CS Executive · Corporate Accounting and Financial Management

Accounting for Debentures: formula sheet

Full chapter guide

Key formulas

Nature of the holder: Debenture holder = creditor; shareholder = owner (member); This is the root of almost every difference between the two.
Return on debentures: Interest = Face value × Rate of interest ÷ 100; Payable at a fixed rate regardless of profit. It is a charge against profit.
Classification by security: Secured (charge on assets) | Unsecured (naked); Unsecured holders rank only as ordinary creditors.
Classification by convertibility: Convertible (into shares) | Non-convertible; Convertible ones may be fully or partly convertible.
Classification by redemption: Redeemable (fixed date or instalments) | Irredeemable or perpetual; Do not apply Section 55 here; it governs preference shares.
Classification by transfer: Registered (name in register, transfer by instrument) | Bearer (transfer by delivery); Registered ones carry the holder's name; bearer ones are payable to the holder.
Amount payable on issue: Issue price = Face value + Premium, or Face value − Discount; Work on the issue price for cash received, but always credit Debentures A/c at face value.
Application entry: Bank A/c Dr; to Debenture Application A/c; Record the actual money received with the applications.
Allotment entry at par: Debenture Application A/c Dr (amount received on application); Debenture Allotment A/c Dr (amount due on allotment); to Debentures A/c (face value); For an issue at par, application plus allotment equals face value, so the entry balances. When the allotment money is received, pass a separate entry: Bank A/c Dr; to Debenture Allotment A/c.
Issue at premium: Debentures A/c credit = Face value; Securities Premium credit = Premium (usual convention); Premium is a capital receipt and is never credited to the Profit and Loss Statement. Crediting it to Securities Premium is the usual convention for debentures. Section 52(1) itself applies to shares.
Issue at discount: Discount on Issue of Debentures A/c Dr = Face value − Issue price; This is a loss and is written off. Section 52(2)(c) allows the securities premium account to be applied to write off discount allowed on an issue of shares or debentures, if a balance is available.
Premium on redemption: Loss on Issue of Debentures A/c Dr; to Premium on Redemption of Debentures A/c. Amount = redemption premium per debenture × number of debentures issued; This is a separate, additional entry passed at the time of issue when the debentures are redeemable at a premium. It is over and above the allotment entry. If the debentures are also issued at a discount, the discount and this loss may be combined in one Loss on Issue of Debentures account or shown separately as Discount on Issue and Loss on Issue.
Issue for consideration other than cash: Asset A/c Dr; to Vendor A/c. Then Vendor A/c Dr; to Debentures A/c (and Securities Premium, or Discount on Issue Dr); Vendor is settled at the issue price of the debentures.
Collateral security: Optional: Debenture Suspense A/c Dr; to Debentures A/c. Disclose by note; No cash is received. No interest is payable on collateral debentures unless the company defaults and the lender enforces them.
Discount on issue: Discount = Face value of debentures − Issue price received; Debit Discount on Issue of Debentures. The company still repays the full face value.
Loss on issue of debentures: Loss on issue = Discount on issue + Premium payable on redemption; If debentures are issued at par but redeemed at a premium, the loss equals the redemption premium only.
Write-off when redeemed in one lot: Yearly write-off = Total loss ÷ Number of years to redemption; Use this when all debentures are redeemed on one date. Use it for equal-year spreading.
Write-off when redeemed in instalments: Write-off for a year = Total loss × (Debentures outstanding that year ÷ Sum of debentures outstanding over all years); The charge is higher in earlier years when more debentures are outstanding. Use debenture-years as weights.
Use of securities premium: Section 52(2)(c) and (d): securities premium may be applied against discount, commission, expenses and redemption premium; It is permitted, not compulsory. Write the loss off from securities premium first if the question says so.
Entry at issue (discount and redemption premium): Bank A/c Dr (cash received); Loss on Issue of Debentures A/c Dr (discount + redemption premium); To Debentures A/c (face value); To Premium on Redemption of Debentures A/c (redemption premium); Both the discount and redemption premium sit in the loss account until written off.
Annual interest: Interest = Face value of debentures × Coupon rate; Always use face value, never issue price or market price.
Interest for part of a year: Interest = Face value × Rate × Months outstanding ÷ 12; Use this when debentures are issued or redeemed during the year.
TDS amount: TDS = Gross interest × TDS rate; Apply the rate stated in the question to gross interest.
Net interest paid: Net payment = Gross interest − TDS; Debenture holders receive this amount.
Payment entry: Debenture Interest A/c Dr (gross); to TDS Payable A/c (tax); to Bank A/c (net); The expense is always the gross amount.
Deposit of TDS: TDS Payable A/c Dr; to Bank A/c; Passed when the tax is paid to the Government.
Redemption at par: Debentures A/c Dr (face value); To Bank A/c; Use when the terms say redemption at par. Pay face value.
Redemption at premium: Debentures A/c Dr (face value); Premium on Redemption of Debentures A/c Dr; To Bank A/c (face value + premium); If the premium was provided for at issue, it already sits as a liability. Then debit that account instead.
Purchase in open market: Profit or loss on cancellation = Face value cancelled − Cost paid; Cost lower than face value gives a gain, which is credited to Capital Reserve or as the question's treatment directs. Cost higher gives a loss.
Redemption by instalments: Debentures redeemed each year = Total issue ÷ Number of instalments; Under draw of lots the numbers are chosen at random. Paid debentures are removed from the balance.
Section 71(4) DRR: DRR is created out of profits available for payment of dividend; used only to redeem debentures; Transfer from Profit and Loss A/c to DRR A/c. The quantum is fixed by the Rules under section 71(13), so use the percentage given in the question.
Conversion: Debentures A/c Dr; To Share Capital A/c; To Securities Premium A/c (if shares issued above par); Needs a conversion option in the terms of issue and a special resolution under section 71(1).
Voting rights: Debentures carry no voting rights; Section 71(2): no company shall issue debentures with voting rights.
Annual sinking fund instalment: Annual instalment = Debentures to be redeemed ÷ Future value annuity factor; Use the factor given in the question (a sinking fund table). Do not compute your own unless given the rate.
Cum-interest cost of debentures: Cost of debentures = Total price paid − Accrued interest; Accrued interest = Nominal value × rate × months from last interest date ÷ 12.
Ex-interest total cash paid: Total cash paid = Price of debentures + Accrued interest; Only the price part is the cost of the debentures.
Profit or loss on cancellation: Profit = Nominal value − Cost (excluding interest); Positive means profit, transferred to Capital Reserve. Negative means loss, charged to Profit and Loss.
Sinking fund balance at end of a year: Opening fund + Annual instalment + Interest on investments; The investments are made equal to the instalment plus interest received.
Capital redemption reserve: CRR transfer = Nominal value of shares purchased; Under section 69(1), where shares are purchased out of free reserves or securities premium. It is for shares, not debentures.
Amount extinguished: Debenture face value + premium payable on redemption (if any); This is the liability you clear. Check whether the question says the premium on redemption is payable at conversion. Any unwritten discount or loss on issue of debentures is not deducted here. Write it off by a separate entry as the question directs.
Number of shares issued: Number of shares = Amount converted ÷ Issue price per share; Issue price includes any premium. At par, issue price equals face value.
Share capital credited: Share Capital = Number of shares × Face value per share; Always credit face value to share capital, never the issue price.
Securities premium: Securities Premium = Number of shares × (Issue price − Face value); Credited when shares are issued above face value, as required by Section 52(1).
Basic conversion entry: Debentures A/c Dr. (amount converted); To Share Capital A/c (face value); To Securities Premium A/c (excess, if any); The issue price must be at least the face value, so expect conversion at par or at a premium.
Entry with intermediate account: Debentures A/c Dr.; To Debenture-holders' A/c. Then Debenture-holders' A/c Dr.; To Share Capital A/c; To Securities Premium A/c; Use this two-step form if the question asks for it or involves a premium on redemption.

Quick revision

Section 53 prohibits only the issue of shares at a discount (except as Section 54 allows, and Section 53(2A) for debt converted under RBI-regulated restructuring). It does not cover debentures, which may be issued at a discount.
Premium received on shares goes to the securities premium account under Section 52(1). Section 52 itself deals with premium on issue of shares only. Premium on debentures is conventionally credited to Securities Premium and treated as a capital profit. The uses listed in Section 52(2) are written for the securities premium account arising on shares, so apply them to debenture premium only as the question directs.
Debentures issued at a discount: Debenture Allotment A/c (or Bank A/c) Dr for the amount due, Discount on Issue of Debentures A/c Dr for the discount, To Debentures A/c for the full face value. Any money already received on application is transferred from Debenture Application A/c in the same entry.
Loss on issue includes discount and any premium payable on redemption; write it off over the life of the debentures.
Interest is a charge against profit and is due whether or not the company earns a profit.
TDS on interest: debit Interest on Debentures, credit Debenture-holders and TDS Payable; deposit TDS with the Government later.
Redemption out of fresh issue, out of profits and by instalment each follow different entry patterns.
Under the sinking fund method, yearly instalments are invested; the fund plus interest on it must equal the debentures at redemption.
On purchase in the open market, any profit or loss on cancellation goes to the capital reserve or is charged to the profit and loss account as the facts require.
On conversion, debit Debentures, credit Share Capital, and credit Securities Premium for any excess of value over nominal value of shares issued. Conversion at a discount is barred by Section 53, except as Section 54 allows and under Section 53(2A) for debt converted under an RBI-regulated resolution plan or restructuring scheme. Under Section 62(3), a conversion option approved by special resolution before the debentures were issued is exempt from the rights-offer requirements of Section 62.
Preference share redemption (Section 55) needs a capital redemption reserve; do not confuse it with debenture redemption entries.
Always add a short narration and show working notes.

Common mistakes

Calling debenture holders owners or members of the company. Fix: Remember: debenture holder = lender and creditor; shareholder = owner. Write this in the first line of your comparison.
Saying interest on debentures is paid only out of profits. Fix: Interest is payable at the fixed rate even when there is a loss. It is a charge against profit, not an appropriation.
Crediting Debentures A/c at the issue price instead of face value. Fix: Always credit Debentures A/c at face value. Show premium and discount separately.
Treating the discount as a gain or ignoring it. Fix: Debit Discount on Issue of Debentures A/c. It is a loss, and it is written off later.
Leaving out the redemption premium from the loss on issue. Fix: Always compare the redemption price with face value too. Add the redemption premium to the discount.
Calculating the discount on the issue price instead of the face value. Fix: Unless told otherwise, discount and premium percentages apply to face value.
Calculating interest on issue price instead of face value. Fix: Interest is always on the nominal value. Premium or discount has no effect on it.
Debiting only the net amount to Debenture Interest Account. Fix: Debit the gross interest. The TDS part is a liability, not a saving in expense.
Paying the premium at face value only Fix: Check the terms of issue. Bank is credited with face value plus premium.
Treating DRR as a charge against profit Fix: It is an appropriation of profit. It stays in reserves until redemption and then moves to General Reserve.

Exam tips

Begin every theory answer with the creditor-versus-owner point; it earns marks and frames the rest.
In a 'distinguish' question, use a clean two-column style with at least five points and no overlap.
Name the basis of classification before the type; examiners look for the basis.
Do not cite a section number unless you are sure; a wrong section costs more than leaving it out.
Link to practice: mention that interest is a finance cost, which sets up the later journal-entry topics.
Write the face value, issue price and total amounts first. Most marks are lost by wrong base figures, not by wrong entries.
Give a narration under each entry. Examiners in descriptive papers check it.
If a question says the debentures are collateral security, state clearly that no cash is received and explain the treatment in one or two lines.