Discount on Debenture represents a loss of capital nature. It may not be possible to write off the entire loss against the Profit and Loss Account in the year in which the discount is allowed. As such the amount of discount is written off gradually over a number of years against Profit and Loss Account i.e. distributable profits.
What is debenture and its types?
Companies use debentures when they need to borrow the money at a fixed rate of interest for its expansion. Secured and Unsecured, Registered and Bearer, Convertible and Non-Convertible, First and Second are four types of Debentures.
It means that company converts debenture in to share if company issued convertible debenture but if company issued non convertible, company has no right to convert debentures into shares. These debentures only will redeem after the winding up of company.
Redemption by Payment in Instalments
Bondholders who have not received their interest can throw an offending company into bankruptcy, or seize its assets if that is stipulated in the contract. A Treasury Bill (T-Bill) is a short-term debt obligation issued by the U.S. Treasury and backed by the U.S. government with a maturity of less than one year. Fixed-rate debentures may have interest rate risk exposure in environments where the market interest rate is rising. A debenture is a type of debt instrument that is not backed by any collateral and usually has a term greater than 10 years. Both corporations and governments make use of debentures. Examples of debentures are Treasury bonds and Treasury bills.
- Convertible bond debenture can be converted to equity through shares on maturity.
- The most common debts are most likely US Treasury bonds.
- Investors prefer fixed interest rates for long-term investments such as unsecured debentures.
- An indenture is a legal and binding contract between bond issuers andbondholders.
- Debentures may be issued with or without the security of assets of the company.
- Bonds having ten-year maturities are typically issue by governments.
They can come with several features such as convertibility to allow further flexibility to issuers. The repayment can be in one large repayment or installments. Issues of debentures with maturity of 18 months or less are exempted from the requirement of appointment of debenture trustee or creating a Debentures Redemption Reserve . Having a conversion period of more than 36 months will not be permissible, unless conversion is made optional with “put” and “call” option.
Characteristics of a Debenture
A debenture is a certificate issued by a company acknowledging a debt of a specified amount of public borrowing. They are the creditors of the company and are entitled to receive an agreed and fixed rate of interest on their debentures regularly. Debentures carry interest periodically at a certain rate. Convertible debentures, which are convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. “Convertibility” is a feature that corporations may add to the bonds they issue to make them more attractive to buyers. In other words, it is a special feature that a corporate bond may carry. As a result of the advantage a buyer gets from the ability to convert, convertible bonds typically have lower interest rates than non-convertible corporate bonds.
It is computed as the sum of future investment returns discounted at a certain rate of return expectation. DividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity. Or interest rates are usually fixed unless when they are of the floating kind.
Issue and Redemption of Debentures Notes, Corporate Accounting Notes B.Com 2nd & 4th Sem CBCS Pattern
It may be noted that no Debenture Redemption Reserve is required in the case of convertible debentures because no funds are required for redemption. When a corporation issues debentures, https://accounting-services.net/ it always mentions the terms on which they’re going to be redeemed on their maturity. It means discharge of liability on account of debentures by repayment made to the debenture holders.
- A Company can issue debentures to serve as collateral security for a loan or for Bank Overdraft.
- The Debenture Redemption Fund Investments are encashed and therefore the amount so obtained is employed for the redemption of debentures.
- These types of bonds that are not backed up by assets or some other kind of surety are known as debentures.
- Issue if debentures are advantageous during times of inflation.
- Encash the investments at the top of the year of redemption.
This date dictates when the company must pay back the debenture holders. The company has options on the form the repayment will take. Most often, it is as redemption from the capital, where the issuer pays a lump sum amount on the maturity of the debt. Alternatively, the payment may use a redemption reserve, where the company pays specific amounts Debentures in Accounting each year until full repayment at the date of maturity. There are also other features that minimize risk, such as a “sinking fund”, which means that the debtor must pay some of the value of the bond after a specified period of time. This decreases risk for the creditors, as a hedge against inflation, bankruptcy, or other risk factors.
Issue of debentures as collateral security
Convertible debentures can be exchange for shares of the company that issued them. Debentures are loans with set interest rates and payments. Owners of debentures have the option of keeping the loan until it is paid off and collecting interest, or converting it into equity shares.
Because debentures have a fixed interest rate, the lender suffers if interest rates rise. Furthermore, interest payments may fail to reflect changes in inflation. Treasury bonds are exchange on the secondary market in several cases. On the secondary market, investors can acquire and sell existing bonds.
Debentures issued at par and redeemable at par
The issue can happen at par, discount and premium, and they all call for a distinct journal entry. An entity is issuing a debenture of 5 years, $1,000 to be remitted in equal installments at an 8% percent interest rate. Present ValuePresent Value is the today’s value of money you expect to get from future income.
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FEATURES OF DEBENTURES
Furthermore, they do not show how a company uses its cash resources or report cash movements. The amount credited to the Debenture Redemption Reserve shall not be utilised by the corporate apart from the aim of redemption of debentures. The corporate may issue its debentures to the lenders in addition to other assets already pledged.
The discount/loss on it is, therefore, treated as a capital loss. The discount may be charged to Securities Premium A/c or could also be written-off over 3 to five years through the statement of profit and loss as per guidelines issued by ICAI. As it is a loan taken by company, it is repaid after a specified period or at the option of the company as per terms of the issue.