Issue of debentures

Issue of
Debentures
salonI agarwal
126/2
b.Com (H) 2nD
Year
seCtIon: ‘C’
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Debentures – meanIng
• A debenture is an instrument issued by a company under its common
seal as acknowledgment of a debt. It contains a contract for
repayment of the principal amount on or before a specified date and
for payment of interest at a fixed rate until the principal sum is
repaid.
• According to Section 2 (12) of the Companies Act, ‘debenture’
includes “debenture stock, bonds and any other security of a company
whether constituting a charge on the assets of the company or not”.
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features of Debentures:
(i) A certificate acknowledging the debt owned by a company to the
person named therein.
(ii) Promise to repay the principal amount on or before a specified
date.
(iii) Promise of periodic payment of interest at a fixed rate.
(iv) Precise details of the security, if any.

tYpes of Debentures
1. From Security point of view
a.a. Naked/Simple DebenturesNaked/Simple Debentures b.b. Mortgage DebenturesMortgage Debentures
2. From Permanence point of view
a.a. Redeemable DebenturesRedeemable Debentures b.b. Irredeemable debenturesIrredeemable debentures
3. From priority point of view
a.a. First DebenturesFirst Debentures b.b. Second DebenturesSecond Debentures
4. From recording point of view
a.a. Bearer DebenturesBearer Debentures b.b. Registered DebenturesRegistered Debentures
5. From conversion point of view
a.a. Convertible DebenturesConvertible Debentures b.b. Non-Convertible DebenturesNon-Convertible Debentures
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Issue of Debentures for Cash at
Par reDeemable at Par1. For receiving application money
Bank A/c Dr.
To Debenture Application A/c
(Being application money received)
2. On allotment for transferring application money to Debentures account
Debentures Application A/c Dr.
To Debentures A/c
(Being application money transferred to Debentures A/c)
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3. On allotment-for making due allotment money
Debentures Allotment A/c Dr.
To Debentures A/c
(Being allotment money made due on ... debentures @ Rs. ..per debentures)
4. For receiving allotment money
Bank A/c Dr.
To Debentures Allotment A/c
(Being allotment money received)
5. For making due call money
Debentures .......... Call A/c Dr.
To Debentures A/c
(Being call money made due on... Debentures @ Rs... per debenture)
6. For receiving call money
Bank A/c Dr.
To Debentures .......... Call A/c
(Being call money received)

Issue of Debentures at
PremIum reDeemable at Par
(i) When premium has been called on application
The application money will consist of debenture money and premium. The amount received as premium
should be credited to ‘Security Premium Account.’ On allotment, application money will be transferred
as:
To Debentures A/c
To Securities Premium A/c
(Being application money transferred to debentures and security premium A/c)
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(ii) If the premium is called along with allotment money,
then entry for making due allotment money will be:
To Debentures A/c
(Being allotment money, including premium made due)
(iii) If the premium is demanded along with call money, the entry for making due call money will
be:
Debentures …….. Call A/c Dr.
To Debentures A/c
(Being call money including premium made due)
Note:
Normally, it is mentioned in the question as to when premium is receivable - on application or on allotment or on call.
If not mentioned, it is assumed that the premium is due along with allotment money.

Issue of Debentures at
DIsCount reDeemable
at Par
The amount of discount is recorded at the time of
allotment, therefore the following entries should be passed
for making allotment money due:
Discount on Issue of Debentures A/c Dr.
To Debentures A/c
(Being amount made due on allotment and adjusted
discount)
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Issue of Debentures for Cash at Par
reDeemable at PremIum
1. For receiving application money
Bank A/c Dr.
Loss on Issue of Debentures A/c Dr.
To Debentures A/c
To Premium on Redemption of Debentures A/c
(Being application money transferred to Debentures A/c and made provision for premium on redemption)
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Issue of Debentures for Cash at DIsCount
reDeemable at PremIum
1. For receiving application money
Bank A/c Dr.
Debenture Application A/c Dr.
Loss on Issue of Debentures A/c Dr.
To Debentures A/c
To Premium on Redemption of Debentures A/c
(Being application money transferred to Debentures A/c, and made provision for premium on redemption)

Issue of Debentures as
Collateral seCurIty
• Debentures issued as collateral security means issue of debentures as a subsidiary or secondary
security in addition to principal security for taking a loan.
• No interest is payable on such debentures.
• When loan is repaid the debentures issued as collateral security shall be released by the lender.
• If company fails to repay the loan and the lender is unable to recover the loan amount from the
principal security, he can sell these debentures in the open market to realize his loan.
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aCCountIng for Issue of Debentures as
Collateral seCurIty
(1)When no entry is passed:
In this case, the fact is disclosed in the balance sheet of the company that the loan is
secured and the debentures have been issued as collateral security.
(2)When a company records the debentures issued as collateral security,
following entry is passed:
Debenture Suspense A/c Dr.
To Debentures A/c
(Being debentures issued as collateral security)
Note: Debenture Suspense A/c is shown in the Balance Sheet of the company, under
the head ‘Other Non-Current Assets’.

Issue of Debentures for
ConsIDeratIon other than
CashA company can issue Debentures for purchase of an asset or for purchase of business.
(a) Entry for purchase of a fixed asset:
Fixed Assets A/c Dr.
To Vendor’s A/c
(Being fixed assets purchased from vendor)
Notes: Vendor’s A/c is credited with the amount of Purchase consideration.
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(b) For purchase of business:
Sundry Assets A/c Dr.
Goodwill A/c (ii) Dr.
To Sundry Liabilities A/c
To Vendor’s A/c (i)
To Capital Reserve A/c (iii)
(Being business purchased)
Notes:
(i) Vendor’s A/c is credited by purchase consideration.
Purchase consideration, if not given in the question, it will be equal to net assets, i.e., Assets minus Liabilities.
(ii) If purchase consideration is given and it is more than net assets, then the difference shall be debited to Goodwill
A/c.
(iii) If purchase consideration is given and it is less than net assets, then the difference shall be credited to Capital
Reserve A/c.

For issue oF debentures to vendors
(a) Issue of debentures at par:
Vendor’s A/c Dr.
To Debentures A/c
(Being debentures issued to vendor at par)
(b) Issue of debentures at premium:
Vendor’s A/c Dr.
To Debentures A/c
(Being debentures issued to Vendor at premium)
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(c) Issue of debentures at discount:
Vendor’s A/c Dr.
To Debentures A/c
(Being debentures issued to vendor at discount)
Note : A working note should be prepared to calculate number of debentures
to be issued.
Number of debentures to be issued
PriceIssue
PayableAmount
=

interest on debentures
1. When Interest becomes due:
Interest on Debentures A/c Dr. (Total amt. due)
To Income Tax Payable (TDS) A/c
To Debentures holders A/c
2. For payment of interest to Debentures holders:
Debentures holders A/c Dr.
To Bank A/c
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3. When Income Tax Payable (TDS) is paid:
Income Tax Payable (TDS) A/c Dr.
To Bank A/c
4. For closing Interest on Debentures A/c:
Profit and Loss A/c Dr.
To Interest on Debentures A/c

interest Accrued And due And
interest Accrued but not due
• Interest Accrued and Due - When due date
expired
Interest on Debentures A/cDr.
To Outstanding Interest on Deb. A/c
• Interest Accrued but Not Due - When due date
not expired
Interest on Debentures A/cDr.
To Accrued Interest on Deb. A/c
Note: Both are shown in “Other Current Liabilities” in
B/S.
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