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ISSUANCE OF
DEBENTURES/LOAN
CAPITAL
FAR160
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Introduction…
• Debentures may be issued at par, at a discount or at premium.
• Debentures issued are initially recognized at cost less any issue
costs or transaction cost…this initial cost of debenture is the
fair value of the total consideration/money received from the
issue.
• Debentures should be measured at fair value using the
effective interest rate after the initial cost.
• For example, if a company issued debentures at a discount and
incurred an issue cost, the total consideration received from
the issue of debenture is:
*Total consideration received (fair value) = Total cost – discount – issue
cost.
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Issue of debentures at par

Accounts required Purposes

Bank a/c  This account is debited with money received from applicants less
issue costs (if any)
 The remaining balance will be recorded in the SOFP as a current
asset.

Debenture a/c  This account is maintained at par value/nominal value less issue
cost and plus finance costs.
 The remaining balance will be recorded in the SOFP as long term
liability.

Finance costs a/c  Used to record the amount of interest on debentures incurred for
the year. At the end of the year, this account is written off against
the retained earnings account.

Retained Earnings a/c  To write off the amount of finance costs incurred for the year.
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Journal entries to record issue of debentures at par / nominal value

TRANSACTION JOURNAL ENTRIES

Cash or cheque Dr. Bank a/c

received on the Cr. Debentures a/c
date of issue (amount of debentures issued at par less issue costs)
(to record fair value of money received from the issue)

At the end of the Dr. Finance costs

year: (effective interest rate x fair value of money received from the issue )
(to record interest incurred by the company)
Cr. Bank a/c
( interest on debentures rate x nominal
value of debentures) paid interest to
debenture holders for the year
Cr. Debentures a/c
( Finance cost less interest on debentures paid, to increase debentures
amount of fair value)

Close off debentures interest:

Dr. Retained earnings
Cr. Finance costs a/c
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Statement of Financial Position (extract) as at XXX

RM
Reserves
Retained earnings XXX

Non-current liabilities
% Debentures (remaining balance on debentures account) XXX

Represented by:
Current assets:
Bank XXX
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On 1 January 2011, ABC Bhd issued 3% debentures with nominal value of

RM1,500,000 at par. It is assumed that the effective interest rate is 10% and the
debenture interest was paid at the end of the financial year on 31 December 2011.
Transaction costs incurred amounted to RM100,000.

Prepare journal and SOFP for this transaction.

Dr. Bank Account RM1,400,000

Cr. Debentures Account RM1,400,000

(to record total received from the issue)

At the end of the year:

DR Finance costs a/c RM140,000
(10% x RM1,400,000)
CR Bank a/c RM45,000
(3% x RM1,500,000)
CR Debentures a/c RM95,000
(RM140,000 – RM45,000)
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Cont’d…

DR Retained earnings a/c RM140,000

CR Finance costs a/c RM140,000
(to close off finance costs a/c)
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Statement of Financial Position (extract) as at 31/12/2011

RM
Reserves:
Retained earnings XXX
Non current liabilities:
3% Debentures (1.4m + 95k) 1,495,000

Represented by:

Current assets:
Bank (1.4m-45k) 1,355,000
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Journal entries to record issue of debentures at

a discount price
TRANSACTION JOURNAL ENTRIES

Cash or cheque Dr. Bank a/c

received on the Cr. Debentures a/c
date of issue (amount of debentures issued at par - discount - issue costs)
(to record fair value of total received from the issue)

At the end of the Dr. Finance costs

year: (effective interest rate x fair value of total received from the issue )
Cr. Bank a/c
( interest on debentures rate x nominal
value of debentures) – paid interest to
debenture holders
Cr. Debentures a/c
( Finance cost less interest on debentures paid)

To close off finance costs account:

Dr. Retained earnings a/c
Cr. Finance costs a/c
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On 1 January 2013 RMZ Bhd offered for public subscription, RM500,000 6% debentures
at discount of 10%. Transaction costs incurred amounted to RM15,000. Interest on
debentures are payable at the end of every year. It is assumed that the effective interest
rate is 10%. Retained earnings as at 1.1.2013 is RM100,000.
Prepare journal and SOFP for these transactions.
Debit (RM) Credit (RM)
Dr. Bank Account 435,000
Cr. 6% Debentures Account 435,000
(being cash received from issue of debentures at a
discount)
(RM500,000-RM50,000-RM15,000)

Dr. Finance costs(10% x 435,000) 43,500

Cr. Bank Account (6% x 500,000) 30,000
Cr. 6% debenture account (43,500-30,000) 13,500

Dr. Retained earnings a/c 43,500

Cr. Finance costs a/c 43,500
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Noreen Bhd
SOFP (extract) as at 31 January 2013
RM
Reserves
Retained earnings (100k-43,500) 56,500

Non current liabilities

6% debentures (435k + 13,500) 448,500

Represented by:
Current assets:
Bank (435k-30k) 405,000
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Thank you…