Accounting For Debentures : Introduction - Accounting, Class 12 Video Lecture

hello students welcome to the lecture on
issue of debentures and after this
lecture we will be able to learn the
following objectives describe debentures
and types of debentures explain issue of
debentures describe redemption of
debentures describe discounts on issue
of debentures and loss on issue of
debentures let us first understand what
a dementia is a dementia 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 acknowledgement 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
dementia holder is the creditor of the
company in other words a debenture is a
document acknowledging a debt against
company which is issued by the company
under common seal of the company and
contracting to pay principle along with
interest up to a specified time a
debenture is a document that either
creates a debt or acknowledges it and it
is a debt without collateral in
corporate finance the term is used for a
medium to long term debt instrument used
by large companies to borrow money in
some countries the term is used
interchangeably with bond loan stock our
note the debenture is thus like a
certificate of loan or a loan bond
evidencing the fact that the company is
liable to pay a specified amount with
interest and although the money raised
by the debentures becomes a part of the
company's capital structure it does not
become share capital senior debentures
get paid before subordinate debentures
and there are varying rates of risk and
payoff for these categories the benchers
are generally freely transferable by the
debenture holder debenture holders have
no rights to vote in the company's
general meetings of share
but they may have separate meetings or
votes for example on changes to the
rights attached to the debentures the
interest paid to them as a charge
against profit in the company's
financial statements there are several
types of debentures they are registered
debentures these are those debentures
which are registered in the register of
the company the names addresses and
particulars of holdings of debenture
holders are entered in a register kept
by the company such debentures are
treated as non negotiable instruments
and interest on such debentures are
payable only to the registered holders
of debentures registered debentures are
also called as debentures payable to
registered holders bearer debentures
these are those debentures which are not
registered in the register of the
company Baro dimensions are like a
bearer cheque
they are payable to the bearer and are
deemed to be negotiable instruments they
are transferable by mere delivery no
formality of executing a transfer deed
as necessary when bearer documents are
transferred stamp duty need not be paid
a person transferring a bearer debenture
need not give any notice to the company
to this effect
the transferee who acquires such a
debenture in due course bona fide and
for available consideration gets good
title notwithstanding any defect and the
title of the transfer or interest
coupons are attached to each debentures
and are payable to barrow security
benches these are those debentures which
are secured against the assets of the
company which means if the company is
closing down its business the assets
will be sold and the debenture holders
will be paid their money unsecured
debentures these are those debentures
which are not secured against the assets
of the company which means when the
company is closing down its business the
assets will not be
sold to pay off the debenture holders
these adventures do not create any
charge on the assets of the company
convertible debentures these are those
debentures which can be converted into
equity shares these dimensions have an
option to convert them into equity or
preference shares at the stated rate of
exchange after a certain period if the
holders exercised the right of
conversion they cease to be the lender
to the company and become the members
non convertible debentures these are
those debentures which cannot be
converted either into equity shares or
preference shares they may be secured or
unsecured non convertible debentures are
normally redeemed on maturity period
which may be ten or twenty years 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 a lot mint are
issued on rejection of applications
application money is refunded in case of
partial allotment excess application
money may be adjusted towards subsequent
goals there are several types of issue
of debentures the first type we are
going to study is issue of debentures at
par the benches are said to be issued at
par when their issue price is equal to
the face value the benches 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 hundred dollars is issued
at 110 dollars this excess amount of ten
dollars is the amount of premium the
premium on the issue of debentures is
credited to the securities premium
as per section 78 of the Companies Act
1956 when dimensions are issued at less
than their nominal value they are said
to be issued at discount for example
debenture of rupees hundred each is
issued a trapeze 90 per dimension
Companies Act 1956 has not laid down any
conditions for the issue of debentures
at a discount as have been laid down in
case of issue of shares at discount
however there should be provision for
issue of such debentures in the articles
of association of the company there are
some types more in the case of issue of
debentures issue of debentures for
consideration other than cash sometimes
the company purchases assets from
vendors and instead of making payment in
cash issues debentures for consideration
thereof such issue of debenture is
called debentures issued for
consideration other than cash in that
case also the debentures may be issued
at par at a premium or at a discount
then entry is made in such a situation
are similar to those of the shells
issued for consideration other than cash
issue of debenture as collateral
security a collateral security may be
defined as a subsidiary or secondary or
additional security
besides the primary security when a
company obtains a loan or overdraft from
a bank or any other financial
institution it may pledge or market
Somerset's
as a secured loan against the said loan
but the lending institutions may insist
on some more assets as collateral
security so that the amount of loan can
be realized in full with the help of
collateral security in case the amount
from the sale of principal security
should fall short of the loan money in
such a situation the company
may issue its own debentures to the
lenders in addition to some other assets
already pledged such an issue of
debenture is known as debentures issued
as collateral security if the company
fails to repay the loan along with
interest the sender is free to receive
his money from the sale of primary
security and if the realizable value of
the primary security falls short to
cover the entire amount the lender has
the right to invoke the benefit of
collateral security whereby debentures
may either be presented for redemption
or sold in the open market
we must also learn that the discount or
loss on issue of debentures is a capital
loss or a fictitious asset and therefore
must be written off during the lifetime
of debentures the amount of discount
loss on issue of debentures should
normally not be written off in the year
of issue itself since the benefit of the
debentures would accrue to the company
till their redemption 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 accounting 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 dimensions 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
premium on issue of debentures company
may issue debentures with the
stipulation that the repayment of the
debentures and mature
we'll be made at premium the amount of
the premium payable is debited to loss
on issue of debentures account 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 the next
topic we are going to study is the
interest on debentures and redemption of
debentures debenture is always prefixed
by a certain percentage say 9%
debentures or 12% debentures have one
ever thought what meaning does this
prefix carry it is the rate of interest
per annum that will be paid to the
debenture holders companies generally
pay interest on its debentures after
every six months redemption of
debentures refers to extinguishing or
discharging the liability on account of
debentures in accordance with the terms
of issue in other words redemption of
debentures means repayment of the amount
of debentures by the company there are
four ways by which the debentures can be
redeemed
these are payment in lump sum the
company redeems the debentures by paying
the whole amount in one lump sum to the
debentures holder at the expiry of the
agreed time or earlier and the option of
the company in this case the time of
repayment is known in advance and the
company can plan its financial resources
accordingly companies always keep some
important points in mind while
redemption of debentures that are given
by the Companies Act and by sebby
provisions of the companies Amendment
Act 2000 section 117 C are when a
company issued debentures after the
commencement of this act it shall create
a debenture redemption reserved for the
redemption of such debentures to which
adequate amount shall be credited from
out of its profit every year
until such debentures are redeemed the
amount credited to the debenture
redemption reserve shall not be utilized
by the company except for the purpose of
redemption of debenture and guidelines
by Securities and Exchange Board of
India are every company shall create
debenture redemption reserve in case of
issue of dementia redeemable after a
period of more than 18 months from the
date of issue the creation of debenture
redemption Reserve is obligatory only
for non convertible debentures and non
convertible portion of partly
convertible debentures a company shall
create debenture redemption reserve
equivalent to at least 50% of the amount
of debenture issue before starting the
redemption of dementia withdrawal from
dementia redemption reserve is
permissible only after 10% of the
debenture liability has already been
reduced by the company
there are also some situations given by
Sebby where these guidelines will not be
followed a company issuing debentures
with a maturity period of not more than
18 months
hey this is Marisa from 37signals and
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other method for redemption is
redemption in installment the debentures
are to be redeemed in installments
beginning from a particular year the
actual dimensions to be redeemed are
selected usually by draw of lots and the
redemption to be made either out of
profits or out of capital the third
method Redemption is redemption by
purchase and open market when a company
purchases its own debentures in the open
market for the purpose of immediate
cancellation the purchase and
cancellation of such debentures are
termed as redemption by purchase in the
open market the advantage of such an
option is that a company can redeem the
debentures at its convenience whenever
it has surplus funds secondly the
company can purchase them when they're
available in market at a discount the
next method for redemption is Redemption
by conversion the debenture may be
redeemed by converting them into equity
shares as per the terms of their issue
the Companies Act prohibits any
non-convertible portion of debenture to
be redeemed by conversion this implies
that the debentures
be redeemed by conversion only if they
were issued as such and no cash outflow
will take place and hence there is no
requirement of creating debentures
redemption reserve whenever dimensions
are redeemed by conversion the debenture
holders have to apply for the same and
semi guidelines require that no company
shall issue fully convertible debentures
F CDs having a conversion period of more
than thirty six months unless conversion
is made optional with put and call
option if conversion of the debenture
takes place at or after eighteen months
from the date of allotment but before 36
months any conversion in part or whole
shall be optional at the hands of
debenture holders the premium amount and
time of conversion shall be determined
and disclosed by the issuer company the
last method we are going to study is the
sinking fund method sufficient funds are
required to redeem debentures at the end
of a specified period to meet this
requirement the company may decide to
create a sinking fund and invest
adequate amount in marketable securities
or bonds of other business entities
normally a company ensures that an equal
amount is set aside every year to
arrange the necessary funds and the time
of redemption this is called sinking
fund method according to while the
company makes necessary arrangements it
sets aside a part of divisible profit
every year and invests the same outside
the business in marketable securities an
appropriate amount is calculated by
referring to on sinking fund table
depending upon the rate of return on
investments and the number of years for
which investments are made the amount
thus ascertained is transferred from
profits every year to debenture
Redemption fund and its investment is
termed
debenture redemption fund investment
this investment earns a certain amount
of income call it interest which is
reinvested together with the fixed
appropriate amount for the purpose and
subsequent years in last year the
interest earn and the appropriated fixed
amount is not invested in fact at this
stage the debenture redemption fund
investments are in cashed and the
amounts obtained is used for the
redemption of debentures any profit or
loss made on the in catchment of
dementia redemption fund investments is
also transferred to debenture redemption
fund account the creation of debenture
redemption fund account serves the
purpose of debenture redemption reserve
as required by law
and the SEBI guidelines and as after
redemption is transferred to general
reserve the sinking fund method is a
technique for depreciating an asset and
bookkeeping records while also
generating money to purchase a
replacement for the asset when it
reaches the end of its useful life under
the sinking fund method the business
sets aside an amount of money to invest
annually so that the principal plus the
interest earned in the fund will be
enough to replace the asset the amount
of money that needs to be added to the
asset replacement fund each year is
calculated by determining how much it
will cost to replace the asset how many
years the asset is expected to last in
what rate of interest can be earned as
well as how much can be earned through
the effects of compound interest the
sinking fund method is not common and is
not desirable when interest rates cannot
reasonably thus the steps involved in
the working of sinking fund method are
calculate the amount of profit to be set
aside annually with the help of sinking
fund table set aside the amount of
profit at the end of each year and
credit to debenture Redemption fund DRF
account
butshe's the investments of the
equivalent amount at the end of first
year and debited debenture redemption
on investment DRF I account receive
interest on investment at the end of
each subsequent year but raise the
investments equivalent to the fixed
amount of profit set aside and the
interest earned every year except last
year year of redemption receive interest
on investment for the last year set
aside the fixed amount of profit for the
last year in cash the investments at the
end of the year of redemption transfer
the profit loss on sale of investments
reflected in the balance of debenture
Redemption fund investment account to
debenture Redemption fund account now in
the end let us summarize what we have
learnt in this lecture 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 and debenture
holder a debenture is a document issued
under the seal of the company types of
dimensions are registered debentures
bearer debentures secured aventures
unsecured debentures convertible
debentures non convertible debentures
types of issue of debentures are
debentures issued at par dimensions
issued at discount debentures issued at
premium issuing debentures for something
other than cash debentures issued as a
collateral security the discount loss on
issue of debentures is a capital loss or
a fictitious asset and therefore must be
written off during the lifetime of
debentures redemption of debentures
refers to extinguish or discharging the
liability on account of debentures in
accordance with the terms of issue in
other words redemption of debentures
means repayment of the amount of
debentures by the company
four ways of redemption of debentures
our payment and lump sum Redemption by
purchase and open market redemption by
conversion sinking fund method
you