COMPANY ACCOUNTS

DEBENTURES
Introduction, Issue and Debentures
 DEBENTURE

• The word debenture is derived from ‘debera’, a Latin word which means ‘to owe a
debt’. It is only a written document issued by a company as an evidence of its debt
capital.

• A debenture is
“an instrument in writing acknowledging a debt under the seal of the company, usually
secured by a fixed or floating charge on the assets of the company, bearing a fixed rate of
interest and repayable within or after a specified period or irredeemable during the
existence of the company.”
Demystifying Debentures

A debenture is a type of bond or other debt instrument that is unsecured by

collateral.
Debentures have no collateral backing
Debentures must rely on the creditworthiness and reputation of the issuer for
support. 
They carry fixed rate of interest
They generally have life of more than 5 years
Similar to most bonds, debentures may pay periodic interest payments called
coupon payments. 
Debentures are supported by documents called indentures
 KINDS OF DEBENTURE
• Registered debenture: these are the debentures registered in the books of the company.
• Bearer debenture: the name and other details of the bearer debentures are not recorded in the register of
debenture of the company.
• Secured or mortgage debenture: these are debentures which are secured by a fixed or floating charge on the
assets of the company.
• Simple or unsecured debenture: these debentures carry no security with regards to repayment of principle and
interest.
• Redeemable debenture: debentures, the principle amount of which is repayable after a specified period of time
are called redeemable debentures
• Irredeemable debenture: debentures, which are not repayable during the life time of the company called
irredeemable debentures.
• Convertible debentures: a convertible debenture can be converted into shares of the company at the option of the
share holders. It may be fully convertible or partly.
• Non- convertible debenture: debentures which are not convertible into shares of a company are called non-
convertible debentures.
• First mortgage debenture: these debenture are payable first out of the property charged.
• Second mortgage debenture: these debenture are payable after satisfying the first mortgage debentures

ISSUE OF DEBENTURES
• Debentures may be issued at par, at premium or at a discount. They may be issued for cash or for consideration
other than cash.
• The amount of debentures may be collected in lump-sum or in installments.
• The entries for issue of debentures are made on the same pattern as for the issue of the shares.
 DIFFERENCE BETWEEN SHARES AND DEBENTURES
Shares Debentures

Amount collected through shares constitute capital of the Amount collected through debentures constitutes “
company borrowed fund” of the company

A share holder is a member of the company A debenture holder is only a creditor

A shareholder gets a share in the profits is called dividend A debenture holder receives interest at a fixed rate

A share holder is entitled to vote at meetings A debenture holder is not entitled to vote

In the event of winding up of the company the shareholders In the event of winding up of the company debenture
get their dues after paying all the liabilities of the company. holders are paid first.
Issue of Debentures

The procedure for the issue of debentures is the same as that for the issue of shares

Issue at Par Issue at Premium Issue at Discount

Issue of Debentures at Par

If whole amount is received in one instalment:

Bank A/c Dr.
To Debenture Application & Allotment A/c

On Allotment of debentures
Debenture Application & Allotment A/c Dr.
To Debentures A/c
Issue of Debentures at Par

If debenture amount is received in two instalments:

On receipt of application money
Bank A/c Dr.
To Debenture Application A/c
For adjustment of applications money on allotment
Debenture Application A/c Dr.
To Debentures A/c
For allotment money due Debenture
Allotment A/c Dr.
To Debentures A/c
On receipt of allotment money
Bank A/c Dr.
To Debenture Allotment A/c
Issue of Debentures

If debenture money is received in more than two instalments Additional entries:

(i) On making the first call

Debenture First Call A/c Dr.
To Debentures A/c
On the receipt of the first call
Bank A/c Dr.
To Debenture First Call A/c
Illustration 1

ABC Limited issued 10,000, 12% debentures of Rs 100 each payable

Rs 30 on application and remaining amount on allotment.
The public applied for 9,000 debentures which were fully allotted, and
all the relevant allotment money was duly received.
Give journal entries in the books of ABC Ltd. and exhibit the relevant
information in the balance sheet.
Solution 1

Particulars Debit Amount (Rs) Credit Amount (Rs)

Bank A/c Dr. 2,70,000  

To 12% Debenture Application A/c   2,70,000

(Application money on 9,000 debentures received)
2,70,000  
12% Debenture Application A/c Dr.

To 12% Debentures A/c   2,70,000

(Application money transferred to debentures Account on allotment)

6,30,000  
12% Debenture Allotment A/c Dr.
To 12% Debentures A/c
(Amount due on 9,000 debentures on allotment @ Rs 70 per   6,30,000
debenture)

6,30,000  
Bank A/c Dr.
To 12% Debenture Allotment A/c
  6,30,000
(Amount received on allotment)
Illustration 2

TV Components Ltd., issued 10,000, 12% debentures of Rs

100 each at a discount of 5% payable as follows:

On application Rs 40
On allotment Rs 55
Show the journal entries including those for cash, assuming that
all the instalments were duly collected.
Solution 2

Particulars L.F. Debit Amount (Rs) Credit Amount (Rs)

Bank A/c Dr.   4,00,000  

To 12% Debenture Application A/c
(Receipt of application money @ Rs 40 per debenture)   4,00,000

12% Debenture Application A/c Dr. 4,00,000  

To 12% Debenture A/c
(Transfer of application money to debenture account)   4,00,000

12% Debenture Allotment A/c Dr. 5,50,000

 
Discount on Issue of Debentures A/c Dr. 50,000
To 12% Debenture A/c
(Allotment money due on debentures)   6,00,000

Bank A/c Dr. 5,50,000  

To 12% Debenture Allotment A/c
(Receipt of allotment money on debentures)   5,50,000
Issue of Debentures at a Premium

XYZ Industries Ltd., issued 2,000, 10% debentures of Rs 100 each, at a premium of Rs 10 per
debenture payable as follows:
On application Rs 50
On allotment Rs 60
The debentures were fully subscribed, and all money was duly received. Record the journal entries in
the books of a company.
Show how the amounts will appear in the balance sheet.
 Solution 3

Particulars L.F. Debit (Rs) Credit (Rs)

Bank A/c Dr. 1,00,000  
To 10% Debenture Application A/c
(Application money Rs 50 per debentures received)   1,00,000
10% Debenture Application A/c 1,00,000  
To 10% Debentures A/c Dr.
(Transfer of application money )   1,00,000
1,20,000  
10% Debenture Allotment A/c
  1,00,000
To 10% Debentures A/c
To Securities Premium A/c Dr.
(Allotment money due on debentures including the
premium)   20,000
Bank A/c 1,20,000  
To 10% Debenture Allotment A/c Dr.
(Allotment money received)     1,20,000
Issue of Debentures Other Than Cash

Aashirward Company Limited purchased assets of the book

value of Rs 2,00,000 from Mahesh Babu company and
agreed to make the payment of purchase consideration by
issuing 2,000, 10% debentures of Rs 100 each.
Record the necessary journal entries.
 Solution 4

Books of Aashirwad Company Limited Journal

Credit
Particulars L.F. Debit Amount
(Rs) Amount
(Rs)

Sundry Assets A/c 2,00,000  

To Mahesh Babu Dr. 2,00,000
(Assets purchased from vendors)  

Mahesh Babu   2,00,000  

To 10% Debentures A/c
Dr.
(Allotment of debentures to vendors as purchase   2,00,000
consideration)
     
1. Sooraj limited issued 10,000 debentures of Rs 10 each. Rs 3 on application, Rs 4 on
allotment and the balance on first and final call all the amounts were received. Pass the
necessary journal entries.

2. Sunrise Ltd issue the following debentures pass journal entries in the books of the
company in connection with the issue and redemption of debentures
I. 12% debentures of Rs 3,60,000 issued at par, redeemable at par
II. 12% debentures of Rs 3,60,000 issued at a discount of 10%, redeemable at par
III. 12% debentures of Rs 3,60,000 issued at a premium of 10%, redeemable at par
IV. 12% debentures of Rs 3,60,000 issued at par, redeemable at a premium of 10%
V. 12% debentures of Rs 3,60,000 issued at a discount of 10%, redeemable at a premium
of 10%

3. Wealth Ltd, issues 10000 12% secured debentures of Rs 100 each Give journal entries if
the debentures are redeemable at par and are issues (i) at par (ii) at a discount of 2% (iii) at
a premium of 3%.
Also show the journal entries which will be made if the debentures are redeemable at a
premium of 5% and are issued at (i) at par and (ii) at a discount of 2%.
 Questions for Practice

4. On 1st January, 2015, Reliable Ltd. issued 1000 14% debentures of Rs 100 redeemable
at the end of 3 years. On 31st December 2015, a sinking fund (Debenture Redemption
Fund) was created for the redemption of debentures. According to the Sinking Fund table
a sum of Rs 31,720 invested annually at 5% compound rate of interest was required to
redeem Rs 1, 00,000 worth debentures on the expiry of third year of issue. On the date of
redemption investment realized Rs 67,500. Assume that the company had sufficient bank
balance. Write the journal entries and ledger accounts in the books of the company to
record the debenture transactions.

5. On 1st January, 2016, A company issued Rs 40,000 9% debentures of Rs 100 each

repayable after 3 years. It has been decided to create a sinking fund for their redemption.
Sinking fund table shows that an annual installment towards sinking fund comes to Rs
12,950. The investments yield 4% interest. Prepare the necessary journal entries and
ledger accounts for three years.