This chapter covers the accounting treatment of issuing and redeeming debentures, an important way for companies to raise long-term finance. Understanding this process is crucial for financial management.
Issue and Redemption of Debentures – Formula & Equation Sheet
Essential formulas and equations from Accountancy Part - II, tailored for Class 12 in Accountancy.
This one-pager compiles key formulas and equations from the Issue and Redemption of Debentures chapter of Accountancy Part - II. Ideal for exam prep, quick reference, and solving time-bound numerical problems accurately.
Key concepts & formulas
Essential formulas, key terms, and important concepts for quick reference and revision.
Formulas
Total Interest = Face Value × Coupon Rate × (1/100)
Total Interest is the total interest payable on the debenture, where Face Value is the nominal value of the debenture and Coupon Rate is the percent of interest per annum.
Discount = Face Value - Issue Price
Discount represents the reduction from the face value when debentures are issued at a price below nominal value. Useful for calculating the effective cost to investors.
Premium = Issue Price - Face Value
Premium is the amount added to the face value when debentures are issued at a price above nominal value.
Debenture Redemption Reserve (DRR) = 15% of Debentures maturing within 1 year
DRR is a mandatory reserve for debentures to ensure that funds are available for redemption, calculated as 15% of maturing debentures.
Number of Debentures Issued = Purchase Consideration / Issue Price
This formula is used to determine how many debentures to issue based on the total purchase consideration divided by the price at which they are sold.
Loss on Issue of Debentures = Discount on Issue of Debentures + Premium on Redemption
This accounts for both the discount incurred while issuing the debentures and any premiums that need to be paid at redemption.
Debenture Application Account = Total Application Money Received
This represents the total amount received from investors at the time of application for debentures.
Interest Payable = Total Debenture Amount × Interest Rate per annum × Time
Calculates the interest amount that needs to be paid over the period based on the total value of debentures.
Journal Entry for Issuing Debentures = Bank A/c Dr. to Debentures A/c
This represents the basic entry for recording the inflow of cash when debentures are issued, equaling the total amount received.
Journal Entry for Redemption of Debentures = Debentureholders A/c Dr. to Bank A/c
Records the outflow of cash when debentures are redeemed. Shows the payment made to debentureholders upon redemption.
Equations
Debenture A/c = Cash A/c - Loss on Issue A/c + Premium on Redemption A/c
This equation reflects the accounting treatment of cash received from debenture issuance considering discounts and premiums.
Profit on Redemption of Debentures = Nominal Value - Purchase Price
Used to determine the profit made by the company when it redeems its own debentures at a lower price than their nominal value.
Debenture Redemption Fund Investment = 15% of Total Redeemable Debentures
Shows the legal requirement for companies to allocate funds for future redemption of debentures.
Bank A/c Dr. = Debentureholders A/c + Premium on Redemption A/c
This entry indicates the total amount that needs to be paid out to the debentureholders upon redemption, including premium if applicable.
Securities Premium Reserve = Premium on Issue of Debentures + Other Premiums
Cumulatively shows all amounts that can be applied to offset losses or enhance capital, considering issued premiums.
Total Debt = Short-term Loan + Long-term Debt
This calculation shows the total liabilities on the balance sheet, including all forms of debt.
Accounting Entry for DRR = Debenture Redemption Reserve A/c Dr. to Bank A/c
This entry records the allocation of profits or reserves into the Debenture Redemption Reserve.
Debenture Application & Allotment A/c = Total Debentures Issued
This reflects the total of debenture applications and their subsequent allotment accounting.
Cash A/c = Total Interest Payable - Income Tax Payable
This calculates the net cash inflow after accounting for the tax deductions from interest payments.
Journalise Loss on Redemption = Loss on Redemption A/c + General Reserve
Shows the entry for losses incurred from the redemption of debentures when their repayment exceeds the expected value.
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