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 Issue of Debentures As Collateral Security

Collateral security means secondary or supporting security for a loan, which can be realised by the lender in the event of the original loan not being repaid on the due date.

Accounting entries

There are two methods of showing these types of debentures in the accounts of a company.

 

Method 1

Under this method, no entry is made in the books of account of the company.

 

Solved example:

 

Q.3  X Ltd. obtains a loan from IDBI of Rs. 10,00,000, giving as collateral security of Rs. 15,00,000, 14%. First mortgage debentures. In the balance sheet of X Ltd., it is shown as follows:

 

Solution :

         Balance sheet of X Limited as at… (includes)

Liabilities

Rs.

Assets

Rs.

Secured loan

IDBI loan

(Collateral secured by issue of Rs. 15,00,000 14% first mortgage debentures)

 

10,00,000

Bank

10,00,000

 

Method 2

Under this method, the following entry is made to record the issue of such debentures:

Debentures suspense account                    Dr.

                To debentures account

 

Solved example:

 

Q.4  Taking the same information of the above example, the entry on issue will be as follows:

                                         Journal                           

Date

Particulars

Rs.

Rs.

 

Debentures Suspense A/c                                       Dr.

       To 14% first mortgage debentures A/c

(Being the issue of Rs. 15,00,000 debentures

collaterally as per board’s resolution no….dated…..)

15,00,000

 

15,00,000

 

Balance sheet of X Limited as at… (includes)

Liabilities

Rs.

Assets

Rs.

Secured loan

IDBI loan

 

14% first mortgage debentures

 

10,00,000

 

15,00,000

Debentures suspense account

(issue of Rs. 15,00,000 14% first mortgage debentures as collateral security as per contra)      Bank

15,00,000

 

 

 

10,00,000






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