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Notes
Issue of Debentures Accounting for Shares and Debentures
You have learnt that share capital is the main source of finance of a joint stock company. Such capital is raised by issuing shares. Those who hold the shares of the company are called the shareholders and are owners of the company. Company may need additional amount of money for a long period. It cannot issue shares every time. It can raise loan from the public. The amount of loan can be divided into units of small denominations and the company can sell them to the public. Each unit is called a ‘debenture’ and holder of such units is called Debenture holder. The amount so raised is loan for the company. In this lesson we shall learn about issue of debentures and its accounting treatment.
OBJECTIVES
After studying this lesson you will be able to : state the meaning and types of debentures; explain the procedure of issue of debentures and its accounting treatment; explain issue of debentures as collateral security; explain ‘writing off discount’ and ‘loss on issue debentures’ and their accounting treatment in the books of the company; calculate interest on debentures.
26.1 DEBENTURE AND ITS TYPES
A Debenture is a unit of loan amount. When a company intends to raise the loan amount from the public it issues debentures. A person holding debenture or debentures is called a debenture holder. A debenture is a
ISSUE OF DEBENTURES
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Accounting for Shares and Debentures
Notes
Issue of Debentures
document issued under the seal of the company. It is an acknowledgment of the loan received by the company equal to the nominal value of the debenture. It bears the date of redemption and rate and mode of payment of interest. A debenture holder is the creditor of the company.
As per section 2(12) of Companies Act 1956, “Debenture includes debenture stock, bond and any other securities of the company whether constituting a charge on the company’s assets or not”.
Types of debentures
Debenture can be classified as under :
1. From security point of view
(i) Secured or Mortgage debentures : These are the debentures that are secured by a charge on the assets of the company. These are also called mortgage debentures. The holders of secured debentures have the right to recover their principal amount with the unpaid amount of interest on such debentures out of the assets mortgaged by the company. In India, debentures must be secured. Secured debentures can be of two types :
(a) First mortgage debentures : The holders of such debentures have a first claim on the assets charged.
(b) Second mortgage debentures : The holders of such debentures have a second claim on the assets charged.
(ii) Unsecured debentures : Debentures which do not carry any security with regard to the principal amount or unpaid interest are called unsecured debentures. These are called simple debentures.
2. On the basis of redemption
(i) Redeemable debentures : These are the debentures which are issued for a fixed period. The principal amount of such debentures is paid off to the debenture holders on the expiry of such period. These can be redeemed by annual drawings or by purchasing from the open market.
(ii) Non-redeemable debentures : These are the debentures which are not redeemed in the life time of the company. Such debentures are paid back only when the company goes into liquidation.
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Accounting for Shares and Debentures
Notes
Issue of Debentures
INTEXT QUESTIONS 26.
Name the type of debentures against each of the following :
(i) Debentures that are redeemed before other debentures.
(ii) Debentures the holders of which have a first claim on the assets charged.
(iii) Debentures that are transferable merely by delivery.
(iv) Debentures that are paid back only when the company goes into liquidation.
26.2 ISSUE OF DEBENTURES
By issuing debentures means issue of a certificate by the company under its seal which is an acknowledgment of debt taken by the company.
The procedure of issue of debentures by a company is similar to that of the issue of shares. A Prospectus is issued, applications are invited, and letters of allotment are issued. On rejection of applications, application money is refunded. In case of partial allotment, excess application money may be adjusted towards subsequent calls.
Issue of Debenture takes various forms which are as under :
- Debentures issued for cash
- Debentures issued for consideration other than cash
- Debentures issued as collateral security.
Further, debentures may be issued
(i) at par, (ii) at premium, and (iii) at discount
Accounting treatment of issue of debentures for cash
1. Debentures issued for cash at par :
Following journal entries will be made :
(i) Application money is received
Bank A/c Dr
To Debentures Application A/c (Application money received for Debentures)
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Issue of Debentures Accounting for Shares and Debentures
(ii) Transfer of debentures application money to debentures account on their allotment
Debentures Application A/c Dr To Debentures A/c (Application money transferred to debenture account on allotment)
(iii) Money due on allotment
Debentures Allotment A/c Dr To Debentures A/c
(Allotment money made due) (iv) Money due on allotment is received
Bank A/c Dr To Debentures Allotment A/c (Receipt of Debenture allotment money) (v) First and final call is made
Debentures First and Final call A/c Dr To Debentures A/c (First and Final call money made due on ............... debentures) (vi) Debentures First and Final call money is received
Bank A/c Dr To Debentures First and Final call A/c (Receipt of Amount due on call) Note : Two calls i.e. first call and second call may be made Journal entries will be made on the lines made for first and final call.
Illustration 1 Shining India Ltd. issued 5000 8% Debentures of Rs 100 each payable as follows Rs 20 on Application Rs 30 on Allotment Rs. 50 on First and Final call
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Issue of Debentures Accounting for Shares and Debentures
(a) The total amount of excess number of applications is refunded in case the applications are totally rejected. (b) The amount of excess application money is totally adjusted towards amount due on allotment and calls — in case partial allotment is made, — the excess amount is adjusted towards sums due on allotment and rest of the amount is refunded.
Journal entries in the above cases will be as follows : For refund of money if the applications are rejected Debentures Application A/c Dr To Bank A/c (Refund of money on rejected applications)
For adjustment of excess application money adjusted towards sum due on allotment Debentures Application A/c Dr To Debentures Allotment A/c (Excess application money adjusted)
Illustration 2 ABC Ltd issued 5000 10% Debentures of Rs 100 each payable as Rs 40 on application and Rs 60 on allotment. Applications were received for 6000 debentures. Applicants for 500 debentures were sent letter of regret and money was returned. Allotment was made proportionately to the remaining applicants. Over subscription was applied to the amount due on allotment. All money was duly received.
Make journal entries for the above transactions in the books of the company.
Solution : Journal entries Dr Cr Date Particulars LF Amount Amount Rs Rs
- Bank A/c Dr 240000 To Debentures Application A/c 240000 (Application money received for 6000 debentures @ Rs 40 per debenture)
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Issue of Debentures
- Debentures Application A/c Dr 240000 To 10% Debentures A/c 200000 To Bank A/c 20000 To Debentures Allotment A/c 20000 (Debenture application money of 5000 debentures transferred to debenture A/c on their allotment of 500 debentures returned and balance of 500 adjusted towards allotment)
- Debentures Allotment A/c Dr 300000 To 10% Debentures A/c 300000 (Allotment money due on 5000 debentures @ Rs 60 per debenture)
- Bank A/c Dr 280000 To Debentures Allotment A/c 280000 (Allotment money received)
INTEXT QUESTIONS 26.
I. Write the various forms in which debentures can be issued
(i) ......................................................................................................
(ii) ......................................................................................................
(iii) ......................................................................................................
II. A company issued 10000 10% debentures of Rs 100 each. Rs 30 per debenture was to be paid along with application. Applications were received for 12000 debentures. What can the company do with the excess application money i.e. Rs 60000 (2000 × Rs 30)
(a) ......................................................................................................
(b) ......................................................................................................
26.3 ISSUE OF DEBENTURES AT PREMIUM AND AT DISCOUNT
Debentures are said to be issued at premium when these are issued at a value which is more than their nominal value. For example, a debenture of
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Accounting for Shares and Debentures
Notes
Issue of Debentures
Issue of Debentures at Discount
When debentures are issued at less than their nominal value they are said to be issued at discount. For example, debenture of Rs 100 each is issued at Rs 90 per debenture. Companies Act, 1956 has not laid down any conditions for the issue of debentures at a discount as have been laid down in case of issue of shares at discount. However, there should be provision for issue of such debentures in the Articles of Association of the Company.
Journal entry for issue of debentures at discount (at the time of allotment)
Debentures Allotment A/c Dr
Discount on issue of debentures A/c Dr
To Debentures A/c
(Allotment money due. The amount of discount is @ Rs .... per debenture)
Illustration 4
A company has issued 2000 9% debentures of Rs 100 each at a discount of 10% payable as
Rs 40 on application
Rs 50 on allotment
Make necessary journal entries.
Solution
Dr Cr Date Particulars LF Amount Amount Rs Rs
- Bank A/c Dr 80000 To Debentures Application A/c 80000 (Application money received)
- Debentures Application A/c Dr 80000 To 9% Debentures A/c 80000 (Application money transferred to debenture A/c)
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Issue of Debentures Accounting for Shares and Debentures
- Debentures Allotment A/c Dr 100000 Debentures Discount A/c Dr 20000 To 9% Debenture A/c 120000 (Amount due on allotment, along with discount amount Rs 10 per debenture)
- Bank A/c Dr 100000 To Debentures Allotment 100000 (Receipt of allotment money)
Issue of Debentures for consideration other than cash When a company purchases some assets and issues debentures as a payment for the purchase, to the vendors it is known as issue of debentures for consideration other than cash. Debentures can be issued to vendors at par, at premium and at discount
Accounting Treatment :
- Purchase of Assets Sundry Assets A/c Dr (Individually) To Vendors A/c (Purchase of assets)
- Allotment of debentures (i) At par Vendors' A/c Dr To Debentures A/c (issue of debentures at par to vendors) (ii) At discount Vendors' A/c Dr Debentures Discount A/c Dr To Debentures A/c (Issue of debentures to vendors at a discount of Rs ... per debenture)
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Notes
Issue of Debentures Accounting for Shares and Debentures
Working notes Amount due = Rs 198000 Value of debenture including Rs 10 for premium = Rs 110
No. of denentures to be issue =
Rs 198000 Rs 110 = 1800
∴ Debenture amount (Nominal value) = 1800 × 100 = Rs 180000 Securities Premium Amount = 1800 × Rs 10 = Rs 18000 (c) Vendors A/c Dr 198000 Discount on Issue of Debentures A/c Dr 22000 To 9% Debentures A/c 220000 (Issue of 2200 9% debentures of Rs 100 each at a discount of Rs 10 per debenture)
Working notes Amount due to vendor = Rs 198000 Value of one debenture at a discount of Rs 10 = Rs 90 No. of denentures to be issued = Rs 198000 ÷ Rs 90 = 2200 Debentures amount (Nominal value) = 2200 × Rs 100 = Rs 220000
Discount on issue of Debentures = 2200 × Rs 10 = Rs 22000
Issue of Debentures with conditions Stipulated to their Redemption (Journal entry) (i) Issued at par redeemable at par Bank A/c Dr To Debentures Account (Issue of debentures of Rs .... at par) (ii) Issued at discount and redeemable at par Bank A/c Dr Discount on issue of Debentures A/c Dr To Debentures A/c (Issue of debentures of Rs ... at a discount of Rs ....) (iii) Issued at premium redeemable at par Bank A/c Dr
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Issue of Debentures
To Debentures A/c To Securities Premium A/c (Issue of ... debentures of Rs .... at a premium of Rs ....)
(iv) Issue at par, redeemable at premium
Bank A/c Dr Loss on Issue of Debentures A/c Dr To Debentures A/c To Premium on Redemption of Debenture A/c (Issue of ... debentures of Rs ... a redeemable at a premium of Rs ...)
(v) Issued at discount and redeemable at premium
Bank A/c Dr Discount on Issue of Debentures A/c Dr Loss on Issue of Debentures A/c Dr To Debentures A/c To Premium on Redemption of Debenture A/c (issue of ... debentures of Rs ... at a discount of Rs ... redeemable at a premium of Rs ....)
Illustration 6
Make journal entries if 200 debentures of Rs 500 each have been issued as :
(i) Issued at Rs 500, redeemable at Rs 500 (ii) Issue at Rs 450; redeemable at Rs 500 (iii) Issued at Rs 550; redeemable at Rs 500 (iv) issued at Rs 500; redeemable at Rs 550 (v) Issued at Rs 450; redeemable at Rs 550
Solution : Journal
Dr Cr Date Particulars LF Amount Amount Rs Rs (i) Bank A/c Dr 100000 To Debentures A/c 100000 (Issue of 200 debentures @ of Rs 500 each)
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Accounting for Shares and Debentures
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Issue of Debentures
(iii) 100 8% debentures of Rs 100 each has been issued to vendors for plant purchased the debentures are said to be issued ........................... (iv) A company can issue its debentures at a discount if a provision in this regard has been made in its ...........................
26.4 ISSUE OF DEBENTURES AS COLLATERAL SECURITY
Collateral security means security given in addition to the principal security. It is a subsidiary or secondary security. Whenever a company takes loan from bank or any financial institution it may issue its debentures as secondary security which is in addition to the principal security. Such an issue of debentures is known as ‘issue of debentures as collateral security’. The lender will have a right over such debentures only when company fails to pay the loan amount and the principal security is exhausted. In case the need to exercise this right does not arise debentures will be returned back to the company. No interest is paid on the debentures issued as collateral security because company pays interest on loan.
In the accounting books of the company issue of debentures as collateral security can be credited in two ways.
(i) No journal entry to be made in the books of accounts of the company :
Debentures are issued as collateral security. A note of this fact is given on the liability side of the balance sheet under the heading Secured Loans and Advances.
Balance Sheet ...... Co. Ltd.
Capital & liabilities Amount Assets Amount Rs Rs Rs
Debentures (.... debentures of Rs .... per debenture issued as collateral security
Loan
(Secured by the issue of .... debentures of Rs .... each issued as collateral security
(ii) Entry to be made in the books of account the company
A journal entry is made on the issue of debentures as a collateral security, Debentures suspense A/c is debited because no cash is received for such issue.
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Issue of Debentures Accounting for Shares and Debentures
Following journal entry will be made Debenture Suspense A/c Dr To Debentures A/c (.....Debentures of Rs .... each issued as collateral security to .....)
In the Balance sheet of the issuing company it will be shown as udner :
Balance Sheet of ...... Co. Ltd. Capital & Liabilities Amount Assets Amount Rs Rs Rs Bank Debenture Debenture suspense A/c (.....debenture of Rs .... each (Debenture issued as collateral issued as collateral security security for loan as per contra) as per contra)
Loan
Illustration 7 Sky Rocketing Company Ltd issued 6000 10% debentures of Rs 100 each to the bank as collateral security against a loan of Rs 500000 taken from the bank. Record the issue of debentures in the books of the company and show the issued Debentures in the Balance Sheet of the Company.
Solution (i) No journal entry is required
Balance Sheet (Relevant) of Sky Rocketing Co. Ltd
Capital & Liabilities Amount Assets Amount Rs Rs Rs
Secured Loan 500000 Current Assets & loans and Advance Bank loan Cash at Bank 500000 (Secured by 6000 10% debentures of Rs 100 each issued as collateral security)
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Issue of Debentures Accounting for Shares and Debentures
year in which this discount is allowed. The amount of such discount is very heavy and to the company gets benefit from the loan by issuing debentures over a number of years. Hence some part of the amount of discount is written off every year. Generally it is written off prior to the redemption of these debentures.
As the amount of discount on issue of debentures is treated as a capital loss, it is shown on the asset side of the balance sheet of the company under the head “Miscellaneous Expenditure” until and by the amount it is not written off.
The amount of debenture discount can be written off in two ways :
1. All debentures are to be redeemed after a fixed period.
When the debentures are to be redeemed after a fixed period, the amount of discount will be distributed equally within the number of years spreaded between the issue of debentures and their redemption. The amount of discount on issue of debentures to be written off each year is calculated as
Amount of discount to be written off annually
Total amount of Discount Number of years
Illustration 8 A company issues 1000 debentures of Rs 1000 each at a discount of 10% for a period of 5 years i.e. to be redeemed after 5 years. Calculate the amount of discount to be written off each year and prepare on issue of debentures discount account.
Solution
Amount of discount =
b^1000 ×^ Rs1000g ×^10 100
= Rs 100000
Amount to be written off each year =
Rs 100000 5
= Rs 20000
Accounting Treatment Journal entry to write off debenture discount each year
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Issue of Debentures
Dr. Cr. Profit and Loss A/c ...Dr 20000 To Discount on Issue of Debentures A/c 20000 (Amount of Discount on Issue of Debentures written off)
Discount on Issue of Debentures Account till the amount of discount is written off, is shown as under :
Discount on Issue of Debentures A/c
Dr. Cr.
Date Particulars Amount Date Particulars Amount Rs Rs
1st year 1st year
Jan 1 Debenture A/c 100000 Dec 31 Profit & Loss A/c 20000
Dec 31 Balance cld 80000 100000 100000
2nd year 2nd year
Jan 1 Balance b/d 80000 Dec. 31 Profit & Loss A/c 20000
Dec.31 Balance cld 60000 80000 80000
3rd year 3rd year
Jan 1 Balance b/d 60000 Dec 31 Profit & Loss A/c 20000
Dec 31 Balance cld 40000
60000 60000
4th year 4th year
Jan 1 Balance b/d 40000 Dec 31 Profit & Loss A/c 20000
Dec 31 Balance cld 20000 40000 40000
5th year 5th year
Jan 1 Balance b/d 20000 Dec 31 Profit & Loss A/c 20000
20000 20000
