AccountsISC Class 12 · Issue of Debentures

Debentures Issued as Collateral and for Consideration Other than Cash: ISC Class 12 Accounts

Updated 16 October 2026 · Fact-checked

Debentures issued as collateral security back a loan and are either shown only as a note or recorded through a Debenture Suspense Account. Debentures issued for consideration other than cash are given to vendors for assets, to promoters for services or to underwriters for commission; the number issued is the amount payable divided by the issue price.

Collateral debentures are only a back-up for a loan, while non-cash issues pay vendors, promoters or underwriters; divide the amount by the issue price.

Illustration drawn for QuestionBuddy.

Understand Debentures as Collateral and for Non-cash Consideration

Collateral security. A lender may ask for debentures as additional (collateral) security for a loan. The lender can enforce them only if the company defaults. No interest is paid on them, because interest is paid on the loan itself. Two treatments:

Method 1: no entry. Show a note under the loan: 'Secured by issue of … debentures as collateral security'.
Method 2: Debenture Suspense A/c. Debenture Suspense A/c Dr; To Debentures A/c. In the Notes to Accounts, Debentures are shown with Debenture Suspense deducted, so the net effect on borrowings is nil. On repayment of the loan the entry is reversed.

Consideration other than cash. The syllabus lists three cases:

Vendors. Purchase: Sundry Assets Dr; To Vendor (and To Liabilities taken over). If the purchase consideration exceeds net assets, debit Goodwill; if less, credit Capital Reserve. Payment: Vendor Dr; To Debentures (face value); To Securities Premium (if at premium); Loss on Issue Dr (if at discount).
Promoters. Debentures given for services in forming the company: Goodwill (or Incorporation Costs) A/c Dr; To Debentures.
Underwriters. Commission settled in debentures: Underwriting Commission Dr; To Underwriter; then Underwriter Dr; To Debentures (and Securities Premium).

Number of debentures = Amount payable ÷ Issue price per debenture (face ± premium or discount). If the result is not a whole number, a whole number is issued and the small balance paid in cash.

Loss on issue. If debentures to vendors are issued at a discount or are redeemable at a premium, the loss is written off in the same year in the ISC order: Securities Premium, Statement of Profit and Loss, Capital Reserve.

Debentures as Collateral and for Non-cash Consideration: key facts

Number of debentures to a vendor: Number = Amount payable in debentures ÷ Issue price per debenture; Issue price = face value ± premium or discount.
Net assets taken over: Net assets = Assets taken over − Liabilities taken over
Goodwill or Capital Reserve: Purchase consideration − Net assets = Goodwill (if positive) | Capital Reserve (if negative)
Collateral, Method 2: Debenture Suspense A/c Dr → Debentures A/c; Shown as a deduction from Debentures.
Promoters' debentures: Goodwill / Incorporation Costs A/c Dr → Debentures A/c

How to answer Debentures as Collateral and for Non-cash Consideration questions

These are short ISC questions, often 3 marks, built on one or two entries and one calculation.

1Identify the case: collateral, vendor, promoter or underwriter.
2For a business purchase, find net assets and compare with the purchase consideration.
3Pass the purchase entry, crediting the vendor with the purchase consideration.
4Calculate the number of debentures from the issue price.
5Pass the issue entry with any premium or loss on issue.
6For collateral, follow the method asked and show the note or the deduction in the Balance Sheet.

Debentures as Collateral and for Non-cash Consideration in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Paying a seller in IOUs instead of cash

Suppose a courier company buys a delivery van worth ₹1,50,000 from a dealer. Instead of paying cash, it gives the dealer its own ₹100 interest-bearing bonds at face value.

How many bonds should the dealer receive?

Try it first, then show the solutionSolution

Amount payable = ₹1,50,000.
Bonds = 1,50,000 ÷ 100 = 1,500.

Answer: The dealer receives 1,500 bonds, just as a vendor receives debentures for an asset.

Memory hook: Price paid ÷ price of one debenture = number issued.

Tricks to remember Debentures as Collateral and for Non-cash Consideration

Short memory aids. Say each one aloud once, then use it on a question the same day.

Collateral: backup, not borrowing
Collateral debentures are a spare key for the lender; no cash comes in and no interest goes out.
Use it when: Why the net effect is nil.
Buy first, then pay
Entry 1: assets to vendor; Entry 2: vendor to debentures.
Use it when: Vendor questions.
Pay more than worth: Goodwill
If you pay more than net assets, the excess is Goodwill; pay less and the bargain is Capital Reserve.
Use it when: Business purchase.

Debentures as Collateral and for Non-cash Consideration: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Debenture Suspense in the Balance Sheet · 1 mark · MCQBoard level

When debentures issued as collateral are recorded through Debenture Suspense A/c, the Debenture Suspense A/c is shown:
(a) as a current asset
(b) as a deduction from Debentures under Long-term Borrowings
(c) under Reserves and Surplus
(d) as an expense

Try it first, then show the solutionSolution

No money is received for collateral debentures.
Deducting the suspense balance cancels them in borrowings.

Answer: (b) as a deduction from Debentures under Long-term Borrowings

Example 2: Machinery bought from a vendor · 3 marks · Short answerBoard level

Kadamba Ltd bought machinery for ₹4,32,000 and paid the vendor by issuing 9% Debentures of ₹100 each at a premium of 8%. Pass the entries. (3 marks)

Try it first, then show the solutionSolution

Machinery A/c Dr 4,32,000; To Vendor 4,32,000.
Number = 4,32,000 ÷ 108 = 4,000 debentures.
Vendor Dr 4,32,000; To 9% Debentures 4,00,000; To Securities Premium 32,000.

Answer: 4,000 debentures: Debentures ₹4,00,000 and Securities Premium ₹32,000.

Example 3: Collateral through Debenture Suspense · 3 marks · Short answerHarder board level

Laurel Ltd took a bank loan of ₹6,00,000 and issued 7,000, 9% Debentures of ₹100 each as collateral security. Pass the entry using Debenture Suspense and show the Long-term Borrowings note. (3 marks)

Try it first, then show the solutionSolution

Bank Dr 6,00,000; To Bank Loan 6,00,000.
Debenture Suspense Dr 7,00,000; To 9% Debentures 7,00,000.
Note: Bank Loan 6,00,000 (secured by debentures as collateral); 9% Debentures 7,00,000 less Debenture Suspense 7,00,000 = nil.

Answer: Long-term Borrowings total ₹6,00,000; the collateral debentures net to nil.

Example 4: Business purchase with Goodwill and debentures at a discount · 6 marks · Long answerHarder board level

Magnolia Ltd took over assets of ₹9,60,000 (building ₹5,00,000, stock ₹2,60,000, debtors ₹2,00,000) and creditors of ₹1,80,000 for a purchase consideration of ₹8,40,000. It paid ₹1,20,000 by cheque and the balance by 8% Debentures of ₹100 at a 4% discount. Pass the entries and calculate the number of debentures. (6 marks)

Try it first, then show the solutionSolution

Net assets = 9,60,000 − 1,80,000 = 7,80,000; Goodwill = 8,40,000 − 7,80,000 = ₹60,000.
Building 5,00,000, Stock 2,60,000, Debtors 2,00,000, Goodwill 60,000 Dr; To Creditors 1,80,000; To Vendor 8,40,000.
Vendor Dr 1,20,000; To Bank 1,20,000.
Debentures = 7,20,000 ÷ 96 = 7,500. Vendor Dr 7,20,000; Loss on Issue Dr 30,000; To 8% Debentures 7,50,000.

Answer: Goodwill ₹60,000; 7,500 debentures; Loss on Issue ₹30,000.

Example 5: Capital Reserve and debentures at a premium · 6 marks · Long answerHOTS / competency

Neem Ltd took over assets of ₹6,50,000 and liabilities of ₹70,000 for ₹5,50,000, paid entirely by 10% Debentures of ₹100 at a premium of 10%. Find the Capital Reserve and the number of debentures, and pass the issue entry. (6 marks)

Try it first, then show the solutionSolution

Net assets = 6,50,000 − 70,000 = 5,80,000; consideration ₹5,50,000; Capital Reserve = ₹30,000.
Debentures = 5,50,000 ÷ 110 = 5,000.
Vendor Dr 5,50,000; To 10% Debentures 5,00,000; To Securities Premium 50,000.

Answer: Capital Reserve ₹30,000; 5,000 debentures; Securities Premium ₹50,000.

Example 6: Promoters and underwriters · 3 marks · Short answerHOTS / competency

Oak Ltd issued 300 Debentures of ₹100 at par to its promoters for their services, and settled underwriting commission of ₹21,000 by issuing Debentures of ₹100 at a 5% premium. Pass the entries. (3 marks)

Try it first, then show the solutionSolution

Goodwill (or Incorporation Costs) A/c Dr 30,000; To Debentures 30,000.
Underwriting Commission Dr 21,000; To Underwriter 21,000.
Underwriter Dr 21,000; To Debentures 20,000 (200 × 100); To Securities Premium 1,000.

Answer: Promoters: ₹30,000 Debentures. Underwriter: 200 debentures, Securities Premium ₹1,000.

Where students lose marks in Debentures as Collateral and for Non-cash Consideration

The slips examiners see most often, and what to write instead.

Mistake: Dividing by face value when issued at a premium
Ignoring the issue price.
Wrong working
4,32,000 ÷ 100 = 4,320 debentures
Right working
4,32,000 ÷ 108 = 4,000 debentures
Do this: Divide by the issue price.
Usually costs: 1 mark.
Mistake: Crediting cash for collateral debentures
Treating them as a normal issue.
Wrong working
Bank Dr 7,00,000; To Debentures
Right working
Debenture Suspense Dr 7,00,000; To Debentures
Do this: No money is received for collateral.
Usually costs: 1 mark.
Mistake: Paying interest on collateral debentures
Assuming all debentures earn interest.
Wrong working
Interest on loan and on debentures
Right working
Interest on the loan only
Do this: Collateral debentures are security, not borrowing.
Usually costs: 1 mark.
Mistake: Skipping the vendor account
Going straight from assets to debentures.
Wrong working
Machinery Dr; To Debentures
Right working
Machinery Dr; To Vendor. Vendor Dr; To Debentures
Do this: Record purchase and payment separately.
Usually costs: 1 mark.

Exam tips

Show net assets and goodwill or capital reserve as working notes.
State the method used for collateral in a bracket.
Write 'Being debentures issued to vendor at …% premium' in narrations.
Write off any loss on issue in the same year in the ISC order.

Practice questions on Debentures as Collateral and for Non-cash Consideration

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
If no entry is passed for debentures issued as collateral security, they are:
(a) shown under Share Capital
(b) shown by a note below the loan they secure
(c) shown as current liabilities
(d) not disclosed
Hint
Method 1.
Answer
(b) shown by a note below the loan they secure
Q2 · 1 mark · MCQBoard level
When purchase consideration exceeds net assets taken over, the excess is debited to:
(a) Capital Reserve
(b) Goodwill
(c) Securities Premium
(d) Vendor
Hint
Paying more than worth.
Answer
(b) Goodwill
Q3 · 3 marks · Short answerBoard level
Furniture of ₹2,40,000 is bought and paid for by issuing Debentures of ₹100 at par. How many debentures are issued? Pass the issue entry. (3 marks)
Hint
Divide by ₹100.
Answer
2,400 debentures. Vendor Dr 2,40,000; To Debentures 2,40,000.
Q4 · 3 marks · Short answerHarder board level
A vendor is owed ₹3,84,000 and is paid by Debentures of ₹100 at a 4% discount. Calculate the number of debentures and the loss on issue. (3 marks)
Hint
Issue price ₹96.
Answer
4,000 debentures; Loss on Issue ₹16,000.
Q5 · 3 marks · Short answerHarder board level
Assets of ₹4,50,000 and liabilities of ₹50,000 are taken over for ₹3,70,000. Find the Goodwill or Capital Reserve. (3 marks)
Hint
Net assets first.
Answer
Net assets ₹4,00,000 > consideration: Capital Reserve ₹30,000.
Q6 · 1 mark · Assertion-reasonHarder board level
Assertion (A): No interest is paid on debentures issued as collateral security.
Reason (R): Interest is paid on the loan actually taken, not on the security given for it.
(a) Both A and R are true, and R is the correct explanation of A.
(b) Both A and R are true, but R is not the correct explanation of A.
(c) A is true, but R is false.
(d) A is false, but R is true.
Hint
Security, not borrowing.
Answer
(a) Both A and R are true, and R is the correct explanation of A.
Q7 · 6 marks · Long answerHarder board level
Assets of ₹8,10,000 and liabilities of ₹1,50,000 are taken over for ₹7,20,000: ₹60,000 by cheque and the balance by Debentures of ₹100 at a 10% premium. Calculate goodwill, the number of debentures and the Securities Premium. (6 marks)
Hint
Debentures cover ₹6,60,000.
Answer
Goodwill ₹60,000; 6,000 debentures; Securities Premium ₹60,000.
Q8 · 3 marks · Short answerHarder board level
A loan of ₹2,00,000 is secured by 2,500 Debentures of ₹100 issued as collateral (Debenture Suspense method). Show the Long-term Borrowings note. (3 marks)
Hint
Deduct the suspense.
Answer
Loan ₹2,00,000 (secured by debentures as collateral); Debentures ₹2,50,000 less Debenture Suspense ₹2,50,000 = nil. Total ₹2,00,000.
Q9 · 6 marks · Long answerHOTS / competency
A vendor is paid ₹2,85,000 in Debentures of ₹100 issued at a 5% discount and redeemable at a 10% premium. Calculate the number of debentures and the Loss on Issue, and pass the issue entry. (6 marks)
Hint
Issue price ₹95.
Answer
3,000 debentures; Loss = 15,000 + 30,000 = ₹45,000. Vendor Dr 2,85,000; Loss on Issue Dr 45,000; To Debentures 3,00,000; To Premium on Redemption 30,000.
Q10 · 3 marks · Short answerHOTS / competency
A vendor is to receive ₹1,00,000 in Debentures of ₹100 issued at a 4% premium, any fraction being paid in cash. How many debentures are issued and how much cash is paid? (3 marks)
Hint
1,00,000 ÷ 104 is not a whole number.
Answer
961 debentures (961 × 104 = 99,944); cash ₹56.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Entry for collateral debentures (Method 2)?Show answer
Debenture Suspense A/c Dr; To Debentures A/c.
2.Debentures of ₹100 at 25% premium for ₹2,50,000: number?Show answer
2,000.
3.Which account is debited for debentures given to promoters?Show answer
Goodwill or Incorporation Costs A/c.
4.Consideration less than net assets gives?Show answer
Capital Reserve.
5.Is interest paid on collateral debentures?Show answer
No.

Debentures as Collateral and for Non-cash Consideration: frequently asked questions

What happens to collateral debentures when the loan is repaid?

They are cancelled; under Method 2 the entry is reversed: Debentures Dr; To Debenture Suspense.

Can the lender sell collateral debentures?

Only if the company defaults on the loan; until then they are held as security.

Is Capital Reserve on purchase a revenue profit?

No. It is a capital profit shown under Reserves and Surplus.

Do promoters' debentures bring in cash?

No. They are issued for services, so the debit goes to Goodwill or Incorporation Costs.