CHAPTER 9
ACCOUNTING FOR ISSUE OF DEENTURES
ONE WORD TO ONE ENTENCE QUESTIONS
Q.1. What is a
debenture?
Ans. A
debenture is a type of long-term debt instrument issued by a company or a
government entity to raise funds. It is a written acknowledgement of a debt,
which provides a fixed rate of interest and a specified period for repayment.
Debentures are typically unsecured, meaning they are not backed by specific
assets of the company. They are considered as loan instruments and represent a
form of borrowing for the issuing entity. Debenture holders are creditors of
the company and have a priority claim on the company's assets in the event of
liquidation.
Q.2. What is
meant by simple or naked debentures?
Ans. Simple
or naked debentures refer to debentures that are issued without any specific
charge or security on the assets of the company. These debentures are unsecured
and do not have any collateral backing them. In case of default or non-payment
by the company, the debenture holders have a claim on the general assets of the
company along with other unsecured creditors. Simple debentures carry a higher
risk for the debenture holders compared to secured debentures, as there is no
specific asset or security pledged to protect their interests.
Q.3. What is
meant by redeemable debenture?
Ans. redeemable
debentures are the type of debentures that come with a specific maturity date
on which the issuing company is obligated to repay the principal amount to the
debenture holders. These debentures are issued for a fixed period and are
redeemed after the expiry of that period.
Q.4. What are
deep discount debentures?
Ans. deep
discount debentures are a type of debentures that are issued at a significant
discount to their face value. These debentures are sold at a price lower than
their redemption value and do not carry any interest or coupon payments. The
debenture holders receive the full face value of the debentures upon their
maturity.
Q.5. What is
meant by convertible debenture?
Ans. convertible
debentures are a type of debentures that can be converted into equity shares of
the issuing company after a certain period of time. This means that the
debenture holders have the option to convert their debentures into shares at a
predetermined conversion ratio. It provides the debenture holders with the
opportunity to participate in the company's ownership and potential growth by
converting their debt investment into equity.
Q.6. What is
bearer debenture?
Ans. bearer
debentures are a type of debentures that are not registered in the name of any
specific individual or entity. Instead, they are issued in a negotiable form
and can be transferred by mere delivery. The holder of a bearer debenture is
considered the rightful owner and is entitled to receive the interest payments
and principal amount upon maturity. Bearer debentures provide anonymity and
ease of transferability, as they can be bought and sold without the need for
formal registration or endorsement. However, they also pose a higher risk of
loss or theft since they are not linked to a specific owner.
Q.7. What are
registered debentures?
Ans. registered
debentures are a type of debentures that are issued in the name of a specific
individual or entity. The ownership of registered debentures is recorded in the
company's register of debenture holders. The registered debenture holders are
entitled to receive interest payments and principal amount upon maturity.
Registered debentures provide a clear record of ownership and facilitate
communication between the company and the debenture holders. They offer a
higher level of security compared to bearer debentures, as the ownership is
tied to a specific entity and can be easily verified.
Q.8. Mention
one point of difference between share and debenture?
Ans. a key
point of difference between shares and debentures is that shares represent
ownership in a company and provide the holder with voting rights and potential
dividends, while debentures represent debt owed by a company and provide the
holder with a fixed interest payment and repayment of principal amount.
Q.9. Give any
two characteristic of debentures?
Ans. two characteristics of debentures are:
Debt instrument: Debentures represent a form of long-term debt
issued by a company to raise funds from investors. Holders of debentures are
creditors of the company and have a claim on its assets
Fixed interest payment: Debentures typically offer a fixed
interest rate, and the company is obligated to make regular interest payments
to the debenture holders. The interest payment is usually predetermined and
agreed upon at the time of issuance.
Q.10. what is
partly convertible debentures?
Ans. partly
convertible debentures are a type of debentures where a portion of the
debenture is convertible into equity shares of the company, while the remaining
portion remains as a non-convertible debenture. This means that the holder of
the partly convertible debenture has the option to convert a specific portion
of the debenture into equity shares at a predetermined ratio, while the
remaining portion continues to earn a fixed interest rate and is not eligible
for conversion.
Q.11. What is
full convertible debentures?
Ans. full
convertible debentures are a type of debentures where the entire value of the
debenture is convertible into equity shares of the company. This means that the
holder of the full convertible debenture has the option to convert the entire
debenture into equity shares at a predetermined ratio. Unlike partly
convertible debentures, there is no portion of the debenture that remains as a
non-convertible component.
Q.12. What is
meant by issue of debenture at par?
Ans. issuing
debentures at par means offering them at their face value, which is equal to
the nominal value or the principal amount of the debentures. It implies that
the debentures are issued without any premium or discount. The subscribers or
purchasers of the debentures pay the exact face value per debenture to the
company.
Q.13. What is
meant by issue of debenture at discount?
Ans. issuing
debentures at a discount means offering them at a price lower than their face
value or nominal value. The debentures are issued at a discounted price, and
the subscribers or purchasers pay an amount less than the face value per
debenture. The discount is usually expressed as a percentage of the face value.
The difference between the face value and the discounted price represents the
discount, which is treated as an expense for the company.
Q.14. What is
meant by issue of debenture at premium?
Ans. issuing
debentures at a premium means offering them at a price higher than their face
value or nominal value. The debentures are issued at a premium, and the
subscribers or purchasers pay an amount greater than the face value per
debenture. The premium is usually expressed as a percentage of the face value.
The difference between the premium price and the face value represents the
premium, which is treated as a capital surplus for the company.
Q.15. what is
meant by ‘’Debentures issued at par but redeemadle at premium?
Ans. when
debentures are issued at par but are redeemable at a premium, it means that the
debentures are initially issued at their face value or nominal value, but upon their
redemption or repayment, the company will pay an amount greater than the face
value. The premium payable on redemption is an additional amount that the
debenture holders will receive as a return on their investment. The premium is
typically stated as a percentage of the face value and is paid by the company
to the debenture holders as an incentive for holding the debentures until
maturity.
Q.16. What is
meant by ‘’Premium on redemption of debentures?
Ans. "Premium
on redemption of debentures" refers to the additional amount paid by a
company to the debenture holders upon the redemption or repayment of the
debentures. It is an extra payment made above the face value or nominal value
of the debentures. The premium on redemption is usually stated as a percentage
of the face value and serves as a form of compensation or incentive for the
debenture holders for holding the debentures until maturity. It represents an
additional return on investment for the debenture holders when the debentures
are eventually redeemed by the company.
Q.17. What is
meant by’’ Debentures issued at a discount and redeemable at a premium?
Ans. "Debentures
issued at a discount and redeemable at a premium" refers to a situation
where a company issues debentures to investors at a price lower than their face
value or nominal value, known as a discount, and upon redemption or repayment
of the debentures, the company pays the investors an amount higher than the
face value, known as a premium. This means that investors initially purchase the
debentures at a discounted price, but they receive a higher amount than the
face value when the debentures are eventually redeemed by the company. The
difference between the discount and the premium represents the additional
return or compensation provided to the investors for holding the debentures
until maturity.
Q.18. What is
meant by ‘’ Issue of debentures for consideration other than cash?
Ans. "Issue
of debentures for consideration other than cash" refers to a situation
where a company issues debentures to investors in exchange for assets or
services other than cash. Instead of receiving cash payment, the company
accepts non-cash assets or services as consideration for the debentures. This
can include the transfer of tangible assets, such as land or machinery, or the
provision of services, such as advertising or consulting, in exchange for the
debentures. The value of the non-cash consideration is determined based on the
fair market value of the assets or services exchanged.
Q.19. Name the
head under which the ‘’debentures issued for consideration other than cash’’
appesr in the balance sheet?
Ans. In the
balance sheet, debentures issued for consideration other than cash are
generally shown under the head of "Non-Cash Consideration" or
"Debentures issued for Non-Cash Consideration." This category is used
to highlight the specific debentures that were issued in exchange for assets or
services instead of cash.
Q.20. Name the
type of debentures which are payable only to the person who is holding the debentures?
Ans. The
type of debentures that are payable only to the person who is holding the
debentures are known as "Bearer Debentures." These debentures are not
registered in the name of any specific individual or entity and are
transferable by mere delivery. The interest and principal payments are made to
whoever physically holds the debenture at the time of payment.
Q.21. What is
the nature of interest on debentures?
Ans. The
nature of interest on debentures is fixed. It is predetermined and specified in
the terms and conditions of the debenture issuance. The interest rate remains
constant throughout the tenure of the debenture, and the interest payments are
made periodically as per the agreed-upon terms.
Q.22. Is the
interest on debentures calculated at the fixed percentage on the issue price?
Ans. the
interest on debentures is typically calculated at a fixed percentage on the
issue price. The rate of interest is determined at the time of debenture
issuance and remains constant for the duration of the debenture. The interest
payments are calculated based on this fixed percentage applied to the face
value or issue price of the debenture.
Q.23. Under
what heading debenture will be shown in the balance sheet?
Ans. Debentures
are typically shown under the "Long-term Borrowings" or
"Non-current Liabilities" section of the balance sheet.
Q.24. Mention
the rate of interest payable on debentures issued as collateral security?
Ans. The
rate of interest payable on debentures issued as collateral security varies and
depends on the specific terms and conditions agreed upon by the parties
involved. There is no fixed or standardized rate for such debentures.
Q.25. Name the
head under which the ‘’interest accrued and due debentures’’ appear in the
balance sheet of a company?
Ans. The
"Interest Accrued and Due on Debentures" typically appears under the
current liabilities section in the balance sheet of a company.
Q.26. What is
debenture suspense account?
Ans. Debenture
suspense account is a temporary account used to record the transactions related
to debentures when there is uncertainty or discrepancy regarding their
treatment. It helps in maintaining the accuracy of the company's books until
the issue is resolved and the proper accounting entries can be made.
Q.27. Under
what heading debenture suspense account will appear in the balance sheet?
Ans. Debenture
suspense account does not appear as a separate heading in the balance sheet. It
is a temporary account used for internal purposes to track and resolve
discrepancies related to debentures. Once the issues are resolved, the
necessary adjustments are made in the financial statements, and the balances
are allocated to their appropriate headings such as "Long-term
Liabilities" or "Reserves and Surplus" in the balance sheet.
Q.28. How loss
on issue of debentures account will be treated?
Ans. Loss
on issue of debentures account is treated as an expense in the financial
statements. It is typically shown as a debit entry in the income statement or
profit and loss account. The loss is incurred when the issue price of
debentures is lower than their face value or when the expenses related to the
debenture issue exceed the proceeds received. Treating it as an expense helps
to reflect the true cost of raising funds through debenture issuance and
reduces the reported profits of the company.
VERY SHORT ANSWER TYPE QUESTIONS
Q.1. Write
types of debentures?
Ans. There are several types of debentures that can be issued by a company.
Here are some common types:
Secured Debentures: These debentures are backed by specific assets
of the company as security. In case of default, the debenture holders have the
right to claim against the specified assets.
Unsecured Debentures: Also known as naked debentures, these
debentures are not backed by any specific assets. They are issued solely based
on the creditworthiness of the company. In case of default, the debenture
holders have a claim on the general assets of the company.
Redeemable Debentures: These debentures have a specified maturity date
at which they are redeemed by the company. The company is obligated to repay
the principal amount to the debenture holders on or before the maturity date.
Irredeemable Debentures: Also known as perpetual debentures, these
debentures do not have a specified maturity date. They are not repayable by the
company unless certain specific events occur, such as liquidation or winding up
of the company.
Convertible Debentures: These debentures give the debenture holders the
option to convert their debentures into equity shares of the company after a
specified period. This provides the debenture holders with an opportunity to
participate in the company's ownership and potential growth.
Non-Convertible Debentures: These debentures cannot be converted into
equity shares. They remain as debt instruments until their maturity or
redemption.
Callable Debentures: These debentures can be called back or redeemed
by the company before their maturity date, usually at the discretion of the
company. This allows the company to repay the debentures early if desired.
Puttable Debentures: These debentures give the debenture holders the
right to sell back the debentures to the company before their maturity date.
This provides an exit option to the debenture holders if they wish to sell
their investments back to the company.
It's
important to note that the specific types of debentures issued by a company can
vary based on the company's needs and the terms and conditions of the debenture
issue.
Q.2. Write the
types of debentures from conversion point of view?
Ans. From a conversion point of view, debentures can be classified into the
following types:
Convertible Debentures: These are debentures that can be
converted into equity shares of the issuing company after a specific period of
time or as per predetermined terms and conditions.
Non-convertible Debentures: These debentures cannot be converted into
equity shares. They are repaid to the debenture holders along with the interest
on the maturity date.
Fully Convertible Debentures: These debentures can be fully converted into
equity shares of the issuing company within a specified period of time or as
per predetermined terms.
Partly Convertible Debentures: Part of these debentures is converted into
equity shares within a specified period of time or as per predetermined terms,
while the remaining portion is redeemed to the debenture holders.
Optionally Convertible Debentures: The debenture holders have the option to
convert these debentures into equity shares within a specified period of time
or as per predetermined terms. If they choose not to convert, the debentures
are redeemed at maturity.
Debentures with Detachable Warrants: These debentures are issued along with
detachable warrants, which give the debenture holders the right to subscribe to
additional equity shares at a predetermined price within a specified period of
time.
It's
important to note that the specific terms and conditions of conversion may vary
for each type of debenture, as determined by the issuing company.
Q.3. Write
types of debentures from redemption point of view?
Ans. From a redemption point of view, debentures can be classified into the
following types:
Redeemable Debentures: These are debentures that have a specific
maturity date mentioned in the debenture agreement. The issuing company is
obligated to repay the principal amount to the debenture holders on or before
the maturity date.
Irredeemable Debentures (Perpetual
Debentures): These
debentures do not have a fixed maturity date. The issuing company does not have
an obligation to repay the principal amount to the debenture holders. However,
the company will make regular interest payments to the debenture holders
indefinitely.
Callable Debentures: These debentures can be redeemed by the issuing
company before their maturity date at a specified call price. The company
usually includes a provision allowing early redemption when interest rates fall
or when there is a favorable condition for refinancing the debt.
Puttable Debentures: These debentures give the debenture holders the
right to request the company to redeem their debentures before the maturity
date. This provides the debenture holders with an option to exit their investment
if they choose to do so
It's
important to note that the terms and conditions of redemption may vary for each
type of debenture, as specified in the debenture agreement.
Q.4. What do
you mean by secured debentures?
Ans. Secured
debentures refer to a type of debentures that are backed by specific assets or
properties of the issuing company. These assets act as collateral or security
for the debenture holders in case the company defaults on the repayment of the
principal amount or interest payments.
When a
company issues secured debentures, it pledges certain assets, such as land,
buildings, machinery, or other valuable properties, as security for the
debenture holders. This provides an additional layer of protection for the
debenture holders in case of default by the company. In the event of default,
the debenture holders have the right to claim the specified assets to recover
their investment.
Secured
debentures are considered less risky for investors compared to unsecured
debentures since they have a higher priority claim on the company's assets in
case of default. However, it's important to note that the security provided may
vary in terms of value and quality, and the recovery of the investment depends
on the value and marketability of the pledged assets.
The terms
and conditions related to security, repayment, interest, and other provisions
are outlined in the debenture agreement, which provides detailed information
about the rights and obligations of the company and the debenture holders.
Q.5. What is
meant by convertible debentures?
Ans. Convertible
debentures are a type of debt instrument issued by a company that can be
converted into equity shares of the same company at a predetermined conversion
ratio or price. In simple terms, convertible debentures provide the debenture
holders with the option to convert their debt holdings into equity ownership in
the future.
The
conversion feature of convertible debentures gives the debenture holders the
potential to benefit from the future growth and profitability of the company.
If the debenture holders choose to convert their debentures into equity shares,
they become shareholders of the company and are entitled to the rights and
privileges associated with equity ownership, such as voting rights and dividend
payments.
The
conversion ratio or price is determined at the time of issuing the debentures
and is mentioned in the terms and conditions of the debenture agreement. It
specifies the number of equity shares that the debenture holder will receive in
exchange for each debenture converted. The conversion can be exercised during a
specified period or upon meeting certain conditions as per the terms of the
debenture agreement.
Convertible
debentures offer flexibility to investors as they have the option to choose
between holding the debentures as debt or converting them into equity shares
based on their assessment of the company's performance and prospects. It
provides an opportunity for investors to participate in the potential upside of
the company's growth while initially receiving fixed interest payments as
debenture holders.
It's
important to note that the conversion of debentures into equity shares is
subject to certain terms and conditions, including conversion timelines,
conversion price adjustments, and other provisions as mentioned in the
debenture agreement.
Q.6. Differentiate
between a share and ‘Fully convertible debentures?
Ans. Shares
and fully convertible debentures are both financial instruments used by
companies to raise capital, but they have some key differences. Here's a
comparison between shares and fully convertible debentures:
Ownership
and Voting Rights:
Shares: Shares represent ownership in a company. When
an investor holds shares, they become a partial owner of the company and are
entitled to voting rights. Shareholders can participate in the company's
decision-making process by voting on important matters during shareholder
meetings.
Fully Convertible Debentures: Fully convertible debentures, on the other
hand, do not provide ownership rights or voting rights in the company.
Debenture holders have a debt-like position and do not participate in the
decision-making process.
Conversion:
Shares: Shares do not have a conversion feature since
they already represent ownership in the company.
Fully Convertible Debentures: Fully convertible debentures are issued with a
conversion feature, allowing debenture holders to convert their debentures into
equity shares of the company at a predetermined conversion ratio or price. This
conversion privilege gives debenture holders the option to become shareholders
in the future.
Income and
Returns:
Shares: Shareholders receive returns on their
investment through dividends, which are a portion of the company's profits
distributed to shareholders. Additionally, shareholders may benefit from
capital appreciation if the value of the shares increases.
Fully Convertible Debentures: Debenture holders receive interest
payments at a fixed rate for the duration of the debenture. Upon conversion,
they become equity shareholders and can then participate in potential dividends
and capital appreciation.
Risk and
Priority:
Shares: Shareholders bear the risk of the company's
performance and are exposed to both potential gains and losses. In the event of
liquidation or bankruptcy, shareholders have a residual claim on the company's
assets after all debts and obligations are paid.
Fully Convertible Debentures: Debenture holders have a lower
risk compared to shareholders since they have a priority claim on the company's
assets. In the event of liquidation or bankruptcy, debenture holders are
generally repaid before shareholders.
It's
important to note that these characteristics can vary depending on the specific
terms and conditions outlined in the share or debenture agreement.
Q.7.
Differentiate between shareholder and debentureholder?
Ans. Shareholder
and debenture holder are two distinct entities in a company. Here's a
comparison between a shareholder and a debenture holder:
Ownership:
Shareholder: A shareholder is an individual or entity that
owns shares of a company. By holding shares, they become partial owners of the
company and have an ownership stake in its assets, profits, and decision-making
process.
Debenture Holder: A debenture holder, on the other hand, is a
lender or creditor to the company. They hold debentures, which are a type of
debt instrument issued by the company. Debenture holders do not have ownership
rights in the company.
Rights and
Participation:
Shareholder: Shareholders have voting rights and can participate
in the company's decision-making process. They have the right to vote on
important matters during shareholder meetings, such as electing directors,
approving major transactions, and adopting corporate policies.
Debenture Holder: Debenture holders do not have voting rights and
typically do not participate in the company's decision-making process. Their
relationship with the company is primarily contractual, based on the terms and
conditions of the debenture agreement.
Returns and
Income:
Shareholder: Shareholders can earn returns on
their investment in two ways. Firstly, they may receive dividends, which are a
portion of the company's profits distributed to shareholders. Secondly, they
can benefit from capital appreciation if the value of the shares increases.
Debenture Holder: Debenture holders earn returns through periodic
interest payments, known as coupon payments, at a fixed rate specified in the
debenture agreement. Unlike shareholders, they do not participate in dividends
or capital appreciation unless the debentures are convertible into shares.
Risk and
Priority:
Shareholder: Shareholders bear the risk of the company's
performance and are exposed to both potential gains and losses. In the event of
liquidation or bankruptcy, shareholders have a residual claim on the company's
assets after all debts and obligations are paid.
Debenture Holder: Debenture holders have a creditor's position
and are lenders to the company. They have a priority claim on the company's
assets, meaning they have a higher likelihood of repayment in the event of
liquidation or bankruptcy compared to shareholders.
It's
important to note that shareholders and debenture holders have different roles
and rights within a company. Shareholders have an ownership interest and
participate in the company's decision-making, while debenture holders are
creditors and have a contractual relationship with the company based on the
terms of the debenture agreement.
Q.8. Write
feature of debenture?
Ans. The features of debentures, which are a type of debt instrument issued by
a company, include the following:
Fixed Interest Payment: Debentures offer a fixed rate of interest,
which is predetermined and specified in the debenture agreement. Debenture
holders receive regular interest payments at the specified rate for the
duration of the debenture.
Creditor Status: Debenture holders are considered creditors of
the company rather than owners. They have a contractual relationship with the
company based on the terms of the debenture agreement and have a priority claim
on the company's assets in the event of liquidation or bankruptcy.
Secured or Unsecured: Debentures can be secured or unsecured. Secured
debentures are backed by specific assets of the company, providing an
additional layer of security for debenture holders. In contrast, unsecured
debentures are not backed by specific assets and rely solely on the creditworthiness
of the company.
Redemption Date: Debentures have a specified maturity or
redemption date, which is the date when the principal amount of the debenture
becomes due for repayment by the company. Debenture holders have the
expectation that the company will repay the principal amount on or before the
maturity date.
Convertibility: Some debentures may have a provision for
conversion into equity shares of the company at a predetermined conversion
ratio. Convertible debentures give debenture holders the option to convert
their debentures into shares, allowing them to participate in the company's
ownership and potential capital appreciation.
Transferability: Debentures are generally freely transferable,
allowing debenture holders to sell or transfer their debentures to other
investors. The transferability may be subject to certain restrictions outlined
in the debenture agreement or applicable laws.
Limited Voting Rights: Debenture holders typically do not
have voting rights in the company's decision-making process. Their relationship
with the company is primarily contractual, focusing on the repayment of
principal and interest as per the terms of the debenture agreement.
Diverse Types: Debentures can come in various types, such as
simple/naked debentures, convertible debentures, redeemable debentures,
perpetual debentures, secured debentures, unsecured debentures, etc. Each type
has its own specific features and characteristics.
It's
important to note that the features of debentures can vary depending on the
specific terms and conditions outlined in the debenture agreement. Investors
considering debentures should carefully review the terms of the debenture
offering before making any investment decisions.
Q.9. Write
difference between debentures and debenture stock?
Ans. The key differences between
debentures and debenture stock are as follows:
Nature of Instrument: Debentures are individual debt instruments
issued by a company, while debenture stock represents a collective or pooled
form of debt capital. Debentures are issued in specific denominations and carry
unique identification numbers, whereas debenture stock is issued in bulk as a
single security with a consolidated face value.
Transferability: Debentures are usually freely transferable,
allowing holders to buy or sell them in the open market. On the other hand,
debenture stock is transferable in the form of share certificates, similar to
company shares. Debenture stock can be bought and sold on the stock exchange.
Dividends and Voting Rights: Debenture holders are entitled to receive fixed
interest payments, typically at a specified rate, on their investment. They do
not have any voting rights in the company. In contrast, debenture stockholders
may receive dividends if the company declares them, and they may have voting
rights in the company's general meetings.
Redemption: Debentures have a specific maturity or redemption
date when the principal amount becomes due for repayment by the company.
Debenture stock, however, does not have a fixed maturity date. Instead, it may
be redeemable by the company at its discretion or may have an indefinite term.
Repayment Priority: In the event of liquidation or bankruptcy of
the company, debenture holders have a higher priority over debenture
stockholders in the repayment of their principal and interest. Debenture
holders are considered secured creditors and have a claim on the company's
assets before the debenture stockholders.
Denomination: Debentures are typically issued in specific
denominations, reflecting the principal amount invested by individual debenture
holders. Debenture stock, on the other hand, does not have individual
denominations as it represents a consolidated pool of debt capital.
Registration: Debentures are usually registered in the names
of individual debenture holders, and they may receive interest payments through
direct bank transfers or checks. Debenture stock, being a collective security,
is registered in the name of a nominee or a trust and interest payments are
made to the registered holder of the debenture stock.
It's
important to note that the specific terms and features of debentures and
debenture stock can vary depending on the issuing company and the terms of the
debenture or debenture stock offering. Investors should carefully review the
terms and conditions before investing in either instrument.
Q.9. Write
difference between debentures and debenture stock?
Ans. The key differences between debentures and debenture stock are as
follows:
Nature of Instrument: Debentures are individual debt instruments
issued by a company, while debenture stock represents a collective or pooled
form of debt capital. Debentures are issued in specific denominations and carry
unique identification numbers, whereas debenture stock is issued in bulk as a
single security with a consolidated face value.
Transferability: Debentures are usually freely transferable,
allowing holders to buy or sell them in the open market. On the other hand,
debenture stock is transferable in the form of share certificates, similar to
company shares. Debenture stock can be bought and sold on the stock exchange.
Dividends and Voting Rights: Debenture holders are entitled to receive fixed
interest payments, typically at a specified rate, on their investment. They do
not have any voting rights in the company. In contrast, debenture stockholders
may receive dividends if the company declares them, and they may have voting
rights in the company's general meetings.
Redemption: Debentures have a specific maturity or redemption
date when the principal amount becomes due for repayment by the company.
Debenture stock, however, does not have a fixed maturity date. Instead, it may
be redeemable by the company at its discretion or may have an indefinite term.
Repayment Priority: In the event of liquidation or bankruptcy of
the company, debenture holders have a higher priority over debenture
stockholders in the repayment of their principal and interest. Debenture
holders are considered secured creditors and have a claim on the company's
assets before the debenture stockholders.
Denomination: Debentures are typically issued in specific
denominations, reflecting the principal amount invested by individual debenture
holders. Debenture stock, on the other hand, does not have individual
denominations as it represents a consolidated pool of debt capital.
Registration: Debentures are usually registered
in the names of individual debenture holders, and they may receive interest
payments through direct bank transfers or checks. Debenture stock, being a
collective security, is registered in the name of a nominee or a trust and
interest payments are made to the registered holder of the debenture stock.
It's
important to note that the specific terms and features of debentures and
debenture stock can vary depending on the issuing company and the terms of the
debenture or debenture stock offering. Investors should carefully review the
terms and conditions before investing in either instrument.
Q.10. What do
you mean by debentures issued at par?
Ans. Debentures
issued at par refers to the situation when the issue price of the debentures is
equal to their nominal or face value. In other words, when debentures are
issued at par, the company sells them to investors at their exact face value
without any premium or discount.
For
example, if a company issues debentures with a face value of $1,000 each and
offers them to investors at $1,000 per debenture, it means the debentures are
issued at par. In this case, the investors pay the full face value of the
debenture to the company, and upon maturity or redemption, they will receive
the same amount back.
Issuing
debentures at par is a common practice, particularly when the company wants to
raise funds without requiring investors to pay any additional premium or
discount. It simplifies the pricing and ensures that the investors receive the
exact amount of principal stated on the debentures.
However,
it's important to note that debentures can also be issued at a premium or at a
discount, depending on various factors such as market conditions, interest
rates, creditworthiness of the company, and investor demand.
Q.11. What do
you mean by debentures issued at premium?
Ans. Debentures
issued at a premium refers to the situation when the issue price of the
debentures is higher than their nominal or face value. In other words,
investors purchasing these debentures will pay an amount greater than the face
value of the debentures.
For
example, if a company issues debentures with a face value of $1,000 each but
offers them to investors at $1,050 per debenture, it means the debentures are
issued at a premium of $50. In this case, investors pay a higher price upfront
to acquire the debentures, and upon maturity or redemption, they will receive
the face value of the debentures.
The premium
on debentures is typically justified when the issuing company is considered
financially strong or has a good credit rating. Investors are willing to pay a
premium to obtain the debentures because they believe the company is less likely
to default on interest payments or the repayment of principal.
The premium
amount received by the company is often transferred to a securities premium
account, which can be utilized for specific purposes as per the applicable regulations
and company's policies.
Issuing
debentures at a premium allows the company to raise additional funds and
potentially lower the effective interest rate for the company in the long run,
as the interest payments remain fixed based on the face value of the
debentures.
Q.12. What do
you mean by debentures issued at discount?
Ans. Debentures
issued at a discount refers to the situation when the issue price of the
debentures is lower than their nominal or face value. In other words, investors
purchasing these debentures will pay an amount less than the face value of the
debentures.
For
example, if a company issues debentures with a face value of $1,000 each but
offers them to investors at $950 per debenture, it means the debentures are
issued at a discount of $50. In this case, investors pay a lower price upfront
to acquire the debentures, and upon maturity or redemption, they will still
receive the full face value of the debentures.
The
discount on debentures is typically justified when the issuing company is in
need of funds and wants to incentivize investors to subscribe to the
debentures. The discount serves as a way to compensate investors for taking on
the risk associated with the debentures.
The
discount amount is usually treated as an expense for the company and is
amortized over the tenure of the debentures. The discount is gradually reduced
and charged to the profit and loss account over the period, which increases the
effective interest cost for the company.
Issuing
debentures at a discount can make the debentures more attractive to investors,
as they can purchase them at a lower price and potentially benefit from capital
appreciation when the debentures are redeemed at their face value.
Q.13. Give any
two difference between a shareholder and a debentureholder?
Ans. Ownership and
Rights: A shareholder is an owner of
the company, holding equity shares, which represent ownership in the company.
As a shareholder, they have voting rights, the right to receive dividends, and
the right to participate in the company's profits. On the other hand, a
debentureholder is a creditor of the company, holding debentures that represent
a loan to the company. They have the right to receive interest on the
debentures and repayment of the principal amount at maturity, but they do not
have ownership rights or voting rights in the company.
Risk and Priority: Shareholders bear the risk of the company's
performance and are exposed to both the potential gains and losses of the
company. Their returns are dependent on the profitability and success of the
company. Debentureholders, on the other hand, have a more secure position as
creditors. They have a priority claim on the company's assets and income over
shareholders in case of liquidation or bankruptcy. Debentureholders are
entitled to repayment of their principal amount and interest before shareholders
receive any distributions.
Overall,
shareholders have an equity stake in the company and participate in its
ownership and profits, while debentureholders have a debt investment and
receive fixed interest payments with priority in repayment.
Q.14. Give any
three differences between share and debenture?
Ans. Ownership and
Rights: Shares represent ownership in a company, and shareholders
are considered the owners of the company. They have voting rights and can
participate in the decision-making process of the company. On the other hand,
debentures represent a loan or debt taken by the company, and debentureholders
are creditors of the company. They do not have ownership rights or voting
rights but have the right to receive fixed interest payments and repayment of
the principal amount.
Risk and Returns: Shareholders bear the risk and reward of the
company's performance. They have the potential to earn dividends and capital
appreciation if the company performs well. However, they also face the risk of
losing their investment if the company performs poorly. Debentureholders, on
the other hand, have a fixed interest rate specified in the debenture
agreement. They receive regular interest payments regardless of the company's profitability.
Their returns are relatively fixed and lower than the potential returns of
shares.
Priority in Liquidation: In the event of liquidation or bankruptcy of a
company, shareholders have a residual claim on the company's assets. They are
entitled to receive their share of the remaining assets after all other
obligations, including debenture repayments, are fulfilled. Debentureholders,
being creditors, have priority in repayment. They are entitled to receive
repayment of the principal amount and any outstanding interest before shareholders
receive any distributions.
In summary,
shares represent ownership in a company with potential returns and risks, while
debentures represent debt with fixed interest payments and priority in
repayment. Shareholders have ownership rights and potential for higher returns
but face more risk, while debentureholders have creditor rights and receive
fixed returns with lower risk.
Q.15. Give any
four differences between a share and a debenture?
Ans. Ownership vs.
Creditorship: Shares represent
ownership in a company, making shareholders owners of the company. On the other
hand, debentures represent debt or loan taken by the company, making
debentureholders creditors of the company.
Voting Rights: Shareholders have voting rights and can
participate in the decision-making process of the company by voting on
important matters such as the appointment of directors or major corporate
changes. Debentureholders, however, do not have voting rights and do not
participate in the decision-making process.
Returns: Shareholders have the potential to earn returns
in the form of dividends and capital appreciation. Their returns depend on the
profitability and performance of the company. Debentureholders receive fixed
interest payments at a predetermined rate specified in the debenture agreement.
Their returns are fixed and do not depend on the company's profitability.
Risk and Priority: Shareholders bear the risk of loss if the
company performs poorly or faces financial difficulties. They have a residual
claim on the company's assets, meaning they are entitled to a share of the
remaining assets after all other obligations are fulfilled. Debentureholders,
being creditors, have priority in repayment. In the event of liquidation or
bankruptcy, they are paid before shareholders and have a higher chance of
recovering their investment.
In summary,
shares represent ownership with voting rights and potential returns tied to the
company's performance, while debentures represent debt with fixed interest
payments and priority in repayment. Shareholders have ownership rights,
potential higher returns, and bear more risk, while debentureholders have
creditor rights, fixed returns, and lower risk.
Q.16. Give any
four differences between a shareholder and debentureholder?
Ans. Ownership vs.
Creditorship: Shareholders are owners
of the company as they hold shares that represent ownership stakes in the
company. Debentureholders, on the other hand, are creditors of the company as
they have lent money to the company by holding debentures.
Rights and Control: Shareholders have voting rights and can
participate in the decision-making process of the company. They can vote on
matters such as the appointment of directors, major company decisions, and
changes in the company's structure. Debentureholders, however, do not have
voting rights and do not participate in the company's decision-making process.
Returns and Risk: Shareholders have the potential to earn returns
on their investment in the form of dividends and capital appreciation. Their
returns are linked to the company's profitability and success. Debentureholders
receive fixed interest payments as agreed upon in the debenture terms. Their
returns are predetermined and do not depend on the company's profitability.
Shareholders bear the risk of the company's performance, while debentureholders
have a more secure claim on their interest payments.
Priority in Claims: In the event of liquidation or bankruptcy of
the company, shareholders are the last to be paid. They have a residual claim
on the company's assets, meaning they receive payment after all other
obligations are fulfilled, including those of debentureholders.
Debentureholders, being creditors, have priority in the repayment of their principal
amount and interest payments. They are more likely to receive their dues before
shareholders.
In summary,
shareholders are owners with voting rights and potential returns tied to the
company's performance, while debentureholders are creditors with fixed returns
and priority in repayment. Shareholders have ownership control, potential
higher returns, and bear more risk, while debentureholders have creditor
rights, fixed returns, and lower risk.
Q.17. Explain
briefly issues of debenture at par and pass necessary journal entries taking
imaginary example?
Ans. Issuing
debentures at par means that the debentures are issued at their face value or
the nominal value mentioned on the debenture certificate. In other words, the
debentures are issued at the same value for which they are redeemable at
maturity. It indicates that no premium or discount is associated with the
debentures.
Let's take
an example to illustrate the journal entries for the issue of debentures at
par:
Suppose XYZ
Company decides to issue 1,000 debentures of $100 each at par. The journal
entries for the issuance of debentures at par would be as follows:
When the
debentures are issued:
Debenture
A/C (Dr) $100,000
To Debenture
Application A/C $100,000
(Being the
application received for debentures)
When the
application money is allotted:
Debenture
Allotment A/C (Dr) $100,000
To
Debenture A/C $100,000
(Being the allotment
of debentures at par)
When the
allotment money is received:
Bank A/C
(Dr) $100,000
To Debenture
Allotment A/C $100,000
(Being the
receipt of allotment money for debentures)
After these
entries, the debentureholders will hold the debentures at their face value,
i.e., $100 each. The company will pay regular interest to the debentureholders
as per the terms of the debentures.
It's
important to note that the above journal entries are simplified for
illustrative purposes. The actual entries may vary based on the specific
circumstances and accounting practices followed by the company. It's advisable
to consult a professional accountant or refer to the applicable accounting
standards for accurate recording of financial transactions.
Q.18. Explain
briefly issues of debenture at discount and pass necessary journal entries
taking imaginary example?
Ans. Issuing
debentures at a discount means that the debentures are issued at a price lower
than their face value or nominal value mentioned on the debenture certificate.
The discount represents the reduction in the amount payable by the debentureholder
upon redemption.
Let's take
an example to illustrate the journal entries for the issue of debentures at a
discount:
Suppose ABC
Company decides to issue 1,000 debentures of $100 each at a discount of 10%.
The journal entries for the issuance of debentures at a discount would be as
follows:
When the
debentures are issued:
Debenture
A/C (Dr) $90,000 ([$100,000 - (10% * $100,000)])
To Debenture
Application A/C $100,000
(Being the
application received for debentures at a discount)
When the
application money is allotted:
Debenture
Allotment A/C (Dr) $90,000
To
Debenture A/C $90,000
(Being the
allotment of debentures at a discount)
When the
allotment money is received:
Bank A/C
(Dr) $90,000
To Debenture
Allotment A/C $90,000
(Being the
receipt of allotment money for debentures)
After these
entries, the debentureholders will hold the debentures at a discounted price of
$90 each. The company will pay regular interest to the debentureholders based
on the face value of the debentures, i.e., $100 each.
It's
important to note that the above journal entries are simplified for
illustrative purposes. The actual entries may vary based on the specific
circumstances and accounting practices followed by the company. It's advisable
to consult a professional accountant or refer to the applicable accounting
standards for accurate recording of financial transactions.
Q.19. Explain
briefly issue of debentures at premium and pass necessary journal entries
taking imaginary example?
Ans. Issuing
debentures at a premium means that the debentures are issued at a price higher
than their face value or nominal value mentioned on the debenture certificate.
The premium represents the additional amount paid by the debentureholder to
acquire the debentures.
Let's take
an example to illustrate the journal entries for the issue of debentures at a
premium:
Suppose XYZ
Company decides to issue 1,000 debentures of $100 each at a premium of 10%. The
journal entries for the issuance of debentures at a premium would be as
follows:
When the
debentures are issued:
Debenture
A/C (Dr) $110,000 ([$100,000 + (10% * $100,000)])
To
Debenture Application A/C $100,000
To
Debenture Premium A/C $10,000
(Being the
application received for debentures at a premium)
When the
application money is allotted:
Debenture
Allotment A/C (Dr) $110,000
To
Debenture A/C $110,000
(Being the
allotment of debentures at a premium)
When the
allotment money is received:
Bank A/C
(Dr) $110,000
To Debenture
Allotment A/C $110,000
(Being the
receipt of allotment money for debentures)
After these
entries, the debentureholders will hold the debentures at a premium price of
$110 each. The company will pay regular interest to the debentureholders based
on the face value of the debentures, i.e., $100 each.
It's
important to note that the above journal entries are simplified for illustrative
purposes. The actual entries may vary based on the specific circumstances and
accounting practices followed by the company. It's advisable to consult a
professional accountant or refer to the applicable accounting standards for
accurate recording of financial transactions.
SHORT ANSWER TYPE QUESTIONS
Q.1. What is a debenture? Give its important features?
Ans. A
debenture is a type of long-term debt instrument issued by a company or a
government entity to raise funds from the public. It represents a loan
agreement between the issuer and the debentureholders, who lend money to the
issuer in exchange for regular interest payments and the repayment of the
principal amount at maturity.
Important
features of debentures include:
Fixed Interest Payments: Debentureholders receive fixed interest
payments at a predetermined rate and frequency, typically on a semi-annual or
annual basis. The interest rate is stated in the debenture agreement and
remains constant throughout the debenture's term.
Maturity Date: Debentures have a specified maturity date,
which is the date when the issuer is obligated to repay the principal amount to
the debentureholders. Maturity periods can range from a few years to several
decades, depending on the terms of the debenture.
Security: Debentures can be either secured or unsecured.
Secured debentures are backed by specific assets of the issuer, such as
property or equipment, which serve as collateral in case of default. Unsecured
debentures, also known as naked debentures, are not backed by any specific
assets and rely solely on the creditworthiness of the issuer.
Transferability: Debentures are generally freely transferable,
allowing debentureholders to sell or transfer their ownership rights to other
investors. This enhances liquidity and provides investors with flexibility to
manage their investment portfolios.
Priority of Repayment: In the event of liquidation or bankruptcy of
the issuer, debentureholders have a higher priority of repayment compared to
equity shareholders. They are typically repaid before equity shareholders, but
after other secured creditors.
No Voting Rights: Debentureholders do not possess any voting
rights in the company's decision-making process. They are lenders to the
company and do not have ownership rights or control over the management of the
company.
Fixed-Rate or Floating-Rate: Debentures can have either a fixed interest
rate or a floating interest rate, depending on the terms of the debenture
agreement. Fixed-rate debentures have a predetermined interest rate that
remains constant throughout the debenture's term. Floating-rate debentures have
an interest rate that fluctuates based on a reference interest rate, such as a
benchmark interest rate plus a specified margin.
These
features may vary depending on the specific terms and conditions of each
debenture issuance. It's important for investors to carefully review the
prospectus or offering documents before investing in debentures.
Q.2.
Distinguish between debentureholder and shareholder?
Ans. Debentureholder and shareholder are two distinct entities in a company.
Here are the key differences between them:
Ownership
and Rights:
Shareholder: A shareholder is an individual or entity that
owns shares of a company's stock, representing ownership in the company.
Shareholders have ownership rights, which may include voting rights, rights to
receive dividends, and rights to participate in the company's decision-making
processes.
Debentureholder: A debentureholder is a creditor of the company
who holds debentures issued by the company. Debentureholders do not have
ownership rights or voting rights in the company. They are lenders to the
company and have the right to receive regular interest payments and repayment of
the principal amount as per the terms of the debenture.
Risk and
Returns:
Shareholder: Shareholders bear the risk and reward
associated with the company's performance. They may benefit from capital
appreciation of the shares and receive dividends when the company distributes
profits. However, they also face the risk of potential losses if the company's
performance declines.
Debentureholder: Debentureholders are creditors and have a more
secure position compared to shareholders. They receive fixed interest payments
from the company and have a legal claim on the company's assets in case of
default. Their returns are predetermined and do not depend on the company's
profits or losses.
Participation
in Company Decisions:
Shareholder: Shareholders have the right to vote on
important matters of the company, such as the appointment of directors, major
business decisions, and changes to the company's articles of association. They
can attend general meetings and exercise their voting rights based on the
number of shares they hold.
Debentureholder: Debentureholders do not have voting rights and
cannot participate in the company's decision-making process. Their relationship
with the company is purely contractual, based on the terms of the debenture
agreement.
Priority of
Claims:
Shareholder: In case of liquidation or
bankruptcy of the company, shareholders are the last in line to receive payment
after all creditors and debentureholders have been paid. Their claims on the
company's assets are subordinate to the claims of debentureholders and other
creditors.
Debentureholder: Debentureholders have a higher
priority of claims compared to shareholders. In case of liquidation or
bankruptcy, they are usually repaid before shareholders and have a secured
position if the debentures are secured by specific assets of the company.
These
differences highlight the contrasting roles and rights of debentureholders and
shareholders in a company. Shareholders have ownership and voting rights, while
debentureholders have creditor rights and receive fixed interest payments.
Q.3. What is
meant by ‘Debentures issued as collateral security? Give its accounting
treatment?
Ans. Debentures
issued as collateral security refer to debentures that are issued by a company
and backed by specific assets of the company as collateral. These debentures
provide an added level of security to debentureholders as they have a claim on
the specified assets in case of default by the company.
Accounting
treatment for debentures issued as collateral security involves the following
steps:
Creation of Debenture Liability: The company records the issuance of the
debentures as a liability on its balance sheet. The debenture amount is
credited to a Debenture Account.
Identification and Documentation of
Collateral Assets: The company
identifies and documents the specific assets that are pledged as collateral for
the debentures. These assets are typically disclosed in the terms and
conditions of the debenture agreement.
Creation of Collateral Security
Reserve: To reflect the value of the
collateral assets, the company creates a reserve called the Collateral Security
Reserve or Debenture Redemption Reserve (DRR). This reserve is credited with an
amount equal to the value of the collateral assets.
Disclosure in the Balance Sheet: The debentures issued as collateral security,
along with the Collateral Security Reserve, are disclosed in the liability
section of the company's balance sheet. The debenture liability is shown
separately, and the Collateral Security Reserve is shown as a separate reserve.
Periodic Interest Payments: The company makes regular interest payments to
the debentureholders as per the terms of the debenture agreement. These
interest payments are recorded as an expense in the company's income statement
and are debited to the Interest on Debentures Account.
Redemption of Debentures: When the debentures mature or upon their
redemption, the company repays the principal amount to the debentureholders.
The amount is debited from the Debenture Account and credited to the Bank
Account or the Debentureholders' Account, depending on the payment method.
It's
important to note that the accounting treatment may vary depending on the
specific circumstances and applicable accounting standards. It is advisable to
consult the relevant accounting guidelines and seek professional advice for
accurate accounting treatment of debentures issued as collateral security.
