XII. Chapter 10. Issue of Debenture theory in word file

 

ACCOUNTING FOR DEBENTURE

Meaning of Debenture

         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.

      According to Section 2(30) of Companies Act 2013, Debenture includes Debenture stock, bonds or any other instrument of a Company evidencing a debt, whether constituting a charge on the assets of Company or not. According to Section 44, the Debentures or other interest of any member in a Company shall be movable property transferable in the manner provided by the articles of the Company.

 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 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 (30) of Companies Act 2013, “Debenture includes Debenture Stock, Bond and any other securities of the Company whether constituting a charge on the Company’s Assets or not”. As per Companies Act, 2013 no Company is allowed to issue Debentures having a maturity date of more than 10 years from the date of issue. However, a Company engaged in infrastructure project can issue Debentures for more than 10 years but not more than 30 years.

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.

 3. On the basis of Records

      (i) Registered Debentures:  These are the Debentures that are registered with the Company. The amount of such Debentures is payable only to those Debenture holders whose name appears in the register of the Company.

      (ii) Bearer Debentures:  These are the Debentures which are not recorded in a register of the Company. Such Debentures are transferrable merely by delivery. Holder of these Debentures is entitled to get the interest.

4. On the basis of Convertibility

          (i) Convertible Debentures: These are the Debentures that can be converted into Shares of the Company on the expiry of predicated period. The term and conditions of conversion are generally announced at the time of issue of Debentures.

         (ii) Non-Convertible Debentures:  The Debenture holders of such debentures cannot convert their Debentures into shares of the Company.

5. On the basis of Priority

         (i) First Debentures: These Debentures are redeemed before other Debentures.

        (ii) Second Debentures: These Debentures are redeemed after the redemption of first Debentures.

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 is transferable merely by delivery.

    (iv) Debentures that are paid back only when the Company goes into liquidation.

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:

      1. Debentures issued for cash

      2. Debentures issued for consideration other than cash

      3. 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 X% Debentures Application A/c

                    (Application money received for Debentures)

            (ii) Transfer of debentures application money to debentures account on their allotment

                         Debentures Application A/c                       Dr

                              To X% Debentures A/c

                 (Application money transferred to Debenture account on allotment)

           (iii) Money due on allotment

                        Debentures Allotment A/c                        Dr

                              To X% Debentures A/c

                         (Allotment money made due)

           (iv)  Money due on allotment is received

                        Bank A/c                                                Dr

                              To X% Debentures Allotment A/c

                     (Receipt of Debenture allotment money)

            (v)  First and final call is made

                    X% Debentures First and Final call A/c                  Dr

                             To X% 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 X% 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 received:

    (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)

ISSUE OF DEBENTURES AT PREMIUM 

         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 ₹ 100 is issued at ₹ 110. This excess amount of ₹ 10 is the amount of premium. Journal entry will be as follows:

                    Debentures Allotment A/c                            Dr

                          To X% Debentures Account

                          To Securities Premium A/c

          (Amount due on allotment along with premium of ₹ ....)

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 ₹ 100 each is issued at ₹ 90 per debenture. However, there should be provision for issue of such Debentures in the Articles of Association of the Company. Section 53 of Companies Act, 2013 does not impose any restrictions upon the issue of Debentures at a discount or Company can issue its Debentures at a discount.

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 X% Debentures A/c

                (Allotment money due with discount is @ ₹.... per Debenture)

2. 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

               1. Purchase of Assets

                            Sundry Assets A/c           Dr   (Individually)

                                   To Vendors A/c

                              (Being assets purchase)

               2. Allotment of Debentures to the vendor for purchase consideration of assets

                         (i) At Par

                                  Vendors' A/c                               Dr

                                           To X% Debentures A/c

                                    (Issue of Debentures at par to vendors)

                          (ii) At Discount

                                     Vendors' A/c                                Dr

                                      Debentures Discount A/c            Dr

                                               To X% Debentures A/c

                                   (Issue of Debentures to vendors at a discount of ₹ ... per Debenture) 

                            (iii) At Premium

                                             Vendors’ A/c                     Dr

                                                    To X% Debentures A/c

                                                    To Securities Premium A/c

                       (Being issue of Debentures to vendors at a premium of ₹ .... per Debenture)

Issue of Debentures with conditions Stipulated to their Redemption

            (i) Issued at par, Redeemable at par

                       Bank A/c           Dr

                              To X% Debentures Account

                     (Issue of Debentures of ₹ .... at par)

         (ii) Issued at discount and Redeemable at par

                       Bank A/c                                           Dr

                       Discount on issue of Debentures A/c Dr

                             To X% Debentures A/c

                    (Issue of Debentures of ₹ ... at a discount of ₹ ....)

          (iii) Issued at premium, Redeemable at par

                     Bank A/c 

                           To X% Debentures A/c

                           To Securities Premium Reserve A/c

                  (Issue of ... Debentures of ₹ .... at a premium of ₹....)

          (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 ... X% Debentures of ₹ ... a redeemable at a premium of ₹ ...)

          (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 X% Debentures A/c

                              To Premium on Redemption of Debenture A/c

            (Issue of ... X% Debentures of ₹ ... at a discount of ₹ ... redeemable at a premium of ₹ ....)

ISSUE OF DEBENTURES AS COLLATERAL SECURITY

               Collateral security means security given in addition to the principle 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.

Particular	₹
Equity & liabilities  Non-Current Liabilities Debentures           (....X% Debentures of ₹.... per Debenture  issued as collateral security) Bank Loan      (Secured by the issue of ....Debentures of ₹ .... 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. Following journal entry will be made;

             Debenture Suspense A/c                Dr

                        To X% Debentures A/c

          (.....Debentures of ₹.... each issued as collateral security to .....)

In the Balance sheet of the issuing company it will be shown as under:

                                                              Balance Sheet of...... Co. Ltd.

Particular	₹
Equity & liabilities  Non-Current Liabilities Bank Loan       (Secured by the issue of ....Debentures of ₹.... each  issued as Collateral Security)

 

 DISCOUNT ON ISSUE OF DEBENTURES AND LOSS ON ISSUE OF DEBENTURES

            In case Company issues Debentures on discount the total amount of discount is not charged to Profit and Loss Account of the Company in the 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 speeded 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

       2. Debentures are redeemed in installments

                     Debentures may also be redeemed in installments but over a fixed period. In that case the amount of Debenture discount will be written off each year in proportion to the amount of debentures redeemed. Similarly entry will be made every year with the respective amount of discount. 

Loss on Issue of Debentures

         You have learnt that a Company may issue Debentures with the stipulation that the repayment of the Debentures on maturity will be made at premium. The amount of the premium payable is debited to Loss on Issue of Debentures A/c at the time of issue of Debentures. This amount will also be written off in the same manner as is done in case of writing off Discount on Issue of Debentures. This is illustrated as under:

      (i) All Debentures are redeemed after fixed period

Journal Entry

           Amount of Loss on Issue of Debentures written off each year

                      Profit and Loss A/c Dr

                              To Loss on Issue of Debentures A/c

                      (Loss on Issue of Debentures written off)

Same journal entry will be made each year till the whole amount of the Loss on issue of Debentures is written off. 

    Calculation of the amount to be written off    = Total Amount of Loss on Issue of Debentures / No. of years.

      (ii) Debentures are redeemed in Installments

            The amount of Loss on Issue of Debentures to be written off each year is calculated in the manner it is calculated in case of Discount on Issue of Debentures and accounting treatment is also the same.

Interest on Debentures

            If you have seen an advertisement in newspaper regarding issue of Debentures by a Company, you must have noticed that ‘Debenture’ is always prefixed by a certain percentage say 9% Debentures or 12% Debentures. Have you ever thought what meaning this prefix carries? It is the rate of interest per annum that will be paid to the Debenture holders. Whether company earns profit or sustains loss, Companies generally pay interest on its Debentures after every six months. Journal entries that are made in the books of the company are as follows;

         (i). When interest is due and tax is deducted at source (TDS) under the Section 193 of Income Tax Act, 1961.

                     Interest on Debentures A/c        Dr

                                  To Debenture holders A/c

To Income Tax Payable A/c

(ii). Payment of Interest on Debentures

                       Debenture holders A/c             Dr

                                 To Bank A/c 

             (Interest on .... X% Debentures paid for six months ending ...@ ....% p.a.)

         (iii). On the payment of tax deducted at source

Income Tax Payable A/c        Dr

To Bank A/c 

         (ii) Transfer of Debenture Interest to Profit and Loss A/c

                  Profit and Loss A/c                Dr

                        To Debenture Interest A/c

               (Debenture Interest transferred to Profit and Loss A/c)