Ogoya Limited: Financial Accounting Report on Debenture Options

This report provides a financial analysis of debenture financing options for Ogoya Limited, a company seeking to expand its business. The report explores two primary financing methods: issuing debentures at par and issuing convertible debentures. It details the accounting entries for each option, referencing relevant accounting standards like AASB 132. The report evaluates the advantages and disadvantages of each approach, considering factors such as fixed costs, interest rates, investor appeal, and potential for equity conversion. The analysis includes journal entries for both options and discusses the implications for the company's financial statements. Ultimately, the report recommends the most suitable financing option for Ogoya Limited based on a comprehensive evaluation of the available alternatives, concluding that the convertible debenture option is more appropriate, particularly in line with Australian Accounting Standards, due to the potential benefits of protecting the investment and the flexibility of offering conversion into equity shares at a later date, thus reducing the interest liability.

Running head: FINANCIAL ACCPOUNTING 0
Financial Accounting

FINANCIAL ACCPOUNTING 1
Executive Summary
This report talks about the options available for the Ogoya Limited Company to
expand its business. The company wants to finance the business through the issue of
debenture at par at first and issue of debentures and then converting into equity to protect the
investment as a second option. Further, analysis of both the options is done in detail to
carefully choose the best alternative for the company. Each option is evaluated and thereafter
the recommendations are given on account of which option is suitable for the company
amongst the two.

FINANCIAL ACCPOUNTING 2
Table of Contents
Introduction................................................................................................................................3
Option of debentures Issued at Par.............................................................................................3
Option of convertible Debentures..............................................................................................8
Recommendation......................................................................................................................12
References................................................................................................................................13

FINANCIAL ACCPOUNTING 3
Introduction
A debenture is a financial instrument which carried rate of interest and can be
borrowed without keeping the assets of the company as collateral security. The rate of
interest can be fixed or floating. This type of instrument is used by the company to raise
money and consists of a contract which determines the repayment of principal and the
interest. To fulfil the financial requirements the debenture is one of the primary sources of
capital. The key highlights of the debentures are that they do not require collateral security.
They are transferrable from one person to another. Loans are given by the financial
institutions or lending banks but debentures are given by public for a fixed rate of return.
They can also be converted into equity shares or preference shares.
Goya limited company is a fast growing company and is in the mood of expansion of
the business. The business can be expanded by various methods and schemes like financing
through equity, debentures, bonds, loans from banks and financial institutions. Ogoya limited
company decided to finance its expansion by introducing $10 million dollars thorough issue
of debentures (Florou, Kosi & Pope, 2017).
Option of debentures Issued at Par
The first option considered by the company is the issue of the debentures at 8% at par
and the interest is paid annually.

FINANCIAL ACCPOUNTING 4
DATE PARTICULARS L/
F
N
O
.
DEBIT
(in $)
CREDIT
(in $)
1st Jan
2019
31st
Dec
2019
Bank A/c
Dr.
To debenture Application and Allotment A/c
(for debentures are issued and allotted at par and
redeemable at par)
Debenture Application and Allotment A/c
Dr.
To 8% Debentures A/c
(for application and allotment money transferred to
debentures account)
Interest A/c
Dr.
To Debenture holders A/c
100,00,000
100,00,000
800,000
100,00,000
100,00,000
800,000

FINANCIAL ACCPOUNTING 5
1st Jan
2020
31st
Dec
2020
(for interest due for the year 2019)
Debenture holders A/c
Dr.
To Bank A/c
(for payment of the interest of the year 2019)
Profit and loss A/c
Dr.
To Interest A/c
(for interest transferred to profit and loss account)
Bank A/c
Dr.
To debenture Application and Allotment A/c
(for debentures are issued and allotted at par and
redeemable at par)
Debenture Application and Allotment A/c
Dr.
To 8% Debentures A/c
(for application and allotment money transferred to
debentures account)
800,000
800,000
800,000
800,000
800,000
800,000
800,000
800,000

FINANCIAL ACCPOUNTING 6
Interest A/c
Dr.
To Debenture holders A/c
(for interest due for the year 2019)
Debenture holders A/c
Dr.
To Bank A/c
(for payment of the interest of the year 2019)
Profit and loss A/c
Dr.
To Interest A/c
(for interest transferred to profit and loss account)
800,000
800,000
800,000
800,000
800,000
800,000
The Australian Accounting Standards Board made Accounting Standard AASB 132
Financial Instruments: Disclosure and Presentation under section 334 of the Corporations Act
2001 on 15 July 2004. The objective of this standard is to determine the presentation of the
financial instruments as equity or liabilities and setting off the financial assets and liabilities.
it also applies to the categorisation of financial instruments, from the point of view of the
issuer, into financial liabilities, financial assets and equity instruments; the classification of

FINANCIAL ACCPOUNTING 7
relevant interest, dividends, losses and gains; and the circumstances in which financial assets
and financial liabilities should be offset (Chandra, 2017).
Under this option the debentures are issued at par and the interest is calculating don
the annual basis. Under this option of expansion of the business there is fixed cost. These can
be termed as non-convertible debentures and the major benefit of these types of debentures is
that a fixed cost of interest is to be expensed every year. This way the company can lure the
investors for purpose of investments (Bloomfield et al, 2017).
Non-convertible debentures offer higher effective yield in comparison to bank
deposits and other modes of debentures. In comparison to the equity the non-convertible
debentures get a fixed rate of interest unlike equity that is highly volatile (Nash, 2018). In
case of liquidation of the company the debenture holders are given preference over the equity
shareholders. The obligations of the debenture holders are settled first.
Though the interest income received form debentures is accumulated in the total
income while filing the income tax returns is free from the liability of the tax deducted at
source. The non-convertible debentures are listed on the stock exchanges and offer the
facility of the liquidity which is often very low on account of low volume of trade for the debt
instruments (Stent, Bradbury & Hooks, 2017).
Despite having advantages of purchasing the non-convertible debentures there are
certain drawbacks through which the non-convertible debentures are surrounded which can
be as follows. They are not able to be converted into equity shares which at times reduce the
chances of loss (Bagella, 2018). These types of investments are not suitable for the investors
who are approaching for higher rate of return due to an inherent element of risk. If interest
rates are higher than offered by non-convertible debentures then the returns tends to be lower
if the debentures are sold through secondary markets and there might be negative return for

FINANCIAL ACCPOUNTING 8
investors in some cases. However, if there is decrease in rates of interest after buying non-
convertible debentures then selling on stock market may prove beneficial as the nod will
demand a premium (Ward & Lowe, 2017).
Option of convertible Debentures
The second option the company can opt for is convertible debentures which are discussed
below.
DATE
1ST JAN
2019
31STDEC
2020
PARTICULARS
4% Debenture Account A/c
Dr.
To Equity share Application A/c
(for the liability of the debentures converted
into the share capital liability)
Equity Share Application A/c
Dr.
To Equity Share Capital A/c
(for application money transferred to equity
share capital account)
4% Debenture Account A/c
Dr.
L/F
NO.
DEBIT
(IN $)
104,00,000
104,00,000
104,00,000
CREDIT
(IN $)
104,00,000
104,00,000

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To Equity share Application A/c
(for the liability of the debentures converted
into the share capital liability)
Equity Share Application A/c
Dr.
To Equity Share Capital A/c
(for application money transferred to equity re
capital account)
104,00,000
104,00,000
104,00,000
Under this option of expansion of the business by the Goya Limited the debentures
Aare converted into equity shares at par. An example of a convertible debt can also be a bond
under which the interest is paid ate fix rate at first and after that there is an option to convert
the debentures into equity stock on any future event or by a particular date. Slice the
investment is initially in the debt it can the investor has greater opportunities to protect its
investment from any kind of loss. If the business is liquidated the creditors are paid before the
stock investors.
By issuing convertible debentures, majority of stockholders can be hold. Usually, it is
cheaper and less time consuming to issue convertible debt instead of stock. With convertible
debt, it is easy to determine stock share price by figuring out worth of company. Convertible
debentures carry lower interest rate as compared to rates of bank and any financial institution.
Therefore, company shall under this case opt for term loans from financial institutions and
bank they impose many term and conditions including placing representative on the board.
But in case of convertible debentures, there is greater degree of autonomy for the companies.

FINANCIAL ACCPOUNTING 10
The advantage of convertible debentures for investors is that they get value appreciation on
their investment, if converted into equity (Wang & Qin, 2017). The investors, who have
bought convertible debentures issued, will get following options
1. sell all the parts instantly on allotment
2. Sell one or more parts and retain other or others till conversion.
The main advantages of convertible debentures are that they do not have to pay back
if they convert to common shares. Convertibles are not senior as bond or regular debentures
but they are more senior than equity. When share prices fall, then convertible debentures get
paid before common shareholders (Stent, Bradbury & Hooks, 2017).
Besides the advantages there are certain disadvantages which are as follows. The
main disadvantage of convertible debentures is credit risk. Investing in convertible
debentures gives less favourable to credit rating and helps in analysing the risk of default.
Other disadvantages are that convertible debentures are unsecured bond. if the company runs
into financial trouble ,in this case investors in convertible debentures may only be able to
claim company asset that are not used to back other bond issues or collateral for additional
credit line.
Recommendation
Therefore after the analysis of both the options it can be recommended that the second
option is suitable for the company as the investment of a large amount of $10 million and it
will be a safer and the return based option for the company to protect the investment. The
expansion can be done using the second option because of the fact that if at a later date the
debenture holder wishes to substitute they can be offered a better deal and a facility of the
conversion of the debentures into equity shareholders. Along with the facilitates certain
privileges are also associated with equity shareholders. They are the member of the board and

FINANCIAL ACCPOUNTING 11
therefore, they are allowed to sit along with the board of the directors and they are allowed to
take part in the decision making process. Further, the fix income of interest liability will also
be decreased on the part of management. Therefore it can be concluded that the option second
is suitable in line with the Australian Accounting Standards.

FINANCIAL ACCPOUNTING 12
References
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Labor Migration: Evidence from the Accounting Profession. Journal of Accounting
Research, 55(1), 35-78.
Chandra, P. (2017). Investment analysis and portfolio management. London: McGraw-Hill
Education.
Florou, A., Kosi, U., & Pope, P. F. (2017). Are international accounting standards more credit
relevant than domestic standards?. Accounting and Business Research, 47(1), 1-29.
Nash, P. (2018). Accounting Standards: Recognition and Measurement. Effective Product
Control‐Controlling for Trading Desks, First Edition, 41-74. London: Mcgraw-Hill.
Stent, W., Bradbury, M. E., & Hooks, J. (2017). Insights into accounting choice from the
adoption timing of International Financial Reporting Standards. Accounting &
Finance, 57(S1), 255-276.
Ward, C. L., & Lowe, S. K. (2017). cultural impact of international financial reporting
standards on the comparability of financial statements. International Journal of
Business, Accounting, & Finance, 11(1). pp 45-60.
Wang, W., & Qin, X. (2017). A Kind of Investor-Friendly Dual-Trigger Contingent
Convertible Bond. In International Symposium on Knowledge and Systems
Sciences (pp. 242-249). Springer, Singapore.