Download Chapter 3

Issue of debentures
MEANING AND NATURE OF DEBENTURE
 Debenture
is a written instrument acknowledging a debt and
containing provisions as regards repayment of interest at a
fixed rate.
 Debenture includes debentures, stock, bonds and any other
securities of a company whether constituting a charge on the
assets of the company or not. Debenture represents a debt.
DISTINCTION BETWEEN A SHARE AND A DEBENTURE
Basis of
distinction
share
debenture
1. capital vs. loan Share is a part of Debenture
owned capital.
constitutes a
loan.
2. Reward for
investment
Reward is a
payment of
dividend.
The raward is
payment of
interest.
3. Fluctuations
in the rate of
interest and
dividend
The rate of
The rate of
dividend may
interest is fixed.
vary from year to
year depending
upon the profit
decisions of
directors and
members.
4. Charge vs.
appropriations
Payment of dividend
is an appropriation
out of profits and this
cannot be made if
there is no profit.
Payment of interest is
a charge against
profits and is to be
made even if there is
no profit.
5. Priority as to payment Payment of dividend
of interest\dividend
gets no priority over the
payment of interest
Payment of interest gets
priority over the
payment of dividend.
6. Priority as to
repayment of principal
during winding up.
Payment of share capital
is made after the
repayment of
debentures.
Payment of debentures
is made before the
payment of share
capital.
7. Secured by charge
Shares are not secured
by any charge.
Debentures are usually
secured by a charge.
8. Restrictions on the
purchase by company.
Sec. 79 imposes certain
restrictions on issue of
shares at discount
No restrictions is
imposed on the issue of
debentures at discount.
9. Restrictions on the
purchase by company.
Sec.77 imposes
restriction on the
purchase of shares by
the company.
No restriction is
imposed on the
purchase of by
debentures by the
company.
10. Voting rights.
Shareholders generally
enjoy voting rights.
Debenture holders do not
have any voting rights
(except at their class
meeting).
11. Redemption
Equity shares cannot
be redeemed during
the lifetime of the
company.
Debentures are to be
redeemed during the
lifetime of the
company.
12. convertibility
Equity shares can never
be convertible.
Debentures can be
convertible.
13. Trust deed
Share trust deed is not
required to be executed.
Debenture trust deed is
required to be executed.
KIND OF DEBENTURES
The different type of debentures are under:
 (A). naked debentures or unsecured debentures
which are not secured on any asset.
 (B). secured debentures are those which are
secured either on a particular asset or on all the
asset of the company in general.
 (c). First mortgage debentures are those which
have a first claim on the asset charged.
 (d).second mortgage debentures are those which
have a second claim on the asset charge.







(e) Redeemable debentures are those which are
repayable after a specified period in lump sum or
by instalments during life time of the company.
(f) Irredeemable debentures are those which are
not redeemable during the life time of the
company.
Registered debentures are those which are
payable to those persons whose name appears in
the Register of debentures.
Bearer debentures are those which are payable to
the bearer thereof.
Convertible debentures are those, the holders of
which have the right to convert into shares.
Non-convertible debentures are those debentures
which cannot be convertible into shares.
ISSUE OF DEBENTURES
The procedure for the issue of debentures is exactly the same
as in the case of shares. Therefore, the pattern of accounting
entries on the issue of debentures is basically similar to the
one on the issue of shares. The only differences are that the
term ‘debenture’ is substituted for the word ‘share’ and the
percentage of interest is pre-fixed to the term ‘debenture’.
From the point of consideration, the debentures may be
issued in the following three ways:
1.
2.
3.
Issue of debentures for cash;
Issue of debentures for consideration other than cash;
Issue of debenture as a collateral security: Issue of
debenture as a collateral security means the issue of
debentures as an additional security against the loan in
addition to any other security that may be offered.
JOURNAL ENTRIES FOR THE ISSUE OF DEBENTURES
1. When the application money is received
Bank Account Dr.
Debenture Application Account Cr
2. When the application money is transferred:
Debenture Application Account Dr.
Debentures Account Cr.
3. When the allotment money is due:
Debenture allotment Account Dr.
Debentures Account Cr.
4. When the allotment money is received:
Bank Account Dr.
Debenture Allotment Account Cr.
5. When the call money is due:
Debenture call Account Dr.
Debentures Account Cr.
6. When the call money is received:
Bank Account Dr.
Debenture Call Account Cr.
PRO FORMA ENTRY- CONTD.
When debentures are issued in consideration of
assets:
Land and Building Account
Dr. XXXX
Plant and Machinery Account Dr XXXX
Furniture and fittings Account Dr. XXXX
Any other assets Account
Dr. XXXX

Debenture Account
Cr.
XXXX
(Being the issue of debenture against assets)