Terms of Issue of Debentures

09/05/2021 1 By indiafreenotes

Debentures are an instrument of debt. So, when their term expires they have to be redeemed (paid back). So, the terms of such redemption are generally mentioned when issuing the debentures. The terms on which the money will be repaid to debenture holders are the terms of the issue of debentures.

Issue of debentures is referred to as the action of issuing a certificate by a company under its seal in acknowledgement of any debt that is taken by the company.

The issuing of debentures follows a process which is similar to that of issue of shares by a company. There will be issuing of prospectus, applications will be invited from interested parties and there will be issuing of letters of allotment.

The application money is refunded in case the application is rejected and in case of partial allotment, the excess amount of application money will be used in further calls.

At Par: This is when debentures will be redeemed at their face value/nominal value. So, a debenture issued for face value 100/- will be redeemed also at 100/-
At Premium: This is when the redemption is at a higher value than the face value of the debenture. Such a premium to be paid will be treated as a capital loss. And while the premium amount is only paid at redemption, it will be shown as a liability since the issue of the debentures.
At Discount: This is when the debentures are redeemed at a price lower than face value. However, this is now only a theoretical concept. Such debentures now cannot be issued.

Accounting Treatment for Terms of Issue

Let us now see the journal entries for the six different scenarios of the terms of issue. These are the entries passed for the issue of the shares in these different cases.

1) Issued at Par & Redeemable at Par

Particulars		Amount	Amount
Bank A/c	Dr	xxx
To Debenture Application & Allotment A/c			xxx
(Being application money received)

2) Issued at Discount & Redeemable at Par

Particulars		Amount	Amount
Bank A/c	Dr	xxx
To Debenture Allotment A/c			xxx
(Being allotment money received)

Particulars		Amount	Amount
Debenture Allotment A/c	Dr	xxx
Discount on Debenture A/c	Dr	xxx
To Debenture A/c			xxx
(Being allotment of debentures at discount)

3) Issued at Premium & Redeemable at Par

Particulars		Amount	Amount
Bank A/c	Dr	xxx
To Debenture Allotment/Call A/c			xxx
(Being allotment/call money received)

Particulars		Amount	Amount
Debenture Allotment/Call A/c	Dr	xxx
To Debenture A/c			xxx
To Securities Premium A/c			xxx
(Being allotment of debentures at premium)

4) Issue at Par & Redeemable at Premium

Particulars		Amount	Amount
Bank A/c	Dr	xxx
To Debenture Application & Allotment A/c			xxx
(Being application money received)

Particulars		Amount	Amount
Debenture Application & Allotment A/c	Dr	xxx
Loss on Issue of Debentures	Dr	xxx (premium amount)
To Debentures A/c			xxx (nominal value)
To Premium on Redemption of Debenture A/c			xxx (premium amount)
(Allotment of debentures at par, redeemable at premium)

5) Issued at Discount & Redeemable at Premium

Particulars		Amount	Amount
Bank A/c	Dr	xxx
To Debenture Application & Allotment A/c			xxx
(Being application money received)

Particulars		Amount	Amount
Debenture Application & Allotment A/c	Dr	xxx
Loss on Issue of Debentures	Dr	xxx (discount amout+premium on redemption)
To Debentures A/c			xxx (nominal value)
To Premium on Redemption of Debenture A/c			xxx (premium amount)
(Allotment of debentures at discount, redeemable at premium)

6) Issued at Premium & Redeemable at Premium

Particulars		Amount	Amount
Bank A/c	Dr	xxx
To Debenture Application & Allotment A/c			xxx
(Being application money received)

Particulars		Amount	Amount
Debenture Application & Allotment A/c	Dr	xxx
Loss on Issue of Debentures	Dr	xxx (premium amount)
To Debentures A/c			xxx (nominal value)
To Securities Premium A/c			xxx (premium on issue)
To Premium on Redemption of Debenture A/c			xxx (premium on redemption)
(Allotment of debentures at premium, redeemable at premium)