Chapter 2: Issue and Redemption of Debentures is a crucial topic in Class 12 Accountancy under the NCERT syllabus. It deals with the concept of raising funds through the issue of debentures by companies and their subsequent redemption. The chapter provides students with in-depth knowledge of debentures as a financial instrument, its types, methods of issue and redemption, and the accounting treatment associated with these processes.
Definition: A debenture is a written acknowledgment of debt issued by a company under its common seal. It represents a loan that the company needs to repay after a certain period. Debenture holders are creditors of the company.
Features of Debentures:
It carries a fixed rate of interest.
It can be secured or unsecured.
Debentures are generally redeemable, i.e., repayable after a fixed period.
Debenture holders do not have voting rights in the company.
Debentures can be classified based on different criteria:
On the basis of security:
Secured Debentures: These are secured against the assets of the company.
Unsecured Debentures: No charge is created on any asset of the company.
On the basis of convertibility:
Convertible Debentures: Can be converted into equity shares after a specified period.
Non-Convertible Debentures: Cannot be converted into equity shares.
On the basis of tenure:
Redeemable Debentures: These are repayable after a fixed period.
Irredeemable Debentures: These are not repayable during the lifetime of the company.
On the basis of registration:
Registered Debentures: The details of the holders are recorded in the register.
Bearer Debentures: These are transferable by mere delivery.
Companies can issue debentures for raising funds using different methods. The primary methods include:
Issue of Debentures for Cash: When debentures are issued in exchange for cash.
Issue of Debentures as Collateral Security: When debentures are issued to secure a loan.
Issue of Debentures for Consideration Other than Cash: When debentures are issued in lieu of purchasing assets or as compensation for services.
Accounting entries are made to record the issuance of debentures. Students are taught to pass journal entries in situations where debentures are issued at par, premium, or discount.
The company needs to pay interest on debentures at the pre-determined rate. The interest paid is a charge against profit and is to be shown in the profit and loss account.
The concept of Tax Deducted at Source (TDS) on interest payable to debenture holders is also discussed.
Redemption refers to repaying the debenture holders at the end of the tenure. The chapter covers:
Methods of Redemption:
Lump-Sum Payment: Repayment of the total amount at once after a fixed period.
Redemption in Instalments: Payment of the debentures in regular instalments over the tenure.
Purchase in the Open Market: Redemption by buying debentures from the market.
Sources of Funds for Redemption:
Sinking Fund Method: The company creates a fund every year to accumulate the amount required for redemption.
Capital Redemption Reserve: Some portion of profits is transferred to this reserve for redeeming debentures.
Students learn how to pass journal entries for redemption and understand the accounting treatment required for these transactions.
The chapter also explains the provisions of the Companies Act, 2013 regarding the issue and redemption of debentures. It emphasizes the legal framework within which debentures are issued and redeemed.
Through this chapter, students are equipped with practical knowledge related to financing through debentures and its accounting treatment. The concepts of premium on redemption, debenture holders’ rights, and obligations of the issuing company are crucial for students to understand the financial strategy of companies.
This chapter is vital for students as it not only provides theoretical knowledge but also builds their practical skills in handling complex accounting transactions related to debentures. The concepts learned here are frequently tested in board exams and are applicable in real-world corporate financial management.
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