Issue and Redemption of Debentures

 

ISSUE AND REDEMPTION OF DEBENTURES.

Learning Objectives:

 

What is a Debenture?

A Debenture is a document issued by the company under its common seal, acknowledging the debt by it to its holders.  Debenture is a certificate of creditorship.

                As per Sec.2(12) of Indian Companies Act, 1956, “A Debenture includes debenture Stock, bonds and other securities of a company, whether constituting a charge on the assets of the company or not”.

TYPES OF DEBENTURES

1.       Bearer Debentures,        2.  Registered Debentures,          3.Unsecured Debentures,             

4.   Secured Debentures       5.  Redeemable Debentures,      6. Irredeemable Debentures,

7.   Convertible Debentures.

 

1.       Bearer Debentures:

Ø  Payable to the Bearer of the debenture

Ø  They are treated as negotiable instruments and are transferable by mere delivery.

Ø  Registration of such transfer with company is not necessary.

Ø  Interest is paid to the person who produces Interest Coupon attached to such Debenture.

2.       Registered Debentures.

Ø  Payable to the person whose name have been registered with the company.

Ø  The  transfer of such debentures can be done by execution of transfer deed. Such transfer is registered with the company.

Ø  The payment of interest and repayment of principal is made to those whose name have been registered with the company and duly recorded in the register of Debenture Holders.

3.       Unsecured Debentures:

Ø  These are also known as ‘Naked’ or ‘Simple’ Debentures.

Ø  These Debentures are not fully or partly secured by a charge on the assets of the company.

Ø  The debenture holders are treated as unsecured creditors.

4.       Secured Debentures:

Ø  These are also known as mortgage debentures.

Ø  The debentures are secrured fuly or partly by a charge on the assets of the company.

Ø  The charge may be fixed (on a particular asset) or floating.

Ø  The charge should be filed with Registrar within 30 days of its creation.

Ø  In India, only the secured debentures can be issued.

5.       Redeemable Debentures:

Ø  These are repayable on the expiry of a specified period in lump sum or by instalments during the life time of the company.

Ø  The Debentures may be redeemed by the company on demand by the holders or at the direction of the company.

6.       Irredeemable Debentures:

Ø  These can also be known as’ perpetual debentures’.

Ø  These debentures are not redeemable during the life time of the company.

Ø  These debentures are retained as a part of the permanent capital structure of the company.

Ø  These Debentures are repaid at the time of liquidation of the company.

Ø  The company can redeem such debentures by giving due notice to the holders.

7.       Convertible Debentures:

Ø  The holders of these Debentures have a right to convert them into shares.(Equity /preference shares)

Ø  Conversion takes place as per the terms of issue like

·         Conversion takes place at a specified date.

·         After a specified period – after the expiry of 6 months from the date of allotment.

·         Within a specified period – after the expiry of 2 years but within 4 years from the date of allotment.

Ø  In this case conversion is optional.

8.       Non-convertible Debentures :

Ø  Here the holders have no right to convert theminto shares.

9.       First Mortgage Debentures:

Ø  The holders of these debenture have a first claim on the assests charged by the company.

10.   Second Mortgage Debentures:

Ø  The holders of these debentures have a second claim on the assests charged by the company.

Ø  These Debentureholders are entitled to receive the amount which is left after fulfilling the claim of first debenture holders.

 

Issue of Debenture:

Ø  The procedure for the issue of debentures is the same as n the case of shares.

Ø  So, the accounting entries on the issue of Debentures is basically similar to the one on the issue of shares.

Ø  Debentures are issued by the company at par, at a premium or at a discount.

Ø  The Debentures holders are entitled to get a fixed rate of interest on the face value of the Debentures.

Ø  Interest on Debentures is a charge against profit.

Ø  Debentureholders may be asked to pay the whole amount along with the application or to pay the sum in instalments like on shares.

 

Types of Debenture Issue:

1.       Debentures issued for cash.

2.       Debentures issued for consideration other than cash.

3.       Debentures issued as Collateral security.

 

Debentures issued for cash:

Debentures may be issued at par, at a premium or at a discount.

a.       Issued at par: Here the issue price of debentures is equal to their face value.

PROFORMA JOURNAL  ENTRIES:

                                                         i.            On receipt of application money:

Bank a/c ----------------------------Dr.

   To Debenture Application a/c

                                                       ii.            On transfer of application money to debentures a/c:

Debentures application a/c-----------Dr.

   To Debentures a/c.

                                                     iii.            On making allotment money due:

Debenture allotment a/c--------------Dr

   To Debentures a/c

                                                     iv.            On receipt of allotment money:

Bank a/c ----------------------------------Dr.

   To Debentures Allotment a/c.

                                                       v.            On making the First Call:

Debentures First call a/c --------------Dr.

   To Debentures a/c.

                                                     vi.            On receipt of First call amount:

Bank a/c---------------------------------Dr.

   To Debentures First call a/c.

                 (Note: Similar entries may be given for the second call, third call etc. In case of the last call    we must add the word final to the concerned debenture call account.

                       (b) Issued at a premium: In this case issue price of the debentures is more than their face valves.

Generally premium is recorded along with allotment. The following is the Proforma journal entries to record premium. 

                                                         i.            On making allotment money due:

Debenture allotment a/c--------------Dr

   To Debentures a/c

   To Debenture Premium a/c

Note:

·         The premium is credited to separate account called the debenture premium account and can be used for writing of the capital losses and fictitious assets.

·         This account is shown on the liabilities side of the balance sheet under the head of Reserves and Surplus.

      

          (c) Issue at a Discount:  Here the issue price of debentures is less than their face value.

                 Like premium discount also generally recorded along with allotment.

PROFORMA JOURNAL ENTRIES FOR RECORDING DISCOUNT ON ISSUE OF DEBENTURES IS:

1.       On making allotment money due:

Debenture allotment a/c--------------    Dr.

Discount on issue of Debentures a/c   Dr.

         To Debentures a/c

Note:     a) Discount on Debentures is Debited to a separate a/c called Discount on issue of    debentures a/c.

b) It is a capital loss and is to be shown on the Asset Side of the Balance Sheet under the Head Misc. Expenditure.

                c) it can be written off against share premium or Debenture Premium or Profit and Loss A/c.

 

ISSUE OF DEBENTURES FOR CONSIDERATION OTHER THAN CASH.

Sometimes companies issue debentures (at par, at premium or at discount) against the purchase of Assets instead of making payment by cash.

Proforma Entries:

1.       On Purchase of Asset

       Asset a/c                      Dr.                                                                                                                                          To Vendor A/c

2.       On Issue of Debentures.

a)       At Par.

Vendors A/c               Dr.

     To Debentures A/c.

b)      At Premium

Vendors A/c               Dr.

     To Debentures A/c

     To Debenture Premium A/c.

c)       At Discount

Vendors A/c               Dr.

Discount on issue of Debentures A/c Dr.

     To Debentures A/c.

 

ISSUE OF DEBENTURES AS COLLATRIAL SECURITY

Ø  In this case the company offers Debentures as an additional security against a loan taken.

Ø  Such Securities will supplement the tangible security given, if any.

Ø  After the repayment of loan with interest, the creditor will return the debentures to the company which can be cancelled by the company.

Ø  If the company fails to repay the loan on the stipulated date, the debentures given as collateral security to the creditors will become Live Debentures and the cretior resumes all the rights of the debenture holder.

 

Proforma Entries:

There are 2 methods of dealing with such debentures in the books

a)       For the debentures issued as collateral security the company makes no entry.

It will be shown in the inner column of Valance sheet under the head Debentures by way of information.

 

b)      When an accounting is to be given:

i.                     On  issue of such Debentures

Debenture Suspense A/c      Dr.

      To Debenture A/c.

ii.                   On Repayment of Loan

Debenture A/c                          Dr.

     To Debenture Suspense A/c

Note: a) Debenture Suspense a/c is to be shown on the Asset Side of the Balance Sheet   under the head Misc. Expenditure.

Debentures A/c is to be shown along with other debentures as secured Loans.

 

Journal Entries for Issue and Redemption of Debentures –

1.       Debentures Issued at Par & Redeemable at Par –

Bank A/c                                              Dr. 100

      To Debentures A/c                                   100

 

2.       Debentures Issued at Discount & Redeemable at Par or Discount –

Bank A/c                                                              Dr. 95

Loss on Issue of Debentures A/c                Dr.   5

      To Debentures A/c                                   100

3.       Debentures Issued at Premium & Redeemable at Par or Discount –

Bank A/c                                                              Dr. 105

      To Debentures A/c                                                   100

      To Premium on Issue A/c                                            5

4.       Debentures Issued at Par & Redeemable at Premium –

Bank A/c                                                              Dr. 100

Loss on Issue of Debentures A/c                Dr.     5

      To Debentures A/c                                                   100

      To Premium on Redemption A/c                              5

5.       Debentures Issued at Discount & Redeemable at Premium –

Bank A/c                                                              Dr. 95

Loss on Issue of Debentures A/c                Dr. 10  

      To Debentures A/c                                                   100

      To Premium on Redemption A/c                              5