ICAI Notes- Unit 3: Issue of Debentures | Principles and Practice of Accounting - CA Foundation PDF Download

 Page 1


    
 
11.79 
COMPANY ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 3 ISSUE OF DEBENTURES 
 
 
After studying this unit, you would be able to:  
? Understand the meaning and basic purpose for raising debentures 
by the company 
? Differentiate between shares and debentures of a company 
? Understand various types of debentures 
? Pass entries for issue of debentures payable in instalments 
? Make entries for issue of debentures considering the conditions of 
redemption 
? Pass entries for issue of debentures as collateral security 
? Pass entries for debentures issued for consideration other than for 
cash 
? Write off discount on issue of debentures 
? Calculate interest on debentures. 
  
© The Institute of Chartered Accountants of India
Page 2


    
 
11.79 
COMPANY ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 3 ISSUE OF DEBENTURES 
 
 
After studying this unit, you would be able to:  
? Understand the meaning and basic purpose for raising debentures 
by the company 
? Differentiate between shares and debentures of a company 
? Understand various types of debentures 
? Pass entries for issue of debentures payable in instalments 
? Make entries for issue of debentures considering the conditions of 
redemption 
? Pass entries for issue of debentures as collateral security 
? Pass entries for debentures issued for consideration other than for 
cash 
? Write off discount on issue of debentures 
? Calculate interest on debentures. 
  
© The Institute of Chartered Accountants of India
 
ACCOUNTING 
1.
80 
11.80
3.1 INTRODUCTION 
In the earlier units of this chapter, we have studied the issue of share capital as a means of 
raising funds for financing the business activities. But with increasing and evergrowing needs 
of the corporate expansion and growth, equity source of financing is not sufficient. Hence 
corporates turn to debt financing through various means. Issuing debt instruments by offering 
the same for public subscription is one of the sources of financing the business activities. Debt 
financing does not only helps in reducing the cost of the capital but also helps in designing 
appropriate capital structure of the company. Debenture is one of the most commonly used 
debt instrument issued by the company to raise funds for the business. 
Security 
Convertibility 
Permanence 
Negotiability 
Secured Debentures 
Unsecured Debentures 
Convertible Debentures 
Non-convertible 
Debentures 
Redeemable Debentures 
Irredeemable Debentures 
Registered Debentures 
Bearer Debentures 
First Mortgage Debentures 
Second Mortgage 
Debentures 
Priority 
Types of Debentures 
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


    
 
11.79 
COMPANY ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 3 ISSUE OF DEBENTURES 
 
 
After studying this unit, you would be able to:  
? Understand the meaning and basic purpose for raising debentures 
by the company 
? Differentiate between shares and debentures of a company 
? Understand various types of debentures 
? Pass entries for issue of debentures payable in instalments 
? Make entries for issue of debentures considering the conditions of 
redemption 
? Pass entries for issue of debentures as collateral security 
? Pass entries for debentures issued for consideration other than for 
cash 
? Write off discount on issue of debentures 
? Calculate interest on debentures. 
  
© The Institute of Chartered Accountants of India
 
ACCOUNTING 
1.
80 
11.80
3.1 INTRODUCTION 
In the earlier units of this chapter, we have studied the issue of share capital as a means of 
raising funds for financing the business activities. But with increasing and evergrowing needs 
of the corporate expansion and growth, equity source of financing is not sufficient. Hence 
corporates turn to debt financing through various means. Issuing debt instruments by offering 
the same for public subscription is one of the sources of financing the business activities. Debt 
financing does not only helps in reducing the cost of the capital but also helps in designing 
appropriate capital structure of the company. Debenture is one of the most commonly used 
debt instrument issued by the company to raise funds for the business. 
Security 
Convertibility 
Permanence 
Negotiability 
Secured Debentures 
Unsecured Debentures 
Convertible Debentures 
Non-convertible 
Debentures 
Redeemable Debentures 
Irredeemable Debentures 
Registered Debentures 
Bearer Debentures 
First Mortgage Debentures 
Second Mortgage 
Debentures 
Priority 
Types of Debentures 
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
    
 
11.81 
COMPANY ACCOUNTS 
3.2 MEANING 
The most common method of supplementing the capital available to a company is to issue 
debentures which may either be simple or naked carrying no charge on assets, or mortgage 
debentures carrying either a fixed or a floating charge on some or all of the assets of the 
company. 
A debenture is a bond issued by a company under its seal, acknowledging a debt and 
containing provisions as regards repayment of the principal and interest. If a charge
*
has been 
created on any or on the entire assets of the company, the nature of the charge and the assets 
charged are described therein. Since the charge is not valid unless registered with the 
Registrar, and the certificate registering the charge is printed on the bond. It is also customary 
to create a trusteeship in favour of one or more persons in the case of mortgage debentures. 
The trustees of debenture holders have all powers of a mortgage of a property and can act in 
whatever way they think necessary to safeguard the interest of debenture holders. 
Section 2 (30) of the Companies Act, 2013 defines debentures as “Debenture” includes 
debenture stock, bonds or any other instrument of a company evidencing a debt, whether 
constituting a charge on the assets of the company or not. 
Thus, It is clear from definition that debenture may be Secured Debenture or Unsecured 
Debenture. 
Note: No company shall issue any debentures carrying any voting rights. 
3.3  FEATURES OF DEBENTURES 
1. It is a document which evidences a loan made to a company. 
2. It is a fixed interest-bearing security where interest falls due on specific dates. 
3. Interest is payable at a predetermined fixed rate, regardless of the level of profit. 
4. The original sum is repaid at a specified future date or it is converted into shares or 
other debentures. 
5. It may or may not create a charge on the assets of a company as security. 
6. It can generally be bought or sold through the stock exchange at a price above or 
below its face value. 
*
Charge is an incumbrance to meet the obligation under the Trust Deed, whereby the company agrees to 
mortgage specific portion either by way of a first or second charge.  Such charge implies right of lenders to 
secure their payment from such asset(s) or from the liquidator in the event of winding up or from the 
company when the charge becomes void. 
© The Institute of Chartered Accountants of India
Page 4


    
 
11.79 
COMPANY ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 3 ISSUE OF DEBENTURES 
 
 
After studying this unit, you would be able to:  
? Understand the meaning and basic purpose for raising debentures 
by the company 
? Differentiate between shares and debentures of a company 
? Understand various types of debentures 
? Pass entries for issue of debentures payable in instalments 
? Make entries for issue of debentures considering the conditions of 
redemption 
? Pass entries for issue of debentures as collateral security 
? Pass entries for debentures issued for consideration other than for 
cash 
? Write off discount on issue of debentures 
? Calculate interest on debentures. 
  
© The Institute of Chartered Accountants of India
 
ACCOUNTING 
1.
80 
11.80
3.1 INTRODUCTION 
In the earlier units of this chapter, we have studied the issue of share capital as a means of 
raising funds for financing the business activities. But with increasing and evergrowing needs 
of the corporate expansion and growth, equity source of financing is not sufficient. Hence 
corporates turn to debt financing through various means. Issuing debt instruments by offering 
the same for public subscription is one of the sources of financing the business activities. Debt 
financing does not only helps in reducing the cost of the capital but also helps in designing 
appropriate capital structure of the company. Debenture is one of the most commonly used 
debt instrument issued by the company to raise funds for the business. 
Security 
Convertibility 
Permanence 
Negotiability 
Secured Debentures 
Unsecured Debentures 
Convertible Debentures 
Non-convertible 
Debentures 
Redeemable Debentures 
Irredeemable Debentures 
Registered Debentures 
Bearer Debentures 
First Mortgage Debentures 
Second Mortgage 
Debentures 
Priority 
Types of Debentures 
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
    
 
11.81 
COMPANY ACCOUNTS 
3.2 MEANING 
The most common method of supplementing the capital available to a company is to issue 
debentures which may either be simple or naked carrying no charge on assets, or mortgage 
debentures carrying either a fixed or a floating charge on some or all of the assets of the 
company. 
A debenture is a bond issued by a company under its seal, acknowledging a debt and 
containing provisions as regards repayment of the principal and interest. If a charge
*
has been 
created on any or on the entire assets of the company, the nature of the charge and the assets 
charged are described therein. Since the charge is not valid unless registered with the 
Registrar, and the certificate registering the charge is printed on the bond. It is also customary 
to create a trusteeship in favour of one or more persons in the case of mortgage debentures. 
The trustees of debenture holders have all powers of a mortgage of a property and can act in 
whatever way they think necessary to safeguard the interest of debenture holders. 
Section 2 (30) of the Companies Act, 2013 defines debentures as “Debenture” includes 
debenture stock, bonds or any other instrument of a company evidencing a debt, whether 
constituting a charge on the assets of the company or not. 
Thus, It is clear from definition that debenture may be Secured Debenture or Unsecured 
Debenture. 
Note: No company shall issue any debentures carrying any voting rights. 
3.3  FEATURES OF DEBENTURES 
1. It is a document which evidences a loan made to a company. 
2. It is a fixed interest-bearing security where interest falls due on specific dates. 
3. Interest is payable at a predetermined fixed rate, regardless of the level of profit. 
4. The original sum is repaid at a specified future date or it is converted into shares or 
other debentures. 
5. It may or may not create a charge on the assets of a company as security. 
6. It can generally be bought or sold through the stock exchange at a price above or 
below its face value. 
*
Charge is an incumbrance to meet the obligation under the Trust Deed, whereby the company agrees to 
mortgage specific portion either by way of a first or second charge.  Such charge implies right of lenders to 
secure their payment from such asset(s) or from the liquidator in the event of winding up or from the 
company when the charge becomes void. 
© The Institute of Chartered Accountants of India
 
ACCOUNTING 
1.
82 
11.82
3.4 DISTINCTION BETWEEN DEBENTURES AND SHARES 
Debentures
 
Shares
 
1. Debenture holders are the creditors of
the company.
1. Shareholders are the owners of the
company.
2. Debenture holders have no voting rights
and consequently do not pose any threat
to the existing control of the company.
2. Shareholders have voting rights and
consequently control the total affairs of
the company.
3. Debenture interest is generally paid at a
pre- determined fixed rate. It is payable,
whether there is any profit or not.
Debentures rank ahead of all types of shares 
for payment of the interest due on them.
3. Dividend on equity shares is paid at a
variable rate which is vastly affected by
the profits of the company (however,
dividend on preference shares is paid at
a fixed rate).
4. Interest on debentures are the charges
against profits and they are deductible
as an expense in determining taxable
profit of the company.
4. Dividends are appropriation of profit
and these are not deductible in
determining taxable profit of the
company.
5. There are different kinds of debentures,
such as Secured/ Unsecured;
Redeemable/ Irredeemable; Registered /
Bearer; Convertible/ Non-convertible, etc.
5. There are only two kinds of shares–
Equity Shares and Preference Shares.
6. In the Company’s Balance Sheet,
Debentures are shown under “Long
Term Borrowings”.
6. In the Company’s Balance Sheet, shares are
shown under “Shareholder’s Fund” detailed
in ‘Share Capital’ of Notes to Accounts.
7. Debentures can be converted into other
debentures or shares as per the terms of
issue of debentures.
7. Shares cannot be converted into other
shares in any circumstances.
8. Debentures cannot be forfeited for non-
payment of call moneys.
8. Shares can be forfeited for non-payment
of allotment and call moneys.
9. At maturity, debenture holders get back
their money as per the terms and
conditions of redemption.
9. Equity shareholders cannot get back
their money before the liquidation of the
company (however, preference
shareholders can get back their money
before liquidation).
10. At the time of liquidation, debenture
holders are paid-off before the
shareholders.
10. At the time of liquidation shareholders
are paid at last, after paying debenture
holders, Trade payable, etc.
© The Institute of Chartered Accountants of India
Page 5


    
 
11.79 
COMPANY ACCOUNTS 
 
LEARNING OUTCOMES 
UNIT – 3 ISSUE OF DEBENTURES 
 
 
After studying this unit, you would be able to:  
? Understand the meaning and basic purpose for raising debentures 
by the company 
? Differentiate between shares and debentures of a company 
? Understand various types of debentures 
? Pass entries for issue of debentures payable in instalments 
? Make entries for issue of debentures considering the conditions of 
redemption 
? Pass entries for issue of debentures as collateral security 
? Pass entries for debentures issued for consideration other than for 
cash 
? Write off discount on issue of debentures 
? Calculate interest on debentures. 
  
© The Institute of Chartered Accountants of India
 
ACCOUNTING 
1.
80 
11.80
3.1 INTRODUCTION 
In the earlier units of this chapter, we have studied the issue of share capital as a means of 
raising funds for financing the business activities. But with increasing and evergrowing needs 
of the corporate expansion and growth, equity source of financing is not sufficient. Hence 
corporates turn to debt financing through various means. Issuing debt instruments by offering 
the same for public subscription is one of the sources of financing the business activities. Debt 
financing does not only helps in reducing the cost of the capital but also helps in designing 
appropriate capital structure of the company. Debenture is one of the most commonly used 
debt instrument issued by the company to raise funds for the business. 
Security 
Convertibility 
Permanence 
Negotiability 
Secured Debentures 
Unsecured Debentures 
Convertible Debentures 
Non-convertible 
Debentures 
Redeemable Debentures 
Irredeemable Debentures 
Registered Debentures 
Bearer Debentures 
First Mortgage Debentures 
Second Mortgage 
Debentures 
Priority 
Types of Debentures 
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
    
 
11.81 
COMPANY ACCOUNTS 
3.2 MEANING 
The most common method of supplementing the capital available to a company is to issue 
debentures which may either be simple or naked carrying no charge on assets, or mortgage 
debentures carrying either a fixed or a floating charge on some or all of the assets of the 
company. 
A debenture is a bond issued by a company under its seal, acknowledging a debt and 
containing provisions as regards repayment of the principal and interest. If a charge
*
has been 
created on any or on the entire assets of the company, the nature of the charge and the assets 
charged are described therein. Since the charge is not valid unless registered with the 
Registrar, and the certificate registering the charge is printed on the bond. It is also customary 
to create a trusteeship in favour of one or more persons in the case of mortgage debentures. 
The trustees of debenture holders have all powers of a mortgage of a property and can act in 
whatever way they think necessary to safeguard the interest of debenture holders. 
Section 2 (30) of the Companies Act, 2013 defines debentures as “Debenture” includes 
debenture stock, bonds or any other instrument of a company evidencing a debt, whether 
constituting a charge on the assets of the company or not. 
Thus, It is clear from definition that debenture may be Secured Debenture or Unsecured 
Debenture. 
Note: No company shall issue any debentures carrying any voting rights. 
3.3  FEATURES OF DEBENTURES 
1. It is a document which evidences a loan made to a company. 
2. It is a fixed interest-bearing security where interest falls due on specific dates. 
3. Interest is payable at a predetermined fixed rate, regardless of the level of profit. 
4. The original sum is repaid at a specified future date or it is converted into shares or 
other debentures. 
5. It may or may not create a charge on the assets of a company as security. 
6. It can generally be bought or sold through the stock exchange at a price above or 
below its face value. 
*
Charge is an incumbrance to meet the obligation under the Trust Deed, whereby the company agrees to 
mortgage specific portion either by way of a first or second charge.  Such charge implies right of lenders to 
secure their payment from such asset(s) or from the liquidator in the event of winding up or from the 
company when the charge becomes void. 
© The Institute of Chartered Accountants of India
 
ACCOUNTING 
1.
82 
11.82
3.4 DISTINCTION BETWEEN DEBENTURES AND SHARES 
Debentures
 
Shares
 
1. Debenture holders are the creditors of
the company.
1. Shareholders are the owners of the
company.
2. Debenture holders have no voting rights
and consequently do not pose any threat
to the existing control of the company.
2. Shareholders have voting rights and
consequently control the total affairs of
the company.
3. Debenture interest is generally paid at a
pre- determined fixed rate. It is payable,
whether there is any profit or not.
Debentures rank ahead of all types of shares 
for payment of the interest due on them.
3. Dividend on equity shares is paid at a
variable rate which is vastly affected by
the profits of the company (however,
dividend on preference shares is paid at
a fixed rate).
4. Interest on debentures are the charges
against profits and they are deductible
as an expense in determining taxable
profit of the company.
4. Dividends are appropriation of profit
and these are not deductible in
determining taxable profit of the
company.
5. There are different kinds of debentures,
such as Secured/ Unsecured;
Redeemable/ Irredeemable; Registered /
Bearer; Convertible/ Non-convertible, etc.
5. There are only two kinds of shares–
Equity Shares and Preference Shares.
6. In the Company’s Balance Sheet,
Debentures are shown under “Long
Term Borrowings”.
6. In the Company’s Balance Sheet, shares are
shown under “Shareholder’s Fund” detailed
in ‘Share Capital’ of Notes to Accounts.
7. Debentures can be converted into other
debentures or shares as per the terms of
issue of debentures.
7. Shares cannot be converted into other
shares in any circumstances.
8. Debentures cannot be forfeited for non-
payment of call moneys.
8. Shares can be forfeited for non-payment
of allotment and call moneys.
9. At maturity, debenture holders get back
their money as per the terms and
conditions of redemption.
9. Equity shareholders cannot get back
their money before the liquidation of the
company (however, preference
shareholders can get back their money
before liquidation).
10. At the time of liquidation, debenture
holders are paid-off before the
shareholders.
10. At the time of liquidation shareholders
are paid at last, after paying debenture
holders, Trade payable, etc.
© The Institute of Chartered Accountants of India
    
 
11.83 
COMPANY ACCOUNTS 
3.5  TYPES OF DEBENTURES 
The following are the types of debentures issued by a company. They can be classified on the 
basis of:  
 
1.  Security 
(a) Secured Debentures: These debentures are secured by a charge upon some or 
all assets of the company. There are two types of charges: (i) Fixed charge; and 
(ii) Floating charge. A fixed charge is a mortgage on specific assets. These assets 
cannot be sold without the consent of the debenture holders. The sale proceeds 
of these assets are utilized first for repaying debenture holders. A floating 
charge generally covers all the assets of the company including future one. 
(b) Unsecured or “Naked” Debentures:  These debentures are not secured by any 
charge upon any assets. A company merely promises to pay interest on due 
dates and to repay the amount due on maturity date. These types of debentures 
are very risky from the view point of investors.  
2.  Convertibility 
(a) Convertible Debentures: These are debentures which will be converted into 
equity shares (either at par or premium or discount) after a certain period of 
time from the date of its issue. These debentures may be fully or partly 
convertible. In future, these debenture holders get a chance to become the 
shareholders of the company. 
(b) Non-Convertible Debentures: These are debentures which cannot be converted 
into shares in future. As per the terms of issue, these debentures are repaid. 
3.  Permanence 
(a) Redeemable Debentures:  These debentures are repayable as per the terms of 
issue, for example, after 8 years from the date of issue. 
(b) Irredeemable Debentures:  These debentures are not repayable during the life 
time of the company. These are also called perpetual debentures. These are 
repaid only at the time of liquidation. 
 
Security Convertibility Permanence Negotiability Priority
© The Institute of Chartered Accountants of India