A debenture is a written acknowledgment of a debt taken by the company as those are issued under the seal of the company which contains an undertaking to repay the principal sum and to pay interest on the debt as per terms and conditions.
Note: Accounting treatment for the issue of debenture is also the same as in the case of shares. The only difference is that “X % Debentures A/c” will be opened in place of “Share Capital A/c”.
Topics Discussed
Issue of Debentures for Cash or for considering the term of Redemption
Debentures may be issued at par, at a premium, or at a discount and may redeemed at par or at a premium.
Case 1: Debentures issued at par, Redeemed at Par
Bank A/c Dr.
To Debenture Application & Allotment A/c
Debenture Application & Allotment A/c Dr.
To Debentures A/c
Case 2: Debentures issued at Premium, Redeemed at Par
Bank A/c Dr.
To Debenture Application & Allotment A/c
Debenture Application & Allotment A/c Dr.
To Debentures A/c
To Securities Premium Reserve A/c
Case 3: Debentures issued at Discount, Redeemed at Par
Bank A/c Dr.
To Debenture Application & Allotment A/c
Debenture Application & Allotment A/c Dr.
Discount on issue of Debentures A/c Dr.
To Debentures A/c
Case 4: Debentures issued at Par, Redeemed at Premium
Bank A/c Dr.
To Debenture Application & Allotment A/c
Debenture Application & Allotment A/c Dr.
Loss on issue of Debenture A/c Dr.
To Debentures A/c
To Premium on Redemption A/c
Case 5: Debentures issued at Premium, Redeemable at Premium
Bank A/c Dr.
To Debenture Application & Allotment A/c
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 A/c
Case 6: Debentures issued at Discount, Redeemable at Premium
Bank A/c Dr.
To Debenture Application & Allotment A/c
Debenture Application & Allotment 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 A/c
Issue of Debentures for Consideration other than Cash
If a company issues fully paid debentures against the purchase of some assets from the vendor, it is called debentures issued for consideration other than cash. Debentures may be issued at par, at a premium, or at a discount.
Calculation of number of Debentures issued = Amt. due to vendor/ Issue price of debenture
Note: When only the value of assets and liabilities taken over is given, their difference is treated as purchase consideration.
When a company acquires assets and liabilities from another company, in such a case there may be capital loss or capital profit.
Capital loss is treated as goodwill debited in the entry and capital profit is treated as capital reserve, credited in the entry.
Issue of Debentures as Collateral Security
Sometimes, the company issues debentures as collateral security against a loan from a bank or other person. The term collateral security means security provided to the lender over and above the prime or principal security. It is also called a subsidiary or additional security.
Note: No interest is payable on the debentures issued as collateral security because interest on the loan is being paid.
The liability of the company is for the amount of the loan and not for the face value of the debentures issued.
Interest on Debentures
Interest on debentures is a charge against the profits of the company. It has to be paid regularly even if the company suffers a loss or does not earn profit.
Notes:
- Interest on debentures is computed at the prefixed rate and it is usually paid half-yearly.
- Interest is always calculated on the face value.
- According to the Income Tax Act, of 1961, the company is also required to deduct income tax before making the payment of interest.
Accounting for Share Capital Class 12 Notes
Redemption of Debentures
Redemption of debentures means repayment of the amount of debentures to debenture holders.
Sources of Finance for the Redemption of Debentures
- Redemption from the proceeds of fresh issue of shares & debentures.
- Redemption of debentures out of capital
- Redemption of debentures out of Profits
Methods of Redemption of Debentures
- Lump sum payment at the end of a fixed period
- Redemption of debentures in installments (By draw of lots)
- By the purchase of their debentures in the open market.
- By conversion into shares.
The journal entries in the lump-sum method:
1) On 31st March of the Previous Year
On transfer of profits from surplus in the statement of P & L @ 25% of the face value of debentures issued:
The surplus in the statement of Profit & Loss A/c Dr.
To Debentures Redemption Reserve A/c
2) At the beginning of the financial year (up to 30th April)
On investing 15% of the face value of debentures to be redeemed:
Debenture Redemption Investment A/c Dr.
To Bank A/c
3) At the time of Redemption
On Encashing Investment
Bank A/c Dr.
To Debenture Redemption Investment A/c
4) On Redemption of Debentures
a) Debenture A/c Dr.
To Debenture holders A/c
b) Debenture holders A/c Dr.
To Bank A/c
5) On Transfer of the amount to the General Reserve
Debenture Redemption Reserve A/c Dr.
To General Reserve A/c
Procedural Requirements for Redemption (As Per SEBI)
A company shall create DRR equivalent to 25% of the amount of debentures issued before starting the redemption of debentures.
According to Rule 18(7)(c) of The Companies Rules ‘Every company is required to invest an amount equal to at least 15% of the debentures redeemed on or before 30th April of that year.
Notes:
- AIFI is regulated by RBI.
- Other financial institutions.
- Banking Companies
- Housing Finance Companies registered with the National Housing Bank