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

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


8
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attend and vote in general meetings
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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
...

ii
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Issue of Debentures
Understanding Minimum Subscription, Issue of Debentures and Accounting
Treatment:


Concept of Minimum Subscription with respect to Debentures under section 39(1) of the
Companies Act, 2013: According to section 39(1) of the Companies Act, 2013, a company cannot
allot securities unless minimum subscription stated in the prospectus is received
...
As per SEBI, 75% of the issue should be
subscribed before a company allots debentures
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for Cash: It means that the company has received an amount (in cash or cheque) against
the debentures issued
...




ii
...
Such issue of debentures can be issue to
promoters for their services, to vendors against assets purchased, etc
...


as Collateral Security: Security given for loans in addition to the prime or principal security is
known as collateral security
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Issue of Debentures for Cash: Such issue can be at par, at premium or at discount as follows:
 At par: Debentures are issued at their nominal (face) value
...

Such premium on issue is a capital receipt and is credited to Securities Premium Reserve
Account
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ACCOUNTANCY Issue of Debentures


At discount: Here, debentures are issued at a price that is less than its nominal (face) value
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Balance in such account is written off at the earliest but within the tenure of
debentures
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If it has no balance, it is written off from Securities Premium Reserve and/or from Statement
of Profit and Loss
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It will be disclosed in the books as follows:
i
...

ii
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

Accounting Entries: Entries can be explained as follows:
 If amount of debentures is received in Lump Sum:
i
...
(With application money received)
To Debentures Application and Allotment A/c
ii
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(With the amount of application
money on the allotted debentures)
To %Debentures A/c
iii
...
(With the application money
refunded)
To Bank A/c
 If amount of debentures is received in instalments:
i
...
(With application money received)
To Debentures Application A/c
ii
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(With the amount of application money on the
allotted debentures)
To %Debentures A/c
iii
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(With surplus application money on partially
accepted applications)
To Debentures Allotment A/c
iv
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(With the application money refunded on
rejected applications)
To Bank A/c
v
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(With the amount due on Allotment)

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ACCOUNTANCY Issue of Debentures
vi
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viii
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(With the amount actually received on allotment)
To Debentures Allotment A/c
For calls money being called:
Debentures Call A/c
…Dr
...
(With amount received on call)
To % Debentures Call A/c

Section 52(2) of the Companies Act, 2013 on use of the amount received as premium on
securities: As per section 52(2) of the Companies Act, 2013, use of the amounts received as
premium on securities is restricted to the following purposes only:
i
...


writing off preliminary expenses of the company;

iii
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providing for the premium payable on the redemption of any redeemable Preference Shares
or any debentures of the company;

v
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e
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

Disclosure of Securities Premium Reserve: It is shown in Equity and Liabilities Part of Balance
Sheet under head ‘Shareholders’ Funds’ and sub-head ‘Reserves and Surplus’
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Security given in addition to the prime or principal security is termed as
Collateral Security
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

Disclosure of Debentures issued at Collateral Security in the Balance Sheet: Since it is for
the loan of the company, such debentures issued as Collateral Security are shown in the Notes to
Account in which the loan secured by debentures is shown
...
First Method: As per this method, entry for issue of such debentures is not passed in the
books of account at the time of issuing such debentures
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ii
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To % Debentures A/c
At the time when the loan is paid to the lender, this entry will be reversed to cancel or nullify
the effect of entry already passed
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ACCOUNTANCY Issue of Debentures


If the borrower fails to repay the loan: In case if the borrower fails to pay the loan along with
interest, the lender can recover the amount due by selling primary security or by redeeming
collateral security, i
...
, debentures
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At the time of issuing the debentures as collateral security, no immediate liability is created
and therefore, no journal entry is passed
...
Liability arises when the lender exercises his right vested in the collateral security
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% Debentures A/c
…Dr
...
Loan A/c
…Dr
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(Interest outstanding for the period intervening
the date of default on the loan to date of invoking security by the lender)
To % Debentures A/c
(Principal + Interest outstanding)



Oversubscription of Debentures:
i
...

ii
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Rejecting excess applications;
b
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A combination of the above 2 alternatives
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Such excess application money received on account of oversubscription may be retained for
adjustment towards allotment and the respective calls, in case of pro-rata allotment, if so
provided in the terms of issue
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

Undersubscritption of Debentures:
i
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ii
...

iii
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

Issue of Debentures for consideration other than Cash: Such issue is possible under the
following circumstances where debentures are issued to:
i
...
Entry to be passed is as follows:
Incorporating Expenses A/c …Dr
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Vendors against purchase of assets or business: Entry to be passed is as follows:
a
...
(With agreed value of assets taken over)
To Vendor’s A/c
b
...
Entry to
be passed in each of these cases is as follows:

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ACCOUNTANCY Issue of Debentures
I
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(agreed value)
To Sundry Liabilities (individually)
(agreed value)
To Vendor’s A/c
(purchase consideration)
II
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(agreed value)
Goodwill A/c
…Dr
...
if consideration is less than the difference between the value of assets and
liabilities, such shortfall is credited to Capital Reserve Account:
Sundry Assets A/c (individually) …Dr
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Issued at par:
Vendor’s A/c
…Dr
...
Issued at premium:
Vendor’s A/c
…Dr
...
Issued at discount:
Vendor’s A/c
…Dr
...
(discount amount)
To % Debentures A/c
(nominal value of debentures)



Calculation of Number of Debentures: When a business is purchased and consideration is paid in
the form of issue of debentures, number of debentures is to be calculated as follows:

Number of Debentures Issued =

Purchase Considerati

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