Issue of Debentures Notes3

Study Material & Notes for the Chapter 9

COMPANY - ISSUE OF DEBENTURES

III.  ISSUE OF DEBENTURES AS COLLETERAL SECURITY

  • A collateral security may be defined as a subsidiary or secondary or additional security besides the primary security
  • Whenever a company takes loan from bank or any financial institution it may issue its debentures as secondary security
  • Such an issue of debentures is known as ‘Issue of Debentures as Collateral Security’
  • No interest is paid on the debentures issued as collateral security because company pays interest on loan
  • The liability of the Company is towards the loan availed and not for the face value of debentures issued 
  • If the company fails to repay the loan along with interest, the lender is free to receive his money from the sale of primary security and if the realisable value of the primary security falls short to cover the entire amount, the lender has the right to invoke the benefit of collateral security whereby debentures may either be presented for redemption or sold in the open market.
  • In case the need to exercise this right does not arise, debentures will be returned back to the company.
Accounting Treatment
Method-1 No Journal Entry is passed
  • No entry is made in the books of accounts since no liability is created by such issue.
  • However, on the liability side of the balance sheet, below the item of loan, a note to the effect that it has been secured by issue of debentures as a collateral security is appended.
Disclosure in the Balance Sheet
debenture issue 3_1.1
Method-2 Journal Entry is passed
Disclosure in the Balance Sheet