NCERT Textbook - Issue and Redemption of Debentures Commerce Notes | EduRev

 Page 1


A
 company raises its capital by means of issue of
 shares. But the funds raised by the issue of
shares are seldom adequate to meet their long-term
financial needs of a company. Hence, most companies
turn to raising long-term funds also through
debentures which are issued either through the route
of private placement or by offering the same to the
public. The finances raised through debentures are
also known as long-term debt.  This chapter deals with
the accounting treatment of issue and redemption of
debentures and other related aspects.
SECTION  I SECTION  I SECTION  I SECTION  I SECTION  I
2.1 2.1 2.1 2.1 2.1 Meaning of Debentures Meaning of Debentures Meaning of Debentures Meaning of Debentures Meaning of Debentures
Debenture: The word ‘debenture’ has been derived
from a Latin word ‘debere’ which means to borrow.
Debenture is a written instrument acknowledging a
debt under the common seal of the company.  It
contains a contract for repayment of principal after
a specified period or at intervals or at the option of
the company and for payment of interest at a fixed
rate payable usually either half-yearly or yearly on
fixed dates. According, to section 2(12) of The
Companies Act,1956 ‘Debenture’ includes
Debenture Inventory, Bonds and any other
securities of a company whether constituting a
charge on the assets of the company or not.
L L L L LEARNING EARNING EARNING EARNING EARNING O O O O OBJECTIVES BJECTIVES BJECTIVES BJECTIVES BJECTIVES
After studying this chapter
you will be able to :
•state the meaning of
debenture capital and
explain the difference
between debentures and
shares;
• describe various types of
debentures;
• record the journal entries
for the issue of debentures
at par, at a discount and
at premium;
•explain the concept of
debentures issued for
consideration other than
cash and the accounting
thereof;
•explain the concept of
issue of debentures as a
collateral security and the
accounting thereof;
• record the journal entries for
issue of debentures with
various terms of issue,
terms of redemption;
• show the items relating to
issue of debentures in
company’s balance sheet;
• describe the methods of
writing-off discount/loss
on issue of debentures;
•explain the methods
of redemption of
debentures and the
accounting thereof; and
•explain the concept of
sinking fund, its use for
redemption of debentures
and the accounting
thereof;
Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures 2 2 2 2 2
Page 2


A
 company raises its capital by means of issue of
 shares. But the funds raised by the issue of
shares are seldom adequate to meet their long-term
financial needs of a company. Hence, most companies
turn to raising long-term funds also through
debentures which are issued either through the route
of private placement or by offering the same to the
public. The finances raised through debentures are
also known as long-term debt.  This chapter deals with
the accounting treatment of issue and redemption of
debentures and other related aspects.
SECTION  I SECTION  I SECTION  I SECTION  I SECTION  I
2.1 2.1 2.1 2.1 2.1 Meaning of Debentures Meaning of Debentures Meaning of Debentures Meaning of Debentures Meaning of Debentures
Debenture: The word ‘debenture’ has been derived
from a Latin word ‘debere’ which means to borrow.
Debenture is a written instrument acknowledging a
debt under the common seal of the company.  It
contains a contract for repayment of principal after
a specified period or at intervals or at the option of
the company and for payment of interest at a fixed
rate payable usually either half-yearly or yearly on
fixed dates. According, to section 2(12) of The
Companies Act,1956 ‘Debenture’ includes
Debenture Inventory, Bonds and any other
securities of a company whether constituting a
charge on the assets of the company or not.
L L L L LEARNING EARNING EARNING EARNING EARNING O O O O OBJECTIVES BJECTIVES BJECTIVES BJECTIVES BJECTIVES
After studying this chapter
you will be able to :
•state the meaning of
debenture capital and
explain the difference
between debentures and
shares;
• describe various types of
debentures;
• record the journal entries
for the issue of debentures
at par, at a discount and
at premium;
•explain the concept of
debentures issued for
consideration other than
cash and the accounting
thereof;
•explain the concept of
issue of debentures as a
collateral security and the
accounting thereof;
• record the journal entries for
issue of debentures with
various terms of issue,
terms of redemption;
• show the items relating to
issue of debentures in
company’s balance sheet;
• describe the methods of
writing-off discount/loss
on issue of debentures;
•explain the methods
of redemption of
debentures and the
accounting thereof; and
•explain the concept of
sinking fund, its use for
redemption of debentures
and the accounting
thereof;
Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures 2 2 2 2 2
75 Issue and Redemption of Debentures
Bond:          Bond is also an instrument of acknowledgement of debt. Traditionally,
the Government issued bonds, but these days’ bonds are also being issued by
semi-government and non-governmental organisations. The terms ‘debentures’
and ‘Bonds’ are now being used inter-changeably.
2.2 2.2 2.2 2.2 2.2 Distinction between Shares and Debentures Distinction between Shares and Debentures Distinction between Shares and Debentures Distinction between Shares and Debentures Distinction between Shares and Debentures
Ownership: A ‘share’ represent ownership of the company whereas a debenture
is only acknowledgement of. A share is a part of the owned capital whereas a
debenture is a part of borrowed capital.
Return: The return on shares is known as dividend while the return on
debentures is called interest. The rate of return on shares may vary from year to
year depending upon the profits of the company but the rate of interest on
debentures is prefixed. The payment of dividend is an appropriation of profits,
whereas the payment of interest is a charge on profits and is to be paid even if
there is no profit.
Repayment:  Normally, the amount of shares is not returned during the life of
the company, whereas, generally, the debentures are issued for a specified period
and repayable on the expiry of that period.
Voting Rights:      Shareholders enjoy voting rights whereas debentureholders do
not normally enjoy any voting right.
Rate of Discount on issue: Both shares and debentures can be issued at a
discount. However, shares can be issued at discount in accordance with the
provisions of Section 79 of The Companies Act, 1956 which stipulates that the
rate of discount must not exceed 10% of the face value while debentures can be
issued at any rate of discount.
Security :  Shares are not secured by any charge whereas the debentures are
generally secured and carry a fixed or floating charge over the assets of the
company.
Convertibility:  Shares cannot be converted into debentures whereas debentures
can be converted into shares if the terms of issue so provide, and in that case
these are known as convertible debentures.
2.3 2.3 2.3 2.3 2.3 Types of Debentures Types of Debentures Types of Debentures Types of Debentures Types of Debentures
A company may issue different kinds of debentures which can be classified as
under:
Page 3


A
 company raises its capital by means of issue of
 shares. But the funds raised by the issue of
shares are seldom adequate to meet their long-term
financial needs of a company. Hence, most companies
turn to raising long-term funds also through
debentures which are issued either through the route
of private placement or by offering the same to the
public. The finances raised through debentures are
also known as long-term debt.  This chapter deals with
the accounting treatment of issue and redemption of
debentures and other related aspects.
SECTION  I SECTION  I SECTION  I SECTION  I SECTION  I
2.1 2.1 2.1 2.1 2.1 Meaning of Debentures Meaning of Debentures Meaning of Debentures Meaning of Debentures Meaning of Debentures
Debenture: The word ‘debenture’ has been derived
from a Latin word ‘debere’ which means to borrow.
Debenture is a written instrument acknowledging a
debt under the common seal of the company.  It
contains a contract for repayment of principal after
a specified period or at intervals or at the option of
the company and for payment of interest at a fixed
rate payable usually either half-yearly or yearly on
fixed dates. According, to section 2(12) of The
Companies Act,1956 ‘Debenture’ includes
Debenture Inventory, Bonds and any other
securities of a company whether constituting a
charge on the assets of the company or not.
L L L L LEARNING EARNING EARNING EARNING EARNING O O O O OBJECTIVES BJECTIVES BJECTIVES BJECTIVES BJECTIVES
After studying this chapter
you will be able to :
•state the meaning of
debenture capital and
explain the difference
between debentures and
shares;
• describe various types of
debentures;
• record the journal entries
for the issue of debentures
at par, at a discount and
at premium;
•explain the concept of
debentures issued for
consideration other than
cash and the accounting
thereof;
•explain the concept of
issue of debentures as a
collateral security and the
accounting thereof;
• record the journal entries for
issue of debentures with
various terms of issue,
terms of redemption;
• show the items relating to
issue of debentures in
company’s balance sheet;
• describe the methods of
writing-off discount/loss
on issue of debentures;
•explain the methods
of redemption of
debentures and the
accounting thereof; and
•explain the concept of
sinking fund, its use for
redemption of debentures
and the accounting
thereof;
Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures 2 2 2 2 2
75 Issue and Redemption of Debentures
Bond:          Bond is also an instrument of acknowledgement of debt. Traditionally,
the Government issued bonds, but these days’ bonds are also being issued by
semi-government and non-governmental organisations. The terms ‘debentures’
and ‘Bonds’ are now being used inter-changeably.
2.2 2.2 2.2 2.2 2.2 Distinction between Shares and Debentures Distinction between Shares and Debentures Distinction between Shares and Debentures Distinction between Shares and Debentures Distinction between Shares and Debentures
Ownership: A ‘share’ represent ownership of the company whereas a debenture
is only acknowledgement of. A share is a part of the owned capital whereas a
debenture is a part of borrowed capital.
Return: The return on shares is known as dividend while the return on
debentures is called interest. The rate of return on shares may vary from year to
year depending upon the profits of the company but the rate of interest on
debentures is prefixed. The payment of dividend is an appropriation of profits,
whereas the payment of interest is a charge on profits and is to be paid even if
there is no profit.
Repayment:  Normally, the amount of shares is not returned during the life of
the company, whereas, generally, the debentures are issued for a specified period
and repayable on the expiry of that period.
Voting Rights:      Shareholders enjoy voting rights whereas debentureholders do
not normally enjoy any voting right.
Rate of Discount on issue: Both shares and debentures can be issued at a
discount. However, shares can be issued at discount in accordance with the
provisions of Section 79 of The Companies Act, 1956 which stipulates that the
rate of discount must not exceed 10% of the face value while debentures can be
issued at any rate of discount.
Security :  Shares are not secured by any charge whereas the debentures are
generally secured and carry a fixed or floating charge over the assets of the
company.
Convertibility:  Shares cannot be converted into debentures whereas debentures
can be converted into shares if the terms of issue so provide, and in that case
these are known as convertible debentures.
2.3 2.3 2.3 2.3 2.3 Types of Debentures Types of Debentures Types of Debentures Types of Debentures Types of Debentures
A company may issue different kinds of debentures which can be classified as
under:
76 Accountancy : Company Accounts and Analysis of Financial Statements
2.3.1 2.3.1 2.3.1 2.3.1 2.3.1 From the Point of view of Security From the Point of view of Security From the Point of view of Security From the Point of view of Security From the Point of view of Security
(a) Secured Debentures: Secured debentures refer to those debentures
where a charge is created on the assets of the company for the purpose
of payment in case of default. The charge may be fixed or floating.  A
fixed charge is created on a specific asset whereas a floating charge is
on the general assets of the company. The fixed charge is created
against those assets which are held by a company for use in operations
not meant for sale whereas floating charge involves all assets excluding
those assigned to the secured creditors.
(b) Unsecured Debentures: Unsecured debentures do not have a specific
a charge on the assets of the company. However, a floating charge may
be created on these debentures by default. Normally, these kinds of
debentures are not issued.
2.3.2 2.3.2 2.3.2 2.3.2 2.3.2 From the Point of view of Tenure From the Point of view of Tenure From the Point of view of Tenure From the Point of view of Tenure From the Point of view of Tenure
(a) Redeemable Debentures: Redeemable debentures are those which are
payable on the expiry of the specific period either in lump sum or in
Instalments during the life time of the company. Debentures can be
redeemed either at par or at premium.
(b) Irredeemable Debentures: : : : : Irredeemable debentures are also known
as Perpetual Debentures because the company does not given any
undertaking for the repayment of money borrowed by issuing such
debentures.  These debentures are repayable on the on winding-up of
a company or on the expiry of a long period.
2.3.3 2.3.3 2.3.3 2.3.3 2.3.3 From the Point of view of Convertibility From the Point of view of Convertibility From the Point of view of Convertibility From the Point of view of Convertibility From the Point of view of Convertibility
(a) Convertible Debentures: Debentures which are convertible into equity
shares or in any other security either at the option of the company or
the debentureholders are called convertible debentures. These
debentures are either fully convertible or partly convertible.
(b) Non-Convertible Debentures     : The debentures which cannot be
converted into shares or in any other securities are called non-
convertible debentures. Most debentures issued by companies fell in
this category.
2.3.4 2.3.4 2.3.4 2.3.4 2.3.4 From Coupon Rate Point of view From Coupon Rate Point of view From Coupon Rate Point of view From Coupon Rate Point of view From Coupon Rate Point of view
(a) Specific Coupon Rate Debentures: : : : : These debentures are issued with
a specified rate of interest, which is called the coupon rate. The specified
rate may either be fixed or floating. The floating interest rate is usually
tagged with the bank rate.
Page 4


A
 company raises its capital by means of issue of
 shares. But the funds raised by the issue of
shares are seldom adequate to meet their long-term
financial needs of a company. Hence, most companies
turn to raising long-term funds also through
debentures which are issued either through the route
of private placement or by offering the same to the
public. The finances raised through debentures are
also known as long-term debt.  This chapter deals with
the accounting treatment of issue and redemption of
debentures and other related aspects.
SECTION  I SECTION  I SECTION  I SECTION  I SECTION  I
2.1 2.1 2.1 2.1 2.1 Meaning of Debentures Meaning of Debentures Meaning of Debentures Meaning of Debentures Meaning of Debentures
Debenture: The word ‘debenture’ has been derived
from a Latin word ‘debere’ which means to borrow.
Debenture is a written instrument acknowledging a
debt under the common seal of the company.  It
contains a contract for repayment of principal after
a specified period or at intervals or at the option of
the company and for payment of interest at a fixed
rate payable usually either half-yearly or yearly on
fixed dates. According, to section 2(12) of The
Companies Act,1956 ‘Debenture’ includes
Debenture Inventory, Bonds and any other
securities of a company whether constituting a
charge on the assets of the company or not.
L L L L LEARNING EARNING EARNING EARNING EARNING O O O O OBJECTIVES BJECTIVES BJECTIVES BJECTIVES BJECTIVES
After studying this chapter
you will be able to :
•state the meaning of
debenture capital and
explain the difference
between debentures and
shares;
• describe various types of
debentures;
• record the journal entries
for the issue of debentures
at par, at a discount and
at premium;
•explain the concept of
debentures issued for
consideration other than
cash and the accounting
thereof;
•explain the concept of
issue of debentures as a
collateral security and the
accounting thereof;
• record the journal entries for
issue of debentures with
various terms of issue,
terms of redemption;
• show the items relating to
issue of debentures in
company’s balance sheet;
• describe the methods of
writing-off discount/loss
on issue of debentures;
•explain the methods
of redemption of
debentures and the
accounting thereof; and
•explain the concept of
sinking fund, its use for
redemption of debentures
and the accounting
thereof;
Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures 2 2 2 2 2
75 Issue and Redemption of Debentures
Bond:          Bond is also an instrument of acknowledgement of debt. Traditionally,
the Government issued bonds, but these days’ bonds are also being issued by
semi-government and non-governmental organisations. The terms ‘debentures’
and ‘Bonds’ are now being used inter-changeably.
2.2 2.2 2.2 2.2 2.2 Distinction between Shares and Debentures Distinction between Shares and Debentures Distinction between Shares and Debentures Distinction between Shares and Debentures Distinction between Shares and Debentures
Ownership: A ‘share’ represent ownership of the company whereas a debenture
is only acknowledgement of. A share is a part of the owned capital whereas a
debenture is a part of borrowed capital.
Return: The return on shares is known as dividend while the return on
debentures is called interest. The rate of return on shares may vary from year to
year depending upon the profits of the company but the rate of interest on
debentures is prefixed. The payment of dividend is an appropriation of profits,
whereas the payment of interest is a charge on profits and is to be paid even if
there is no profit.
Repayment:  Normally, the amount of shares is not returned during the life of
the company, whereas, generally, the debentures are issued for a specified period
and repayable on the expiry of that period.
Voting Rights:      Shareholders enjoy voting rights whereas debentureholders do
not normally enjoy any voting right.
Rate of Discount on issue: Both shares and debentures can be issued at a
discount. However, shares can be issued at discount in accordance with the
provisions of Section 79 of The Companies Act, 1956 which stipulates that the
rate of discount must not exceed 10% of the face value while debentures can be
issued at any rate of discount.
Security :  Shares are not secured by any charge whereas the debentures are
generally secured and carry a fixed or floating charge over the assets of the
company.
Convertibility:  Shares cannot be converted into debentures whereas debentures
can be converted into shares if the terms of issue so provide, and in that case
these are known as convertible debentures.
2.3 2.3 2.3 2.3 2.3 Types of Debentures Types of Debentures Types of Debentures Types of Debentures Types of Debentures
A company may issue different kinds of debentures which can be classified as
under:
76 Accountancy : Company Accounts and Analysis of Financial Statements
2.3.1 2.3.1 2.3.1 2.3.1 2.3.1 From the Point of view of Security From the Point of view of Security From the Point of view of Security From the Point of view of Security From the Point of view of Security
(a) Secured Debentures: Secured debentures refer to those debentures
where a charge is created on the assets of the company for the purpose
of payment in case of default. The charge may be fixed or floating.  A
fixed charge is created on a specific asset whereas a floating charge is
on the general assets of the company. The fixed charge is created
against those assets which are held by a company for use in operations
not meant for sale whereas floating charge involves all assets excluding
those assigned to the secured creditors.
(b) Unsecured Debentures: Unsecured debentures do not have a specific
a charge on the assets of the company. However, a floating charge may
be created on these debentures by default. Normally, these kinds of
debentures are not issued.
2.3.2 2.3.2 2.3.2 2.3.2 2.3.2 From the Point of view of Tenure From the Point of view of Tenure From the Point of view of Tenure From the Point of view of Tenure From the Point of view of Tenure
(a) Redeemable Debentures: Redeemable debentures are those which are
payable on the expiry of the specific period either in lump sum or in
Instalments during the life time of the company. Debentures can be
redeemed either at par or at premium.
(b) Irredeemable Debentures: : : : : Irredeemable debentures are also known
as Perpetual Debentures because the company does not given any
undertaking for the repayment of money borrowed by issuing such
debentures.  These debentures are repayable on the on winding-up of
a company or on the expiry of a long period.
2.3.3 2.3.3 2.3.3 2.3.3 2.3.3 From the Point of view of Convertibility From the Point of view of Convertibility From the Point of view of Convertibility From the Point of view of Convertibility From the Point of view of Convertibility
(a) Convertible Debentures: Debentures which are convertible into equity
shares or in any other security either at the option of the company or
the debentureholders are called convertible debentures. These
debentures are either fully convertible or partly convertible.
(b) Non-Convertible Debentures     : The debentures which cannot be
converted into shares or in any other securities are called non-
convertible debentures. Most debentures issued by companies fell in
this category.
2.3.4 2.3.4 2.3.4 2.3.4 2.3.4 From Coupon Rate Point of view From Coupon Rate Point of view From Coupon Rate Point of view From Coupon Rate Point of view From Coupon Rate Point of view
(a) Specific Coupon Rate Debentures: : : : : These debentures are issued with
a specified rate of interest, which is called the coupon rate. The specified
rate may either be fixed or floating. The floating interest rate is usually
tagged with the bank rate.
77 Issue and Redemption of Debentures
(b) Zero Coupon Rate Debentures: These debentures do not carry a specific
rate of interest. In order to compensate the investors, such debentures
are issued at substantial discount and the difference between the
nominal value and the issue price is treated as the amount of interest
related to the duration of the debentures.
2.3.5 2.3.5 2.3.5 2.3.5 2.3.5 From the view Point of Registration From the view Point of Registration From the view Point of Registration From the view Point of Registration From the view Point of Registration
(a) Registered Debentures: Registered debentures are those debentures
in respect of which all details including names, addresses and
particulars of holding of the debentureholders are entered in a register
kept by the company. Such debentures can be transferred only by
executing a regular transfer deed.
(b) Bearer Debentures: Bearer debentures are the debentures which can
be transferred by way of delivery and the company does not keep any
Types of Debenture/Bond Types of Debenture/Bond Types of Debenture/Bond Types of Debenture/Bond Types of Debenture/Bond
Security Tenure Mode of Coupon Registration
Redemption rate
Secured/ Unsecured/ Redeemable Perpetual/ Convertible Non- Zero Specific Registered Unregistered/
Mortgage Naked debenture Irredeemable debenture convertible coupon rate debenture Bearer
debenture debenture debenture debenture rate/Deep debenture
Discount Rate
Fully Partly
convertible convertible
debenture debenture
record of the debentureholders.  Interest on debentures is paid to a
person who produces the interest coupon attached to such debentures.
2.4 2.4 2.4 2.4 2.4 Issue of Debentures Issue of Debentures Issue of Debentures Issue of Debentures Issue of Debentures
The procedure for the issue of debentures is the same as that for the issue of shares.
The intending investors apply for debentures on the basis of the prospectus issued
by the company. The company may either ask for the entire amount to be paid on
application or by means of instalments on application, on allotment and on various
calls. Debentures can be issued at par, at a premium or at a discount. They can
also be issued for consideration other than cash or as a collateral security.
Page 5


A
 company raises its capital by means of issue of
 shares. But the funds raised by the issue of
shares are seldom adequate to meet their long-term
financial needs of a company. Hence, most companies
turn to raising long-term funds also through
debentures which are issued either through the route
of private placement or by offering the same to the
public. The finances raised through debentures are
also known as long-term debt.  This chapter deals with
the accounting treatment of issue and redemption of
debentures and other related aspects.
SECTION  I SECTION  I SECTION  I SECTION  I SECTION  I
2.1 2.1 2.1 2.1 2.1 Meaning of Debentures Meaning of Debentures Meaning of Debentures Meaning of Debentures Meaning of Debentures
Debenture: The word ‘debenture’ has been derived
from a Latin word ‘debere’ which means to borrow.
Debenture is a written instrument acknowledging a
debt under the common seal of the company.  It
contains a contract for repayment of principal after
a specified period or at intervals or at the option of
the company and for payment of interest at a fixed
rate payable usually either half-yearly or yearly on
fixed dates. According, to section 2(12) of The
Companies Act,1956 ‘Debenture’ includes
Debenture Inventory, Bonds and any other
securities of a company whether constituting a
charge on the assets of the company or not.
L L L L LEARNING EARNING EARNING EARNING EARNING O O O O OBJECTIVES BJECTIVES BJECTIVES BJECTIVES BJECTIVES
After studying this chapter
you will be able to :
•state the meaning of
debenture capital and
explain the difference
between debentures and
shares;
• describe various types of
debentures;
• record the journal entries
for the issue of debentures
at par, at a discount and
at premium;
•explain the concept of
debentures issued for
consideration other than
cash and the accounting
thereof;
•explain the concept of
issue of debentures as a
collateral security and the
accounting thereof;
• record the journal entries for
issue of debentures with
various terms of issue,
terms of redemption;
• show the items relating to
issue of debentures in
company’s balance sheet;
• describe the methods of
writing-off discount/loss
on issue of debentures;
•explain the methods
of redemption of
debentures and the
accounting thereof; and
•explain the concept of
sinking fund, its use for
redemption of debentures
and the accounting
thereof;
Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures Issue and Redemption of Debentures 2 2 2 2 2
75 Issue and Redemption of Debentures
Bond:          Bond is also an instrument of acknowledgement of debt. Traditionally,
the Government issued bonds, but these days’ bonds are also being issued by
semi-government and non-governmental organisations. The terms ‘debentures’
and ‘Bonds’ are now being used inter-changeably.
2.2 2.2 2.2 2.2 2.2 Distinction between Shares and Debentures Distinction between Shares and Debentures Distinction between Shares and Debentures Distinction between Shares and Debentures Distinction between Shares and Debentures
Ownership: A ‘share’ represent ownership of the company whereas a debenture
is only acknowledgement of. A share is a part of the owned capital whereas a
debenture is a part of borrowed capital.
Return: The return on shares is known as dividend while the return on
debentures is called interest. The rate of return on shares may vary from year to
year depending upon the profits of the company but the rate of interest on
debentures is prefixed. The payment of dividend is an appropriation of profits,
whereas the payment of interest is a charge on profits and is to be paid even if
there is no profit.
Repayment:  Normally, the amount of shares is not returned during the life of
the company, whereas, generally, the debentures are issued for a specified period
and repayable on the expiry of that period.
Voting Rights:      Shareholders enjoy voting rights whereas debentureholders do
not normally enjoy any voting right.
Rate of Discount on issue: Both shares and debentures can be issued at a
discount. However, shares can be issued at discount in accordance with the
provisions of Section 79 of The Companies Act, 1956 which stipulates that the
rate of discount must not exceed 10% of the face value while debentures can be
issued at any rate of discount.
Security :  Shares are not secured by any charge whereas the debentures are
generally secured and carry a fixed or floating charge over the assets of the
company.
Convertibility:  Shares cannot be converted into debentures whereas debentures
can be converted into shares if the terms of issue so provide, and in that case
these are known as convertible debentures.
2.3 2.3 2.3 2.3 2.3 Types of Debentures Types of Debentures Types of Debentures Types of Debentures Types of Debentures
A company may issue different kinds of debentures which can be classified as
under:
76 Accountancy : Company Accounts and Analysis of Financial Statements
2.3.1 2.3.1 2.3.1 2.3.1 2.3.1 From the Point of view of Security From the Point of view of Security From the Point of view of Security From the Point of view of Security From the Point of view of Security
(a) Secured Debentures: Secured debentures refer to those debentures
where a charge is created on the assets of the company for the purpose
of payment in case of default. The charge may be fixed or floating.  A
fixed charge is created on a specific asset whereas a floating charge is
on the general assets of the company. The fixed charge is created
against those assets which are held by a company for use in operations
not meant for sale whereas floating charge involves all assets excluding
those assigned to the secured creditors.
(b) Unsecured Debentures: Unsecured debentures do not have a specific
a charge on the assets of the company. However, a floating charge may
be created on these debentures by default. Normally, these kinds of
debentures are not issued.
2.3.2 2.3.2 2.3.2 2.3.2 2.3.2 From the Point of view of Tenure From the Point of view of Tenure From the Point of view of Tenure From the Point of view of Tenure From the Point of view of Tenure
(a) Redeemable Debentures: Redeemable debentures are those which are
payable on the expiry of the specific period either in lump sum or in
Instalments during the life time of the company. Debentures can be
redeemed either at par or at premium.
(b) Irredeemable Debentures: : : : : Irredeemable debentures are also known
as Perpetual Debentures because the company does not given any
undertaking for the repayment of money borrowed by issuing such
debentures.  These debentures are repayable on the on winding-up of
a company or on the expiry of a long period.
2.3.3 2.3.3 2.3.3 2.3.3 2.3.3 From the Point of view of Convertibility From the Point of view of Convertibility From the Point of view of Convertibility From the Point of view of Convertibility From the Point of view of Convertibility
(a) Convertible Debentures: Debentures which are convertible into equity
shares or in any other security either at the option of the company or
the debentureholders are called convertible debentures. These
debentures are either fully convertible or partly convertible.
(b) Non-Convertible Debentures     : The debentures which cannot be
converted into shares or in any other securities are called non-
convertible debentures. Most debentures issued by companies fell in
this category.
2.3.4 2.3.4 2.3.4 2.3.4 2.3.4 From Coupon Rate Point of view From Coupon Rate Point of view From Coupon Rate Point of view From Coupon Rate Point of view From Coupon Rate Point of view
(a) Specific Coupon Rate Debentures: : : : : These debentures are issued with
a specified rate of interest, which is called the coupon rate. The specified
rate may either be fixed or floating. The floating interest rate is usually
tagged with the bank rate.
77 Issue and Redemption of Debentures
(b) Zero Coupon Rate Debentures: These debentures do not carry a specific
rate of interest. In order to compensate the investors, such debentures
are issued at substantial discount and the difference between the
nominal value and the issue price is treated as the amount of interest
related to the duration of the debentures.
2.3.5 2.3.5 2.3.5 2.3.5 2.3.5 From the view Point of Registration From the view Point of Registration From the view Point of Registration From the view Point of Registration From the view Point of Registration
(a) Registered Debentures: Registered debentures are those debentures
in respect of which all details including names, addresses and
particulars of holding of the debentureholders are entered in a register
kept by the company. Such debentures can be transferred only by
executing a regular transfer deed.
(b) Bearer Debentures: Bearer debentures are the debentures which can
be transferred by way of delivery and the company does not keep any
Types of Debenture/Bond Types of Debenture/Bond Types of Debenture/Bond Types of Debenture/Bond Types of Debenture/Bond
Security Tenure Mode of Coupon Registration
Redemption rate
Secured/ Unsecured/ Redeemable Perpetual/ Convertible Non- Zero Specific Registered Unregistered/
Mortgage Naked debenture Irredeemable debenture convertible coupon rate debenture Bearer
debenture debenture debenture debenture rate/Deep debenture
Discount Rate
Fully Partly
convertible convertible
debenture debenture
record of the debentureholders.  Interest on debentures is paid to a
person who produces the interest coupon attached to such debentures.
2.4 2.4 2.4 2.4 2.4 Issue of Debentures Issue of Debentures Issue of Debentures Issue of Debentures Issue of Debentures
The procedure for the issue of debentures is the same as that for the issue of shares.
The intending investors apply for debentures on the basis of the prospectus issued
by the company. The company may either ask for the entire amount to be paid on
application or by means of instalments on application, on allotment and on various
calls. Debentures can be issued at par, at a premium or at a discount. They can
also be issued for consideration other than cash or as a collateral security.
78 Accountancy : Company Accounts and Analysis of Financial Statements
2.4.1 2.4.1 2.4.1 2.4.1 2.4.1 Issue of Debentures for Cash Issue of Debentures for Cash Issue of Debentures for Cash Issue of Debentures for Cash Issue of Debentures for Cash
Debentures are said to be issued at par when their issue price is equal to the
face value. The journal entries recorded for such issue are as under:
(a) If whole amount is received in one instalment:
(i) On receipt of the application money
Bank   A/c Dr.
To Debenture Application & Allotment A/c
(ii) On Allotment of debentures
Debenture Application & Allotment A/c Dr.
To Debentures A/c
(b) If debenture amount is received in two instalments:
(i) On receipt of application money
Bank   A/c Dr.
       To Debenture Application A/c
(ii) For adjustment of applications  money on allotment
Debenture Application A/c Dr.
To Debentures A/c
(iii) For allotment money due
Debenture Allotment A/c Dr.
To Debentures A/c
(iv) On receipt of allotment money
Bank A/c Dr.
To Debenture Allotment A/c
(c) If debenture money is received in more than two instalments
Additional entries:
(i) On making the first call
Debenture First Call A/c Dr.
To Debentures A/c
(ii) On the receipt of the first call
Bank   A/c Dr.
To Debenture First Call A/c
Note: Similar entries may be made for the second call and final call. However, normally
the whole amount is collected on application or in two instalments, i.e. on
application and allotment.
Illustration 1 Illustration 1 Illustration 1 Illustration 1 Illustration 1
ABC Ltd. issued Rs.10,000, 12% debentures of Rs.100 each payable Rs.30 on
application and remaining amount on allotment. The public applied for 9,000
debentures which were fully allotted, and all the relevant allotment money was
duly received. Give journal entries in the books of ABC Ltd., and exhibit the
relevent information in the balance sheet.