Issue of Debenture

 

Debentures are a type of debt instrument that companies use to raise capital. They are an alternative to raising equity by issuing shares. Debentures are essentially a loan to the company from investors; in return, the company pays interest to the debenture holders at a fixed rate and repays the principal amount on a specified date. This lesson will explore the process, types, and accounting treatment of debenture issuance for Class 12 Commerce students.

Types of Debentures

1. Secured and Unsecured Debentures: Secured debentures are backed by the company's assets, while unsecured, or naked debentures, are not.

2. Convertible and Non-Convertible Debentures: Convertible debentures can be converted into equity shares after a certain period, whereas non-convertible ones cannot.

3. Registered and Bearer Debentures: Registered debentures are issued in the name of the holder, and their transfer requires a formal process. Bearer debentures are transferable by mere delivery.

4. Redeemable and Perpetual Debentures: Redeemable debentures are issued for a fixed term. Perpetual debentures, or irredeemable debentures, do not have a maturity date.

Process of Issuing Debentures

1. Resolution: The company's board of directors passes a resolution to issue debentures.

2. Offer Document: The company prepares an offer document detailing the issue's terms and conditions, which is filed with the relevant regulatory authority.

3. Subscription: Investors subscribe to the debentures by applying and making payment as per the terms of the offer.

4. Allotment: After the subscription period ends, debentures are allotted to the subscribers.

5. Listing: If the debentures are to be traded publicly, they are listed on a stock exchange.

Accounting for Issue of Debentures

The accounting treatment of the issue of debentures involves several entries:

At Par Issue

When debentures are issued at their face value:

• Cash Account (Dr.)
• Debentures Account (Cr.)

At Premium Issue

When debentures are issued at a price higher than their face value:

• Cash Account (Dr.)
• Securities Premium Reserve (Cr.) [for the premium amount]
• Debentures Account (Cr.)

At Discount Issue

When debentures are issued at a price lower than their face value:

• Cash Account (Dr.)
• Discount on Issue of Debentures Account (Dr.) [for the discount amount]
• Debentures Account (Cr.)

Interest on Debentures

Interest paid to debenture holders is treated as an expense:

• Interest on Debentures Account (Dr.)
• Cash/Bank Account (Cr.)

Conclusion

Debentures offer a flexible financing option for companies, allowing them to raise capital without diluting ownership. For investors, debentures provide a fixed income with varying degrees of risk and return, depending on the type of debenture. Understanding the intricacies of debenture issuance is crucial for commerce students, as it combines elements of corporate finance, accounting, and securities law, providing a comprehensive view of corporate fundraising activities.

Exercises

1. Define debentures and explain their significance in corporate finance.
2. Compare and contrast secured and unsecured debentures.
3. What are the accounting entries involved in the issue of debentures at par, at a premium, and at a discount?
4. Explain the concept of a convertible debenture and its advantages to both the issuer and the investor.
5. Prepare a journal entry for the issue of 1,000 10% debentures of $100 each at a premium of 10%.

By engaging with these concepts and exercises, students will gain a solid understanding of the role and implications of debentures in corporate financing.