Debentures issued at a premium
When debentures are issued at a premium, debenture account is credited with the nominal amount and debenture premium account with the premium. Debenture premium account can be shown in the balance sheet as a revenue reserve. The companies act does not specify the uses of the debenture premium account.
Debenture issued at a discount
Debenture can be issued at a discount, but must be redeemed at par or a premium; since a capital profit (which is subject to tax) is made on redemption, a lower rate of interest can be paid than if the debentures were issued at their redeemable price.
Where debentures are issued at a discount, cash is debited with the net sum received and discount on debentures account being credited with the full nominal value of the debentures, at which value they must appear as a liability in the balance sheet. The discount on debentures, or so much as has not been written off, must be shown separately in the balance sheet.
The discount on the issue is, in effect, deferred interest, and should accordingly be written off over the period having the use of the money raised by the debentures, unless a sinking fund is created to accumulate the full redemption price, including the discount. Where the debentures are to be redeemed by annual drawings, the discount should be written off by proportionately reducing installments, since each succeeding year has the use of a reducing amount of principal.
Debentures repayable at a premium
These debentures will stand in the balance sheet as a liability at their nominal amount, with a note of the amount at which they are repayable, any discount or premium on issue being treated as described above.
If a sinking fund is raised to provide for repayment, it should include provision for the payment of the premium on redemption. If no sinking fund is created, the premium should be provided for out of profits over the period of the debentures.
Debentures may even be issued at a discount and repayable at a premium.