Accounting for Debentures Test - 3

Debentures are external equity i.e. outsiders liability. Capital contributed by the shareholders is called internal equity but amount contributed by the debenture holders is called external equity.

At the time of liquidation the payment to debenture holders is made on the priority bases and then to the shareholders.

In a company only those people are shareholder can vote but debenture holders are not allowed to vote. The simple reason is debenture holders are treated as outsiders and shareholders are treated as insiders.

Debentures are generally secured by a charge on assets. It shows that debentures are not issued for cash or kind but have been issued as a security for the loan obtained.

A company can issue its Debentures at par, premium and discount. But shares cannot be issued at discount.

Nonconvertible debentures are those which cannot be converted into shares. These debentures are entitled for interest and can be redeemed normally at the time of maturity.

Debenture holders do not have dividend right. They can’t claim for dividend because dividend is only for the shareholders. Debenture holders get a fixed interest annually.

There are different types of debentures except Equity Debentures.
(i) Redeemable Debentures
(ii) Perpetual Debentures
(iii) Convertible Debentures
(iv) Coupon Rate Debentures

Debentures are safe in comparison of shares. Debentures are almost risk free because most of the time they are secured by a charge on the assets of the company.

(i) Security debentures are those which are secured by a fixed charge.
(ii) Priority Debentures are repaid before the other debentures.
(iii) Convertible debentures are those which can be converted into shares.