DEBENTURE REDEMPTION

Hi! Here’s a clear explanation about debenture redemption accounting with issue costs:

Context:

• Debentures with face/par value = ₹1,00,000

• Issue costs = ₹10,000 (transaction costs)

• Issue price = Par (₹1,00,000)

• Redeemed at par (₹1,00,000)

How to treat issue costs and redemption amount?

1. Redemption amount is always based on the nominal/par value of the debentures.

   • So, redemption amount = ₹1,00,000 (not ₹90,000 or the amortised balance).

2. Issue costs (₹10,000) are treated separately:

   • They are capitalized and amortized over the life of the debenture using the Effective Interest Rate (EIR) method.

   • This amortization forms part of the interest expense in profit and loss over the debenture tenure.

3. At redemption:

   • You pay the face value (₹1,00,000).

   • The amortised cost (carrying amount) of the debenture on your books will be face value less unamortized issue costs + accumulated amortization.

4. In summary:

   • Redemption amount = Par value = ₹1,00,000

   • Issue costs reduce your initial proceeds but do not affect redemption amount.

   • The amortised cost (adjusted for issue costs) determines your carrying amount and any gain/loss on redemption.

Practical points:

• Your redemption liability on maturity is ₹1,00,000.

• Your carrying amount in books will be ₹1,00,000 - unamortized issue cost (plus amortized portion).

• Gain or loss on redemption = Carrying amount - Redemption amount.