Which among the following represents a decrease in the Owner’s equity?
[B] Redemption of the Debentures
[C] Redemption of the Preference Shares
[D] Purchase of the Building
A debenture is one of the capital market instruments which is used to raise medium or long term funds from public. A debenture is essentially a debt instrument that acknowledges a loan to the company and is executed under the common seal of the company. The debenture document, called Debenture deed contains provisions as to payment, of interest and the repayment of principal amount and giving a charge on the assets of a such a company, which may give security for the payment over the some or all the assets of the company. Issue of Debentures is one of the most common methods of raising the funds available to the company. It is an important source of finance.
Debentures may be redeemed (repaid) a) at a par b) at a premium or c) at a discount.
- Redeemable at par:When debentures are to be redeemed at their face value they are said to be redeemable at par.
- Redeemable at a premium:When debentures are to be redeemed at an amount higher than their face value they said to be redeemable at a premium. Premium payable on redemption of debentures is a capital loss for the company. Such premium even though payable on redemption must be provided as a liability at a time of issue of debentures.
Redeemable at a discount: When debentures are to be redeemed at an amount lower than their face value, they are said to be redeemable at a discount such discount is a capital profit for the company