Chapter -6

1. Introduction to Debentures
- Definition: Debentures are a type of long-term debt instrument issued by companies to borrow funds from the public. They are a promise to pay interest periodically and repay the principal amount on a specified maturity date.
- Features:
- Fixed interest rate.
- Redeemable after a specified period.
- Can be secured or unsecured.
- Do not carry voting rights.

2. Types of Debentures
- Secured Debentures: Backed by specific assets of the company.
- Unsecured Debentures: Not backed by any assets.
- Convertible Debentures: Can be converted into equity shares after a specified period.
- Non-Convertible Debentures: Cannot be converted into equity shares.
- Redeemable Debentures: Redeemed after a fixed period.
- Irredeemable Debentures: Not subject to redemption during the lifetime of the company.
- Registered Debentures: Registered in the name of the holder.
- Bearer Debentures: Payable to the bearer of the debenture certificate.

3. Issue of Debentures
- At Par: Debentures issued at their face value.
- At Premium: Debentures issued at a price higher than their face value.
- At Discount: Debentures issued at a price lower than their face value.

4. Accounting Entries for Issue of Debentures
- **For Debentures Issued at Par**:
- On receipt of application money:
```
Bank A/c Dr.
To Debenture Application A/c
```
- On allotment of debentures:
```
Debenture Application A/c Dr.
To Debentures A/c
```
- **For Debentures Issued at Premium**:
- On receipt of application money:
```
Bank A/c Dr.
To Debenture Application A/c
```
- On allotment of debentures:
```
Debenture Application A/c Dr.
To Debentures A/c
To Securities Premium A/c
```
- **For Debentures Issued at Discount**:
- On receipt of application money:
```
Bank A/c Dr.
To Debenture Application A/c
```
- On allotment of debentures:
```
Debenture Application A/c Dr.
Discount on Issue of Debentures A/c Dr.
To Debentures A/c
```

5. Interest on Debentures
- Interest Payment: Paid periodically (annually, semi-annually, or quarterly) at a fixed rate.
- **Accounting Entries**:
- For interest due:
```
Interest on Debentures A/c Dr.
To Debenture Holders A/c
```
- For interest paid:
```
Debenture Holders A/c Dr.
To Bank A/c
```
- For interest accrual:
```
Interest on Debentures A/c Dr.
To Interest Accrued but not Due A/c
```

6. Redemption of Debentures
- Methods of Redemption:
- Lump Sum Payment: Full repayment at the end of a specified period.
- Installment Payment: Periodic repayment in installments.
- Purchase in Open Market: Company buys back its debentures from the open market.
- Conversion: Debentures are converted into shares or new debentures.
- **Sources of Redemption**:
- Out of profits.
- Out of fresh issue of shares or debentures.
- Through sinking fund.

7. Accounting Entries for Redemption of Debentures
- **At Par**:
- On redemption:
```
Debentures A/c Dr.
To Bank A/c
```
- **At Premium**:
- On redemption:
```
Debentures A/c Dr.
Premium on Redemption of Debentures A/c Dr.
To Bank A/c
```
- **Out of Sinking Fund**:
- Transfer to sinking fund:
```
Profit and Loss Appropriation A/c Dr.
To Sinking Fund A/c
```
- Investment in sinking fund:
```
Sinking Fund Investment A/c Dr.
To Bank A/c
```
- Sale of sinking fund investment:
```
Bank A/c Dr.
To Sinking Fund Investment A/c
```
- Redemption of debentures:
```
Debentures A/c Dr.
To Bank A/c
```
- Transfer of sinking fund balance:
```
Sinking Fund A/c Dr.
To General Reserve A/c
```

8. Purchase of Own Debentures
- **Purchase for Immediate Cancellation**:
- On purchase:
```
Own Debentures A/c Dr.
To Bank A/c
```
- On cancellation:
```
Debentures A/c Dr.
To Own Debentures A/c
Profit on Cancellation of Debentures A/c Dr.
To Profit and Loss A/c
```
- **Purchase for Investment**:
- On purchase:
```
Own Debentures A/c Dr.
To Bank A/c
```

9. Conversion of Debentures into Shares
- **Conversion**:
- On conversion:
```
Debentures A/c Dr.
To Share Capital A/c
To Securities Premium A/c
```

10. Practical Illustrations
- Example Problems: Various scenarios showing the steps involved in the issue and redemption of debentures and the related accounting entries.

Key Terms
- Debentures: Long-term debt instruments.
- Secured Debentures: Backed by specific assets.
- Unsecured Debentures: Not backed by assets.
- Convertible Debentures: Can be converted into shares.
- Redeemable Debentures: Redeemable after a fixed period.
- Sinking Fund: Fund established to facilitate the redemption of debentures.
- Interest on Debentures: Fixed interest paid periodically to debenture holders.

These notes cover the basic concepts and accounting treatments related to the issue, interest payment, and redemption of debentures, providing a comprehensive understanding of debenture accounting.