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Issue of Debentures

Arjun EP

Published on: July 16, 2020

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.

Methods for Debenture Issue

There are three methods for debenture issue.

Issue of debentures for cash

Issue of debentures other than cash (purchase of business).

Issue of debenture for collateral security.

1. Issue for cash

2. Issue for business purchase

3. Issue for collateral security

(a) Lump sum basis

(b) Installment basis

(a) Only lump sum basis

Debentures can be issued at par, at discount or at premium.

At par mean issued at face value,

At discount mean issued less than face value,

At premium mean issued more than face value.

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

(Suppose value of one debenture is $/₹/Rs 100)

Issued at par Rs 100

Issued at discount Rs 100

Issued at premium Rs 100

Rs 100

Rs 90

Rs 110, 120 and more (no limit of premium)

Issued of Debentures for cash

There are two methods to issue debentures for cash; (a) lump sum basis; (b) installment basis.

(a) Lump sum basis

Under lump sum basis, company issues debentures in one installment; it may be at par, at discount or at premium.

Journal Entry

For lump sum basis

Date

Particulars

Amount Dr

Amount Cr

Bank account

Discount on issue of debenture account

To Debenture account

To Premium on issue of deb. (security premium)

(Being- ….. debenture issued of Rs …

at par/discount/premium)

xxxx

Note: In one question, either discount or premium

Simple rules are:

Received

Due

Transfer or due

Received

Received:

Bank account

To Debenture application account [first time]

To Debenture allotment account [second time]

To Debenture first call account [third time]

To Debenture second and final call account [fourth time]

(Being- amount received on ………. debenture @ $ .. each)

Transfer/due/receivable:

Debenture application account [first time]

Debenture allotment account [second time]

Debenture first call account [third time]

Debenture second and final call account [fourth time]

To % Debenture account

(Being- amount transfer/due/receivable on ………..)

Keep in Mind (KIM)

Shares can be issued at par, at discount or at premium

Many countries cannot issue shares at discount but few countries do.

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(b) Installment basis

Under installment basis, company issues shares in installments; it may be at par, at discount or at premium.

These installments are application, allotment, first call, second and final call etc.

Journal Entries

For installment basis

Journal entries for debenture application

Date	Particulars		LF	Amount Dr	Amount Cr
Received	Amount received on application
	Bank account To Debenture application account (Being- amount received on ……. debenture @ $ .. each)	Dr		xxxx	xxxx
Transfer	Amount transfer of application
	Debenture application account To % Debenture account (Being- amount transfer of application to Debenture account)	Dr		xxxx	xxxx

Journal entries for debenture allotment

Date	Particulars		LF	Amount Dr	Amount Cr
Due	Amount due/receivable on allotment
	Debenture allotment account To % Debenture account (Being- amount due/ receivable on allotment) *Note:* lack of information, discount is debited, premium is credited with allotment)	Dr		xxxx	xxxx
Received	Amount received on allotment
	Bank account To Debenture allotment account (Being- amount received on ……. debenture @ $ .. each)	Dr		xxxx	xxxx

Journal entries for debenture first call

Date	Particulars		LF	Amount Dr	Amount Cr
Due	Amount due/receivable on first call
	Debenture first call account To % Debenture account (Being- amount due/ receivable on first call)	Dr		xxxx	xxxx
Received	Amount received on first call
	Bank account To Debenture first call account (Being- amount received on ……. debenture @ $ .. each)	Dr		xxxx	xxxx

Journal entries for debenture second and final call

Date	Particulars		LF	Amount Dr	Amount Cr
Due	Amount due/receivable on second and final call
	Debenture second and final call account To % Debenture account (Being- amount due/ receivable on second and final call)	Dr		xxxx	xxxx
Received	Amount received on second and final call
	Bank account To Debenture second and final call A/c (Being- amount received on ……. debenture @ $ .. each)	Dr		xxxx	xxx