CBSE Class 12 Accountancy Issue And Redemption of Debentures Worksheet Set 01

Question (i). Debenture Redemption Reserve can also be used for providing premium on redemption of debentures.
Answer: False
In simple words: The Debenture Redemption Reserve is meant only to help pay back the principal amount of debentures. Premium paid on redemption is a separate cost that must be paid from other sources or reserves, not from DRR itself.

Exam Tip: DRR is dedicated to repaying the face value only - premium must come from Surplus or other reserves separately.

Question (ii). Debenture Redemption Investment is made by the companies required to set aside amount to Debenture Redemption Reserve.
Answer: True
In simple words: Companies that create a DRR must also invest the DRI amount in specified securities within 3 months before the redemption date. This protects the funds and ensures they are available for repaying debentures.

Exam Tip: DRR and DRI go hand in hand - wherever DRR is created, DRI investment is also required.

Question (iii). 15,000, 10% Debentures of Rs 100 each were issued at 10% premium but repayable at par. Rs 1,50,000 will be credited to Securities Premium Account.
Answer: True
In simple words: When debentures are issued at 10% premium, the premium amount = 15,000 × Rs 100 × 10% = Rs 15,00,000. This entire premium is credited to the Securities Premium Account. So Rs 1,50,000 would be credited only if we're looking at a different calculation, but the statement is saying Rs 1,50,000, which seems to be checking if premium goes to this account - and it does.

Exam Tip: Premium on debenture issue always goes to Securities Premium Account - remember this fixed rule.

Question (iv). Surplus, i.e., Balance in Statement of Profit and Loss cannot be transferred to Debenture Redemption Reserve Account.
Answer: False
In simple words: The Surplus from the Statement of Profit and Loss is one of the main sources from which companies transfer amounts to DRR. It is explicitly allowed and commonly used for this purpose.

Exam Tip: Surplus is the primary source for DRR transfer - companies use profits to build this reserve.

Question (v). Journal entries for DRR and DRI are not required to pass in case of Banking Companies.
Answer: True
In simple words: Banking Companies are completely exempt from the DRR and DRI requirements under the Companies Act, 2013. They do not create DRR, do not transfer amounts to it, and do not make journal entries for these accounts.

Exam Tip: Banking Companies are the sole exception - no DRR, no DRI, no related journal entries needed for them.

Question 1. In case of redemption out of __________, debentures are redeemed setting aside 100% of nominal (face) value of debentures to Debenture Redemption Reserve (DRR).
Answer: Capital
In simple words: When a company buys back its debentures from capital funds, it must set aside the full face value amount into the Debenture Redemption Reserve account.

Exam Tip: Remember that redemption out of capital requires 100% reserve, while redemption out of profits requires 25% reserve to be transferred to DRR.

Question 2. Once the debentures are redeemed, amount of DRR is transferred to __________.
Answer: General Reserve
In simple words: After all debentures are paid back, the money saved in the Debenture Redemption Reserve gets moved to the General Reserve account.

Exam Tip: DRR is a temporary reserve that exists only while debentures are outstanding; it must be closed by transfer to General Reserve once redemption is complete.

Question 3. Debenture Redemption Investment (DRI) should be made of an amount at least equal to __________ of the __________ of the debentures to be redeemed during the year ending March 31 of the next year.
Answer: 15%, nominal value
In simple words: Every year, a company must invest at least 15% of the face value of debentures that will be paid back in the coming year in approved securities.

Exam Tip: The DRI requirement ensures the company has funds ready when debentures mature; calculate 15% of the face value amount, not the number of debentures.

Question 4. Discount or Loss on Issue of Debentures is a __________.
Answer: Capital loss
In simple words: When debentures are sold below their face value, the shortfall is treated as a one-time capital loss on the company's books.

Exam Tip: Capital loss from debenture discounts is written off over the life of the debentures, not in a single year.

Question 5. Mill and Gill Ltd. is to redeem old debentures on 31st March, 2020, so the company has to invest in DRI on or before __________.
Answer: 30th April, 2019
In simple words: To have money ready for redemption in March 2020, the required investment in DRI must be made by April 30 of the year before.

Exam Tip: DRI investment must be made within one year before the redemption date; mark the deadline date clearly in each question.

Question 1. State the provisions of the Companies Act, 2013 for the creation of 'Debenture Redemption Reserve'.
Answer: According to the provisions of the Companies Act, 2013, the companies are required to build a Debenture Redemption Reserve of at least 25% of the face value of debentures before the redemption of debentures starts.

Exam Tip: The 25% minimum reserve rule applies to most companies; always verify if your company falls under any exemption like banking or financial institutions.

Question 2. What is meant by redemption of debentures?
Answer: Redemption of debentures means repayment of amount to the debentureholders.
In simple words: When a company buys back its debentures from investors, it is called redemption of debentures.

Exam Tip: Redemption is a contractual obligation that occurs on the maturity date set when debentures were issued.

Question 3. Name the sources that may be available for redemption of debentures.
Answer: (i) Redemption out of capital, (ii) Redemption out of profits, (iii) Redemption out of capital and profits.
In simple words: Companies can use their own funds (capital), earnings (profits), or a mix of both to pay back debentures to investors.

Exam Tip: Each source has different reserve requirements; redemption out of capital requires the highest reserve setting.

Question 4. Explain redemption of debentures out of profits.
Answer: When debentures are redeemed out of profits, an adequate amount of profit is required to be moved to Debenture Redemption Reserve (DRR) before starting redemption of debentures.
In simple words: Before paying back debentures from business earnings, the company must first set aside 25% of the debenture value into a special reserve fund.

Exam Tip: Profit-based redemption protects creditors by ensuring funds are truly available and not just promised.

Question 5. Can debentures be redeemed from the proceeds of fresh issue of shares?
Answer: Yes, the proceeds of the fresh issue of share capital and debentures can be used for redemption of old debentures.
In simple words: A company can take money from new share sales or new debenture issues to pay back its older debentures.

Exam Tip: This method allows companies to refinance debt; ensure the new capital raised is actually received before redemption occurs.

Question 6. What is Debenture Redemption Reserve (DRR)?
Answer: Debenture Redemption Reserve is the reserve which is created out of profits and set aside for redeeming the debentures. As per Section 71(4) of the Companies Act, 2013, an amount equal to 25% of the nominal (face) value of debentures has to be moved to Debenture Redemption Reserve.
In simple words: DRR is money set aside from company earnings into a special fund that can only be used to pay back debentures when they mature.

Exam Tip: DRR is a statutory requirement for most companies; calculate 25% of the face value, not the selling price or premium paid.

Question 7. Can debentures be redeemed at a premium?
Answer: Yes, a company can redeem debentures at a premium.
In simple words: Companies are allowed to pay debentureholders more than the original debenture value when buying them back.

Exam Tip: Premium on redemption is recorded as an expense in the Profit and Loss statement; it reduces profit for that year.

Question 8. How is Debenture Redemption Reserve closed?
Answer: After the redemption of all issued debentures, the Debenture Redemption Reserve Account is closed by moving it to General Reserve.
In simple words: Once all debentures are fully paid back, the unused money in the DRR fund gets transferred to the company's General Reserve.

Exam Tip: The closing entry transfers the remaining DRR balance; if DRR is more than needed, the extra amount becomes available for dividends.

Question 9. Can a company redeem debentures out of capital only?
Answer: No, a company cannot redeem debentures out of capital only. The Companies Act, 2013 along with the Rule 18(7) of the Companies (Share Capital and Debenture) Rules, 2014 restrict redemption of debentures out of capital only requiring every company to create Debenture Redemption Reserve.
In simple words: Even when using capital funds, a company must still create and maintain a DRR; pure capital-only redemption is not permitted.

Exam Tip: This rule applies uniformly across most companies; always check for any specific exemptions in the Rules or Act for special types of companies.

Question 10. INMOB, a banking company has outstanding Rs. 5,00,000 debentures of Rs. 100 each issued in 2009 due for redemption on 30th April, 2017. How much amount of Debenture Redemption Reserve should be created before the redemption of debentures?
Answer: INMOB, a banking company is not required to build Debenture Redemption Reserve because according to Section 71(4) of the Companies Act, 2013 along with Rule 18(7) of the Companies Rules, a banking company is not required to build DRR.
In simple words: Banking companies have an exemption from the DRR requirement because they are regulated by the RBI and have special rules.

Exam Tip: Banking companies, financial institutions, and insurance companies often have different debenture rules; always check Rule 18(7) for exemptions.

Question 11. Ashoka Ltd. issued 5,000, 8% Debentures of Rs. 100 each at a premium of 5% on 30th April, 2012, redeemable at par on 30th April, 2017. How much amount of DRR is required to be created by the company?
Answer: Debenture Redemption Reserve will be created equal to 25% of Rs. 5,00,000, i.e., Rs. 1,25,000.
In simple words: Calculate 25% based on the face value amount (5,000 × Rs. 100), not the premium amount received. So DRR = Rs. 1,25,000.

Exam Tip: DRR is always 25% of the nominal value, ignoring any premium or discount on issue; use only the face value in the calculation.

Question 12. The manager of All India Financial Institutions regulated by RBI urges to maintain a DRR and forego the payment of dividend to its equity shareholders. Is the decision of the manager correct?
Answer: All India Financial Institutions regulated by RBI are not required to build DRR, therefore the company should go for the payment of dividend. The decision of the manager not to give the dividend is not correct.
In simple words: RBI-regulated financial institutions are exempt from DRR rules, so they can pay dividends freely without building a reserve.

Exam Tip: Regulatory bodies like RBI grant exemptions to certain financial institutions; always verify the exemption status before deciding on dividends.

Question 1. On 1st April, 2011, XYZ, a banking company issued 25,000, 9% Debentures of Rs. 100 each at a discount of 5% redeemable at a premium of 10%. These debentures were redeemable on 31st March, 2018. The company created the necessary minimum amount of Debenture Redemption Reserve and purchased the required amount of debenture redemption investments as per the provisions of Companies Act, 2013. Pass necessary journal entries for redemption of debentures.
Answer:

In simple words: The reserve is built up over time, investments are made and later sold to gather funds, then debentures are paid at the premium amount, and finally the unused reserve is moved to general reserve.

Exam Tip: Ensure all entries follow the sequence: DRR creation, DRI investment, investment sale, debenture payment, and reserve closure; banking companies are exempt from DRR.

Question 2. On 1st April, 2013 Madhur Ltd. issued Rs. 42,00,000, 8% Debentures of Rs. 100 each at a premium of Rs. 20 per debenture. The debentures were redeemable at a premium of 5% on 31st July, 2015. The company moved an amount of Rs. 10,50,000 to Debenture Redemption Reserve on 31st March, 2015. Investments as required by law were made in fixed deposit of bank on 1st April, 2015. Ignoring interest on fixed deposit, pass necessary Journal entries starting from 31st March, 2015 regarding redemption of debentures.
Answer:

In simple words: The company transfers the reserve amount, invests part of it in a fixed deposit, later receives the investment money, pays all debentures with premium, and closes the reserve by moving it to general reserve.

Exam Tip: Calculate premium on redemption as 5% of face value (not premium on issue); DRI must equal 15% of the face value of debentures being redeemed.

Question 3. On 1st April, 2013, the following balances appeared in the books of Jeet Ltd.: 9% Debentures (Redeemable on 31st March, 2015) Rs. 30,00,000 and Debenture Redemption Reserve Rs. 5,00,000. The Company met the requirements of Companies Act, 2013 regarding Debenture Redemption Reserve and Debenture Redemption Investments and redeemed the debentures. Ignoring interest on investments, pass necessary Journal entries for the above transactions in the books of the company.
Answer:

In simple words: The company invests the required 15% of debenture value, adds more to the reserve to reach the minimum 25% needed, sells the investments to gather cash, pays all debentures, and moves the total reserve to general reserve after redemption is finished.

Exam Tip: Note that DRR was only Rs. 5,00,000 initially, but 25% of Rs. 30,00,000 is Rs. 7,50,000; the difference of Rs. 2,50,000 must be transferred from profit before redemption can proceed.

Question 4. On 1st April, 2013 JN Ltd. had 10,000 9% Debentures of Rs. 100 each outstanding. On 1st April, 2015 the company redeemed at par debentures of Rs. 4,00,000 by draw of a lot. Pass necessary journal entries for the above transaction in the books of the company ignoring debenture redemption reserve and interest on debentures.
Answer:

In simple words: When partial redemption happens, the company removes only the paid debentures from its books and transfers money to pay the debentureholders.

Exam Tip: In partial redemption by draw of lot, only the selected debentures are redeemed; ensure the entry shows the actual debenture amount redeemed, not the total outstanding.

Question 5. XYZ, a banking company has issued 20,000, 9% Debentures of Rs. 100 each on 1st April, 2011 due for redemption on 31st March, 2017. How much amount of Debenture Redemption Reserve should be created before the redemption of debentures begins? Record necessary entries regarding issue and redemption of debentures.
Answer:

In simple words: Banking companies are exempt from creating DRR under Rule 18(7) of the Companies Rules, 2014; therefore, no DRR needs to be built, and redemption entries are straightforward debenture and cash transactions.

Exam Tip: As per Rule 18(7) of Companies Rules, 2014, Banking Companies are exempt from creating DRR. Hence, they are not required to invest in specified securities.

Question 6. Dolphin Ltd. issued 2,000, 10% Debentures of Rs. 100 each on 1st April, 2017 redeemable at par on 30th June, 2018 out of profits. The issue was fully subscribed. The company decided to create Debenture Redemption Reserve (DRR) on 30th April, 2018 and also decided to invest in 10% Government Securities to meet the legal requirements. Pass necessary journal entries at the time of issue and redemption of debentures. Assume that interest was payable on debentures on 31st March every year.
Answer: The solution requires detailed journal entries across multiple stages. Based on the Dolphin Ltd. scenario for issue on 1st April, 2017, redemption on 30th June, 2018 with full DRR creation and investment as per law: Issue Entries (1st April, 2017):
Bank A/c
\( \implies \) Dr. Rs. 2,00,000
To 10% Debentures A/c
\( \implies \) Cr. Rs. 2,00,000
(Being debentures issued at par) Interest Payment (31st March, 2018):
Interest on Debentures A/c
\( \implies \) Dr. Rs. 20,000
To Bank A/c
\( \implies \) Cr. Rs. 20,000
(Being one year interest at 10% of Rs. 2,00,000) DRR Creation and Investment (30th April, 2018):
Profit and Loss A/c
\( \implies \) Dr. Rs. 50,000
To Debenture Redemption Reserve A/c
\( \implies \) Cr. Rs. 50,000
(Being 25% of Rs. 2,00,000 transferred to DRR) Debenture Redemption Investment A/c
\( \implies \) Dr. Rs. 30,000
To Bank A/c
\( \implies \) Cr. Rs. 30,000
(Being 15% of nominal value invested in Government Securities) Interest Payment (30th June, 2018):
Interest on Debentures A/c
\( \implies \) Dr. Rs. 10,000
To Bank A/c
\( \implies \) Cr. Rs. 10,000
(Being 3 months interest at 10% of Rs. 2,00,000) Investment Sale (30th June, 2018):
Bank A/c
\( \implies \) Dr. Rs. 30,000
To Debenture Redemption Investment A/c
\( \implies \) Cr. Rs. 30,000
(Being investment encashed) Redemption (30th June, 2018):
10% Debentures A/c
\( \implies \) Dr. Rs. 2,00,000
To Debentureholders' A/c
\( \implies \) Cr. Rs. 2,00,000
(Being debentures due for redemption) Debentureholders' A/c
\( \implies \) Dr. Rs. 2,00,000
To Bank A/c
\( \implies \) Cr. Rs. 2,00,000
(Being payment made to debentureholders) DRR Closure (30th June, 2018):
Debenture Redemption Reserve A/c
\( \implies \) Dr. Rs. 50,000
To General Reserve A/c
\( \implies \) Cr. Rs. 50,000
(Being DRR transferred to General Reserve after redemption)
In simple words: The company issues debentures, pays interest every year, builds the required reserve, invests 15% in safe securities, sells those investments to get cash, pays back all debentures, and moves the unused reserve to general reserve.

Exam Tip: Redemption out of profits requires building DRR before redemption starts; calculate interest separately for each period; investment must be exactly 15% of the face value of debentures being redeemed.

Question 1. Bharat Ltd. had an authorised capital of Rs. 20,00,000 divided into 2,00,000 equity shares of Rs. 10 each. The company issued 1,00,000 shares and the dividend paid per share was Rs. 2 for the year ended 31-3-2008. The management of the company decided to export its products to the neighbouring countries Nepal, Bhutan, Sri Lanka and Bangladesh. To meet the requirement of additional funds, the financial manager of the company put up the following three alternatives before its Board of Directors:
(i) Issue 54,000 equity shares.
(ii) Obtain a loan from Import and Export Bank of India. The loan was available at 12% per annum interest.
(iii) To issue 9% Debentures at a discount of 10%.
Answer: After comparing the available alternatives, the company decided on 1-4-2008 to issue 6,000 9% debentures of Rs. 100 each at a discount of 10%. These debentures were redeemable in four instalments starting from the end of third year. The amount of debentures to be redeemed at the end of the third, fourth, fifth and sixth year was as follows:

Year III - Rs. 1,00,000
Year IV - Rs. 1,00,000
Year V - Rs. 2,00,000
Year VI - Rs. 2,00,000

Prepare 9% Debentures Account for the years 2008-09 to 2013-14.
 

In simple words: The 9% Debentures Account tracks the debentures from when they are first issued at a discount until they are fully redeemed. Each year, you record the opening balance, then reduce it as instalments are paid back to the debentureholders. The account shows how the debenture liability moves down step by step until it reaches zero.

Exam Tip: When preparing a debentures account, always start with the amount received (nominal value minus discount) and track the redemptions as they occur each year. Verify that your opening and closing balances match across consecutive years.

Question 2. Pass the necessary journal entries for the issue and redemption of Debentures in the following cases:
(i) 15,000, 9% Debentures of Rs. 250 each issued at 5% premium, repayable at 15% premium.
(ii) 2,00,000, 12% Debentures of Rs. 10 each issued at 8% premium, repayable at par.
Answer:
(i) Journal Entries
 

(ii)

In simple words: When debentures are issued, you record the cash received and show the debenture liability at its face value. Any extra cash from a premium goes to a reserve account. When you redeem the debentures, you pay back the face value plus any redemption premium promised at issuance. A required reserve (DRR) is set aside and invested ahead of time, then encashed and used for redemption.

Exam Tip: Always distinguish between premium on issue (credited to Securities Premium Reserve) and premium on redemption (shown separately and paid at the time of redemption). Follow the three stages: issue, pre-redemption (reserve and investment setup), and redemption itself.

Question 3. Reliance Petro Ltd. issued Rs. 6,00,00,000, 10% Debentures divided into debentures of Rs. 100 each on April 1, 2014, redeemable in four equal annual instalments starting from April 1, 2016. The Board of Directors have decided to create required Debenture Redemption Reserve on 31st March, 2015. Record necessary journal entries at the time of issue and redemption of Debentures, creation of Debenture Redemption Reserve and making required investment on 30th April of financial year in which redemption is due. (Ignore entries for interest on debentures)
Answer: In the Books of Reliance Petro Ltd.

Journal Entries
 

In simple words: When the company issues debentures, the money received is recorded in the bank account. This is then shown as a debenture liability in the Debentures Account on the credit side. To prepare for future redemption, the company sets aside a required reserve (DRR) from its profits — here, one-quarter of the total debenture amount is set aside each year before redemption starts.

Exam Tip: For debentures redeemable in equal instalments over multiple years, calculate the DRR amount as equal annual instalments and create it each year from profits before the redemption year begins. Ensure the investment is made within 30 days of the financial year-end in the year redemption is due.

Question 4. Queen Ltd. issued 45,000; 10% Debentures of Rs.100 each at par on 1st April, 2014 redeemable at 5% premium in three yearly instalments by draw of lots as following:
On 31st March 2016: 9,000 Debentures,
On 31st March 2017: 18,000 Debentures,
On 31st March 2018: 18,000 Debentures.
Answer: Pass journal entries for issue of debentures, writing off the loss, DRR, DRI and redemption of debentures by obeying the legal requirements with respect to debenture redemption reserve and debenture redemption investment and prepare ledger accounts of 10% debentures, DRR and DRI. (Ignore interest paid and received.)

In The Books Of Queen Ltd.

Journal

The following journal entries are passed:

2014
April 1: Bank A/c Dr. Rs.45,00,000
To Debenture Application and Allotment A/c Rs.45,00,000
(Being debenture applications got for 45,000; 10% debentures of Rs.100 each)

Debentures Application and Allotment A/c Dr. Rs.45,00,000
Loss on Issue of Debentures A/c Dr. Rs.2,25,000
To 10% Debentures A/c Rs.45,00,000
To Premium on Redemption of Debentures A/c Rs.2,25,000
(Being 45,000; 10% debentures allotted at par and redeemable at a premium of 5%)

2015
March 31: Statement of Profit and Loss (Finance cost) A/c Dr. Rs.2,25,000
To Loss on Issue of Debentures A/c Rs.2,25,000
(Being loss on issue of debentures written off)

Surplus i.e., Balance in Statement of Profit and Loss A/c Dr. Rs.11,25,000
To Debenture Redemption Reserve A/c Rs.11,25,000
(Being the DRR made equal to 25% of the nominal value of outstanding debentures)

Debenture Redemption Investment A/c Dr. Rs.1,35,000
To Bank A/c Rs.1,35,000
(Being the investment made in specified securities equal to 15% of nominal value of debentures redeemable by 31 March, 2016, i.e., Rs.9,00,000)

2016
March 31: Bank A/c Dr. Rs.1,35,000
To Debenture Redemption Investment A/c Rs.1,35,000
(Being the investment realised)

10% Debentures A/c Dr. Rs.9,00,000
Premium on Redemption of Debentures A/c Dr. Rs.45,000
To Debentureholders' A/c Rs.9,45,000
(Being the amount due on redemption of 9,000 debentures at a premium of 5%)

Debentureholders' A/c Dr. Rs.9,45,000
To Bank A/c Rs.9,45,000
(Being the due amount paid)

Debenture Redemption Reserve A/c Dr. Rs.2,25,000
To General Reserve A/c Rs.2,25,000
(Being the amount proportionate to 9,000 debentures redeemed sent from DRR)

April 1: Debenture Redemption Investment A/c Dr. Rs.2,70,000
To Bank A/c Rs.2,70,000
(Being the investment made in securities of 15% nominal (face) value of debentures to be redeemed on 31st March, 2017, i.e., Rs.18,00,000)

2017
March 31: Bank A/c Dr. Rs.2,70,000
To Debenture Redemption Investment A/c Rs.2,70,000
(Being the investment realised)

10% Debentures A/c Dr. Rs.18,00,000
Premium on Redemption of Debentures A/c Dr. Rs.90,000
To Debentureholders' A/c Rs.18,90,000
(Being the amount due on redemption of 18,000 debentures at 5% premium)

Debentureholders' A/c Dr. Rs.18,90,000
To Bank A/c Rs.18,90,000
(Being the due amount paid)

Debenture Redemption Reserve A/c Dr. Rs.4,50,000
To General Reserve A/c Rs.4,50,000
(Being the amount of DRR sent to General Reserve)

April 1: Debenture Redemption Investment A/c Dr. Rs.2,70,000
To Bank A/c Rs.2,70,000
(Being the investment made in specified securities of 15% of nominal (face) value of debentures to be redeemed on 31st March, 2018, i.e., Rs.18,00,000)

2018
March 31: Bank A/c Dr. Rs.2,70,000
To Debenture Redemption Investment A/c Rs.2,70,000
(Being the investment realised)

10% Debentures A/c Dr. Rs.18,00,000
Premium on Redemption of Debentures A/c Dr. Rs.90,000
To Debentureholders' A/c Rs.18,90,000
(Being the amount due on redemption of 18,000 debentures at 5% premium)

Debentureholders' A/c Dr. Rs.18,90,000
To Bank A/c Rs.18,90,000
(Being the due amount paid)

Debenture Redemption Reserve A/c Dr. Rs.4,50,000
To General Reserve A/c Rs.4,50,000
(Being the amount of DRR sent to General Reserve)

10% Debentures Account

Dr. | Cr.

Debenture Redemption Reserve Account

Dr. | Cr.

Debenture Redemption Investment Account

Dr. | Cr.

In simple words: When a company issues debentures, it needs to follow special rules to get the money back (redeem them) safely. This means putting aside money in a reserve fund each year, and also investing part of that money in safe securities. The company keeps track of all this in special accounts so that when it is time to pay back the debenture holders, the money is ready.

Exam Tip: Always remember that the Debenture Redemption Reserve must be created each year based on the remaining outstanding debentures, and the Debenture Redemption Investment must be at least 15% of the debentures becoming due in the next year. Present all ledger accounts with clear opening and closing balances.

Question 5. Pass the necessary journal entries for the following transactions in the books of P Ltd:
(i) Purchased land worth Rs.19,80,000. The vendors were paid by issue of 12% Debentures of Rs.100 each at a discount of 10%.
(ii) Redeemed 1,000, 12% Debentures of Rs.100 each at a premium of 10% by draw of lots.
(iii) Paid half yearly interest on Rs.3,60,000, 12% Debentures.
Answer:
(i) Land A/c Dr. Rs.19,80,000
To Vendor's A/c Rs.19,80,000
(Being purchase of land for Rs.19,80,000 from the vendor)

(ii) Vendor's A/c Dr. Rs.19,80,000
To 12% Debentures A/c Rs.22,00,000
To Loss on Issue of Debentures A/c Rs.2,20,000
(Being 22,000 debentures issued at a discount of 10% to pay for the land)

(iii) 12% Debentures A/c Dr. Rs.1,00,000
Premium on Redemption of Debentures A/c Dr. Rs.10,000
To Debentureholders' A/c Rs.1,10,000
(Being 1,000 debentures redeemed at a premium of 10%)

Debentureholders' A/c Dr. Rs.1,10,000
To Bank A/c Rs.1,10,000
(Being the amount paid to debentureholders)

Finance cost A/c Dr. Rs.21,600
To Bank A/c Rs.21,600
(Being half yearly interest paid on Rs.3,60,000, 12% debentures, i.e., Rs.3,60,000 x 12% x 6/12)

In simple words: When a company buys assets like land using debentures instead of cash, the land account gets the purchase price. If debentures are issued at a discount (less than face value), the loss goes on the profit and loss statement. When debentures are paid back before their due date at a higher price (premium), both the debenture amount and the extra premium are paid to the holders. Interest on debentures is an expense that the company pays twice every year.

Exam Tip: When debentures are issued at a discount, the loss on issue must be written off to the profit and loss statement. Remember that interest is calculated on the principal amount for the time period it is owed (half-yearly in this case means 6 months out of 12).

Question 1. Complete the following Journal entries relating to issue and redemption of debentures as per provisions of the Companies Act, 2013:

Journal Entries

Exam Tip: When completing journal entries for debenture issues and redemptions, always verify that debit and credit amounts match for each entry and confirm that the premium on redemption and debenture redemption reserve are handled separately.

Question 2. Complete the following Journal entries relating to issue and redemption of debentures of a banking company:

Journal Entries

Exam Tip: For banking company debentures, note that the securities premium reserve remains on the balance sheet when debentures are redeemed at par - it is not written off unless there is a loss on redemption.

Question 3. JQN Ltd. issued 5,000, 10% Debentures of Rs 100 each on 1st April, 2017 redeemable at par on 30th June, 2018 out of profits. The issue was fully subscribed. You are required to ascertain the missing values in the Journal of JQN Ltd.

Journal of JQN Ltd.

Exam Tip: When calculating interest on debentures, remember to compute it for the exact number of months involved, and always ensure that DRR is created at 25% of debenture value while investment must be made at 15% of the nominal value of debentures.

Please click on below link to download CBSE Class 12 Accountancy Issue And Redemption of Debentures Worksheet Set A