Issue of debentures: journal entries for every case

A share makes you an owner. A debenture makes you a lender. The company must pay interest on debentures whether it earns a profit or not.

What a debenture is

A debenture is a written acknowledgement of a debt taken by a company, usually under its seal, with a fixed rate of interest and terms of repayment. Debenture holders are creditors of the company. Interest on debentures is a charge against profit: it is paid even in a loss year and is deducted before profit is found.

Shares and debentures compared

Basis	Shares	Debentures
Holder	Owner (member)	Creditor (lender)
Return	Dividend, out of profit, not fixed for equity	Interest at a fixed rate, payable even without profit
Voting rights	Equity shareholders vote	No voting rights
Repayment	Equity is repaid only on winding up (or buy-back)	Repaid on the due date
Security	Not secured	Usually secured by a charge on assets
On winding up	Paid last	Paid before shareholders
Issue at discount	Not allowed	Allowed

Types of debentures

By security: secured (mortgage) and unsecured (naked).
By redemption: redeemable and irredeemable (perpetual).
By conversion: convertible into shares, or non-convertible.
By record: registered and bearer.
By coupon: specific-rate and zero-coupon.

Issue for cash

Like shares, the money may be received in a lump sum or in instalments. The examples below use 1,000, 9% debentures of ₹100 each, payable in full on application.

Case 1: issued at par, redeemable at par
Particulars	Dr. (₹)	Cr. (₹)
Bank A/c Dr.	1,00,000
To Debenture Application and Allotment A/c		1,00,000
(Application money received)
Debenture Application and Allotment A/c Dr.	1,00,000
To 9% Debentures A/c		1,00,000
(Issue at par: debentures allotted)
Total	2,00,000	2,00,000

Case 2: issued at a premium of 5%, redeemable at par
Particulars	Dr. (₹)	Cr. (₹)
Bank A/c Dr.	1,05,000
To Debenture Application and Allotment A/c		1,05,000
(Application money received at ₹105)
Debenture Application and Allotment A/c Dr.	1,05,000
To 9% Debentures A/c		1,00,000
To Securities Premium A/c		5,000
(Issue at 5% premium)
Total	2,10,000	2,10,000

Case 3: issued at a discount of 5%, redeemable at par
Particulars	Dr. (₹)	Cr. (₹)
Bank A/c Dr.	95,000
To Debenture Application and Allotment A/c		95,000
(Application money received at ₹95)
Debenture Application and Allotment A/c Dr.	95,000
Discount on Issue of Debentures A/c Dr.	5,000
To 9% Debentures A/c		1,00,000
(Issue at 5% discount)
Total	1,95,000	1,95,000

When debentures are redeemable at a premium

If the company promises to repay more than the face value, the extra is a known loss from the day of issue. It is recorded at once by debiting Loss on Issue of Debentures A/c and crediting Premium on Redemption of Debentures A/c, which is a liability.

Case 4: issued at par, redeemable at a premium of 10%
Particulars	Dr. (₹)	Cr. (₹)
Bank A/c Dr.	1,00,000
To Debenture Application and Allotment A/c		1,00,000
(Application money received)
Debenture Application and Allotment A/c Dr.	1,00,000
Loss on Issue of Debentures A/c Dr.	10,000
To 9% Debentures A/c		1,00,000
To Premium on Redemption of Debentures A/c		10,000
(Issue at par, redeemable at 10% premium)
Total	2,10,000	2,10,000

Case 5: issued at a discount of 5%, redeemable at a premium of 10%
Particulars	Dr. (₹)	Cr. (₹)
Bank A/c Dr.	95,000
To Debenture Application and Allotment A/c		95,000
(Application money received at ₹95)
Debenture Application and Allotment A/c Dr.	95,000
Loss on Issue of Debentures A/c Dr.	15,000
To 9% Debentures A/c		1,00,000
To Premium on Redemption of Debentures A/c		10,000
(Issue at 5% discount, redeemable at 10% premium)
Total	2,05,000	2,05,000

In case 5 the loss of ₹15,000 is the discount of ₹5,000 plus the redemption premium of ₹10,000. A sixth case, issue at a premium and redeemable at a premium, credits Securities Premium as well.

Writing off the discount or loss

Discount or loss on issue of debentures is a capital loss. It is written off in the year of issue, first out of Securities Premium, if any, and the remainder to the Statement of Profit and Loss as a finance cost.

Journal
Date	Particulars	Dr. (₹)	Cr. (₹)
Mar 31	Securities Premium A/c Dr.	5,000
	To Discount on Issue of Debentures A/c		5,000
	(Discount written off out of securities premium)

Issue for consideration other than cash

Example. Sahyadri Ltd. takes over the business of Konkan Traders: assets ₹4,50,000 and liabilities ₹50,000, for a purchase consideration of ₹4,40,000, paid by issuing 9% debentures of ₹100 each at par.

Net assets = ₹4,50,000 − ₹50,000 = ₹4,00,000. The price is ₹40,000 more, which is goodwill. (If the price were less than net assets, the difference would be credited to Capital Reserve.) Number of debentures = 4,400.

Journal
Particulars	Dr. (₹)	Cr. (₹)
Sundry Assets A/c Dr.	4,50,000
Goodwill A/c Dr.	40,000
To Sundry Liabilities A/c		50,000
To Konkan Traders		4,40,000
(Business purchased)
Konkan Traders Dr.	4,40,000
To 9% Debentures A/c		4,40,000
(4,400 debentures of ₹100 issued at par in payment)
Total	9,30,000	9,30,000

Issue as collateral security

A company taking a bank loan may give the bank its own debentures as additional (collateral) security. The bank can sell them only if the loan is not repaid. No interest is paid on such debentures. Either no entry is passed and the fact is stated in a note to the loan, or this entry is passed and reversed when the loan is repaid:

Journal
Particulars	Dr. (₹)	Cr. (₹)
Debenture Suspense A/c Dr.	1,00,000
To 9% Debentures A/c		1,00,000
(Debentures issued as collateral security for a bank loan)

Interest on debentures

Interest is calculated on the face value at the stated rate, whatever the issue price. On ₹1,00,000 of 9% debentures the yearly interest is ₹9,000, usually paid half-yearly as ₹4,500. Companies deduct income tax at source from the interest at the rate in force and pay it to the government; the entries show the gross interest as due, then the net payment and the tax deducted.

Journal
Date	Particulars	Dr. (₹)	Cr. (₹)
Sep 30	Debenture Interest A/c Dr.	4,500
	To Debenture holders A/c		4,500
	(Half-yearly interest due (tax deduction ignored))
Sep 30	Debenture holders A/c Dr.	4,500
	To Bank A/c		4,500
	(Interest paid)
Mar 31	Statement of Profit and Loss Dr.	9,000
	To Debenture Interest A/c		9,000
	(Interest for the year transferred (after the second half-year's entries))
	Total	18,000	18,000

In the balance sheet

Debentures: under Non-current liabilities as Long-term borrowings (the part due within 12 months is shown under Current liabilities).
Premium on redemption: with the debentures, as a long-term liability.
Securities premium: under Reserves and Surplus.

Redemption of debentures. The rules on Debenture Redemption Reserve and on setting aside investments before redemption depend on the type of company and have been amended several times. Follow your board's or university's current syllabus for that part.

Questions students ask

Can debentures be issued at a discount?

Yes. Unlike shares, debentures may be issued at a discount. The discount is a capital loss, written off in the year of issue from securities premium and then from profit.

On what amount is debenture interest calculated?

On the face (nominal) value of the debentures at the stated rate, not on the issue price.

What is Loss on Issue of Debentures?

The total of discount allowed on issue and premium payable on redemption. It is recorded at the time of issue.