ISSUE OF DEBENTURES class 12 students.pptx

Chapter -
7 Accounting for
Companies :
Issue of
Debenture
Accountancy Class
12

Debenture is a written instrument issued by the company, given under the seal of the company,
acknowledging a debt and containing provisions in respect of repayment of principal and the
payment of interest at a fixed rate.
According to section 2(30) of the Companies Act 2013, “Debenture includes debenture stock, bonds
and any other securities of a Company, whether constituting a charge on the assets of the Company
or
not”.
Meaning of
Debenture
Characteristics or Features of
Debentures

BON
D
 It is very much similar to that of debenture.
 Main distinction between debenture and bond is with
respect to the rate of interest. Debentures are issued
with a fixed rate of interest whereas bonds can be
issued without predetermined rate of interest as in
the case of deep discount bonds or zero coupon
bonds.
 A deep discount bond or zero coupon bond is one
which is issued without prefixed rate of interest and
its issue price is heavily discounted.

These debentures are those which are not given any
security.
The holders of such debentures are treated as unsecured creditors at the time of liquidation of the
Company.
Such debentures are not freely transferable. The transfer of such debentures requires
the
execution of a proper transfer deed. Principal amount and interest on such a debenture is paid to the person
whose name appears in the Company s
‟ register.
Names and addresses of the holders of such debentures are not recorded in the Company
and
these debentures are transferable by mere delivery. Coupons are attached with these debentures and the interest
is
paid to such persons who produce the coupons in the specified bank.
Redeemable debentures are those debentures which will be repaid by the
company
either in lump sum at the end of a specified period or by installments during the lifetime of the company. Most of
the debentures are generally of this type.
Irredeemable debentures are those debentures which are not
repayable
by the company during its lifetime. These debentures are repayable only at the time of liquidation of the
Company.
Convertible debentures are those debentures which are convertible into equity shares
or
other securities at a stated rate of exchange either at the option of debenture holders or at the option of the
company after a specified period. When only a part of the amount of debenture is convertible into shares, such
debentures are called „Partly Convertible Debentures .
‟ When the full amount of debenture is convertible into shares,
such debentures are called „Fully Convertible Debentures .
‟
Types or Kinds of
Debentures
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4)
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Debeebnetnutrues :
3) BBeeaarreerr
DDeebbeenntutures :
2)
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benetnutruerse:s :
1)
UUnnsseeccuurreeddoorrNNaakek
dedDeDbeebnteunres :

Basis Share Debenture
Capital Vs. Loan
A share is a part of the Capital of the
Company, therefore, the shareholders are the
owners of the Company.
A debenture is a part of the loan and as such,
the debenture holders are the creditors of
the Company.
Dividend Vs. Interest A shareholder gets dividend from the Company.
A debenture holder gets interest
from the Company.
Fluctuating or Fixed
Rate of dividend or
interest
Dividend is paid only when there are profits. The rate
of dividend may fluctuate from year to year
depending upon the profits and decision of the
directors.
The rate of interest is fixed and it must be
paid irrespective of the company making a
profit or incurring a loss.
Voluntary or
compulsory
redemption
It is at the option of the Company to return the
amount of shares by buying back its own shares.
The amount of debentures must be
returned according to the terms of the
issue.
Priority of Repayment
of Principal in case of
Winding Up
In the case of winding up, the payment of share
capital is made after the repayment of debentures.
In the case of winding up, the payment of
debentures is made before the payment of
share capital.
Unsecured or Secured A share is always unsecured. Hence, they bear more risk.
Debentures are usually secured on the assets of
the Company. Hence, they bear little risk.
Restriction on Issue at
Discount
Under Section 53 of the Companies Act 2013, shares
cannot be issued at discount except sweat equity
shares.
There are no restrictions on the issue of
debentures at discount.
Voting Rights
Share confers on its holder the right to participate in
and vote at Company s
‟ meetings.
A holder of debenture neither possesses any
voting right in the Company s
‟ meetings nor can
be participate in the meeting.
Distinction Between a Share and a
Debenture

1. On receipt of application money :
Bank A/c Dr.
To 12% Debenture Application
A/c (Application money received)
2. On Transfer of application money to Debenture Account :
12% Debenture Application A/c Dr.
To 12% Debenture A/c
(Application money transferred)
3. On refund of money on totally rejected applications :
12% Debenture Application A/c Dr.
To Bank A/c
(Application money returned on rejected applications)
4. On the transfer of surplus application money on partially accepted applications
: 12% Debenture Application A/c Dr.
To 12% Debenture Allotment A/c
(Transfer of excess application money to allotment A/c)
5. On making allotment money due :
12% Debenture Allotment A/c Dr.
To 12% Debentures
A/c (Allotment money
due)
6. On receipt of allotment money :
Bank A/c Dr.
To 12% Debenture Allotment
A/c (Allotment money received)
7. On making the call money due :
12% Debenture First Call A/c Dr.
To 12% Debentures
A/c (First Call money
due)
8. On receipt of call money :
Bank A/c Dr.
To 12% Debenture First Call
A/c (First Call money received)
Following entries will be
passed on the issue of
debentures (assuming that
the debentures carry 12%
interest) :

Dr.
Dr.
Securities Premium Reserve
A/c
Or
Capital Reserve
A/c
O
r
Dr.
To Discount / Loss on Issue of Debentures
A/c
When the debentures are issued at more than
their face value, they are said to have been
issued at premium.
Issue of
Debentures at
Premium
When the company issues debentures at a price which is
lessthan their face or nominal value, the debentures are
said to have been issued at a discount. Discount or Loss
on Issue of Debentures is a capital loss.
Issue of
Debentures at
Discount

1) On purchase of assets :
Assets A/c Dr.
To Vendor s
‟ A/c
2) I.
II.
III.
For the issue of debentures to vendor at par :
Vendor s
‟ A/c Dr.
To Debentures A/c
For the issue of debentures to vendor at premium
: Vendor s
‟ A/c Dr.
To Debentures A/c
To Securities Premium Reserve A/c
For the issue of debentures to vendor at discount
: Vendor s
‟ A/c Dr.
Discount on Issue of Debentures A/c Dr.
To Debentures A/c
Sometimes a Company purchases some assets from the vendor and
instead of paying the vendor in cash, the Company may decide to issue
debentures to the vendor in payment of purchase consideration. Such an
issue of debentures to vendors is known as issue of debentures for
consideration other than cash.
Issue of
Debentures for
Consideration
other than
Cash

1) First Method : In this method, no entry need to be passed in the books of the Company, as
the debentures are not actually issued, but only given away as collateral security. As
such, under this method, entry is passed only for taking a loan. If the loan is taken from
a bank, the entry will be:
Bank A/c Dr.
To Bank Loan A/c
2) Second Method : In this method, the entry for issuing debentures as
Collateral Security is also recorded with the entry for taking the
loan.
a) On taking a loan :
Bank A/c Dr.
To Bank Loan A/c
b) On issuing the debentures as collateral security
: Debentures Suspense A/c
Dr.
Sometimes, when a Company takes a loan, the Company may have to issue
debentures as a subsidiary or secondary security in addition to the principal
security. If a default is made either in the payment of interest or in the payment
of principal debt, the lender will first realize its debt from the principal security.
But if the full amount of debt is not realized from the principal security, it may
claim all the rights of a debentureholder.
Issue of
Debentures
as
Collateral
Security

Following entries are passed for interest on debentures
:
Dr.
1) When Interest is due :
Interest on Debentures
A/c
To Debentureholders A/c
(Interest due to
debentureholders)
Dr.
2) When Interest is paid to the Debentureholders
:
Debentureholders A/c
To Bank A/c
(Payment of interest)
3) On Transfer of Debenture Interest to Statement of Profit and
Loss
at the end of the year : Dr.
Statement of Profit & Loss
To Interest on Debentures A/c
(Interest transferred to Statement of P &
L)
Interest on
Debentures

Accounting Entry for writing off Discount / Loss on Issue
of
Debentures :
Dr.
Dr.
Securities Premium Reserve
A/c and / or
Capital Reserve
A/c and / or
Statement of Profit
& Loss
Dr.
To Discount / Loss on Issue of
Debentures
Wriitiing Off Diiscount / Loss on Issue of
Debentures

ISSUE OF DEBENTURES class 12 students.pptx

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ISSUE OF DEBENTURES class 12 students.pptx