What is meant by 'Mortgaged Debentures'?

Short Answer Questions · Q9

Q. What is meant by 'Mortgaged Debentures'?

Dnh Dd CbseNCERTSubjective· 2mImportance★★★★★

79% · 92/117 Questions

🔒 Locked · start free trial →

You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.

Start your 14-day free trial to unlock the full solution →

Concept understanding — Debenture Definition

Debentures: The Company's Way of Borrowing Money

Think of a debenture like this: you need ₹5,00,000 to expand your business. Instead of asking a bank for a loan, you go to the public and say, "Lend me money, and I'll pay you interest every year. After 5 years, I'll return your full amount." Each person who lends you money gets a certificate — that certificate is a debenture.

The Precise Meaning

A debenture is a written instrument issued by a company under its common seal, acknowledging a debt. It contains a promise to repay the borrowed amount at a specified date (maturity) and to pay interest at a fixed rate at regular intervals (usually half-yearly or yearly).

Note

A debenture holder is a creditor of the company, not an owner. They have no voting rights and no share in profits — only a fixed interest payment.

Why Debentures Matter

Companies issue debentures because:

They raise large funds without diluting ownership (unlike shares)
Interest paid on debentures is a tax-deductible expense (reduces taxable profit)
Debentures are safer for investors than shares (fixed return, priority in repayment)

For investors, debentures offer:

Fixed, predictable income
Higher safety than equity shares
Priority over shareholders if the company is liquidated

Accounting Treatment

When a company issues debentures, the journal entry is:

Particulars	Debit (₹)	Credit (₹)
Bank A/c Dr.	[Amount received]
To Debentures A/c		[Face value]
To Securities Premium Reserve A/c (if issued at premium)		[Premium amount]
(Being debentures issued at premium)

Key points:

Debit Bank A/c with the actual amount received
Credit Debentures A/c with the face value (nominal value)
If issued at a premium (e.g., ₹100 debenture issued for ₹110), credit the extra ₹10 to Securities Premium Reserve A/c
If issued at a discount (e.g., ₹100 debenture issued for ₹95), debit the discount to Discount on Issue of Debentures A/c (a fictitious asset written off over the debenture's life)

Watch out

Never confuse debentures with shares. Debentures are liabilities (shown under "Non-Current Liabilities" in the Balance Sheet), while shares are equity (shown under "Shareholders' Funds").

Interest on Debentures

Interest is calculated as:

Interest = Face Value of Debentures × Rate of Interest × Time Period

For example, if a company issues ₹10,00,000 worth of 9% debentures, the annual interest is:

₹10,00,000 × 9% = ₹90,000 per year

The journal entry for interest payment:

Start your 14-day free trial to unlock the full solution →

Mortgaged debentures are debentures that are secured by a charge on the fixed assets (like land, building, or plant) of the company. If the company defaults on interest or principal repayment, the debenture holders can sell those assets to recover their money.

Concept and Accounting Treatment

A debenture is a written instrument acknowledging a debt taken by a company. It is issued under the company's seal and contains a promise to repay the principal at a specified date and to pay interest at a fixed rate at regular intervals.

Now, debentures can be either secured or unsecured. A mortgaged debenture is a type of secured debenture. The word "mortgage" here means a legal transfer of an interest in specific property (the asset) as security for the loan. The company creates a charge on its fixed assets—typically land, building, plant, or machinery—in favour of the debenture holders.

The key accounting implication is that the company must record this charge in its books. While the journal entry for issuing debentures is the same (Bank A/c Dr. To Debentures A/c), the creation of the mortgage is recorded as a note in the balance sheet or as a separate entry in the ledger. The company debits the asset account (e.g., Building A/c) and credits the Debentures A/c only when the debentures are issued against a specific asset. However, the more common treatment is to simply disclose the nature of security in the balance sheet under "Notes to Accounts."

Why this treatment? The rule of debit and credit for debentures follows the same logic as any liability: when the company receives money (debit Bank), it creates a liability (credit Debentures). The mortgage does not change the double-entry for the issue; it only adds a layer of security. The company does not "lose" the asset—it merely gives the debenture holders a right to sell it if the company fails to pay. Therefore, the asset remains on the company's books, and the debenture liability is shown separately, with a note stating it is secured by a mortgage on the asset.

Watch out

A common mistake is to think that mortgaged debentures mean the company transfers ownership of the asset to the debenture holders. That is incorrect. The company retains ownership and use of the asset; only a charge is created. The debenture holders cannot use the asset unless the company defaults.

Tip

In exam questions, when you see "mortgaged debentures," you do not need to pass a separate journal entry for the mortgage itself. Just mention in the balance sheet or notes: "Debentures are secured by a first charge on the freehold land and building of the company."

Solution (Illustrative Journal Entry and Balance Sheet Disclosure) …

Start your 14-day free trial to unlock the full solution →

←Previous question · questions-for-practiceQ8 — What is a 'Convertible Debenture'?→Next question · questions-for-practiceQ10 — What is discount on issue of debentures?

Q.What is meant by 'Mortgaged Debentures'?

🎓Unlock everything free for 14 days

Unlock everything free for 14 days