Lesson Note on Loan Capital: Debentures, Mortgage and Debenture Accounts for SSS 2

Class: Senior Secondary School 2 (SS2 / SSS2)
Term: Third Term
Week: 8
Age: 16 years
Duration: 45 minutes
Subject: Financial Accounting
Curriculum Theme: Financial Literacy
Previous Lesson: Share Accounts: Cash, Premium, Discount and Share Capital Accounts.
Topic: LOAN CAPITAL
Subject Matter: Meaning of loan capital (borrowed long-term funds used by a company), terminologies used, debentures, mortgage, interest, preparation of debenture accounts

Specific Objectives

By the end of the lesson, pupils should be able to:

Cognitive Domain:

• Define loan capital.
• Explain key terminologies associated with loan capital.
• Differentiate between shares and debentures.
• Describe debentures and mortgages as forms of loan capital.

Affective Domain:

• Appreciate the importance of loan capital to businesses.
• Participate actively in discussions about sources of finance.

Psychomotor Domain:

• Prepare simple journal entries for the issuance of debentures.
• Record debenture interest in ledger accounts.

Social Domain:

• Collaborate effectively in group activities.

Reference Materials

The following resources were used in planning this lesson:

• Senior Secondary Schools Education Curriculum
• State Unified Scheme of Work
• Financial Accounting for Senior Secondary Schools by O. A. Longe.
• https://www.waeconline.org.ng/
• https://www.neco.gov.ng/

Instructional Materials

The teacher will teach this lesson with the aid of:

• Publications on financial markets
• Charts showing different types of capital
• Whiteboard/chalkboard and markers/chalk
• Prepared examples of debenture accounts

Rationale for the Lesson

This lesson helps pupils understand how companies raise long-term funds through borrowing. It enables them to identify different forms of loan capital and the accounting treatment required, which is important for analyzing financial statements and making informed business decisions.

Prerequisite/Previous Knowledge

Pupils have basic knowledge of business organizations, sources of business finance, and fundamental accounting concepts.

Lesson Content/Board Summary

LOAN CAPITAL

Meaning of Loan Capital

Loan capital refers to long-term funds borrowed by a company from external sources, which must be repaid with interest over a specified period. It represents a company’s debt obligations.

Terminologies Used in Loan Capital

The following are important terms related to loan capital:

• Debentures: A type of long-term debt instrument issued by companies to raise capital. Debenture holders are creditors of the company.
• Mortgage: A type of loan used to purchase property, where the property itself serves as collateral for the loan.
• Interest: The cost of borrowing money, usually expressed as a percentage of the principal loan amount, paid periodically to the lender.
• Debenture Holders: Individuals or institutions that have lent money to a company by purchasing its debentures. They are creditors.
• Trustees: An independent party appointed to protect the interests of debenture holders, ensuring the company complies with the terms of the debenture issue.
• Redemption: The repayment of a loan or debenture by the company to its holders on a specified date or over a period.
• Sinking Fund: A fund set aside by a company to accumulate assets over time for the purpose of redeeming its debentures or other long-term debts.

Types of Loan Capital

Common forms of loan capital include:

• Debentures: These can be secured (backed by specific assets) or unsecured (no specific collateral), and redeemable (repayable) or irredeemable (perpetual).
• Mortgage Loans: Loans secured by specific immovable assets like land and buildings.
• Bank Loans: Long-term loans obtained from financial institutions.

Difference Between Shares and Debentures

The table below highlights the key differences:

• Status: Shareholders are owners; debenture holders are creditors.
• Return: Shareholders receive dividends (if declared); debenture holders receive fixed interest.
• Security: Debentures are often secured by assets; shares represent ownership and are not secured.
• Voting Rights: Shareholders have voting rights (for ordinary shares); debenture holders generally do not.
• Repayment: Shares are generally not repaid during the life of the company (except on winding up); debentures are repayable on a specific date.

Preparation of Debenture Accounts

Accounting for debentures involves recording their issuance, payment of interest, and eventual redemption. The initial issue of debentures is recorded as a liability.

Example 1: Issuance of Debentures at Par

A company issues 1,000, 10% Debentures of N100 each for cash at par.

Step 1: Record cash received for debentures.

Debit: Bank/Cash Account N100,000 (1,000 x N100)

Credit: 10% Debentures Account N100,000

(Narration: Being issue of 1,000, 10% Debentures of N100 each at par)

Example 2: Recording Debenture Interest

Using the debentures from Example 1, assume interest is paid annually.

Step 1: Accrue debenture interest.

Interest = 10% of N100,000 = N10,000

Debit: Debenture Interest Account N10,000

Credit: Bank/Cash Account N10,000

(Narration: Being payment of annual debenture interest)

Step 2: Transfer debenture interest to Profit and Loss Account.

Debit: Profit and Loss Account N10,000

Credit: Debenture Interest Account N10,000

(Narration: Being transfer of debenture interest to Profit and Loss Account)

Teaching Methods/Instructional Techniques

Discussion, Lecture, Demonstration, Question and Answer, Visual Aids

Instructional Procedures

Step 1: Introduction

Time: 5 minutes
Teaching Skill: Set Induction
Teacher’s Activity: The teacher asks pupils to name various ways businesses can raise money for their operations.
Pupils’ Activity: Pupils respond by mentioning sources like share capital, bank loans, and retained earnings.
Learning Point: Pupils recall prior knowledge of business finance.

Step 2: Explanation of Loan Capital

Time: 7 minutes
Teaching Skill: Explanation
Teacher’s Activity: The teacher defines loan capital, explaining it as borrowed long-term funds that must be repaid with interest.
Pupils’ Activity: Pupils listen attentively and take notes on the definition of loan capital.
Learning Point: Pupils understand the core concept of loan capital.

Step 3: Terminologies Associated with Loan Capital

Time: 8 minutes
Teaching Skill: Elucidation
Teacher’s Activity: The teacher explains key terms such as debentures, mortgage, interest, debenture holders, and trustees, using simple examples.
Pupils’ Activity: Pupils write down the terminologies and their explanations in their notebooks.
Learning Point: Pupils become familiar with the specialized language of loan capital.

Step 4: Differentiation Between Shares and Debentures

Time: 7 minutes
Teaching Skill: Comparison
Teacher’s Activity: The teacher illustrates the differences between shares and debentures, highlighting their distinct features and implications.
Pupils’ Activity: Pupils observe the comparison and note down the key distinctions.
Learning Point: Pupils can differentiate between ownership capital and loan capital.

Step 5: Introduction to Debenture Accounts (Theoretical)

Time: 8 minutes
Teaching Skill: Explanation
Teacher’s Activity: The teacher explains the theoretical basis for accounting for debentures, including their issuance and interest obligations.
Pupils’ Activity: Pupils listen and ask questions to clarify their understanding of the accounting principles.
Learning Point: Pupils grasp the theoretical framework for recording debentures.

Step 6: Preparation of Debenture Accounts (Practical Example)

Time: 10 minutes
Teaching Skill: Demonstration
Teacher’s Activity: The teacher demonstrates how to prepare simple journal entries for the issuance of debentures and the payment/accrual of interest, using examples on the board.
Pupils’ Activity: Pupils copy the examples and practice making the entries, asking questions as needed.
Learning Point: Pupils gain practical skills in recording debenture transactions.

Step 7: Evaluation/Review

Time: 5 minutes

Teaching Skill: Questioning/Assessment

Teacher’s Activity: The teacher evaluates the learning by asking the following questions:

1. Define loan capital.
2. Mention two terminologies used in relation to loan capital.
3. State two differences between shares and debentures.
4. Explain what a debenture is.
5. Prepare a journal entry for the issuance of N50,000 8% Debentures at par.

Pupils’ Activity: Pupils answer orally and in writing.

Learning Point: Pupils demonstrate understanding of the lesson.

Step 8: Conclusion

Time: 2 minutes
Teaching Skill: Summarization
Teacher’s Activity: The teacher summarizes the key points of the lesson, reinforcing the importance of understanding loan capital in financial accounting.
Pupils’ Activity: Pupils listen and make final notes.
Learning Point: Pupils consolidate their learning and remember the main concepts.

Lesson Keywords

• Loan capital – Borrowed long-term funds for a company.
• Debentures – A type of long-term debt instrument issued by companies.
• Mortgage – A loan secured by property.
• Interest – The cost of borrowing money.
• Shares – Units of ownership in a company.

Differentiation

The teacher will provide additional worked examples for pupils who require more practice in preparing debenture accounts. Advanced pupils will be encouraged to research different types of debentures and their implications. Group discussions will allow pupils of varying abilities to contribute and learn from each other.

Note for teachers using this lesson plan

Teachers should emphasize the practical application of accounting for loan capital by using real-world examples of companies issuing debentures or taking mortgages. Encourage pupils to relate the concepts to current financial news. Ensure sufficient time is allocated for pupils to practice recording transactions, as this is a key examinable area.