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Issue of Debenture with Redeemable Condition (Issued at Premium, Redeemable at Premium)

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:

(9) Issued at 10% premium, redeemable at 5% premium

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

Premium on issue = 60,00,000@10% = 6,00,000

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

Premium on issue of debenture is capital gain; company credits it in journal entry at the time of issue.

Premium on redemption of debentures is future capital loss; it is recorded in debit as well as credit at the time of issue.

Journal Entries

In the book of ABC Company Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
	Issued at 10% premium
a	Bank account Loss on issue of debenture account To 7% Debentures account To Premium on issue of deb. (security premium) To Premium on redemption of debenture (Being- 60,000; 7% debentures of Rs 100 each issued at 10% premium, redeemable at 5% premium)	Dr Dr		66,00,000 3,00,000^#	60,00,000 6,00,000 3,00,000^#
	Debenture transfer to debenture holders
b	7% Debenture account Premium on redemption of debenture To Debentures holder account (Being- debenture transferred to debenture holders at premium)	Dr Dr		60,00,000 3,00,000	63,00,000
	Redeemed at par
c	Debenture holders account To Bank account (Being- payment made to debenture holders)	Dr		63,00,000	63,00,000