Debentures

Debentures

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your ICAN exam.

A debenture is a written acknowledgement of debt issued under the company seal, promising repayment of principal at a stated date and interest at a fixed coupon rate, in most keys paid half-yearly. It is a non-equity liability, ranking behind secured creditors but ahead of shareholders. Interest is a finance charge against profit, not an appropriation, and is tax-deductible for the issuer.

• Issue price (cash) = Nominal Value + Premium − Discount
• Half-yearly interest = Nominal Value × Coupon Rate × 6/12
• Redemption yield ≈ [Annual interest + (Redemption − Issue)/n] ÷ [(Redemption + Issue)/2] × 100
• Redeemable, irredeemable, convertible, secured, and unsecured are the five classifications you must recognise on sight.
• Under CAMA 2020, the charge securing a debenture must be registered with the CAC within 90 days, otherwise it is void against the liquidator.

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Nature, Classification and Ranking

A debenture is a contractual debt instrument, not ownership. It carries a fixed coupon rate on nominal (face) value, and the principal is repaid on a definite maturity date unless classified as irredeemable/perpetual. Because it is debt, debenture interest reduces taxable profit; dividends on shares do not. Ranking on liquidation: fixed-charge holders first, then debenture holders with a floating charge, then unsecured creditors, then preference shareholders, then ordinary shareholders.

Issue Mechanics

Debentures can be issued at par, at a discount, or at a premium. The cash book records actual proceeds; the discount or premium is a separate nominal-ledger balance. Issue costs (brokerage, legal fees, printing) are written off over the life of the loan through the Statement of Profit or Loss, or charged against share premium where CAMA permits.

Key Distinctions

Feature	Debenture	Preference Share
Legal nature	Debt	Equity
Interest/dividend treatment	Tax-deductible charge	Appropriation (not deductible)
Repayment	Fixed maturity date	No maturity
Convertibility	Possible to equity	Rarely convertible
Security	In many papers secured by charge	Unsecured

Common Exam Traps

• Confusing nominal value with carrying amount when amortising discount or premium.
• Treating debenture interest as an appropriation in the profit-and-loss appropriation account.
• Forgetting the 90-day CAC registration window under CAMA 2020, which voids the charge.

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Amortisation Methods

The straight-line method spreads discount or premium equally across the life of the debenture, so each period bears an equal share of the total. The effective-interest (market yield) method keeps the coupon paid constant in cash but varies the interest expense so that the carrying amount grows or shrinks toward the redemption figure at maturity. ICAN Skills and Professional level questions in many papers ask for both, and the examiner marks the carrying amount at year-end, total expense recognised, and the split between interest payable and amortisation.

Worked Mini-Example

A company issues ₦10,000,000 of 10% debentures at 96, redeemable at par in 5 years, interest paid annually on 31 December.

• Cash received = ₦10,000,000 × 0.96 = ₦9,600,000
• Annual coupon = ₦10,000,000 × 10% = ₦1,000,000
• Total discount = ₦400,000, amortised straight-line = ₦80,000 per year
• Annual interest expense (straight-line) = ₦1,000,000 + ₦80,000 = ₦1,080,000
• Carrying amount at end of year 3 = ₦9,600,000 + (3 × ₦80,000) = ₦9,840,000

Redemption, Conversion and Sinking Fund

Redemption can be by lump sum, by drawings (where part is repaid by lot), or from a sinking fund invested in marketable securities. Premium on redemption is a capital loss in profit or loss, never netted against share premium. On conversion of a convertible debenture, the carrying amount is transferred to share capital and share premium — no gain or loss crystallises.

Frequent Mistakes in ICAN Scripts

1. Posting cash at nominal value and forgetting the discount debit balance.
2. Splitting interest between current (accrued) and non-current portions incorrectly on the Statement of Financial Position.
3. Treating issue costs as a one-off expense in the year of issue rather than amortising them.

Practice Prompts

1. Issue ₦5,000,000 of 8% debentures at 95, redeemable at 102 in 4 years. Prepare the journal entries for issue, year-end interest under the effective-interest method, and redemption.
2. A company converts ₦2,000,000 of convertible debentures (carrying amount ₦1,900,000) into ₦1 ordinary shares at a conversion price of ₦1.50. Show the conversion entries and identify any profit or loss.

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