CBSE Class 12 Accountancy – Chapter 7: Accounting for Debentures

NCERT/CBSE-aligned study resource

1. Meaning of Debentures

A debenture is an instrument acknowledging a company’s debt. Debenture holders are creditors of the company and receive interest according to the terms of issue.

2. Issue of Debentures

Debentures may be issued at par, at a premium or at a discount, subject to applicable law. They may be issued for cash or for consideration other than cash, including acquisition of assets or businesses.

3. Issue for Consideration Other Than Cash

When assets are purchased and consideration is discharged by issuing debentures, the accounting records the asset purchase and the liability created through debentures.

4. Debentures as Collateral Security

Debentures may be deposited as collateral security for a loan. The accounting treatment depends on the method adopted by the company and the terms of the arrangement.

5. Interest on Debentures

Interest on debentures is a finance cost and is payable according to the stated rate and period. It is payable irrespective of whether the company earns profit, subject to the legal terms governing the instrument.

6. Loss on Issue of Debentures

When debentures are issued at a discount or are redeemable at a premium, the resulting loss is accounted for and written off according to the applicable accounting treatment.

7. Redemption

Redemption is repayment of debenture liability according to the terms of issue. Entries depend on whether redemption occurs at par, premium or through another permitted arrangement.

Worked Illustration

If 1,000 debentures of ₹100 each carry interest at 10% per annum, annual interest is ₹10,000. If interest is paid half-yearly, each half-year instalment is ₹5,000 before considering applicable tax or other statutory deductions.

Chapter-Specific MCQs

1. Debenture holders are generally: (A) creditors (B) owners (C) customers (D) employees. Answer: A.
2. Interest on debentures is generally: (A) finance cost (B) appropriation of profit only (C) capital receipt (D) sales income. Answer: A.
3. Redemption means: (A) repayment of debenture liability (B) issue of shares (C) purchase of inventory (D) depreciation. Answer: A.

Practice Set

1. Pass entries for issue of debentures at par and at premium.
2. Calculate annual and half-yearly debenture interest from face value and rate.
3. Record issue of debentures for purchase consideration and determine the resulting liability.