NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

Accountancy Class 12

Created by: Nipun Tuteja

Commerce : NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

The document NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev is a part of the Commerce Course Accountancy Class 12.
All you need of Commerce at this link: Commerce

Page No 143:
Long Answers
Question 1: Explain the different types of debentures?
ANSWER: 
Debentures are issued by a company for acquiring long-term borrowings.
They can be classified on the following basis.
1. On the basis of Security
a. Secured Debentures- Mortgaged Debentures are those debentures that are secured against asset/s of a company. These are also known as secured debentures. In case the company fails to pay back the principal amount of debenture or fails to meet its interest obligations on the due date, then the debenture holders have the right to sell the mortgaged asset in order to realise their amount due to the company.
b. Unsecured Debentures- These debentures are treated as unsecured creditors. They do not have any security. These are uncommon now days.
2. On the basis of Tenure
a. Redeemable Debenture- These debentures are payable after the expiry of a specific period. These debentures can be redeemed at par or premium either in lump sum or in installment. Generally all debentures are redeemable.
b. Irredeemable Debenture- Irredeemable Debentures are those debentures that cannot be repayable or redeemable by a company during its life time. These are repayable only at the time of winding up of the company. These are also known as Perpetual Debentures that means debentures having indefinite life. In India, now days, no company can issue irredeemable debentures.
3. On the basis of Mode of Redemption
a. Convertible Debentures- Convertible Debentures are those debentures that can be converted into equity shares after a specified period of time. These are of following two types:
i. Fully Convertible Debentures: When the whole amount of a debenture is  convertible into equity shares of equivalent amount, then these debentures are called Fully Convertible Debentures. There is no need to maintain Debenture Redemption Reserves for such debentures.
ii. Partly Convertible Debentures: When only a part of the amount of a debenture is convertible into equity shares, then these debentures are called Partly Convertible Debentures. In this regards, the Debenture Redemption Reserve is maintained only for the non-convertible part of the debenture.
b. Non-Convertible Debenture- These debentures cannot be converted into shares. Generally debentures are non convertible.
4. On the basis of Coupon Rate
a. Zero Coupon Rate- These debentures do not contain a specific rate of interest and can be issued at discount. The excess of the face value of the debenture over its issue price is considered as interest amount.
b. Specific Rate- These debentures carry a specific rate of interest which may be fixed or floating.
5. On the basis of Registration
a. Registered Debenture- While issuing such debentures, the company maintains a record regarding name, address and number of holding of debentures in the Register of Debenture Holders of the company.
b. Bearer Debentures- When a company does not maintain any record of the debenture holders and the debenture is transferable mere by delivery, then the type of the debenture held by the holders is termed as Bearer Debenture. Interests on such debentures are paid to the persons who produce the interest coupons that are attached with these debentures in a specified bank.

Question 2: Distinguish between a debenture and a share. Why is debenture known as loan capital? Explain.
ANSWER:

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

Issue of debentures implies incurring long-term indebtedness. Generally, a company issues debentures for acquiring long-term borrowings to achieve its long-run targets and growth. Like the owner’s capital, interest is also payable on the principal amount of the debenture. The interest paid is regarded as an expense for the company and is deductible under Income Tax Act. Therefore, debentures are also known as loan capital because they are redeemable after a long period of time.

Question 3: Describe the meaning of ‘Debenture Issued as Collateral Securities’. What accounting treatment is given to the issue of debentures in the books of accounts
ANSWER: 
The term collateral security means additional or secondary security in addition to the primary security. Sometimes, when a company takes loan from a financial institution, then besides the primary security, the company may issue debenture for additional security (as collateral security). The lender who receives debenture as collateral security is not entitled for interest on these debentures. If any default is made by the company in paying back the principal amount (i.e. the loan amount) or interest on the loan, then the lender has the full right to recover his/her dues from the sale of primary security. But, if the primary security is not sufficient to recover the amount of debt, then the debentures issued as collateral may be used for recovery of the remaining amount.
Accounting Treatment
There are  two ways to record issue of debentures as collateral security:
1. No Entry

As no liability has been created so no Journal entry is recorded in the books of account. As per the Revised Schedule-VI of the Companies Act, the issue of debenture as collateral security is shown as a Long-Term Borrowings under the heading of Non-Current Liabilities on the Equity and Liabilities side of the Balance Sheet. In the Notes to Accounts of Long-Term Borrowings, the Loan so taken is shown. And in the Notes to Accounts of Cash and Cash Equivalents, the amount of loan so received (in cash) is shown. This can be better understood with the help of the below explained example.
Example- Suppose Best Bus Ltd. issued 4,000 9% Debentures of Rs 100 each as collateral security to NBP bank for a loan of Rs 3,00,000.

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

2. By Making Entry
In order to record the issue of debentures as collateral security, the following necessary Journal entries are made in the books of account.
At the time of Issue of Debentures as Collateral Security
NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

In this case, as per the Revised Schedule VI of the Companies Act, Debentures so issued as collateral security will be shown as Long-Term Borrowings under the head of Non-Current Liabilities of the Equity and Liabilities side of the Company's Balance Sheet. Unlike Method-1, in this method, Debentures Suspense Account is deducted from the Debentures Account in the Notes to Accounts of Long-Term Borrowings.
NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

Question 4: How is ‘Discount on Issue of Debentures’ treated in the books of accounts? How will you deal with the ‘discount in issue of debentures’ when the debentures are to be redeemed in instalments?
ANSWER: 
When the debentures are issued at a price below its par value or face value, then it is said that the debentures are issued at discount. The difference between the issue price and the face value of the debenture is regarded as a capital loss. As per the Revised Schedule VI of the Companies Act, Discount on Issue of Debentures is shown in the Notes to Accounts:
1. With the amount that is to be written off within 12 months from the date of Balance Sheet - Shown under Other Current Assets
2. With the amount that is to be written off after 12 months from the date of Balance Sheet - Shown under Other Non-Current Assets
Accounting Treatment

For example, if a company has issued 10% debentures of Rs 6,00,000 at 5% discount redeemable annually by Rs 2,00,000 each year. The total amount of discount on Rs 6,00,000 debentures @ 5% is Rs 30,000, i.e. (6,00,000 × 5/100 = Rs 30,000). The accounting treatment for discount on issue of debentures(if it is to be written-off in 5 years) is:
Year 1: Amount to be written-off each year =NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRevShown in Statement of Profit and Loss
Amount to be written-off in the next year = 6,000 - Shown as Other Current Asset under Current Assets
Remaining Amount to be written-off after next year = 30,000 − 6,000 − 6,000= 18,000 - Shown as Other Non-Current Asset under Non-Current Assets
NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

Year 2 

Amount to be written-off = NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev Shown in Statement of Profit and Loss
Amount to be written-off in the next year = 6,000 - Shown as Other Current Asset under Current Assets
Remaining Amount to be written-off after next year = 18,000 − 6,000 = 12,00018,000 - 6,000 = 12,000 - Shown as Other Non-Current Asset under Non-Current Assets
At the end of Year 5, the amount of discount on issue of debentures will be completely written off.

Question 5: Explain the different terms for the issue of debentures with reference to their redemption.
ANSWER: 
The different terms for the issue of debentures with reference to their redemption can be the combinations of at par, at premium and at discount. Normally, the debentures are not redeemable at discount. The permutation and the combination of the various terms of issue and redemption of debentures give rise to following six situations:

1. Issue at Par, Redeemable at Par.
2. Issue at Premium, Redeemable at Par.
3. Issue at Discount, Redeemable at Par.
4. Issue at Par, Redeemable at Premium.
5. Issue at Premium, Redeemable at Premium.
6. Issue at Discount Redeemable at Premium.

1. Issue at Par and Redeemable at Par- When the debentures are issued and are redeemed at their face value, then the following Journal entry is passed.

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

2. Issue at Premium and Redeemable at Par- When the debentures are issued at premium and are redeemable at par, then the following Journal entry is passed. As premium is a gain for a company so it is credited in the Journal entry.

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

3. Issue at Discount and Redeemable at Par- When the debentures are issued at discount and are redeemable at par, then the following Journal entry is passed. As discount is a loss for a company so it is debited in the Journal entry.
NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

4. Issue at Par and Redeemable at Premium- When debentures are issued at par and redeemable at premium, then the following Journal entry is passed. In such case, the company did not suffer any loss at the time of issue but there will be loss at the time of redemption.
NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

5. Issued at Premium and Redemption at Premium- When the debentures are issued and redeemable at premium, then the following Journal entry is passed.
NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

6. Issue of Discount and Redemption at Premium- When the debentures are issued at discount and redeemable at premium, then the following Journal entry is passed.
NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

Question 6: Differentiate between redemption of debentures out of capital and out of profits.
ANSWER: Redemption of Debentures Out of Capital
When debentures are redeemed out of capital and no profits are utilised for redemption, then such redemption is termed as redemption out of capital. In such a situation, no profits are transferred to the Debenture Redemption Reserve (DRR).
As per the guideline laid down by Securities and Exchange Board of India (SEBI) and the Section 117C of Company Act of 1956, the creation of DRR is mandatory (DRR). Therefore, it is not possible to redeem debentures purely out of capital, as it reduces the value of assets. The following companies are exempted from the creation of DRR.
1. Infrastructure companies (i.e. those companies that are engaged in the business of developing, maintaining and operating infrastructure facilities)
2. A Company that issues debentures with a maturity up to 18 months
Redemption of Debenture Out of Profits
When debentures are redeemed out of profit then no capital is utilised for redemption. Before redeeming the debentures profits are transferred to DRR from Profit and Loss Appropriation Account. The creation of DRR is mandatory as per the guidelines laid down by Securities and Exchange Board of India (SEBI). SEBI mandates transferring amount equal to 50% of debentures issued to DRR before redeeming debentures. In this method, as profits are transferred to the DRR Account, thereby reducing the total amount of profits, therefore this method is termed as Redemption of Debentures Out of Profits. In this method, first of all, the required profits are transferred from Statement of Profit and Loss to the DRR Account. The working of which is shown in the Notes to Accounts of Reserves and Surplus (as prescribed in Revised Schedule VI). The final balance (after considering DRR) is shown as the sub-head 'Reserves and Surplus' under the main head of Shareholders' Funds on the Equity and Liabilities side of the Company's Balance Sheet. Lastly, when all the debentures are redeemed, then DRR account is closed by transferring its amount to the General Reserve.

Question 7: Explain the guidelines of SEBI for creating Debenture Redemption Reserve.
ANSWER: The following are the main points of SEBI’s guidelines for creation of Debenture Redemption Reserve (DRR).
1. Every company that issues debentures with a maturity of more than 18 months shall create DRR.
2. An amount equal to 50% of debenture issued shall be transferred to DRR before starting redemption of debentures.
3. Creation of DRR is applicable only for Non-Convertible Debentures and for non-convertible part of Partly Convertible Debentures.
4. Any withdrawal from DRR is allowed only after 10% of debentures are redeemed.
Thus, as per the SEBI’s guidelines, 50% of the debentures issued should be redeemed out of the profits that are transferred to DRR and the remaining 50% of the debentures issued can be redeemed either out of profits or out of capital. Hence, no company can redeem all the debentures issued purely out of the capital.
As per the SEBI’s guidelines the following companies are exempted from the creation of DRR.
1. Infrastructure companies (i.e. those companies that are engaged in the business of developing, maintaining and operating infrastructure facilities)
2. A Company that issues debentures with a maturity up to 18 months

Offer running on EduRev: Apply code STAYHOME200 to get INR 200 off on our premium plan EduRev Infinity!

Complete Syllabus of Commerce

Dynamic Test

Content Category

Related Searches

Exam

,

shortcuts and tricks

,

past year papers

,

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

,

Summary

,

Sample Paper

,

ppt

,

study material

,

mock tests for examination

,

Extra Questions

,

Semester Notes

,

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

,

NCERT Solution (Part - 2) - Issue and Redemption of Debentures Commerce Notes | EduRev

,

video lectures

,

Important questions

,

practice quizzes

,

Viva Questions

,

MCQs

,

Objective type Questions

,

Previous Year Questions with Solutions

,

Free

,

pdf

;