ISSUE OF DEBENTURES

1. Debentures can be issued at par , premium or discount

2. Debentures can be converted into shares
3. Interest on debenture is a charge against profits
4. Debenture is shown in the Balance sheet Under the main head Noncurrent Liability and sub
head Long Term Borrowings
5. Debenture is shown in the Balance sheet Under the main head current Liability and sub head
Short Term Borrowings ( when current maturities of long term debt)
6. Use of Security Premium (v imp )
a) For Issue of fully paid Bonus shares
b) For purchase of own shares or securities of the company
c) For writing off preliminary Expenses
d) For writing off underwriting commission paid or discount allowed on debentures of the
company
e) For writing off premium on redemption of debentures or preference shares.
7. Discount on issue of debentures is written off in the year the year the debentures are allotted
from securities premium and /or Statement of profit and Loss
8. Discount on issue of debenture is a capital loss and issue at premium is capital receipt
9. Loss on issue of debenture is written off in the year in which it is incurred ( ie; when debentures
are allotted )
10. Interest is not payable on debentures issued as collateral security
11. Interest on debenture is calculated at fixed rate on the paid up value ,if not fully paid up or on
the nominal value if fully paid up
12. Company should receive minimum subscription of 75% of the issued debentures, if the issue is
rs.100 crore or more
Debentures may be issued for
a) For Cash
b) For consideration other than cash
c) As Collateral Security

Debentures issued for Cash

When Issue price is received in Lump sum
1. Bank a/c. dr x
To Debenture application and allotment x
(Application money received on …………debentures)
 2. Debenture Application and allotment A/c. dr x
Discount on issue of debenture A/c.(if any) dr x
To ……. % Debenture x
To security Premium A/c.(if any) x
To Bank (refund if any on excess application) x
(…% debentures issued at discount/premium, excess refunded)

When Issue price is received in Instalments

1. Bank a/c. dr x
To Debenture Application A/c. x
(Application Money Received)

2. Debenture Application A/c. Dr x

To …. % Debenture A/c. x
To Bank (if Excess refunded) x
To Debenture allotment (excess adjusted in allotment if any) x
(Allotment of ….debentures, adjusted excess towards allotment
And balance refunded)

3. If debentures are issued at premium

Debenture Allotment A/c. dr x
To ….. % debenture a/c. x
To Security Premium x
(Allotment money due)

OR

If debentures are issued at discount

Debenture Allotment A/c. dr x
Discount on issue of debenture A/c. dr x
To ….. % debenture a/c. x
(Allotment money due)

4. Bank A/c dr x
To Debenture Allotment x
(Allotment Money received on ….debentures)

5. Debenture first and Final Call A/c. dr x

To ……% Debenture A/c. x
(First and Final Call money due)
6. Bank A/c. dr x
To Debenture first and final Call A/c. x
( First and final call amount received)

Journal Entry for Writing off loss

Securities premium A/c. dr x

Statement of profit and loss A/c. dr x
To Discount on issue of debenture A/c. x
To Premium of redemption of debentures A/c. x

b) when debentures are issued for consideration other than cash

Debentures may be issued for consideration other than cash in the following situations
1) Promoters for incorporating company
2) Underwriters for undertaking to subscribe the unsubscribed debentures
3) Vendors for assets against purchase
4) Purchase of the business
Journal entry for issue of debentures to promoters
a) Incorporation expenses or preliminary expenses A/c. dr x
To Promoters A/c. x
(Incorporation expenses payable)
b) Promoters A/c. dr x
To ……% Debentures A/c. x
(…..% debentures allotted to promoters)

Journal entry for issue of debentures to Underwriters

a) Underwriting Commission A/c. dr x
To Underwriters x
(Underwriting commission Payable)
b) Underwriters A/c. dr x
To …..% debentures A/c. x
(Debentures issued to Underwriters)

Journal entry for issue of debentures to Vendors of Assets

a) When Purchase consideration is equal to net assets
Sundry Assets A/c. dr (individually with agreed value of assets) x
To Sundry Liabilities (individually with agreed value of liabilities) x
To Vendors A/c. (with purchase consideration) x
 b) When Purchase consideration is more than net assets
Sundry Assets A/c. dr (individually with agreed value of assets) x
Good will A/c. dr (Asset less than liability) x
To Sundry Liabilities (individually with agreed value of liabilities) x
To Vendors A/c. (with purchase consideration) x
c) When Purchase consideration is less than net assets
Sundry Assets A/c. dr (individually with agreed value of assets) x
To Sundry Liabilities (individually with agreed value of liabilities) x
To Vendors A/c. (with purchase consideration) x
To Capital reserve (difference asset more than liability) x

Calculation of number of debentures to be issued against purchase consideration

Purchase consideration is rs.110000 is paid by issue of debentures of nominal value 100
Case 1 debentures issued at par: 110000 / 100 = 1100 debentures
Case 2 debentures issued at premium: 110000 / 110 = 1000 debentures
Case 3 debentures issued at discount: 110000 / 90 = 1222 debentures

C) When debentures are issued as collateral Security

Collateral security is the security given to the lender in addition to the primary security
Debentures issued as collateral security can be dealt in two ways
Method 1: When journal entry is not passed
a) Debentures issued as collateral securities for Long term Loan from Bank
Balance sheet as at …….
Particulars Note no Amt
Equity and Liabilities
Non-current liability
Long term borrowings 1 x

Notes to Accounts
1. Long term Borrowings
Term Loan from Bank x
(Secured by issue of ____9%debenturesof rs100as collateral security)

b) Debentures issued as collateral securities for short term Loan from Bank
Balance sheet as at …….
Particulars Note no Amt
Equity and Liabilities
Current liability
Short term borrowings 1 x

Notes to Accounts
1. Short term Borrowings
Loan from Bank x
(Secured by issue of ____9% debentures of rs100as collateral security)

Method 2: When journal entry is passed

Debentures Suspense A/c…..dr x

To …. % Debentures A/c. x

Balance sheet as at …….

Particulars Note no Amt
Equity and Liabilities
Non-current liability
Long term borrowings 1 x

Notes to Accounts
1. Long term Borrowings
Term Loan from Bank x
(Secured by issue of ____9%debenturesof rs100as collateral security) x
Less: Debentures Suspense A/c. x -
XX
Cancel the existing entry for debentures issued as Collateral Security
…. % Debentures A/c. dr x
To Debenture Suspense A/c. x

Loan being converted into Debentures

Loan A/c. dr (principal) x
Outstanding interest dr (outstanding interest for the period) x
To …% Debentures (principal + Interest outstanding)

Redemption of Debentures
Case 1: Issued at Par (100) ; redeemed at par( 100)

a) Bank A/c. dr 100

To Debenture application and allotment 100
(Application money received at Rs100each for ___deb)

b) Debenture application and allotment A/c. dr 100

To …% debenture A/c. 100
(Application money transferred to …% debenture account)
Case 2: Issued at discount (90); redeemed at par (100)
a) Bank A/c. dr 90
To Debenture application and allotment 90
(Application money received at Rs100each for ___deb)

b) Debenture application and allotment A/c. dr 90

Discount on issue of debenture A/c. 10
To …% debenture A/c. 100
(Application money transferred to …% debenture account)
Case 3: Issued at Premium (110); redeemed at par (100)
a) Bank A/c. dr 110
To Debenture application and allotment 110
(Application money received at Rs100each for ___deb)
b) Debenture application and allotment A/c. dr 110
To …% debenture A/c. 100
To Security premium A/c 10
(Application money transferred to …% debenture account)
Case 4: Issued at Par (100); redeemed at premium (110)
a) Bank A/c. dr 100
To Debenture application and allotment 100
(Debenture application money received)

b) Debenture application and allotment A/c. dr 110

Loss on issue of Debentures A/c. dr 10
To …% debenture A/c. 100
To premium on redemption of debentures A/c 10
(…% debenture issued at par redeemed at premium)

Case 5: Issued at discount (90); redeemed at premium (110)

a) Bank A/c. dr 90
To Debenture application and allotment 90
(Debenture application money received)
 b) Debenture application and allotment A/c. dr 90
Discount on issue of debenture A/.c dr 10
Loss on issue of Debentures A/c. dr 10
To …% debenture A/c. 100
To premium on redemption of debentures A/c 10
(…% debenture issued at discount and redeemed at premium)

Case 6: Issued at premium (110); redeemed at premium (105)

a) Bank A/c. dr 110

To Debenture application and allotment 110
(Debenture application money received)

b) Debenture application and allotment A/c. dr 110

Loss on issue of Debentures A/c. dr 5
To …% debenture A/c. 100
To Security Premium A/c. 10
To premium on redemption of debentures A/c 5
(…% debenture issued at premium and redeemed at premium)

Interest on Debentures

1. Debenture interest A/c. or Interest on Debenture A/c. dr x

To Debenture holders A/c. x
(Interest due on debentures)
2. Debenture holder A/c. dr x
To Bank A/c. x
(Interest paid on debenture)
3. Statement of profit and loss A/c. dr x
To Debenture interest or interest on debenture x
(Interest on debenture transferred to statement of profit and loss)

Eg: On 1st April 2019 a company took a loan of Rs.8000000on security of land and building this
loan was further secured by issue of 40000, 12% debenture of rs100 each as collateral security.
On 31st March 2024 the company defaulted on repayment of the principal amount of his loan
consequently on 1st April 2024 the land and building were taken over and sold by the Bank for rs
7000000. For the balance amount debentures were sold in the market on 1st May 2024.From
which date would the interest on debentures become payable by the company
Ans : 1st May 2024 since on this day debentures were sold