By CA CS Harish A Mathariya

DEBENTURES 99 70 66 88 07
 • is an acknowledgement of a debt taken by the company
• Issued under the common seal of the company and
• a debenture certificate contains an undertaking to pay back the
principal sum
DEBENTURE? • on or after a specified maturity period and
• to pay the interest on the debt at a fixed rate whichever is decided at
regular intervals
• generally half yearly until the debt is repaid fully

WHY ISSUE OF DEBENTURE??

Equity sources of financing are not always sufficient to meet needs of co.
ISSUE OF DEBENTURES
hence, debt financing, through:
Financial institutions, at par, or
commercial banks or
by issuing debt instruments at a premium, or
at a discount without any legal
Either through restriction
 private placement or
 by public subscription
Having tax benefits, helps in reducing the cost of capital (appropriate capital structure)
THUS, Debentures are part of loan capital and interest is to pay (Charge)
KINDS OF DEBENTURES
KINDS OF Secured or Mortgage Debenture
DEBENTURE Unsecured or Naked Debenture
S Bearer Debenture
Registered Debenture
Debentures Shares
Ownership
Convertible Debenture loan capital capital
Non-Convertible Debenture
Creditor Owner
Redeemable Debenture
Irredeemable Debenture Interest Dividend
First Mortgage Debenture Charge appropriation
Second Mortgage Debenture
No Voting Voting
CONDITIONS FOR ISSUE OF DEBENTURES
Can issue @ No Discount
Special Resolution Discount
No Voting Rights Fixed Interest Dividend rate –
vary
Debenture Redemption Reserve Non-
Convertible convertible
Debenture Trustee (>than 500)
according to prescribed terms and conditions
 Issue of Debentures
for other than Cash

For acquisition of On allotment of On allotment of On allotment of

assets debentures (at par) debentures (at debentures (at a
premium) discount)

Vendor A/c Dr. Vendor A/c Dr.

Sundry Assets A/c Dr Vendor A/c Dr.
To Vendor A/c To Debenture A/c Disc. On deb a/c Dr
To Debenture A/c
To Sec. Prem a/c To Debenture A/c
ISSUE OF DEBENTURES AS A COLLATERAL
SECURITY
‘Collateral Security’-additional security given for a loan

it may issue its own debentures to the lender as collateral security

Lender has right over debentures until and unless the loan is
repaid

Holder of such debentures is entitled to interest only on the

amount of loan

Entry- Debenture Suspense Dr. xxx

To % Debenture A/c xxx
WRITE OFF LOSS / DISCOUNT ON ISSUE
OF DEBENTURES:
Can be treated as Capital
loss Written off against capital profits

Can be treated as deferred

revenue expenditure Written off against revenue profit

Is to write it off against revenue over the period of life of the debentures on an equitable basis (In the raito,
amount of debentures o/s)
TREATMENT OF DISCOUNT/LOSS ON THE ISSUE OF DEBENTURES
Is to write it off against revenue over the period of life of the debentures on an equitable basis (In the raito, amount
of debentures o/s)

INTEREST ACCRUED AND DUE (OUTSTANDING INTEREST)

Suppose a company pays interest on 30th September and 31st March on Rs. 5,00,000, 14% Debentures. The company
will pay Rs. 35,000 in every six months. The debenture-holders cannot demand interest before these specified due dates.
Assuming that the accounting period ends on 31st March and the interest from 1st October to 31st March remains unpaid.

INTEREST ACCRUED BUT NOT DUE (ACCRUED INTEREST)

if the debenture interest is paid on 30th June and 31st December and the company closes its books on
31st March. After the payment of interest on 31st December, the next payment will be made on 30th
June in next accounting period. But for proper accounting, interest from 1st January to 31st March must
be accounted for. It is called interest accrued but not due or simply accrued interest and will be
recorded as:
REDEMPTION OF DEBENTURES
Methods of
Redemption

By Means of By Purchase of its own

By Conversion in
In Lump Sum Annual Instalments Debebntures in the Open
to Shares
or by Draw of Lots Market

As Investment in As Investment in
own Debentures own Debentures
DEBENTURES REDEMPTION RESERVE
(DRR) - SECTION 71(4)
is created out of divisible profits
CO. required to create DRR shall on or before the 30th day of April in each year invest or deposit, as
the case may be, a sum which shall not be less than 15% of the amount of its debentures maturing
during the year ending on 31st day of March of next year in:
deposits with any scheduled banks free of any charge
Securities of the Central / State Government
Securities of Indian Trusts Act, 1882

shall be used only for the redemption of the debentures

DRR shall create in respect of non-convertible portion
No DRR is required for AIFIs & Banking companies
For other companies (Including NBFC (not reqd. if pvt. Placement for NBFC)) 10% of the value of
outstanding debentures issued
INSURANCE POLICY METHOD
annual sum is appropriated out of surplus and credited to Debenture Redemption Fund A/c in the same
manner as it is done in Sinking Fund method
However, the appropriate profit is not invested in marketable securities, instead an insurance policy is taken
for the required amount and an amount equal to profit set aside is paid as premium to insurance company.
At the end of policy period, the insurance company returns the total accumulated amount which is sufficient
to pay the debenture holders
Eg. Go ltd. Issued 500, 12% debentures of rs. 100 each at par on 1st april, 2015, repayable at par
after 3 years on 31st march, 2018. The directors decided to take out an insurance policy to
provide necessary cash for the redemption of the debentures. The annual premium for the policy
payable on 1st april every year was rs. 15,705. You are required to show the journal entries in the
books of the company.
REDEMPTION BY CONVERSION
Bima Ltd. had issued 11% 5,00,000 debentures of Rs. 100 each redeemable on 31st March 2019 at a
premium of 5%. The company offered three options to debenture holders as under:
(i) 13% Preference shares of Rs.10 each at Rs.10.50
(ii) 14% debentures of Rs. 100 at par.
(iii) Redemption in cash.
The options were accepted as under :
Option (i) by holders of 1,00,000 debentures.
Option (ii) by holders of 1,00,000 debentures.
Option (iii) by holders of 3,00,000 debentures.
The company carried out the redemption. Pass the necessary journal entries
PURCHASE OF DEBENTURES IN THE OPEN
MARKET
PURCHASE OF DEBENTURES IN THE OPEN MARKET
On 1.1.2014, HM Ltd. Had outstanding in its books 1,000 12% Debentures of Rs.100 each. The interest is
payable on 30th June and 31st December. In accordance with the power in the deed, the directors
acquired in the open market Debentures for immediate cancellation as follows:
2014 1st March Rs.10,000 @ Rs.98.00 (cum interest)
2014 1st August Rs.20,000 @ Rs.100.25 (cum interest)
2014 1st Nov Rs.5,000 @ Rs.98.50 (ex – interest)
DEBENTURE REDEMPTION FUND/SINKING FUND METHOD
At the end of the first year
a. Annual Appropriation to Sinking P & L Appropriation Account
Fund To Debentures Sinking Fund Account
(Annual Installment is derived from Sinking Fund Table)
a. Investment of annual Debentures Sinking Fund Investment Account
appropriation in outside securities To Bank A/c
(Amt. of Investment = Annual Installment only)
At the end of the second and subsequent years
1.Interest earned on Bank Account Dr.
Sinking Fund To Debentures Sinking Fund Account
Investments (Income relates to the Fund, hence credited to the Fund itself)
2.Annual Appropriation P & L Appropriation Account Dr.
to Sinking Fund To Debentures Sinking Fund A/c
(Amt. of annual Installment is derived from Sinking Fund Table)
3.Investment of annual Debentures Sinking Fund Investment A/c Dr.
appropriation in To Bank Account
outside securities (Amt. of Investment = Annual Installment + Interest earned)
Note: If however, if the Sinking Fund is non-cumulative, the amount of investment every
year = Annual Installment only. In this case, the interest earned every year will not be
re – invested.
At the time of redemption
a. Interest earned on Sinking Fund
Investments
a. Annual Appropriation to
Sinking Fund
a. Sale of Investments for
providing cash for redemption
a. Transfer of loss / Profit on sale
of investments to Sinking Fund
a. Redemption of Debentures
a. Transfer to General Reserve
Bank Account
To Debentures Sinking Fund Account
(Income relates to the Fund, hence credited to the Fund itself)
P & L Appropriation Account
To Debentures Sinking Fund A/c
(Amt. of annual Installment is derived from Sinking Fund Table)
Bank Account
Loss on Sale of Investments (if sold at a loss)
To Debentures Sinking Fund Investment
To Profit on Sale of Investments (if sold at a profit)
Debentures Sinking Fund A/c
To Loss on Sale of Investments A/c (in case of loss)
OR
Profit on sale of investments A/c
To Debentures Sinking Fund A/c (in case of Profit)
Debenture holders A/c (face value + Premium if any)
To Bank Account
Debenture Sinking Fund A/c
To General Reserve Account
(Amount equal to Face value of Debentures redeemed is transferred to General
Reserve, any surplus in Sinking Fund Account is transferred to Capital Reserve, any
shortfall is provided from the P & L Account)