What is Issue of Debentures for Consideration Other than Cash

Issuing debentures for consideration other than cash is a strategic move employed by companies to diversify their capital structure or facilitate business transactions. While cash is the most common form of consideration for debentures, companies may opt for alternative methods such as asset transfers, services rendered, or securities exchange. This approach allows companies to leverage their existing resources or relationships to raise capital and expand their operations. However, it also entails various considerations and implications that need careful evaluation. 

What is issue of debentures for consideration other than cash is a vital topic to be studied for the commerce related exams such as the UGC-NET Commerce Examination.

In this article, the readers will be able to know about what is issue of debentures for consideration other than cash in detail, along with other related topics in detail.

Debentures Meaning

Debentures are long-term debt instruments issued by corporations or governments to raise capital. When an entity issues debentures, it essentially borrows money from investors with a promise to repay the principal amount along with periodic interest payments over a specified period. Unlike shares, debentures do not represent ownership in the issuing company but rather a form of loan that entitles the holder to receive fixed or floating interest payments and repayment of the principal amount at maturity. Debentures typically have a predetermined maturity date, after which the issuer is obligated to repay the principal amount to the debenture holders. These securities are often used by companies to finance expansion, capital expenditures, or other long-term projects. Debentures can vary in terms of their security, interest rate, maturity, and other features, offering flexibility to both issuers and investors.

What is Issue of Debentures for Consideration Other than Cash?

Typically, companies issue debentures to raise cash. However, there are scenarios where debentures are issued for non-cash considerations. For instance, if a company acquires another business or purchases assets from a vendor, instead of making a cash payment, the company may choose to issue debentures to the vendor as a form of payment.

There are three methods for the issuance of debentures: at par, at a discount, or at a premium. 

Let's delve into the different journal entries that can be made in each of these instances.

Acquisition or Purchase of Assets

Sundry Assets A/c Dr. (with the value of the purchase consideration)

To Vendor’s A/c

(Entry for the acquisition of various assets)

Issue of Debentures at Par

Vendor’s A/c Dr.

To Debentures A/c

(Entry for debentures issued at par as payment for asset acquisition)

Issue of Debentures at a Discount

Vendor A/c Dr.

Discount on Issue of Debentures A/c Dr.

To Debentures A/c

(Entry for debentures issued at a discount as payment for asset acquisition)

Issue of Debentures at a Premium

Vendor A/c Dr.

To Debentures A/c

To Securities Premium Reserve A/c

(Entry for debentures issued at a premium as payment for asset acquisition)

Conclusion

Issuing debentures for consideration other than cash presents both opportunities and challenges for companies. It can be a flexible and innovative way to raise capital, leveraging existing assets or relationships. However, it requires careful evaluation of the terms, implications, and regulatory requirements involved. Transparency, proper valuation, and compliance with legal frameworks are crucial to ensure the success and legality of such transactions. After reading this article the learners will be able to know in detail about what is issue of debentures for consideration other than cash.