Company Accounts - Issue Of Debentures

Debentures is an instrument issued under the common seal of the company acknowledging a debt and is
a contract for the repayment of the principal sum at a specified date and for the payment of interest at a
fixed rate percent until the principal sum is repaid

 Treated as external equity or long-term borrowings.

 If interest is 9% then it is written as "9%Debenturs.
 Bond = Same as debentures but the rate of interest is not determined.

Types of Debentures

1) Security:-

(i) Mortage or secured debentures:-

They are secured by either a fixed charge or a floating charge.

(ii) unsecured debentures:-

They do not have any security.

2) Redemption:-

(i) Redeemable:-
They are those debentures that are repayable by the company at the end of a specified period.
(ii) irredeemable:-
They are not repayable during the lifetime of the company and are repaid only when
the company goes into liquidation.

3) Records point of view:-

(i) Registered:
The names, addresses, and particular holdings debentures holders are entered
in a registered rep. Company

ii) Bearer:-
The company does not maintain any record of such debentures transferable.
4) priority point of view:-
(i) First debentures:-
These have to be repaid before the others.

(ii) second:-
They are repayable after the first debentures.

5) Point of view of coupon rate:-

The debentures are issued at a specific rate of interest is known as the coupon rate.

(i) specific:-
The rate can be fixed on floating.
The floating rate is usually linked with the bank rate.

(ii) Zero rate debentures [Bonds]:-

issued at discount

Face Value- issued price= interest

(6) convertibility:-

(i) convertible
They are those which can be convertible into equity shows

(ii)Non-convertibility
Trusted:-
A document that explains the powers and the authority of debentures holders.

Discloser in B/ sheet

As it is borrowing for a company ie..liability

hence, shown in the equity and liabilities part.

either,
Non-current lia. or current lia.

Payable after more than payable within 1year

1year
unless otherwise agreed it is trusted that debentures are long turn Liability and shown as non-current
liability in B/sheet:

Issue of Debentures
[same as shares]

1. For cash
2. Other than cash

1. For cash
(i) Amt rec. In lump sum
On receipts of app. money= Bank A/c…Dr.
To Debentures App A/c

On Acceptance of app. money= Debentures App. A/c…Dr.

To Debentures A/c

On refused of excess Debentures App A/c…Dr.

App. money ⇒ To Bank A/c

(ii) In installments:-

1st - Application
2nd - Allotment
3rd - 1st call
 On receipt of Bank A/c …Dr. To with app. money
app. money Deb. App A/c received

 On acceptance of Deb. App A/c…Dr. with amt. of app

Applicants To debentures A/c money on the alloted deb.

 On making all Deb. all A/c…Dr. with ant. due on

Money due to To debentures A/c allotment

 On Adj. of excess Deb. App A/c…Dr. with surplus app. money

Deb. app. money To deb. A/c on a partially accepted app.

 On refund of excess Deb. App A/c …Dr. with app. money refunded
Deb. App. money To bank A/c on rejected application

 On rec. Of all. Bank A/c …Dr. with actual and vecived

money To Deb. all A/c on allotment

 On making calls Deb. call A/c…Dr. with money due on

To Deb. A/c. particular call.

 On rec. Of all money Bank A/c…Dr. with actual amt.

To Deb. call A/c rec. on call
(a) issued at par:-

issued price=Face (Nominal) value

(b) issued at premium:- (same as shares)

issued price> nominal (face) value

for premium = "Securities premium reserve A/c" is opened

(c)issued at discount:- (same as shares)

issued price < nominal (face) value

For discount:- " & Discount on issue of deb.

A/C” is opened.

(2)Other than cash:-

Purchase of assets or purchase of business

→assets
 when assets are purchased
Sundry Assets A/c…Dr.
To vendors A/c.

 When Deb. are issued

Vendors A/c .. Dr.
To Debentures A/c

→ purchase of business:-

same as of shares (previous chap.)

other than cash:- issued at

(i) par. →Vendor A/c Dr.
To…% deb… A/C

(ii) premium → Vendor A/c Dr.

To..% Deb A/c
To S.P.R Alc

(iii) at dis. → Vendor A/c.....Dr.

Dis on the issue of deb. A/c…Dr.
To....% Deb A/c

NOTE :- No of Deb. = purchase consideration

FV + P-s (p.c)

Ex:- P.C = 1,10,000

issued Deb = F.V = 100
calculate = No of Deb= ? deb. issued

(i) at par
no. of deb. = 1,10,000/100 = 1,100

(ii) at prem of 10Rs.

= 1,10,000/110 = 1000 deb.

(iii) at dis. 10 Rs.

= 1,10,000/90 = 1222.22 deb.

Issue of deb. as a collateral Security

“Collateral Security”[issue of deb on Collateral Security]

It is the Secondary security given to the lender over the primary (prime, principal security). It can only be
realised when prime security fails is meet the loan liability
if primary security can fulfill the loan liability then collateral Security is of no use and
is given back lender to the borrower. generally, Deb. is issued as collateral security.
Treatment
2 ways:-

i) First method:-

No entry is passed in the books.

however it is disclosed by the way of information
below debentures.
It is disclosed as follows -

Balance sheet as at…(Relevant extract)

Particulars Note No ₹

1. Equity and liabilities

1 Non-current liabilities
Long term borrowings 1 5,00,000

NOTE

1. Long-term borrowings ₹
Term loan from bank 5,00,000
(secured by issues of 6000 9% Deb of ₹ 100 each as c.s)

The amt. in the note has no relation with debenture

(ii) Second method→

Entry→ :Deb. Suspense A/c.. Dr (appears in assets side]
To Debentures A/c (appears in lia. side]
When the loan is paid the above entry is canceled and the reserve entry is passed.
 Discloser in B/S
Particular Note No. ₹

1. Equity and liability

1. Non-current liabilities
Long-term borrowings 1 80,000

NOTE
1. Long-Term Borrowings ₹
Term Loan from the bank 5,00,000
6,000; 9% Debentures of 100 each issued as C.S 6,00,000
Less: Debentures Suspense. 6,00,000

* In case other deb. exist in B/ sheet then above adj. is made under the heading debentures.

Non-payment of a loan:
in case the company fails to pay the loan along with int. on time then the lender recovers the dues from
the sale of primary or by seeking redemption of collateral Security ie...... debentures

Accounting treatment:
When the under exercise the c.s the entry is recorded.

loan A/c...... Dr [principal + int. out on loan]

out int A/c ......Dr (out. int from the date of default and the date of inworking sec.)
To .........% deb A/c
cases from the point of view of Redemption

*Deb. can be issued at par, premium or at discount but redemption can either be at par or at premium.
Case No. Condition of issue Condition of Redemption

(i) At par At par

(i) At premium At par
(iii) At discount At par
(iv) At par At premium
(v) At premium At premium
(vi) At discount At premium
(i) a) Bank A/c…. Dr 100
To Deb. App A/c 100 (with the app. money)
______________________________________________________
b) Deb App A/c… Dr 100 (with the app. money)
To Deb. A/c (with the nominal money)
______________________________________________________
(ii) a) Bank A/c… Dr. (with the app. money) 105
To Deb. App A/c 105
___________________________________________________________
b) Deb. App. A/c……Dr. (with app. money) 105
To Deb A/c (with nominal value) 100
To S.P.R. A/c (with premium) 5
____________________________________________________________________
(iii) a) Bank A/c……..Dr 95
To Deb App. A/c (with app money) 95

b) Deb. App. A/c …..Dr (with app money) 95

Discount on issue of Deb. A/c…. Dr (with Discount) 5
To Deb. A/c (with nominal value) 100

(iv) Deb. App. A/c Dr. (With App. Money) 100

Loss on issue of Deb. A/c…..Dr. (For proud prem. On red.) 5
To Deb. A/c. (with nominal value) 100
To prem. On red. of Debentures A/c (with prem. On red.) 5
____________________________________________________________________

a. Bank A/c……Dr 100

To deb App. A/c (with App. money) 100
____________________________________________________________________

(v) Bank A/c…….Dr 105

To Deb. App. A/c (with App. money) 105
______________________________________________________________________
b. Deb. App. A/c …….Dr. (with App. money) 105
Loss on issue of Deb. A/c ….Dr. (with prem. on red.) 5
To Deb. A/c. (with face value) 100
To S.P.R. A/c (with prem. On issue) 5
To Prem. on redemption of Deb. A/c (Prem. on red.) 5
_________________________________________________________
(vi) a) Bank A/c…….Dr.
To Deb. App. A/c (with app. money)

b) Deb. App. A/c……….Dr. (with App. money) 95

Dis. on issue of Deb. A/c….Dr. (with Dis.) 5
Loss on issue of Deb. A/c ….Dr. (with prem. On red.) 5
To Deb. (with nominal value) 100
To Prem on red. of Deb. A/c (prem on red.) 5
_____________________________________________________________
Can be Combined with name loss on issue of Deb.

Interest on Debentures.

It is calculated at a fixed rate on its face value. And usually payable half-yearly.

It is a charge on profit i.e. payable even if there is a loss

Entry→
1. Interest is due:-
Deb. Interest A/c …Dr.
To Deb. Holders A/c
2. Interest Paid:-
Deb. Holders A/c…Dr.
To Bank A/c (with interest)
3. Transfer Entry:-
Statement of P&L A/c …Dr.
To Deb. Int. A/c (with amt. of Int.)

 Int is not payable on Deb. issued at collected security

 Paying it on debentures is a request to deduct income tax.
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