Debentures for assets and as collateral

Debentures issued to buy assets: first Assets Dr. To Vendor (the purchase price); then Vendor Dr. To Debentures (with Securities Premium credited, or Discount debited, if needed).

Number of debentures = purchase consideration ÷ issue price.

Buying a whole business: the company takes over its assets and liabilities. If the price (purchase consideration) is more than the net assets (assets − liabilities), the extra is goodwill, debited. If it is less, the difference is a capital reserve, credited.

Example: assets of 5,00,000 and liabilities of 1,00,000 are taken over for 4,50,000, paid in ₹100 debentures at par. Net assets 4,00,000, so goodwill 50,000; debentures 4,50,000 ÷ 100 = 4,500.

Debentures as collateral security. A company may give debentures to a lender as extra security for a loan. They create no new debt: the lender can use them only if the company fails to repay. Two ways to show them:

• First method: no entry; just a note under the loan in the balance sheet.
• Second method: Debenture Suspense Dr. To Debentures. Debenture Suspense is deducted from the debentures in the balance sheet. When the loan is repaid, the entry is reversed.