Debentures are a debt instrument used by companies and government to issue the loan. The procedure and accounting entries for the issue of debentures are very much similar to that of share. The procedure of issuing debentures by a company is similar to the one followed while issuing equity stocks. A prospectus is issued to the public for inviting applications. The company starts by releasing a prospectus declaring the debenture issuance. The money on debentures may be payable in full at a time along with the application or by installments on the application, allotment, and various calls.
By issuing debentures mean the issue of a certificate by the company under its seal which is an acknowledgment of debt taken by the company. There is no legal restriction on the price for which debentures are issued. The procedure of the issue of debentures by a company is similar to that of the issue of shares. Thus, a debenture may be issued at par, at a premium, or at a discount. They can be issued in cash, for consideration other than cash and as collateral security as well as issue of debentures with redeemable conditions.
- Issue of Debentures at Par
When the issue price of the debenture is equal to its face value, the debenture is said to be issued at par. When a debenture is issued at its face value, it is called the issue of debenture at par. When a debenture is issued at par, the long-term borrowings in the liabilities section of the balance sheet equals the cash in the assets side of the balance sheet. If a debenture of $100 is issued at $ 100, it is called the issue of debenture at par.
- Issue of Debentures at Premium
When the price of the debenture is more than its nominal value, it is said to be issued at a premium. A debenture is said to be issued at a premium when the issue price exceeds the par value. If a debenture of $100 is issued at $110, then it is called an issue of debenture at a premium. The excess amount of $10 ($110-$100) is a debenture premium. Therefore, the premium amount is credited to Securities Premium Account and is reflected under ‘Reserves and Surpluses’ on the liabilities side of the balance sheet.
- Issue of Debentures at Discount
The debenture is said to be issued at a discount when the issue price is below its nominal value. When a debenture is issued at an amount less than its face value, it is said to be issued at discount. The discount can be written off later. If a debenture of $100 is issued at $95, it is said to have been issued at a discount of $5.