Issue and Redemption of Debentures Class 12: Notes and Journal Entries

What Issue and Redemption of Debentures is about

Weightage: This chapter is part of Part A: Accounting for Companies, which carries 24 of the 80 theory marks together with Accounting for Share Capital.Source: CBSE Accountancy (055) syllabus 2026-27, Part A: Accounting for Companies

In real board papers: asked in 2 of the 2 board papers we hold (2026 to 2026), on average 10.5 marks per paper. See the questions

Key concepts

Debentures and how they differ from shares

NCERT section 2.1, 2.2

A debenture is an instrument acknowledging a loan to the company, usually under its common seal or authorised signature, carrying a fixed rate of interest and repayable on agreed terms.

Basis	Shares	Debentures
Status of holder	Owner	Creditor
Return	Dividend, only from profit, at a varying rate	Interest at a fixed rate, payable even in a loss year
Repayment	Not repaid during the company's life (except buy-back or redeemable preference shares)	Redeemed after the agreed period
Voting rights	Equity shareholders vote	No voting rights
Security	Unsecured	Usually secured by a charge on assets
Issue at discount	Not allowed (except sweat equity)	Allowed

Worked example

Suppose a company makes a loss this year. Can it skip (a) dividend on equity shares, (b) interest on its 9% debentures? [1 mark]

Try it first, then show the solutionSolution

1. Dividend is a share of profit; with a loss it can be skipped.
2. Debenture interest is a charge on the loan and must be paid.

Answer: (a) Yes; (b) No.

Types of debentures

NCERT section 2.3

• Security: secured (charge on assets) or unsecured.
• Tenure: redeemable (repaid after a fixed period) or irredeemable (repaid only on winding up or a long-term contingency).
• Convertibility: convertible (fully or partly into shares) or non-convertible.
• Coupon rate: specific coupon rate (fixed or floating interest) or zero coupon (no interest; issued at a deep discount and redeemed at face value, the difference being the return).
• Registration: registered (name in the company's register; transfer needs a transfer deed) or bearer (transferable by delivery).

Worked example

Suppose a company issues debentures of face value ₹1,000 at ₹800 with no interest, repayable at ₹1,000 after three years. What type are they and what return does the investor earn? [1 mark]

Try it first, then show the solutionSolution

1. No coupon interest; issued at a discount; redeemed at face value.
2. Return = 1,000 − 800 = ₹200 over three years.

Answer: Zero coupon rate debentures; the investor's return is the ₹200 discount.

Issue for cash at par, premium or discount

NCERT section 2.4, 2.5

Instalment entries mirror shares: Bank Dr, To Debenture Application A/c; Debenture Application A/c Dr, To x% Debentures A/c; and so on for allotment and calls (or a single Debenture Application and Allotment A/c if the whole amount is paid together).

• Premium on issue is credited to Securities Premium A/c, usually with allotment.
• Discount on issue is debited to Discount on Issue of Debentures A/c (a capital loss), usually at allotment.
• Over-subscription: excess application money is refunded or adjusted against allotment, as for shares.

The x% Debentures account is always credited at face value.

Worked example

Suppose a company issues 5,000 10% debentures of ₹100 each at a 6% discount, the whole amount payable with application. Pass the entries. [2 marks]

Try it first, then show the solutionSolution

1. Particulars	Dr (₹)	Cr (₹)
   Bank A/c ... Dr	4,70,000
   To Debenture Application and Allotment A/c		4,70,000
   (Application money received @ ₹94)
   Debenture Application and Allotment A/c ... Dr	4,70,000
   Discount on Issue of Debentures A/c ... Dr	30,000
   To 10% Debentures A/c		5,00,000
   (Debentures allotted at 6% discount)

Answer: Debentures credited ₹5,00,000; discount ₹30,000.

Issue with terms of redemption

NCERT section 2.8

The terms state both the issue price and the redemption price. If redemption is at a premium, the company records the future liability now: credit Premium on Redemption of Debentures A/c (shown under other long-term liabilities) and debit Loss on Issue of Debentures A/c, which also absorbs any discount on issue.

Rule for the entry at allotment: Bank (or Allotment) Dr with cash due + Loss on Issue Dr (discount + premium on redemption) = x% Debentures Cr at face value + Securities Premium Cr (if issued at a premium) + Premium on Redemption Cr.

The six standard cases for a ₹100 debenture are tabulated below.

Terms of issue: entry per ₹100 debenture (x% Debentures always credited at face value ₹100)

Case	Bank Dr	Loss on Issue Dr	Securities Premium Cr	Premium on Redemption Cr
Issued at par, redeemable at par	100
Issued at 10% discount, redeemable at par	90	10
Issued at 5% premium, redeemable at par	105		5
Issued at par, redeemable at 10% premium	100	10		10
Issued at 5% discount, redeemable at 10% premium	95	15		10
Issued at 5% premium, redeemable at 10% premium	105	10	5	10

Worked example

Suppose 1,000 8% debentures of ₹100 each are issued at a premium of 5% and are redeemable at a premium of 10%. Pass the issue entry (whole amount with application). [2 marks]

Try it first, then show the solutionSolution

1. Particulars	Dr (₹)	Cr (₹)
   Bank A/c ... Dr	1,05,000
   Loss on Issue of Debentures A/c ... Dr	10,000
   To 8% Debentures A/c		1,00,000
   To Securities Premium A/c		5,000
   To Premium on Redemption of Debentures A/c		10,000
   (Debentures issued at 5% premium, redeemable at 10% premium)

Answer: Loss on issue ₹10,000 (the premium on redemption); securities premium ₹5,000.

Issue to vendors and as collateral security

NCERT section 2.6, 2.7

Vendor: Assets A/c Dr, To Vendor A/c; then Vendor A/c Dr, To x% Debentures A/c (and Securities Premium, or with Discount debited). Number of debentures = amount payable ÷ issue price.

Collateral security: debentures given to a lender as additional security for a loan. Two methods:

• First method: no entry; the loan in the balance sheet carries a note that it is secured by the issue of debentures as collateral.
• Second method: Debentures Suspense A/c Dr, To x% Debentures A/c. In the balance sheet, the debentures are shown under long-term borrowings with the suspense account deducted, so there is no double counting. On repayment of the loan, the entry is reversed.

No interest is paid on debentures issued as collateral; interest is paid only on the loan.

Worked example

Suppose a company takes a bank loan of ₹5,00,000 and issues 6,000 10% debentures of ₹100 each as collateral security. Pass the entry under the second method and explain how the loan is shown. [3 marks]

Try it first, then show the solutionSolution

1. Particulars	Dr (₹)	Cr (₹)
   Debentures Suspense A/c ... Dr	6,00,000
   To 10% Debentures A/c		6,00,000
   (6,000 debentures of ₹100 issued as collateral security for a bank loan of ₹5,00,000)

2. Long-term borrowings: Bank loan ₹5,00,000 (secured by issue of 6,000 10% debentures as collateral); 10% Debentures ₹6,00,000 less Debentures Suspense ₹6,00,000 = nil.

Answer: Debentures Suspense A/c Dr ₹6,00,000 To 10% Debentures A/c ₹6,00,000; net effect on borrowings is only the ₹5,00,000 loan.

Interest on debentures

NCERT section 2.9, 2.9.1

Interest is calculated on the face (nominal) value at the coupon rate, for the period the debentures were outstanding, regardless of the issue price. It is a charge against profit (finance cost) and must be paid even in a loss year.

Entries (TDS is outside the 2026-27 syllabus): Debenture Interest A/c Dr, To Debentureholders A/c (interest due); Debentureholders A/c Dr, To Bank A/c (payment); Statement of Profit and Loss Dr, To Debenture Interest A/c (transfer at year-end).

Worked example

Suppose 20,000 9% debentures of ₹100 each were issued at ₹95 on 1st October 2025. Calculate interest for the year ended 31st March 2026. [1 mark]

Try it first, then show the solutionSolution

1. Interest is on face value: 20,00,000 × 9% × 6/12.

Answer: ₹90,000 (not on ₹19,00,000).

Writing off discount or loss on issue

NCERT section 2.10

Discount or loss on issue of debentures is a capital loss. As per the syllabus note (AS 16), it is written off in the year the debentures are allotted: first from Securities Premium (if a balance exists), and the rest from the Statement of Profit and Loss as a finance cost.

Entry: Securities Premium A/c Dr (to the extent available), Statement of Profit and Loss Dr (balance), To Discount/Loss on Issue of Debentures A/c.

Worked example

Suppose a company has ₹50,000 in Securities Premium and a loss on issue of debentures of ₹3,00,000. Pass the write-off entry. [1 mark]

Try it first, then show the solutionSolution

1. Particulars	Dr (₹)	Cr (₹)
   Securities Premium A/c ... Dr	50,000
   Statement of Profit and Loss ... Dr	2,50,000
   To Loss on Issue of Debentures A/c		3,00,000
   (Loss on issue written off in the year of allotment)

Answer: Securities Premium ₹50,000 and Statement of Profit and Loss ₹2,50,000.

Meaning of redemption

NCERT section 2.11

Redemption of debentures means repaying (discharging) the liability on debentures, at par or at a premium, as per the terms of issue. Methods include payment in a lump sum at maturity, payment in instalments, purchase in the open market, and conversion into shares or new debentures.

For 2026-27 you need the meaning of redemption and how terms of redemption affect the issue entry (premium on redemption recorded at issue). The accounting entries for the actual redemption are not assessed.

Worked example

Suppose debentures issued at par are to be repaid at ₹110 each after five years. When is the ₹10 premium first recorded? [1 mark]

Try it first, then show the solutionSolution

1. It is a liability the company accepts at the time of issue.
2. So it is recorded at issue: Loss on Issue Dr, Premium on Redemption Cr.

Answer: At the time of issue, not at redemption.

Issue and Redemption of Debentures in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Issue of Debentures with Terms of Redemption
• Writing off Discount or Loss on Issue of Debentures
• Debentures Issued for Consideration Other than Cash

Issue and Redemption of Debentures: key facts

Loss on issue of debentures

Discount on issue + premium payable on redemption

Allotment entry check

Cash due + loss on issue = face value + securities premium + premium on redemption

Interest on debentures

Face value × coupon rate × months outstanding/12

Never on the issue price.

Debentures to a vendor

Number = amount payable ÷ issue price

Write-off order

Securities Premium first, then Statement of Profit and Loss (finance cost), in the year of allotment

Zero coupon return

Redemption value − issue price

How the board asks Issue and Redemption of Debentures

The question patterns to expect, and the method that works for each.

Tricks to remember Issue and Redemption of Debentures

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Face value, always

  Debentures account and interest both use face value.

  Use it when: Every entry and interest calculation.

• Loss = discount + redemption premium

  Anything the company pays beyond what it receives, now or later, is loss on issue.

  Use it when: Terms of issue.

• SP first, P&L next, this year

  Write off loss from Securities Premium, then Profit and Loss, in the year of allotment.

  Use it when: Write-off entries.

• Collateral: no interest, no new debt

  Suspense in, suspense out; interest only on the real loan.

  Use it when: Collateral questions.

Issue and Redemption of Debentures: board-level solved questions

Ordered from board level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section E style)

Read the situation, then answer every part. In the board paper this is a 4-mark question split into 1 + 1 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Issue and Redemption of Debentures

The slips examiners see most often, and what to write instead.

• ✗Mistake: Calculating interest on the issue price

  Using cash received.

  Wrong working

  19,00,000 × 9%

  Right working

  20,00,000 × 9%

  ✓Do this: Interest is always on face value.

  Usually costs: 1 mark.

• ✗Mistake: Crediting debentures at the issue price

  Matching cash.

  ✓Do this: x% Debentures A/c is always credited at face value; the difference goes to premium or discount/loss accounts.

  Usually costs: 1-2 marks.

• ✗Mistake: Forgetting premium on redemption at the time of issue

  Thinking it belongs to redemption.

  ✓Do this: Record it at issue: Loss on Issue Dr, Premium on Redemption Cr.

  Usually costs: 1-2 marks.

• ✗Mistake: Writing off loss over several years

  Older practice.

  ✓Do this: Write it off in the year of allotment, Securities Premium first.

  Usually costs: 1 mark.

• ✗Mistake: Paying interest on collateral debentures

  Treating them as an ordinary issue.

  ✓Do this: No interest on collateral debentures; only on the loan.

  Usually costs: 1 mark.

• ✗Mistake: Passing redemption entries in a question on issue

  Going beyond the syllabus.

  ✓Do this: For 2026-27, record only the issue (with terms of redemption); actual redemption entries are not assessed.

  Usually costs: Time lost.

NCERT exercise guide: Issue and Redemption of Debentures

What each exercise in the NCERT chapter tests, how to approach it, and a question of the same kind solved step by step. Questions here are written in our own words.

Issue and Redemption of Debentures: previous year questions

• Asked in 2 of the 2 board papers we hold (2026 to 2026), on average 10.5 marks per paper; 12 questions in all, counting OR alternatives. In 4 of 4 sample papers.

Counted from the real papers on our previous year papers page, not estimated. Average marks are over every board paper we hold, with an OR pair counted once. Chapter tags are ours.

Solved board questions from Issue and Redemption of Debentures

Real questions from recent papers. Try each one first, then open our step-by-step solution with marks per step.

Every Issue and Redemption of Debentures question, by year

Practice questions on Issue and Redemption of Debentures

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQBoard level

   Debentureholders are:
   (a) owners of the company
   (b) creditors of the company
   (c) employees of the company
   (d) promoters

   Hint

   A loan.

   Answer

   (b) creditors

2. Q2 · 1 mark · MCQBoard level

   Premium on redemption of debentures is shown in the balance sheet under:
   (a) Reserves and Surplus
   (b) Other Long-term Liabilities
   (c) Short-term Provisions
   (d) Share Capital

   Hint

   Payable in future.

   Answer

   (b) Other Long-term Liabilities

3. Q3 · 3 marks · Short answerBoard level

   Distinguish between shares and debentures on any three bases.

   Hint

   Status, return, voting.

   Answer

   Status: owner vs creditor. Return: dividend from profit vs fixed interest even in loss. Voting: equity shareholders vote vs no voting rights (also repayment and security).

4. Q4 · 3 marks · Short answerBoard level

   Explain the two methods of recording debentures issued as collateral security.

   Hint

   No entry vs suspense.

   Answer

   First: no entry; a note below the loan says it is secured by debentures as collateral. Second: Debentures Suspense A/c Dr To Debentures A/c; in the balance sheet the suspense account is deducted from debentures.

5. Q5 · 3 marks · Short answerHarder board level

   Suppose 2,000 debentures of ₹100 each are issued at ₹110 (₹30 on application, the rest on allotment) and redeemable at par. Pass the entries.

   Hint

   Premium with allotment.

   Answer

   Particulars	Dr (₹)	Cr (₹)
   Bank A/c ... Dr	60,000
   To Debenture Application A/c		60,000
   (Application money)
   Debenture Application A/c ... Dr	60,000
   To Debentures A/c		60,000
   (Transferred)
   Debenture Allotment A/c ... Dr	1,60,000
   To Debentures A/c		1,40,000
   To Securities Premium A/c		20,000
   (Allotment due)
   Bank A/c ... Dr	1,60,000
   To Debenture Allotment A/c		1,60,000
   (Allotment received)

6. Q6 · 3 marks · Short answerHarder board level

   Suppose 15,000 10% debentures of ₹100 each were issued at a 10% discount on 1st July 2025. The company has ₹1,00,000 in Securities Premium. Pass the entry to write off the discount for the year ended 31st March 2026, and calculate interest for that year.

   Hint

   Interest for nine months on face value.

   Answer

   Discount ₹1,50,000: Securities Premium A/c Dr 1,00,000 and Statement of Profit and Loss Dr 50,000 To Discount on Issue of Debentures A/c 1,50,000. Interest = 15,00,000 × 10% × 9/12 = ₹1,12,500.

7. Q7 · 3 marks · Short answerHarder board level

   Suppose a company invited applications for 10,000 debentures of ₹100 at par, whole amount on application, and received applications for 12,000. Excess money was refunded. Pass the entries.

   Hint

   Refund 2,000 × ₹100.

   Answer

   Bank A/c Dr 12,00,000 To Debenture Application and Allotment A/c 12,00,000. Debenture Application and Allotment A/c Dr 12,00,000 To Debentures A/c 10,00,000 and To Bank A/c 2,00,000.

8. Q8 · 1 mark · Assertion-reasonHOTS / competency

   Assertion (A): A company may issue debentures at a discount.
   Reason (R): The Companies Act 2013 prohibits issue of debentures at a discount.
   (a) Both true and R explains A (b) Both true, R does not explain A (c) A true, R false (d) A false, R true

   Hint

   The prohibition is for shares.

   Answer

   (c) A is true; R is false (the bar on discount applies to shares, not debentures).

9. Q9 · 4 marks · Short answerHOTS / competency

   Suppose a company issues 10,000 zero coupon debentures of ₹1,000 each at ₹750, redeemable at par after four years. Pass the issue entry and state the total return to investors.

   Hint

   The discount is the investors' return.

   Answer

   Bank A/c Dr 75,00,000 and Discount on Issue of Debentures A/c Dr 25,00,000 To Zero Coupon Debentures A/c 1,00,00,000. Investors earn ₹25,00,000 in total (₹250 per debenture) instead of interest.

10. Q10 · 1 mark · MCQHarder board level

    Debentures of ₹1,00,000 are issued at a premium of 5% and are redeemable at a premium of 10%. The amount credited to Premium on Redemption of Debentures A/c is:
    (a) ₹5,000
    (b) ₹10,000
    (c) ₹15,000
    (d) nil

    Hint

    Redemption premium only.

    Answer

    (b) ₹10,000

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.What is a zero coupon debenture?Show answer

   A debenture with no interest, issued at a discount and redeemed at face value.

2. 2.Which account records the premium payable on redemption?Show answer

   Premium on Redemption of Debentures A/c (a liability).

3. 3.On what is interest on debentures calculated?Show answer

   Face value at the coupon rate for the period.

4. 4.How is loss on issue of debentures written off?Show answer

   In the year of allotment, from Securities Premium first and then from the Statement of Profit and Loss as a finance cost.

5. 5.What entry is passed under the second method for collateral debentures?Show answer

   Debentures Suspense A/c Dr, To Debentures A/c.

6. 6.Is TDS on debenture interest in the 2026-27 syllabus?Show answer

   No.

7. 7.Can debentures be issued at a discount?Show answer

   Yes, unlike shares.

8. 8.What does redemption of debentures mean?Show answer

   Repaying the debenture liability as per the terms of issue.

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Can you state five differences between shares and debentures?
• ☐Can you explain zero coupon and convertible debentures?
• ☐Can you pass instalment entries for debentures issued at a premium?
• ☐Can you record a discount on issue?
• ☐Can you build the entry for any of the six terms of issue?
• ☐Can you issue debentures to a vendor at a premium or discount?
• ☐Can you record collateral debentures by both methods?
• ☐Can you calculate interest on face value for part of a year?
• ☐Can you write off loss on issue from Securities Premium and Profit and Loss?
• ☐Can you define redemption?

Issue and Redemption of Debentures: frequently asked questions