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Accounting for debentures
Presented by:
Harshit Garg
Assistant Professor
IBM (UG)
Debenture
• Debenture: It is a document issued by a company under its
common seal acknowledging the debt and it also contains the
terms of repayment of debt and payment of interest at a
specified rate.
• Section 2 (30) of Companies Act, 2013 defines debenture as
“Debenture includes debenture stock, bonds or any other
instrument of a company evidencing a debt, whether
constituting a charge on the company’s assets or not.”
2BCCC 0011 Company Accounts And Practices
Reliance Industries raises Rs 8,500cr
from NCDs offering 7.20% return
• Reliance Industries has mopped up Rs 8,500 crore
from the sale of non-convertible debentures (NCDs),
cashing in on the cheaper funds flooding the debt market
that is starved of quality paper, priced it at 7.20 percent..
3BCCC 0011 Company Accounts And Practices
Latest issues of debentures
4BCCC 0011 Company Accounts And Practices
Company Name Issue Open Issue Close
Issue Size (Rs
Cr)
Muthoot Fincorp Limited Sep 28, 2020 Oct 23, 2020 200
Kosamattam Finance Ltd Sep 16, 2020 Oct 13, 2020 150
Muthoottu Mini Financiers Ltd Sep 09, 2020 Sep 24, 2020 100
Muthoot Fincorp Ltd Jun 29, 2020 Jul 13, 2020 100
Muthoottu Mini Financiers Ltd Jun 03, 2020 Jun 26, 2020 100
KLM Axiva Finvest Ltd Jun 02, 2020 Jun 26, 2020 100
Kosamattam Finance Ltd Mar 19, 2020 May 22, 2020 150
Sakthi Finance Ltd Mar 13, 2020 Apr 30, 2020 100
Muthoot Vehicle & Asset Fin
Ltd
Feb 25, 2020 Mar 11, 2020 100
JM Financial Products Ltd Feb 13, 2020 Mar 09, 2020 100
Muthoottu Mini Financiers Ltd Jan 20, 2020 Feb 12, 2020 100
Muthoot Fincorp Limited Jan 09, 2020 Feb 04, 2020 250
Tata Capital Housing Finance Ltd NCD
(Tata Capital Housing NCD Jan 2020)
5BCCC 0011 Company Accounts And Practices
Issue Open Jan 7, 2020 - Jan 8, 2020
Security Name Tata Capital Housing Finance Ltd
Security Type Secured, Redeemable, Non-Convertible
Debentures (Secured NCDs) and/or
Unsecured Subordinated Non-Convertible
Debentures (Unsecured NCDs)
Issue Size (Shelf) Rs 5,000.00 Crores
Issue Price Rs 1000 per NCD
Face Value Rs 1000 each NCD
Minimum Lot size 10 NCD
Market Lot 1 NCD
Listing At BSE, NSE
Credit Rating CRISIL AAA/ Stable, ICRA AAA/ stable
Tenor 36 months/ 60 months/ 96 months/ 120
months
Payment Frequency Monthly and Annual
Basis of Allotment First Come First Serve Basis
Features of Debentures
• It is a document known as Debenture Certificate.
• It is an acknowledgement of debt by the company.
• It is an agreement between the company and its debenture
holders for repayment of the principal amount on a specified
date along with interest at a pre-determined rate charged on
the principal amount until the principal is repaid.
• It is an evidence of a debt to the holder usually arising out of
a loan and mostly secured by a charge.
6BCCC 0011 Company Accounts And Practices
• It is a common practice to prefix ‘Debentures’
with the rate of interest like if the rate of interest
is 10%, the title of the debentures will be ‘10%
Debentures’.
• It is treated as an external equity or long term
borrowings by the company.
• It is usually secured by way of charge on the
assets of the company.
• The interest charged on debentures is a charge
against profit.
BCCC 0011 Company Accounts And Practices 7
Debenture holders:
• They are the persons to whom debentures are issued by a
company.
• These persons are lenders to the company as they provide
funds in exchange of debentures issued to them.
8BCCC 0011 Company Accounts And Practices
Types of Debentures
• i. Security point of view:
• a. Secured: Such debentures are secured by either a fixed
charge or a floating charge on the assets of the company. Such
charge is to be registered with the Registrar of the Companies.
• b. Unsecured: Such debentures are not secured by any
charge on assets of the company.
9BCCC 0011 Company Accounts And Practices
ii. Redemption point of view
• a. Redeemable: Such debentures are repayable by the
company at the end of a specified period or by instalments
during the existence of the company.
• b. Irredeemable: Such debentures are not repayable
during the lifetime of the company and are repayable only
when the company is liquidated.
10BCCC 0011 Company Accounts And Practices
iii. Records/ Negotiability
point of view
• a. Registered: Such debentures are registered in the
company’s records in the holder’s name. All amounts towards
principal and interest are to be paid to the registered
debentureholder only. Any transfer of such debentures
requires execution of transfer deed.
• b. Bearer: Such debentures are not registered in the records
of the company in the name of the holder. They are easily
transferable by mere delivery. Interest is paid to the person
who produces coupons attached to the debenture.
11BCCC 0011 Company Accounts And Practices
iv. Priority point of view:
• a. First Debentures: Such debentures are to be repaid
before the other debentures.
• b. Second Debentures: Such debentures are to be repaid
after the first debentures are redeemed
12BCCC 0011 Company Accounts And Practices
v. Coupon rate point of view:
• a. Specific Coupon Rate: Such debentures are issued with
a specified rate of interest, called the coupon rate. This rate
may be either fixed or floating. If it’s a floating rate, it is
usually linked with the bank rate . ex 10% Debentures
• b. Zero Coupon Rate (Bonds): Such debentures do not
carry a specific rate of interest. They are issued at a
substantial discount. Such difference between the face value
and issue price is the total amount of interest related to the
duration of debentures.
13BCCC 0011 Company Accounts And Practices
Convertibility point of view:
• a. Convertible: Such debentures are convertible into
shares. Where only a part of the debentures amount is
convertible into Equity Shares, they are known as Partly
Convertible Debentures. However, when full amount of
debentures is convertible into Equity Shares, they are known
as Fully Convertible Debentures.
• b. Non-Convertible: Such debentures are not convertible
into shares.
14BCCC 0011 Company Accounts And Practices
Disclosure of Debentures in
the Balance Sheet
• Since these are the borrowings of a company, they are considered
as liability and therefore, shown in the Equity and Liabilities part of
the Balance Sheet.
• They can be disclosed either as Non-Current or Current Liability
depending upon the tenure of such debentures. An important point
to remember is that unless the question requires otherwise,
debentures are shown as Long-term Borrowings under Non-
current Liabilities.
• Non-Current Liability: This is done when Debentures are due for
redemption after 12 months from the reporting date i.e., the date
of Balance Sheet or after the period of Operating Cycle. The date of
issue of debentures determines whether these debentures are
Long-term borrowings or Short-term Borrowings.
15BCCC 0011 Company Accounts And Practices
Concept of Minimum Subscription
with respect to Debentures
• a company cannot allot securities unless minimum
subscription stated in the prospectus is received.
• Such minimum subscription is therefore, to be decided by the
company. As per SEBI, 75% of the issue should be subscribed
before a company allots debentures.
16BCCC 0011 Company Accounts And Practices
INTEREST ON DEBENTURES
Interest on Debentures is calculated at a fixed rate on its face
value and is usually payable half yearly & is paid even company
is suffering from loss because it is charge on profit.
• Income Tax is deducted from interest before payment to
debenture holders. It is called T.D.S. (Tax deducted at source)
17BCCC 0011 Company Accounts And Practices
Interest on Debentures
i. It is a charge against profit of the company and is payable
whether the company earns profit or incurs loss.
ii. It is calculated at a fixed rate of interest on the nominal (face)
value.
iii. It is not payable on debentures issued as collateral security.
iv. It is prefixed on debentures i.e., if the rate is 15% p.a. then
debentures will be titled ‘15% Debentures.’
v. Balance in the Debentures’ Interest Account is transferred to
Statement of Profit and Loss (Finance Cost) at the end of the
year.
vi. Interest payment may be subject to TDS
18BCCC 0011 Company Accounts And Practices
19BCCC 0011 Company Accounts And Practices
1. When interest is Due
Debentures Interest A/c Dr. (Gross Interest)
To Debentures holder A/c (Net Interest)
To Income Tax Payable A/c
(Income Tax
Deducted)
2. When Interest is paid
Debentures Holder A/c Dr. (With Interest)
To Bank A/c
3. On payment of Income Tax to Government
Income Tax Payable A/c Dr.
To Bank A/c
(Amount of Income)
4.
On Transfer of Interest on Debenture to
statement of profit and Loss A/c
(Tax deducted at
source)
Statement of Profit and Loss Dr.
To Debenture Interest A/c (Amount of Interest
Issue of Debentures
Debentures can be issued in following ways:
20BCCC 0011 Company Accounts And Practices
for cash
for consideration other than cash
As collateral security
Issue of Debentures for Cash
• It means that the company has received an amount (in cash
or cheque) against the debentures issued.
• When debentures are issued at cash, they may be issued at
par, premium or at discount.
21BCCC 0011 Company Accounts And Practices
When Debentures amount
received in lump sum with the
application
22BCCC 0011 Company Accounts And Practices
On receipt of
application
money
Bank A/c Dr.
To Debenture
Application
and Allotment A/c
With the application
money
received
On acceptance
of application
money
Debenture Application
and Allotment A/c Dr.
To X% Debentures A/c
To Bank A/c
With Amount of
application
money on allotted
debentures, and
Excess amount
refunded.
When Debentures amount
received in installments.
• In this case accounting entries will be same as at the time of
issue of shares in instalments with small change in the name
of term like-
• the share capital word replaced with the X% Debentures A/c,
and Share word replaced with Debentures
• e.g. Equity share capital into 8% Debentures, Equity share
application into Debentures Application and follows on.
23BCCC 0011 Company Accounts And Practices
Issue of Debentures for
Consideration other than Cash:
• It means that the company has not received amount (in cash
or cheque) against the debentures issued.
Such issue of debentures can be issue to promoters for their
services, to vendors against assets purchased, etc.
• .
24BCCC 0011 Company Accounts And Practices
25BCCC 0011 Company Accounts And Practices
Debentures
Issued for
purchases
Asset at par
Sundry Asset A/c Dr.
To Vendor
With the purchases
consideration
Vendor Dr.
To Debenture Account
When
Debentures
are issued
for
purchases of
asset at
premium
Sundry Assets A/c Dr.
To Vendor With the purchases
Consideration
No. of debentures par
value
No. of debentures x
premium
Vendor Dr.
To Debenture A/c
To Security Premium
Reserve A/c
When business is
Purchased
26BCCC 0011 Company Accounts And Practices
Sundry Assets A/c Dr. (Value of asset)
Goodwill A/c (BF) Dr. (PC > Value of assets)
To Sundry Liabilities A/c ( Value of liabilities)
To Capital Reserve A/c ( PC < Value of assets)
To Vendor (Purchases Consideration)
Vendor A/c Dr
To % Debenture A/c
(Being Debenture issued)
Issue of Debentures as a
Collateral Security
• Collateral security means security provided to lender in addition to
the principal security.
• It is a subsidiary or secondary security.
• Whenever a company takes loan from bank or from any financial
institution it may issue its debentures as secondary security which
is in addition to the principal security. Such an issue of debentures
is known as ‘issue of debentures as collateral security’.
• The lender will have a right over such debentures only when
company fails to pay the loan amount and the principal security is
exhausted. In case the need to exercise the right does not arise
debentures will be returned back to the company.
• No interest is paid on the debentures issued as collateral security
because company pays interest on loan.
27BCCC 0011 Company Accounts And Practices
Accounting methods
• In the accounting books of the company issue of debentures
as collateral security can be credited in two ways :
• First method : No Journal entry to be made in the books of
accounts of the company for debentures issued as collateral
security. A note of this fact is given in this case.
• Second method : Entry to be made in the books of accounts
of the company.
28BCCC 0011 Company Accounts And Practices
What is Redemption of
Debentures?
Redemption of debentures refers to payment of the
amount of debentures by the enterprise.
• Debentures can be redeemed either at par or at a premium.
• The terms and conditions of redemption are usually given in
the prospectus inviting applications for the issue of
debentures.
29BCCC 0011 Company Accounts And Practices
Methods of Redemption of
Debentures:
30BCCC 0011 Company Accounts And Practices
Payment in lump sum
Payment in instalments
Purchase in the open market
By conversion into shares or new debentures
Redemption of Debentures
by Lump-sum Payment
• When the total amount of debentures is paid
to the debenture holders in lump-sum on
maturity or even before maturity, it is known
as Redemption of debentures in lump-sum.
• In this case, the time of repayment is known in
advance and the company can plan its
financial resources accordingly
BCCC 0011 Company Accounts And
Practices
31
Redemption of Debentures in
Payment in instalments
• Under this method, the debentures are
redeemed in instalments and debentures to
be redeemed are selected by draw
• For example, total debentures of 2,00,000
may be redeemed at the rate of 50,000 per
annum. Debentures of 50,000 to be redeemed
each year are selected by lottery
BCCC 0011 Company Accounts And
Practices
32
Redemption of Debentures
by Conversion
• Under this method, the debentures are
redeemed by converting them into new
class debentures or shares.
• At the time of conversion, new shares or
debentures can be issued at par or at a
premium or at a discount
BCCC 0011 Company Accounts And
Practices
33
Journal Entry
• Debentures A/c Dr. (with a face value of
debentures converted)
• Discount on issue of shares/debentures Dr.
(with the amount of discount,(bf)
• To Share Capital/Debentures(new)
(with face value of new shares or debentures
issued)
• To Securities Premium (with the
amount if securities premium, (BF)
BCCC 0011 Company Accounts And
Practices
34
Debentures by Purchase From
Open Market
• When a company purchases its own
debentures through stock exchanges for the
purpose of cancellation such an act of
purchasing and cancellation is known as
Redemption Of Debentures By purchasing
them in the Open Market
BCCC 0011 Company Accounts And
Practices
35
When Debentures Are Purchased for Immediate Cancellation:
A company may immediately cancel the debentures so purchased. For this, a resolution
must be passed by the Board of Directors
1. When Purchase Cost
of Own Debentures =
Nominal Value of
Debentures
(i) On Purchase of Own Debentures:
Own Debentures A/c (with purchase cost) Dr.
To Bank A/c
(ii) On Cancellation of Own Debentures:
….%Debentures A/c Dr.
To Own Debentures A/c
2. When Purchase Cost
of Own Debentures <
Nominal Value of
Debentures
(i) On Purchase of Own Debentures:
Own Debentures A/c (with purchase cost) Dr.
To Bank A/c
(ii) On Cancellation of Own Debentures:
….%Debentures A/c Dr.
To Own Debentures A/c
To Gain or Profit on Cancellation of Own Debentures A/c
(iii) On transfer of profit on cancellation of debentures
Gain or Profit on Cancellation of Own Debentures
A/c Dr.
To Capital Reserve A/c
BCCC 0011 Company Accounts And
Practices
36
What is Debenture
Redemption Reserve (DRR)?
• DRR is a reserve created out of profits for redeeming debentures.
• a Company is required to transfer an amount equal to at least 25%
of the value of debentures to the Debenture Redemption Reserve
a/c before redemption of debentures.
• For example, let's say that a company ABC Pvt Ltd. issues Rs. 20
lakhs in debentures on the 1st of April of 2020 with a maturity date
of March 2025. Here, as per the companies act, ABC Pvt Ltd. needs
to assemble 25% of Rs. 20 lakhs as debenture redemption reserve
before the maturity date of the debenture.
• Shown in the Equity and Liability part of the Balance Sheet under
the head ‘Shareholders’ fund and sub-head ‘Reserves and Surplus’.
37BCCC 0011 Company Accounts And Practices
• Investment in the Specified Securities:
• at least 15% of the nominal value of the debentures to be
redeemed during the year should be invested on or before
30th April of the year in which the redemption is to be made.
• Exemption to Create DRR
• All India Financial Institutions (AIFIs) regulated by RBI
• Banking Companies
• When all the debentures are redeemed, DRR Account is
closed by transferring the amount to General Reserve.
38BCCC 0011 Company Accounts And Practices
(1) On Transfer of
Profits From
Surplus
Surplus or P&L A/c Dr. *****
To Debenture Redemption Reserve A/c *****
(2) On Investment
or Making Deposit
in the Specified
Securities
Debenture Redemption Reserve A/c Dr. *****
To Bank A/c *****
(3) On Debentures
Becoming Due for
Payment
a) If debentures are to be redeemed at Par:
Debentures A/c Dr. *****
To Debenture holders A/c *****
b) If debentures are to be redeemed at Premium:
Debentures A/c Dr. *****
Premium on Redemption of Debentures A/c Dr. *****
To Debenture holders A/c *****
BCCC 0011 Company Accounts And
Practices
39
(4) On Encashment
of Investment
Bank A/c Dr. *****
To Debenture Redemption Reserve A/c *****
(5) On Redemption
of Debentures
Debenture holders A/c Dr. *****
To Bank A/c *****
(6) On Transfer of
DRR to General
Reserve
Debenture Redemption Reserve A/c Dr. *****
To General Reserve A/c *****
BCCC 0011 Company Accounts And
Practices
40
Various cases of Issue of Debentures
from the redemption point of view
• Debentures issued at par, at premium or at discount may be
redeemed either at par or at premium:
• Debentures redeemable at par: It means debentures are
redeemable at their nominal (face) value.
• Debentures redeemable at premium: It means debentures
are redeemable at a value that is higher than their nominal
(face) value. :
41BCCC 0011 Company Accounts And Practices
Depending on the terms of issue and
redemption of debentures, there may
be six cases of redemption as follows
• Issued at par and redeemable at par
• Issued at discount and redeemable at par
• Issued at a premium and redeemable at par
• Issued at par and redeemable at a premium
• Issued at a discount and redeemable at a premium
• Issued at a premium and redeemable at a premium
42BCCC 0011 Company Accounts And Practices
Table Showing all 6 cases
BCCC 0011 Company Accounts And
Practices
43
ISSUE Redemption Account Effected
PAR PAR
DISCOUNT PAR Discount On issue of debentures A/c Dr
PREMIUM PAR Security Premium A/c Cr
PAR PREMIUM Loss on issue of Debenture Dr &
Premium on redemption A/c Cr.
DISCOUNT PREMIUM Loss on issue of Debenture Dr &
Premium on redemption A/c Cr
PREMIUM PREMIUM Loss on issue of Debenture Dr &
Premium on redemption A/c Cr,
Security Premium A/c Cr,
1. Issue at par and redeemable at par
(a) Bank A/c Dr.
To Debenture Application & Allotment A/c
(b) Debenture Application & Allotment A/c Dr.
To Debentures A/c (Allotment of debentures)
2. Issue at a discount and redeemable at par
(a) Bank A/c Dr.
To Debenture Application & Allotment A/c
(b) Debenture Application & Allotment A/c Dr.
Discount on Issue of Debentures A/c Dr.
BCCC 0011 Company Accounts And
Practices
44
3. Issue at premium and redemption at par
(a) Bank A/c Dr.
To Debenture Application & Allotment A/c
(b) Debenture Application & Allotment A/c Dr.
To Debentures A/c
To Securities Premium A/c (Allotment of debentures at a premium)
4. Issue at par and redeemable at premium
(a) Bank A/c Dr.
To Debenture Application & Allotment A/c
(b) Debenture Application & Allotment A/c Dr.
Loss on Issue of Debentures A/c Dr.
To Debentures A/c
To Premium on Redemption of Debenture A/c
(Allotment of debentures at par and redeemable at a premium)
BCCC 0011 Company Accounts And
Practices
45
5. Issue at discount and redemption at premium
(a) Bank A/c Dr.
To Debenture Application & Allotment A/c
(b) Debenture Application & Allotment A/c Dr.
Loss on Issue of Debentures A/c Dr.
To Debentures A/c
To Premium on Redemption of Debentures A/c
6. Issued at a premium and redeemable at premium
(a) Bank A/c Dr.
To Debenture Application & Allotment A/c
(b) Loss on Issue of Debentures A/c Dr.
To Debentures A/c (with nominal value of debenture)
To Securities Premium A/c (with premium on issue)
To Premium on Redemption of Debentures A/c
BCCC 0011 Company Accounts And
Practices
46
Example 1:
• Give Journal entries for the following:
1. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at par and
redeemable at par.
2. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at premium
of 5% but redeemable at par.
3. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at discount of
5% repayable at par.
4. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at par but
repayable at a premium of 5%.
5. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at discount of
5% but redeemable at premium of 5%.
6. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at premium
of 5% and redeemable at premium of 5%
47BCCC 0011 Company Accounts And Practices
1.
Bank A/c Dr.
To 9% Debenture Application & Allotment A/c
(Debentures Application money received)
1,00,000
1,00,000
Debenture Application & Allotment A/c Dr.
To 9% Debentures A/c
(Application money transferred to Debentures
Account)
1,00,000
1,00,000
2.
Bank A/c Dr.
To 9% Debenture Application & Allotment A/c
(Debentures application money received)
1,05,000
1,05,000
Debenture Application & Allotment A/c Dr.
To 9% Debentures A/c
To Securities Premium A/c
(Debentures application money transferred to
Debentures & Securities Premium account
105000
100000
5000
BCCC 0011 Company Accounts And
Practices
48
3. Bank A/c Dr.
To 9% Debenture Application & Allotment A/c
(Debentures application money received)
95,000
95,000
9% Debenture Application & Allotment A/c Dr.
Discount on Issue of Debentures A/c Dr.
To 9% Debentures A/c
(Debentures application money transferred to
Debentures account)
95,000
5,000
1,00,000
4.
Bank A/c Dr.
To 9% Debenture Application & Allotment A/c
(Debentures Application money received)
1,00,000
1,00,000
Debenture Application & Allotment A/c Dr.
Loss on Issue of Debentures A/c Dr.
To 9% Debentures A/c
To Premium on Redemption of Debentures A/c
(Debentures Application money transferred to
Debentures account)
100000
5000
100000
5000
BCCC 0011 Company Accounts And
Practices
49
5. Bank A/c Dr.
To 9% Debenture Application & Allotment A/c
(Debentures Application money received)
95,000
95,000
Debenture Application & Allotment A/c Dr.
Loss on Issue of Debentures A/c Dr.
To 9% Debentures A/c
To Premium on Redemption of Debentures A/c
(Debentures application money transferred to
debentures and Premium on debenture account)
95,000
10,000
1,00,000
5,000
6. Bank A/c Dr.
To 9% Debenture Application & Allotment A/c
(Debentures Application money received)
1,05,000
1,05,000
Debenture Application & Allotment A/c Dr.
Loss on Issue of Debentures A/c Dr.
To 9% Debenture A/c
To Premium on Redemption of Debentures A/c
To Securities Premium A/c
(Debenture application money transferred to
debentures account)
1,05,000
5,000
1,00,000
5,000
5,000
BCCC 0011 Company Accounts And
Practices
50
• A Ltd. decided to redeem Rs. 2,12,500 12% debentures. It
purchased Rs. 1,70,000 debentures in the open market at Rs.
98.50 each the expenses being Rs. 100 and redeemed the
balance of Rs. 42,500 debentures by draw of lots.
51BCCC 0011 Company Accounts And Practices
52BCCC 0011 Company Accounts And Practices
Date Particulars Debit Credit
12% debentures A/c Dr.
To Bank A/c
To profit on redemption of debentures
1,70,000
1,68,300
1,700
12% debentures A/c Dr.
To bank A/c
42,500
42,500
Profit on redemption of debenture A/c Dr.
To capital reserve
1,700
1,700
Profit & loss appropriation A/c Dr.
To debenture redemption reserve A/c
2,12,500
2,12,50
• XYZ Ltd. issued 6,000, 15% debentures of Rs. 100 each at par
on January 1, 2015. The due date for payment of interest on
these debentures is December 31 every year. The debentures
are redeemable at par in three equal installments, beginning
from the end of 3rd year. Prepare 15% Debentures Account &
Debenture Interest Account.
53BCCC 0011 Company Accounts And Practices
54BCCC 0011 Company Accounts And Practices
55BCCC 0011 Company Accounts And Practices
• Kayaan Ltd. purchased its own debentures of Rs 100 each of
the face value of Rs. 70,000 from the open market for
cancellation at Rs 95. Record necessary journal entries.
•
56BCCC 0011 Company Accounts And Practices
Example 5: AB&D Ltd redeemed 5,000 15% Debentures of Rs 10
each at a premium of 10 % on 31st March 2018. Debenture
holders were given equity shares of Rs 10 each at premium of Rs
10 per share. Journal entries in the books of Anil Ltd will be:
Amount of Debenture due for payment = Total number of
Debentures X Value of per Debenture
= 5,000 X 10
= 50,000
Amount of premium on redemption of per Debenture = 10 X
10/100 = 1
Total amount of premium payable = No of Debenture to be
redeemed X Amount of premium on redemption of per
Debenture
= 5,000 X 1
= 5,000
57BCCC 0011 Company Accounts And Practices
Total amount due to Debenture holders = 50,000 + 5,000
= 55,000
Issue price of share = 10 + 10
Issue price of share = 20
= (50,000+5,000)/20
= 2,750
Entry for amount due to Debentureholders on conversion of 5,000 15 %
BCCC 0011 Company Accounts And
Practices
58
59BCCC 0011 Company Accounts And Practices
MCQ
60BCCC 0011 Company Accounts And Practices
1. Which is a document issued by a company under its
common seal acknowledging the debt
A. Debenture
B. Share
C. Stock
2.Debenture is treated as an………… by the company
A. Assets
B. Equity
C. long term borrowings
61BCCC 0011 Company Accounts And Practices
3. Is the debentures are secured by way of charge
on the assets of the company.
A. Yes
B. No
4. The interest charged on debentures is a
A. Appropriation against profit.
B. charge against profit.
C. Reserve
62BCCC 0011 Company Accounts And Practices
5. persons Who are lenders to the company as they provide
funds in exchange of debentures is called
A. Shareholders
B. Debentureholders
C. Stackholders
6. Such debentures are secured by either a fixed charge or a
floating charge on the assets of the company Called
A. Unsecured debentures
B. Convertible debentures
C. Secured Debentures
D. First Debentures
E. Unsecured Debentures
63BCCC 0011 Company Accounts And Practices
7. Such debentures are not secured by any
charge on assets of the company
A. Unsecured debentures
B. Convertible debentures
C. Secured Debentures
D. First Debentures
E. Unsecured Debentures
64BCCC 0011 Company Accounts And Practices
• 8. Such debentures are to be repaid before
the other debentures.
A. First debentures
B. Secured Debentures
C. Redeemable Debenture
D. Irredeemable Debentures
E. Unsecured Debentures
65BCCC 0011 Company Accounts And Practices
9. Such debentures are not repayable during the
lifetime of the company and are repayable only
when the company is liquidated.
A. Secured Debentures
B. Redeemable Debenture
C. Irredeemable Debentures
D. Unsecured Debentures
66BCCC 0011 Company Accounts And Practices
• 10. Such debentures are convertible into
shares.
A. Unsecured debentures
B. Convertible debentures
C. Secured Debentures
D. Redeemable Debenture
67BCCC 0011 Company Accounts And Practices
11. Such debentures are issued with a specified
rate of interest, This rate may be either fixed or
floating
A. Unsecured debentures
B. Convertible debentures
C. Specific coupon Rate Debentures
D. Secured Debentures
E. Zero coupon bond (Debenture)
68BCCC 0011 Company Accounts And Practices
12 Such debentures do not carry a specific rate
of interest. They are issued at a substantial
discount.
A. Unsecured debentures
B. Convertible debentures
C. Specific coupon Rate
D. Secured Debentures
E. Zero coupon bond (Debenture)
69BCCC 0011 Company Accounts And Practices
• 13. Balance in the Debentures’ Interest
Account is transferred to ……..at the end of the
year.
A. Balance Sheet – Liability side
B. Profit and loss A/c
70BCCC 0011 Company Accounts And Practices
• 14. The journal entry of When interest is Due
is Interest on debentures A/c debited and
…………..A/c Credited
A. Debentures
B. Debenture holder A/c
71BCCC 0011 Company Accounts And Practices
15. In Journal entry of payment to debenture
holders the ……….A/c Debited ,to bank.
A. Debentures
B. Debenture holder A/c
• 16. Debentures can be issued for
A. for cash
B. for consideration other than cash
C. As collateral security
D. All of the above
BCCC 0011 Company Accounts And
Practices
72
17. When Debentures amount received in lump
sum with the application ,so the journal entry is
bank a/c Debited, and ………….A/c Credited
A. Debenture holder A/c
B. % Debentures Application & Allotment A/c
BCCC 0011 Company Accounts And
Practices
73
18. Debentures Issued for purchases Asset at par
so at the time of company issued the
debentures , Vendor A/c is debited and …… A/c
is credited
A. % Debenture A/c
B. Debentureholder A/c
BCCC 0011 Company Accounts And
Practices
74
19. When business is Purchased and there is a
difference between net assets and purchase
consideration , and net assets is more than
purchase consideration so which account is
opended
A. Goodwill A/c Debited
B. Capital reserve A/c is credited
BCCC 0011 Company Accounts And
Practices
75
20. When business is Purchased and there is a
difference between net assets and purchase
consideration , and purchase consideration is
more than net assets so which account is
opended
A. Goodwill A/c Debited
B. Capital reserve A/c is credited
BCCC 0011 Company Accounts And
Practices
76
21. Security provided to lender in addition to
the principal security is called
A. Main security
B. Collateral security
C. Primary security
BCCC 0011 Company Accounts And
Practices
77
• 22. Is mandatory to pass Journal entry in the
books of accounts of the company for
debentures issued as collateral security.
A. Yes
B. No
BCCC 0011 Company Accounts And
Practices
78
MCQ ( More than 1 options)
• 23. If we pass journal entry of debentures
issued at collateral security so
A. Debenture A/c Debited
B. Debenture A/c Credited
C. Debenture suspense a/c credited
D. Debenture suspense a/c debited
BCCC 0011 Company Accounts And
Practices
79
• 24. What are the method of redemption of
debentures
A. Payment in lump sum
B. Payment in installments
C. Purchase in the open market
D. By conversion into shares or new debentures
E. All of the above
BCCC 0011 Company Accounts And
Practices
80
• 25. Debentures can be redeemed
A. at par
B. at a premium
C. Both
BCCC 0011 Company Accounts And
Practices
81
• 26. When the total amount of debentures is
paid to the debenture holders in full on
maturity or even before maturity, it is known
as Redemption of debentures in
A. Payment in lump sum
B. Payment in installments
C. Purchase in the open market
D. By conversion into shares or new debentures
BCCC 0011 Company Accounts And
Practices
82
• 27. the debentures are redeemed in
installments and debentures to be redeemed
are selected by draw, it is known as
Redemption of debentures in
A. Payment in lump sum
B. Payment in installments
C. Purchase in the open market
D. By conversion into shares or new debentures
BCCC 0011 Company Accounts And
Practices
83
• 28. the debentures are redeemed by
converting them into new class debentures or
shares. it is known as Redemption of
debentures in
A. Payment in lump sum
B. Payment in instalments
C. Purchase in the open market
D. By conversion into shares or new debentures
BCCC 0011 Company Accounts And
Practices
84
• 29. When the redemption of debentures By
conversion into shares or new debentures is
happened so debentures account debited and
……..A/c is credited
A. Equity shares A/c
B. Bank
C. P&L A/c
BCCC 0011 Company Accounts And
Practices
85
• 30. When a company purchases its own
debentures through stock exchanges for the
purpose of cancellation such an act of purchasing
and cancellation is known
A. Payment in lump sum
B. Payment in instalments
C. Purchase in the open market
D. By conversion into shares or new debentures
BCCC 0011 Company Accounts And
Practices
86
• 31. On Cancellation of Own Debentures the
%Debentures A/c Dr. and
A. To Equity shares A/c
B. To Bank A/c
C. To Own Debentures A/c
BCCC 0011 Company Accounts And
Practices
87
32. a reserve created out of profits for
redeeming debentures
A. DRR
B. CRR
C. SLR
BCCC 0011 Company Accounts And
Practices
88
33. a Company is required to transfer an amount
equal to at least ………….of the value of
debentures to the Debenture Redemption
Reserve a/c before redemption of debentures
A. 25%
B. 15%
C. 5%
BCCC 0011 Company Accounts And
Practices
89
34. at least ………of the nominal value of the
debentures to be redeemed during the year
should be invested on or before 30th April of the
year in which the redemption is to be made
A. 25%
B. 15%
C. 5%
BCCC 0011 Company Accounts And
Practices
90
• 35. DRR Account is closed by transferring the
amount to…………..
A. General Reserve
B. Capital Reserve
C. Capital Redemption reserve
BCCC 0011 Company Accounts And
Practices
91
BCCC 0011 Company Accounts And
Practices
92

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Debentures

  • 1. Accounting for debentures Presented by: Harshit Garg Assistant Professor IBM (UG)
  • 2. Debenture • Debenture: It is a document issued by a company under its common seal acknowledging the debt and it also contains the terms of repayment of debt and payment of interest at a specified rate. • Section 2 (30) of Companies Act, 2013 defines debenture as “Debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the company’s assets or not.” 2BCCC 0011 Company Accounts And Practices
  • 3. Reliance Industries raises Rs 8,500cr from NCDs offering 7.20% return • Reliance Industries has mopped up Rs 8,500 crore from the sale of non-convertible debentures (NCDs), cashing in on the cheaper funds flooding the debt market that is starved of quality paper, priced it at 7.20 percent.. 3BCCC 0011 Company Accounts And Practices
  • 4. Latest issues of debentures 4BCCC 0011 Company Accounts And Practices Company Name Issue Open Issue Close Issue Size (Rs Cr) Muthoot Fincorp Limited Sep 28, 2020 Oct 23, 2020 200 Kosamattam Finance Ltd Sep 16, 2020 Oct 13, 2020 150 Muthoottu Mini Financiers Ltd Sep 09, 2020 Sep 24, 2020 100 Muthoot Fincorp Ltd Jun 29, 2020 Jul 13, 2020 100 Muthoottu Mini Financiers Ltd Jun 03, 2020 Jun 26, 2020 100 KLM Axiva Finvest Ltd Jun 02, 2020 Jun 26, 2020 100 Kosamattam Finance Ltd Mar 19, 2020 May 22, 2020 150 Sakthi Finance Ltd Mar 13, 2020 Apr 30, 2020 100 Muthoot Vehicle & Asset Fin Ltd Feb 25, 2020 Mar 11, 2020 100 JM Financial Products Ltd Feb 13, 2020 Mar 09, 2020 100 Muthoottu Mini Financiers Ltd Jan 20, 2020 Feb 12, 2020 100 Muthoot Fincorp Limited Jan 09, 2020 Feb 04, 2020 250
  • 5. Tata Capital Housing Finance Ltd NCD (Tata Capital Housing NCD Jan 2020) 5BCCC 0011 Company Accounts And Practices Issue Open Jan 7, 2020 - Jan 8, 2020 Security Name Tata Capital Housing Finance Ltd Security Type Secured, Redeemable, Non-Convertible Debentures (Secured NCDs) and/or Unsecured Subordinated Non-Convertible Debentures (Unsecured NCDs) Issue Size (Shelf) Rs 5,000.00 Crores Issue Price Rs 1000 per NCD Face Value Rs 1000 each NCD Minimum Lot size 10 NCD Market Lot 1 NCD Listing At BSE, NSE Credit Rating CRISIL AAA/ Stable, ICRA AAA/ stable Tenor 36 months/ 60 months/ 96 months/ 120 months Payment Frequency Monthly and Annual Basis of Allotment First Come First Serve Basis
  • 6. Features of Debentures • It is a document known as Debenture Certificate. • It is an acknowledgement of debt by the company. • It is an agreement between the company and its debenture holders for repayment of the principal amount on a specified date along with interest at a pre-determined rate charged on the principal amount until the principal is repaid. • It is an evidence of a debt to the holder usually arising out of a loan and mostly secured by a charge. 6BCCC 0011 Company Accounts And Practices
  • 7. • It is a common practice to prefix ‘Debentures’ with the rate of interest like if the rate of interest is 10%, the title of the debentures will be ‘10% Debentures’. • It is treated as an external equity or long term borrowings by the company. • It is usually secured by way of charge on the assets of the company. • The interest charged on debentures is a charge against profit. BCCC 0011 Company Accounts And Practices 7
  • 8. Debenture holders: • They are the persons to whom debentures are issued by a company. • These persons are lenders to the company as they provide funds in exchange of debentures issued to them. 8BCCC 0011 Company Accounts And Practices
  • 9. Types of Debentures • i. Security point of view: • a. Secured: Such debentures are secured by either a fixed charge or a floating charge on the assets of the company. Such charge is to be registered with the Registrar of the Companies. • b. Unsecured: Such debentures are not secured by any charge on assets of the company. 9BCCC 0011 Company Accounts And Practices
  • 10. ii. Redemption point of view • a. Redeemable: Such debentures are repayable by the company at the end of a specified period or by instalments during the existence of the company. • b. Irredeemable: Such debentures are not repayable during the lifetime of the company and are repayable only when the company is liquidated. 10BCCC 0011 Company Accounts And Practices
  • 11. iii. Records/ Negotiability point of view • a. Registered: Such debentures are registered in the company’s records in the holder’s name. All amounts towards principal and interest are to be paid to the registered debentureholder only. Any transfer of such debentures requires execution of transfer deed. • b. Bearer: Such debentures are not registered in the records of the company in the name of the holder. They are easily transferable by mere delivery. Interest is paid to the person who produces coupons attached to the debenture. 11BCCC 0011 Company Accounts And Practices
  • 12. iv. Priority point of view: • a. First Debentures: Such debentures are to be repaid before the other debentures. • b. Second Debentures: Such debentures are to be repaid after the first debentures are redeemed 12BCCC 0011 Company Accounts And Practices
  • 13. v. Coupon rate point of view: • a. Specific Coupon Rate: Such debentures are issued with a specified rate of interest, called the coupon rate. This rate may be either fixed or floating. If it’s a floating rate, it is usually linked with the bank rate . ex 10% Debentures • b. Zero Coupon Rate (Bonds): Such debentures do not carry a specific rate of interest. They are issued at a substantial discount. Such difference between the face value and issue price is the total amount of interest related to the duration of debentures. 13BCCC 0011 Company Accounts And Practices
  • 14. Convertibility point of view: • a. Convertible: Such debentures are convertible into shares. Where only a part of the debentures amount is convertible into Equity Shares, they are known as Partly Convertible Debentures. However, when full amount of debentures is convertible into Equity Shares, they are known as Fully Convertible Debentures. • b. Non-Convertible: Such debentures are not convertible into shares. 14BCCC 0011 Company Accounts And Practices
  • 15. Disclosure of Debentures in the Balance Sheet • Since these are the borrowings of a company, they are considered as liability and therefore, shown in the Equity and Liabilities part of the Balance Sheet. • They can be disclosed either as Non-Current or Current Liability depending upon the tenure of such debentures. An important point to remember is that unless the question requires otherwise, debentures are shown as Long-term Borrowings under Non- current Liabilities. • Non-Current Liability: This is done when Debentures are due for redemption after 12 months from the reporting date i.e., the date of Balance Sheet or after the period of Operating Cycle. The date of issue of debentures determines whether these debentures are Long-term borrowings or Short-term Borrowings. 15BCCC 0011 Company Accounts And Practices
  • 16. Concept of Minimum Subscription with respect to Debentures • a company cannot allot securities unless minimum subscription stated in the prospectus is received. • Such minimum subscription is therefore, to be decided by the company. As per SEBI, 75% of the issue should be subscribed before a company allots debentures. 16BCCC 0011 Company Accounts And Practices
  • 17. INTEREST ON DEBENTURES Interest on Debentures is calculated at a fixed rate on its face value and is usually payable half yearly & is paid even company is suffering from loss because it is charge on profit. • Income Tax is deducted from interest before payment to debenture holders. It is called T.D.S. (Tax deducted at source) 17BCCC 0011 Company Accounts And Practices
  • 18. Interest on Debentures i. It is a charge against profit of the company and is payable whether the company earns profit or incurs loss. ii. It is calculated at a fixed rate of interest on the nominal (face) value. iii. It is not payable on debentures issued as collateral security. iv. It is prefixed on debentures i.e., if the rate is 15% p.a. then debentures will be titled ‘15% Debentures.’ v. Balance in the Debentures’ Interest Account is transferred to Statement of Profit and Loss (Finance Cost) at the end of the year. vi. Interest payment may be subject to TDS 18BCCC 0011 Company Accounts And Practices
  • 19. 19BCCC 0011 Company Accounts And Practices 1. When interest is Due Debentures Interest A/c Dr. (Gross Interest) To Debentures holder A/c (Net Interest) To Income Tax Payable A/c (Income Tax Deducted) 2. When Interest is paid Debentures Holder A/c Dr. (With Interest) To Bank A/c 3. On payment of Income Tax to Government Income Tax Payable A/c Dr. To Bank A/c (Amount of Income) 4. On Transfer of Interest on Debenture to statement of profit and Loss A/c (Tax deducted at source) Statement of Profit and Loss Dr. To Debenture Interest A/c (Amount of Interest
  • 20. Issue of Debentures Debentures can be issued in following ways: 20BCCC 0011 Company Accounts And Practices for cash for consideration other than cash As collateral security
  • 21. Issue of Debentures for Cash • It means that the company has received an amount (in cash or cheque) against the debentures issued. • When debentures are issued at cash, they may be issued at par, premium or at discount. 21BCCC 0011 Company Accounts And Practices
  • 22. When Debentures amount received in lump sum with the application 22BCCC 0011 Company Accounts And Practices On receipt of application money Bank A/c Dr. To Debenture Application and Allotment A/c With the application money received On acceptance of application money Debenture Application and Allotment A/c Dr. To X% Debentures A/c To Bank A/c With Amount of application money on allotted debentures, and Excess amount refunded.
  • 23. When Debentures amount received in installments. • In this case accounting entries will be same as at the time of issue of shares in instalments with small change in the name of term like- • the share capital word replaced with the X% Debentures A/c, and Share word replaced with Debentures • e.g. Equity share capital into 8% Debentures, Equity share application into Debentures Application and follows on. 23BCCC 0011 Company Accounts And Practices
  • 24. Issue of Debentures for Consideration other than Cash: • It means that the company has not received amount (in cash or cheque) against the debentures issued. Such issue of debentures can be issue to promoters for their services, to vendors against assets purchased, etc. • . 24BCCC 0011 Company Accounts And Practices
  • 25. 25BCCC 0011 Company Accounts And Practices Debentures Issued for purchases Asset at par Sundry Asset A/c Dr. To Vendor With the purchases consideration Vendor Dr. To Debenture Account When Debentures are issued for purchases of asset at premium Sundry Assets A/c Dr. To Vendor With the purchases Consideration No. of debentures par value No. of debentures x premium Vendor Dr. To Debenture A/c To Security Premium Reserve A/c
  • 26. When business is Purchased 26BCCC 0011 Company Accounts And Practices Sundry Assets A/c Dr. (Value of asset) Goodwill A/c (BF) Dr. (PC > Value of assets) To Sundry Liabilities A/c ( Value of liabilities) To Capital Reserve A/c ( PC < Value of assets) To Vendor (Purchases Consideration) Vendor A/c Dr To % Debenture A/c (Being Debenture issued)
  • 27. Issue of Debentures as a Collateral Security • Collateral security means security provided to lender in addition to the principal security. • It is a subsidiary or secondary security. • Whenever a company takes loan from bank or from any financial institution it may issue its debentures as secondary security which is in addition to the principal security. Such an issue of debentures is known as ‘issue of debentures as collateral security’. • The lender will have a right over such debentures only when company fails to pay the loan amount and the principal security is exhausted. In case the need to exercise the right does not arise debentures will be returned back to the company. • No interest is paid on the debentures issued as collateral security because company pays interest on loan. 27BCCC 0011 Company Accounts And Practices
  • 28. Accounting methods • In the accounting books of the company issue of debentures as collateral security can be credited in two ways : • First method : No Journal entry to be made in the books of accounts of the company for debentures issued as collateral security. A note of this fact is given in this case. • Second method : Entry to be made in the books of accounts of the company. 28BCCC 0011 Company Accounts And Practices
  • 29. What is Redemption of Debentures? Redemption of debentures refers to payment of the amount of debentures by the enterprise. • Debentures can be redeemed either at par or at a premium. • The terms and conditions of redemption are usually given in the prospectus inviting applications for the issue of debentures. 29BCCC 0011 Company Accounts And Practices
  • 30. Methods of Redemption of Debentures: 30BCCC 0011 Company Accounts And Practices Payment in lump sum Payment in instalments Purchase in the open market By conversion into shares or new debentures
  • 31. Redemption of Debentures by Lump-sum Payment • When the total amount of debentures is paid to the debenture holders in lump-sum on maturity or even before maturity, it is known as Redemption of debentures in lump-sum. • In this case, the time of repayment is known in advance and the company can plan its financial resources accordingly BCCC 0011 Company Accounts And Practices 31
  • 32. Redemption of Debentures in Payment in instalments • Under this method, the debentures are redeemed in instalments and debentures to be redeemed are selected by draw • For example, total debentures of 2,00,000 may be redeemed at the rate of 50,000 per annum. Debentures of 50,000 to be redeemed each year are selected by lottery BCCC 0011 Company Accounts And Practices 32
  • 33. Redemption of Debentures by Conversion • Under this method, the debentures are redeemed by converting them into new class debentures or shares. • At the time of conversion, new shares or debentures can be issued at par or at a premium or at a discount BCCC 0011 Company Accounts And Practices 33
  • 34. Journal Entry • Debentures A/c Dr. (with a face value of debentures converted) • Discount on issue of shares/debentures Dr. (with the amount of discount,(bf) • To Share Capital/Debentures(new) (with face value of new shares or debentures issued) • To Securities Premium (with the amount if securities premium, (BF) BCCC 0011 Company Accounts And Practices 34
  • 35. Debentures by Purchase From Open Market • When a company purchases its own debentures through stock exchanges for the purpose of cancellation such an act of purchasing and cancellation is known as Redemption Of Debentures By purchasing them in the Open Market BCCC 0011 Company Accounts And Practices 35
  • 36. When Debentures Are Purchased for Immediate Cancellation: A company may immediately cancel the debentures so purchased. For this, a resolution must be passed by the Board of Directors 1. When Purchase Cost of Own Debentures = Nominal Value of Debentures (i) On Purchase of Own Debentures: Own Debentures A/c (with purchase cost) Dr. To Bank A/c (ii) On Cancellation of Own Debentures: ….%Debentures A/c Dr. To Own Debentures A/c 2. When Purchase Cost of Own Debentures < Nominal Value of Debentures (i) On Purchase of Own Debentures: Own Debentures A/c (with purchase cost) Dr. To Bank A/c (ii) On Cancellation of Own Debentures: ….%Debentures A/c Dr. To Own Debentures A/c To Gain or Profit on Cancellation of Own Debentures A/c (iii) On transfer of profit on cancellation of debentures Gain or Profit on Cancellation of Own Debentures A/c Dr. To Capital Reserve A/c BCCC 0011 Company Accounts And Practices 36
  • 37. What is Debenture Redemption Reserve (DRR)? • DRR is a reserve created out of profits for redeeming debentures. • a Company is required to transfer an amount equal to at least 25% of the value of debentures to the Debenture Redemption Reserve a/c before redemption of debentures. • For example, let's say that a company ABC Pvt Ltd. issues Rs. 20 lakhs in debentures on the 1st of April of 2020 with a maturity date of March 2025. Here, as per the companies act, ABC Pvt Ltd. needs to assemble 25% of Rs. 20 lakhs as debenture redemption reserve before the maturity date of the debenture. • Shown in the Equity and Liability part of the Balance Sheet under the head ‘Shareholders’ fund and sub-head ‘Reserves and Surplus’. 37BCCC 0011 Company Accounts And Practices
  • 38. • Investment in the Specified Securities: • at least 15% of the nominal value of the debentures to be redeemed during the year should be invested on or before 30th April of the year in which the redemption is to be made. • Exemption to Create DRR • All India Financial Institutions (AIFIs) regulated by RBI • Banking Companies • When all the debentures are redeemed, DRR Account is closed by transferring the amount to General Reserve. 38BCCC 0011 Company Accounts And Practices
  • 39. (1) On Transfer of Profits From Surplus Surplus or P&L A/c Dr. ***** To Debenture Redemption Reserve A/c ***** (2) On Investment or Making Deposit in the Specified Securities Debenture Redemption Reserve A/c Dr. ***** To Bank A/c ***** (3) On Debentures Becoming Due for Payment a) If debentures are to be redeemed at Par: Debentures A/c Dr. ***** To Debenture holders A/c ***** b) If debentures are to be redeemed at Premium: Debentures A/c Dr. ***** Premium on Redemption of Debentures A/c Dr. ***** To Debenture holders A/c ***** BCCC 0011 Company Accounts And Practices 39
  • 40. (4) On Encashment of Investment Bank A/c Dr. ***** To Debenture Redemption Reserve A/c ***** (5) On Redemption of Debentures Debenture holders A/c Dr. ***** To Bank A/c ***** (6) On Transfer of DRR to General Reserve Debenture Redemption Reserve A/c Dr. ***** To General Reserve A/c ***** BCCC 0011 Company Accounts And Practices 40
  • 41. Various cases of Issue of Debentures from the redemption point of view • Debentures issued at par, at premium or at discount may be redeemed either at par or at premium: • Debentures redeemable at par: It means debentures are redeemable at their nominal (face) value. • Debentures redeemable at premium: It means debentures are redeemable at a value that is higher than their nominal (face) value. : 41BCCC 0011 Company Accounts And Practices
  • 42. Depending on the terms of issue and redemption of debentures, there may be six cases of redemption as follows • Issued at par and redeemable at par • Issued at discount and redeemable at par • Issued at a premium and redeemable at par • Issued at par and redeemable at a premium • Issued at a discount and redeemable at a premium • Issued at a premium and redeemable at a premium 42BCCC 0011 Company Accounts And Practices
  • 43. Table Showing all 6 cases BCCC 0011 Company Accounts And Practices 43 ISSUE Redemption Account Effected PAR PAR DISCOUNT PAR Discount On issue of debentures A/c Dr PREMIUM PAR Security Premium A/c Cr PAR PREMIUM Loss on issue of Debenture Dr & Premium on redemption A/c Cr. DISCOUNT PREMIUM Loss on issue of Debenture Dr & Premium on redemption A/c Cr PREMIUM PREMIUM Loss on issue of Debenture Dr & Premium on redemption A/c Cr, Security Premium A/c Cr,
  • 44. 1. Issue at par and redeemable at par (a) Bank A/c Dr. To Debenture Application & Allotment A/c (b) Debenture Application & Allotment A/c Dr. To Debentures A/c (Allotment of debentures) 2. Issue at a discount and redeemable at par (a) Bank A/c Dr. To Debenture Application & Allotment A/c (b) Debenture Application & Allotment A/c Dr. Discount on Issue of Debentures A/c Dr. BCCC 0011 Company Accounts And Practices 44
  • 45. 3. Issue at premium and redemption at par (a) Bank A/c Dr. To Debenture Application & Allotment A/c (b) Debenture Application & Allotment A/c Dr. To Debentures A/c To Securities Premium A/c (Allotment of debentures at a premium) 4. Issue at par and redeemable at premium (a) Bank A/c Dr. To Debenture Application & Allotment A/c (b) Debenture Application & Allotment A/c Dr. Loss on Issue of Debentures A/c Dr. To Debentures A/c To Premium on Redemption of Debenture A/c (Allotment of debentures at par and redeemable at a premium) BCCC 0011 Company Accounts And Practices 45
  • 46. 5. Issue at discount and redemption at premium (a) Bank A/c Dr. To Debenture Application & Allotment A/c (b) Debenture Application & Allotment A/c Dr. Loss on Issue of Debentures A/c Dr. To Debentures A/c To Premium on Redemption of Debentures A/c 6. Issued at a premium and redeemable at premium (a) Bank A/c Dr. To Debenture Application & Allotment A/c (b) Loss on Issue of Debentures A/c Dr. To Debentures A/c (with nominal value of debenture) To Securities Premium A/c (with premium on issue) To Premium on Redemption of Debentures A/c BCCC 0011 Company Accounts And Practices 46
  • 47. Example 1: • Give Journal entries for the following: 1. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at par and redeemable at par. 2. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at premium of 5% but redeemable at par. 3. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at discount of 5% repayable at par. 4. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at par but repayable at a premium of 5%. 5. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at discount of 5% but redeemable at premium of 5%. 6. Issue of Rs. 1,00,000, 9% debentures of Rs. 100 each at premium of 5% and redeemable at premium of 5% 47BCCC 0011 Company Accounts And Practices
  • 48. 1. Bank A/c Dr. To 9% Debenture Application & Allotment A/c (Debentures Application money received) 1,00,000 1,00,000 Debenture Application & Allotment A/c Dr. To 9% Debentures A/c (Application money transferred to Debentures Account) 1,00,000 1,00,000 2. Bank A/c Dr. To 9% Debenture Application & Allotment A/c (Debentures application money received) 1,05,000 1,05,000 Debenture Application & Allotment A/c Dr. To 9% Debentures A/c To Securities Premium A/c (Debentures application money transferred to Debentures & Securities Premium account 105000 100000 5000 BCCC 0011 Company Accounts And Practices 48
  • 49. 3. Bank A/c Dr. To 9% Debenture Application & Allotment A/c (Debentures application money received) 95,000 95,000 9% Debenture Application & Allotment A/c Dr. Discount on Issue of Debentures A/c Dr. To 9% Debentures A/c (Debentures application money transferred to Debentures account) 95,000 5,000 1,00,000 4. Bank A/c Dr. To 9% Debenture Application & Allotment A/c (Debentures Application money received) 1,00,000 1,00,000 Debenture Application & Allotment A/c Dr. Loss on Issue of Debentures A/c Dr. To 9% Debentures A/c To Premium on Redemption of Debentures A/c (Debentures Application money transferred to Debentures account) 100000 5000 100000 5000 BCCC 0011 Company Accounts And Practices 49
  • 50. 5. Bank A/c Dr. To 9% Debenture Application & Allotment A/c (Debentures Application money received) 95,000 95,000 Debenture Application & Allotment A/c Dr. Loss on Issue of Debentures A/c Dr. To 9% Debentures A/c To Premium on Redemption of Debentures A/c (Debentures application money transferred to debentures and Premium on debenture account) 95,000 10,000 1,00,000 5,000 6. Bank A/c Dr. To 9% Debenture Application & Allotment A/c (Debentures Application money received) 1,05,000 1,05,000 Debenture Application & Allotment A/c Dr. Loss on Issue of Debentures A/c Dr. To 9% Debenture A/c To Premium on Redemption of Debentures A/c To Securities Premium A/c (Debenture application money transferred to debentures account) 1,05,000 5,000 1,00,000 5,000 5,000 BCCC 0011 Company Accounts And Practices 50
  • 51. • A Ltd. decided to redeem Rs. 2,12,500 12% debentures. It purchased Rs. 1,70,000 debentures in the open market at Rs. 98.50 each the expenses being Rs. 100 and redeemed the balance of Rs. 42,500 debentures by draw of lots. 51BCCC 0011 Company Accounts And Practices
  • 52. 52BCCC 0011 Company Accounts And Practices Date Particulars Debit Credit 12% debentures A/c Dr. To Bank A/c To profit on redemption of debentures 1,70,000 1,68,300 1,700 12% debentures A/c Dr. To bank A/c 42,500 42,500 Profit on redemption of debenture A/c Dr. To capital reserve 1,700 1,700 Profit & loss appropriation A/c Dr. To debenture redemption reserve A/c 2,12,500 2,12,50
  • 53. • XYZ Ltd. issued 6,000, 15% debentures of Rs. 100 each at par on January 1, 2015. The due date for payment of interest on these debentures is December 31 every year. The debentures are redeemable at par in three equal installments, beginning from the end of 3rd year. Prepare 15% Debentures Account & Debenture Interest Account. 53BCCC 0011 Company Accounts And Practices
  • 54. 54BCCC 0011 Company Accounts And Practices
  • 55. 55BCCC 0011 Company Accounts And Practices
  • 56. • Kayaan Ltd. purchased its own debentures of Rs 100 each of the face value of Rs. 70,000 from the open market for cancellation at Rs 95. Record necessary journal entries. • 56BCCC 0011 Company Accounts And Practices
  • 57. Example 5: AB&D Ltd redeemed 5,000 15% Debentures of Rs 10 each at a premium of 10 % on 31st March 2018. Debenture holders were given equity shares of Rs 10 each at premium of Rs 10 per share. Journal entries in the books of Anil Ltd will be: Amount of Debenture due for payment = Total number of Debentures X Value of per Debenture = 5,000 X 10 = 50,000 Amount of premium on redemption of per Debenture = 10 X 10/100 = 1 Total amount of premium payable = No of Debenture to be redeemed X Amount of premium on redemption of per Debenture = 5,000 X 1 = 5,000 57BCCC 0011 Company Accounts And Practices
  • 58. Total amount due to Debenture holders = 50,000 + 5,000 = 55,000 Issue price of share = 10 + 10 Issue price of share = 20 = (50,000+5,000)/20 = 2,750 Entry for amount due to Debentureholders on conversion of 5,000 15 % BCCC 0011 Company Accounts And Practices 58
  • 59. 59BCCC 0011 Company Accounts And Practices
  • 60. MCQ 60BCCC 0011 Company Accounts And Practices 1. Which is a document issued by a company under its common seal acknowledging the debt A. Debenture B. Share C. Stock 2.Debenture is treated as an………… by the company A. Assets B. Equity C. long term borrowings
  • 61. 61BCCC 0011 Company Accounts And Practices 3. Is the debentures are secured by way of charge on the assets of the company. A. Yes B. No 4. The interest charged on debentures is a A. Appropriation against profit. B. charge against profit. C. Reserve
  • 62. 62BCCC 0011 Company Accounts And Practices 5. persons Who are lenders to the company as they provide funds in exchange of debentures is called A. Shareholders B. Debentureholders C. Stackholders 6. Such debentures are secured by either a fixed charge or a floating charge on the assets of the company Called A. Unsecured debentures B. Convertible debentures C. Secured Debentures D. First Debentures E. Unsecured Debentures
  • 63. 63BCCC 0011 Company Accounts And Practices 7. Such debentures are not secured by any charge on assets of the company A. Unsecured debentures B. Convertible debentures C. Secured Debentures D. First Debentures E. Unsecured Debentures
  • 64. 64BCCC 0011 Company Accounts And Practices • 8. Such debentures are to be repaid before the other debentures. A. First debentures B. Secured Debentures C. Redeemable Debenture D. Irredeemable Debentures E. Unsecured Debentures
  • 65. 65BCCC 0011 Company Accounts And Practices 9. Such debentures are not repayable during the lifetime of the company and are repayable only when the company is liquidated. A. Secured Debentures B. Redeemable Debenture C. Irredeemable Debentures D. Unsecured Debentures
  • 66. 66BCCC 0011 Company Accounts And Practices • 10. Such debentures are convertible into shares. A. Unsecured debentures B. Convertible debentures C. Secured Debentures D. Redeemable Debenture
  • 67. 67BCCC 0011 Company Accounts And Practices 11. Such debentures are issued with a specified rate of interest, This rate may be either fixed or floating A. Unsecured debentures B. Convertible debentures C. Specific coupon Rate Debentures D. Secured Debentures E. Zero coupon bond (Debenture)
  • 68. 68BCCC 0011 Company Accounts And Practices 12 Such debentures do not carry a specific rate of interest. They are issued at a substantial discount. A. Unsecured debentures B. Convertible debentures C. Specific coupon Rate D. Secured Debentures E. Zero coupon bond (Debenture)
  • 69. 69BCCC 0011 Company Accounts And Practices • 13. Balance in the Debentures’ Interest Account is transferred to ……..at the end of the year. A. Balance Sheet – Liability side B. Profit and loss A/c
  • 70. 70BCCC 0011 Company Accounts And Practices • 14. The journal entry of When interest is Due is Interest on debentures A/c debited and …………..A/c Credited A. Debentures B. Debenture holder A/c
  • 71. 71BCCC 0011 Company Accounts And Practices 15. In Journal entry of payment to debenture holders the ……….A/c Debited ,to bank. A. Debentures B. Debenture holder A/c
  • 72. • 16. Debentures can be issued for A. for cash B. for consideration other than cash C. As collateral security D. All of the above BCCC 0011 Company Accounts And Practices 72
  • 73. 17. When Debentures amount received in lump sum with the application ,so the journal entry is bank a/c Debited, and ………….A/c Credited A. Debenture holder A/c B. % Debentures Application & Allotment A/c BCCC 0011 Company Accounts And Practices 73
  • 74. 18. Debentures Issued for purchases Asset at par so at the time of company issued the debentures , Vendor A/c is debited and …… A/c is credited A. % Debenture A/c B. Debentureholder A/c BCCC 0011 Company Accounts And Practices 74
  • 75. 19. When business is Purchased and there is a difference between net assets and purchase consideration , and net assets is more than purchase consideration so which account is opended A. Goodwill A/c Debited B. Capital reserve A/c is credited BCCC 0011 Company Accounts And Practices 75
  • 76. 20. When business is Purchased and there is a difference between net assets and purchase consideration , and purchase consideration is more than net assets so which account is opended A. Goodwill A/c Debited B. Capital reserve A/c is credited BCCC 0011 Company Accounts And Practices 76
  • 77. 21. Security provided to lender in addition to the principal security is called A. Main security B. Collateral security C. Primary security BCCC 0011 Company Accounts And Practices 77
  • 78. • 22. Is mandatory to pass Journal entry in the books of accounts of the company for debentures issued as collateral security. A. Yes B. No BCCC 0011 Company Accounts And Practices 78
  • 79. MCQ ( More than 1 options) • 23. If we pass journal entry of debentures issued at collateral security so A. Debenture A/c Debited B. Debenture A/c Credited C. Debenture suspense a/c credited D. Debenture suspense a/c debited BCCC 0011 Company Accounts And Practices 79
  • 80. • 24. What are the method of redemption of debentures A. Payment in lump sum B. Payment in installments C. Purchase in the open market D. By conversion into shares or new debentures E. All of the above BCCC 0011 Company Accounts And Practices 80
  • 81. • 25. Debentures can be redeemed A. at par B. at a premium C. Both BCCC 0011 Company Accounts And Practices 81
  • 82. • 26. When the total amount of debentures is paid to the debenture holders in full on maturity or even before maturity, it is known as Redemption of debentures in A. Payment in lump sum B. Payment in installments C. Purchase in the open market D. By conversion into shares or new debentures BCCC 0011 Company Accounts And Practices 82
  • 83. • 27. the debentures are redeemed in installments and debentures to be redeemed are selected by draw, it is known as Redemption of debentures in A. Payment in lump sum B. Payment in installments C. Purchase in the open market D. By conversion into shares or new debentures BCCC 0011 Company Accounts And Practices 83
  • 84. • 28. the debentures are redeemed by converting them into new class debentures or shares. it is known as Redemption of debentures in A. Payment in lump sum B. Payment in instalments C. Purchase in the open market D. By conversion into shares or new debentures BCCC 0011 Company Accounts And Practices 84
  • 85. • 29. When the redemption of debentures By conversion into shares or new debentures is happened so debentures account debited and ……..A/c is credited A. Equity shares A/c B. Bank C. P&L A/c BCCC 0011 Company Accounts And Practices 85
  • 86. • 30. When a company purchases its own debentures through stock exchanges for the purpose of cancellation such an act of purchasing and cancellation is known A. Payment in lump sum B. Payment in instalments C. Purchase in the open market D. By conversion into shares or new debentures BCCC 0011 Company Accounts And Practices 86
  • 87. • 31. On Cancellation of Own Debentures the %Debentures A/c Dr. and A. To Equity shares A/c B. To Bank A/c C. To Own Debentures A/c BCCC 0011 Company Accounts And Practices 87
  • 88. 32. a reserve created out of profits for redeeming debentures A. DRR B. CRR C. SLR BCCC 0011 Company Accounts And Practices 88
  • 89. 33. a Company is required to transfer an amount equal to at least ………….of the value of debentures to the Debenture Redemption Reserve a/c before redemption of debentures A. 25% B. 15% C. 5% BCCC 0011 Company Accounts And Practices 89
  • 90. 34. at least ………of the nominal value of the debentures to be redeemed during the year should be invested on or before 30th April of the year in which the redemption is to be made A. 25% B. 15% C. 5% BCCC 0011 Company Accounts And Practices 90
  • 91. • 35. DRR Account is closed by transferring the amount to………….. A. General Reserve B. Capital Reserve C. Capital Redemption reserve BCCC 0011 Company Accounts And Practices 91
  • 92. BCCC 0011 Company Accounts And Practices 92