Issue and Redemption of Debentures - Notes, Mind Map And Questions

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Dive into the fascinating world of corporate finance with our comprehensive exploration of Class 12 Accountancy Chapter 2, focusing on the issue and redemption of debentures. This chapter is a critical component of Class 12 accounts, providing students with a deep understanding of debentures as a key instrument used by companies to raise capital. Our Class 12 accountancy chapter 2 notes are intricately designed to offer a thorough insight into the intricacies of debenture transactions, a must-have knowledge for any aspiring accountancy expert.

Learn the complexities of issue of debentures in Class 12 with our detailed notes. These resources cover the entire spectrum of debenture transactions, from issuance to redemption. Students will explore various aspects of debentures, including types, terms of issue, and interest payments. The chapter also delves into the redemption of debentures, providing a comprehensive understanding of how companies fulfill their obligations to debenture holders.

For a visual learning experience, our issue and redemption of debentures class 12 mind map simplifies these concepts, enabling students to grasp and retain the critical points effectively. Additionally, our collection of issue and redemption of debentures class 12 MCQs and important questions offers extensive practice opportunities, ensuring students are well-prepared for their exams.

We also provide an issue and redemption of debentures PDF, an invaluable resource for detailed study. Accompanied by issue and redemption of debentures class 12 NCERT solutions, students will have access to accurate answers and explanations for their queries.

In summary, our extensive resources on the issue and redemption of debentures for Class 12 accountancy are designed to provide a complete and in-depth understanding of this crucial topic. With our notes, mind maps, MCQs, PDFs, and NCERT solutions, students will be fully equipped to tackle this chapter with confidence and achieve academic success in the field of accountancy.

Meaning of Debentures

Debentures are a type of long-term debt instrument issued by companies to borrow funds at a fixed rate of interest. They are an essential tool for raising capital and are akin to a certificate of loan or a bond, evidencing the company's obligation to repay the borrowed amount at a specified date. Unlike shares, debentures do not confer ownership rights in the company. Instead, they offer a fixed rate of return, known as interest, to the debenture holders. Being a creditor, debenture holders have a priority over shareholders in the payment of interest and capital during the winding up of a company. Debentures can be secured or unsecured and may come with varying terms and conditions regarding repayment, conversion, and security.

Distinction between Shares and Debentures

Shares and debentures are both instruments of finance used by companies, but they have distinct characteristics. Shares represent a portion of ownership in a company, giving shareholders voting rights and a claim to a part of the company's profits through dividends. Conversely, debentures signify a loan to the company, making debenture holders creditors who receive a fixed interest irrespective of the company's profits. While shareholders benefit from the company's growth, their investment is riskier compared to debenture holders, who have a priority claim over the company's assets and earnings. Additionally, shares are a permanent source of capital without a maturity date, whereas debentures are typically issued for a specified period after which they are redeemed.

Types of Debentures

Debentures are categorized based on convertibility, security, redemption, and registration. Convertible debentures can be converted into equity shares after a certain period, while non-convertible ones cannot. Secured debentures are backed by the company's assets, making them safer, whereas unsecured or naked debentures are not protected by any collateral. Redeemable debentures have a fixed term of redemption, whereas irredeemable or perpetual debentures do not have a maturity date. Registered debentures are recorded in the company's register of debenture holders, and their transfer requires a formal process, unlike bearer debentures, which are transferable by mere delivery.

Issue of Debentures

The issue of debentures refers to the process by which a company raises funds by issuing debt securities to investors. The process involves deciding the terms of the debentures, such as the interest rate, redemption period, and convertibility. The company then makes a public offering, inviting investors to subscribe to the debentures. The funds raised through this issuance are typically used for long-term financing needs, such as capital expenditures or business expansion. The entire process must comply with regulatory requirements and involves comprehensive documentation to protect the interests of both the company and the investors.

Over Subscription

Over-subscription of debentures occurs when the applications received from investors exceed the number of debentures offered by the company. This situation reflects high investor demand and confidence in the company's potential and creditworthiness. In handling over-subscription, the company can either allot debentures on a pro-rata basis to all applicants, refund the excess application money, or in some cases, can decide to allot additional debentures, subject to legal provisions and the company's capital requirements. The approach taken depends on the company's financial strategy and the terms outlined in the issue prospectus.

Issue of Debentures for Consideration other than Cash

Companies may issue debentures for consideration other than cash, typically in transactions involving the purchase of assets, services, or settling debts. In such cases, debentures are issued to vendors, service providers, or creditors in lieu of direct monetary payment. The value of the debentures issued corresponds to the value of the consideration (assets, services, or debt). This method of issuing debentures helps the company preserve cash while fulfilling its obligations or acquiring assets. The accounting treatment of such transactions involves recording the debentures at their fair value or the fair value of the consideration, whichever is more evident.

Issue of Debentures as a Collateral Security

Issuing debentures as collateral security involves using debentures as a guarantee for a loan or another obligation. In this arrangement, the debentures act as a secondary security; they will only be executed if the primary security is insufficient to cover the debt. The debentures remain with the trustees until the company fulfills its loan obligations. If the company defaults on its payment, the loan providers have the right to recover their dues from the sale of these debentures. This method provides an additional layer of security to lenders and can help companies secure loans on more favorable terms.

Terms of Issue of Debentures

The terms of issue of debentures define the conditions under which a company issues debentures. Key terms include the issue price (at par, premium, or discount), interest rate, redemption period, convertibility options, and security against assets. The issue price determines how debentures are sold relative to their face value. The interest rate is the cost the company pays for using the debenture holders' money. The redemption period specifies when the company will repay the debenture holders, while convertibility terms define if and how debentures can be converted into equity shares. The security terms provide assurance to debenture holders about the safety of their investment.

Interest on Debentures

Interest on debentures is the return that debenture holders earn for their investment. It's paid at a fixed rate, agreed upon at the time of the issue. The interest is usually paid annually or semi-annually and is a charge against the company's profits. For accounting purposes, interest on debentures is recorded as a finance cost in the income statement. The obligation to pay interest exists irrespective of the company's profit or loss status, making debentures a fixed financial commitment for the company.

Writing off Discount/Loss on Issue of Debentures

Writing off discount or loss on the issue of debentures involves gradually expensing the loss incurred in issuing debentures below their face value. The discount amount represents an additional cost of financing and is written off to the income statement over the life of the debentures. This accounting treatment spreads the cost over several periods, aligning it with the benefit the company receives from the debenture funds. The write-off is usually done using the effective interest method or the straight-line method, depending on the company’s accounting policy.

Redemption of Debentures

Redemption of debentures refers to the repayment of the principal amount to the debenture holders at the end of the agreed period or earlier, as specified in the terms of issue. Redemption is a critical aspect of debenture management as it signifies the company's obligation to return the borrowed funds. The company must plan its finances effectively to meet this obligation, which might involve setting aside funds over time in a sinking fund, or arranging for refinancing. Properly managing redemption is crucial for maintaining the company's creditworthiness and investor confidence.

Redemption by Payment in Lump Sum

Redemption by payment in lump sum is a method where the company repays the entire principal amount of the debentures at once on a predetermined date. This method is straightforward and involves a single payment, clearing the debt obligation entirely. Companies opting for this method need to ensure adequate liquidity to meet the large cash outflow at the time of redemption. This method is often preferred when the company expects to have sufficient funds available at the time of maturity.

Redemption by Purchase in Open Market

Redemption by purchase in the open market allows a company to buy back its debentures from the market before maturity. This method is advantageous when the debentures are trading at a price below their face value, allowing the company to fulfill its redemption obligation at a lower cost. The purchased debentures are usually cancelled, reducing the company’s debt burden. This method provides flexibility to the company in managing its debt and can be used as a tool for financial optimization.

Redemption by Conversion

Redemption by conversion involves converting debentures into equity shares of the company at the terms agreed upon at the time of issue. This method does not require an immediate cash outlay, making it an attractive option for companies with limited cash resources. Conversion dilutes the equity base but reduces the company’s debt burden and interest obligations. It's an effective way of restructuring the company's capital and can be appealing to debenture holders if the company’s equity has good growth prospects.

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