Accounting: Issue of Debentures: Consideration Other Than Cash and Issue of Debentures as a Collateral Security

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Sometimes debentures are issued to acquire assets or to repay the creditors instead of money. Debentures can be issued to vendors at par, discount or at premium.

Journal Entries

Table Supporting: Accounting: Issue of Debentures: Consideration Other Than Cash and Issue of Debentures as a Collateral Security

Tablutation of: Purchase of Assets: Sundry Assets A/c Dr. To Vendors -individually- A/c-Purchase of Assets-, Allotment of Debentures at Par:Vendors A/c Dr. To Debentures A/c-issue of debent …

Purchase of Assets:

Sundry Assets A/c Dr.

To Vendors (individually) A/c

(Purchase of Assets)

Allotment of Debentures at Par:

Vendors A/c Dr.

To Debentures A/c

(issue of debentures to vendors at par)

Allotment of Debentures at Premium: Vendors A/c Dr.

To Debentures A/c

To Securities Premium A/c

(issue of debentures to vendors at premium)

Allotment of Debentures at Discount:

Vendors A/c Dr.

Debentures Discount A/c Dr.

To Debentures A/c

(issue of debentures to vendors at Discount)

Example:

M.B. Electronics Ltd. purchased machinery for Rs 198000 and issued 9% debentures of Rs 100 each to the vendors. Make journal entries if the debentures were issued

(a) At par (b) at a premium of Rs 10 (c) at a discount of Rs 10

Solution: Journal Entries

Table Supporting: Accounting: Issue of Debentures: Consideration Other Than Cash and Issue of Debentures as a Collateral Security

Tablutation of: S.No, Particulars, L.F, Amount (Rs.)

S.No

Particulars

L.F

Amount (Rs.)

Dr.

Cr.

1.

Machinery A/c Dr.

To Vendor’s A/c

(Machine Purchased)

198000

198000

2.

Vendor’s A/c Dr.

To 9% Debentures A/c

(1980 debentures of Rs 100 each issued to vendors)

198000

198000

3.

Vendor’s A/c Dr.

To 9% Debentures A/c

To Securities Premium A/c

(1800 debentures issued at a premium of Rs 10 per debenture)

198000

180000

18000

4.

Vendor’s A/c Dr.

Discount on Issue of Debentures A/c Dr.

To 9% Debentures A/c

198000

22000

220000

Working Notes:

Premium: Amount due = Rs 198000

Value of debenture including Rs 10 for premium = Rs 110

No. of debentures to be issue = 198000/110 = 1800

∴ Debenture amount (Nominal value) = 1800 × 100 = Rs 180000

Securities Premium Amount = 1800 × Rs 10 = Rs 18000

Discount: Amount due to vendor = Rs 198000

Value of one debenture at a discount of Rs 10 = Rs 90

No. of debentures to be issued = Rs 198000 ÷ Rs 90 = 2200

Debentures amount (Nominal value) = 2200 × Rs 100 = Rs 220000

Discount on issue of Debentures = 2200 × Rs 10 = Rs 22000

Issue of Debentures with conditions Stipulated to their Redemption:

Journal Entries

Table Supporting: Accounting: Issue of Debentures: Consideration Other Than Cash and Issue of Debentures as a Collateral Security

Tablutation of: Issued at par and redeemable at par: Bank A/c Dr. To Debentures A/c, Issue at par, redeemable at premium:Bank A/c Dr.Loss on Debentures A/c Dr. &n …

Issued at par and redeemable at par:

Bank A/c Dr.

To Debentures A/c

Issue at par, redeemable at premium:

Bank A/c Dr.

Loss on Debentures A/c Dr.

To Debentures A/c

To Premium on Redemption of Debenture A/c

Issued at discount and redeemable at par:

Bank A/c Dr.

Debentures Discount A/c Dr.

To Debentures A/c

Issued at discount and redeemable at premium: Bank A/c Dr.

Discount of issue of Debentures A/c Dr.

Loss on Debentures A/c Dr.

To Debentures A/c

To Premium on Redemption of Debenture A/c

Issued at premium redeemable at par:

Bank A/c Dr.

To Debentures A/c

To Securities Premium A/c

Issue of Debentures as a Collateral Security

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

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:

  1. No journal entry is required

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

Dr. Cr.

Table Supporting: Issue of Debentures as a Collateral Security

Tablutation of: Liabilities, Amount (Rs.), Assets, Amount (Rs.)

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

  1. When journal entry is required

Journal Entries

Table Supporting: Issue of Debentures as a Collateral Security

Tablutation of: S.No, Particulars, L.F, Amount (Rs.)

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.

Table Supporting: Issue of Debentures as a Collateral Security

Tablutation of: Liabilities, Amount (Rs.), Assets, Amount (Rs.)

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

Developed by: