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Issue of Debenture with Redeemable Condition (Issued at Par, Redeemable at Discount)

Arjun EP

Published on: July 17, 2020

Meaning of Debentures

Debentures are also known bonds and debt but there are slightly differences.

Company issues debentures; government and semi government issues bonds.

Both debentures and bonds are long-term loan.

The owner of debentures is called debenture holders.

Debentures have fixed interest rate and maturity period.

Normally, interest is payable annually or sometime half yearly.

Debenture holders have priority to receive interest and refund money before equity shareholder at the time dissolution of firm.

Issue of Debentures with Redeemable Conditions

The company can issue different types of debentures.

Out of them redeemable debentures should be redeemed after maturity period.

At the time of repayment, principal amount and arrear interest is paid to debenture holders.

Debentures can be redeemed at par, discount or premium.

Issue of debentures

1. At par

2. At discount

3. At premium

Redemption of debentures

1. At par

2. At discount

3. At premium

From above short cut, detailed rules are:

1.1 Issued at par, redeemable at par

1.2 Issued at par, redeemable at discount

1.3 Issued at par, redeemable at premium

2.1 Issued at discount, redeemable at par

2.2 Issued at discount, redeemable at discount

2.3 Issued at discount, redeemable at premium

3.1 Issued at premium, redeemable at par

3.2 Issued at premium, redeemable at discount

3.3 Issued at premium, redeemable at premium

Keep in Mind (KIM)

Discount on issue of debentures is capital loss, it debited in journal entry

Premium on issue of debentures is capital gain, it is credited in journal entry

Discount on redemption of debentures is capital gain, it is future gain. No entry at the time of issue.

Premium on redemption of debentures is capital loss, it is future loss. It credited as well as debited

Discount on issue and premium on redemption = loss on issue of debentures

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =

PROBLEM: 9

ABC Company Ltd provides you following transactions relating to debentures:

(1) Issued 60,000; 7% debentures of Rs 100 each at par and redeemable at par

(2) Issued 60,000; 7% debentures of Rs 100 each at par and redeemable at 5% discount

(3) Issued 60,000; 7% debentures of Rs 100 each at par and redeemable at 5% premium

(4) Issued 60,000; 7% debentures of Rs 100 each at 10% discount and redeemable at par

(5) Issued 60,000; 7% debentures of Rs 100 each at 10% discount and redeemable at 5% discount

(6) Issued 60,000; 7% debentures of Rs 100 each at 10% discount and redeemable at 5% premium

(7) Issued 60,000; 7% debentures of Rs 100 each at 10% premium and redeemable at par

(8) Issued 60,000; 7% debentures of Rs 100 each at 10% premium and redeemable at 5% discount

(9) Issued 60,000; 7% debentures of Rs 100 each at 10% premium and redeemable at 5% premium

Required: Journal entry with redeemable conditions

Solution:

(2) Issued at par, redeemable at 5% discount

Face value = 60,000 x Rs 100 = Rs 60,00,000

Discount on redemption = 60,00,000@5% = 3,00,000

Discount on redemption of debentures is future capital gain, so no entry at the time of issue.

Company credits this gain in journal entry at the time of redemption or transfer to debenture holders.

Journal Entries

In the book of ABC Company Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
	Issued at par
a	Bank account To 7% Debentures account (Being- 60,000; 7% debentures of Rs 100 each issued at par, redeemable at par)	Dr		60,00,000	60,00,000
	Debenture transfer to debenture holders
b	7% Debenture account To Debentures holder account To Discount on redemption of debenture (Being- debenture transferred to debenture holders at discount)	Dr		60,00,000	57,00,000 3,00,000
	Redeemed at 5% discount
c	Debenture holders account To Bank account (Being- payment made to debenture holders)	Dr		57,00,000	57,00,000