Journal Entry for Issue Debenture
Debenture is the long-term debt that the government and company issue to the investors to borrow their cash.
There are several methods that a company can use to raise funds to support or expand the operation. The owner or management can raise funds by issuing the equity instruments to the investors. It is simply exchanging the company ownership for capital, the current owners will lose some portion to the new investors.
Some owners may decide to borrow money from banks or creditors to raise capital. It is good as they will not lose control over the business. But they have the obligation to pay back the debt which includes the interest as well. The company can issue debt such as bonds, notes, and debentures into the capital market.
The debenture is different from other debt instruments as it has a long-term life. The issuer can issue the debenture in more than 10 years as they have enough time to pay back the investors. It gives many benefits to the company as they have a long time to generate a return to settle the debt.
A debenture is usually considered an unsecured instrument due to the long term and they are issued without collateral. The debenture is mostly issued by the government, so the investors are less likely to worry about bankruptcy. For the company, the investors rely upon creditworthiness to access the risk of debenture.
Journal Entry for Issue Debenture
When the company issue the debenture, it will receive cash from the investors. At the same time, they will have the obligation to pay back the principal and interest to the investors.
The issuer has to record cash received and debenture as the liability on the balance sheet. However, it can be issued at a discount or premium, so we have to take a look at each case below.
The issue at par value
It means that company issue the debentures at the same price as the par value stated on the note.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Debenture Account | $$$ |
Issue at premium
It means the company issues the debenture at a higher price compared to the par value. It happens when the debenture interest rate is higher than the market rate. So the price will be adjusted for this variance.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Debenture Account | $$$ | |
| Premium on Debenture | $$$ |
The premium on debenture will be slightly removed from the balance sheet base on the monthly interest expense and interest paid. The process is similar to premium bond payable.
Issue at discount
It means the debenture was issued at a lower price compared to the par value. It happens when its interest rate is lower than the market rate.
| Account | Debit | Credit |
|---|---|---|
| Cash | $$$ | |
| Discounted on issue debenture | $$$ | |
| Debenture Account | $$$ |
The debenture account is recorded lower than the payback amount. The discounted amount will slightly reverse to the debenture account base on the interest paid and interest expense.
Example
During the accounting period, company ABC has issued three batches of debentures with different scenarios.
- 1,000 debentures with $ 100 par value, issue at par value
- 2,000 debentures, $ 100 par value, issue at $ 90
- 3,000 debenture, $ 100 par value, issue at $ 110
Please prepare the journal entry for the debenture issue.
For the first case, ABC issued debenture at par value. The cash received and debenture records are the same. The journal entry is debiting cash of $ 100,000 and credit debenture account of $ 100,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 100,000 | |
| Debenture Account | 100,000 |
The cash balance will increase by $ 100,000 and the debenture record as a long-term liability on balance sheet.
For the second case, company issues a debenture at discount. It means the company receives money less than the amount recorded as a debenture. They have to pay back the full amount. The journal entry is debiting cash $ 90,000, discount on debenture $ 10,000 and credit debenture account $ 100,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 90,000 | |
| Discounted on issue debenture | 10,000 | |
| Debenture Account | 100,000 |
For the third case, the company issues debenture at a premium. They receive cash more than the debenture par value.
The journal entry is debiting cash $ 110,000 and credit debenture account $ 100,000, Premium on issue debenture $ 10,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 110,000 | |
| Premium on issue debenture | 10,000 | |
| Debenture Account | 100,000 |