AccountsISC Class 12 · Issue of Debentures

Issue of Debentures and Terms of Redemption: ISC Class 12 Accounts

Updated 16 October 2026 · Fact-checked

Debentures may be issued at par, at a premium or at a discount, and redeemed at par or at a premium. At issue, Debentures are credited at face value, any issue premium goes to Securities Premium, and any discount or redemption premium is debited to Loss on Issue of Debentures, with Premium on Redemption credited as a liability.

Discount and redemption premium both go to one Loss on Issue of Debentures A/c, while Premium on Redemption is credited as a liability at issue.

Illustration drawn for QuestionBuddy.

Understand Issue of Debentures and Terms of Redemption

What a debenture is. A debenture is a written acknowledgement of a debt raised by a company, carrying a fixed rate of interest. Debenture holders are creditors, not owners, and interest is a charge against profit.

Six combinations of issue and redemption. Face value ₹100 in each case:

Issue at par, redeem at par: Debenture Application & Allotment Dr; To Debentures.
Issue at premium, redeem at par: credit Securities Premium with the premium.
Issue at discount, redeem at par: debit Loss on Issue of Debentures with the discount.
Issue at par, redeem at premium: debit Loss on Issue; credit Premium on Redemption of Debentures.
Issue at discount, redeem at premium: Loss on Issue = discount + redemption premium.
Issue at premium, redeem at premium: credit Securities Premium and Premium on Redemption; debit Loss on Issue with the redemption premium.

One loss account. ISC examiners in 2024 noted candidates opening a separate Discount on Issue A/c instead of taking both the discount and the redemption premium to Loss on Issue of Debentures A/c. Premium on redemption is recorded at issue because the company has already committed to it.

Account names. When money is payable in full with the application, use Debenture Application & Allotment A/c. In instalments, use Debenture Application, Debenture Allotment and Debenture Call accounts. Use 'Debenture holders', not 'Sundry Members' or 'Shares'; ISC examiners in 2025 flagged both.

Calls in arrears and in advance work as for shares. Interest on calls in advance is credited to Debenture holders A/c and closed to the Statement of Profit and Loss.

Interest with TDS. Debenture Interest A/c Dr (gross); To Debenture holders A/c (net); To TDS Payable A/c. Then pay the holders and the tax, and close Debenture Interest to the Statement of Profit and Loss. The question gives the TDS rate.

Disclosure. Debentures are shown under Non-current Liabilities → Long-term Borrowings (current maturities under Current Liabilities); Premium on Redemption under Other Long-term Liabilities.

Issue of Debentures and Terms of Redemption: key facts

Issue entry: Bank (issue price) + Loss on Issue (discount + redemption premium) = Debentures (face) + Securities Premium + Premium on Redemption; Both sides must balance.
Loss on issue of debentures: Loss on Issue = Discount on issue + Premium payable on redemption; One account for both.
Interest on debentures: Face value × Rate × Months ÷ 12; Interest is on face value, not issue price.
TDS split: Gross interest = Net paid to holders + TDS; TDS rate is given in the question.
Interest on calls in advance: Advance × Rate × Months from receipt to call due date ÷ 12; Credited to Debenture holders A/c.

How to answer Issue of Debentures and Terms of Redemption questions

ISC asks issue of debentures as 3-mark ledger or journal questions. Identify the issue price and redemption price first.

1Write: face value, issue price, redemption price.
2Receive money: Bank Dr; To Debenture Application & Allotment (or Application, Allotment, Calls).
3Allot: credit Debentures at face value and Securities Premium with any premium.
4Debit Loss on Issue with discount plus redemption premium; credit Premium on Redemption.
5Handle calls in arrears or advance and interest on them, using 'Debenture holders'.
6Prepare ledger accounts if the question asks; ISC examiners in 2024 and 2025 noted journals written where ledgers were asked.

Issue of Debentures and 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.

Discount now, premium later

Suppose a growing bakery borrows from its customers by issuing ₹100 bonds. To attract lenders it accepts only ₹96 now and promises to repay ₹106 after five years, plus yearly interest on ₹100.

Apart from interest, what extra cost does the bakery bear on each bond?

Try it first, then show the solutionSolution

It receives ₹96 but must repay ₹106.
Extra cost = 106 − 96 = ₹10 per bond: ₹4 discount and ₹6 premium on redemption.

Answer: ₹10 per bond, which in a company's books is the Loss on Issue of Debentures.

Memory hook: Less in, more out: the gap is the loss on issue.

Tricks to remember Issue of Debentures and Terms of Redemption

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

Face to Debentures, always
Debentures A/c is always credited with face value, whatever the issue price.
Use it when: Every issue entry.
Two costs, one loss
Discount on issue + premium on redemption = Loss on Issue of Debentures.
Use it when: Discount and redemption premium together.
Holders, not members
Shareholders are members; debenture holders are creditors.
Use it when: Naming accounts for interest on calls.

Issue of Debentures and Terms of Redemption: solved examples

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

Example 1: Nature of premium on redemption · 1 mark · MCQBoard level

Premium on Redemption of Debentures A/c is:
(a) a capital profit
(b) a liability until the debentures are redeemed
(c) a revenue income
(d) part of Securities Premium

Try it first, then show the solutionSolution

The company must pay this premium to holders on redemption.
Until then it is owed: a liability.

Answer: (b) a liability until the debentures are redeemed

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

Aster Ltd issued 7,500, 8% Debentures of ₹100 each at a premium of 4%, redeemable at par, payable in full on application. Pass the entries. (3 marks)

Try it first, then show the solutionSolution

Bank A/c Dr 7,80,000; To 8% Debenture Application & Allotment A/c 7,80,000.
8% Debenture Application & Allotment A/c Dr 7,80,000; To 8% Debentures A/c 7,50,000; To Securities Premium A/c 30,000.

Answer: Debentures ₹7,50,000 and Securities Premium ₹30,000 credited; Bank ₹7,80,000.

Example 3: Issue at discount, redeemable at premium · 3 marks · Short answerHarder board level

Banyan Ltd issued 4,000, 9% Debentures of ₹100 each at a discount of 4%, redeemable at a premium of 6%. Pass the allotment entry. (3 marks)

Try it first, then show the solutionSolution

Cash = 4,000 × 96 = ₹3,84,000.
Loss on Issue = discount 16,000 + redemption premium 24,000 = ₹40,000.
Debenture Application & Allotment Dr 3,84,000; Loss on Issue of Debentures Dr 40,000; To 9% Debentures 4,00,000; To Premium on Redemption of Debentures 24,000.

Answer: Loss on Issue ₹40,000 debited; Debentures ₹4,00,000 and Premium on Redemption ₹24,000 credited.

Example 4: Instalments with calls in advance · 6 marks · Long answerHarder board level

Cypress Ltd issued 3,000, 9% Debentures of ₹100 each at par: ₹30 on application, ₹30 on allotment (1 August 2025) and ₹40 on first and final call (1 December 2025). A holder of 200 debentures paid the call with the allotment. Interest on calls in advance is 12% p.a. Calculate cash received on allotment and on the call, and the interest, and give the interest entry. (6 marks)

Try it first, then show the solutionSolution

Allotment due 90,000; advance 200 × 40 = 8,000; cash on allotment = ₹98,000.
Call due 1,20,000; Calls in Advance Dr 8,000; cash on call = ₹1,12,000.
Interest = 8,000 × 12% × 4/12 = ₹320.
Interest on Calls in Advance A/c Dr 320; To Debenture holders A/c 320; closed to the Statement of Profit and Loss.

Answer: Allotment ₹98,000; call ₹1,12,000; interest on calls in advance ₹320 credited to Debenture holders.

Example 5: Premium on both sides and writing off the loss · 6 marks · Long answerHOTS / competency

Deodar Ltd issued 5,000, 7% Debentures of ₹100 each at a premium of 8%, redeemable at a premium of 10%. Pass the allotment entry, and write off the loss at the year end using the order the ISC syllabus prescribes. There is no other balance in Securities Premium. (6 marks)

Try it first, then show the solutionSolution

Debenture Application & Allotment Dr 5,40,000; Loss on Issue Dr 50,000; To 7% Debentures 5,00,000; To Securities Premium 40,000; To Premium on Redemption 50,000.
Order: Securities Premium first, then Statement of Profit and Loss, then Capital Reserve.
Securities Premium Dr 40,000; Statement of Profit and Loss Dr 10,000; To Loss on Issue 50,000.

Answer: Loss on Issue ₹50,000: ₹40,000 written off from Securities Premium and ₹10,000 from the Statement of Profit and Loss.

Example 6: Half-year interest with TDS · 3 marks · Short answerHOTS / competency

Elm Ltd issued ₹7,00,000, 9% Debentures on 1 October 2025. Its year ends on 31 March. TDS is 10%. Pass the entries for interest due on 31 March 2026 and its payment. (3 marks)

Try it first, then show the solutionSolution

Interest for six months = 7,00,000 × 9% × 6/12 = ₹31,500.
Debenture Interest Dr 31,500; To Debenture holders 28,350; To TDS Payable 3,150.
Debenture holders Dr 28,350; To Bank 28,350. Statement of Profit and Loss Dr 31,500; To Debenture Interest 31,500.

Answer: Gross interest ₹31,500: ₹28,350 to holders, ₹3,150 TDS.

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

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

Mistake: Separate discount account
Following share-issue habits.
Wrong working
Discount on Issue of Debentures Dr 16,000; Loss on Redemption Dr 24,000
Right working
Loss on Issue of Debentures Dr 40,000
Do this: ISC examiners in 2024 asked for one Loss on Issue account.
Usually costs: 1 mark.
Mistake: Wrong application account
Crediting Bank or 'Debenture Application A/c' when full money is payable at once.
Wrong working
To Debenture Application A/c
Right working
To Debenture Application & Allotment A/c
Do this: 2024 examiners reported this naming error.
Usually costs: 1 mark.
Mistake: Misreading 'along with premium'
Leaving premium out of the allotment instalment.
Wrong working
Allotment = 40% only
Right working
Allotment = 40% + premium
Do this: ISC examiners in 2025 noted this error; add the premium to the instalment named.
Usually costs: 1 mark.
Mistake: Carrying the loss forward
Leaving Loss on Issue in the Balance Sheet.
Wrong working
Loss on Issue shown as an asset
Right working
Written off in the same year: Securities Premium, then P&L, then Capital Reserve
Do this: The syllabus requires capital losses to be written off in the year they occur.
Usually costs: 1 mark.

Exam tips

Write the debenture rate in the account name: '9% Debentures A/c'.
Show a working for each instalment, especially when premium is added.
Prepare ledger accounts when asked; do not substitute journal entries.
Close interest on calls in advance and debenture interest to the Statement of Profit and Loss.

Practice questions on Issue of Debentures and 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 issued at a discount and redeemable at par: the discount is debited to:
(a) Securities Premium A/c
(b) Loss on Issue of Debentures A/c
(c) Debentures A/c
(d) Capital Reserve A/c
Hint
One loss account.
Answer
(b) Loss on Issue of Debentures A/c
Q2 · 1 mark · MCQBoard level
When the whole amount on debentures is payable with the application, money received is credited to:
(a) Debentures A/c
(b) Debenture Application & Allotment A/c
(c) Debenture holders A/c
(d) Bank A/c
Hint
One combined account.
Answer
(b) Debenture Application & Allotment A/c
Q3 · 3 marks · Short answerBoard level
2,500, 8% Debentures of ₹100 each are issued at par, redeemable at a premium of 5%. Pass the allotment entry. (3 marks)
Hint
Loss = redemption premium only.
Answer
Debenture Application & Allotment Dr 2,50,000; Loss on Issue Dr 12,500; To 8% Debentures 2,50,000; To Premium on Redemption 12,500.
Q4 · 3 marks · Short answerHarder board level
8,000 Debentures of ₹100 each are issued at a discount of 3%, redeemable at par. Find the cash received and the Loss on Issue. (3 marks)
Hint
₹97 each.
Answer
Cash ₹7,76,000; Loss on Issue ₹24,000.
Q5 · 3 marks · Short answerHarder board level
Interest on ₹12,00,000, 7% Debentures for a full year is due; TDS is 10%. Pass the entries for interest due and its transfer at year end. (3 marks)
Hint
Gross ₹84,000.
Answer
Debenture Interest Dr 84,000; To Debenture holders 75,600; To TDS Payable 8,400. Statement of Profit and Loss Dr 84,000; To Debenture Interest 84,000.
Q6 · 1 mark · Assertion-reasonHarder board level
Assertion (A): Premium payable on redemption of debentures is recorded at the time of issue.
Reason (R): The company commits to that liability when it issues the debentures.
(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
Known liability.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q7 · 6 marks · Long answerHarder board level
7,000 Debentures of ₹100 are issued at a premium of 6%: 25% on application, 35% on allotment along with premium, and the balance on final call. A holder of 60 debentures pays the call with allotment. Calculate the amount due on each instalment and cash received on allotment and call. (6 marks)
Hint
Allotment includes ₹6 premium.
Answer
Application ₹1,75,000; allotment due ₹2,87,000, cash ₹2,89,400; call due ₹2,80,000, cash ₹2,77,600; total ₹7,42,000.
Q8 · 3 marks · Short answerHarder board level
Loss on Issue of Debentures of ₹45,000 is to be written off. Securities Premium has ₹28,000. How much is written off from the Statement of Profit and Loss under the ISC order? (3 marks)
Hint
Securities Premium first.
Answer
Securities Premium ₹28,000; Statement of Profit and Loss ₹17,000.
Q9 · 6 marks · Long answerHOTS / competency
A holder of 150 debentures did not pay allotment of ₹40 each, due on 1 July, until 31 October. Interest on calls in arrears is 10% p.a. Calculate the interest and give the entry when it becomes due. (6 marks)
Hint
Four months on ₹6,000.
Answer
Interest = 6,000 × 10% × 4/12 = ₹200. Debenture holders A/c Dr 200; To Interest on Calls in Arrears A/c 200.
Q10 · 3 marks · Short answerHOTS / competency
1,000 Debentures of ₹100 are issued at a premium of 5% and redeemable at a premium of 5%. Is there any net charge to the Statement of Profit and Loss from the issue? Explain. (3 marks)
Hint
Use Securities Premium first.
Answer
Securities Premium ₹5,000; Loss on Issue ₹5,000. Written off from Securities Premium, so there is no charge to the Statement of Profit and Loss.

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.Is interest on debentures an appropriation of profit?Show answer
No, it is a charge against profit.
2.Issue at 5% discount, redeem at 5% premium: loss per ₹100 debenture?Show answer
₹10.
3.Under which head is Premium on Redemption shown?Show answer
Other Long-term Liabilities.
4.ISC order for writing off capital losses?Show answer
Securities Premium, Statement of Profit and Loss, Capital Reserve.
5.Which account name do examiners want for interest on calls on debentures?Show answer
Debenture holders A/c.

Issue of Debentures and Terms of Redemption: frequently asked questions

Is interest calculated on the issue price or face value?

On face value, whatever the issue price.

Can debentures be issued at a discount under the Companies Act, 2013?

Yes. The ISC syllabus includes issue of debentures at par, premium and discount.

Where is TDS Payable shown?

Under Current Liabilities, until it is paid to the government.

What if Securities Premium is not enough to write off the loss?

Write off the balance from the Statement of Profit and Loss, and then from Capital Reserve, in the same year.