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Company Accounts Issue of Debentures CA Foundation Notes

Company Accounts – Issue of Debentures – CA Foundation, CPT notes, PDF

This article is about Company Accounts – Issue of Debentures for CA foundation CPT students. we also provide PDF file at the end.

Company Accounts – Issue of Debentures

Company Accounts – Issue of Debentures

ISSUE OF DEBENTURES

24.1 MEANING OF DEBENTURE:

♦     Debenture means “an instrument in writing issued by a company under its common seal, acknowledging its indebtedness for a certain sum of money and undertaking to repay it on or after a fixed future date.”

♦     According to section 2(30) of Companies Act, 2013 “Debenture include debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not.”

24.2     CHARACTERISTIC FEATURES OF A DEBENTURE:

♦     It is issued by the company and is in the form of a certificate of indebtedness.

♦     It usually specifies the date of redemption. It also provides for the re-payment of principal and interest at specified date or dates.

♦     It generally creates a charge on the undertaking or undertakings of the company.

♦     Usually the words pari passu appear in the terms and conditions of debentures.

■ This means that all the debentures of a particular class will receive the money proportionately in case the company is unable to discharge the whole obligation.

♦     Terms of issuing debentures

–    At par

–    At premium

–    At discount

♦     Ways of issuing debentures

–    Issue of debenture for cash

–    Issue of debentures for consideration other than cash

–    Issue of debentures as collateral security

ISSUE OF DEBENTURES FOR CASH

Debentures are issued for cash either at par, at premium or at discount. The full amount collected on the issue of debentures is payable in the following ways :

  1. If the full amount is payable along with the application money or,
  2. If the full amount is payable in instalments, he., on application, on allotment & on calls.

24.3 ENTRIES FOR ISSUE OF DEBENTURE:

♦     Entries for the issue of debentures will be passed in the same manner as in the case of issue of shares seen earlier in Chapter 23.

24.4 DEBENTURE ISSUE AT PREMIUM:

♦     Premium will be credited to Debenture Premium A/c or (Premium on Debenture A/c)

♦     It should be treated as a capital profit and it can be used for writing off capital losses, or expenses like discount, commission etc. relating to share or debentures.

♦     The restrictions on utilisation of Share Premium are not applicable to Debenture Premium.

24.5 DEBENTURE DISCOUNT:

♦     The discount is a capital loss and it should be written off as early as possible.

♦     Even whole amount can be written off in the year of issue itself against share premium or any other capital profit.

♦     Otherwise Debenture Discount can be written off over the lifetime of debentures as follows (applying matching principle):

(1) If the Debentures are redeemable at the end of aperiod, then the Discount will be written off equally over that period.

Illustration 24.1 : A company issued 1000, 9% debentures @ Rs. 100 each, in following manner

ApplicationRs.40
AllotmentRs.30
First callRs.20
Second and final callRs. 10

Mr. R holder of 20 debentures failed to pay the 1st and 2nd call money. Company decided to charge Rs. 35 as Interest on calls in arrear. Give necessary journal entries in the books of the company.

SOLUTION :

Journal Entries

S. No.ParticularsL.F.Amount Rs.Amount Rs.
1.Bank a/cDr.40,000
To 9% debenture application a/c40,000
(Application money received on 1,000 debentures @ Rs. 40 each)
2.9% debenture application a/cDr.40,000
To 9% debenture a/c40,000
(Being application money transferred to 996 debenture a/c)
3.996 debenture allotment a/cDr.20,000
Discount on issue of 9% debenture a/cDr.10,000
To 9% debenture a/c30,000
(Being allotment due on 1,000 debenture @ Rs. 30 each).
4.Bank a/cDr.20,000
To 9% debenture allotment a/c20,000
(Being amount received on allotment of 996 debenture)
5.9% debenture 1st call a/cDr.20,000
To 9% debenture a/c20,000
(Being first and final call due on 1,000 debenture @ Rs. 20 each).
6.Bank a/cDr.19,600
To 9% debenture 1st call a/c19,600
(Being amount received on first call)
7.9% debenture End and final call a/cDr.10,000
To 9% debenture a/c10,000
(Being second and final call due on 1000 debentures @ Rs. 10 per debenture)
8.Bank a/cDr.9,800
To 9% debenture second and final call a/c9,800
(Being amount received on second and final call)
9.9% debentureholder a/cDr.35
To Interest on calls-in-arrears a/c35
(Being interest on calls-in-arrear charged by the company)

Issue of debentures in consideration other than cash

Debentures can be issued for non-cash considerations. In the following cases, issue of debentures is considered to be as ‘consideration other than cash’:

(a)   Issue of debentures to promoters of the company

In this case the company issues fully paid debentures to the promoters in return for the services rendered by them.

(b)   Issue of debentures to underwriters

The company may issue debentures to the underwriters in order to pay their underwriting commission.

(c)   Issue of debentures to vendors

When the company purchases assets and issues its fully paid debentures as payment to the vendor instead of paying in form of cash ; such issue of debentures is called issue of debentures to vendors.

The accounting entries under each method are given below.

(a)Issue of debentures to promoters of the company
Goodwill a/c or Incorporation costs/Expenses a/cDr.
To ___ % debentures a/c
(b)Issue of debentures to underwriters
(i) Underwriting commission a/cDr.
To underwriters a/c
(ii) Underwriters a/cDr.
To ___ % debentures a/c
(c)Issue of debentures to vendors
Vendor’s a/cDr.
To Debentures a/c

Illustration 24.2 : A company purchased some plant costing Rs. 4,30,000 at an agreed price of Rs. 4,00,000. Company decided to issue its 8% debentures of Rs. 100 each against purchased consideration. Give necessary accounting entries in the following cases:-

(i) If debenture were issued @ Rs. 100 per debenture

(ii) If debenture were issued @ Rs. 80 per debenture

(iii) If debenture were issued @ Rs. 125 per debenture

SOLUTION :

Journal Entries

S. No.ParticularsL.F.Amount Rs.Amount Rs.
1.Plant a/cDr.4,30,000
To vendor a/c4,00,000
To Capital Reserve a/c30,000
(Being asset/plant purchased at an agreed price of Rs. 4,00,000)
2.(n)Vendor a/cDr.4,00,000
To 8% debenture a/c (4000 × 100)4,00,000
(Being 8% debentures issued to vendors @ Rs. 100 each)
2.(b)Vendor a/c (5000 × 80)Dr.4,00,000
Discount on 8% debentures a/cDr.1,00,000
To 8% debenture a/c5,00,000
(Being 8% debentures issued @ Rs. 80 per debenture to vendors)
2.<c)Vendor a/c (3200 × 125)Dr.4,00,000
To 8% debenture a/c3,20,000
Securities Premium reserve a/c (3200 × 25)

(Being 8% debenture issued to vendor @ Rs. 125 each)

80,000

Working Note

♦ No. of debenture to be issued =

1st case =  = 4,000 debentures.

2nd case =  = 5,000 debentures.

3rd case =  = 3200 debentures

Issue of debentures as collateral security

Where a company borrows money from a bank or an insurance company or any other financial institution, and the principal security offered by it is not sufficient, it may issue its debentures to the lender as a collateral security against the loan. In this case the Lender has absolute right over the debentures until the loan is repaid. On the repayment of loan, he is under an obligation to return the debentures to the company.

In case of non-payment, the lender has the right to retain and realize the debentures, if the realizable value of primary security is insufficient to clear the dues.

Illustration 24.3 : A company took a bank loan of Rs. 5,00,000 from SBI and issued its 6000, 10% debentures of Rs. 100 each as collateral security to loan. Give necessary accounting treatment.

SOLUTION:

♦ Ist method :-

When debenture issued as collateral security are not shown as issued debentures in the balance sheet of the company.

(i) Bank a/cDr.5,00,000
To Bank loan a/c5,00,000

(Being bank loan taken on issue of 6000, 10% debentures of Rs. 100 each as collateral security).

(ii) No entry required for issuing debentures.

Balance sheet (Extract) as at – …..

ParticularsNote no.Rs.
IEquity and liability

Non current liabilities

(a) Long term borrowings15,00,000
Total5,00,000
IIAssets

Current assets

(a) Cash and cash equivalents5,00,000
Total5,00,000

Note

(1) Long term borrowings :

Rs.
Bank Loan from SBI5,00,000
(on collateral security of 6,000, 10% debentures of Rs. 100 each).

♦ Ilnd method

When debentures issued as collateral security are shown as issued debentures in the books of the company.

(i)Bank a/cDr.5,00,000
To Bank loan a/c5,00,000
(Being bank loan taken)
(ii)10% debenture suspense a/cDr.6,00,000
To 10% debenture a/c6,00,000
(Being 6,000, 10% debentures of Rs. 100 each issued as collateral security to loan)

Balance sheet (Extract) as at…….

ParticularsNote no.Rs.
IEquity and liabilities

Non-current liabilities

(a) Long term borrowings15,00,000
Total5,00,000
IIAssets

Current assets

(a) Cash and cash equivalents5,00,000
Total5,00,000

Note

(1) Long term borrowings :

Rs.
Bank Loan from SBI5,00,000
(on collateral security of 6,000, 10% debentures of Rs. 100 each).

Issue of debentures with a point of view to its redemption

1. Issue price Rs. 100/-; Nominal value Rs. 100/-; Redeemable value Rs. 100/-100
Bank a/cDr.
To 996 debentures a/c100
2. Issue price Rs. 103/-; Nominal value Rs. 100/-; Redeemable value Rs. 100/-
Bank a/cDr.103
To 9% debentures a/c100
To securities premium Reserve a/c3
3. Issue price Rs. 96. ; Nominal value Rs. 100; Redeemable value Rs. 100/-.
Bank a/cDr.96
Discount on issue of 996 debentures a/cDr.4
To 9% debentures a/c100
4. Issue price Rs. 100 ; Nominal value Rs. 100/- Redeemable value Rs. 105/-
Bank a/cDr.100
Loss on issue of 9% debentures a/cDr.5
To 9% debentures a/c100
To premium on redemption of 9% debentures a/c5
5. Issue value Rs. 96.; Nominal value Rs. 100; Redeemable value ‘105/-
Bank a/cDr.96
Discount on issue of 9% debentures a/c”Dr.4
Loss on issue of 9% debentures a/c*Dr.5
To 9% debentures a/c100
To premium on redemption of 9% debentures a/c5
‘There can be a single entry for the above
Loss on issue of 9% debentures a/cDr.9
6. Issue price Rs. 103 ; Nominal value Rs. 100; Redeemable value Rs. 105/-
Bank a/cDr.103
Loss on issue of 9% debentures a/cDr.5
To 9% debentures a/c100
To premium on issue of 9% debentures a/c3
To premium on redemption of 9% debentures a/c5

 

Interest on debentures

The company pays interest on the issue of debentures at a fixed rate. Interest on debentures is usually payable half- yearly and is calculated at the nominal or face value of debentures. It is a charge against the profits of the company, thus the payment is not subject to earning of profits only. According to the provisions of Income Tax Act, 1961, a company is under an obligation to deduct income tax at a prescribed rate from the amount of debenture interest payable to the debenture-holders. The amount so deducted is called Tax deducted at source (TDS), and, is payable to the tax authorities by the company.

Illustration 24.4: A company issued 1000 12% debentures of Rs. 100 each on 1st Jan 2016 at a premium of 10%, Interest was given/payable on 30th June and 31st December, every year subject to 10% TDS. Give necessary journal entries for the year 2016.

SOLUTION:

DateParticularsL.F.Amount Rs.Amount Rs.
2016
1st Jan.Bank a/c (1000 × 110)Dr.1,10,000
To 12% debenture a/c (1000 × 10)1,00,000
To Premium on issue of 12% debenture a/c (1000 × 10)10,000
(Being 12% debenture of Rs. 100 each issued @ a premium of 10%)
30th JuneInterest on 12% debenture a/cDr.6,000
To 12% debenture holder a/c5,400
To TDS payable a/c (6000 × 10%)600
(Being interest due on debentures (half yearly) and tax deducted at source)
12% debenture holder a/cDr.5,400
TDS payable a/cDr.600
To Bank a/c6,000
(Being interest paid and TDS payable).
31st Dec.Interest on 12% debenture a/cDr.6,000
To 12% debenture holder a/c5,400
To TDS payable a/c (6000 × 10%)600
(Being half yearly interest due on debentures and tax deducted at source.)
12% debenture holder a/cDr.5,400
TDS payable a/cDr.600
To Bank a/c6,000
(Being interest paid and TDS paid on 12% debentures).
Statement of Profit & Loss a/cDr.12,000
To Interest on 12% debenture a/c12,000
(Being interest transferred to statement of Profit and loss a/c)

 

Writing off of discount/Loss on issue of Debentures.

*Discount/Loss on issue of debentures may be written off through security premium reserve (if available). OR From statement of profit & loss a/c of the company in the following manner

Securities Premium Reserve a/cDr.
OR.
Statement of Profit & Loss a/cDr.

 

To Discount or Loss on issue of debentures a/c

Illustration 24.5 : ABC company issued 1000,9% debentures of, Rs. 100 each at a discount of 5% on 1st Jan, 2011. These debentures were to be redeemed after 5 years. Show necessary journal entries at the time of issue of debentures. Also prepare discount on issue of 9% debentures a/c.

SOLUTION:

Working Note

(1)  = Rs. 1,000/-

♦ At the time of issue

Journal Entries

DateParticularsL.F.Amount Rs.Amount Rs.
2011
1st Jan.Bank a/cDr.95,000
Discount on issue of 9% debentures a/cDr.5,000
To 9% debenture a/c1,00,000
(Being 9% debenture issued @ a discount of 5%)

Discount on issue of 9% debenture a/c

DateParticularsJ.F.AmountDateParticularsJ.F.Amount
Rs.Rs.
2011Rs.2011Rs.
1st Jan.To 9% debentures a/c5,00031. Dec.By statement of Profit & loss a/c1,000
By balance c/d4,000
5,0005,000
20122012
1st Jan.To balance b/d4,00031 Dec.By statement of Profit and loss a/c1,000
By balance c/d3,000
4,0004,000
20132013
1st Jan.To balance b/d3,00031 Dec.By statement of Profit & loss a/c1,000
By balance c/d2,000
3,0003,000
20142014
1st Jan.To balance b/d2,00031 Dec.By statement of Profit & loss a/c1,000
By balance c/d1,000
2,0002,000
20152015
1st Jan.To balance b/d1,00031 Dec.By statement of Profit and loss a/c1,000
1,0001,000

Balance sheet as at 31st December 2011.

AssetsNote no.Rs.
Non-current assets other non current assets3,000
Current assets other current assets1,000

Suppose company decided to redeem its debentures in the following manner

♦     At the end of the year 2011 Rs. 20,000.

♦     At the end of the year 2012 Rs. 30,000.

♦     At the end of the year 2013 Rs. 10,000.

♦     At the end of the year 2014 Rs. 20,000.

♦     At the end of the year 2015 Rs. 20,000.

Calculate the amount to be written off at the end of every year.

At the beginning of the year or before redemption

YearAmount utilized or outstanding debenturesRatioDiscount to be written off
20111,00,0005,000 ×  = 1724
201280,0005,000 ×  = 1379
201350,0005,000 ×  = 862
201440,0005,000 ×  = 690
5,000 ×  = 345
201520,000
2,90,0005,000

*This article contains all topics about Company Accounts – Issue of Debentures.

For notes on all CA foundation topics, you can visit this article CA foundation note

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