Handling Debentures Issued Under Various Terms

Every rupee a company borrows through debentures comes with fine print: at what price were they issued, and at what price will they be paid back? A debenture sold at ₹100 and repaid at ₹100 creates a very different accounting trail from one sold at ₹95 and repaid at ₹110. These differences aren’t just bookkeeping trivia – they affect how much capital a company actually raises, what shows up as a loss on its books, and how it plans for repayment years down the line. This post walks through the standard combinations of issue and redemption terms and the journal entries each one demands.

Par, premium, and discount: the three reference points 🔗

Every debenture has a face value (also called nominal value) – the amount printed on the certificate, say ₹100. Three things can happen at issue or redemption relative to this figure:

• At par: the debenture is issued or redeemed at exactly its face value.
• At premium: the amount received or paid exceeds the face value.
• At discount: the amount received or paid is less than the face value.

Because issue and redemption are two separate events, a company can mix and match these terms. It might issue debentures at a discount to make them attractive to investors, yet promise a premium at redemption as a further sweetener. Company can issue debentures at different terms, and redemption too can happen at par, premium, or discount, which is why accountants recognise a set of standard scenarios rather than treating each case from scratch.

The standard issue-redemption combinations 🔗

Textbooks on corporate accounting typically work through six combinations. The table below summarises them before we look at the journal entries for each.

1. Issued at par, redeemed at par 🔗

This is the simplest case. The company receives exactly the face value and repays exactly the face value later, so no premium or discount accounts come into play.

2. Issued at premium, redeemed at par 🔗

Here the company collects more cash than the face value of the debentures. The excess is not treated as income; it is a capital receipt and is credited to the Securities Premium Account.

3. Issued at discount, redeemed at par 🔗

When debentures are sold below face value, the company receives less cash than the liability it books. This shortfall is a loss and is debited to a Discount on Issue of Debentures Account, which is written off over the life of the debentures.

4. Issued at par, redeemed at premium 🔗

The company receives only the face value at issue, but has already committed to paying more than that at redemption. Because this future liability is known and certain, it is recorded upfront under the prudence concept – the company doesn’t wait for redemption to acknowledge the extra payout. The premium payable later is credited to a Premium on Redemption of Debentures Account, a personal account that sits as a liability until redemption, as explained in this breakdown of debenture issue entries. The corresponding loss is debited to a Loss on Issue of Debentures Account.

5. Issued at discount, redeemed at premium 🔗

This is the combination the topic outline flags specifically, and it’s also the most expensive for the company – it collects less than face value now and promises more than face value later. Both shortfalls are losses, and both are usually pooled into a single Loss on Issue of Debentures Account. Suppose a company issues 5,000 debentures of ₹100 each at a 10% discount, redeemable at a 10% premium. It receives ₹90 per debenture but owes ₹110 per debenture at redemption – a total loss of ₹20 per debenture, or ₹1,00,000 across the issue, as illustrated in this set of worked debenture problems.

Notice that the ₹1,00,000 debited to the loss account equals ₹50,000 discount on issue plus ₹50,000 premium on redemption – the two shortfalls are simply combined.

6. Issued at premium, redeemed at premium 🔗

The company earns a premium on issue but still owes a premium on redemption. Both effects appear together: the issue premium is credited to Securities Premium, while the redemption premium is booked as a future liability against a debited loss.

Where the discount and loss finally get absorbed 🔗

The Discount on Issue of Debentures Account and the Loss on Issue of Debentures Account are not left hanging indefinitely. Companies typically write them off in one of two ways: against the balance in the Securities Premium Account, if one exists, or directly against the Statement of Profit and Loss over the tenure of the debentures. This is exactly what accounting treatment guidance on debenture issue and redemption lays out – the loss doesn’t sit as a permanent asset; it gets absorbed gradually. Companies are allowed to use the Securities Premium Account this way because the Companies Act permits the account to be applied toward writing off discount on debenture issue and toward the premium payable on redemption, alongside its use for bonus shares and preliminary expenses. This is a narrow, defined list of uses – the premium can’t be treated as free reserves to be spent however the company likes.

It’s worth noting that under Ind AS, which listed and larger companies now follow, debentures redeemable at a premium are measured at amortised cost using the effective interest method rather than through a separate Loss on Issue account, and the Securities Premium Account can no longer be used to fund redemption premiums once a company transitions to Ind AS. This is confirmed in clarifications on accounting for debenture redemption premium under Ind AS. For a B.Com syllabus, though, the traditional journal-entry approach shown above remains the standard method taught and examined.

Why these terms matter beyond the ledger 🔗

Getting these entries right isn’t just an academic exercise. The terms on which debentures are issued directly affect how much actual cash a company raises versus how much debt it books – issuing at a discount means the balance sheet liability is larger than the cash received, which matters for working capital planning. Redemption premiums are a known future cash outflow, and companies are required to plan for it. Under the Companies Act’s provisions on debentures, companies issuing debentures must maintain adequate arrangements for repayment, including setting aside funds ahead of maturity where prescribed. A business that ignores the true cost of a discount-and-premium issue may end up underestimating how much it will ultimately have to pay debenture holders.

There’s also an investor-facing angle. The combination of issue and redemption terms chosen by a company signals how it’s pricing its own credit risk and how eager it is to attract subscribers. A steep discount paired with a redemption premium usually means the company is offering a higher effective yield to compensate investors for perceived risk, compared to a plain at-par issue.

Keeping the entries straight 🔗

A useful shortcut when working through these problems: always ask two separate questions. First, was cash received above, at, or below face value at issue? Second, is cash to be paid above, at, or below face value at redemption? Each answer maps to a specific account – Securities Premium for a premium received, Discount on Issue for a shortfall received, and Loss on Issue plus Premium on Redemption for any premium promised later. Once these four accounts are familiar, every combination in the table above becomes a matter of picking the right building blocks rather than memorising six separate formats.

What do you think? If you were advising a company on whether to issue debentures at a discount with a redemption premium, versus a straightforward at-par issue, what factors would weigh most in that decision? And do you think the shift to amortised cost accounting under Ind AS makes debenture pricing more transparent, or does it just move the complexity elsewhere?

References

1. https://www.geeksforgeeks.org/accountancy/redemption-of-debentures/
2. https://www.yourarticlelibrary.com/accounting/debentures/journal-entries-for-issues-of-debentures/46939
3. https://www.careerlauncher.com/cbse-ncert/class-12/Accounts/CBSE-Redemptionofdebentures.html
4. https://www.accountsaptitude.com/issue-of-debentures-notes4/
5. https://ca2013.com/application-of-premiums-received-on-issue-of-shares/
6. https://www.caalley.com/icai_faq/45130asb35158.pdf
7. https://indiankanoon.org/doc/58841310/
8. https://byjus.com/commerce/terms-of-issue-of-debentures/