Issue Of Debentures

What is a Debenture?

A debenture is a form of corporate debt that is not supported by collateral. Therefore, companies do not have to pledge their assets to comply with the capital requirement. The trust of the issuing company is therefore an important factor for the financial validity of the debenture in the market.

Some government organizations also issue debentures for their infrastructure and growth projects. As these firms do not have to pledge anything during the issue of debentures, traders can earn higher profits from the debenture trade in the market. Debentures are therefore traded by networks of investment brokers in the secondary market.

Debentures are offered as a certificate from the issuing organization to the debenture holders. Therefore, the issuing organizations are obligated to return the invested amount in debentures after a given period of time. Additionally, as the interest on the amount accumulated is fixed, debentures are an investment avenue that is often referred to as fixed cost-bearing capital.

Issue of Debentures

Issue of debentures is an action of a company where it issues certificates to accumulate debt. The company used its seal of acknowledgment while doing so. A debenture issue is similar to an issue of shares. Issuing of the prospectus, invitation of applications, and issuing of letters of allotment are all part of the process.

The registration fees and/or application fees collected upfront from interested parties are refunded in case the application is rejected. In the case of partial allotment, the extra amount of application money is used for further calls.

Issue of debentures can occur in the following forms:

• By cash

• Consideration other than cash

• As collateral security

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

• At par

• At discount

• At premium

The issue of debentures by cash and the various journal entries in each of the three scenarios are as follows:

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 the 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)

7. For Debentures issued at a 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)

8. For debenture issued at a premium

The 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 a premium. Therefore, the following combinations are possible that can result from the two factors:

• Issued at par and redeemable at par

• Issued at a discount and redeemable at par

• Issued at a premium and redeemable at par

• Issued at par and redeemable at a premium

• Issued at a discount and redemption at a premium

• 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)

Issued 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)

Issued at par and redeemable at a 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 a premium on redemption)

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

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

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

Issued at a discount and redemption at a 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 a discount on the issue plus premium on redemption)

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

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

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

Issued at a premium and redeemable at a 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 a premium on redemption)

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

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

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

Conclusion

The issue of debentures is an important part of business for organizations that raise their capital via debentures. As a form of non-collateral investment vehicle, the debentures play a key role in the accumulation of debt which can be considered as the backbone of business findings. Therefore, the owners and analysts must know how to calculate the returns on debentures and how to deal with investors who invest in the company for a better return.

FAQs

Q1. What are debentures? Do companies need to pledge with an asset for issuing debentures?

Ans. A debenture is a form of corporate debt that is not supported by collateral. Therefore, companies do not have to pledge their assets to comply with the capital requirement. The trust of the issuing company is therefore an important factor for the financial validity of the debenture in the market.

Q2. In which forms can issues of debentures occur?

Ans. Issue of debentures can occur in the following forms:

• By cash

• Consideration other than cash

• As collateral security.

Q3. What are the three ways in which debentures can be issued depending on the terms of the issue?

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

• At par

• At discount

• At premium.