Short Answer Type Question:
Q.1 What is meant by a Debenture?
ANSWER: The word Debenture is derived from a Latin word ‘debere’ which means to borrow. A debenture is issued in the form of a certificate under the seal of a company and containing a contract for the repayment of the principal sum after a fixed period of time and payment of interest at regular intervals, generally half yearly. Debentures are issued by a company for acquiring long-term borrowings.
Q.2 What does a Bearer Debenture mean?
ANSWER: When a company does not maintain any record of the debenture holders and the debenture is transferable mere by delivery, then the type of the debenture held by the holders is termed as Bearer Debenture. Interests on such debentures are paid to the persons who produce the interest coupons that are attached with these debentures in a specified bank.
Q.3 State the meaning of ‘Debentures issued as a Collateral Security’.
ANSWER: The term collateral security means additional or secondary security in addition to the primary security. Sometimes, when a company takes loan from a financial institution, then besides the primary security, the company may issue debenture for additional security (as collateral security). The lender who receives debenture as collateral security is not entitled for interest on these debentures. If any default is made by the company in paying back the principal amount (i.e. the loan amount) or interest on the loan, then the lender has the full right to recover his/her dues from the sale of primary security. But, if the primary security is not sufficient to recover the amount of the debt, then the debentures issued as collateral may be used for recovery of the remaining amount.
Q.4 What is meant by ‘Issue of debentures for Consideration other than Cash’?
ANSWER: If a company purchases assets from its suppliers or vendors, then instead of paying them in cash the company issues debentures to them. This is known as issue of debenture for consideration other than cash. The issue of debenture for consideration other than cash serves the purpose of both the vendor as well as of the purchaser (company). From the purchaser’s point of view, purchasing an asset against the issue of debentures requires no additional cost for raising loans or arranging funds immediately. On the other hand, the vendor gets interest on the amount of debentures received. In this case, payment is deferred by issue of debentures and interest is paid for time lag payment. Debentures may be issued at par, premium or discount to the vendor.
Accounting treatment for Issue of Debentures for Consideration other than Cash
1. For purchase of Assets:
| Assets A/c | Dr. | |
| To Vendor A/c | ||
| (Asset Purchased) | ||
2. For Issue of Debentures
a. If debentures are issued at Par:
| Vendor A/c | Dr. | |
| To Debentures A/c | ||
| (Debenture issued to Vendor at par ) | ||
b. If debentures are issued at Premium
| Vendor A/c | Dr. | |
| To Debentures A/cTo Securities Premium A/c | ||
| (Debenture issued to Vendor at premium) | ||
c) If debentures are issued at Discount
| Vendor A/c | Dr. | |
| Discount on Issue of Debentures | Dr. | |
| To Debentures A/c | ||
| (Debenture issued to Vendor at discount ) | ||
Q.5 What is meant by ‘Issue of debenture at discount and redeemable at premium?
ANSWER: When debentures are issued below its par value (or the face value) but are redeemed at price higher than its par value, then it is termed as issue of debenture at discount and redeemable at premium. The difference between the issue price and the redemption price is treated as loss on issue of debenture.
Example:
A 10% debenture of Rs 1,000 is issued at 5% discount and is redeemed at 10% premium.
| Bank A/c | Dr. | 950 | ||
| Discount on Issue of Debenture A/c | Dr. | 50 | ||
| Loss on Issue of Debenture A/c | Dr. | 100 | ||
| To Debenture A/c | 1,000 | |||
| To Debenture Redemption Premium A/c | 100 | |||
| (Debenture issued) |
Total loss = Payment made at redemption – Amount received on issue of debenture
1,100 – 950 = Rs 150
Q.6 What is ‘Capital Reserve’?
ANSWER: Capital Reserve is a reserve that is created out of capital profits i.e. gains or profits arising from other than the normal activities of business operations i.e. activities other than sale or purchase of goods and services. This reserve is utilised to meet future capital losses, if any, and to issue bonus shares. It cannot be distributed as dividend among the share holders. The Capital Reserve is generated out of the following activities:
i. Premium on issue of shares.
ii. Premium on issue of debentures.
iii. Profit on redemption of debentures.
iv. Profit on sale of fixed assets.
v. Profit on reissue of forfeited shares.
vi. Profit prior to incorporation, etc.
Q.7 What is meant by an ‘Irredeemable Debenture’?
ANSWER: Irredeemable Debentures are those debentures that are not repayable or redeemable by a company during its life time. These are repayable only at the time of winding up of the company. These are also known as Perpetual Debentures that means debentures having indefinite life. In India, now days, no company can issue irredeemable debentures.
Q.8 What is a ‘Convertible Debenture’?
ANSWER: Convertible Debentures are those debentures that can be converted into equity shares after a specified period of time. These are of following two types:
i. Fully Convertible Debentures: When the whole amount of a debenture is convertible into equity shares worth of equivalent amount, then these debentures are called Fully Convertible Debentures. There is no need to maintain Debenture Redemption Reserves for such debentures.
ii. Partly Convertible Debentures: When only a part of the amount of a debenture is convertible into equity share, then these debentures are called Partly Convertible Debentures. In this regards, the Debenture Redemption Reserve is maintained only for the non-convertible part of the debenture.
Q.9 What is meant by ‘Mortgaged Debentures’?
ANSWER: Mortgaged Debentures are those debentures that are secured against asset/s of a company. These are also known as secured debentures. If the debentures are secured against a particular asset, then it is called fixed charge whereas, if the debentures are secured against all the assets of a company, then it is called floating charge. In case the company fails to pay back the principal amount of debenture or fails to meet its interest obligations on the due date, then the debenture holders have the right to sell the mortgage asset in order to realise their amount due to the company.
Q.10 What is discount on issue of debentures?
ANSWER: When the debentures are issued at a price below its par value or face value, then it is said that the debentures are issued at discount. The difference between the issue price and the face value of the debenture is regarded as a capital loss.
As per the Revised Schedule VI of the Companies Act, Discount on Issue of Debentures is shown in the Notes to Accounts:
1. With the amount that is to be written off within 12 months from the date of Balance Sheet – Shown under Other Current Assets
2. With the amount that is to be written off after 12 months from the date of Balance Sheet – Shown under Other Non-Current Assets
Q.11What is meant by ‘Premium on Redemption of Debentures’?
ANSWER: When the debentures are redeemed at a price more than its face value or the par value, then it is said that the debentures are redeemed at premium. The difference between the redeemed price and the par value is regarded as a capital loss and this loss is written off till the redemption of the debentures. The Premium on Redemption of Debenture is shown in the Notes to Accounts under the sub-head of ‘Other Long-term Liabilities’. The final balance is shown under the main head of ‘Non-Current Liabilities’ on the Equity and Liabilities side of the Company’s Balance Sheet.
Accounting Treatment for Premium on Redemption on Debentures:
1. At the time of the Issue of Debenture:
| Bank/Debenture Allotment A/c | Dr. | |
| Loss on Issue of Debenture A/c | Dr. | |
| To Debenture A/c | ||
| To Premium on Redemption | ||
| (Debenture issued with the term of redemption at premium) |
2. At the time of Redemption of Debentures:
| Debenture A/c | Dr. | |
| Premium on Redemption A/c | Dr. | |
| To Debentureholder A/c | ||
| (Amount of debentures due to debentureholders) | ||
Q.12 How are debentures different from shares? Give two points.
ANSWER:
| Basis of Comparisons | Debentures | Shares |
| 1. Meaning | Debentures are a part of loan, therefore, the debenture holders are the creditors of a company. | Shares form a part of capital, hence, share holders are the owner of a company. |
| 2. Voting Rights | These do not carry any voting rights for their holders. | These carry voting rights for their holders. |
Q.13 Name the head under which ‘discount on issue of debentures’ appears in the Balance Sheet of a company.
ANSWER: Discount on Issue of Debentures is regarded as a capital loss. As per the Revised Schedule VI of the Companies Act, Discount on Issue of Debentures is shown in the Notes to Accounts:
1. With the amount that is to be written off within 12 months from the date of Balance Sheet – Shown under Other Current Assets
2. With the amount that is to be written off after 12 months from the date of Balance Sheet – Shown under Other Non-Current Assets
Q.14 What is meant by redemption of debentures?
ANSWER: Redemption of debenture means repayment of debentures by the company to the debenture holders. In other words, it implies the discharge of liabilities by repaying the amount due to the debenture holders as per the terms and conditions determined at the time of issue of debentures. Debentures may be redeemable at par, premium or discount, but, nowa days, these are mostly redeemable at par or premium. The redemption can be done out of profits or from the fresh issue of debentures or shares. Redemption of debentures may be done by the following methods:
1. In lump sum at the time of maturity,
2. In instalments by draw of lots at the end of each year,
3. By purchase in open market whenever price is below its face value,
4. By converting debentures into shares or new debentures.
Q.15 Can the company purchase its own debentures?
ANSWER: Yes, a company can purchase its own debentures provided it is authorised by its Article of Association. As per the Company Act, if a company is authorised by its Article of Association, only then it may purchase its own debentures from the open market. The main purposes of such purchase are as follows:
1. For immediate cancellation of debenture liability, if the interest rate on its debenture is higher than the market rate of interest.
2. A company may also purchase its own debentures with the motive of investment and sell them at higher price in future and thereby earn profit.
Q.16 What is meant by redemption of debentures by conversion?
ANSWER: When a debenture holder can convert his/her debentures into shares or new debentures after the expiry of a specified period of time, then it is known as redemption of debentures by conversion. As the company do not need to pay any funds for the redemption, so there is no need to maintain the Debenture Redemption Reserve (DRR). The new shares or debentures may be issued at par, premium or at discount.
Q.17 How would you deal with ‘Premium on Redemption of Debentures’?
ANSWER: When the debentures are redeemed at a price more than its face value or the par value, then it is said that the debentures are redeemed at premium. The difference between the redeemed price and the par value is regarded as a capital loss and this loss is written off till the redemption of the debentures. The Premium on Redemption of Debenture is shown in the Notes to Accounts under the sub-head of ‘Other Long-term Liabilities’. The final balance is shown under the main head of ‘Non-Current Liabilities’ on the Equity and Liabilities side of the Company’s Balance Sheet.
Accounting Treatment for Premium on Redemption on Debentures:
1. At the time of the Issue of Debenture:
| Bank/Debenture Allotment A/c | Dr. | |
| Loss on issue of Debenture A/c | Dr. | |
| To Debenture A/c | ||
| To Premium on Redemption | ||
| (Debenture issued with the term of redemption atpremium) |
2. At the time of Redemption of Debentures:
| Debenture A/c | Dr. | |
| Premium on Redemption A/c | Dr. | |
| To Debenture Holder A/c | ||
| (Amount of debentures due to debenture holders) | ||
Q.18 What is meant by ‘Redemption out of Capital?
ANSWER: When debentures are redeemed out of capital and no profits are utilised for redemption, then such redemption is termed as redemption out of capital. In such a situation, no profits are transferred to the Debenture Redemption Reserve.
As per the guideline laid down by Securities and Exchange Board of India (SEBI) and the Section 117C of Company Act of 1956, the creation of Debenture Redemption Reserve is mandatory (DRR). Therefore, it is not possible to redeem debentures purely out of capital, as it reduces the value of assets. The following companies are exempted from the creation of DRR.
1. Infrastructure companies (i.e. those companies that are engaged in the business of developing, maintaining and operating infrastructure facilities)
2. A Company that issues debentures with a maturity up to 18 months
The following are the necessary Journal entries that need to be passed, in case the debentures are redeemed out of capital.
a. If debentures are redeemed out of capital at Par
| Debenture A/c | Dr. | |
| To Debenture holder A/c | ||
| (Amount of debentures due to debenture holders) | ||
| Debenture holder A/c | Dr. | |
| To Bank A/c | ||
| (Amount of debentures paid to debenture holders) | ||
b. If debentures are redeemed out of capital at Premium
| Debenture A/c | Dr. | |
| Premium on Redemption A/c | Dr. | |
| To Debenture holder A/c | ||
| (Amount of debentures due to debenture holders) | ||
| Debenture holder A/c | Dr. | |
| To Bank A/c | ||
| (Amount of debentures paid to debenture holders) | ||
Q.19 What is meant by redemption of debentures by ‘Purchase in the Open Market’?
ANSWER: According to the Company Act, if a company is authorised by its Article of Association, only then it may purchase its own debentures from the open market. The main purpose of such purchase is as follows:
1. For immediate cancellation of debenture liability, if the interest rate on its debenture is higher than the market rate of interest.
2. A company may also purchase its own debentures with the motive of investment and sell them at higher price in future and thereby earn profit.
Q.20 Under which head is the ‘Debenture Redemption Reserve’ shown in the Balance Sheet?
ANSWER: As per the Revised Schedule VI, Debenture Redemption Reserve (DRR) is shown in the Notes to Accounts of Reserve and Surplus. The final balance after adding DRR, is shown as the sub-head ‘Reserves and Surplus’ under the main head of Shareholders’ Funds on the Equity and Liabilities side of the Company’s Balance Sheet.
Long Answer Type Question:
Q.1 What is meant by a debenture? Explain the different types of debentures?
ANSWER: Debenture: The word ‘Debenture’ has been derived from a Latin w’ord ‘Debere’ which means to borrow. Debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates.
According, to Section 2(12) of The Companies Act, 1956 ‘Debenture’ includes Debenture Stock, Bonds and any other securities of a company whether constituting a charge on the assets of the company or not. There are various types of Debentures.
(i) From Security Point of View :From security point of view debentures can be classified into two broad categories naked or simple debentures and Mortgaged debentures.
(a) Naked or Simple Debentures :Naked or Simple Debentures are those debentures which do not carry any security in respect of repayment of interest or the principal. The general solvency of the company is the only security for the holders of simple debentures.
(b) Mortgaged Debentures: Mortgaged Debentures are the debentures which are secured by a charge on the asset or properties of the company. The debenture holders have the right to recover their principal amount as well as unpaid interest out of the assets mortgaged by the company.
In case of mortgage debentures, a company may prefer to appoint trustees who will hold the property given by way of security in trust for the benefits of debentures holders.
(ii) From Permanence Point of View the debentures may be Redeemable or Irredeemable debentures.
(a) Redeemable Debentures Redeemable debentures provide for the payment of principal amount on the expiry of certain period. Redeemable debentures can be reissued even after they have been redeemed until they have been cancelled.
(b) Irredeemable Debentures Irredeemable Debentures are retained as a part of the permanent capital structure during the life time of the company. Such debt becomes due for payment only when the company goes into liquidation or when the payment of interest is not made regularly.
The company has the option of cancelling its liability to the debenture holders at any time by giving due notice to them.
(iii) From Priority Point of View :From this point of view the debentures may be First and Second debentures.
(a) First Debentures :First Debentures are those debentures which are paid first before any payment is made to another type of debentures.
(b) Second Debentures: Second Debentures are those debentures which are paid after making the payment of first debentures.
(iv) From Recording Point of View :From recording point of view debentures can be classified into two categories bearer and registered debentures.
(a) Bearer Debentures :Bearer Debentures are transferable per bearer without endorsement and they are just like bearer cheques or government currency notes. They are treated as negotiable instrument and transferable by mere delivery. It is not necessary that transfer of such debentures should be registered with the company. The interest is paid to the holder irrespective of identity.
(b) Registered Debentures: Registered debentures are made out in the name of a particular person who is registered by the company as a holder and are transferable in the same way as shares.
The payment of interest and repayment of capital is made to those whose name are registered with the company and duly entered in the register of debenture holders.
(v) From Conversion Point of View: From conversion point of view debentures may be convertible or non-convertible.
(a) Convertible Debentures :Convertible debenture holders are given an option to convert them into equity or preference shares at a stated rate of exchange after a certain period. Convertible debentures are very popular these days with the companies as it provides them a major source of permanent working capital. It also provides safety, liquidity, capital appreciation and assured return to the investors.
(b) Non-Convertible Debentures: Non-convertible debentures are not convertible into equity or preference shares afterwards.
Q.2 Distinguish between a debenture and a share. Why debenture is known as loan capital? Explain.
Q.3 Describe the meaning of ‘Debenture Issued as Collateral Securities’. What accounting treatment is given to the issue of debentures in the books of accounts?
ANSWER: When a company takes a loan, it has to give some security, it may do so by giving debentures to the party from whom loan is takes. If on the due date principal is paid back by the Company and interest is also paid, the loan-giver will return the debentures to the Company and then they will be cancelled by the Company,
If the Company makes a default, the bank may either keep the debenture and become debenture-holder or sell them and realise money. This type of issue by the Company is called Issue of Debenture as Collateral Security.
When debentures are issued by the company, they are not really alive and no accounting entry is made in the books of the Company for it. Only a note is given in the balance sheet for it as under
If an accounting record for these debentures is to be made Debentures Suspense A/c is debited and deoentures A/c credited, debentures are shown in the liability side and balance of debentures Suspense A/c is shown in the assets side of the Balance Sheet. When debt is paid off by the Company, Debentures A/c is debited and Debentures Suspense A/c is credited.
Q.4 How is ‘Discount on Issue of Debentures’ treated in the books of accounts? How will you deal with the ‘Discount on issue of debentures’ when the debentures are to be redeemed in instalments?
ANSWER: When the debentures are issued at a price below its par value or face value, then it is said that the debentures are issued at discount. The difference between the issue price and the face value of the debenture is regarded as a capital loss. This loss is written off every year till the debentures are redeemed.
The loss on the issue of debenture is shown on the Assets side of the Balance Sheet under the heading of Miscellaneous Expenditures.
Accounting Treatment for Discount on Issue of Debentures:
At the time of issue of debentures at discount
At the time of writing off the discount on issue of debentures at the end of each year
(i) Fixed Instalment Method/Equal Instalment Method : This method is used when debentures are redeemable in lump sum after a specified period of time. In this case an equal amount of discount (loss) is written off in equal instalments over the life of the debenture. The formula for calculating amount of discount written off every year is given below
(ii) Fluctuating Instalment Method/Variable Instalment Method/ Proportion Method: When debentures are repaid by annuaLdrawings or in instalments, the discount should be written-off in the ratio of
debentures outstanding as at the end of each accounting year. The amount of discount, under this method, goes on reducing every year and so this method may also be known as Reducing Instalment Method. –
e.g., if a company has issued 10% debentures of Rs. 12,00,000 at 5% discount redeemable annually by Rs. 2,40,000 each year. The total amount of discount on Rs.12,00,000 debentures @ 5% is Rs. 60,000, i.e., (12,00,000 x 5/100 =Rs. 60,000). The amount of discount to be written off every year is calculated as
Hence, the amount of the total discount of’ 60,000 will be written off in the ratio of ,5 : 4 : 3 : 2 :1 i.e.,’ 20,000,’ 16,000,’ 12,000,’ 8,000 and 4,000 respectively.
Q.5 Explain the different terms for the issue of debentures with reference to their redemption.
ANSWER: Debentures can be issued at par, at premium and at discount in the same way they can be redeem at par and at premium. Debentures can never be redeemed at discount. The following are the six situation under which debentures can be issued to their redemption.
(i) Issue at Par and Redeemable at Par: When the debentures are issued and are redeemed at their face value, then the following Journal entry is passed.
(ii) Issue at Premium and Redeemable at Par When the debentures are issued at premium and redeemable at par, then the following Journal entry is passed. As premium is a gain for a company so it is credited in the Journal entry.
(iv)Issue at Discount and Redeemable at Par When the debentures are issued at discount and redeemable at par, then the following Journal entry is passed. As discount is a loss for a company so it is debited in the Journal entry.
(v) Issue at Premium and Redeemable at Premium When debentures are issued at par and redeemable at premium, then the following Journal entry is passed. In such case, the company did not suffer any loss at the time of issue but there will be loss at the time of redemption.
(vi) Issue at Discount and Redemption at Premium When the debentures are issued at discount and redeemable at premium, then the following Journal entry is passed.
Q.6 Differentiate between redemption of debentures out of capital and out of profits.
ANSWER: Debentures can be redeemed out of capital and out of profits. The following are the difference between these two methods.
Redemption of Debentures Out of Capital: This is the situation where debentures are redeemed out of capital and no profits are utilised for redemption of the debentures, such redemption is termed as redemption out of capital. In this situation, no profits are required to be transferred to the Debenture Redemption Reserve (DRR).
Here it is to be remembered that no company can redeem its debenture purely out of capital because as per the guideline laid down by Securities and Exchange Board of India (SEBI) and the Section 117C of Company Act of 1956, before starting any redemption process a company is required to create a DRR equal to 50% of the debentures issued).
Therefore, it is not possible to redeem debentures purely out of capital, as it reduces the value of assets. There are exceptions in the following case
(i) Infrastructure companies (i.e., those companies that are engaged in the business of developing, maintaining and operating infrastructure facilities)
(ii) A Company that issues debentures with a maturity up to 18 months.
(iii) In case of convertible debentures and convertible portion of partly convertible debentures.
Redemption of Debenture Out of Profits:When debentures are redeemed out of profit then no capital is utilised for redemption. Before redeeming the debentures profits are transferred to DRR from Profit and Loss Appropriation Account. The creation of DRR is mandatory as per the guidelines laid down by Securities and Exchange Board of India (SEBI).
SEBI mandates transferring amount equal to 50% of debentures issued to DRR before redeeming debentures. As transfer of amount (profits) to the DRR from Profit and Loss Appropriation Account reduces the amount of profit available for distribution of dividend, so this redemption process is known as redemption out of profit.
DRR is shown under the head of Reserves and Surpluses on the Liabilities side of the Balance Sheet. DRR account is closed by transferring it to General Reserve only when all the debentures are redeemed.
Q.7 Explain the guidelines of SEBI for creating Debenture Redemption Reserve.
ANSWER: Securities and Exchange Board of India (SEBI) have provided some guidelines for redemption of debentures. The focal points of these guidelines are *
(i) Every company shall create Debenture Redemption Reserve in case of issue of debenture redeemable after a period of more than 18 months from the date of issue.
(ii) The creation of Debenture Redemption Reserve is obligatory only for non-convertible debentures and non-convertible portion of partly convertible debentures.
(iii) A company shall create Debenture Redemption Reserve equivalent to at least 50% of the amount of debenture issue before starting the redemption of debenture.
(iv) Withdrawal from Debenture Redemption Reserve is permissible only after 10% of the debenture liability has already been reduced by the company.
SEBI guidelines would not apply under the following situations:
(i) Infrastructure company (a company wholly engaged in the business of developing, maintaining and operating infrastructure facilities), and
(ii) A company issuing debentures with a maturity period of not more than 18 months.
Q.8 Describe the steps for creating Sinking Fund for redemption of debentures.
ANSWER: The steps involved in creation of Sinking Fund on redemption of Debenture are
(i) Calculate the amount of profit to be set-aside annually with the help of sinking fund table.
(ii) Set aside the amount of profit at the end of each year and credit to Debenture Redemption Fund (DRF) Account.
(iii) Purchase the investments of the equivalent amount at the end of first year and debit Debenture Redemption Fund Investment (DRFI) Account.
(iv) Receive interest on investment at the end of each subsequent year.
(v) Purchase the investments equivalent to the fixed amount of profit set aside and the interest earned every year except last year (year of redemption).
(vi) Receive interest on investment for the last year.
(vii) Set aside the fixed amount of profit for the last year.
(viii) Encash the investments at the end of the year of redemption.
(ix) Transfer the profit/loss on sale of investments reflected in the balance of Debenture Redemption Fund Investment Account to Debenture Redemption Fund Account.
(x) Make payment to debenture holders.
(xi) Transfer Debenture Redemption Fund A/c balance to General Reserve.
Q.9 Can a company purchase its own debentures in the open market? Explain.
ANSWER: Securities and Exchange Board of India (SEBI) have provided some guidelines for redemption of Yes, a company, if authorised by its Articles of Association, can purchase its own debentures in the open market. The main purposes of such purchase may be as follows
(i) A company may purchase its own debenture for immediate cancellation for reducing the debenture liability especially in case when the interest rate on its debenture is higher than the market rate of interest.
(ii) A company may also purchase its own debentures with the motive of investment and sell them at higher price in future and thereby earn profit.
When a company purchase its own debenture,in the open market it can happen in either of the two ways first debentures may be purchased at premium for cancellation and debenture may be purchase at discount for cancellation. The following will be the accounting treatment in both situation.
(i) If Debentures are Purchased at Discount for Cancellation :When the company purchase its own debentures at discount for cancellation, then the following Journal entries are recorded.
Q.10 What is meant by conversion of debentures? Describe the method of such a conversion.
ANSWER: The debentures can also be redeemed by converting them into shares or new debentures. If debenture holders find that the offer is beneficial to them they may convert his/her debentures into shares or new debentures after the expiry of a specified period of time, then this whole process is known as redemption of debentures by conversion.
It is worth mentioning here that in such a case no Debenture Redemption Reserve is required because no funds are required for redemption.
If a debenture holder exercises the conversion option, then the issue price of shares must be equal to or less than the amount .actually received from debentures. The accounting treatment in that case will be as follows:
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