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CS Executive · Corporate Accounting and Financial Management · Accounting for Debentures

A company issues debentures that give the holder the right, at the holder's option, to convert them into equity shares after two years on fixed terms. These debentures are best classified as:

They are convertible debentures, because the holder has the right to convert them into equity shares on pre-set terms after two years. Non-convertible debentures can only be redeemed in cash, so the conversion feature decides the classification.

  1. ANon-convertible debentures
  2. BFully convertible debentures at the company's option only
  3. CConvertible debenturesCorrect
  4. DPerpetual debentures

Explanation

Debentures that can be converted into equity shares on stated terms are convertible debentures. Non-convertible debentures are repaid in cash only. The conversion right here is with the holder, so it is not a company-option-only case, and a fixed conversion period shows they are not perpetual.

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