Issue of Debentures for Consideration other than Cash

When a company buys assets (or a whole business) and pays the seller by issuing debentures instead of cash, those debentures are said to be issued for consideration other than cash. The key idea is that the vendor is paid in debentures, not money. The accounting treatment mirrors that of shares issued for non-cash consideration.

The process always involves two journal entries:

1. Recording the purchase of assets (or business): Debit the asset account(s) with the agreed value of what is acquired, and credit the vendor's account.
2. Recording the issue of debentures: Debit the vendor's account to settle the liability, and credit the Debentures account. If the debentures are issued at a premium or discount, the Securities Premium Reserve or Discount on Issue of Debentures account is also credited or debited, respectively.

Case 1: Purchase of Assets Only (No Liabilities Taken Over)

The purchase consideration is simply the value of the assets purchased. The debentures may be issued at par, at a premium, or at a discount.

Journal Entries:

Case 2: Purchase of a Whole Business (Assets and Liabilities Taken Over)

When a company takes over both assets and liabilities of another firm, the purchase consideration is for the net assets (Assets – Liabilities). The journal entry for the purchase is:

Case 3: Difference Between Purchase Consideration and Net Assets

If the purchase consideration (the amount paid via debentures) is not equal to the net assets taken over, the difference is adjusted.

• Purchase Consideration > Net Assets: The excess is treated as Goodwill. It is debited in the first journal entry. …