Chapter:7

What are Accounting for Debentures ?

Meaning Of Debentures

Debentures are instruments issued by the corporate or government companies from the public to raise funds under the common seal of the company for long-term activities and growth. It contains the terms of repayment of debt and payment of interest at a specified rate either half-yearly or yearly. People holding debentures are known as debentureholders. Debenture holders are the creditors of the company.

Types of Debentures

  • Secured or Mortgage Debentures
  • Unsecured or Naked Debentures
  • Registered Debentures
  • Bearer Debentures
  • Redeemable Debentures
  • Irredeemable Debentures
  • Convertible Debentures

Debentures can be Issued

For Cash

  • At Par
  • At a Premium
  • At a Discount

For Consideration Other than Cash

  • To Promoters
  • To Underwriters
  • To Vendors
  • ➥ When assets are purchased and debentures are issued
  • ➥ When a business is purchased and debentures are issued

As Collateral Security

  • Accounting Treatment
  • ➥ First Method
  • ➥ Second Method

For Cash

(i) Issue of Debentures at par
When the issue price of debentures is equal to the face value of it, it is said to be issued at par.
(ii) Issue of Debentures at a Premium
When debentures are issued at a value more than its face value or nominal value, it is said to be issued at a premium.
(iii) Issue of Debentures at a Discount
When debentures are issued at a value less than its face value or nominal value, it is said to be issued at a discount.

For Consideration Other Than Cash

(i) Issue of Debentures to Promoters
A company may allot debentures to the promoters for providing services. Such issue of debentures come under the category of issue of Debentures for consideration other than cash. The entries are :

Date Particulars L.F. Debit
Credit
(a) Goodwill or Incorporation Expenses A/c
To Promoter’s A/c
(Being the cost of company incorporation to be paid by issue of debentures).
Dr. ........ ........
(b) Promoter’s A/c
To.......% Debentures A/c
(Being the debentures alloted to promoters)
Dr. ........ ........

(ii) Issue of Debentures to Underwriters
A company may allot debentures to the underwriters to pay their commission. The entries are :

Date Particulars L.F. Debit ₹ Credit ₹
(a) Underwriting Commission A/c
To Underwriter’s A/c
(Being the underwriting commission due)
Dr. ........ ........
(b) Underwriter’s A/c
To........% Debentures A/c
(Being the allotment of debentures to underwriters for the commission due to them)
Dr. ........ ........

(iii) Issue of Debentures to Vendors
Debentures can also be issued to vendors against purchase of assets and business.
The Journal entries passed are :

Cash-I : When assets are purchased and debentures are issued

Date Particulars L.F. Debit ₹ Credit ₹
Sundry Assets A/c
To Vendor’s A/c
(Being the purchase of sundry assets)
Dr. ........ ........

Case–II : When a business is purchased and debentures are issued

(i) When purchase consideration is equal to the difference between the value of assets and liabilities :

Date Particulars L.F. Debit ₹ Credit ₹
Sundry Assets A/c
To Sundry Liabilities A/c
To Vendor’s A/c
(Being the assets and liabilities taken our from vendor)
Dr. ........ ........
........

(ii) When purchase consideration is more than the difference between the value of assets and liabilities (i.e., net assets acquired), the difference is debited to Goodwill Account. It is a case of purchase of goodwill for which the money is being paid.

Date Particulars L.F. Debit ₹ Credit ₹
Sundry Assets A/c Dr. ........ ........
Goodwill A/c
To Sundry Liabilities A/c
To Vendor’s A/c
(Being the assets and liabilities taken our from vendor)
Dr. ........ ........

(iii) When purchase consideration is less than the difference between the value of assets and liabilities. In such a cash, the excess of net value of assets our purchase consideration is transferred to Capital Reserve Account because the transaction has resulted in a gain to the company which is capital in nature.

Date Particulars L.F. Debit ₹ Credit ₹
Sundry Assets A/c
To Sundry Liabilities A/c
To Capital Reserve A/c
To Vendor’s A/c
(Being the assets and liabilities taken over from vendor)
Dr. ........ ........
........
........

Issue Of Debentures With Terms Of Redemption

(i) Debentures issued at par and are Redeemable at Par :

Date Particulars L.F. Debit
Credit
(a) Bank A/c
To Debentures Application and Allotment A/c
(Being the application money received)
Dr. ........ ........
(b) Debenture Application and Allotment A/c
To Debentures A/c
(Being the application money transferred to Debentures account)
Dr. ........ ........

(ii) Debentures issued at Discount and are Redeemable at Par :

Date Particulars L.F. Debit
Credit
(a) Bank A/c
To Debentures Application and Allotment A/c
(Being the application money received)
Dr. ........ ........
(b) Debentures Application and Allotment A/c Dr. ........
Discount on Issue of Debentures A/c
To........%Debentures A/c
(Being the application money transferred to Debentures account and recording of discount on issue of debentures)
Dr. ........ ........

(iii) Debentures issued at Premium and are Redeemable at Par :

Date Particulars L.F. Debit
Credit
(a) Bank A/c
To Debentures Application and Allotment A/c
(Being the application money received)
Dr. ........ ........
(b) Debentures Application and Allotment A/c
To % Debentures A/c
To Securities Premium Reserve A/c
(Being the debentures issued at Premium and redeemable at Par)
Dr. ........ ........
........

(iv) Debentures issued at Par and are Redeemable at Premium :

Date Particulars L.F. Debit
Credit
(a) Bank A/c
To Debentures Application and Allotment A/c
(Being the application money received)
Dr. ........ ........
(b) Debentures Application and Allotment A/c Dr. ........ ........
Discount on Issue of Debentures A/c
To........%Debentures A/c
To Premium on Redemption of Debentures A/c
(Being the debentures issued at par and redeemable at premium)
Dr. ........ ........

(v) Debentures issued at Discount and are Redeemable at Premium

Date Particulars L.F. Debit
Credit
(a) Bank A/c
To Debentures Application and Allotment A/c
(Being the application money received)
Dr. ........ ........
(b) Debentures Application and Allotment A/c Dr. ........
Loss on Issue of Debentures A/c
(with discount+premium on redemption) To........ % Debentures A/c
To Premium on Redemption of Debentures A/c
(Being the debentures issued at discount and redeemed at premium)
Dr. ........ ........
........

(vi) Debentures issued at Premium at Redeemable at premium :

Date Particulars L.F. Debit
Credit
(a) Bank A/c
To Debentures Application and Allotment A/c
(Being the application money received)
Dr. ........ ........
(b) Debentures Application and Allotment A/c Dr. ........
Loss on Issue of Debentures A/c
(with discount+premium on redemption) To........ % Debentures A/c
To Securities Premium A/c
To Premium on Redemption of Debentures A/c
(Being debentures issued at Premium and redeemed at premium)
Dr. ........ ........
........

Issue Of Debentures As Collateral Security

Collateral security means additional, supporting or secondary security besides a primary security when a company obtains a loan or overdraft from a bank or any other institution. Usually the borrower gives a single asset or a group of assets as collateral security. If the borrower fails to pay the primary loan amount on the due date of payment, the lender sells these collateral securities to recover the amount of loan.

Accounting treatment for collateral security

First Method

Entry for issue of debentures as collateral security is not passed in the books of account at the time of issuing such debentures. It is disclosed under the head secured loans on the equity and liabilities part of the Balance sheet that debentures have been issued as collateral security as follows:

Balance Sheet (Extract) as at.......

Particulars Note No. Amount
I. Equity and Liabilities
Non-Current Liabilities
Long-term Borrowing
1 50,000

Notes to Accounts

Note No. Particulars Amount
1 Long-term Borrowings
Bank Loan
(Being secured by the Issue of 6,000 8% Debentures of `10 each as collateral security)
50,000

Second Method

Entry for issue for debentures as collateral security is passed in the books of account. The journal entry passed is :

Date Particulars L.F. Debit
Credit
Debentures Suspense A/c
To..........% Debentrure A/c
(Being the issue of Debentures as collateral security for a loan)
Dr.

It is Shown in the Balance Sheet as follows :

Balance Sheet (Extract) as at.......

Particulars Note No. Amount
I. Equity and Liabilities
Non-Current Liabilities
Long-term Borrowing
1 50,000

Note to Accounts

Note No. Particulars Amount
1 Long-term Borrowings
Bank Loan
6,000 8% Debentures of ` 10 each
Less : Debenture Suspense Account
60,000
60,000
50,000
Date Particulars L.F. Debit
Credit
(a) Bank A/c
To Debentures Application and Allotment A/c
(Being the application money received)
Dr. ........ ........
(b) Debentures Application and Allotment A/c Dr. ........
Loss on Issue of Debentures A/c
(with discount+premium on redemption) To........ % Debentures A/c
To Securities Premium A/c
To Premium on Redemption of Debentures A/c
(Being debentures issued at Premium and redeemed at premium)
Dr. ........ ........
........

Interest On Debentures

When company issues debentures, immediately it goes under the obligation of paying fixed interest (half yearly) until debentures are repaid. The percentage of interest payable is calculated on the face value of Debentures. As per Income Tax Act 1961, a company must deduct Income tax at a prescribed rate from the interest payable on debenture if it exceeds the prescribed limit and this is called as Tax Deducted at Source (TDS). It has to be deposited to the tax authorities. No interest is payable on debentures issued as collateral security.

Journal Entries for Interest on Debentures are

(i) When Interest is Due :

Date Particulars L.F. Debit
Credit
Debenture’s Interest or Interest on Debentures A/c
To Debentureholder’s A/c
To TDS Payable A/c
(Being the interest on debentures due)
Dr. ........ ........
........

(ii) On Payment to Debentureholder’s

Date Particulars L.F. Debit
Credit
Debentureholder’s A/c
To Bank A/c
(Being the interest amount paid)
Dr. ........ ........

(iii) On Deposit of TDS in Government Account :

Date Particulars L.F. Debit
Credit
TDS Payable A/c
To Bank A/c
(Being the TDS deducted deposited)
Dr. ........ ........

Writing Off Discount/loss On Issue Of Debentures

Discount or loss on issue of Debentures is a capital loss for a company, which is written off in the year it is
incurred, i.e., in the year the debentures are allotted from :


(i) Securities Premium Reserves, if it has a balance

(ii) Statement of profit and loss.

The Journal entry passed is :

Date Particulars L.F. Debit
Credit
Securities Premium Reserve A/c Dr. ........
Statement of Profit and Loss A/c
To Discount or loss on issue of Debentures A/c
(Being the discount on loss on issue of debentures written off)
Dr. ........ ........