Journal Entries for Issue of Debentures for Consideration Other Than Cash
The issue of debentures for consideration other than cash is an important accounting concept for Class 12 and commerce students. This topic frequently appears in Board and competitive exams, and is vital for real-world business situations. Understanding it helps students answer exam questions confidently and relate accounting entries to business practices.
| Basis | Issue for Cash | Issue for Consideration Other Than Cash |
|---|---|---|
| Purpose | To raise funds for the company | To pay for assets/services or settle purchase consideration |
| Recipient | General public/investors | Vendors of assets, sellers of business, etc. |
| Cash Inflow | Company receives cash | No cash inflow; payment made via debentures |
| Example | Public issue of debentures to raise working capital | Issue of debentures to pay for purchased land |
What is the Issue of Debentures for Consideration Other Than Cash?
The issue of debentures for consideration other than cash means a company pays for assets, businesses, or services not with cash, but by giving the seller debentures. This is common when purchasing assets, taking over another business, or settling liabilities. Instead of immediate cash outflow, the company issues debentures to the vendor as payment.
When and Why Companies Issue Debentures for Non-Cash Consideration
Companies may use this method when they acquire assets, settle vendor accounts, or buy a running business. This helps manage funds efficiently and avoids a sudden cash outflow. Vendors (sellers) benefit by receiving interest on debentures instead of waiting for cash.
- Purchase of fixed assets (e.g., land, building, machinery)
- Takeover or merger with another business
- Settlement of outstanding liabilities to a supplier/vendor
- Acquisition of intangible assets (e.g., patents, goodwill)
Journal Entries for Issue of Debentures for Consideration Other Than Cash
| Situation | Journal Entry | Explanation |
|---|---|---|
| Purchase of Asset/Business | Sundry Assets A/c Dr. To Vendor A/c |
To record asset/business purchased |
| Debentures issued at Par | Vendor A/c Dr. To Debentures A/c |
Debentures issued for exact amount |
| Debentures issued at Discount | Vendor A/c Dr. Discount on Issue of Debentures A/c Dr. To Debentures A/c |
Debentures face value exceeds amount payable |
| Debentures issued at Premium | Vendor A/c Dr. To Debentures A/c To Securities Premium A/c |
Debentures issued for more than claim amount |
Real Example: Issue of Debentures for Consideration Other Than Cash
Suppose X Ltd. buys machinery worth ₹1,00,000 from Y Ltd. Instead of cash, debentures are issued at par. The entries will be:
Machinery A/c Dr. ₹1,00,000
To Y Ltd. ₹1,00,000
Y Ltd. Dr. ₹1,00,000
To Debentures A/c ₹1,00,000
Such real cases often occur during mergers or large capital asset purchases.
Legal and Accounting Guidance
The Companies Act 2013 allows companies to issue debentures for non-cash consideration, subject to authorized capital limits and proper disclosures. It is covered in all standard textbooks, including TS Grewal Solutions Class 12 Accountancy and DK Goel Accountancy. In financial statements, such debentures are shown under Non-Current Liabilities.
- Disclose in notes to accounts when issued for non-cash consideration
- Comply with authorised debenture limits
- Follow appropriate reporting for interest and redemption
How This Topic Helps Students
Understanding this topic ensures you can write diagram-based, practical answers in CBSE Board exams. It also prepares you for competitive commerce exams, helps in business case studies, and improves your overall knowledge of accounting transactions.
Further Learning and Related Reading
- Explore Issue of Debentures (Vedantu) for full basics.
- See Issue of Debentures as Collateral Security to understand differences.
- Review Non-Current Liabilities to see debenture placement in balance sheets.
- For exam-style questions, visit TS Grewal Solutions.
Summary
The issue of debentures for consideration other than cash occurs when companies pay for assets or businesses using debentures instead of cash. This accounting process is practical, often tested in exams, and must be shown in journal entries. At Vedantu, we provide detailed explanations and examples to strengthen your Commerce understanding.
FAQs on What Is Issue of Debentures for Consideration Other Than Cash?
1. What is meant by the issue of debentures for consideration other than cash?
Issuing debentures for consideration other than cash means a company acquires assets or services not by paying cash, but by issuing debentures. This is a common method in mergers, acquisitions, and vendor settlements. Debentures are essentially a form of long-term debt.
2. How are debentures issued for non-cash consideration recorded in the books of accounts?
Journal entries for issuing debentures for non-cash consideration depend on whether the debentures are issued at par, at a premium, or at a discount. The entries involve debiting the asset received and crediting the debenture account. Additional entries might be needed for premium or discount.
3. Can debentures be issued at a premium or discount for consideration other than cash?
Yes, debentures can be issued at a premium or a discount for consideration other than cash. If issued at a premium, the excess over the face value is credited to a premium account. If issued at a discount, the difference is debited to a discount account. The accounting treatment is similar to cash issuance, but the debit side involves the asset acquired instead of cash.
4. Which Companies Act, 2013 sections regulate the non-cash issue of debentures?
Specific sections within the Companies Act, 2013 regulate the issue of debentures, including non-cash issues. These sections outline rules regarding disclosure, valuation, and compliance. Refer to the relevant sections for precise details on the legal aspects.
5. Give an example of issuing debentures for asset purchase from a vendor.
A company buys machinery worth ₹10,00,000 from a vendor. Instead of cash, it issues debentures to the vendor. The journal entry would involve debiting the machinery account and crediting the debenture account. If the debentures were issued at a premium, an additional credit to the premium account would be necessary.
6. What is the issue of debentures for consideration other than cash?
The issue of debentures for consideration other than cash refers to a company's acquisition of assets or services by issuing debentures instead of cash. This is often used in business combinations and vendor settlements, offering flexibility in capital management.
7. What is issue for consideration other than cash?
Issue for consideration other than cash involves exchanging assets, services, or other forms of value for debentures, rather than direct cash payment. This is a common strategy for acquiring businesses or significant assets.
8. What is the consideration of a debenture called?
The consideration for a debenture can be cash or other assets. When it is not cash, it's referred to as 'consideration other than cash'. The amount received in exchange for debentures is recorded as the issue price, which may be at par, premium, or discount.
9. What is the issue of debentures?
The issue of debentures is a method of raising long-term funds. A company issues debentures (essentially loan certificates) to lenders, promising to repay the principal amount along with interest at a predetermined rate.
10. How does the issue of debentures for non-cash consideration impact a company's cash flow statement?
The issue of debentures for non-cash consideration does not directly impact the cash flow from operating, investing, or financing activities. However, it indirectly affects the cash flow by reducing the need for cash outflows for acquisitions. The cash flow statement primarily focuses on cash transactions.
11. What are the advantages and disadvantages for vendors who receive debentures instead of cash?
Advantages for vendors receiving debentures include: potential for higher returns if the debentures offer good interest rates; deferral of tax implications until the debentures are sold or redeemed. Disadvantages include: illiquidity if the debentures are not easily tradable; potential loss of value if the company issuing the debentures faces financial distress.
