3. How do you issue debentures ? 1. against cash 2. against assets 3. as collateral security
4. What is “as collateral security”? ‘ Collateral Security’ implies additional security given for a loan. When a company takes a loan from bank or insurance company, it may issue its own debentures to the lender as collateral security against the loan in addition to any other security that may be offered, such an issue of debentures is known as “Debentures Issued as Collateral Security. No accounting entry is required for this. No interest is to be paid on this. It is not required to be shown in accounts also
5.
6. Can we issue debentures on premium / discount ? Yes - if you issue on discount – provide for the loss learn how to adjust these losses
7. What to do of premium / discount ? Premium is part of securities premium and is a capital receipt and can be used for payment of premium on redemption of debentures. Discount on issue of debentures is a capital loss of the company and it is required to be shown on the assets side of the Balance Sheet under the heading “Miscellaneous Expenditure” until it is written off.
8. Can we redeem debentures on premium / discount ? Yes if you redeem at premium, the loss has to be provided in the year of issue
9. Where will the premium received on debenture be transferred ? It will go to securities premium account the entry will be : Bank a/c debit to debentures application debentures application a/c debit to debentures a/c credit to securities premium a/c credit
10. Is it necessary to create debenture redemption fund? Yes there are two methods : 1. you may transfer a fixed amount every year 2. you may transfer fluctuating amount / ratio based amount / reducing amount every year to this fund
11. What to do with redemption reserve fund after redemption ? This fund is transferred to general reserve on redemption of debentures
12. How to redeem debentures? There are many methods to redeem debentures : 1. you may redeem certain number of debentures every year. In this case you dont have have to transfer amount to debenture redemption reserve every year. 2. you may convert debentures into shares 3. you may buy your company's debentures from open market 4. you may redeem debentures in one shot (lump sum method).
13. How do you pay interest on debentures? It is generally paid half yearly. You may pay it on 31 March and on 30 Sept. On 31/3, when the interest on debentures falls due, you have to show it on balance sheet as outstanding debenture interest (short term liability). If your account closes on 31/12, you have to show interest for that period (from 1/10 to 31/12) as outstanding debenture interest (short term liability)
14. Is debenture interest a charge on profit and loss account Yes it is debited to profit and loss account but when we create a debenture redemption reserve, the money transferred to debenture redemption reserve is not a charge against profit and therefore that is taken out of P & L appropriation account
15. A company issues debentures of 20 lakhs to be redeemed at 10% premium in 4 years = 5 lakh each – from 3 rd year. How will you transfer the premium on redemption to P & L account ? Here you can transfer this loss in reducing balance method balance at the end of 1 st year = 20, balance at the end of 2 nd year = 20, balance at the end of 3 rd year = 15, balance at the end of 4 th year = 10, balance at the end of 5 th year = 5, balance at the end of 6 th year = 0, amount to be transferred in 1 st year 20/70*20= 5.7 lakhs amount to be transferred in 5 th year 5/70*20= 1.4 lakhs
16. What is cum interest and ex interest ? If the purchase price for the debentures includes interest for the expired period, the quotation is said to be “Cum-interest”, on the other hand, the purchase price for the debentures excludes the interest for the expired period, the quotation is said to be “Ex-interest”. Example : you purchase debenture on 31 march – interest is due. You buy debentures in 103 and interest of 3 is due on it. You have purchased it cum-interest and you have paid 3 for interest amount.
41. What are the dangers of budgeting ? It creates inflexibility There is a possibility of over or under budgeting (both the situation create problems) budget creates rigidity Budgets takes away attention from main objectives People give more importance to budget (not to the ultimate goals of the organisation ).
42. Effective budgeting ? The budget should be related to the goals of the organisation. Budget should be able to link the performance to the mission and vision of the organisation There should be flexible budgeting budget should be formulated by employee participation Budget should be actually implemented Budget limiting factors must be specified
43. How else can control be maintained ? Personal observation Guidance Feedback Statistical Data analysis Ratio analysis Break Even Analysis Analysis of financial data