Question

When debentures are issued as collateral security, the entry passed is:

• A. Bank A/c Dr. to Debentures A/c
• B. Debenture Suspense A/c Dr. to Debentures A/c
• C. No entry is passed
• D. Bank A/c Dr. to Debenture Suspense A/c

Hint:

For debentures issued as collateral security:
• Most common exam answer: No journal entry.
• Alternative treatment: \[ \text{Debenture Suspense A/c Dr.} \] \[ \text{To Debentures A/c} \]

Answer 1

The Correct Option is C

Concept: Collateral Security refers to additional security provided by a company to a lender for obtaining a loan. Debentures issued as collateral security are not issued for immediate cash consideration. They are merely held by the lender as security and become effective only if the company defaults in repayment of the loan. Therefore, according to the alternative accounting treatment, no journal entry is passed.

Step 1: Understand collateral security.
Suppose a company borrows: \[ ₹10,00,000 \] from a bank. The bank may ask for additional security. The company may issue debentures as collateral security. These debentures act only as a guarantee.

Step 2: Understand why no entry may be passed.
The debentures are not actually issued for raising funds. They merely provide assurance to the lender. Since there is no immediate financial transaction regarding those debentures, many firms follow the alternative method where no journal entry is recorded. Only a note is given in the Balance Sheet.

Step 3: Know the alternative treatment.
Sometimes companies pass: \[ \text{Debenture Suspense A/c Dr.} \] \[ \text{To Debentures A/c} \] However, this is an optional treatment. For examination purposes, when asked generally, the accepted answer is that no journal entry is passed.

Step 4: Evaluate the options.
Option (A): Used for normal issue of debentures for cash. Incorrect. Option (B): Represents the alternative method. Not the standard answer here. Option (C): No entry is passed. Correct. Option (D): Incorrect accounting treatment.

Step 5: Select the answer.
Hence, \[ \boxed{\text{No entry is passed}} \] Therefore, \[ \boxed{(C)} \]