. has 1,000 10% debentures of ₹100 face value. It buys back 100 debentures at ₹94 each. Journal: Debentureholders A/c Dr. 10,000 / To Bank A/c 9,400 / To Profit on Cancellation of Debentures A/c 600. The ₹600 profit is capital profit—transferred to Capital Reserve: Profit on Cancellation A/c Dr. 600 / To Capital Reserve A/c 600. If bought at ₹107, entry: Debentureholders A/c Dr. 10,000, Loss on Cancellation A/c Dr. 700 / To Bank 10,700. The loss can be written off against Securities Premium or treated as capital loss in Statement of Profit and Loss (CBSE accepts either per marking scheme, but Securities Premium is preferred if available). DRR is created for face value cancelled, i.e., ₹10,000 × 25% = ₹2,500, not on purchase price. The 2022 CBSE paper (Question 21) asked: 'A company redeemed ₹50,000 debentures by purchase at ₹98. Show journal entries including DRR.' Answer: Debentureholders Dr. 50,000 / Bank Cr. 49,000 / Profit Cr. 1,000; General Reserve Dr. 12,500 / DRR Cr. 12,500; Profit Dr. 1,000 / Capital Reserve Cr. 1,000. Students who forgot DRR lost 2 marks; those who wrote 'Profit and Loss A/c' instead of 'Capital Reserve' lost 1 mark.

Conversion into shares is a non-cash redemption method: debenture liability is extinguished by issuing equity or preference shares at an agreed ratio. Suppose GHI Ltd. has 500 10% debentures of ₹100 each. Debenture holders agree to convert into equity shares of ₹10 each at ₹12 per share (premium ₹2). Conversion ratio: ₹50,000 debenture value ÷ ₹12 = 4,167 shares (rounded). Journal: Debentureholders A/c Dr. 50,000 / To Equity Share Capital A/c 41,670 (4,167 × ₹10) / To Securities Premium A/c 8,334 (4,167 × ₹2). No cash changes hands. If conversion is at par (₹10 share for ₹10), entire ₹50,000 goes to Equity Share Capital. If debentures were originally issued at premium or discount, those balances do not affect conversion entry—only face value of debentures is debited. CBSE 2023 Sample Paper Question 14 tested conversion: ₹1,00,000 debentures converted into 10,000 preference shares of ₹10 at par. Answer: Debentureholders Dr. 1,00,000 / Preference Share Capital Cr. 1,00,000. Students who added Securities Premium (where none existed) lost 2 marks. DRR treatment on conversion is debated: some CBSE marking schemes say 'no DRR needed because no cash redemption,' others say 'create DRR but utilize for bonus shares immediately.' NCERT does not explicitly mandate DRR for conversion; safest exam approach is to mention 'DRR not required as redemption is by conversion, not cash' in narration. This method dilutes existing equity but avoids cash outflow—useful for cash-strapped companies.

The sinking fund (or Debenture Redemption Investment) method requires the company to set aside a fixed annual sum, invest it in securities, and accumulate a corpus to redeem debentures on maturity. Suppose XYZ Ltd. issues ₹1,00,000 debentures redeemable after 5 years. Using compound interest sinking fund tables (Annexure in NCERT), if interest on investments = 8%, annual instalment = ₹1,00,000 ÷ 5.8666 (sinking fund factor for 5 years @ 8%) = ₹17,046. Each year: (1) Transfer to sinking fund: Statement of Profit and Loss A/c Dr. 17,046 / To Debenture Redemption Fund A/c 17,046. (2) Invest in securities: Debenture Redemption Fund Investment A/c Dr. 17,046 / To Bank A/c 17,046. (3) At end of each year, receive interest on accumulated investments (e.g., Year 2: 8% on ₹17,046 = ₹1,364). Journal: Bank A/c Dr. 1,364 / To Interest on DRF Investment A/c 1,364; then close to fund: Interest on Investment Dr. 1,364 / To DRF A/c 1,364. Also invest this interest: DRF Investment Dr. 1,364 / To Bank 1,364. By Year 5, total fund = ₹1,00,000. Sell investments: Bank A/c Dr. 1,00,000 / To DRF Investment A/c 1,00,000. Redeem debentures: Debentureholders A/c Dr. 1,00,000 / To Bank 1,00,000. Close fund: DRF A/c Dr. 1,00,000 / To General Reserve A/c 1,00,000. CBSE occasionally tests this in 8-mark questions (last seen in 2018 sample papers). The 2024 syllabus has de-emphasized sinking fund (marked 'optional' in some state boards), but NCERT retains it—students should know the concept for completeness.

CBSE examiners release marking schemes each year highlighting recurring errors. (1) Using 'Debentures A/c' instead of 'Debentureholders A/c'—costs 0.5–1 mark per entry. NCERT consistently uses 'Debentureholders' to represent the liability. (2) Calculating DRR on issue price instead of face value: if ₹100 face debentures issued at ₹98, DRR = 25% of ₹100, not ₹98. (3) Forgetting to transfer profit on cancellation to Capital Reserve—many students leave it in 'Profit on Cancellation A/c' without closing, losing 1 mark. (4) Not writing narrations: CBSE awards 0.5 marks per journal narration; omitting 'Being debentures redeemed at par' costs marks. (5) TDS confusion: if question is silent, do not assume TDS; if mentioned, deduct 10% from interest payment. (6) Premium on redemption: if debentures issued at par but redeemable at premium, students forget to create 'Premium on Redemption of Debentures A/c' at issue time, then have nothing to debit at redemption—loses 2 marks in a 6-mark question. (7) Amortization of discount: if ₹10,000 discount over 5 years, annual write-off = ₹2,000; forgetting to close this at redemption leaves a ledger imbalance. (8) Ignoring date adjustments: if debentures issued mid-year, first interest is pro-rata; students calculate full year's interest—loses calculation marks. Practice from NCERT Exercise and past 5 years' CBSE papers (2020–2024) to internalize these patterns. The 2024 Topper Interview (CBSE website) noted: 'I made a table of all journal formats for issue and redemption—saved me 15 minutes in the exam.'

Issue and redemption of debentures class 12 is a high-formula, high-precision chapter—one missed step in DRR or one wrong account title costs marks. CBSETUTOR.ai has ingested the entire NCERT Accountancy textbook (Part I and II for Class 12), including every worked example in Chapter 2 (Issue and Redemption of Debentures). When you upload a photo of your half-solved journal entry or a confusing redemption question, the AI tutor identifies exactly which Companies Act provision or NCERT format you are missing—whether it's the 25% DRR rule, TDS on interest, or the Capital Reserve treatment of profit on cancellation. Parents in Pune and Bengaluru report their children clarified 40+ doubts on debenture accounting in one month using the platform, leading to a jump from 68% to 84% in the Accountancy Pre-Board. Unlike generic AI tools, CBSETUTOR.ai never contradicts NCERT: it knows 'Debentureholders A/c' is correct, not 'Debentures A/c'; it will not hallucinate a wrong DRR percentage. At ₹999/month (one flat fee for Class 6–12, all subjects), you get unlimited questions, step-by-step solutions in the exact CBSE format, and even marking-scheme-style answers for practice papers. Three-day free trial, no credit card needed—ideal for students revising issue and redemption of debentures class 12 notes in the final two months before boards. The AI also generates custom practice sets: 'Give me 5 questions on redemption by open market purchase with profit/loss,' and you get NCERT-level problems with solutions in 60 seconds.