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Vashya Ltd. issued 30,000, 10% Debentures of ₹ 100 each as collateral security for a loan of ₹ 25,00,000 taken from Bank of India. Fill in the blanks for the journal entry for issue of debentures as a collateral security :

Vashya Ltd. Journal

DateParticularsL.F.Dr. ₹Cr. ₹
............................. A/c Dr...........
To ............................. A/c..........
(Being ₹ 30,00,000; 10% debentures issued as collateral security for a loan of ₹ 25,00,000)
CBSECBSE Class XII Board 2020Subjective· 1mImportance★★★★★
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Debenture Suspense A/c Dr. ₹30,00,000 and To 10% Debentures A/c ₹30,00,000 — debentures issued as collateral security are recorded at face value but do not create a liability until the primary loan defaults.

Concept: Debentures Issued as Collateral Security

When a company borrows money from a bank and issues debentures as collateral security (not as the primary borrowing instrument), the debentures serve as a secondary charge. The bank can enforce these debentures only if the company defaults on the loan. Until that happens, the debentures do not represent an actual liability to debenture-holders; the real liability is the bank loan itself.

Accounting Treatment

Because the debentures are issued but do not yet create a liability, we cannot credit a liability account in the normal way. Instead, we use a contra entry that keeps the transaction off the main liability side:

  • Debit: Debenture Suspense Account (a fictitious asset, shown on the asset side of the Balance Sheet as a deduction from the corresponding liability or separately)
  • Credit: 10% Debentures Account (the nominal value of debentures issued)

Both accounts are for the full face value of the debentures issued (₹30,00,000), not the loan amount (₹25,00,000). The loan itself is recorded separately when cash is received from the bank (Bank A/c Dr. to Bank Loan A/c).

This contra entry ensures that:

  1. The issue of debentures is on record.
  2. No liability is recognized until the debentures are actually converted (if the loan defaults).
  3. The Balance Sheet shows both the Debenture Suspense (deducted) and the 10% Debentures, netting to zero effect on equity.
Note

The face value of debentures (₹30,00,000) exceeds the loan (₹25,00,000) to provide a margin of security to the bank. Only the nominal value of debentures is recorded, not the loan amount.


Solution: Journal Entry

The completed journal entry is:

DateParticularsL.F.Dr. ₹Cr. ₹
Debenture Suspense A/c Dr.30,00,000
To 10% Debentures A/c30,00,000
(Being ₹30,00,000; 10% debentures issued as collateral security for a loan of ₹25,00,000)

Explanation of the Blanks …

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