Updated NCERT Solutions for Issue and Redemption of Debentures: Class 12 Accountancy Ch 2 Important Questions (2026-27)
Struggling with Debentures? This guide simplifies Class 12 Accountancy Ch 2: Issue and Redemption of Debentures. Master key concepts and journal entries to ace your CBSE board exams (2026-27) and competitive tests like CUET. Let's get started and score high!
Learning Objectives
After completing this chapter, students will be able to:
- Define a debenture and understand its key features.
- Differentiate between shares and debentures.
- Explain the various types of debentures.
- Pass journal entries for the issue of debentures at par, premium, and discount.
- Account for the issue of debentures as collateral security and for consideration other than cash.
- Understand and record transactions related to the six special cases of issue with terms of redemption.
- Calculate and write off the discount or loss on the issue of debentures.
- Explain the methods of redemption of debentures.
- Create and utilize Debenture Redemption Reserve (DRR) and Debenture Redemption Investment (DRI).
Key Concepts and Definitions
Master these terms to build a strong foundation for this chapter.
- Debenture: As per Section 2(30) of the Companies Act, 2013, a debenture is a written instrument acknowledging a debt by a company. It includes debenture stock, bonds, or any other instrument of a company evidencing a debt.
- Bond: Similar to a debenture, but often issued by government or semi-government bodies. In India, there's no major legal distinction between debentures and bonds.
- Issue of Debentures at Par: When the issue price of a debenture is equal to its face value (e.g., a ₹100 debenture issued for ₹100).
- Issue of Debentures at a Premium: When the issue price is more than the face value (e.g., a ₹100 debenture issued for ₹110). The extra ₹10 is a capital profit and credited to Securities Premium Reserve Account.
- Issue of Debentures at a Discount: When the issue price is less than the face value (e.g., a ₹100 debenture issued for ₹95). The ₹5 discount is a capital loss.
- Collateral Security: When a company takes a loan from a bank, it may issue its debentures as secondary security, in addition to the primary security.
- Consideration other than Cash: When debentures are issued to a vendor in exchange for assets or a business, instead of cash payment.
- Debenture Redemption Reserve (DRR): A reserve created out of profits available for dividend distribution for the purpose of redeeming debentures. As per rules, certain companies must create a DRR of 10% of the face value of outstanding debentures.
- Debenture Redemption Investment (DRI): Companies required to create DRR must also invest an amount equal to at least 15% of the face value of debentures to be redeemed during the year ending 31st March. This investment must be made on or before 30th April of that year.
Full NCERT Solutions (Based on NCERT Pattern)
Here are the step-by-step solutions to typical questions you'll find in your NCERT textbook for Chapter 2.
Question 1: What is a debenture?
Answer: A debenture is a formal document issued by a company that acknowledges a loan or debt. It is a written promise to repay a specified sum of money at a specified date, along with interest at a fixed rate.
Key features of a debenture include:
- It is a certificate of debt.
- It carries a fixed rate of interest.
- The principal amount is repaid on a fixed future date.
- Debenture holders are creditors of the company and do not have voting rights.
Question 2: B Ltd. purchased assets of the book value of ₹4,00,000 from C Ltd. It was agreed that the purchase consideration be paid by issuing 12% Debentures of ₹100 each. Pass the necessary journal entries in the books of B Ltd. if the debentures are issued: (a) At Par (b) At a Premium of 25%.
Step 1: Record the purchase of assets. This entry will be common for all cases.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Sundry Assets A/c ... Dr. | 4,00,000 | |
| To C Ltd. (Vendor) | 4,00,000 | |
| (Being assets purchased from C Ltd.) |
Step 2: Calculate the number of debentures to be issued.
- Purchase Consideration = ₹4,00,000
- Face Value per Debenture = ₹100
(a) Issued at Par:
- Issue Price = ₹100
- Number of Debentures = ₹4,00,000 / ₹100 = 4,000 Debentures
(b) Issued at a Premium of 25%:
- Premium per Debenture = 25% of ₹100 = ₹25
- Issue Price = ₹100 + ₹25 = ₹125
- Number of Debentures = ₹4,00,000 / ₹125 = 3,200 Debentures
Step 3: Pass journal entries for the issue of debentures.
(a) When Debentures are issued at Par:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| C Ltd. A/c ... Dr. | 4,00,000 | |
| To 12% Debentures A/c | 4,00,000 | |
| (Being 4,000, 12% Debentures of ₹100 each issued at par to C Ltd.) |
(b) When Debentures are issued at a Premium of 25%:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| C Ltd. A/c ... Dr. | 4,00,000 | |
| To 12% Debentures A/c | 3,20,000 | |
| To Securities Premium Reserve A/c | 80,000 | |
| (Being 3,200, 12% Debentures of ₹100 each issued at a premium of ₹25 per debenture) | ||
| Working Note: | ||
| Debenture Capital = 3,200 × ₹100 = ₹3,20,000 | ||
| Securities Premium = 3,200 × ₹25 = ₹80,000 |
Question 3: XYZ Ltd. issued 5,000, 9% Debentures of ₹100 each at a discount of 10%, redeemable at a premium of 5%. Pass the necessary journal entry for the issue of debentures.
Explanation: This is a case of "Issue at Discount, Redeemable at Premium". This is the most important case as it involves two losses for the company.
Step 1: Calculations.
- Face Value = 5,000 debentures × ₹100 = ₹5,00,000
- Discount on Issue = 10% of ₹5,00,000 = ₹50,000
- Premium on Redemption = 5% of ₹5,00,000 = ₹25,000
- Total Loss on Issue = Discount on Issue + Premium on Redemption = ₹50,000 + ₹25,000 = ₹75,000
- Amount received on Application = 5,000 × (₹100 - ₹10) = ₹4,50,000
Step 2: Journal Entries.
(1) On receipt of application money:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c ... Dr. | 4,50,000 | |
| To Debenture Application & Allotment A/c | 4,50,000 | |
| (Being application money received for 5,000 debentures) |
(2) On allotment of debentures:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Debenture Application & Allotment A/c ... Dr. | 4,50,000 | |
| Loss on Issue of Debentures A/c ... Dr. | 75,000 | |
| To 9% Debentures A/c | 5,00,000 | |
| To Premium on Redemption of Debentures A/c | 25,000 | |
| (Being 5,000, 9% Debentures issued at 10% discount, redeemable at 5% premium) |
Explanation: The `Loss on Issue of Debentures A/c` is debited with the total loss (₹75,000). `Premium on Redemption of Debentures A/c` is a liability and is credited.
Question 4: What are the conditions for writing off Discount/Loss on Issue of Debentures?
Discount or Loss on Issue of Debentures is a capital loss. As per accounting principles, it must be written off during the life of the debentures.
Step 1: Prioritize Source for Write-off.
- First Priority - Securities Premium Reserve (SPR): If there is a balance in the SPR account, it should be used first to write off the loss.
- Second Priority - Statement of Profit and Loss: If SPR is insufficient or not available, the remaining amount is written off against the Statement of Profit and Loss.
Step 2: Timing of Write-off.
The loss can be written off in the year of issue itself or over the tenure of the debentures. If it's written off over the tenure, the amount written off each year is proportionate to the amount of debentures outstanding.
Step 3: Journal Entry to write off the loss.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Securities Premium Reserve A/c ... Dr. | (Amount available) | |
| Statement of Profit and Loss ... Dr. | (Balancing Figure) | |
| To Discount/Loss on Issue of Debentures A/c | (Total Loss) |
Extra Important Questions (Board Style)
Practice these questions to test your understanding.
Multiple Choice Questions (MCQs)
Q1. Debenture holders are the __________ of the company.
(a) Owners
(b) Creditors
(c) Customers
(d) Promoters
Q2. As per SEBI guidelines, a company must create a Debenture Redemption Reserve (DRR) equivalent to what percentage of the face value of outstanding debentures?
(a) 15%
(b) 25%
(c) 10%
(d) 50%
Q3. Loss on Issue of Debentures is a __________.
(a) Revenue Loss
(b) Capital Loss
(c) Revenue Gain
(d) Capital Gain
Q4. When debentures are issued at a discount and are redeemable at a premium, which account is debited at the time of issue?
(a) Debentures Account
(b) Premium on Redemption Account
(c) Loss on Issue of Debentures Account
(d) Securities Premium Reserve Account
Q5. The balance of the Debenture Redemption Reserve (DRR) is transferred to which account after all the debentures are redeemed?
(a) General Reserve
(b) Capital Reserve
(c) Statement of P&L
(d) Securities Premium Reserve
Short Answer Questions
Q6. G-Star Ltd. took a loan of ₹8,00,000 from a bank and issued 10,000, 9% Debentures of ₹100 each as collateral security. Show how this will be presented in the Balance Sheet of the company.
Step 1: Choose Presentation Method. There are two methods. Method 1 (disclosure by way of note) is preferred and simpler.
Step 2: Prepare Balance Sheet Extract.
Balance Sheet (Extract) as at...
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| EQUITY AND LIABILITIES | ||
| Non-Current Liabilities | ||
| Long-term Borrowings | 1 | 8,00,000 |
Step 3: Prepare Notes to Accounts.
Notes to Accounts
| Note No. | Particulars | Amount (₹) |
|---|---|---|
| 1 | Long-term Borrowings | |
| Bank Loan | 8,00,000 | |
| (Secured by issue of 10,000, 9% Debentures of ₹100 each as collateral security) | ||
| Total | 8,00,000 |
Q7. Pass the journal entry for the issue of 2,000, 8% Debentures of ₹100 each, issued at a premium of 20%, redeemable at par.
Step 1: Calculate Amounts.
- Amount Received = 2,000 × (100 + 20) = ₹2,40,000
- Debenture Capital = 2,000 × 100 = ₹2,00,000
- Securities Premium = 2,000 × 20 = ₹40,000
Step 2: Pass Journal Entry. (Combined entry for application and allotment)
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c ... Dr. | 2,40,000 | |
| To 8% Debentures A/c | 2,00,000 | |
| To Securities Premium Reserve A/c | 40,000 | |
| (Being 2,000 debentures issued at ₹120 each, redeemable at par) |
Long Answer Questions
Q8. Pioneer Ltd. issued 20,000, 10% Debentures of ₹100 each on April 1, 2022. The debentures were issued at a discount of 5% and are redeemable at a premium of 10% after 5 years. The company has a balance of ₹50,000 in its Securities Premium Reserve. Pass the journal entry for the issue of debentures and writing off the Loss on Issue of Debentures.
Step 1: Calculate Total Loss on Issue.
- Face Value = 20,000 × ₹100 = ₹20,00,000
- Discount on Issue = 5% of ₹20,00,000 = ₹1,00,000
- Premium on Redemption = 10% of ₹20,00,000 = ₹2,00,000
- Total Loss = ₹1,00,000 + ₹2,00,000 = ₹3,00,000
- Amount Received = 20,000 × ₹95 = ₹19,00,000
Step 2: Journal Entry for Issue of Debentures.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Apr 1, 2022 | Bank A/c ... Dr. | 19,00,000 | |
| Loss on Issue of Debentures A/c ... Dr. | 3,00,000 | ||
| To 10% Debentures A/c | 20,00,000 | ||
| To Premium on Redemption of Debentures A/c | 2,00,000 | ||
| (Being debentures issued at discount, redeemable at premium) |
Step 3: Journal Entry for Writing off the Loss.
The total loss of ₹3,00,000 will be written off using the available SPR first (₹50,000), and the balance from P&L.
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| Mar 31, 2023 | Securities Premium Reserve A/c ... Dr. | 50,000 | |
| Statement of Profit and Loss ... Dr. | 2,50,000 | ||
| To Loss on Issue of Debentures A/c | 3,00,000 | ||
| (Being loss on issue of debentures written off) |
Case-Based Questions
Q9. Strong Cements Ltd. is an infrastructure company that needs funds for a new project. On April 1, 2023, it decided to issue 50,000, 8% Debentures of a nominal value of ₹100 each. The issue was fully subscribed. The terms of redemption state that the debentures will be redeemed at a premium of 5% after 4 years. The company is required to comply with the provisions of the Companies Act, 2013 regarding DRR and DRI. Based on the above information, answer the following:
(i) Pass the journal entry for the allotment of debentures.
(ii) Is Strong Cements Ltd. required to create a DRR? If so, for what amount?
(iii) Calculate the minimum amount of DRI the company needs to make and by which date.
(i) Journal Entry for Allotment:
Step 1: Calculations.
- Face Value = 50,000 × ₹100 = ₹50,00,000
- Premium on Redemption = 5% of ₹50,00,000 = ₹2,50,000
- Loss on Issue = ₹2,50,000 (since there is no discount)
Step 2: Journal Entries.
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c ... Dr. | 50,00,000 | |
| To Debenture Application & Allotment A/c | 50,00,000 | |
| Debenture App. & Allotment A/c ... Dr. | 50,00,000 | |
| Loss on Issue of Debentures A/c ... Dr. | 2,50,000 | |
| To 8% Debentures A/c | 50,00,000 | |
| To Premium on Redemption of Debs. A/c | 2,50,000 | |
| (Being 50,000 debentures allotted) | ||
(ii) DRR Requirement:
As per Rule 18(7) of Companies (Share Capital and Debentures) Rules, 2014, infrastructure companies are exempt from the requirement of creating DRR. Therefore, Strong Cements Ltd. is not required to create a DRR.
Note: If it were any other listed company, it would need a DRR of 10% of ₹50,00,000 = ₹5,00,000.
(iii) DRI Requirement:
Companies that are exempt from creating DRR are also exempt from investing in DRI. Therefore, Strong Cements Ltd. is not required to make any DRI.
Note: If required, the amount would be 15% of the face value of debentures to be redeemed (15% of ₹50,00,000 = ₹7,50,000), invested on or before April 30 of the year of redemption.
(Difficulty: Hard) - This question tests theoretical rules of DRR/DRI.Common Mistakes Students Make
- Confusing Shares and Debentures: Remember, debenture interest is a charge against profit (must be paid regardless of profit), while dividends on shares are an appropriation of profit.
- Incorrect Calculation of Loss on Issue: Forgetting to add the "Premium on Redemption" to the "Discount on Issue" to calculate the total `Loss on Issue of Debentures`.
- Forgetting DRR and DRI Rules: Students often get confused about the percentages (10% for DRR, 15% for DRI) and the exemption categories. Make a small chart and revise it regularly.
- Journal Entry for Writing Off the Loss: Many students forget to write off the loss on issue. It must be written off, first against Securities Premium Reserve and then against the Statement of P&L.
- Collateral Security Entry: Confusing the two methods. The easiest method is to simply disclose it in the Notes to Accounts without passing any journal entry.
Exam Preparation Tips
- Master the Six Cases: The core of this chapter is the set of six journal entries for issuing debentures with different redemption conditions. Practice them until they become second nature. *(Hint: Always create a liability "Premium on Redemption" and a "Loss on Issue" if debentures are redeemable at a premium).*
- Focus on Journal Entry Format: In board exams, marks are allotted for correct format, narration, and amounts. Be neat and precise.
- Revise DRR/DRI Theory: The rules for DRR and DRI are theoretical but crucial for long-answer questions. Know which companies are exempt.
- Practice, Practice, Practice: Solve as many practical problems as you can from your textbook, reference books, and past year papers (PYQs).
- Time Management: This chapter's questions can be lengthy. Time yourself while practicing to ensure you can solve them within the exam time limit.
Frequently Asked Questions (FAQs)
Q1: What is the difference between shares and debentures?
Q2: Are debentures considered long-term debt?
Q3: What are the 6 cases of issue and redemption of debentures?
- Issued at Par, Redeemable at Par
- Issued at Discount, Redeemable at Par
- Issued at Premium, Redeemable at Par
- Issued at Par, Redeemable at Premium
- Issued at Discount, Redeemable at Premium
- Issued at Premium, Redeemable at Premium
Q4: Is it mandatory for all companies to create a Debenture Redemption Reserve (DRR)?
Q5: Can a company issue debentures with no redemption date (irredeemable debentures)?
Conclusion: "Issue and Redemption of Debentures" might seem complex at first, but it is a very logical and high-scoring chapter. The key to success is a clear understanding of the concepts and rigorous practice of the journal entries. Go through the six special cases, revise the DRR/DRI rules, and solve past year questions. Keep practicing, and you'll find this chapter to be one of your strengths in the CBSE 2026-27 board exam. All the best!