Date: 01 July 2020

VIRTUAL COACHING CLASSES

ORGANISED BY BOS, ICAI

FOUNDATION LEVEL
PAPER 1: PRINCIPLES AND PRATICE OF
ACCOUNTING

Faculty: CA VS Hiranmai

© The Institute of Chartered Accountants of India

CHAPTER 10-Company Accounts- Unit 3
•This unit deals with the issue and redemption of the debentures
•While raising the loan from different external sources by a company, one of the convenient
methods is to issue the debentures, which is debt instrument.
•It is simple debt instrument, which acknowledges the debt against the company, carrying the
terms of redemption (repayment) and interest to be charged.
•Section 2(30) of the Companies Act debenture includes debenture stock, bonds or any other
instrument which are in the nature of the debt, whether they are constituting a charge on the
assets or not.
•Generally when a bank loan is taken, security has to be given by the company in the same way
when the money is taken from the debenture holders- then the charge on the assets of the
company y to be created so that in case of any default, the debenture holders get the rights on
the assets.

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CHAPTER 10-Company Accounts- Unit 3
•The features of debentures are as follows-
• It is loan against the company
• It is a fixed income bearing security where the interest is charge against the profit and has to
be paid periodically.
• The repayment of the principal value to the debenture holders to be done after a specific
period.
• It can be secured (charge against the company’s assets) or unsecured (no charge on the
assets of co)
• It can be bought and sold through the stock exchange at value more or below the face value.

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CHAPTER 10-Company Accounts- Unit 3
Debentures Shares
1. They are the creditors of the company as it is a 1. They are the owners of the company
debt instrument
2. They do not have voting rights in the company 2. They have voting right through which they take
part in the management of the co
3. Interest is payable on debentures at specified 3. The dividend is paid only if there is profit and all
intervals irrespective of whether profit or loss is the other expenses have been first. Rate of dividend
earned. Rate of interest is fixed is varying.
4. In Balance sheet they are shown under the 4. They are shown under the shareholders funds in
Liabilities- Long term borrowings the liabilities of the Balance sheet
5. Debentures cannot be forfeited for the non 5. Shares can be forfeited and re- issued in case of
payment of any installment non-payment upto two calls.
6. The repayment of the amount given by 6. The remaining amount after all the payments is
debenture holders is done first. repaid to the shareholders
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CHAPTER 10-Company Accounts- Unit 3
•The Types of debentures which can be issued can be classified on the basis of the following-
• Security
• Convertibility
• Permanence
• Negotiability
• Priority
• Security- we have secured debentures which refer to the creation of charge on the assets of
the company and unsecured debentures or naked debentures which are not secured against
the assets of the company.
• The charges can be fixed or floating. Fixed charge is created against specific assets which
cannot be sold unless debenture holders are consulted. Floating charge is created on all the
assets of the company.

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CHAPTER 10-Company Accounts- Unit 3
• Convertibility- Convertible debentures are those which can be converted into equity shares
after certain period of time from the issue. Debentures can be partly or fully convertible into
shares.
• Non-convertible debentures cannot be converted into shares and they have to be paid in cash.
• Permanence- From the permanence point of view- we have redeemable and irredeemable
debentures. Redeemable debentures are those which are repaid after certain period of time
from issue. Irredeemable or perpetual are those which are not repaid in the life time of the
company except on winding up.
• Negotiability- from this point the debentures are called registered and bearer debentures.
Registered debentures are those whose name is entered in the register of the debenture
holders and to whom the interest and the principal is paid. They are not easily transferable
except with rules and procedures to be complied as per Co Act 2013. They are paid to the
registered holder or their order

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CHAPTER 10-Company Accounts- Unit 3
• Negotiability- from this point the debentures are called registered and bearer debentures.
Bearer debentures are those which are transferable by delivery. They are negotiable
instruments just payable to the holder. Interest is paid to the holder irrespective of the identity.
• Priority- Based on the priority there are first and second mortgage debentures. Out of the
property charged- the first mortgage debentures are paid first and then the second mortgage
debentures is paid.
• Accounting treatment of the issue of debentures- The main difference between the issue of
shares and debentures is that in case of shares- we journalize only the issue of shares and we
don’t have the terms of redemption. Here in debentures while passing the issue entries, we
shall also provide for the terms of redemption.
• The debentures can be repaid as par and at premium (such a premium is taken to Premium on
redemption account). This is not securities premium amount- but it a loss or expense on
repayment of debentures which shall be treated as expense and debited.

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CHAPTER 10-Company Accounts- Unit 3
• Accounting treatment of the issue of debentures- Like the shares, even the debentures can be
issued at par, premium as well as discount (this is not possible in case of shares). Hence the
following situations can arise as a result of the issue and redemption of debentures-
• Case 1- Issue at par and redemption at par
• Case 2- Issue at par and redemption at premium
• Case 3- Issue at premium and redemption at par
• Case 4- Issue at premium and redemption at premium
• Case 5- Issue at discount and redemption at par
• Case 6- Issue at discount and redemption at premium.
The journal entries will be passed for each case- with regard to the terms of redemption they will
be recorded in the transfer entry of the debenture application or allotment as given in the
question.

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CHAPTER 10-Company Accounts- Unit 3
• Case 1- Issue at par and redemption at par
Bank A/c Dr
To % Debenture Application A/c

% Debenture application A/c Dr

To % Debenture A/c

◦ Case 2- Issue at par redemption at premium

Bank A/c Dr
To % debenture application A/c

% Debenture application A/c Dr

To % debenture A/c

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CHAPTER 10-Company Accounts- Unit 3
◦ Case 2- Issue at par redemption at premium
in the transfer entry of the allotment we shall bring the adjustment with regard to
redemption at premium

Debenture Allotment A/c Dr

Loss on issue of debenture A/c Dr
To %Debenture
To Premium on redemption A/c (with the amount of the premium on redemption)

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CHAPTER 10-Company Accounts- Unit 3
◦ Case 3- Issue at premium redemption at par
Bank A/c Dr
To % debenture application A/c

% Debenture application A/c Dr

To % debenture A/c
To securities premium A/c (if the SP is collected with application else it has to be taken
with allotment instalment- depending on the question)

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CHAPTER 10-Company Accounts- Unit 3
◦ Case 4- Issue at premium and redemption at premium
Bank A/c Dr
To % debenture application A/c

% Debenture application A/c Dr

Loss on issue of debentures A/c
To % Debenture A/c
To securities premium A/c (if the SP is collected with application else it has to be taken
with allotment instalment- depending on the question)
To premium on redemption A/c (with the amount of premium on redemption)

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CHAPTER 10-Company Accounts- Unit 3
◦ Case 5- Issue at discount and redemption at par
Bank A/c Dr
To % debenture application A/c

% Debenture application A/c Dr

Discount on issue of debentures A/c Dr (with the amount of discount in ques)
To % debenture A/c

Case 6- Issue at discount and redemption at premium- change only in the transfer entry
% Debenture application A/c Dr
Discount on issue of debentures A/c Dr (with the amount of discount in ques)
Loss on issue of debenture A/c Dr
To % Debenture A/c
To Premium on redemption A/c (with the premium on redemption amount)

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CHAPTER 10-Company Accounts- Unit 3
• Issue of debentures as collateral security- Under this concept- where a loan is taken from a
bank- in order to have additional security apart from the primary security- the debentures of a
company can be issued as collateral security.
• Once after the repayment of the original loan, these debentures are release with main security.
If there is default in the loan repayment, then the bank becomes our debenture holders.
• The main point to be noted here is that debentures issued as collateral security does not entitle
them to interest on debentures, the bankers still receive only the interest on the main loan.
Only upon default they become the actual debenture holders and get right for interest on such
debentures.
• In the books of the company- there are two methods in which this can be accounted.
• Method 1- Not to pass any entry, but to show the collateral in the notes to accounts that the
debentures have been issued as collateral to the main loan.

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CHAPTER 10-Company Accounts- Unit 3
• Issue of debentures as collateral security- Under this concept- where a loan is taken from a
bank- in order to have additional security apart from the primary security- the debentures of a
company can be issued as collateral security.
• Method 2- To pass the following entry in the books-
Debentures Suspense A/c Dr (will be shown under the assets in BS)
To % Debentures A/c (will be shown under the liabilities in BS)
◦ Out of both the methods- it is logical to follow the method 1 since the bankers are not yet the
debenture holders, hence passing an entry means that debentures have been issued.
◦ Issue of debentures for consideration other than cash- As in the case of issue of equity shares,
even the debentures can be issued as consideration instead of cash in case of purchase of any
assets or any running business consisting of both assets and liabilties..
◦ The debentures can be issued at par, premium and discount against the consideration for the
purchase.

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CHAPTER 10-Company Accounts- Unit 3
◦ Issue of debentures for consideration other than cash- hence it becomes very important to
find out the no. of debentures which is calculated as below-
No of debentures= Purchase consideration
Issue price of debentures
◦ Issue price of the debentures is as follows-
◦ At Par- Issue price = face value
◦ At Premium- Issue price = Face value + premium
◦ At discount- Issue price= Face value- discount
◦ The entry to be passed in the above case is as follows-
Assets A/c Dr
To liabilities A/c
To Purchase consideration (This amount from entry shall be substituted in the
formula as above)

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CHAPTER 10-Company Accounts- Unit 3
◦ Issue of debentures for consideration other than cash- The next entry to be passed in the
above case is as follows-
Purchase consideration A/c Dr (This amount from entry shall be substituted in
the formula as above)
Discount on issue of debentures A/c Dr* (only if the deb are issued at discount)
To % Debenture A/c
To Securities premium A/c (only if deb are issued at premium)
◦ Treatment of loss/ discount on issue of debentures- The loss concerned with issue of
debentures is of two types- The discount on debentures issued, and the premium to be paid on
redemption.
◦ Both these amount shall be computed from the question and the total amount to be written off
to the Profit and loss account in a particular ratio.

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CHAPTER 10-Company Accounts- Unit 3
◦ Treatment of loss/ discount on issue of debentures- The amount to be written off to the Profit
and loss account shall be in two ways.
◦ One – In equal proportion over the tenure of the debentures. For ex if debentures are issued
for 5 years and the total loss is 20,000. Then Rs. 4,000 (20,000/5), shall be written off for the
next 5 years to the profit and loss A/c.
◦ Two- when the debentures are redeemed in a particular way- then based on the ratio of the
outstanding value of the debentures- the amount of total loss will be written off to the profit
and loss ac.
◦ Interest on debentures- The interest is always calculated on the face /nominal value of the
debentures and the coupon rate . The company will pay the interest to the debenture holders
after deducting the TDS.

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 THANK YOU

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