JustPractice
justpractice.in
Ch 9 · Companies · NCERT — Company Accounts and Analysis of Financial Statements

Issue and Redemption
of Debentures

90 MCQs 60 Flashcards NCERT Class 12 Updated May 2026
Start Practice Test Revise Flashcards
Chapter Overview

Chapter 9 of the NCERT Class 12 Accountancy book (Company Accounts and Analysis of Financial Statements, Part 2) covers Issue and Redemption of Debentures. A debenture — under Section 2(30) of the Companies Act, 2013 — is an instrument acknowledging a DEBT owed by the company. The debenture-holder is a creditor (not an owner): she earns a fixed rate of interest (a CHARGE against profit, payable even on losses) and is repaid before all shareholders on winding up. Debentures may be classified by security (secured / unsecured), tenure (redeemable / perpetual), convertibility (FCD / PCD / NCD) and negotiability (registered / bearer).

The chapter walks through every issue scenario: at par, at premium (premium credited to Securities Premium A/c — governed by Section 52), and at discount (a debit to the Discount on Issue of Debentures A/c, written off first against Securities Premium and then against the Statement of P&L). It then covers the six issue / redemption combinations — including the critical case of debentures issued at a discount AND redeemable at a premium, where BOTH losses are recognised UPFRONT in a single Loss on Issue of Debentures A/c (with a matching credit to the Premium on Redemption of Debentures A/c, a non-current liability). The chapter also covers issue as collateral security (Method 1 — no entry, mere disclosure; Method 2 — Debenture Suspense A/c Dr; To Debentures A/c at face value) and issue for consideration other than cash (vendor / business purchase, with Goodwill or Capital Reserve recognised when face differs from consideration).

The redemption side covers interest on debentures with TDS at 10% under Section 193 of the Income Tax Act, the Debenture Redemption Reserve (DRR) at 10% of nominal value for unlisted public companies under Section 71(4) (listed companies are now exempt post the 2019 amendment), and the Debenture Redemption Investment (DRI) at 15% of next-year's redemption under Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014 (deposited by 30 April). Four methods of redemption are taught — lump sum, instalments by drawing of lots, open market purchase, and conversion — alongside the question of whether redemption is out of profits, out of capital, or a combination of both. The chapter sets up the journal entries you will see in any company-level balance sheet question in CBSE Class 12.

What You'll Learn
Key Concepts
Definition
Debenture concept
An instrument evidencing a debt (Sec 2(30)). Holder = creditor, not owner. Carries fixed interest, no voting rights. Repaid before all shareholders on winding up.
Classify
Types of debentures
By security: secured / unsecured. Tenure: redeemable / perpetual. Convertibility: FCD / PCD / NCD. Negotiability: registered / bearer. First / second mortgage = priority of charge.
Issue
Issue at Par / Premium / Discount
Premium → Securities Premium A/c (Section 52). Discount → Discount on Issue A/c (allowed for debentures, unlike shares). Debentures A/c always credited at FACE value.
Sec 52
Securities Premium uses
Bonus shares, preliminary expenses, issue expenses (incl. discount), premium on redemption of preference shares / debentures, buy-back of own securities. NEVER for dividend.
Combos
Issue + Redemption combinations
Six combinations possible. Premium on redemption recognised UPFRONT via Loss on Issue Dr / Premium on Redemption A/c Cr. Redemption at premium triggers a non-current liability today.
Loan
Collateral Security (2 methods)
Method 1: no entry, mere disclosure under the Loan A/c. Method 2: Debenture Suspense A/c Dr; To Debentures A/c at face value. Net Balance Sheet impact: same.
Charge
Interest on Debentures + TDS
Charge against profit (payable on loss too). Calculated on FACE value at the contracted rate. TDS @ 10% under Section 193. Closed to Statement of P&L as finance cost.
Reserve
DRR (Section 71(4))
10% of nominal value for unlisted public cos (post-2019 rate; was 25% earlier). Listed cos exempt. Created out of distributable profit; transferred to General Reserve after redemption.
Liquidity
DRI (15% rule)
15% of nominal value of debentures redeemable in NEXT financial year. Deposited by 30 April. Held in safe, charge-free instruments. Shown under Non-Current Investments.
Methods
Methods of Redemption
Lump sum at maturity (most common); instalments by drawing of lots; open market purchase (gain → Capital Reserve, loss → P&L); conversion into shares.
Sample MCQs
Q1. Interest paid on debentures is treated in the company's books as:
A. An appropriation of profit, payable only when there are sufficient distributable profits
B. A reserve set aside out of post-tax profits each financial year
C. A dividend approved at the Annual General Meeting of the shareholders
D. A charge against profit, payable even if the company incurs a loss
Debenture interest is a CHARGE against profit (debited to the Statement of Profit & Loss), payable at the contracted rate even when the company incurs a loss. Dividend on shares, in contrast, is an appropriation paid only out of profits.
Q2. Pearl Ltd. issued 4,000 10% Debentures of ₹100 each at a discount of 6%. The Discount on Issue of Debentures A/c will be debited with:
A. ₹40,000 (number of debentures multiplied by the rate of discount given on issue)
B. ₹2,40,000 (rate of interest × face value × number of years till redemption arrives)
C. ₹24,000 (4,000 debentures × ₹6 discount per debenture, debited to Discount A/c)
D. ₹4,000 (discount per debenture × number of years till date of redemption)
Discount per debenture = ₹100 × 6% = ₹6. Total discount = 4,000 × ₹6 = ₹24,000. Discount on Issue of Debentures A/c is debited by ₹24,000. Bank receives ₹3,76,000 (4,000 × ₹94); Debentures A/c is credited with the face value ₹4,00,000.
Q3. Tulip Ltd. issued 5,000 12% Debentures of ₹100 each at a discount of 4%, redeemable at a premium of 5%. The amount debited to the Loss on Issue of Debentures A/c is:
A. ₹20,000 (only the discount on issue, premium on redemption recognised separately)
B. ₹25,000 (only the premium on redemption, discount recognised separately on issue)
C. ₹45,000 (discount of ₹20,000 plus premium on redemption of ₹25,000 — both upfront)
D. ₹5,000 (the per-debenture difference between issue price and redemption price)
Discount on issue = 5,000 × ₹4 = ₹20,000. Premium on redemption = 5,000 × ₹5 = ₹25,000. Loss on Issue of Debentures A/c is debited by the total = ₹20,000 + ₹25,000 = ₹45,000. Premium on Redemption A/c is credited with ₹25,000; Bank receives 5,000 × ₹96 = ₹4,80,000; Debentures A/c is credited with face value ₹5,00,000.
Frequently Asked Questions
What is a debenture and how does it differ from a share?
A debenture is an instrument issued by a company evidencing a debt — defined under Section 2(30) of the Companies Act, 2013. It is an acknowledgement of borrowing, normally issued under the company's common seal, carrying a fixed rate of interest. The key difference from a share is the legal relationship: a shareholder is an OWNER (member) of the company entitled to dividend and voting rights, while a debenture-holder is a CREDITOR entitled only to fixed interest and return of principal. Interest on debentures is a charge against profit (payable even on losses), whereas dividend on shares is an appropriation paid only out of profits. On winding up, debenture-holders are paid before all shareholders.
What is the difference between issue at premium and issue at discount?
Issue at PREMIUM means the debentures are issued for more than their face value. The premium is credited to the Securities Premium A/c, governed by Section 52 of the Companies Act, 2013 (uses: bonus shares, writing off preliminary expenses or issue expenses, premium on redemption, buy-back). Issue at DISCOUNT means debentures are issued for less than face value — permitted for debentures (unlike shares, which are prohibited under Section 53). The discount is debited to the Discount on Issue of Debentures A/c (a fictitious-asset-style item) and is written off — first against Securities Premium A/c (Section 52(2)(c)) and then against the Statement of Profit & Loss. In both cases the Debentures A/c is credited at the FACE value.
How are debentures issued as collateral security accounted for?
Debentures issued as collateral are a SECONDARY security to a lender alongside a primary security on a loan — they are not issued for cash. Two methods exist: METHOD 1 (no journal entry method) — no entry is passed; the fact is merely DISCLOSED as a footnote/note to the Loan A/c in the Balance Sheet, e.g., "Loan from XYZ Bank ₹40,00,000 secured by issue of 50,000 9% Debentures of ₹100 each as collateral". METHOD 2 (journal entry method) — entry passed at the FACE VALUE of the collateral debentures: Debenture Suspense A/c Dr; To Debentures A/c. In the Balance Sheet, the Debenture Suspense A/c is shown as a deduction from the Debentures A/c on the Equity & Liabilities side, so the net effect on totals is identical to Method 1.
What is the rate of TDS on debenture interest?
Tax Deducted at Source on interest paid on debentures is 10%, under Section 193 of the Income Tax Act (subject to threshold limits and exemptions). The journal entry for interest due is: Debenture Interest A/c Dr (gross); To Debenture-holders A/c (net of TDS); To TDS Payable A/c (TDS portion). When the interest is paid: Debenture-holders A/c Dr; To Bank A/c. The TDS is later remitted to the Government: TDS Payable A/c Dr; To Bank A/c. Debenture interest itself is a CHARGE against profit and is closed at year-end to the Statement of Profit & Loss as a finance cost — payable even when the company incurs a loss.
When is DRR required and at what percentage?
Debenture Redemption Reserve (DRR) is mandated by Section 71(4) of the Companies Act, 2013. After the Companies (Share Capital and Debentures) Amendment Rules 2019, the position is: LISTED COMPANIES are exempt from creating DRR. UNLISTED PUBLIC COMPANIES must create DRR of 10% of the nominal value of their outstanding debentures (down from the earlier 25% level). All-India Financial Institutions, banking companies, and NBFCs registered with the RBI are also exempt. DRR is created out of distributable profits (i.e., the Surplus i.e., Statement of P&L) and is shown under Reserves & Surplus on the equity & liabilities side of the Balance Sheet. After redemption is complete, the DRR is transferred to the General Reserve.
What is DRI and when must it be created?
Debenture Redemption Investment (DRI) is mandated by Rule 18(7) of the Companies (Share Capital and Debentures) Rules, 2014. It requires the company to invest or deposit, on or before 30 APRIL of each year, an amount equal to 15% of the nominal value of debentures DUE FOR REDEMPTION DURING THE NEXT FINANCIAL YEAR. The investment must be in safe, marketable, charge-free forms — bank deposits, central or state government securities, listed bonds of other companies, etc. — and must be retained until 31 March of the year of redemption. DRI is shown in the Balance Sheet under Non-Current Investments on the assets side. Note that DRI is computed only on the next year's redemption amount, not on the entire face value of all outstanding debentures.