Accounting
For Issue of Debentures:
Debentures
It
is a financial instrument, issued by Companies to raise Funds from the Market that my acknowledges Payment of Interest on regular intervals and Repayment of
Principle on maturity of the instrument to its holders.
It
includes Debentures, Stock, Bonds or any other Instrument of a Company that
evidences debt on it.
It
can be redeemable (having maturity period) or Irredeemable (No maturity
period.) (Explanation of Types of Debentures has been ignored intentionally.)
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Disclosure
of Debentures in Balance Sheet
Debenture
is generally a long term Financial Instrument, a means of raising Long term
Finance for the Company that falls under Non Current Liability Head in
Balance Sheet.
An
Extract of Balance Sheet
However,
if it has been issued for a period of Less than 12 Months, then it falls
under Short Term Borrowing under Current Liability Head of Balance Sheet.
Note:
In
Case, Part of Long Term Debentures become due for redemption before maturity
within 12 months from the date of Balance Sheet, it will be recorded in Other
Current Liability under Current Liability Head as “Current Maturities of Long
Term Debts”.
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Issue
of Debentures
Debentures
can be issued for Cash or Consideration other than Cash.
Further,
whether issued in Cash or For Consideration other than Cash, it can be issued
at Par, Premium or Discount.
Issue
of Debentures for Cash
Two methods
Debentures Payable in
Lump sum
It
means when payment of Debentures is received in one instilment.
Debentures Payable in
Installments:
Payment
of Debentures is received in installments.
First
installment comes with application known as application money, Second-
allotment, third -First call, fourth - Second call and so on. Last
installment is also called as Final call.
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Accounting Entries
for issue of Debentures Payable in
Lump sum
Issued
at Par
1. On receipt of
Application money
Bank A/c
….....................….Dr
To Debenture
Application A/c
2. On Allotment of Debentures
Debenture Application A/c……….Dr
To Debenture A/c
3. On refund of
Excess Application Money:
Debenture
Application A/C………..Dr
To
Bank A/C
Note: We can also write Debenture Application & Allotment
A/C instead of Debenture Application A/C.
Accounting Entries
for issue of Debentures Payable in
Lump sum
Issued
at Premium
1. On receipt of Application
money
Bank A/c
….....................….Dr (Total Application money including Premium)
To Debenture
Application A/c
2. On Allotment of Debentures
Debenture Application
A/c……….Dr (Total Application money including Premium)
To Debenture A/c (with
Nominal/ Face value)
To Security Premium
Reserve A/c (with Premium amount)
Accounting Entries
for issue of Debentures Payable in
Lump sum
Issued
at Discount
1. On receipt of
Application money
Bank A/c
….....................….Dr (Total Application money)
To Debenture
Application A/c
2. On Allotment of Debentures
Debenture Application
A/c……….Dr (Total Application money received)
Discount on Issue of
Debentures…….Dr (Total Discount Allowed)
To Debenture A/c (with
Nominal/ Face value)
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Accounting Entries
for issue of Debentures Payable in
Installments
Issued
at Par
1. On receipt of Application
money
Bank A/c
….....................….Dr
To Debenture
Application A/c
2. on Allotment of Debentures
Debenture Application
A/c……….Dr
To Debenture A/c (with
nominal/ face value)
3. Amount due on
allotment
Debenture
allotment A/c……..Dr
To
Debenture A/c
4. On receipt of
allotment money
Bank
A/c………………………Dr
To
Debenture Allotment A/c
5. On First call
being Due
First
Call A/c…………….Dr
To
Debenture A/c
6. On receipt of
First Call
Bank
A/c ……………….Dr
To
First Call A/c
7. On Second &
Final Call being Due
Second
& Final Call A/c……….Dr
To
Debenture A/c
8. On receipt of
Second & Final Call
Bank
A/c ……………..Dr
To
Second & Final Call A/c
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Accounting Entries
for issue of Debentures Payable in
Installments
Issued
at Premium:
Case I.
When premium is received at the time of application along with application
money:
1. On receipt of
Application money
Bank A/c ….....................….Dr
(Total Application money including Premium)
To Debenture
Application A/c
2. on Allotment of Debentures
Debenture Application
A/c……….Dr (Total Application money including Premium)
To Debenture Capital
A/c (with nominal/ face value)
To Security Premium
Reserve A/c (with Premium amount)
Note:
All other Entries for allotment, First call and final call
will remain similar as to the case of Debentures issued at Par.
Case
II. When premium is receivable at the time of Allotment:
1. On receipt of
Application money
Bank A/c
….....................….Dr
To Debenture
Application A/c
2. on Allotment of Debentures
Debenture Application
A/c……….Dr
To Debenture Capital
A/c (with nominal/ face value)
3. Amount due on
Allotment including Security Premium
Debenture
allotment A/c……..Dr
To
Debenture Capital A/c
To Security Premium Reserve A/c
4. On receipt of
allotment money including Security Premium
Bank
A/c………………………Dr
To
Debenture Allotment A/c
Note:
If question is silent with regard to receipt of Security
Premium, it is assumed that it is due with allotment money.
All other Entries for First call and final call will remain
similar as to the case of Debentures issued at Par.
Case
III. When premium is receivable at the time of Application, Allotment and all
Calls:
1. On receipt of
application money
Bank A/c
….....................….Dr (Total Application money including Premium)
To Debenture
Application A/c
2. on allotment of Debentures
Debenture Application
A/c……….Dr (Total Application money including Premium)
To Debenture Capital
A/c (with nominal/ face value)
To
Security Premium Reserve A/c (with Premium amount)
3. Amount due on
allotment including Security Premium
Debenture
allotment A/c……..Dr
To
Debenture Capital A/c
To Security Premium Reserve A/c
4. On receipt of
allotment money including Security Premium
Bank
A/c………………………Dr
To
Debenture Allotment A/c
5. On First call
being Due including Security Premium
First
Call A/c…………….Dr
To
Debenture Capital A/c
To Security Premium Reserve A/c
6. On receipt of First
Call including Security Premium
Bank
A/c ……………….Dr
To
First Call A/c
7. On Second &
Final Call being Due including Security Premium
Second
& Final Call A/c……….Dr
To
Debenture Capital A/c
To Security Premium Reserve A/c
8. On receipt of
Second & Final Call including Security Premium
Bank
A/c ……………..Dr
To
Second & Final Call A/c
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Accounting Entries
for issue of Debentures Payable in
Installments
Issued
at Discount
1. On receipt of
Application money
Bank A/c
….....................….Dr
To Debenture Application
A/c
2. on Allotment of Debentures
Debenture Application
A/c……….Dr
To Debenture A/c (with
nominal/ face value)
3. Amount due on
allotment
Debenture
allotment A/c……..Dr
Discount
on Issue of Debentures A/C ……Dr
To
Debenture A/c
Note: Until and unless specified in the question; The amount
demanded on Allotment is assumed to be net of Discount.
4. On receipt of
allotment money
Bank
A/c………………………Dr
To
Debenture Allotment A/c
5. On First call
being Due
First
Call A/c…………….Dr
To
Debenture A/c
6. On receipt of
First Call
Bank
A/c ……………….Dr
To
First Call A/c
7. On Second &
Final Call being Due
Second
& Final Call A/c……….Dr
To
Debenture A/c
8. On receipt of
Second & Final Call
Bank
A/c ……………..Dr
To
Second & Final Call A/c
Accounting Treatment & Disclosures in relation to Discount or
Loss on Issue of Debentures
Discount or Loss on
Issue of Debentures is a capital loss which can be written off against
1. Security Premium
Reserve or
2. Profit & Loss
A/C
A Company can write off
Discount or Loss on Issue of Debentures in two ways:
1. In first Year itself
either from Security Premium Reserve A/C or P&L A/C.
2. Writing Off amount
of Discount or Loss on Issue of Debentures in equal Installments every year
over the maturity period of Debentures.
For Example
Company issues 1000 Debentures of Rs. 100 at 10 % Discount and
to be redeemable after 5 years at 20 % Premium. Loss on issue is to written off
in 5 equal installments over 5 Years maturity period.
Amount to be written Off every Year = Rs. 3000 ÷ 5 = Rs.600
Journal Entry for
writing off Loss on Issue of Debentures:
P&L A/C or Security
Premium Reserve A/C …..Dr
To Discount or Loss on
Issue of Debentures
Disclosure of
Unamortised Discount on Issue of Debentures to be written off within 12
months:
It
is shown under the Head ‘Current Asset’ & Sub Head ‘Other Current Asset’
in Balance Sheet
Disclosure of
Remaining Balance of Unamortised (Not Written off) Discount on Issue of
Debentures :
It
is shown under the Head ‘Non Current Asset’ and Sub Head Other ‘Non Current
Asset’.
For
Example:
500
Debentures of Rs. 100 each at a discount of Rs. 20 on 1 April 2017. Discount
on Issue will be written off in 4 Equal Installments then in this case Total
Discount is = Rs. 20 × 500 =Rs. 10000.
Discount
to be written off every year = Rs. 10000 ÷ 4 = Rs. 2500
Discount
to be written off during April 1, 2017 – 31 March 2018 = Rs. 2500.(This amount will be written off this year, So No entry for this amount in Balance Sheet.)
Discount
to be written off in next Operating cycle that is within 12 months from the date of Balance Sheet = Rs. 2500.
Amount to be written off after 12 months= Rs. 10000 - Rs. 2500 - Rs. 2500 = Rs. 5000.
Disclosure in Balance Sheet of Above Data will be:
Non Current Asset:
Other Current Assets 5000
Current Asset:
Other Current Assets
2500
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Issue of
Debentures for Consideration Other than Cash
Issue of Debentures
to Vendors for Purchase of Fixed Asset or Business
On
Purchase of Assets:
Sundry
Asset A/C……Dr
To
Vendor’s A/C
On Purchase of
Business:
Sundry
Assets A/C……………Dr (Agreed Value of Assets)
Goodwill
A/C …………………Dr*
To
Sundry liabilities A/C (Agreed Value of Liabilities)
To
Vendor A/C (With Purchase Consideration)
To
Capital Reserve A/C**
*If
Purchase Consideration > Net Asset Value, then difference is debited to
Goodwill A/C.
**If
Purchase Consideration < Net Asset Value, then difference is credited to
Capital Reserve A/C.
Either Goodwill A/C or Capital Reserve A/C will be written at a
time. Both cannot come together.
Calculation
of
Number of
Debentures to be issued = Purchase Consideration ÷ Issue Price of
One Debenture
On
Issue of Debentures at Par
Vendor
A/C……………………Dr (With Purchase Price)
To
Debenture Cap A/C (With Nominal or Face Value of Debentures)
Issue Price = Par value of Debenture
On
Issue of Debentures at Premium
Vendor
A/C……………………Dr (With Purchase Price)
To
Debenture Cap A/C (With Nominal or Face Value of Debentures)
To
Security Premium Reserve A/C (if Debentures have been issued at Premium)
Issue Price = Par value of Debenture + Security Premium
Reserve
On
Issue of Debentures at Discount
Vendor
A/C……………………Dr (With Purchase Price)
Discount
on Issue of Debenture A/C …Dr (If issued at Discount)
To
Debenture Cap A/C (With Nominal or Face Value of Debentures)
Issue Price = Par value of Debenture – Discount on Issue of
Debenture
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Issue of
Debentures as Collateral Security:
It
means issue of Debentures as an additional security or Collateral against the
Loan in addition to the principal or main security.
Two
Methods for Accounting Issue of Debentures as Collateral Security:
Method 1. No Journal Entry is passed for issue of Debentures.
It is disclosed by way of information written in bracket with Long Term
Borrowings under Non Current Liability or Short Term Borrowings under Current
Liability.
Case I: Disclosure of Debentures issued as Collateral Security
under Long Term Borrowings in Non Current Liability Head.
Extract of Balance Sheet
Notes to Accounts
Case II: Disclosure of Debentures issued as Collateral
Security under Short Term Borrowings in Current Liability Head.
Extract of Balance Sheet
Notes to Accounts
Method 2: When Debentures issued as Collateral Security are
recorded in the Books of Account:
Debenture
Suspense A/C is created against Debentures issued.
Journal
Entry passed in this case will be:
Debenture
Suspense A/C…….Dr
To
Debenture A/C
When Loan is repaid to the lender, we reverse the above entry.
Disclosure
in Balance Sheet
Case I: Disclosure of Debentures issued as Collateral Security
under Long Term Borrowings in Non Current Liability Head.
Extract of Balance Sheet
Notes to Accounts
Case II: Disclosure of Debentures issued as Collateral
Security under Short Term Borrowings in Current Liability Head.
Extract of Balance Sheet
Notes to Accounts
Rights of
Lender in case of Non Payment of Loan:
Lenders
can recover the Loan amount by selling Debentures or by redemption of
Debentures:
No Journal entry is passed if lender does not exercise rights
as no immediate Liability is by issuing Debentures as Collateral Security.
Journal Entries
passed in case Lender exercise his/ her rights:
For
reversing the entry for issue of Debentures as Collateral Security
Debenture
A/C……….Dr
To
Debenture Suspense A/C
For
Conversion of Debentures issued as Collateral security into Liability along
with interest Due on it:
Loan
A/C………………….Dr (with Principal Amount)
Outstanding
Interest A/C …….Dr
To
Debentures A/C (Principal + Outstanding Interest)
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Various
Cases related to Redemption of Debentures:
Debentures
issued either at Par, Premium or Discount can be redeemed at Par or Premium.
Case I: Debentures issued at Par, Redeemable at Par
On
Receipt of Application Money
Bank
A/C……….Dr
To
Debenture Application A/C
On
Transfer of Application Money to Debenture A/C
Debenture
Application A/C………Dr
To
Debenture Allotment A/C
Case II: Debentures issued at Discount, Redeemable at Par
On
Receipt of Application Money
Bank
A/C……….Dr
To
Debenture Application A/C
On
Transfer of Application Money to Debenture A/C & Recording of Discount on
Issue
Debenture
Application A/C………Dr
Discount
on Issue of debenture A/c…..Dr
To
Debenture Allotment A/C
Case III: Debentures issued at Premium, Redeemable at Par
On
Receipt of Application Money
Bank
A/C……….Dr
To
Debenture Application A/C
On
Transfer of Application Money to Debenture A/C & Recording of Premium on
Issue
Debenture
Application A/C………Dr
To
Debenture Allotment A/C
To
Security Premium Reserve A/C
Note:
No Extra entries have been passed as amount payable at the time of
Redemption is Equal to Nominal Value.
Case IV: Debentures issued at Par, Redeemable at Premium
Company
will suffer a loss equal to Premium amount payable at the time of redemption.
So it is debited to Loss on Issue of Debentures A/C at the time of allotment
following principle of Prudence of Recording anticipated losses to companies
in future.
On
Receipt of Application Money
Bank
A/C……….Dr
To
Debenture Application A/C
On
Transfer of Application Money to Debenture A/C
Debenture
Application A/C………Dr
Loss on Issue of Debenture A/C…..Dr
To
Debenture Allotment A/C
To Premium on Redemption of Debenture A/C
Case V: Debentures issued at Discount, Redeemable at Premium
In
this case, Company will suffer a loss equal to Premium amount payable at the
time of redemption as well as loss incurred due to Discount offered at the
time of issue.. Both these losses are debited to Loss on Issue of Debentures
A/C at the time of allotment following principle of Prudence of Recording
anticipated losses to companies in future.
On
Receipt of Application Money
Bank
A/C……….Dr
To
Debenture Application A/C
On
Transfer of Application Money to Debenture A/C
Debenture
Application A/C………Dr
Loss on Issue of Debenture A/C…..Dr (with Discount on issue+
Premium on Redemption)
To
Debenture Allotment A/C
To Premium on Redemption of
Debenture A/C
Or
We can also write both losses separately that is:
On
Transfer of Application Money to Debenture A/C
Debenture
Application A/C………Dr
Loss on Issue of Debenture A/C…..Dr (Premium on Redemption)
Discount on Issue of Debenture A/C….Dr (Discount on Issue)
To
Debenture Allotment A/C
To Premium on Redemption of Debenture A/C
Case V: Debentures issued at Premium, Redeemable at Premium
In
this case, Company will suffer a loss equal to Premium amount payable at the
time of redemption and a Capital receipt at the time of issue of Debentures in
the form of Security Premium. Loss is to be debited to Loss on Issue of
Debentures A/C at the time of allotment following principle of Prudence of
Recording anticipated losses to companies in future and Security Premium
received will be credited.
On
Receipt of Application Money
Bank
A/C……….Dr
To
Debenture Application A/C
On
Transfer of Application Money to Debenture A/C
Debenture
Application A/C………Dr
Loss on Issue of Debenture A/C…..Dr (with Premium on Redemption)
To
Debenture Allotment A/C
To Premium on Redemption of
Debenture A/C
To Security Premium Reserve
A/C
Note:
Loss on Issue of
Debentures is a Capital Loss and it can be written off either from Security
Premium Reserve A/C or P&L A/C with in maturity period of Debentures.
Generally these losses are distributed equally over maturity period of
Debentures. However it can be written off at one time also.
Accounting treatment for
amortization or writing off of Loss on Issue of Debenture is similar to
Discount on issue of Debentures as discusses earlier in the column of Accounting Treatment & Disclosures
in relation to Discount or Loss on Issue of Debentures.
Premium on Redemption of
Debenture is a liability for the company. It is shown under Other Long Term
Liabilities in Non Current Liability Head, when Debentures are shown as Long
Term Borrowings under Non Current Liability Head.
However, when Debentures
are shown as Current Maturities of Long Term Debt, Premium on Redemption of
Debenture is also shown under the head Current Liability & Sub Head Other
Current Liability.
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Interest on
Debentures
Interest
on Debenture is calculated on Nominal / Face value, whether it has been
issued at Par, Premium or Discount.
Interest
rate also means coupon rate, which is mentioned with Debenture.
For
example In 12 % Debenture of Rs. 100 each; Interest or Coupon rate is 12% and Interest will be calculated on Face
value that is 12 %of Rs. 100 = Rs. 12.
Interest
on Debenture is a charge against profit.
Interest
Payment may be subject to Tax Deducted at source (TDS) which is always calculated
on Interest amount.
For
example, if TDS is 10 %, then from the above example TDS chargeable will be
10 % of Rs. 12 = Rs. 1.2.
Journal
Entries related to Interest on Debenture & TDS:
When
Interest is due and TDS is applicable:
Debenture
Interest A/C….Dr
To
Debentureholders’ A/C
To
TDS Payable A/C (No entry of TDS Payable if question does not ask for TDS)
When
Interest is Paid:
Debentureholders’
A/C…..Dr
TDS
Payable A/C………….Dr (No entry of TDS Payable if question does not ask for TDS)
To
Bank A/C
For
Transfer of Interest at the end of the year to P& L A/C as an expense (Finance
Cost)
P&L
A/C………..Dr
To
Interest on debenture A/C
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