- Oversubscription occurs when more debentures are applied for than issued.
- The company may allot debentures to all applicants on a pro rata basis.
- It can also reject some applications and allot the rest on a pro rata basis.
- The company may reject excess applications and fully allot to the remaining ones.
- The process is similar to oversubscription of shares.
Definitions [2]
Definition: Debenture
- According to section 2(30) of the Companies Act, 2013, " Debenture includes debenture stock, bonds and any other securities of a Company, whether constituting a charge on the assets of the Company or not."
- “A Debenture is a document given by a company as evidence of a debt to the holder, usually arising out of a loan and most commonly secured by a charge." -Topham
- According to Evelyn Thomas, "a debenture is a document under the company's seal which provides for the payment of a principal sum and interest thereon at regular intervals, which is usually secured by a fixed or floating change on the company's property or undertaking and which acknowledges a loan to the company".
Define debenture.
According to Companies Act, sec. 2(12), “Debenture includes stock, bonds and any other securities of a company whether constituting a charge on the company’s assets or not”.
Formulae [1]
Number of Debentures Issued
\[\text{Number of Debentures Issued}=\frac{\text{Purchase Consideration}}{\text{Issue Price of Debenture}}\]
Key Points
Key Points: Debentures
- Debenture: A written promise by a company to repay a loan with interest.
- Legal View: Includes all debt instruments, as per the Companies Act, 2013.
- Key Features: Fixed interest, secured by assets, issued under seal, max 10-year term (30 for infrastructure).
- Debentureholders: They are lenders, not owners of the company.
- Bond vs Debenture: Bonds may have no fixed interest; debentures always do.
Difference Between Debenture and Share
| Basis | Debenture | Share |
|---|---|---|
| Ownership | Debentureholder is a lender. | Shareholder is part-owner of the company. |
| Capital vs Loan | It is a loan taken by the company. | It is a part of the company’s capital. |
| Return | Debentureholder gets interest. | Shareholder gets a dividend. |
| Interest/Dividend Rate | Fixed rate of interest. | Dividend is variable and depends on profits. |
| Redemption | Compulsory repayment on maturity. | Voluntary buy-back by the company. |
| Issue at Discount | Can be issued at a discount. | Cannot be issued at discount (except sweat equity). |
| Security | Usually secured by company assets (less risk). | Always unsecured (more risk). |
| Priority in Repayment | Paid before share capital during liquidation. | Paid after debentures during liquidation. |
| Convertibility | Can be converted into shares (if convertible). | Cannot be converted into debentures. |
| Purchase/Buy-back | Company can repurchase from the market. | Buy-back allowed with certain conditions. |
| Voting Rights | No voting rights in company meetings. | Shareholders have voting rights. |
Difference between Debentureholder and Shareholder
| Basis | Debentureholder | Shareholder |
|---|---|---|
| Status | Lender to the company | Owner of shares in the company |
| Return | Gets fixed interest, even if the company makes a loss | Gets a dividend if declared by the company |
| Management | No right in company management | Has voting rights and can participate in management |
| Risk | Lower risk, especially if secured | Higher risk; may lose the invested amount |
Key Points: Types of Debentures
- Debentures are classified based on Security, Redemption, Registration, and Convertibility.
- Secured Debentures are backed by company assets (fixed or floating charge), while Unsecured Debentures have no security and involve more risk.
- Redeemable Debentures are repayable after a fixed period or in instalments, whereas Irredeemable Debentures are repaid only at the time of the company's liquidation.
- Registered Debentures are recorded in the company's register and require a transfer deed, while Bearer Debentures are freely transferable and paid against attached coupons.
- Convertible Debentures can be exchanged into shares (partly or fully), while Non-convertible Debentures cannot be converted into equity or other securities.
Journal Entries: Issue of Debentures for Cash
A. When amount is received in Lump Sum as Application Money
1. On receipt of application money:
Bank A/c ...Dr.
To Debentures Application and Allotment A/c
(Being application money received for debentures)
2. On allotment – i.e., acceptance of applications:
Debentures Application and Allotment A/c ...Dr.
To ...% Debentures A/c
(Being application money adjusted on allotted debentures)
3. On refund of money on totally rejected applications:
Debentures Application and Allotment A/c ...Dr.
To Bank A/c
(Being excess application money refunded for rejected applications)
B. When amount is received in More Than One instalment:
1. On receipt of application money:
Bank A/c ...Dr.
To Debentures Application A/c
(Being application money received on debentures)
2. On acceptance of applications or On Allotment of Debentures:
Debentures Application A/c ...Dr.
To ...% Debentures A/c
(Being application money adjusted on allotted debentures)
3. On adjustment of surplus application money (partially allotted):
Debentures Application A/c ...Dr.
To Debentures Allotment A/c
(Being surplus application money adjusted towards allotment)
4. On refund of excess application money (rejected applications):
Debentures Application A/c ...Dr.
To Bank A/c
(Being refunded of application money on rejected applications)
5. On allotment money becoming due:
Debentures Allotment A/c ...Dr.
To ...% Debentures A/c
(Being allotment money due on debentures)
6. On receipt of allotment money:
Bank A/c ...Dr.
To Debentures Allotment A/c
(Being allotment money received)
7. On making a call (e.g., First Call) due:
Debentures Call A/c ...Dr.
To ...% Debentures A/c
(Being call money due on debentures)
8. On receipt of call money:
Bank A/c ...Dr.
To Debentures Call A/c
(Being call money received)
Note: Repeat call entries for Second Call, Third Call, etc., using separate accounts as needed.
Journal Entries: Issue of Debentures at Discount
Securities Premium A/c ...Dr.
Capital Reserve A/c ...Dr.
Statement of Profit & Loss ...Dr.
To Discount/Loss on Issue of Debentures A/c
Key Points: Oversubscription of Debentures
Key Points: Undersubscription of Shares
- Undersubscription occurs when fewer debentures are applied for than the number issued.
- In this case, debentures are allotted to all the applicants.
- If the issue price is payable in instalments, entries are made based on the debentures actually applied and allotted.
Journal Entries: Issue of Debentures For Consideration Other than Cash
A. Issue of Debentures to Promoters
1. When recording incorporation cost or preliminary expenses:
Incorporation Cost A/c or Preliminary Expenses A/c ...Dr.
To Promoters’ A/c
(Being cost of company incorporation payable to promoters)
2. When debentures are issued to promoters:
Promoters’ A/c ...Dr.
To...% Debentures A/c
(Being debentures issued to promoters)
B. Issue of Debentures to Underwriters
1. When underwriting commission becomes due:
Underwriting Commission A/c ...Dr.
To Underwriter’s A/c
(Being underwriting commission due)
2. When debentures are issued to settle the dues:
Underwriter’s A/c ...Dr.
To ...% Debentures A/c
(Being debentures issued to underwriters)
C. Issue of Debentures to Vendors
1. On Purchase of Business or Assets:
(i) When Purchase Consideration = Net Assets:
Sundry Assets A/c ...Dr.
To Sundry Liabilities A/c
To Vendor’s A/c
(Being assets and liabilities taken over and balance payable to vendor)
(ii) When Purchase Consideration > Net Assets - (Excess debited to Goodwill A/c)
Sundry Assets A/c ...Dr.
Goodwill A/c ...Dr.
To Sundry Liabilities A/c
To Vendor’s A/c
(Being the excess purchase price over net assets treated as goodwill)
(iii) When Purchase Consideration < Net Assets - (Excess credited to Capital Reserve A/c)
Sundry Assets A/c ...Dr.
To Sundry Liabilities A/c
To Capital Reserve A/c
To Vendor’s A/c
(Being purchase consideration less than net assets; balance credited to capital reserve)
2. On Issue of Debentures to Vendors:
(i) When Debentures are issued at Par:
Vendor’s A/c ...Dr.
To ...% Debentures A/c
(Being debentures issued at par to vendor)
(ii) When Debentures are issued at Premium:
Vendor’s A/c ...Dr.
To ...% Debentures A/c
To Securities Premium A/c
(Being debentures issued at premium)
(iii) When Debentures are issued at Discount:
Vendor's A/c ...Dr.
Discount on Issue of Debentures A/c ...Dr.
To ...% Debentures A/c
(Being debentures issued at discount)
Journal Entries: Issue of Debentures as Collateral Security
A. First Method: Entry for Debentures is Not Passed
1. If the loan is taken from a bank :
Bank A/c ...Dr.
To Bank Loan A/c
(Being loan taken from bank)
B. Second Method: Entry for Debentures is Passed
1. On Taking the Loan:
Bank A/c ...Dr.
To Bank Loan A/c
(Being loan taken from bank)
2. On Issuing Debentures as Collateral:
Debentures Suspense A/c ...Dr.
To ...% Debentures A/c
(Being debentures issued as collateral security for a loan)
C. On Repayment of the Loan (for both methods)
1. Reverse of Loan Entry:
Bank Loan A/c ...Dr.
To Bank A/c
(Being repayment of a bank loan)
2. Reverse of Debentures Entry:
... % Debentures A/c ...Dr.
To Debentures Suspense A/c
(Being the cancellation of debentures issued as collateral)
Journal Entries: Debentures Issued at Par and are Redeemable at Par
A. When Application Money is received in Lump sum:
1. Bank A/c ...Dr.
To Debentures Application and Allotment A/c
2. Debentures Application and Allotment A/c ...Dr.
To ...% Debentures A/c
B. When Application Money is received in parts (Instalments):
1. Bank A/c ...Dr.
To Debentures Application A/c
2. Debentures Application A/c ...Dr.
To ...% Debentures A/c
Journal Entries: Debentures Issued at Discount and are Redeemable at Par
A. When Application Money is Received in Lump Sum
1. On receipt of application money:
Bank A/c ...Dr.
To Debentures Application and Allotment A/c
( Being application money received)
(ii) On allotment of debentures and accounting for discount:
Debentures Application and Allotment A/c ...Dr.
Discount on Issue of Debentures A/c ...Dr.
To ...% Debentures A/c
(Being debentures allotted and discount recorded)
B. When Application Money is Received in Instalments
(i) On receipt of application money:
Bank A/c ...Dr.
To Debentures Application A/c
(Being application money received)
(ii) On allotment and transfer of application money:
Debentures Application A/c ...Dr.
To ...% Debentures A/c
(Being application money adjusted on allotment)
(iii) On recording discount and allotment due:
Debentures Allotment A/c ...Dr.
Discount on Issue of Debentures A/c ...Dr.
To ...% Debentures A/c
(Being debentures allotted at discount and allotment due)
(iv) On receipt of allotment money:
Bank A/c ...Dr.
To Debentures Allotment A/c
(Being allotment money received)
Note: If the question doesn’t specify when the discount is allowed, it is assumed to be allowed on allotment.
C. Writing Off Discount on Issue of Debentures:
As Discount on Issue of Debentures is a capital loss, it is written off in the year incurred using the following order of preference:
Securities Premium A/c ...Dr.
Capital Reserve A/c ...Dr.
Statement of Profit and Loss ...Dr.
To Discount on Issue of Debentures A/c
(Being discount on issue of debentures written off)
These accounts are used in sequence depending on availability. If none exist, the entire amount is charged to Statement of Profit and Loss.
Journal Entries: Debentures Issued at Premium and are redeemable at Par
A. When Application Money is payable in a Lump Sum
1. Bank A/c ...Dr.
To Debentures Application and Allotment A/c
2. Debentures Application and Allotment A/c ...Dr.
To ...% Debentures A/c
To Securities Premium A/c
Note: Securities Premium Account is credited on allotment of debentures.
B. When Application Money is payable in parts (Instalments)
1. Bank A/c ...Dr.
To Debentures Application A/c
2. Debentures Allotment A/c ...Dr.
To ...% Debentures A/c
To Securities Premium A/c
3. Debentures Allotment A/с ...Dr.
To ...% Debentures A/c
To Securities Premium A/с
4. Bank A/c ...Dr.
To Debentures Allotment A/c
Note: If the question does not specify when the premium is due, it is presumed to be due on the allotment money being demanded.
Journal Entries: Debentures Issued at Par and are Redeemable at Premium
A. When Application Money is received in a Lump sum:
1. Bank A/c ...Dr.
To Debentures Application and Allotment A/c
2. Debentures Application and Allotment A/c ...Dr.
Loss on Issue of debentures A/c ...Dr.
To ...% Debentures A/c
To Premium on Redemption of Debentures A/c
Note: Like the Discount on Issue of Debentures, the premium payable on Redemption of Debentures is provided on allotment.
B. When Application Money is received in parts (Instalments):
1. Bank A/c ...Dr.
To Debentures Application A/c
2. Debentures Application A/c ...Dr.
To ...% Debentures A/c
3. Debentures Allotment A/c ...Dr.
Loss on Issue of Debentures A/c ...Dr.
To ...% Debentures A/c
To Premium on Redemption of Debentures A/c
4. Bank А/с ...Dr.
To Debentures Allotment A/c
Note: Like the Discount on Issue of Debentures, the premium payable on Redemption of Debentures is accounted for when allotment money is demanded.
Journal Entries: Debentures Issued at Discount and are Redeemable at Premium
A. When Application Money is Received in Lump Sum
1. On Receipt of Application Money
Bank A/c ...Dr.
To Debentures Application and Allotment A/c
(Being application money received)
2. On Allotment of Debentures:
Debentures Application and Allotment A/c ...Dr.
Discount on Issue of Debentures A/c ...Dr.
Loss on Issue of Debentures A/c ...Dr.
To ...% Debentures A/c
To Premium on Redemption of Debentures A/c
B. When Application Money is Received in Parts (Instalments)
1. On Receipt of Application Money:
Bank A/c ...Dr.
To Debentures Application A/c
(Being application money received)
2. On Allotment of Debentures:
Debentures Application A/c ...Dr.
To ...% Debentures A/c
(Being application money transferred on allotment)
3. On Recording Discount, Loss and Premium:
Debentures Allotment A/c ...Dr.
Discount on Issue of Debentures A/c ...Dr.
Loss on Issue of Debentures A/c ...Dr.
To ...% Debentures A/c
To Premium on Redemption of Debentures A/c
4. On Receipt of Allotment Money:
Bank A/c ...Dr.
To Debentures Allotment A/c
(Being allotment money received)
C. Alternative Entry (Combining Discount & Loss Accounts)
Instead of two separate accounts (Discount on Issue and Loss on Issue), a single Loss on Issue of Debentures A/c may be used:
Debentures Application and Allotment A/c ...Dr.
Loss on Issue of Debentures A/c ...Dr.
To ...% Debentures A/c
To Premium on Redemption of Debentures A/c
Journal Entries: Debentures Issued at Premium and redeemable at Premium
A. When Application Money is received in a Lump sum:
1. Bank A/c ...Dr.
To Debentures Application and Allotment A/c
2. Debentures Application and Allotment A/c ...Dr.
Loss on Issue of Debentures A/c ...Dr.
To ...% Debentures A/c
To Securities Premium A/c
To Premium on Redemption of Debentures A/c
B. When Application Money is received in parts (Instalments):
1. Bank A/c ...Dr.
To Debentures Application A/c
2. Debentures Application A/с ...Dr.
To ...% Debentures A/c
3. Debentures Allotment A/c ...Dr.
Loss on Issue of Debentures A/c ...Dr.
To ...% Debentures A/c
To Securities Premium A/c
To Premium on Redemption of Debentures A/c
4. Bank A/c ...Dr.
To Debentures Allotment A/c
Difference Between Premium on Issue of Debentures and Redemption of Debentures
| Basis | Premium on Issue of Debentures | Premium on Redemption of Debentures |
|---|---|---|
| Capital Profit/Loss | Capital receipt (as per Sec 52(2), Companies Act, 2013) | Capital loss |
| Nature | Reserve | Liability |
| Outflow of Cash | No cash outflow | Cash outflow at redemption |
| Balance Sheet | Shown under Reserves & Surplus in Shareholders' Funds | Shown under Long-term Borrowings in Non-current Liabilities |
Journal Entries: Calls-In-Arrears
A. By Opening the Calls-in-Arrears Account:
1. When the amount is not received (Calls-in-Arrears Account is opened):
Calls-in-Arrears A/c ...Dr.
To Debentures Allotment/Call A/c
(Being the amount not received, transferred to Calls-in-Arrears A/c)
2. When the amount is later received:
Bank A/c ...Dr.
To Calls-in-Arrears A/c
(Being the amount received on Calls-in-Arrears)
B. For Calls-in-Arrears:
1. On non-receipt of the call amount on the due date:
Calls-in-Arrears A/c ...Dr.
To Relevant Call A/c (e.g., Debentures Allotment A/c)
(Being the amount not received on call, transferred to Calls-in-Arrears)
2. On receipt of Calls-in-Arrears at a later date:
Bank A/c ...Dr.
To Calls-in-Arrears A/c
(Being the amount received on Calls-in-Arrears)
C. For Interest on Calls-in-Arrears:
1. On making interest due on Calls-in-Arrears:
Sundry Debentureholders’ A/c ...Dr.
To Interest on Calls-in-Arrears A/c
(Being the amount of interest due on Calls-in-Arrears)
2. On receipt of interest on Calls-in-Arrears:
Bank A/c ...Dr.
To Sundry Debentureholders’ A/c
(Being the amount of interest received)
D. On transferring Interest on Calls-in-Arrears to Statement of Profit & Loss:
Interest on Calls-in-Arrears A/c ...Dr.
To Statement of Profit & Loss
(Being the interest transferred to Profit & Loss A/c)
Journal Entries: Calls-In-Advance
A. For Calls-in-Advance
1. When the issue is oversubscribed and excess application money is retained to adjust against future calls:
Debentures Application A/c Dr.
To Calls-in-Advance A/c
(Being the excess application money retained as calls-in-advance)
2. When debenture holders pay the call amount in advance:
Bank A/c Dr.
To Calls-in-Advance A/c
(Being the amount of call money received in advance)
3. When the call becomes due and is adjusted:
Calls-in-Advance A/c Dr.
To Debentures First Call A/c
(Being the calls-in-advance adjusted against the call due)
B. For Interest on Calls-in-Advance:
1. On interest becoming due on Calls-in-Advance:
Interest on Calls-in-Advance A/c Dr.
To Sundry Debentureholders’ A/c
(Being interest payable on calls-in-advance)
2. On payment of interest on Calls-in-Advance:
Sundry Debentureholders’ A/c Dr.
To Bank A/c
(Being the payment of interest on calls-in-advance)
3. On transferring interest on Calls-in-Advance to Profit & Loss A/c:
Statement of Profit & Loss A/c (Finance Cost) Dr.
To Interest on Calls-in-Advance A/c
(Being the interest transferred to the profit and loss account)
Journal Entries: Interest on Debentures
1. When Interest is Due:
Debentures' Interest or Interest on Debentures A/c ...Dr.
To Debentureholders' A/c
To TDS Payable A/c
(Being interest due on debentures and TDS deducted)
2. On payment to Debentureholders:
Debentureholders' A/c ...Dr.
To Bank A/c
(Being payment of interest to debentureholders)
3. On deposit of TDS in the Government Account:
TDS Payable A/c ...Dr.
To Bank A/c
(Being TDS deposited to the government)
4. On transfer of Interest to Statement of Profit & Loss at the end of the year:
Statement of Profit & Loss (Finance cost) ...Dr.
To Debentures' Interest or Interest on Debentures A/c
(Being interest charged to Profit & Loss Account)
Journal Entries: Writing Off Discount/Loss on Issue of Debentures:
Securities Premium A/c ...Dr.
Capital Reserve A/c ...Dr.
Statement of Profit & Loss A/c (Finance Cost) ...Dr.
To Discount or Loss on Issue of Debentures A/c
(Being the discount or loss on issue of debentures written off)
Important Questions [5]
- During the year 2021-22 SM Ltd. issued 10,000, 10% Debentures of ₹100 each at a discount of 10% to be redeemed after three years The company had a balance of ₹60,000 in its Securities Premium Reserve.
- Xylo Ltd. issued 9,000, 7% Debentures of ₹ 100 each at a certain rate of discount.
- Select the correct statement from the following options. (a) A debenture holder is entitled to receive a dividend on his debentures from the company even if the company has incurred losses.
- On 1st April, 2021, Bhim Ltd. issued 2,000, 5% Debentures of ₹100 each as follows: (a) For cash at a discount of 5% - ₹80,000 (Nominal), (b) To a vendor for ₹60,000 in satisfaction of his claim
- The Balance Sheet of Anjum Ltd. as at 31March,2022, had outstanding 1,000, 8% Debentures of ₹ 100 each. These debentures were to be redeemed by the company on 31st March, 2023.
Concepts [24]
- Concept of Debentures
- Difference Between Debentures and Shares
- Difference Between Debentureholder and Shareholder
- Types of Debentures
- Issue of Debentures for Cash
- Terms of Issue of Debentures> Issue of Debentures at Par
- Terms of Issue of Debentures> Issue of Debentures at Premium
- Terms of Issue of Debentures> Issue of Debentures at Discount
- Oversubscription of Debentures
- Undersubscription of Debentures
- Issue of Debentures for Consideration Other than Cash
- Issue of Debentures as Collateral Security
- Issue of Debentures with Terms of Redemption
- Debentures Issued at Par and are Redeemable at Par
- Debentures Issued at Discount and are Redeemable at Par
- Debentures Issued at Premium and are Redeemable at Par
- Debentures Issued at Par and are Redeemable at Premium
- Debentures Issued at Discount and are Redeemable at Premium
- Debentures Issued at Premium and redeemable at Premium
- Difference Between Premium on Issue of Debentures and Redemption of Debentures
- Issue of Debentures> Calls-In-Arrears
- Issue of Debentures> Calls-In-Advance
- Interest on Debentures
- Writing off Discount/Loss on Issue of Debentures
