Key Points - Accounting for Debentures

A debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a medium­ to long­term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company’s capital structure, it does not become share capital.
Note : Debenture is instrument that is not secured by physical asset or collateral

In case of bond interest is not declared.
Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company’s general meetings of shareholders,The interest paid to them is a charge against profit in the company’s financial statements.

Types of debentures
Convertibility point of view : there are two types of debentures:
Convertible debentures, which are can be converted into equity shares of the issuing company after a predetermined period of time.
These may be Partly Convertible Debentures (PCD): A part of these instruments are converted into Equity shares in the future at notice of the issuer. The issuer decides the ratio for conversion. This is normally decided at the time of subscription.

Fully convertible Debentures (FCD): These are fully convertible into Equity shares at the issuer’s notice. The ratio of conversion is decided by the issuer. Upon conversion the investors enjoy the same status as ordinary shareholders of the company.
Non­convertible debentures, which are simply regular debentures, cannot be converted into equity shares of the liable company. They are debentures without the convertibility feature, they usually carry higher interest rates than their convertible counterparts.

On basis of Security, debentures are classified into:?
Secured Debentures: These instruments are secured by a charge on the fixed assets of the issuer company. So if the issuer fails on payment of either the principal or interest amount, his assets can be sold to repay the liability to the investors
Unsecured Debentures: These instrument are unsecured in the sense that if the issuer defaults on payment of the interest or principal amount, the investor is treated like along other unsecured creditors of the company .

From redemption point of view
Redeemable Debentures:­ Redeemable debentures are those which are redeemed or paid off after the termination of fixed term. The amount paid off includes the principal amount and the current year’s interest. The company always has the option of either to redeem a specific number of debentures each year or redeem all the debentures at specified date.
Irredeemable or Perpetual Debentures:­ Irredeemable debentures are those debentures which do not have any fixed date of redemption. They are redeemed either in the event of winding up or at a very remote period of time. Irredeemable or perpetual debenture holders can never force the company to redeem their debentures.

Issue of Debentures: Debentures can be issued in two ways

1.. for cash

2. for consideration other than cash

3. As collateral security

Terms of issue of: Debentures can be issued in two ways

1..Issue of Debentures at Par

2. Issue of Debentures at Premium

Debentures payable in Instalments

1. First instalment paid along with application is called as application money

2. Second instalment paid on allotment is called as allotment money

3. Subsequent instalments paid are called as call money calls can be more than one and called First call, second call or as the case may be ISSUE OF Debentures FOR

CASH
AT PAR : This means shares are issued at face value
JOURNAL ENTRIES
On receipt of application
Bank Account
Dr. With the application
To Debenture Application money received
Account
On acceptance of application Debenture Application Account Dr. With the amount of
To Debenture Account of application money on allotted debentures
On making allotment money Debenture Allotment Account Dr. With the amount due due
To Debenture Account on allotment of debentures
On adjustment of excess
Debenture Application Acccount Dr. With the surplus debenture application money To Bank Account money on rejectedshares
On receipt of allotment
Bank Account
Dr. With the amount money
To Debenture Allotment Account actually received
On making calls
Debenture Call Account
Dr. With the amount due on
To Debenture Account particular call of debentures
On receipt of call money
Bank Account
With the amount actually received
Issue of Debenture at par: This means Debentures are issued at face value

Important : If % of debenture is given then it must be written along with Debenture
ISSUE OF DEBENTURES AT PREMIUM : It is issue of Debenture at more than face value
Note : Premium is Presumed To be Demanded on Allotment Unless Specified and Credited to Securities Premium Account 

Oversubscription of debentures : In such case excess application are rejected or partial or
Pro­rata allotment is done or combination of both is carried on.
 

1.% premium)
When Purchase consideration is more than net value of assets

Calculation : Goodwill = purchase consideration+liabilities assets = Rs.15,00,000+Rs.1,00,000­Rs.14,00,000 =Rs.1,00,000
When Purchase consideration is less than net value of assets

Collateral security means security provided to lenderin 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 excercise the right dose 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. This is used when there are no assets to mortgage.

In the accounting books of the company issue of debentues as collateral security can be credited in two ways. (i) First method : 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 (ii) on the liability side of the balance sheet under the heading Secured Loans and Advances.

Debentures 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 Account is debited because no cash is reeived for such issue
Following journal entry will be made
Date
Particulars
L.F.
Debit
Credit

Debenture Suspense Account
Dr
To Debentrues Account (Being the issue of Debentues of Rs.... each issued as collateral security)
It is represented in Balance Sheet
Balance Sheet as on
Liabilities
Rs.
Secured Loans
Debenture issued as collateral security
Loan from the Banks
Assets
Miscellaneous Expenditure
Debenture Suspense Account

Debenture Application Account
Dr. to % Debenture Account (Being the transfer of application money to debenture account)

When Debentures are issued at Premium redeemable at premium
Date
Particulars
L.F.
Debit
Credit
Bank Account
Dr.
To % Debenture Application Account (Being the application money received)
Debenture Application Account
Dr.
Loss on issue of Debenture Account Dr.
To % Debenture Account
To Premium on Redemption of Debenture account (Being the debenture issued at premium and redeemable at premium)
Example : Give Journal Entry assuming the face value of 10% debenturesat Rs.100 issued at Rs.105 and repayable at Rs.110.
Date
Particulars
L.F.
Debit
Credit

WRITING OFF LOSS ON ISSUE OF DEBENTURES
The loss on issue of debentures is fictitious asset and shown on assets side of Balance
Sheet and should be written off as soon as possible by debiting profit and loss account
Profit and Loss Account
Dr.
To Loss on issue of Debentures
A/c

WRITING OFF LOSS ON ISSUE OF DEBENTURES
First Method : When debentues are redeemed after fixed period here loss is spread equally over life of debenture therefore called equal instalment method.

Proportion Method or variable instalment method : In this method loss on issue of debenture is written off each year in proportion to amount of debenture which reduces with every instalment paid

Insert on Debentures: Insert on Debentures is calculated at a fixed rate on its face value and is usually payable half yearly is paid even company is suffering from loss becuase it is change on profit.
Income Tax is deducted from interest before payment to debenture holders
JOURNAL ENTRIES (1) When Interest is Due
Debenture's interest A/c
Dr. (Gross Interest)
To Debenture holder A/c (Net Interest)
To Income Tax Payable A/c (Income Tax deducted) (2) When Interest is paid
Debenture holder A/c
Dr. (With interest)
To Bank A/c (3) On payment of Income Tax to Government
Income Tax Payable A/c
Dr.
To Bank A/c (Amount of Income Tax deducted at source) (4) On transfer of interest on debenture to profit and loss Account
Profit & Loss A/c
Dr.
To Debenture interest A/c (Amount of Interest)