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Issue and Redemption of Debentures Chapter Notes | Accountancy Class 12 - Commerce PDF Download

Accounting For Debentures

Debenture : It is a document issued by a company under its common seal acknowledging the debt and it also contains the terms of repayment of debt and payment of interest at a specified rate.

Section 2 (30) of Companies Act, 2013 defines debenture as “Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the company’s assets or not.”

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 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.

Non-convertible Debentures, which are simply regular debentures, cannot be converted into equity shares. These are debentures without the convertibility feature, these 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 issuer fails to pay of either the principal or interest amount, its assets can be sold to repay the liability towards debenture holders.

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 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.

Distinguish Between a Share and Debenture

 

Basis

Share

Debenture

Ownership

Shareholders are the owners of

company

Debenture holders are the

lenders of company

Form of return

Dividend

Interest

Security

Not secured

Secured by a charge on

assets

Voting right

Equity shareholders have the voting right

No voting right in normal

course of business

Risk

More risk as compared to

Risk Free due to secured

 

 

Issue of Debentures:

Debentures can be issued in following ways:

1.     for cash

2.     for consideration other than cash

3.     As collateral security

Terms of Issue

Debentures can be issued in following ways:

1.     Issue of Debentures at Par

2.     Issue of Debenture at Premium

3.     Issue of Debentures at Discount.

Debenture Payable in Installments

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

 

(a) When Debentures amount received in lump sum with the application

 

On receipt of application money

Bank A/c Dr.

To Debenture Application

and Allotment A/c

With the application money

received

On acceptance of

application money

Debenture Application and Allotment

A/c Dr.

To X% Debentures A/c

To Bank A/c

With Amount of application money on allotted debentures,

and Excess amount refunded.

 

(B) When Debentures amount received in installments.

In this case accounting entries will be same as at the time of issue of shares in instalments with small change in the name of term like-the share capital word replaced with the X% Debentures A/c, and Share word replaced with Debentures e.g. Equity share capital into 8% Debentures, Equity share application into Debentures Application and follows on.

AT Par : means debentures are issued at face value.

Issue of Debentures for Consideration other than Cash

 

When Debentures are issued for purchased of asset

 

When Debentures Issued

for purchases Asset at par

Sundry Asset A|c Dr.

To Vendor

With the purchases

consideration

Vendor Dr.

To Debenture Account

 

 

When Debentures

are issued for purchases of

asset at premium

Sundry Assets A/c Dr.

To Vendor

With the purchases

Consideration

No. of debentures par value No. of debentures x premium

Vendor Dr.

To Debenture A/c

To Security Premium

Reserve A/c

When business is

Purchased

When Purchase

consideration is equal to net

value of assets

Sundry Assets A/c Dr.

To Sundry Liabilities A/c

To Vendor

When Purchases

consideration more than net

value of assets

Goodwill Account Dr.

Value of asset

Value of liabilities

Purchases consideration

Excess of Purchase Value

(B/F)

Value of Liabilities

Purchases Consideration

 

To Sundry Liabilities A/c

To Vendor

 

 

When Purchase

Consideration is less than net

value of asset

Sundry Assets Account Dr.

To Sundry Liabilities A/c

To Capital Reserve

To Vendor

Value of Asset

Value of liabilities

Difference (B/F

Purchases Consideration

 

Collateral Security : Collateral security means security provided to lender in addition to the principal security. It is a subsidiary or secondary security. Whenever a company takes loan from bank or from 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 the 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.   First method : No Journal entry to be made in the books of accounts of the company for debentures issued as collateral security. A note of this fact is given in this case.

ii.      Second method : Entry to be made in the books of accounts of 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 received for such issue.

Following journal entry will be made

 


 


Journal                                                                                                                                                                                      Debit                    Credit      

Date

Particulars

LF.

(Rs.) 

(Rs.)

 

Debenture Suspense A/c Dr.

To % Debentures A/c

(Being the issue of Debentures of Rs.... each issued as collateral security)

 

 

 

 

INTEREST ON DEBENTURES

Interest 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 because it is charge on profit.

Income Tax is deducted from interest before payment to debenture holders. It is called T.D.S. (Tax deducted at source).

 

JOURNAL ENTRIES

1.

When interest is Due

 

 

Debentures Interest A/c Dr.

(Gross Interest)

 

To Debentures holder A/c

(Net Interest)

 

To Income Tax Payable A/c

(Income Tax Deducted)

2.

When Interest is paid

 

 

Debentures Holder A/c Dr.

(With Interest)

 

To Bank A/c

 

3.

On payment of Income Tax to Government

 

 

Income Tax Payable A/c Dr.

(Amount of Income)

4.

On Transfer of Interest on Debenture to statement of

profit and Loss A/c

(Tax deducted at source)

 

Statement of Profit and Loss Dr.

 

 

To Debenture Interest A/c

(Amount of Interest)

The document Issue and Redemption of Debentures Chapter Notes | Accountancy Class 12 - Commerce is a part of the Commerce Course Accountancy Class 12.
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FAQs on Issue and Redemption of Debentures Chapter Notes - Accountancy Class 12 - Commerce

1. What is the meaning of issue of debentures?
Ans. The issue of debentures refers to the process of raising funds by a company through the sale of debentures to investors. Debentures are long-term debt instruments issued by companies to borrow money from the public or financial institutions.
2. How are debentures redeemed?
Ans. Debentures can be redeemed by the company in several ways. The most common methods of redemption are: 1. Redemption at par: The company repays the debentureholders the original amount invested in the debentures. 2. Redemption at a premium: The company repays the debentureholders an amount higher than the face value of the debentures. 3. Redemption by conversion: The company offers the debentureholders the option to convert their debentures into equity shares of the company.
3. What is the difference between secured and unsecured debentures?
Ans. The main difference between secured and unsecured debentures is the presence or absence of collateral or security. Secured debentures are backed by specific assets of the company, such as land, buildings, or machinery. If the company fails to repay the debentureholders, they have the right to claim and sell the assets to recover their investment. On the other hand, unsecured debentures are not backed by any specific assets. They are based solely on the creditworthiness of the company. In case of default, the debentureholders do not have any specific assets to claim and can only rely on the company's overall financial health.
4. What are the advantages of issuing debentures for a company?
Ans. Issuing debentures offers several advantages for a company: 1. Lower interest cost: Debentures often carry lower interest rates compared to bank loans or other forms of financing, resulting in reduced interest expenses for the company. 2. Diversification of funding sources: By issuing debentures, a company can diversify its sources of funding beyond traditional bank loans, enabling it to tap into a larger pool of investors. 3. Tax benefits: The interest paid on debentures is tax-deductible for the company, resulting in potential tax savings. 4. Flexibility in repayment: Companies can choose from various redemption options for debentures, allowing them to align their repayment schedule with their cash flow and financial needs.
5. What are the risks associated with investing in debentures?
Ans. Investing in debentures carries certain risks, including: 1. Default risk: There is a possibility that the company may fail to repay the principal amount or interest payments on the debentures, leading to financial losses for the investors. 2. Interest rate risk: Debenture investments are exposed to interest rate fluctuations. If interest rates rise, the market value of debentures may decline, affecting the returns for the investors. 3. Liquidity risk: Debentures are not as liquid as stocks or other highly traded securities. It may be challenging to sell debentures quickly in the secondary market, especially during times of financial distress. 4. Credit risk: The creditworthiness of the company issuing the debentures is crucial. If the company faces financial difficulties or defaults on its other obligations, the value of the debentures may be negatively impacted.
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