Accounting for Debentures

What is a debenture? Types

A debenture is a document acknowledging a debt, under the company's seal, carrying a fixed rate of interest and usually repayable on a fixed date. Holders are creditors, not owners.

• Security: secured (charge on assets) / unsecured.
• Tenure: redeemable / irredeemable (perpetual).
• Convertibility: fully or partly convertible / non-convertible.
• Coupon rate: specific coupon / zero coupon (issued at a big discount).
• Registration: registered / bearer.

Shares vs debentures: shares are ownership, get dividend only from profit, have voting rights; debentures are loans, get interest even in loss, no voting rights, are repaid before shares on winding up.

Issue at par, premium and discount

Money may be received in one go or in instalments (application and allotment).

• At par: Bank Dr, To Debenture Application & Allotment; then Debenture Application & Allotment Dr, To Debentures.
• At premium: credit the premium to Securities Premium.
• At discount: debit Discount on Issue of Debentures (a loss).

Over-subscription is handled as for shares (refund or adjust).

Issue for consideration other than cash

Assets Dr, To Vendor; then Vendor Dr, To Debentures (and To Securities Premium, or Discount Dr). Number of debentures = purchase consideration ÷ issue price.

Issue with terms of redemption (six cases)

1. Par, redeem at par.
2. Discount, redeem at par.
3. Premium, redeem at par.
4. Par, redeem at premium.
5. Discount, redeem at premium.
6. Premium, redeem at premium.

When redeemable at a premium, the premium payable later is a liability now: Debenture Application & Allotment Dr, Loss on Issue of Debentures Dr, To Debentures, To Premium on Redemption of Debentures. Premium on redemption is shown under non-current liabilities along with debentures (or current if due within 12 months).

Debentures as collateral security

Collateral security is extra security for a loan. If the loan is repaid, the debentures return to the company; if not, the lender can keep them.

• First method (no entry): show a note under the loan: 'secured by issue of debentures as collateral security'.
• Second method: Debenture Suspense A/c Dr, To Debentures; shown as a deduction from debentures.

Interest on debentures

Interest is a charge on profit, paid whether or not there is profit. Tax is deducted at source (TDS).

• Debenture Interest Dr, To Debentureholders, To TDS Payable.
• Debentureholders Dr, To Bank.
• TDS Payable Dr, To Bank.
• Statement of Profit and Loss Dr, To Debenture Interest.

Interest is always on the face value, not the issue price.

Writing off discount or loss on issue

Discount or loss on issue of debentures is a capital loss. Write it off first from Securities Premium (if available), and the balance from the Statement of Profit and Loss as a finance cost, in the year the debentures are issued. Any part not written off is shown under 'Other non-current/current assets'.

Key formulas and definitions

• Loss on issue = Discount on issue + Premium on redemption
• Discount = Face value − Issue price
• Interest = Face value × Rate (not issue price)
• Debentures to vendor = Consideration ÷ Issue price
• TDS = Interest × TDS rate; Net paid = Interest − TDS
• Write-off order: Securities Premium first, then P&L

Worked examples

Common mistakes

• Calculating interest on the issue price. Use face value.
• Forgetting the liability for premium on redemption when debentures are issued.
• Recording collateral debentures as a real new debt without the suspense entry or note.
• Writing off loss from P&L while Securities Premium is still available.