AccountancyCBSE Class 12 · Issue and Redemption of Debentures

Issue of Debentures with Terms of Redemption: Six Cases and Entries (Class 12)

Updated 15 October 2026 · Fact-checked

Debentures may be issued at par, at a discount or at a premium, and redeemed at par or at a premium. If redeemable at a premium, the company records that premium as a liability at issue and debits Loss on Issue of Debentures with that premium plus any discount allowed. Interest is paid on face value.

Notice that the redemption premium of ₹10 plus the ₹5 discount makes the ₹15 Loss on Issue, so debits equal credits.

Illustration drawn for QuestionBuddy.

Understand Issue of Debentures with Terms of Redemption

What is a debenture? A debenture is an instrument acknowledging a debt of the company. Debenture holders are creditors, not owners: they get a fixed rate of interest (a charge, payable even in a loss year) and repayment (redemption) on the agreed terms.

Types. Secured or unsecured; convertible or non-convertible; redeemable or irredeemable (perpetual); registered or bearer; specific-coupon-rate or zero-coupon-rate (issued at a deep discount, no periodic interest).

The six combinations (face value ₹100).
1. Issue at par, redeem at par: Debentures Cr 100.
2. Issue at a discount, redeem at par: Discount on Issue Dr.
3. Issue at a premium, redeem at par: Securities Premium Cr.
4. Issue at par, redeem at a premium: Loss on Issue Dr; Premium on Redemption of Debentures Cr.
5. Issue at a discount, redeem at a premium: Loss on Issue Dr (discount + redemption premium); Premium on Redemption Cr.
6. Issue at a premium, redeem at a premium: Securities Premium Cr and Premium on Redemption Cr, Loss on Issue Dr (redemption premium).

Entries.

Bank A/c Dr; To Debenture Application and Allotment A/c.
Debenture Application and Allotment A/c Dr (amount received); Loss on Issue of Debentures A/c Dr (discount + redemption premium, if any); To % Debentures A/c (face value); To Securities Premium A/c (issue premium, if any); To Premium on Redemption of Debentures A/c (redemption premium, if any).

(Separate application and allotment accounts are used if the money is called in stages.)

Why record the redemption premium now? It is a liability the company accepts at issue, so it is shown immediately as Premium on Redemption of Debentures (a long-term liability), and the cost is captured in Loss on Issue, which is written off in the year of allotment (see Writing off Loss on Issue of Debentures).

Interest on debentures (TDS excluded from the syllabus). On face value, for the period outstanding: Debenture Interest A/c Dr; To Debentureholders A/c. Payment: Debentureholders A/c Dr; To Bank A/c. Transfer: Statement of Profit and Loss Dr; To Debenture Interest A/c (shown as finance costs). Actual redemption entries are not in the 2026-27 syllabus; only issue with terms of redemption is.

Issue of Debentures with Terms of Redemption: key facts

Loss on issue: Discount on issue + premium payable on redemption; Per debenture × number.
Securities Premium: (Issue price − face value) × number, if issued above face value
Premium on redemption: (Redemption price − face value) × number; Liability recorded at issue.
Interest: Face value × rate × months outstanding/12; Never on issue price.
Entry check: Cash + Loss on issue = Face value + Securities Premium + Premium on redemption

How to answer Issue of Debentures with Terms of Redemption questions

Identify the case from the issue price and redemption price, then use the entry check to make sure the entry balances.

1Write per debenture: face value, issue price, redemption price.
2Discount = face − issue price (if positive); issue premium = issue price − face (if positive).
3Redemption premium = redemption price − face.
4Loss on issue = discount + redemption premium.
5Pass the receipt and allotment entries; check cash + loss = face + securities premium + redemption premium.
6For interest, use face value and the months outstanding in the year.

Issue of Debentures with Terms of Redemption in real life

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

Loss on issue as the true cost of borrowing

Suppose Riverbend Cement Ltd (a fictional company) needs funds and issues 2,000 debentures of ₹100 each to investors at ₹96, promising to repay ₹104 each after five years, besides annual interest.

What extra cost, beyond interest, has the company accepted, and how is it recorded at issue?

Try it first, then show the solutionSolution

Discount per debenture = 100 − 96 = ₹4; redemption premium = 104 − 100 = ₹4.
Loss on issue = 2,000 × 8 = ₹16,000.
Entry: Debenture Application and Allotment Dr 1,92,000; Loss on Issue Dr 16,000; To Debentures 2,00,000; To Premium on Redemption 8,000.

Answer: Beyond interest, the company bears ₹16,000: it receives ₹8,000 less than face value and will repay ₹8,000 more. Both are recorded at issue as Loss on Issue of Debentures, with ₹8,000 shown as a liability for the redemption premium.

Memory hook: Get less now, pay more later: both are loss on issue.

Tricks to remember Issue of Debentures with Terms of Redemption

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

Loss = Less now + More later
Loss on issue = discount (less received) + redemption premium (more repaid).
Use it when: Cases 4, 5 and 6.
Interest on Face
Interest is always on face value, whatever the issue price.
Use it when: Interest sums.
Holders lend, shareholders own
Debentureholders are creditors: interest, not dividend.
Use it when: Theory and assertion-reason.

Issue of Debentures with Terms of Redemption: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Loss on issue · 1 mark · MCQBoard level

A company issued 1,000 debentures of ₹100 each at a discount of 5%, redeemable at a premium of 10%. The Loss on Issue of Debentures is:
(a) ₹5,000
(b) ₹10,000
(c) ₹15,000
(d) ₹1,05,000

Try it first, then show the solutionSolution

Discount = 1,000 × 5 = 5,000; redemption premium = 1,000 × 10 = 10,000.
Loss on issue = ₹15,000.

Answer: (c) ₹15,000

Example 2: Issue at par, redeemable at a premium · 3 marks · Short answerBoard level

Orchid Ltd issued 2,000, 9% debentures of ₹100 each at par, redeemable at a premium of 5%. Pass the journal entries for issue. (3 marks)

Try it first, then show the solutionSolution

Bank A/c Dr 2,00,000 To Debenture Application and Allotment A/c 2,00,000.
Debenture Application and Allotment A/c Dr 2,00,000; Loss on Issue of Debentures A/c Dr 10,000; To 9% Debentures A/c 2,00,000; To Premium on Redemption of Debentures A/c 10,000.

Answer: Loss on issue ₹10,000 is recorded at issue, matched by a liability of ₹10,000 for the redemption premium.

Example 3: Issue at a premium and annual interest · 3 marks · Short answerHarder board level

A company issued 5,000, 10% debentures of ₹100 each at a premium of 10%, redeemable at par. Pass the entries for issue and calculate the annual interest. (3 marks)

Try it first, then show the solutionSolution

Bank A/c Dr 5,50,000 To Debenture Application and Allotment A/c 5,50,000.
Debenture Application and Allotment A/c Dr 5,50,000; To 10% Debentures A/c 5,00,000; To Securities Premium A/c 50,000.
Annual interest = 5,00,000 × 10% = ₹50,000 (on face value, not ₹5,50,000).

Answer: Securities Premium ₹50,000; annual interest ₹50,000.

Example 4: Discount and redemption premium, money in two stages · 4 marks · Short answerHarder board level

A company issued 3,000 debentures of ₹100 each at ₹95, payable ₹40 on application and ₹55 on allotment, redeemable at ₹105. Pass the journal entries (ignore the receipt of cash). (4 marks)

Try it first, then show the solutionSolution

Debenture Application A/c Dr 1,20,000 To Debentures A/c 1,20,000.
Loss on issue = 3,000 × (5 + 5) = 30,000.
Debenture Allotment A/c Dr 1,65,000; Loss on Issue of Debentures A/c Dr 30,000; To Debentures A/c 1,80,000; To Premium on Redemption of Debentures A/c 15,000.
Check: debentures credited 1,20,000 + 1,80,000 = 3,00,000 (face value).

Answer: Two entries as shown; Loss on Issue ₹30,000 and Premium on Redemption ₹15,000.

Example 5: Interest for part of the year · 3 marks · Short answerHOTS / competency

A company issued 8% debentures of ₹4,00,000 on 1st July 2025. Interest is payable on 31st March each year. Pass the entries for interest for the year ended 31st March 2026 (ignore TDS). (3 marks)

Try it first, then show the solutionSolution

Interest = 4,00,000 × 8% × 9/12 = ₹24,000.
Debenture Interest A/c Dr 24,000 To Debentureholders A/c 24,000; Debentureholders A/c Dr 24,000 To Bank A/c 24,000.
Statement of Profit and Loss Dr 24,000 To Debenture Interest A/c 24,000.

Answer: Interest ₹24,000 for 9 months, shown under finance costs.

Example 6: Interest in a loss year · 1 mark · Assertion-reasonHOTS / competency

Assertion (A): Interest on debentures must be paid even if the company suffers a loss.
Reason (R): Interest on debentures is a charge against profits, not an appropriation.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.

Try it first, then show the solutionSolution

Debentureholders are creditors; interest is a contractual charge. R explains A.

Answer: (a) Both A and R are true, and R is the correct explanation of A.

Where students lose marks in Issue of Debentures with Terms of Redemption

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

Mistake: Not recording the redemption premium at issue
Thinking it is recorded only on redemption.
Wrong working
Debenture App. & Allot. Dr 2,00,000 To Debentures 2,00,000 (redeemable at 5% premium).
Right working
Also Loss on Issue Dr 10,000 To Premium on Redemption 10,000 (in the same entry).
Do this: Terms of redemption are recorded at issue.
Usually costs: 1-2 marks.
Mistake: Calculating interest on the issue price
Using cash received.
Wrong working
Interest = 5,50,000 × 10%.
Right working
Interest = 5,00,000 × 10%.
Do this: Interest is on face value.
Usually costs: 1 mark.
Mistake: Debiting only the discount to Loss on Issue
Forgetting the redemption premium.
Wrong working
Loss on Issue Dr 15,000 (discount only).
Right working
Loss on Issue Dr 30,000 (discount 15,000 + premium 15,000).
Do this: Loss = discount + redemption premium.
Usually costs: 1 mark.
Mistake: Passing entries for actual redemption
Going beyond the syllabus.
Wrong working
Writing redemption-by-lump-sum entries in a 2026-27 answer.
Right working
Only issue with terms of redemption is assessed.
Do this: Check the syllabus note.
Usually costs: Time lost, no marks.

Exam tips

Write the case number (for example, 'issued at discount, redeemable at premium') before the entry.
Use the debenture rate in the account name: '9% Debentures A/c'.
Always verify with cash + loss = face + securities premium + redemption premium.
Issue of debentures appears as 1-mark MCQs and 3- or 4-mark entries every year.

Practice questions on Issue of Debentures with Terms of Redemption

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

Q1 · 1 mark · MCQBoard level
Debentures represent:
(a) owned funds
(b) borrowed funds
(c) reserves
(d) share capital
Hint
Holders are creditors.
Answer
(b) borrowed funds
Q2 · 1 mark · MCQBoard level
Loss on issue of debentures arises when debentures are:
(a) issued at par and redeemable at par
(b) issued at premium and redeemable at par
(c) issued at par and redeemable at premium
(d) issued as collateral security
Hint
More repaid than face value.
Answer
(c) issued at par and redeemable at premium
Q3 · 3 marks · Short answerBoard level
A company issued 1,000 debentures of ₹100 each at a discount of 6%, redeemable at par. Pass the journal entries. (3 marks)
Hint
Case 2.
Answer
Bank A/c Dr 94,000 To Debenture Application and Allotment A/c 94,000. Debenture Application and Allotment A/c Dr 94,000; Discount on Issue of Debentures A/c Dr 6,000; To Debentures A/c 1,00,000.
Q4 · 1 mark · Very short answerHarder board level
2,000 debentures of ₹500 each were issued at ₹480, redeemable at ₹525. Calculate the Loss on Issue of Debentures. (1 mark)
Hint
(20 + 25) per debenture.
Answer
2,000 × (20 + 25) = ₹90,000.
Q5 · 3 marks · Short answerHarder board level
A company has 10% debentures of ₹6,00,000 outstanding for the whole year. Pass the entries for interest and its transfer (ignore TDS). (3 marks)
Hint
₹60,000.
Answer
Debenture Interest A/c Dr 60,000 To Debentureholders A/c 60,000. Debentureholders A/c Dr 60,000 To Bank A/c 60,000. Statement of Profit and Loss Dr 60,000 To Debenture Interest A/c 60,000.
Q6 · 3 marks · Short answerHarder board level
Give three differences between shares and debentures. (3 marks)
Hint
Status, return, repayment.
Answer
(1) Status: shareholders are owners; debentureholders are creditors. (2) Return: shareholders get dividend, an appropriation of profit; debentureholders get interest, a charge payable even in a loss. (3) Repayment: share capital is not normally repaid during the company's life (except buy-back or redeemable preference shares); debentures are usually redeemed after a period. (Also: debentures may be secured; shares are not.)
Q7 · 3 marks · Short answerHarder board level
1,500 debentures of ₹100 each were issued at a premium of 6%, redeemable at a premium of 10%. Pass the issue entry (single application and allotment). (3 marks)
Hint
Case 6.
Answer
Debenture Application and Allotment A/c Dr 1,59,000; Loss on Issue of Debentures A/c Dr 15,000; To Debentures A/c 1,50,000; To Securities Premium A/c 9,000; To Premium on Redemption of Debentures A/c 15,000.
Q8 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Debentureholders are owners of the company.
Reason (R): Debentureholders are creditors who receive interest at a fixed rate.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Lenders, not owners.
Answer
(d) A is false, but R is true.
Q9 · 3 marks · Short answerHOTS / competency
A company issued 3,000 debentures of ₹100 each, redeemable at a premium of 5%. The Loss on Issue of Debentures was ₹21,000. At what price were the debentures issued? (3 marks)
Hint
Loss per debenture first.
Answer
Loss per debenture = 21,000 ÷ 3,000 = ₹7 = discount + 5; discount = ₹2; issue price = ₹98.
Q10 · 3 marks · Short answerHOTS / competency
A company can either issue debentures of ₹100 at ₹95 redeemable at par, or at par redeemable at ₹105. Compare the Loss on Issue in each case and explain one practical difference between the two options. (3 marks)
Hint
Same loss, different timing.
Answer
Loss on issue is ₹5 per debenture in both cases. But in the first option the company receives ₹5 less cash now, while in the second it receives full cash now and pays ₹5 more at redemption, which suits a company needing more funds today.

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.Loss on issue when ₹100 debentures are issued at ₹97 and redeemable at ₹106?Show answer
₹9 per debenture.
2.On which value is debenture interest calculated?Show answer
Face value.
3.Which account records the liability for premium payable on redemption?Show answer
Premium on Redemption of Debentures Account.
4.Name two types of debentures by security.Show answer
Secured and unsecured.
5.Is TDS on debenture interest in the 2026-27 syllabus?Show answer
No, it is excluded.

Issue of Debentures with Terms of Redemption: frequently asked questions

What are the six cases of issue of debentures in Class 12?

Issue at par, discount or premium, each redeemable at par or at a premium; the common board cases are par-par, discount-par, premium-par, par-premium and discount-premium.

Why is Loss on Issue debited at the time of issue?

Because the discount and the redemption premium are costs the company accepts when it issues the debentures; the premium is a liability from day one.

Is redemption of debentures in the 2026-27 syllabus?

Only the meaning and issue with terms of redemption; accounting entries for actual redemption are excluded.

Where is debenture interest shown?

In the Statement of Profit and Loss under finance costs.