UNIT 5: ACCOUNTING FOR DEBENTURES
LEARNING OBJECTIVES I) II) III) IV) V) VI) VII) IX) X) Understand the meaning and features of debentures. Differentiate between shares and debentures. Understand different classes of debentures Journal entries regarding issue of debentures for cash and for consideration other than cash. Accounting treatment of debentures issued as collateral security Accounting treatment of issue and redemption of debentures at par, discount and at premium. Understand the methods of redemption of debentures. Understand the redemption of debentures by purchase in the open market Understand redemption of debentures by conversion into shares and new debentures. VIII) Accounting treatment of redemption of debentures out of capital and profit.
What do you meant by Debentures?
Debentures is an instrument of debt owned by a company as an acknowledgement of debt, such measurements are issued under the seal of company and duly signed by authorized signatory. 2) Write any four types of debentures i) ii) iii) i) 3) Redeemable debentures Perpetual Debentures Convertible debentures Secured debentures
What is debenture Trust Deed? Debenture trust deed is a document created by the company whereby trustee is appointed to protect the interest of debenture holders before they are offered for public subscription.
4) What is meant by convertible debentures? Convertible debentures are those, the holders of which are given an option to exchanging the amount of their debentures with equity shares or other securities after a specified period. 5) Why is premium on the issue of debentures considered as a capital profit? Premium on the issue of debentures is considered a capital profit because it is not an income arising from the normal course of business operations. 85
Explain deep discount Bond When debentures are issued without interest rate and issue price is thereby discounted, the issue of debenture is said to have been made as deep discount bond.
7) Differentiate between shareholders and debenture holder, Point of Difference Share holder Debenture holder 1) Status There are the owners of the company They are paid Dividend Shares are not secured They are the creditors of the company They are paid interest Debentures are ordinarily secured
8) What is the nature of interest on debentures? Interest on debentures is a charge against profits. 9) Ans. State in brief, the SEBI Guidelines regarding Debenture Redemption Reserve At per SEBI Guidelines, an amount equal to 50% of the debenture issue must be transferred to DRR before the redemption begins. In other words, before redemption, at least an amount equal to 50% of the debenture issue must stand to the credit of DRR Name the head under which discount on issue of debentures appears in the Balance Sheet of "C" Company.
Discount on issue of debentures will appear under the heading Miscellaneous Expenditure. 11) What are the exceptions for creating debenture Redemption Reserve? (i) An infrastructure company, (ii) Debentures are issued for less than 18 months maturity period (iii) if debentures issued by private placement. 12) What do you mean by debentures issued as collateral security? The issue of debentures as a collateral security means the issue of debentures as an additional security against the loan in addition to principal security that may be offered.
A Ltd issued 5,000 13% debentures of Rs.100 each at par and raised a loan of Rs.80, 000 from Bank. Collaterally secured by Rs. 100,000 13% debentures. How will You show the debenture in the Balance Sheet of the Company assuming that the company has recorded the issue of Debentures as collateral security in the books.
Balance Sheet Liabilities Secured Loans Amount 13% Debenture 5,000 deb of Rs. 100 each at 500000 par Bank loan (secured by the 80000 issue of 1000 13% deb of Rs.100 each) Assets Current assets Bank a/c Amount 500000...
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