Define Full Value Debentures Finance Management

Full Value Debentures | Financial Management | Finance Help

The company usually does not require a debenture holder to pay in one lot the full value debentures. He is generally required to pay it by installments however this no way prevents a company form calling for the full amount on debentures at the time of application.

Issue of debentures for consideration other than cash

It is not necessary to issue debentures only for cash it can be issued of consideration other than cash if a company purchases some assets form vendor in such case instead of making the payment in cash it issues fully paid debentures to vendor whereby the latter accepts it. The following journal entries are required for this purpose.

1. For purchase of assets

Assets A/c

To vendor A/c

2. Debentures can be issued to vendor under one of the following conditions

(i) at par

Vendor A/c Dr.

To X% debentures A/c

(No of debentures issued X par value)

(ii) at premium

Vendor A/c

To X% debentures A/c

(No. of debenture issued x par value)

To securities premium a/c

(No. of debentures issued x premium value)

(iii) at discount

Vendor A/c

Discount on issue of debentures A/c

(Not of debentures issued X discount value)

To X% debentures A/c

(No of debentures issued x par value)

No of debentures issued = purchase price of asset / issue price of debenture

Calculation of goodwill or capital reserve

As discussed earlier when the company purchases some assets it issued fully paid debentures instead of making the payment in cash. If the amount of purchase consideration is equal to the value of net assets acquired the difference between the agreed value of the assets takeover and the agreed amount of liabilities takeover). No problem is raised but if the purchase consideration is greater than the value of the net assets acquired the difference is treated a capital loss which should be debited to goodwill entry will be:

Sundry assets A/c Dr.

Goodwill A/c (balancing figure) Dr.

To sundry liabilities A/c

To vendor A/c

Secondly if the amount of the purchase consideration is lower than the value of the net assets acquired the difference is treated as a capital profit which should be credited to capital reserve A/c instead of goodwill A//c entry will be

Sundry assets A/c Dr.

To sundry liabilities A/c

To vendor A/c

To capital reserve A/c (balancing figure)

After that entry for allotment of debentures at par or at premium or at discount will be made which has been discussed earlier.

Issue of debentures as collateral security

Meaning sometimes company issues debentures as collateral security against loan taken from a bank or other person, the term collateral security means subsidiary or secondary or additional security in addition to the primacy security if the company makes a default nith repayment of loan at proper time the lender will first of all realise its amount of loan from the principal security if the realizable value of primacy security is insufficient to clear the dues the lender has the right to invoke the benefit of collateral security whereby the debentures may either be presented for redemption or sold in the market if the lender has only surplus form sale of security after meeting the dues he is under obligation to return the same to the borrower in this connection the following important points ar to be remembered.

(i) Lender will simply be the custodian of these debentures.

(ii) No interest is payable on the debentures issued as collateral security because interest on loan is being paid

(iii) The liability of the company is for the amount of land and not for the face value of debentures issued.

Accounting treatment: there are two methods of accounting treatment for such debentures

First method: for pledging the debenture as collateral security since no immediate liability is created by the company therefore no journal entry is recorded in such situation entry is passed only for taking a loan if the loan is taken from a bank the journal entry will be as follows:

Bank A/c Dr.

To bank loan A/c

On the liabilities side of balance sheet only a note being appended below the loan account that the loan is secured by the issue of debentures as collateral security.

Second method: under this method it is necessary to record the issue of debentures as collateral security with the entry for taking a loan. In such a case the following journal entrées will be passed.

(a) On taking a loan

Bank A/c Dr.

To bank loan A/c

(b) On issuing the debentures as collateral security

Debenture suspense A/c Dr.

To X % debentures A/c

Debenture suspense account is shown on the assets side of balance sheet while the debentures account is shown on the liabilities side of the balance sheet. Alternatively debenture suspense account may be shown as deduction out of debentures account on the liabilities side of balance sheet.

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