Meet Your Tutor
Debenture entries become straightforward when you separate issue price, redemption value, interest and any loss on issue. I will help you read the terms before passing an entry, keep the liability view clear, and verify every debit and credit with a short accounting reason.
Let us begin with a picture you already know. Suppose your uncle needs ₹5,00,000 to expand his sweet shop. He borrows it from you and writes you a signed paper: “I owe you ₹5,00,000. I will pay you 9% interest every year, and I will return the money after five years.” That paper is a promise, and you are a lender — not an owner. You do not get a share of his profits; you get your fixed interest, rain or shine. Now replace your uncle with a company, and replace that handwritten paper with a printed certificate. That certificate is a debenture.
That is genuinely the whole idea. A debenture is simply a loan with a certificate. Everything else in this chapter — premium, discount, collateral security, terms of redemption, writing off losses — is just bookkeeping detail hanging off that one simple sentence. If you keep coming back to “this is a loan, not ownership”, the journal entries stop feeling like magic spells and start feeling obvious.
Many students find this chapter scary because it looks like a wall of journal entries. It is not. There are really only about six situations, and each one has a pattern. We will build them one at a time, slowly, with full worked solutions where every line is explained. Take your time. There is no prize for rushing.
We checked the official CBSE curriculum document for Class XII Accountancy (Code 055), session 2026-27, published on cbseacademic.nic.in. The unit is titled “Accounting for Debentures”, and its scope is: meaning and types of debentures; issue of debentures at par, at a premium and at a discount; issue of debentures for consideration other than cash; issue of debentures with terms of redemption; debentures as collateral security; interest on debentures; and writing off discount / loss on issue of debentures.
Two things you must notice:
1. The accounting for redemption of debentures is NOT in your syllabus. The learning outcome asks only that you can “state the meaning of redemption of debentures”. Redemption methods (lump sum, draw of lots, purchase from open market, conversion) and Debenture Redemption Reserve / Debenture Redemption Investment entries have been removed. What is examinable is the terms of redemption recorded at the time of issue — that is, premium payable on redemption.
2. TDS on debenture interest is explicitly excluded. The syllabus says in so many words: “interest on debentures (concept of TDS is excluded)”.
We have still kept redemption and TDS in this page, but clearly parked at the end in a section marked Beyond the current syllabus, because students writing competitive exams, and schools following older question banks, still need them. Always confirm against your own school’s copy of the current syllabus before you decide to skip anything.
What You’ll Learn
- Meaning and Features of a Debenture
- Debenture vs Share — The Difference That Explains Everything
- Types of Debentures
- Issue of Debentures for Cash — At Par, At Premium, At Discount
- Issue of Debentures in Instalments
- Issue of Debentures for Consideration Other Than Cash
- Issue of Debentures as Collateral Security
- Terms of Issue and Terms of Redemption — The Six Combinations
- Interest on Debentures
- Writing Off Discount or Loss on Issue of Debentures
- Presentation of Debentures in the Balance Sheet
- Redemption of Debentures (Beyond the Current Syllabus)
- Practice Worksheet — 10 Questions with Full Solutions
Your Game Plan
- Day 1: Read the meaning, the debenture-vs-share table and the types. Pure understanding, no numbers. Do not write a single journal entry today.
- Day 2: Issue for cash — at par, at premium, at discount, first in lump sum, then in instalments. Redo every worked example on paper with the solution covered.
- Day 3: Issue for consideration other than cash, and issue as collateral security. These two are small and score full marks when done cleanly.
- Day 4: The six combinations of terms of issue and terms of redemption. This is the heart of the chapter. Learn the grid, then practise until you can write the entry without looking.
- Day 5: Interest on debentures and writing off discount / loss on issue. Short topics, guaranteed marks.
- Day 6: The full practice worksheet, timed, closed book. Then mark yourself honestly and go back to the sections you fumbled.
Meaning and Features of a Debenture
A company needs money for the long term — a new plant, a second factory, machinery. It has two honest ways to get it. It can invite people to become owners (issue shares), or it can invite people to become lenders (issue debentures). A debenture is a document issued by a company under its seal acknowledging a debt, stating the rate of interest and the terms on which the money will be repaid.
Notice the word “acknowledging a debt”. That is the legal heart of it. The debenture holder is a creditor of the company. Read the features slowly:
- It is borrowed money (a liability), not owned money. Debentures appear on the Equity and Liabilities side of the Balance Sheet under Non-Current Liabilities → Long-term Borrowings, never under Shareholders’ Funds.
- Interest is a charge against profit, not an appropriation of profit. This is the sentence examiners love. It means interest must be paid even if the company makes a loss, exactly like rent or salary. Dividend, by contrast, is paid only out of profits.
- The rate of interest is fixed and printed on the face of the debenture. That is why we always name the account with the rate in it — “9% Debentures A/c”, never just “Debentures A/c”.
- Debenture holders have no voting rights. They lent money; they did not buy a say in how the company is run.
- They are usually secured by a charge on the company’s assets, and they are repayable on a stated date.
- Interest on debentures is an allowable business expense for tax purposes, which is one big reason companies like raising money this way.
One more vocabulary point that trips people up. The face value (or nominal value) is what is printed on the certificate — say ₹100. The issue price is what the buyer actually pays — it might be ₹100, or ₹110, or ₹94. The redemption value is what the company will eventually pay back — again ₹100, or maybe ₹110. These three are independent of each other, and confusing them is the single biggest cause of wrong answers in this chapter. Keep them in three separate mental boxes.
Statement: “Vaishnavi Textiles Ltd issued 5,000 9% Debentures of ₹100 each at par, redeemable at par after five years, the full amount payable on application.”
Let us decode it phrase by phrase before touching a single figure. 5,000 is the number of debentures. ₹100 each is the face value. 9% is the annual interest rate on face value. At par means issue price = face value = ₹100, so nothing extra is charged and nothing is given away. Redeemable at par means the company will one day repay ₹100 per debenture, no premium. Full amount on application means there are no instalments — the whole ₹100 arrives in one go.
Working note: Total money received = 5,000 × ₹100 = ₹5,00,000. Since issue price equals face value, there is no premium and no discount. This is the simplest case that exists.
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| (i) | Bank A/c Dr. To Debenture Application & Allotment A/c (Being application money received on 5,000 debentures @ ₹100 each) | 5,00,000 | 5,00,000 |
| (ii) | Debenture Application & Allotment A/c Dr. To 9% Debentures A/c (Being 5,000 9% debentures of ₹100 each allotted at par) | 5,00,000 | 5,00,000 |
Balance check: Entry (i) — Dr ₹5,00,000 = Cr ₹5,00,000. Entry (ii) — Dr ₹5,00,000 = Cr ₹5,00,000. Both balance.
Why it works: Entry (i) records the physical fact that cash has landed in the bank; at that moment we do not yet know who will get debentures, so we park the credit in a temporary account. Entry (ii) closes that temporary account and converts it into the real, permanent liability. Two entries, because two different economic events: money arrives, then debentures are allotted.
Don’t move on until that feels comfortable. Cover the solution, take a blank sheet, and write both entries from the statement alone. If you can do that, you have already cleared the first hurdle.
Debenture vs Share — The Difference That Explains Everything
This comparison is worth 3 or 4 marks on its own, but more importantly it is the mental map for the whole chapter. Learn it as a story about owner versus lender, not as a list to cram.
| Basis | Share | Debenture |
|---|---|---|
| Status of holder | Owner (member) of the company | Creditor (lender) of the company |
| Return | Dividend — varies, and only if there are profits | Interest — fixed, payable whether or not there are profits |
| Treatment of return | Appropriation of profit | Charge against profit (a finance cost) |
| Voting rights | Equity shareholders normally have voting rights | No voting rights at all |
| Security | Unsecured — no charge on assets | Usually secured by a fixed or floating charge on assets |
| Repayment | Not normally returned during the life of the company | Repaid (redeemed) on the stated date |
| Order on winding up | Paid last, after every creditor is settled | Paid before shareholders |
| Issue at discount | Heavily restricted by law | Permitted, with no such restriction |
| Balance Sheet head | Shareholders’ Funds → Share Capital | Non-Current Liabilities → Long-term Borrowings |
Types of Debentures
Debentures are classified on four different bases. Students often mix these up because they try to memorise one long list. Don’t. Learn the four questions instead, and the answers fall out naturally.
| Basis (the question being asked) | Types | What it means in plain words |
|---|---|---|
| Security Is any asset pledged? | Secured (mortgage) / Unsecured (naked) | Secured debentures carry a charge on specific assets, so if the company defaults those assets can be sold to repay holders. Unsecured ones rest only on the company’s general creditworthiness. |
| Tenure Will they be repaid? | Redeemable / Irredeemable (perpetual) | Redeemable debentures have a repayment date. Irredeemable ones have no fixed repayment date and are repaid only on winding up — these are largely of theoretical interest now. |
| Convertibility Can they become shares? | Convertible (fully or partly) / Non-convertible | A convertible debenture can be exchanged for equity shares later. A partly convertible one converts in part and is repaid in part. A non-convertible debenture stays a loan until it is repaid. |
| Registration Whose name is on it? | Registered / Bearer | Registered debentures record the holder’s name in the company’s register and transfer needs a proper transfer deed. Bearer debentures pass by mere delivery, like cash, and interest goes to whoever holds the coupon. |
Issue of Debentures for Cash — At Par, At Premium, At Discount
Here is the one rule that governs this entire section, and if you hold on to it you will never go wrong:
Think of it like this. The certificate says ₹100. That is what the company promises. If an eager investor pays ₹110 for it, the company has made a ₹10 gain on the deal — that gain is a capital receipt and goes to Securities Premium. If instead the company had to sweeten the offer and accept ₹94, it has effectively given away ₹6 to attract the lender — that is a cost, and it goes to Discount on Issue. Either way, the promise on the certificate stays ₹100.
Problem: Kaveri Cements Ltd issued 4,000 8% Debentures of ₹100 each at a premium of 10%, redeemable at par. The entire amount was payable on application. Pass the journal entries.
Working notes — do these first, always:
- Face value per debenture = ₹100 → total face value = 4,000 × ₹100 = ₹4,00,000 (this is what we credit to 8% Debentures A/c)
- Premium = 10% of ₹100 = ₹10 per debenture → total premium = 4,000 × ₹10 = ₹40,000
- Issue price = ₹100 + ₹10 = ₹110 → cash received = 4,000 × ₹110 = ₹4,40,000
- Cross-check: ₹4,00,000 + ₹40,000 = ₹4,40,000 ✓
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| (i) | Bank A/c Dr. To Debenture Application & Allotment A/c (Being application money received on 4,000 debentures @ ₹110 each) | 4,40,000 | 4,40,000 |
| (ii) | Debenture Application & Allotment A/c Dr. To 8% Debentures A/c To Securities Premium A/c (Being 4,000 8% debentures of ₹100 each issued at a premium of 10%) | 4,40,000 | 4,00,000 40,000 |
Balance check: Entry (ii) — Dr ₹4,40,000; Cr ₹4,00,000 + ₹40,000 = ₹4,40,000. Balanced.
Why it works: The company will one day repay ₹100 per debenture, not ₹110. So its liability is only ₹4,00,000. The extra ₹40,000 is not a liability at all — it is a capital gain belonging to the company, parked in Securities Premium (a reserve under Shareholders’ Funds). Notice that premium on issue is credited immediately and never causes any loss.
Problem: Nandini Foods Ltd issued 6,000 10% Debentures of ₹100 each at a discount of 6%, redeemable at par. The whole amount was received on application. Pass the journal entries.
Working notes:
- Total face value = 6,000 × ₹100 = ₹6,00,000
- Discount = 6% of ₹100 = ₹6 per debenture → total discount = 6,000 × ₹6 = ₹36,000
- Issue price = ₹100 − ₹6 = ₹94 → cash received = 6,000 × ₹94 = ₹5,64,000
- Cross-check: ₹5,64,000 + ₹36,000 = ₹6,00,000 ✓
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| (i) | Bank A/c Dr. To Debenture Application & Allotment A/c (Being application money received on 6,000 debentures @ ₹94 each) | 5,64,000 | 5,64,000 |
| (ii) | Debenture Application & Allotment A/c Dr. Discount on Issue of Debentures A/c Dr. To 10% Debentures A/c (Being 6,000 10% debentures of ₹100 each issued at a discount of 6%, redeemable at par) | 5,64,000 36,000 | 6,00,000 |
Balance check: Entry (ii) — Dr ₹5,64,000 + ₹36,000 = ₹6,00,000; Cr ₹6,00,000. Balanced.
Why it works: The company received only ₹5,64,000 but has promised to repay ₹6,00,000. That ₹36,000 gap is a genuine cost of borrowing. Accounting refuses to let a credit float unmatched, so the gap is debited to Discount on Issue of Debentures — a loss that will be written off (we will handle that in a later section). The liability credited is still the full face value, exactly as the Key Rule promised.
Issue of Debentures in Instalments
So far the whole amount arrived in one go. In practice a company often collects the money in stages — some on application, some on allotment, sometimes a further call. Nothing conceptually new happens. You simply record each stage as it occurs, and by the end the totals must add up to exactly the same figures as before.
The routine is mechanical once you see it:
- Money received at any stage: debit Bank, credit that stage’s account (Debenture Application A/c, Debenture Allotment A/c, Debenture First Call A/c).
- Amount becomes due at any stage: debit that stage’s account, credit Debentures A/c (and Securities Premium if premium sits in that instalment; debit Discount on Issue if the discount is being recognised there).
- Where do premium and discount go? Premium is credited in whichever instalment the question says it is included in. Discount, by long-standing convention, is recorded in full at the allotment stage.
Problem: Ambika Steel Ltd issued 8,000 9% Debentures of ₹100 each at a premium of ₹20 per debenture, redeemable at par. The amount was payable ₹40 on application and ₹80 on allotment (including the premium of ₹20). All money was duly received. Pass the journal entries.
Working notes — start with the arithmetic check:
- Instalments total = ₹40 + ₹80 = ₹120 = ₹100 face value + ₹20 premium ✓ (so the question is internally consistent)
- Application money = 8,000 × ₹40 = ₹3,20,000 — all of it towards face value, since the premium sits in allotment
- Allotment money = 8,000 × ₹80 = ₹6,40,000, which splits into:
• premium portion = 8,000 × ₹20 = ₹1,60,000
• face-value portion = 8,000 × ₹60 = ₹4,80,000 - Total credited to 9% Debentures A/c = ₹3,20,000 + ₹4,80,000 = ₹8,00,000 = 8,000 × ₹100 ✓
- Total Securities Premium = ₹1,60,000 = 8,000 × ₹20 ✓
| No. | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| (i) | Bank A/c Dr. To Debenture Application A/c (Being application money received on 8,000 debentures @ ₹40 each) | 3,20,000 | 3,20,000 |
| (ii) | Debenture Application A/c Dr. To 9% Debentures A/c (Being application money transferred on allotment of 8,000 debentures) | 3,20,000 | 3,20,000 |
| (iii) | Debenture Allotment A/c Dr. To 9% Debentures A/c To Securities Premium A/c (Being allotment money due on 8,000 debentures @ ₹80 each, including premium ₹20) | 6,40,000 | 4,80,000 1,60,000 |
| (iv) | Bank A/c Dr. To Debenture Allotment A/c (Being allotment money received in full) | 6,40,000 | 6,40,000 |
Balance check: (i) 3,20,000 = 3,20,000 ✓ | (ii) 3,20,000 = 3,20,000 ✓ | (iii) 6,40,000 = 4,80,000 + 1,60,000 ✓ | (iv) 6,40,000 = 6,40,000 ✓ | Total in Debentures A/c = ₹8,00,000 ✓
Why it works: Look at entries (iii) and (iv). They look similar but do completely different jobs. Entry (iii) says “this money is now legally owed to us” — it creates the receivable and simultaneously creates the liability and the premium. Entry (iv) says “and now it has actually arrived” — it converts the receivable into cash. Due first, received second. Students who merge these two entries lose marks even when their totals are right.
Problem: Sundaram Alloys Ltd issued 5,000 8% Debentures of ₹100 each at a discount of 10%, redeemable at par. The amount was payable ₹30 on application, ₹40 on allotment and ₹20 on first and final call. All amounts were received. Pass the journal entries.
Working notes:
- Instalments total = ₹30 + ₹40 + ₹20 = ₹90. Face value is ₹100, so discount = ₹10 per debenture ✓ (matches “discount of 10%”)
- Application = 5,000 × ₹30 = ₹1,50,000
- Allotment = 5,000 × ₹40 = ₹2,00,000; discount recognised here = 5,000 × ₹10 = ₹50,000
- First and final call = 5,000 × ₹20 = ₹1,00,000
- Total credited to 8% Debentures A/c = ₹1,50,000 + (₹2,00,000 + ₹50,000) + ₹1,00,000 = ₹5,00,000 = 5,000 × ₹100 ✓
| No. | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| (i) | Bank A/c Dr. To Debenture Application A/c (Being application money received @ ₹30 on 5,000 debentures) | 1,50,000 | 1,50,000 |
| (ii) | Debenture Application A/c Dr. To 8% Debentures A/c (Being application money transferred on allotment) | 1,50,000 | 1,50,000 |
| (iii) | Debenture Allotment A/c Dr. Discount on Issue of Debentures A/c Dr. To 8% Debentures A/c (Being allotment money due @ ₹40 and discount of ₹10 per debenture recorded) | 2,00,000 50,000 | 2,50,000 |
| (iv) | Bank A/c Dr. To Debenture Allotment A/c (Being allotment money received) | 2,00,000 | 2,00,000 |
| (v) | Debenture First & Final Call A/c Dr. To 8% Debentures A/c (Being first and final call due @ ₹20 per debenture) | 1,00,000 | 1,00,000 |
| (vi) | Bank A/c Dr. To Debenture First & Final Call A/c (Being call money received in full) | 1,00,000 | 1,00,000 |
Balance check: Every entry above has equal debits and credits; entry (iii) is the only one with two debits — ₹2,00,000 + ₹50,000 = ₹2,50,000 = credit ✓. Total cash received = ₹1,50,000 + ₹2,00,000 + ₹1,00,000 = ₹4,50,000 = 5,000 × ₹90 ✓
Why it works: The discount of ₹50,000 is not spread across instalments — it is recognised once, in full, at allotment. Why allotment? Because that is the moment the company legally commits to issuing those debentures at that price. From that instant the full ₹100 liability exists, so the ₹10 shortfall must be recognised at the same time.
Issue of Debentures for Consideration Other Than Cash
Sometimes a company buys something — a machine, a building, an entire running business — and instead of paying cash it hands over debentures. The seller becomes a lender to the company. It sounds exotic; the accounting is remarkably tidy.
There are always exactly two entries, and it helps to think of them as two separate conversations:
- “We bought something and now we owe the vendor.” Debit the asset (or assets and goodwill), credit the vendor.
- “We are settling that debt with debentures.” Debit the vendor, credit Debentures A/c at face value, with Securities Premium or Discount on Issue for the difference.
Number of debentures issued = Purchase Consideration ÷ Issue Price
Divide by the issue price, not the face value. If debentures of ₹100 are issued at a 25% premium, you divide by ₹125. If issued at a 6% discount, you divide by ₹94. Getting this one division right is usually worth the whole question.
When an entire business is bought (assets plus liabilities), one extra step appears. Compare the purchase consideration with the net assets taken over:
- Net Assets = Assets taken over − Liabilities taken over
- If Purchase Consideration > Net Assets → the excess is Goodwill (debited, an asset — you paid extra for reputation)
- If Purchase Consideration < Net Assets → the difference is Capital Reserve (credited — you got a bargain)
Problem: Meenakshi Polymers Ltd purchased machinery worth ₹7,20,000 from Rathore Machines Ltd. The payment was made by issuing 9% Debentures of ₹100 each at par. Pass the journal entries.
Working note: Issue price = ₹100 (at par). Number of debentures = ₹7,20,000 ÷ ₹100 = 7,200 debentures. Face value credited = 7,200 × ₹100 = ₹7,20,000. No premium, no discount.
| No. | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| (i) | Machinery A/c Dr. To Rathore Machines Ltd A/c (Being machinery purchased from Rathore Machines Ltd) | 7,20,000 | 7,20,000 |
| (ii) | Rathore Machines Ltd A/c Dr. To 9% Debentures A/c (Being 7,200 9% debentures of ₹100 each issued at par in settlement) | 7,20,000 | 7,20,000 |
Balance check: Both entries — Dr ₹7,20,000 = Cr ₹7,20,000 ✓
Why it works: Notice that Bank A/c never appears. No cash moved. The vendor’s account acts as a bridge: it is created in entry (i) and extinguished in entry (ii). At the end, the company owns a machine and owes 7,200 debenture holders — which is exactly what happened in real life.
Problem: Girnar Ceramics Ltd took over the assets of ₹18,50,000 and liabilities of ₹4,30,000 of Shreeji Traders for an agreed purchase consideration of ₹15,00,000. The amount was settled by issuing 10% Debentures of ₹100 each at a premium of 25%. Pass the journal entries.
Working notes — go one line at a time:
- Net Assets = ₹18,50,000 − ₹4,30,000 = ₹14,20,000
- Purchase Consideration = ₹15,00,000, which is MORE than net assets
- Goodwill = ₹15,00,000 − ₹14,20,000 = ₹80,000 (debited)
- Issue price = ₹100 + 25% of ₹100 = ₹125
- Number of debentures = ₹15,00,000 ÷ ₹125 = 12,000 debentures
- Credit to 10% Debentures A/c = 12,000 × ₹100 = ₹12,00,000
- Credit to Securities Premium A/c = 12,000 × ₹25 = ₹3,00,000
- Cross-check: ₹12,00,000 + ₹3,00,000 = ₹15,00,000 ✓
| No. | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| (i) | Sundry Assets A/c Dr. Goodwill A/c Dr. To Sundry Liabilities A/c To Shreeji Traders A/c (Being assets and liabilities of Shreeji Traders taken over, excess of purchase consideration over net assets recorded as goodwill) | 18,50,000 80,000 | 4,30,000 15,00,000 |
| (ii) | Shreeji Traders A/c Dr. To 10% Debentures A/c To Securities Premium A/c (Being 12,000 10% debentures of ₹100 each issued at 25% premium in settlement of purchase consideration) | 15,00,000 | 12,00,000 3,00,000 |
Balance check: Entry (i) — Dr ₹18,50,000 + ₹80,000 = ₹19,30,000; Cr ₹4,30,000 + ₹15,00,000 = ₹19,30,000 ✓. Entry (ii) — Dr ₹15,00,000; Cr ₹12,00,000 + ₹3,00,000 = ₹15,00,000 ✓
Why it works: Girnar agreed to pay ₹15,00,000 for a bundle of net assets objectively worth ₹14,20,000. Why would anyone overpay? Because Shreeji Traders has a customer list, a brand, a location — things that are valuable but do not sit on a balance sheet. Accounting gives that intangible extra a name and a home: Goodwill, ₹80,000. And because the debentures were placed at ₹125 each, only 12,000 of them were needed rather than 15,000 — the premium works in the company’s favour.
Problem: Konkan Marine Ltd purchased a fleet of trucks valued at ₹9,40,000 from Deshmukh Motors. Payment was made by issuing 8% Debentures of ₹100 each at a discount of 6%, redeemable at par. Pass the journal entries.
Working notes:
- Issue price = ₹100 − 6% of ₹100 = ₹94
- Number of debentures = ₹9,40,000 ÷ ₹94 = 10,000 debentures
- Credit to 8% Debentures A/c = 10,000 × ₹100 = ₹10,00,000
- Discount on Issue = 10,000 × ₹6 = ₹60,000 (debited)
- Cross-check: ₹9,40,000 + ₹60,000 = ₹10,00,000 ✓
| No. | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| (i) | Trucks A/c Dr. To Deshmukh Motors A/c (Being trucks purchased from Deshmukh Motors) | 9,40,000 | 9,40,000 |
| (ii) | Deshmukh Motors A/c Dr. Discount on Issue of Debentures A/c Dr. To 8% Debentures A/c (Being 10,000 8% debentures of ₹100 each issued at 6% discount in settlement) | 9,40,000 60,000 | 10,00,000 |
Balance check: Entry (ii) — Dr ₹9,40,000 + ₹60,000 = ₹10,00,000; Cr ₹10,00,000 ✓
Why it works: Konkan Marine got trucks worth ₹9,40,000 but committed to repaying ₹10,00,000. The ₹60,000 gap is the price of borrowing on those terms, and it goes to Discount on Issue exactly as it did in the cash case. The transaction being non-cash changes nothing about the principle.
Issue of Debentures as Collateral Security
Picture this. You go to a bank for a loan of ₹8,00,000. The bank says, “Fine, but we want extra comfort.” So along with the main security you hand over some debentures worth ₹10,00,000 with a clear understanding: if I repay the loan normally, you return these to me untouched; only if I default may you sell them.
That is collateral security — a secondary or additional security. The key word is additional. These debentures are not sold to anyone, no money is received against them, and no interest is paid on them while they sit idle with the lender.
CBSE expects you to know both accepted treatments. Learn them as a pair.
| Method 1 — No entry passed | Method 2 — Entry passed | |
|---|---|---|
| Journal entry | None. Only the loan itself is recorded. | Debenture Suspense A/c Dr. To Debentures A/c (at face value of collateral debentures) |
| How it is shown | The loan appears under Long-term Borrowings, with an explanatory note stating that debentures of ₹__ have been issued as collateral security. | Under Long-term Borrowings, Debentures are shown and Debenture Suspense A/c is deducted from them, so the net effect on the Balance Sheet total is nil. |
| Effect on totals | No effect whatsoever | No net effect (the two cancel out) |
| On repayment of loan | Nothing to reverse; the note is simply dropped. | The entry is reversed: Debentures A/c Dr. To Debenture Suspense A/c |
Problem: Panchganga Sugar Ltd took a loan of ₹8,00,000 from Bank of Maharashtra and issued 10,000 9% Debentures of ₹100 each as collateral security. Show the journal entries under both methods and the Balance Sheet presentation.
Working note: Face value of collateral debentures = 10,000 × ₹100 = ₹10,00,000. The loan itself is ₹8,00,000. Note carefully that these two figures are different, and both appear — the collateral is deliberately more than the loan so the bank is over-covered.
Entry common to both methods — recording the loan:
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Bank A/c Dr. To Bank Loan A/c (Being loan taken from Bank of Maharashtra) | 8,00,000 | 8,00,000 |
Method 1 — No entry for the collateral debentures. Nothing further is recorded. In the Balance Sheet, under Non-Current Liabilities → Long-term Borrowings, you show Bank Loan ₹8,00,000 with a note: “Secured by issue of 10,000 9% Debentures of ₹100 each (₹10,00,000) as collateral security.”
Method 2 — Entry passed:
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Debenture Suspense A/c Dr. To 9% Debentures A/c (Being 10,000 9% debentures of ₹100 each issued as collateral security against a bank loan) | 10,00,000 | 10,00,000 |
Balance Sheet extract under Method 2:
| Non-Current Liabilities — Long-term Borrowings | ₹ |
|---|---|
| Bank Loan | 8,00,000 |
| 9% Debentures (issued as collateral security) 10,00,000 Less: Debenture Suspense A/c (10,00,000) | Nil |
| Total | 8,00,000 |
Balance check: Dr ₹10,00,000 = Cr ₹10,00,000 ✓, and under both methods the Balance Sheet total for borrowings is ₹8,00,000 — proving the two methods are genuinely equivalent.
Why it works: Method 2 exists so that the debentures actually issued are visible on the face of the accounts rather than buried in a note. But since no money was received against them, it would be dishonest to let them inflate the liabilities. So the Debenture Suspense A/c is created purely to cancel them out. Suspense here does not mean “we are confused”; it means “held in abeyance until it becomes real”.
Terms of Issue and Terms of Redemption — The Six Combinations
This is the section that separates students who have understood the chapter from students who have memorised it. Take it slowly; it is genuinely the most important idea here.
Two independent decisions are made when debentures are issued:
- Terms of issue — what the investor pays now: at par (₹100), at a premium (more than ₹100), or at a discount (less than ₹100).
- Terms of redemption — what the company will pay back later: at par (₹100) or at a premium (more than ₹100).
Three choices now × two choices later = six possible combinations. And here is the crucial accounting principle that makes all six manageable:
If the company has promised to repay more than the face value, that extra amount is a known future loss. Accounting refuses to wait five years to admit it. So the premium payable on redemption is recorded right now, at the time of issue:
• the future obligation is credited to Premium on Redemption of Debentures A/c (a liability), and
• the corresponding loss is debited to Loss on Issue of Debentures A/c.
And therefore: Loss on Issue of Debentures = Discount on issue (if any) + Premium payable on redemption (if any).
Read that formula once more. It explains every single one of the six rows below. Now here is the complete grid — this table is worth photographing and sticking on your wall.
| Case | Terms of Issue | Terms of Redemption | Journal Entry at the time of issue |
|---|---|---|---|
| 1 | At par | At par | Bank A/c Dr. To Debentures A/c No premium, no discount, no loss. The simplest case. |
| 2 | At premium | At par | Bank A/c Dr. To Debentures A/c To Securities Premium A/c Company gains. No loss at all. |
| 3 | At discount | At par | Bank A/c Dr. Discount on Issue of Debentures A/c Dr. To Debentures A/c Loss = discount only. |
| 4 | At par | At premium | Bank A/c Dr. Loss on Issue of Debentures A/c Dr. To Debentures A/c To Premium on Redemption of Debentures A/c Loss = premium on redemption only. |
| 5 | At premium | At premium | Bank A/c Dr. Loss on Issue of Debentures A/c Dr. To Debentures A/c To Securities Premium A/c To Premium on Redemption of Debentures A/c The longest entry — five accounts. Loss = premium on redemption only. |
| 6 | At discount | At premium | Bank A/c Dr. Loss on Issue of Debentures A/c Dr. To Debentures A/c To Premium on Redemption of Debentures A/c Loss = discount + premium on redemption. The worst case for the company. |
Problem: Trilokchand Papers Ltd issued 4,000 9% Debentures of ₹100 each at a discount of 5%, redeemable at a premium of 10%. The entire amount was received on application. Pass the journal entry for the issue.
Working notes — build each figure separately:
- Face value (credited to Debentures A/c) = 4,000 × ₹100 = ₹4,00,000
- Issue price = ₹100 − 5% = ₹95 → cash received = 4,000 × ₹95 = ₹3,80,000
- Discount on issue = 4,000 × ₹5 = ₹20,000
- Redemption value = ₹100 + 10% = ₹110 → premium payable on redemption = 4,000 × ₹10 = ₹40,000
- Loss on Issue = ₹20,000 + ₹40,000 = ₹60,000
- Balance test: Debits ₹3,80,000 + ₹60,000 = ₹4,40,000. Credits ₹4,00,000 + ₹40,000 = ₹4,40,000 ✓
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Bank A/c Dr. Loss on Issue of Debentures A/c Dr. To 9% Debentures A/c To Premium on Redemption of Debentures A/c (Being 4,000 9% debentures of ₹100 each issued at 5% discount, redeemable at 10% premium) | 3,80,000 60,000 | 4,00,000 40,000 |
Why it works: Trace the money. Trilokchand collected ₹3,80,000 today, and has promised to hand back ₹4,40,000 one day. The company is ₹60,000 worse off over the life of the loan, and prudence says recognise that ₹60,000 now, not in year five. Notice also that Discount on Issue does not appear as a separate account here — when debentures are redeemable at a premium, the discount is absorbed into the single account called Loss on Issue of Debentures.
Problem: Anantpur Solar Ltd issued 3,000 8% Debentures of ₹100 each at a premium of 8%, redeemable at a premium of 5%. The full amount was received on application. Pass the journal entry for the issue.
Working notes:
- Face value = 3,000 × ₹100 = ₹3,00,000
- Issue price = ₹108 → cash received = 3,000 × ₹108 = ₹3,24,000
- Securities Premium = 3,000 × ₹8 = ₹24,000
- Premium payable on redemption = 3,000 × ₹5 = ₹15,000
- Loss on Issue = ₹0 discount + ₹15,000 = ₹15,000
- Balance test: Debits ₹3,24,000 + ₹15,000 = ₹3,39,000. Credits ₹3,00,000 + ₹24,000 + ₹15,000 = ₹3,39,000 ✓
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Bank A/c Dr. Loss on Issue of Debentures A/c Dr. To 8% Debentures A/c To Securities Premium A/c To Premium on Redemption of Debentures A/c (Being 3,000 8% debentures of ₹100 each issued at 8% premium, redeemable at 5% premium) | 3,24,000 15,000 | 3,00,000 24,000 15,000 |
Why it works: This is the five-account entry, and students panic at it unnecessarily. The two premiums are completely unrelated and must never be netted off. Securities Premium ₹24,000 is a gain received today and belongs to reserves. Premium on Redemption ₹15,000 is a liability payable in the future. One is a credit balance that helps the company; the other is a debt. Do not let the shared word “premium” fool you into combining them.
Interest on Debentures
This is the friendliest topic in the chapter, and it is almost free marks — provided you remember one thing.
Interest on debentures is a charge against profit — a finance cost. It is payable whether the company has earned a profit or is drowning in losses. In the Statement of Profit and Loss it appears under Finance Costs. There are three entries in the cycle:
- Interest becomes due: Debenture Interest A/c Dr. To Debenture Holders A/c
- Interest is paid: Debenture Holders A/c Dr. To Bank A/c
- At year end, transfer to P&L: Statement of Profit and Loss Dr. To Debenture Interest A/c
Problem: Bhavnagar Chemicals Ltd issued 6,000 9% Debentures of ₹100 each on 1 April 2026. Interest is payable half-yearly on 30 September and 31 March. Pass the journal entries for the year ended 31 March 2027.
Working notes:
- Total face value = 6,000 × ₹100 = ₹6,00,000
- Annual interest = 9% of ₹6,00,000 = ₹54,000
- Half-yearly interest = ₹54,000 ÷ 2 = ₹27,000
- Check: ₹27,000 × 2 = ₹54,000 ✓
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 30 Sep 2026 | Debenture Interest A/c Dr. To Debenture Holders A/c (Being half-yearly interest due on 9% debentures) | 27,000 | 27,000 |
| 30 Sep 2026 | Debenture Holders A/c Dr. To Bank A/c (Being half-yearly interest paid) | 27,000 | 27,000 |
| 31 Mar 2027 | Debenture Interest A/c Dr. To Debenture Holders A/c (Being half-yearly interest due on 9% debentures) | 27,000 | 27,000 |
| 31 Mar 2027 | Debenture Holders A/c Dr. To Bank A/c (Being half-yearly interest paid) | 27,000 | 27,000 |
| 31 Mar 2027 | Statement of Profit and Loss Dr. To Debenture Interest A/c (Being debenture interest for the year transferred to Statement of Profit and Loss as a finance cost) | 54,000 | 54,000 |
Balance check: Each of the four half-yearly entries is ₹27,000 = ₹27,000 ✓. The closing transfer is ₹54,000 = ₹27,000 + ₹27,000 ✓, which correctly empties the Debenture Interest A/c.
Why it works: The Debenture Interest A/c is an expense account that collects the year’s cost in instalments and is then emptied into the Statement of Profit and Loss. The Debenture Holders A/c is just a short-lived payable — created when interest becomes due, killed when it is paid. If a question asks only for entries “for the year”, all five of the above are expected.
Writing Off Discount or Loss on Issue of Debentures
We have created two loss accounts along the way — Discount on Issue of Debentures and Loss on Issue of Debentures. Both are debit balances, and a debit balance sitting around forever is not acceptable. It has to be written off, and the syllabus is very specific about how.
Discount or loss on issue of debentures is to be written off in the year the debentures are allotted — that is, all in one go, not spread over the life of the debentures. It is written off:
(1) first from Securities Premium Reserve, if such a balance exists, and
(2) then the balance from the Statement of Profit and Loss as a finance cost (AS 16).
Entry: Securities Premium Reserve A/c Dr. and Statement of Profit and Loss Dr. To Discount / Loss on Issue of Debentures A/c
The order matters. You must exhaust Securities Premium Reserve first, and only the remainder touches the Statement of Profit and Loss. If there is no Securities Premium Reserve at all, the entire loss goes to the Statement of Profit and Loss.
Problem: On 1 April 2026 Vindhya Cables Ltd issued 5,000 10% Debentures of ₹100 each at a discount of 4%, redeemable at a premium of 6%. The company had a Securities Premium Reserve of ₹18,000 on that date. Pass the journal entries for the issue and for writing off the loss.
Working notes:
- Face value = 5,000 × ₹100 = ₹5,00,000
- Issue price = ₹96 → cash received = 5,000 × ₹96 = ₹4,80,000
- Discount on issue = 5,000 × ₹4 = ₹20,000
- Premium payable on redemption = 5,000 × ₹6 = ₹30,000
- Loss on Issue = ₹20,000 + ₹30,000 = ₹50,000
- Write-off: from Securities Premium Reserve ₹18,000; remaining ₹50,000 − ₹18,000 = ₹32,000 to Statement of Profit and Loss
- Balance test on issue entry: Debits ₹4,80,000 + ₹50,000 = ₹5,30,000; Credits ₹5,00,000 + ₹30,000 = ₹5,30,000 ✓
| No. | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| (i) | Bank A/c Dr. Loss on Issue of Debentures A/c Dr. To 10% Debentures A/c To Premium on Redemption of Debentures A/c (Being 5,000 10% debentures of ₹100 each issued at 4% discount, redeemable at 6% premium) | 4,80,000 50,000 | 5,00,000 30,000 |
| (ii) | Securities Premium Reserve A/c Dr. Statement of Profit and Loss Dr. To Loss on Issue of Debentures A/c (Being loss on issue written off — first against Securities Premium Reserve, balance to Statement of Profit and Loss) | 18,000 32,000 | 50,000 |
Balance check: Entry (i) — ₹5,30,000 = ₹5,30,000 ✓. Entry (ii) — Dr ₹18,000 + ₹32,000 = ₹50,000; Cr ₹50,000 ✓. The Loss on Issue A/c now shows a nil balance.
Why it works: Securities Premium Reserve is a capital reserve created out of amounts received above face value. Using it first to absorb a capital-type loss is logical — capital gains absorbing capital losses. Only what it cannot absorb is allowed to hit the year’s profits. And because the whole thing happens in the year of allotment, nothing is left dangling on the asset side of future balance sheets.
Presentation of Debentures in the Balance Sheet
Companies present their Balance Sheet in the format prescribed by Schedule III, Part I of the Companies Act, 2013. You only need to know where the debenture-related items sit. Here is the map.
| Item | Where it appears | Why |
|---|---|---|
| 9% Debentures | Equity & Liabilities → Non-Current Liabilities → Long-term Borrowings | It is borrowed money repayable after more than twelve months. |
| Securities Premium (Reserve) | Equity & Liabilities → Shareholders’ Funds → Reserves and Surplus | It is a capital gain belonging to the company, not a liability. |
| Premium on Redemption of Debentures | Non-Current Liabilities → Other Long-term Liabilities (or Other Current Liabilities if redemption is due within a year) | It is a genuine future obligation to pay extra on redemption. |
| Debenture Interest outstanding | Current Liabilities → Other Current Liabilities | Interest already due but not yet paid is payable shortly. |
| Debentures issued as collateral security | Long-term Borrowings — either as a note only, or shown and reduced by Debenture Suspense A/c | No money was received, so the net effect must be nil. |
| Discount / Loss on Issue of Debentures | Normally nowhere — it is written off in full in the year of allotment | Under the current treatment nothing is carried forward to later balance sheets. |
Redemption of Debentures (Beyond the Current Syllabus)
Everything in this section is provided for completeness and for students preparing for CA Foundation, CS Executive and similar exams. For the CBSE Class 12 board exam in 2026-27, the only redemption-related requirements are (a) that you can state the meaning of redemption of debentures, and (b) that you can record the terms of redemption at the time of issue — which we covered in the six-combinations section. The methods, the Debenture Redemption Reserve and the Debenture Redemption Investment shown below are not examinable this session. Please confirm against your own school’s copy of the syllabus before deciding what to study.
Meaning (this part you DO need). Redemption of debentures means the repayment of the amount of debentures to the debenture holders — that is, discharging the liability, either on the due date or earlier, as per the terms of issue. That single sentence is what the syllabus learning outcome asks for.
Sources of finance for redemption — out of capital, out of profits, or out of a fresh issue of shares or debentures.
Methods of redemption (for reference only):
- Lump sum — the whole lot is repaid on one stated maturity date. Simplest and most common.
- Draw of lots (instalments) — a proportion is redeemed each year, and the specific debentures to be repaid are picked by drawing lots so the selection is fair.
- Purchase from the open market — the company buys its own debentures off the market, usually when they are trading below face value, and cancels them. A gain or loss arises on cancellation.
- Conversion — convertible debentures are exchanged for new shares or new debentures instead of being repaid in cash. No cash leaves the company.
• DRR — unlisted companies are required to create a DRR of 10% of the outstanding value of debentures out of profits available for dividend. Listed companies, NBFCs registered with the RBI and Housing Finance Companies registered with the NHB were exempted from creating a DRR (for both public issues and private placements).
• DRI — companies required to create a DRR must, on or before 30 April each year, invest or deposit a sum of not less than 15% of the amount of debentures maturing during the year ending 31 March of the next year.
Because these are statutory percentages that can be amended by the Ministry of Corporate Affairs at any time, do not quote them from memory in a professional exam without checking the current version of the Rules. They are, in any case, outside the CBSE 2026-27 scope.
Problem: Chandrapur Textiles Ltd, an unlisted company, has 5,000 10% Debentures of ₹100 each outstanding, redeemable at par in lump sum on 31 March 2027. Show the entries assuming DRR at 10% of outstanding debentures and DRI at 15% of debentures maturing.
Working notes:
- Outstanding debentures = 5,000 × ₹100 = ₹5,00,000
- DRR required = 10% of ₹5,00,000 = ₹50,000
- DRI required = 15% of ₹5,00,000 = ₹75,000, to be invested on or before 30 April 2026
| No. | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| (i) | Surplus i.e. Balance in Statement of P&L Dr. To Debenture Redemption Reserve A/c (Being DRR created at 10% of outstanding debentures) | 50,000 | 50,000 |
| (ii) | Debenture Redemption Investment A/c Dr. To Bank A/c (Being 15% of debentures maturing invested on or before 30 April) | 75,000 | 75,000 |
| (iii) | Bank A/c Dr. To Debenture Redemption Investment A/c (Being investment encashed on maturity) | 75,000 | 75,000 |
| (iv) | 10% Debentures A/c Dr. To Debenture Holders A/c (Being amount due on redemption at par) | 5,00,000 | 5,00,000 |
| (v) | Debenture Holders A/c Dr. To Bank A/c (Being payment made to debenture holders) | 5,00,000 | 5,00,000 |
| (vi) | Debenture Redemption Reserve A/c Dr. To General Reserve A/c (Being DRR transferred to General Reserve after redemption) | 50,000 | 50,000 |
Balance check: (i) 50,000 = 50,000 ✓ (ii) 75,000 = 75,000 ✓ (iii) 75,000 = 75,000 ✓ (iv) 5,00,000 = 5,00,000 ✓ (v) 5,00,000 = 5,00,000 ✓ (vi) 50,000 = 50,000 ✓
Why it works: The DRR is a ring-fence around profits, stopping the company from paying out as dividend money it will need to repay lenders. The DRI forces it to actually park real cash so the repayment is not a scramble. Once the debentures are gone, the ring-fence has done its job and the DRR is released to General Reserve. Again — reference only for CBSE 2026-27.
Practice Worksheet — 10 Questions with Full Solutions
Work these on paper with the answers hidden. Give yourself about 60 minutes for all ten. Then open each accordion and mark yourself strictly — a journal entry that does not balance scores zero, however good the working looked. All questions are on the in-syllabus portion for 2026-27.
Q1. State any three differences between a share and a debenture. (3 marks)
Show Answer
Any three of the following, each with both sides written out:
- Status of holder: A shareholder is an owner (member) of the company, whereas a debenture holder is a creditor (lender) of the company.
- Nature of return: A shareholder receives dividend, which varies and is payable only out of profits; a debenture holder receives interest at a fixed rate, payable whether or not the company earns a profit.
- Voting rights: Equity shareholders normally enjoy voting rights; debenture holders have no voting rights at all.
- Treatment in accounts: Dividend is an appropriation of profit; debenture interest is a charge against profit (a finance cost).
- Security: Shares are unsecured; debentures are usually secured by a charge on the company’s assets.
Marking note: one mark per complete difference. Writing only the debenture column scores nothing, because a difference needs two sides.
Q2. Ratnagiri Foods Ltd issued 7,500 8% Debentures of ₹100 each at par, redeemable at par, the entire amount being payable on application. All the money was received. Pass the necessary journal entries. (3 marks)
Show Answer
Working: Total = 7,500 × ₹100 = ₹7,50,000. At par, so no premium and no discount.
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Bank A/c Dr. To Debenture Application & Allotment A/c (Being application money received on 7,500 debentures @ ₹100 each) | 7,50,000 | 7,50,000 |
| Debenture Application & Allotment A/c Dr. To 8% Debentures A/c (Being 7,500 8% debentures of ₹100 each allotted at par) | 7,50,000 | 7,50,000 |
Balance check: ₹7,50,000 = ₹7,50,000 in both entries ✓
Q3. Haldia Petro Ltd issued 6,000 9% Debentures of ₹100 each at a premium of ₹25 per debenture, redeemable at par. The amount was payable ₹45 on application (including ₹10 premium) and ₹80 on allotment (including ₹15 premium). All money was duly received. Pass the journal entries. (6 marks)
Show Answer
Working notes:
- Check: ₹45 + ₹80 = ₹125 = ₹100 + ₹25 premium ✓ and ₹10 + ₹15 = ₹25 ✓
- Application = 6,000 × ₹45 = ₹2,70,000 → premium part 6,000 × ₹10 = ₹60,000; debenture part 6,000 × ₹35 = ₹2,10,000
- Allotment = 6,000 × ₹80 = ₹4,80,000 → premium part 6,000 × ₹15 = ₹90,000; debenture part 6,000 × ₹65 = ₹3,90,000
- Total to 9% Debentures A/c = ₹2,10,000 + ₹3,90,000 = ₹6,00,000 ✓ ; Total Securities Premium = ₹60,000 + ₹90,000 = ₹1,50,000 ✓
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Bank A/c Dr. To Debenture Application A/c (Being application money received @ ₹45 on 6,000 debentures) | 2,70,000 | 2,70,000 |
| Debenture Application A/c Dr. To 9% Debentures A/c To Securities Premium A/c (Being application money transferred on allotment, including premium ₹10 per debenture) | 2,70,000 | 2,10,000 60,000 |
| Debenture Allotment A/c Dr. To 9% Debentures A/c To Securities Premium A/c (Being allotment money due @ ₹80, including premium ₹15 per debenture) | 4,80,000 | 3,90,000 90,000 |
| Bank A/c Dr. To Debenture Allotment A/c (Being allotment money received in full) | 4,80,000 | 4,80,000 |
Balance check: ₹2,70,000 = ₹2,10,000 + ₹60,000 ✓ ; ₹4,80,000 = ₹3,90,000 + ₹90,000 ✓
Q4. Sabarmati Engineering Ltd purchased assets worth ₹13,44,000 and paid for them by issuing 9% Debentures of ₹100 each at a premium of 12%. Calculate the number of debentures issued and pass the journal entries. (4 marks)
Show Answer
Working notes:
- Issue price = ₹100 + 12% = ₹112
- Number of debentures = ₹13,44,000 ÷ ₹112 = 12,000 debentures
- 9% Debentures A/c = 12,000 × ₹100 = ₹12,00,000 ; Securities Premium = 12,000 × ₹12 = ₹1,44,000
- Check: ₹12,00,000 + ₹1,44,000 = ₹13,44,000 ✓
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Sundry Assets A/c Dr. To Vendor A/c (Being assets purchased) | 13,44,000 | 13,44,000 |
| Vendor A/c Dr. To 9% Debentures A/c To Securities Premium A/c (Being 12,000 9% debentures of ₹100 each issued at 12% premium in settlement) | 13,44,000 | 12,00,000 1,44,000 |
Balance check: ₹13,44,000 = ₹12,00,000 + ₹1,44,000 ✓
Q5. Netravati Mills Ltd took a loan of ₹6,00,000 from a bank and issued 8,000 10% Debentures of ₹100 each as collateral security. Show the journal entries under both accepted methods. (4 marks)
Show Answer
Working: Loan = ₹6,00,000. Face value of collateral debentures = 8,000 × ₹100 = ₹8,00,000. Note that these are deliberately different figures.
Entry for the loan (both methods):
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Bank A/c Dr. To Bank Loan A/c (Being loan taken from bank) | 6,00,000 | 6,00,000 |
Method 1 — No entry. The collateral issue is disclosed only by way of a note under Long-term Borrowings: “Secured by issue of 8,000 10% Debentures of ₹100 each (₹8,00,000) as collateral security.”
Method 2 — Entry passed:
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Debenture Suspense A/c Dr. To 10% Debentures A/c (Being 8,000 10% debentures issued as collateral security) | 8,00,000 | 8,00,000 |
In the Balance Sheet under Method 2, 10% Debentures ₹8,00,000 is shown and Debenture Suspense A/c ₹8,00,000 is deducted from it, leaving nil — so total Long-term Borrowings is ₹6,00,000 under both methods.
Balance check: ₹6,00,000 = ₹6,00,000 ✓ ; ₹8,00,000 = ₹8,00,000 ✓
Q6. Gomti Agro Ltd issued 2,500 8% Debentures of ₹100 each at par, redeemable at a premium of 8%. The whole amount was received on application. Pass the journal entry for the issue. (3 marks)
Show Answer
Working notes — this is Case 4 of the six-combination grid (issued at par, redeemable at premium):
- Cash received = 2,500 × ₹100 = ₹2,50,000 (at par, so issue price = face value)
- Premium payable on redemption = 2,500 × ₹8 = ₹20,000
- Loss on Issue = ₹0 discount + ₹20,000 = ₹20,000
- Balance test: ₹2,50,000 + ₹20,000 = ₹2,70,000 = ₹2,50,000 + ₹20,000 ✓
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Bank A/c Dr. Loss on Issue of Debentures A/c Dr. To 8% Debentures A/c To Premium on Redemption of Debentures A/c (Being 2,500 8% debentures of ₹100 each issued at par, redeemable at 8% premium) | 2,50,000 20,000 | 2,50,000 20,000 |
Trap to avoid: “At par” does not mean “no entry beyond Bank and Debentures”. The redemption premium still has to be recognised now.
Q7. Malwa Agro Ltd issued 4,500 9% Debentures of ₹100 each at a discount of 8%, redeemable at a premium of 12%. Pass the journal entry for the issue and show the calculation of Loss on Issue. (4 marks)
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Working notes — Case 6, the worst-case combination:
- Face value = 4,500 × ₹100 = ₹4,50,000
- Issue price = ₹92 → cash = 4,500 × ₹92 = ₹4,14,000
- Discount on issue = 4,500 × ₹8 = ₹36,000
- Premium on redemption = 4,500 × ₹12 = ₹54,000
- Loss on Issue = ₹36,000 + ₹54,000 = ₹90,000
- Balance test: Dr ₹4,14,000 + ₹90,000 = ₹5,04,000 ; Cr ₹4,50,000 + ₹54,000 = ₹5,04,000 ✓
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Bank A/c Dr. Loss on Issue of Debentures A/c Dr. To 9% Debentures A/c To Premium on Redemption of Debentures A/c (Being 4,500 9% debentures of ₹100 each issued at 8% discount, redeemable at 12% premium) | 4,14,000 90,000 | 4,50,000 54,000 |
Q8. Chenab Papers Ltd issued 8,000 10% Debentures of ₹100 each on 1 April 2026. Interest is payable half-yearly on 30 September and 31 March. Pass the journal entries for the year ended 31 March 2027, including the transfer to the Statement of Profit and Loss. (4 marks)
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Working notes: Face value = 8,000 × ₹100 = ₹8,00,000. Annual interest = 10% of ₹8,00,000 = ₹80,000. Half-yearly = ₹40,000. (TDS is excluded per the 2026-27 syllabus.)
| Date | Particulars | Dr (₹) | Cr (₹) |
|---|---|---|---|
| 30 Sep 2026 | Debenture Interest A/c Dr. To Debenture Holders A/c | 40,000 | 40,000 |
| 30 Sep 2026 | Debenture Holders A/c Dr. To Bank A/c | 40,000 | 40,000 |
| 31 Mar 2027 | Debenture Interest A/c Dr. To Debenture Holders A/c | 40,000 | 40,000 |
| 31 Mar 2027 | Debenture Holders A/c Dr. To Bank A/c | 40,000 | 40,000 |
| 31 Mar 2027 | Statement of Profit and Loss Dr. To Debenture Interest A/c (Being interest for the year transferred as a finance cost) | 80,000 | 80,000 |
Balance check: ₹40,000 × 4 entries all balance ✓ ; closing transfer ₹80,000 = ₹40,000 + ₹40,000 ✓
Q9. On 1 April 2026 Kolar Minerals Ltd issued 3,000 9% Debentures of ₹100 each at a discount of 5%, redeemable at a premium of 10%. The company had a Securities Premium Reserve of ₹22,000. Pass the entries for the issue and for writing off the loss on issue. (6 marks)
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Working notes:
- Face value = 3,000 × ₹100 = ₹3,00,000 ; issue price ₹95 → cash = 3,000 × ₹95 = ₹2,85,000
- Discount = 3,000 × ₹5 = ₹15,000 ; premium on redemption = 3,000 × ₹10 = ₹30,000
- Loss on Issue = ₹15,000 + ₹30,000 = ₹45,000
- Write-off: Securities Premium Reserve ₹22,000 first; balance ₹45,000 − ₹22,000 = ₹23,000 to Statement of Profit and Loss
- Balance test on issue: ₹2,85,000 + ₹45,000 = ₹3,30,000 = ₹3,00,000 + ₹30,000 ✓
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Bank A/c Dr. Loss on Issue of Debentures A/c Dr. To 9% Debentures A/c To Premium on Redemption of Debentures A/c (Being 3,000 9% debentures issued at 5% discount, redeemable at 10% premium) | 2,85,000 45,000 | 3,00,000 30,000 |
| Securities Premium Reserve A/c Dr. Statement of Profit and Loss Dr. To Loss on Issue of Debentures A/c (Being loss on issue written off in the year of allotment) | 22,000 23,000 | 45,000 |
Balance check: ₹3,30,000 = ₹3,30,000 ✓ ; ₹22,000 + ₹23,000 = ₹45,000 ✓
Q10. Tungabhadra Foods Ltd took over assets of ₹22,00,000 and liabilities of ₹5,60,000 of Bansal Agro for a purchase consideration of ₹15,40,000, settled by issuing 10% Debentures of ₹100 each at a premium of 10%. Pass the journal entries. (6 marks)
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Working notes — watch the direction carefully here:
- Net Assets = ₹22,00,000 − ₹5,60,000 = ₹16,40,000
- Purchase Consideration = ₹15,40,000, which is LESS than net assets
- Therefore Capital Reserve = ₹16,40,000 − ₹15,40,000 = ₹1,00,000 (credited — a bargain purchase, not goodwill)
- Issue price = ₹110 → number of debentures = ₹15,40,000 ÷ ₹110 = 14,000 debentures
- 10% Debentures A/c = 14,000 × ₹100 = ₹14,00,000 ; Securities Premium = 14,000 × ₹10 = ₹1,40,000
- Check: ₹14,00,000 + ₹1,40,000 = ₹15,40,000 ✓
| Particulars | Dr (₹) | Cr (₹) |
|---|---|---|
| Sundry Assets A/c Dr. To Sundry Liabilities A/c To Bansal Agro A/c To Capital Reserve A/c (Being assets and liabilities of Bansal Agro taken over, excess of net assets over purchase consideration credited to Capital Reserve) | 22,00,000 | 5,60,000 15,40,000 1,00,000 |
| Bansal Agro A/c Dr. To 10% Debentures A/c To Securities Premium A/c (Being 14,000 10% debentures of ₹100 each issued at 10% premium in settlement) | 15,40,000 | 14,00,000 1,40,000 |
Balance check: ₹22,00,000 = ₹5,60,000 + ₹15,40,000 + ₹1,00,000 ✓ ; ₹15,40,000 = ₹14,00,000 + ₹1,40,000 ✓
Why Capital Reserve and not Goodwill? Because the company paid less than the net assets were worth. There is no reputation being paid for — there is a bargain being gained, and gains of a capital nature go to Capital Reserve.
If some of those came out wrong, that is genuinely fine — it is information, not a verdict. Go back to the one section that caused the trouble, reread the worked example there, and try the question again tomorrow with fresh eyes. Debentures reward patient, repeated practice more than almost any other chapter in the syllabus.
Kaizen — the one-percent rule. You do not need to master this chapter today. You need to be slightly better at it than you were yesterday. Aim for one more correct question than yesterday, every single day, and by the time the board exam arrives this chapter will be one of the places you actually look forward to on the question paper.