NCERT Class 12 Accountancy Issue and Redemption of Debentures

Issue and Redemption of Debentures

A company raises its capital by means of issue of shares. But the funds raised by the issue of shares are seldom adequate to meet their long-term financial needs of a company. Hence, most companies turn to raising long-term funds als  through debentures which are issued either throughthe route of private placement or by offering the same to the public. The finances raised through debentures are also known as long-term debt. This chapter deals with the accounting treatment of issue and redemption of debentures and other related aspects.

SECTION I

2.1 Meaning of Debentures

Debenture: The word ‘debenture’ has been derived from a Latin word ‘debere’ which means to borrow. Debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates. According, to section 2(12) of The Companies Act,1956 ‘Debenture’ includes Debenture Stock, Bonds and any other securities of a company whether constituting a charge on the assets of the company or not. Bond: Bond is also an instrument of acknowledgement of debt. Traditionally, the Government issued bonds, but these days’ bonds are also being issued by semi-government and non-governmental organisations. The terms ‘debentures’ and ‘Bonds’ are now being used inter-changeably.

2.2 Distinction between Shares and Debentures

Ownership: A shareholder is an owner of the company whereas a debenture holder is only a loan creditor. A share is a part of the owned capital whereas a debenture is a part of borrowed capital.

Return: The return on shares is known as dividend while the return on debentures is called interest. The rate of return on shares may vary from year to year depending upon the profits of the company but the rate of interest on debentures is pre-fixed. The payment of dividend is an appropriation out profits, whereas the payment of interest is a charge on profits and is to be paid even if there is no profit.

Repayment: Normally, the amount of shares is not returned during the life of the company, while the debentures are issued for a specified period and the amount of debentures is returned after that period. However, an amendment in 1998 to The Companies Act, 1956 has permitted the companies to buy back its own shares from the market, particularly, when the price of its share in the market is lower than the book value.

Voting Rights: Shareholders enjoy voting rights whereas debentureholders do not normally enjoy any voting right. Issue on Discount: Both shares and debentures can be issued at a discount. However, shares can be issued at discount in accordance with the provisions of Section 79 of The Companies Act, 1956 which stipulates that the rate of discount must not exceed 10% of the face value.

Security : Shares are not secured by any charge whereas the debentures are generally secured and carry a fixed or floating charge over the assets of the company.

Question for Practice

Short Answer Questions

1. What is meant by a Debenture?

2. What does a Bearer Debenture mean?

3. State the meaning of ‘Debentures issued as a Collateral Security’.

4. What is meant by ‘Issue of debentures for Consideration other than Cash’?

5. What is meant by ‘Issue of debenture at discount and redeemable at premium?

6. What is ‘Capital Reserve’?

7. What is meant by a ‘Irredeemable Debenture’?

8. What is a ‘Convertible Debenture’?

9. What is meant by ‘Mortgaged Debentures’?

10. What is discount on issue of debentures?

11. What is meant by ‘Premium on Redemption of Debentures’?

12. How debentures are different from shares? Give two points.

13. Name the head under which ‘discount on issue of debentures’ appears in the Balance Sheet of a company.

14. What is meant by redemption of debentures?

15. Can the company purchase its own debentures?

16. What is meant by redemption of debentures by conversion?

17. How would you deal with ‘Premium on Redemption of Debentures?

18. What is meant by ‘Redemption out of Capital?

19. What is meant by redemption of debentures by ‘Purchase in the Open Market’?

20. Under which head is the ‘Debenture Redemption Reserve’ shown in the Balance Sheet.

Long Answer Questions

1. What is meant by a debenture? Explain the different types of debentures?

2. Distinguish between a debenture and a share. Why debenture is known as loan capital? Explain.

3. Describe the meaning of ‘Debenture Issued as Collateral Securities’. What accounting treatment is given to the issue of debentures in the books of accounts?

Please refer to attached file for NCERT Class 12 Accountancy Issue and Redemption of Debentures