Issue of Debenture – Methods and accounting treatment

Issue of Debenture - Methods and accounting treatment-min

The Issue of Debenture refers to raising funds from other persons or groups of persons for the expansion of a business/company. 

What is the Issue of Debenture?

It means offers to provide a loan to the company to other persons or the public for raising funds for expansion. Persons included a natural person and an artificial person also. Artificial person means company or institution. Any business can issue its Debenture by following the steps: 

  1. Issuing prospectus 
  2. Receiving Application
  3. Allotment of Shares

Methods of Issue of Debenture:

The Methods of Issue of Debenture is on the basis of the following: 

  1. Issue Debenture for cash 
  2. Issue Debenture for consideration other than cash 
  3. As collateral security

1. Issue Debenture for cash:

Issue debenture for cash means the company will issue debenture to the applicant against the payment of cash. The Debenture can be issued for cash in the two following ways :

  1. The Lump Sum amount called/paid along with the application:
  2. In Instalments

1. The Lump Sum amount called/paid along with the application:

When the company called up the full value of debenture including premium or discount at the time of application, the Debentures are said to be issued against lump-sum payment.

2. The total value of shares called/paid in instalments: 

When the company called up full Debentures price including premium or discount in the instalments i.e., partly on Application, partly on Allotment and balance in the one or more calls, the Debentures are said to be issued in the instalments. The name of these instalments are must be as following :

1st Instalment: Debentures Application
2nd Instalment: Debentures Allotment
3rd Instalment:  Debentures 1st Calls
4th Instalment: Debentures 2nd Calls (If any)
and So on. 

2. Issue Debentures for consideration other than cash: –

When the company issued Debentures against the consideration other than cash i.e., for any assets, the Debentures are said to be issued for consideration other than cash. 

3. As collateral security: –

Any security given to lender against the amount of loan and interest on it will be known as principle security and any other security given to the lender in addition to principle security is known as collateral security.  It can be realised by the lender only when the company make any default in the payment of the principal and interest amount. 

Accounting Treatment of Issue of Debenture: 

The accounting treatment of issued shares is on the basis of the following: 

  1. Issue Debenture for cash 
  2. Issue Debenture for consideration other than cash 
  3. As collateral security

1. Issue Debenture for Cash: –

The Debenture can be issued for cash in the two following ways and there two have different accounting treatment as shown following: 

1. The Lump Sum amount called/paid along with the application;

When the company called up full share price including premium or discount at the time of application, the shares are said to be issued against lump-sum payment. The accounting treatment of this is shown as follows: 

It can be issued in three ways :

  1. Debenture Issued at Par
  2. Debenture Issued at Discount 
  3. Debenture Issued at Premium 
1. Debenture Issued at Par:

When Debenture are issued at the face value. 

Date   Particulars
L.F. Debit Credit
           
  Bank A/c Dr.   *****  
  To Debenture App. & Allot. A/c       *****
  (Being Debenture application and allotment money received)      
           
  Debenture App. and Allot. A/c Dr.   *****  
  To ___% Debenture A/c     *****
  (Being Debenture allotted against the payment received on Debenture application and allotment)      
         

 

2. Shares Issued at Discount

At par means when shares are issued at less than their face value. 

Date   Particulars
L.F. Debit Credit
           
  Bank A/c Dr.   *****  
  Discount on Issue of Shares A/c Dr.   ***  
  To Debenture App. & Allot. A/c       *****
  (Being Debenture application and allotment money received and discount allowed)      
           
  Debenture App. and Allot. A/c Dr.   *****  
  To ____% Debenture A/c     *****
  (Being Debenture allotted against the payment received on Debenture application and allotment)      
         

 

3. Shares Issued at Premium

When shares are issued at a higher price than their face value. 

Date   Particulars
L.F. Debit Credit
           
  Bank A/c Dr.   *****  
  To Debenture App. & Allot. A/c       *****
  (Being Debenture application and allotment money received)      
           
  Debenture App. and Allot. A/c Dr.   *****  
  To ____% Debenture A/c     *****
  To Securities Premium A/c     ***
  (Being Debenture allotted and securities premium created against the payment received on Debenture application and allotment)      
   

2. The total value of Debenture called/paid in instalments: 

The accounting treatment of this is shown as follows: 

We have shown the Debenture issued at par, at a discount and at a premium in the following single journal format and treatment of discount and premium are shown with grey colour so if in the question there is discount then u can add discount treatment and do not write a premium treatment and vice versa.

Date   Particulars
L.F. Debit Credit
           
  Bank A/c Dr.   *****  
  Discount on Issue of Deb. A/c Dr.   ***  
  To Debenture Application A/c       *****
  (Being share application money received)      
           
  Debenture Application A/c Dr.   *****  
  To ___% Debenture A/c     *****
  To Securities Premium A/c[If any]     ***
  (Being Debenture allotted and securities premium created (if issued at a premium)against the payment received on Debenture application)      
         
  Debenture Allotment A/c Dr.   *****  
  To ___% Debenture A/c     *****
  To Securities Premium A/c[If any]     ***
  (Being Debenture allotted and securities premium created (if issued at a premium) against the payment received on Debenture application)      
         
  Bank A/c Dr.   *****  
  Discount on Issue of Deb. A/c Dr.   ***  
  To Debenture Allotement A/c       *****
  (Being Debenture Allotment money received)      
         
  Debenture 1st Call A/c Dr.   *****  
  To Debenture Capital A/c     *****
  To Securities Premium A/c[If any]     ***
  (Being Debenture 1st call and securities premium created (if issued at a premium)against the payment received on Debenture 1st call)      
         
  Bank A/c Dr.   *****  
  Discount on Issue of Den A/c Dr.   ***  
  To Debenture 1st Call A/c       *****
  (Being share 1st call money received)      
         
  Debenture 2nd Call A/c Dr.   *****  
  To ___% Debenture A/c     *****
  To Securities Premium A/c[If any]     ***
  (Being Debenture 2nd call and securities premium created (if issued at a premium) against the payment received on Debenture 2nd call)      
         
  Bank A/c Dr.   *****  
  Discount on Issue of Shares A/c Dr.   ***  
  To Debenture 2nd Call A/c       *****
  (Being Debenture 2nd Call money received)      
         
  So on……………….      

Note: 
The company can call the amount of premium with any call. So with which it is called, you have to record with that call. But we had shown treatment with all calls. 

2. Issue Debenture for consideration other than cash: –

The accounting treatment of this is shown as follows: 

Date   Particulars
L.F. Debit Credit
           
  Name of Assets/Company A/c Dr.   *****  
  Discount on Issue of Shares A/c Dr.   ***  
  To ____% Debenture A/c       *****
  To Securities Premium a/c       ***
  (Being Debenture Allotted against the purchase of assets or other running company.       
           

 

2. As collateral security: –

The two types of accounting treatment of this are shown as follows: 

  1.  No Journal entry posted into the account. 
  2. When Journal entry posted.
Date   Particulars
L.F. Debit Credit
           
  Debenture Suspense A/c Dr.   *****  
  To ____% Debenture A/c       *****
  (Being Debenture Suspense account is prepared for the collateral security of the debenture.)      
           

Thanks for reading the topic.

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References: –

    1. mca.gov.in
    2. Class +2 Accountancy by Sultan Chand & Sons (P) Ltd.

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