NOTES

CHAPTER 9: Issue of 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.

Types of Debentures

Convertible debentures: Is which can be converted into equity shares of the issuing company after a predetermined period of time.

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.

Secured Debentures: These instruments are secured by a charge on the fixed assets of the issuer company. So if issuer fails to pay of the principal or interest amount, its assets can be sold to repay the liability towards debenture holders.

Unsecured Debentures: These instruments 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.

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.

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.

Example 1:

XYZ Ltd. issues Rs. 22,500 12% debentures of Rs. 100 each payable as follows Application = 30 and the remaining on allotment. The public applied for 20250 debentures which were fully allotted and all the relevant allotment money duly received.

Solution:

Date	Particulars	L.F.	Debit	Credit
	Bank A/c Dr.  To 12% debenture application A/c		6,07,500	6,07,500
	12% debenture application A/c Dr.  To 12% debenture application A/c		6,07,500	6,07,500
	12% debenture allotment A/c Dr.  To 12% debenture A/c		14,17,500	14,17,500
	Bank A/c Dr.  To 12% debenture allotment A/c		14,17,500	14,17,500

Example 2:

CT Ltd. issued 32500 10% debentures of Rs. 100 each at a premium of Rs. 10 per debenture payable as follows:

 On application: Rs. 25
 On allotment: Rs. 45 (including premium)
 On first call and final call: Rs. 40

The debentures were fully subscribed and all the money was duly received. Record the necessary entries in the books of the company.

Solution:

Date	Particulars	L.F.	Debit	Credit
	Bank A/c Dr.  To 10% debenture application A/c		8,12,500	8,12,500
	10% debenture application A/c Dr.  To  10% debenture A/c		8,12,500	8,12,500
	10% debenture allotment A/c Dr.  To 10% debentures A/c  To security premium		14,62,500	11,37,500 3,25,000
	Bank A/c Dr.  To 10% debenture allotment A/c		14,62500	14,62,500
	10% debenture first & final call Dr.  To 10% debentures A/c		13,00,000	13,00,000
	Bank A/c Dr.  To 10% debenture first and final call		13,00,000	13,00,000

Issue of Debentures for Cash

1. For Purchase Assets:  Assets A/c ...Dr.   To Vendor A/c  (Being assets purchase)

2. For Issue of Debentures:  a. If debentures are issued at par   Vendor A/c ...Dr.    To Debentures A/c   (Being debenture issued to vendor at par)

b. If debentures are issued at premium   Vendor A/c ...Dr.    To Debentures A/c    To Securities Premium A/c    (Being debenture issued to vendor at premium)

c. If debentures are issued at discount   Vendor A/c ...Dr.   Discount on Issue of Debentures A/c ...Dr.    To Debentures A/c   (Being debenture issued to vendor at discount)

Issue of debentures as a collateral security: Additional or secondary security in addition to the primary security. Sometimes, when a company takes loan from a financial institution, then besides the primary security, the company may issue debenture for additional security (as collateral security). The lender who receives debenture as collateral security is not entitled for interest on these debentures. If any default is made by the company in paying back the principal amount (i.e. the loan amount) or interest on the loan, then the lender has the full right to recover his/her dues from the sale of primary security. But, if the primary security is not sufficient to recover the amount of the debt, then the debentures issued as collateral may be used for recovery of the remaining amount.