Question

If an item titled 'Premium on Redemption of Debentures' is visible inside a corporate balance sheet, under which primary classification category heading must it be presented?

• A. \( \text{Non-Current Liabilities (Long-term Borrowings)} \)
• B. \( \text{Reserves and Surplus} \)
• C. \( \text{Current Liabilities (Other Current Liabilities)} \)
• D. \( \text{Share Capital} \)

Hint:

Be careful not to confuse Securities Premium with Premium on Redemption. Securities Premium is a capital gain held under *Reserves and Surplus*, while Premium on Redemption represents a future payment obligation classified under *Non-Current Liabilities*.

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
"Premium on Redemption" is the extra amount a company agrees to pay debenture holders when their debt matures.
According to the Principle of Prudence (Conservatism), companies must record all possible future losses and liabilities today.
Since the company knows it has to pay this extra amount in the future (usually after 5-10 years), it is recorded as a liability at the time of issue.
Step 2: Detailed Explanation:
Because debentures are typically long-term loans, the promise to pay a premium on them is also a long-term obligation.
Under Schedule III of the Companies Act, 2013:
- Debentures are shown under Non-Current Liabilities $\rightarrow$ Long-term Borrowings.
- The premium payable on their redemption is part of the total cost of borrowing and is grouped under the same heading.
- It is NOT a reserve (it's not profit) and it is NOT share capital (it's a debt obligation).
- It is only moved to "Current Liabilities" if the debentures are due for redemption within the next 12 months.
Step 3: Final Answer:
The correct classification for 'Premium on Redemption of Debentures' is Non-Current Liabilities, specifically under the sub-head Long-term Borrowings.