Collateral Security

Collateral Security:Sometimes while obtaining loans the company issues debentures as collateral security. It is nothing but a additional security. However such debentures are issued completely on temporary basis and the bankers refund the debentures whenever the loan is repaid. However if the loan is not repaid then the bank keeps it with himself and such issue becomes permanent. It can be recorded in the books of company by following 2 methods. i) ii)

No record is made regarding debenture issue. Recording is made regarding debenture issue.

i)

No record is made regarding debenture issue:-

a)

When loan is obtain Cash a/c. ….. Dr. To bank loan a/c.

b)

For issue of debentures:No entry

c)

For repayment of loan Bank loan a/c. …. Dr. To cash a/c.

d)

For refund of debentures:No entry So the net effect is nil However if the loan is not refunded then

c)

For repayment of loan No entry

d)

Bank loan a/c…… Dr To debentures a/c Net entry:cash a/c…… Dr. To debenture a/c.

ii)

When record is made regarding debenture issue:-

a)

Cash a/c ….. Dr. To bank loan a/c. (Loan is obtain)

b)

For debentures issue:-

Debenture suspense a/c. … Dr. To debentures a/c. Loan refunded:Bank loan a/c. ….. Dr. To cash a/c.

c)

d)

Debenture refunded:Debenture a/c. ….. Dr. To debenture suspense a/c. So the net effect is nil If loan is not refunded

c)

Loan refunded:No entry

d)

Debentures issue becomes permanent:Bank loan a/c. ….. Dr To debenture suspense a/c. Debenture suspense – Asset side of Balance sheet NOTES Discount on Reissue 1.

If the shares are originally not issued at discount i.e. originally issued at par or at premium; then reissue can have never a discount entry. Discount will find a place on reissue only when shares are originally at discount. The reissue discount can nevertheless be more then the originally discount but can be equal or less than the originally discount or nil as per the situation requires.

2. 3.

Ex. 1. If the shares are originally issued at 10 cr. Rs.12, they are forfeited and reissued at 20% discount then discount will not find a place. 2. If shares of Rs.10 % issued at Rs.1 discount and forfeited. Situation:1) 2) 3) 4) 5) 6)

Reissued at par = Reissued at premium= Reissued at Rs.8% = Reissued at Rs.9% = Reissued at Rs.7% = Reissued at Rs.9.50%=

Discount will appear nil -do1% discount 1% Discount 1% Discount 0.50% Discount