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Issue of debentures
1. DEBENTURES
In corporate finance, the term is used for a
medium- to long-term debt instrument used
by large companies to borrow money.
A debenture is thus like a certificate of loan or
a loan bond evidencing the fact that the
company is liable to pay a specified amount
with interest and although the money raised
by the debentures becomes a part of the
company's capital structure.
2. DEBENTURES VS SHARES
CHARACTERISTICS DEBENTURES SHARES
Capital/Loan Part of loan of the co. Part of capital of the co.
Presentation On Liabilities side under On Liabilities side under
Secured Loan. Share Capital.
Creditor/Owner Holders are the creditors. Holders are the owners.
Participation in Debentureholders do not Shareholders participate in
Management participate in the management the management of the
of the company because they company and control the
do not have any threat to the total affairs of the company
existing control of the company.
Voting Right Do not have voting right. Have voting right.
Interest/Dividend Interest is paid at pre- Dividend on equity shares is
determined fixed rate whether paid at variable rate affected
there is any profit or not by the profits of the
company.
3. DEBENTURES VS SHARES
CHARACTERISTICS DEBENTURES SHARES
Expense/Appropriation Debenture Interest is charges Dividend is appropriation of
against the profit and the profit and not deductible
deductible as expense to to determine taxable profit
determine taxable profit of of the company.
the company.
Repayment At maturity holders get back Equity shareholders can not
their money as per the terms get back their money before
& conditions of redemption. the liquidation of the
company.
Convertibility Can be converted into shares Can not be converted into
or other debentures as per debentures.
terms of issue.
Forfeiture Can not be forfeited for non- Can t be forfeited for non-
payment of call(s) money. payment of allotment
and/or call(s) money.
4. DEBENTURES VS SHARES
CHARACTERISTICS DEBENTURES SHARES
Priority For Payment At the time of liquidation Shareholders are paid at last
debentureholders are paid- after paying
off before the shareholders. debentureholders, creditors
etc.
Surplus At Liquidation Surplus is not paid to After paid all the liabilities if
debentureholders. there is any surplus, is paid
to shareholders.
5. CLASSIFICATION OF DEBEBTURES
From security point of view
On the basis of redemption
On the basis of Negotiability
On the basis of convertibility
On the basis of priority
From coupon or interest rate point of view
6. TYPES OF DEBEBTURES
From security point of view
Secured or Mortgage debentures
Unsecured debentures
On the basis of redemption
Redeemable debentures
Non-redeemable debentures
On the basis of Negotiability
Registered debentures
Bearer debentures
On the basis of convertibility
Convertible debentures
Non-convertible debentures
On the basis of priority
First debentures
Second debentures
From coupon or interest rate point of view
Coupon rate point
Zero coupon Rate
7. TYPES OF DEBEBTURES
From security point of view
Secured or Mortgage debentures
secured by a charge on the assets of the company.
debenture holders have the right to recover their principal
amount with the unpaid amount of interest on such
debentures out of the assets mortgaged by the company.
Unsecured debentures
such debentures do not carry any security with regard to the
principal amount or unpaid interest.
8. TYPES OF DEBEBTURES
On the basis of redemption
Redeemable debentures
debentures are issued for a fixed period.
principal amount of such debentures is paid off to the
debenture holders on the expiry of such period.
such debentures can be redeemed by annual drawings or by
purchasing from the open market.
Non-redeemable debentures
debentures which are not redeemed in the life time of the
company.
such debentures are paid back only when the company goes
into liquidation.
9. TYPES OF DEBEBTURES
On the basis of Negotiability
Registered debentures
debentures that are registered with the company.
amount of such debentures is payable only to those
debenture holders whose name appears in the register of
the company.
Bearer debentures
debentures which are not recorded in a register of the
company.
such debentures are transferrable merely by delivery.
holder of these debentures is entitled to get the interest.
10. TYPES OF DEBEBTURES
On the basis of convertibility
Convertible debentures
debentures that can be converted into shares of the
company on the expiry of pre-decided period.
the term and conditions of conversion are generally
announced at the time of issue of debentures.
Non-convertible debentures
debentures that can not be converted into shares of the
company.
11. TYPES OF DEBEBTURES
On the basis of priority
First debentures
debentures are redeemed before other debentures.
Second debentures
debentures are redeemed after the redemption of first
debentures.
12. TYPES OF DEBEBTURES
From coupon rate or interest rate point of view
Coupon rate point
Usually debentures are issued with a coupon rate, that is
annual interest rate on the face value of debentures.
This rate may be fixed or floating with the market interest
rate.
Zero coupon rate
Such debentures does not carry coupon rate or specified
interest rate with itself.
These debentures are issued with substantial discount to
compensate the investor for interest.
13. DEBENTURES AS COLLATERAL SECURITY
Collateral security
security given in addition to the principal security.
It is a subsidiary or secondary security.
Issue of Debentures as Collateral security
Whenever a company takes loan from bank or any financial
institution it may issue its debentures as collateral security.
such debentures are issued completely on temporary basis and
the bankers refund the debentures whenever the loan is repaid.
When company pays the loan amount this right does not arise
and debentures will be returned back to the company.
However if the loan is not repaid and the principal security is
exhausted then the banker will have a right over such
debentures and such issue becomes permanent.
No interest is paid on the debentures issued as collateral
security because company pays interest on loan.
14. ACCOUNING TREATMENT OF
DEBENTURES AS COLLATERAL SECURITY
Alternative-1 No journal entry to be made in
the books of accounts of the company:
Entry is passed only for taking a loan.
Bank A/C Dr.
To Bank Loan A/C
A note of this fact is given on the liability side of
the balance sheet under the heading Secured
Loans and Advances.
15. ACCOUNING TREATMENT OF
DEBENTURES AS COLLATERAL SECURITY
Balance Sheet ...... Co. Ltd.
Capital & liabilities Amount Assets Amount
(Rs.) (Rs.)
Current Assets
Bank 50,00,000
Secured Loan & Advances
Bank Loan 50,00,000
(Secured by the issue of ....
debentures of Rs .... Each
issued as collateral security
16. ACCOUNING TREATMENT OF
DEBENTURES AS COLLATERAL
SECURITY
Alternative-2 Journal entry to be made in the books of
accounts of the company:
A journal entry is made on the issue of debentures as a
collateral security with the entry for taking a loan.
Debentures suspense A/c is debited because no cash is received
for such issue.
Bank A/C Dr. (With Loan Amount)
To Bank Loan A/C
Debentures Suspense A/C Dr. (With Collateral Security)
To Debentures A/C
(.....Debentures of Rs .... each issued as collateral
security to .....)
17. ACCOUNING TREATMENT OF
DEBENTURES AS COLLATERAL SECURITY
Balance Sheet ...... Co. Ltd.
Capital & liabilities Amount Assets Amount
(Rs.) (Rs.)
Debentures 30,00,000 Current Assets
(.... Debentures Bank 50,00,000
of Rs .... per debenture
issued as collateral security
Secured Loan & Advances Miscellaneous Expenditure
Bank Loan 50,00,000 Debentures Suspense A/C 30,00,000
(Secured by the issue of .... (Debentures issued as
debentures of Rs .... Each collateral security for loan as
issued as collateral security per contra)
18. INTEREST ON DEBENTURES
A coupon rate is carry with debentures such as 9%
Debentures or 12% Debentures.
It is the rate of interest per annum.
Interest is always paid on the face value of debentures.
Companies generally pay interest on its debentures
after every six months.
The TDS will be deducted on the interest as prescribed
rate on the behalf of debenture holders. (ITA 1961)
This deducted TDS will be deposited into Govt.
treasury.
At the end of the accounting year interest is transferred
to Profit & Loss Account.
19. ACCOUNTING TREATMENT OF
INTEREST ON DEBENTURES
For making Interest Due
Interest on Debentures A/C Dr.
To Debentureholders A/C
For making Payment of Interest and Deduction of (TDS)
Debentureholders A/C Dr.
To Bank /C
To TDS Payable A/C
For making Payment TDS
TDS Payable A/C Dr.
To Bank A/C
For Transferring Interest to P&L A/C
Profit & Loss A/C Dr.
To Interest on Debentures A/C