Give journal entries and show its behavior in the balance sheet. [Explain the meaning of debentures issued as Collateral Securities by a company. Give journal entries and show its treatment in the balance sheet.] (Bastar University 2018)
Issue of debentures as subsidiary security (Issue of Debentures as a Collateral Securities)
Subsidiary Security means- Additional or Secondary or Subsidiary Security (Collateral Security means Additional or Secondary or Subsidiary Security). Sometimes a company borrows money from a bank or any other institution and keeps or issues debentures with a bank institution in addition to other security as a secondary or collateral security. Thus the debentures issued as collateral security act as additional security for the loan taken by the company. If the company is unable to pay the loan, the lender has the right to sell the debentures held by the company to get the payment of its loan along with interest. If the company repays the loan, the issuer held as collateral security of the lender
Debt companies made have to be returned. The interest to the lender was lent by him to the company. The amount is given only and no interest is paid on the company’s debentures deposited as security. In respect of debentures so held as subsidiary security or collateral security, the following Points to be kept in mind
(1) The company gives its debentures as subsidiary security but it does not give these debentures to the lending institution Not liable to pay interest on debentures.
(2) Interest is paid only on the amount borrowed. No interest is paid on the debentures.
(3) The company is only liable to pay the amount of the loan and not the debentures issued Of value
(4) The lending institution is only the custodian of such debentures.
(5) In case of non-repayment of loan from the lending institution, first of all, it recovers its loan by selling the primary security. Even after this, if the loan is not fully repaid, the secondary security is sold.
(6) Thereafter, the lending company returns the remaining amount to the company. Debentures in the form of subsidiary security are issued in the following two ways (1) No entry is made in the books of accounts of Collateral Security. to issue is not accounted for. There is only account of getting loan. lending institution loan repayment After receiving it returns the debentures.
Issuance of debentures as subsidiary security is not accounted for in the Presentation in Balance Sheet. It is shown in the form of a comment below the bank loan under the title ‘Non-current liability’ under the equity and liability of the company’s balance sheet. For example, Company X has issued 1,000 10% debentures at the rate of ₹100 each, against taking a loan of ₹70,000 from a bank This fact is shown in the economic balance as follows-