X Ltd. Issued 20,000, 9% debentures of ₹100 each on July 1st, 2021 as a Collateral Security. Calculate interest on debentures for the year ending March 31, 2022 to be paid on 9% debentures issues as Collateral Security.

NIL

The correct answer is option (4) : NIL

Nil is the right answer as no interest is provided.

A collateral security may be defined as a subsidiary or secondary or additional security besides the primary security when a company obtains a loan or overdraft from a bank or any other financial Institution. It may pledge or mortgage some assets as a secured loan against the said loan. But the lending institutions may insist on additional assets as collateral security so that the amount of loan can be realised in full with the help of collateral security in case the amount from the sale of principal security falls short of the loan money. In such situation, the company may issue its own debentures to the lenders in addition to some other assets already pledged. Such an issue of debentures is known as ‘Debentures issued as Collateral Security’. If the company fails to repay the loan along with interest, the lender is free to receive his money from the sale of primary security and if the realisable value of the primary security falls short to cover the entire amount, the lender has the right to invoke the benefit of collateral security whereby debentures may either be presented for redemption or sold in the open market. Debentures issued as collateral security can be dealt in two ways in the books of the company.

* First Method- Company does not make any journal entry in the account books at the time of issue of these debentures. A note is attached below the loan on the liabilities side of the balance sheet. It will state the fact that they have been secured by the issue of debentures.

* Second Method- Sometimes the issue of debentures as collateral security is shown by making the following journal entry: 
  Debenture Suspense A/c Dr. 
           To Debentures A/c

As there is no change in debentures amount due to issue of debentures as collateral security. Only loan amount is shown in the balance sheet. So, No interest is provided on debentures which are issued as collateral security.