Issue of Debentures at Discount: An Overview
A debenture is the most common type of long-term debt that a firm can obtain. This is an important financial technique for raising funds from the general public in exchange for a predetermined interest rate. Debentures issued at a discount are debentures that a corporation might issue instead of shares. Giving debentures at a discount boosts the company's capital relative to the decreasing growth in cash. As a result, the firm suffers a loss while increasing demand for security.
Debentures: An Introduction
When an applicant is required to pay a sum less than the face value of the debenture, the debenture is said to have been issued at a discount. The discount amount differs between the face value and the issue price. It should be noted that firms are not prohibited by law from issuing discounted debt securities. Similarly, the Companies Act does not define a maximum limit for the discount on debentures. The Act requires that the discount amount be recorded on the assets side of the balance sheet until it is written off under the heading "Miscellaneous Expenditure."
Issue of Debentures
The corporation indicates by issuing debentures that it will issue a certificate carrying its stamp as an acknowledgement of the debt that it has incurred. The process of issuing debentures by a company is similar to issuing shares. Letters of allocation are issued, a prospectus is made available, and applications are sought. When applications are rejected, application fees are refunded. Any residual monies may be applied to future calls if an application is only partially allocated.
Debenture issues can take one of several forms:
Debentures issued in cash
Debentures issued in exchange for non-cash consideration
Securities that are issued as collateral
Treatment of Discount on Issue of Debentures
Some of the approaches utilised to treat the discount on debenture issue are as follows:
A capital loss results from a discount on a debenture issue. It will be listed on the asset side of the balance sheet until it is written off. It is expected to be written off as quickly as feasible. The discount on issuing debentures can be written off as a capital loss in two ways.
First Approach: In this scenario, the entire debenture discount amount is equally spread across the debenture term. Assume the discounted bonds had a five-year redemption duration when they were issued. The resultant payment will be charged to the profit and loss account for five years, five times the discount amount. This process is used to redeem debentures after a set period.
Second Approach: The amount of discount is deducted annually following the quantity of debenture utilisation. This method, which involves serving a notice and holding a lottery, is used to redeem debentures annually.
Case Study
ABC Co. Limited issued 10,000 Rs. 100 debentures at a 10% discount from face value. Determine the discount that was applied to the debentures issuance.
Solution:
Discount on issue of debenture(per debentures) = Face Value * Rate of Discount
= 100 * 10%
= Rs 10/- (per debentures)
The total amount of Discount = Number of debentures * Amount of Discount (per debentures)
= 10,000 * 10
= Rs. 1,00,000/-
Conclusion
So here we discussed the accounting entries for the issue of debentures, especially the Issue of debentures at discount. Discount on debenture issue is a capital loss that should be removed from the profit and loss account over time while also being recorded in the balance sheet for the amount not yet deducted. When debentures are issued, they are assigned a face value, and interest is always computed about that face value. Go through the FAQs below to understand more about the topic discussed above.
FAQs on Issue of Debentures at Discount
1. What do you mean by loss on the issuance of debentures? Explain in detail.
When a company issues discounted debentures, the full amount of the discount is not recorded in the profit and loss statement during the fiscal year in which the discount is permitted. The corporation gains from the borrowing by issuing debentures over the years, although at a significant discount. As a result, a portion of the discount is written off each year. It is usually written off before these debentures are redeemed.
Since the discount on the debenture issue is recognised as a capital loss, it is recorded on the asset side of the balance sheet under the heading "Miscellaneous Expenditure" until and unless it is wiped off.
2. Why are discounted debt obligations on a balance sheet reported as assets?
Debentures are debt certificates that include the repayment amount and redemption date. Debentures are debt securities purchased at either a premium or a discount. The "Discount on Issue of Debentures Account" is deducted when debentures are issued at a discount. The discount amount should be reflected on the asset side of the balance sheet under the heading "Miscellaneous Expenditure" until it is written off. Debenture discounts can be written off in proportion to the amount redeemed or equally over the life of the debentures.
3. Name the heading on a company's balance sheet that contains the phrase "Discount on Issue of Debentures." Explain in Detail.
The discount on the issuance of debentures, as is well known, is a capital loss that will be taken from future profit. So, until it is written off, it is recorded on the Balance Sheet's Assets side under the heading "Miscellaneous Expenditures."
When debentures are issued for less than their nominal value, the shortage amount is referred to as the discount on the issuance of debentures. For example, a debenture with a nominal value of 1000 rupees issued at 950 rupees would have an Rs. 50 discount on the issuance price. The corporation suffers a capital loss due to the discount on the debenture issue. It should be represented as a fictional item called "Miscellaneous Expenditure" on the assets side of the balance sheet.