Issue of Debentures
Company Accounts — Part 2
Debentures are the most important borrowing instrument for companies. This chapter covers everything from the meaning and types of debentures to every possible journal entry scenario — issue at par, premium, discount, collateral security, over and under subscription, redemption terms, debenture interest with TDS, and writing off the Loss on Issue — with 12 solved numericals, 40 MCQs, and a 40-question live quiz.
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📌 The Big Picture
What is a Debenture — and How is it Different from a Share?
In Chapter 7, we studied how a company raises capital from its owners (shareholders). A company also borrows money from the public by issuing debentures. A debenture holder is a creditor of the company, not an owner. The company must pay interest on debentures whether it makes a profit or not, and must repay the principal on maturity. The accounting for debenture issue is the focus of this entire chapter.
1. Meaning and Features of a Debenture
A debenture is a written acknowledgement of debt by a company under its common seal. It is an instrument through which a company borrows money from the public for a fixed period at a fixed or floating rate of interest. The word comes from the Latin debentur, meaning "there are owed."
1
Fixed Interest Rate
Debentures carry a fixed (or pre-determined) rate of interest, stated on the certificate itself (e.g., "12% Debentures"). Interest is paid regardless of profit.
2
Charge on Assets
Secured debentures are backed by a charge on the company's specific or floating assets. If the company defaults, debenture holders can recover money by selling those assets.
3
No Voting Rights
Debenture holders are creditors, not members. They have no voting rights in the general meetings of the company.
4
Redeemable
Debentures are usually redeemed (repaid) on a fixed date or after a specified period. The company is obligated to repay the principal.
5
Debenture Certificate
Each debenture holder receives a Debenture Certificate, stating the face value, interest rate, terms of repayment, and any security charged.
6
Interest is a Charge
Unlike dividend on shares, debenture interest is a charge against profits (not an appropriation). It must be paid even if the company incurs a loss.
2. Types of Debentures
| Basis of Classification | Type | Meaning |
|---|---|---|
| Security | Secured (Mortgage) Debentures | Backed by a charge on the company's assets (fixed or floating). Debenture holders can enforce the charge if interest or principal is not paid. |
| Unsecured (Naked/Simple) Debentures | Not backed by any charge on assets. Treated as ordinary creditors on insolvency. | |
| Convertibility | Convertible Debentures | Can be converted into equity shares after a specified period. Fully or partly convertible. |
| Non-Convertible Debentures (NCD) | Cannot be converted into shares. Must be repaid in cash on maturity. | |
| Redemption | Redeemable Debentures | Principal is repaid to debenture holders on or before maturity. Most common type. |
| Irredeemable (Perpetual) Debentures | No fixed maturity date. Company pays interest indefinitely. Rarely issued today. | |
| Interest Rate | Fixed Rate Debentures | Interest rate is fixed for the entire tenure. |
| Floating Rate Debentures | Interest rate varies with market benchmark rates. | |
| Registration | Registered Debentures | Name of holder is registered with the company. Transfer requires registration formality. |
| Bearer Debentures | Transferable by delivery like cash. Holder is presumed to be the owner. |
3. Difference Between a Share and a Debenture
| Basis | Share | Debenture |
|---|---|---|
| Nature | Represents ownership in the company | Represents a loan to the company |
| Holder | Shareholder is a member (owner) | Debenture holder is a creditor |
| Return | Dividend — not fixed, depends on profit | Interest — fixed rate, paid regardless of profit |
| Charge on profit | Dividend is an appropriation of profit | Interest is a charge against profit |
| Voting Rights | Equity shareholders have full voting rights | Debenture holders have no voting rights |
| Repayment | Share capital is not repaid during the life of the company (generally) | Debentures are repaid (redeemed) on maturity |
| Issue at Discount | Cannot be issued at discount (except ESOP) | Can be issued at discount |
| Priority on Winding Up | Shareholders paid last | Debenture holders paid before shareholders |
| Security | No charge on assets | May be secured by a charge on assets |
🎯 Key Exam Difference: Debentures CAN be issued at a discount. Shares CANNOT (except ESOP). This distinction appears in almost every exam.
4. Issue of Debentures for Cash: At Par, Premium, and Discount
Like shares, debentures are issued through a process of application and allotment. The money is typically collected in one or two instalments. The key difference is the accounting for discount (which creates a Loss on Issue of Debentures) and the treatment of premium on issue vs premium on redemption.
Issue at Par
When Issue Price = Face Value. Example: 12% Debentures of ₹100 each issued at ₹100.
| Stage | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Application received | Bank A/c Dr. | ✕✕ | ||
| To Debenture Application A/c | ✕✕ | |||
| (Application money received for X debentures) | ||||
| On allotment | Debenture Application A/c Dr. | ✕✕ | ||
| To X% Debentures A/c | ✕✕ | |||
| (Debentures allotted; application money transferred to Debentures Account at face value) | ||||
Issue at Premium
When Issue Price > Face Value. Example: ₹100 debenture issued at ₹110 (premium ₹10). The premium is credited to Securities Premium Reserve A/c.
| Stage | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Application received | Bank A/c Dr. | ✕✕ | ||
| To Debenture Application A/c | ✕✕ | |||
| (Application at ₹110 per debenture received) | ||||
| On allotment | Debenture Application A/c Dr. | ✕✕ | ||
| To X% Debentures A/c | ✕✕ (face value) | |||
| To Securities Premium Reserve A/c | ✕✕ (premium) | |||
| (Debentures allotted: face value credited to Debentures A/c, premium to Securities Premium Reserve A/c) | ||||
Issue at Discount
When Issue Price < Face Value. Example: ₹100 debenture issued at ₹95 (discount ₹5). The discount is debited to Discount on Issue of Debentures A/c (or Loss on Issue of Debentures A/c). This account is a fictitious asset, written off over the life of the debentures.
💡 Remember: Unlike shares, debentures CAN be issued at a discount. The discount is NOT part of the company's profit — it is a cost of borrowing, treated as a fictitious asset and written off over time.
| Stage | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Application received | Bank A/c Dr. | ✕✕ (at ₹95) | ||
| To Debenture Application A/c | ✕✕ | |||
| (Application money at ₹95 per debenture received) | ||||
| On allotment | Debenture Application A/c Dr. | ✕✕ (₹95) | ||
| Discount on Issue of Debentures A/c Dr. | ✕✕ (₹5) | |||
| To X% Debentures A/c | ✕✕ (₹100 face value) | |||
| (Debentures allotted; discount on issue debited as a deferred cost) | ||||
📈 Numerical 1 — Issue at Par
Question: Sun Ltd. issued 2,000 debentures of ₹500 each at par. Full amount was received on application itself. Pass journal entries.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 10,00,000 | |||
| To Debenture Application A/c | 10,00,000 | |||
| (Application money received: 2,000 x ₹500) | ||||
| Debenture Application A/c Dr. | 10,00,000 | |||
| To 12% Debentures A/c | 10,00,000 | |||
| (2,000 debentures of ₹500 allotted at par; application transferred to Debentures A/c) | ||||
📈 Numerical 2 — Issue at Premium
Question: Moon Ltd. issued 1,000 debentures of ₹1,000 each at a premium of ₹100 per debenture. Full amount received on application. Pass journal entries.
Working: Issue price = ₹1,000 + ₹100 = ₹1,100. Total received = 1,000 x ₹1,100 = ₹11,00,000.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 11,00,000 | |||
| To Debenture Application A/c | 11,00,000 | |||
| (Application at ₹1,100 per debenture: 1,000 x ₹1,100) | ||||
| Debenture Application A/c Dr. | 11,00,000 | |||
| To 10% Debentures A/c | 10,00,000 | |||
| To Securities Premium Reserve A/c | 1,00,000 | |||
| (1,000 debentures of ₹1,000 allotted at ₹100 premium; premium to Securities Premium Reserve) | ||||
📈 Numerical 3 — Issue at Discount
Question: Star Ltd. issued 5,000 debentures of ₹100 each at a discount of 5% (i.e., at ₹95). Pass journal entries.
Working: Issue price = ₹95. Discount = ₹5 per debenture. Total received = 5,000 x ₹95 = ₹4,75,000. Face value total = 5,000 x ₹100 = ₹5,00,000. Discount = ₹25,000.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 4,75,000 | |||
| To Debenture Application A/c | 4,75,000 | |||
| (Application money received at ₹95 per debenture) | ||||
| Debenture Application A/c Dr. | 4,75,000 | |||
| Discount on Issue of Debentures A/c Dr. | 25,000 | |||
| To 12% Debentures A/c | 5,00,000 | |||
| (5,000 debentures of ₹100 each allotted; discount of ₹5 per debenture recorded as fictitious asset) | ||||
5. Issue of Debentures for Consideration Other Than Cash
A company may issue debentures to a vendor from whom it has purchased assets (land, machinery, goodwill) without paying cash. The asset is debited at the agreed value and debentures are credited at face value. Any difference is treated as premium or discount.
| Situation | Entry |
|---|---|
| Asset purchased, debentures at par | Asset A/c Dr. (agreed value) → To X% Debentures A/c (face value) |
| Asset purchased, debentures at premium | Asset A/c Dr. (agreed value) → To X% Debentures A/c (face value) + To Securities Premium Reserve A/c (premium) |
| Asset purchased, debentures at discount | Asset A/c Dr. (agreed value) + Discount on Issue A/c Dr. (discount) → To X% Debentures A/c (face value) |
💡 The logic is simple: Agreed value = face value ± premium or discount. Asset is always debited at agreed value. Debentures are always credited at face value. The difference goes to Securities Premium Reserve or Discount on Issue.
📈 Numerical 4 — Issue for Consideration Other Than Cash (at Premium)
Question: PQR Ltd. purchased machinery for ₹5,50,000 and issued 5,000 debentures of ₹100 each at a premium of ₹10 per debenture. Pass the journal entry.
Working: Number of debentures x issue price = 5,000 x ₹110 = ₹5,50,000 ✔ (matches asset value). Share Capital portion = 5,000 x ₹100 = ₹5,00,000. Premium = 5,000 x ₹10 = ₹50,000.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Machinery A/c Dr. | 5,50,000 | |||
| To 10% Debentures A/c | 5,00,000 | |||
| To Securities Premium Reserve A/c | 50,000 | |||
| (5,000 debentures of ₹100 each issued at ₹10 premium to vendor for machinery) | ||||
📈 Numerical 5 — Issue for Consideration Other Than Cash (at Discount)
Question: ABC Ltd. purchased land worth ₹4,80,000 and issued 5,000 debentures of ₹100 each at a discount of 4% (i.e., at ₹96). Pass the journal entry.
Working: 5,000 debentures at ₹96 = ₹4,80,000 ✔. Face value = ₹5,00,000. Discount = 5,000 x ₹4 = ₹20,000. Land is debited at agreed value ₹4,80,000; debentures credited at face value ₹5,00,000; difference of ₹20,000 is discount debited.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Land A/c Dr. | 4,80,000 | |||
| Discount on Issue of Debentures A/c Dr. | 20,000 | |||
| To 12% Debentures A/c | 5,00,000 | |||
| (5,000 debentures of ₹100 each at 4% discount issued to vendor for land worth ₹4,80,000) | ||||
6. Issue of Debentures as Collateral Security
When a company takes a loan from a bank, it may pledge (hypothecate) debentures as additional (collateral) security. If the company fails to repay the loan, the bank can sell these debentures to recover its money. The actual loan is the primary security; the debentures are only the backup.
There are two methods of recording collateral security:
Method 1 — No Journal Entry (Most Common)
No entry is made in the books because no actual liability exists unless the loan is defaulted. The bank loan is already recorded. The company simply adds a note in the Balance Sheet:
Balance Sheet Note: "The above bank loan is secured by a charge on the company's assets and also by the issue of ₹X debentures of ₹Y each pledged as collateral security."
In the Balance Sheet, these debentures appear as a note below the bank loan — NOT as a separate liability.
Method 2 — Journal Entry in the Books
Some companies prefer to record the debentures issued as collateral with an entry using a Debenture Suspense Account:
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| When debentures are pledged | Debenture Suspense A/c Dr. | ✕✕ | ||
| To X% Debentures A/c | ✕✕ | |||
| (Debentures issued as collateral security for bank loan) | ||||
| When loan is repaid | X% Debentures A/c Dr. | ✕✕ | ||
| To Debenture Suspense A/c | ✕✕ | |||
| (Debentures cancelled on repayment of bank loan) | ||||
⚠ Balance Sheet Presentation (Method 2): Debentures appear on the Liabilities side (under Long-term Borrowings). Debenture Suspense A/c appears on the Assets side (under Other Non-current Assets). The two cancel each other, showing no net effect on net worth — correctly reflecting that no real additional liability exists beyond the original bank loan.
📈 Numerical 6 — Collateral Security (Both Methods)
Question: XYZ Ltd. took a bank loan of ₹8,00,000 and issued 1,000 debentures of ₹1,000 each as collateral security. Show the Balance Sheet presentation under both methods.
Method 1 (No Entry) — Balance Sheet Extract:
| Liabilities | ₹ |
|---|---|
| Long-term Borrowings: Bank Loan (secured by charge on assets and by debentures of ₹10,00,000 issued as collateral security) | 8,00,000 |
Method 2 (Entry Made) — Journal Entry and Balance Sheet Extract:
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Debenture Suspense A/c Dr. | 10,00,000 | |||
| To 12% Debentures A/c | 10,00,000 | |||
| (1,000 debentures of ₹1,000 each issued as collateral security for bank loan of ₹8,00,000) | ||||
| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| Long-term Borrowings: Bank Loan 12% Debentures (collateral) | 8,00,000 10,00,000 | Other Non-current Assets: Debenture Suspense A/c | 10,00,000 |
7 and 8. Over-Subscription and Under-Subscription of Debentures
Over-Subscription
When applications received exceed the number of debentures offered. Treatment is similar to shares: excess application money is refunded. The company allots debentures to the extent offered and refunds the rest.
Under-Subscription
When applications received are less than the debentures offered. The company proceeds with allotment of only those debentures for which applications were received (unlike shares, where minimum subscription rules are stricter). For debentures, there is no SEBI minimum subscription requirement in the same manner.
📈 Numerical 7 — Over-Subscription
Question: Galaxy Ltd. invited applications for 10,000 debentures of ₹100 each at par. Applications received for 15,000 debentures. Pro-rata allotment was made. Excess application money refunded. Pass journal entries.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 15,00,000 | |||
| To Debenture Application A/c | 15,00,000 | |||
| (Application money received for 15,000 debentures at ₹100 each) | ||||
| Debenture Application A/c Dr. | 15,00,000 | |||
| To 12% Debentures A/c | 10,00,000 | |||
| To Bank A/c (refund for 5,000 excess) | 5,00,000 | |||
| (10,000 debentures allotted; excess application money for 5,000 debentures refunded) | ||||
📈 Numerical 8 — Under-Subscription
Question: Neptune Ltd. offered 8,000 debentures of ₹500 each at par. Applications received for only 6,000 debentures. Allotment made for 6,000. Pass journal entries.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 30,00,000 | |||
| To Debenture Application A/c | 30,00,000 | |||
| (Applications received for 6,000 debentures at ₹500 each) | ||||
| Debenture Application A/c Dr. | 30,00,000 | |||
| To 10% Debentures A/c | 30,00,000 | |||
| (6,000 debentures allotted; company proceeds with partial issue) | ||||
9. Issue of Debentures with Terms of Redemption
The terms of redemption state how and at what price the company will repay the debentures on maturity. This creates an important accounting concept: the Loss on Issue of Debentures.
Four Possible Combinations:
| Issued At | Redeemable At | Loss on Issue per Debenture | Notes |
|---|---|---|---|
| Par (₹100) | Par (₹100) | Nil | Simple case; no loss on issue |
| Premium (₹110) | Par (₹100) | Nil — premium received | Securities Premium created; no loss |
| Par (₹100) | Premium (₹110) | ₹10 (premium on redemption) | Loss on Issue = premium to be paid at redemption |
| Discount (₹95) | Premium (₹110) | ₹15 (discount ₹5 + premium ₹10) | Double loss: discount on issue + premium on redemption |
Loss on Issue of Debentures = Discount on Issue + Premium on Redemption
The Loss on Issue A/c is a fictitious asset. Premium on Redemption of Debentures A/c is a liability (current or non-current depending on maturity).
Journal Entry — Issued at Par, Redeemable at Premium:
| Stage | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| On allotment | Debenture Application A/c Dr. (issue price ₹100) | ✕✕ | ||
| Loss on Issue of Debentures A/c Dr. (₹10 per deb) | ✕✕ | |||
| To X% Debentures A/c (face value ₹100) | ✕✕ | |||
| To Premium on Redemption of Debentures A/c (₹10) | ✕✕ | |||
| (Debentures issued at par but redeemable at ₹110; loss on issue = premium on redemption ₹10 per deb) | ||||
📈 Numerical 9 — Issue at Par, Redeemable at Premium
Question: Orbit Ltd. issued 10,000 debentures of ₹100 each at par, redeemable at ₹105 after 5 years. Pass the allotment entry.
Working: Loss on Issue = Premium on redemption = ₹5 per debenture. Total Loss on Issue = 10,000 x ₹5 = ₹50,000. Total Premium on Redemption = ₹50,000. Total Debentures at face value = 10,000 x ₹100 = ₹10,00,000. Total money received (at par) = ₹10,00,000.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 10,00,000 | |||
| To Debenture Application A/c | 10,00,000 | |||
| (Application money received at par: 10,000 x ₹100) | ||||
| Debenture Application A/c Dr. | 10,00,000 | |||
| Loss on Issue of Debentures A/c Dr. | 50,000 | |||
| To 12% Debentures A/c | 10,00,000 | |||
| To Premium on Redemption of Debentures A/c | 50,000 | |||
| (10,000 debentures at par; redeemable at ₹105; loss on issue = ₹5 per deb = ₹50,000) | ||||
📈 Numerical 10 — Issue at Discount, Redeemable at Premium (Double Loss)
Question: Zenith Ltd. issued 5,000 debentures of ₹100 each at a discount of ₹5 per debenture, redeemable at a premium of ₹10 per debenture after 4 years. Pass the allotment entry.
Working: Issue price = ₹95. Redemption price = ₹110. Loss on Issue per debenture = Discount ₹5 + Premium on Redemption ₹10 = ₹15. Total Loss on Issue = 5,000 x ₹15 = ₹75,000. Total money received = 5,000 x ₹95 = ₹4,75,000. Debentures face value = ₹5,00,000. Premium on Redemption = 5,000 x ₹10 = ₹50,000.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 4,75,000 | |||
| To Debenture Application A/c | 4,75,000 | |||
| (Application at ₹95 per debenture: 5,000 x ₹95) | ||||
| Debenture Application A/c Dr. | 4,75,000 | |||
| Loss on Issue of Debentures A/c Dr. | 75,000 | |||
| To 10% Debentures A/c | 5,00,000 | |||
| To Premium on Redemption of Debentures A/c | 50,000 | |||
| (5,000 debentures at ₹95 discount, redeemable at ₹110; total loss on issue = ₹5 discount + ₹10 redemption premium = ₹15 per deb) | ||||
🎯 Verify: Dr side = 4,75,000 + 75,000 = ₹5,50,000. Cr side = 5,00,000 + 50,000 = ₹5,50,000. ✔ Balanced.
10. Debenture Interest (Including TDS)
Debenture interest is a charge against profit, not an appropriation. This means it must be paid whether or not the company earns profit. It is calculated on the face value of debentures at the rate stated (e.g., 12% per annum).
Interest Calculation:
Debenture Interest = Face Value of Debentures × Rate of Interest / 100
Example: 10,000 debentures of ₹100 each at 12% p.a. = ₹10,00,000 x 12/100 = ₹1,20,000 per year
TDS (Tax Deducted at Source) on Debenture Interest:
When a company pays debenture interest, it is required to deduct Tax Deducted at Source (TDS) at the applicable rate (10% for resident debenture holders) and deposit it with the government. The debenture holder receives the net amount (after TDS deduction).
Journal Entries for Debenture Interest:
| Step | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| Step 1: Interest accrued | Debenture Interest A/c Dr. (gross interest) | ✕✕ | ||
| To Outstanding Debenture Interest A/c (net interest after TDS) | ✕✕ | |||
| To TDS Payable A/c (TDS amount) | ✕✕ | |||
| (Interest accrued; TDS deducted at source) | ||||
| Step 2: Interest paid to holders | Outstanding Debenture Interest A/c Dr. | ✕✕ | ||
| To Bank A/c | ✕✕ | |||
| (Net interest paid to debenture holders after TDS deduction) | ||||
| Step 3: TDS deposited | TDS Payable A/c Dr. | ✕✕ | ||
| To Bank A/c | ✕✕ | |||
| (TDS deposited with the government) | ||||
| Step 4: Transfer to P&L | Statement of Profit & Loss (Finance Costs) Dr. | ✕✕ | ||
| To Debenture Interest A/c | ✕✕ | |||
| (Debenture interest transferred to Statement of Profit and Loss as finance cost) | ||||
📈 Numerical 11 — Debenture Interest with TDS
Question: A company has outstanding 8,000 debentures of ₹500 each at 12% p.a. Interest is due for the year ending 31st March. TDS rate is 10%. Interest was paid on 1st April. Pass all related journal entries.
Working: Total face value = 8,000 x ₹500 = ₹40,00,000. Gross interest = ₹40,00,000 x 12/100 = ₹4,80,000. TDS = ₹4,80,000 x 10/100 = ₹48,000. Net interest payable = ₹4,80,000 − ₹48,000 = ₹4,32,000.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| 31st March | Debenture Interest A/c Dr. | 4,80,000 | ||
| To Outstanding Debenture Interest A/c | 4,32,000 | |||
| To TDS Payable A/c | 48,000 | |||
| (Annual debenture interest accrued at 12%; TDS deducted at 10%) | ||||
| 31st March | Statement of P & L (Finance Costs) Dr. | 4,80,000 | ||
| To Debenture Interest A/c | 4,80,000 | |||
| (Debenture interest transferred to P&L as finance charge) | ||||
| 1st April | Outstanding Debenture Interest A/c Dr. | 4,32,000 | ||
| To Bank A/c | 4,32,000 | |||
| (Net interest paid to debenture holders after deducting TDS) | ||||
| 1st April | TDS Payable A/c Dr. | 48,000 | ||
| To Bank A/c | 48,000 | |||
| (TDS deposited with the Income Tax Department) | ||||
11. Writing off Discount/Loss on Issue of Debentures
The Discount on Issue or Loss on Issue of Debentures is a fictitious asset that must be gradually written off. It is not written off in one year because the benefit (the loan amount received) lasts over the entire life of the debentures. Writing it off annually spreads the cost over the period of borrowing.
Methods of Writing Off:
| Method | Entry | When Used |
|---|---|---|
| Method 1: Against Statement of Profit and Loss | Statement of P&L Dr. → To Discount/Loss on Issue A/c (Equal annual amount = Total Loss ÷ Life of Debentures) | Most common; reduces profit each year |
| Method 2: Against Securities Premium Reserve | Securities Premium Reserve A/c Dr. → To Discount/Loss on Issue A/c | When the company has a Securities Premium Reserve balance available; preserves the P&L |
📈 Numerical 12 — Writing off Loss on Issue
Question: Titan Ltd. issued 2,000 debentures of ₹500 each at a discount of 10% on 1st April 20X1, redeemable at par after 5 years. Show the Loss on Issue written off each year, and pass the entry for Year 1 (through P&L) and also show the alternate Securities Premium Reserve method.
Working: Face value = 2,000 x ₹500 = ₹10,00,000. Discount = 10% of ₹10,00,000 = ₹1,00,000. Life = 5 years. Annual write-off = ₹1,00,000 ÷ 5 = ₹20,000 per year.
| Date | Particulars | L.F. | Dr. (₹) | Cr. (₹) |
|---|---|---|---|---|
| 31 March 20X2 (Method 1) | Statement of P & L Dr. | 20,000 | ||
| To Discount on Issue of Debentures A/c | 20,000 | |||
| (1/5th of discount on issue written off in Year 1 against P&L) | ||||
| 31 March 20X2 (Method 2) | Securities Premium Reserve A/c Dr. | 20,000 | ||
| To Discount on Issue of Debentures A/c | 20,000 | |||
| (Alternatively, discount written off against Securities Premium Reserve balance) | ||||
💡 Balance Sheet Impact: After Year 1, the Loss on Issue A/c balance reduces from ₹1,00,000 to ₹80,000. After 5 years, it becomes zero — fully written off. The debentures are then redeemed at par by paying ₹10,00,000 to holders.
⚡ Quick Recall — Issue of Debentures Key Points
A debenture is a loan document; the holder is a creditor, not a member. No voting rights.
Debenture interest is a CHARGE against profits, paid whether or not the company earns profit.
Debentures CAN be issued at discount (unlike shares which cannot, except ESOP).
Issue at premium: excess credited to Securities Premium Reserve A/c.
Issue at discount: discount debited to Discount on Issue of Debentures A/c (fictitious asset).
Collateral security Method 1: No entry; note in Balance Sheet. Method 2: Debenture Suspense A/c Dr. To Debentures A/c.
Debenture Suspense A/c appears on Asset side; Debentures (collateral) appear on Liability side.
Loss on Issue = Discount on Issue + Premium on Redemption.
Premium on Redemption of Debentures = Liability. Loss on Issue of Debentures = Fictitious Asset.
TDS on debenture interest at 10%. Gross interest debited to Debenture Interest A/c; TDS goes to TDS Payable A/c; net goes to Outstanding Interest A/c.
Loss on Issue written off: either against P&L (most common) or against Securities Premium Reserve, in equal annual amounts.
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40 MCQs — Issue of Debentures
Q 1–20: Concepts and theory. Q 21–40: Numerical and application. Correct answer with explanation shown below each question.
📚 Section B1 — Concepts and Theory (Q 1–20)
1
A debenture is best described as:
AA share issued at premium
BA written acknowledgement of debt by a company
CA document showing ownership in the company
DA type of equity share with fixed return
Answer: B. A debenture is a written acknowledgement of debt. The holder is a creditor of the company, not an owner. The Latin origin debentur means "there are owed."
2
Debenture interest is classified as a:
AAppropriation of profit
BCharge against profit
CCapital expenditure
DDeferred revenue expenditure
Answer: B. Debenture interest is a charge against profits — it must be paid even if the company incurs a loss. Contrast: dividend is an appropriation, paid only from profits.
3
Which of the following is a key difference between a share and a debenture?
AShares carry fixed return; debentures carry variable return
BDebenture holders have voting rights; shareholders do not
CDebentures can be issued at a discount; shares generally cannot
DShares represent a loan; debentures represent ownership
Answer: C. This is the most-tested difference. Debentures CAN be issued at a discount (below face value). Shares CANNOT be issued at a discount under the Companies Act 2013 (except under ESOP).
4
Secured debentures are backed by:
AA charge on the assets of the company
BA personal guarantee from shareholders
CThe government guarantee
DThe paid-up share capital
Answer: A. Secured debentures carry a fixed or floating charge on the company's assets. If interest or principal is defaulted, debenture holders can enforce this charge and recover their money.
5
When debentures are issued at a premium, the premium is credited to:
ADebentures Account
BCapital Reserve Account
CSecurities Premium Reserve Account
DGeneral Reserve Account
Answer: C. Both shares and debentures issued at a premium have the premium credited to Securities Premium Reserve Account (Section 52 of the Companies Act 2013).
6
When debentures are issued at a discount, the discount is debited to:
ADiscount on Issue of Debentures Account (a fictitious asset)
BDebentures Account
CSecurities Premium Reserve Account
DStatement of Profit and Loss directly
Answer: A. Discount on Issue is debited to Discount on Issue of Debentures A/c, which is a fictitious asset. It is NOT written off in one year but is gradually written off over the life of the debentures.
7
The most common method of accounting for debentures issued as collateral security is:
ANo journal entry; just a note in the Balance Sheet below the bank loan
BDebit Debenture Suspense A/c and credit Debentures A/c
CDebit Bank A/c and credit Debentures A/c
DDebit Bank Loan A/c and credit Debentures A/c
Answer: A. Method 1 (most common): No entry is made. The debentures pledged are simply mentioned as a note in the Balance Sheet below the bank loan. No actual new liability is created.
8
In Method 2 for collateral security, the Debenture Suspense Account appears in the Balance Sheet:
AOn the liabilities side, reducing the debenture liability
BOn the assets side, under Other Non-current Assets
CAs a deduction from Share Capital
DIt does not appear in the Balance Sheet
Answer: B. When the entry is made (Method 2), Debentures appear on the liability side and Debenture Suspense A/c appears on the asset side. Both cancel each other, showing no net effect.
9
Loss on Issue of Debentures is calculated as:
AFace value minus issue price only
BPremium on redemption only
CDiscount on issue + Premium on redemption
DIssue price minus redemption price
Answer: C. Loss on Issue = Discount on Issue + Premium on Redemption. This is the total cost of borrowing that the company must account for. If there is only a discount (no redemption premium), Loss = discount only.
10
Premium on Redemption of Debentures Account is:
AA fictitious asset
BA capital reserve
CA liability of the company
DAn income of the company
Answer: C. Premium on Redemption is a commitment to pay extra at maturity. It is a liability, shown under Non-current Liabilities (if more than one year away) or Current Liabilities (if within one year).
11
Discount on Issue of Debentures Account is classified as:
AA liability
BA tangible asset
CA fictitious asset (written off over the life of debentures)
DA capital reserve
Answer: C. Discount on Issue is a fictitious asset — it has no realisable value. It appears on the asset side of the Balance Sheet and is written off gradually each year until zero.
12
Debenture interest is always calculated on the:
AIssue price of the debentures
BMarket price of the debentures
CFace value (nominal value) of the debentures
DNet proceeds after discount
Answer: C. Debenture interest is always calculated on the face value of the debentures, regardless of whether they were issued at par, premium, or discount. The rate stated on the certificate applies to the face value.
13
TDS on debenture interest is deducted at:
A5%
B10%
C15%
D20%
Answer: B — 10%. TDS on debenture interest for resident holders is deducted at 10% as per the Income Tax Act. The company deducts this before paying the net interest to debenture holders.
14
When discount on issue of debentures is written off, the entry is:
ADiscount A/c Dr.; To Debentures A/c
BStatement of P&L Dr.; To Discount on Issue of Debentures A/c
CDebentures A/c Dr.; To Discount A/c
DBank A/c Dr.; To Discount A/c
Answer: B. The write-off entry debit goes to Statement of P&L (as an expense) or to Securities Premium Reserve, and the credit goes to Discount on Issue of Debentures A/c, reducing its balance.
15
Which of these is NOT an advantage of debentures over shares (from the company perspective)?
AInterest is tax-deductible (charge on profit)
BNo dilution of ownership or voting rights
CNo obligation to repay the principal
DCan be issued at discount to attract investors
Answer: C. Debentures MUST be repaid (redeemed) on maturity. This is actually a disadvantage. Shares need not be repaid during the life of the company. So C is false, making it the correct answer to the question.
16
Convertible debentures are those that:
ACan be converted into cash at any time
BCan be converted into equity shares after a specified period
CCan be converted into preference shares
DAre automatically converted when the market price falls below face value
Answer: B. Convertible debentures give the holder the option (or obligation) to convert the debentures into equity shares at a pre-decided price and time. Fully Convertible Debentures (FCDs) convert the entire amount; Partly Convertible (PCDs) convert only part.
17
When debentures are issued for consideration other than cash (to a vendor for assets), which account is debited?
ABank Account
BDebenture Application Account
CThe specific Asset Account at the agreed value
DVendor Account
Answer: C. The asset received (machinery, land, goodwill) is debited at the agreed value. No Bank A/c entry is made since no cash changes hands.
18
When debentures are over-subscribed, the company:
AIssues more debentures than offered
BAllots only the offered quantity and refunds excess application money
CCancels the issue entirely
DAdjusts excess money against future calls
Answer: B. The company can only allot the number of debentures it originally offered. Excess application money is refunded to unsuccessful applicants.
19
Which of the following correctly describes an irredeemable debenture?
ADebenture that must be repaid within 1 year
BDebenture that pays variable interest
CDebenture with no fixed maturity date; principal not repaid during the life of the company
DDebenture that cannot be transferred
Answer: C. Irredeemable (perpetual) debentures have no maturity date. The company pays interest indefinitely. These are rarely issued today and were more common in older times.
20
[Assertion–Reason] Assertion (A): Debenture interest is debited to Statement of Profit and Loss. Reason (R): Debenture interest is a charge against profits, not an appropriation.
ABoth A and R are true, and R explains A
BBoth A and R are true, but R does not explain A
CA is true; R is false
DBoth A and R are false
Answer: A. Debenture interest is a financial charge that must be paid before calculating profit. Because it is a charge (not appropriation), it correctly appears on the debit side of P&L — R explains A.
Section B2 — Numericals & Application (Q 21–40)
21
A company issues 3,000 debentures of ₹200 each at par. Total proceeds received are:
A₹3,000
B₹6,00,000
C₹2,00,000
D₹60,000
Answer: B. Proceeds = 3,000 x ₹200 = ₹6,00,000. At par: issue price = face value, so the full ₹6,00,000 is credited to Debentures A/c.
22
2,000 debentures of ₹500 each issued at ₹550. The Securities Premium Reserve created is:
A₹11,00,000
B₹1,00,000
C₹10,00,000
D₹50,000
Answer: B. Premium per debenture = ₹550 − ₹500 = ₹50. Total Securities Premium = 2,000 x ₹50 = ₹1,00,000.
23
4,000 debentures of ₹100 each issued at 10% discount. Total cash received is:
A₹4,40,000
B₹3,60,000
C₹4,00,000
D₹40,000
Answer: B. Issue price = ₹100 − ₹10 (10% of ₹100) = ₹90. Cash received = 4,000 x ₹90 = ₹3,60,000. Discount on Issue = 4,000 x ₹10 = ₹40,000.
24
From Q23, the Discount on Issue of Debentures A/c is debited with:
A₹40,000
B₹3,60,000
C₹4,00,000
D₹4,40,000
Answer: A — ₹40,000. Discount = 4,000 x ₹10 = ₹40,000. This is the fictitious asset debited at allotment. The Debentures A/c is still credited at full face value ₹4,00,000.
25
A company buys machinery worth ₹2,20,000 and issues 2,000 debentures of ₹100 each at ₹10 premium. The Machinery A/c is debited with:
A₹2,00,000
B₹20,000
C₹2,20,000
D₹1,00,000
Answer: C. The asset is always debited at its agreed value = ₹2,20,000. Debentures A/c is credited at face value ₹2,00,000 and Securities Premium Reserve at ₹20,000.
26
Goodwill worth ₹4,75,000 is settled by issuing 5,000 debentures of ₹100 each at 5% discount. The Discount on Issue of Debentures A/c is debited with:
A₹4,75,000
B₹25,000
C₹5,00,000
DNil — no discount for non-cash issue
Answer: B. Discount = 5,000 x ₹5 (5% of ₹100) = ₹25,000. Entry: Goodwill Dr. 4,75,000; Discount on Issue Dr. 25,000; To 12% Debentures 5,00,000.
27
A company issues 500 debentures of ₹1,000 each as collateral security for a bank loan of ₹4,00,000 (Method 2). The Debentures Account is credited with:
A₹4,00,000
B₹5,00,000
C₹1,00,000
DNil — no entry in Method 2
Answer: B. Method 2 entry: Debenture Suspense A/c Dr. ₹5,00,000; To X% Debentures A/c ₹5,00,000. The full face value (500 x ₹1,000 = ₹5,00,000) is credited, not the loan amount.
28
Applications received for 20,000 debentures of ₹100 at par but only 15,000 offered. Amount refunded to excess applicants:
A₹5,00,000
B₹15,00,000
C₹20,00,000
DNil — all applicants receive debentures
Answer: A. Excess applications = 20,000 − 15,000 = 5,000. Refund = 5,000 x ₹100 = ₹5,00,000.
29
10,000 debentures of ₹100 each issued at par, redeemable at ₹108 after 4 years. Loss on Issue per debenture is:
ANil
B₹100
C₹8
D₹108
Answer: C — ₹8. Issued at par (₹100); redeemable at ₹108. No discount on issue. Loss = premium on redemption only = ₹8 per debenture.
30
From Q29, the total Loss on Issue of Debentures Account debited at allotment is:
A₹10,00,000
B₹10,80,000
C₹80,000
DNil
Answer: C. Total Loss on Issue = 10,000 x ₹8 = ₹80,000. Also, Premium on Redemption of Debentures A/c is credited ₹80,000 (liability created).
31
5,000 debentures of ₹100 each issued at ₹95, redeemable at ₹106. Loss on Issue per debenture is:
A₹5
B₹6
C₹11
D₹1
Answer: C — ₹11. Loss = Discount (₹100 − ₹95 = ₹5) + Premium on Redemption (₹106 − ₹100 = ₹6) = ₹5 + ₹6 = ₹11 per debenture.
32
From Q31, the total Loss on Issue of Debentures Account for 5,000 debentures is:
A₹25,000
B₹30,000
C₹55,000
D₹5,00,000
Answer: C. Total Loss = 5,000 x ₹11 = ₹55,000. This is the total debit to Loss on Issue A/c. Premium on Redemption A/c is credited ₹30,000 (5,000 x ₹6). Cash received = 5,000 x ₹95 = ₹4,75,000.
33
Annual debenture interest on ₹20,00,000 of 10% debentures is:
A₹10,000
B₹2,00,000
C₹20,00,000
D₹20,000
Answer: B. Interest = ₹20,00,000 x 10/100 = ₹2,00,000. Always calculated on face value of debentures, not on issue price.
34
From Q33, TDS deducted at 10% on the gross interest is:
A₹20,000
B₹2,00,000
C₹18,000
D₹1,80,000
Answer: A. TDS = ₹2,00,000 x 10/100 = ₹20,000. Net interest paid to holders = ₹2,00,000 − ₹20,000 = ₹1,80,000.
35
Loss on Issue of Debentures of ₹60,000 is to be written off over 5 years equally. Annual write-off amount is:
A₹60,000
B₹12,000
C₹6,000
D₹30,000
Answer: B. Annual write-off = ₹60,000 ÷ 5 = ₹12,000 per year. After 5 years, the balance in Loss on Issue A/c becomes zero.
36
After writing off ₹12,000 for 3 years from a Loss on Issue balance of ₹60,000, the remaining balance in the Loss on Issue A/c is:
A₹36,000
B₹48,000
C₹24,000
DZero
Answer: C. Written off in 3 years = 3 x ₹12,000 = ₹36,000. Remaining = ₹60,000 − ₹36,000 = ₹24,000 (still a fictitious asset in the Balance Sheet).
37
[CUET Level] A company issued 10,000 debentures of ₹100 at 5% discount, redeemable at 10% premium after 5 years. Annual write-off of Loss on Issue is:
A₹10,000
B₹20,000
C₹30,000
D₹15,000
Answer: C. Loss = Discount ₹5 + Redemption premium ₹10 = ₹15 per deb. Total loss = 10,000 x ₹15 = ₹1,50,000. Annual write-off = ₹1,50,000 ÷ 5 = ₹30,000.
38
[CUET Level] From Q37, the Premium on Redemption of Debentures A/c (liability) created at allotment is:
A₹50,000
B₹1,50,000
C₹1,00,000
DNil
Answer: C. Premium on Redemption = 10,000 x ₹10 = ₹1,00,000 (this is the extra amount paid at redemption). It is a liability created at the time of issue. Discount on Issue = ₹50,000 (separate).
39
[CUET Level] Company has 6% debentures of total face value ₹50,00,000. Annual gross interest and net interest paid (after 10% TDS) respectively are:
A₹3,00,000 and ₹3,30,000
B₹3,00,000 and ₹2,70,000
C₹30,000 and ₹27,000
D₹5,00,000 and ₹4,50,000
Answer: B. Gross interest = ₹50,00,000 x 6/100 = ₹3,00,000. TDS = ₹3,00,000 x 10/100 = ₹30,000. Net paid = ₹3,00,000 − ₹30,000 = ₹2,70,000.
40
[Assertion–Reason] Assertion (A): When debentures are issued at par and redeemable at premium, a Loss on Issue of Debentures is recorded at the time of issue itself. Reason (R): The premium to be paid at redemption is a future obligation that must be recognized (and matched) when the debentures are issued.
ABoth A and R are true, and R explains A
BBoth A and R are true, but R does not explain A
CA is true; R is false
DBoth A and R are false
Answer: A. The loss is recognized upfront because the cost of redemption at premium is a known obligation from day one. Creating the Loss on Issue A/c and Premium on Redemption A/c at issue satisfies the matching and prudence concepts of accounting.
Chapter 8 — Live Quiz
40 questions · Issue of Debentures — Concepts & Numericals · One at a time · Instant feedback
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