Chapter 2 Issue and Redemption of Debentures Solutions
Question - 11 : - What is meant by ‘Premium on Redemption of Debentures’?
Answer - 11 : -
Debenture redeemed at premium refers to the situation where Debentures are redeemed at a price which is more than its face value or nominal value. The difference between the redeemed price and face value of debenture is regarded as a capital loss and hence needs to be written off. The premium obtained on redemption of debenture is shown on liabilities side of balance sheet.
Question - 12 : - How are debentures different from shares? Give two points.
Answer - 12 : -
| Basis of Comparison | Debentures | Shares |
| 1. Meaning | The holders of debentures are regarded as creditors of the company as debentures are a part of loan. | As shares are a part of capital therefore shareholders are owners of the company. |
| 2. Voting Rights | No voting rights for holders | Holders have voting rights |
Question - 13 : - Name the head under which ‘discount on issue of debentures’ appears in the Balance Sheet of a company.
Answer - 13 : -
Discount on issue of debentures is treated as a capital loss. As per the revised schedule VI of the Companies Act, it should be shown on the Asset side of balance sheet under “Miscellaneous Expenditures” heading until it is written off.
Question - 14 : - What is meant by redemption of debentures?
Answer - 14 : -
It refers to the repayment of debentures by the company to the debenture holders. In this process debenture holders get payment for the debentures they were issued and the repayment is made as per terms and conditions determined at the time of debenture issue. It may be redeemable at par, discount or premium. Redemption takes place from profits or from a fresh batch of debentures. Following methods are used in redeeming debentures:
1. By conversion into equity shares and new debentures
2. By annual drawing in instalments
3. By purchasing debentures in an open market
4. Lump sum payment on maturity date
5. Utilizing call or put option
Question - 15 : - Can the company purchase its own debentures?
Answer - 15 : -
Yes, it is possible if a company which is authorised by its Article of Association is able to purchase its own debentures. The debentures are purchased to serve the following purpose:
1. As a source of investment which can be sold at a higher price on a later date to earn more profit
2. To cancel debenture liabilities if the debenture rate is higher than the rate of interest in market.
Question - 16 : - What is meant by redemption of debentures by conversion?
Answer - 16 : -
The situation where a debenture holder is able to convert existing debentures into equity shares or new debentures after the expiry of the existing debentures time period is known as redemption of debentures by conversion.
Question - 17 : - How would you deal with ‘Premium on Redemption of Debentures’?
Answer - 17 : - Debentures which are redeemed for a price which is more than its par value or nominal value is known as debentures redeemed at premium. The difference between the par value (face value) and the price at which it is redeemed is known as capital loss and this will be written off till debentures are redeemed. It is shown on the liabilities part of Balance Sheet till debentures are redeemed. The accounting treatment can be represented as:
Question - 18 : - What is meant by ‘Redemption out of Capital?
Answer - 18 : -
It refers to the condition when the debentures are redeemed from the capital without utilising the profits for redemption. Such a condition results in no profit being transferred to the Debenture Redemption Reserve, a reserve that needs to be created as debentures cannot be redeemed entirely from the capital. SEBI has issued guidelines for the redemption of debenture by creating Debenture Redemption reserve. However, there are some industries that are exempted from creating a reserve and they are:
1. Companies that issue debentures with maturity of 18 months
2. Companies involved in infrastructure sector like maintenance, construction, business development activities
Question - 19 : - What is meant by redemption of debentures by ‘Purchase in the Open Market’?
Answer - 19 : -
Redemption of debentures by purchase in open market refers to the condition when a company is authorised by its Article of Association to be able to purchase its own debentures. The debentures are purchased to serve the following purpose:
1. As a source of investment which can be sold at a higher price on a later date to earn more profit
2. To cancel debenture liabilities if the debenture rate is higher than the rate of interest in market.
Question - 20 : - Under which head is the ‘Debenture Redemption Reserve’ shown in the Balance Sheet?
Answer - 20 : -
The Debenture Redemption Reserve (DRR) is shown on balance sheet under header Reserves and Surplus as per the revised Schedule VI of the Company Act.