October 10, 2018

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ISSUE AND REDEMPTION OF DEBENTURES Accountancy Notes

Issue and Redemption of Debentures

ISSUE AND REDEMPTION OF DEBENTURES

 

ISSUE AND REDEMPTION OF DEBENTURES

Debentures

A debenture is an instrument of debt executed by the company acknowledging its obligation to repay the sum at a specified rate and also carrying an interest. It is only one of the methods of raising the loan capital of the company. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures become a part of the company’s capital structure, it does not become share capital.


 

Difference between Shares and Debentures

 

Basis Shares Debentures
Capital vs. Loan It is the part of owned capital. It is the part of loan.
Reward for Investment Dividend is the reward. Interest is the reward.
Secured by Charge

 

Shares are not secured by any charge. Debentures are generally secured by a charge.
Voting right Shareholders enjoy voting rights. Debenture-holders does not enjoys voting rights.
Conversion Equity shares can never be converted. Debentures can be converted in to shares or debentures of different category.


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  • Journal Entries in case of Debentures.
Case Journal Entries
For making interest due Debenture Interest A/c                                                    Dr.

To Debenture-holders A/c

To TDS A/c

For making payment of interest Debenture-holders A/c                                                   Dr.

To Bank A/c

For payment of TDS

 

TDS A/c                                                                            Dr.

To Bank A/c

For transfer of debenture interest Profit & Loss A/c                                                             Dr.

To Debenture Interest  A/c


  • Methods of redemption of Debentures.


 

 

 Points to remember.

1)      Profit on cancellation of debentures is transferred to Capital Reserve Account.

2)      DRR is not mandatory for infrastructure companies.

3)      Redemption of debentures means discharge of an obligation arising out of the contractual obligation created through the Debenture trust Deed.

4)      Debenture interest is always paid even in case of losses.

 

 

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