Loan Capital – SS3 Financial Accounting Lesson Note (First Term)

A debenture is a medium to long-term debt that a company uses to borrow money. It is a bond issued under the company’s seal, acknowledging a loan and bearing a fixed rate of interest. A debenture is a long-term liability. Debentures can be issued at par, at a premium or at a discount.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Define debentures.
2. List the types of debentures.
3. List the issue prices of debentures.
4. List the relevant ledger accounts.

Instructional techniques

• Identification
• Explanation
• Questions and answers
• Demonstration
• Videos from source

Instructional materials

• Videos
• Loudspeaker
• Textbook
• Pictures

What are the types of debentures?

There are various types of debentures based on certain classifications. They include:

1. Redeemable debentures
2. Irredeemable/perpetual debentures
3. Convertible debentures
4. Non-convertible debentures
5. Secured debentures
6. Unsecured debentures
7. First mortgage debentures
8. Second mortgage debentures
9. Registered debentures
10. Bearer debentures

The types above can be classified under four headings: redemption (tenure), convertibility, security, and transferability (registration).

1. Redemption (tenure)

Redeemable debentures: These are repayable at a specified future date.

Irredeemable debentures: These are also known as perpetual debentures. They do not carry any date of redemption.

2. Convertibility

Convertible debentures: The holders have the option of converting their holdings into equity shares.

Non-convertible debentures: These have no option of being converted into shares or equity.

3. Security

Secured or mortgage debentures: A secured debenture is secured by a charge on some asset or set of assets of the company.

Unsecured debentures: These are also known as simple or naked debentures. They carry no charge on the assets of the company.

4. Transferability (registration)

Registered debentures: These are registered with the company. The name, address and other holding details of the holder are recorded with the issuing company. When the holder transfers the debenture, the holder must inform the issuing company so that it can update its records.

Unregistered or bearer debentures: These can be transferred by mere delivery to the new holder. They are not recorded in the register of the company.

What are the issue prices of debentures?

A debenture may be issued at par, at a premium or at a discount.

Which ledger accounts are used for debentures?

1. Cash Book/Bank Account
2. Debenture Application and Allotment Account
3. Debenture First and Final Call Account
4. % Debenture Account
5. Discount Account
6. Premium Account, etc.

Worked example: ledger entries for a debenture issue

Mibal Limited issued 10,000 5% debentures of ₦1.00 each, payable as follows:

• 30k on application
• 50k on allotment
• 20k on first and final call

All the debentures were applied for and allotted.

Required: Show the necessary ledger entries.

Solution

Workings:

• Application: 0.30 × 10,000 = ₦3,000
• Allotment: 0.50 × 10,000 = ₦5,000
• First and final call: 0.20 × 10,000 = ₦2,000

Evaluation

1. What is a debenture?
2. Mention four types of debentures.
3. Mention three issue prices of debentures.
4. List four ledger accounts used in the issue of debentures.
5. List the ledger accounts for the issue of debentures.
6. State three differences between shares and debentures.
7. Jones Plc issued 15,000 8% debentures of ₦1.00 at ₦1.20 each, payable as follows:
   • 40k on application
   • 60k on allotment (including premium)
   • 20k on the first and final call

   Required: Show the necessary ledger and journal entries.

Classwork: As in the evaluation questions.

The teacher commends the students positively.

Assignment

1. Define a debenture.
2. Explain the difference between debentures issued at a premium and debentures issued at a discount. Give one example of each.