This is the third type of consideration for which company issues debentures. Issue of debentures as a collateral security means issue of debentures as a subsidiary or secondary security, that is, a security in addition to the prime security. Secondary security is to be realized only when the prime security fails to pay the amount of loan. Debentures issued as a collateral security can be dealt with in two ways in the books:
a. First Method No entry is made in the books. On the liability side of the balance sheet below the item of loan a note that it has been secured by the issue of debentures is to be given. This is shown in the balance sheet as follows:
b. Second method Sometimes issue of debentures as collateral security is recorded by making a journal entry as follows:
Discount on issue of Debenture
When debentures are issued at discount, it is prudent to write off the loss during the life of debentures.