Debentures part 1

CORPORATE ACCOUNTING
DEBENTURES-Part 1
1
 ISSUE OF DEBENTURES
Prepared By Paritosh Dube

Synopsis of the Chapter
2
What is Debenture
Types of Debenture
Issue of Debenture
Issue at Par
Oversubscription
Issue at Premium
Issue at Discount
Issue of Debenture for Consideration
other than cash
Issue of Debenture as collateral Security

What is a Debenture?
3 Meaning :-
 Debenture is an ‘Financial instrument’ in
writing for a ‘fixed period’ given by a company
acknowledging the liability for total amount
received and stating rate of interest due on it as a
result of issue of debenture and agreeing thereby
to pay the money raised after the expiry of
stipulated period at a certain rate of interest.
 Need for issue of debentures :-
 A company for its extension & development
may require to raise funds without increasing its
share capital so, a may invite the public by open
declaration to lend money for a fixed period at a
‘declared rate’ to be paid on such money.

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 In law, a debenture is a document that either
creates a debt or acknowledges it. In corporate
finance, the term is used for a medium- to long-term
debt instrument used by large companies to borrow
money. In some countries the term is used
interchangeably with bond, loan, stock or note.
 Debentures are generally freely transferable by
the debenture holder. Debenture holders have no
rights to vote in the company's general meetings
of shareholders, but they may have separate
meetings or votes e.g. on changes to the rights
attached to the debentures. The interest paid to them
is a charge against profit in the company's financial
statements.

Types of Debentures
5Debenture can be classified as under:
1. From security point of view:-
 Secured or Mortgage debentures : These a
re the debentures that are secured by a charge
on the assets of the company.
 These are also called mortgage debentures.
 The holder’s secured debentures have the right
to recover their principal amount with unpaid
amount of interest on such debentures out of
the assets mortgaged by the company. In
India, debentures must be secured.

6
i. Secured debentures can be of two types :
 (a) First mortgage debentures : The holders of such de
bentures have a first claim on the assets charged.
 b) Second mortgage debentures : The holders of
such debentures have a second claim on the assets charged.
ii. Unsecured debentures: Debentures which do not carry
any security with regard to the principal amount or unpaid
interest are called unsecured debentures. These are called
simple debentures.
2) On the basis of redemption:
(i) Redeemable debentures : These are the debentures
which are issued for a fixed period.The principal amount
of such debenture is paid off to the debenture holders
on the expiry of such period. These can be redeemed by
annual drawings or by purchasing from the open market

7
ii) Non-redeemable debentures : These are the
debentures which are not redeemed in the life time of the
company. Such debentures are paid back only when the
company goes into liquidation.
On the basis of Records
 i) Registered debentures: These are the debentures that
are registered with the company.
 The amount of such debentures is payable only to those
debenture holders whose name appears in the register
of the company.
 ii)
Bearer debentures : These are the debentures which are n
ot recorded in a register of the company. Such
debentures are transferrable merely by delivery. Holder of
these debentures is entitled to get the interest

8
On the basis of convertibility
 i) Convertible debentures : These are the debentures
that can be converted into shares of the company on
the expiry of pre-decided period. The term and
conditions of conversion are generally announced at
the time of issue of debentures.
 Nonconvertible debentures : The debenture holders
of such debentures cannot convert their debentures
into shares of the company
 On the basis of priority
 First debentures : These debentures are redeemed
before other debentures.
 Second debentures : These debentures are redeemed
after the redemption of first debentures

9
From Coupon Rate Point of view
• Specific Coupon Rate Debentures: These debentures are
issued with a specified rate of interest, which is called the
coupon rate. The specified rate may either be fixed or
floating. The floating interest rate is usually tagged with
the bank rate.
• Zero Coupon Rate Debentures: These debentures do not
carry a specific rate of interest. In order to compensate
the investors, such debentures are issued at substantial
discount and the difference between the nominal value
and the issue price is treated as the amount of interest
related to the duration of the debentures.

ISSUE OF DEBENTURES
10 By issuing debentures means issue of a certificate by the compan
y under its seal which is an
acknowledgment of debt taken by the company.
 The procedure of issue of debentures by a company is similar to
that of the issue of shares. A
Prospectus is issued, applications are invited, and letters
of allotment are issued. On rejection of
applications, application money is
refunded. In case of partial allotment, excess application
money may be
Issue of Debenture takes various forms which are as under
adjusted towards subsequent calls.
 Debentures issued for cash
debentures may be issued
i) at par (ii) at premium, and(iii) at discount
 Debentures issued for consideration other than cash

Journal Entries For Issue of Debenture at Par11
Application money is received
Bank A/c Dr
To Debentures Application A/c
(Application money received for Debentures
Transfer of debentures application money to
debentures account on their allotment
Debentures Application A/c Dr
To Debentures A/c
(Application money transferred to debenture
account on allotment)

Money due on allotment
Debentures Allotment A/c Dr
To Debentures A/c
(Allotment money made due)
(iv) Money due on allotment is received
Bank A/c Dr
To Debentures Allotment A/c
(Receipt of Debenture allotment money)

First and final call is made
Debentures First and Final call A/c Dr
To Debentures A/c
(First and Final call money made due on ...............
debentures)
(vi) Debentures First and Final call money is
received
Bank A/c Dr
To Debentures First and Final call A/c
(Receipt of Amount due on call)

Illustration 1
Shiny Ltd. issued 3000 9% Debentures of Rs 100 each
payable as follows
Rs 20 on Application
Rs 40 on Allotment
Rs. 40 on First and Final call
All the debentures were applied for and allotted. All the calls
were duly received. Make necessary journal entries in the
books of the company.
14

Dr Cr
S.No. Particulars LF Amount Amount
Rs Rs
1. Bank A/c ... Dr 60000
To Debentures Application A/c 60000
(Application money received for
6000 debentures)
2. Debentures Application A/c Dr 60000
To 9% Debentures A/c 60000
(Application money transferred to
Debentures A/c on allotment)
Shining India Ltd.
15

3. Debentures Allotment a/c Dr 120000
(Allotment money due on
3000
debentures @ Rs 40 per debenture)
4. Bank A/c Dr 120000
To Debentures Allotment
A/c 120000
(Allotment money received)
16

5. Debentures First and Final call A/cDr 120000
(Debentures first and final call money
made due @ Rs 40 per debenture)
6. Bank A/c Dr 120000
To Debentures First and Final call A/c 120000
(Receipt of Debentures first and final
call money)
17

18
OVER SUBSCRIPTION
 A Company if it receives applications for number of
debentures that exceed the number of debentures
offered for subscription, The excess number is
called over subscription. There can be following
2 treatments of the excess application money
received :
 (a) The total amount of excess number of
applications is refunded in case the excess
applications are totally rejected.
 (b) The amount of excess application money is
totally adjusted towards amount due on allotment
and calls
--- in case partial allotment is made,
--- the excess amount is adjusted towards sums
due on allotment and rest of the amount is
refunded.

For refund of money if the applications are rejected
To Bank A/c
(Refund of money on rejected applications)
For adjustment of excess application money adjusted
towards sum due on allotment
To Debentures Allotment A/c
(Excess application money adjusted)
Journal entries in the case of Over subscription will be as follows :
19

Illustration 2
A&C Ltd issued 4000 10% Debentures of Rs 100 each payable as
Rs 50 on application and Rs 50 on allotment.
Applications were received for 5000 debentures.
Applicants for 500 debentures were sent letter of regret and money was
returned.
Allotment was made proportionately to the remaining applicants.
Over subscription was applied to the amount due on allotment.
All money was duly received.
Make journal entries for the above transactions in the books of the
company.
20

Dat
e
Particular L.F Dr. Amount
Rs.
Cr. Amount
Rs.
1.
Bank A/c Dr 250000
To Debentures Application A/c
(Application money
received for 5000
debentures @ Rs 50 per
debenture)
21

Date Particular L.F Dr. Amount Rs. Cr. Amount Rs.
2
Debentures Application A/c Dr 250000
To Bank A/c 25000
To Debentures Allotment A/c 25000
(Debenture application money of
5000 debentures transferred to
debenture A/c on their allotment
of 500 debentures returned and
balance of 500 adjusted towards
allotment
22

Date Particular L.F Dr. Amount Rs. Cr. Amount Rs.
3
Debentures Allotment A/c Dr 200000
(Allotment money due on 4000
debentures @ Rs 50 per debenture)
4. Bank A/c Dr 175000
To Debentures Allotment A/c 175000
Allotment Money Received
23

ISSUE OF DEBENTURES AT PREMIUM AND AT
DISCOUNT
ISSUE OF DEBENTURES AT PREMIUM
Debentures are said to be issued at premium when these are issued at a
value which is more than their nominal value. For example, a debenture
of Rs 100 is issued at Rs 110. This excess amount o f Rs 10 is the amount of
premium. The premium on the issue of debentures is credited to the
Securities Premium A/c as per section 78 of the Companies Act, 1956.
ISSUE OF DEBENTURES AT DISCOUNT
When debentures are issued at less than their nominal value they are said
to be issued at discount . For example, debenture of Rs 100 each is issued
at Rs 90 per debenture. Companies Act,1956 has not laid down any
conditions for the issue of debentures at a discount as have been laid
down in case of issue of shares at discount. However, there should be
provision for issue of such debentures in the Articles of Association of the
Company. 24

Journal Entries for Issue of Debentures at Premium
To Debentures Account
To Securities Premium A/c
(Amount due on allotment along with premium of Rs ....)
Journal entry for issue of debentures at discount (at the time of
allotment)
Discount on issue of debentures A/c Dr
To Debentures A/c
(Allotment money due. The amount of
discount is @ Rs .... per debenture)
25

On application Rs 50
On allotment Rs 65
Illustration 3
Y&Z Industries Ltd., issued 3,000, 9% debentures of Rs 100 each,
at a premium of Rs 15 per debenture payable as follows:
The debentures were fully subscribed and all money
was duly received. Record the journal entries in the
books of a company. Show how the amounts will
appear in the balance sheet
26

Books of XYZ Industries Limited
Journal
Particulars
L.F
. Debit Credit
Amount Amount
(Rs) (Rs)
Bank A/c Dr. 1,50,000
To 9% Debenture Application A/c 1,50,000
(Application money Rs 50 per debentures
received)
9% Debenture Application A/c Dr. 1,50,000
To 10% Debentures A/c 1,50,000
(Transfer of application money )
27

9% Debenture Allotment A/c Dr. 1,95,000
To Securities Premium A/c 45,000
(Allotment money due on debentures
including the premium)
Bank A/c Dr. 1,95,000
To 9% Debenture Allotment A/c 1,95,000
28

Illustration 4
XYZ Industries Ltd., issued 2,500, 11% debentures of Rs 100 each,
at a discount of Rs 5 per debenture payable as follows:
The debentures were fully subscribed and all money
was duly received. Record the journal entries in the
books of a company. Show how the amounts will
appear in the balance sheet
On application Rs 50
On allotment Rs 45
29

Books of XYZ Industries Limited
Journal
Particulars
L.F
. Debit Credit
Amount Amount
(Rs) (Rs)
Bank A/c Dr. 1,25,000
To 11% Debenture Application A/c 1,25,000
(Application money Rs 50 per debentures
received)
11% Debenture Application A/c Dr. 1,25,000
(Transfer of application money )
30

11% Debenture Allotment A/c Dr. 112,500
Discount on Issue of Debenture
Dr
To 11% Debentures A/c
12500
1,25,000
(Allotment money due on debentures
after the discount)
Bank A/c Dr. 112,500
To 10% Debenture Allotment A/c 112,500
31

32
Issue of Debentures for consideration other than cash
When a company purchases some assets and issues debentures as a
payment for the purchase, to the vendors it is known as issue of
debentures for consideration other than cash. Debentures can be
issued to vendors at par, at premium and at discount

AccountingTreatment :
33
1.Purchase of Assets
SundryAssets A/c Dr
(Individually)
ToVendors A/c
(Purchase of assets)

2.Allotment of debentures
At par
Vendors'A/c Dr
To DebenturesA/c
(issue of debentures at par to vendors)

34
(iii) At premium

Vendors’ A/c
To Debentures A/c
To Securities Premium A/c

(issue of debentures to vendors at a premium
of Rs .... per debenture)
(ii)At discount
Vendors' A/c Dr
Debentures Discount A/c Dr
To Debentures A/c
(Issue of debentures to vendors at a discount of Rs ... per debenture)

35
Illustration 5
M.I.B. Steels Ltd. purchased machinery for Rs 195500 and issued 7%
debentures of Rs 100 each to the vendors.
Make journal entries if the debentures were issued
•at par
•at a premium of Rs 15
•at a discount of Rs 15

36
Dr Cr
S.No. Particulars Amount Amount
Rs Rs
(a) Machinary A/c ...Dr 195500
To Vendors A/c 195500
(Machine purchased)
(b) Vendors A/c Dr 195500
1955 debentures of Rs 100 each issued to
vendors
Solution :

37
(c) Vendors A/c Dr 195500
To Securities Premium A/c 25500
1700 debentures issued at a premium of
Rs 15 per debenture)
(
(d) Vendors A/c Dr. 195500
Debenture Discount A/c Dr. 34500
To 7%DebentureA/c
230000
(2300 debentures of Rs. 100 issued at a
Discount of Rs.105each)

38
Working notes
For Premium Issue
Amount due = Rs 195500
Value of debenture including Rs 10 for premium = Rs 110
No.of Debentures to be issued=Amount due/value of deb.
=195500/110=1700
∴Debenture amount (Nominal value) = 1700 × 100 = Rs 170000
Securities Premium Amount = 1700 × Rs 15 = Rs 25500
For Discount Issue
Amount due = Rs 195500
Value of debenture including Rs 10 after discount = Rs 100-10=90
No.of Debentures to be issued=Amount due/value of deb.
=195500/90=2300
∴Debenture amount (Nominal value) = 2300 × 100 = Rs 230000
Discount on Issue of Debenture Amount = 2300 × Rs 15 = Rs 34500

39
Sometimes it happens that the company also takes over
the liabilities of another firm while entering into
purchase consideration.The accounting treatment for
it are as following:
AssetA/c Dr.
GoodwillA/c Dr.(balancing Figure)
To S.Liabities A/c
ToVendor A/c
To Capital ReserveA/c.(balancing Figure)

40
R&S Ltd. acquired assets of Rs 25 lakh
It took over creditors of Rs 5 lakh from Kosh Enterprises.
R&S Ltd. issued 7% debentures of Rs 100 each at par as purchase
consideration. Record necessary journal entries in the books of Romi Ltd.
Date Particulars L.F. Debit Credit
Amount Amount
(Rs) (Rs)
Sundry Assets A/c Dr. 25,00,000
To Kosh Enterprises 22,00,000
To Sundry Creditors A/c 3,00,000
(Purchase of business from Kosh Enterprises)
Kosh Enterprises a/c Dr. 22,00,000
(Issue of 22,000, 7% debentures of
Rs 100 each)
Books of Romi Ltd.
Journal

41
B&P Ltd., purchased building worth Rs
1,80,000, machinery worth Rs 1,00,000 and
furniture worth Rs 30,000 from X&Y Co., and
took over its liabilities of Rs 50,000 for a
purchase consideration of Rs 3,30,000. B&P
Ltd., paid the purchase consideration by issuing
12% debentures of Rs 100 each at a premium of
10%. Record necessary journal entries.

42
Amount Amount
(Rs) (Rs)
Building A/c Dr. 1,80,000
Plant & Machinery A/c Dr. 1,00,000
Furniture A/c Dr. 30,000
Goodwill A/c 1(balancing Figuer)
Dr. 70,000
To Liabilities (Sundry) 50,000
To X&Y Co. 3,30,000
(Purchase of assets and taking over of liabilities
of X&Y Co.)
X&Y Co. Dr. 3,30,000
To Securities Premium A/c 30,000
(Issue of 3,000 debentures at a premium of 10%)
Books of Blue Prints Limited
Journal

43
ABC Limited took over the assets of
Rs 4,00,000 and liabilities of Rs
20,000 from B Co. Ltd. for an agreed
purchase consideration of Rs
3,63,000 to be satisfied by issue of
10% debentures of Rs 100 at 10%
premium. Show the journal entries in
the journal of ABC Limited

44
Amount Amount
(Rs) (Rs)
Sundry Assets A/c Dr. 4,00,000
To Sundry Liabilities A/c 20,000
To B & Co. Ltd. 363,000
To Capital
Reserve( balancing
Figuer) 17,000
(Purchased assets and took over liabilities from B Ltd.)
B Co. Ltd Dr. 363000
To 10% debenture A/c 330000
To Securities Premium A/c 33000
Issue of 3300 debentures of Rs. 100 each at a premium of
10%
(

Issue of Debentures as a Collateral Security
A collateral security may be defined as a subsidiary or secondary or
additional security besides the primary security when a company
obtains a loan or overdraft from a bank or any other financial
Institution. It may pledge or mortgage some assets as a secured loan
against the said loan. But the lending institutions may insist on
additional assets as collateral security so that the amount of loan
can be realised in full with the help of collateral security in case the
amount from the sale of principal security falls short of the loan
money. In such situation, the company may issue its own
debentures to the lenders in addition to some other assets already
pledged. Such an issue of debentures is known as ‘Debentures
issued as Collateral Security’.
45

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