Issue of Debentures — Notes

A debenture is a written instrument by which a company acknowledges a debt. It states the amount, the rate of interest and the terms of repayment. Under Section 2(30) of the Companies Act 2013, "debenture" includes debenture stock, bonds and other instruments evidencing a debt, whether or not they create a charge on assets.

• Debentureholders are creditors; they get interest at a fixed rate, which is a charge against profit.
• Section 71: debentures cannot carry voting rights.
• Unlike shares (Section 53), debentures may be issued at a discount.
• On winding up, debentureholders are paid before shareholders.

• Security: secured debentures carry a fixed or floating charge on assets; unsecured (naked) debentures carry none.
• Tenure: redeemable debentures are repaid on a fixed date or by instalments; irredeemable (perpetual) debentures are repaid only on winding up (or at the company’s option after a long period).
• Convertibility: convertible debentures (fully or partly) may be exchanged for equity shares; non-convertible ones may not.
• Record: registered debentures are recorded in a register of debentureholders and transferred by a transfer deed; bearer debentures pass by delivery, interest being paid on coupons.
• Coupon rate: specific coupon rate debentures carry a stated rate; zero coupon rate debentures carry none and are issued at a deep discount, the difference being the holder’s return.

In instalments:

1. Bank A/c Dr, To Debenture Application A/c (application money received).
2. Debenture Application A/c Dr, To Debentures A/c (transfer); excess refunded: Debenture Application A/c Dr, To Bank A/c.
3. Debenture Allotment A/c Dr, To Debentures A/c (allotment due), then Bank A/c Dr, To Debenture Allotment A/c.

In a lump sum: one Debenture Application and Allotment Account.

• Premium: credit Securities Premium A/c (Section 52 lists its uses).
• Discount: debit Discount on Issue of Debentures A/c (a capital loss).
• The Debentures A/c is always credited at face value.

The terms of repayment are fixed at the time of issue, giving six combinations (issued at par, premium or discount × redeemable at par or premium).

• When debentures are redeemable at a premium, the premium payable is credited at issue to Premium on Redemption of Debentures A/c (a liability: other long-term liabilities) and debited to Loss on Issue of Debentures A/c.
• Loss on issue = discount on issue + premium on redemption.
• A premium on issue is still credited to Securities Premium; it does not reduce the loss on issue in the entry.

Redemption of debentures itself (its methods, the Debenture Redemption Reserve and the investment for redemption) is not in the 2026–27 syllabus; only the terms of redemption recorded at the time of issue are.

Asset bought: Asset A/c Dr, To Vendor’s A/c; then Vendor’s A/c Dr (and Discount on Issue Dr), To Debentures A/c (and To Securities Premium A/c).

Number of debentures = amount payable to the vendor ÷ issue price.

Business bought:

• Net assets = assets taken over − liabilities taken over.
• Sundry Assets Dr (and Goodwill Dr if price > net assets), To Sundry Liabilities, To Vendor’s A/c (price), To Capital Reserve (if price < net assets).
• Any part paid in cash: Vendor’s A/c Dr, To Bank A/c.

Collateral security is additional security given to a lender besides the main security. No cash is received and no interest is paid on collateral debentures.

• First method: no entry; the loan is shown under long-term borrowings with a note that it is secured by the collateral debentures.
• Second method: Debentures Suspense A/c Dr, To Debentures A/c. In the note on long-term borrowings, the debentures are shown less Debentures Suspense, net nil. The entry is reversed when the loan is repaid.

Interest (tax deducted at source is outside the syllabus):

• Interest = face value × rate × months ÷ 12, from the date of allotment.
• Due: Debenture Interest A/c Dr, To Debentureholders’ A/c. Paid: Debentureholders’ A/c Dr, To Bank A/c.
• Year end: Statement of Profit and Loss Dr, To Debenture Interest A/c (a finance cost).
• Interest due but unpaid at the year end is shown under other current liabilities.

Writing off discount / loss on issue (in the year of issue):

• Securities Premium A/c Dr (to the extent of its balance, including premium received that year).
• Statement of Profit and Loss Dr (the balance).
• To Discount / Loss on Issue of Debentures A/c.