Accounting for Issue of Debentures | Class 12 Accountancy

 Issue of Debentures as a Collateral Security 

Collateral security means secondary or additional security over and above the primary security.

When a company takes loan and issues debentures as a secondary security, it is called issue of debentures as a collateral security. 

Accounting Treatment 

Method 1

Journal Entry

Bank a/c      Dr.

    To Bank Loan a/c 

( For taking loan )

Balance Sheet

Particulars	Note No.	Amount
Equity and Liabilities  Non Current Liabilities Long Term Borrowings	1

Notes to Accounts:

Particulars	Amount
Long Term Borrowings Bank Loan

Method 2

Journal Entries 

Bank a/c           Dr.

    To Bank Loan a/c 

( For taking loan )

Debentures Suspense A/c       Dr.

    To Debentures A/c 

( For issue of debentures as collateral security )

Balance Sheet

Particulars	Note No.	Amount
Equity and Liabilities  Non Current Liabilities Long Term Borrowings	1

Notes to Accounts:

Particulars	Amount
Long Term Borrowings Bank Loan Debentures Less: Debenture Suspense

Issue of Debentures for consideration other than cash

When a company purchases assets/business from the vendor and issues debentures to the vendor. 

Journal Entries  

For purchase of asset / business 

Assets A/c      Dr

    To Vendor A/c

( For purchase of assets )

       Or 

Assets A/c      Dr

Goodwill A/c    Dr 

   To Liabilities A/c

    To  Vendor A/c

    To Capital Reserve A/c 

( For purchase of business )

For issue of debentures

Vendor A/c    Dr

                 To Debentures A/c

( For issue of debentures at par)

Vendor A/c    Dr

                To Debentures A/c

                To Securities Premium A/c

(For issue of debentures at premium)

Vendor A/c    Dr

            Discount on issue of debentures A/c  Dr

                    To Debentures A/c

(For issue of debentures at discount)

Issue of Debentures with reference to terms of Redemption

Debentures can be issued at par, premium or discount and redeemed at par or premium. So, company can issue debentures from the following 6 cases:

Issued at par and redeemable at par:

Following entries will be passed:

Bank A/c         Dr 

   To Debenture Application & Allotment A/c

( Application money received )

Debenture Application & Allotment A/c      Dr

   To Debentures A/c

( Application money transferred to debentures a/c )

Issued at premium and redeemable at par:

Following entries will be passed:

Bank A/c         Dr 

   To Debenture Application & Allotment A/c

( Application money received )

Debenture Application & Allotment A/c      Dr

   To Debentures A/c

    To Securities Premium Reserve A/c

( Application money transferred to debentures a/c )

Issued at discount and redeemable at par:

Following entries will be passed:

Bank A/c         Dr 

   To Debenture Application & Allotment A/c

( Application money received )

Debenture Application & Allotment A/c      Dr

Discount on Issue of Debentures A/c         Dr

   To Debentures A/c

( Application money transferred to debentures a/c )

Issued at par and redeemable at premium:

Following entries will be passed:

Bank A/c         Dr 

   To Debenture Application & Allotment A/c

( Application money received )

Debenture Application & Allotment A/c      Dr

Loss on Issue of Debentures A/c               Dr

   To Debentures A/c

    To Premium on Redemption of Debentures A/c

( Application money transferred to debentures a/c )

Issued at premium and redeemable at premium:

Following entries will be passed:

Bank A/c         Dr 

   To Debenture Application & Allotment A/c

( Application money received )

Debenture Application & Allotment A/c      Dr

Loss on Issue of Debentures A/c               Dr

   To Debentures A/c

    To Securities Premium Reserve A/c

    To Premium on Redemption of Debentures A/c

( Application money transferred to debentures a/c )

Issued at discount and redeemable at premium:

Following entries will be passed:

Bank A/c         Dr 

   To Debenture Application & Allotment A/c

( Application money received )

Debenture Application & Allotment A/c      Dr

Loss on Issue of Debentures A/c               Dr

   To Debentures A/c

    To Premium on Redemption of Debentures A/c

( Application money transferred to debentures a/c )

Interest on Debentures

Interest on Debentures A/c        Dr

      To Debentureholders A/c

       To TDS Payable A/c

( Interest due on debentures )

Debentureholders A/c              Dr

       To Bank A/c

( Payment of interest to debentureholders )

TDS Payable A/c                    Dr

       To Bank A/c

( Depositing the amount of TDS in government account )

Statement of Profit & Loss A/c     Dr

       To Interest on Debentures A/c 

( Interest transferred to statement of p&l )

Writing off Discount/Loss on Issue of Debentures

·        The discount/loss on issue of debentures is a capital loss or a fictitious asset and, therefore, must be written-off during the life time of debentures.

·        The amount of discount/loss on issue of debentures should normally not be written-off in the year of issue itself since the benefit of the debentures would accrue to the company till their redemption.

·        Section 78 of the Companies Act, 1956 also permits the utilisation of ‘Securities Premium Account’ and other capital profits for writing-off the discount/loss on issue of debentures. In case, however, there are no capital profits or if the capital profits are not adequate, the amount of such discount/ loss can be written-off against the revenue profits every year by passing the following journal entry:

Securities Premium A/c      Dr.

Capital Reserve A/c                 Dr.

Statement of Profit and Loss Dr.

            To Discount/Loss on Issue of Debentures A/c

(Discount/loss on issue of debentures written-off)

 

Ques: A Ltd. Company has issued Rs 1,00,000, 9% debentures at a discount of 6% on 1st April 2016. These debentures are to be redeemed equally, spread over 5 annual instalments. Show Discount on issue of debentures account for five years.

Sol.

Amount of Discount = 6/100X100,000 = 6,000

 Amount of discount to be written-off is determined as follows:

Year	Amount	Ratio	Amount
2017	100,000	5	5/15X6000 = 2000
2018	80,000	4	4/15X6000 = 1600
2019	60,000	3	3/15X6000 = 1200
2020	40,000	2	2/15X6000 = 800
2021	20,000	1	1/15X6000 = 400
		15

 

Books of A Ltd.

Discount on Issue of Debentures Account

Date	Particulars	Amount	Date	Particulars	Amount
1/4/16	To 9% Debentures A/c	6000	31/03/17     31/03/17	By Statement of Profit & Loss A/c By Balance c/d	2000     4000
		6000			6000
1/4/17	To Balance b/d	4000	31/03/18     31/03/18	By Statement of Profit & Loss A/c By Balance c/d	1600     2400
		4000			4000
1/4/18	To Balance b/d	2400	31/03/19     31/03/19	By Statement of Profit & Loss A/c By Balance c/d	1200     1200
		2400			2400
1/4/19	To Balance b/d	1200	31/03/20     31/03/20	By Statement of Profit & Loss A/c By Balance c/d	800     400
		1200			1200
1/4/20	To Balance b/d	400	31/03/21	By Statement of Profit & Loss A/c	400
		400			400