03 Issue of Debentures Notes by Sachin Pareek

Chapter 10
Issue of Debentures
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Chapter 10: Issue of Debentures
01 02 03
Introduction Types of Debentures Issue of Debentures
04 05
Interest on Writing off Discount and
Debentures Loss on Issue of Debentures
Chapter 10: Issue of Debentures
What is a Debenture? Issue of Debentures for Consideration Other
Than Cash
Difference Between Debenture and Share
Issue of Debentures as Collateral Security
Types of Debentures
Issue of Debentures with Terms of
Disclosure of Debentures in Balance Sheet Redemption
Issue of Debentures for Cash Interest on Debentures
Issue of Debentures at Premium Writing off Discount and Loss on Issue of

Debentures
Issue of Debentures at Discount
Oversubscription of Debentures
Undersubscription of Debentures

Company Accounts -
Issue of Debentures

Meaning
Debenture is a written instrument or document issued by the

company acknowledging the borrowing. The terms of repayment
of principal and payment of interest at a specified rate are stated
in the document.

Meaning
"Debenture includes debenture stock, bonds and any other

instrument of the company evidencing a debt, whether
constituting a charge on the assets of the company or not."
- Section 2(30) of the Companies Act, 2013

Meaning
"A debenture is a document given by a company as evidence of a

debt to the holder usually arising out of a loan and most
commonly secured by a charge."
- Topham

Characteristics
or Features of
Debenture
🙂🙂🙂

Characteristics or Features of Debenture
1. Debenture is a written document or certificate acknowledging

borrowing by the company.

2. Mode and period of repayment of principal and interest is fixed.

3. Rate of interest on the debenture is specified. It is a practice to

prefix 'Debentures' with the rate of interest. For example, if the rate of
interest is 7%, the title of the debentures will be "7% Debentures.

4. It is borrowing of the company.

5. It is normally secured by way of charge on the assets of the

company.

6. Interest on Debentures is a charge against profit.

Bond

Meaning
Bond, like debenture, is an acknowledgement of borrowing issued

by the company and signed by an authorised signatory. The
expression 'Bond' has become synonymous with the debt
instrument where the rate of interest is not predetermined.
Examples of bonds are Deep Discount Bond and Zero Coupon

Bond.

Any Other
Instrument

Meaning
Any other instrument will include any kind of security (document)

evidencing borrowing that a company may issue. For example,
Public Deposit, it being an instrument of the company, is also
termed as debenture. In other words, the term 'Any Other
Instrument' is a wide term that includes every instrument issued by
the company that evidences debt.

Difference
between
Debenture and
Share
😁😁😁

1. Ownership
Debenture
Debenture is borrowing of the company. Therefore, a debenture holder is a lender.
Share
Share is capital of the company. Hence, a shareholder is the owner.

2. Return
Debenture
Debenture holder gets interest at the stated rate whether the company earns
profit or not.
Share
A shareholder gets dividend on his investment.

3. Repayment
Debenture
Debentures are issued for a specified period. Hence, the amount of debentures is
repaid on the due date..
Share
Normally, the amount of share is not repaid during the lifetime of the company.
However, preference shares have a specified life and are redeemed on due date.

4. Issue at Discount
Debenture
Debentures can be issued at discount..
Share
Shares cannot be issued at discount except where they are issued as Sweat Equity
shares.

5. Security
Debenture
Debentures may or may not be secured by a charge on the assets of the company..
Share
Shares are not secured.

6. Convertibility
Debenture
Debentures can be converted into shares.
Share
Shares (except Convertible Preference Shares) cannot be converted into any

other security.

7. Voting Right
Debenture
Debenture holders do not have voting right.
Share
Shareholders (Equity) have a right to attend and vote in the general meetings.

8. Risk
Debenture
Debenture holders are relatively safe. Secured Debentures are almost risk free.
Share
Shareholders are at a greater risk. They can even lose the amount invested in
shares.

9. Priority as to Repayment of Principal
Debenture
In case of winding-up of the company, payment of debentures is made before the

payment of share capital.
Share
In case of winding-up of the company, payment of share capital is made after

repayment of debentures.

Difference between Debenture and Share
Basis Debenture Share
1. Ownership Debenture is borrowing of the company. Share is capital of the company. Hence, a shareholder is the
Therefore, a debenture holder is a lender. owner.
2. Return Debenture holder gets interest at the stated rate A shareholder gets dividend on his investment.
whether the company earns profit or not.
3. Repayment Debentures are issued for a specified period. Normally, the amount of share is not repaid during the lifetime
Hence, the amount of debentures is repaid on the of the company. However, preference shares have a specified
due date.. life and are redeemed on due date.
4. Issue at Discount Debentures can be issued at discount.. Shares cannot be issued at discount except
where they are issued as Sweat Equity shares.
5. Security Debentures may or may not be secured by a Shares are not secured.
charge on the assets of the company..
6. Convertibility Debentures can be converted into shares. Shares (except Convertible Preference Shares) cannot be
converted into any other security.
7. Voting Right Debenture holders do not have voting right. Shareholders (Equity) have a right to attend and vote in the
general meetings.
8. Risk Debenture holders are relatively safe. Secured Shareholders are at a greater risk. They can even lose the
Debentures are almost risk free. amount invested in shares.
9. Priority as to In case of winding-up of the company, payment of In case of winding-up of the company, payment of share
Repayment of debentures is made before the payment of share capital is made after repayment of debentures.
Principal capital.
Difference
between
Debenture
holder and
Shareholder
😁😁😁

1. Status
Debenture holder
Debenture holder is the lender of the company.
Shareholder
Shareholder is the owner of the company.

2. Return
Debenture holder
A debenture holder gets interest on his investment at the specified rate whether
the company earns profit or not.
Shareholder
A shareholder gets dividend.

3. Control
Debenture holder
A debenture holder has no right to control the activities of the company by voting
or otherwise.
Shareholder
A shareholder has a right of control over the working of the company by

attending and/ voting in the General Meeting.

4. Risk
Debenture holder
Debenture holders are relatively safe. Secured debentureholders are almost free
from risk.
Shareholder
Shareholders are at a greater risk. They can even Jose the amount invested In
shares.

Difference between Debenture holder and Shareholder
Basis Debenture holder Shareholder
1. Status Debenture holder is the lender of the company. Shareholder is the owner of the company.
2: Return A debenture holder gets interest on his A shareholder gets dividend.

investment at the specified rate whether the
company earns profit or not.
3. Control A debenture holder has no right to control the A shareholder has a right of control over the working of the
activities of the company by voting or otherwise. company by attending and/ voting in the General Meeting.
4. Risk Debenture holders are relatively safe. Secured Shareholders are at a greater risk. They can even Jose the
debentureholders are almost free from risk. amount invested In shares.

TYPES OF
DEBENTURES
😉😉😉

Types of
Debentures
View Point of View Point of View Point of View Point of
Security Redemption Registration Convertibility
Secured Redeemable Registered Convertible

Debentures Debentures Debentures Debentures
Unsecured Irredeemable Bearer Non-convertible

Debentures Debentures Debentures Debentures

From Security Point of View
(i) Secured Debentures:
Secured Debentures are those debentures which are secured by either fixed or floating charge
on the assets of the company. A charge on the assets of the company is registered with the
Registrar of Companies.
(ii) Unsecured Debentures:
Unsecured Debentures are those debentures which are not secured by a charge on assets of the
company.

The expression charge means securing the loan by mortgaging specific assets towards
the loan. It means, if the company does not meet its obligation, the lender can secure his
payment from the assets mortgaged or in case of winding-up of the company from the
official liquidator. A charge may be either fixed or floating.
A charge created on definite assets of a permanent nature, such as land, building,

machinery, etc., is known as Fixed Charge.
A charge is a Floating Charge when no specific asset but all assets (except those
charged by way of fixed charge) are charged as security. A Floating Charge holder has a
preference over an unsecured creditor for settling his claims, in the event of winding-up
of the company,

From Redemption Point of View
(i) Redeemable Debentures:
Redeemable Debentures are those debentures that are repayable by the company on maturity,
i.e., at the end of a specified period as per the terms of issue.
(ii) Irredeemable Debentures:
Irredeemable Debentures are those debentures that are not repayable during the lifetime of the
company and hence are repaid only when the company is wound-up.

From Registration Point of View
(i) Registered Debentures:
Registered Debentures are the debentures that are registered in the company's records in the
name of the holder. Principal and interest of such debentures is payable to the registered
debentureholders. The transfer of debentures in this case requires the execution of a transfer
deed.
(ii) Bearer Debentures:
Bearer debentures are the debentures that are not registered in the records of the company in
the name of the holder. These debentures are transferable by mere delivery. Interest is paid to
the person who produces coupons attached to the debenture.

From Convertibility Point of View
(i) Convertible Debentures:
Convertible Debentures are the debentures that are convertible into shares. If a part of the
debenture amount is convertible into Equity Shares, they are known as Partly Convertible
Debentures. If full amount of debentures is convertible into Equity Shares, they are known as
Fully Convertible Debentures.
(ii) Non-convertible Debentures:
Non-convertible Debentures are the debentures that are not convertible into shares.

Company issuing debentures to public is required to appoint
trustees and execute a Trust Deed. It is the responsibility of the
trustees to protect the interest of the debentureholders through
the powers granted by the Trust Deed.

Disclosure of
Debentures in
the Balance
Sheet
😉😉😉

Meaning
Debentures are borrowings of a company, i.e., a liability. Hence,

they are shown in the Equity and Liabilities part of the Balance
Sheet.

Meaning
Debentures may be issued for long-term or short-term period.

Thus, they are shown as either Long-term Borrowings under the
head Non-current Liabilities or Short-term Borrowings under the
head Current Liabilities, which depends on the tenure of the
debentures from the date of their issue.

Schedule Ill of the Companies Act, 2013 prescribes that liabilities are to be
shown as Non-current Liabilities and Current Liabilities on the basis of its
maturity period.
To recapitulate, liabilities that are due for payment after 12 months or after
the period of Operating Cycle from the date of Balance Sheet are shown as
Non current Liabilities and the remaining Liabilities as Current Liabilities.

When Current
When Long - When Short-
Maturities of
term term
Long-term
Borrowings Borrowings
Debts
Disclosure of Debentures
in the Balance Sheet

When Long-term Borrowings
Debentures are classified, i.e., shown in the Balance Sheet under the main head
'Non-current Liabilities and sub-head 'Long-term Borrowings’,
when they are due for redemption after 12 months or after the period of
Operating Cycle from the reporting date, i.e., the date of Balance Sheet,
whichever is later.

For example, Nirula's Ltd. has 10,000; 9% Debentures of 100 each redeemable
on 31st March, 2027. The period of Operating Cycle is 24 months.
In the Balance Sheet as at 31st March, 2021, such debentures will be shown as
Long-term Borrowings under the head Non-current Liabilities because they are
redeemable after 31st March, 2022 (i.e., 12 months-after the date of Balance
Sheet) and also after 31st March, 2023, i.e., after the period of Operating Cycle
(i.e., 24 months after the date of Balance Sheet).

Particulars Note No Amount

1. EQUITY AND LIABILITIES
Non Current Liabilities
Long-term Borrowings 1 10,00,000
Note to Accounts
1. Long-term Borrowings
10,000; 9% Debentures of 100 each 10,00,000

When Short-term Borrowings
Debentures are classified, i.e., shown in the Balance Sheet under the head
'Current Liabilities' and sub-head 'Short-term Borrowings’
when they are due for redemption within 12 months or within the period of
Operating Cycle from the date of Balance Sheet.

For example, if 10,000, 9% Debentures of 100 each are issued on 1st April,
2020 redeemable on 1st January, 2022.
These debentures will be shown as Short-term Borrowings under the head

Current Liabilities in the Balance Sheet as at 31st March, 2021
Because they are issued to be redeemed within 12 months from the date of
Balance Sheet (i.e., by 31st March, 2022)..


1. EQUITY AND LIABILITIES
Current Liabilities
Short-term Borrowings 1 10,00,000
Note to Accounts
1. Short-term Borrowings
10,000; 9% Debentures of 100 each 10,00,000

Current Maturities of Long-term Debts
Debentures normally are Long-term Borrowings.
However, part of debentures out of the Long-term Borrowings (Debentures)

becoming due for redemption within 12 months or within the period of
Operating Cycle from the date of Balance Sheet
is shown as Current Liabilities under the head Current Maturities of Long-term

Debts.

For example, a company has outstanding debentures of ₹ 10,00,000 (10,000,

9% Debentures of 100 each) as on 31st March, 2021,
out of which debentures of 1,00,000 (1,000, 9% Debentures of 100 each) are

due for redemption on 31st January, 2022, i.e., within 12 months from the date
of Balance Sheet (i.e., 31st March, 2021).


I. EQUITY AND LIABILITIES
1. Non-Current Liabilities
Long-term Borrowings. 1 9,00,000
2. Current Liabilities
Other Current Liabilities 2 1,00,000
Note to Accounts
9,000,9% Debentures of ₹ 100 each 9,00,000
2. Other Current Liabilities
1,000; 9% Debentures of 100 each. (Redeemable on 31st January, 2022) 1,00,000

ISSUE OF
DEBENTURES
FOR CASH
😁😁😁

At
Premium
Issue of
Debentures
For Cash
At Par
At
Discount

Meaning
Debentures issued for cash may be issued at par, at premium or at

discount.

At Par
Debentures issued at Par means Debentures issued at their

nominal (face) value.
For example, Debenture of nominal (face) value of 100 issued

at 100.

At Premium
Debentures issued at Premium means Debentures issued at a

price that is higher than its nominal (face) value.

at 125, means debentures are issued at premium.
The premium received is credited to 'Securities Premium

Reserve Account and can be utilised for the purposes specified
in Section 52(2) of the Companies Act, 2013.

At Discount
Debentures Issued at Discount means Debentures issued at a

price that is less than its nominal (face) value.

at 90, means debentures are issued at discount.

When Issue Price of Debentures is Received in Lump Sum
On Receipt of Application Money
Bank A/c Dr.

To Debentures Application and Allotment A/c.
[With the application money received]

On Allotment of Debentures
Debentures Application and Allotment A/c Dr.

To ...% Debentures A/c
[With the amount of application money on the allotted debentures]

On Refund of Excess Application Money
Debentures Application and Allotment A/c Dr.

To Bank A/c
[With the application money refunded]

When Issue Price of Debentures is Received in Instalments
On Receipt of Application Money
Bank A/c Dr.

To Debentures Application A/c
[With the application money received]

On Allotment of Debentures
Debentures Application A/c Dr.

To % Debentures A/c
[With the amount of application money on the allotted debentures]

On Adjustment of Excess Money
Debentures Application A/c. Dr.

To Debentures Allotment A/c
[With the surplus application money on partially accepted applications]

On Refund of Excess Money
Debentures Application A/c Dr.

To Bank A/c
[With the application money refunded on rejected applications]

On Allotment Money Being Called
Debentures Allotment A/c Dr.

To …% Debentures A/c
[With the amount due on allotment of the debentures]

On Receipt of Allotment Money
Bank A/c Dr.

To. Debentures Allotment A/c
[With the amount actually received on allotment]

On Calls Money being Called
Debentures Call A/c Dr.

To …% Debentures A/c
[With the money due on a particular call]

On Receipt of Call Money
Bank A/c Dr.

To. Debentures Call A/c
[With the amount received on particular call]

Issue of
Debentures
at Par

Illustration 1 (Issue of Debentures at Par, Issue Price Payable in Lump sum)
Sun India Ltd. issued 20,000; 9% Debentures of 100 each at par payable on
application by 1st April, 2021. Applications were received for 20,000
debentures. Debentures were allotted on 5th April, 2021.
Pass necessary Journal entries in the books of the company.

Illustration 2 (Issue of Debentures at Par, Issue Price Payable in Instalments).
Dash Ltd., on 1st May, 2021 issued 40,000; 10% Debentures of 100 each,
payable 20 on application and balance amount on allotment. Applications
were received for the issued debentures and allotment was made to all the
applicants. The amount was received on due dates.
Pass the Journal entries for issue of Debentures and prepare the Balance
Sheet.

Issue of
Debentures
at Premium

Meaning
Debentures are said to have been issued at premium when the

issue price of a debenture is more than the nominal (face) value of
a debenture.
For example, a debenture of 100 is issued for 110, 10 is premium.

Premium on Issue of Debentures is a capital receipt and is credited
to Securities Premium Reserve Account.

The use of Securities Premium received is restricted by Section 52(2) of the
Companies Act, 2013. It prescribes that Securities Premium Reserve can be
used:
(a) for writing off preliminary expenses;
(b) for writing off expenses of, or commission paid or discount allowed on
debentures of the company;
(c) for providing premium payable on the redemption of redeemable
preference shares or debentures of the company;
(d) for issuing fully paid bonus shares;
(e) for purchase of own shares or securities of the company.

Disclosure of Securities Premium Reserve in the Balance Sheet
Securities Premium Reserve
Securities Premium Reserve Account is shown in the Equity and Liabilities Part
of Balance Sheet under the main head 'Shareholders' Funds' and Sub-head
'Reserves and Surplus',

Illustration 3 (Issue of Debentures at Premium, Issue Price Payable in Lump sum).
Surya Ltd. issued 10,000, 10% Debentures of 100 each at a premium of 10%,
payable along with application. Applications were received for all the
debentures issued and allotment was made.
Pass the Journal entries.

Illustration 4 (Issue of Debentures at Premium, Issue Price Payable in Instalments).
Lemon Tree Ltd. issued 5,000; 9% Debentures of 100 each at a premium of 20%
payable:
On Application 50, On Allotment Balance Amount.
Applications were received for the debentures issued and also the amount due
Pass the Journal entries for the above.

IMPORTANT
NOTES

Important Notes
1. When issue price is payable in lump sum, the amount received on
application is credited to ‘Debentures Application and Allotment Account’.
2. When issue price is payable in instalments, the amount received on

application is credited to ‘Debentures Application Account’.
3. The amount of premium is presumed to be payable along with allotment

money, if not stated otherwise.

Issue of
Debentures
at Discount

Meaning
Debentures are said to have been issued at discount when the

issue price is less than its nominal (face) value.
For example, if a debenture of 100 is issued for 95, it means

debentures are issued at discount of 5.
Debentures Account is credited with the nominal (face) value of the

debentures and discount is debited to an account titled Discount
on Issue of Debentures Account.

Accounting Treatment
Discount on Issue of Debentures is debited when allotment of

debentures is made and allotment money becomes due.

It is written off in the year when the loss is incurred, i.e., in the year
when debentures are issued.
It is a capital loss for the company.

It is written off from Securities Premium Reserve, if it exists (Section

52(2)), then from Capital Reserve and thereafter from the
Statement of Profit and Loss.

Journal entry for Writing off Loss on Issue of Debentures
Writing off Discount on Issue of Debentures
Securities Premium Reserve A/c Dr.

[Up to the balance in Securities Premium Reserve]
Capital Reserve A/c Dr.
[Up to the balance in Capital Reserve]
Statement of Profit and Loss (Finance Cost) Dr.
[With Amount of Discount or Loss less amount written off from Securities Premium Reserve and Capital Reserve]
To Discount or Loss on issue of Debentures A/c

Example 1.
Intel Ltd. issued 10,000, 7% Debentures of 100 each at a discount of 10%. It

has Securities Premium Reserve of 1,50,000. Discount on Issue of Debentures,
i.e., 1,00,000 will be written off by passing the following entry:
Securities Premium Reserve A/c 1,00,000

To Discount on Issue of Debentures A/c 1,00,000

Example 2.
Rehan Ltd. issued 20,000, 6% Debentures of 100 each at a discount of 10%: It

has balance in Securities Premium Reserve of 1,50,000 and Capital Reserve of
₹80,000. Discount on Issue of Debentures * 2,00,000 will be written off by
passing the following entry:
Securities Premium Reserve A/c 50,000

Capital Reserve A/c 1,50,000
To Discount on Issue of Debentures A/c 2,00,000

Example 3.
Citizen Ltd. issued 10,000, 6 % Debentures of 100 each at a discount of 10%

redeemable at 10% premium. It has Securities Premium Reserve of 1,75,000.
Loss on Issue of Debentures 2,00,000 will be written off by passing the
following entry:
Securities Premium Reserve A/c 1,75,000

Statement of Profit and Loss (Finance Cost) 25,000
To Loss on Issue of Debentures A/c 2,00,000

Illustration 5 (Issue of Debentures at Discount).
Nitro Ltd. issued 20,000; 9% Debentures of 100 each at a discount of 4% on 1st

April, 2021, payable 30 on application and the balance on allotment.
The debentures are redeemable after 5 years.
Pass Journal entries for the issue of debentures and writing off discount on
issue of debentures.

Over
Subscription of
Debentures
😁😁😁

Meaning
Oversubscription of Debentures means that the company has

received applications for more debentures than it has issued for
subscription.
In such a situation, the company may make allotment, by any of the

following three options or combinations:

Oversubscription
of Debentures
Rejecting A Combination
Excess of the Above
Applications Two
Alternatives
Partial or
Pro rata
Allotment

Meaning
Excess application money received on oversubscription is retained

towards allotment money and may be retained for adjustment
against calls, in case of pro rata allotment, if so provided in the
terms of issue.
However, application money is refunded to those applicants to

whom debentures are not allotted.

Illustration 6 (Issue of Debentures at Premium, Issue Price Payable in Lump sum, Oversubscribed, Excess Applications Rejected).
Nav Lakshmi Ltd. invited applications for 3,000; 12% Debentures of 100 each at a
premium of 50 per debenture. Full amount was payable on application. Applications were
received for 4,000 debentures. Applications for 1,000 debentures were rejected and
application money was refunded. Debentures were allotted to the remaining applicants.
Pass necessary Journal entries for the above transactions in the books of Nav Lakshmi
Ltd.

Bank A/c 6,00,000
To Debentures Application and Allotment A/c 6,00,000
(Application money received for 4,000 debentures)
Debentures Application and Allotment A/c 6,00,000

To 12% Debentures A/c 3,00,000
To Securities Premium Reserve A/c 1,50,000
To Bank A/c 1,50,000
(12% Debentures issued at a premium of 50 each and surplus application money refunded)

Illustration 7 (Issue of Debentures at Premium, Issue Price Payable in Instalments, Oversubscribed, Pro rata Allotment).
Telecom Ltd. issued 10,000; 9% Debentures of 100 each at a premium of 10% payable 25
on application, 35 on allotment (including premium) and the balance on first and final
call. Applications were received for 15,000 debentures. Allotment was made on pro rata
basis excess application money was adjusted against amount due on allotment. The due
amounts were received by the company on due dates.
Journalise the above transactions in the books of the company and prepare extract of
the Balance Sheet showing Securities Premium Reserve and Debentures.

Illustration 8 (Pro rata Allotment and Rejection).
Savoy Ltd. invited applications for 4,000 Debentures of 100 each issued at a premium of
20%. Applications were received for 6,000 debentures and it was decided to deal with
the same as follows:
(i) To refuse allotment to applicants for 1,200 debentures.
(ii) To give full allotment to applicants for 400 debentures.
(iii) To allot the remaining debentures on pro rata basis among other applicants.
(iv) To utilise excess application money in part payment of allotment money.
Journalise the above transactions (including cash transactions) if:

(a) issue price is payable along with the application, and
(b) issue price is payable in instalments-on application 20, on allotment 750 (including
premium) and balance on first and final call.

Under
Subscription of
Debentures
😁😁😁

Meaning
Undersubscription of Debentures means that applications are

received for lesser number of debentures than offered for
subscription.
For example, the company issued 10,000, 9% Debentures of 100

each for subscription and it received applications for 9,000
Debentures. It is a case of undersubscription.

Meaning
In the case of undersubscription, allotment is made to all the

applicants.
Since allotment is made to all the subscribers of the debentures,

Journal entries are passed for the number of debentures subscribed.

Illustration 9 (Undersubscription of Debentures issued at Par, Issue Price Payable in Lump sum).
Citizen Watches Ltd. issued 7,500, 8% Debentures of 100 each at par for
subscription payable along with application. Subscription was received for
7,000 debentures. The debentures were duly allotted.
Pass the necessary Journal entries.

Bank A/c 7,00,000
(Application money received for 7,000; 8% Debentures @100 per debenture)

(7,000; 8% Debentures of 100 each allotted)

Illustration 10 (Undersubscription of Debentures issued at Premium, Issue Price Payable in Lump sum).
Elegant Ltd. issued for subscription 10,000, 11% Debentures of 100 at a

premium of 10% payable along with application. Subscription was received for
9,000 debentures and all the applicants were allotted the debentures.
Pass the Journal entries for the above.

Bank A/c 9,90,000
(Application money received for 9,000; 11% Debentures)

To Securities Premium Reserve A/c 90,000
(9,000; 11% Debentures allotted at 10% premium)

Illustration 11 (Undersubscription of Debentures issued at Par, Issue Price Payable in Instalments).
Honey Ltd, issued 10,000, 9% Debentures of 100 each for subscription, payable
60 on application and balance on allotment. Subscription was received for
9,000 debentures. Allotment was made and due amount was received.
Pass the Journal entries for issue and allotment of debentures.

Bank A/c 5,40,000
To Debentures Application A/c 5,40,000
(Application money received for 9,000; 9% Debentures)
Debentures Application A/c 5,40,000

(9,000; 9% Debentures allotted)
Debentures Allotment A/c 3,60,000

(Allotment money due)
Bank A/c 3,60,000

To Debentures Allotment A/c 3,60,000
(Allotment money received)

ASBA is a system for applying shares or securities whereby the applicant authorises
his or her bank to block the amount payable as application money in his or her bank
account, i.e., place a lien up to the amount payable as Application Money on the
number of Shares or securities applied.
The effect of placing lien on the amount is that the account holder will not be able to
use the amount till the time lien of the bank remains. Another effect is that the
account holder will get interest on the blocked amount till the time the amount is
remitted by the bank to the company, whose shares or securities were subscribed.
On shares or securities being allotted, the bank will transfer the amount due on
allotted shares or securities to the company and remove lien on the balance amount.

ISSUE OF
DEBENTURES FOR
CONSIDERATION
OTHER THAN CASH
😁😁😁

To
Promoters
ISSUE OF
DEBENTURES FOR
CONSIDERATION
To
OTHER THAN
CASH Vendors
To
Underwriters

Meaning
Issue of Debentures for consideration other than cash means that

the company has not received amount in cash or by cheque against
the debentures issued.

Issue of
Debentures to
Promoters

Meaning
A company may allot debentures to the promoters for rendering

services for incorporating the company.

Journal Entries
The entries passed are:
Incorporation Expenses or Preliminary Expenses A/c

To Promoters' A/c
(Incorporation Expenses Payable)
Promoters' A/c
To % Debentures A/c
(...% Debentures allotted to promoters)

Meaning
Incorporation Expenses or Preliminary Expenses are written off in

the year they are incurred from
Securities Premium Reserve,
Capital Reserve or

Issue of
Debentures to
Underwriters

Meaning
Underwriters undertake to subscribe the securities that are not

subscribed by the public for a fee.
A company may allot Debentures to the underwriters in payment of

their fees.

Journal Entries
Underwriting Commission A/c

To Underwriters' A/c
(Underwriting commission payable)
Underwriters' A/c
To % Debentures A/c
(Debentures issued to underwriters)

Meaning
Underwriting Commission is written off in the year in which it is

incurred. It is written off from
Securities Premium Reserve,
Capital Reserve or

Issue of
Debentures to
Vendors

Meaning
Debentures may also be issued to vendors against purchase of

assets or business.

Journal Entries
(a) When assets are purchased:

Sundry Assets A/c
To Vendor's A/c
(Purchase of sundry assets)

Journal Entries
Accounting Entries for Issue of Debentures to Vendor:

(i) When Debentures are issued at Par:
Vendor's A/c
To...% Debentures A/c
(ii) When Debentures are issued at Premium:

Vendor's A/c
To % Debentures A/c
To Securities Premium Reserve A/c
(iii) When Debentures are issued at Discount:

Vendor's A/c.
Discount on'issue of Debentures A/c
Journal Entries
(b) When a business is purchased:

(i) When purchase consideration is equal to the net assets
Sundry Assets A/c (Individually)
To Sundry Liabilities A/c (individually)
To Vendor's A/c
(ii) When purchase con deration is more or less than the net assets
Sundry Assets A/c (Individually)
Goodwill A/c*
To Sundry Liabilities A/c (Individually)
To Vendor's A/c
To Capital Reserve A/c*

Calculation
of Number of
Debentures

Calculation of Number of Debentures to be issued against Purchase Consideration:
Purchase Consideration
Number of Debentures Issued =
Issue Price of Debenture

Illustration 12 (Issue of Debentures to Vendors at Par, at Premium and at Discount).
Bose Ltd. purchased assets of 9,90,000 from Bhagat & Co. Payment was made
by issuing 11% Debentures of 100 each.
Pass Journal entries when debentures have been issued: (i) at par, (ii) at a
premium of 10%, and (iii) at a discount of 10%.

Illustration 13 (Issue of Debentures to Vendors at Premium).
Exe Ltd. took over assets of 7,00,000 and liabilities of 60,000 of Wye Ltd. for
the purchase consideration of 6,60,000. Exe Ltd. paid the purchase
consideration by issuing 9% Debentures of 100 each at 10% premium.
Pass Journal entries in the books of Exe Ltd.

Illustration 14 (Issue of Debentures to Vendors at Premium with Part Payment in Cash).
Rocky Ltd. purchased building for 22,00,000. Half the payment was made by
cheque and the balance half by issue of 9% Debentures of 100 each at a
premium of 10%.
Pass necessary Journal entries.

Illustration 15 (Issue of Debentures to Vendor at Premium with Part Payment as Bill of Exchange).
Vayee Ltd. purchased the following assets of E.X. Ltd.:
Land and Building of 60,00,000 at 84,00,000; Plant and Machinery of
40,00,000 at 36,00,000.
The purchase consideration was 1,10,00,000. Payment was made by accepting
a Bill of Exchange in favour of E.X. Ltd. of 20,00,000 and remaining by issue of
8% Debentures of 100 each at a premium of 20%.
Record the necessary Journal entries for the above transactions in the books
of Vayee Ltd.

Illustration 16 (Issue of Debentures to Vendors at a Discount).
Exe Ltd. acquired the business of Hay Ltd., assets being of 8,40,000 and
liabilities being 80,000 for a consideration of 7,20,000. Exe Ltd. issued 10%
Debentures of 100 each at 10% discount as payment of the consideration.
Discount on Issue of Debentures was written off from Securities Premium
Reserve of 1,00,000.
Pass Journal entries in the books of Exe Ltd.

Illustration 17 (Issue of Debentures to Vendors at Discount with Part Payment in Cash).
Pass Journal entries for the following transactions: Green Ltd. purchased
plant and machinery for 2,00,000 from Machine Mart payable as
65,000 by three months post-dated cheque and balance by issue of 6%
Debentures of 100 each at a discount of 10%.
The company has balance of 10,000 in Securities Premium Reserve and 8,000
in Capital Reserve.

Illustration 18 (Issue of Debentures to Vendors at Discount with Part Payment in Cash).
Blue Ltd. purchased from HCL Ltd., computers of ₹3,00,000 and software for
5,00,000 payable 80,000 by cheque and balance by issue of 7% Debentures of
100 each at a discount of 10%. The company has balance in Securities Premium
Reserve of 40,000 and in Capital Reserve of ₹ 25,000.
Pass the Journal entries in the books of Blue Ltd.

Illustration 19.
Sony Ltd. took over business of Mohit Ltd. on 1st April, 2021. The details of the
agreement. regarding the assets and liabilities taken over are:
Liabilities Book Value Agreed Value
Building 30,00,000 45,00,000
Plant and Machinery 15,00,000 8,00,000
Stock 4,00,000 4,00,000
Trade Receivables 4,30,000 4,00,000
Trade Payables. 12,00,000 13,00,000
Outstanding Expenses 1,50,000 1,00,000
It was decided to pay purchase consideration 7,00,000 through Cheque and balance
by issue of 40,000; 9% Debentures of 100 each at a premium of 25%.
Pass necessary Journal entries to record the above transactions in the books of Sony
Ltd.

Illustration 20.
Zoom Cars Ltd. issued 2,000; 10% Debentures of 100 each credited as fully paid
to the promoters for their services and issued 1,000; 10% Debentures of 100
each credited

ISSUE OF
DEBENTURES AS
COLLATERAL
SECURITY
😁😁😁

Meaning
Loans taken are secured by mortgage of the assets purchased is

known as primary or principal security.
For example, Bull Ltd. purchased machinery for ₹ 10,00,000 and

took a loan from State Bank of India. The machinery is mortgaged to
the Bank and is the primary or principal Security.

Meaning
Security given in addition to the primary or principal security is

termed or known as Collateral Security..

Meaning
Taking the above example further, Bull Ltd. also issued 10,000, 8%
Debentures of ₹ 100 each to further secure the loan. Debentures
issued to further secure the loan is Collateral Security.

Meaning
Collateral security is realised by the lender only if the due amount

(loan plus interest) cannot be recovered by realising the primary or
principal security.

Meaning
When the loan is repaid, debentures issued as a collateral security

are returned to the company.
These debentures do not carry any right till the time loan is being
repaid along with due interest and the lender has not demanded the
loan to be repaid.
If the company does not repay the loan, lender may exercise its right
towards debentures being issued as collateral security.

When Journal
entry is not
Passed

Meaning
Entry for issue of debentures as collateral security is not passed in the books of
account at the time of issuing such debentures.
It is shown under the head Secured Loans in the Equity and Liabilities part of the
Balance Sheet that debentures have been issued as collateral security as follows:
(a) Debentures Issued as Collateral Security for Long-term Loan from Bank.
(b) Debentures Issued as Collateral Security for Short-term Loan from Bank.

Debentures Issued as Collateral Security for Long-term Loan from Bank

Non-Current Liabilities.
Note to Accounts Amount

Term Loan from Bank
(Secured by issue of 6,000; 9% Debentures of 100 each as Collateral Security) 5,00,000

Debentures Issued as Collateral Security for Short-term Loan from Bank

Current Liabilities.
Short-term Borrowings 1 5,00,000

1. Short-term Borrowings
Loan from Bank
(Secured by issue of 6,000; 9% Debentures of 100 each as Collateral Security) 5,00,000

When Journal
entry is
Passed

Meaning
Debentures issued as collateral security are recorded in the books of account. The
Journal entry passed is:
Debentures Suspense A/c

When the loan is paid to the lender, the above entry is cancelled by passing a
reverse entry.
In the Balance Sheet, the debentures issued as collateral security are shown
separately from other debentures.

Balance Sheet
Debentures issued as collateral security being for the loan of the company, are
shown in the Note to Accounts on the loan secured by debentures.
For example, if the Bank Loan is shown as Long-term Borrowings, debentures issued as
collateral security are also shown in the Note to Accounts on Long-term Borrowings. The
underlying principle being to disclose the security given for the borrowings.
Debentures Suspense Account is shown as a deduction from the ... % Debentures

Account.

Disclosure of Debentures issued as Collateral Security in the Balance Sheet

Non-Current Liabilities.

Term Loan from Bank 5,00,000
6,000; 9% Debentures of 100 each issued as Collateral Security 6,00,000
Less: Debentures Suspense A/c 6,00,000 --
5,00,000

Illustration 21 (Debentures issued as Collateral Security).
Hyatt Ltd. took loan of 8,00,000 from State Bank of India and issued 10,000;
9% Debentures of 100 each as collateral security. How will issue of debentures
be shown in the Balance Sheet.
(i) When Journal entry is not passed; and

(ii) When Journal entry is passed?

Illustration 21 (Debentures issued as Collateral Security).
Hyatt Ltd. took loan of 8,00,000 from State Bank of India and issued 10,000;
9% Debentures of 100 each as collateral security. How will issue of debentures
be shown in the Balance Sheet.
(i) When Journal entry is not passed; and

(ii) When Journal entry is passed?

Non-Payment
of Loan Secured
by Debentures

Meaning
If the company (borrower) does not pay the loan along with interest, the lender
can recover the due amount by selling primary or principal security or by
redeeming collateral security, i.e., debentures.
To cancel the existing entry for debentures issued as Collateral Security:

...% Debentures A/c Dr.
To Debentures Suspense A/c
Loan being converted into Debentures:

Loan A/c Dr.
Outstanding Interest A/c Dr.
To % Debentures A/c

Illustration 22.
Zee Ltd. issued 10,000, 10% Debentures of ₹ 100 each as collateral security for
a loan of 8,00,000 from Dena Bank. The company was unable to repay the loan
on which interest payable was 2,00,000 as on 31st March, 2021.
Dena Bank, on 31st March, 2021, exercised the right vested in it by way of
debentures being issued as collateral Security.
Pass Journal entries in the books of Zee Ltd. on 31st March, 2021.

VARIOUS CASES OF
ISSUE OF
DEBENTURES
FROM THE POINT
OF VIEW OF
REDEMPTION
😁😁😁

Meaning
Debentures issued at par, at premium or at discount may be

redeemed either at par or at premium.
If the debentures are redeemed at premium, premium payable at the

time of redemption is provided in the books of account at the time
of issue following the Prudence Concept of accounting.

Meaning
The term Redeemable at Par means debentures are redeemable at

their nominal (face) value.
For example, a debenture has a nominal (face) value of 100 and is

to be redeemed by paying 100, it is a case of redemption of
debentures at par.

Meaning
The term Redeemable at Premium means debentures are

redeemable at a value that is higher than their nominal (face) value.
For example, a debenture has a nominal (face) value of 100

and is to be redeemed by paying 110, it is a case of redemption of
debentures at premium.

Difference between
Premium on Issue of
Debentures and Premium
on Redemption of
Debentures

Difference between Premium on Issue of Debentures and Premium on Redemption of Debentures
Basis Premium on Issue of Debentures Premium on Redemption of Debentures
1. Capital Profit/Loss It is a capital profit and is used for the It is a capital loss.
purposes specified in Section 52(2) of
the Companies Act, 2013.
2. Nature It is a reserve. It is a liability.
3. Outflow of Cash It does not involve outflow of cash. It is paid when the debentures are
redeemed.
4. How shown in The Balance is shown in the Equity and It is shown in the Equity and Liabilities
Balance Sheet Liabilities part of the Balance Sheet part of the Balance Sheet under the
under main head Shareholders Funds main head Non-current Liabilities and
and sub-head Reserves and Surplus. sub-head Other Long-term Liabilities

There are six cases of issue and their redemption as follows:
Case Conditions of issue Conditions of Redemption

1 Issued at par Redeemable at par
2 Issued at discount Redeemable at par
3 Issued at premium Redeemable at par
4 Issued at par Redeemable at premium
5 Issued at discount Redeemable at premium
6 issued at premium Redeemable at premium.

Case 1.
When debentures are
issued at par and are
redeemable at par

Meaning
It means that amount payable at the time of redemption is equal to

its nominal (face) value.
Thus, the company will not incur any loss at the time of redemption
of debentures. Therefore, further entries besides issue and allotment
of debentures are not passed.

Accounting Entries when Issue Price is Received in Lump Sum
(a) Bank A/c Dr.

To Debentures Application and Allotment A/c [With the application money]
(b) Debentures Application and Allotment A/c Dr.

To ...% Debentures A/c [With nominal value]

Illustration 23.
Chand Ltd. issued 50,000; 8% Debentures of 100 each, payable on application
and redeemable at par after 6 years. Pass necessary entries for issue of
debentures in the books of Chand Ltd.

Illustration 24.
Moon Ltd. issued 50,000, 8% Debentures of 100 each, payable 50 on
Application, 25 on Allotment and balance on First and Final Call. All the
debentures were subscribed and due amounts were received.
Pass the necessary Journal entries in the books of Moon Ltd.

Case 2.
When debentures are
issued at discount and
are redeemable at par

Meaning

It means the company will not incur any loss at the time of
redemption of debentures. Thus, further entries besides issue and
allotment of debentures are not passed.

(a) Bank A/c Dr.


Discount on Issue of Debentures A/c [With discount] Dr.

Illustration 25. (Debentures Issued at Discount, Redeemable at Par,
Application Money received in Lump sum)
Anushree Ltd. issued 10,000; 9% Debentures of 50 each at a discount of 8%
redeemable at par after 7 years. Pass necessary entries in the books of
Anushree Ltd

Illustration 26 (Issue of Debentures at Discount, Redeemable at Par and Issue
Price receivable in Instalments).
On 1st April, 2019, Bright Ltd. issued 4,00,000, 6% Debentures of 100 each at a
discount of 5%, redeemable after three years. The amount per debenture was
payable as follows:
On Application-80 per debenture
On Allotment-Balance
The debentures were fully subscribed and all money was duly received. Pass
necessary Journal entries for issue of debentures.

Case 3.
When debentures are
issued at premium and
are redeemable at par

Meaning

It means the company will not incur any loss at the time of
redemption of debentures. Thus, further entries besides issue and
allotment of debentures are not passed.

(a) Bank A/c Dr.


To Securities Premium Reserve A/c [With premium]

Illustration 27 (Debentures are issued at Premium, Redeemable at Par and Issue Price is Received in Lump sum).
Green Ltd. issued 8,00,000; 9% Debentures of 100 each at a premium of 5%
redeemable at par. All the debentures were subscribed and due amount was
received. Give Journal entries for issue and allotment of debentures.

Illustration 28.
Suvidha Ltd. issued 8,00,000; 9% Debentures of 100 each at a premium of 5%
and redeemable at par. Issue price was payable as follows:
On Application-50; and Balance on Allotment
All the debentures were subscribed and due amount was received. Give the
Journal entries for issue and allotment of debentures.

Case 4.
When debentures are
issued at par and are
redeemable at
premium

Meaning
When debentures are issued at par and are redeemable at premium,

the difference between redeemable value and the issue price is a
loss for the company.
It is debited to Loss on Issue of Debentures Account at the time of

allotment of debentures. Premium payable on redemption of
Debentures is recognised as a loss following the Prudence Principle
of accounting.

(a) Bank A/c Dr.


Loss on Issue of Debentures A/c [With premium payable on redemption]
To Premium on Redemption of Debentures A/c [With premium payable on redemption]

Illustration 29 (Debentures are issued at Par, Redeemable at Premium and
Issue Price Received in Lump sum).
Blue Ltd. issued 8,00,000; 9% Debentures of 100 each at par and redeemable at
10% premium at the end of sixth year. All the debentures were subscribed and
due amounts were received: Pass Journal entries for issue of debentures.

Illustration 00.
Blue Ltd. issued 8,00,000; 9% Debentures of 100 each and redeemable at 10%
Premium, payable:
50 on Application, 25 on Allotment; and balance on First and Final Call.
All the debentures were subscribed and due amount was received.
Pass the Journal entries for issue of debentures.

Case 5.
When debentures are
issued at discount and
are redeemable at
premium

Meaning
In this situation, the company incurs loss on two counts, i.e.,

discount allowed at the time of issue of debentures and premium
payable at the time of its redemption, i.e., discount and premium
payable on redemption.
Both these losses are accounted at the time of issue of debentures

following the Prudence Principle.

(a) Bank A/c Dr.


Discount on Issue of Debentures A/c [With discount]

Illustration 31.
On 1st April, 2018, RJ. Ltd. issued 10,00,000, 9% Debentures of 100 each at a
discount of 10%. These debentures were redeemable at a premium of 5% after
four years.
Pass necessary Journal entries for the issue of debentures and prepare 9%
Debentures Account.

Illustration 32 (Payment of Issue Price of Debentures in Instalments).
Zed Ltd. issued 2,00,000, 8% Debentures of 100 each at a discount of 6%
redeemable at a premium of 10% after 5 years. The amount was payable as
follows:
On application-50 per debenture; and
On allotment-Balance.
Record the necessary Journal entries for the issue of debentures in the books
of Zed Ltd.

Illustration 33.
On 1st April, 2020, RJ Ltd, issued 10,00,000,9% Debentures of 100 each at a
discount of 10% payable 50 on application and balance on allotment. These
debentures were redeemable at a premium of 5% after four years.
Pass necessary Journal entries for issue of debentures and prepare 9%
Debentures Account.

Case 6.
When debentures are
issued at premium and
are redeemable at
premium

Meaning
Premium received by the company at the time of issue of debentures

is a capital receipt and is credited to Securities Premium Reserve
Account.
On the other hand, premium payable at the time of redemption of

debentures is a loss for the company and is provided in the books
of account following the principle of prudence.

(a) Bank A/c Dr.


To Securities Premiu Reserve A/c [With premium received on issue]

Illustration 34.
H.P. Ltd. issued 7,00,000; 10% Debentures of 100 each at a premium of 5%
redeemable at 110% after 5 years. Journalise.

Illustration 35.
HP Ltd. issued 7,00,000; 10% Debentures of 100 each at a premium of ₹ 5 per
debenture redeemable at 110%, payable 40 on application, 35 on allotment
(including premium) and balance on first and final call. All the debentures were
subscribed and due amount was received. Journalise.

Illustration 36.
Pass Journal entries for issue of debentures in each of the following
alternative cases, application
money being receivable in lump sum:
(i) 10% Debenture of 100 each issued at 100, repayable at 100.
(ii) 10% Debenture of 100 each issued at 95, repayable at 100.
(iii) 10% Debenture of 100 each issued at 105, repayable at 100.
(iv) 10% Debenture of 100 each issued at 100, repayable at 105.
(v) 10% Debenture of 100 each issued at 95, repayable at 105.
(vi) 10% Debenture of 100 each issued at 105, repayable at 110.

Illustration 37.
Pass Journal entries for issue of debentures in each of the following
transactions:
(i) Star Ltd. issued 30,000; 10% Debentures of 100 each at a discount of 5% to
be repaid at par at the end of 5 years.
(ii) Green Ltd. issued 10% Debentures of 100 each for the total nominal (face)
value of 40,00,000 at a premium of 5% to be redeemed at par at the end of
5 years.
(iii)Moon Ltd. issued 50,00,000; 10% Debentures of 100 each at par but
redeemable at the end of 10 years at 105%.
(iv)Strong Ltd. issued 60,00,000; 10% Debentures of 100 each at a discount at
a premium of 10% at the end of 5 years. of 5% repayable
(v) Smart Ltd. issued 70,00,000; 9% Debentures of 100 each at a premium of
5% redeemable at 110% at the end of 10 years.

Illustration 38.
Journalise the following transactions:
(a) Mehar Ltd. issued 1,00,000, 12% Debentures of 100 each at a premium of 5%
redeemable at a premium of 2%.
(b) 12% Debentures were issued at a discount of 10% to a vendor of machinery
for payment of ₹ 9,00,000.
(c) Issue of 10,000, 11% Debentures of 100 each as collateral in favour of State
Bank of India. Company opted to pass necessary entry for issue of
debentures.

INTEREST ON
DEBENTURES
😁😁😁

Meaning
Interest on debentures is calculated at fixed rate on its nominal

(face) value payable quarterly, half yearly or yearly as per the terms
of issue.
Rate of interest is prefixed to the debenture, say 9% Debentures

and, therefore, is payable even if the company incurs loss.
Interest on debentures is a charge against profit.

Accounting Entries
1. When Interest is due:

Debentures' Interest or Interest on Debentures A/c
To Debentureholders' A/c
2. When Interest is paid:

Debentureholders' A/c
To Bank A/c
3. On transfer of Interest to Statement of Profit and Loss at the end of the year:
Statement of Profit and Loss (Finance Cost)
To Debentures' Interest or Interest on Debentures A/c

Illustration 39.
Times Sports Ltd. issued 15,000; 10% Debentures of 100 each on 1st April,
2020. The issue was fully subscribed. According to the terms of issue, interest
is due on half-yearly basis. Pass Journal entries for Interest on Debentures for
the year ended 31st March, 2021.

Illustration 40.
BG Ltd. issued 2,000, 12% Debentures of 100 each on 1st April, 2020 at a
discount redeemable at premium of 5. The issue was fully subscribed.
According to the terms of issue, of 5 and interest on the debentures is payable
half-yearly on 30th September and 31st March. Pass necessary Journal entries
for issue of debentures, writing-off Loss on Issue of Debentures, debenture
interest for the year ending 31st March, 2021 and transfer of interest on
debentures of the year to the Statement of Profit and Loss.

WRITING OFF
DISCOUNT OR
LOSS ON ISSUE OF
DEBENTURES
😁😁😁

Meaning
Discount or Loss on Issue of Debentures is a capital loss for a

company, which is written off in the year it is incurred, i.e., in the
year the debentures are allotted, From:
(i) Securities Premium Reserve,

(ii) Capital Reserve, or
(iii) Statement of Profit and Loss.

Meaning
Discount or Loss on Issue of Debentures is written off from

Securities Premium Reserve. If Securities Premium Reserve does not
have balance or is not adequate to write off total discount or loss,
balance discount or loss is written off from Capital Reserve. In case,
balance is still left in Discount or Loss on Issue of Debentures
Account, it is written off from Statement of Profit and Loss.

Meaning
In brief, Securities Premium Reserve to the extent of balance is used

to write off Discount or Loss on Issue of Debentures. Thereafter,
Capital Reserve to the extent of balance is used and lastly Statement
of Profit and Loss.

Accounting Entries
The Journal entry passed is:
Securities Premium Reserve A/c [Amount of discount or loss or up to the balance in Securities Premium Reserve]
Capital Reserve A/c [Amount of discount or loss up to the balance in Capital Reserve]
Statement of Profit and Loss [Amount of discount or loss or balance left after writing off from Securities Premium Reserve and Capital Reserve]
To Discount or Loss on Issue of Debentures A/c
(Discount or Loss on issue of debentures written off)

Discount or Loss on
Issue of Debentures -
How Shown in the
Balance Sheet

Meaning
Discount or Loss on Issue of Debentures is written off in the year

they are allotted. It is written off from Securities Premium Reserve to
the extent of balance, from Capital Reserve to the extent of balance
and balance left from Statement of Profit and Loss.

Meaning
Discount or loss written off is shown in the Balance Sheet by way of

deduction from balance in Securities Premium Reserve, if it is written
off from Securities Premium Reserve and/or Capital Reserve, if
written off from Capital Reserve and/or by debiting to Statement of
Profit and Loss as a loss.

Meaning
For example, a company issues 40,000, 10% Debentures of 100 each at 10%
Discount. It has balances as follows in 'Reserves and Surplus’:
Debentures Redemption Reserve- 40,000;

Securities Premium Reserve-50,000;
Surplus, i.e., Balance in Statement of Profit and Loss- 2,50,000 and
Capital Reserve- 1,50,000.

Discount on Issue of Debentures will be shown in Balance Sheet as follows

Shareholders' Funds
Reserves and Surplus 1 90,000

1. Reserves and Surplus
Debentures Redemption Reserve 40,000
Securities Premium Reserve 50,000
Less: Discount on Issue of Debentures written off 50,000 -
Capital Reserve 1,50,000
Less: Discount on Issue of Debentures 1,50,000 -
Surplus, i.e., Balance in Statement of Profit and Loss 2,50,000
Less: Discount on issue of Debenture (Balance) 2,00,000 50,000
90,000

Illustration 41.
On 1st April, 2020, Amro Ltd. issued 10,000, 9% Debentures of 100 each
10% redeemable at par after 5 years. The issue price is payable along with
application. The debentures were subscribed. It has a balance of 1,75,000 in
Securities Premium Reserve and 50,000 in Capital Reserve.
Pass Journal entries for issue of debentures and writing off the discount and
prepare Discount on Issue of Debentures Account.

Illustration 42 (Issue of Debentures at a Discount to Vendors).
Chrome Ltd. took over assets of 6,00,000 and liabilities of 40,000 of Polymer
Ltd. at an agreed value of 6,30,000. Chrome Ltd. issued 10% Debentures of 100
each at 10% discount to Polymer.
Ltd, as consideration. It has balance of 1,00,000 in Capital Reserve. Pass the
necessary Journal entries to record the above transactions in the books of
Chrome Ltd.

Illustration 43.
On 1st April, 2015, P Ltd. issued 6,000, 12% Debentures of 100 each at par
redeemable at a premium of 7% at the end of third year.
Pass the Journal entries for issue of Debentures and writing off Loss on Issue
of Debentures. Also prepare Loss on Issue of Debentures Account.

Illustration 44.
On 1st April, 2020, Moonlight Ltd. issued 10,000, 9% Debentures of 200 each at
a discount of 5% redeemable after 5 years at a premium of 10%. All the
debentures were subscribed and allotment was made. The balance in Securities
Premium Reserve is 1,00,000.
Pass the Journal entries for issue of debentures and writing off the loss on
issue of debentures.

Illustration 45.
Home Products Ltd. issued on 1st April, 2021, 10,000, 9% Debentures of 100
each at a premium of 10% redeemable at a premium of 5% after 5 years. Issue
price was payable along with application. Pass the necessary Journal entries.

Illustration 46.
On 1st April, 2018, Sun India Ltd. issued 10,000, 12% Debentures of 100 each at
a discount of 5%, redeemable at paras follows:
On 31st March, 2019 2,000 Debentures;
On 31st March, 2020 5,000 Debentures;
On 31st March, 2021. 3,000 Debentures.
Interest is paid annually on 31st March.
You are required to pass the Journal entries for issue of debentures, interest
for the three years and prepare Discount on Issue of Debentures Account.

Illustration 47.
On 1st April, 2020, Anshika Ltd. purchased assets of 4,30,000 and took over
liabilities of ₹90,000, of Greg Ltd. at an agreed value of 3,80,000. It issued to
the vendor, 10% Debentures of 100 each at 5% discount, redeemable at par
after 5 years, in full satisfaction of the purchase price.
On the same date, the company issued 5,000, 11% Debentures of 100 each as a
collateral security to a bank who had advanced a loan of 4,50,000 to it for a
period of 3 years and also issued 5,000, 12% Debentures of 100 each at par,
redeemable after 3 years at 5% premium.
Additional Information:
The interest on debentures is paid half yearly on 30th September and 31st
March each year.
The Company had 1,20,000 in its Securities Premium Reserve Account at the
end of the year
(Ignore interest on bank loan). Pass Journal entries in the books of Anshika
Ltd. for the year ended 31st March, 2021.

Thankyou
“Your Accounts Best Friend – Sachin Pareek”

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03 Issue of Debentures Notes by Sachin Pareek

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03 Issue of Debentures Notes by Sachin Pareek

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Chapter 10

Your Accounts Best Friend - Sachin Pareek

11th & 12th

Your Accounts Best Friend - Sachin Pareek

Your Accounts Best Friend - Sachin Pareek

“Your Accounts Best Friend”

Introduction Types of Debentures Issue of Debentures

Issue of Debentures for Cash Interest on Debentures

Issue of Debentures at Premium Writing off Discount and Loss on Issue of

Your Accounts Best Friend - Sachin Pareek

Your Accounts Best Friend - Sachin Pareek

Debenture is a written instrument or document issued by the

Your Accounts Best Friend - Sachin Pareek

"Debenture includes debenture stock, bonds and any other

Your Accounts Best Friend - Sachin Pareek

"A debenture is a document given by a company as evidence of a

Your Accounts Best Friend - Sachin Pareek

Your Accounts Best Friend - Sachin Pareek

1. Debenture is a written document or certificate acknowledging

Your Accounts Best Friend - Sachin Pareek

2. Mode and period of repayment of principal and interest is fixed.

Your Accounts Best Friend - Sachin Pareek

3. Rate of interest on the debenture is specified. It is a practice to

Your Accounts Best Friend - Sachin Pareek

4. It is borrowing of the company.

Your Accounts Best Friend - Sachin Pareek

5. It is normally secured by way of charge on the assets of the

Your Accounts Best Friend - Sachin Pareek

6. Interest on Debentures is a charge against profit.

Your Accounts Best Friend - Sachin Pareek

Your Accounts Best Friend - Sachin Pareek

Bond, like debenture, is an acknowledgement of borrowing issued

Examples of bonds are Deep Discount Bond and Zero Coupon

Your Accounts Best Friend - Sachin Pareek

Your Accounts Best Friend - Sachin Pareek

Any other instrument will include any kind of security (document)

Your Accounts Best Friend - Sachin Pareek

Your Accounts Best Friend - Sachin Pareek

Debenture is borrowing of the company. Therefore, a debenture holder is a lender.

Share is capital of the company. Hence, a shareholder is the owner.

Your Accounts Best Friend - Sachin Pareek

A shareholder gets dividend on his investment.

Your Accounts Best Friend - Sachin Pareek

Your Accounts Best Friend - Sachin Pareek

Debentures can be issued at discount..

Your Accounts Best Friend - Sachin Pareek

Shares are not secured.

Your Accounts Best Friend - Sachin Pareek

Debentures can be converted into shares.

Shares (except Convertible Preference Shares) cannot be converted into any

Your Accounts Best Friend - Sachin Pareek

Debenture holders do not have voting right.

Your Accounts Best Friend - Sachin Pareek

Your Accounts Best Friend - Sachin Pareek

In case of winding-up of the company, payment of debentures is made before the

In case of winding-up of the company, payment of share capital is made after

Your Accounts Best Friend - Sachin Pareek

Your Accounts Best Friend - Sachin Pareek

Debenture holder is the lender of the company.

Shareholder is the owner of the company.

Your Accounts Best Friend - Sachin Pareek

A shareholder gets dividend.

Your Accounts Best Friend - Sachin Pareek