Accountancy · Class 12 · Accounting for Companies · 2.º Período

Issue of Debentures

Understanding debentures as a source of borrowed funds and their types. Accounting entries for the issue of debentures for cash and for consideration other than cash.

TL;DR:Issue of Debentures explores how companies raise debt capital, a vital component of corporate finance in India. Unlike shares, debentures represent a loan to the company, carrying a fixed rate of interest. This topic covers the various types of debentures and the accounting for their issue at par, premium, or discount.

• CBSE Learning Outcomes
• CBSE Class 12 Accountancy, Part A, Unit 2: Accounting for Companies - Accounting for Debentures: Debentures meaning, types, Issue of debentures at par, at a premium and at a discount
• CBSE Class 12 Accountancy, Part A, Unit 2: Accounting for Companies - Issue of debentures for consideration other than cash and as collateral security

About This Topic

Issue of Debentures explores how companies raise debt capital, a vital component of corporate finance in India. Unlike shares, debentures represent a loan to the company, carrying a fixed rate of interest. This topic covers the various types of debentures and the accounting for their issue at par, premium, or discount.

Students learn critical concepts like issuing debentures as collateral security and the accounting treatment for the 'loss on issue' when debentures are redeemable at a premium. This aligns with CBSE's focus on long-term liabilities and financial prudence. Students grasp this concept faster through structured discussion and peer explanation, especially when comparing the cost of debt versus equity.

Key Questions

1. How does a debenture differ from a share?
2. What are the entries for issuing debentures as collateral security?
3. How is the discount on the issue of debentures written off?

Watch Out for These Misconceptions

Common Misconception

Students often forget that interest on debentures is a charge against profit.

What to Teach Instead

Interest must be paid regardless of profit. A simulation where a company has a low EBIT (Earnings Before Interest and Tax) helps students see how debenture interest can lead to a net loss, unlike dividends which are appropriations.

Common Misconception

Believing that 'Discount on Issue' and 'Premium on Redemption' are the same thing.

What to Teach Instead

While both represent a loss, they arise at different times. However, for accounting, they are often combined into 'Loss on Issue of Debentures'. Using a think-pair-share activity helps students practice the combined entry for these two items.

Active Learning Ideas

Formal Debate

Debentures vs. Shares

Divide the class into 'Company Directors' and 'Investors'. They must debate whether to issue debentures or shares to fund a new factory, considering factors like interest tax-deductibility, control, and the obligation to pay interest even during losses.

35 min·Whole Class

Inquiry Circle

Collateral Security

Groups are given a scenario where a company takes a bank loan and issues debentures as collateral. They must research the two methods of recording this (with and without a journal entry) and present the balance sheet disclosure for both.

30 min·Small Groups

Gallery Walk

Issue and Redemption Terms

Post six scenarios showing different combinations of issue price (par/discount/premium) and redemption price (par/premium). Students move in groups to write the journal entries for the 'Issue' stage, focusing on the 'Loss on Issue' account.

40 min·Small Groups

Frequently Asked Questions

What are debentures issued as collateral security?

These are debentures issued to a lender (like a bank) as an additional guarantee for a loan. If the company defaults on the loan, the lender can claim the debentures. Students can use a collaborative investigation to see how this is disclosed in the company's balance sheet notes.

How is 'Loss on Issue of Debentures' written off?

It is typically written off in the year it occurs from the Securities Premium Account or the Statement of Profit and Loss. A gallery walk activity can help students practice the entries for writing off these capital losses.

What are the best hands-on strategies for teaching debentures?

Using 'debt-equity' role plays helps students understand the financial risk and reward of debentures. By simulating a board meeting to decide on funding, students learn the practical implications of fixed interest. Hands-on mapping of the 'Loss on Issue' entry helps them visualise the future liability of a redemption premium.

Is interest on debentures paid if the company makes a loss?

Yes, because it is a 'charge against profit'. This is a key difference from dividends. Teachers can use a structured debate to discuss the risks this poses to a company's solvency during an economic downturn.