Issue of debentures

The essentials

A debenture is an instrument issued by a company acknowledging a debt, usually carrying a fixed rate of interest and repayable on a stated date or under stated terms. Debenture holders are creditors, not owners: they get interest whether the company makes a profit or not, and they generally have no voting rights. Debentures may be issued at par, at a premium or at a discount, and may be redeemable at par or at a premium.

Key points

• Issue at premium: premium credited to Securities Premium A/c.
• Issue at discount: Discount on Issue of Debentures A/c is debited.
• Redeemable at a premium: Loss on Issue of Debentures A/c is debited with the premium payable later, which is credited to Premium on Redemption of Debentures A/c (a liability).
• Issued to vendors for assets: number of debentures = Amount payable ÷ Issue price.
• Collateral security: debentures given to a lender as extra security for a loan. Either no entry is made (with a note under the loan) or Debenture Suspense A/c is debited.
• Debentures may be secured or unsecured, convertible or non-convertible, registered or bearer.

Exam tips

For the six combinations (par/discount/premium issue × par/premium redemption), write the entry with all three or four accounts and check that both sides agree.

Common mistakes

• Treating debenture holders as owners.
• Forgetting the Premium on Redemption account when debentures are redeemable at a premium.