Q.A company obtained a loan of ₹2,00,000 from a bank and issued, as collateral security, 2,500, 9% Debentures of ₹100 each. Show how this transaction is recorded/disclosed under

Since these debentures back up an existing loan rather than raising fresh cash, they are treated as a contingent security rather than an ordinary debenture issue.

Under method (a), no journal entry is passed for the debentures at all — only a note is appended to the Bank Loan liability in the Balance Sheet, disclosing that it is secured by 2,500, 9% Debentures of ₹100 each (₹2,50,000) issued as collateral security. Under method (b), a journal entry is passed debiting Debenture Suspense A/c and crediting Debentures A/c with ₹2,50,000, and both accounts are shown in the Balance Sheet …

Face value of debentures issued as collateral security = 2,500 × 100 = ₹2,50,000 — note this is deliberately larger than the ₹2,00,000 loan itself, which is normal practice, giving the lender a cushion of extra security.

Method (a) — No journal entry passed.

The company simply does not record any entry for the debentures, since no fresh liability or cash flow arises from issuing them — the real liability is the ₹2,00,000 bank loan itself, which is recorded normally (Bank A/c Dr. ₹2,00,000; To Bank Loan A/c ₹2,00,000). A note is appended to the Bank Loan in the Balance Sheet:

"Bank Loan ₹2,00,000 (secured by issue of 2,500, 9% Debentures of ₹100 each as collateral security, ₹2,50,000)."

Method (b) — Journal entry passed.

A common error is crediting Bank A/c with ₹2,50,000 (the face value of the collateral debentures) as if fresh cash were received for them — no cash is ever received for debentures issued purely a …