Issue of Debentures as a Collateral Security Part 4

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Collateral security is a supporting security for a loan. This is also called as secondary security. When company takes loan from any bank or financial institution in return as collateral security company provides debentures. Lender will have the right over debentures only in case of default in repayment of original loan. If the loan is paid by the company in due date then the debentures will be cancelled along with the loan amount. If company fails to repay these are the steps for accounting treatment.

Option 1: No entry in the books of accounts. Issue of collateral security is disclosed as a note in the balance sheet under the heading of Secured Loans and Advances on liabilities side.

Option 2: Pass the following journal entry

Debenture Suspense A/c Dr

To Debentures A/c

(.....Debentures of Rs .... each issued as collateral security to .....)

Note: Debentures A/c will appear on liabilities side and Debentures Suspense A/c will appear on asset side in balance sheet.

Image of Balance Sheet

Image of Balance Sheet

Image of Balance Sheet

Example: Sky Rocketing Company Ltd issued 6000 10% debentures of Rs 100 each to the bank as collateral security against a loan of Rs 500000 taken from the bank. Record the issue of debentures in the books of the company and show the issued Debentures in the Balance Sheet of the Company.

Solution:

No journal entry is required

Balance Sheet of Sky Rocketing Co. Ltd. as on 31st March, 2006

Dr. Cr.

Journal Entry Sky Rocketing
Journal Entry Sky Rocketing

Liabilities

Amount (Rs.)

Assets

Amount (Rs.)

Secured Loan

Bank loan

(Secured by 6000 10%

debentures of Rs 100 each

issued as collateral security)

500000

Current Assets & Loans and Advances:

Cash at Bank

500000

When journal entry is required

Journal Entries

Journal Entry Sky Rocketing
Journal Entry Sky Rocketing

S.No

Particulars

L.F

Amount (Rs.)

Dr.

Cr.

1.

Debentures Suspense A/c Dr.

To Debentures A/c

((Issue of 6000 10% debentures of Rs 100 each issued as collateral security to bank)

600000

600000

Balance Sheet of Sky Rocketing Co. Ltd. as on 31st March, 2006

Dr. Cr.

Balance Sheet Sky Rocketing
Balance Sheet Sky Rocketing

Liabilities

Amount (Rs.)

Assets

Amount (Rs.)

Secured Loan

Bank loan

Debentures

(6000 10% debentures issued

as collateral security)

500000

600000

Current Assets:

Cash at Bank

Miscellaneous Expenditure:

Debentures Suspense A/c

(6000 Debentures of Rs 100 each issued as collateral security as per contra)

500000

600000

Discount on Issue of Debentures and Loss on Issue of Debentures

When company issues debentures on discount that will not be charged from Profit and Loss of that accounting period. As the discount amount is high that will be written off with some amount every year prior to the redemption of these debentures. As discounted amount is treated as capital loss it will be shown on asset side of the balance sheet under ‘Miscellaneous Expenditure’.

The Amount of Debenture Discount Can Be Written off in Two Ways:

When All Debentures Are to Be Redeemed After a Fixed Period

Amount of discount will be written off every year equally.

Amount of discount to be written off every year =

Journal Entry to written off every year:

Profit and Loss A/c Dr.

To Discount on Issue of Debentures A/c

When Debentures Are Redeemed in Installments:

Over a fixed period of time debentures amount can be written off in installments and the written off amount will be in proportion to the amount of debentures redeemed. Same journal entry for every installment.