ACCOUNTANCY
B
UNIT -2
ISSUE AND REDEMPTION OF DEBENTURES
1. What is Debenture? What are
its Characteristics?
Ans: Debenture is an instrument in writing given by a company
acknowledging the liability for the total amount received as a result of issue
of debentures and agreeing thereby to pay the money raised after the expiry of
the stipulated period at a certain rate of interest per annum.
Following are the characteristics of Debentures:
a. It is an acknowledgement of debt or loan taken by a company.
b. A debenture is generally redeemable.
c. Its face value is pre- determined.
d. It is issued under the common seal of the company.
e. It does not carry any voting rights like shares.
f. Debentures are issued in the form of a certificate.
2. What are different types of
debentures?
Ans: Following are the different types of
debentures:
A. On the Basis of securities:
a. Secured or Mortgaged debenture: When debentures are secured by
the assets of the company they are called Secured or Mortgaged debenture.
b. Naked or Simple debenture: When no security is given against
debenture they are called Naked or Simple debenture.
B. On the Basis of Redemption:
a. Redeemable debenture: When debentures are repayable after a
specified period they are called redeemable debentures.
b. Irredeemable debenture: When debentures are repayable only
when the company goes into liquidation they are called irredeemable debenture.
C. On the Basis of Registration:
a. Registered debenture: Registered debenture is payable to a
person whose name is appears in the register of debenture holders.
b. Bearer Debenture: A bearer debenture is one which is payable
to the bearer of the debentures.
D. On the basis of
convertibility:
a. Convertible debenture: Convertible
debentures are those debentures which can be converted into shares.
b. Non-convertible debenture: Non-convertible debentures are
those debentures which cannot be converted into shares.
3. Write the difference between Share holder and
Debenture holder?
Ans: Following
are the difference between Share holder and Debenture holder:
4. What are the differences
between Shares and Debentures?
Ans: Following are the differences between Shares
and Debentures:
Ans: Redemption of debentures means the repayment of
debentures. As debenture is shown in the liability side of balance sheet it is
necessary for the company to discharge these liabilities. Thus redemption of
debentures denotes discharge of liability on account of debentures by repayment
to the debenture holders. The redemption is made on the expiry of specified
period mentioned in the debenture certificates.
Following are the methods of redemption of debentures:-
(i) By payment in lump sum at
the end of fixed period: Redemption
of debenture by making payment in lump sum at the end of the fixed period means
redemption of the whole of the debentures on a fixed date by making payment at
a time to the debenture holders.
(ii) Redemption in instalments: Redemptions in instalment means that all the
debentures are not redeemed on a particular date. Instead when the company
decides to redeem only a part of the total debenture annually on a particular
date and whole of the debenture are redeemed within the fixed period from the
date of issue of debentures.
(iii) Redemption by purchase in open market: Sometimes debentures of some companies are
quoted on the stock exchanges. When the price of such debentures quoted in the
stock exchange is lower than the amount agreed to be paid by the company at the
time of redemption as per the terms of issue, the company may discharge its
liabilities in respect of such debentures by purchasing them from the open
market.
(iv) Redemption by Conversion into shares: Sometimes a company may issue fully
convertible debenture (FCD)/ partly convertible debenture (PCD) i.e. the
debentures are either fully or partly convertible into shares. If such
debentures are converted into shares, it means that the debentures have been
redeemed to the extent of conversion into shares.
6. What is Debenture Redemption
Reserve?
Ans: Debenture Redemption Reserve Account is
created out of profits to the extent of 50% of the amount of debentures to be
redeemed. The Debenture Redemption Reserve is created before the commencement
of redemption. It is shown on the liabilities side of balance sheet.
7. What is sinking fund?
Ans: A sinking fund is a fund, created by a charge
against or an appropriation of profits represented by specific investments,
which is brought into existence for a specific purpose, such as replacement of
an asset at the expiration of its life or the redemption of debentures.
8. What is meant by: Loss on
issue of Debenture?
Ans: When the company issue debentures at par but
repayable at premium, it gives rise to loss on issue of debenture. Again where
the company issues debentures at a discount but repayable at a premium, it also
gives rise to loss on issue of debenture.
9. Mention two advantages of
issuing debentures?
Ans: Following are the advantages of issuing
debentures:
a. For meeting expenditure on modernization of plant.
b. For setting up of new projects.
c. For meeting long term requirements of working capital.
d. For expansion and diversification of plant.
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