COMPANY ACCOUNTS 11.

UNIT – 3 ISSUE OF DEBENTURES

LEARNING OUTCOMES
After studying this unit, you would be able to:
 Understand the meaning and basic purpose for raising
debentures by the company
 Differentiate between shares and debentures of a company
 Understand various types of debentures
 Pass entries for issue of debentures payable in instalments
 Make entries for issue of debentures considering the
conditions of redemption
 Pass entries for issue of debentures as collateral security
 Pass entries for debentures issued for consideration other
than for cash
 Write off discount on issue of debentures
 Calculate interest on debentures.

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 11.2 ACCOUNTING

UNIT OVERVIEW

Secured Debentures
Security
Unsecured
Debentures
Convertible
Debentures
Convertibility Non-convertible
Debentures

Redeemable
Debentures
Permanence
Irredeemable
Debentures
Types of Registered
Debentures Debentures
Negotiability
Bearer Debentures

First Mortgage
Debentures

Priority
Second
Mortgage
Debentures

3.1 INTRODUCTION
In the earlier units of this chapter, we have studied the issue of share capital as a means
of raising funds for financing the business activities. But with increasing and
evergrowing needs of the corporate expansion and growth, equity source of
financing is not sufficient. Hence corporates turn to debt financing through various
means. Issuing debt instruments by offering the same for public subscription is one
of the sources of financing the business activities. Debt financing does not only
helps in reducing the cost of the capital but also helps in designing appropriate
capital structure of the company. Debenture is one of the most commonly used
debt instrument issued by the company to raise funds for the business.

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 COMPANY ACCOUNTS 11.3

3.2 MEANING
The most common method of supplementing the capital available to a company is
to issue debentures which may either be simple or naked carrying no charge on
assets, or mortgage debentures carrying either a fixed or a floating charge on some
or all of the assets of the company.
A debenture is a bond issued by a company under its seal, acknowledging a debt
and containing provisions as regards repayment of the principal and interest. If a
charge has been created on any or on the entire assets of the company, the nature
of the charge and the assets charged are described therein. Since the charge is
not valid unless registered with the Registrar, and the certificate registering the
charge is printed on the bond. It is also customary to create a trusteeship in favour
of one or more persons in the case of mortgage debentures. The trustees of
debenture holders have all powers of a mortgage of a property and can act in
whatever way they think necessary to safeguard the interest of debenture
holders.
Section 2 (30) of the Companies Act, 2013 defines debentures as “Debenture”
includes debenture stock, bonds or any other instrument of a company evidencing a
debt, whether constituting a charge on the assets of the company or not.
Thus, It is clear from definition that debenture may be Secured Debenture or
Unsecured Debenture.
Note: No company shall issue any debentures carrying any voting rights.

3.3 FEATURES OF DEBENTURES

1. It is a document which evidences a loan made to a company.
2. It is a fixed interest-bearing security where interest falls due on specific
dates.
3. Interest is payable at a predetermined fixed rate, regardless of the level of
profit.
4. The original sum is repaid at a specified future date or it is converted into
shares or other debentures.
5. It may or may not create a charge on the assets of a company as security.
6. It can generally be bought or sold through the stock exchange at a price
above or below its face value.


Charge is an incumbrance to meet the obligation under the Trust Deed, whereby the
company agrees to mortgage specific portion either by way of a first or second charge.
Such charge implies right of lenders to secure their payment from such asset(s) or from the
liquidator in the event of winding up or from the company when the charge becomes void.

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 11.4 ACCOUNTING

3.4 DISTINCTION BETWEEN DEBENTURES AND

SHARES
Debentures Shares
1. Debenture holders are the 1. are the owners of the
creditors of the company. Shareholde
rs
company.
2. Debenture holders have no voting 2. Shareholders have voting rights and
rights and consequently do not pose consequently control the total
any threat to the existing control of affairs of the company.
the company.
3. Debenture interest is generally paid 3. Dividend on equity shares is paid at
at a pre-determined fixed rate. It is a variable rate which is vastly
payable, whether there is any profit affected by the profits of the
or not. Debentures rank ahead of all company (however, dividend on
types of shares for payment of the preference shares is paid at a fixed
interest due on them. rate).

4. Interest on debentures are the 4. Dividends are appropriation of

charges against profits and they profit and these are not deductible
are deductible as an expense in in determining taxable profit of the
determining taxable profit of the company.
company.
5. There are different kinds of 5. There are only two kinds of
debentures, such as Secured/ shares– Equity Shares and
Unsecured; Redeemable/ Preference Shares.
Irredeemable; Registered / Bearer;
Convertible/ Non-convertible, etc.
6. In the Company’s Balance Sheet, 6. In the Company’s Balance Sheet,
Debentures are shown under shares are shown under
“Long Term Borrowings”. “Shareholder’s Fund” detailed in
‘Share Capital’ of Notes to Accounts.

7. Debentures can be converted into 7. Shares cannot be converted into

other debentures or shares as per other shares in any circumstances.
the terms of issue of debentures.

8. Debentures cannot be forfeited for 8. Shares can be forfeited for non-

non- payment of call moneys. payment of allotment and call
moneys.
9. At maturity, debenture holders get 9. Equity shareholders cannot get
back their money as per the terms back their money before the
and conditions of redemption. liquidation of the company
(however, preference shareholders
can get back their money before
liquidation).

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 COMPANY ACCOUNTS 11.5

10. At the time of liquidation, 10. At the time of liquidation

debenture holders are paid-off shareholders are paid at last, after
before the shareholders. paying debenture holders, Trade
payable, etc.

3.5 TYPES OF DEBENTURES

The following are the types of debentures issued by a company. They can be
classified on the basis of:

Securi Convertibili Permanen Negotiabili Priorit

ty ty ce ty y

1. Security
(a) Secured Debentures: These debentures are secured by a charge
upon some or all assets of the company. There are two types of
charges: (i) Fixed charge; and
(ii) Floating charge. A fixed charge is a mortgage on specific assets.
These assets cannot be sold without the consent of the debenture
holders. The sale proceeds of these assets are utilized first for
repaying debenture holders. A floating charge generally covers all
the assets of the company including future one.
(b) Unsecured or “Naked” Debentures: These debentures are not secured
by any charge upon any assets. A company merely promises to pay
interest on due dates and to repay the amount due on maturity date.
These types of debentures are very risky from the view point of
investors.
2. Convertibility
(a) Convertible Debentures: These are debentures which will be
converted into equity shares (either at par or premium or discount)
after a certain period of time from the date of its issue. These
debentures may be fully or partly convertible. In future, these
debenture holders get a chance to become the shareholders of the
company.
(b) Non-Convertible Debentures: These are debentures which cannot be
converted into shares in future. As per the terms of issue, these
debentures are repaid.
3. Permanence
(a) Redeemable Debentures: These debentures are repayable as per the
terms of issue, for example, after 8 years from the date of issue.

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 11.6 ACCOUNTING

(b) Irredeemable Debentures: These debentures are not repayable during

the life time of the company. These are also called perpetual
debentures. These are repaid only at the time of liquidation.
4. Negotiability
(a) Registered Debentures: These debentures are payable to a registered
holder whose name, address and particulars of holding is recorded in
the Register of Debenture holders. They are not easily transferable.
The provisions of the Companies Act, 2013 are to be complied with for
effecting transfer of these debentures. Debenture interest is paid
either to the order of registered holder as expressed in the warrant
issued by the company or the bearer of the interest coupons.
(b) Bearer Debentures: These debentures are transferable by delivery.
These are negotiable instruments payable to the bearer. No kind of
record is kept by the company in respect of the holders of such
debentures. Therefore, the interest on it is paid to the holder
irrespective of any identity. No transfer deed is required for transfer of
such debentures.
5. Priority
(a) First Mortgage Debentures: These debentures are payable first out of
the property charged.
(b) Second Mortgage Debentures: These debentures are payable after
satisfying the first mortgage debentures.

3.6 ISSUE OF DEBENTURES

3.6.1 Accounting entries for issue of redeemable debentures
The issue of redeemable debentures can be categorized into the following:
1. Debentures issued at a par and redeemable at par or at a discount;
2. Debentures issued at a discount and redeemable at par or at discount;
3. Debentures issued at premium and redeemable at par or at discount;
4. Debentures issued at par and redeemable at premium;
5. Debentures issued at a discount and redeemable at premium.
6. Debentures issued at premium and redeemable at premium.
Note: Redemption at a discount may be a rare circumstance in practical life.

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 COMPANY ACCOUNTS 11.7

Journal entries in each of the above cases are discussed below:

1. Debentures issued at par redeemable at par: When debenture are

issued at par, the issue price is equal to par value, in this regard the
following entries are recorded:
(a) For receipt of application money :
Bank A/c Dr.
To Debenture Application A/c
(b) For transfer of application money to debentures
account : Debenture Application A/c

Dr.
To …% Debenture A/c
ILLUSTRATION 1
Amol Ltd. issued 40,00,000, 9% debentures of ` 50 each, payable on
application as per term mentioned in the prospectus and redeemable at
par any time after 3 years from the date of issue. Record necessary
entries for issue of debentures in the books of Amol Ltd.

SOLUTION
Books of Amol Ltd.
Journal
Date Particulars L.F. Debit Credit
Amount (`) Amount (`)
Bank A/c Dr. 20,00,00,000
To Debenture Application A/c 20,00,00,000
(Debenture application money
received)
Debenture Application A/c Dr. 20,00,00,000
To 9% Debentures A/c 20,00,00,000
(Application money transferred to
9% debentures account consequent
upon allotment)

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 11.8 ACCOUNTING

2. Debentures issued at Discount and Redeemable at par or at discount

: When debentures are issued at discount, issue price will be less than par
value. The difference between the two is considered as loss on issue on
debentures and is to be written-off over the life of debentures. The entries
with regards to issue are given below :
(a) For receipt of application money
Bank A/c Dr.
To Debenture Application A/c
(b) At the time of making allotment
(i) Debenture Application A/c

Dr. Discount on issue of debentures A/c

Dr.
To …% Debentures A/c
ILLUSTRATION 2
Atul Ltd. issued 1,00,00,000, 8% debenture of `100 each at a discount of
10% redeemable at par at the end of 10th year. Money was payable as
follows :
` 30 on application
` 60 on allotment
Record necessary journal entries regarding issue of debenture.
SOLUTION
Books of Atul Ltd.
Journal
Date Particulars L.F Debit Credit
.
(`) (`)
Bank A/c Dr. 30,00,00,00
0
To Debenture Application A/c
30,00,00,00
(Debenture application money 0

received)
Debenture Application Dr. 30,00,00,00
0
A/c To 8%
30,00,00,00
Debentures A/c 0
(Application money transferred to 8%
debentures account consequent upon
allotment)
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 COMPANY ACCOUNTS 11.9

Debenture allotment A/c Dr. 60,00,00,00

0
Discount on issue of debentures Dr.
10,00,00,00
A/c To 8% Debentures A/c 0
(Amount due on allotment) 70,00,00,00
0

Bank A/c Dr. 60,00,00,00

0
To Debenture Allotment A/c
60,00,00,00
(Money received upon 0
consequent
allotment)

3. Debentures Issued at Premium and Redeemable at par or at

discount
When debenture are issued at premium, the issue price is more than the par
value. The premium is transferred to securities premium account. In this
regard, the following journal entries are recorded:
When premium amount is received at the time of application;
(a) For receipt of application money
Bank A/c Dr.
To Debenture Application A/c
(b) For transfer of application of money at the time of
allotment Debenture application A/c Dr.
To …% Debentures A/c
To Securities Premium A/c
When debentures are issued at par or premium value but redeemed at
discount, then it means that the company will gain by paying less. This gain
will not be recognised in the books at the time of issue of debentures as per
the conservatism concept. The utilisation of premium on debentures shall
be based on the provisions of Section 52 of Companies Act, 2013,
ILLUSTRATION 3
Koinal Chemicals Ltd. issued 15,00,000, 10% debenture of ` 50 each at
premium of 10%, payable as ` 20 on application and balance on allotment.
Debentures are redeemable at par after 6 years. All the money due on
allotment was called up and received. Record necessary entries when
premium money is included in application money.

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 11.10 ACCOUNTING

SOLUTION
Books of Koinal Chemicals Ltd.
Journal
When premium money is received along with application money:
Date Particulars Debit Credit
Amount (`) Amount (`)
Bank A/c Dr. 3,00,00,000
To Debenture Application A/c 3,00,00,000
(Debenture application
money received)
Debentures Application Dr. 3,00,00,000
A/c To 10% 2,25,00,000
Debentures A/c To 75,00,000
Securities Premium A/c
(Application money transferred
to 10% debentures account and
securities premium
account
consequent upon allotment)
Debenture Allotment A/c Dr. 5,25,00,000
To 10% Debentures 5,25,00,000
A/c
(Call made consequent
upon allotment)
Bank A/c Dr. 5,25,00,000
To Debenture Allotment A/c 5,25,00,000
(Call made consequent
upon allotment money
received)
4. Debentures issued at par and redeemable at a premium
Where debentures are to be redeemed at premium, an extra entry is to be
made at the time of issue and allotment of debentures. This extra entry is to
be passed for providing premium payable on redemption. Debenture
Redemption Premium Account is a personal account which represents a
liability of the company in respect of premium payable on redemption.
In this case, the issue price is same as par value but the redemption value is
more than the par value, therefore redemption premium is recorded as a loss
on issue of debentures at the time of allotment of debentures. Following
journal entries are recorded in this regard:

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 COMPANY ACCOUNTS 11.11

(a) For receipt of application money

Bank A/c Dr.
To Debenture application A/c
(b) At the time of making allotment
(i) Transfer of application money to debenture
account Debenture Application A/c Dr.
To …% Debenture A/c
(ii) Call made consequent upon allotment
Debenture Allotment A/c

Dr.
Loss on issue of debenture A/c Dr. [Equal to Debenture
Redemption Premium]
To …% Debenture A/c
To Debenture redemption premium A/c
Students can note that instead of passing the separate
entries, a compound entry can be passed:
Bank A/c Dr.
Loss on issue of debenture A/c Dr.
To …% Debenture A/c
To Debenture redemption premium A/c
ILLUSTRATION 4
Modern Equipments Ltd. issued 4,00,000, 12% debentures of ` 100 payable
as follows : On application ` 30
On allotment ` 70
The debenture were fully subscribed and all the money was duly
received. As per the terms of issue, debentures are redeemable at `110
per debenture. Record necessary entries regarding issue of debentures.

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 11.12 ACCOUNTING

SOLUTION
Books of Modern Equipments Ltd.
Journal
Date Particulars Debi Credi
t t
Amoun Amoun
t t
(` (`
Lakhs) Lakhs)
Bank A/c Dr. 120
To Debentures application A/c 120
(Debenture application money received)
Debentures Application Dr. 120
A/c To 12% 120
Debentures A/c
(Application money transferred to
12% debentures account
consequent to allotment)
Debentures Allotment A/c Dr. 280
Loss on issue of Debentures Dr. 40
A/c To 12% Debentures 280
A/c 40
To Debenture redemption premium
A/c
(Call made on allotment of debentures at
par and entry for debentures redeemable
at premium)
Bank A/c Dr. 280
To Debentures allotment A/c 280
(Call made consequent upon allotment
money received)

5. Debentures Issued at discount and redeemable at premium

In this situation the issue price is less than par value but redemption value is
more than par value. The difference between the redemption price and the
issue price is treated as discount/loss on issue of debentures. Suppose, a
10% debentures of ` 1,000 is issued at a discount of ` 100 and redeemable at
a premium of `5 per debenture, the amount of loss will be equal to ` 1,005 –
` 900 = ` 105. This is to be treated as loss on issue. It is to be noted that
premium on redemption of debentures is also credited by ` 5.

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 COMPANY ACCOUNTS 11.13

(a) For the receipt of application money

Bank A/c Dr.
To Debenture Application A/c
(b) At the time of making allotment
(i) Transfer of application money to debenture
account Debenture Application A/c Dr.
To % Debentures A/c
(ii) Call made consequent upon allotment of debentures at
discount and redeemable at premium
Debenture Allotment A/c Dr.
Discount on issue of debenture Dr. [Amount equal to
A/c
the discount on issue
of debenture]
Loss on issue of Debentures A/c Dr. [Amount equal to
premium on redemption
of
debenture]
To …% Debenture A/c
To Debenture redemption premium A/c
Alternatively, the discount on issue of debentures can be combined with loss
on issue of debentures A/c as both discount and premium on redemption
represent loss to the company. In that case, the journal entry will be

Debenture Allotment A/c Dr.

Discount/Loss on issue of debenture A/c Dr. [Amount equal to
the discount on issue
of debenture plus
premium on redemption
of debenture]
To …% Debenture A/c
To Debenture redemption premium A/c

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 11.14 ACCOUNTING

(c) For receipt of call made on allotment

Bank A/c Dr.
Discount on issue of debenture A/c

Dr. Loss on issue of Debentures A/c

Dr.
To Debenture Allotment A/c
To Debenture redemption premium A/c
Alternatively, the discount on issue of debentures can be combined
with loss on issue of debentures A/c as both discount and premium on
redemption represent loss to the company. In that case, the journal
entry will be

Bank A/c Dr.

Discount/Loss on issue of debentures A/c Dr.
To …% Debentures A/c
To Debenture redemption premium A/c
ILLUSTRATION 5
Agrotech Ltd. issued 150 lakh 9% debentures of ` 100 each at a discount of
6%, redeemable at a premium of 5% after 3 years payable as: ` 50 on
application and ` 44 on allotment. Record necessary journal entries for
issue of debentures.
SOLUTION
Books of Agrotech Ltd.
Journal
Date Particulars L.F. Debit Credit
Amount Amount
(` (`
Lakhs) Lakhs)
Bank A/c Dr. 7,500
To Debenture Application A/c 7,500
(Debentures application money
received)
Debenture Application A/c Dr. 7,500

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 COMPANY ACCOUNTS 11.15

To 9% Debentures A/c 7,500

(Application money transferred to 9%
debentures account)
Debenture Allotment A/c Dr. 6,600
Discount on issue of debentures Dr 900

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 11.16 ACCOUNTING

Loss on issue of debenture A/c Dr. 750

To 9% Debentures A/c 7,500
To Debenture redemption premium A/c 750
(Call made consequent upon allotment of
debentures issued at discount and
redeemable at premium)

Bank A/c Dr. 6,600

To Debenture Allotment A/c 6,600
(Allotment amount received)
Working Notes:
Amount of discount on issue = 150 Lakhs X ₹100 X 6% =
₹900 lakhs Loss on issue of debentures = 150 Lakhs X ₹100
X 5% = ₹750 Lakhs
Alternatively, the discount on issue of debentures can be combined with
loss on issue of debentures A/c as both discount and premium on
redemption represent loss to the company. In that case, the journal
entries will be

Books of Agrotech Ltd.

Journal
Date Particulars Debit Credit
Amount Amount
(` (`
Lakhs) Lakhs)
Bank A/c Dr. 7,500
To Debenture Application A/c 7,500
(Debentures application money
received)
Debenture Application A/c Dr. 7,500
To 9% Debentures A/c 7,500
(Application money transferred to 9%
debentures account)

Debenture Allotment A/c Dr. 6,600

Loss on issue of debenture A/c Dr. 1,650
To 9% Debentures A/c 7,500
To Debenture redemption premium A/c 7,50
(Call made consequent upon allotment of
debentures issued at discount and redeemable
at premium)

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 COMPANY ACCOUNTS 11.17

Bank A/c Dr. 6,600

To Debenture Allotment A/c 6,600
(Allotment amount received)

Working Notes :
Loss on issue of debentures =
(Amount of discount on issue + Premium payable on redemption) x No. of
Debentures
= (6% of `100 + 5% of `100) x 150 lakh
= (` 6 + ` 5) x 150 lakh
= ` 1,650 lakh
6. Debentures Issued at premium and redeemable at premium
In this situation, the issue price is more than par value and also redemption
value is more than par value. The premium received at the time of issue of
debentures is credited to Securities premium account and premium paid
at the time of redemption is a loss to be provided at the time of issue of
debentures. Suppose, a 10% debenture of ` 1,000 is issued at a premium of
` 100 and redeemable at a premium of ` 50 per debenture. In the given case
` 100 is to be credited to Securities premium account and
` 50 will be the loss to be provided at the time of issue of debentures. It is to
be noted that premium on redemption of debentures is also credited by `
50.
(a) For the receipt of application money
Bank A/c Dr.
To Debenture Application A/c
(b) At the time of making allotment
(i) Transfer of application money to debenture
account Debenture Application A/c Dr.
To % Debentures A/c
(ii) Call made consequent upon allotment of debenture at
premium and Redeemable at premium
Debenture Allotment A/c Dr.
Loss on issue of debenture A/c Dr. [Amount equal to
the premium
on
redemption]

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 11.18 ACCOUNTING

To …% Debenture A/c
To Securities Premium A/c [Amount equal
to
premium on issue]
To Premium on Redemption of [Amount equal
to Debentures premium
on Debentures
A/c
redemption]
Students can note that instead of passing the separate
entries, a compound entry can be passed:
Bank A/c Dr.
Loss on issue of Debentures A/c Dr.
To …% Debentures A/c
To Securities Premium A/c
To Premium on redemption of debentures A/c
The Debenture Application A/c and Debenture allotment A/c are closed after
the allotment of debentures. The net effect of the above 6 situations can
be summarised as given below:
Condition Debenture issued at Debenture redemption at
under par or discount or premium
which premium
debentures
are issued
Debentures Bank A/c Dr. Bank A/c Dr.
issued at To Debentures A/c Loss on issue of Debentures A/c
par (Face value)
Dr. To Debentures A/c (Face
value)
To Premium on Redemption of
Debentures A/c
Debentures Bank A/c Dr. Bank A/c Dr.
issued at To Debentures A/c Loss on issue of Debentures A/c
premium (Face value)
To Securities Dr. To Debentures A/c (Face
premium value)
(premium)
To Securities premium
(premium) To Premium on
Redemption of
Debentures A/c

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 COMPANY ACCOUNTS 11.19

Debentures Bank A/c Dr. Bank A/c Dr.

issued at Discount on issue of Discount on issue of Debentures
Discount debentures A/c A/c Dr. Loss on issue of
Debentures A/c
Dr.
To Debentures A/c
(Face value) Dr.
To Debentures A/c (Face
value) To Premium on
Redemption of
Debentures A/c
or
Bank A/c Dr.
Loss on issue of Debentures A/c

Dr. To Debentures A/c (Face

value)
To Premium on Redemption of
Debentures A/c
When the debentures are redeemed at a premium (as per terms and
conditions of issue), the premium payable on redemption should be
recognised at the time of issue of debenture itself considering the
principle of conservatism or prudence.
This recognition involves loss on issue of debentures A/c (i.e. discount on
issue of debentures) and Premium on redemption A/c.
*Alternatively, the discount on issue of debentures, can be combined with
loss on issue of debentures A/c as both discount and redemption premium
represent loss to the company.

3.6.2 Accounting for issue of debentures payable in instalments

Just like shares, money payable on debentures may be paid either in full with
application or by instalments. Accounting entries will differ to some extent in
either case.
3.6.2.1 Debentures Payable in Full on Application
Where the amount due on debentures are payable in full on application, it is usual
to open a separate Debentures Application Account for each class of debentures,
such as 10% Debentures Application Account or 12% Debentures Application
Account. These accounts record moneys received from the applicants of
debentures. If an issue is over-subscribed, these accounts can be used to record
the refund of moneys to the unsuccessful applicants. At the time of allotment of
debentures, the amount in Debentures Application Account is transferred to the
respective Debentures Account.
As discussed above, debentures may be issued at par, at a premium, or at a
discount.

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 11.20 ACCOUNTING

3.6.2.2 Debentures Issued at Par

The debentures which are issued at par are issued at the same price as their
nominal value; that is, if a debenture with a nominal value of ` 100 is issued at par,
the company receives ` 100.
The accounting entries would be as follows:
(a) When cash is received
Bank A/c Dr.
To Debentures Application A/c
(Being money received on…. debentures @ ` ….each)
(b) When excess money is refunded or adjusted for
future calls Debentures Application A/c Dr.
To Bank A/c (Amount refunded)
To Debenture Allotment A/c (Amount adjusted for
allotment) (Being excess money…debentures adjusted as per
Board’s Resolution No….dated…..)
(c) When the debentures are allotted
Debentures Application A/c Dr.
To % Debentures A/c
(Being the allotment of…debentures of ` ….each as per Board’s
Resolution No….dated….)
(d) On Allotment money being called
Debenture Allotment A/c Dr.
To % Debentures A/c
(Being Allotment Money
Called)
(e) On Allotment money being received
Bank A/c Dr.
To Debenture Allotment A/c
(Being Allotment money received)

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 COMPANY ACCOUNTS 11.21

(f) On Debenture Call money being called

Debenture Calls A/c Dr.
To % Debentures A/c
(Being Call money made due)
(g) On Debenture Call money being called
Bank A/c Dr.
To Debenture Calls A/c
(Being Call money received)
ILLUSTRATION 6
Simmons Ltd. issued 1,00,000, 12% Debentures of `100 each at par payable in full
on application by 1st April, Application were received for 1,10,000 Debentures.
Debentures were allotted on 7th April. Excess money refunded on the same date.
You are required to pass necessary Journal Entries (including cash transactions) in
the books of the company.
SOLUTION
In the books of Simmons Limited

Date Particulars ` 000 ` 000

April 1 Bank A/c Dr. 11,000
To Debentures Application A/c 11,000
(Being money received on 1,10,000 debentures)

April 7 Debentures Application A/c Dr. 1,000

To Bank A/c 1,000
(Being money on 10,000 debentures refunded as
per Board’s Resolution No…..dated…)

April 7 Debentures Application A/c Dr. 10,000

To Debentures A/c 10,000
(Being the allotment of 1,00,000 debentures of `
100 each at par, as per Board’s Resolution
No….dated…)
3.6.2.3 Debentures Issued at a Premium
A company issues debentures at a premium when the market rate of interest is lower
than the debentures interest rate. The debentures, which are issued at a premium,
are issued at a higher

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of India
 11.22 ACCOUNTING

price than their nominal value; that is, if a debenture with a nominal value of `
100 is issued at 10% premium, the company receives at `110 where the investor
gets slightly less interest than stated in the debenture. For example, 12%
Debentures of `100 issued at a premium of 10%. The investor will get `12 p.a. for
his investment of 110. Therefore, the effective rate of interest on investment is
(12/110x 100) = 10.91%.
The premium on debentures is credited to ‘Securities Premium
Account’ as ‘Debentures’ are covered in the definition of ‘securities’
specified in the clause (h) of section 2 of the Securities Contracts
(Regulation) Act. Therefore, restriction of utilization of debentures
(securities) premium will also be governed by Section 52 of the
Companies Act, 2013.
The accounting entries would be as follows:
(a) When cash is received
Bank A/c Dr. [Nominal value plus premium]
To Debentures Application A/c
(Being money received on….debentures @
` ….. each including premium of ` …..)

(b) When excess money is refunded

Debentures Application A/c Dr.
To Bank A/c
(Being refund of money on….debentures
@ ` …. each, as per Board’s Resolution
No…..dated….)
(c) When the debentures are allotted
Debentures Application A/c Dr.
To % Debentures A/c
To Securities Premium A/c
(Being the allotment of….debentures, premium
transferred to Securities Premium A/c,
as per Board’s Resolution No….dated….)
3.6.2.4 Debentures Issued at a Discount
The Companies Act does not impose any restriction on the price at which
debentures can be issued. Unlike shares, there is no limit for discount on issue of
debentures. This is why it is

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of India
 COMPANY ACCOUNTS 11.23

very common for debentures to be issued at a discount. The debentures which

are issued at a discount are issued at a lower price than nominal value, that is, if a
debenture with a nominal value of `100 is issued at 10% discount, the company
receives `90 only. The issue of debentures at a discount slightly increases the
true rate of interest payable. For example, 12% Debentures of `100 issued at a
discount of 10%. The Company will have to pay `12 for a loan of `90. Therefore,
the true rate of interest is (12/90 x 100) = 13.33%.
The company issues debentures at a discount when the market rate of interest is
higher than the debenture interest rate. Like shares, Debentures Account is
credited with the nominal value. The difference between the nominal value of
debentures and cash received is transferred to “Discount on Issue of Debentures
Account. In the subsequent years, Discount on Issue of Debentures is written-off
proportionately by charging to the Statement of Profit and Loss. It is considered a
normal practice to amortize discount on issue of debentures over the period of
benefit, i.e., normally 3 to 5 years. However, this cannot go beyond tenure of
debentures.
The accounting entries would be as follows :
(a) When Cash is received
Bank A/c Dr. [Actual cash received]
To Debentures Application A/c
(Being money received on….debentures @` ……each)
(b) When excess money is refunded
Debentures Application A/c Dr.
To Bank A/c
(Being excess money on…debentures refunded as
per Board’s Resolution No…..dated….)
(c) When the debentures are allotted
Debentures Application A/c Dr. [Actual cash received]
Discount on Issue of Debentures A/c Dr. [Discount on
debentures]
To% Debentures A/c [Nominal value of
debentures] (Being the allotment of…debentures of ` ….each
@ ` …..each as per Board’s Resolution No…..dated…)

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of India
 11.24 ACCOUNTING

In fact, the discount on issue of debentures is considered as incremental

interest expense. The true expense (net borrowing cost) for a particular
accounting period is, therefore, the total interest payment plus the
discount amortised.
ILLUSTRATION 7
X Ltd. issued 1,00,000 12% Debentures of `100 each at a discount of 10% payable
in full on application by 31st May, 2022. Applications were received for 1,20,000
debentures. Debentures were allotted on 9th June, 2022. Excess money was
refunded on the same date. Pass necessary Journal Entries. Also show necessary
ledger accounts.

SOLUTION
In the books of X
Limited Journal Entries

Date
2022 Particulars ` '000 ` '000
May 31 Bank A/c Dr. 10,800
To Debentures Application A/c 10,800
(Being money received for 1,20,000 debentures @ `
90 each)
June 9 Debentures Application A/c Dr. 1,800
To Bank A/c 1,800
(Being excess money on 20,000 debentures @ ` 90
refunded as per Board’s Resolution No….dated….)
June 9 Debentures Application A/c Dr. 9,000
Discount on Issue of Debentures A/c Dr. 1,000
To 12% Debentures A/c 10,000
(Being the allotment of 1,00,000 debentures of ` 100
each at a discount of ` 10 per debenture as per
Board’s Resolution No…..dated…)

Bank Account

Date Particulars ` Date Particulars `

31.5.2022 To 12% 10,800 9.6.2022 By 12% Debentures 1,800
Debentures Application A/c
Application A/c 9.6.2022 By Balance c/d 9,000
10,800 10,800

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 COMPANY ACCOUNTS 11.25

12% Debentures Account

Date Particulars ` Date Particulars `

30.6.2022 To Balance 10,000 9.6.202 By 12% 9,000
c/d 2 Debentures
Application A/c
9.6.202 By Discount on Issue 1,000
2 of Debentures A/c
10,000 10,000

Debentures Application Account

Date Particulars ` Date Particulars `

9.6.2022 To Bank A/c 1,800 31.5.2022 By Bank A/c 10,800
9.6.2022 To 12% Debentures A/c 9,000
10,800 10,800

Discount on Issue of Debentures Account

Date Particulars ` Date Particulars `

9.6.2022 To12% Debentures 1,000 30.6.2022 By Balance c/d 1,000
A/c
1,000 1,000

3.7 ISSUE OF DEBENTURES AS COLLATERAL

SECURITY
Collateral security means secondary or supporting security for a loan, which can
be realised by the lender in the event of the original loan not being repaid on the
due date. Under this arrangement, the borrower agrees that a particular asset or a
group of assets will be realized and the proceeds there from will be applied to
repay the loan in the event that the amount due, cannot be paid.
Sometimes companies issue their own debentures as collateral security for a loan or
a fluctuating overdraft. When the loan is repaid on the due date, these debentures
are at once released with the main security. In case, the company cannot repay its
loan and the interest thereon on the due date, the lender becomes the debenture
holder who can exercise all the rights of a debenture holder.
In such cases, the holder of such debentures is entitled to interest only on
the amount of loan, but not on the debentures.

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 11.26 ACCOUNTING

Accounting Entries
There are two methods of showing these types of debentures in the accounts of a
company.
Method 1
Under this method, no entry is made in the books of account of the company at the
time of making issue of such debentures. In the ‘Notes to Accounts’ of Balance
Sheet, the fact of the debentures being issued and outstanding is shown by a
note under the liability secured.
ILLUSTRATION 8
X Ltd. obtains a loan from IDBI of `1,00,00,000, giving as collateral security of
`1,50,00,000 (of
` 10 each), 14%, First Mortgage Debentures.
SOLUTION
In the Notes to Accounts of Balance Sheet of X Ltd., it is shown as follows:
Notes to Accounts of X Limited as at…(includes)
Long Term Borrowings `
Secured Loan
IDBI Loan 1,00,00,000

(Collaterally secured by issue of ` 1,50,00,000 14% First Mortgage Debentures)

Method 2
Under this method, the following entry is made to record the issue of such
debentures: Debentures Suspense Account Dr.
To % Debentures Account
(Being the issue of…debentures collaterally as
per Board’s Resolution No…..dated……)
The Debentures Suspense Account will appear on the assets side of the Balance
Sheet under Other Non- Current Assets and Debentures on the liabilities side of the
Balance Sheet. When the loan is repaid, the entry is reversed in order to cancel
it.

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 COMPANY ACCOUNTS 11.27

ILLUSTRATION 9
Taking the same information of the illustration 8, the entry on issue will be as
follows :

In the Books of X Ltd.

Journal
Date Particulars ` `
Debentures Suspense A/c Dr. 1,50,00,000
To 14% First Mortgage Debentures A/c 1,50,00,000
(Being the issue of ` 15,00,000 debentures @
`10 collaterally as per Board’s Resolution No…
dated…)
Balance Sheet of X Limited as at….(Extracts)
Particulars Notes `
No.
EQUITY AND LIABILITIES
1. Non-Current Liabilities
Long Term Borrowings 1 1,00,00,000
Total 1,00,00,000
ASSETS
2. Non-current Assets
Other non-current asset
3. Current Assets
Cash and cash equivalent 1,00,00,000
Total
Notes to accounts 1,00,00,000
`

1. Long Term Borrowings `

Secured Loan
1,00,00,00
IDBI Loan
0
14% First Mortgage Debentures
Debenture Suspense Account 1,50,00,00
(issue of ` 15,00,000 14% First 0
Debentures as collateral security as per 1,50,00,00
contra) 0

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 11.28 ACCOUNTING

Students should note that the Method 1 is much more logical from the
accounting point of view. Therefore, it is advised to follow Method 1.

3.8 ISSUE OF DEBENTURES IN CONSIDERATION

OTHER THAN FOR CASH
Just like shares, debentures can also be issued for consideration other than for
cash, such as for purchase of land, machinery, etc. In this case, the following
entries are passed:
(a) Sundry Assets Account Dr. [Assets taken
over] To Sundry Liabilities Account [Liabilities
assumed]
To Vendors Account [Purchase
consideration] (Being the assets and liabilities taken over)
(b) Vendors Account Dr.
To Debentures Account
(Being the issue of….debentures to satisfy purchase consideration)
Further it should be noted that these debentures can be issued at par, premium and
at discount. In each case the second entry for issue of debentures would be done
accordingly. Number of debentures to be issued is calculated as follows:-
1. When debentures are issued at par
Purchase Consideration
No. of Debentures = Par Value
2. When debentures are issued at premium
Purchase Consideration
No. of Debentures = Par Value +Premium

3. When debentures are issued at discount

Purchase Consideration
No. of Debentures = Par Value - Discount

ILLUSTRATION 10
X Company Limited issued 10,000 14% Debentures of the nominal value of
`50,00,000 as follows:

(a) To sundry persons for cash at 90% of nominal value of ` 25,00,000.

(b) To a vendor for purchase of fixed assets worth `10,00,000 – ` 12,50,000
nominal value.

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 COMPANY ACCOUNTS 11.29

(c) To the banker as collateral security for a loan of ` 10,00,000 – ` 12,50,000

nominal value. Pass necessary Journal Entries.
SOLUTION
In the books of X Company Ltd.
Journal Entries

Date Particulars ` `

Bank A/c Dr. 22,50,000

To Debentures Application A/c 22,50,000

(Being the application money received on 5,000
debentures @ ` 450 each)

Debentures Application A/c Dr. 22,50,000

Discount on issue of Debentures A/c Dr. 2,50,000

To 14% Debentures A/c 25,00,000
(Being the issue of 5,000 14% Debentures @ 90% as per
Board’s Resolution No….dated….)

Fixed Assets A/c Dr. 10,00,000

To Vendor A/c 10,00,000

(Being the purchase of fixed assets from vendor)

Vendor A/c Dr. 10,00,000

Discount on Issue of Debentures A/c Dr. 2,50,000

To 14% Debentures A/c 12,50,000
(Being the issue of debentures of ` 12,50,000 to vendor
to satisfy his claim)

Bank A/c Dr. 10,00,000

To Bank Loan A/c (See Note) 10,00,000
(Being a loan of ` 10,00,000 taken from bank by issuing
debentures of ` 12,50,000 as collateral security)

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 11.30 ACCOUNTING

Note : No entry is made in the books of account of the company at the time of
making issue of such debentures. In the Balance Sheet due to the fact that the
debentures being issued as collateral security and outstanding are shown under
the respective liability.

3.9 TREATMENT OF DISCOUNT/LOSS ON ISSUE OF

DEBENTURES
The discount on issue of debentures is amortised over a period between the
issuance date and redemption date. It should be written-off in the following manner
depending upon the terms of redemption:
(a) If the debentures are redeemable after a certain period of time, say at the
end of 5 years, the total amount of discount should be written-off equally
throughout the life of the debentures (applying the straight line method).
The main advantage of this method is that it spreads the burden of
discount equally over the years.
(b) If the debentures are redeemable at different dates, the total amount of
discount should be written-off in the ratio of debenture amount outstanding
in each year. This method is suitable when debentures are redeemed by
unequal instalments.
The accounting entries would be as follows :
Profit and Loss Account Dr.
To Discount on Issue of Debentures Account
(Being the amount of discount on issue of debentures written-off)
Loss on issue of debentures is also a capital loss and should be written off in a
similar manner as discount on debentures issued. In the balance sheet both the
items (Discount and Loss) are shown as Non-current/current assets depending upon
the period for which it has to be written off.


Accounting Standard 16 Borrowing Costs states that ancillary borrowing costs and
discounts or premiums related to borrowings can be amortized over the loan period. It also
states that share issue expenses, discount on shares, and ancillary costs—such as discount
premiums on borrowing—are excluded from the scope of Accounting Standard 26
Intangible Assets.
Keeping this in view, Guidance Note clarified that following the generally accepted
accounting principle to amortize these expenses over the period of benefit, typically 3
to 5 years is acceptable.

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 COMPANY ACCOUNTS 11.31

ILLUSTRATION 11

HDC Ltd issues 1,00,000, 12% Debentures of ` 100 each at ` 94 on 1st January,
2022. Under the terms of issue, the debentures are redeemable at the end of 5
years from the date of the issue. Calculate the amount of discount to be written-
off in each of the 5 years.
SOLUTION

Total amount of discount comes to ` 6,00,000 (`6 X 1,00,000). The amount of

discount to be written-off in each year is calculated as under :

Year end Debentures Ratio in Amount of discount

outstanding which to be written-
discount to off
be written-
off
1st ` 1,00,00,000 1/5 1/5th of ` 6,00,000 = `
1,20,000
2nd ` 1,00,00,000 1/5 1/5th of ` 6,00,000 = `
1,20,000
3rd ` 1,00,00,000 1/5 1/5th of ` 6,00,000 = `
1,20,000
4th ` 1,00,00,000 1/5 1/5th of ` 6,00,000 = `
1,20,000
5th ` 1,00,00,000 1/5 1/5th of ` 6,00,000= ` 1,20,000

ILLUSTRATION 12

HDC Ltd. issues 2,00,000, 12% Debentures of `10 each at `9.40 on 1st January,
2022. Under the terms of issue, 1/5th of the debentures are annually
redeemable by drawings, the first redemption occurring on 31st December, 2022.
Calculate the amount of discount to be written- off from 2022 to 2026.
SOLUTION
Calculation of amount of discount to be written-off
At the Debentures Ratio of Amount of discount
Year Outstanding benefit to be written-
end before Derived off
redemption
2022 ` 20,00,000 5 5/15th of ` 1,20,000 = ` 40,000
2023 ` 16,00,000 4 4/15th of ` 1,20,000 = ` 32,000
2024 ` 12,00,000 3 3/15th of ` 1,20,000 = ` 24,000
2025 ` 8,00,000 2 2/15th of ` 1,20,000 = ` 16,000
2026 ` 4,00,000 1 1/15th of ` 1,20,000 = ` 8,000
TOTAL 15 ` 1,20,000

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 11.32 ACCOUNTING

3.10INTEREST ON DEBENTURES
Interest payable on coupon debenture is treated as a charge against the profits
of the company. Interest on debenture is paid periodically and is calculated at
coupon rate on the nominal value of debentures. The company will pay interest
net of tax to the debenture holders because the company is under obligation to
deduct tax at source at the rates applicable as per the provisions of the Income
tax act 1961. The companies will deposit the tax so deducted with income tax
authorities. Following accounting entries are to be recorded in this regard:
1. For making interest due
Interest A/c Dr.
To Debenture holders’ A/c
2. For making payment of interest and deduction of tax at source (TDS)
Debenture holders A/c Dr.
To TDS Payable
A/c To Bank A/c
3. For making payment of tax deducted at source
TDS payable A/c Dr.
To Bank A/c
4. For transferring interest to profit and loss account
Profit and Loss A/c Dr.
To Interest A/c

ILLUSTRATION 13
A company issued 12% debentures of the face value of `10,00,000 at 10% discount
on 1-1-2022. Debenture interest after deducting tax at source @ 10% was payable
on 30th June and 31st of December every year. All the debentures were to be
redeemed after the expiry of five year period at 5% premium.
Pass journal entries for the accounting year 2022.
SOLUTION
Journal Entries

(`) (`)
1-1-2022 Bank A/c Dr. 9,00,000

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 COMPANY ACCOUNTS 11.33

Discount/Loss on Issue of Debentures A/c Dr. 1,50,000

To 12% Debentures A/c 10,00,000
To Premium on Redemption of Debentures 50,000
A/c
(For issue of debentures at discount
redeemable at premium)
30-6-2022 Debenture Interest A/c Dr. 60,000
To Debenture holders A/c 54,000
To Tax Deducted at Source 6,000
A/c (For interest payable)
54,000
Debenture holders A/c Dr.
6,000
Tax Deducted at Source Dr.
60,000
A/c To Bank A/c
(For payment of interest and TDS)

31-12-2022 Debenture Interest A/c Dr. 60,000

To Debenture holders A/c 54,000
To Tax Deducted at Source 6,000
A/c (For interest payable)
Debenture holders A/c Dr. 54,000
Tax Deducted at Source Dr. 6,000
A/c To Bank A/c 60,000
(For payment of interest and tax)

Profit and Loss A/c Dr. 1,20,000

To Debenture Interest A/c 1,20,000
(For transfer of debenture interest to profit
and loss account at the end of the year)

Profit and Loss A/c Dr. 30,000

To Discount/Loss on issue of debenture A/c 30,000
(For proportionate debenture discount and
premium on redemption written off, i.e.,
1,50,000 x 1/5)

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 11.34 ACCOUNTING

SUMMARY
 Debenture is one of the most commonly used debt instrument issued by the
company to raise funds for the business. A debenture is a bond issued by a
company under its seal, acknowledging a debt and containing provisions as
regards repayment of the principal and interest. Money payable on
debentures may be paid either in full with application or in instalments.
 Debenture holders are the creditors of the company whereas shareholders
are the owners of the company. Debenture holders have no voting rights
and consequently do not pose any threat to the existing control of the
company. Shareholders have voting rights and consequently control the
total affairs of the company.
 Debentures can be classified on the basis of: (1) Security; (2) Convertibility;
(3) Permanence; (4) Negotiability; and (5) Priority.
 Issue of redeemable debentures can be categorized into the following:
1. Debenture issued at par and redeemable at par or at a discount;
2. Debenture issued at a discount and redeemable at par or at discount;
3. Debenture issued at premium and redeemable at par or at discount;
4. Debenture issued at par and redeemable at premium;
5. Debenture issued at a discount and redeemable at premium;
6. Debenture issued at premium and redeemable at premium;
Note: In practical life, redemption of debentures at a discount is a rare
situation.
 Collateral security means secondary or supporting security for a loan, which
can be realised by the lender in the event of the original loan not being
repaid on the due date. Under this arrangement, the borrower agrees that
a particular asset or a group of assets will be realized and the proceeds
there from will be applied to repay the loan in the event that the amount
due, cannot be paid. Sometimes companies issue their own debentures as
collateral security for a loan or a fluctuating overdraft.
 Debentures can also be issued for consideration other than for cash, such as
for purchase of land, machinery, etc.
 The discount on issue of debentures is amortised over a period between the
issuance date and redemption date. Loss on issue of debentures is also a
capital loss and should be written off in a similar manner as discount on
debentures issued. In the balance sheet both the items (Discount and Loss)
are shown as Non-current/current assets depending upon the period for
which it has to be written off.
 Interest payable on debentures is treated as a charge against the profits of
the company. Interest on debenture is paid periodically and is calculated
at coupon rate on the nominal value of debentures.

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TEST YOUR KNOWLEDGE

True and False
1. Debenture holder are the owners of the company.
2. Perpetual debentures are payable at the time of liquidation of the company.
3. Registered debentures are transferable by delivery.
4. When companies issue their own debentures as collateral security for a
loan, the holder of such debenture is entitled to interest only on the amount
of loan and not on the debentures
5. Debentures suspense account appears on liability side of balance sheet.
6. If a company incurs loss, then it does not pay interest to the debenture
holders.
7. At the time of liquidation, debenture holders are paid off after the
shareholders.
8. Convertible debentures can be converted into equity shares.
9. Redeemable debentures are not payable during the life time of the
company.
10. Debentures can be issued for a consideration other than for cash, such as for
purchasing land, machinery etc.

Multiple Choice Questions

1. Premium on redemption of debentures account appearing in the balance
sheet is .
(a) A nominal account – expenditure
(b) A nominal account - income
(c) A personal account .
2. Debenture interest
(a) Is payable before the payment of any dividend on shares
(b) Accumulates in case of losses or inadequate profits
(c) Is payable after the payment of preference dividend but before the
payment of equity dividend .
3. F Ltd. purchased Machinery from G Company for a book value of ` 4,00,000.
The consideration was paid by issue of 10% debentures of ` 100 each at a
premium of 25%. The debenture account was credited with .
(a) ` 4,00,000

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 11.36 ACCOUNTING

(b) ` 5,00,000

(c) ` 3,20,000
4. Which of the following is not a characteristic of Bearer Debentures?
(a) They are treated as negotiable instruments
(b) Their transfer requires a deed of transfer
(c) They are transferable by mere delivery
5. When debentures are issued as collateral security, the final entry for
recording the collateral debentures in the books is .
(a) Credit Debentures A/c and debit Cash A/c.
(b) Debit Debenture suspense A/c and credit Cash A/c.
(c) Debit Debenture suspense A/c and credit Debentures A/c.
6. When debentures are redeemable at different dates, the total amount of
discount on issue of debentures should be written off
(a) Every year by applying the sum of the year’s digit method
(b) Every year by applying the straight line method
(c) To profit and loss account in full in the year of final or last redemption
7. Debentures are issued at discount when
(a) Market interest rate is higher than debenture interest rate
(b) Market interest rate is lower than debenture interest rate
(c) Market interest rate is equal debenture interest rate
8. Interest payable on Debentures attract
(a) Tax deducted at source
(b) Goods and Service tax
(c) Fringe benefit tax

Theoretical questions
1. Distinguish between debentures and shares.
2. Explain the purpose for raising of debenture by the company. Also give the
main features of debentures.

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of India
 COMPANY ACCOUNTS 11.37

Practical questions
1. Country Crafts Ltd. issued 1,00,000, 8% debentures of ` 100 each at
premium of 5% payable fully on application and redeemable at premium of `
10 Pass necessary journal entries at the time of issue.
2. Koinal Chemicals Ltd. issued 20,00,000, 10% debentures of ` 50 each at
premium of 10%, payable as ` 20 on application and balance on allotment.
Debentures are redeemable at par after 6 years. All the money due on
allotment was called up and received. Record necessary entries when
premium money is included in allotment money.
3. Kapil Ltd. issued 50,000, 12% Debentures of ` 100 each at a premium of 10%
payable in full on application by 1st March, 2022. The issue was fully
subscribed and debentures were allotted on 9th March, 2022.
Pass necessary Journal Entries (including cash transactions).
4. On 1st April 2022 Sheru Ltd. issued 1,00,000 12% debentures of ` 100 each
at a discount of 5%, redeemable on 31st March, 2027. Issue was
oversubscribed by 20,000 debentures, who were refunded their money.
Interest is paid annually on 31st March. You are required to prepare:
(i) Journal Entries at the time of issue of debentures.
(ii) Discount on issue of Debenture Account
(iii) Interest account and Debenture holder Account assuming TDS is
deducted @ 10%.
5. A Limited issued 14% Debentures of the nominal value of ` 10 each as
follows:
(a) To sundry persons 1,00,000 Debentures for cash at 10% discount.
(b) To a vendor for purchase of Inventory worth ` 1,00,000, 8,000
debentures at 25% premium.
(c) To the banker as collateral security for a loan of ` 1,00,000 – `
1,50,000 nominal value.
Pass necessary Journal Entries.

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of India
 11.38 ACCOUNTING

ANSWERS/HINTS
True and False
1. False: Debenture holder are the creditors of the company.
2. True: Perpetual debentures, also known as irredeemable debentures are not
repayable during the life time of the company.
3. False: Registered debentures are not easily transferable by delivery. Bearer
debentures are transferrable by delivery.
4. True: In case the company cannot repay its loan & the interest thereon
on the due date, the lender becomes debenture holder & then only he is
entitled to interest on debentures.
5. False: Debentures suspense account appears on asset side of balance sheet
under non- current asset.
6. False: Even if the company incurs loss or earns profit, it has to pay the
interest on debentures.
7. False: At the time of liquidation, debenture holders are paid off before
shareholders on priority basis.
8. True: Convertible debentures can be converted into equity share after a
certain period of time from the date of its issue.
9. False: These debentures are repayable as per the terms of issue, for
example, after 8 years from the date of issue.
10. True: Debentures can be issued for a consideration other than for cash, such
as for purchasing land, machinery etc.

Multiple Choice Questions

1. (c) 2. (a) 3. (c) 4. (b) 5. (c) 6. (a)
7. (a) 8. (a)

Theoretical Questions
1. Refer para 3.4 for the distinction between Shares and Debentures.
2. Debenture is one of the most commonly used debt instrument issued by the
company to raise funds for the business. The most common method of
supplementing the capital available to a company is to issue debentures
which may either be simple or

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of India
 COMPANY ACCOUNTS 11.39

naked carrying no charge on assets, or mortgage debentures carrying either a

fixed or a floating charge on some or all of the assets of the company.
For features of debentures refer para 3.3.

Practical Questions
1. Journal Entries in the Books of Country Crafts Ltd.
Debi Credit
Date Particulars t Amount
Amoun(`'000)
t
(`'000)
Bank A/c 10,500

To Debenture Application A/c 10,500

(Debenture application money

received)
Debenture Application A/c Loss 10,500
on Issue of Debenture A/c 1,000
To Securities Premium A/c To 500
8% Debentures A/c
10,000
To Premium on Redemption A/c
1,000
(Debenture application
money transferred to
debenture account)

2. Journal Entries in the Books of Koinal Chemicals Ltd.

Particulars Debit Credit
Amount Amount
(` (`
lakhs) lakhs)
Bank A/c Dr. 400
To Debenture Application A/c 400
(Debenture application money received)
Debentures Application A/c Dr. 400
To 10% Debentures A/c 400
(Debenture application money transferred to
10% debenture account consequent
upon allotment)

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of India
 11.40 ACCOUNTING

Debenture allotment A/c Dr. 700

To 10% Debentures 600
A/c To Securities 100
Premium A/c
(Call made on allotment of debenture including
premium)
Bank A/c Dr. 700
To Debenture Allotment A/c 700
(Money received consequent upon allotment)

3. Journal Entries in the books of Kapil Limited

Date Particulars ` `
2022
March 1 Bank A/c Dr. 55,00,000
To Debentures Application A/c 55,00,000
(Being the money received on
50,000 debentures @ ` 110 each
including premium of
` 10 each)
March 9 Debentures Application A/c Dr. 55,00,000
To 12% Debentures A/c 50,00,000
To Securities Premium A/c 5,00,000
(Being the allotment of 50,000
debentures of
` 100 each, premium @ ` 10 each
transferred to Securities Premium Account
as per Board’s Resolution No….dated….)
4. (i) Journal in the Books of Sheru Ltd.
Date Particulars LF (` 00) (` 00)
2022
Apr 1 Bank A/c 1,14,000
To Debenture Application A/c 1,14,000
(Being debenture application money
received for 1,20,000 debentures)

Debenture Application A/c Dr. 1,14,000

Discount on Issue of Debenture A/c Dr. 5,000

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of India
 COMPANY ACCOUNTS 11.41

To 12% Debenture 1,00,000

A/c To Bank A/c 19,000
(Being application money transferred
to debenture account and excess
refunded)
(ii) Discount on Issue of Debenture A/c
Date Particulars `'00 Date Particulars `'00
1.4.2 To 12% Debentures 5,000 31.3.2 By Profit & Loss 1,000
2 A/c 3 A/c
31.3.2 By Balance c/d 4,00
3 0
5,000 5,000
1.4.2 To Balance b/d 4,000 31.3.2 By Profit & Loss 1,000
3 4 A/c
31.3.2 By Balance c/d 3,00
4 0
4,000 4,000
1.4.2 To Balance b/d 3,000 31.3.2 By Profit & Loss 1,000
4 5 A/c
31.3.2 By Balance c/d 2,00
5 0
3,000 3,000
1.4.2 To Balance b/d 2,000 31.3.2 By Profit & Loss 1,000
5 6 A/c
31.3.2 By Balance c/d 1,00
6 0
2,000 2,000
1.4.2 To Balance b/d 1,000 31.3.2 By Profit & Loss 1,000
6 7 A/c
1,000 1,000

(iii) Interest A/c

Date Particulars `'00 Date Particulars `'00
31.3.23 To Debenture holder 12,000 31.3.2 By Profit & Loss 12,000
A/c 3 A/c
12,000 12,000
31.3.24 To Debenture holder 12,000 31.3.2 By Profit & Loss 12,000
A/c 4 A/c
12,000 12,000
31.3.25 To Debenture holder 12,000 31.3.2 By Profit & Loss 12,000
A/c 5 A/c
12,000 12,000

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of India
 11.42 ACCOUNTING

31.3.26 To Debenture holder 12,000 31.3.2 By Profit & Loss 12,000

A/c 6 A/c
12,000 12,000

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of India
 COMPANY ACCOUNTS 11.43

31.3.27 To Debenture holder 12,000 31.3.2 By Profit & Loss 12,000

A/c 7 A/c
12,000 12,000

Debentureholder A/c
Date Particulars `'00 Date Particulars `'00
31.3.23 To Bank A/c 10,800 31.3.23 By Interest 12,000
A/c
31.3.23 To TDS A/c 1,200
12,000 12,000
31.3.24 To Bank A/c 10,800 31.3.24 By Interest 12,000
A/c
31.3.24 To TDS A/c 1,200
12,000 12,000
31.3.25 To Bank A/c 10,800 31.3.25 By Interest 12,000
A/c
31.3.25 To TDS A/c 1,200
12,000 12,000
31.3.26 To Bank A/c 10,800 31.3.26 By Interest 12,000
A/c
31.3.26 To TDS A/c 1,200
12,000 12,000
31.3.27 To Bank A/c 10,800 31.3.27 By Interest 12,000
A/c
31.3.27 To TDS A/c 1,200
12,000 12,000

5. In the books of A Ltd.

Journal Entries

Date Particulars ` `
(a) Bank A/c Dr. 9,00,000
To Debentures Application A/c 9,00,000
(Being the application money received on
100,000 debentures @ ` 9 each)

Debentures Application A/c Dr. 9,00,00

Discount on issue of Debentures A/c Dr. 0

To 14% Debentures A/c 1,00,00

0
(Being the issue of 100,000 14% Debentures 10,00,000
@ 90% as per Board’s Resolution
No….dated….)

© The Institute of Chartered Accountants

of India
 11.44 ACCOUNTING
(b) Inventories A/c Dr. 1,00,000
To Vendor A/c 1,00,000

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of India
 COMPANY ACCOUNTS 11.45

(Being the purchase of inventories from

vendor)
Vendor A/c Dr. 1,00,000
To 14% Debentures 80,000
A/c To Securities 20,000
Premium
(Being the issue of 8,000 debentures of to
vendor to satisfy his claim at premium of
25%)
(c) Bank A/c Dr. 1,00,000
To Bank Loan A/c (See Note) 1,00,000
(Being a loan of `1,00,000 taken from bank
by issuing debentures of ` 1,50,000 as
collateral security)

Note : No entry is made in the books of account of the company at the time of
making issue of such debentures. In the Balance Sheet due to the fact that the
debentures being issued as collateral security and outstanding are shown under
the respective liability.

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of India