CHAPTER
–
9
Unit 4
Issue
of
Debentures
COM
PAN
Y
ACCOUNTS
© The Institute of Chartered Accountants of India
FUNDAMENTALS OF ACCOUNTING
9.95
Learning Objectives
After studying this unit, you will be able to :
Understand the meaning and basic purpose for raising debentures by the company
Differentiate between shares and debentures of a company
Understand various types of debentures
Pass entries for issue of debentures payable in installments
Make entries for issue of debentures considering the conditions of redemption
Pass entries for issue of debentures as collateral security
Pass entries for debentures issued for consideration other than for cash
Write off discount on issue of debentures.
Calculate interest on debentures
1.
INTRODUCTION
In the earlier units of this chapter, we have studied the issue of share capital as a means of raising
funds for financing the business activities. But with increasing and ever growing needs of the
corporate expansion and growth, equity source of financing is not sufficient. Hence corporates
turn to debt financing through various means. Issuing debt instruments by offering the same for
public subscription is one of the sources of financing the business activities. Debt financing does
not only helps in reducing the cost of the capital but also helps in designing appropriate capital
structure of the company. Debenture is one of the most commonly used debt instrument issued
by the company to raise funds for the business.
2.
MEANING
The most common method of supplementing the capital available to a company is to issue
debentures which may either be simple or naked carrying no charge on assets, or mortgage
debentures carrying either a fixed or a floating charge on some or all of the assets of the
company.
A debenture is a bond issued by a company under its seal, acknowledging a debt and containing
provisions as regards repayment of the principal and interest. If a charge
*
has been created on
any or on the entire assets of the company, the nature of the charge and the assets charged are
described therein. Since the charge is not valid unless registered with the Registrar, and the
certificate registering the charge is printed on the bond. It is also customary to create a trusteeship
in favour of one or more persons in the case of mortgage debentures. The trustees of debenture
holders have all powers of a mortgage of a property and can act in whatever way they think
necessary to safeguard the interest of debenture holders.
∗
Charge is an incumbrance to meet the obligation under the Trust Deed, whereby the company agrees to mortgage
specific portion either by way of a first or second charge.
Such charge implies right of lenders to secure their payment
from such asset(s) or from the liquidator in the event of winding up or from the company when the charge becomes
void.
