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.
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.
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/-
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.