Issue of Debentures — Lesson
1) Hook — A Fun Real-Life Example
Imagine Tata Motors wants to build a new factory but doesn't have enough cash. Instead of borrowing from a bank, it issues debentures — a kind of loan certificate — to thousands of investors across India. Each investor lends money to Tata Motors and in return receives a promise of fixed interest. This way, Tata Motors raises funds without giving up ownership, and investors earn steady income. This is the magic of Issue of Debentures!
2) Core Concepts — Clear Explanation with Examples and Tables
What are Debentures?
Debentures are long-term debt instruments issued by companies to borrow money. They are like IOUs with a promise to pay interest and repay principal at maturity.
Types of Debentures Based on Issue Price:
| Type | Issue Price | Meaning |
|---|---|---|
| At Par | ₹100 (Face Value) | Issued at face value |
| At Premium | Above ₹100 | Issued above face value |
| At Discount | Below ₹100 | Issued below face value |
Accounting Entries for Issue of Debentures
Let’s say a company issues 1,000 debentures of ₹100 each.
| Scenario | Accounting Entry |
|---|---|
| Issued at Par (₹100 each) |
Bank A/c Dr. ₹1,00,000 To Debentures A/c ₹1,00,000 |
| Issued at Premium (₹110 each) |
Bank A/c Dr. ₹1,10,000 To Debentures A/c ₹1,00,000 To Securities Premium A/c ₹10,000 |
| Issued at Discount (₹95 each) |
Bank A/c Dr. ₹95,000 Discount on Issue of Debentures A/c Dr. ₹5,000 To Debentures A/c ₹1,00,000 |
Note on Discount on Issue of Debentures: It is a deferred revenue expenditure and shown on the asset side of the balance sheet under “Miscellaneous Expenditure” and written off over the years.
3) Key Formulas / Rules
Accounting Entry for Issue at Premium:
Bank A/c Dr. (Face Value + Premium)
To Debentures A/c (Face Value)
To Securities Premium A/c (Premium)
Accounting Entry for Issue at Discount:
Bank A/c Dr. (Face Value - Discount)
Discount on Issue of Debentures A/c Dr. (Discount)
To Debentures A/c (Face Value)
4) Did You Know?
In India, the Companies Act, 2013 regulates the issue of debentures. It mandates that companies must create a Debenture Redemption Reserve (DRR) to ensure funds are available to repay debentures at maturity. This protects investors and maintains financial discipline.
5) Exam Tips — Common Mistakes and Board Exam Patterns
- Common Mistake: Confusing the treatment of discount on issue of debentures as an immediate loss. Remember, it is a deferred expense and written off over years.
- Common Mistake: Forgetting to credit the Securities Premium Account when debentures are issued at premium.
- Board Exam Pattern: Questions often ask for journal entries related to issue of debentures at par, premium, or discount. Sometimes, you may be asked to prepare the balance sheet extract showing debentures.
- Tip: Always write clear journal entries with correct amounts and narrations. Practice previous year questions from CBSE Sample Papers and NCERT Exemplar.
Previous Year Question Example:
"Journalise the following transactions:
(a) Issue of 5,000 debentures of ₹100 each at a premium of ₹10 per debenture.
(b) Issue of 2,000 debentures of ₹100 each at a discount of 5%."
Issue of Debentures — Mcq
Issue of Debentures — Mnemonic
Mnemonic 1: "DEBENTURES" for Types of Debentures Issued 📜💰
Direct Issue, Existing Shareholders, Below Par, Equal Installments, Not Convertible, Tradeable, Upside Potential, Redeemable, Equity-Linked, Secured
Funny Hindi Phrase: "Dekh Ek Bandar Ek Naya Tota Udd Raha Ek Saal" 🐒🦜 (D E B E N T U R E S)
Mnemonic 2: Steps in Issue of Debentures 🔢📈
- Resolution passed by Board
- Opening of Debenture Account
- Application received
- Lotteries (if oversubscribed)
- Proceeds received
- Allotment of Debentures
- Record in Register
Mnemonic Phrase: "ROA L PAR" - Resolution, Opening, Application, Lottery, Proceeds, Allotment, Register
Mnemonic 3: Modes of Issue of Debentures 💸📊
“PRAISE” stands for:
- Public Issue
- Right Issue (to existing shareholders)
- Allotment on Private Placement
- Interest on Debentures
- Subscription
- Exchange of Shares
Hindi rhyme: "Public mein Right, Private mein Allot, Interest aur Subscription se Exchange hota hai Lot!" 🎉
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