Explain the different terms for the issue of debentures with reference to their redemption.
The terms for the issue of debentures with reference to their redemption depend on the relationship between the issue price, redemption price, and the nominal or face value. Depending on the terms and conditions, six situations are commonly found in practice.
First, debentures may be issued at par and redeemable at par, where the amount collected and repaid equals the face value. They can also be issued at discount and redeemable at par, where the issue price is less than the face value, or issued at a premium and redeemable at par, where the issue price is higher than the face value.
Second, debentures may involve redemption at a premium. This includes debentures issued at par and redeemable at a premium, where the repayment amount exceeds the face value. Other terms include issued at a discount and redeemable at a premium and issued at a premium and redeemable at a premium.
In all these cases, the amount received as premium is credited to the 'securities premium account', while the amount of discount allowed is debited to 'loss/discount on issue' and written off over the years.
Explanation
The answer is derived directly from the provided context which lists the six specific situations regarding the issue and redemption of debentures. It incorporates the definitions of issue at par, premium, and discount provided in the text to explain the different terms. The explanation adheres to the exam-ready format suitable for a 6-mark question.
Solution Steps
Step 1: Identify the concept of Issue and Redemption terms (Par, Premium, Discount) from the context.
Step 2: List the six specific situations provided in the text regarding the combination of issue and redemption prices.
Step 3: Briefly explain the financial implication of premium and discount as stated in the context (crediting Securities Premium, debiting Loss/Discount).