Accounting treatment for debenture (I)

Issue of Debenture

A debenture is an instrument issued under the common seal of a company, acknowledging its debt to the holder under the terms and conditions specified. According to the Company Act, 2053(1997), " A public limited company can raise capital after the permission of the concerned authority by issuing debentures with or without pledging immovable assets of the company. Like share, the debenture is offered by a company to the public along with prospectus."

Issue of Debentures for cash

Debentures are issued for cash considerations either at par or at a premium or at a discount, just like the issue of share. The amount of debentures can be collected either on lump-sum (single installment) or on an instalment basis.

Issue of debenture on a lump-sum basis

If all the money is collected in a single installment at the time of application then such issue of the debenture is said to be made on a lump-sum basis. The whole amount of debentures is collected in a single installment with application form in this option.

Example: 1

ABC Company Ltd. Issued 2000, 8% debentures of Rs 1,000 each. All the debenture were applied for and allotted by the company.

Required: Journal Entries

Issue of Debenture on Installment Basis

The amount of debenture may be collected in several installments. The debenture money is collected in several installments as the application, allotment and subsequent calls as on shares. The entries regarding the issue of debentures are similar to the entries for the issue of shares.

Example: 2

Kantipur Co. Ltd issued 5000, 10% Debenture of Rs.100 each payable as Rs.40 each on an application, Rs.30 each on an allotment and Rs.30 each on first and final call. All the debenture were fully subscribed and the debenture money called for was duly received.

Required:Journal entries

Issue of Debenture at Par

If a company issues debentures inviting the public to subscribe at face value (nominal value) then the debentures are said to be issued at par. Their par or face value is printed on the face of debenture certificates. For example, a company issued 10,000 debentures are issued at Rs.100 each, it is known as an issue of debentures at par.

Example: 3

Atlantic Co.Ltd issued 10,000, 10% debenture of Rs.100 each payable as under.

Rs.25 on Application

Rs.50 on allotment

Rs.25 on first and final call

All the debentures were subscribed by the public and were allotted. The entire amounts sue on debentures were received.

Required: Journal Entries

Issue of Debentures at Discount

A debenture may be issued at a price less than its face value. Such an issue of a debenture is called the issue of debentures at a discount. For example, when a company issues debentures of Rs.1,000 face value per debenture at Rs.950 each, then Rs.50 each is considered as the discount on issue of debenture account at the time of du. The discount on debentures is allowed at the time of allotment. Mostly, it is debited to discount on issue of debentures at the time of due. However, it may also be debited at the time of allotment money received. It is a capital loss, so it is shown on the balance sheet. It is to be written off as per the decision of the Board of Directors.

Example: 4

Gautam Sugar Mills Ltd. Issued 5,000, 8% debentures of Rs.500 each at 10% discount payable as follow:

On application Rs.200 each

On allotment Rs.150 each

On first and final call Rs100 each

All the debentures were fully subscribed and all the debenture money was duly received.

Required: Journal entries

Issue of debentures at Premium

When debenture are issued at a price higher than its face value, such an issue is known as an issue of debentures at the premium. If the debenture’s face value of Rs.100 each is issued at Rs.110, the excess of Rs.10 over the face value is termed as debenture premium. It is a capital gain and is credited to debenture premium account.

The amount of premium can be collected either with the application or with an allotment or with subsequent calls. Normally, the amount of the premium is collected along with the application or with allotment money.

Example: 5

ND Ltd issued 10,000, 8% Debentures of Rs.100 each at 10% premium , payable as follows:

On application Rs.40

On allotment Rs.30 (with premium)

On first and final call Rs.40

All debentures were fully debenture were fully subscribed and all the money called on debentures was duly received.

Required: Journal Entries

Alternatively, when the amount of denture premium is received along with the application money then there is another possibility of recording debenture premium as shown below:

Calls In Arrear

When debenture holders fall to pay debenture allotment or/and debenture call, such an outstanding amount is called ‘calls in arrears’. There are two alternative methods of accounting treatment on such calls in arrears. These methods are as follows:

• Showing calls-in-arrears: The outstanding amount of debenture allotment and debenture calls are shown in a separate account called call in arrears account.

• Without showing call-in-arrears: The calls in arrears amounts are not shown separately in the book of account but are deducted out of debenture allotment and/or debenture call.

A company needs to receive interests on calls in arrears from those debenture holders who fail to pay their called money within the stipulated time. The interest is paid on the basis of the provision made for calls in arrears in the Article of Association.

Example: 6

Bajaj Co.Ltd issued 5,000 debentures of Rs.100 each at 10% premium for public subscription. The debenture money payable on an application was Rs.40, on allotment Rs.40 and Rs.30 on debenture first and final call. All the debentures were applied for allotted and the money was duly received expect from a debenture-holder who held 1,000 debentures failed to pay debentures and first and final call money.

Required: Journal Entries

Calls In Advance

The company may receive the debenture call amount in advance. Such an amount is known as calls-in-advance. It may be received with allotment money for subsequent calls or with first call money for a second and final call. The amount so received in advance is created to calls-in-advance account and is debited by the amount withdraw for subsequent calls. The credit balance of calls-in-advance is shown on the capital and liabilities side of the balance sheet till it is fully withdrawn.

The company needs to pay interest at a certain rate on call-in-advance from the data receipt to the data to withdraw if its Article of Association provides for such an interest. Interest is paid on the basis if the provision made for calls in advance in the Article of Association.

Example: 7

Honda co.Ltd. issued 2,000, 8% debentures of Rs.100 each at 10% discount. The amount of payable on application Rs.40 each, on an allotment, is Rs.30 each and balance on first and final call.

All the debenture were subscribed and allotted. A debenture-holders, Mr.Basu, to whom 100 debentures were allotted, paid the entire balance of debentures with the amount of allotment.

Required: Journal Entries

Note: Call-in-advance also occurs when a company retains the excess money received in the application for subsequent allotment and calls due to the over-subscription.(Koirala, Shrestha and Singh)

References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu