Meaning

It means the issue of Debentures by a company as an additional security for borrowing a loan from bank or any other financial institution so that these debentures can meet the purpose of security in case the amount realized out of principal (first/main) security is insufficient to pay for the loan, in case of default by the company in repayment of loan. Then, these debentures can be presented for redemption or sold in the open market.

Accounting treatment

There are two methods of treatment of Issue of Debentures as a Collateral Security

1. When journal entry is passed.

2. When journal entry is not passed.

1. When journal entry is passed.

Following journal entry is made on the issue of debentures as a collateral security; Debentures Suspense Account is debited because no cash is received for such issue.

Debenture Suspense Account…………………… Dr.₹ 15,00,000

To Debentures Account  ₹ 15,00,000

(Being the issue of Debentures of ₹…. each issued as collateral security)

It is shown in the Notes to Accounts for Loan secured by the debentures as follows:

Long- term Borrowings

   Term Loan from State Bank of India  ₹ 10,00,000

Debentures

   15,000, 15% Debentures of ₹ 100 each           ₹ 15, 00,000

                Less: Debenture Suspense                    ₹ 15,00,000

                                     Total                                           nil

2. When journal entry is not passed.

In this case no Journal entry is to be made in the books of accounts of the company.It is shown in the Notes to Accounts for Loan secured by the debentures by way of a note as follows:

Long – term Borrowings        ₹ 10,00,000

   Term Loan from State Bank of India

(The above loan is collaterally secured by issue of 15,000, 12% Debentures of ₹  100 each)

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