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Accounting 3% exam weight

Debentures

Part of the CMA Foundation study roadmap. Accounting topic accoun-009 of Accounting.

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Debentures

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

A debenture is a written instrument acknowledging a long-term loan taken by a company, repayable on a fixed future date and carrying a fixed coupon rate of interest payable periodically. Debenture holders are creditors, not owners, and receive interest (a charge against profit), never dividends.

Must-Know Formulas

ComputationFormula
Issue price (at discount)Face Value − Discount (per debenture)
Issue price (at premium)Face Value + Premium (per debenture)
Annual interestFace Value × Coupon Rate
Half-yearly interestFace Value × (Coupon Rate ÷ 2)
Discount / Loss written off per yearTotal Discount or Loss ÷ Life of debenture (years)
Sinking fund instalment (scrip method)(Redeemable Amount − Scrap Value) ÷ Life (years)

Exam pointers: The exam (CMA Foundation Paper 3) carries roughly 3% weightage. Expect calculations of interest accrued, redemption amounts, and journal entries for issue at par/discount/premium.

🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Nature and Classification

A debenture is evidence of debt under Section 2(30) of the Companies Act, 2013. Unlike shares, debentures do not confer ownership; interest is paid whether or not profits are earned. Companies classify debentures in four overlapping ways: secured vs unsecured (backed by a charge on assets), registered vs bearer (transfer by deed vs by delivery), convertible vs non-convertible (option to convert into shares), and redeemable vs perpetual (fixed maturity date vs no maturity).

Issue of Debentures

Debentures may be issued at par, at a discount, or at a premium. When issued at a discount, the gap between face value and issue price is debited to a separate asset account — Discount/Loss on Issue of Debentures A/c. Under Section 52 of the Companies Act, 2013, this discount and any issue expenses must be written off against securities premium (where available) or, failing that, amortised from the Statement of Profit and Loss over the life of the debenture.

Interest Accrual

Interest accrues on a time basis. At year-end, the unpaid portion is shown as Interest Accrued but Not Due under Current Liabilities, while the full year’s interest is charged to the Statement of Profit and Loss. Half-yearly interest = Face Value × (Coupon Rate ÷ 2).

Redemption and DRR

Before redeeming debentures, companies must transfer a stipulated percentage of the nominal value of outstanding debentures to the Debenture Redemption Reserve (DRR). Redemption happens either as a lump-sum on maturity, in instalments, or through conversion into shares.

Typical Exam Questions

PatternTested Skill
Compute issue proceeds and discountJournal entry for issue
Half-yearly interest + accrualTime apportionment
Annual write-off of discountSchedule preparation
DRR creation entryReserve accounting
Sinking fund instalmentFormula application

Common trap: Treating debenture interest as an appropriation of profit. It is a charge against profit and must be provided even when unpaid, unlike dividends which are discretionary.

🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Discount vs Loss on Issue — A Subtle Distinction

Many students conflate the two, but accounting treatment differs. Discount on issue arises whenever debentures are issued below face value, including non-convertible issues. Loss on issue is a wider concept: it includes discount, underwriting commission, brokerage, legal fees, and any intrinsic loss on a convertible debenture issued below its fair conversion value. Loss on issue is written off in the year of issue to the extent it is not set off against securities premium, while pure discount is amortised annually.

Sinking Fund Method — Mechanics

Under the sinking fund (scrip) method, the company invests in marketable securities to build a fund matching the redemption liability. The annual appropriation equals (Redeemable Amount − Scrap Value) ÷ Life. Each year: (1) debit Statement of Profit and Loss and credit Sinking Fund A/c; (2) debit Sinking Fund Investment A/c and credit Bank; (3) accrue interest on investments back to Sinking Fund. On redemption, investments are sold, and any loss or profit on sale is transferred to the Sinking Fund A/c before the balance moves to General Reserve.

Adjacent Topics to Connect

Debentures link closely to Issue of Shares (premium, discount, and DRR concepts), Redemption of Preference Shares (similar reserve mechanism), and Underwriting of Issues. Mastery of time-based amortisation here transfers to lease accounting and intangible asset write-offs.

Common Mistakes

  • Crediting the full discount to the Statement of Profit and Loss in year one instead of amortising it.
  • Recording premium payable on redemption as income at issue; it must be written off over debenture life.
  • Forgetting DRR creation — without it, the balance sheet is non-compliant with Schedule III.
  • Confusing “Interest accrued but not due” (current liability) with “Interest accrued and due” (different treatment).

Practice Prompts

  1. A company issues 10,000 9% debentures of ₹100 each at a discount of 10%, redeemable after 5 years at par. Prepare the journal entries for issue and compute the annual discount to be written off.
  2. A sinking fund is created to redeem ₹5,00,000 of debentures after 5 years; scrap value of investments is expected at ₹50,000. Compute the annual instalment and show the investment entry for year 1.

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