Debenture Trustees (Accounting Treatment) | India | Company

In this article we will discuss about the accounting entries relating to debenture trustees, explained with the help of an illustration.

Generally, to look after the interest of the debenture-holders, certain persons are elected as trustees by the debenture-holders. Alternatively, the names of trustees may be mentioned in the prospectus inviting subscription for debentures of the company. The guide-lines issued by the Securities Exchange Board of India (SEBI) makes mandatory appointing of trustees for debenture- holders for debentures with maturity of 18 months or more.

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The trustees are vested with requisite powers for protecting the interests of debenture-holders including a right to appoint a nominee director on the Board of the company in consultation with the institutional debenture-holders. The company is expected to give full cooperation to the trustees.

The trustees may purchase and sell investments, purchase and cancel debentures as per the terms of issue of debentures. The necessary fund may be provided by the company for this purpose. The trustees do not normally maintain their books of account. The company maintains the necessary accounts on behalf of the trustees.

However, it may be remembered that the cash given to the trustees and the investments purchased by them are called the “Debentures Trustees Cash Account” and “Debentures Trustees Investment Account” respectively, so as to differentiate them for the company’s Cash Account and Investment Account.

The accounting entries relating the Debentures Trustees can be understood with the help of the following illustration:

Illustration:

X Ltd. has 6% Rs. 1, 00,000 Debentures on 1st January 2007. The terms of issue provide that the Company should pay to the trustees Rs. 12,000 each year to be applied by the trustees in redemption of debentures by purchase below par in open market. It also provided that 1/5 of the outstanding balance is to be redeemed from 2007.

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If redemption by purchase is below the required amount, the balance is redeemable at par by drawing lots on 31st December.

On 1st January 2007, the trustees has Rs. 16,900 represented by 5% investments (cost Rs. 16,000, face value Rs. 17,000) and Rs. 900 in cash.

The trustees purchased 15,000 debentures at Rs. 96 on June 30th, 2007, and the balance required was redeemed by lottery. For this purpose, Rs. 12,750 debentures were sold for Rs. 11,750, the balance being met by cash in hand. Surplus cash in hand was invested at Rs. 96 in units of Rs. 100 on 31st December 2007.

Write up the following accounts:

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1. 6% Debenture Account

2. Debenture Trustee’s Fund Account

3. Debenture Trustees’ Investment Account

4. Interest on Debenture Account

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5. Interest on Debenture Trustee Investment Account

6. Debenture Trustee Cash Account.

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