16.2 Debentures and loan stock

• Debentures and loan stock are both forms of long-term debt financing used by limited companies to raise capital
• Loan stock may have limited voting rights, while debentures do not.


  True
• Debentures are secured against company assets
• Match the characteristic with the type of debt financing:

  Debentures ↔️ Secured against assets

  Loan Stock ↔️ Fixed interest rate
• Debentures are a more formal and secured form of long-term debt
• What type of interest rate do debentures have?

  Fixed
• Loan stock holders may have limited voting rights.


  True
• The key features that differ between debentures and loan stock are security, repayment, interest, and voting rights
• There are two main types of debentures: secured and unsecured
• What is the defining feature of redeemable debentures?

  Fixed maturity date
• Match the type of debenture with its characteristic:

  Secured debenture ↔️ Backed by specific assets

  Redeemable debenture ↔️ Fixed maturity date
• What is the first step in the issuance of debentures?

  Decision to raise capital
• Interest expense is debited when interest is paid on debentures.


  True
• Interest expense on debentures is reported on the income statement
• Match the account with its debit or credit entry for interest payment:

  Interest Expense ↔️ Debit

  Cash ↔️ Credit
• Loan stock has a fixed maturity date.

  False
• Loan stock is unsecured, meaning it is not backed by company assets
• Debentures are a more formal and secured form of long-term debt
• Loan stock has a fixed interest rate.

  False
• Irredeemable debentures remain outstanding indefinitely.


  True
• The issuance of debentures generates cash for the company.
• The accounting treatment for loan stock is similar to debentures, but loan stock is unsecured.
• Debentures have a fixed maturity
• What is the primary advantage of loan stock over debentures?

  Flexibility
• Debentures have a fixed interest
• Loan stock does not have a fixed maturity
• Debentures are unsecured debt.

  False
• Loan stock may have a variable interest
• What determines the choice between debentures and loan stock for a company?

  Financing needs
• Match the characteristic with the type of debt financing:

  Debentures ↔️ Fixed interest rate

  Loan Stock ↔️ Variable interest rate
• Secured debentures are backed by specific company assets.

  True
• Irredeemable debentures do not have a fixed maturity date
• Unsecured debentures rely on the company's general creditworthiness.

  True
• When debentures are issued, cash is debited, and debentures payable is credited
• Where are debentures recorded on the balance sheet?

  Liability
• Cash is credited when debentures are issued.

  False
• Debentures are recorded as a liability on the balance sheet
• Debentures are secured against company assets
• Debentures have a fixed maturity date for repayment.

  True
• Order the steps in the repayment of debentures.

  1️⃣ Debentures mature on their fixed maturity date

  2️⃣ The company returns the face value of the debentures

  3️⃣ Journal entries are made to debit Debentures Payable and credit Cash