Accounting for Debentures Test - 5

Interest on debentures is a charge against the profit. It means it will be paid whether the firm is in profit or loss. It will reduce the profit of the firm or it will increase the loss of the firm.

Following journal entry will be recorded in the books:

(i) Bank A/c Dr. and Deb. App. & Allot. A/c Cr.

(ii) Deb. App. & Allot. A/c Dr. ; Debenture A/c Cr. Securities premium Cr. Bank A/c Cr.

At the time of allotment excess money should be refund. so bank account will be credit with that amount.

When a company reject excess debenture applications received and paid back their money, in such a case bank account should be credited with the amount to be refunded to the applicants.

Sometimes a company issue an instrument on which rate of interest is not pre-determined. Such instruments are called Bond.

When a company issue its debentures at a price more than its actual price, it is known as debentures issued at premium.

Methods of Redemption are:

Redemption by paying Lump Sum amount

Redemption by Draw of Lots

Redemption by purchasing own debentures from the open market

Redemption by converting debentures into shares

Premium on issue of debentures is considered as capital profit because it is not earned by the normal course of business operations. Any profit or gain earned by the company which is not part of the normal operating business is termed as capital profit.

Total 10,000 Applications were rejected by the company.

Applications received = 10,000 x 3 times = 30,000

Full allotment made to only 2000 (30,000 – 2,000) remaining 28,000

Pro-rata allotment made to only 18,000 (28,000 – 18,000)

Company has refunded Rs.44,00,000. Excess money received from all the applicants will be refunded.

Amount to be credited to the Securities Premium Account Rs.2,00,000. i.e. Applications issued 20,000 x Premium Rate 10 = 2,00,000

Amount Received on Allotment Rs.42,00,000 i.e. 7,000 × 600 = 42,00,000

When a company purchased assets form an outsider and payment is not made in cash and it is settled by issue of debentures in such a case Vendor’s Account is to be credited.

Debentures can be shown as long term borrowings, short term borrowings and other current liabilities, under different situations but cannot be shown as Shareholders Funds.

When a company purchases some assets and issues debentures as a payment for the purchase, to the vendors it is known as issue of debentures for consideration other than cash.

Discount allowed by company at the time of issue debentures is treated as capital loss and should be written off against the Statement of Profit and loss or against the Securities premium reserve.

When debentures become due for the redemption they are shown under the heading of Current Liabilities and sub heading Other Current Liabilities.

When a company receives more applications for the debentures than the actual debentures offered for the subscription, it is known as over subscription.

Sometimes a company issue its debentures as a subsidiary or secondary security. Such issue is known as issue of debentures a collateral security.

Securities premium account is to be credited with Rs.9,500 i.e. Applications received 950 x 10 Rate of premium = 9,500

Rs.55,000 is to be refunded to the applicants i.e. 500 Excess applications x 110 = 55,000.

Following journal entry will be recorded for the issue of debentures:

Bank A/c Dr.    1,10,000

To 12% Debentures App. & Allot. A/c   1,10,000

Note: In this first entry there is no need to show premium separately Premium will be showed in Transfer entry.

The amount of discount which is unamortized or not written off yet is shown in the balance sheet under the heading Non-current Assets and sub heading other non-current assets.

A sole proprietor firm cannot issue debentures. Only those firms which are registered under the Companies Act, 2013 or before can issue debentures with the permission of SEBI.

A company issue its debentures as collateral security when lender demands for the additional security in addition to the prime or principal security.

When a company receives less applications for the debentures than the actual debentures offered for the subscription, it is known as under subscription.