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Interactive Audio Lesson
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Understanding Debentures
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Today, we will discuss debentures, which are loan certificates issued by companies. Can anyone tell me why companies might choose to issue debentures instead of shares?
To raise funds without diluting ownership?
Exactly! They allow companies to secure funding while maintaining control. Remember, debentures are a form of debt. Now, can someone explain what a redeemable debenture is?
It's a debenture that the company has to repay at a future date.
Correct! And what about irredeemable debentures?
Those are never paid back and remain as long-term liabilities.
Good! Just remember: IRR is for irredeemable, and R for redeemable. Letβs summarize: debentures are important because they offer a way to borrow money while keeping equity intact.
Types of Debentures
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Now let's delve deeper into types of debentures. Can anyone name the types?
Excellent! Each has specific characteristics. What do we mean by secured debentures?
Those are backed by assets, so if the company fails, the debenture holders may claim those assets.
Exactly right! And what about unsecured debentures?
They are not backed by any collateral.
Great! To remember the types, think of 'C-FURRS' β Convertible, Fixed, Unsecured, Redeemable, Secure! Letβs move on to how these are issued.
Issuing Debentures
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When it comes to issuing debentures, they can be issued at par, at a premium, or at a discount. Who can remind us what it means to issue at a premium?
It's when the issued price is higher than the face value.
Correct! A common example is a βΉ100 debenture sold for βΉ110. What happens in the accounting entries for that?
We would credit the securities premium account with the difference between the issue price and the face value.
That's right! Always remember, the accounting entries make a difference in financial statements.
Introduction & Overview
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Quick Overview
Standard
The issue of debentures involves understanding what they are, their different types (convertible, non-convertible, secured, unsecured, redeemable, irredeemable), and how they are issued at par, premium, or discount. Additionally, it discusses the necessary accounting entries required for different issues.
Detailed
Detailed Summary
The section on the Issue of Debentures provides a comprehensive view of what debentures are and their significance in financial operations for companies. A debenture is essentially a loan certificate that companies issue to raise funds, promising to repay the principal amount at a future date along with interest. The key types of debentures include:
- Convertible: Can be converted into equity shares at a later date.
- Non-Convertible: Cannot be converted into shares.
- Secured: Backed by company assets.
- Unsecured: Not tied to any specific assets.
- Redeemable: Will be paid back at maturity is fixed.
- Irredeemable: Permanent and cannot be paid back.
Debentures can be issued at par, at a premium, or at a discount. For example, if a company issues βΉ1,00,000 12% Debentures at par, the accounting entry reflects the full value as a liability. In contrast, issuing at a discount involves recording a separate account for the discount amount. Understanding these principles is crucial for accurate financial accounting and reporting, ensuring compliance with the statutory requirements of businesses.
Audio Book
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Meaning of Debentures
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A debenture is a loan certificate issued by a company acknowledging debt repayable at a future date with interest.
Detailed Explanation
A debenture represents a way for companies to borrow money. When a company issues a debenture, it essentially acknowledges that it owes money to the debenture holder, which is usually paid back at a specified future date, along with interest. This makes it a formal agreement that ensures investors receive their returns.
Examples & Analogies
Think of a debenture like a loan agreement between a person and a bank. Just as a bank provides a loan that the person must repay with interest, a company issues debentures to raise funds from investors, promising to repay them with interest later on.
Types of Debentures
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β’ Convertible and Non-Convertible
β’ Secured and Unsecured
β’ Redeemable and Irredeemable
Detailed Explanation
Debentures can be categorized based on various characteristics:
1. Convertible Debentures can be converted into equity shares after a certain period, while Non-Convertible Debentures cannot.
2. Secured Debentures are backed by collateral, reducing risk for the investor, whereas Unsecured Debentures are not backed by any assets, making them riskier.
3. Redeemable Debentures are repaid after a specified period, whereas Irredeemable Debentures do not have a maturity date and remain in circulation indefinitely.
Examples & Analogies
Consider types of loans: a convertible debenture is like a car loan that can be turned into a vehicle purchase, while a non-convertible debenture is like a regular loan that must be paid back in cash. Secured debentures are like getting a loan against your house, whereas unsecured debentures are like personal loans with no collateral.
Issue of Debentures
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β’ At par, premium, or discount
β’ Redeemable at par or premium
Detailed Explanation
When a company issues debentures, it can do so at three main price points: 1. At Par means the debenture is issued at its face value. 2. At Premium means investors pay more than the face value. 3. At Discount means it is sold for less than its face value. Additionally, debentures can be redeemed at either face value (par) or at a higher price (premium) when the company repays them.
Examples & Analogies
Imagine buying concert tickets: a ticket at par is its face value, a premium ticket costs more for better seats, and a discount ticket is sold for less than the original price. Similarly, companies set prices for debentures based on demand and investment terms.
Accounting Entries for Debentures
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Example: Issued βΉ1,00,000 12% Debentures at par
Bank A/c Dr. βΉ1,00,000
To 12% Debentures A/c βΉ1,00,000
If issued at a discount of 5%:
Bank A/c Dr. βΉ95,000
Discount on Issue of Debentures A/c Dr. βΉ5,000
To 12% Debentures A/c βΉ1,00,000
Detailed Explanation
When a company issues debentures, it must record the transaction in its books of accounts. For example, if it issues βΉ1,00,000 worth of debentures at par, it records the full value in its bank account (assets) and in the debentures account (liabilities). If issued at a 5% discount, the company collects βΉ95,000 in cash and recognizes the βΉ5,000 as a discount, reflecting it as a loss in the debentures account.
Examples & Analogies
Think of this as if a bookstore sells loyalty cards: if they sell a card worth βΉ100 for βΉ100, all value is collected. If they offer it for βΉ95, they still record the βΉ100 value but acknowledge the βΉ5 loss - similar to how companies handle debenture discounts in their financial records.
Definitions & Key Concepts
Learn essential terms and foundational ideas that form the basis of the topic.
Key Concepts
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Debenture: A financial instrument representing a borrowing by a company.
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Convertible Debenture: Can be converted into equity shares.
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Secured vs. Unsecured: Refers to whether the debenture is backed by assets.
Examples & Real-Life Applications
See how the concepts apply in real-world scenarios to understand their practical implications.
Examples
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A company issues βΉ1,00,000 worth of 12% debentures at par. The journal entry would be: Bank A/c Dr. βΉ1,00,000 To 12% Debentures A/c βΉ1,00,000.
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If a company issues βΉ100,000 debentures at a 5% discount, the entry would include a Discount on Issue of Debentures account.
Memory Aids
Use mnemonics, acronyms, or visual cues to help remember key information more easily.
π΅ Rhymes Time
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When a debenture comes your way, it's a loan with interest to repay.
π Fascinating Stories
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Imagine a company needing money for a new project. They promise to pay back in a few years. This promise is called a debentureβa loan for future growth.
π§ Other Memory Gems
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Try remembering CUSP for types of debentures: Convertible, Unsecured, Secured, and Premium.
π― Super Acronyms
Remember DARE for the importance of debentures
- Debt financing
- Asset-backed securities
- Reduces equity share dilution
- Easy to issue.
Flash Cards
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Glossary of Terms
Review the Definitions for terms.
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Term: Debenture
Definition:
A loan certificate issued by a company acknowledging a debt to be repaid with interest.
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Term: Convertible Debenture
Definition:
A type of debenture that can be converted into equity shares after a certain period.
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Term: NonConvertible Debenture
Definition:
A debenture that cannot be converted into shares and remains a debt till maturity.
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Term: Secured Debenture
Definition:
A debenture secured by the company's assets.
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Term: Unsecured Debenture
Definition:
A debenture not backed by any assets.
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Term: Redeemable Debenture
Definition:
Debentures that are repayable at a predetermined date.
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Term: Irredeemable Debenture
Definition:
Debentures that are not repayable over a set period and remain as a permanent source of capital.