Accountancy · Ch 6 — Issue and Redemption of Debentures
Issue of Debentures
Issue of Debentures
The issue of debentures follows the same procedure as the issue of shares. A company invites the public through a prospectus, and investors apply for debentures. The company may collect the full amount on application, or in instalments — on application, on allotment, and on calls.
Debentures can be issued in several ways:
- At par — issue price equals face value.
- At a premium — issue price exceeds face value.
- At a discount — issue price is less than face value.
- For consideration other than cash — debentures are issued to vendors or promoters in exchange for assets or services.
- As a collateral security — debentures are given as a secondary security for a loan or bank overdraft.
Types of Debentures
The textbook presents a classification of debentures based on five criteria. The table below summarises these types:
| Basis of Classification | Types |
|---|---|
| Security | Secured (Mortgage) debentures / Unsecured (Naked) debentures |
| Tenure | Redeemable debentures / Irredeemable (Perpetual) debentures |
| Mode of Redemption | Convertible debentures (Fully or Partly convertible) / Non-convertible debentures |
| Coupon Rate | Specific coupon rate debentures / Zero coupon rate debentures / Deep discount debentures |
| Registration | Registered debentures / Bearer (Unregistered) debentures |
The textbook text includes a table with these categories but does not define each type in this section. The classification is presented as a reference. For exam purposes, you must know the meaning of each term — for example, secured debentures are backed by a charge on the company's assets, while unsecured debentures are not.
Accounting Treatment
The accounting entries for issue of debentures are parallel to those for issue of shares. The key accounts used are:
- Debenture Application Account — credited when application money is received.
- Debenture Allotment Account — credited when allotment money is due.
- Debenture Calls Account — credited when call money is due.
- Debentures Account — credited with the face value of debentures issued.
- Securities Premium Reserve Account — credited with the premium amount (if issued at a premium).
- Discount on Issue of Debentures Account — debited with the discount amount (if issued at a discount). This discount is a capital loss and is written off over the life of the debentures.
Journal Entry Format
The standard journal entry for the issue of debentures (when the full amount is called on application) is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | xxx | |||
| Discount on Issue of Debentures A/c Dr. (if any) | xxx | |||
| To Debenture Application A/c | xxx | |||
| (Being application money received) | ||||
| Debenture Application A/c Dr. | xxx | |||
| To Debentures A/c | xxx | |||
| To Securities Premium Reserve A/c (if any) | xxx | |||
| (Being debentures allotted and application money transferred) |
When debentures are issued in instalments, separate entries are passed for application, allotment, and calls — exactly like shares.
Issue for Consideration Other Than Cash
When debentures are issued to a vendor for the purchase of assets or business, the entry is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Sundry Assets A/c Dr. | xxx | |||
| To Vendor A/c | xxx | |||
| (Being assets purchased from vendor) | ||||
| Vendor A/c Dr. | xxx | |||
| To Debentures A/c | xxx | |||
| To Securities Premium Reserve A/c (if any) | xxx | |||
| (Being debentures issued to vendor) |
Issue as Collateral Security
When debentures are issued as collateral security for a loan or bank overdraft, no entry is passed in the debentures account. Instead, a note is given in the balance sheet. The journal entry for the loan is:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | xxx | |||
| To Loan/Bank Overdraft A/c | xxx | |||
| (Being loan taken against collateral security of debentures) |
The fact that debentures have been issued as collateral security is disclosed in the notes to accounts or as a contingent liability. …