Active learning ideas
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.
Activity 01
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.
How does a debenture differ from a share?
Activity 02
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.
What are the entries for issuing debentures as collateral security?
Activity 03
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.
How is the discount on the issue of debentures written off?
A few notes on teaching this unit
Watch Out for These Misconceptions
Students often forget that interest on debentures is a charge against profit.
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.
Believing that 'Discount on Issue' and 'Premium on Redemption' are the same thing.
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.
Methods used in this brief
Accounting for Share Capital
Features and types of companies, and the process of issuing shares. Accounting treatment for over-subscription, calls-in-arrears, forfeiture, and reissue of shares.
8 methodologies
Financial Statements of a Company
Preparation of the Statement of Profit and Loss and Balance Sheet as per Schedule III of the Companies Act, 2013. Focus on major headings and sub-headings.
8 methodologies