Debentures Issued for Collateral Security

  

Meaning of Debentures

Debentures are also known bonds and debt but there are slightly differences.

Company issues debentures; government and semi government issues bonds.

Both debentures and bonds are long-term loan.

The owner of debentures is called debenture holders.

Debentures have fixed interest rate and maturity period.

Normally, interest is payable annually or sometime half yearly.

Debenture holders have priority to receive interest and refund money before equity shareholder at the time dissolution of firm.

 

 

Issue of Debentures for Collateral Security

When a limited company needs loan, it can issued debentures for long term, takes bank overdraft for short term or collateral security.

These types of debentures are issued to take loan from banks or financial institutions.

Generally, values of debentures are more than loan.

But interest is calculated on loan not on deposited debentures.

If the company cannot pay its loan and interest within time, bank or financial institute automatically becomes debenture holders. In this condition, the company has to pay more interest.

 

Journal Entries

Date	Particulars		LF	Amount Dr	Amount Cr
Due	Loan taken
	Bank account           To Bank loan account (Being- loan taken from bank)	Dr		xxxx	xxxx
Received	Debentures issued for collateral security
	Debentures suspense account           To Debentures account (Being- …. debentures of Rs….. each issued as collateral security for loan)	Dr		xxxx	xxxx

 

Balance Sheet

ABC Company Ltd

Liabilities + capital + profit	Amount	Assets                                                  .	Amount
Bank loan Debentures (debentures of Rs…. each issued as collateral security for loan)		Bank balance Debentures suspense

 

Or

Extracted Balance sheet

Particulars		Note No.	As on 31 Mar CY	As on 31 Mar LY
(I) EQUITY AND LIABILITIES
(2) Non-current liabilities:
(a) Long-term borrowings:	Bank Loan Debenture		xxxxx xxxxx
(b) Differed tax liabilities
(c) Long-term provisions
Total liabilities			xxxxx

 

(II) ASSETS
(1) Non-Current Assets
(a) Fixed asset:
(i) Tangible assets
(ii) Intangible assets (Debenture suspense)		xxxxx
(2) Current Assets
(a) Inventories (closing stock)
(b) Trade receivables
(c) Cash and bank balance		xxxxx
Total assets		xxxxxx

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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

PROBLEM: 8

ABC Company Ltd taken 9% loan from NB Bank for Rs 50,00,000 by issuing 70,000; 7% debentures of Rs 100 each as collateral security.

Required: Journal entry and balance sheet

Solution:

Journal Entries

In the book of ABC Company Ltd

Date	Particulars		LF	Amount Dr	Amount Cr
Due	Loan taken
	Bank account           To 9% Bank loan account (Being- loan taken from bank)	Dr		50,00,000	50,00,000
Received	Debentures issued for collateral security
	Debentures suspense account           To Debentures account (Being- 70,000; 7% debentures of Rs 100 each issued as collateral security for bank loan)	Dr		70,00,000	70,00,000

 

Balance Sheet

ABC Company Ltd

Liabilities + capital + profit	Amount	Assets	Amount
9% Bank loan 7% Debentures (70,000; 7% debentures of Rs100 each issued as collateral security)	50,00,000 70,00,000	Bank balance Debentures suspense	50,00,000 70,00,000
	1,20,00,000		1,20,00,000

Or

Extracted Balance sheet

Particulars		Note No.	As on 31 Mar CY	As on 31 Mar LY
(I) EQUITY AND LIABILITIES
(2) Non-current liabilities:
(a) Long-term borrowings:	Bank Loan 7% Debenture		50,00,000 70,00,000
(b) Differed tax liabilities
(c) Long-term provisions
Total liabilities			xxxxx

 

(II) ASSETS
(1) Non-Current Assets
(a) Fixed asset:
(i) Tangible assets
(ii) Intangible assets (Debenture suspense)		70,00,000
(2) Current Assets
(a) Inventories (closing stock)
(b) Trade receivables
(c) Cash and bank balance		50,00,000
Total assets		xxxxxx

 

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PROBLEMS   AND   ANSWERS

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

AP: 7          [collateral security]

Mechi Tea Company Limited borrowed loan of Rs 1,00,00,000 from Nabil Bank Ltd by issuing 100,000; 8% debentures of Rs 100 each as collateral security against the loan.

Required: Journal entry and balance sheet

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