Explain the accounting treatment of debentures issued as collater… - Vidyadip

Question

Explain the accounting treatment of debentures issued as collateral security.

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Answer

When a company takes a loan from a bank or from some other party, the company may have to issue debentures as a subsidiary or secondary security in addition to the principal security.

The debentures so issued are known as debentures issued as collateral securities.
If the company repays its dues to the bank in right time, the bank will return the debentures to the company and the debentures received this way are cancelled by the company.
If the company fails to repay the amount of loan or interest on this in proper time then the lender will first realize its debt from the principal security and still anything is remained lender can recover balance amount from the sale of debenture.
Entry for issue of debentures as collateral security will be recorded as follows:
Debenture suspense A/c Dr.
- To Debenture A/c
$($Being issue of debentures as collateral security against loan$)$

As and when the loan amount is fully paid up by the company, bank will return all the debentures to the company and entry passed above will be reversed in that case.

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