Issue of Debentures as Collateral Security – Journal Entry, Accounting Treatment, Methods (Class 12)

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Looking for Journal Entry of Issue of Debentures as Collateral Security and Accounting treatment and Method of Issue of Debentures as Collateral Security as per the syllabus of class 12 CBSE, ISC, and State Board.

This topic is concerned with the Accounting treatment of Debentures chapter of class 12.

What is Collateral Security

The security given in addition to the primary or principal security is termed or known as Collateral Security.

What is meant by the issue of debentures as collateral security class 12

See, the big amount of loan issued by the banks is always secured by the mortgage of the assets purchased. Such security is called primary or principal security.

For example, Sun Ltd purchased machinery for ₹ 20,00,000 and took a loan from Punjab National Bank. The machinery is mortgaged to the bank and is the primary or principal security.

to further secure the loan against machinery, sun ltd can issue debentures to further secure the loan. Such debentures are called debenture issued as collateral Security.

For example, taking the above example further, Sun Ltd, issued 10,000, 8% Debentures of ₹100 each to further secure the loan. These ₹ 10,00,000 value debentures are called debentures issued as collateral security.

When debentures are issued as collateral security

Following are the characteristics of Debentures issued as collateral Security

  • Collateral security is realized by the lender only if the due amount (loan plus interest) can not be recovered by realizing the primary or principal security.
  • When the loan is repaid, debentures issued as collateral security are returned to the company.
  • These debentures do not carry any right till the time loan is being repaid along with due interest and the lender has not demanded the loan to be repaid.
  • If the company does not repay the loan, the lender may exercise its right towards debentures being issued as collateral security.

Accounting Treatment of Issue of Debentures as Collateral Security

Debentures issued as collateral security can be dealt with in two ways:-

First Method – When Journal Entry is not passed

In this method, Journal entry to issue debentures as collateral security is not passed. It is just shown under the head secured loans in the Equity and Liabilities part of the Balance Sheet that debentures have been issued as collateral security.

In other words, such debentures are shown as narration under long-term borrowings heds in notes to accounts as follows.

when debentures are issued as collateral security the final entry for recording the transaction is?

What is debenture issued as collateral securities show the treatment of it in financial statements by taking imaginary situations?

What is not paid on debentures issued as collateral security

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Anurag Pathak
Anurag Pathak is an academic teacher. He has been teaching Accountancy and Economics for CBSE students for the last 18 years. In his guidance, thousands of students have secured good marks in their board exams and legacy is still going on. You can subscribe his youtube channel and can download the Android & ios app for free lectures.
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