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Share and Debenture Accounting Theory ExpertsMind
1. Accounting Theory | Share & Debenture | Expertsmind.com
Shares and Debentures
The word charge means securing the loan by mortgaging specific assets towards the loan So, if a company fails to
meet its obligation the lender can secure his payment form the assets mortgaged or in case of winding-up of the
company form the official liquidator. Charge may be of two types:
(i) Fixed charge when the charge is created against specific assets of the company such a charge is called a fixed
charge this charge is created against those assets which are held by the company for use in operations and are not
for sale. Further it may b be divided into two parts
(a) First debentures or charge are those which have to be repaid before other debentures
(b) Second debentures or charge are those which will be repaid after the first debentures.
(ii) Floating charge a floating charge is a kind of security for which no specific asset is given but all assets of the firm
(excluding those given by way of specific charge to secured creditors ar under change of such creditors).
Thus fixed charge denies the company form dealing with mortgaged assets whereas the floating charge does not
prevent the company from using the assets.
Basis Share Debenture
Capital or loan A share is a part of capital of the company. A debenture is a part of the loan of the company.
Dividend or Dividend on shares is paid only when there Debenture interest has to be paid irrespective of
interest are profits in the company the company earning a profit or suffering a loss.
Rate of dividend may change from time to Rate of interest on debenture is fixed 10 % or
Rate
time depending upon the availability of profit. 12%
Convertibility Shares cannot be converted into debentures. Debentures can be converted into shares.
Shares are not secured by charge not eh Debentures are usually secured note assets of
Security
assets of the company the company.
2. Difference between shareholders and debenturedolders
Basis Share Debenture
Holder Holder of share is called shareholder Holder of debenture is called debenture holder.
Shareholders are the owners of the Debenturedolders are just the creditors of the
Ownership
company. company.
A shareholder gets dividend from the A debenturedolder gets interest from the
Dividend/interest
company. company.
Shareholders are entitled to participate in Debenture holders are not entitled to participate
Participation
the management of the company. in the management of the company.
Accounting treatment for issue of debentures for cash
Accounting treatment regarding issued of debentures is done in the same manner as in the case of issue of shares.
The only difference is that debentures in place of shard and debenture account in place of share capital A/c are
substituted. It is common to put the rate of interest before debenture. It the debentures carry interest @ 12 % the
account will be headed as 12% debentures A/c debentures account is shown on the liabilities side of balance sheet
under the head secured loan it is also known as debentures issued with a coupon rate (or interest rate).
Example: You are required to set out the journal endures relating to the issue of the debentures in the books of X
Ltd. And show how they would appear in its balance sheet under the following cases.
(a) 120, 8% debentures of $ 1,000 each are issued at 5% discount and repayable at par.
(b) 15, 7% debentures of $ 1,000 each are issued at 5% discount and repayable at premium of 10%
(c) 80, 9% debentures of $ 1,000 each ar issued at 5% premium.
(d) Another 400 8% debentures of $ 100 each are issued as collateral security against a loan of $ 40,000.
Date Particulars L.F Dr.($) Cr.($)
Bank A/c Dr. 1,14,000
Discount on issue of debentures A/c Dr. 6,000 1,20,000
(for issue of 120 8% debentures at discount of 5 % repayable at par)
3. Balance sheet of X Ltd
Journal
Liabilities $ Assets $
Cash at bank
1,14,000
8 % debentures 1,20,000 Miscellaneous expenditure
6,000
Discount on debentures
1,20,000 1,20,000
Journal
Date Particulars L.F Dr.($) Cr. ($)
Bank A/c Dr.
Loss on issue of debentures A/c Dr.
To 7 % debentures A/c
To premium on redemption of debentures A/c
(For issue of 15, 7% debentures at a discount of 5 % repayable at premium of 10 %)
Note: discount so issue of debentures $ 7,500 and premium on redemption of debentures $ 15,000
Balance sheet of X Ltd
Liabilities $ Assets $
Secured loans Cash at bank 1,42,500
7 % debentures 1,50,000 Miscellaneous expenditure
Premium on redemption of debentures 15,000 Loss on issue of debentures 22,500
1,65,000 1,65,0000
Journal
Date Particulars L.F Dr. ($) Cr.($)
4. Bank A/c Dr. 84,000
To 9 % debentures A/c 80,000
To securities premium A/c 4,000
(for issue of 80, 9% debentures of $ 1,000 each at 5% premium)
Balance sheet of X Ltd
Liabilities $ Assets $
Reserves $ surplus Cash at bank 84,000
Securities premium 4,000
Secured loans 80,000
9% debentures
84,000 84,000
Journal
Date Particulars L.F Dr.($) Cr.($)
Debenture suspense A/C Dr.
40,000
To 8% debentures A/c
(for issue of 400 8% debentures of $100 each as collateral security against a loan of $
40,000
40,000)
Balance sheet of X Ltd
Liabilities $ Assets $
Secured loans
Bank loan 40,000
400 8% debentures $ 100 40,000
Less: debenture suspense A/c 40,000