Last Updated on: 18th September 2024, 12:51 pm
Company Debentures Accounts
Company Debentures
Debenture is a document issued by the company as evidence of its debt. It is an acknowledgement of the company’s indebtness to its holders.
The term Debenture includes debenture stock, bonds and any other security of a company, whether constituting a charge on the assets of the company or not. [s. 2 (12)]
Debenture is the most common form of loan capital on a long term basis. To arrange long term loan capital (bearing a fixed rate of interest), company issues debentures to the investing public splitting the amounts into many units.
Company Shares .vs. Debentures
| Basis | Shares | Debentures |
| Status | Shareholders are owners of the company. | Debenture holders are creditors of the company. |
| Voting right | Share holders have voting rights in the General meeting of company. | Debenture holders have no voting rights in the General meeting of company. |
| Balance Sheet | The value of shares is shown under “Share Capital” in the Balance Sheet. | Debentures are shown under “Secured Loans” in the Balance Sheet. |
| Return on Investment | Dividends can be paid to share holders out of profit of the company only. | Debenture holders get a fixed rate of interest whether there is profit or not. |
| Convertibility | Shares can not be converted into debentures. | Debentures can be converted into shares as per the terms of issue |
| Charge against profit | Dividends on shares are appropriation of profit, and not deducted to determine income. | Interests on debentures are charged against profit and are deducted as an expense to determine income. |
| Repayment | At the time of liquidation, shareholders are paid at last, after paying debenture holders and creditors. | At the time of liquidation, debenture holders must be paid off before payment of shareholders. |
Company Debentures Types
Company Debenture Types : Debentures may be classified in various ways:
As per transferability
- Registered debentures: These debentures are payable to the registered holders whose name appear in the Register of debenture. These are not easily transferable.
- Bearer (or Unregistered) debentures: These are negotiable instrument and easily transferable. It bears no stamp duty and no record is kept in the company in respect of debenture holders.
As per security
- Secured (or mortgaged) debentures: Debentures which are secured by a charge on the assets of the company are known as secured debentures.
- Unsecured (or naked) debentures: Debentures which do not create any charge on the assets of the company are known as unsecured or naked debentures. The holders of these debentures are ranked at per with unsecured creditors in regard to their claims on the asset of the company.
As per repayment
- Redeemable Debentures: These debentures are repayable after the specific period of time as per the terms of issue.
- Irredeemable debentures: These debentures are not repayable during lifetime of the company. These are repaid at the time of liquidation. These are also called Perpetual Debentures.
As per Convertibility
- Convertible debentures: These debenture may be converted into equity shares fully or partly, after a certain period of time as per the terms of issue.
- Non-convertible debentures: These debentures do not carry any conversion right. They are repaid at maturity.
As per repayment Priority
- First debentures. Such debentures to be repaid in priority to other debentures.
- Second debentures. Such debentures are to be repaid only after first debentures have been repaid in full.
Company Debentures Issue against Cash
Debentures are normally issued against receipt of Cash. Debentures may be issued at par, at premium or at a discount.
Issued and redeemable at par
Bank A/c
To Debenture A/c
Issued at a premium and redeemable at par
Bank A/c
To Debenture A/c
To Premium on Issue of Debenture A/c
Issued at a discount and redeemable at par
Bank A/c
Discount on Issue of Debenture A/c
To Debenture A/c
Issued at par and redeemable at premium
Bank A/c
Loss on Issue of Debenture A/c
To Debenture A/c
To Premium on Redemption of Debenture A/c
Issued at a discount and redeemable at par
Bank A/c
Discount on Issue of Debenture A/c
To Debenture A/c
Issued at a discount and redeemable at premium:
Bank A/c
Loss on Issue of Debenture A/c
To Debenture A/c
To Premium on Redemption of Debenture A/c
(Loss on Issue of Debenture = Discount on issue + Premium on Redemption).
Issued at a premium and redeemable at a premium
Bank A/c
Loss on Issue of Debenture A/c
To Debenture A/c
To Premium on Issue of Debenture A/c
Notes:
- “Loss on issue of Debenture Account” and “Discount on issue of Debenture Account” appear under Misc. Expenses at the asset side of the Balance Sheet.
- “Premium on Redemption of Debenture” appears under Reserve & Surplus in the liabilities side of Balance Sheet.
Company Debentures Issue against Cash – Practical Examples
Debentures issue against Cash – Accounting entries
Issue of debentures at discount redeemable at par
| Account | Dr | Cr |
| Bank A/c | 9500 | |
| Discount on Issue of Debenture A/c | 500 | |
| To Debentures A/c | 10000 | |
| Issue of 100 Debentures at Rs 100 at 5% Discount redeemable at par | ||
Issue of debentures at discount redeemable at premium
| Account | Dr | Cr |
| Bank A/c | 9500 | |
| Discount on Issue of Debenture A/c | 500 | |
| Loss on issue of Debenture A/c | 500 | |
| To Debentures A/c | 10000 | |
| To Premium on Redemption of Debenture A/c | 500 | |
| (Issue of 100 debentures at Rs.100 at a discount of 5% redeemable at premium at 5%.) | ||
Issue of Debentures redeemable at a premium
| Account | Dr | Cr |
| Bank A/c | 10000 | |
| Loss on issue of Debenture A/c | 500 | |
| To Debenture A/c | 10000 | |
| To Premium on Redemption of Debenture A/c | 500 | |
| Issue of 100 debentures of Rs.100 at par and redeemable at premium @5%.) | ||
Issue debentures at premium and redeemable at premium
| Account | Dr | Cr |
| Bank A/c | 10500 | |
| Loss on issue of Debenture A/c | 500 | |
| To Debentures A/c | 10000 | |
| To Premium on issue of Debenture A/c | 500 | |
| To Premium on Redemption of Debenture A/c | 500 | |
| (Issue of 100 debentures of Rs.100 at a premium of 5% and redeemable at a premium of 5 %.) | ||
Issue of Company Debentures through Multiple Stages
Like issue of shares, money may be called in multiple stages, for issue of Debentures.
Accounting Entries on receipt of Application Money for Debentures Issue
Receipt of application money
Bank A/c Dr
To Debenture Application A/c Cr
Excess application money refund
Debenture Application A/c Dr
To Bank Cr
Accounting Entries on Allotment of Debentures
i) Debentures Issued and Redeemable at par
Debenture Application A/c Dr
To Debentures A/c Cr
Debenture Allotment A/c Dr
To Debentures A/c Cr
ii) Debentures Issued at discount
Debenture Application A/c Dr
To Debentures A/c Cr
Debenture Allotment A/c Dr
Discount on Issue of Debenture A/c Dr
To Debentures A/c Cr
iii) Issued at premium (prem.is paid on application.)
Debenture Application A/c Dr
To Debentures A/c
To Premium on Issue of Debenture A/c
Debenture Allotment A/c Dr
To Debentures A/c
Allotment Money Receipt on Debenture Issue
Bank A/c Dr
To Debenture Allotment A/c
Calls money due on Debenture Issue
Debenture Call A/c Dr
To Debentures A/c
Calls money received on Debenture Issue
Bank A/c
To Debenture Call A/c
Issue of Company Debentures through Multiple Stages– Practical Problems
Debentures Issue through Multiple Stages– Practical Problems
A ltd. issued 5,000, 14% Debentures of Rs.100 each at a premium of 10%, payable Rs.30 on application, Rs.50 on allotment (including premium) and the balance on call. Applications were received for 5,500 debentures. Excess applications were rejected. All moneys were duly received. Journalize the transaction.
Bank A/c Dr. 1,65,000
To Debenture Application A/c 1,65,000
(1. Application money received for 5,500 debentures @30 )
Debenture Application A/c Dr. 15000
To Bank A/c 15000
(2.Excess application money of 500 debentures @30, refunded)
Debenture Application A/c Dr. 1.50,000
To 14% Debenture A/c 1,50,000
(3.Allotment of 5,000 debentures @30)
Debenture Allotment A/c Dr. 2,50,000
To 14% Debenture A/c 2,00,000
To Debenture Premium A/c 50,000
(4. Allotment money due on 5,000 debentures @40 after adjusting premium @10 )
Bank A/c Dr 2,00,000
To Debenture Allotment A/c 2,00,000
(5.Allotment money of 5000 debentures @ 40 received in full.)
Debenture Call A/c Dr. 1,50,000
To 14% Debenture A/c 1,50,000
(6. The call money due on 5,000 debentures @30)
Debenture of Rs.100 is issued at a premium of Rs.10 (10%). So the amount payable on call is Rs.110- (30+50), i.e @30
Bank A/c Dr. 1,50,000
To Debenture Call A/c 1,50,000
(7. Final call on 50000 debentures @30 received in full.)
Issue of Company Debentures at Discount
1. If the debentures are issued at a discount, or redeemable at a premium, such discount or premium represents capital loss and should be written off.
Journal entry to write off discount.
Profit & Loss A/c Dr
To Discount on Issue of Debenture A/c
Remaining balance will be shown on the asset side of the debenture under miscellaneous expenses.
2. If the debentures are redeemed after a certain period of time, the total amount of discount should be written off equally over the period after which the debenture will be redeemed.
Amount of discount to be written off annually = Total Discount / No. of years of redemption of debenture
3. When debentures are redeemed by unequal instalment, then the total amount of issue of debentures should be written off in the ratio in which the amount of debentures has been used each year.
4. If the debentures are irredeemable, the discount should be written off gradually over a long period.
Issue of Debentures at Discount – Practical Problems
Issue of Debentures at Discount – Practical Problems
N Ltd. issued 12% 4,000 debentures of Rs.100 each, at a discount of 10%, redeemable at par after 5 years. Equal amount of discount is to be written off every year. Show ‘Discount on issue of Debentures A/c’
Total discount allowed on issue of debentures : (4,000 x 100) x (10/100) = 40,000.
Annual Amount of Discount to be charged to revenue : 40,000/5 = 8,000.
Discount on issue of Debentures A/c
| Date | Particulars | Dr | Date | Particulars | Cr |
| 1st Yr | To Debenture. A/c | 40,000 | 1st Yr | P L A/c | 8,000 |
| 2nd Yr | P L A/c | 8,000 | |||
| 3rd Yr | P L A/c | 8,000 | |||
| ` | 4th Yr | P L A/c | 8,000 | ||
| 5th Yr | P L A/c | 8,000 | |||
| 40,000 | 40,000 |
Company Debentures Issue for consideration other than cash
Debentures Issue for consideration other than cash
Sometimes, instead of paying cash, Debenture may be issued against payment for take over of an organisation, or purchase of assets.
On purchase consideration becoming due
Sundry Asset A/c Dr
To Sundry Liabilities A/c
To Vendor A/c
Debenture issued to satisfy purchase consideration
Vendor A/c Dr
To Debentures A/c
Debentures Issue for consideration other than cash – Practical Example
B Ltd. took over the asset of the A ltd. of Rs.3,00,000 and liabilities of Rs.1,50,000 for purchase consideration of Rs.1,60,000. B Ltd. settled the purchase consideration by issuing 12% debentures of Rs.100 each. Show the Journal entries.
- Computation of Purchase Consideration : Net Assets taken over = (Assets – liabilities) i.e. (3,00,000 – 1,50,000) = Rs.1,50,000. Purchase Consideration = Rs.1,60,000.
- Computation of Goodwill : Excess amount of Purchase Consideration over Assets taken over =Rs.(1,60,000 – 1,50,000) = 10,000 will be treated as goodwill.
- No. of debentures to be issued = 1,60,000 / 100 = 1,600
Accounting Entries :
Sundry Asset A/c Dr 3,00,000
Goodwill A/c Dr 10,000
To Sundry Liabilities A/c 1,50,000
To B Ltd. A/c 1,60,000
(Assets and liabilities taken over.)
B Ltd. A/c Dr 1,60,000
To 12% Debentures A/c 1,60,000
(Issue of 12% debenture for settlement of purchase consideration.)
Company Debenture Issue as Collateral Security
Debenture Issue as Collateral Security
Collateral Security means secondary or supporting security to bank or financial institution. Debenture may be issued to them as a collateral security for loan. On repayment of loan, debentures are released. If the loan is not repaid on due date, the lender becomes the debenture holder and can exercise all the rights of a debenture holder. Such holder does not receive any interest on debenture, but gets the interest on loan amount.
Accounting Entries on Debenture Issue as Collateral Security
Sometimes no entry is made on such issue. Only reference is made in the Balance Sheet along with the loan amount. However, when recorded in Books, following entry will be passed.
On Issue of debentures as collateral security
Debenture Suspense A/c Dr
To Debenture A/c
On repayment of loan
Debenture A/c Dr
To Debenture Suspense A/c
A loan was obtained from a bank of Rs.15,00,000, giving a collateral security of Rs.20,00,000, 12% Debentures of Rs.100 each. How will it be treated?
Method 1: When not recorded in Books : If the issue of debentures is not recorded in books, this is reflected in Balance Sheet as part of note. The fact would be disclosed in liability side of Balance Sheet along with the loan as follows
Method 2: When recorded in Books
Consequently, the respective entries would appear in Balance sheet as follows
Balance Sheet ..(Extract)
| Liabilities | Rs. | Assets | Rs. |
| Secured Loan: | Debenture Suspense Account | 20,00,000 | |
| Bank loan | 15,00,000 | ||
| 12% Debentures | 20,00,000 |
Company Debentures Interest Payment
Company has to pay interest on debentures at a specified rate at regular interval (normally sixth months). Interest is payable on nominal value of the debentures and charged against profit and debited to Profit & Loss Account.
As per the Income Tax Act, 1956, a company is also required to deduct tax at source (TDS)
Accounting Entries for payment of Interest on debenture
1. Interest on debenture is payable
Interest on Debenture A/c (total interest) Dr.
To Debenture holders A/c (net interest)
To Tax Deducted at source A/c (TDS)
2. Net interest is paid
Debenture holders A/c Dr.
To Bank
3. On charging Interest to P& L A/c
Profit & Loss A/c Dr.
To Interest on Debenture A/c
4. Outstanding interest on debenture:
Interest on Debenture A/c Dr.
To Outstanding Interest on Debenture A/c
Company Debenture Interest Payment – Practical Problems
Debenture Interest Payment – Practical Problems
A ltd. issued 5,000, 14% Debentures of Rs.100 each on 1st January, 2015. Interest is payable yearly on 31st December, 2015.
Show the necessary journal entries relating to debenture interest for the year ended 31st December, 2015 assuming that all money was duly paid by the company and tax deducted at source on debenture interest rate is 10%.
Interest on Debenture A/c Dr 70,000
To Debenture holders A/c 63,000
To Tax Deducted at source A/c 7000
(Interest on 5000 debentures of 100 each, @14% pa, TDS @ 10%)
Debenture holders A/c 63,000
To Bank A/c 63,000
(Payment of interest to debenture holders.)
Tax Deducted at source A/c Dr 7,000
To Bank A/c 7,000
(Deposit of TDS)
Profit & Loss A/c 63,000
To Interest on Debenture A/c 63,000
(Transfer of Interest on Debenture to Profit & Loss A/c.)
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