ISSUE OF DEBENTURES AS COLLATERAL SECURITY
Collateral security means security given in addition to the principal security. It is a subsidiary or secondary security. Whenever a company takes loan from bank or any financial institution it may issue its debentures as secondary security which is in addition to the principal security. Such an issue of debentures is known as ‘issue of debentures as collateral security’. The lender will have a right over such debentures only when company fails to pay the loan amount and the principal security is exhausted. In case the need to exercise this right does not arise debentures will be returned back to the company. No interest is paid on the debentures issued as collateral security because company pays interest on loan.
In the accounting books of the company issue of debentures as collateral security can be credited in two ways.
(i) No journal entry to be made in the books of accounts of the company :
Debentures are issued as collateral security. A note of this fact is given on the liability side of the balance sheet under the heading Secured Loans and Advances.
(ii) Entry to be made in the books of account the company
A journal entry is made on the issue of debentures as a collateral security, Debentures suspense A/c is debited because no cash is received for such issue.
Following journal entry will be made
Debenture Suspense A/c Dr
To Debentures A/c
(.....Debentures of Rs .... each issued as collateral security to .....)
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