ISSUE OF SHARES AND DEBENTURES

PROCEDURE OF ISSUE OF SHARES

Face value of a share is the par value of the share. It is also known as the Nominal
value or denomination of a share. To issue shares a company follows a definite
procedure which is controlled and regulated by the Companies Act and Securities
Exchange Board of India (SEBI). There are different ways of issue of shares which
may be:
(A) For consideration other than cash
(B) For cash
(A) ISSUE OF SHARES FOR CONSIDERATION OTHER THAN CASH
Sometimes shares are issued to the promotors of the company in lieu of the services
provided by them during the incorporation of the compnay. The issue price of these
shares is normally debited to ‘Goodwill A/c’ and journal entry is made as follows:
Goodwill A/c Dr.
To Share Capital A/c
In case a company does not have sufficient funds for the purchase of fixed assets or
for payment to creditors it may offer and allot its shares to vendors/ creditors in lieu
of cash. Any allotment of shares against which cash is not to be received is called
‘issue of shares for consideration other than cash’. For example building is
purchased and payment is made by issuing shares.
In case of purchase of assets like building, machinery, stock of materials, etc. the
following journal entry is made :
1. Assets A/c Dr.
To Vendors/Creditors A/c
(Assets purchased)
2. Vendors/Creditors A/c Dr.
To Share Capital A/c
(Issue of shares of `…….each fullly paid up)
(B) ISSUE OF SHARES FOR CASH
In general, shares are issued for cash. The company may call the share money
either in one instalment or in two or more instalments. But company always collects
this money through its bankers.
(i) Receipt of Share Money in One Instalment : The company may receive
the share money in one instalment along with application. In this case the following
journal entries are made in the books of the company
1. On Receipt of Application Money
Bank A/c Dr.
To Share Application A/c
(Application money received on ….shares of `…each)
2. On transferring the Application Money
Share Application A/c Dr.
To Share Capital A/c
(Application money transferred to share capital A/c)
(ii) Share Money Received in Two or More Instalments : Instead of receiving
payment in one instalment i.e. at the time of application the company collects
it in two or more instalments. The first, instalment which the appplicants have
to pay along with the applications for shares is known as application money. On
the allotment of shares the allottees are required to pay the second instalment
which is termed as allotment money. If the company decides to call the share
money in more than two instalments the other instalment is/are termed as call
money (i.e. first-call, second call or final call).
In the above case the transactions are recorded in journal as given below :
(a) On Receipt of Application Money
Bank A/c Dr.
To Share Application A/c
(Receipt of share application money for …. Shares @ `.. per share)
(b) On Allotment of Shares : After receiving the application for shares within
the prescribed time, the Board of Directors of the company proceed to allot
shares. On allotment of shares the application money is transferred to Share Capital
A/c.
For this the following journal entry is made :
Share Application A/c Dr.
To Share Capital A/c
(Share application for …. Shares @ `… per
share transferred to share capital A/c)
Allotment Money Becoming Due and Received
On the allotment of shares the amount receivable on the next instalment i.e. on
allotment becomes due. The following entry is made for recording the amount due:
(i) Allotment money becoming due
Share Allotment A/c Dr.
To Share Capital A/c
(Share allotment money due on …. shares @` ... per share)
(ii) Receipt of allotment money
On the receipt of share allotment money the following journal entry is made:
Bank A/c Dr.
To Share Allotment A/c
(Receipt of the amount due on allotment of … shares)
Calls on Shares
After the receipt of application and allotment money the money that remains unpaid
can be called up by the company as and when required. Thus a call is a demand
made by the company asking the shareholders to remit the called up amount on
shares allotted to them. The company may demand the remaining money in more
than two instalments. The amount called after the allotment is known as call money.
There may be one or more calls, depending on the fund requirements of the
company. When only one call is made and Call Money is Due :
Share First and Final Call A/c Dr.
To Share Capital A/c.
(Call money due on …. share @ ` … per share).
Receipt of Call Money
The following journal entry is made for receipt of call money:
Bank A/c Dr.
To Share First & Final call A/c
(call money due on … shares @ ` ... per share received)
Note : If the company makes more than one call the same accounting treatment is
followed for recording the second call or third call money due and their receipt. The
last call made is termed as final call.
FULL, UNDER AND OVER SUBSCRIPTION
A company decides to issue number of shares to raise capital. It invites public to buy
these shares. Now there may be three situations :
I. Full Subscription : Company may receive applications equal to the number of
shares company has offered to people. It is called full subscription. In case of full
subscription the journal entries will be made as follows :
(a) On receipt of application money
Bank A/c Dr
To Share Application A/c
(Application money received for ......... shares)
(b) On allotment of shares
Share Application A/c Dr
To Share Capital A/c
(Application money of shares transferred to capital A/c on their allotment)
II. The company does not receive applications equal to the number of shares offered
for subscription, there may be two situations :
(i) under subscription;
(ii) over subscription
(i) Under Subscription : The issue is said to have been under subscribed when the
company receives applications for less number of shares than offered to the public
for subscription. In this case company is not to face any problem regarding allotment
since every applicant will be alloted all the shares applied for. But the company can
proceed with allotment provided the subscription for shares is at least equal to the
minimum required number of shares termed as minimum subscription.
(ii) Over Subscription : When company receives applications for more number of
shares than the number of shares offered to the public for subscription it is a case of
over subscription. A company cannot allot more shares than what it has offered. In
case of over subscription, company has the following options :
Option I
(i) Rejection of Excess Applications and Money Returned : The company may
reject the applications for shares in excess of the shares offered for issue and a
letter of rejection is sent to such applicants. In this case the application money
received from these applicants is refunded to them in full. The journal entry made is
as follows:
Share Application A/c Dr.
To Bank A/c
(Application money on … shares refunded to the applicants)
(ii) Excess application money adjusted towards sums due on allotment.
Journal entry made is :
Shares Application A/c Dr.
To Share Allotment A/c
(Excess application money adjusted towards sums due on allotment) If the
application money received on partially accepted applications is more than the
amount required for adjustment towards allotment money, the excess money is
refunded. However, if the Articles of the company so authorise, the directors may
retain the excess money as calls in advance to be adjusted against the call/ calls
falling due later on and the following entry is made :
Share Application A/c Dr.
To Call-in-advance A/c
(The adjustment of excess share application money
retained as call-in-advance in respect of ... shares)
Option II
Partial Acceptance of Applications
In some cases the company accepts the applications for subscription partially. It
means that the company does not allot the full number of shares applied for. For
example if an applicant has applied for 5000 shares and is allotted only 2000 shares,
then the applications is said to have been partially accepted. The company may
evolve some formula of accepting applications partially or making proportionate
allotment/ the Prorata allotment which means that the applicants are allotted shares
proportionately.
In such a case the company adjusts the excess share money received on application
towards share allotment money due on partially accepted applications. The journal
entry recording the adjustment of application money towards share allotment money,
is as under :
Share Application A/c Dr.
To Share Allotment A/c
(Share application money transferred to Share
Allotment Account in respect of ... shares)
ISSUE OF SHARES AT PREMIUM
A company can issue its shares at their face value. When company issues its shares
at their face value, the shares are said to have been issued at par. Company can
also issue its shares at more than or less than its face value i.e, at ‘Premium’ or at
‘Discount’ respectively. When shares are issued at premium or at discount an
accounting treatment different from shares issued at par is required. Let us discuss
issue of shares at premium.
Issue of Shares at Premium
If a company issues its shares at a price more than its face value, the shares are
said to have been issued at Premium. The difference between the issue price and
face value or nominal value is called ‘Premium’. If a share of ` 10 is issued at ` 12, it
is said to have been issued at a premium of ` 2 per share. The money received as
premium is transferred to Securities Premium A/c. A company issues its shares at
premium only when its financial position is very sound. It is a capital gain to the
company. The Premium money may be demanded by the company with application,
allotment or with calls.
Accounting Treatment of Premium on Issue of Shares
Following is the accounting treatment of Premium on issue of shares :
(a) Securities Premium Collected with Share Application Money : If the
Securities premium is collected on application and the company has taken decision
about the allotment of shares, the following journal entry is made :
Share Application A/c Dr.
To Securities Premium A/c
(The amount of Securities premium received on application
of the alloted shares is transferred to Securities Premium A/c)
(b) Premium Collected with Allotment Money or Calls : If the company decides to
demand the premium with share Allotment or/and share call money, the journal entry
made is :
Share Allotment A/c Dr.
Or/and
Share Call A/c Dr.
To Securities Premium A/c
(Adjustment of share premium due on……shares @ `…….per share.)
I. Equity and Liabilities There are broadly two headings shown on the Equity and
Liabilities side. First, being the equity, i.e., liability of the company towards
shareholders. It is termed as Shareholders’ Funds. It includes Share Capital,
Reserves and Surplus and Money received against share warrants. Second, being
liability of the company towards the outsiders. It is termed as Liabilities.
1. Shareholders’ Funds
(a) Share Capital : It is the first item under shareholders’ funds. Details required to
be shown are :
Authorised Share Capital : Authorised Share Capital is stated in the Memorandum
of Association and is divided into different categories such as equity share capital
and perference share capital. It is the amount of share capital that a company is
authorised to issue under each category. It is shown by way of information in the
notes attached to the Balance Sheet. The above information is shown for information
only, i.e., it is not added to liability.
Issued Share Capital : It is that part of the authorised share capital which the
company has issued for subscription up to the authorised share capital which the
company has issued for subscription up to the date of Balance Sheet. It includes a
number and classes (Equity or Preference) of shares and their face value, etc.
Subscribed Share Capital : It is that part of issued share capital which has been
subscribed by the applicants. Called-up Share Capital: It is that part of the issued
share capital that has been called-up to be paid by the company. Paid-up Share
Capital : It refers to that part of subscribed share capital which has been paid-up by
the subscriber towards share capital.
(ii) If a company has issued different types of Equity and Preference shares, detail of
each type of shares is given.
(iii) Amount of Calls-in-Arrear is shown as deduction from called-up capital or
‘subscribed capital’ to ascertain the paid-up capital of the company and shown as
liability in the Balance Sheet. Calls-in Arrear from Directors and Officers of the
company have to be disclosed.
(iv) Forfeited shares amount, i.e., amount originally paid up is shown by adding it to
subscribed capital. But in case of profit on reissue of forfeited shares, it is transferred
to Capital Reserves. It is to be noted that details regarding share capital or in fact,
any item of Balance Sheet and Statement of Profit and Loss is to be given in the
notes.
(b) Reserve and Surplus : Reserve and Surplus include following items and are
shown separately :
(i) Capital Reserves
(ii) Capital Redemption Reserve
(iii) Securities Premium Reserve
(iv) Debentures Redemption Reserve
(v) Revaluation Reserves
(vi) Share Options Outstanding Account
(vii) Other Reserves (to specify the nature and purpose of each reserve)
(viii) Balance in the statement of Profit and Loss after appropriations
towards proposed dividend and transfer to reserves. In case, Reserves and Surplus
has a balance under the head, profit (surplus) or loss (deficit) for the year is added to
it. Thereafter, appropriation is made by transfer to reserves or for provision for
dividend. If the balance after transfer of profit to the existing balance results in
negative figure, it is shown under Reserves and Surplus as a negative amount. It
means it is deducted to arrive at the total reserves. The balance of the reserve and
surplus, whether positive or negative, is shown under shareholders funds.
CALLS IN ADVANCE AND CALLS IN ARREARS
CALLS IN ADVANCE
If a shareholder pays any amount to company before it is demanded, it is called Call-
in-Advance. This amount is put in a separate account known as Calls-in-Advance
A/c. This amount is not shown as capital of the company, till such time the company
makes a demand from all the shareholders. Call-in-Advance A/c is shown on the
liabilities side of the Balance Sheet. For example if a company issued shares of Rs.
10 on which it has already called Rs. 5. Against the uncalled portion of Rs.5 per
share the company makes a call Rs. 3 per share, the entry for call money due will be
made only for Rs. 3 per share. Now suppose a shareholder pays ` 5 per share
including the uncalled amount of Rs. 2 per share along with the call money, it means
he has paid Rs. 2 per share in advance, which will be credited to calls in Advance
A/c. The company is required to pay interest on this amount @ 6% till the date of its
appropriation.
Accounting Treatment
Following journal entry is made for calls-in-advance.
Bank A/c Dr.
To Calls-in-Advance A/c
(Calls in advance received on…….shares @ ` …….per share)
Appropriation of calls-in-Advance A/c say in the final call
Journal entry will be :
Calls-in-Advance A/c Dr.
To Share Final call A/c
(Calls in advance amount adjusted)
For interest given on Calls-in-Advance
journal entry will be :
Interest on calls-in-Advance A/c Dr.
To Bank A/c
(Interest paid on the amount of Call-in-Advance)
CALLS IN ARREARS
When the company sends notice to the shareholders to pay allotment and /or call
money, it has to be paid by them within the specified time period. If it is not paid by
any one or more of the shareholders, the unpaid amount becomes arrears due from
them. Such arrears are transferred to an account termed as Calls-in-Arrears A/c. The
company is authorised to charge interest on calls-in-Arrears @ 5% p.a. for the
intervening peroid. (The period between date of non-receipt of the due amount and
the date of actual receipt of the due amount).
Accounting Treatment
The following jounal entry is made to record Calls-in-Arrears:
Calls-in-Arrears A/c Dr.
To Share Allotment/Call A/c
(Share allotment/ Call money not received on …. shares)
When the unpaid balance is received later on the following journal entry is made:
Bank A/c Dr.
To Calls in Arrears A/c
(Amount due on allotment/ call remaining unpaid
now received on…… shares.)
The company may charge interest on the amount of calls in arrears at a given rate
from the date of amount due till it is paid journal entry will be
Bank A/c Dr.
To Interest on calls in arrears A/c
FORFEITURE OF SHARES
If a shareholder fails to pay the due amount of allotment or any call on shares issued
by the company, the Board of directors may decide to cancel his/her membership of
the company. With the cancellation, the defaulting shareholder also loses the
amount paid by him/her on such shares. Thus, when a shareholder is deprived of
his/her membership due to non payment of calls, it is known as forfeiture of shares.
The result of forfeiture of shares is :
1.Cancellation of membership of the shareholder.
2.Reduction of issued share Capital of the company.

Procedure of forfeiture of shares

The authority to forfeit shares is given to the Board of Directors in Articles of of the
company. The Board of Directors has to give at least fourteen days notice to the
defaulting members calling upon them to pay outstanding amount with or without
interest as the case may be before the specified date. The notice must also state
that if the shareholders fail to remit the amount mentioned therein within the
stipulated period, their shares will be forfeited. If they still fail to pay the amount
within the specified period of time, the Board of Directors of the company may decide
to forfeit such shares by passing a resolution. The decision regarding the forfeiture of
shares should be communicated to the concerned allottees and should be asked to
return the allotment letters and share certificates of the forfeited shares to the
company.
Illustration 1
XYZ Ltd. Was registered with a capital of Rs. 300,0000 Shares of Rs. 10 each
payable as follows:
Application - Rs. 2 per share 1st Call - Rs. 2 per share
Allotment - Rs. 3 per share 2 nd Call – Rs. 3 per share
All the applications and money duly received. Pass necessary journal entries.

Illustration 2
Fashion Fabrics Ltd. issued 100000 shares of ` 10 each on 1 st April, 2014. The
amount payable on these shares was as under:
Rs. 2 per share on application.
Rs. 3 per share on allotment.
Rs. 5 per share on call.

Illustration 3
Luxuary Cars Ltd. issued 100000 shares of Rs. 10 each at a premium of
Rs. 5 per share, payable as:
On application Rs. 4 (including Rs 2 premium) per share
On allotment Rs 8 (including Rs. 3 premium) per share
On call Rs. 3 per share
Applications were received for 100000 shares and allotment was made to all. Make
journal entries.
Illustration 4
ABC Ltd invited applications for issuing 80,000 equity shares of ` 10 each. Money
is payable as follows :
Rs. 3 on Application, Rs. 3 on Allotment, Rs. 2 on First Call and Rs. 2 on Second &
Final call.
All the shares were applied and all sums due on allotment and calls have been
received.
Share issue expenses amounted to Rs. 8,000. You are required to prepare Journal,
Ledger Accounts and the Balance Sheet of ABC Ltd.

Illustration 5
Sunita Ltd. was registered with an authorised capital of Rs. 50,00,000 divided in
50,000
shares of Rs. 100 each. Company issued 20,000 shares at a premium of Rs. 20 per
share.
Amount receivables as Rs. 40 on application, Rs. 40 on allotment (including
premium)
Rs. 20 on first call & Rs. 20 on second & final call. All shares were subscribed & all
money was duly received. Share issue expenses amounted to Rs. 20,000 which
were fully written off against securities premium reserve A/c. Pass necessary Journal
entries.

Illustration 6
India Software Ltd. offered 50000 shares of Rs. 10 each to the public payable as:
Rs. 2 on application
Rs. 3 on allotment
Rs. 2 on First call and the balance as and when required.
All the shares were applied for and duly allotted but Mukesh a shareholder holding
200 shares paid the entire balance on allotment.
Make necessary journal entries.

Illustration 7
ABC Ltd issued 20000 shares of Rs. 10 each payable as Rs. 2 per share on
application,
Rs. 5 (including premium of Rs. 2 per share) on allotment, Rs. 3 per share on first
call and the balance on Final Call.
All the money was received except the first call money on 400 shares; which was
received later on with final call.
Make necessary journal entries.
Illustration 8
The Full Health Care Ltd has offered to public for subscription 20000 shares of Rs.
100 each payable as Rs. 30 per share on application, Rs. 30 per share on allotment
and the balance on call. Applications were received for 30000 shares. Applications
for 5000 shares were rejected all together and application money was returned.
Remaining applicants were alloted the offered shares. Their excess application
money was adjusted towards some due on allotment. Calls were made and duly
received.
Make journal entries in the books of the company.

Illustration 9
The Progressive Industries Limited was registered with a capital of Rs. 50,00,000. It
issued 20000 equity shares of Rs. 100 each payable as Rs. 25 on application,
Rs. 25 on allotment and balance on 1st and final call and 10000, 9% preference
shares of Rs. 100 each payable as Rs. 50 on application and allotment and the
balance on two calls of Rs. 25 each. All the shares were applied for and allotted.
All money was duly received. Make necessary journal entires in the books of the
Company.

Illustration 10
Preeti Company Limited invited applications for 35,000 Equity Shares of Rs. 100
each at par, payable as follows:
On Application Rs. 30
On Allotment Rs. 40
On First & Final Call Rs. 30
The public applied for all shares and these shares were allotted. All money due were
collected with an exception of first & final call on 4,000 shares, These were forfeited.
All forfeited shares were re-issued by Director at Rs. 80 per share.

Illustration 11
Suman Ltd. Issued 3,000 equity shares of Rs. 10 each at a Premium of Rs. 3 per
share, Payable as follows –
Rs. 3 on application
Rs. 5 on allotment (Including premium)
Rs. 2.50 on 1st Call
Rs. 2.5 on Final Call
One share holder Mr. Ashok failed to pay Allotment money and 1st call money on 200
shares. Directors forfeited his shares after first call. While another shareholder Mr.
Atul failed to pay 1st Call and Final call money on 100 shares and his shares were
forfeited after final call. Show journal entries for forfeiture of shares of Mr. Ashok &
Mr. Atul.
 ISSUE OF DEBENTURES
DEBENTURE AND ITS TYPES
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 a debenture holder. A debenture is a document issued under
the seal of the company. It is an acknowledgment 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 debenture holder is the
creditor of the company.
Types of Debentures
1. From Security Point of View
(i) Secured or Mortgage Debentures : These are the debentures that are secured by
a charge on the assets of the company. These are also called mortgage debentures.
The holders of secured debentures have the right to recover their principal amount
with the unpaid amount of interest on such debentures out of the assets mortgaged
by the company. In India, debentures must be secured.
Secured debentures can be of two types :
(a) First Mortgage Debentures : The holders of such debentures have a first claim on
the assets charged.
(b) Second Mortgage Debentures : The holders of such debentures have a second
claim on the assets charged.
(ii) Unsecured Debentures : Debentures which do not carry any security with regard
to the principal amount or unpaid interest are called unsecured debentures. These
are called simple debentures. Such debentures do not have any charge on the
assets of the company.
2. On the Basis of Redemption
(i) Redeemable Debentures : These are the debentures which are issued for a fixed
period. The principal amount of such debentures is paid off to the debenture holders
on the expiry of such period. These can be redeemed by annual drawings or by
purchasing from the open market.
(ii) Non-redeemable Debentures : These are the debentures which are not redeemed
in the life time of the company. Such debentures are paid back only when the
company goes into liquidation.
3. On the Basis of Records
(i) Registered Debentures : These are the debentures that are registered with the
company. The amount of such debentures is payable only to those debenture
holders whose name appears in the register of the company.
(ii) Bearer Debentures : These are the debentures which are not recorded in a
register of the company. Such debentures are transferrable merely by delivery.
Holder of these debentures is entitled to get the interest.
4. On the Basis of Convertibility
(i) Convertible Debentures : These are the debentures that can be converted into
shares of the company on the expiry of predecided period. The term and conditions
of conversion are generally announced at the time of issue of debentures.
(ii) Non-convertible Debentures : The debenture holders of such debentures cannot
convert their debentures into shares of the company.
5. On the Basis of Priority
(i) First Debentures : These debentures are redeemed before other debentures.
(ii) Second Debentures : These debentures are redeemed after the redemption of
first debentures.
ISSUE OF DEBENTURES
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 allotment are issued. On rejection of
applications, application money is refunded. In case of partial allotment, excess
application money may be adjusted towards subsequent calls.
Issue of Debenture takes various forms which are as under :
1. Debentures issued for cash
2. Debentures issued for consideration other than cash
3. Debentures issued as collateral security.
Further, debentures may be issued
(i) at par, (ii) at premium, and (iii) at discount
Accounting treatment of issue of debentures for cash
1. Debentures Issued for Cash at Par :
Following journal entries will be made :
(i) Application money is received
Bank A/c Dr.
To Debentures Application A/c
(Application money received for Debentures)
(ii) Transfer of debentures application money to debentures account on allotment of
debentures
Debentures Application A/c Dr.
To Debentures A/c
(Application money transferred to debenture
account on allotment)
(iii) Money due on allotment
Debentures Allotment A/c Dr.
To Debentures A/c
(Allotment money made due)
(iv) Money due on allotment is received
Bank A/c Dr.
To Debentures Allotment A/c
(Receipt of Debenture allotment money)
(v) First and final call is made
Debentures First and Final call A/c Dr.
To Debentures A/c
(First and Final call money made due on ............... debentures)
(vi) Debentures First and Final call money is received
Bank A/c Dr.
To Debentures First and Final call A/c
(Receipt of Amount due on call)
Note : Two calls i.e. first call and second call may be made Journal entries will be
made on the lines made for first and final call.
Over Subscription
If the company receives applications for number of debentures that exceed the
number of debentures offered for subscription, it is called over subscription. The
excess application money received can be treated as follows :
(a) The total amount of excess number of applications is refunded in case the
applications are totally rejected.
(b) The amount of excess application money is totally adjusted towards amount due
on allotment and calls
# in case partial allotment is made,
# the excess amount is adjusted towards sums due on allotment and rest of the
amount is refunded.
Journal entries in the above cases will be as follows :
For refund of money if the applications are rejected
Debentures Application A/c Dr.
To Bank A/c
(Refund of money on rejected applications)
For adjustment of excess application money adjusted towards sum due on allotment
Debentures Application A/c Dr.
To Debentures Allotment A/c
(Excess application money adjusted)
ISSUE OF DEBENTURES AT PREMIUM AND AT DISCOUNT
Debentures 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 Rs. 100 is
issued at Rs. 110. This excess amount of Rs. 10 is the amount of premium. The
premium on the issue of debentures is credited to the Securities Premium A/c as per
Companies Act, 2013.
Journal entry will be as follows :
Debentures Allotment A/c Dr.
To Debentures Account
To Securities Premium A/c
(Amount due on allotment alongwith premium of ` ....)
Issue of Debentures at Discount
When debentures are issued at less than their nominal value they are said to be
issued at discount. For example, debenture of Rs. 100 each is issued at Rs. 90 per
debenture. Companies Act, 2013 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.
Journal entry for issue of debentures at discount (at the time of allotment)
Debentures Allotment A/c Dr.
Discount on issue of debentures A/c Dr.
To Debentures A/c
(Allotment money due. The amount of discount is @ ` .... per debenture)
Issue of Debentures for Consideration Other than Cash
When a company purchases some assets and issues debentures as a payment for
the purchase to the vendors it is known as issue of debentures for consideration
other than cash. Debentures can be issued to vendors at par, at premium and at
discount.
Accounting Treatment :
1. Purchase of Assets
Sundry Assets A/c (Individually) Dr.
To Vendors A/c
(Purchase of assets)
2. Allotment of debentures
(i) At par
Vendors' A/c Dr.
To Debentures A/c
(issue of debentures at par to vendors)
(ii) At discount
Vendors' A/c Dr.
Debentures Discount A/c Dr.
To Debentures A/c
(Issue of debentures to vendors at a discount of
` ... per debenture)
(iii) At premium
Vendors’ A/c Dr
To Debentures A/c
To Securities Premium Reserve A/c
(Issue of debentures to vendors at a premium of ` .... per debenture)
Issue of Debentures with conditions Stipulated to their Redemption (Journal
entry)
Issued at par redeemable at par
(i) Bank A/c Dr.
To Debentures Application Account
(Issue of debentures of ` .... at par)
(ii) Debentures Application Dr.
To Debentures A/c
(Debentures application amount transferred to debentures account)
Issued at discount and redeemable at par
(i) Bank A/c Dr.
To Debentures A/c
(Issue of debentures of ` ... at a discount of ` ....)
(ii) Debentures A/c Dr.
Discount on issue of Debentures A/c Dr.
To Debentures Account
(Debentures application amount transferred to debentures account)
Issued at premium redeemable at par
(i) Bank A/c Dr.
To Debentures Application A/c
(Issue of ... debentures of ` .... at a premium of ` ....)
(ii) Debentures Application Dr.
To Debentures A/c
To Securities Premium A/c
(Debenture Application amount transferred to debenture account)
Issue at par, redeemable at premium
(i) Bank A/c Dr
To Debentures A/c
(Issue of ... debentures of ` ... a redeemable at a premium of ` ...)
(ii) Debentures Application A/c Dr
Loss on issue of Debentures A/c Dr
To Debentures A/c
To Premium on Redemption of Debentures
(Debenture application amount transferred to debenture A/c &
recognised loss on issue)
Issued at discount and redeemable at premium
(i) Bank A/c Dr
To Debentures Application A/c
(issue of ... debentures of ` ... at a discount of
` ... redeemable at a premium of ` ....)
(ii) Debentures Application A/c Dr
Discount on issue of Debenture A/c Dr
Loss on issue of Debentures Dr
To Debentures A/c
To Premium on Redemption of Debentures
(Transferred debentures approving to Debentures A/c & recognised loan on
issue of debentures)
ISSUE OF DEBENTURES AS COLLATERAL SECURITY
Collateral security means security given in addition to the principal security. It is a
subsidiary or secondary security. Whenever a company takes loan from bank or 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 this 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) No journal entry to be made in the books of accounts of the company
Journal entries are not passed in the books, however, debentures issued as
collateral security are shown by way of information in Note to Accounts below Long-
term Borrowings under Non-Current Liabilities if issued for obtaining Long-term
Loans or below Short-term. Borrowing under current liabilities if issued for obtaining
short-term loans.
(ii) Entry to be made in the books of account the company
A journal entry is made on the issue of debentures as a collateral security,
Debentures suspense A/c is debited because no cash is received for such issue.
Following journal entry will be made
Debenture Suspense A/c Dr.
To Debentures A/c
(.....Debentures of ` .... each issued as collateral security to .....)
When the loan is paid this entry is cancelled by means of a reverse entry. In the
Balance Sheet, debentures issued as collateral security are distinguished from other
debentrues. Debentures issued as colletral security are related to the loan, therefore,
they are shown in the same 'note to accounts' in which the loan secured by
debentures is shown. For example if the loan is shown as Long-term Borrowings,
debentures issued as collateral securities are also shown as long-term borrowings
under Non-Current Liabilities in the Equity and Liabilities part of the Balance Sheet.
Illustration 1
Shining India Ltd. issued 5000, 8% Debentures of Rs. 100 each payable as follows
Rs. 20 on Application
Rs. 30 on Allotment
Rs. 50 on First and Final call
All the debentures were applied for and allotted. All the calls were duly received.
Make necessary journal entries in the books of the company.
Illustration 2
ABC Ltd issued 5000 10% Debentures of Rs. 100 each payable as Rs. 40 on
application and Rs. 60 on allotment. Applications were received for 6000 debentures.
Applicants for 500 debentures were sent letter of regret and money was returned.
Allotment was made proportionately to the remaining applicants. Over subscription
was applied to the amount due on allotment. Remaining amount was duly received.
Make journal entries for the above transactions in the books of the company.
Illustration 3
A company issued 5000 10% Debentures of ` 100 each at a premium of 20%
payable as Rs. 60 on application Rs. 60 on allotment (including premium). All the
debentures were subscribed for and money was duly received. Make journal entries.
Illustration 4
A company has issued 2000 9% debentures of Rs. 100 each at a discount of 10%
payable as -
Rs. 40 on application
Rs. 50 on allotment
Make necessary journal entries.
Illustration 5
M.B. Electronics Ltd. purchased machinery for Rs. 1,98,000 and issued 9%
debentures of Rs. 100 each to the vendors. Make journal entries if the debentures
were issued
(a) at par
(b) at a premium of Rs. 10
(c) at a discount of Rs. 10
Illustration 6
Make journal entries if 200, 9% debentures of Rs. 500 each have been issued as :
(i) Issued at Rs. 500, redeemable at Rs. 500
(ii) Issue at Rs. 450; redeemable at Rs. 500
(iii) Issued at Rs. 550; redeemable at Rs. 500
(iv) issued at Rs. 500; redeemable at Rs. 550
(v) Issued at Rs. 450; redeemable at Rs. 550
Illustration 7
XY Ltd obtained a term loan of Rs. 8,00,000 from bank and issued Rs. 10,00,000,
9% debentures of Rs. 100 each as collateral security. Pass necessary journal
entries.