If the consideration for issue of Debentures is less than the amount of debentures issued, then the difference is:

Question

Prepp Team · Accepted Answer

Understanding Debenture Issue for Consideration

When a company issues debentures, it usually receives cash. However, sometimes a company might issue debentures as consideration for acquiring assets, like purchasing a business or specific assets, instead of paying cash. This is known as issuing debentures for consideration other than cash.

Accounting for Consideration Less Than Debenture Value

Let's consider the scenario where a company acquires assets or a business and issues debentures in return. If the value of the assets or business acquired (the consideration) is less than the total face value of the debentures issued, there is a difference. This difference needs to be accounted for. Why does this difference arise? When a company issues debentures with a face value higher than the value of the assets or business received, it's essentially paying more (in terms of future liability via debentures) than the identifiable value of what it acquired. This excess payment is often attributed to acquiring intangible benefits or value associated with the going concern, which is termed as Goodwill. Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. The accounting treatment for this difference is to recognize it as an asset, specifically Goodwill. Since assets usually have a debit balance, increasing an asset like Goodwill requires a debit entry. Let's illustrate with a simplified conceptual journal entry for acquiring a business for consideration other than cash, where the debenture value exceeds the asset value:

Assets Account             Dr.  (Value of assets acquired)
Goodwill Account           Dr.  (The difference - balancing figure)
  To Liabilities Account        (Liabilities taken over, if any)
  To Debentures Account         (Face value of debentures issued)

In this entry, if the Liabilities and Debentures Credit total is more than the Assets Debit total, the balancing figure on the debit side is Goodwill. This happens when the face value of debentures issued exceeds the net value of assets taken over (Assets acquired - Liabilities taken over).

Analyzing the Given Options

We are given that the consideration for the issue of debentures is less than the amount of debentures issued. This means the value received by the company is less than the face value of the debentures it has issued. As explained above, this difference is treated as Goodwill acquired. Let's look at the options:

Credited to Goodwill Account: If Goodwill is acquired, it's an asset and should be debited, not credited.
Credited to Capital Reserve Account: Capital Reserve arises when the consideration received is more than the value of debentures issued (or net assets acquired). This is the opposite scenario. Also, reserves are typically credited when created.
Debited to Goodwill Account: As established, when the debenture value issued is more than the consideration received (i.e., consideration is less than debenture value), the difference represents Goodwill acquired, which is debited. This aligns with our understanding.
Debited to Capital Reserve Account: Capital Reserve is a reserve and typically has a credit balance. It wouldn't be debited in this context; it's credited when created (in the opposite scenario).

Based on this analysis, the difference is debited to the Goodwill Account.

Summary of Accounting Treatment

When debentures are issued for consideration other than cash:

If Consideration > Face Value of Debentures Issued: The difference is credited to Capital Reserve.
If Consideration < Face Value of Debentures Issued: The difference is debited to Goodwill Account.
If Consideration = Face Value of Debentures Issued: No difference to account for in this specific way.

This question focuses on the scenario where consideration is less than the face value of debentures issued.

Scenario	Relationship	Accounting Treatment for Difference
Consideration > Debenture Face Value	Consideration is more than debentures issued	Credited to Capital Reserve
Consideration < Debenture Face Value	Consideration is less than debentures issued	Debited to Goodwill Account

Therefore, if the consideration for issue of debentures is less than the amount of debentures issued, the difference is Debited to Goodwill Account.

Revision Table: Debenture Consideration Differences

Concept	Explanation	Accounting Entry (Difference)
Debentures Issued for Consideration Other Than Cash	Issuing debentures to acquire assets or a business instead of cash.	Varies based on the relationship between consideration and debenture value.
Consideration < Debenture Value	Value of assets/business received is less than face value of debentures issued.	Difference is Debited to Goodwill Account. Represents value paid for intangible benefits.
Consideration > Debenture Value	Value of assets/business received is more than face value of debentures issued.	Difference is Credited to Capital Reserve Account. Represents a capital profit or gain.

Additional Information: Related Accounting Concepts

Debentures Issued for Consideration Other Than Cash: This is a common practice when one company acquires assets or buys a business from another. Instead of paying cash, which might strain liquidity, the acquiring company issues its debentures as payment. The value of the transaction is determined by the agreed purchase consideration, which is then settled by issuing debentures at their face value, at premium, or at discount.

Goodwill: In the context of acquiring a business, Goodwill is an intangible asset that arises when the purchase price (or the value of consideration given, e.g., debentures) is higher than the fair value of the identifiable net assets acquired. As per accounting standards, Goodwill is recorded as an asset on the balance sheet. In the specific scenario discussed, when debentures of a higher face value are issued compared to the consideration value, the excess debenture value implicitly covers goodwill.

Capital Reserve: A Capital Reserve is a reserve created out of capital profits, not operational profits. In the context of issuing debentures for consideration other than cash, if the value of the assets or business acquired is more than the face value of the debentures issued, the difference is considered a capital gain and is transferred to the Capital Reserve account. This reserve is generally not available for distribution as dividends.