Class 12 Accountancy - ISC
Issue of Debentures
The chapter 'Issue of Debentures' in Class 12 ISC Accountancy covers the methods by which a company raises long-term borrowed capital by issuing debentures. Students learn journal entries for the issue of debentures for cash, consideration other than cash, and as collateral security. A major focus is placed on accounting treatment for the issue of debentures redeemable at a premium or par, incorporating the terms of redemption. This chapter holds high weightage in board exams, frequently appearing as comprehensive 6 to 8-mark numerical problems.
Start Learning FreeKey Concepts
Debenture
A written instrument acknowledging a debt issued by a company under its common seal, containing a contract for the repayment of principal at a specified date and payment of interest at a fixed rate.
Issue of Debentures at Par, Premium, and Discount
Debentures can be issued at face value (par), above face value (premium), or below face value (discount). The discount on the issue of debentures is a capital loss written off against Securities Premium or Statement of Profit and Loss.
Issue of Debentures for Consideration Other Than Cash
When a company purchases assets or an entire business from vendors, it may issue debentures as payment instead of paying cash.
Issue of Debentures as Collateral Security
When a company takes a loan from a bank, it may issue its own debentures as secondary or subsidiary security alongside the primary security.
Terms of Redemption of Debentures
Accounting treatment at the time of issue must account for future losses if debentures are to be redeemed at a premium, by creating a 'Loss on Issue of Debentures' account.
Important Formulas
Board Exam Info
In the ISC Class 12 Accountancy examination, this chapter typically carries around 6 to 10 marks. Common question types include full-length numerical problems on journal entries for issuing debentures with various terms of redemption, and short theoretical or journal-entry questions on collateral security.
Frequently Asked Questions
What is the difference between a Share and a Debenture?
A share represents ownership in the company and its holder is a member (owner), receiving dividends. A debenture represents a loan to the company and its holder is a creditor, receiving fixed interest.
How do we record debentures issued as collateral security?
There are two methods: either by passing no journal entry (only disclosing it in notes to accounts) or by debiting 'Debentures Suspense A/c' and crediting 'Percentage Debentures A/c'.
Why is 'Loss on Issue of Debentures A/c' created?
It is created at the time of issue to anticipate and record the future liability/loss arising when debentures are to be redeemed at a premium, following the prudence principle of accounting.
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