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Chapter 2 of Class 12 Accountancy, Issue and Redemption of Debentures, covers one of the most important aspects of corporate finance—raising capital through debentures and their eventual redemption. This chapter dives into the types of debentures, methods of issuing them, and the legal and financial obligations tied to redeeming debentures. In this chapter’s solutions, students will find detailed explanations and step-by-step answers to questions about journal entries, debenture issuance at par, premium, or discount, and the accounting treatment for interest and redemption. Understanding these solutions will help students gain a solid grasp of these fundamental concepts, which are crucial for excelling in their exams and understanding corporate finance.
Debenture: Debenture is the acknowledgements of debt. It is a loan capital raised by the company from general public. A person/holder of such a written acknowledgement is called‘debenture-holder’.
Bond: Bond is similar to debenture in terms of contents and texture. The only difference is with respect of issue condition, i.e bonds can be issued without pre-determined rate of interest as is in case of deep discount bonds.
Charge: Charge is an incumbrance to meet the obligation under trust deed on certain assets which company agrees to mortgage either by way of first or second charge. First charge implies the priority in repayment of loan. Those who hold first charge against any specific asset will realise their claim from the net realisable value of such assets. Any amount of surplus from such assets given under first charge will be utilised for setting the claims for holder of second charge.
Types of Debenture: Debentures are of various types such as: secured and unsecured debentures redeemable and perpetual debentures, convertible and non-convertible debentures, zero coupon rate and specific rate, registered and bearer debentures.
Issue of Debenture: Debentures are said to be issued at par when the amount to be collected on them is equal to their nominal or face value. If the issue price is more than nominal or face value, it is said to be issued at a premium. If the issue price is less than the nominal or face value, it is said to be issued on discount. The amount received as premium is credited to ‘securities premium account’ whereas amount of discount allowed is debited to “loss/discount on issue” and is written-off over the years.
Issue of Debentures for consideration other than Cash: Sometimes debentures can be issued to vendor or suppliers of patents, copyrights and for transfer of intellectual property rights
on preferential basis without receiving money in cash.
Purchase Consideration: Purchase consideration is amount paid by purchasing company inconsideration for purchase of assets/business firm, another enterprise/vendor.
Collateral Security: Any security in addition to primary security is called‘collateral security’.
Redemption of Debenture: Means discharge of liability on account of debenture/bond by repayment made to debenture-holders. Normally, the redemption takes place on the expiry of period for which they have been issued, depending upon the terms and conditions of issue.