CBSE Class 12 Accountancy Accounting For Debentures Notes

Accounting for Debentures 

DEBENTURES :A debenture is a document that either creates a debt or acknowledges it. In corporate finance, the term is used for a mediumto longterm debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest and although the money raised by the debentures becomes a part of the company’s capital structure, it does not become share capital. 

Note : Debenture is instrument that is not secured by physical asset or collateral In case of bond interest is not clared. Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company’s general meetings of shareholders,The interest paid to them is a charge against profit in the company’s financial statements. 

Types of debentures

 Convertibility point of view : there are two types of debentures: 

Convertible debentures, which are can be converted into equity shares of the issuing company after a predetermined period of time.

 These may be Partly Convertible Debentures (PCD): A part of these instruments are converted into Equity shares in the future at notice of the issuer. The issuer decides the ratio for conversion. This is normally decided at the time of subscription. 

•Fully convertible Debentures (FCD): These are fully convertible into Equity shares at the issuer’s notice. The ratio of conversion is decided by the issuer. Upon conversion the investors enjoy the same status as ordinary shareholders of the company. 

Nonconvertible 

debentures, which are simply regular debentures, cannot be converted into equity shares of the liable company. They are debentures without the convertibility feature, they usually carry higher interest rates than their convertible counterparts. On basis of Security, debentures are classified into:∙ 

Secured Debentures: These instruments are secured by a charge on the fixed assets of the issuer company. So if the issuer fails on payment of either the principal or interest amount, his assets can be sold to repay the liability to the investors 

Unsecured Debentures: These instrument are unsecured in the sense that if the issuer defaults on payment of the interest or principal amount, the investor is treated like along other unsecured creditors of the company . 

From redemption point of view 

Redeemable Debentures:Redeemable debentures are those which are redeemed or paid off after the termination of fixed term. The amount paid off includes the principal amount and the current year’s interest. The company always has the option of either to redeem a specific number of debentures each year or redeem all the debentures at specified date.

 Irredeemable or Perpetual Debentures:Irredeemable debentures are those debentures which do not have any fixed date of redemption. They are redeemed either in the event of winding up or at a very remote period of time. Irredeemable or perpetual debenture holders can never force the company to redeem their debentures. 

Issue of Debentures :

 Debentures can be issued in two ways 

1 . for cash 

2. for consideration other than cash 

3. As collateral security

 Terms of issue of: Debentures can be issued in two ways

1 .Issue of Debentures at Par 

2. Issue of Debentures at Premium 

Debentures payable in Instalments 

1. First instalment paid along with application is called as application money 

2. Second instalment paid on allotment is called as allotment money 

3. Subsequent instalments paid are called as call money calls can be more than one and called First call, second call or as the case may be ISSUE OF Debentures FOR CASH AT PAR : This means shares are issued at face value 

Example
Raj Ltd. Issued 2,000 12% Debentures of Rs.100 each at par payable Rs.25 on Application, Rs.50 on Allotment and the balance on first and final call. In all 3,000 application were received. Allotment was made to 2,000 applicants others were rejected. Give Journal entries.

Importan : If % of debenture is given then it must be written along with Debenture ISSUE OF DEBENTURES AT PREMIUM : It is issue of Debenture at more than face value Note : Premium is Presumed To be Demanded on Allotment Unless Specified and Credited to Securities Premium Account

Example Z Ltd. Invited applications for 5,000, 8% Debentures of Rs.100 each at a premium of 2%, Rs.40 were payable on Application and balance an allotment. Applications were received for 4,800 shares and accepted in full. All money duly received. Journalise the transactions.

Oversubscription of debentures : In such case excess application are rejected or partial or Prorata allotment is done or combination of both is carried on.

Ganga Ltd. issued 2,000 debentures of Rs.100 each at a premium of 10% payable Rs.25 on application Rs.40 (including premium) payable on allotment and balance on First and final Call. In all 3,500 application were received 500 application were rejected and allotment was made to applicants of 3,000 debentures on Prorata basis. The excess money was adjusted on allotment. Give journal entries

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