Question -
Answer -
Collateral security refers to an additional layer of security over and above the primary security. It is seen in case of company taking a loan from a financial institution, in such cases, company issues debentures which are additional security or collateral security. The money lender will not be receiving any interest on these debentures. In case the company defaults in making payment and the primary security is not sufficient to cover the debt, then debentures can be used for recovering the amount.
Treatment of Debentures:
Debentures when issued for the first time by a company are not active and to make it active an accounting entry is required to be passed
For creating accounting record Debenture Suspense A/C is debited and debenture account is credited. Debentures are represented in liabilities side and Debenture suspense A/c is shown on credit side. When the debt is paid off by the business debenture account is debited and debenture suspense account gets credited.