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

What Redemption of Debentures is about

Weightage: Redemption 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

Debenture Redemption Reserve: who creates it and how much

DRR is a reserve created out of profits available for dividend, to make sure profits are retained for repayment.

Company	DRR
Listed companies, including listed NBFCs (RBI) and HFCs (NHB), public issue or private placement	Not required
Unlisted NBFCs and HFCs, public issue or private placement	Not required
Unlisted companies other than NBFCs and HFCs	10% of outstanding debentures
Banks, all-India financial institutions, other financial institutions	Exempt

Entry: Surplus (Statement of Profit and Loss) Dr To Debenture Redemption Reserve A/c. It may be built up over the years before redemption; starting in the year of issue spreads the burden over several years' profits, so no single year's dividend capacity is squeezed. After redemption, DRR (in proportion to debentures redeemed) is transferred to General Reserve.

Worked example

Suppose an unlisted manufacturing company has ₹40,00,000 debentures due for redemption on 31st March 2026 and its DRR shows ₹2,50,000. How much must it transfer, and what happens to DRR after redemption? [2 marks]

Try it first, then show the solutionSolution

1. Required DRR = 10% of ₹40,00,000 = ₹4,00,000; transfer ₹1,50,000 from surplus before redemption.
2. After redemption: DRR A/c Dr ₹4,00,000 To General Reserve A/c ₹4,00,000.

Answer: Transfer ₹1,50,000; then the whole ₹4,00,000 goes to General Reserve.

Debenture Redemption Investment: 15% by 30th April

Companies that must invest (listed companies including listed NBFCs and HFCs, and unlisted companies other than NBFCs and HFCs) invest or deposit, on or before 30th April each year, at least 15% of the debentures maturing during the year ending 31st March of the next year, in:

• deposits with a scheduled bank free of any charge or lien;
• unencumbered Central or State Government securities;
• unencumbered securities or bonds under Section 20 of the Indian Trusts Act, 1882.

The amount cannot be used for any other purpose. Interest is earned on it (calculate from the date of investment to 31st March: usually 11 months), with TDS deducted by the bank. On the redemption date the DRI is realised; any difference from book value is a gain or loss.

Exempt: banks, all-India financial institutions, other financial institutions, and unlisted NBFCs and HFCs.

Worked example

Suppose a listed company has ₹12,00,000 debentures maturing on 31st March 2026. It deposits the required amount in a bank on 30th April 2025 at 5% p.a. Calculate the deposit and the interest for 2025-26. [2 marks]

Try it first, then show the solutionSolution

1. Deposit = 15% × 12,00,000 = ₹1,80,000.
2. Interest = 1,80,000 × 5% × 11/12 = ₹8,250 (30th April to 31st March).

Answer: Deposit ₹1,80,000; interest ₹8,250 (less TDS when received).

Interest on DRI with TDS; gain or loss on sale of DRI

Interest on DRI (income):

1. Bank A/c Dr (net) and TDS Receivable A/c Dr (tax deducted) To Interest on DRI A/c (gross).
2. Interest on DRI A/c Dr To Statement of Profit and Loss (closing).

Sale of DRI:

• At a gain: Bank A/c Dr To DRI A/c; DRI A/c Dr To Gain on Sale of DRI A/c (or one entry: Bank Dr To DRI and To Gain on Sale of DRI); close Gain on Sale of DRI A/c to the Statement of Profit and Loss.
• At a loss: Bank A/c Dr and Loss on Sale of DRI A/c Dr To DRI A/c; then Statement of Profit and Loss Dr To Loss on Sale of DRI A/c.

If a commission is paid on sale, deduct it from the sale value first. The DRI A/c itself always closes at nil once the investment is sold.

Worked example

Suppose a company bought DRI of ₹3,00,000 (15% of ₹20,00,000) on 30th April 2025 and sold it on 31st March 2026 at 103% less 0.5% commission. Find the gain and give the closing entry. [3 marks]

Try it first, then show the solutionSolution

1. Sale value = 3,00,000 × 103% = ₹3,09,000; commission 0.5% = ₹1,545; net = ₹3,07,455.
2. Gain = 3,07,455 − 3,00,000 = ₹7,455, debited to DRI A/c and credited to Gain on Sale of DRI A/c.
3. Closing: Gain on Sale of DRI A/c Dr ₹7,455 To Statement of Profit and Loss ₹7,455.

Answer: Gain ₹7,455, closed to the Statement of Profit and Loss.

Redemption out of profits and out of capital

Out of capital: no profit is set aside; debentures are repaid from the company's existing funds. This is the case for companies not required to create DRR (listed companies, unlisted NBFCs/HFCs, banks). A listed company can therefore redeem its whole issue out of capital (though it must still make the DRI).

Out of profits: an amount equal to the debentures redeemed (or the part redeemed out of profits) is transferred from surplus to DRR, so that profits, not capital, finance repayment; after redemption DRR is transferred to General Reserve. For an unlisted company that keeps only the required 10% DRR, redemption is out of profits to the extent of 10% and out of capital for the rest.

Redemption entries are the same in every case:

1. Debentures A/c Dr (face value) and Premium on Redemption of Debentures A/c Dr (if any) To Debenture Holders' A/c.
2. Debenture Holders' A/c Dr To Bank A/c.

Worked example

Suppose a listed NBFC has issued ₹500 crore non-convertible debentures. What is the maximum it can redeem out of capital and why? [1 mark]

Try it first, then show the solutionSolution

1. Listed NBFCs are not required to create DRR, so no profits need be retained for redemption.

Answer: The whole ₹500 crore can be redeemed out of capital.

Lump-sum redemption and redemption in instalments (theory)

Lump sum: all debentures are repaid on the due date (or earlier at the company's option), as in most ISC numericals.

Annual instalments by draw of lots (theory only): a fixed number of debentures is repaid each year; the debentures to be repaid are chosen by lottery. The syllabus notes that the DRI bought for one instalment is not entirely sold at the year-end, but sold or topped up to maintain 15% of the face value of the debentures to be redeemed in the next instalment; with equal instalments, the DRI bought for the first instalment remains invested until the last instalment.

Premium on redemption is a liability created at issue and debited at redemption; only face value passes through the Debentures A/c.

Worked example

Suppose ₹10,00,000 debentures are redeemable in five equal annual instalments. How much DRI is kept, and for how long? [2 marks]

Try it first, then show the solutionSolution

1. Each instalment = ₹2,00,000; DRI = 15% × 2,00,000 = ₹30,000.
2. With equal instalments, the ₹30,000 bought for the first instalment remains invested until the last instalment.

Answer: ₹30,000, kept invested until the final instalment.

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

• Debenture Redemption Reserve and Investment
• Redemption in Lump Sum out of Profits or Capital
• Redemption in Instalments by Draw of Lots

Redemption of Debentures: key facts

DRR (unlisted company other than NBFC/HFC)

10% of outstanding debentures

DRI

15% of debentures maturing by 31st March of next year, invested by 30th April

Interest on DRI

DRI × rate × 11/12 (if invested on 30th April); net = gross − TDS

Sale of DRI

Sale value = DRI × price% − commission; gain/loss = sale value − book value

Amount due on redemption

Face value + premium on redemption (+ interest due, less TDS, if paid together)

How the board asks Redemption of Debentures

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

Tricks to remember Redemption of Debentures

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

• 10 and 15

  DRR 10% of outstanding; DRI 15% of maturing.

  Use it when: Every redemption sum.

• Listed: no reserve, still invest

  Listed companies skip DRR but must still make DRI; unlisted NBFCs/HFCs skip both.

  Use it when: MCQs on the rules.

• Close what you open

  Interest on DRI, Gain or Loss on Sale of DRI: each is closed to the Statement of P&L at the year-end.

  Use it when: Ledger questions.

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 A style)

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

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

• ✗Mistake: Crediting debenture holders with face value plus premium as "debentures"

  CISCE examiners' comments, 2024: "Credited Debenture holders' A/c with ₹ 51,00,000 for debentures instead of ₹ 50,00,000 debentures and ₹ 1,00,000 premium".

  ✓Do this: Debentures A/c and Premium on Redemption A/c are debited separately; only face value passes through Debentures A/c.

  Usually costs: 1 mark.

• ✗Mistake: Gain or loss on DRI not shown through its own account

  CISCE examiners' comments, 2024: "Did not debit DRI A/c with the gain on sale of investments, or wrote 'Gain A/c' instead of 'Gain on sale of DRI A/c'"; CISCE examiners' comments, 2025: "Transferred loss on sale directly to P/L instead of via Loss on sale of DRI A/c."

  ✓Do this: Record the gain or loss in Gain/Loss on Sale of DRI A/c, then close it to the Statement of P&L.

  Usually costs: ½-1 mark.

• ✗Mistake: Interest on DRI for 12 months; account not closed

  CISCE examiners' comments, 2024: "Calculated interest for twelve months instead of eleven months"; "Did not pass the entry closing Interest on DRI A/c".

  ✓Do this: Count from 30th April to 31st March (11 months); close Interest on DRI to the Statement of P&L.

  Usually costs: 1 mark.

• ✗Mistake: Not knowing the DRR rules for listed companies

  CISCE examiners' comments, 2024: "Chose option (a) ₹ 100 crore instead of ₹ 1,000 crore" for a listed NBFC.

  ✓Do this: Listed companies (including NBFCs) create no DRR, so all debentures can be redeemed out of capital.

  Usually costs: 1 mark.

• ✗Mistake: Journal instead of ledger; wrong TDS

  CISCE examiners' comments, 2025: "Passed journal entries instead of ledger; could not compute sale value and loss on sale of DRI."; "Incorrect interest and TDS calculation."

  ✓Do this: Prepare the accounts asked for, with dates; TDS = rate × gross interest.

  Usually costs: Up to the whole 3-mark question.

Practice questions on 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

   DRR is required for:
   (a) a listed company
   (b) an unlisted NBFC
   (c) an unlisted manufacturing company
   (d) a banking company

   Hint

   Only one category.

   Answer

   (c)

2. Q2 · 1 mark · Very short answerBoard level

   By what date must DRI be made each year?

   Hint

   One month after the year starts.

   Answer

   On or before 30th April.

3. Q3 · 1 mark · Very short answerBoard level

   Give the entry for transferring DRR of ₹2,00,000 after redemption.

   Hint

   To which reserve?

   Answer

   Debenture Redemption Reserve A/c Dr ₹2,00,000 To General Reserve A/c ₹2,00,000.

4. Q4 · 2 marks · Short answerHarder board level

   A company invested ₹2,40,000 in DRI on 30th April 2025 at 8% p.a. Calculate the interest for 2025-26 and pass the entry for its receipt (TDS 10%).

   Hint

   11 months.

   Answer

   Interest = 2,40,000 × 8% × 11/12 = ₹17,600; TDS ₹1,760. Bank Dr 15,840; TDS Receivable Dr 1,760 To Interest on DRI 17,600.

5. Q5 · 3 marks · Short answerHarder board level

   DRI of ₹4,50,000 is sold at 102% less 1% commission. Find the gain and give the entries.

   Hint

   Commission on sale value.

   Answer

   Sale = 4,59,000; commission 4,590; net 4,54,410; gain ₹4,410. Bank Dr 4,54,410 To DRI 4,50,000 and To Gain on Sale of DRI 4,410; Gain on Sale of DRI Dr 4,410 To Statement of P&L.

6. Q6 · 2 marks · Short answerHOTS / competency

   A student credited Debenture Holders' A/c with ₹21,00,000 as "Debentures" when ₹20,00,000 debentures were redeemed at 5% premium. Correct the entry.

   Hint

   Face value only through Debentures A/c.

   Answer

   Debentures A/c Dr ₹20,00,000; Premium on Redemption of Debentures A/c Dr ₹1,00,000 To Debenture Holders' A/c ₹21,00,000. The Debentures A/c moves only at face value.

7. Q7 · 2 marks · Short answerHOTS / competency

   Explain why DRI does not by itself make the redemption "out of profits".

   Hint

   Asset versus reserve.

   Answer

   DRI is an asset (cash set aside), not a retention of profit. Redemption is out of profits only to the extent profits are transferred to DRR (a reserve), which reduces distributable profit.

8. Q8 · 1 mark · Very short answerBoard level

   Interest on DRI was calculated for 12 months by a student although the investment was made on 30th April. What is the error in a ₹3,00,000 deposit at 6%?

   Hint

   11 months.

   Answer

   Correct interest = ₹16,500 (11 months), not ₹18,000.

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.DRR for an unlisted company (not NBFC/HFC)?Show answer

   10% of outstanding debentures.

2. 2.DRI percentage and date?Show answer

   15% of debentures maturing next year, by 30th April.

3. 3.Who is exempt from both DRR and DRI?Show answer

   Banks, all-India financial institutions, other financial institutions, unlisted NBFCs and HFCs.

4. 4.What happens to DRR after redemption?Show answer

   Transferred to General Reserve.

5. 5.Redemption in instalments: in syllabus for numericals?Show answer

   No, theory only.

Quick revision checklist

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

• ☐DRR 10% only for unlisted companies other than NBFCs/HFCs.
• ☐DRI 15% by 30th April for listed and unlisted (other than NBFC/HFC) companies.
• ☐Interest on DRI: 11 months; TDS receivable.
• ☐Gain/Loss on Sale of DRI A/c, closed to Statement of P&L.
• ☐Debentures Dr (face value) + Premium on Redemption Dr To Debenture Holders.
• ☐DRR → General Reserve after redemption.

Redemption of Debentures: frequently asked questions