Terms of Issue of Debentures

Issue of Debentures

Issue of debentures is referred to as the action of issuing a certificate by a company under its seal in acknowledgement of any debt that is taken by the company.

The issuing of debentures follows a process which is similar to that of issue of shares by a company. There will be issuing of prospectus, applications will be invited from interested parties and there will be issuing of letters of allotment.

The application money is refunded in case the application is rejected and in case of partial allotment, the excess amount of application money will be used in further calls.

Issue of debentures can take place in following forms:

  1. By cash
  2. Consideration other than cash
  3. As collateral security

Depending on the terms of issue, there are three ways in which debentures can be issued, they are:

  1. At par
  2. At discount
  3. At premium

We will be discussing the issue of debentures by cash and the various journal entries in each of the three scenarios.

For debentures issued for cash at par 

1. When application money is received

Bank A/c        Dr.

To Debentures Application A/c 

( Towards application money received for Debentures)

2. Transfer of debentures application money to debentures account on their allotment

Debentures Application A/c       Dr. 

To Debentures A/c

(Towards application money transferred to debenture account on allotment)

3. Money due on allotment

Debentures Allotment A/c     Dr. 

To Debentures A/c

(Towards money due on allotment)

4.Money due on allotment is received

Bank A/c  Dr.

To Debentures Allotment A/c 

(Towards receipt of Debenture allotment money)

5.First and final call is made

Debentures First and Final call A/c Dr 

To Debentures A/c

(Towards first and final call money made due on debentures)

6.Debentures First and Final call money is received

Bank A/c Dr

To Debentures First and Final call A/c 

(Towards receipt of Amount due on call)

For Debentures issued at discount

The following journal entry will be passed

Debentures Allotment A/c Dr.

Discount on issue of  debentures A/c   Dr. 

To Debentures A/c

(Towards allotment money due and the amount of discount is @ Rs …. per debenture)

For debenture issued at premium

Following journal entry will be passed

Debentures Allotment A/c Dr. 

To Debentures Account

To Securities Premium A/c

(Towards amount due on allotment along with premium of Rs.__ )

Accounting Treatment for Terms of Issue of Debentures

Debentures can be redeemed at par or at premium, therefore the possible combinations that can result from the two factors are:

  1. Issued at par and redeemable at par
  2. Issued at a discount and redeemable at par
  3. Issued at a premium and redeemable at par
  4. Issued at par and redeemable at a premium
  5. Issued at a discount and redemption at a premium
  6. Issued at a premium and redeemable at a premium

The associated journal entries for each of the above mentioned instances are as follows:

Issued at par and redeemable at par

(a) Bank A/c Dr.

  To Debenture Application & Allotment A/c 

    (Towards receipt of application money)

(b) Debenture Application & Allotment A/c Dr.

     To Debentures A/c 

 (Towards allotment of debentures)

Issued at a discount and redeemable at par

(a) Bank A/c Dr.

 To Debenture Application & Allotment A/c

 (Receipt of application money)

(b) Debenture Application & Allotment A/c  Dr. 

     Discount on Issue of Debentures A/c   Dr.

     To Debentures A/c

 (Towards allotment of debentures at a discount)

Issue at premium and redemption at par

(a) Bank A/c Dr.

To Debenture Application & Allotment A/c 

 (Receipt of application money)

(b) Debenture Application & Allotment A/c Dr. 

To Debentures A/c

To Securities Premium A/c 

 (Allotment of debentures at a premium)

Issue at par and redeemable at premium

(a) Bank A/c Dr.

To Debenture Application & Allotment A/c 

(Receipt of application money)

(b) Debenture Application & Allotment A/c   Dr.

Loss on Issue of Debentures A/c Dr.  (with premium on redemption)

To Debentures A/c (with nominal value of debenture)

To Premium on Redemption of Debenture A/c  (with premium on redemption) 

(Allotment of debentures at par and redeemable at a premium)

 Issue at discount and redemption at premium

Bank A/c     Dr.

To Debenture Application & Allotment A/c 

(Receipt of application money)

Debenture Application & Allotment A/c  Dr.

Loss on Issue of Debentures A/c Dr. (with discount on issue plus premium on redemption)

To Debentures A/c (with nominal value of debenture)

To Premium on Redemption of Debentures A/c (with premium on redemption)

(Allotment of debentures at a discount and redeemable at premium)

Issued at a premium and redeemable at premium

Bank A/c   Dr.

To Debenture Application & Allotment A/c 

(Receipt of application money)

Debenture Application & Allotment A/c   Dr.

Loss on Issue of Debentures A/c   Dr. (with premium on redemption) 

To Debentures A/c  (with nominal value of debenture) 

To Securities Premium A/c  (with premium on issue)

To Premium on Redemption of Debentures A/c (with premium on redemption) 

N.B: The following journal entries are the same as suggested in the NCERT Commerce textbook.

This concludes the article on the topic of Terms of Issue of Debentures, which is an important topic for Commerce students. For more such interesting articles, stay tuned to BYJU’S.

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