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Issue of Debentures

Debentures Issued at Discount

Debentures are the most common form of long-term loans that can be taken out by a corporation.  This is also an important financial instrument to raise funds from the public in exchange for a fixed rate of interest. Unlike shares, a company can issue debentures at a discount which is called “Debentures issued at Discount”. Giving debentures at a discount increases the capital of the company with respect to the less increase in the Cash for it. Hence, discount turns out to be a loss for the company but increases the demand for security.

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Issue of Debentures

A person has to follow a specific process to take some debentures in his own name. It involves the investors applying for debentures according to the prospectus given by the company.

Browse more Topics under Issue Of Debentures

Sometimes, the company asks for the whole amount on application only but mostly the company does it on an instalment basis. Debentures can be issues at 3 different values which are :

1. Debentures issued at par

2.Debentures issued at a premium

3. Debenture issued at a discount

Debentures Issued at Discount

Debentures issued at Discount

When debentures are issued by the company at a price less than its nominal value (face value) it is said to be issued at discount. It is important to note that the Companies Act has not put any restriction on the maximum limit of discount.

For example, if a debenture of Rs. 2,000 is offered to the public at Rs. 1,950, it is issued at a discount. Here Rs. 50 on each debenture is a loss to the company. For a company, it is desirable to write off this loss.

There are different journal entries in connection with the issue of debentures.

1. On receipt of Application Money

Date Particulars L.F. Amount Dr. Amount Cr.
Bank A/c                                                                      Dr.  XXX
     To Debentures Application A/c                         Cr.  XXX
(Being the receipt of the application money on debentures @ per debenture)

2. On allotment, the application money on debentures allotted is transferred to debentures account

Date Particulars L.F. Amount Dr. Amount Cr.
Debentures Application A/c                            Dr.  XXX
      To Debentures A/c                                       Cr.  XXX
(Being the transfer of application money on debentures allotted to the debentures account.)

3. Amount Due on Allotment (Considering Discount)

Date Particulars L.F. Amount Dr. Amount Cr.
Debentures Allotment A/c                                    Dr.  XXX
Discount on Issue of Debentures A/c                 Dr.  XXX
     To Debentures A/c                                             Cr.  XXX
(Being the allotment money due along with the discount on debentures)

4. Receipt of debenture allotment money

Date Particulars L.F. Amount Dr. Amount Cr.
Bank A/c                                                                  Dr.  XXX
     To Debentures Allotment A/c                        Cr.  XXX
(Being the receipt of debenture allotment money)

5. Amount Due On First Call

Date Particulars L.F. Amount Dr. Amount Cr.
Debentures First Call A/c                              Dr.  XXX
     To Debentures A/c                                     Cr.  XXX
(Being the first call money due on debentures Rs.__)

6. Receipt of Debentures first call money

Date Particulars L.F. Amount Dr. Amount Cr.
Bank A/c                                                           Dr.  XXX
     To Debentures First Call A/c                   Cr.  XXX
(Being the receipt of debentures 1st call amount)

Note: If there is any second or final call then entries will be similar to the entries of the first call just with a change of name entry to second or final call as the case may be considering the term Debentures issued at Discount.

Question for You

Alabama Ltd. issued 10,000, 10% Debentures of Rs.100 each, at Rs.90 (Case of Debentures issued at Discount), redeemable at par after 5 years, payable Rs.70 on the application and the balance on allotment. The debentures were fully subscribed and all the money was duly received. Prepare Journal.

Journal

Date Particulars L.F. Amount Dr. Amount Cr.
1. Bank A/c (10000 X 70)                                 Dr. 7,00,000
To Debenture Application A/c 7,00,000
2. Debenture Application A/c                          Dr. 7,00,000
To 10% Debentures A/c 7,00,000
3. Debenture Allotment A/c                             Dr. 2,00,000
Discount on Issue of Debentures A/c        Dr. 1,00,000
To 10% Debentures A/c 3,00,000
4. Bank A/c                                                          Dr. 2,00,000
To Debentures Allotment A/c 2,00,000
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