Issue of Debentures: ISC Class 12 Accounts Notes and Solved Problems

What Issue of Debentures is about

Weightage: Issue of Debentures is part of the unit Issue of Debentures and Redemption of Debentures, which carries 8 of the 80 theory marks, shared with 1 other chapter. It is in the compulsory Section A (60 marks).Source: CISCE ISC Accountancy (Accounts) syllabus, examination year 2027, distribution of marks

Key concepts

Debentures: meaning and types

A debenture is a certificate issued under the company's seal acknowledging a debt, with a fixed rate of interest and a date or method of repayment. Debenture holders are creditors, not owners: they have no voting rights, receive interest as a charge on profit, and are repaid before shareholders on winding up.

Types:

• Secured (backed by a charge on assets) or unsecured.
• Redeemable (repaid on a date) or irredeemable (perpetual).
• Convertible (into shares) or non-convertible.
• Registered or bearer.
• Specific coupon rate or zero coupon (issued at a deep discount, no interest).

Differences from shares: return (fixed interest vs dividend), ownership (creditor vs owner), security (often secured vs none), voting rights (none vs yes), priority on repayment (before vs after).

Worked example

Suppose a student says "interest on debentures, like dividend, is paid only out of profits". Correct the statement and give one more difference between debentures and shares. [2 marks]

Try it first, then show the solutionSolution

1. Interest on debentures is a charge against profit: it is payable whether or not there is a profit. Dividend is an appropriation of profit and is paid only out of profit.
2. Debenture holders have no voting rights; equity shareholders do.

Answer: Interest is a charge, dividend an appropriation; debenture holders cannot vote.

Issue at par, premium or discount; redemption at par or premium

Four combinations are tested. The Debentures A/c is always credited at face value.

Issue	Redemption	Allotment entry (after Bank Dr To Debenture Application and Allotment A/c)
Par	Par	Debenture Application and Allotment A/c Dr To Debentures A/c
Premium	Par	… To Debentures A/c; To Securities Premium A/c
Discount	Par	Debenture Application and Allotment A/c Dr; Loss on Issue of Debentures A/c Dr (discount) To Debentures A/c
Par or discount	Premium	… Loss on Issue of Debentures A/c Dr (discount + premium on redemption) To Debentures A/c; To Premium on Redemption of Debentures A/c

Premium on Redemption of Debentures A/c is a liability, shown under Other Long-term Liabilities until redemption. If debentures are issued at a premium and redeemed at a premium, the issue premium goes to Securities Premium and the redemption premium is still a loss on issue.

Worked example

Suppose Wren Ltd issues 10,000 9% debentures of ₹100 each at a premium of 5%, redeemable at 10% premium. Pass the allotment entry. [2 marks]

Try it first, then show the solutionSolution

1. Particulars	Dr (₹)	Cr (₹)
   Debenture Application and Allotment A/c ... Dr	10,50,000
   Loss on Issue of Debentures A/c ... Dr	1,00,000
   To 9% Debentures A/c		10,00,000
   To Securities Premium A/c		50,000
   To Premium on Redemption of Debentures A/c		1,00,000
   (Being debentures allotted at 5% premium, redeemable at 10% premium)

Answer: Debentures ₹10,00,000; Securities Premium ₹50,000; Premium on Redemption ₹1,00,000; Loss on Issue ₹1,00,000.

Writing off the Loss on Issue of Debentures

Discount on issue and premium on redemption are capital losses. The syllabus requires them to be written off in the year in which they occur, in this order:

1. Securities Premium (Section 52 allows its use for discount on debentures and premium on redemption);
2. Statement of Profit and Loss (as a finance cost or other expense);
3. Capital Reserve, lastly.

Entry: Securities Premium A/c Dr; Statement of Profit and Loss Dr (balance) To Loss on Issue of Debentures A/c.

General Reserve is used only if the question says so. Because the whole loss is written off in the year of issue, the Balance Sheet at the year-end shows no Loss on Issue of Debentures.

Worked example

Suppose a company issued 6,000 debentures of ₹100 each at a discount and wrote off the discount from Securities Premium, whose balance fell from ₹90,000 to ₹54,000. At what rate of discount were the debentures issued? [1 mark]

Try it first, then show the solutionSolution

1. Discount = 90,000 − 54,000 = ₹36,000.
2. Per debenture = 36,000 ÷ 6,000 = ₹6, i.e. 6% of ₹100.

Answer: 6% discount.

Debentures as collateral security

Collateral security is an additional security given to a lender along with the primary security. If the loan is repaid, the debentures return to the company; if not, the lender can sell them. No money is received for them.

• Method 1 (no entry): the debentures are not recorded; in the note to Long-term Borrowings, below the loan, write "(secured by the issue of ... debentures of ₹... each as collateral security)".
• Method 2 (entry): Debenture Suspense A/c Dr To ...% Debentures A/c. In the note, show the debentures and deduct the Debenture Suspense A/c, so the net is nil, along with the loan.

When the loan is repaid, the Method 2 entry is reversed.

Worked example

Suppose Hoopoe Ltd takes a bank loan of ₹10,00,000 and issues 12,000 9% debentures of ₹100 each as collateral security, recording the issue in its books. Pass the entry and show the note. [3 marks]

Try it first, then show the solutionSolution

1. Particulars	Dr (₹)	Cr (₹)
   Debenture Suspense A/c ... Dr	12,00,000
   To 9% Debentures A/c		12,00,000
   (Being debentures issued as collateral security)

2. Note: Long-term Borrowings

   Particulars	₹
   Bank Loan (secured)	10,00,000
   9% Debentures (issued as collateral security)	12,00,000
   Less: Debenture Suspense A/c	(12,00,000)
   Total	10,00,000

Answer: The debentures add nothing to borrowings: the loan of ₹10,00,000 is the liability.

Debentures for consideration other than cash

• Vendors: Sundry Assets A/c Dr (Goodwill if price > net assets) To Sundry Liabilities and To Vendor's A/c; if price < net assets, the difference is credited to Capital Reserve. Then Vendor's A/c Dr To Debentures A/c (and Securities Premium if issued above par; Loss on Issue Dr if at a discount or redeemable at a premium).
• Promoters: Goodwill A/c (or Incorporation Costs A/c) Dr To Debentures A/c.
• Underwriters: Underwriting Commission A/c Dr To Debentures A/c.

Number of debentures = Purchase consideration ÷ issue price per debenture.

Worked example

Suppose Ibis Ltd purchases assets of ₹9,00,000 for ₹8,80,000, paying by issuing 10% debentures of ₹100 each at 10% premium. Pass the journal entries. [3 marks]

Try it first, then show the solutionSolution

1. Capital reserve = 9,00,000 − 8,80,000 = ₹20,000. Debentures = 8,80,000 ÷ 110 = 8,000.

2. Particulars	Dr (₹)	Cr (₹)
   Sundry Assets A/c ... Dr	9,00,000
   To Vendor A/c		8,80,000
   To Capital Reserve A/c		20,000
   (Being assets purchased)
   Vendor A/c ... Dr	8,80,000
   To 10% Debentures A/c		8,00,000
   To Securities Premium A/c		80,000
   (Being 8,000 debentures issued at ₹110 to the vendor)

Answer: 8,000 debentures; Capital Reserve ₹20,000; Securities Premium ₹80,000.

Calls on debentures and interest with TDS

Debenture money may be payable in instalments, like shares. Use Debenture Application A/c, Debenture Allotment A/c and Debenture Call A/cs, with Calls in Arrears and Calls in Advance as needed. Interest on calls in advance is payable to Debenture Holders' A/c (not "Sundry Members"), and is closed to the Statement of Profit and Loss.

Interest on debentures is a charge, calculated on face value at the coupon rate for the period. The company deducts tax at source (TDS) and pays it to the government:

1. Interest on Debentures A/c Dr (gross) To Debenture Holders' A/c (net) and To TDS Payable A/c.
2. Debenture Holders' A/c Dr To Bank A/c (net paid).
3. TDS Payable A/c Dr To Bank A/c (deposit with the government).
4. Statement of Profit and Loss Dr To Interest on Debentures A/c (year-end).

Interest due but unpaid at the year-end is shown as interest accrued but not due (or due) under Other Current Liabilities.

Worked example

Suppose a company has ₹5,00,000 9% debentures; interest is paid annually on 31st March with TDS at 10%. Pass the entries for the year's interest. [3 marks]

Try it first, then show the solutionSolution

1. Particulars	Dr (₹)	Cr (₹)
   Interest on Debentures A/c ... Dr	45,000
   To Debenture Holders' A/c		40,500
   To TDS Payable A/c		4,500
   (Being interest due and TDS deducted)
   Debenture Holders' A/c ... Dr	40,500
   To Bank A/c		40,500
   (Being interest paid)
   TDS Payable A/c ... Dr	4,500
   To Bank A/c		4,500
   (Being TDS deposited)
   Statement of Profit and Loss ... Dr	45,000
   To Interest on Debentures A/c		45,000
   (Being interest transferred)

Answer: Gross interest ₹45,000 (charge); ₹40,500 paid to holders; ₹4,500 to the government.

Issue 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 and Terms of Redemption
• Loss on Issue of Debentures
• Debentures as Collateral and for Non-cash Consideration

Issue of Debentures: key facts

Loss on issue

Discount on issue + Premium payable on redemption (per debenture × number)

Write-off order

1. 1.Securities Premium
2. 2.Statement of Profit and Loss
3. 3.Capital Reserve

In the year the loss occurs.

Debentures to vendor

Purchase consideration ÷ issue price per debenture

Interest on debentures

Face value × coupon rate × months/12; net paid = gross − TDS

Interest on calls in advance

Amount in advance × rate × months from receipt to due date/12

How the board asks Issue of Debentures

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

Tricks to remember Issue of Debentures

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

• Debentures always at face value

  Whatever the issue or redemption price, the Debentures A/c moves only at face value; the gaps go to Securities Premium, Loss on Issue or Premium on Redemption.

  Use it when: Every issue and redemption entry.

• Write-off order: "S-P-C"

  Securities premium, Profit and Loss, Capital reserve.

  Use it when: Writing off the loss on issue.

• Holders, not members

  Debenture holders lend; members own. Use "Debenture Holders' A/c".

  Use it when: Interest and calls in advance entries.

Issue 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 A style)

Read the situation, then answer every part. In the board paper this is a 6-mark question split into 2 + 1 + 2 + 1 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 of Debentures

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

• ✗Mistake: Separate discount account; loss not written off from Securities Premium first

  CISCE examiners' comments, 2024: "Opened a separate Discount on Issue of Debentures A/c instead of taking discount and premium on redemption into Loss on issue of Debentures A/c"; "Did not use Securities Premium to write off part of the loss; wrote off entirely from revenue profits or carried forward".

  ✓Do this: One Loss on Issue of Debentures A/c; write it off in the same year: Securities Premium, then P&L, then Capital Reserve.

  Usually costs: 1-2 marks.

• ✗Mistake: Wrong contra account or journal entries instead of ledger

  CISCE examiners' comments, 2024: "Credited Debenture Application A/c or Bank A/c instead of Debenture Application & Allotment A/c"; "Passed journal entries instead of making ledger accounts".

  ✓Do this: Read whether ledger accounts, a Cash Book or journal entries are asked; post with the exact contra account names.

  Usually costs: The whole part if the format is wrong.

• ✗Mistake: Calls in advance merged with allotment; "shares" instead of "debentures"

  CISCE examiners' comments, 2025: "Did not show calls-in-advance separately (₹4,000); wrote allotment as ₹4,04,000."; "Used 'Shares' instead of 'Debentures'"; "Misunderstood 'along with premium' in calculating instalments."

  ✓Do this: Show Calls in Advance as a separate receipt; use debenture terminology throughout.

  Usually costs: 1 mark.

• ✗Mistake: Interest on calls in advance: wrong account or not closed

  CISCE examiners' comments, 2025: "Used 'Sundry Members' instead of 'Debenture holders'."; "Showed interest on calls-in-advance as balance c/d instead of transferring to Statement of P&L."

  ✓Do this: Credit Debenture Holders' A/c; close the interest account to the Statement of Profit and Loss.

  Usually costs: 1 mark.

• ✗Mistake: Instalment debentures shown in full under long-term borrowings

  CISCE examiners' comments, 2025: "Showed 8% Debentures as ₹5,00,000 instead of ₹4,00,000 and omitted current maturities of ₹1,00,000."; "Collateral security disclosure missing".

  ✓Do this: Move the instalment due within 12 months to Short-term Borrowings as current maturities; describe collateral below the loan.

  Usually costs: 1-2 marks of the 6-mark question.

Practice questions on Issue 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

   Debentures issued as collateral security, when recorded, are credited to Debentures A/c and debited to:
   (a) Bank A/c
   (b) Debenture Suspense A/c
   (c) Loss on Issue A/c
   (d) Bank Loan A/c

   Hint

   No cash comes in.

   Answer

   (b)

2. Q2 · 1 mark · Very short answerBoard level

   Give the entry for issuing ₹2,00,000 debentures at par to promoters for their services.

   Hint

   Same choice as for shares.

   Answer

   Goodwill A/c (or Incorporation Costs A/c) Dr ₹2,00,000 To Debentures A/c ₹2,00,000.

3. Q3 · 1 mark · Very short answerBoard level

   5,000 debentures of ₹100 issued at ₹94, redeemable at ₹103. Calculate the loss on issue.

   Hint

   Discount plus redemption premium.

   Answer

   5,000 × (6 + 3) = ₹45,000.

4. Q4 · 2 marks · Short answerHarder board level

   A company with Securities Premium of ₹30,000 and Capital Reserve of ₹50,000 has a loss on issue of debentures of ₹70,000. How is it written off under the ISC rule?

   Hint

   Order matters.

   Answer

   Securities Premium ₹30,000 first, then Statement of Profit and Loss ₹40,000. Capital Reserve is used only after P&L, so it is not touched here.

5. Q5 · 2 marks · Short answerHarder board level

   Debentures of ₹8,00,000 at 9% were issued on 1st July 2025; interest is payable annually on 30th June. Calculate interest accrued but not due on 31st March 2026 and state where it is shown.

   Hint

   Nine months.

   Answer

   8,00,000 × 9% × 9/12 = ₹54,000, under Other Current Liabilities.

6. Q6 · 3 marks · Short answerHarder board level

   A business with assets of ₹7,20,000 and liabilities of ₹1,20,000 is bought for ₹6,30,000, paid by 8% debentures of ₹100 at 10% discount. Find the goodwill and the number of debentures, and pass the entry for issuing them.

   Hint

   Debentures issued at ₹90.

   Answer

   Goodwill = 6,30,000 − 6,00,000 = ₹30,000. Debentures = 6,30,000 ÷ 90 = 7,000. Vendor A/c Dr 6,30,000; Loss on Issue of Debentures A/c Dr 70,000 To 8% Debentures A/c 7,00,000.

7. Q7 · 2 marks · Short answerHOTS / competency

   A student prepared "Discount on Issue A/c" and "Premium on Redemption A/c" as two separate loss accounts. What does the ISC answer key expect?

   Hint

   One account.

   Answer

   Both are debited to one Loss on Issue of Debentures A/c, which is written off in the year (Securities Premium first). Premium on Redemption of Debentures A/c is the liability account, not a loss account.

8. Q8 · 2 marks · Short answerHOTS / competency

   Explain why a company might issue debentures rather than more equity shares to finance expansion.

   Hint

   Control and cost.

   Answer

   Debentures do not dilute control (no voting rights), and interest is tax-deductible, so the cost of debt is often lower than equity; if the return on the project exceeds the interest rate, shareholders gain (trading on equity).

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.At what value is the Debentures A/c always recorded?Show answer

   Face value.

2. 2.What two items go into Loss on Issue of Debentures A/c?Show answer

   Discount on issue and premium payable on redemption.

3. 3.Order of writing off capital losses?Show answer

   Securities Premium, Statement of P&L, Capital Reserve.

4. 4.Where is Premium on Redemption of Debentures shown?Show answer

   Other Long-term Liabilities.

5. 5.Interest on debentures: charge or appropriation?Show answer

   Charge.

Quick revision checklist

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

• ☐Debentures at face value; premium to Securities Premium; discount and redemption premium to Loss on Issue.
• ☐Write off loss in the year: Securities Premium → P&L → Capital Reserve.
• ☐Collateral: no entry, or Debenture Suspense deducted in the note.
• ☐Interest: gross to P&L; net to Debenture Holders' A/c; TDS to government.
• ☐Current maturities → Short-term Borrowings; interest accrued → Other Current Liabilities.

Issue of Debentures: frequently asked questions