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ACCOUNTANCY Issue of Debentures

Issue of Debentures
Introduction to Debentures
Meaning and Characteristics of Debentures:


Meaning of Debentures as per Section 2(30) of the Companies Act, 2013: Debenture includes
debenture stock, bonds and any other instrument of the company evidencing a debt, whether
constituting a charge on the assets of the company or not
...

Debentures:
 It is a document known as Debenture Certificate
...

 It is an agreement between the company and its debenture holders for repayment of
the principal amount on a specified date along with interest at a pre-determined rate
charged on the principal amount until the principal is repaid
...

ii
...

 These persons are lenders to the company as they provide funds in exchange of
debentures issued to them
...

A document known as Debenture Certificate
...

An acknowledgement of debt by the company
...

Involves an agreement between the company and its debenture holders to fix the mode and
period of repayment of principal and interest
...

It is a common practice to prefix ‘Debentures’ with the rate of interest like if the rate of
interest is 10%, the title of the debentures will be ‘10% Debentures’
...

It is treated as an external equity or long term borrowings by the company
...

It is usually secured by way of charge on the assets of the company
...

The interest charged on debentures is a charge against profit
...
It is an
acknowledgment of debt issued by the company and signed by an authorized signatory
...
But these days, bonds are also being issued
by semi-government and non-government organisations as an acknowledgement of debt
...

no
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Ownership

It is a debt taken by the company It is the capital of a company and
and therefore, holder of such a therefore, holder of such share is the

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Share

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ACCOUNTANCY Issue of Debentures



document is a lender
...

In form of dividend which is paid by
the company as an appropriation out
of profits
...


2
...


3
...

except for preference share which is
redeemed on the due date
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Convertibility

It can be converted into shares
...


Issue
Discount

6
...

company
...


Risk

It is relatively safe as most secured Relatively riskier, as shareholder can
debentures are risk free
...


8
...

attend and vote in general meetings
...


Priority as to In the event of winding-up, In the event of winding-up, payment
repayment of debentures are paid before the to shareholders is made after
Principal
payment of share capital
...

during
winding-up

at It can be issued at discount
...

It is not issued at discount except
Sweat Equity Shares
...

Basis

Shareholders

1
...

the company
...


Return

Shareholders get dividend on Debentureholders get interest at the
their investment
...

company suffers losses
...


Control

Shareholders have the right to Debentureholders do not have such
attend and vote in the General right
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4
...

they are at a greater risk
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Security point of view:
a
...
Such charge is to be registered with the Registrar of the
Companies
...
Unsecured: Such debentures are not secured by any charge on assets of the
company
...

Redemption/Permanence point of view:
a
...

b
...

iii
...
Registered: Such debentures are registered in the company’s records in the holder’s
name
...
Any transfer of such debentures requires execution of transfer
deed
...
Bearer: Such debentures are not registered in the records of the company in the
name of the holder
...
Interest is paid to
the person who produces coupons attached to the debenture
...

Priority point of view:
a
...

b
...

v
...
Specific Coupon Rate: Such debentures are issued with a specified rate of interest,
called the coupon rate
...
If it’s a floating rate, it
is usually linked with the bank rate
...
Zero Coupon Rate (Bonds): Such debentures do not carry a specific rate of interest
...
Such difference between the face value and
issue price is the total amount of interest related to the duration of debentures
...

Convertibility point of view:
a
...
Where only a part of the
debentures amount is convertible into Equity Shares, they are known as Partly
Convertible Debentures
...

b
...


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ACCOUNTANCY Issue of Debentures


Disclosure of Debentures in the Balance Sheet: Since these are the borrowings of a company,
they are considered as liability and therefore, shown in the Equity and Liabilities part of the
Balance Sheet
...
An important point to remember is that unless the question requires
otherwise, debentures are shown as Long-term Borrowings under Non-current Liabilities
...
e
...

The date of issue of debentures determines whether these debentures are Long-term
borrowings or Short-term Borrowings
...

Short-term Borrowings: This is done when Debentures are due for redemption within
12 months from the reporting date i
...
, the date of Balance Sheet or within the period of
Operating Cycle
...

Current Maturities of Long term debt: This is a part of Debentures shown as Longterm borrowings that become due for redemption within 12 months of the Balance Sheet
or within the period of Operating Cycle
...
Such minimum
subscription is therefore, to be decided by the company
...




Issue of Debentures: As per the Companies Act, 2013, a company may issue debentures:
i
...
When debentures are issued at cash, they may be issued at par,
premium or at discount
...


for Consideration other than Cash: It means that the company has not received amount (in
cash or cheque) against the debentures issued
...


iii
...
Debentures may be issued as collateral security when the
borrower is not in a position to give any other asset as a collateral security
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 At premium: Debentures are issued at a price that is higher than its nominal (face) value
...
Utilisation of balance in such Securities Premium Account is governed by Section
52(2) of the Companies Act, 2013
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Such amount of discount is debited to an account titled Discount on Issue of Debentures
Account
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Since, it is a capital loss it is written off from Capital Reserve, if it has a balance
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

Disclosure of Unamortised Discount (loss) on issue of Debentures: Since, the balance in
such account is written off over the life of debentures but within the tenure of debentures, it will
have a debit balance
...

Under Current Assets: That part of unamortised discount or loss on issue of debentures
which is to be written off within a period of 12months from the date of Balance Sheet or
within the period of Operating Cycle is shown in the Balance Sheet under the head ‘Current
Assets’ and sub-head ‘Other Current Assets’
...

Under Non-Current Assets: That part of unamortised discount or loss on issue of
debentures which is to be written off after a period of 12months from the date of Balance
Sheet or after the period of Operating Cycle is shown in the Balance Sheet under the head
‘Non-Current Assets’ and sub-head ‘Other Non-Current Assets’
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For receipt of Application Money:
Bank A/c
…Dr
...

For allotment of Debentures:
Debentures Application and Allotment A/c
…Dr
...

For Refund of Excess Application Money:
Debentures Application and Allotment A/c
…Dr
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For receipt of Application Money:
Bank A/c
…Dr
...

For allotment of Debentures:
Debentures Application A/c
…Dr
...

For adjustment of Excess Debentures Application Money:
Debentures Application A/c …Dr
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For Refund of Excess Debentures Application Money:
Debentures Application A/c …Dr
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For Allotment Money Being Called:
Debentures Allotment A/c
…Dr
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vii
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

To % Debentures A/c
For receipt of Allotment Money:
Bank A/c
…Dr
...

(With the money due on call)
To % Debentures A/c
For receipt of call money:
Bank A/c
…Dr
...

issuing fully paid bonus shares to the members;
ii
...


writing off the expenses of, or the commission paid or discount allowed on any issue of
securities or debentures of the company;

iv
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in purchasing its own shares i
...
, in case of buy back of shares
...




Collateral Security: Loans taken are secured by mortgage of the assets which are known as
prime or principal security
...
Such security is realised by the lender only if the due amount cannot be
recovered by realising the principal security
...




Accounting of Debentures issued as collateral security: When the debentures are issued as
collateral security, they can be dealt in following 2 ways:
i
...
It is disclosed under the head
Secured Loans in the Equity and Liabilities part of the Balance Sheet
...
Second Method: As per this method, entry for issue of such debentures is passed in the
books of account as follows:
Debentures Suspense A/c …Dr
...
In balance sheet, such debentures are disclosed
separately from the other debentures
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e
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Accounting treatment for the same is as follows:
i
...

ii
...
Following
journal entries are to be passed as and when the lender exercises this option:
a
...

To Debentures Suspense A/c
b
...

(Principal)
Outstanding Interest A/c
…Dr
...
It is a situation where applications received for debentures is more than the number of
debentures issued
...
In such situation the company may make allotment by any of the 3 options available;
a
...
Partial or Pro-rata allotment;
c
...

iii
...
However, in case of applicants to whom no debentures are
allotted, such excess application money is refunded to the respective applicants
...
It is a situation where the applications received are for lesser number of debentures than the
number of debentures offered for subscription
...
In this situation, allotment is made to all the applicants
...
In such situation where the allotment is made to all the applicants, Journal entries are passed
for the number of debentures subscribed
...
Promoters for rendering their services: Such issue is made for services rendered by
promoters for incorporating the company
...

To % Debentures A/c
ii
...
if debentures are issued for purchase of assets:
Sundry Assets A/c …Dr
...
if debentures are issued for purchase of business: When a business is purchased,
both assets and liabilities are taken over for a consideration which can be equal to,
more than or less than the difference between values of assets and liabilities
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if consideration is equal to the difference between the value of assets and
liabilities:
Sundry Assets A/c (individually) …Dr
...
if consideration is more than the difference between the value of assets and
liabilities, such excess is debited to Goodwill Account:
Sundry Assets A/c (individually) …Dr
...
(excess consideration over net assets)
To Sundry Liabilities (individually)
(agreed value)
To Vendor’s A/c
(purchase consideration)
III
...
(agreed value)
To Sundry Liabilities (individually)
(agreed value)
To Vendor’s A/c
(purchase consideration)
To Capital Reserve A/c
(excess of net assets over
consideration)


Accounting Entries for issue of Debentures to Vendors when debentures are:
i
...

(nominal value of debentures)
To % Debentures A/c
ii
...

(purchase consideration)
To % Debentures A/c (nominal value of debentures)
To Securities Premium A/c (premium amount)
iii
...

(purchase consideration)
Discount on Issue of Debentures A/c …Dr
...

 Debentures redeemable at premium: It means debentures are redeemable at a value that is
higher than their nominal (face) value
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Capital Profit/Loss

It is a capital profit and is to It is a capital loss
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2
...


3
...

are redeemed
...
Disclosure in Balance
Sheet

It is shown under the subhead of Reserves and
Surplus which comes under
the
main
head
of
Shareholders’ Funds which
forms a part of Equity and
Liabilities
...


It is shown under the sub-head
of Other Long term liabilities
which comes under the main
head of Non-current liabilities
which forms a part of Equity and
Liabilities
...
Following entries are passed:
a
...

To Debentures Application A/c
(application money)
b
...
(application money)
To % Debentures A/c
(nominal value)

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ACCOUNTANCY Issue of Debentures
Case II: When debentures are issued at discount but are redeemable at par:
In this case, since the amount payable at the time of redemption is equal to the nominal
value of debentures, company will not incur any loss at the time of redemption of
debentures
...
Bank A/c
…Dr
...
Debentures Application A/c
…Dr
...
(discount amount)
To % Debentures A/c
(nominal value)
Case III: When debentures are issued at premium and are redeemable at par:
In this case, since the amount payable at the time of redemption is equal to the nominal
value of debentures, so company will not incur any loss at the time of redemption of
debentures
...
Bank A/c
…Dr
...
Debentures Application A/c
…Dr
...
Difference between the redeemable value and the issue price is the loss
which is to be debited to Loss on Issue of Debentures Account at the time of allotment of
debentures
...
Following entries are passed:
a
...

To Debentures Application A/c
(application money)
b
...
(application money)
Loss on Issue of Debentures A/c …Dr
...
e
...
These losses are
to be accounted at the time of issue of debentures as per the principle of prudence/
Following entries are passed:
a
...

To Debentures Application A/c
(application money)
b
...
(application money)
Discount on Issue of Debentures …Dr
...
(premium payable on redemption)
To % Debentures A/c
(nominal value)
To Premium on Redemption of Debentures A/c (premium payable on redemption)
Instead of using 2 separate accounts for as ‘Discount on Issue of Debentures’ and
‘Premium Payable on Redemption’, one combined account can be used titled as ‘Loss
on Issue of Debentures Account’
...
(application money)
Loss on Issue of Debentures A/c …Dr
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topperlearning
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On the other
hand, premium payable at the time of redemption of debentures is a loss for the
company and is provided in the books of account following the principle of prudence
...
Bank A/c
…Dr
...
Debentures Application A/c
…Dr
...
(premium payable on redemption)
To % Debentures A/c
(nominal value)
To Securities Premium Reserve A/c (premium received on issue)
To Premium on Redemption of Debentures A/c (premium payable on
redemption)


Interest on Debentures:
i
...

ii
...

iii
...

iv
...
e
...
a
...
’
v
...

vi
...




Journal entries for interest on Debentures are as follows:
i
...

To Debentureholders’ A/c
ii
...

To Debentureholders’ A/c
To TDS Payable A/c
iii
...

To Bank A/c
iv
...

To Bank A/c
v
...

To Debentures’ Interest A/c

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ACCOUNTANCY Issue of Debentures


Writing off Discount or loss on Issue of Debentures:
i
...

ii
...

iii
...
written off in the first year itself;
b
...

o Fluctuating Instalment Method: This method is used when debentures are
redeemed on different dates by draw of lots
...

iv
...

v
...
The balance so left in
the account is shown under the Assets of the Balance Sheet as follows:
a
...
amount other than mentioned in (a) above is shown as Other Non-Current Assets
under the head Non-current Assets
...
(Amount Witten Off)
and/or
Securities Premium Reserve A/c
…Dr
...
(Amount Witten Off)
To Discount or Loss on Issue of Debentures A/c

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