Issue and Redemption of Debentures

A debenture is a written acknowledgement of debt issued by a company.

When a company needs money, it can collect money by issuing shares or by borrowing money.

If the company borrows money from people and gives them written proof, that proof is called a debenture.

Example: Riya Stationery Ltd. needs Rs.1,00,000 to buy new machines. Instead of issuing more shares, it borrows money by issuing debentures.

People who give money to the company become debenture holders.

Simple line: A debenture is loan taken by a company from debenture holders.

Companies issue debentures because they need money for expansion.

They may not want to issue more shares.

They can borrow from many people.

Debenture holders get fixed interest.

Ownership of company does not change like shares.

Company repays debentures later.

Simple line: Shares bring ownership capital. Debentures bring borrowed capital.

Riya Stationery Ltd. wants to open a printing unit.

The company needs Rs.2,00,000.

It has two options: issue more shares or borrow money by issuing debentures.

The company decides to issue 2,000 debentures of Rs.100 each.

Total money raised = 2,000 x Rs.100 = Rs.2,00,000.

The people who buy debentures are not owners. They are lenders.

The company must pay them interest and repay the debenture amount later.

This is debenture accounting.

Shares are part of owner's capital.

Debentures are borrowed capital or loan.

Shareholders are owners.

Debenture holders are lenders.

Dividend may be paid from profit on shares.

Interest is paid on debentures.

Shares do not have fixed repayment like a loan.

Debentures are usually repaid after a fixed period.

Memory line: Shareholder is owner. Debenture holder is lender.

A debenture holder is a person who gives money to the company by buying debentures.

Example: Amit buys 10 debentures of Rs.100 each.

Amit gives 10 x Rs.100 = Rs.1,000.

Amit becomes a debenture holder.

He will receive interest from the company.

Simple line: Debenture holder lends money to the company.

Debenture holders receive interest.

Example: a company issues 10% debentures of Rs.1,00,000.

Interest = Rs.1,00,000 x 10% = Rs.10,000 per year.

Interest on debentures is an expense for the company.

Simple journal entry idea: Debenture Interest A/c Dr., To Debentureholders A/c or Bank A/c.

Simple line: Debenture interest is cost of borrowing money.

Issue of debentures means giving debentures to people and receiving money from them.

Debentures can be issued at par, at premium, or at discount.

At par means issue price equals face value.

Premium means issue price is above face value.

Discount means issue price is below face value.

Simple line: Debenture issue records how borrowed money comes into the company.

At par means issue price equals face value.

Example: company issues 1,000 debentures of Rs.100 each at Rs.100.

Amount received = 1,000 x Rs.100 = Rs.1,00,000.

Entry idea: Bank A/c Dr. Rs.1,00,000, To Debentures A/c Rs.1,00,000.

Simple line: At par means issue price = face value.

Premium means debentures are issued above face value.

Example: company issues 1,000 debentures of Rs.100 each at Rs.110.

Face value = 1,000 x Rs.100 = Rs.1,00,000.

Premium = 1,000 x Rs.10 = Rs.10,000.

Total received = Rs.1,10,000.

Entry idea: Bank A/c Dr. Rs.1,10,000, To Debentures A/c Rs.1,00,000, To Securities Premium A/c Rs.10,000.

Simple line: Premium is extra amount received above face value.

Discount means debentures are issued below face value.

Example: company issues 1,000 debentures of Rs.100 each at Rs.95.

Face value is Rs.1,00,000.

Amount received is Rs.95,000.

Discount is Rs.5,000.

Entry idea: Bank A/c Dr. Rs.95,000, Discount on Issue of Debentures A/c Dr. Rs.5,000, To Debentures A/c Rs.1,00,000.

Simple line: Discount is a loss or expense-like amount for the company.

Redemption means repayment of debentures by the company.

When the company returns the debenture money to debenture holders, it is called redemption.

Example: company issued debentures of Rs.1,00,000.

After 5 years, it repays Rs.1,00,000 to debenture holders.

This is redemption.

Simple line: Redemption means repayment of debenture money.

Redemption at par means the company repays face value.

Example: Rs.100 debenture is redeemed at Rs.100.

Redemption at premium means the company repays more than face value.

Example: Rs.100 debenture is redeemed at Rs.105.

Premium on redemption is Rs.5 per debenture.

Simple line: Redemption premium is extra amount paid at repayment.

Issue at par: Bank A/c Dr., To Debentures A/c.

Issue at premium: Bank A/c Dr., To Debentures A/c, To Securities Premium A/c.

Issue at discount: Bank A/c Dr., Discount on Issue of Debentures A/c Dr., To Debentures A/c.

Interest due: Debenture Interest A/c Dr., To Debentureholders A/c.

Interest paid: Debentureholders A/c Dr., To Bank A/c.

Redemption at par: Debentures A/c Dr., To Debentureholders A/c.

Payment: Debentureholders A/c Dr., To Bank A/c.